CITIZENS UTILITIES COMPANY
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
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OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE YEAR ENDED DECEMBER 31, 19951998
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 19951998 Commission file number 001-11001
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OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
CITIZENS UTILITIES COMPANY
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(Exact name of registrant as specified in its charter)
Delaware 06-0619596
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3 High Ridge Park
P.O. Box 3801
Stamford, Connecticut 06905
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(Address, zip code of principal executive offices) (Zip Code)
Registrant's telephone number, including area codecode: (203) 329-8800614-5600
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Securities registered pursuant to Section 12(b) of the Act:
Common Stock, Series A, par value $.25 per share New York Stock Exchange
Common Stock Series B, par value $.25 per share New York Stock Exchange
Guarantee of Convertible Preferred Securities of Citizens Utilities Trust New York Stock Exchange
Citizens Convertible Debentures N/A
Guarantee of Partnership Preferred Securities of Citizens Utilities Capital L.P. N/A
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(Title of each class) (Name of exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve12 months, (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety90 days.
Yes X No
State the aggregate market value of the voting stock held by nonaffiliates of
the registrant as of January 31, 1996: $2,721,397,606.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of January 31, 1996.
Common Stock Series A 154,679,357
Common Stock Series B 73,326,013
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement for the registrant's 1996 Annual Meeting of Stockholders is
incorporated by reference into Part III of this Report.--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of February 26, 1999 was $1,935,322,722.
The number of shares outstanding of the registrant's Common Stock as of February
26, 1999 was 259,884,972.
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement for the registrant's 1999 Annual Meeting of Stockholders to
be held on May 20, 1999, is incorporated by reference into Part III of this Form
10-K.
TABLE OF CONTENTS
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Page
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PART I
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Item 1. Description of Business 2
General Development of Business 2
Financial Information about Industry Segments 2
Narrative Description of Business 3
Communications 3
CLEC 6
Public Services 7
Gas 8
Electric 9
Water and Wastewater 11
General 12
Financial Information about Foreign and Domestic
Operations and Export Sales 13
Item 2. Description of Property 14
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to Vote of Security Holders 16
Executive Officers 17
PART II
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Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters 18
Item 6. Selected Financial Data 19
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 32
Item 8. Financial Statements and Supplementary Data 32
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 32
PART III Incorporation by Reference to the 1999 Proxy Statement 32
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PART IV
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Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 32
Signatures 35
Index to Consolidated Financial Statements F-1
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PART 1
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Item 1. Description of Business
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This annual report on Form 10-K contains forward-looking statements that are
subject to risks and uncertainties which could cause actual results to differ
materially from those expressed or implied in the statements. Further discussion
regarding forward-looking statements, including the factors which may cause
actual results to differ from such statements, is located in Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," in this report.
(a) General Development of Business
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The "Company" includes Citizens Utilities Company and its subsidiaries except
where the context or statement indicates otherwise. The Company is a diversified
operating public utility which provides, either
directly or through subsidiaries, telecommunications, electric distribution, naturalcommunications services, competitive local
exchange carrier (CLEC) services and public services including gas transmission
and distribution, electric transmission and distribution, water ordistribution and
wastewater treatment services to nearly
1,600,000 customer connections in areas of nineteen states.primarily rural and suburban customers
throughout the United States.
The Company was incorporated in Delaware in 1935 to acquire the assets and
business of a predecessor corporation. Since then, the Company has grown as a
result of investment in owned utilitycommunications and public services operations and
from numerous acquisitions of additional utilitycommunications, CLEC and public
services operations. It continues to consider and carry out business
expansionexpand through internal investment,
acquisitions and joint ventures in traditional public utility
and related fields and the rapidly evolving telecommunications
industry and cable
television industries.in traditional public services and related fields. The Company's
strong financial resources and consistent operating performance enable it to make the investments
and conduct the operations necessary to serve growing areas and to expand
through acquisitions.
In 1993 and 1994,On May 18, 1998, the Company agreedannounced its plans to acquire from GTE Corp.separate its
telecommunications businesses and ALLTEL
Corporation approximately 610,000 local telephone access linespublic services businesses into two
stand-alone publicly-traded companies. The Company intends to establish and
7,000
cable subscriberstransfer to a new company all of its telecommunications businesses, including
its approximate 83% interest in twelve states for approximately $1.4 billion. AsElectric Lightwave, Inc. (ELI). This separation
is subject to federal and state regulatory approvals and final Board approval,
and is expected to be carried out through a distribution in the stock of December 31, 1995 all but approximately 23,000 local telephone access lines
in Nevada have been transferredthe new
company to the Company.Company's shareholders. The public services businesses will
continue to operate as Citizens Utilities Company and intend to provide gas
transmission and distribution, electric transmission and distribution, water
distribution and wastewater treatment services. This separation is being made in
recognition of the different investment features, performance criteria, capital
structures, dividend policies, customers' requirements and regulatory designs of
each business, and would allow each business to pursue its own strategy and
compete more effectively in its respective markets. The separation is expected
to strengthen both businesses and enable each of them to take full advantage of
opportunities to enhance value.
The Company received an order from the Federal Energy Regulatory Commission that
granted an approval necessary to proceed with its separation plans. The Company
filed a request with the Internal Revenue Service for a private letter ruling
that the transaction is not subject to federal income tax. The Company has filed
petitions with numerous state regulatory agencies for the approvals necessary to
proceed with its separation plans and to date has received the necessary
approval from four of these agencies. An application with the Federal
Communications Commission (FCC) for the transfer of certain licenses and filings
with the Securities and Exchange Commission will also be made during the
separation process. The transaction is expected to be completed in the second
half of 1999.
Although the Company continues to aggressively pursue its separation plans,
changing market conditions and new business opportunities may require it to
consider other methods to enhance shareholder value, including the sale or other
disposition of certain properties and the acquisition of new properties.
(b) Financial Information about Industry Segments
The Consolidated Statements of Income and---------------------------------------------
Note 1014 of the Notes to Consolidated Financial Statements included herein sets
forth financial information about industry segments of the Company for the last
three fiscal years.
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(c) Narrative Description of Business
TELECOMMUNICATIONS
The---------------------------------
COMMUNICATIONS
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Through subsidiaries, the Company provides telecommunicationsboth regulated and competitive
communications services to all segments of the
marketplace. Telecommunicationsresidential, business and wholesale customers.
Communications services consist of local exchange service,
centrex service,network services, network access
service, intrastateservices, long distance services, directory advertising, centrex, cellular,
voice mail and interstate toll
services, competitive access services and directorycable television services. The Company operates as an Incumbent
Local Exchange Carrier (ILEC) that provides telecommunicationslocal and intraLATA services to the
following approximate number of primarily residential customersretail access lines in the following states:
Local Network
State CustomersAccess Lines
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New York 295,600320,900
West Virginia 139,400143,400
Arizona 133,000141,900
California 116,300127,200
Tennessee 81,10096,100
Nevada 25,800
Wisconsin 24,200
Utah 21,900
Idaho 18,600
Utah 18,30020,600
Oregon 13,10014,200
Montana 7,8008,500
New Mexico 4,700
Louisiana 2,700
Washington 2,300
------------5,400
Pennsylvania 1,400
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Total 832,900
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Various state regulatory agencies, state legislatures951,500
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The Company provides network access services and the federal government
have initiated proceedingsbilling and collections
services primarily to promote the development of competitionAT&T Corp., MCI Worldcom Corp. and Sprint Corp. The
Company is also enhancing its network support systems to offer local resale
capabilities in telecommunications markets. These proceedings are focused on removing the
regulatory and legal barriers to competitive entry into the interLATA toll,
intraLATA toll andits local exchange markets and developing rulesfranchise serving areas to governemerging CLECs.
Communications Strategy
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In 1998, the relationship among competitors in these markets. Simultaneously, many states are
investigating or have implemented procedures forCompany initiated a strategy designed to foster growth within its
local exchange companies to
enter into incentive regulatory frameworks ("IRF") as an alternative to
traditional rate of return regulation and/or classifying servicesservice areas. This strategy focuses on the basisprovision of the presence of competitiontraditional local
and allowing deregulation or flexible pricing
regulation for thelong distance telecommunications services deemed competitive. Local exchange competition has
been authorized in the following states in which the Company currently provides
local exchange service: Arizona, California, New York, Oregon, Tennessee, Utah
and West Virginia.
On November 8, 1995, the California Public Utilities Commission issued a final
order approving a restructuring of Citizens Telecom of California's ("CTCC")
rates and an Incentive Regulatory Framework ("IRF"). The restructured rates
allow CTCC to compete more effectively. Under the IRF, CTCC can earn and keep up
to 1.5% above its authorized rate of return while earned returns greater than
1.5% and up to 5% above its authorized rate of return will be shared equally
with customers.
The Company has developed, and is implementing, an aggressive growth strategy to
take advantage ofaddressing emerging
opportunities in the emerging telecommunications marketplace.
This strategy includes expansion of the Company's customer basecommunications marketplace, such as internet and telecommunicationshigh-speed
data services. The Company's customer base expansiongoal is focused onto strengthen its franchised service territoriesposition as well as markets adjacent to
these franchised service territories, and includes customers of affiliated
companies. The Company's expansion of telecommunications of services is with
the objective of becoming a full
service telecommunicationscommunications provider offering to customers within its local service areas
through the provision of an integrated package of products and services. The
Company will expand into additional markets by offering its long
distance serviceis committed to continuous improvements in combination with other value-added services such as
Internet access, messaging and Centrex. The Company sells its products
using multiple sales distribution channels and a marketing organization
structured around productoperational efficiencies
through the application of value based management and customer segmentation. The
key products the Company offers or planstechniques designed to
offer are long-distance,
or toll, services, advanced CLASS, voice mail, Internet access, data,
cellular and paging services in addition to its traditional local exchange
services. As required, approvals have been and are received, the Company has
begun and intends to provide intrastate and interstate toll services in
those markets it currently serves as well as several adjacent markets. Toll
services include One plus, 800, calling card, 10XXX and prepaid calling
card services. The Company is investigating other value-added services
such as fax on demand, voice activated dialing, desktop video conferencing,
cable modem and direct broadcast satellite.
The Company currently contracts for advertising sales, printing and distribution
for its 77 telephone directories with a circulation of approximately 1.7
million.
The Company expects to expand and enhance its network in order to offer
distribution capability to interexchange carriers and potentially to other long
distance resellers, cellular companies, cable companies, and other independent
telephone companies. The Company currently sells access primarily to AT&T Corp.,
MCI Communications Corp. and Sprint Corp. and provides billing and collection
services to AT&T Corp.aggressively generate free cash flow.
The Company continues to expandlook at acquisition opportunities. The Company is
especially interested in acquiring properties that would help make its
Communications business a full service provider from which customers can buy
local, long distance, cellular, paging, Internet access and personal
communications services.
Telecommunications Act
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In February 1996, the Telecommunications Act of 1996 (the 1996 Act) became law.
The national public policy framework for telecommunications was changed
dramatically by the 1996 Act. A central focus of this sweeping policy reform was
to open local telecommunications markets to practical competition. The 1996 Act
preempts state and local laws to the extent that they prevent competitive entry
into the provision of any telecommunications service. Under the 1996 Act,
however, states retain authority to impose on carriers requirements necessary to
preserve universal telecommunications service, protect public safety and
welfare, ensure quality of service and protect consumers. States are also
responsible for mediating and arbitrating interconnection agreements between
CLECs and ILECs if voluntary negotiations fail.
-3-
Pursuant to the requirements of the 1996 Act, the FCC has been and will be
conducting rule-making proceedings resulting in a number of new rules that
could impact the operations of the Company. These rules, described in more
detail below, address interconnection, universal service reform and access
charge/price cap reform.
Interconnection
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The FCC's Interconnection Order, issued in August 1996, addresses the
relationship between ILECs, such as the Company, and CLECs, such as the
Company's subsidiary, Electric Lightwave, Inc.
("ELI"),ELI.
The 1996 Act and the Interconnection Order outline three routes, which are not
mutually exclusive, to competitive market entry. The first is through a CLEC's
construction and operation of its own local exchange facilities, in which case
the sole requirement of the ILEC is interconnection for purposes of traffic
interchange. The second allows a CLEC to acquire, at incremental cost, unbundled
network elements from the ILEC for CLEC assembly into end-to-end local exchange
services and/or as a supplement to the facilities it has constructed on its own.
The third is through CLEC resale of ILEC retail services acquired from the ILEC
at wholesale rates.
Subject to the rural telephone company exemption discussed below, the
Interconnection Order affects the Company's local network services business as
follows:
(a) ILECs must provide interconnection to telecommunications carriers at
any technically feasible point, equal in quality to that provided for
the ILECs' own operations;
(b) ILECs must provide those carriers with access to network elements on
an unbundled basis;
(c) ILECs must offer for resale, at wholesale rates, any
telecommunications services that the ILECs provide at retail to
subscribers who are not telecommunications carriers;
(d) ILECs and CLECs must compensate each other for the termination of
interchanged local exchange traffic.
All of the provisions of the Interconnection Order could materially impact the
Company's financial position and results of operations. Because of its smaller
size and smaller market service areas, the Company's local network services
business has a qualified exemption from the FCC's Interconnection Order. The
qualified exemption pertains to certain technical requirements imposed upon
ILECs and is neither an exemption from interconnection, in general, nor against
competitive access providerentry by other carriers. This exemption is known as the rural
telephone company exemption and it continues until a bonafide request for
interconnection is received and a state commission with jurisdiction determines
that discontinuation of the exemption is warranted, consistent with universal
service principles, and that such discontinuation will not impose an undue
economic hardship on the Company and the interconnection requested is
technically feasible. The Company has received over 100 interconnection requests
from CLECs and wireless communications providers. With respect to CLEC
interconnection, three contracts have been approved by state commissions. The
Company will be providing unbundled network elements in 1999. The Company has
signed resale contracts in Arizona, California, Oregon, UtahNevada and Washington. Through ELI,New York and continues to receive
additional requests for resale. None of Citizens' bonafide requests for
interconnection received and finalized in 1998 required payment of usage based
reciprocal compensation to CLECs. Reciprocal compensation is payment for the
transport and termination of local traffic between the Company and a
network-based CLEC. The first contract with a CLEC for usage based reciprocal
compensation will begin in 1999. On February 25, 1999, the FCC issued a
Declaratory Ruling and Notice of Proposed Rulemaking that categorized calls
terminated to Internet Service Providers (ISPs) as "largely" interstate in
nature, which could have the effect of precluding these calls from reciprocal
compensation charges. However, the ruling stated that ILECs are bound by the
existing interconnection agreements and the state decisions that have defined
them.
-4-
Universal Service Reform
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In May 1997, the FCC released its order creating a new federal universal service
system (the Universal Service Order). The Universal Service Order was the FCC's
response to one of the 1996 Act's mandates for a new system for funding of
ubiquitous basic exchange telephone services to all areas of the United States
and its possessions through explicit contributions of all telecommunications
carriers. This new system for funding of basic services in rural, high cost and
insular locations is designed to end the long standing system of funding through
implicit subsidies levied by ILECs in the form of artificially high, mandated
prices for access, intraLATA toll, and other non-basic services. A second
significant mandate of the 1996 Act addressed in the Universal Service Order is
the creation of a federal funding mechanism for the provision of discounted
basic and advanced telecommunications services to qualifying public primary and
secondary schools and local libraries. A third mandate creates a mechanism for
providing federal funding of advanced services to rural health care providers
sufficient in scope to allow qualified entities to receive such services at
rates comparable to those paid by health care providers in urban areas.
The Universal Service Order has been granted authorityimplications for the Company in Washington,
Utah and Oregonaddressing
universal service funding to rural telephone companies. First, the Company
expects to continue receiving funding under the new federal universal service
system. Second, the FCC determined that it is not appropriate at this time to
bring rural telephone companies under a proxy-model driven universal service
cost determination system in the same time frame applicable to non-rural
carriers. The Company expects that its ILECs will continue receiving federal
universal service funding, with certain adjustments, based upon its actual costs
incurred to provide competitiveuniversal services for several years.
The Company cannot predict what the levels or methods of contributions will be
or whether the amount of receipts from the new system will be equal to or
greater than its contributions, because the new system is still under
development by the FCC.
Access Charge/Price Cap Reform
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In May 1997, the FCC released separate orders in its Access Reform and Price Cap
Reform proceedings (the Access Reform Order and the Price Cap Reform Order,
respectively). Both orders affect the Company's ILECs as the Company elected
price cap regulation commencing July 1, 1996.
Price cap regulation is a form of rate regulation in which the interstate rates
of affected ILECs are subject to maximums that are periodically adjusted
according to formulae contained in the FCC's Rules. Price cap regulation allows
affected carriers to retain all earnings generated by operating at the capped
rates. In this manner, affected ILECs are rewarded for achieving operating
efficiencies.
In the Access Reform Order, the FCC ordered price cap carriers to restructure
certain components of the mandated interstate access structure in order to bring
pricing more in line with underlying costs. The Company has complied with this
FCC order since July 1, 1997, as required.
In the Price Cap Reform Order, the FCC arrived at a new productivity factor,
known as the X-factor, by which ILEC price caps are lowered each year. The
purpose of the X-factor adjustment is to reflect the FCC's findings that ILECs
enjoy productivity gains that are proportionately greater than those experienced
in other industries. The X-factor adjustment is designed to give price cap
ILECs' interexchange carrier customers some of the benefits of technology-driven
declining costs in local exchange service.telephony. The new X-factor prescribed by the
Price Cap Reform Order, 6.5%, which is adjusted for inflation, is based upon
data unique to the Regional Bell Operating Companies (RBOCs), with no
consideration given to any other price cap regulated carriers. In particular,
the Company believes that the 6.5% X-factor, which was effective July 1, 1997,
is inappropriate as applied to small price cap regulated ILECs. The Company, completed constructionin
conjunction with the Independent Telephone and Telecommunications Alliance, is
pursuing an appeal in the U. S. Court of a fiber-optic route from Las Vegas, NevadaAppeals for the District of Columbia of
the 6.5% X-factor as applied to Phoenix,
Arizona which providesrural price cap ILECs. The appeal contends that
such carriers lack the Company with fiber optic capacity for its long
distance operations as well as for other telecommunications carriers.economics of scope and scale required to achieve that
level of productivity growth each year. The court has not yet ruled on this
appeal. The FCC will likely revisit the X-factor issue in 1999.
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Joint Ventures, Acquisitions and Investments
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The Company owns a one-third interest and is general managing partner of Mohave
Cellular, a cellular limited partnership operating sixeight cell sites in Arizona.
On September 22, 1994,In March 1999, Adelphia Communications Corporation (Adelphia) and Century
Communications Corp. (Century) announced the signing of a definitive agreement
for the merger of Century with Adelphia. The Company currently owns 1,807,095
shares of Century Class A Common Stock. Pursuant to the Merger Agreement, each
Century Class A Common share will be exchanged for cash of $9.16 and .6122 of a
share of Adelphia Class A Common Stock (for a total market value of $44.14 per
Century Class A Common share based on Adelphia's March 4, 1999 closing price of
$57 1/8).
A subsidiary of the Company, andin a joint venture with a subsidiary of Century
Communications Corp. ("Century") entered into a joint venture agreement for the
purpose of acquiring, for approximately $89 million,, acquired and operating twooperates four cable television systems in
southern California (the "Systems").serving over 90,000 basic subscribers. Century is a cable
television company of which Leonard Tow, the Chairman Chief Executive Officer
and Chief FinancialExecutive
Officer of the Company, is Chairman Chief Executive Officer
and Chief FinancialExecutive Officer. In addition,
Claire Tow, a directorDirector of the Company, is a Senior Vice President and a director of Century and Robert Siff, a director
of the Company is a directorDirector
of Century. The joint venture is governed by aA management board on which the Company and Century are equally
represented. Therepresented governs the joint venture has entered into an agreement pursuant to which aventure. A subsidiary of Century (the "Manager") will manageManager)
manages the day-to-day operations of the Systems.systems. The Manager willdoes not receive a
management fee but will beis reimbursed only for the actual costs it incurs on behalf
of the joint venture. With respect to the
purchase of any service or asset for the joint venture for use in the Systems,
theThe Manager is obligated to pass through to the joint
venture any discount, up to 5%, off the published prices of vendors andservices or assets
purchased for the joint venture for use in the systems. The Manager is entitled
to retain any discount in excess of 5%. On September 30, 1994,The Company accounts for the joint
venture acquiredfollowing the first system servingequity method of accounting. It is expected that these
properties will become part of a larger partnership with Tele-Communications,
Inc., a cable operator in California, and Century. Upon formation of the
partnership, the Company will own 5.5% of this partnership, which will serve
approximately 26,500 subscribers. On November 30, 1995,772,000 customers in the Los Angeles basin. Upon consummation of
the Adelphia/Century merger, the Company expects to sell to Adelphia its
interest in the joint venture properties (or its interest in the partnership if
the joint venture properties are transferred to the partnership before the
Adelphia/Century merger).
In November 1998, the Company acquired all the stock of Rhinelander
Telecommunication, Inc. (RTI) for approximately $84 million in cash. RTI is a
diversified telecommunications company engaged in providing local exchange, long
distance, Internet access, wireless and cable television services to rural
markets in Wisconsin.
In January 1998, the Company purchased approximately 1.3 million shares of D&E
Communications (D&E) for approximately $27 million in cash. As of December 31,
1998, this investment represented 17.9% of D&E's outstanding common stock. D&E
is a full-service telecommunications company in Lancaster County, Pennsylvania
that offers both local and long distance service, wireless service, Internet
service, paging, voice, data and video communications equipment and computer
networking services.
CLEC
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The Company's CLEC subsidiary, ELI, is a facilities-based integrated
communications provider providing a broad range of communications services. ELI
provides the full range of its products and services, including switched local
and long distance voice service as well as enhanced data communications services
and dedicated point-to-point services, in the western United States. Enhanced
data services are also offered in selected cities throughout the country. ELI
markets to retail customers, who are primarily large- and medium-sized
communications-intensive businesses, and to wholesale customers, who are
primarily other communications providers. ELI was incorporated in 1990 and is
approximately 83% owned by the Company. ELI completed the initial public
offering of its common stock in November 1997.
ELI initially operated as a Competitive Access Provider (CAP) in selected
western United States cities, providing point-to-point connectivity for
inter-exchange carriers (IXC) and businesses. With the passage of the 1996 Act,
the increase in customer demand for enhanced broadband data services and the
development of competitive public data and voice networks, ELI has substantially
expanded the breadth of its product offering and its geographic reach.
During 1998, ELI expanded the number of its Metropolitan Area Networks (MANs),
where it provides the full range of its services on its own fiber optic network,
from 5 to 7. ELI also added 2 voice switches, 3 frame relay switches, 6
Asynchronous Transfer Mode (ATM) switches and 7 Internet routers to its
facilities during the year. ELI's ATM network backbone began operation in 1998
and is used to transfer voice, video images and data. Management believes the
ATM network will position ELI to offer one network for all data, voice and video
transmission needs. ELI's local and long-haul installed fiber optic network was
expanded by 24% to 3,091 route miles during the year, and construction has
started on over 2,900 route miles of additional fiber with completion scheduled
for the second half of 1999. In the second half of 1998, ELI began the expansion
of its enhanced data services to cities outside of its MAN network, with
additional cities scheduled for addition in 1999.
-6-
The following table represents certain operating information relating to ELI:
1998 1997
---- ----
Route miles 3,091 2,494
Fiber miles 181,368 140,812
Buildings connected 766 610
Access line equivalents 74,924 34,328
Switches installed:
Voice 7 5
Frame relay 23 20
Internet 24 17
ATM 14 8
Customers 1,644 1,165
In each of its facilities-based markets, ELI faces significant competition from
the ILECs, which currently dominate the local exchange market and are a de facto
monopoly provider of local switched voice services. ELI's primary ILEC
competitors are US WEST, PacBell and GTE. Under certain circumstances, FCC and
state regulatory authorities may provide ILECs with increased flexibility to
reprice their services as competition develops and as ILECs allow competitors to
interconnect to their networks. If the ILECs and other competitors lower their
rates and can sustain significantly lower prices over time, this may adversely
affect revenues of ELI if it is required by market pressure to price at or below
the ILECs' prices. If regulatory decisions permit the ILECs to charge CAPs/CLECs
substantial fees for interconnection to the ILECs' networks or afford ILECs
other regulatory relief, such decisions could also have a material adverse
effect on ELI.
ELI's facility-based operational CLEC competitors in the markets in which ELI
operates include, among others: AT&T Local Services, GST Telecommunications, MCI
WorldCom Corp. and NEXTLINK Communications. In each of the markets in which ELI
operates, at least one other CLEC, and in some cases several other CLECs, offer
many of the same local communications services provided by ELI, generally at
similar prices.
Potential and actual new market entrants in the local communications services
business include RBOCs entering new geographic markets, IXCs, cable television
companies, electric utilities, international carriers, satellite carriers,
teleports, microwave carriers, wireless telephone system serving approximately 20,700
subscribers.operators and private
networks built by large end users, many of which may have financial, personnel
and other resources substantially greater than those of ELI. In addition, the
current trend of business combinations and alliances in the communications
industry, including mergers between RBOCs, may increase competition for ELI.
With the passage of the 1996 Act and the entry of RBOCs into the long distance
market, ELI believes that IXCs may be motivated to construct their own local
facilities or otherwise acquire the right to use local facilities and/or resell
the local services of ELI's competitors.
PUBLIC SERVICES
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The public services sector strategy is focussed on strategically managing
resources and on growth through acquisition. The Company has entered into a systems integration agreement with ALLTEL
Corporation to reengineer all local exchange telephone billingis increasing
productivity by capitalizing on economies of scale, where appropriate, disposing
of non-productive assets, managing the deployment of capital, and customer care
business processes and to develop the next generation of telecommunications
support systems.
NATURAL GASreducing
operating costs.
-7-
Gas
- - ---
Operating divisions of the Company provide natural gas transmission and
distribution services to the following approximate number of primarily
residential customers in the following states.states:
State Customers
----- --------------------
Louisiana 262,900274,200
Arizona 88,100103,600
Hawaii 66,000
Colorado 12,200
-------13,400
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Total 363,200
=======457,200
===========
The provision of services and/or rates charged are subject to the jurisdiction
of federal and state regulatory agencies. The Company purchases all needed gas
supply (except for the production by the Company of synthetic natural gas the supply ofin
Hawaii), which is believed to be adequate to meet current demands and to provide
for additional sales to new customers. The natural gas industry is subject to seasonal
demand (except in Hawaii), with the peak demand occurring during the heating
season of November 1 through March 31. The Company's natural gas sector experiences
third party competition from fuel oil, propane and other
natural gas suppliers for most
of its large consumption customers (of which there are few) and from electric
suppliers for all of its customer base. The competitive position of natural gas at any
given time depends primarily on the relative prices of natural gas and these other
energy sources.
In November 1998, a class action lawsuit was filed in state District Court for
Jefferson Parish, Louisiana, against the Company and three of its subsidiaries:
LGS Natural Gas Company, LGS Intrastate, Inc. and Louisiana General Service
Company. The lawsuit alleges that the Company and the other named defendants
passed through in rates charged to Louisiana customers certain costs that
plaintiffs contend were unlawful. The lawsuit seeks compensatory damages in the
amount of the alleged overcharges and punitive damages equal to three times the
amount of any compensatory damages, as allowed under Louisiana law. In addition,
the Louisiana Public Service Commission has indicated its intention to open an
investigation into the allegations raised in the lawsuit. The Company and its
subsidiaries believe that the allegations made in the lawsuit are unfounded and
the Company will vigorously defend its interests in both the lawsuit and the
related Commission investigation.
The Company seeks to expand into high growth areas adjacent to its Louisiana
operations. The Company targeted the high growth areas of the River Parishes and
Northlake districts. In October 1998, the Company acquired St. Charles Natural
Gas Company for $5 million in cash. St. Charles Natural Gas Company is a natural
gas distribution company serving 5,000 customers in Louisiana and will become
part of the Company's Louisiana Gas Services operations. This acquisition will
provide expansion opportunities in the St. Charles, Lafourche, Ascension and
Iberville Parishes. In July 1998, the Company began managing the operations of
the Pine Pipeline in north Louisiana and contracted with a new industrial
customer for a ten-year supply contract.
The Company continues to expand its northern Arizona natural gas transmission and distribution
service area.areas as certain portions of the service territory continue to
experience double digit customer growth. The Company is expanding in new areas
that are expected to provide 8,000 potential new customers from capital invested
between 1997 and 1999. The Company partnered with local economic development
agencies to attract controlled agriculture to the service territory. The first
hydroponics facility was placed in eastern Arizona in mid 1998. The Company
anticipates that additional hydroponics facilities will be placed in service
during 1999.
In November 1998, Castle and Cooke Properties, Inc. (Castle) filed a complaint
for recovery of response costs, contribution under CERCLA and under the Hawaii
Environmental Response Law, statutory and equitable indemnity, damages and
injunctive relief for trespass and nuisance, damages for negligence, and
declaratory relief arising out of the alleged environmental contamination of
real property located adjacent to the former gas plant site. Castle alleges that
hazardous chemicals and certain petroleum products migrated from the BHP Iwilei
Road property to the adjacent Castle property. Since BHP Hawaii has retained
ownership of the Iwilei Road property and has indemnified the Company for
environmental liabilities related to this property, it is expected that the
outcome of the litigation will result in no judgment against the Company.
-8-
In 1995, the Hawaii Department of Health (HDOH) issued notices requesting
information from current property owners and facility operators around Honolulu
Harbor relating to the HDOH's intent to conduct a regional assessment of
environmental conditions under authority of the Hawaii Environmental Response
Law. Information relating to two sites within the assessment area has grownwas provided
to HDOH by BHP Gas Company. On October 31, 1997, BHP Gas Company (Gasco, Inc.)
was acquired by the Company, and is now operated as The Gas Company, a division
of Citizens Utilities Company. The two sites in the assessment area are Gasco,
Inc.'s former gas plant site at 616 Iwilei Road and the Company's leased
facilities at Pier 38. Site specific cleanup was completed at Pier 38 and a "no
further action" letter was obtained from 65,000 customers
in 1991the HDOH prior to 82,000 customers asthe Company's
acquisition of December 31, 1995.
ELECTRICGasco, Inc. The former gas plant site on Iwilei Road was
purchased by BHP Hawaii from Gasco, Inc. prior to the Company's acquisition of
Gasco, Inc. Furthermore, BHP Hawaii provided to the Company a complete indemnity
from all environmental claims related to the Iwilei Road property. This
indemnity is guaranteed by BHP Hawaii's parent, Broken Hill Proprietary, Ltd.,
an Australian company.
Electric
- - --------
Operating divisions of the Company provide electric transmission and
distribution services to the following approximate number of primarily
residential customers in the following states:
State Customers
----- --------------------
Arizona 58,50065,100
Hawaii 28,80029,800
Vermont 20,000
------20,500
------------
Total 107,300
=======115,400
============
The provision of services and/or rates charged are subject to the jurisdiction
of federal and state regulatory agencies. The Company purchases 80%approximately
81% of needed electric energy, the supply of which is believed to be adequate to
meet current demands and to provide for additional sales to new customers. As a whole,The
majority of the Company's generating facilities are on Kauai. The Company has
smaller generating facilities in Arizona and Vermont which are used mainly for
back-up power supply. Generally, the Company's electric sector does not
experience material seasonal fluctuations.
ThereThe electric utility industry in the United States is undergoing fundamental
changes. Electric utilities have for many years been federal and state regulatory activitiesvertically-integrated
entities with the aim of creating
a more competitive environment inresponsibility for the electric utility industry. These federalgeneration, transmission and
state regulatory activities are still in the investigation stage. The
Company anticipates no material adverse impact on its electric sector should the
industry be opened to competition since the Company is not a large generatordistribution of electric power in a franchise territory. In return for monopoly
status, electric utilities have been subject to comprehensive regulation at the
state and serves primarily residentialfederal level. The industry is now shifting toward electric customers
being able to choose their energy provider much like telephone customers are
able to choose their long distance provider. Generally, this involves splitting
apart the generation and transmission of power from the remainder of the
business, and having generators compete with one another in the sale of power
directly to retail customers. The adventinterconnected regional transmission grids
will be operated independently, continuing as a federally regulated monopoly.
Local transmission and distribution facilities would continue as state-regulated
monopolies. The change in the industry is in various stages of development
around the United States.
In December 1996, the Arizona Corporation Commission (ACC) issued Decision No.
59943 approving rules for a phased-in transition to a competitive retail
electric power market beginning January 1, 1999. Under the plan, retail access
will be phased in over four years with 20% of the load open to competition would most likely provide opportunitiesby
1999, 50% by 2001 and 100% by 2003. Stranded costs are expected to be recovered
from ratepayers through a surcharge with both an energy and/or demand component.
In January 1999, the ACC voted to temporarily stay the electric deregulation
rules. The ACC delayed the move to a competitive electric market until issues
such as pricing, market structure and stranded costs can be resolved. The ACC
plans to begin an intensive series of public hearings to fine tune the
competition rules and expects to outline a process and timeframe for expansion.the
transition to electric competition in Arizona.
In response
to regulatory initiatives,1995, the Company's electric sectorArizona Electric Division was notified by the United
States Environmental Protection Agency (USEPA) of it being a Potentially
Responsible Party related to poly chlorinated biphenol shipments that the
Company made to PCB Inc., sites located in Kansas City, Kansas and Kansas City,
Missouri in the mid 1980s. These sites have been designated by the USEPA as
Superfund Sites and are in the process of being evaluated for remediation. The
Company is one of over 1,500 parties that sent material to the sites and is
considered a de minimus participant. The Company responded to a number of data
requests from USEPA related to its shipments. There has not yet been a
determination of the total cost of the remediation of the sites and of
particular parties, including the Company's share of the cost. The Company is
currently engaged in settlement discussions among the parties. The Company has
reached a de minimis settlement for one of the two pending claims, and it
expects that settlement of the other will be finalized in the near future.
-9-
The Company's Kauai, Hawaii operation is a participant in a collaborative
proceeding with demand-side management programs and integrated resource planning techniques
designed to promote the most efficient use of electricity and to reduce the
environmental impacts associated with new generation facilities.
In 1994, the Company filed for a $19,153,000 rate increase withapproximately 15 other parties initiated by the Hawaii Public
Utilities Commission ("HPUC"). Part(HPUC) on Electric Utility Competition and Investigation of
the requested increase is forElectric Utility Infrastructure in the recoveryState of restorationHawaii. The parties filed
executive summaries and repair costs associated with Hurricane Iniki. In an
effort to reduce the rate impact on its customers, the Company subsequently
filed an applicationfinal statements of position with the HPUC on November
19, 1998. The HPUC is expected to recover $8,000,000deliberate on the findings and issue a final
decision and order in 1999 or later.
The Vermont Public Service Board (the VPSB) has opened a docket (No. 5854) into
competition, customer choice and restructuring of the $19,153,000
throughVermont electric industry.
The purpose of the investigation is to develop an information base, principles
and policy bases to support legislative proposals and rule making by the VPSB.
During 1997 and 1998, the Senate passed a statewide surchargebill to partially recover Iniki restorationallow customers to purchase
power on the open market but it was defeated in the State House of
Representatives.
The General Affairs Committee in the House has advised Vermont Governor Howard
Dean that serious consideration be given to consolidation of the 22 utilities in
the State. The panel specifically recommended that consideration begin with the
amalgamation of the Company's Vermont operations with Green Mountain Power and
repair
costsCentral Vermont Public Service Corporation. The Company has signed a
confidentiality and cooperation agreement with Green Mountain Power and Central
Vermont Public Service Corporation to permit an exchange of information to
evaluate the possibility of consolidating the Vermont operations of the three
utilities. In addition, consideration may be given to converting Vermont's
investor owned utilities into a cooperative ownership structure. The Company
will work with the VPSB and other parties to implement an appropriate plan,
however, it is uncertain at this time whether the plan or its key elements
including consolidation will ultimately be implemented.
The Vermont Joint Owners (VJO), a consortium of 14 Vermont utilities, including
the Company, have entered into a purchase power agreement with Hydro-Quebec. The
agreement contains "step-up" provisions that state that if any VJO member
defaults on its obligation under the provisionscontract to purchase power from
Hydro-Quebec the other VJO participants will assume responsibility for the
defaulting party's share on a pro-rata basis. As of Subsection 269-16.3December 31, 1998, the
Company's obligation under the agreement is approximately 10% of the Hawaii Revised
Statutes. Iftotal
contract. The two largest participants in the HPUC approves the surcharge application, customers of
all electric utility companies in Hawaii would pay a portionVJO represent approximately 46%
and 37% of the approved
Inikitotal contract, respectively. During 1998, these two major
participants have each experienced regulatory disallowances that have resulted
in credit rating downgrades and stock price declines. Both of these participants
are in the process of appealing the regulatory disallowances; however, both
companies have stated that an unfavorable ruling could jeopardize their ability
to continue as going concerns. If either or both of these companies default on
their obligations under the Hydro-Quebec agreement, the remaining members of the
VJO, including the Company, may be required to pay for a substantially larger
share of the VJO's total power purchase obligation for the remainder of the
agreement. Such a result could have a materially adverse effect on the financial
results of the Company's Vermont Electric Division and on the Company as a
whole.
In January 1998, a power outage to approximately 5,000 customers in Vermont was
caused by an ice storm. The costs related to power restoration was approximately
$3 million. The Company received insurance recovery for certain costs and repairhas
requested and received from the Vermont Public Service Board the ability to
defer the remaining costs overfor potential recovery in future rate requests.
In November 1995, the Company's Vermont electric division was permitted an 8.5%
rate increase. Subsequently, the VPSB called into question the level of rates
awarded the Company in connection with its formal review of allegations made by
the Department of Public Service (the DPS), the consumer advocate in Vermont and
a five year periodformer Citizens employee. The major issues in this proceeding involved
classification of certain costs to property, plant and equipment accounts and
the Company's rate increase request will be reduced by $8,000,000. The HPUC
issued an Interim Decision and Order which took effect on June 15, 1995
grantingDemand Side Management program. In addition, the DPS believed that
the Company a $5,983,000 interim increaseshould have sought and received regulatory approvals prior to
construction of certain facilities in annual revenues.
The second phaseprior years. On June 16, 1997, the VPSB
ordered the Company to reduce its rates for Vermont electric service by 14.65%
retroactive to November 1, 1995 and to refund to customers, with interest, all
amounts collected since that time in excess of the requestedrates authorized by the VPSB.
The Company estimates that the annual effect of the rate increasereduction ordered by
the VPSB is approximately $3.9 million. The Company made a $6.6 million refund
to its customers in 1997 by issuing a credit to the utility bills of each
customer. In addition, the VPSB assessed statutory penalties totaling $60,000
and placed the statewide surcharge
is expectedCompany on regulatory probation for a period of at least five
years. During this probationary period, the Company could lose its franchise to
be includedoperate in aVermont if it violates the terms of probation prescribed by the VPSB.
The VPSB prescribed final terms of probation in its final order fromissued September
15, 1998. In October 1998, the HPUC. The Company expects a final orderfiled an appeal in the first halfVermont Supreme
Court challenging certain of 1996.
WATER/WASTEWATER
Thethe penalties imposed by the VPSB.
-10-
Water and Wastewater
- - --------------------
Through subsidiaries, the Company provides water and/ordistribution, wholesale water
transmission, wastewater treatment, public works consulting and marketing and
billing services to the following approximate number of primarily residential
customers in the following states:
State Customers
----- --------------------
Arizona 107,600115,000
Illinois 68,70071,700
California 59,60060,000
Pennsylvania 27,20031,800
Ohio 14,60014,900
Indiana 1,300
----------------------
Total 279,000
==========294,700
============
The provision of services and/or rates charged are subject to the jurisdiction
of federal state and localstate regulatory agencies. A significant portion of the Company's
water/wastewater treatment sector construction expenditures necessary
to serveserving new
customers are made under agreements with land developers who generally advance
plant and/or funds for construction and/or plant to the Company that are later refunded in
part by the Company as new customers and revenues are added in the respective
land developments.
In addition to increasing customers through agreements with land developers, the
Company acquires ongoing water/seeks to acquire water and/or wastewater operations from municipalities
and private companies. In 1995,Privatization opportunities are increasing as the Company acquired approximately 4,300 customers
of the water/water
and wastewater systemsindustries in Youngtown, Arizona and Douglasville,
Pennsylvania.
In September 1992, the EPA filed a complaint with the United States District
Courtcontinue to face significant
changes due to increasing demands for advanced technical expertise and capital
to meet the requirements of more stringent environmental regulations.
Opportunities for public-private partnerships are demonstrated by the following
factors: Water and wastewater industries continue to face significant challenges
as environmental regulations rise and federal funding opportunities decline;
there is a growing need for enhancement of existing infrastructure and
construction of new facilities for water and wastewater systems; and there is an
increased demand for government to restructure and decrease internal spending.
The Company's geographic and service diversity and decades of experience in the
water and wastewater industry provide a strong platform to successfully meet
these needs and respond to the increasing trend for privatization. The Company
plans to initially focus its privatization efforts in existing and surrounding
service areas.
In October 1998, the Company agreed to acquire all of the stock of the Sorenson
Utility Company (Sorenson) for approximately $800,000. Sorenson provides
wastewater collection and treatment for approximately 450 customers around
Bullhead City, Arizona, which is adjacent to the Company's Mohave Water Division
operations.
Pursuant to agreements with the Del Webb Corporation signed in September of
1997, the Company began providing construction water services to the master
planned community of Anthem in September of 1998. Anthem is an approximately
5,700 acre master planned community located about 20 miles north of downtown
Phoenix, Arizona. As currently planned, the project will consist of a mix of
residential and commercial units which total approximately 14,500 equivalent
residential units (ERUs). Development commenced in mid 1998 and home sales are
scheduled to begin in March of 1999 with the first closing planned for August of
1999. On June 19, 1998, the Company was granted Certificates of Convenience and
Necessity by the Arizona Corporation Commission for the Northern Districtapproximately 5,700
acres of Illinois relatingthe project. The certificates are conditioned upon receiving franchises
or consents from Maricopa County for approximately 4,800 acres and the City of
Phoenix for approximately 900 acres before June 19, 1999. The Company expects to
alleged violationsreceive the required franchises or consents.
In the first half of 1998, the Company conducted an extensive public planning
process in its Sun City, Sun City West and Youngtown service areas. A Central
Arizona Project (CAP) Task Force consisting of numerous customer groups
evaluated various options for using CAP water in the communities and selected a
CAP water use plan. On October 1, 1998, the Company applied to the Arizona
Corporation Commission (ACC) to approve the CAP water use plan adopted by the
Company's Illinois subsidiary with respectCAP Task Force and to National Pollutant Discharge
Elimination System permit requirements.authorize a fee for recovery of deferred and ongoing costs
related to its CAP subcontracts for the Sun City, Sun City West and Youngtown
service areas. If approved by the ACC, all deferred costs would be recovered
over a 42-month period and all ongoing costs related to the CAP subcontracts
would be recovered as incurred. The Company settled this action on March
21, 1995 and paid a $490,000 fine. Under the settlement, the Company also agreed
to construct plant improvements, with an estimated cost of $2,200,000, which would be required to fund
approximately $15 million in ordercapital improvements needed to complyimplement the water
use plan over the next four years.
-11-
In November 1998, the Company received a complaint filed with new discharge limits providedthe Illinois
Commerce Commission by residents in certain subdivisions in Orland Township, IL.
The residents allege that the Company has overcharged them for wastewater
collection and treatment services from September 1995 to present. The residents
have asked the Commission to investigate and reduce the Company's wastewater
rates for their subdivisions and to refund overpayments for the period September
1995 to the date of the decision. On March 3, 1999, a Commission Hearing
Examiner limited the residents potential claims to periods after November 16,
1996. The Company disagrees with the residents' position and believes that it
has implemented rates in accordance with Commission Orders. Commission hearings
will be scheduled in 1999.
Citizens Lake Water Company was created to deliver Lake Michigan water to
wholesale public water supply customers. The target public water supplies are
located primarily in southwest Cook County and northeast Will County, Illinois.
This southwest suburban area targeted by the settlement. Shortly afterpipeline is one of the action was settled,major growth
corridors in the Chicago area. The Company entered intohas secured a tentative agreementCertificate of
Convenience and Necessity to provide lake water to a 30-square mile service
territory in this high growth region. The Company, pursuant to contracts, will
swap assets with the neighboring Village of Bolingbrook which will add 6,000
water customers to transfer flowthe Company and service territory land capable of supporting
8,000 new customers.
In October 1998, the Company received an Order from the California Public
Utilities Commission (CPUC) approving an increase in revenue of $934,000 over
two years. The revenue increase affected the Company's toCalifornia water
operations in its Felton, Larkfield and Sacramento Districts. The Order will
increase the Village's nearby facilities for treatment. If this agreementCompany's water rates in California between 5% and 14% in two steps
and went into effect on October 22, 1998.
The Company has been named as one of many defendants in two class actions
pending against a variety of industrial companies and water providers in the
Sacramento, CA area. Both actions involve the Company's California water
property and the Company's compliance with the Village is approvedproviding potable water in accordance
with established drinking water standards. Both cases have been stayed by the
EPA andcourt (plaintiffs have appealed) pending the Court, the Company's plant would
be converted to a flow transfer station. The Company's financial obligations
would be the same under either the plant improvement project or the flow
transfer project. The agreement with the Villageoutcome of Bolingbrook is now pending
approvalan Order Instituting
Investigation (OII) by the EPA and the court. As a regulated entity,CPUC.
In January 1999, the Company is
entitled to earn a fair ratereceived an order from the Public Utility
Commission of return on improvements that are placedOhio approving an increase in service for the benefitannual revenues of its customers.$975,000.
GENERAL
- - -------
The Company believes that the cost of
the above discussed improvements will be recovered through customer rates.
General
The Company's public utility operations are conducted primarily in small and medium size towns
and communities. No material part of the Company's business is dependent upon a
single customer or small group of customers for its revenues. As a result of its
diversification, the Company is not dependent upon any single geographic area
or upon any one type of utility service for its revenues. Due to this diversity, no single regulatory body regulates a
utility service of the Company accounting for more than 10.3%19% of its 1995 revenues.
The Company is subject to regulation by the respective local, state regulatory agencies and federal
regulatory agencies. The Company is not subject to the Public Utility Holding
Company Act. Order backlog is not a significant consideration in the Company's
business and the Company has no contracts or subcontracts which may be subject
to renegotiation of profits or termination at the election of the federal
government. The Company holds franchises from local governmental bodies which
vary in duration. The Company also holds certificatesCertificates of convenienceConvenience and
necessityNecessity granted by various state commissions which are generally of indefinite
duration. The Company has no special working capital practices. The Company's
research and development activities are not material. There are no patents,
trademarks, licenses or concessions held by the Company that are material.
The Company had 4,760approximately 6,700 employees at December 31, 1995.1998.
The Year 2000 (Y2K) issue results from computer programs using a two-digit
format, as opposed to four, to indicate the year. Such computer systems may be
unable to interpret dates beyond the year 1999, which could cause system
failures or other computer errors. For a detailed discussion regarding the
Company's Y2K effort, see Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operation."
-12-
(d) Financial Information about Foreign and Domestic Operations and Export Sales
The Company does not have any foreign operations or material export sales except
for the following:----------------------------------------------------------------------------
In 1995, the Company made a $4,200,000an investment in and entered into definitive
agreements with Hungarian Telephone and Cable Corp. ("HTCC")(HTCC), a Delaware
corporation.corporation, which owns and operates local telephone concessions in Hungary. In
1995 and 1996, the Company amended certain of such agreements and entered in
additional agreements with HTCC regarding financial support provided by the
Company. Such financial support agreements have since expired. In 1997, the
Company acquired additional HTCC shares in the open market. Pursuant to these agreementsthe
agreement, as amended, and such open market purchases, the Company (i) owns
approximately 17% of the CompanyHTTC shares presently outstanding, (ii) has rights to
purchase up to 54%HTCC shares that, if fully exercised, would result in the Company
owning a majority of HTCC common stock (ii) provides certainon a fully diluted basis, (iii) provided
requested management services to HTCC on a cost-plus basis, (iii)and (iv) has the
right to and has designated one membertwo members of the HTCC Board of Directors,Directors. The
Company's investment in HTCC is classified as an available for sale security and
(iv) has providedaccounted for using the cost method of accounting.
During 1997, HTCC with guaranteesdisputed certain provisions of the agreement and financial support. HTCC presently controls the
rights to
own, operate and expand certain telecommunications servicesassociated management fee. As a result, in certain
regions of Hungary. TheSeptember 1998, the current
management services fee payable byagreement was terminated and a new seven-year consulting
services agreement between the Company and HTCC was entered into with services
to begin in 2004. In return, HTCC issued to the Company is100,000 shares of its
common stock and an $8,400,000 note maturing in 2004 in settlement of the
greaterdispute with the Company.
The investment in HTCC has declined in value during 1998 and in the fourth
quarter of 5% of adjusted gross revenues of HTCC or1998 management determined that the decline was other than temporary.
As a monthly
fixed amount. In addition, expenses incurred byresult, the Company recognized a loss of $31,900,000 in providing such
services, including certain allocable overhead items, are to be reimbursed by
HTCC. A subsidiarythe HTCC investment
as a reduction of Other income (loss), net in the Company isstatements of income and
comprehensive income. This loss did not impact the guarantor of a $33,200,000 bank loan
to HTCC. The Company has agreed to provide HTCC with up to $20,000,000 of
additional financial support. The Company has been compensated for such
guarantees and financial support.Company's operating cash
flows (see Note 16).
-13-
Item 2. Description of Property
-----------------------
The administrative officesAdministrative Office of the Company areis located at 3 High Ridge Park,
Stamford, Connecticut, 06905 and areis leased. The operations support office for
the Company's Communications businesses is located at 3 North Park East, 8800
North Central Expressway, Dallas, Texas, 75231 and is leased. The operations
support office for the Company's CLEC business is located at 4400 NE 77th
Avenue, Vancouver, Washington, 98662 and is owned. The operations support office
for the Company's Public Service businesses is located at 1233 Westbank
Expressway, Harvey, Louisiana, 70058 and is owned. In addition, the Company
purchased a 30 acre site in Plano, Texas where a new operations support office
is being constructed for the Company's Communications businesses. The Company
also purchased a 25,000 sq. ft. office facility in the City of Flagstaff,
Arizona which will serve as an additional operations support office for the
Public Services businesses. The Company owns property including:
telecommunications outside plant, central office, microwave radio and
fiber-optic facilities; electric generation,gas production, transmission and distribution
facilities; gaselectric generation, transmission and distribution facilities; water
production, treatment, storage, transmission and distribution facilities; and
wastewater treatment, transmission, collection and discharge facilities; all of
which are necessary to provide services at the locations listed below.
State Service(s) Provided
----- -------------------
1. Arizona Electric, Natural Gas, Telecommunications,*Telecommunications*, Water, Wastewater
2. California Telecommunications, Water
3. Colorado Natural Gas
4. Florida Telecommunications
5. Hawaii Electric, Gas
6. Idaho Telecommunications
7. Illinois Telecommunications, Water, Wastewater
8. Indiana Water
9. Louisiana Natural Gas
Telecommunications10. Montana Telecommunications
11. Nevada Telecommunications
12. New Mexico Telecommunications
13. New York Telecommunications *
14. Ohio Water, Wastewater
15. Oregon Telecommunications
16. Pennsylvania Water
17. Tennessee Telecommunications
18. Utah Telecommunications
19. Vermont Electric
20. Washington Telecommunications
21. West Virginia Telecommunications*
22. Wisconsin Telecommunications*
* Certain properties are subject to mortgage deeds pursuant to Rural Utilities
Services and Rural Telephone BankService borrowings.
-14-
Item 3. Legal Proceedings
-----------------
In 1995, the Company's Arizona Electric Division was notified by the United
States Environmental Protection Agency (USEPA) of it being a Potentially
Responsible Party related to poly chlorinated biphenol shipments that the
Company made to PCB Inc., sites located in Kansas City, Kansas and Kansas City,
Missouri in the mid 1980s. These sites have been designated by the USEPA as
Superfund Sites and are in the process of being evaluated for remediation. The
Company is one of over 1,500 parties that sent material to the sites and is
considered a de minimus participant. The Company responded to a number of data
requests from the USEPA related to its shipments. There has not yet been a
determination of the total cost of the remediation of the sites and of
particular parties, including the Company's share of the cost. The Company is
currently engaged in settlement discussions among the parties. The Company has
reached a de minimis settlement of one of the two pending claims, and it expects
that settlement of the other will be finalized in the near future.
In November 1995, the Company's Vermont electric division was permitted an 8.5%
rate increase. Subsequently, the VPSB called into question the level of rates
awarded the Company in connection with its formal review of allegations made by
the Department of Public Service (the DPS), the consumer advocate in Vermont and
a former Citizens employee. The major issues in this proceeding involved
classification of certain costs to property, plant and equipment accounts and
the Company's Demand Side Management program. In addition, the DPS believed that
the Company should have sought and received regulatory approvals prior to
construction of certain facilities in prior years. On June 16, 1997, the VPSB
ordered the Company to reduce its rates for Vermont electric service by 14.65%
retroactive to November 1, 1995 and to refund to customers, with interest, all
amounts collected since that time in excess of the rates authorized by the VPSB.
The Company estimates that the future annual effect of the rate reduction
ordered by the VPSB is approximately $3.9 million. The Company made a $6.6
million refund to its customers in 1997 by issuing a credit to the utility bills
of each customer. In addition, the VPSB assessed statutory penalties totaling
$60,000 and placed the Company on regulatory probation for a period of at least
five years. During this probationary period, the Company could lose its
franchise to operate in Vermont if it violates the terms of probation prescribed
by the VPSB. The VPSB prescribed final terms of probation in its final order
issued September 1992,15, 1998. In October 1998, the EPACompany filed an appeal in the
Vermont Supreme Court challenging certain of the penalties imposed by the VPSB.
In January 1997, the Company's Illinois subsidiary was served with a complaint
in an action commenced by the Illinois Attorney General (the State). The
complaint alleges violations of National Pollution Discharge Elimination System
permits issued to three wastewater treatment plants, acquired in mid-1994
through a merger with Metro Utility Company (Metro), as well as related
allegations. The majority of the alleged violations predate the Company's
acquisition of the plants, one of which has been taken out of service to foster
regionalization. The Company filed its answer denying the allegations of the
complaint and raised the affirmative defense of failure of the State to comply
with certain provisions of the Illinois Environmental Protection Act. A
settlement has been completed with the Illinois Environmental Protection Agency
by payment to the State of $65,000. No determination of violation was reached.
The Company has contractual rights of indemnification from the former
shareholders of Metro. The Company has been compensated for its costs of
settlement through settlement of these contractual rights and other claims
against the shareholders of Metro.
In August 1997, a lawsuit was filed in the United States District Court for the
Northern District of Illinois relating to alleged violationsConnecticut (Leventhal vs. Tow, et al.) against the Company and five
of its officers, one of whom is also a director, on behalf of all persons who
purchased or otherwise acquired Series A and Series B shares of Common Stock of
the Company between September 5, 1996 and July 11, 1997, inclusive. On February
9, 1998, the plaintiffs filed an amended complaint. The complaint alleges that
Citizens and the individual defendants, during such period, violated Sections
10(b) and 20(a) of the Securities Exchange Act of 1934 based upon certain public
statements made by the Company's Illinois subsidiary with respectCompany, which are alleged to National Pollutant Discharge
Elimination System permit requirements.be materially false or
misleading, or are alleged to have failed to disclose information necessary to
make the statements made not false or misleading. The plaintiffs seek to recover
unspecified compensatory damages. The Company settled this actionand the individual defendants
believe the allegations are unfounded and filed a motion to dismiss on March 21, 1995 and paid27,
1998. On April 28, 1998 the plaintiffs served a $490,000 fine. UnderMemorandum of Law in Opposition
to Defendants Motion to Dismiss. Subsequent to that date, the settlement,parties filed
reply memoranda. The court has the motion under consideration but has not yet
established a schedule of oral arguments.
-15-
In March 1998, a lawsuit was filed in the United States District Court for the
District of Connecticut (Ganino vs. Citizens Utilities Company, et al.), against
the Company and three of its officers, one of whom is also agreed
to construct plant improvements, with an estimated costa director, on behalf
of $2,200,000, which
would be required in order to comply with new discharge limits provided for byall purchasers of the settlement. Shortly after the action was settled,Company's common stock between May 6, 1996 and August
7, 1997, inclusive. The complaint alleges that the Company entered into a
tentative agreement withand the Villageindividual
defendants, during such period, violated Sections 10(b) and 20(a) of Bolingbrook to transfer flow fromthe
Securities Exchange Act of 1934 by making materially false and misleading public
statements concerning the Company's relationship with a purported affiliate,
Hungarian Telephone and Cable Corp. (HTCC), and by failing to the Village's nearby facilities for treatment. If this agreement
with the Village is approved by the EPAdisclose material
information necessary to render prior statements not misleading. The plaintiff
seeks to recover unspecified compensatory damages. The Company and the
Court,individual defendants believe that the Company's plant would
be convertedallegations are unfounded and have filed
a motion to a flow transfer station.dismiss. The plaintiff requested leave to file an amended complaint
and an amended complaint was served on the Company on July 24, 1998. The
Company's financial obligations
would bemotion to dismiss the same under eitheramended complaint was filed on October 13, 1998.
The court canceled scheduled oral argument for January 25, 1999 and has not yet
reset a date for oral argument on the plant improvement project ormotion.
In November 1998, a class action lawsuit was filed in state District Court for
Jefferson Parish, Louisiana, against the flow
transfer project.Company and three of its subsidiaries:
LGS Natural Gas Company, LGS Intrastate, Inc. and Louisiana General Service
Company. The agreement withlawsuit alleges that the Village of Bolingbrook is now pending
approval by the EPACompany and the court. As a regulated entity,other named defendants
passed through in rates charged to Louisiana customers certain costs that
plaintiffs contend were unlawful. The lawsuit seeks compensatory damages in the
amount of the alleged overcharges and punitive damages equal to three times the
amount of any compensatory damages, as allowed under Louisiana law. In addition,
the Louisiana Public Service Commission has indicated its intention to open an
investigation into the allegations raised in the lawsuit. The Company and its
subsidiaries believe that the allegations made in the lawsuit are unfounded and
the Company will vigorously defend its interests in both the lawsuit and the
related Commission investigation.
In addition, the Company is entitledparty to earn a fair ratevarious other legal proceedings arising in
the normal course of return on improvements that are placed in
service for the benefitbusiness. The outcome of its customers. The Companyindividual matters is not
predictable. However, management believes that the costultimate resolution of all
such matters, including those discussed above, after considering insurance
coverages, will not have a material adverse effect on the above discussed improvements will be recovered through customer rates.Company's financial
position, results of operations, or its cash flows.
Item 4. Submission of Matters to Vote of Security Holders
-------------------------------------------------
None in fourth quarter 1995.1998.
-16-
Executive Officers
- - ------------------
Information as to Executive Officers of the Company as of January 31, 1996,March 1, 1999 follows:
Name Age Current Position and Office
Leonard Tow 67 Chairman of the Board, Chief
Executive Officer and Chief
Financial Officer
Daryl A. Ferguson 57 President and Chief Operating
Officer
Robert J. DeSantis 40 Vice President and Treasurer
James P. Avery 39 Vice President, Energy
Richard A. Faust, Jr. 49 Vice President, Mohave County
J. Michael Love 44 Vice President, Corporate
Planning
Robert L. O'Brien 53 Vice President, Regulatory
Affairs
Livingston E. Ross 47 Vice President and Controller
David B. Sharkey 46 President, Electric
Lightwave, Inc.
Ronald E. Spears 47 Vice President,
Telecommunications
Ronald E. Walsh 56 Vice President,
Water/Wastewater
Name Age Current Position and Office
---- --- ---------------------------
Leonard Tow 70 Chairman of the Board and Chief Executive Officer
Daryl A. Ferguson 60 President and Chief Operating Officer
Robert J. DeSantis 43 Chief Financial Officer, Vice President and Treasurer
O. Lee Jobe 41 Vice President, Communications; President, Citizens Communications Sector
J. Michael Love 47 Vice President, Public Services; President, Citizens Public Services Sector
L. Russell Mitten 47 Vice President, General Counsel and Assistant Secretary
James D. Ranton 43 Vice President, Corporate Human Resources
Livingston E. Ross 50 Vice President and Controller
David B. Sharkey 49 President, Electric Lightwave, Inc.
Donald P. Weinstein 34 Vice President, Planning and Development
There is no family relationship between any of the officers of the Registrant.
The term of office of each of the foregoing officers of the Registrant will
continue until the next annual meeting of the Board of Directors and until a
successor has been elected and qualified.
LEONARD TOW has been associated with the Registrant since April 1989 as a
Director. In June 1990, he was elected Chairman of the Board and Chief Executive
Officer. In October 1991, heHe was appointed to the additional position ofalso Chief Financial Officer of the Registrant.from October 1991 through November
1997. He has also been a Director Chief
Executive Officer and Chief FinancialExecutive Officer of Century
Communications Corp. since its incorporation in 1973 and Chairman of its Board
of Directors since October 1989. He is Director of Hungarian Telephone and Cable
Corporation, Chairman of the Board of Electric Lightwave, Inc. and is a Director
of the United States Telephone Association.
DARYL A. FERGUSON has been associated with the Registrant since July 1989. He
was Vice President, Administration from July 1989 through March 1990 and Senior
Vice President, Operations and Engineering from March 1990 through June 1990. He
has been President and Chief Operating Officer since JuneJuly 1990. During the
period April 1987 through July 1989, he was President and Chief Executive
Officer of Microtecture Corporation. He is currently
a Director of Centennial
Cellular Corp.Hungarian Telephone and Cable Corporation and Chief Executive
Officer and Vice Chairman of the Board of Electric Lightwave, Inc.
ROBERT J. DeSANTIS has been associated with the Registrant since January 1986.
He was Assistant to the Treasurer through May 1986 and Assistant Treasurer
from June 1986 through September 1991. He has been Vice President and Treasurer since October 1991.
JAMES P. AVERY1991 and also has been
Chief Financial Officer since November 1997. He is currently Chief Financial
Officer, Vice President and Treasurer of Electric Lightwave, Inc.
O. LEE JOBE has been associated with the Registrant since August 1981.July 1997. He was Project Manager, Electric through June 1988, Assistant Vice
President, ElectricNetwork Operations from June 1988July 1997 through December 1990 and Vice President,
Electric from December 1990 through May 1994.October 1997. He has been
Operating Vice President, EnergyCommunications since June 1994.
RICHARD A. FAUST, JR. has been associated withOctober 1997. In January 1999 he
was also appointed President, Citizens Communications Sector. Prior to joining
the Registrant, since December
1990. Hehe was associated with Louisiana General Services, Inc. from 1972 until
that Company was merged with the Registrant in December 1990. He served as Vice President, General CounselBusiness Operations at Pacific Bell from
June 1994 through June 1997 and Secretary of Louisiana General Services, Inc.Director, Business Operations at Sprint
Corporation from March 1984 through May 1993. He was elected Vice President, Mohave County,
(Arizona) inFebruary 1990 to June 1993.1994.
J. MICHAEL LOVE has been associated with the Registrant since May 1990 and from
November 1984 through January 1988. He was Assistant Vice President,
Regulatory Affairs and Community Relations from June 1986 through January 1988.
He left the Registrant in January 1988 to become President and General Counsel
of Southern New Hampshire Water Company. He rejoined the Registrant in April
1990 and was Assistant Vice President, Corporate Planning
from June 1990March 1991 through March 1991.January 1997. He has beenwas appointed Vice President, Corporate Planning since March 1991.
ROBERTPublic
Services in January 1997. In January 1999, he was also appointed President,
Citizens Public Services Sector.
L. O'BRIENRUSSELL MITTEN has been associated with the Registrant since March 1975.June 1990. He
was General Counsel until June 1991. He has been Vice President, Regulatory AffairsGeneral Counsel
and Assistant Secretary since June 1981.
1991.
JAMES D. RANTON has been associated with the Registrant since August 1996. Prior
to joining the Registrant, he was Director of Compensation and Benefits at
Carrier Corporation, a manufacturing company, from April 1993 to August 1996.
LIVINGSTON E. ROSS has been associated with the Registrant since August 1977.
He was Manager of Reporting from September 1984 through March 1988, Manager of
General Accounting from April 1988 through September 1990 and Assistant
Controller from October 1990 through November 1991. He
has been Vice President and Controller since December 1991.
DAVID B. SHARKEY has been associated with the Registrant since August 1994 and
has been President of Electric Lightwave, Inc. since that date. He has been
Chief Operating Officer of Electric Lightwave, Inc. since October 1997 and is
Director of Electric Lightwave, Inc. Prior to joining the Registrant, he was
Vice President and General Manager of MobilMedia,Metromedia Paging, a wireless company
headquartered in New Jersey, from August 1989 through July 1994.
RONALD E. SPEARSDONALD P. WEINSTEIN has been associated with the Registrant since June 1995 and
has been Vice President, Telecommunications since that date. Prior to joining
the Registrant, he was Managing Director at Russell Reynolds Associates, an
executive recruiting firm from April 1994 to May 1995.August 1989.
He was ChairmanManager, Financial Planning from October 1992 through September 1996; and
Chief
Executive Officer, and prior to that, President and Chief Operating Officer of
Videocart, Inc. from February 1991 to March 1994. He served as President, MCI
Midwest, an operating division of MCI TelecommunicationsDirector, Financial Planning from September 1984 to
January 1991.
RONALD E. WALSH has been associated with the Registrant since January 1986.
He was Attorney and Assistant Secretary from November 19871996 through August 1992.October 1997. He has
been Vice President, Water/WastewaterPlanning and Development since August 1992.October 1997.
-17-
PART II
-------
Item 5. Market for the Registrant's Common StockEquity and Related Stockholder
-----------------------------------------------------------------------
Matters
-------
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the New York Stock Exchange under the
symbol CZN. Prior to the conversion of the Company's Common Stock Series A into
Common Stock Series B (now Common Stock) on August 25, 1997, the two series
traded separately on the New York Stock Exchange under the symbols CZNA and
CZNB, for Series A and Series B, respectively. The following table indicates the high and low prices per
share as taken from the daily quotations published in the "Wall"The Wall Street Journal"
during the periods indicated. Prices have been adjusted retroactively for
subsequent stock dividends, and the August
31, 1993 2-for-1 stock split, rounded to the nearest 1/8th.16th. (See Note 78 of Notes
to Consolidated Financial Statements.)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
-------------------------- ------------------------- ------------------------ -----------------------
High Low High Low High Low High Low
1995:
Series A $13 5/1998: ---- --- ---- --- ---- --- ---- ---
- - ----
CZN $ 10 7/8 $11$ 8 7/8 $ 11 3/4 $12 3/16 $ 9 1/2 $ 10 $ 6 7/8 $10$ 9 1/16 $ 7 1/4
$11 1/2 $10 5/8 $13 1/4 $10 5/8
Series B 13 5/81997:
- - ----
CZNA $ 11 3/4 12 3/8 10 1/211/16 $9 13/16 $ 11 1/2 10 3/4 13 3/$ 8 105/16 N/A N/A N/A N/A
CZNB $ 11 11/16 $9 15/16 $ 11 1/2 $ 7 5/8 1994:
Series A $ 9 $ 7 9/16 $ 10 1/16 $ 8 13 1/8 14 7/8 12 1/2 13 5/8 12 3/8 13 11 3/4
Series B 13/16 1/4 13 14 7/8 12 1/2 13 5/8 12 3/8 13 11 7/8
1993:
Series A 15 3/4 12 16 1/2 14 1/4 16 3/8 11 7/8 17 3/4 14 3/8
Series B 15 3/4 12 1/8 16 1/2 14 1/8 16 3/8 11 7/8 17 5/8 14 3/8
1992:
Series A 11 1/8 9 3/8 10 3/4 9 7/8 12 1/8 9 5/8 13 10 3/4
Series B 10 7/8 9 3/8 10 3/4 9 1/2 12 1/4 9 1/2 13 10 3/4
The December 29, 1995 prices were: Series A $12 7/8 high,
$12 5/8 low; Series B $12 7/8 high, $12 5/8 low.
As of January
31, 1996,February 26, 1999, the approximate number of record security holders of
the Company's Common Stock Series A and Series B was 26,330 and 21,385,
respectively.46,592. This information was obtained from the
Company's transfer agent.
DIVIDENDS
The amount and timing of dividends payable on Common Stock are within the sole
discretion of the Company's Board of Directors. The Board of Directors has
undertaken an extensive review of the Company's dividend policy in conjunction
with its separation plans, which are discussed in detail in Item 1(a) of this
report. Resulting from this review, in November 1998, the Board concluded that
after the payment of the December 1998 stock dividend, the Company should
discontinue the payment of stock dividends at least through the separation.
Post-separation dividend policies for both the new company and Citizens
Utilities Company will continue to be evaluated and will be subject to approval
by each company's board of directors. In 1998 and 1997, the Board of Directors
reviewed alternative stock dividend cash equivalents and associated stock
dividend rates each quarter in order to determine and declare a prudent stock
dividend rate in light of the Company's actual and forecasted financial position
and results of operations, as well as dividend yields of comparable
communications and public services companies. Quarterly stock dividends declared
and issued on both Common Stock Series A and Series B were 1.5%.75% for each quarter of 1998, 1.6% for the
first and second quarters of 1997 and 1.6%1.0% for each the third and fourth quarters of
1995.
Quarterly1997. The stock dividends declared and issued on both Common Stock
Series A and Series B were 1.1% fordividend cash equivalents considered to determine the first quarter of 1994, 1.15%
for the second quarter of 1994, 1.3% for the third quarter of 1994 and
1.4% for the fourth quarter of 1994. An annual cashstock
dividend equivalent rate of 72 1/4 cents and 68 7/8 cents per share
(adjustedrates, adjusted for all stock dividends paid subsequent to all
dividends declared through December 31, 19951998, and rounded to the nearest 1/8th) was considered by the Company's Board of Directors in
establishing the Series A and Series B stock dividends during 1995 and
1994, respectively.
(See Note16th,
were as follows:
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
------------- ------------- -------------- ----------------
1998 6 15/16 cent 7 of Notes to Consolidated Financial Statements.)9/16 cent 7 7/16 cent 6 3/8 cent
1997 17 5/16 cent 16 1/16 cent 8 1/16 cent 9 7/8 cent
RECENT SALES OF UNREGISTERED SECURITIES, USE OF PROCEEDS FROM REGISTERED
SECURITIES
None
-18-
Item 6. Selected Financial Data (In($ in thousands, except for per-share amounts)
----------------------------------------------------------------------
Year Ended December 31,
1995 1994 1993 1992 1991
---- ---- ---- ---- ---------------------------------------------------------------------------------
Operating revenues $1,069,032 $906,150 $613,099 $576,881 $545,0251998 1997 1996 1995 1994
---- ---- ---- ---- ----
Revenues $ 1,542,372 $ 1,393,619 $1,306,517 $ 1,069,032 $ 906,150
Net income $159,536 $143,997 $125,630 $115,013 $112,354
Earnings(1) $ 57,060 $ 10,100 $ 178,660 $ 159,536 $ 143,997
Basic net income per-share of Common Stock Series A and Series B(1) $.73 $.72 $.63 $.59 $.58(1) (2) $ .22 $ .04 $ .68 $ .64 $ .61
Stock dividends declared on Common Stock Series A and Series B(2)(3) 3.03% 5.30% 6. 56% 6.35% 5.04%
4.37% 5.61% 7.93%As of December 31,
-----------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Total assets $3,918,187 $3,576,566 $2,627,118 $1,887,981 $1,721,452$ 5,292,932 4,872,852 $ 4,523,148 $ 3,918,187 $ 3,576,566
Long-term debt $1,187,000$ 1,900,246 1,706,532 $ 1,509,697 $ 1,187,000 $ 994,189
Equity (4) $ 547,6731,994,021 1,880,461 $ 522,6991,879,433 $ 484,0211,559,913 $ 1,156,896
(1) Reflects the impact of special items in 1998 and 1997 and CLEC losses (See
Net Income and Net Income per Common Share section of the Results of
Operations in Management's Discussion and Analysis of Financial Condition
and Results of Operations).
(2) Adjusted for subsequent stock dividends and splits; no adjustment
has been made for the Company's 1.6% first quarter 1996 stock
dividend because the effect is immaterial.
(2) Annualdividends.
(3) Compounded annual rate of quarterly stock dividends compounded.dividends.
(4) Includes Company obligated mandatorily redeemable convertible preferred
securities.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
------------------------------------------------------------------------
of Operations
-------------
This annual report on Form 10-K contains forward-looking statements that are
subject to risks and uncertainties which could cause actual results to differ
materially from those expressed or implied in the statements. All
forward-looking statements (including oral representations) are only predictions
or statements of current plans, which are constantly under review by the
Company. All forward-looking statements may differ from actual future results
due to, but not limited to, changes in the economy of the Company's markets, the
nature and pace of technological changes, the number and effectiveness of
competitors in the Company's markets, weather conditions, changes in legal and
regulatory policy, success in overall strategy, the Company's ability to
identify future markets and successfully expand existing ones, the mix of
products and services offered in the Company's target markets, Y2K issues and
the effects of the separation. Readers should consider these important factors
in evaluating any statement in this Form 10-K or other wise made by the Company
or on its behalf. The following information should be read in conjunction with
the consolidated financial statements and related notes to the consolidated
financial statements included in this report. The Company has no obligation to
update or revise these forward-looking statements to reflect the occurrence of
future events or circumstances.
On May 18, 1998, the Company announced its plans to separate its
telecommunications businesses and public services businesses into two
stand-alone publicly-traded companies. The Company intends to establish and
transfer to a new company (Newco) all of its telecommunications businesses,
including its approximate 83% interest in Electric Lightwave, Inc. (ELI). This
separation is subject to federal and state regulatory approvals and final Board
approval, and is expected to be carried out through a distribution in the stock
of the new company to the Company's shareholders. The public services businesses
will continue to operate as Citizens Utilities Company and intend to provide gas
transmission and distribution, electric transmission and distribution, water
distribution and wastewater treatment services. This separation is being made in
recognition of the different investment features, performance criteria, capital
structures, dividend policies, customers' requirements and regulatory designs of
each business, and would allow each business to pursue its own strategy and
compete more effectively in its respective markets. The separation is expected
to strengthen both businesses and enable them to take full advantage of
opportunities to enhance value.
-19-
The Company received an order from the Federal Energy Regulatory Commission that
granted an approval necessary to proceed with its separation plans. The Company
filed a request with the Internal Revenue Service for a private letter ruling
that the transaction is not subject to federal income tax. The Company has filed
petitions with numerous state regulatory agencies for the approvals necessary to
proceed with its separation plans and to date has received the necessary
approval from four of these agencies. An application with the Federal
Communications Commission (FCC) for the transfer of certain licenses and filings
with the Securities and Exchange Commission will also be made during the
separation process. The transaction is expected to be completed in the second
half of 1999.
Although the Company continues to aggressively pursue its separation plans,
changing market conditions and new business opportunities may require it to
consider other methods to enhance shareholder value, including the sale or other
disposition of certain properties and the acquisition of new properties.
(a) Liquidity and Capital Resources
In 1995, the Company's primary source of funds was from
operations. Funds requisitioned from the 1995, 1994, 1993 and
1991 Series Industrial Development Revenue Bond construction fund
trust accounts were used to pay for the construction of
qualifying utility plant. Commercial paper notes payable in the
amount of $156,800,000 were outstanding as of December 31, 1995.
$140,650,000 of such commercial paper was classified as
short-term debt as it was issued to temporarily and partially
fund the acquisition of the GTE and ALLTEL Telecommunications
Properties (see Note 3) and was to be repaid with proceeds from
the issuance of equity securities. All such short-term debt has
been repaid with equity issuance proceeds.
On May 3, 1995, the Company arranged for the issuance of
$13,550,000 of Industrial Development Revenue Bonds; the bonds
were issued as demand purchase bonds bearing interest at 6.2% and
maturing on May 1, 2030. On May 12, 1995 and January 22, 1996,
Citizens Utilities Rural Telephone Company, Inc., a subsidiary of
the Company, under it's Rural Telephone Bank Loan Contract, was
advanced $8,793,000 and $4,464,000, respectively. Such funds bear
an initial interest rate of 6.52% and 5.83%, respectively, and
have an ultimate maturity date of December 31, 2027. On January
18, 1996, $10,000,000 of the Company's 1988 Series Special
Purpose Revenue Bonds, originally issued as 7.25% demand purchase
bonds, were converted and remarketed as money market municipals,
initially bearing interest at a rate of 3.31% and maturing on
September 1, 2018.
On June 15, 1995, the Company issued $125,000,000 of
debentures at a price of 99.918% with an interest rate of 7.45%
and a maturity date of July 1, 2035. On October 20, 1995, the
Company issued $150,000,000 of debentures at a price of 99.125%
with an interest rate of 7% and a maturity date of November 1,
2025.
On January 22, 1996, a subsidiary of the Company issued
4,025,000 shares of 5% Equity Providing Preferred Income
Convertible Securities ("EPPICS") having a liquidation preference
of $50 per security and a maturity date of January 15, 2036. Each
security is initially convertible into 3.252 shares of the
Company's Common Stock Series A at a conversion price of $15.375
per share. The $196,722,000 in net proceeds from the sale of
these securities were used to repay short-term debt, permanently
fund a portion of the ALLTEL Telecommunications Properties to be
acquired, and for other general corporate purposes.
On January 30, 1995, the Company, pursuant to an underwritten
public offering, issued 19,000,000 shares of its Common Stock
Series A at an issuance price of $13 3/8 per share and realized
$244,200,000 in net proceeds. These proceeds were used to repay
short-term debt.
On April 28, 1995, 31,928 shares of Series B Common Stock were
issued to effect the merger of Douglasville Water Company into a
subsidiary of the Company. On July 17, 1995, Flex Communications
was merged into the Company requiring the issuance of 855,953
shares of Citizens Series B Common Stock. In conjunction with the
acquisitions of the ALLTEL Telecommunications Properties, the
Company assumed $41,447,000 in debt at a weighted average
interest rate of 6.59%.-------------------------------
The Company considers its operating cash flows and its ability to raise debt and
equity capital as the principal indicators of its liquidity. Although working capital is not considered to be
an indicator of the Company's liquidity, the Company experienced
an increase in its working capital at December 31, 1995. The
increase is primarily due to the repayment of short-term debt
from proceeds from the maturity and sale of investments and the
issuance of equity securities. The Company has
committed lines of credit with commercial banks under which it may borrow up to
$600,000,000.$575,000,000. There were no amounts outstanding under these lines at December
31, 1995.
In 1995, the Company made a $4,200,000
investment in and entered into definitive agreements1998. ELI has committed lines of credit with Hungarian Telephone and Cable Corp. ("HTCC"), a Delaware
corporation. Pursuant to these agreements (i) the Company has
rights to purchasecommercial banks under which it
may borrow up to 54% of HTCC common stock, (ii) provides
certain management services to HTCC on a cost-plus basis, (iii)
has the right to and has designated one member of the HTCC Board
of Directors, and (iv) has provided HTCC with guarantees and
financial support. HTCC presently controls the rights to own,
operate and expand certain telecommunications services in certain
regions of Hungary. The management services fee payable by HTCC
to the Company is the greater of 5% of adjusted gross revenues of
HTCC or a monthly fixed amount. In addition, expenses incurred by
the Company in providing such services, including certain
allocable overhead items, are to be reimbursed by HTCC. A
subsidiary of the Company is the guarantor of a $33,200,000 bank
loan to HTCC.$400,000,000. The Company has agreed to provide HTCC with up to
$20,000,000guaranteed all of additional financial support. The Company hasELI's
obligations under these lines of credit. As of December 31, 1998, $284,000,000
was outstanding under ELI's lines of credit.
Net capital expenditures, by sector, have been compensated for such guarantees and financial support. The
Company's investmentare budgeted as follows:
Budget Actual
--------------------------------------
1999 1998 1997 1996
---------- ---------- ---------- ----------
($ in thousands)
Gas $ 42,600 $ 45,800 $ 47,900 $ 27,700
Electric 21,700 18,900 23,600 24,600
Water and Wastewater 25,700 30,800 32,200 21,000
---------- ---------- ---------- ----------
Public Services $ 90,000 $ 95,500 $ 103,700 $ 73,300
Communications (1) 269,000 201,400 263,000 184,000
CLEC (2) 261,000 200,000 124,500 41,600
General 20,000 25,100 33,300 18,900
---------- ---------- ---------- ----------
$ 640,000 $ 522,000 $ 524,500 $ 317,800
========== ========== ========== ==========
(1) Includes approximately $30,500,000 and $7,700,000 in
HTCC is accounted for using the cost
method of accounting.
Capital expenditures1999 and 1998, respectively, for the years 1995, 1994, and
1993 were $266,963,000, and $311,420,000, and $182,480,000,
respectively, and for 1996 are expected to be approximately
$340,000,000. These expenditures were, andconstruction of an
operations support office.
(2) Includes $45,000,000, of non-cash capital lease
additions in 1996 will be,
for utility and related facilities and properties.1999.
The Company anticipates that the funds necessary for its 19961999 capital
expenditures will be provided from operations; from 1993,
1994 and 1995 Seriesrequisitions of Industrial
Development Revenue Bond construction fund trust account requisitions;accounts; from advances of
Rural Telephone BankUtilities Service loan contract advances;contracts; from commercial paper notes payable;
from parties desiring utility service; from debt, equity and other financingsfinancing at
appropriate times; and if deemed
advantageous, from short-term borrowings under bank credit facilities.
In June 1998, the Company arranged for the issuance of $20,000,000 of Industrial
Development Revenue Bonds with an interest rate of 5.45% and a maturity date of
June 1, 2033. The proceeds are being used to fund the construction of the
Company's gas facilities located in Yavapai County, Arizona.
Investments and Acquisitions
- - ----------------------------
In March 1999, Adelphia Communications Corporation (Adelphia) and Century
Communications Corp. (Century) announced the signing of a definitive agreement
for the merger of Century with Adelphia. The Company currently owns 1,807,095
shares of Century Class A Common Stock. Pursuant to the Merger Agreement, each
Century Class A Common share will be exchanged for cash of $9.16 and .6122 of a
share of Adelphia Class A Common Stock (for a total market value of $44.14 per
Century Class A Common share based on Adelphia's March 4, 1999 closing price of
$57 1/8).
-20-
In January 1999, Centennial Cellular Corp. (Centennial), was acquired as a
result of its merger with CCW Acquisition Corp., a company organized at the
direction of Welsh, Carson, Anderson & Stowe. The Company was a holder of
1,982,294 shares of Centennial Class B Common Stock. In addition, as a holder of
102,187 shares of Mandatorily Redeemable Convertible Preferred Stock (Preferred
Security) of Centennial, the Company was required to convert the Preferred
Security into approximately 2,972,000 shares of Class B Common Stock. In
exchange for all of its common stock interests, the Company received
approximately $223,100,000 in cash, of which approximately $17,500,000 related
to accrued dividends on the preferred stock. The Company recorded a pre-tax gain
of approximately $69,500,000 on this transaction in January 1999.
The investment in HTCC declined in value during 1998 and in the fourth quarter
of 1998 management determined that the decline was other than temporary. As a
result, the Company recognized a loss of $31,900,000 in the HTCC investment as a
reduction of Other income (loss), net in the statements of income and
comprehensive income.
In November 1998, the Company acquired all the stock of Rhinelander
Telecommunications, Inc. (RTI) for approximately $84,000,000 in cash. RTI is a
diversified telecommunications company engaged in providing local exchange, long
distance, Internet access, wireless and cable television services to rural
markets in Wisconsin.
In October 1998, the Company agreed to acquire all of the stock of the Sorenson
Utility Company (Sorenson) for approximately $800,000. Sorenson provides
wastewater collection and treatment for approximately 450 customers around
Bullhead City, Arizona, which is adjacent to the Company's Mohave Water Division
operations.
In October 1998, the Company acquired St. Charles Natural Gas Company for
$5,000,000 in cash. St. Charles Natural Gas Company is a natural gas
distribution company serving 5,000 customers in Louisiana and will become part
of the Company's Louisiana Gas Services operations.
In January 1998, the Company purchased 1,330,000 shares of D&E Communications
(D&E) for approximately $27,000,000 in cash. As of December 31, 1998 the
investment represented 17.9% of D&E's outstanding common stock. D&E is a
full-service telecommunications company in Lancaster County, Pennsylvania that
offers both local and long distance service, wireless service, Internet service,
paging, voice, data and video communications equipment and computer networking
services. D&E is classified as an available for sale security and accounted for
using the cost method of accounting.
Regulatory Environment
- - ----------------------
Communications
--------------
With the passage of the Telecommunications Act of 1996 (the 1996 Act) (see Item
1(c) for a detailed discussion of the 1996 Act), the national public policy
framework for telecommunications was changed. A central focus for this sweeping
policy reform was to open local telecommunications markets to workable
competition. Pursuant to the requirements of the 1996 Act, the FCC has been and
will be conducting rule-making proceedings resulting in a number of new rules
that could negatively impact the operations of the Company's Communications
sector. However, ELI has substantially expanded the breadth of its product
offering and its geographic reach as a result of the 1996 Act which increased
customer demand for enhanced broadband data services and the development of
competitive public data and voice networks.
Electric
--------
The electric industry is moving toward deregulation, where customers will be
able to choose their energy provider. This process is in various stages of
development in the different states where the Company provides this service.
Deregulation could potentially result in stranded plant investments, stranded
costs for supply contracts and stranded costs associated with programs which
promote the most efficient use of electricity and reduce the environmental
impact of generation facilities. The Company believes there are many
uncertainties associated with a restructuring of the electric utility industry.
-21-
The Vermont Joint Owners (VJO), a consortium of 14 Vermont utilities, including
the Company, have entered into a purchase power agreement with Hydro-Quebec. The
agreement contains "step-up" provisions that state that if any VJO member
defaults on its obligation under the contract to purchase power from
Hydro-Quebec the other VJO participants will assume responsibility for the
defaulting party's share on a pro-rata basis. As of December 31, 1998, the
Company's obligation under the agreement is approximately 10% of the total
contract. The two largest participants in the VJO represent approximately 46%
and 37% of the total contract, respectively. During 1995,1998, these two major
participants have each experienced regulatory disallowances that have resulted
in credit rating downgrades and stock price declines. Both of these participants
are in the process of appealing the regulatory disallowances; however, both
companies have stated that an unfavorable ruling could jeopardize their ability
to continue as going concerns. If either or both of these companies default on
their obligations under the Hydro-Quebec agreement, the remaining members of the
VJO, including the Company, may be required to pay for a substantially larger
share of the VJO's total power purchase obligation for the remainder of the
agreement. Such a result could have a materially adverse effect on the financial
results of the Company's Vermont Electric Division and on the Company as a
whole.
Water and Wastewater
--------------------
Privatization opportunities are increasing as the water and wastewater
industries in the United States continue to face significant changes due to
increasing demands for advanced technical expertise and capital to meet the
requirements of more stringent environmental regulations. Over the past few
years, there have been several efforts to remove federal barriers to
privatization. The Company's geographic and service diversity and decades of
experience in the water and wastewater industry provide a strong platform to
successfully meet these needs and respond to the increasing trend for
privatization. The Company plans to initially focus its privatization efforts in
existing and surrounding service areas.
Rate Increases
--------------
In January 1999, the Company was authorized increases in annual revenues for propertiesfrom
regulatory commissions in Hawaii, Illinois, Ohio totaling approximately $975,000. In October 1998,
the Company was authorized increases in annual revenues from regulatory
commissions in California totaling approximately $934,000.
Impact of Year 2000
- - -------------------
The Y2K issue results from computer programs using a two-digit format, as
opposed to four, to indicate the year. Such computer systems may be unable to
interpret dates beyond the year 1999, which could cause system failures or other
computer errors. In late 1997, the Company developed a four-phase program to
address the Y2K issue. The four-phase program was designed to protect the safety
and Vermont
totaling $13,445,000.continuity of the Company's service delivery and support capabilities,
computer systems and other critical functions. The Company's Y2K program seeks
to address problems that could arise: (1) in Information Technology (IT) areas
including information systems and technologies; (2) in non-IT areas such as
telecommunications networks and switches, utility control and monitoring
systems, premises, facilities and general business equipment; and (3) due to
suppliers of products and services not being Y2K compliant. Phase I is inventory
and identification of those systems with which the Company has exposure to Y2K
issues. Phase II is the assessment and development of action plans. Phase III is
the implementation of the Y2K remediation plans. Phase IV, which in some
instances will run concurrent with Phase III, is the testing and validation of
each remedial action to ensure compliance. This phase includes, in some cases,
testing in an environment identical to, but separate from, the production
environment. Each of the Company's sectors has a program office that manages the
progress of the Y2K efforts. The Company has requestsdetermined priorities for additional
increases pending before regulatory commissions in Arizona,
Hawaii, Louisianataking
corrective actions on mission critical systems or products so as to ensure
continued delivery of core business activities.
The Company is and Pennsylvania.
Regulatory Matters
In September 1992,will continue to use both internal and external resources to
reprogram, replace and test software and address remediation of IT and non-IT
operational assets for Y2K compliance. The Company has contracted with
consulting firms to provide direction, support, methodologies, reporting
standards and templates.
-22-
The following table includes information, by Phase, related to the EPA filed a complaint with the United
States District CourtY2K program
for the Northern District of Illinois
relating to alleged violations byboth the Company's Illinois
subsidiary with respect to National Pollutant Discharge
Elimination System permit requirements.sectors:
Estimated
Completion Dates Expenditures
for Mission -----------------------------------------------
Critical Systems Actual to Estimated for Estimated to
and Products % Completed Dec. 31, 1998 1999 Dec. 31, 1999
---------------- ----------- ------------- ------------- -------------
Telecommunications
------------------
and Corporate
-------------
IT
-- $ 5,969,000 $ 17,192,000 $ 23,161,000
Inventory Completed 100%
Assessment 3/31/99 96%
Remediation 6/30/99 50%
Testing 6/30/99 8%
Non-IT 142,000 2,284,000 2,426,000
------
Inventory Completed 100%
Assessment 3/31/99 90%
Remediation 6/30/99 59%
Testing 6/30/99 8%
Public Services
---------------
IT 1,207,000 1,339,000 2,546,000
--
Inventory Completed 100%
Assessment Completed 100%
Remediation 3/31/99 95%
Testing 5/31/99 45%
Non-IT 1,256,000 6,839,000 8,095,000
------
Inventory Completed 100%
Assessment Completed 100%
Remediation 3/31/99 73%
Testing 6/30/99 48%
================ ================ ================
Total $ 8,574,000 $ 27,654,000 $ 36,228,000
================ ================ ================
The Company settled this
action on March 21, 1995is required to expense costs related to Y2K remediation. The timing
of expenses may vary and paid a $490,000 fine. Underis not necessarily indicative of readiness efforts or
progress to date. Funding of the settlement, the Company also agreedY2K costs is expected to construct plant
improvements, with an estimated cost of $2,200,000, which would
be required in order to comply with new discharge limits provided
for by the settlement. Shortly after the action was settled, the
Company entered into a tentative agreement with the Village of
Bolingbrook to transfer flowoccur from operating
cash flows, cash and investments and proceeds from the Company's toissuance of securities
and/or other borrowings.
The systems of vendors and suppliers play a major role in the Village's
nearby facilities for treatment. If this agreement withconduct of the
Village is approved bybusiness of the EPA and the Court, the Company's plant
would be converted to a flow transfer station. The Company's
financial obligations would be the same under either the plant
improvement project or the flow transfer project. The agreement
with the Village of Bolingbrook is now pending approval by the
EPA and the court.Company. As a regulated entity, the Company is entitled
to earn a fair rate of return on improvements that are placedresult, in service for the benefit ofaccordance with its customers. The Company believes
that the cost of the above discussed improvements will be
recovered through customer rates.
Various state regulatory agencies, state legislatures and the
federal government have initiated proceedings to promote the
development of competition in telecommunications markets. These
proceedings are focused on removing the regulatory and legal
barriers to competitive entry into the interLATA toll, intraLATA
toll and local exchange markets and developing rules to govern
the relationship between competitors in these markets.
Simultaneously, many states are investigating or have implemented
procedures for local exchange companies to enter into incentive
regulatory frameworks ("IRF") as an alternative to traditional
rate of return regulation and/or classifying services on the
basis of the presence of competition and allowing deregulation or
flexible pricing regulation for the services deemed competitive.
Local exchange competition has been authorized in the following
states in which the Company currently provides local exchange
service: Arizona, California, New York, Oregon, Tennessee, Utah
and West Virginia.
The Company continues to expand its subsidiary, Electric
Lightwave, Inc. ("ELI"), a competitive access provider in
Arizona, California, Oregon, Utah and Washington. Through ELI,Y2K program, the
Company has been granted authority in Washington, Utah and
Oregoncontacting software suppliers to provide competitive local exchange service.determine major areas of
exposure to Y2K issues. The Company completed construction of a fiber-optic route from Las
Vegas, Nevadahas also been contacting its major suppliers
and service providers to Phoenix, Arizona which providesascertain their ability to comply. In addition, the
Company contracted with fiber optic capacity for its long distance operations as
well as for other telecommunications carriers.
On November 8, 1995,a consulting firm to review the California Public Utilities
Commission issued a final order approving a restructuringY2K programs of Citizens Telecomselected
third party vendors. Thus far, most of California's ("CTCC") rates and an Incentive
Regulatory Framework ("IRF"). The restructured rates allow CTCCthese parties have stated that they
intend to compete more effectively. Underbe Y2K compliant by the IRF, CTCCyear 2000. However, there can earn and
keep up to 1.5% above its authorized ratebe no guarantee
that the systems of return while earned
returns greater than 1.5% and up to 5% above its authorized rate
of returnsuppliers or service providers on which the Company's
systems rely will be shared equally with customers.
There have been federal and state regulatory activitiescompliant, or that failure to be compliant by another
company, or a conversion that is incompatible with the aimCompany's systems, would
not have a material adverse effect on the Company. The Company's
Telecommunications businesses rely, directly and/or indirectly, on a large
number of creatingtraffic carriers to carry telecommunications traffic through a more competitive environmentseries
of interconnected chains of communications. Therefore, despite its efforts, the
Company cannot ensure that each entity involved in the delivery of
telecommunications services will be Y2K compliant. Furthermore, the electric
utility industry. These federal and state regulatory
activitiespower-supply systems of North America are stillconnected into four major
interconnections called grids. Operational component failures of any entity
connected to any of the grids could cause failures in the investigation stage.that grid. The Company
anticipates no material adverse impact on its electric sector
shouldwill need to continue to assess these risks as the industry be openedmillennium approaches to
competition sinceevaluate the Company is
not a large generatorlikelihood of electric powerfailures and serves primarily
residential customers. The adventdevelop approaches for mitigating the
risk of competition would most
likely provide opportunities for expansion. In response to
regulatory initiatives, the Company's electric sector is
proceeding with demand-side management programs and integrated
resource planning techniques designed to promote the most
efficient use of electricity and to reduce the environmental
impacts associated with new generation facilities.
In 1994, the Company filed for a $19,153,000 rate increase
with the Hawaii Public Utilities Commission ("HPUC"). Part of the
requested increase is for the recovery of restoration and repair
costs associated with Hurricane Iniki.failures. In an effort to reduceaddress third party compliance issues, the
rate impact onCompany's Communications sector has initiated testing activities with one of its
customers,major suppliers.
-23-
In the event of non-remediation of the Y2K issues by the Company subsequently filedor certain of
its vendors, the worst case scenario would be disruption of the Company's
operations, possibly impacting the provision of services to customers and the
Company's ability to bill or collect revenues. However, management believes that
the Company's efforts to mitigate its Y2K issues will avoid significant business
interruptions. Contingency planning is an applicationongoing process. While the Company's
overall Y2K contingency plan is now being devised, existing disaster recovery
documentation and procedures remain the first line of defense. Some Y2K specific
plans have been developed and are being reviewed and tested. All Y2K operational
contingency plans are expected to be completed and tested by June 1999.
In addition, the Company participates in trade associations such as the Electric
Power Research Institute (EPRI) and the American Gas Association (AGA), which
furthers the industry's efforts toward Y2K readiness. The Company uses these
organizations' Y2K programs' vast resources to accelerate its Y2K program for
embedded systems. They also provide a forum for working within the industry peer
group whereby joint conclusions may be reached on other key aspects of Y2K
readiness. EPRI's Y2K program participants represent more than 70% of the
electric power generation capacity in the U.S. AGA represents 181 natural gas
utilities that deliver gas to homes and businesses in all fifty states.
The Company intends to complete its Y2K remediation efforts on mission critical
systems and products so as to ensure continued delivery of core business
activities by June 1999. Testing, remediation and monitoring will continue
through the remainder of 1999 to verify that there are no outstanding problems
that either were not captured during the initial Y2K efforts or arose after June
30, 1999. Also, review, modifications and testing of the contingency plans may
and will occur throughout the remainder of 1999 and into the year 2000.
The extent and magnitude of the Y2K problem is difficult to predict or quantify.
The above information is based on the Company's best estimates which were made
using numerous assumptions, including the availability and future costs of
certain technological and other resources, third party modification actions and
other factors. Given the complexity of the issue and the possibility of
unidentified risks, actual results may vary materially from those discussed
above. Specific factors that might cause such differences include, among others,
the availability and cost of the personnel trained in this area, the ability to
locate and correct all affected computer codes, the timing and success of
remedial efforts of third party suppliers and similar uncertainties.
A number of financial and information system applications have been identified
as being Y2K compliant due to their recent implementation. The Company's core
financial systems are being replaced pursuant to the information systems
initiative discussed below.
Other Information Systems Initiatives
- - -------------------------------------
The Company also has information systems initiatives in process which are not
the result of the Y2K initiative. These include implementation of an
enterprise-wide financial system and the development of technology to bring the
Company into full compliance with the HPUCTelecommunications Act of 1996
Interconnection Order. For these two projects, the Company expects to recover $8,000,000 ofincur at
least $19,000,000 in costs over the $19,153,000 through a statewide surchargenext twelve months. The Company will be
required to partially recover
Iniki restoration and repair costs under the provisions of
Subsection 269-16.3 of the Hawaii Revised Statutes. If the
HPUC approves the surcharge application, customers of all
electric utility companies in Hawaii would payexpense a portion of the approved Iniki restoration and repair costs over a fivecost of these projects under generally
accepted accounting principles. For the year period and the Company's rate increase request will be
reduced by $8,000,000. The HPUC issued an Interim Decision and
Order which took effect on June 15, 1995 grantingended December 31, 1998, the
Company a
$5,983,000 interim increaseincurred approximately $31,000,000 in annual revenues. The second
phasetotal costs in connection with
these projects, of the requested rate increase and the statewide
surcharge is expected to be included in a final order from
the HPUC. The Company expects a final order in the first half
of 1996.which approximately $8,000,000 has been expensed.
New Accounting Pronouncements
- - -----------------------------
In March 1995,June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting133, 'Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133). SFAS 133 requires companies to record
derivatives on the Impairmentbalance sheet as assets or liabilities measured at fair
value. Gains or losses resulting from changes in the values of Long-Lived
Assetsthose derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for Long-Lived Assets tohedge accounting. The key criterion for hedge accounting is that
the hedging relationship must be Disposed of" ("SFAS 121"),highly effective in achieving offsetting
changes in fair value or cash flows. This statement is effective for all fiscal
quarters of all fiscal years beginning after DecemberJune 15, 1995.1999. The Company will adopt SFAS 121 in the first quarter of 1996. Based
on current facts and circumstances, the Company believes that
SFAS 121 willdoes not
adversely affect the Company.
In December 1995, the Financial Accounting Standards Board
issued Statement No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), effective for fiscal years beginning
after December 15, 1995. Under SFAS 123, the Company may elect
either a "fair value" based method or the current "intrinsic
value" based method of accounting for its stock-based
compensation arrangements. If the Company were to adopt the "fair
value" based method, the Company would be required to charge
compensation expense for all of its stock-based compensation
arrangements. If the Company were to elect the "intrinsic value"
based method, the Company would be required to disclose in the
footnotes to the financial statements net income and earnings per
share computed under the "fair value" based method. The Company
will elect the "intrinsic value" based method. Accordingly,expect the adoption of SFAS 123 will not impact133 to have a material effect on the Company's
results offinancial position, operations or financial condition.cash flows.
-24-
(b) Results of Operations
Revenues
Telecommunications---------------------
REVENUES
--------
Total revenues increased $159,872,000,$148.8 million, or 35%11%, in 19951998 and increased $279,378,000,$87.1 million, or
157%7%, in 1994. These1997. The increase in 1998 was primarily due to increases are primarily attributable to the acquired GTEin
communications, CLEC and ALLTEL Telecommunications Properties.gas revenues. The increase in revenues in 19951997 was
primarily due to increases in communications and CLEC revenues.
Telecommunications revenues
- - ---------------------------
Telecommunications (communications and CLEC) revenues increased $72.5 million,
or 8%, in 1998 and $74.0 million, or 9%, in 1997. The increase in 1998 was
primarily due to increased network access services revenues in the
communications sector and local telephone services revenues in the CLEC sector.
The increase in 1997 was primarily due to increased local network and long
distance services revenues in the communications sector and network and local
telephone services revenues in the CLEC sector.
1998 1997 1996
------------------------ ----------------------- ------
Change from Change from
Amount Prior year Amount Prior year Amount
------ ----------- ------ ----------- ------
Communications revenues
- - ------------------------ ($ in thousands)
Network access services $ 432,018 7% $ 403,990 3% $ 391,151
Local network services 262,239 5% 250,521 8% 232,904
Long distance services 96,584 6% 90,747 54% 59,072
Directory services 31,691 (1%) 31,982 6% 30,248
Other 44,914 (8%) 48,922 (2%) 50,084
Eliminations (32,407) 37% (23,573) 110% (11,250)
---------- ---------- -----------
Total $ 835,039 4% $ 802,589 7% $ 752,209
========== ========== ===========
Network access services revenues increased $28.0 million, or 7%, in 1998
primarily due to increases in special access revenues resulting from the
introduction of the DS3 product, increased circuit demand due to Internet growth
and increased minutes of use, partially offset by an FCC mandated interstate
switched access rate reduction which became effective July 1, 1997. The network
access services revenues increase in part1997 was primarily due to increased access
minutes of use, partially offset by an FCC mandated interstate switched access
rate reduction which became effective July 1, 1997.
Local network services revenues increased $11.7 million, or 5%, in 1998
primarily, due to business and residential access line growth and an increase in
custom calling features and private line sales. The local network services
revenues increase in 1997 was primarily due to communications acquisitions as
well as internal access line growth.
Long distance services revenues increased $5.8 million, or 6%, in 1998 primarily
due to a 1997 charge of approximately $14.2 million to revenues related to the
curtailment of long distance service operations in adjacent markets. Absent the
1997 charge, long distance services revenues decreased 8% primarily due to the
elimination of long distance product offerings to out-of-territory customers,
partially offset by an increase in network usage for in-territory customers. The
long distance services revenues increase in 1997 was primarily due to growth in
customers and increased minutes of use, partially offset by the 1997 charge.
The directory services revenues increase in 1997 was primarily due to
communications properties acquisitions and increased volume.
Other revenues decreased $4.0 million, or 8%, in 1998 primarily due to the
phasing out of certain surcharges resulting from rate case decisions in
California and New York. The other revenues decrease in 1997 was primarily due
to decreased billing and collection revenues.
Eliminations represent network access revenues received by the Company's local
exchange operations from its long distance and competitive local exchange
operations.
-25-
1998 1997 1996
----------------------- -------------------- ------
Change from Change from
Amount Prior year Amount Prior year Amount
------ ------------ ------ ----------- ------
CLEC revenues ($ in thousands)
- - -------------
Network services $ 36,589 9% $ 33,522 68% $ 19,947
Local telephone services 38,169 261% 10,565 317% 2,533
Long distance services 12,309 51% 8,140 13% 7,232
Data services 13,813 56% 8,857 55% 5,705
Eliminations (3,061) (8%) (3,341) 153% (1,319)
---------- ---------- -----------
Total $ 97,819 69% $ 57,743 69% $ 34,098
========== ========== ===========
Network services revenues increased $3.1 million, or 9%, in 1998 primarily due
to increased revenues in new and existing markets. Existing market increases
resulted from additional circuits sold. Increased revenues were partially offset
by the expiration of a short-term contract with a significant customer. The
network and strategic services revenues increase in 1997 was primarily due to
sales of additional products to existing customers and an increase in route
miles of 75% over 1996. Approximately $6.8 million of the 1997 increase is
associated with a short-term contract with a significant customer which expired
in early 1998.
Local telephone services revenues increased $27.6 million, or 261%, in 1998
primarily due to an increase in reciprocal compensation revenues, an increase in
access line equivalents, and increased sales of the ISDN product. The Company's
interconnection agreements expire in the second half of 1999. Management
believes that these agreements will be replaced by agreements offering the
Company some form of compensation regarding ISP traffic. There is no assurance,
however, that the level of compensation will remain consistent with current
levels, which could have a material adverse effect on the Company's revenue. The
local telephone services revenues increase in 1997 was primarily due to local
switch implementations for new and existing customers in the last half of 1996.
The successful implementation of the ISDN PRI product generated approximately
$2.3 million of increased revenue in 1997.
Long distance services revenues increased $4.2 million,or 51%, in 1998 primarily
due to increases in prepaid services minutes processed resulting from new
customers and increased revenues resulting from bundling of sales of long
distance with other products. The increase in retail long distance revenues were
offset by a decrease in wholesale long distance revenues primarily due to the
loss of $38,000,000a large customer with credit problems. The long distance services
revenues increase in 1997 was primarily due to increased prepaid debit card
services introduced in late 1996 and growth associated with the local dial tone
services market.
Data services revenues increased $5.0 million, or 56%, in 1998 primarily due to
an increase in sales of discontinued subsidyInternet, frame relay, and LAN/WAN services in new and
existing markets, and new products such as ATM and Remote Net Connect. The data
services revenues increase in 1997 was primarily due to a $2.1 million increase
in Internet access services revenues and $1.6 million in frame relay revenue
increases, partially offset by a decrease in other products. The Internet access
service and frame relay revenue increases were primarily due to a 75% increase
in Internet switches installed.
Eliminations reflect intercompany activity between the Company's CLEC and
communications operations.
-26-
Public services revenues
- - ------------------------
Public services revenues increased $76.2 million, or 14%, in 1998 and $13.1
million, or 3%, in 1997 primarily due to increased gas revenues.
1998 1997 1996
---------------------- ------------------------ -------
Change from Change from
Amount Prior year Amount Prior year Amount
------ ----------- ------ ----------- ------
Gas revenues
- - ------------ ($ in thousands)
Residential $ 150,386 4% $ 145,016 8% $ 134,888
Commercial 109,259 71% 64,004 29% 49,633
Industrial 47,497 56% 30,366 (25%) 40,230
Municipal 3,657 12% 3,251 35% 2,403
----------- ---------- -----------
Total distribution 310,799 28% 242,637 7% 227,154
Transportation 2,435 (7%) 2,622 (52%) 5,519
Other 12,189 78% 6,839 (2%) 6,946
----------- ---------- -----------
Total $ 325,423 29% $ 252,098 5% $ 239,619
=========== ========== ===========
Gas revenues increased $73.3 million, or 29%, in 1998 primarily due to the
acquisition in October 1997 of Gasco, Inc., now known as The Gas Company (TGC),
customer growth, increased residential and commercial consumption in Arizona,
and increased industrial consumption in Louisiana, partially offset by a
decrease in revenues resulting from Pacific Bell which had been
received annually through the end of 1994.
Naturalwarmer weather conditions and lower
purchased gas costs passed on to customers in Louisiana. The gas revenues
hadincrease in 1997 was primarily due to higher gas prices, an increase in the
number of customers, the acquisition of TGC and rate increases granted in
Louisiana in May 1996 and Arizona in November 1996. This increase was partially
offset by decreased industrial revenue as a netresult of a decrease in customers
and lower consumption from high usage, low margin customers.
1998 1997 1996
--------------------- ------------------------- ------
Change from Change from
Amount Prior year Amount Prior year Amount
------ ----------- ------ ----------- ------
Electric revenues
- - ----------------- ($ in thousands)
Residential $ 80,887 1% $ 79,808 - $ 79,893
Commercial 57,617 3% 55,805 - 55,826
Industrial 39,393 (7%) 42,209 (4%) 44,165
Municipal 8,265 (3%) 8,555 5% 8,175
---------- ----------- ---------
Total distribution 186,162 - 186,377 (1%) 188,059
Transmission 2,827 5% 2,694 15% 2,339
Other 1,318 (45%) 2,399 26% 1,899
---------- ----------- ---------
Total $ 190,307 (1%) $ 191,470 - $ 192,297
========== =========== =========
Absent the 1997 charge to reflect a Vermont public utility commission order
requiring refunds to customers of $11,038,000,approximately $6.6 million, electric revenues
decreased $7.8 million, or 5%4%,
in 1995 primarily due to lower average revenue per MCF of gas
sold which resulted from pass-onsfuel costs passed on to
customers of lower average
gas costs from suppliers; thisand a commission ordered rate reduction in Vermont. The electric
revenues decrease in 1997 was partially offset by
increased consumption. Natural gas revenues decreased $2,952,000,
or 1%, in 1994 compared to 1993primarily due to a decrease in
transportation revenues; this decreasethe 1997 charge which was
partially offset by increased residential and commercial revenues generated from
the Company's
Northernrate increases granted in Hawaii in August 1996 and Arizona Gas operationsin January 1997 and
increased industrial gas
revenues. Pass-ons are required under tariff provisions and do
not affect net income.
The Company's electric sector revenues had a net increase of
$7,411,000,consumption.
-27-
1998 1997 1996
--------------------- ----------------------- ------
Change from Change from
Amount Prior year Amount Prior year Amount
------ ----------- ------ ----------- ------
Water and wastewater revenues ($ in thousands)
- - -----------------------------
Residential distribution $ 76,167 8% $ 70,742 - $ 70,845
Commercial distribution 14,793 4% 14,212 3% 13,801
Industrial distribution 1,034 8% 961 14% 843
Other 1,790 (53%) 3,804 36% 2,805
--------- ---------- ----------
Total $ 93,784 5% $ 89,719 2% $ 88,294
========= ========== ==========
Water and wastewater revenues increased $4.1 million, or 5%, in 1998 primarily
due to increased consumption and customer growth in Arizona and Illinois and a
rate increase in Pennsylvania. The water and wastewater revenues increase in
1997 was primarily due to an operating and maintenance service contract and a
rate increase granted in Pennsylvania in June 1996.
COST OF SERVICES
----------------
1998 1997 1996
--------------------- ---------------------- ------
Change from Change from
Amount Prior year Amount Prior year Amount
------ ----------- ------ ----------- ------
($ in thousands)
Gas purchased $ 166,829 19% $ 139,900 9% $ 127,913
Network expenses 140,471 3% 136,971 77% 77,214
Electric energy and fuel oil purchased 87,930 (7%) 94,726 2% 93,191
Eliminations (35,468) 32% (26,914) 114% (12,569)
------------ ------------ ----------
Total $ 359,762 4% $ 344,683 21% $ 285,749
============ ============ ==========
Gas purchased expense increased $26.9 million, or 4%19%, in 1995 and $9,718,000, or 6% in 19941998 primarily due to
increased consumptionthe acquisition of TGC in October 1997 and rate increases,
partially offset by pass-ons toan increase in customers of lower commodity
prices.
Revenues earned by the Company's water/wastewater treatment
sector increased $6,637,000, or 9%, in 1995,Arizona.
The gas purchased expense increase in 1997 was primarily due to fluctuations in
the price of gas, increased consumptiondemand as a result of an increase in the number of
customers and rate increases. In 1994, revenues
increased $6,907,000, or 11%, due to rate increasesthe acquisition of $4,800,000
and $2,800,000 from acquired properties.
Expenses
Natural gas purchased costs decreased $8,034,000, or 7%,TGC in 1995 and $1,305,000, or 1%, in 1994 primarily due to a decrease
in supplier prices.October 1997. Under tariff provisions,
increases and
decreases in the Company's wholesale costs of electric energy,
fuel oil and natural gas purchased are largely passed on to
customers.
Electric energy purchased costs for 1995 totaled $68,900,000,
an increase of $2,185,000,Network expenses increased $3.5 million, or 3% ,over the 1994 amount of
$66,715,000 which was a $4,784,000, or 8%, increase over the 1993
cost of $61,931,000. The increase in electric energy purchased
was1998 primarily due to customer growth. TheCLEC
revenue growth, CLEC national data expansion efforts, and significant growth in
CLEC long distance services. This increase was partially offset by an $11.1
million 1997 charge related to lease terminations as a result of the curtailment
of certain long distance service operations and lower negotiated rates in 1998.
Absent the 1997 charge, network expenses increased cost of
electric energy purchased in 1994 was12% primarily due to increased
customer demand. Fuel oil purchasedCLEC
revenue growth, CLEC national data expansion efforts, and significant growth in
1995 of $16,268,000
increased $2,052,000, or 14%, from the 1994 amount of $14,216,000CLEC long distance services. The network expenses increase in 1997 was primarily
due to an increase in long distance minutes sold requiring additional network
access capacity and the 1997 charge.
Electric energy and fuel oil purchased decreased $6.8 million, or 7%, in 1998
primarily due to lower supplier prices in Hawaii and increased
volume to satisfy increased consumption. FuelArizona. The electric
energy and fuel oil purchased costincrease in 1994 decreased $679,000, or 5%, from the 1993 amount of
$14,895,0001997 was primarily due to a decrease inhigher
supplier prices.
Eliminations represent network expenses incurred by the Company's long distance
operation for services provided by its local exchange operations and
intercompany activity between the Company's CLEC and communications operations.
-28-
DEPRECIATION EXPENSE
--------------------
1998 1997 1996
--------------------- ---------------------- ------
Change from Change from
Amount Prior year Amount Prior year Amount
------ ----------- ------ ----------- ------
($ in thousands)
Depreciation expense $ 257,844 9% $ 235,812 22% $ 193,733
Depreciation expense increased $22.0 million, or 9%, in 1998 primarily due to
the acquisition of TGC and increased property, plant and equipment. The
depreciation expense increase in 1997 was primarily due to increased property,
plant and equipment as a result of acquisitions and new construction.
OTHER OPERATING EXPENSES
------------------------
1998 1997 1996
--------------------- ----------------------- --------
Change from Change from
Amount Prior year Amount Prior year Amount
------ ---------- ------ ----------- --------
Operating and Maintenance expense $ 603,277 (7%) $ 650,363 60% $ 407,579
Taxes other than income 95,995 4% 92,026 14% 80,947
Sales and Marketing 47,325 (14%) 54,893 28% 42,823
------------ ------------ ----------
Total $ 746,597 (6%) $ 797,282 50% $ 531,349
============ ============ ==========
Operating and maintenance expense decreased $47.1 million, or 7%, in 1998
primarily due to $150.6 million of 1997 charges partially offset by the full
year impact of the acquisition of TGC, increased CLEC operating costs and 1998
special items consisting of Y2K expense of $8.6 million and separation costs of
$2.1 million. Absent the 1997 charges and 1998 special items, operating and
maintenance expenses increased $87,333,000, or
28%, in 1995 and $139,122,000, or 83%, in 199419% primarily due to the full year impact of the
acquisition of TGC and increased CLEC operating expensescosts. The operating and
maintenance expense increase in 1997 was primarily due to the acquisition of
TGC, increased CLEC costs and the 1997 charges. The 1997 charges include
approximately $.7 million related to the telecommunications properties
acquired.
Depreciation expensecurtailment of certain long distance
service operations, approximately $34.7 million related to benefit plan
curtailments and related regulatory assets, approximately $67.4 million related
to the write-off of communications information systems and software,
approximately $34.3 million related to regulatory commission orders in New York,
Vermont and Arizona, approximately $10.8 million related to accounting policy
changes associated with ELI in preparation for its initial public offering and
approximately $2.7 million of other adjustments.
Taxes other than income increased $43,760,000,$4.0 million, or 38%4%, in 19951998 primarily due to
the acquisition of TGC and $60,477,000,increased property taxes in Vermont. The taxes other
than income increase in 1997 was primarily due to increased payroll, property
and franchise taxes resulting from communications acquisitions, taxes associated
with long distance operations and increased property taxes in Arizona,
California, Louisiana and Pennsylvania.
Sales and marketing expenses decreased $7.6 million, or 111%14%, in 19941998 primarily
due to an $8.6 million 1997 charge related to the curtailment of certain long
distance service operations. Absent the 1997 charge, sales and marketing
expenses increased 2% primarily due to increases in depreciable plant assets aspersonnel and related
expenses to support expanded CLEC service offerings, partially offset by a
result of acquisitions.
Taxes other than income increased $9,537,000, or 16%,reduced communications sales and marketing workforce. The sales and marketing
expense increase in 1995
and $23,688,000, or 67% in 19941997 was primarily due to increased costs necessary to
support an increased level of service offerings and the 1997 charge.
-29-
INVESTMENT AND OTHER INCOME
---------------------------
1998 1997 1996
------------------------- ---------------------- ------
Change from Change from
Amount Prior year Amount Prior year Amount
------ ----------- ------ ----------- ------
($ in thousands)
Non operating gain on sale of subsidiary stock $ - N/A $ 78,734 N/A $ -
Investment income 32,505 (4%) 33,739 26% 26,834
Other income (loss), net (24,526) (704%) 4,062 (90%) 39,621
------------ ------------ -----------
$ 7,979 (93%) $ 116,535 75% $ 66,455
============ ============ ===========
The non operating gain on sale of subsidiary stock in 1997 of $78.7 million
represents the pre-tax gain on the ELI initial public offering of 8,000,000
shares of Class A Common Stock at a price of $16 per share on November 24, 1997.
Investment income decreased $1.2 million, or 4%, in 1998 primarily due to lower
average investment balances. The investment income increase in 1997 was
primarily due to higher investment balances and an increase in the Centennial
dividend.
Other income (loss), net decreased $28.6 million, or 704%, in 1998 primarily due
to the recognition of a $31.9 million loss resulting from the decline in value
of the HTCC investment, partially offset by a 1997 charge of approximately $4.5
million related to an Arizona Public Utility Commission order disallowing
recovery of certain amounts of the equity component of the AFUDC. Absent the
decline in value of HTCC and the 1997 charge, other income (loss), net decreased
14% primarily due to a decrease in the equity component of AFUDC. The other
income (loss), net decrease in 1997 was primarily due to the 1997 charge, $22
million earned from HTCC in 1996 for guarantees and financial support provided
by the Company and 1996 gains totaling $4.5 million on the sale of land in
Illinois assets in Arizona.
MINORITY INTEREST
-----------------
1998 1997 1996
------------------------- -------------------------- -----
Change from Change from
Amount Prior year Amount Prior year Amount
------ ----------- ------ ----------- ------
($ in thousands)
Minority interest $ 14,032 2,076% $ 645 N/A $ -
Minority interest is a result of ELI's initial public offering in November 1997
and it represents 17.35%, as of December 31, 1998, of the minority's share of
ELI's loss before income tax benefit and cumulative effect of a change in
accounting principle.
INTEREST EXPENSE
----------------
1998 1997 1996
------------------------ --------------------- ------
Change from Change from
Amount Prior year Amount Prior year Amount
------ ----------- ------ ----------- ------
($ in thousands)
Interest expense $ 112,239 3% $ 109,329 18% $ 92,695
Interest expense increased $2.9 million, or 3%, in 1998 primarily due to
increased long term debt outstanding partially offset by an increase in the debt
component of AFUDC, a 1997 charge of approximately $1.7 million related to an
Arizona Public Utility Commission order disallowing recovery of certain amounts
of the debt component of AFUDC. Absent the 1997 charge, interest expense
increased 4% primarily due to increased long term debt outstanding, partially
offset by an increase in the debt component of AFUDC. The interest expense
increase in 1997 was primarily due to the issuance of debentures in June and
December 1996 to fund acquisitions and capital expenditures and the 1997 charge.
-30-
INCOME TAXES
------------
1998 1997 1996
----------------------- --------------------- ------
Change from Change from
Amount Prior year Amount Prior year Amount
------ ----------- ------ ----------- ------
($ in thousands)
Income taxes $ 22,337 203% $ 7,383 (91%) $ 84,937
Income taxes increased $15.0 million, or 203%, in 1998 and decreased in 1997
primarily due to the $62.1 million tax benefit associated with the 1997 charges
to earnings. The effective annual tax rate is approximately 27% and 31% in 1998
and 1997, respectively.
NET INCOME AND NET INCOME PER COMMON SHARE
------------------------------------------
1998 1997 1996
--------------------- --------------------- ------
Change from Change from
Amount Prior year Amount Prior year Amount
------ ----------- ------ ----------- ------
($ in thousands)
Net Income $ 57,060 465% $ 10,100 (94%) $178,660
Net Income Per Share $ .22 450% $ .04 (94%) $ .68
1998 net income and net income per share were impacted by the following after
tax items: Net losses from the Company's CLEC subsidiary of $34.7 million, or 14
cents per share, the non-cash write down of the Company's investment in HTCC of
$19.7 million, or 7 cents per share, the cumulative effect of change in
accounting principle at the CLEC sector of $2.3 million, or 1 cent per share,
Y2K costs and separation costs of $6.6 million, or 3 cents per share. Absent the
impact of losses from the Company's CLEC subsidiary and the 1998 special items,
net income would have been $120.4 million, or 47 cents per share.
1997 net income and net income per share were impacted by the following after
tax items: Net losses from the Company's CLEC subsidiary of $23.8 million, or 9
cents per share, 1997 charges to earnings (see below) of $135.2 million, or 52
cents per share, and a gain of $51.2 million, or 20 cents per share, on the newly acquired telecommunications properties.
Interest expense forsale
of stock by a subsidiary. Absent the year ended December 31, 1995
increased $15,031,000,impact of losses from the Company's CLEC
subsidiary and the 1997 special items, net income would have been $117.9
million, or 21%,45 cents per share.
1997 Charges to Earnings
- - ------------------------
In 1996 and early 1997, the Company had been pursuing an aggressive growth
strategy to take advantage of opportunities in 1995the emerging communications
marketplace. This strategy included the initiation and $35,313,000, or 94%,expansion of long
distance services which, in 1994combination with other enhanced service offerings,
would enable the Company to offer an integrated package of products and
services.
Late in 1996, the Company began the transition of its long distance network,
primarily due to interest paidfixed cost leases, in order to achieve the lowest cost of providing
long distance service. In addition, the Company initiated a brand recognition
program to support the sales and marketing initiatives designed to increase the
Company's market share. The increase in revenues resulting from this growth
strategy, though significant, did not offset the resulting increase in
incremental expenses from the branding, sales, and marketing initiatives. As a
result, the Company's long distance service operations generated unexpected
losses during the first half of 1997 which had an adverse impact on the
additional debt
securities issued to financeCompany's earnings and cash flow. During the acquisitionssecond quarter 1997, management
re-evaluated this growth strategy in light of telecommunications propertiesthis continuing impact on earnings
and cash flow.
-31-
In connection with the re-evaluation of the Company's communications growth
strategy, as well as increased Industrial
Development Revenue Bonds.
Cost increases, includinga review of its employee benefit plans to determine if
such plans were competitive with those dueprovided in the industry, several
public utility commission orders requiring the Company to inflation, are expectedrecord charges to
be offsetearnings, and other charges to earnings related to certain accounting
policy changes at ELI in due course by increasesanticipation of its initial public offering, the
Company recorded approximately $197,300,000 of charges to earnings in revenues obtained
under established regulatory procedures.
Investment Income
Investment income increased $1,213,000, or 3%, in 1995
primarily due to gains realized on investments sold to
permanently fund telecommunications acquisitions. Investment
income decreased $1,643,000, or 4%, in 1994 due1997
as follows:
(In thousands)
--------------
Curtailment of certain long distance service operations $34,600
Benefit plan curtailments and related regulatory assets 34,700
Telecommunications information systems and software 67,400
Regulatory commission orders 47,200
Other 13,400
--------
Total $197,300
========
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
---------------------------------------------------------------
The Company is exposed to the liquidationimpact of interest rate and market risks. In
the normal course of business, the Company employs established policies,
procedures and internal processes to manage its exposure to interest rate
and market risks. The Company's objective in managing its interest rate
risk is to limit the impact of interest rate changes on earnings and cash
flows and to lower its overall borrowing costs. To achieve these
objectives, the Company refinances debt when advantageous and maintains
fixed rate debt on a majority of its borrowings. The Company maintains a
portfolio of investments consisting of both equity and bond financial
instruments. The Company's equity portfolio primarily includes long-term
investments in telecommunications companies. The Company's conservative
bond portfolio consists of fixed income, state and municipal securities.
The Company does not hold or issue derivative or other financial
instruments for trading purposes. The Company purchases monthly gas futures
contracts to fundmanage well-defined commodity price fluctuations, caused by
weather and other unpredictable factors, associated with the acquisitionsCompany's
commitments to deliver natural gas to certain industrial customers at fixed
prices. This derivative financial instrument activity is not material to
the Company's consolidated financial position, results of the
telecommunications properties.
Net Income and Earnings Per Share
Net Income increased $15,539,000,operations or
11%, in 1995 despite the
loss of $23,000,000 of net income reported in 1994 which was
derived from the discontinued subsidy revenues from Pacific Bell
which had been received annually through the end of 1994.
Earnings per share increased $.01 in 1995 despite the loss of
$.12 per share reported in 1994 which was derived from the
discontinued Pacific Bell subsidy and despite the issuance in
January 1995 of 19,000,000 additional shares of Common Stock
Series A.cash flows.
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
The following documents are filed as part of this Report:
1. Financial Statements:Statements, See Index on page F-1.
2. Supplementary Data:Data, Quarterly Financial Data is included in
the Financial Statements (see 1. above).
Item 9. Changes in and Disagreements with AuditorsAccountants on Accounting and
--------------------------------------------------------------------
Financial Disclosure
--------------------
None
PART III
--------
The Company intends to file with the Commission a definitive proxy statement for
the 19961999 Annual Meeting of Stockholders pursuant to Regulation 14A not later
than 120 days after December 31, 1995.1998. The information called for by this Part
III is incorporated by reference to that proxy statement.
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
---------------------------------------------------------------
-32-
(a) The exhibits listed below are filed as part of this Report:
Exhibit
No. Description
3.1 Certificate of Incorporation
3.2 By-laws
3.2.1 Amendment dated April 14, 1992, to the By-laws
3.200.1 Restated Certificate of Incorporation of Citizens Utilities
Company, with all amendments to March 4, 1996
3.200.2 By-laws of the Company, as amended to-date of Citizens
Utilities Company, with all amendments to March 4, 1996
4.100.1 Copy of Indenture of Securities, dated as of August 15,
1991, to Chemical Bank, as Trustee
4.100.2 First Supplemental
Indenture, dated August 15, 1991
4.100.3 Letter of Representations, dated August 20, 1991, from
Citizens Utilities Company and Chemical Bank, as Trustee, to
Depository Trust Company ("DTC") for deposit of securities with
DTC
4.100.4 Second Supplemental Indenture, dated January 15, 1992, to
Chemical Bank, as Trustee
4.100.5 Letter of Representations,
dated January 29, 1992, from Citizens Utilities Company and
Chemical Bank, as Trustee, to DTC, for deposit of securities
with DTC
4.100.6 Third Supplemental Indenture, dated April 15, 1994, to Chemical
Bank, as Trustee.
4.100.7 Fourth Supplemental Indenture, dated October 1, 1994, to
Chemical Bank, as Trustee.
10.1 Incentive Deferred Compensation Plan, dated April 16, 1991
10.6 Deferred Compensation Plans for Directors, dated November 26,
1984 and December 10, 1984
10.6.1 Directors' Retirement Plan, effective January 1, 1989
10.6.2 Non-Employee Directors' Deferred Fee Equity Plan dated as of
June 28, 1994
10.9 Management Equity Incentive Plan, effective June 22, 1990
10.13 LGS Supplemental Executive Retirement Plan
10.16 Employment Agreement between Citizens Utilities Company and
Leonard Tow, as amended effective September 28, 1995
10.17 1992 Employee Stock Purchase Plan
10.18 Amendment dated May 21, 1993, to the 1992 Employee Stock
Purchase Plan
10.20 Asset Purchase Agreements, dated November 28, 1994
12. Computation of ratio of earnings to fixed charges (this item is
included herein for the sole purpose of incorporation by
reference)
21. Subsidiaries of the Registrant
23. Auditors' Consent
24. Powers of Attorney
27. Financial Data Schedule
Exhibits 10.1, 10.6, 10.6.1, 10.6.2, 10.9, 10.16, 10.17 and 10.18
are management contract
Exhibit
No. Description
- - ------- -----------
3.200.1 Restated Certificate of Incorporation of Citizens Utilities Company, with all amendments to June 6, 1996
and amendment dated May 21, 1998, (incorporated by reference to Exhibit 3.200.1 to the Registrant's Form
S-3 filed June 27, 1996 and exhibit 3.200.1 to the Registrant's Quarterly Report on Form 10-Q for the six
months ended June 30, 1998, respectively, File No. 001-11001).
3.200.2 By-laws of the Company, as amended to-date of Citizens Utilities Company, with all amendments to January 20,
1998, (incorporated by reference to Exhibit 3.200.2 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1997, File No. 001-11001).
4.100.1 Indenture of Securities, dated as of August 15, 1991, to Chemical Bank, as Trustee, (incorporated by reference
to Exhibit 4.100.1 to the Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30,
1991, File No. 001-11001).
4.100.2 First Supplemental Indenture, dated August 15, 1991, (incorporated by reference to Exhibit 4.100.2 to the
Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30, 1991, File No. 001-11001).
4.100.3 Letter of Representations, dated August 20, 1991, from Citizens Utilities Company and Chemical Bank, as Trustee,
to Depository Trust Company (DTC) for deposit of securities with DTC, (incorporated by reference to Exhibit
4.100.3 to the Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30, 1991, File No.
001-11001).
4.100.4 Second Supplemental Indenture, dated January 15, 1992, to Chemical Bank, as Trustee, (incorporated by reference
to Exhibit 4.100.4 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991, File No.
001-11001).
4.100.5 Letter of Representations, dated January 29, 1992, from Citizens Utilities Company and Chemical Bank, as
Trustee, to DTC, for deposit of securities with DTC, (incorporated by reference to Exhibit 4.100.5 to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1991, File No. 001-11001).
4.100.6 Third Supplemental Indenture, dated April 15, 1994, to Chemical Bank, as Trustee, (incorporated by reference to
Exhibit 4.100.6 to the Registrant's Form 8-K Current Report filed July 5, 1994, File No. 001-11001).
4.100.7 Fourth Supplemental Indenture, dated October 1, 1994, to Chemical Bank, as Trustee, (incorporated by reference
to Exhibit 4.100.7 to Registrant's Form 8-K Current Report filed January 3, 1995, File No. 001-11001).
4.100.8 Fifth Supplemental Indenture, dated as of June 15, 1995, to Chemical Bank, as Trustee, (incorporated by reference
to Exhibit 4.100.8 to Registrant's Form 8-K Current Report filed March 29, 1996, File No. 001-11001).
4.100.9 Sixth Supplemental Indenture, dated as of October 15, 1995, to Chemical Bank, as Trustee, (incorporated by
reference to Exhibit 4.100.9 to Registrant's Form 8-K Current Report filed March 29, 1996, File No. 001-11001).
4.100.11 Seventh Supplemental Indenture, dated as of June 1, 1996, (incorporated by reference to Exhibit 4.100.11 to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 001-11001).
4.100.12 Eighth Supplemental Indenture, dated as of December 1, 1996, (incorporated by reference to Exhibit 4.100.12 to
the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 001-11001).
4.200.1 Indenture dated as of January 15, 1996, between Citizens Utilities Company and Chemical Bank, as indenture
trustee (incorporated by reference to Exhibit 4.200.1 to the Registrant's Form 8-K Current Report filed May 28,
1996, File No. 001-11001).
4.200.2 First Supplemental Indenture dated as of January 15, 1996, between Citizens Utilities Company and Chemical Bank,
as indenture trustee, (incorporated by reference to Exhibit 4.200.2 to the Registrant's Form 8-K Current Report
filed May 28, 1996, File No. 001-11001).
4.200.3 5% Convertible Subordinated Debenture due 2036, (contained as Exhibit A to Exhibit 4.200.2), (incorporated by
reference to Exhibit 4.200.2 to the Registrant's Form 8-K Current Report filed May 28, 1996, File No. 001-11001).
4.200.4 Amended and Restated Declaration of Trust dated as of January 15, 1996, of Citizens Utilities Trust,
(incorporated by reference to Exhibit 4.200.4 to the Registrant's Form 8-K Current Report filed May 28, 1996,
File No. 001-11001).
4.200.5 Convertible Preferred Security Certificate, (contained as Exhibit A-1 to Exhibit 4.200.4), (incorporated by
reference to Exhibit 4.200.4 to the Registrant's Form 8-K Current Report filed May 28, 1996, File No. 001-11001).
4.200.6 Amended and Restated Limited Partnership Agreement dated as of January 15, 1996 of Citizens Utilities Capital
L.P., (incorporated by reference to Exhibit 4.200.6 to the Registrant's Form 8-K Current Report filed May 28,
1996, File No. 001-11001).
4.200.7 Partnership Preferred Security Certificate (contained as Annex A to Exhibit 4.200.6), (incorporated by reference
to Exhibit 4.200.6 to the Registrant's Form 8-K Current Report filed May 28, 1996, File No. 001-11001).
4.200.8 Convertible Preferred Securities Guarantee Agreement dated as of January 15, 1996 between Citizens Utilities
Company and Chemical Bank, as guarantee trustee, (incorporated by reference to Exhibit 4.200.8 to the
Registrant's Form 8-K Current Report filed May 28, 1996, File No. 001-11001).
-33-
Exhibit
No. Description
- - ------- -----------
4.200.9 Partnership Preferred Securities Guarantee Agreement dated as of January 15, 1996 between Citizens Utilities
Company and Chemical Bank, as guarantee trustee, (incorporated by reference to Exhibit 4.200.9 to the
Registrant's Form 8-K Current Report filed May 28, 1996, File No. 001-11001).
4.200.10 Letter of Representations, dated January 18, 1996, from Citizens Utilities Company and Chemical Bank, as
trustee, to DTC, for deposit of Convertible Preferred Securities with DTC, (incorporated by reference to
Exhibit 4.200.10 to the Registrant's Form 8-K Current Report filed May 28, 1996, File No. 001-11001).
10.1 Incentive Deferred Compensation Plan, dated April 16, 1991, (incorporated by reference to Exhibit 10.1 to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1991, File No. 001-11001).
10.6 Deferred Compensation Plans for Directors, dated November 26, 1984 and December 10, 1984, (incorporated by
reference to Exhibit 10.6 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1984,
File No. 001-11001).
10.6.1 Directors' Retirement Plan, effective January 1, 1989, (incorporated by reference to Exhibit 10.6.1 to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1989, File No. 001-11001).
10.6.2 Non-Employee Directors' Deferred Fee Equity Plan dated as of June 28, 1994, with all amendments to May 5, 1997,
(incorporated by reference to Exhibit A to the Registrant's Proxy Statement dated April 4, 1995 and Exhibit A to
the Registrant's Proxy Statement dated March 28, 1997, respectively, File No. 001-11001).
10.16.1 Employment Agreement between Citizens Utilities Company and Leonard Tow, effective July 11, 1996, (incorporated
by reference to Exhibit 10.16.1 to the Registrant's Quarterly Report on Form 10-Q for the nine months ended
September 30, 1996, File No. 001-11001).
10.17 1992 Employee Stock Purchase Plan, with all amendments to May 5, 1997, (incorporated by reference to Exhibit
10.17 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992, File No. 001-11001).
10.18 Amendments dated May 21, 1993 and May 5, 1997, to the 1992 Employee Stock Purchase Plan, (incorporated by
reference to the Registrant's Proxy Statement dated March 31, 1993 and the Registrant's Proxy Statement dated
March 28, 1997, respectively, File No. 001-11001).
10.20 Asset Purchase Agreements dated November 28, 1994, (incorporated by reference to Exhibit 10.20 to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1994, File No. 001-11001).
10.21 1996 Equity Incentive Plan and amendment dated May 5, 1997 to 1996 Equity Incentive Plan, (incorporated by
reference to Exhibit A to the Registrant's Proxy Statement dated March 29, 1996 and Exhibit B to Proxy Statement
dated March 28, 1997, respectively, File No. 001-11001).
10.5 Participation Agreement between ELI, Shawmut Bank Connecticut, National Association, the Certificate Purchasers
named therein, the Lenders named therein, BA Leasing & Capital Corporation and Citizens Utilities Company dated
as of April 28, 1995, and the related operating documents (incorporated by reference to Exhibit 10.5 of ELI's
Registration Statement on Form S-1 effective on November 21, 1997, File No. 333-35227).
12 Computation of ratio of earnings to fixed charges (this item is included herein for the sole purpose of
incorporation by reference).
21 Subsidiaries of the Registrant
23 Auditors' Consent
24 Powers of Attorney
27 Financial Data Schedule
Exhibits 10.1, 10.6, 10.6.1, 10.6.2, 10.16.1, 10.17, 10.18 and 10.21 are management contracts or compensatory plans or
arrangements.
The Company agrees to furnish to the Commission upon request copies of the
Realty and Chattel Mortgage, dated as of March 1, 1965, made by Citizens
Utilities Rural Company, Inc., to the United States of America (the Rural
Electrification AdministrationUtilities Services and Rural Telephone Bank) and the Mortgage Notes which that
mortgage secures; and the several subsequent supplemental Mortgages and Mortgage
Notes; copies of the instruments governing the long-term debt of Louisiana
General Services, Inc.; and
copies of separate loan agreements and indentures
governing various Industrial development revenue bonds; andDevelopment Revenue Bonds; copies of documents
relating to indebtedness of subsidiaries acquired during 1995.
Exhibit number 10.6 is incorporated by reference to1996, 1997 and 1998,
and copies of the same
exhibit designation in the Registrant's Annual Reportcredit agreement between Electric Lightwave, Inc. and
Citibank, N. A. dated November 21, 1997.
(b) The Company filed on Form 10-K for8-K dated November 9, 1998, under Item 7
"Financial Statements, Pro Forma Financial Information and Exhibits," the
year
ended December 31, 1984. Exhibit number 10.6.1 is incorporated by reference to
the same exhibit designation in the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1989. Exhibit number 10.9 is incorporated by
reference to Appendix A to the Registrant's Proxy Statement dated May 14, 1990.
Exhibit numbers 10.10, 10.11, 10.12Company's 1998 third quarter financial results and 10.13 are incorporated by reference to
the same exhibit designation in the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1990. Exhibit numbers 4.100.1, 4.100.2 and 4.100.3
are incorporated by reference to the same exhibit designation in the
Registrant's Quarterly Report on Form 10-Q for the nine months ended September
30, 1991. Exhibit numbers 3.1, 3.2, 4.100.4, 4.100.5, 10.1 and 10.16 are
incorporated by reference to the same exhibit designation in the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1991. Exhibit number
3.2.1 and 10.17 is incorporated by reference to the same exhibit designation in
the Registrant's Annual Report on Form 10-K for the year ended December 31,
1992. Exhibit number 10.18 is incorporated by reference to the Registrant's
Proxy Statement, dated March 31, 1993. Exhibit number 10.19 is incorporated by
reference to exhibit number 2.1 in the Registrant's Form 8-K Current Report
filed June 30, 1993. Exhibit numbers 3.200.1 and 3.200.2 are incorporated by
reference to the same exhibit designation in the Registrant's Form S-3 filed
December 16, 1993. Exhibit numbers 4.100.6 and 4.100.7 are incorporated by
reference to the Registrant's Form 8-K Current Reports filed on July 5, 1994 and
January 3, 1995, respectively. Exhibit number 10.20 is incorporated by
reference to the same exhibit designation in the Registrant's Form 10-K for the
year ended December 31, 1994. Exhibit number 10.6.2 is incorporated by
reference to the Registrant's Proxy Statement, dated April 4, 1995.
(b) No Form 8-K was required during the three months ended December 31,
1995.certain operating data.
-34-
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CITIZENS UTILITIES COMPANY
--------------------------
(Registrant)
By:___________________________________________ /s/ Leonard Tow
--------------------------
Leonard Tow
Chairman of the Board; Chief Executive Officer;
Chief Financial Officer; Member, Executive Committee and Director
March 6, 199611, 1999
-35-
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of
the registrant and in the capacities indicated on the 6th11th day of March 1996.
Signature Title
________________________________ Vice President and Treasurer
(Robert J. DeSantis)
________________________________ Vice President and Controller
(Livingston E. Ross)
Norman I. Botwinik* Director
- --------------------------------
(Norman I. Botwinik)
Aaron I. Fleischman* Member, Executive Committee and
- -------------------------------- Director
(Aaron I. Fleischman)
James C. Goodale* Director
- --------------------------------
(James C. Goodale)
Stanley Harfenist* Member, Executive Committee and
- -------------------------------- Director
(Stanley Harfenist)
Andrew N. Heine* Director
- --------------------------------
(Andrew N. Heine)
Elwood A. Rickless* Director
- --------------------------------
(Elwood A. Rickless)
John L. Schroeder* Member, Executive Committee and
- -------------------------------- Director
(John L. Schroeder)
Robert D. Siff* Director
- --------------------------------
(Robert D. Siff)
Robert A. Stanger* Director
- --------------------------------
(Robert A. Stanger)
Edwin Tornberg* Director
- --------------------------------
(Edwin Tornberg)
Claire L. Tow* Director
- --------------------------------
(Claire L. Tow)
Charles H. Symington, Jr* Director
- --------------------------------
(Charles H. Symington, Jr.)
*By: ---------------------------1999.
Signature Title
--------- -----
/s/ Robert J. DeSantis Chief Financial Officer,
-----------------------
(Robert J. DeSantis) Vice President and Treasurer
/s/ Livingston E. Ross Vice President and Controller
-------------------------
(Livingston E. Ross)
Norman I. Botwinik* Director
-------------------------
(Norman I. Botwinik)
Aaron I. Fleischman* Member, Executive Committee and Director
-------------------------
(Aaron I. Fleischman)
James C. Goodale* Director
-------------------------
(James C. Goodale)
Stanley Harfenist* Member, Executive Committee and Director
------------------------
(Stanley Harfenist)
Andrew N. Heine* Director
-------------------------
(Andrew N. Heine)
John L. Schroeder* Member, Executive Committee and Director
-------------------------
(John L. Schroeder)
Robert D. Siff* Director
-------------------------
(Robert D. Siff)
Robert A. Stanger* Director
-------------------------
(Robert A. Stanger)
Edwin Tornberg* Director
-------------------------
(Edwin Tornberg)
Claire L. Tow* Director
-------------------------
(Claire L. Tow)
Charles H. Symington, Jr* Director
-------------------------------
(Charles H. Symington, Jr.)
*By: /s/ Robert J. DeSantis
----------------------------
(Robert J. DeSantis)
Attorney-in-Fact
-36-
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
Index to Consolidated Financial Statements
Independent Auditors' Report F-2
Consolidated balance sheets as of December 31, 1995, 1994 and 1993 F-3
Consolidated statements of income for the years ended
December 31, 1995, 1994 and 1993 F-4
Consolidated statements of shareholders' equity for the years
ended December 31, 1995, 1994 and 1993 F-5
Consolidated statements of cash flows for the years
ended December 31, 1995, 1994 and 1993
Item Page
- - ---- ----
Independent Auditors' Report F-2
Consolidated balance sheets as of December 31, 1998, 1997 and 1996 F-3
Consolidated statements of income and comprehensive income for the years ended
December 31, 1998, 1997 and 1996 F-4
Consolidated statements of shareholders' equity for the years ended F-5
December 31, 1998, 1997 and 1996
Consolidated statements of cash flows for the years ended
December 31, 1998, 1997 and 1996 F-6
Notes to consolidated financial statements F-7
- F-23
F-1
Independent Auditors' Report
----------------------------
The Board of Directors and Shareholders
Citizens Utilities Company:
We have audited the accompanying consolidated financial statementsbalance sheets of Citizens
Utilities Company and subsidiaries as of December 31, 1995, 19941998, 1997 and 1993,1996, and
the related consolidated statements of income and comprehensive income,
shareholders' equity and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Citizens Utilities
Company and subsidiaries atas of December 31, 1995, 19941998, 1997 and 1993,1996, and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
As discussed in Note 1(n) to the financial statements, the Company changed its
method of accounting in 1998 to adopt the provisions of the American Institute
of Certified Public Accountants Statement of Position (AICPA SOP) 98-1
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" and AICPA SOP 98-5 "Reporting on the Costs of Start-up
Activities."
KPMG Peat Marwick LLP
New York, New York
March 1, 19965, 1999
F-2
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995, 1994 and 1993
(In thousands)
1995 1994 1993
---- ---- ----
ASSETS
Current assets:CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998, 1997 and 1996
($ in thousands)
1998 1997 1996
------------ ------------ ------------
Assets
Current assets:
Cash $ 17,92231,922 $ 14,22435,163 $ 21,738
Temporary investments 0 108,818 89,75224,230
Accounts receivable:
Utility service 146,561 134,510 99,684Customers 251,374 239,226 198,138
Other 55,991 34,713 15,08882,874 60,404 88,320
Less allowance for doubtful accounts 2,739 2,428 459
--------------- -------------- ---------------
Total15,870 22,225 4,808
------------ ------------ ------------
Net accounts receivable 199,813 166,795 114,313318,378 277,405 281,650
Materials and supplies 18,191 18,330 10,06129,249 19,885 27,159
Other current assets 16,776 5,887 4,873
-------------- -------------- --------------34,492 44,826 36,731
------------ ------------ ------------
Total current assets 252,702 314,054 240,737
-------------414,041 377,279 369,770
------------ ------------ ------------
Property, plant and equipment 4,187,354 3,583,723 2,153,8915,947,353 5,297,737 4,582,869
Less accumulated depreciation 1,279,324 1,014,068 461,9241,898,730 1,629,944 1,444,817
------------ ----------------------- ------------
Net property, plant and equipment 2,908,030 2,569,655 1,691,9674,048,623 3,667,793 3,138,052
------------ ----------- ----------------------- ------------
Investments 329,090 325,011 411,022414,761 398,499 539,152
Regulatory assets 180,572 177,414 146,207204,703 209,921 193,779
Deferred debits and other assets 247,793 190,432 137,185
-------------210,804 219,360 282,395
------------ ------------ ------------
Total assets $ 3,918,187 $3,576,566 $2,627,118
=========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY5,292,932 $ 4,872,852 $ 4,523,148
============ ============ ============
Liabilities and Shareholders' Equity
Current liabilities:
Short-term debt $ 140,650 $ 515,200 $ 380,000
Long-term debt due within one year 3,865 13,986 1,620$ 8,930 $ 6,691 $ 3,593
Short-term debt 110,000 - -
Accounts payable 178,384 122,404 84,015187,401 222,458 168,299
Income taxes accrued 72,494 92,366 82,63253,599 45,064 90,317
Other taxes accrued 22,812 21,243 19,541
Interest accrued 22,527 15,841 12,73127,645 25,413 24,522
Customers' deposits 20,501 19,919 19,43633,668 22,095 21,400
Other current liabilities 65,257 72,105 47,791
-------------- -------------- -------------63,676 74,906 81,817
------------ ------------ ------------
Total current liabilities 503,678 851,821 628,225507,731 417,870 409,489
Deferred income taxes 314,094 248,150 213,471
Regulatory liabilities 28,279 30,830 28,376
Deferred credits 101,300 77,950 50,634442,908 420,708 347,975
Customer advances for construction 150,000 145,150 137,012211,941 174,858 154,324
Deferred credits 96,827 128,984 115,291
Contributions in aid of construction 73,923 71,580 47,24190,353 85,932 84,129
Regulatory liabilities 19,120 20,881 22,810
Long-term debt 1,187,000 994,189 547,6731,900,246 1,706,532 1,509,697
Minority interest in subsidiary 29,785 36,626 -
Company obligated mandatorily redeemable
convertible preferred securities * 201,250 201,250 201,250
Shareholders' equity 1,559,913 1,156,896 974,486
------------- --------------- -------------1,792,771 1,679,211 1,678,183
------------ ------------ ------------
Total liabilities and shareholders' equity $ 3,918,1875,292,932 $ 3,576,5664,872,852 $ 2,627,1184,523,148
============ =============== ======================= ============
* Represents securities of a subsidiary trust, the sole assets of which are securities of a subsidiary partnership,
substantially all the assets of which are convertible debentures of the Company.
The accompanying Notes are an integral part of these Consolidated Financial Statements.
F-3
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 and 1996
($ in thousands, except for per-share amounts)
1998 1997 1996
------------ ------------ -------------
Revenues $ 1,542,372 $ 1,393,619 $ 1,306,517
Operating expenses:
Cost of services 359,762 344,683 285,749
Operating and maintenance expenses 746,597 797,282 531,349
Depreciation 257,844 235,812 193,733
------------ ------------ -------------
Total operating expenses 1,364,203 1,377,777 1,010,831
------------ ------------ -------------
Income from operations 178,169 15,842 295,686
Non operating gain on sale of subsidiary stock - 78,734 -
Investment income 32,505 33,739 26,834
Other income (loss), net (24,526) 4,062 39,621
Minority interest 14,032 645 -
Interest expense 112,239 109,329 92,695
------------ ------------ -------------
Income before income taxes, dividends on convertible preferred
securities and cumulative effect of change in accounting principle 87,941 23,693 269,446
Income taxes 22,337 7,383 84,937
------------ ------------ -------------
Income before dividends on convertible preferred securities and
cumulative effect of change in accounting principle 65,604 16,310 184,509
Dividends on convertible preferred securities, net of income tax benefit 6,210 6,210 5,849
------------ ------------ -------------
Income before cumulative effect of change in accounting principle 59,394 10,100 178,660
Cumulative effect of change in accounting principle, net of income tax
benefit and related minority interest 2,334 - -
------------ ------------ -------------
Net income 57,060 10,100 178,660
Other comprehensive income,
net of tax and reclassification adjustment 52,872 10,832 (11,099)
------------ ------------ -------------
Total Comprehensive income $ 109,932 $ 20,932 $ 167,561
============ ============ =============
Net income per common share before cumulative effect of change in
accounting principle:
Basic $ .23 $ .04 $ .68
Diluted $ .23 $ .04 $ .68
Net income per common share:
Basic $ .22 $ .04 $ .68
Diluted $ .22 $ .04 $ .68
The accompanying Notes are an integral part of these Consolidated Financial Statements.
F-4
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 and 1996
($ in thousands, except for per-share amounts)
Accumulated
Common Additional Other Total
Stock Paid-In Retained Comprehensive Shareholders'
($.25) Capital Earnings Income Equity
------------ -------------- ------------ ------------------ ---------------
Balance January 1, 1996 $ 56,896 $ 1,263,694 $ 235,236 $ 4,087 $ 1,559,913
Acquisition 322 15,308 15,630
Common stock buybacks to fund stock
dividends (1,639) (73,842) (75,481)
Stock plans 330 6,959 7,289
Stock issuances to fund EPPICS
dividends 178 7,621 7,799
EPPICS issuance cost (4,528) (4,528)
Net income 178,660 178,660
Other comprehensive income, net of
tax and reclassification adjustment (11,099) (11,099)
Stock dividends in shares of Common
Stock Series A and Series B 3,701 166,129 (169,830) -
------------ -------------- ------------ ------------------ ------------
Balance December 31, 1996 $ 59,788 $ 1,381,341 $ 244,066 $ (7,012) $ 1,678,183
------------ -------------- ------------ ------------------ ------------
Acquisitions 604 2,736 8,318 11,658
Common stock buybacks to fund
Stock dividends (1,226) (47,326) (48,552)
Stock plans 188 6,380 6,568
Stock issuances to fund EPPICS
dividends 247 10,175 10,422
Net income 10,100 10,100
Other comprehensive income, net of
tax and reclassification adjustment 10,832 10,832
Stock dividends in shares of Common
Stock 3,148 127,119 (130,267) -
------------ -------------- ------------ ------------------ ------------
Balance December 31, 1997 $ 62,749 $ 1,480,425 $ 132,217 $ 3,820 $ 1,679,211
------------ -------------- ------------ ------------------ ------------
Acquisitions 133 2,150 2,283
Common stock buybacks to fund stock
dividends (453) (14,370) (14,823)
Stock plans 171 5,935 6,106
Stock issuances to fund EPPICS
dividends 273 9,789 10,062
Net income 57,060 57,060
Other comprehensive income, net of
tax and reclassification adjustment 52,872 52,872
Stock dividends in shares of Common
Stock 1,914 70,259 (72,173) -
------------ -------------- ------------ ------------------ ------------
Balance December 31, 1998 $ 64,787 $ 1,554,188 $ 117,104 $ 56,692 $ 1,792,771
============ ============== ============ ================== ============
The accompanying Notes are an integral part of these Consolidated Financial Statements.
F-5
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 and 1996
($ in thousands)
1998 1997 1996
------------ ------------ ------------
Net cash provided by operating activities $ 262,368 $ 230,432 $ 375,181
------------ ------------ ------------
Cash flows used for investing activities:
Securities matured 2,000 16,205 43,608
Securities sold 992,769 578,494 87,447
Securities purchased (952,628) (434,030) (332,332)
Construction expenditures (482,870) (530,744) (348,379)
Business acquisitions (94,234) (105,039) (87,683)
Other (1,028) 25,686 (47,802)
------------ ------------ ------------
(535,991) (449,428) (685,141)
------------ ------------ ------------
Cash flows from financing activities:
Long-term debt borrowings 243,404 159,769 351,053
Issuance of EPPICS - - 196,722
Issuance of common stock 7,101 4,825 6,049
Issuance of subsidiary stock - 118,554 -
Short-term debt borrowings (repayments) 42,000 - (140,650)
Common stock buybacks to fund stock dividends (14,823) (48,552) (75,481)
Long-term debt principal payments (7,300) (3,287) (20,243)
Other - (1,380) (1,182)
------------ ------------ ------------
270,382 229,929 316,268
------------ ------------ ------------
Increase (decrease) in cash (3,241) 10,933 6,308
Cash at January 1, 35,163 24,230 17,922
------------ ------------ ------------
Cash at December 31, $ 31,922 $ 35,163 $ 24,230
============ ============ ============
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
F-6
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 and 1993
(In thousands, except for per-share amounts)
1995 1994 1993
---- ---- ----
Revenues:
Telecommunications $616,747 $456,875 $177,497
Natural gas 197,902 208,940 211,892
Electric 175,351 167,940 158,222
Water/Wastewater 79,032 72,395 65,488
--------- ---------- ---------
Total revenues 1,069,032 906,150 613,099
---------- --------- --------
Operating expenses:
Natural gas purchased 108,385 116,419 117,724
Electric energy and fuel oil purchased 85,168 80,931 76,826
Operating expenses 306,734 244,877 142,718
Maintenance expenses 87,255 61,779 24,816
Depreciation 158,935 115,175 54,698
Taxes other than income 68,382 58,845 35,157
--------- ---------- ---------
Total operating expenses 814,859 678,026 451,939
-------- --------- --------
Income from operations 254,173 228,124 161,160
Investment income 41,667 40,454 42,097
Other income - net 18,288 12,486 12,102
Interest expense 87,775 72,744 37,431
--------- ---------- ---------
Income before income taxes 226,353 208,320 177,928
Income taxes 66,817 64,323 52,298
--------- ---------- ----------
Net income $159,536 $143,997 $125,630
======== ======== ========
Earnings per share of Common Stock
Series A and Series B $.73 $.72 $.63
==== ==== ====
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 and 1993
(In thousands, except for per-share amounts)
Unrealized gain
Additional on Available-
Common Stock ($.25) Paid-in Retained for-Sale
Series A Series B Capital Earnings Securities Total
Balance January 1, 1993 $ 16,039 $ 5,651 $ 582,299 $ 233,282 $ 0 $ 837,271
Acquisitions 155 1,002 2,914 4,071
Net income 125,630 125,630
Stock dividends in shares of
Common Stock Series A and
Series B 1,029 387 129,963 (131,594) (215)
Stock split (2 for 1) 16,155 6,036 (22,191) 0
Stock plans 114 7,615 7,729
Conversions of Series A to Series B (776) 776 0
--------- --------- ---------- --------- ---------- -----------
Balance December 31, 1993 $ 32,447 $ 13,119 $ 698,688 $230,232 $ 0 $ 974,486
--------- --------- ---------- ---------- ---------- -----------
Acquisitions 126 4,646 3,231 8,003
Net income 143,997 143,997
Stock dividends in shares of
Common Stock Series A and
Series B 1,621 686 137,736 (140,043) 0
Stock plans 88 281 20,911 21,280
Conversions of Series A to Series B (570) 570 0
Change in unrealized gain on
securities classified as available-
for-sale, net of income taxes 9,130 9,130
--------- -------- ---------- --------- --------- ----------
Balance December 31, 1994 $ 33,586 $ 14,782 $ 861,981 $ 237,417 $ 9,130 $1,156,896
--------- -------- ---------- --------- --------- ----------
Acquisitions 222 (4,485) 374 (3,889)
Net income 159,536 159,536
Stock dividends in shares of
Common Stock Series A and
Series B 2,374 1,024 158,693 (162,091) 0
Common stock buybacks (115) (352) (21,561) (22,028)
Stock issuance 4,750 238,830 243,580
Stock plans 150 475 30,236 30,861
Conversions of Series A to Series B (1,906) 1,906 0
Change in unrealized gain on
securities classified as available-
for-sale, net of income taxes (5,043) (5,043)
--------- ---------- ---------- ---------- --------- -----------
Balance December 31, 1995 $38,839 $18,057 $1,263,694 $235,236 $ 4,087 $1,559,913
========= ========== ========== ========== ========= ===========
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 and 1993
(In thousands)
1995 1994 1993
---- ---- ----
Net cash provided by operating activities $ 338,374 $ 262,316 $ 194,949
--------- --------- ---------
Cash flows used for investing activities:
Business acquisitions (223,926) (700,222) (481,257)
Construction expenditures (245,004) (263,162) (168,349).
Securities purchased (86,058) ( 18,219) (254,203)
Securities sold 92,224 23,478 269,624
Securities matured 120,691 89,885 54,465
Other 55 (13,795) (7,086)
--------- ---------- -----------
(342,018) (882,035) (586,806)
---------- --------- ----------
Cash flows from financing activities:
Long-term debt borrowings 321,280 458,589 34,733
Long-term debt principal payments (192,030) ( 1,268) (26,644).
Short-term debt (repayments) borrowings (374,550) 135,200 380,000
Issuance of common stock 272,687 18,465 3,780
Common stock buybacks (22,028) 0 0
Other 1,983 1,219 1,974
----------- -------- -----------
7,342 612,205 393,843
----------- --------- --------
Increase (decrease) in cash 3,698 (7,514) 1,986
Cash at January 1, 14,224 21,738 19,752
----------- --------- --------
Cash at December 31, $ 17,922 $ 14,224 $ 21,738
=========== ========= ========
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
CITIZENS UTILITIES COMPANY AND SUBSIDIARES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies:
------------------------------------------
(a) Description of Business:
Citizens Utilities-----------------------
The Company is a diversified operatingcommunications and public utility
providingservices
company which provides, either directly or through subsidiaries,
telecommunications, , electric distribution, natural gas transmission and distribution, electric
transmission and water/distribution, water distribution and wastewater
treatment services to nearly 1,600,000 customer connectionscustomers in areas of nineteen states
in the United States.22 states. The Company is
not dependent upon any single customer, geographic area or upon any one type of utility servicesingle customer for
its revenues. No single regulatory body regulated a service of the
Company that accounted for more than 19% of its 1998 revenues.
On May 18, 1998, the Company announced its plans to separate its
telecommunications businesses and public services businesses into two
stand-alone publicly-traded companies. The Company intends to
establish and transfer to a new company all of its telecommunications
businesses, including its approximate 83% interest in Electric
Lightwave, Inc. (ELI). This separation is subject to federal and state
regulatory approvals and final Board approval, and is expected to be
carried out through a distribution in the stock of the new company to
the Company's shareholders. The public services businesses will
continue to operate as Citizens Utilities Company and intend to
provide gas transmission and distribution, electric transmission and
distribution, water distribution and wastewater treatment services.
This separation is being made in recognition of the different
investment features, performance criteria, capital structures,
dividend policies, customers' requirements and regulatory designs of
each business, and would allow each business to pursue its own
strategy and compete more effectively in its respective markets. The
separation is expected to strengthen both businesses and enable each
of them to take full advantage of opportunities to enhance value.
The Company received an order from the Federal Energy Regulatory
Commission that granted an approval necessary to proceed with its
separation plans. The Company filed a request with the Internal
Revenue Service for a private letter ruling that the transaction is
not subject to federal income tax. The Company has filed petitions
with numerous state regulatory agencies for the approvals necessary to
proceed with its separation plans and to date has received the
necessary approval from four of these agencies. An application with
the Federal Communications Commission (FCC) for the transfer of
certain licenses and filings with the Securities and Exchange
Commission will also be made during the separation process. The
transaction is expected to be completed in the second half of 1999.
Although the Company continues to aggressively pursue its separation
plans, changing market conditions and new business opportunities may
require it to consider other methods to enhance shareholder value,
including the sale or other disposition of certain properties and the
acquisition of new properties.
(b) Principles of Consolidation and Use of Estimates:
------------------------------------------------
The consolidated financial statements have been prepared in accordance
with Generally Accepted Accounting Principlesgenerally accepted accounting principles and include the accounts
of Citizens Utilities Company and all of its subsidiaries, after elimination of intercompany balances and
transactions.subsidiaries. Certain
reclassifications of balances previously reported have been made to
conform to current presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(c) Revenues:
--------
The Company records revenues from telecommunications, natural gas,
electric,communications and water/wastewater treatmentpublic services
customers when billed. The
Company accrues unbilled revenues earned from the dates customers
were last billed to the end of the accounting period. Natural gas,
electric and water/wastewater treatment customersservices are billed on a
cycle basis based on monthly meter readings.provided. Certain telecommunications toll and access servicescommunications revenues
are estimated under cost separation procedures that base revenues on
current operating costs and investments in facilities to provide such
services.
(d) Construction Costs and Maintenance Expense:
------------------------------------------
Property, plant and equipment are stated at original cost, including
general overhead and an allowance for funds used during construction
("AFUDC").(AFUDC) for regulated businesses and capitalized interest for
unregulated businesses. Maintenance and repairs are charged to
operating expenses as incurred.
F-7
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
AFUDC represents the borrowing costs and a return on common equity of
funds used to finance construction.construction of regulated assets. AFUDC is
capitalized as a component of additions to property, plant and
equipment and is credited to income. AFUDC does not represent current
cash earnings; however, under established regulatory rate-making
practices, after the related plant is placed in service, the Company
is permitted to include in the rates charged for utility services a
fair return on and depreciation of such AFUDC included in plant in
service. The amount of AFUDC relating to equity is included in other
income, net ($10,783,000, $11,402,0005,311,000, $6,881,000 and $10,123,000$8,704,000 for 1995, 19941998, 1997 and
1993,1996, respectively) and the amount relating to borrowings is included
as a reduction of interest expense ($4,193,000, $3,031,0003,396,000, $2,978,000 and
$2,678,000$3,385,000 for 1995, 19941998, 1997 and 1993,1996, respectively). The weighted average rates
used1997 income
statement also reflects a writeoff ($4,486,000 relating to calculate AFUDC were 11% in 1995equity and
12% in 1994 and 1993.
Maintenance and repairs are charged$1,744,000 relating to operating expenses as
incurred.borrowings) pursuant to certain regulatory
commission orders (see Note 10). The book value, net of salvage, of
routine property, plant and equipment dispositions is charged against
accumulated depreciation.depreciation for regulated operations.
Capitalized interest for unregulated construction activities credited
to interest expense related to ELI's capital expenditure program
amounted to $10,444,000, $4,693,000 and $3,109,000 for 1998, 1997 and
1996, respectively.
(e) Depreciation Expense:
--------------------
Depreciation expense, calculated using the straight-line method, is
based upon the estimated service lives of various classifications of
property, plant and equipment and representedrepresents approximately 4%5%, 5% and
5% for 1998, 1997 and 1996, respectively, of the gross depreciable
property, plant and equipment for 1995, 1994 and
1993.
equipment.
(f) Regulatory Assets and Liabilities:
---------------------------------
The Company's regulated operations are subject to the provisions of
Statement of Financial Accounting Standards ("SFAS") 71;(SFAS) No. 71, "Accounting
for the Effects of Certain Types of Regulation".Regulation." SFAS 71 requires
regulated entities to record regulatory assets and liabilities as a
result of actions of regulators. Regulatory assets of $25,006,000,
$24,669,000 and $1,601,000 at December 31, 1995, 1994 and 1993,
respectively, were related to Postretirement Benefits Other than
Pensions (see Note 13). Regulatory assets of $155,566,000,
$152,745,000 and $143,813,000 and regulatory liabilities of
$28,279,000, $30,830,000 and $28,376,000 at December 31, 1995, 1994
and 1993, respectively, were recorded to offset deferred income taxes
(see note 1(i)).
The Company continuously monitors the applicability of SFAS 71 to its
regulated operations. SFAS 71 may, at some future date, be deemed
inapplicable due to changes in the regulatory and competitive
environments and/or a decision by the Company to accelerate deployment
of new technology. If the Company were to discontinue the application
of SFAS 71 to one or more of its regulated operations, the Company
would be required to write off its regulatory assets and regulatory
liabilities associated with such operation(s) and would be required to adjust the carrying amount of any
other assets, including property, plant and equipment, that would be
deemed not recoverable related to those operations. In addition, there
could be potential stranded costs associated with certain long term
fixed price contracts which may not be recoverable. The Company
believes its regulated operations continue to meet the criteria for
SFAS 71 and that the carrying value of its regulated property, plant
and equipment is recoverable in accordance with established
rate-making practices.
(g)Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of:
------------------------------------------------------------------------
The Company reviews long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in
circumstances, including the actions of regulators, indicate that the
carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying
amount of an asset to future net cash flows expected to be generated
by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceed the fair value.
(h) Accounting for Investments Temporary Investments and Short-Term Debt:
----------------------------------------------
Investments include high credit quality, short- and intermediate-
termintermediate-term
fixed-income securities (primarily state and municipal debt
obligations) and equity securities. The Company adoptedclassifies its
investments at purchase as available-for-sale or held-to-maturity in
accordance with SFAS 115, "Accounting for Certain Investments in Debt
and Equity Securities" as of January 1, 1994. Under SFAS 115, the Company is
required to classify its investments at acquisition as available-
for-sale, held-to-maturity or trading.Securities." The Company does not invest
inmaintain a trading
portfolio.
Securities classified as available-for-sale are carried at estimated
fair market value. These securities which would be designated as trading. Prior to
the adoption of SFAS 115, fixed income securities were
stated at amortized cost and marketable equity securities were
stated at the lower of cost or market.
Securities which the Company will holdare held for an indefinite period
of time, but which might be sold in the future as changes in market
conditions or economic factors occur, are classified as
available-for-sale and are carried at estimated fair market value.occur. Net aggregate unrealized gains
and losses related to such securities, net of taxes, are included as a
separate component of Shareholders'shareholders' equity. Securities for which the Company has the intent and ability
to hold to maturity are designatedclassified as
held-to-maturity and are carried at amortized cost, adjusted for
amortization of premiumspremiums/discounts and accretion of discounts over the period to
maturity, and are those which the Company has the ability and intent
to hold to maturity. Interest, dividends and gains and losses realized
on sales of securities are reported in Investment income.
TemporaryF-8
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company evaluates its investments periodically to determine
whether any decline in 1994 and 1993 represented investmentsfair value, below the amortized cost basis, is
other than temporary. If the Company determines that a decline in state and municipal securities which matured in lessfair
value is other than one year,temporary, the proceeds of which were used to repay a portioncost basis of the individual
investment is written down to fair value as a new cost basis and the
amount of the write down is accounted for as a realized loss and
included in earnings.
In 1998, short-term debt issued to partially and temporarily fund the acquisition of the
GTE and ALLTEL Telecommunications Properties (see Note 3). Such
investments were considered held-to-maturity and carried at
amortized cost. Short-term debt outstanding was issued in the form
ofrepresents commercial paper notes payable to temporarily and partially
fund the acquisition of the telecommunications properties.payable.
This short-term debt had a weighted average interest rate of 5.73% at
December 31, 1995 and was repaid in early 1996January 1999 with the proceeds from
the issuancesale of Equity Providing Preferred Income Convertible
Securitiesthe Company's investment in Centennial Cellular Corp.
(Centennial) (see Note 7)1(i) below).
(h)(i) Investment in Centennial Cellular Corp.:
The----------------------------------------
In August 1991, the Company recorded its initial investment in 102,187
shares of Centennial Cellular Corp. ("Centennial") Convertible Redeemable Preferred Stock (the
"Preferred Security")Preferred Security) at $49,842,000 and 1,367,099 shares of Centennial
Class B Common Stock at $19,826,000, which in the aggregate
represented the historical cost of the Company's investment in its
subsidiary, Citizens Cellular Company, prior to its merger with
Century Cellular Corp.Centennial. During 1994, the Company purchased 615,195 additional
shares of Centennial Class B Common Stock for $8,613,000 pursuant to a
Centennial rights offering.
The terms of the Preferred Security provideprovided that the Preferred
Security may be converted by the holder into Centennial common stock
and accretesthat it accreted a liquidation value preference through August 31,
1996 at a fixed annual dividend rate of 7.5%, compounded quarterly,
on an initial
liquidation value preference of $125,700,000 until the Preferred Security reachesreached a liquidation value preference of
$186,000,000$186,287,000 on August 31, 1996.
Commencing on September 1, 1996, Centennial
may elect to pay an 8.5% cash dividendThe Company recognized the non-cash accretion on the Preferred
Security's
$186,000,000 liquidation value preference or to redeem the
Preferred Security for $186,000,000 in cash or in Centennial
common stock. The Preferred Security is mandatorily redeemable
on August 30, 2006.
The Company recognizes the non-cash accretion as it iswas earned in each period through August 31, 1996 as
investment income and increasesincreased the book value of its investment in
Centennial by the same amount. The liquidation value preference earned
on the Preferred Security for 1995, 1994 and 19931996 was $14,353,000, $13,481,000 and
$9,594,000.$9,043,000. From inception
through DecemberAugust 31, 1995, $48,794,0001996, $57,837,000 of such accretion has beenwas accounted
for in this manner. PursuantThe Preferred Security was mandatorily redeemable
on August 30, 2006.
Commencing September 1, 1996, Centennial had the option to SFAS 115, beginningeither (a)
declare and pay or accumulate an 8.5% annual dividend on the Preferred
Security's $186,287,000 liquidation value or (b) redeem the Preferred
Security for $186,287,000 in cash or in Centennial common stock.
Commencing September 1, 1996, the Company recognized $15,835,000,
$15,835,000 and $5,278,000 as dividend income from Centennial related
to 1998, 1997 and 1996, respectively.
In January 1, 1994,1999, Centennial was acquired as a result of its merger
with CCW Acquisition Corp., a company organized at the investment in thedirection of
Welsh, Carson, Anderson & Stowe. The Company was holder of 1,982,294
shares of Centennial Class B Common Stock. In addition, as a holder of
102,187 shares of Mandatorily Redeemable Convertible Preferred Stock
has been classified as available-for-sale and is
carried at fair market value whileof Centennial, the Company was required to convert the Preferred
Security has been
classified as held-to-maturity and is carried at amortized cost. The
fair market valueinto approximately 2,972,000 shares of the Centennial Class B Common Stock at December
31, 1995 and 1994, was $33,947,000 and $33,699,000, respectively.
On a quarterly basis,Stock.
In exchange for all of its common stock interests the Company assesses whetherreceived
approximately $223,100,000 in cash, of which approximately $17,500,000
related to accrued dividends on the book value
of the Preferred Security can be realized by comparing such book
value to the market value of Centennial's common equity and by
evaluating other relevant indicators of realizability including
Centennial's ability to redeem the Preferred Security. The carrying
value of the Preferred Security would be deemed impaired to the
extent that such carrying value exceeds the estimated realizability
of the Preferred Security based on all existing facts and
circumstances including the Company's assessment of its ability to
realize the carrying value of the Preferred Security through
mandatory redemption.preferred stock. The Company
believes it can realize its
investmentrecorded a pre-tax gain of approximately $69,500,000 on this
transaction in Centennial either by cash redemption by the issuer
funded through refinancing by the issuer, by temporary conversion
to common equity securities followed by the sale of the common
equity securities, or by sale of its current investment holdings.
(i)January 1999.
(j) Income Taxes, Deferred Income Taxes and Investment Tax Credits:
---------------------------------------------------------------
The Company and its subsidiaries are included in a consolidated
federal income tax return. The Company utilizes the asset and
liability method of accounting for income taxes. Under the asset and
liability method, deferred income taxes reflectare recorded for the tax
effect of temporary differences between the financial statement and
the tax bases of assets and liabilities using presently enacted tax rates.rates expected to be
in effect when the temporary differences are expected to turn around.
Regulatory assets and liabilities represent(see Note 1(f)) include income tax
benefits previously flowed through to customers and from the allowance
for funds used during construction, the effects of tax law changes and
the tax benefit associated with unamortized deferred investment tax
credits. These regulatory assets and liabilities represent the
probable net increase in revenues that will be reflected through
future ratemaking proceedings. The investment tax credits relating to
utility properties, as defined by applicable regulatory authorities,
have been deferred and are being amortized to income over the lives of
the related properties.
(j) Earnings Per Share:
EarningsF-9
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(k) Employee Stock Plans:
---------------------
The Company has various employee stock based compensation plans.
Awards under these plans are granted to eligible officers, management
employees and non-management exempt and non-exempt employees. Awards
may be made in the form of incentive stock options, non-qualified
stock options, stock appreciation rights, restricted stock or other
stock based awards. The Company recognizes compensation expense in the
financial statements only if the market price of the underlying stock
exceeds the exercise price on the date of grant. The Company provides
pro forma net income and pro forma earnings per share isdisclosures for
employee stock option grants made in 1995 and future years based on
the fair value of the options at the date of grant (see Note 9). Fair
value of options granted is computed using the Black Scholes option
pricing model.
(l) Non Operating Gain on Subsidiary Stock and Minority Interest:
------------------------------------------------------------
On November 24, 1997, ELI completed an initial public offering (IPO)
of 8,000,000 shares of its Class A Common Stock. The Company's policy
is to account for sales of subsidiary stock as income statement
transactions and as a result, in 1997, the Company recorded a pre-tax
non operating gain of approximately $78,700,000 resulting from this
transaction and continues to consolidate ELI. The Company retained
approximately 98% of the voting interest and approximately 83% of the
economic ownership in ELI. Minority interest represents 17.35% of
ELI's loss before income tax benefit and the cumulative effect of
change in accounting principle as of December 31, 1998.
(m) Net Income Per Common Share:
---------------------------
Basic earnings per share (EPS) is computed using the weighted average
number of common shares outstanding shares. Earnings per share isduring the period being reported
on. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock at the beginning of the period being
reported on. Both Basic and Diluted EPS calculations are presented
with adjustmentadjustments for subsequent stock dividendsdividends. See Note 13 for
reconciliation of basic EPS to diluted EPS.
(n) Changes in Accounting Principles and stock splits. The calculation has not
been adjustedNew Accounting Pronouncements:
------------------------------------------------------------------
In March 1998, the Accounting Standards Executive Committee of the
AICPA released Statement of Position (SOP) 98-1, "Accounting for the
1.6% stock dividend declared on February 16,
1996, because its effect is immaterial. The effect on earnings per
shareCosts of Computer Software Developed or Obtained for Internal Use."
SOP 98-1 requires that certain costs for the development or purchase
of internal-use software be capitalized and amortized over the
estimated useful life of the exercisesoftware and costs for the preliminary
project stage and the post-implementation/operations stage of dilutive optionsan
internal-use computer software development project be expensed as
incurred. Capitalized software costs included in construction work in
progress reflect costs for internally developed and purchased
software. The impact of the early adoption of SOP 98-1 was to
capitalize approximately $6,100,000 in 1998 that would have been
expensed had the Company not early adopted SOP 98-1.
In April 1998, the Accounting Standards Executive Committee of the
AICPA released Statement of Position (SOP) 98-5, "Reporting on the
Costs of Start-Up Activities." SOP 98-5 requires that the unamortized
portion of deferred start up costs be written off and reported as a
change in accounting principle. Future costs of start-up activities
should then be expensed as incurred. Certain third party direct costs
incurred by ELI in connection with negotiating and securing initial
rights-of-way and developing network design for new market clusters or
locations had been capitalized by ELI in previous years and were being
amortized over five years. The Company elected to early adopt SOP 98-5
effective January 1, 1998. The net book value of these deferred
amounts was $3,394,000 which has been reported as a cumulative effect
of a change in accounting principle in the statement of income and
comprehensive income for the year ended December 31, 1998, net of an
income tax benefit of $577,000 and the related minority interest of
$483,000.
In 1998, the Company adopted the provisions of SFAS No. 130 "Reporting
Comprehensive Income." SFAS 130 establishes standards for reporting
and presentation of comprehensive income and its components in a full
set of financial statements. Comprehensive income for the Company
consists of net income and net unrealized gains (losses) on available
for sale securities and is immaterial.presented in the consolidated statements of
income and comprehensive income. The statement only requires
additional disclosures in the consolidated financial statements; it
does not affect the Company's financial position, cash flows or
results of operations. Prior year financial statements have been
conformed to satisfy the requirements of SFAS 130.
F-10
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In 1998, the Company adopted the provisions SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS 131
establishes standards for the way that public business enterprises
report information about operating segments in annual financial
statements and requires that those enterprises report selected
information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major
customers. This Statement supersedes SFAS 14, "Financial Reporting for
Segments of a Business Enterprise," but retains the requirement to
report information about major customers. Segment information has been
identified based on the way management organizes the segments within
the Company for making operating decisions and assessing performance.
Prior year information has been reclassified to conform with the
current presentation.
In 1998, the Company adopted the provisions of SFAS 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits, an
Amendment of FASB Statements No. 87, 88 and 106." SFAS 132 revises
employers' disclosures about pension and other postretirement benefit
plans. It does not change the measurement or recognition of those
plans. SFAS 132 standardizes the disclosure requirements for pensions
and other postretirement benefits to the extent practicable, requires
additional information on changes in the benefit obligations and fair
values of plan assets that will facilitate financial analysis, and
eliminates certain disclosures that are no longer as useful as they
were when SFAS 87, "Employers' Accounting for Pensions," SFAS 88,
"Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits," and SFAS 106,
"Employers' Accounting for Postretirement Benefits Other Than
Pensions," were issued. Prior year disclosures have been restated to
conform with the 1998 presentation.
(2) Property, Plant and Equipment:
The components of property, plant and equipment at December 31, 1995,
1994 and 1993------------------------------
The components of property, plant and equipment at December 31, 1998, 1997 and 1996 are as follows:
1995 1994 1993
---- ---- ----
($ in thousands)
1998 1997 1996
------------- ------------- ------------
($ in thousands)
Transmission and distribution facilities $2,641,594 $2,159,452 $1,417,320$ 3,411,055 $ 3,205,529 $ 2,923,630
Production and generating facilities 868,119 818,927 414,7431,202,847 1,103,720 960,422
Administrative facilities 679,862 429,254 368,178
Construction work in progress 478,731 411,708 187,692
Pumping, storage and purification facilities 107,653 93,942 80,175
Construction work in progress 212,892 210,213 68,868
Administrative facilities 337,196 285,445 160,423
Intangibles and other 19,900 15,744 12,362135,552 132,404 122,340
Other 39,306 15,122 20,607
------------- ------------- -------------
$4,187,354 $3,583,723 $2,153,891
=========== ========== ==========------------
$ 5,947,353 $ 5,297,737 $ 4,582,869
============= ============= ============
(3) Mergers and Acquisitions:
------------------------
In July 1995,November 1998, the Company acquired Flex Communications by merger. Theall of the stock of Rhinelander
Telecommunication, Inc. (RTI) for approximately $84,000,000 in cash. RTI
is a diversified telecommunications company engaged in providing local
exchange, long distance, Internet access, wireless and cable television
services to rural markets in Wisconsin. This transaction was accounted for
using the purchase method of accounting and the results of operations of
RTI have been included in the accompanying financial statements from the
date of acquisition.
In October 1998, the Company acquired all of the stock of St. Charles
Natural Gas Company for $5,000,000 in cash. St. Charles Natural Gas
Company is a natural gas distribution company serving 5,000 customers in
Louisiana and will become part of the Company's Louisiana Gas Services
operations. This transaction was accounted for using the purchase method
of accounting and the results of operations of St. Charles Natural Gas
Company have been included in the accompanying financial statements from
the date of acquisition.
F-11
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In December 1997, the Company acquired Ogden Telephone Company (Ogden) in a
stock for stock transaction. In 1997 the Company issued 855,9532,308,262 shares of
Common Stock Series B for allto effect the merger. In 1998, 288,554 additional shares
of the outstanding shares of Flex.Company's Common Stock were issued in connection with this trans-
action. Ogden was an independent telephone operating company providing
services to residential and commercial customers in Monroe County, New York.
This transaction was accounted for using the pooling of interests method
of accounting.accounting and the results of operations of Ogden have been included in
the accompanying financial statements since the beginning of the 1997 year.
Prior year financial statements were not restated as the amounts arewere
not significant.
Flex is
a switch-based, inter-exchange carrier providing long distance, 800
Inbound long-distance, voice mail, paging, private data networks and
cellular services to approximately 5,500 customers in upstate New York.
In March 1995,October 1997, the Company acquired Douglasville Water Companypurchased the St. John The Baptist Parish Gas
System in Louisiana, for $173,000 and 31,928 shares of Common Stock Series B. Douglasville
provides water utility servicesapproximately $2,100,000 in Pennsylvania to approximately 870cash. This system
serves 2,200 customers. This transaction was accounted for using the
purchase method of accounting and the results of operations of DouglasvilleSt. John The
Baptist Parish Gas System have been included in the accompanying financial
statements from the date of acquisition.
In February 1995,October 1997, the Company acquiredpurchased all of the outstanding stock of
Gasco, Inc., now known as The Gas Company (TGC) for approximately
$100,000,000 in cash from the town of Youngtown,
Arizona, the town's water and wastewater systems for $1,192,000,BHP Hawaii. TGC is a gas distribution company
serving approximately 3,400 customers.66,000 customers throughout Hawaii. This acquisitiontransaction
was accounted for using the purchase method of accounting and the results of
operations of YoungtownTGC have been included in the accompanying financial
statements from the date of acquisition.
In November 1994, the Company and ALLTEL Corporation signed definitive
agreements pursuant to which the Company agreed to acquire from ALLTEL
certain telecommunications properties in eight states serving
approximately 110,000 local telephone access lines and certain cable
television systems serving approximately 7,000 subscribers ("ALLTEL
Telecommunications Properties"). The purchase price of the ALLTEL
Telecommunications Properties (net of 3,600 of the Company's telephone
access lines which were valued at $10 million and transferred to ALLTEL
in a tax free exchange) is $282 million. On June 30, 1995, approximately
36,000 local telephone access lines in West Virginia and Oregon were
transferred to the Company. On September 30, 1995, approximately 19,000
local telephone access lines in Tennessee were transferred to the
Company. On October 31, 1995, approximately 18,000 local telephone access
lines in Arizona, New Mexico and Utah and approximately 7,000 cable
television lines in Arizona, New Mexico and California were transferred
to the Company. On December 31, 1995, approximately 20,000 local
telephone access lines in California were transferred to the Company and
the Company's 3,600 local telephone access lines in Pennsylvania were
transferred to ALLTEL. The remaining 23,000 local telephone access lines
are located in Nevada and are expected to be transferred to the Company
in early 1996.
In August 1994,1996, the Company acquired RHC,Conference-Call USA, Inc. ("Metro Utility Co.").
Metro Utility Co.(Conference
-Call) in a stock for stock transaction. Conference-Call provides
waternationwide conference calling services and wastewater treatment services to
approximately 10,000 customers in the suburban Chicago area.its subsidiary, Dial, Inc.(Dial),
provides international dial-back services. The Company issued 504,8071,289,133
shares of Common Stock Series Bcommon stock in exchange for all of the outstandingcommon and preferred
stock of Conference-Call. The agreement provides that Conference-Call and/
or Dial would be required to issue additional shares if specified financial
results are achieved in future periods. As a result, the Company issued
243,497 and 113,785 in 1998 and 1997, respectively, as part of Metro Utility Co.this
provision. This transaction was accounted for using the pooling of interestspurchase method of
accounting. Prior yearaccounting and the results of operations of Conference-Call have been
included in the accompanying financial statements were not restated asfrom the amounts are not significant.
In May 1993, the Company and GTE Corp. ("GTE") signed definitive
agreements pursuant to which the Company agreed to acquire from GTE, for
approximately $1.1 billion in cash, certain GTE telecommunications
properties serving approximately 500,000 local telephone access lines in
eight states ("GTE Telecommunications Properties"). On December 31, 1993,
189,123 local telephone access lines in Idaho, Tennessee, Utah and West
Virginia were transferred to the Company. On June 30, 1994, 270,883
access lines in New York were transferred to the Company. On November 30,
1994, 37,802 access lines in Arizona and Montana were transferred to the
Company and on December 30, 1994, 5,440 local telephone access lines in
California were transferred to the Company.
In 1993, the Company separately acquired Natural Gas Companydate of
Louisiana ("NGL") and Franklin Electric Light Company, Incorporated
("Franklin") by merger. In these mergers, the Company issued 568,748
shares and 51,500 shares of Common Stock Series B for all of the common
stock of NGL and Franklin, respectively.acquisition.
The acquisitions were accounted
for using the poolings of interests method of accounting.
The following unaudited pro forma financial information presents the combined
results of operations of the Company, RTI and the GTE and ALLTEL
Telecommunications Properties acquired to dateTGC as if the acquisitions had
occurred on January 1 of the year preceding the respective dates acquired. The effects of the other acquisitions described above would not
significantly impact the pro forma results.acquisition. The
pro forma financial information does not necessarily reflect the results
of operations that would have occurred had the Company, RTI and the GTE and ALLTEL
Telecommunications PropertiesTGC
constituted a single entity during such periods. The effect of the other
acquisitions discussed above would not significantly impact the pro forma
results.
1995 1994 1993
1998 1997 1996
--------------- ------------- -----------------
($ in thousands, except for per-share amounts)
Revenues $1,141,000 $1,138,000 $1,016,000
Net Income $173,000 $172,000 $153,000
Earnings per share $.78 $.78 $.68amounts)
Revenues $ 1,560,000 $ 1,488,000 $ 1,396,000
Net income $ 56,000 $ 13,000 $ 184,000
Basic earnings per common share $ .22 $ .05 $ .70
Diluted earnings per common share $ .22 $ .05 $ .70
In September 1994, aA subsidiary of the Company, andin a joint venture with a subsidiary of Century
Communications Corp. ("Century") entered into a joint venture
agreement for the purpose of acquiring, for approximately $89 million,(Century), acquired and operating twooperates four cable television
systems in southern California (the
"Systems").serving over 90,000 basic subscribers.
Century is a cable television company of which Leonard Tow, the Chairman
Chief Executive Officer and Chief FinancialExecutive Officer of the Company, is Chairman Chief Executive Officer and Chief FinancialExecutive
Officer. In addition, Claire Tow, a directorDirector of the Company, is a Senior
Vice President and a director of Century and Robert Siff, a director of
the Company is a directorDirector of Century. The joint venture is governed by aA management board on which the
Company and Century are equally represented. Therepresented governs the joint venture has entered into an agreement pursuant to
which aventure. A
subsidiary of Century (the "Manager") will manageManager) manages the day-to-day operations of the
Systems.systems. The Manager willdoes not receive a management fee but will beis reimbursed
only for the actualactua costs it incurs on behalf of the joint venture. With respect to the purchase of any service or asset
for the joint venture for use in the Systems, theThe
Manager is obligated to pass through to the joint venture any discount, up
to 5%, off the published prices of vendors andservices or assets purchased for the
joint venture for use in the systems. The Manager is entitled to retain any
discount in excess of 5%. On September 30, 1994,The Company accounts for the joint venture
acquired the first
system serving approximately 26,500 subscribers. On November 30, 1995,
the joint venture acquired the second system, serving approximately
20,700 subscribers. These joint ventures are being accounted for usingfollowing the equity method of accounting. It is expected that these
properties will become part of a larger partnership with Tele-
Communications, Inc., a cable operator in California, and Century. Upon
formation of the partnership, the Company will own 5.5% of this
partnership, which will serve approximately 772,000 customers in the Los
Angeles basin. In March 1999, Adelphia Communications Corporation (Adelphia)
and Century announced the signing of a definitive agreement for the merger
of Century with Adelphia (see Note 4). Upon consummation of the Adelphia/
Century merger, the Company expects to sell to Adelphia its interest in the
joint venture properties (or its interest in the partnership if the joint
venture properties are transferred to the partnership before the Adelphia/
Century merger).
F-12
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) Investments:
The components of investments at December 31, 1995, 1994 and 1993 are
as follows:
1995 1994 1993
---- ---- ----
($ in thousands)
State and municipal securities $172,518 $174,790 $296,371
Investment in Centennial 132,583 117,982 90,628
Other fixed income securities 408 411 7,670
Marketable equity securities 23,581 31,828 13,282
Other 0 0 3,071
-------- -------- --------
Total $329,090 $325,011 $411,022
======== ======== ========
The Company's investment in Centennial at December 31, 1995, includes
102,187 shares of Convertible Redeemable Preferred Stock (the "Preferred
Security") and 1,982,294 Class B Common Shares (see Note 1(h)).
Centennial is a publicly traded subsidiary of Century.
Net realized gains on marketable equity securities included in the
determination of net income for the years 1995, 1994 and 1993,
respectively, were $13,904,000, $3,760,000 and $0. The amortized cost of
marketable equity securities sold during 1995, 1994 and 1993 were
$9,863,000, $384,000 and $0. The cost of
securities sold was based on the actual cost of the shares of each
security held at the time of sale. The aggregate fair market value of
marketable equity securities at December 31, 1993 was $27,492,000 and
total unrealized gains were $14,210,000.------------
The components of investments at December 31, 1998, 1997 and 1996 are as
follows:
1998 1997 1996
--------------- ------------- -----------
($ in thousands)
State and municipal securities $ 141,202 $ 212,743 $ 370,783
Centennial Preferred Security 107,679 107,679 107,679
Marketable equity securities 163,661 75,855 58,351
Other fixed income securities 2,219 2,222 2,339
----------- ----------- -----------
Total $ 414,761 $ 398,499 $ 539,152
========== =========== ===========
Marketable equity securities for each year1998, 1997 and 1996 include 1,807,095the Company's
investments in Hungarian Telephone and Cable Corp. (HTCC), Centennial Class
B Common Stock and Century Class A Common Stock. The investment in the
shares (1,500,000 original shares adjusted for stock dividends) of Century Class A Common Stock of Century. These shares represent less thanrepresents approximately 2% of the
total outstanding common stock of Century.Century and was recorded at a market value
of approximately $31 3/4 per share as of December 31, 1998. The Chairman Chief Executive
Officer and
Chief FinancialExecutive Officer of the Company is also Chairman and Chief Executive
Officer and Chief Financial Officer of Century. Centennial was a subsidiary of Century. There were
no sales of marketable equity securities in 1998, 1997 or 1996. The
Company recognized $22,138,000 in Other income (loss), net in 1996 for
guarantees and financial support provided by the Company to HTCC.
In March 1999, Adelphia Communications Corporation and Century
Communications Corp. announced the signing of a definitive agree-
ment for the merger of Century with Adelphia. The Company currently owns
1,807,095 shares of Century Class A Common Stock. Pursuant to the provisionsMerger
Agreement, each Century Class A Common share will be exchanged for cash
of SFAS 115, the Company classified its
Investments into two categories at January 1, 1994: "held-to-maturity"$9.16 and "available-for-sale". The Company recorded unrealized holding gains.6122 of a share of Adelphia Class A Common Stock (for a total
market value of $44.14 per Century Class A Common share based on securities classified as available-for-sale as an increase to
Investments and as a separate componentAdelphia's
March 4, 1999 closing price of shareholders equity.$57 1/8).
The following summarizes the amortized cost, gross unrealized holding gains
and losses and fair market value for investments.
Unrealized Holding Aggregate Fair
Investment Classification Amortized Cost Gains (Losses) Market Value
- - ------------------------- -------------- ------------------ --------------
($ in thousands)
As of December 31, 1995
1998
- - -----------------------
Held-To-Maturity $244,982 $ 79,808107,679 $ (59)15,673 $ 324,731- $ 123,352
Available-For-Sale $ 77,485 $ 8,422 $(1,799) $ 84,108215,228 100,329 (8,475) 307,082
As of December 31, 19941997
- - -----------------------
Held-To-Maturity $259,484 $ 80,293 $(3,055)107,679 $ 336,72278,608 $ - $ 186,287
Available-For-Sale 284,630 19,673 (13,483) 290,820
As of December 31, 1996
- - -----------------------
Held-To-Maturity $ 50,809107,679 $ 14,71878,608 $ 0- $ 65,527186,287
Available-For-Sale 442,834 2,903 (14,264) 431,473
The maturitiesamortized cost of debtheld-to-maturity securities and redeemable preferredplus the aggregate fair
market value of available-for-sale securities for each year presented
above equals the total of investments presented in the foregoing investments
table. As of December 31, 1998, all investments except the Centennial
Preferred Security have been classified as heldavailable-for-sale. The fair
market value of the Centennial Preferred Security was estimated to maturity were as followsbe its
accreted value at December 31, 1995:
Held-to-Maturity Securities
Investment Maturities Amortized Cost Fair Market Value
--------------------- ----------------------------- ------------------------
($ in thousands)
Due within 1 year $ 46,465 $ 46,724
Due after 1 through 5 years 72,505 73,627
Due after 5 through 10 years 22,565 23,500
Due after 10 years 103,447 180,880
--------- ---------
$244,982 $324,731
======== ========
1997 and 1996 and its conversion value at
December 31, 1998. The Company sold $68,458,000, and $19,335,000 of securities
classified as held-to-maturity during 1995 and 1994, respectively,fair market value reflected above for the purposeCentennial
Preferred Security and Class B Common Stock at December 31, 1998 approxi-
mates the amount the Company realized in January 1999. (See Note 1(i))
F-13
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In 1995, the Company made an investment in and entered into definitive
agreements with HTCC. In 1997, the Company acquired additional shares in the
open market. Pursuant to a definitive agreement, the Company had been
providing requested management services to HTCC. Expenses incurred by the
Company in providing such services, including allocable overhead items,
were required to be reimbursed by HTCC. HTCC disputed certain provisions of
financingthis definitive agreement and the associated management fee. In September
1998, HTCC satisfied its current obligations with the Company by issuing
to the Company 100,000 shares of its common stock and an $8,400,000 note,
dated September 30, 1998, bearing interest payable annually at the rate
of LIBOR (for one-year dollar deposits) plus 2.5%, maturing in 2004. No gain
or loss was recognized on this transaction. Additionally, the current
management services agreement was terminated and a portionnew seven-year consulting
services agreement between the Company and HTCC was entered into with
services to begin in 2004. HTCC has agreed to pay the Company a combined
termination/consulting fee in the aggregate amount of $21,000,000 in equal
annual installments of $3,000,000 beginning in 2004.
The investment in HTCC declined in value during 1998 and in the acquisitionfourth
quarter of 1998 management determined that the GTEdecline was other than
temporary. As a result, the Company recognized a loss of $31,900,000 in the
HTCC investment as a reduction of Other income (loss), net in the statement
of income and ALLTEL Telecommunications Properties; gross realized gains on such sales
for 1995 and 1994, respectively, were $474,000 and $372,000, gross
realized losses were $8,000 and $94,000 for 1995 and 1994, respectively.comprehensive income.
(5) Fair Value of Financial Instruments:
------------------------------------
The following table summarizes the carrying amounts and estimated fair
values for certain of the Company's financial instruments at December 31,
1995, 19941998, 1997 and 1993.1996. For the other financial instruments, representing
cash, and cash equivalents, accounts and notes receivables, short-term debt, accounts payable and
other accrued liabilities, the carrying amounts approximate fair value due
to the relatively short maturities of those instruments.
1995 1994 1993
---- ---- ----
1998 1997 1996
------------------------ ----------------------- ----------------------
Carrying Carrying Carrying
Amount Fair Value Amount Fair Value Amount Fair Value
-------- ---------- -------- ---------- -------- ----------
($ in thousands)
Temporary Investments $ 0414,761 $ 0 $108,818 $108,935 $89,752 $93,438
Investments 329,090 408,839 325,011 402,249 411,022 534,496
Long-Term Debt 1,187,000 1,263,000 994,189 992,349 547,673 602,710
The fair value of the above financial instruments, except for the
investment in the Centennial Preferred Securities, are based on quoted
prices at the reporting date for those financial instruments. The fair
value of the Centennial Preferred Security is estimated to be its
accreted value at the respective reporting dates (see Note 1(h)430,434 $ 398,499 $ 477,107 $ 539,152 $ 617,760
Long-term debt 1,900,246 2,008,422 1,706,532 1,786,622 1,509,697 1,532,251
EPPICS 201,250 171,566 201,250 192,194 201,250 192,194
The fair value of the above financial instruments, except for the
investment in the Centennial Preferred Security, are based on quoted prices
at the reporting date for those financial instruments. The fair value of
the Centennial Preferred Security was estimated to be its accreted value at
December 1997 and 1996 and its conversion value at December 31, 1998 (based
on its conversion as a result of the merger with CCW Acquisition
Corporation discussed in Note 1(i)).
(6) Long-term Debt:
---------------
Weighted average
interest rate at December 31,
-------------------------------------------------------------------------------
December 31, 19951998 Maturities 1995 1994 19931998 1997 1996
----------------- ---------- ---- ---- ----------------- -------------- -------------
($ in thousands)
Debentures 7.50% 2001-20347.34% 2001-2046 $ 700,000 $425,000 $150,0001,000,000 $ 1,000,000 $ 1,000,000
Industrial development revenue bonds 5.87% 2015-2030 374,089 325,125 284,7774.95% 2015-2033 458,417 439,277 391,789
ELI bank credit facility 5.61% 2002 284,000 60,000 -
Rural Utility Services
and Rural Telephone
Bank notes 5.60% 1996-2027 71,609 47,106 42,237Utilities Service Loan Contracts 5.85% 2000-2027 91,078 87,053 77,909
Senior unsecured notes 8.05% 2012 23,000 0 036,000 36,000 36,000
Other long-term debt 7.37% 1999-2027 30,751 16,202 3,999
Commercial paper notes payable 5.73% Variable 16,100 187,800 58,953
Other- 68,000 -
------------ ------------ -------------
Total long-term debt 8.66% 1996-1998 2,202 9,158 11,706
------- ------------ ----------- ---------
6.86% $1,187,000 $994,189 $547,673
===== ========== ======== ========$ 1,900,246 $ 1,706,532 $ 1,509,697
============ ============ =============
F-14
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The total principal amounts of industrial development revenue bonds at
December 31, 1995, 19941998, 1997 and 1993,1996 were $406,080,000, $392,530,000$500,195,000, $480,195,000 and
$377,890,000,$422,780,000, respectively. IndustrialFunds from industrial development revenue bond
funds
issuedissuances are held by a trustee until used for payment of qualifying construction.construction expenditures
are made at which time the funds are released. The amounts presented in the
table above represent funds that have been used for construction through
December 31, 1995, 19941998, 1997 and 1993,1996, respectively.
CertainOn December 31, 1997, certain commercial paper notes payable have beenwere
classified as long-term debt because thesethe obligations are expected to bewere refinanced with
long-term debt securities.
The Company has available lines of credit with commercial banks in the
amounts of $400,000,000$375,000,000 and $200,000,000, which expire on December 14,
19968, 1999
and December 16, 2000,2003, respectively, and have associated facility fees of
one-twentiethone-thirty third of one percent (.05%(.03%) per annum and one-thirteenthone twentieth of one
percent (.075%(.05%) per annum, respectively. The terms of the lines of credit
provide the Company with extension options. No amounts are outstanding
under these facilities. ELI, a subsidiary of the Company, has committed
lines of credit with commercial banks under which it may borrow up to
$400,000,000 which is guaranteed by the Company and expire November 21,
2002. The ELI credit facility has an associated facility fee of
one-twentieth of one percent (.05%) per annum. There is $284,000,000
outstanding under these facilities.
The installment principal payments and maturities of long-term debt for the
next five years are as follows:
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
($ in thousands)
1999 2000 2001 2002 2003
---------- ----------- ----------------- ----------- ---------
($ in thousands)
Installment principal payments $ 2,965 $2,935 $2,604 $2,710 $2,8398,930 $ 6,990 $ 5,490 $ 5,524 $ 5,971
Maturities 900 125 1,428 - - --------- -------- -------50,000 284,000 -
---------- ----------- ----------------- ----------- ----------
$ 3,8658,930 $ 3,060 $4,032 $2,710 $2,839
======== ======= ====== ====== ======6,990 $ 55,490 $ 289,524 $ 5,971
========== =========== ================= =========== =========
Holders of certain industrial development revenue bonds may tender at par
prior to maturity. The next tender date is AugustApril 1, 19972001 for $30,350,000$14,400,000 of
principal amount of bonds. The Company expects to remarket all such bonds
which are tendered. In the years 1995, 19941998, 1997 and 1993,
respectively,1996, interest payments on
short- and long-term debt were $78,659,000, $74,803,000$123,107,000, $112,127,000 and $40,217,000.$93,274,000,
respectively.
(7) Company Obligated Mandatorily Redeemable Convertible Preferred Securities:
-------------------------------------------------------------------------
During the first quarter of 1996, a consolidated wholly-owned subsidiary of
the Company, Citizens Utilities Trust (the Trust), issued, in an
underwritten public offering, 4,025,000 shares of 5% Company Obligated
Mandatorily Redeemable Convertible Preferred Securities due 2036 (Trust
Convertible Preferred Securities or EPPICS), representing preferred
undivided interests in the assets of the Trust, with a liquidation
preference of $50 per security (for a total liquidation amount of
$201,250,000). The proceeds from the issuance of the Trust Convertible
Preferred Securities and a Company capital contribution were used to
purchase $207,475,000 aggregate liquidation amount of 5% Partnership
Convertible Preferred Securities due 2036 from another wholly owned
consolidated subsidiary, Citizens Utilities Capital L.P. (the Partnership).
The proceeds from the issuance of the Partnership Convertible Preferred
Securities and a Company capital contribution were used to purchase from
the Company $211,756,050 aggregate principal amount of 5% Convertible
Subordinated Debentures Due 2036. The sole assets of the Trust are the
Partnership Convertible Preferred Securities, and the Company's Convertible
Subordinated Debentures are substantially all the assets of the
Partnership. The Company's obligations under the agreements related to the
issuances of such securities, taken together, constitute a full and
unconditional guarantee by the Company of the Trust's obligations relating
to the Trust Convertible Preferred Securities and the Partnership's
obligations relating to the Partnership Convertible Preferred Securities.
The $196,722,000 of net proceeds from the issuances was used to permanently
fund a portion of the acquisition of telecommunications properties.
F-15
Citizens Utilities Company and Subsidiaries
Notes to Consolidated Financial Statements
In accordance with the terms of the issuances, the Company paid the 5%
interest on the Convertible Subordinated Debentures in Citizens' Common
Stock. During 1998, 1,093,274 shares of Common Stock were issued to the
Partnership in payment of interest of which 1,009,231 shares were sold by
the Partnership to satisfy cash dividend payment elections by the holders
of the EPPICS. The sales proceeds and the remaining 84,043 shares of Common
Stock were distributed by the Partnership to the Trust. During 1997,
986,579 shares of Common Stock were issued to the Partnership in payment of
interest of which 952,007 shares were sold by the Partnership to satisfy
cash dividend payment elections by the holders of the EPPICS. The sales
proceeds and the remaining 34,572 shares of Common Stock were distributed
by the Partnership to the Trust. During 1996, 709,748 shares of Common
Stock Series A were issued to the Partnership in payment of interest of
which 654,119 shares were sold by the Partnership to satisfy cash dividend
payment elections by the holders of the EPPICS. The sales proceeds and the
remaining 55,629 shares of Common Stock Series A were distributed by the
Partnership to the Trust. The Trust distributed the cash and shares as
dividends to the holders of the EPPICS in 1998, 1997 and 1996.
(8) Capital Stock:
-------------
The common stock of the Company is inhad consisted of two series, Series A and
Series B. On August 25, 1997, the Board of Directors voted to convert the
shares of Series A Common Stock into Series B Common Stock at a ratio of
one share of Series B Common Stock for each share of Series A Common Stock.
The result of this conversion was one class of stock now referred to as
the Common Stock. The 1997 and 1996 consolidated financial statements give
retroactive effect to the aforementioned conversion. The Company is
authorized to issue up to 200,000,000600,000,000 shares of Common Stock Series A and 300,000,000 shares of Common Stock Series B.Stock. Quarterly
stock dividends arehad been declared and issued at the same rate on both Series ACommon Stock and
Series B. Series B shareholders havehad the option of enrolling in the "Series B Common"Common Stock Dividend Sale
Plan." The Plan offers Series Bplan offered shareholders the opportunity to have their stock
dividends sold by the Plan Brokerplan broker and the net cash proceeds of the sale
distributed to them quarterly.
Series A sharesThe amount and timing of dividends payable on Common Stock are convertible share-for-share into Series B
shares. Series B shares are not convertible into Series A. Both series
arewithin the
samesole discretion of the Company's Board of Directors. The Board of Directors
has undertaken an extensive review of the Company's dividend policy in
all other respects.
On May 21, 1993,conjunction with its separation plans. Resulting from this review, in
November 1998, the Board of Directors concluded that after the payment of
the December 1998 stock dividend, the Company declaredshould discontinue the
payment of stock dividends at least through the separation. Post-separation
dividend policies for both the new company and Citizens Utilities Company
will continue to be evaluated and will be subject to approval by each
company's board of directors. In 1998, 1997 and 1996, the Board of
Directors reviewed alternative stock dividend cash equivalents and
associated stock dividend rates each quarter in order to determine and
declare a 2-for-1prudent stock split of its
Series A and Series B common stock. The stock split was distributed on
August 31, 1993, to shareholders of record on August 16, 1993.
On January 30, 1995, the Company, pursuant to an underwritten public
offering, issued 19,000,000 shares of its Common Stock Series A at an
issuance price of $13 3/8 per share (not adjusted for subsequent stock
dividends). The $244,200,000 of net proceeds from the issuance was used
to permanently fund a portiondividend rate in light of the acquisitionCompany's actual and
forecasted financial position and results of the GTE
Telecommunications Properties.operations, as well as
dividend yields of comparable communications and public services companies.
Quarterly and annual stock dividend rates declared on Common Stock Series A and Series B are based upon cash equivalent rates and share market prices,
and have been as follows:
Dividend Rates
1995 1994 1993
First quarter 1.5% 1.1% 1.2%
Second quarter 1.5% 1.15% 1.0%
Third quarter 1.6% 1.3% 1.1%
Fourth quarter 1.6% 1.4% 1.0%
----- ---- ----
Total 6.2% 4.95% 4.3%
==== ===== ====
Compounded Total 6.35% 5.04% 4.37%
===== ===== =====
Annualizedannual stock
dividend cash equivalent rates considered by the
Company's Board of Directors in declaring stock dividends for 1995, 1994
and 1993, respectively, were 72 1/4 cents, 68 7/8 cents and 65 cents
per shareequivalents (adjusted for all stock splits and stock dividends paid subsequent
to all dividends declared through December 31, 19951998, and rounded to the
nearest 1/8th).
In May 1995,16th) considered by the Board of Director's authorized the buyback of up to
$50 million of Common Stock Series A and Series B shares. Shares have been and will be purchased on the open market from time to time. The
Company purchased 1,865,000 shares at a cost of $22,028,000 in 1995.
Purchased shares are used to pay stock dividends. The Company used 7,000
shares (not adjusted for subsequent stock dividends and a stock split)
acquired from employees pursuant to the Management Equity Incentive
Plan in partial payment of the 1993 stock dividend. These shares had a
cost of $215,000.
The activity in shares of outstanding common stock for Series A and
Series B during 1995, 1994 and 1993 is summarized as follows:
Number of Shares
Series A Series B
Balance at January 1, 1993 64,156,000 22,604,000
Acquisitions 0 621,000
Stock dividends 4,114,000 1,548,000
Stock split (2 for 1) 64,620,000 24,142,000
Stock plans 0 457,000
Conversion of Series A to Series B (3,105,000) 3,105,000
------------ ------------
Balance at December 31, 1993 129,785,000 52,477,000
Acquisitions 0 505,000
Stock dividends 6,484,000 2,744,000
Stock plans 355,000 1,122,000
Conversions of Series A to Series B (2,278,000) 2,278,000
----------- -----------
Balance at December 31, 1994 134,346,000 59,126,000
Acquisitions 0 888,000
Stock issuance 19,000,000 0
Stock dividends 9,499,000 4,098,000
Common stock buybacks (462,000) (1,403,000)
Stock plans 601,000 1,894,000
Conversions of Series A to Series B (7,626,000) 7,626,000
------------ -----------
Balance at December 31, 1995 155,358,000 72,229,000
============ ===========
The Company used 7,000 Series B shares (not adjusted for subsequent
stock dividends and a stock split) acquired from employees pursuant to
the Management Equity Incentive Plan in partial payment of the 1993 stock
dividend. These shares had a cost of $215,000.
On January 22, 1996, pursuant to an underwritten public offering, a
subsidiary of the Company issued 4,025,000 shares of 5% Equity Providing
Preferred Income Convertible Securities ("EPPICS") having a liquidation
preference of $50 per security and a maturity date of January 15, 2036.
Each security is initially convertible into 3.252 shares of the Company's
Common Stock Series A at a conversion price of $15.375 per share. The
$196,722,000 in net proceeds from the sale of these securities were used
to repay short-term debt, permanently fund a portion of the ALLTEL
Telecommunications Properties to be acquired, and for other general
corporate purposes.
Dividend Rates
-------------------------------------------
1998 1997 1996
-------------- -------------- -------------
First quarter .75% 1.6 % 1.6 %
Second quarter .75% 1.6 % 1.6 %
Third quarter .75% 1.0 % 1.6 %
Fourth quarter .75% 1.0 % 1.6 %
-------- ------- -------
Total 3.0% 5.2 % 6.4 %
======== ======= =======
Compounded Total 3.03% 5.30% 6.56%
======== ======= =======
Cash Equivalent 28 5/16 cent 51 1/4 cent 66 1/8 cent
======== ======= =======
The Company purchased 1,811,000 shares at a cost of $14,826,000 in 1998,
4,904,000 shares at a cost of $48,552,000 in 1997, and 6,554,000 shares at
a cost of $75,481,000 in 1996. All purchased shares were used to pay stock
dividends.
F-16
Citizens Utilities Company and Subsidiaries
Notes to Consolidated Financial Statements
The activity in shares of outstanding common stock during 1998, 1997 and 1996 is summarized as follows:
Number of Shares
----------------
Balance at January 1,1996 227,587,000
Acquisition 1,289,000
Common stock dividends 14,803,000
Common stock buybacks to fund stock dividends (6,554,000)
Common stock issued to fund EPPICS dividends 710,000
Stock plans 1,313,000
---------------
Balance at December 31, 1996 239,148,000
Acquisitions 2,417,000
Common stock dividends 12,591,000
Common stock buybacks to fund stock dividends (4,904,000)
Common stock issued to fund EPPICS dividends 986,000
Stock plans 756,000
---------------
Balance at December 31, 1997 250,994,000
Acquisitions 532,000
Common stock dividends 7,657,000
Common stock buybacks to fund stock dividends (1,811,000)
Common stock issued to fund EPPICS dividends 1,093,000
Stock plans 684,000
--------------
Balance at December 31, 1998 259,149,000
==============
The Company has 50,000,000 of authorized but unissued shares of preferred
stock ($.01 par).
(8) Employee(9) Stock Plans:
Under-----------
At December 31, 1998, the Citizens Utilities Company had four stock based compensation plans
and ELI had two stock based plans which are described below. The Company
applies APB Opinion No. 25 and related interpretations in accounting for
the employee stock plans. No compensation cost has been recognized in the
financial statements for options issued pursuant to the Management Equity
Incentive Plan ("MEIP")(MEIP), Equity Incentive Plan (EIP), Employee Stock Purchase
Plan (ESPP), ELI Employee Stock Purchase Plan (ELI ESPP) or ELI Equity
Incentive Plan (ELI EIP) as the exercise price for such options was equal
to the market price of the stock at the time of grant. Compensation cost
recognized for the Company's Directors' Deferred Fee Equity Plan was
$463,798, $352,017 and $161,231 in 1998, 1997 and 1996, respectively. Had
the Company determined compensation cost based on the fair value at the
grant date for its MEIP, EIP, ESPP, ELI ESPP and ELI EIP, the Company's pro
forma Net income and Net income per common share would have been as
follows:
1998 1997 1996
------------ ------------ -----------
($ in thousands)
Net Income As reported $57,060 $10,100 $178,660
Pro forma 45,409 7,374 176,662
Net Income per common share As reported:
Basic $.22 $.04 $.68
Diluted .22 .04 .68
Pro forma:
Basic $.18 $.03 $.68
Diluted .17 .03 .67
Pro forma Net income reflects only the vested portion of options granted in
1998, 1997, 1996 and 1995. Therefore, the full impact of calculating
compensation cost for stock options is not reflected in the pro forma
amounts above because pro forma compensation cost only includes costs
associated with the vested portion of options granted pursuant to the MEIP,
EIP, ESPP, ELI ESPP and ELI EIP on or after January 1, 1995.
F-17
Citizens Utilities Company and Subsidiaries
Notes to Consolidated Financial Statements
In November 1998, the Compensation Committee of the Company's Board of
Directors approved a stock option exchange program pursuant to which
current employees of the Company (excluding senior executive officers)
holding outstanding options, under the MEIP and EIP plans, with an exercise
price in excess of $10.00 had the right to exchange their options for a
lesser number of new options with an exercise price of $7.75. A calculation
was prepared using the Black Scholes option pricing model to determine the
exchange rate for each eligible grant in order to keep the fair value of
options exchanged equal to the fair value of the options reissued. The
exchanged options maintain the same vesting and expiration terms. This
stock option exchange program had no impact on reported earnings and
resulted in an aggregate net reduction in shares subject to option of
2,202,000 for both MEIP and EIP.
In August 1998, the Compensation Committee of ELI's Board of Directors
approved a stock option exchange program pursuant to which employees of ELI
holding outstanding options with an exercise price in excess of $15.50 had
the right to exchange all or half of their options for a lesser number of
new options with an exercise price of $8.75. A calculation was prepared
using the Black Scholes option pricing model to determine the exchange rate
for each eligible grant in order to keep the fair value of options
exchanged equal to the fair value of the options reissued. The repriced
options maintain the same vesting and expiration terms. This stock option
exchange program had no impact on reported earnings and resulted in a net
reduction in shares subject to option of 546,000.
Both ELI and the Company repriced these employee stock options in an effort
to retain employees at a time when a significant percentage of employee
stock options had exercise prices that were above fair market value. No
compensation costs have been recognized in the financial statements as the
exercise price was equal to the market value of the stock at the date of
repricing.
Management Equity Incentive Plan
--------------------------------
Under the MEIP, awards of the Company's Series A or Series B common stockCommon Stock may be granted to
eligible officers, management employees and non-management exempt employees
of the Company and its subsidiaries in the form of incentive stock options,
non-qualified stock options, stock appreciation rights ("SARs")(SARs), restricted
stock or other stock-based awards. The MEIP is administered by the
Compensation Committee of the Board of Directors.
The maximum number of shares of common stock which may be issued pursuant
to awards at any time is 5% (12,957,000 as of December 31, 1998) of the
Company's common stock outstanding provided that no more than 9,100,000 shares (adjusted for
subsequent stock dividends and stock splits) will be issued pursuant to
incentive stock options under the MEIP.outstanding. No awards will be granted more than 10
years after the effective date (June 22, 1990) of the MEIP. The exercise
price of stock options and SARs shall be equal to or greater than the fair
market value of the underlying common stock on the date of grant. Stock
options are generally not exercisable on the date of grant but vest over a
period of time.
Under the terms of the MEIP, subsequent stock dividends and stock splits
have the effect of increasing the option shares outstanding, which
correspondingly decreases the average exercise price of outstanding
options.
The following is a summary of share activity subject to option under the
MEIP adjusted for subsequent stock dividends.
Shares Weighted
Subject to Average Option
Option Price Per Share
------------- ---------------
Balance at January 1, 1996 8,714,000 $ 12.37
Options granted 3,084,000 10.54
Options exercised (392,000) 6.66
Options canceled or lapsed (606,000) 11.23
--------------
Balance at December 31, 1996 10,800,000 11.02
Options granted 1,641,000 8.53
Options exercised (106,000) 10.81
Options canceled or lapsed (631,000) 11.03
--------------
Balance at December 31, 1997 11,704,000 10.72
Options granted 1,869,000 7.75
Options exercised (29,000) 10.56
Options canceled, forfeited or lapsed (4,109,000) 11.09
--------------
Balance at December 31, 1998 9,435,000 $9.91
==============
F-18
Citizens Utilities Company and Subsidiaries
Notes to Consolidated Financial Statements
As a result of the stock option exchange program approved by the
Compensation Committee of the Board of Directors, a total of 3,801,000
options were eligible for exchange, of which 3,554,000 options were
cancelled in exchange for 1,869,000 new options with an exercise price of
$7.75.
The following table summarizes information about shares subject to options
under the MEIP at December 31, 1998.
Options Outstanding Options Exercisable
- - --------------------------------------------------------------------------------- ---------------------------------
Weighted Average Weighted
Number Range of Weighted Average Remaining Number Average
Outstanding Exercise Prices Exercise Price Life in Years Exercisable Exercise Price
------------ --------------- ---------------- ---------------- ----------- --------------
14,000 $ 4 - 5 $ 4 6 14,000 $ 4
2,615,000 7 - 8 8 5 1,960,000 8
1,636,000 8 - 10 9 9 617,000 9
2,264,000 10 - 11 11 6 1,678,000 11
2,343,000 11 - 14 12 4 2,338,000 12
563,000 14 - 15 14 5 563,000 14
---------------- -------------
9,435,000 $ 4 - 15 $ 10 6 7,170,000 $ 10
================ =============
The weighted average fair value of options granted during 1998, 1997 and
1996 were $2.27, $4.23 and $4.61, respectively. For purposes of the pro
forma calculation, the fair value of each option grant is estimated on the
date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions used for grants in 1998, 1997 and
1996:
1998 1997 1996
----- ------ -------
Dividend yield - - -
Expected volatility 26% 32% 20%
Risk-free interest rate 4.43% 6.13% 5.63%
Expected life 4 years 7 years 7 years
During 1996, the Company granted 566,694 shares (adjusted for subsequent
stock dividends) of restricted stock awards to key employees in the form of
the Company's Common Stock. None of the restricted stock may be sold,
assigned, pledged or otherwise transferred, voluntarily or involuntarily,
by the employees until the restrictions lapse in January 2001. At December
31, 1998, 559,974 shares (adjusted for subsequent stock dividends) of
restricted stock were outstanding.
Compensation expense of $1,288,000, $1,302,000 and $1,125,000 for the years
ended December 31, 1998, 1997 and 1996, respectively, has been recorded in
connection with these grants.
Equity Incentive Plan
---------------------
In May 1996, the shareholders of the Company approved the EIP. Under the
EIP, awards of the Company's Common Stock may be granted to eligible
officers, management employees and non-management employees of the Company
and its subsidiaries in the form of incentive stock options, non-qualified
stock options, stock appreciation rights (SARs), restricted stock or other
stock-based awards. The EIP is administered by the Compensation Committee
of the Board of Directors.
The maximum number of shares of common stock which may be issued pursuant
to awards at any time is 12,858,000 shares, which has been adjusted for
subsequent stock dividends. No awards will be granted more than 10 years
after the effective date (May 23, 1996) of the EIP. The exercise price of
stock options and SARs shall be equal to or greater than the fair market
value of the underlying common stock on the date of grant. Stock options
are generally not exercisable on the date of grant but vest over a period
of time.
Under the terms of the EIP, subsequent stock dividends and stock splits
have the effect of increasing the option shares outstanding, which
correspondingly decrease the average exercise price of outstanding options.
F-19
Citizens Utilities Company and Subsidiaries
Notes to Consolidated Financial Statements
The following is a summary of sharesshare activity subject to option under the
MEIP
presents option share activityEIP adjusted for subsequent stock splits and
dividends through the end of the respective year presented.dividends.
Weighted
Average option
Shares subject to option price per share
Shares Weighted Average
Subject to Option Price Per
Option Share
------------- ------------------
Balance at January 1, 1993 3,920,000 $12.541997 - $ -
Options granted 1,862,000 18.06
Options exercised (239,000) 7.622,197,000 8.55
Options canceled or lapsed (25,000) 5.44
Adjustment for stock dividends* 201,000 -
------------
Balance at December 31, 1993 5,719,000 14.14
Options granted 1,562,000 13.06
Options exercised (149,000) 8.04
Options canceled or lapsed (69,000) 14.17
Adjustment for stock dividends* 287,000 -(3,000) 8.53
-------------
Balance at December 31, 1994 7,350,000 14.071997 2,194,000 8.55
Options granted 99,000 11.06
Options exercised (260,000) 6.754,683,000 9.34
Options canceled, forfeited or lapsed (107,000) 14.16
Adjustment for stock dividends* 456,000 -(2,745,000) 10.14
-------------
Balance at December 31, 1995 7,538,000 $14.30
=============
Options exercisable at end of year 4,472,000 $12.591998 4,132,000 $ 8.51
=============
* Represents adjustmentAs a result of the stock option exchange program approved by the
Compensation Committee of the Board of Directors, a total of 2,453,000
options were eligible for exchange, of which 2,123,000 options were
cancelled in exchange for 1,606,000 new options with an exercise price of
$7.75.
The following table summarizes information about shares subject to outstandingoptions
under the EIP at December 31, 1998.
Options Outstanding Options Exercisable
- - -------------------------------------------------------------------------- --------------------------------
Weighted Average
Number Range of Weighted Average Remaining Number Weighted Average
Outstanding Exercise Prices Exercise Price Life in Years Exercisable Exercise Price
- - ---------------- --------------- ---------------- ---------------- ----------- -----------------
1,602,000 $ 7 - 8 $ 8 9 5,000 $ 8
1,758,000 8 - 9 9 9 617,000 9
171,000 9 - 10 9 9 3,000 9
601,000 10 - 11 10 9 22,000 10
- - ---------------- -------------
4,132,000 $ 7 - 11 $ 9 9 647,000 $ 9
================ =============
The weighted average fair value of options granted during 1998 and 1997 was
$3.54 and $4.25, respectively. For purposes of the pro forma calculation,
the fair value of each option shares to reflect stock
dividends.grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1998 and 1997:
1998 1997
------------- -------------
Dividend yield - -
Expected volatility 26% 32%
Risk-free interest rate 5.15% 6.14%
Expected life 6 years 7 years
During 19951998 and 1993,1997, the Company granted restricted stock awards to key
employees in the form of the Company's Common Stock Series B. There
were no restricted stock award grants in 1994.Stock. The number of Series B shares
issued as restricted stock awards during 19951998 and 19931997 were 9,000464,409 and
158,000,23,018, respectively (adjusted for subsequent stock dividends and
stock splits)dividends). The 1998
awards were issued to retain certain key employees. None of the restricted
stock awards may be sold, assigned, pledged or otherwise transferred,
voluntarily or involuntarily, by the employeeemployees until the restrictions
lapse. The restrictions lapse over six
months, three yearare both time and five year periods.performance based. At December
31, 1995, 347,0001998, 487,428 shares (adjusted for subsequent stock dividends and stock splits)dividends) of
restricted stock were outstanding.
The Company'sCompensation expense of $808,000 and $27,000 for the years ended December
31, 1998 and 1997, respectively, has been recorded in connection with these
grants.
F-20
Citizens Utilities Company and Subsidiaries
Notes to Consolidated Financial Statements
Employee Stock Purchase Plan
("ESP Plan")----------------------------
The Company's ESPP was approved by shareholders on June 12,199212, 1992 and
amended on May 21, 1993.22, 1997. Under the ESP
Plan,ESPP, eligible employees of the Company
and its subsidiaries mayhave the right to subscribe to purchase shares of
Common Stock Series B at the lesser of 85% of the lower
ofmean between the averagehigh and low
market priceprices on the first day of the purchase period or on the last day of
the purchase period. An employee may elect to have up to 20% of annual base
pay withheld in equal installments throughout the designated
payroll-deduction period for the purchase of shares. The value of an
employee's subscription may not exceed $25,000 in any one calendar year. An
employee may not participate in the ESPP if such employee owns stock
possessing 5% or more of the total combined voting power or value of the
Company's capital stock. As of December 31, 1995,1998, there were 1,813,0006,407,195
shares of Common Stock Series B reserved for issuance under the ESP Plan.ESPP. These shares
willmay be adjusted for any future stock dividends or stock splits. The ESP
PlanESPP
will terminate when all 1,813,000 shares reserved have been subscribed for and
purchased, unless terminated earlier or extended by the Board of Directors.
The ESP PlanESPP is administered by the Compensation1992 Employee Stock Purchase Plan Committee
of the Board of Directors. As of December 31, 1995,1998, the number of employees
enrolled and participating in the ESP PlanESPP was 1,7681,986 and the total number of
shares purchased under the ESPP was 2,604,912. For purposes of the pro
forma calculation, compensation cost is recognized for the fair value of
the employees' purchase rights, which was estimated using the Black-Scholes
option pricing model with the following assumptions for subscription
periods beginning in 1998, 1997 and 1996:
1998 1997 1996
------------- ------------- -------------
Dividend yield - - -
Expected volatility 26% 32% 20%
Risk-free interest rate 4.91% 5.45% 5.29%
Expected life 6 months 6 months 6 months
The weighted average fair value of those purchase rights granted in 1998,
1997 and 1996 was $3.66, $3.04 and $3.47, respectively.
ELI Employee Stock Purchase Plan
--------------------------------
The ELI ESPP was approved by shareholders on May 21, 1998. Under the ELI
ESPP, eligible employees of ELI may subscribe to purchase shares of ELI
Class A Common Stock at the lesser of 85% of the average of the high and
low market prices on the first day of the purchase period or on the last
day of the purchase period. An employee may elect to have up to 20% of
annual base pay withheld in equal installments throughout the designated
payroll-deduction period for the purchase of shares. The value of an
employee's subscription may not exceed $25,000 in any one calendar year. An
employee may not participate in the ELI ESPP if such employee owns stock
possessing 5% or more of the total combined voting power or value of all
classes of capital stock of ELI. As of December 31, 1998, there were
200,000 shares of ELI Class A Common Stock reserved for issuance under the
ELI ESPP. These shares may be adjusted for any future stock dividends or
stock splits. The ESPP will terminate when all shares reserved have been
subscribed for and purchased, unless terminated earlier or extended by the
Board of Directors. The ELI ESPP is administered by the Compensation
Committee of ELI's Board of Directors. As of December 31, 1998, the number
of employees enrolled and participating in the ELI ESPP was 468 and the
total number of shares purchased under the ESPELI ESPP was 119,345. For
purposes of the pro forma calculation, compensation cost is recognized for
the fair value of the employees' purchase rights, which was estimated using
the Black-Scholes option pricing model with the following assumptions for
subscription periods beginning in 1998:
1998
-----
Dividend yield -
Expected volatility 71%
Risk-free interest rate 4.92%
Expected life 6 months
The weighted average fair value of those purchase rights granted in 1998
was $3.82.
F-21
Citizens Utilities Company and Subsidiaries
Notes to Consolidated Financial Statements
ELI Equity Incentive Plan
-------------------------
In October 1997, the Board of Directors of ELI approved the ELI EIP. Under
the ELI EIP, awards of ELI's Class A Common Stock may be granted to
eligible directors, officers, management employees, non-management
employees and consultants of ELI in the form of incentive stock options,
non-qualified stock options, SARs, restricted stock or other stock-based
awards. The ELI EIP is administered by the Compensation Committee of the
ELI Board of Directors. The exercise price for such awards shall not be
less than 85% or more than 110% of the average of the high and low stock
prices on the date of grant. The exercise period for such awards is
generally 10 years from the date of grant. ELI has reserved 4,170,600
shares for issuance under the terms of this plan.
The following is a summary of share activity subject to option under the
ELI EIP.
Shares Weighted Average
Subject to Option Price Per
Option Share
------------- -----------------
Balance at January 1, 1997 - $ -
Options granted 2,326,000 16.00
-------------
Balance at December 31, 1997 2,326,000 16.00
Options granted 1,654,000 10.77
Options canceled, forfeited or lapsed (1,649,000) 16.21
--------------
Balance at December 31, 1998 2,331,000 $ 12.14
==============
As a result of the stock option exchange program approved by the ELI
Compensation Committee of the Board of Directors, a total of 2,212,000
options were eligible for exchange, of which 1,426,000 options were
cancelled in exchange for 880,000 new options.
The following table summarizes information about shares subject to options
under the EIP at December 31, 1998.
Options Outstanding Options Exercisable
- - ------------------------------------------------------------------------- -------------------------------
Weighted- Average
Number Range of Weighted Average Remaining Number Weighted Average
Outstanding Exercise Prices Exercise Price Life in Years Exercisable Exercise Price
- - ---------------- --------------- ---------------- ----------------- ----------- ----------------
1,261,000 $ 8 - 9 $ 9 9 268,000 $ 9
32,000 9 - 16 13 9 27,000 13
963,000 16 - 17 16 9 320,000 16
75,000 17 - 20 19 9 - -
- - ---------------- -------------
2,331,000 $ 8 - 20 $ 12 9 615,000 $ 13
================ =============
For purposes of the pro forma calculation, compensation cost is recognized
for the fair value of the employees' purchase rights, which was 400,923.estimated
using the Black-Scholes option pricing model with the following assumptions
for subscription periods beginning in 1998 and 1997:
1998 1997
------------- -------------
Dividend yield - -
Expected volatility 71% 13%
Risk-free interest rate 5.44% 5.87%
Expected life 6 years 7 years
The weighted-average fair value of those options granted in 1998 and 1997
were $6.94 and $5.13, respectively.
F-22
Citizens Utilities Company and Subsidiaries
Notes to Consolidated Financial Statements
In conjunction with the IPO, ELI granted 535,000 restricted stock awards to
key employees in the form of Class A Common Stock. Subsequently in 1997,
15,000 shares were returned and canceled. None of the restricted stock
awards may be sold, assigned, pledged or otherwise transferred, voluntarily
or involuntarily, by the employee until the restrictions lapse. For 395,000
shares, restrictions lapse over one through three-year periods, including
one-third of the shares when ELI achieves $100,000,000 of annual revenues,
one-third of the shares when ELI achieves $125,000,000 of annual revenues,
and one-third of the shares when ELI achieves $155,000,000 of annual
revenues. For the remaining 125,000 shares, restrictions will lapse in
January 2001 if certain performance targets are met. At December 31, 1998,
520,000 shares of this stock were outstanding, of which 131,667 shares were
no longer restricted pending board approval. Compensation expense of
$4,666,000 and $219,000 for the years ended December 31, 1998 and 1997,
respectively, has been recorded in connection with this grant.
Directors' Deferred Fee Equity Plan
-----------------------------------
The Company's non-employeeNon-Employee Directors' Deferred Fee Equity Plan (the
"Directors Plan")Directors' Plan) was approved by shareholders on May 19, 1995.1995 and
subsequently amended. The DirectorsDirectors' Plan includes an Option Plan, a Stock
Plan and a StockFormula Plan. Through the Option Plan, an eligible director may
elect to receive up to $30,000 per annum of his or her director's fees for
a period of up to five years in the form of options to purchase Company
common stock, the number of such options being equal to such fees divided
by 20% of the fair market value of Company common stock on the effective
date of the options and are exercisable at 90% of the fair market value of
Company common stock on the effective date of the options. Through the
Stock Plan, an eligible director may elect to receive all or a portion of
his or her director's fees in the form of Plan Units, the number of such
Plan Units being equal to such fees divided by the fair market value of
Company common stock on certain specified dates. The Formula Plan provides
each Director of the Company options to purchase 5,000 shares of common
stock on the first day of each year beginning in 1997 and continuing
through 2002 regardless of whether the Director is participating in the
Option Plan or Stock Plan. In addition, on September 1, 1996, options to
purchase 2,500 shares of common stock were granted to each Director. The
exercise price of the options are 100% of the fair market value on the date
of grant and the options are exercisable six months after the grant date
and remain exercisable for ten years after the grant date. In the event of
termination of Directorship, a Stock Plan participant will receive the
value of such Plan Units in either stock or cash or installments of cash as
selected by the Participant at the time of the related Stock Plan election.
As of any date, the maximum number of shares of Common Stockcommon stock which the Plan
may be obligated to deliver pursuant to the Stock Plan and the maximum
number of shares of Common Stockcommon stock which shall have been purchased by
Participants pursuant to the Option Plan and which may be issued pursuant
to outstanding options under the Option Plan shall not be more than one
percent (1%) percent of the total outstanding shares of Common Stock Series A and Series B of the Company
as of such date, subject to adjustment in the event of changes in the
corporate structure of the Company affecting capital stock. There are currently 9were 11
directors participating in the Directors
Plan.Directors' Plan in 1998. In 1995,1998, the total
Options and Plan Units earned were 96,246,185,090 and 3,416, respectively.16,661, respectively
(adjusted for subsequent stock dividends). In 1997, the total Options and
Plan Units earned were 188,838 and 18,817, respectively (adjusted for
subsequent stock dividends). In 1996, the total Options and Plan Units
earned were 160,151 and 15,585, respectively (adjusted for subsequent stock
dividends). At December 31, 1995, 40,5951998, 525,422 options were exercisable at a
weighted average exercise price of $12.127.
(9)$9.98.
(10) 1997 Charges to Earnings:
-------------------------
In 1996 and early 1997, the Company had been pursuing an aggressive growth
strategy to take advantage of opportunities in the emerging communications
marketplace. This strategy included the initiation and expansion of long
distance services which, in combination with other enhanced service
offerings, would enable the Company to offer an integrated package of
products and services.
Late in 1996, the Company began the transition of its long distance
network, primarily to fixed cost leases, in order to achieve the lowest
cost of providing long distance service. In addition, the Company initiated
a brand recognition program to support the sales and marketing initiatives
designed to increase the Company's market share. The increase in revenues
resulting from this growth strategy, though significant, did not offset the
resulting increase in incremental expenses from the branding, sales, and
marketing initiatives. As a result, the Company's long distance service
operations generated unexpected losses during the first half of 1997 which
had an adverse impact on the Company's earnings and cash flow. During the
second quarter 1997, management re-evaluated this growth strategy in light
of this continuing impact on earnings and cash flow.
F-23
Citizens Utilities Company and Subsidiaries
Notes to Consolidated Financial Statements
In connection with the re-evaluation of the Company's communications growth
strategy, as well as a review of its employee benefit plans to determine if
such plans were competitive with those provided in the industry, several
public utility commission orders requiring the Company to record charges to
earnings, and other charges to earnings related to certain accounting
policy changes at ELI in anticipation of its initial public offering, the
Company recorded approximately $197,300,000 of charges to earnings in 1997
as follows:
($ in thousands)
----------------
Curtailment of certain long distance service operations $34,600
Benefit plan curtailments and related regulatory assets 34,700
Telecommunications information systems and software 67,400
Regulatory commission orders 47,200
Other 13,400
--------
Total $197,300
========
(11) Income TaxesTaxes:
------------
The following is a reconciliation of the provision for income taxes at
federal statutory rates to the effective rates:
1995 1994 1993
----------- ----------- -----------
Consolidated tax provision at
federal statutory rate 35.0% 35.0% 35.0%
State income tax provisions,
net of federal income tax
benefit 2.1% 2.5% 3.6%
Allowance for funds used
during construction (2.3%) (2.4%) (2.5%)
Amortization of
investment tax credits (0.9%) (0.9%) (1.2%)
Nontaxable investment income (1.7%) (2.9%) (4.7%)
Accrual adjustment (2.9%) (0.2%) (0.3%)
All other - net 0.2% (0.2%) (0.5%)
----- ------ -----
29.5% 30.9% 29.4%
===== ====== =====
For 1995, 1994 and 1993, accumulated deferred income taxes amounted to
$298,424,000, $230,556,000 and $194,165,000, respectively, and the
unamortized deferred investment tax credits amounted to $15,670,000,
$17,594,000 and $19,306,000,
1998 1997 1996
----------- ------------ -----------
Consolidated tax provision at federal statutory rate 35.0% 35.0% 35.0%
State income tax provisions, net of federal income tax benefit 1.3% 8.6% 0.5%
Allowance for funds used during construction (2.7%) (4.2%) (2.0%)
Nontaxable investment income (3.3%) (19.9%) (1.7%)
Amortization of investment tax credits (1.9%) (7.3%) (0.7%)
Flow through depreciation 6.0% 17.6% 1.6%
All other, net (9.0%) 1.4% (1.2%)
----------- ------------ -----------
25.4% 31.2% 31.5%
=========== ============ ===========
As of December 31, 1998, 1997 and 1996, accumulated deferred income taxes amounted to $432,299,000, $408,310,000 and
$334,117,000, respectively, and the unamortized deferred investment tax credits amounted to $10,609,000, $12,398,000
and $13,858,000, respectively. Income taxes paid during the year were $5,434,000, $17,765,000 and $22,525,000 for
1998, 1997 and 1996, respectively. Income taxes paid during the
year were $39,425,000, $30,395,000 and $24,139,000 for 1995, 1994 and 1993,
respectively.
The components of the net deferred income tax liability at December 31, are as follows:
1995 1994 1993
---- ---- ----1998 1997 1996
---------- --------- -----------
($ in thousands)
Deferred income tax liabilitiesliabilities:
- - -------------------------------
Property, plant and equipment basis differences $246,128 $177,549 $148,756$ 334,296 $ 338,170 $ 285,673
Regulatory assets 63,871 62,578 57,134
Other-net 22,741 28,704 25,36573,724 76,504 63,447
Other, net 47,572 20,101 14,469
----------- ---------- -------------
455,592 434,775 363,589
----------- ------------
332,740 268,831 231,255
--------- ---------- ------------------------
Deferred income tax assetsassets:
- - --------------------------
Regulatory liabilities 8,431 9,236 10,076
Deferred investment tax credits 6,231 7,183 6,649
Regulatory liabilities 12,415 13,498 11,1354,253 4,831 5,538
----------- ---------- -------------
12,684 14,067 15,614
----------- -----------
18,646 20,681 17,784
---------- ----------- ------------------------
Net deferred income tax liability $314,094 $ 248,150442,908 $ 213,471
======== ========= =========420,708 $ 347,975
=========== ========== =============
F-24
Citizens Utilities Company and Subsidiaries
Notes to Consolidated Financial Statements
The provision for federal and state income taxes, as well as the taxes
charged or credited to Shareholders'shareholders' equity, includes amounts both payable
currently and deferred for payment in future periods as indicated below:
1995 1994 1993
1998 1997 1996
---- ---- ----
($ in thousands)
Income taxes charged (credited) to the income statement:
($ in thousands)
--------------------------------------------------------- - -------------------------------------------------------
Current:
Federal $13,297 $28,347 $39,571$ (1,644) $ 13,658 $ 19,775
State 1,014 3,595 8,682
---------294 38 (3,256)
---------- ------------------- -------------
Total current 14,311 31,942 48,253
--------(1,350) 13,696 16,519
---------- ------------------- -------------
Deferred:
Federal 48,168 29,829 4,91723,800 (7,674) 64,895
Investment tax credits (2,057) (1,949) (2,086)(1,627) (1,740) (1,865)
State 6,395 4,501 1,214
--------1,514 3,101 5,388
---------- ------------------- -------------
Total deferred 52,506 32,381 4,045
--------23,687 (6,313) 68,418
---------- ------------------- -------------
Subtotal 22,337 7,383 84,937
---------- ---------- -------------
Income tax benefit on dividends on convertible preferred securities:
Current:
Federal (3,344) (3,344) (3,149)
State (508) (508) (479)
---------- ---------- -------------
Subtotal (3,852) (3,852) (3,628)
---------- ---------- -------------
Income tax benefit on cumulative effect of change in accounting principle:
Current:
Federal (478) - -
State - - -
---------- ---------- -------------
Subtotal (478) - -
---------- ---------- -------------
Total Income taxes charged (credited) to the income statement $66,817 $64,323 $52,298
======== ========== =========(a) 18,007 3,531 81,309
---------- ---------- -------------
Income taxes charged (credited) to shareholders' equity:
- - -------------------------------------------------------
Deferred income taxes (benefits) on unrealized gains or losses on
securities
classified as available-for-sale ($3,052) $5,588 $ 032,792 6,718 (6,884)
Current benefit arising from stock options exercised (406) (137) (537)
-------- ---------(35) (164) (345)
---------- ---------- -------------
Income taxes charged (credited) to shareholders' equity ($3,458) $5,451 $ (537)
======== ========= ==========(b) 32,757 6,554 (7,229)
---------- ---------- -------------
Total income taxes $63,359 $69,774 $51,761
======== =========taxes: (a) plus (b) $ 50,764 $ 10,085 $ 74,080
========== ========== =============
The Company's alternative minimum tax credit as of December 31, 1998 is
$74,200,000, which can be carried forward indefinitely to reduce future
regular tax liability. The Company's tax net operating loss carry forward
as of December 31, 1998 is $45,400,000, which can be carried forward for 15
years. These benefits are included as debits against accrued income taxes.
(12) Net Income Per Common Share:
---------------------------
The reconciliation of the net income per share calculation for the years ended December 31, 1998, 1997 and 1996 is as
follows:
1998 1997 1996
-------------------------------- -------------------------------- -------------------------------
($ in thousands, except for per share amounts)
Per Per Per
Income Shares Share Income Shares Share Income Shares Share
------ ------ ----- ------ ------ ----- ------ ------ -----
Net income per
common share:
Basic $57,060 258,879 $.22 $10,100 260,226 $ .04 $178,660 261,286 $ .68
Effect of dilutive options - 742 - - 598 - - 802 -
Diluted $57,060 259,621 $.22 $10,100 260,824 $ .04 $178,660 262,088 $ .68
F-25
(10) Segment Information:Citizens Utilities Company and Subsidiaries
Notes to Consolidated Financial Statements
All share amounts represent weighted average shares outstanding for each
respective period. All per share amounts have been adjusted for subsequent
stock dividends. The diluted net income per common share calculation
excludes the effect of potentially dilutive shares when their exercise
price exceeds the average market price over the period. The Company has
4,025,000 shares of potentially dilutive Mandatorily Redeemable Convertible
Preferred Securities which are convertible into common stock at a 3.76 to 1
ratio at an exercise price of $13.30 per share and 6,256,720 potentially
dilutive stock options at a range of $10.31 to $14.24 per share. These
items were adjusted for subsequent stock dividends and were not included in
the diluted net income per common share calculation for any of the above
periods as their effect was antidilutive.
(13) Comprehensive Income:
--------------------
The Company's other comprehensive income is as follows:
Year Ended December 31, 1995 1994 1993
($1998
----------------------------
Before-Tax Tax Expense/ Net-of-Tax
Amount Benefit Amount
--------------- ---------------- ----------------
Net unrealized gains on securities:
Net unrealized holding gains arising during
period $ 56,497 $ 21,627 $ 34,870
Add: Reclassification adjustment for net
losses realized in thousands)
Telecommunications:net income 29,167 11,165 18,002
--------------- ---------------- ----------------
Other comprehensive income $ 85,664 $ 32,792 $ 52,872
=============== ================ ================
(14) Segment Information:
-------------------
The company is a diversified communications and public services company
which is segmented into communications, CLEC, gas, electric and water and
wastewater services. The communications sector provides both regulated and
competitive communications services to residential, business and wholesale
customers. The CLEC sector is a facilities based integrated communications
provider providing a broad range of communications services throughout the
United States through the company's subsidiary, ELI. The electric sector
provides electric transmission and distribution services to primarily
residential customers. The gas sector provides natural gas transmission and
distribution services to primarily residential customers. The water and
wastewater sector provides water distribution, wholesale water
transmission, wastewater treatment, public works consulting, and marketing
and billing services to residential customers.
Special items charged against revenues represent the revenue portion of the
1997 charges to earnings (see Note 10). Special items charged against
operating income represent the 1998 Y2K costs and separation costs, and the
1997 charges to earnings. Sector EBITDA consists of sector operating income
plus depreciation. Special items charged against sector EBITDA include Y2K
costs and separation costs. Consolidated EBITDA represents the aggregate
sector EBITDA plus investment and other income less special items which
include 1998 Y2K and separation costs, the 1998 HTCC investment write off,
the 1997 non operating gain on sale of subsidiary stock and the 1997
charges to earnings. EBITDA is a measure commonly used to analyze companies
on the basis of operating performance. It is not a measure of financial
performance under generally accepted accounting principles and should not
be considered as an alternative to net income as a measure of performance
nor as an alternative to cash flow as a measure of liquidity and may not be
compared to similarly titled measures of other companies.
F-26
Citizens Utilities Company and Subsidiaries
Notes to Consolidated Financial Statements
Year Ended December 31,
1998 1997 1996
----------------- ------------- -----------------
($ in thousands)
Communications:
- - --------------
Revenues $616,747 $456,875 $177,497
Assets 2,097,277 1,805,893 910,276excluding special items $ 867,446 $ 840,329 763,459
Inter-sector revenues (32,407) (23,573) (11,250)
Revenues as reported 835,039 802,589 752,209
Operating income excluding special items 164,821 140,143 231,823
Operating income as reported 157,567 (2,580) 231,823
Depreciation 120,608 81,659 22,744181,656 175,363 148,022
EBITDA excluding special items 346,477 315,506 379,845
EBITDA 339,223 172,783 379,845
Capital expenditures, 144,613 177,419 66,619net 201,453 263,011 184,041
Total sector assets 2,434,183 2,379,936 2,206,092
CLEC:
- - ----
Revenues $ 100,880 $ 61,084 $ 35,417
Inter-sector revenues (3,061) (3,341) (1,319)
Revenues as reported 97,819 57,743 34,098
Operating loss excluding special items (75,647) (37,436) (25,286)
Operating loss as reported (75,923) (48,201) (25,286)
Depreciation 17,002 11,167 5,549
EBITDA excluding special items (58,645) (26,269) (19,737)
EBITDA (58,921) (37,034) (19,737)
Capital expenditures, net 200,000 124,549 41,607
Total sector assets 532,309 359,962 206,290
Public Services:
- - ---------------
Gas:
---
Revenues $ 325,423 $ 252,098 $ 239,619
Operating income beforeexcluding special items 43,757 41,907 33,756
Operating income taxes 174,196 148,720 85,934
Natural gas:
Revenues $197,902 $208,940 $211,892
Assets 344,036 306,979 289,121as reported 42,225 29,200 33,756
Depreciation 12,155 10,827 10,64624,084 15,587 10,953
EBITDA excluding special items 67,841 57,494 44,709
EBITDA 66,309 44,787 44,709
Capital expenditures, 31,056 31,235 25,677net 45,768 47,880 27,691
Total sector assets 554,028 530,696 381,740
Electric:
--------
Revenues excluding special items $ 190,307 $ 198,070 $ 192,297
Revenues as reported 190,307 191,470 192,297
Operating income beforeexcluding special items 27,746 35,777 24,805
Operating income taxes 25,874 30,205 28,971
Electric:
Revenues $175,351 $167,940 $158,222
Assets 487,893 458,457 446,284as reported 27,093 13,723 24,805
Depreciation 17,035 15,251 12,92422,733 22,195 18,718
EBITDA excluding special items 50,479 57,972 43,523
EBITDA 49,826 35,918 43,523
Capital expenditures, 39,829 43,132 43,673net 18,895 23,544 24,591
Total sector assets 479,210 492,926 482,194
F-27
Citizens Utilities Company and Subsidiaries
Notes to Consolidated Financial Statements
Water and Wastewater:
--------------------
Revenues $ 93,784 $ 89,719 $ 88,294
Operating income beforeexcluding special items 28,140 26,541 30,588
Operating income taxes 30,060 31,221 30,660
Water/Wastewater:
Revenues $ 79,032 $ 72,395 $ 65,488
Assets 505,851 455,312 400,288as reported 27,207 23,700 30,588
Depreciation 9,137 7,438 8,38412,369 11,500 10,491
EBITDA excluding special items 40,509 38,041 41,079
EBITDA 39,576 35,200 41,079
Capital expenditures, 41,261 38,884 37,426net 30,793 32,171 21,048
Total sector assets 598,397 556,559 511,628
The following table is a reconciliation of certain sector items to the total consolidated amount.
Year Ended December 31,
-----------------------
1998 1997 1996
----------------- ------------- -----------------
($ in thousands)
Revenues
- - --------
Total sector revenues excluding special items $ 1,577,840 $ 1,441,300 $ 1,319,086
Inter-sector revenues (35,468) (26,914) (12,569)
Charges to earnings - (20,767) -
-------------- ----------- ------------
Consolidated reported revenues $ 1,542,372 $ 1,393,619 $ 1,306,517
============== =========== ============
Operating income
before- - ----------------
Total sector operating income taxes 24,043 17,978 15,595
(11)excluding special
items $ 188,817 $ 206,932 $ 295,686
Y2K costs and separation costs (10,648) - -
Charges to earnings - (191,090) -
------------- ------------- ------------
Consolidated reported operating income $ 178,169 $ 15,842 $ 295,686
============= ============= ============
EBITDA
- - ------
Total sector EBITDA excluding special items $ 446,661 $ 442,744 $ 489,419
Investment and other income 39,884 42,287 66,455
Minority interest 14,032 645 -
HTCC investment write off (31,905) - -
Y2K costs and separation costs (10,648) - -
Charges to earnings - (195,576) -
Non operating gain on sale of subsidiary stock - 78,734 -
------------- ------------- ------------
Consolidated EBITDA $ 458,024 $ 368,834 $ 555,874
============= ============= ============
Capital expenditures
- - --------------------
Total sector capital expenditures $ 496,909 $ 491,155 $ 298,978
General capital expenditures 25,123 33,334 18,785
------------- ------------- ------------
Consolidated reported capital expenditures $ 522,032 $ 524,489 $ 317,763
============= ============= ============
Assets
- - ------
Total sector assets $ 4,598,127 $ 4,320,079 $ 3,787,944
General assets 694,805 552,773 735,204
------------- ------------- ------------
Consolidated reported assets $ 5,292,932 $ 4,872,852 $ 4,523,148
============= ============= ============
F-28
Citizens Utilities Company and Subsidiaries
Notes to Consolidated Financial Statements
(15) Quarterly Financial Data (unaudited):
------------------------------------ Net Income Per Common
---------------------
Share
-----
Revenues Net Income Basic Dilutive
-------- ---------- ----- --------
1998 ($ in thousands)
Per Share
---------------- -------------------
1995 Revenues Amount Series A Series B
---- -------- ------ -------- --------
First quarter $267,034 $33,903 $.16 $.16$403,863 $26,779 $.10 $.10
Second quarter 251,678 41,939 .19 .19366,347 14,462 .06 .06
Third quarter 259,732 45,061 .20 .20378,279 14,461 .06 .06
Fourth quarter 290,588 38,633 .18 .18393,883 1,358 .01 .01
Net Income (Loss) Per
---------------------
Common Share
Net Income ------------
Revenues (Loss) Basic Dilutive
-------- ---------- ----- --------
1997 ($ in thousands)
Per Share
---------------- --------------------
1994 Revenues Amount Series A Series B
---- -------- ------ -------- --------
First quarter $222,156 $31,655 $.16 $.16$375,091 $ 30,584 $ .12 $ .12
Second quarter 187,130 38,016 .19 .19308,857 (123,175) (.47) (.47)
Third quarter 241,005 38,687 .19 .19338,803 23,507 .09 .09
Fourth quarter 255,859 35,639 .17 .17370,868 79,184 .31 .31
First quarter 1998 results include approximately $2,334,000 after tax
cumulative effect of change in accounting principle, net of related
minority interest (see Note 1(n)). Fourth quarter 1998 results include an
approximate $19,700,000 after tax write-off of the HTCC investment (see
Note 4).
Second quarter 1997 results include approximately $135,164,000 after tax
charges to earnings (see Note 10). Fourth quarter 1997 results include a
non-operating $51,197,000 after tax gain on the sale of subsidiary stock
(see Note 11).
The quarterly net income (loss) per common share amounts are rounded to the
nearest cent.cent and are adjusted for subsequent stock dividends. Annual
earnings per share may vary depending on the effect of such rounding.
(12)(16) Supplemental Cash Flow Information:
----------------------------------
The following is a schedule of net cash provided by operating activities
for the years ended December 31, 1995, 19941998, 1997 and 1993.1996:
1995 1994 1993
1998 1997 1996
---- ---- ----
($ in thousands)
Net income $159,536 $143,997 $125,630$ 57,060 $ 10,100 $ 178,660
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation expense 158,935 115,175 54,698
Deferred income taxes and
amortization257,844 235,812 193,733
Non cash charges to earnings - 153,348 -
Non cash HTCC investment write off 31,905 - -
Cumulative effect of investment
tax credits 52,506 32,381 4,045change in accounting principle 3,394 - -
Gain on sale of subsidiary stock - (78,734) -
Centennial non cash investment income (14,353) (13,481) (9,594)- - (9,043)
Allowance for equity funds used during construction (10,783) (11,402) (10,123)(5,311) (6,881) (8,704)
Deferred income tax and investment tax credit 23,687 (6,373) 68,418
Change in operating accounts receivable (22,684) (20,663) (23,068)(30,449) (35,560) (46,342)
Change in accounts payable 11,247 21,520 (3,773)and other (102,386) (36,881) 35,806
Change in accrued taxes and accrued interest (6,923) 13,024 24,960
Other 10,893 (18,235) 32,17418,022 (3,498) (4,997)
Change in other assets 8,602 (901) (32,350)
----------- --------- -------------------- ------------
Net cash provided by operating activities $338,374 $262,316 $ 194,949262,368 $ 230,432 $ 375,181
=========== ========= ==================== ============
In conjunction with the acquisitions of the ALLTEL
Telecommunications Properties,described in Note 3 the Company
assumed $41,447,000debt of $13,800,000, $8,400,000 and $13,000,000 in debt1998, 1997 and
1996, respectively, at a weighted average interest raterates of 6.59%.5.6%, 6.2% and
8.05%, respectively.
F-29
(13)Citizens Utilities Company and Subsidiaries
Notes to Consolidated Financial Statements
(17) Retirement Plans:
----------------
Pension Plan
------------
The Company and its subsidiaries have a noncontributory pension plan
covering all employees who have met certain service and age requirements.
The benefits are based on years of service and final average pay or career
average pay. Contributions are made in amounts sufficient to fund the
plan's net periodic pension cost while considering its tax deductibility and the minimum funding requirement.deductibility. Plan
assets are invested in a diversified portfolio of equity and fixed-income
securities.
Pension costs for 1995, 1994 and 1993 includeThe following tables set forth the following components:
1995 1994 1993
---- ---- ----
($ in thousands)
Service cost $6,549 $ 5,777 $ 3,585
Interest cost on projectedplan's benefit obligations 10,735 8,166 5,038
Net amortization and deferral 335 172 1,751
Return on plan assets (11,784) (9,754) (6,945)
-------- ------- --------
Net pension cost $5,835 $4,361 $ 3,429
======== ======= ========
Assumptions used in the computation of pension costs/actuarial present
value of projected benefit obligations included the following:
1995 1994 1993
---- ---- ----
Discount rate 8.25% /7.50% 8.00% 7.50%
Expected long-term rate of
return on plan assets 8.75% 8.50% 8.00%
Rate of increase in
compensation levels 4.50%/4.00% 4.50% 4.50%
As of December 31, 1995, 1994 and 1993, respectively, the fair
values of plan assets were $133,700,000, $133,964,000as of December 31, 1998 and $73,233,000.1997.
1998 1997
--------- ---------
Change in benefit obligation ($ in thousands)
- - ----------------------------
Benefit obligation at beginning of year $ 208,520 $ 156,442
Service cost 10,747 8,815
Interest cost 15,703 12,978
Amendments (1,487) 55
Actuarial loss 27,941 22,194
Acquisitions 8,344 15,095
Benefits paid (16,854) (7,059)
---------- ----------
Benefit obligation at end of year $ 252,914 $ 208,520
========== ==========
1998 1997
---------- ----------
Change in plan assets ($ in thousands)
- - ---------------------
Fair value of plan assets at beginning of year $ 201,834 $ 154,151
Actual return on plan assets 24,749 25,402
Acquisitions 10,875 21,298
Employer contribution 11,932 8,042
Benefits paid (16,854) (7,059)
---------- -----------
Fair value of plan assets at end of year $ 232,536 $ 201,834
========== ===========
1998 1997
---------- ---------
Prepaid benefit cost ($ in thousands)
- - --------------------
Funded status $ (20,378) $ (6,686)
Unrecognized net liability 189 233
Unrecognized prior service cost 3,682 5,511
Unrecognized net actuarial loss 21,807 1,389
---------- -----------
Prepaid benefit cost $ 5,300 $ 447
========== ===========
1998 1997
---------- -----------
Components of net periodic benefit cost ($ in thousands)
- - ---------------------------------------
Service cost $ 10,747 $ 8,815
Interest cost on projected benefit obligation 15,703 12,978
Return on plan assets (17,241) (13,764)
Net amortization and deferral 400 865
---------- ----------
Net periodic benefit cost $ 9,609 $ 8,894
========== ==========
Assumptions used in the computation of pension costs/ year end benefit obligations were as follows:
1998 1997
------- -------
Discount rate 7.5%/7.0% 8.0%/7.5%
Expected long-term rate of return on plan assets 8.25%/NA 8.5%/NA
Rate of increase in compensation levels 4.0%/4.0% 4.0%/4.0%
F-30
Citizens Utilities Company and Subsidiaries
Notes to Consolidated Financial Statements
In November 1998 the Company acquired Rhinelander Telecommunications, Inc.,
including its pension benefit plans. The actuarial present values ofacquisition increased the accumulated benefit obligations were
$100,367,000, $86,186,000 and $57,216,000 for 1995, 1994 and 1993,
respectively. The actuarial present values of the vested accumulatedpension
benefit obligation for 1995, 1994by $3,974,000 and 1993, respectively, were
$86,260,000, $77,053,000 and $54,591,000. The total projected benefit
obligations for 1995, 1994 and 1993, respectively, were $145,008,000,
$125,943,000 and $75,531,000.the fair value of plan assets by
$4,884,000 as of December 31, 1998.
In 1994,June 1998, the Company recorded $34,199,000
of accumulatedacquired TGC, including its non-collectively
bargained pension benefit plan. The acquisition increased the pension
benefit obligation $28,069,000by $4,370,000 and the fair value of vested accumulatedplan assets by
$5,991,000 as of December 31, 1998.
In October 1997, the Company acquired TGC, including its collectively
bargained pension benefit plan. The acquisition increased the pension
benefit obligation by $15,095,000 and $54,166,000the fair value of projected benefit obligation
pursuant to the acquisitionplan assets by
$21,298,000 as of the GTE Telecommunications Properties.
Assets sufficient to fully fund these obligations were transferred to
the plan from the GTE pension plan.December 31, 1997.
Postretirement Benefits Other Post-Retirement Benefit PlansThan Pensions
-------------------------------------------
The Company provides certain medical, dental and life insurance benefits
for retired employees and their beneficiaries and covered dependents.
The componentsDuring 1997, in conjunction with the Company's elimination of its retiree
medical and dental plans for all non-union employees who were not eligible
to retire, the net periodic postretirement benefit
costCompany accounted for the years ended December 31, 1995 , 1994a negative plan amendment and 1993 are as
follows:
1995 1994 1993
---- ---- ----
($a
curtailment in thousands)
Service cost $2,038 $1,826 $ 845
Interest cost 4,023 3,418 1,710
Amortization of transition obligation 1,038 1,048 1,116accordance with SFAS 106, "Employee's Accounting for
Postretirement Benefits Other 467 313 0
------- ------ ------
Net periodic postretirement
benefit cost $7,566 $6,605 $3,671
======= ====== ======
than Pensions."
The following table sets forth the accruedplan's benefit obligations and the
postretirement benefit liability recognized inon the Company's balance sheets
at December 31, 1995, 19941998 and 1993:1997:
1995 1994 1993
---- ---- ----
1998 1997
--------- ---------
Change in benefit obligation ($ in thousands)
Accumulated postretirement benefit obligation:
Retirees ($19,736) ($14,946) ($13,919)
Fully eligible active plan participants (9,964) (7,158) (2,749)
Other active plan participants (30,304) (32,882) (7,328)
------------- - ----------------------------
Benefit obligation at beginning of year $ 49,110 $ 49,915
Service cost 980 1,513
Interest cost 3,523 3,878
Plan participants' contributions 596 335
Amendments (4,734) (8,024)
Actuarial loss 4,503 2,645
Acquisitions 651 259
Benefits paid (2,646) (1,411)
---------- ----------
Total accumulated postretirement
benefitBenefit obligation (60,004) (54,986) (23,996)
Planat end of year $ 51,983 $ 49,110
========== ==========
1998 1997
---------- ---------
Change in plan assets ($ in thousands)
- - ---------------------
Fair value of plan assets at fairbeginning of year $ 6,661 $ 3,156
Actual return on plan assets 677 155
Acquisition - -
Employer contribution 11,372 3,350
---------- -----------
Fair value 912of plan assets at end of year $ 18,710 $ 6,661
========== ===========
1998 1997
---------- -----------
Accrued benefit cost ($ in thousands)
- - --------------------
Funded status $ (33,273) $ (42,449)
Unrecognized net (gain) loss (2,961) (1,914) 1,563transition obligation 386 2,494
Unrecognized prior service cost 3,480 2,932 (1,477)
Unrecognized transition obligation 17,638 18,676 21,201- -
Accrued benefit cost (7,562) (12,913)
---------- ----------
Net periodic benefit cost $ (40,449) $ (52,868)
========== ==========
1998 1997
--------- Net accumulated----------
Components of net periodic postretirement benefit costs ($ in thousands)
- - -------------------------------------------------------
Service cost $ 980 $ 1,513
Interest cost on projected benefit obligation ($40,935) ($35,292) ($2,709)
==========3,523 3,878
Return on plan assets (549) (268)
Net amortization and deferral (947) 243
Curtailment (gain) charge (2,003) 8,814
---------- ----------
Net periodic postretirement benefit cost $ 1,004 $ 14,180
========== ===================
Of the net periodic post retirementF-31
Citizens Utilities Company and Subsidiaries
Notes to Consolidated Financial Statements
For purposes of measuring year end benefit cost presented above, the
Company recorded $2,781,000, $4,621,000 and $1,601,000 in 1995, 1994 and
1993, respectively, as regulatory assets for states whose regulatory
commissions to date have not but will likely allow recovery of accrued
costs in future rate proceedings. The Company's annual cost includes
20-year prospective recognition of the transition obligation. In those
states in which regulatory commissions have permitted recovery of accrued
costs, the Company has established trusts to fund these future
liabilities. For measurement purposes,obligations, the Company used
the same discount rates as were used for the pension plan and a 7% annual
rate of increase in the per-capita cost of covered health-caremedical benefits,
gradually decreasing to 5% in the year 2040 and remaining at that level
thereafter. The effect of a 1% increase in the assumed health-caremedical cost trend
rates for each future year on the aggregate of the service and interest
cost components of the total postretirement benefit cost would be $606,000$417,000
and the effect on the accumulated postretirement benefit obligation for
health benefits would be $6,000,000. In 1994,$4,854,000. The effect of a 1% decrease in the
Company recorded
$27,357,000assumed medical cost trend rates for each future year on the aggregate of
the service and interest cost components of the total postretirement
benefit cost would be $(376,000) and the effect on the accumulated
postretirement benefit obligation pursuant to
the acquisitionfor health benefits would be
$(4,336,000).
401(k) Savings Plans
--------------------
The Company sponsors employee savings plans under section 401(k) of the
GTE Telecommunications Properties.
(14)Internal Revenue Code. The plans cover substantially all full-time
employees. Under the plans, the Company provides matching contributions in
Company stock based on qualified employee contributions. Matching
contributions were $5,795,000, $4,883,000 and $4,248,000 for 1998, 1997 and
1996, respectively.
(18) Commitments and Contingencies:
-----------------------------
The Company has budgeted capital expenditures for facilities in 19961999 of approximately
$340,000,000$640,000,000 (includes $45,000,000 of non-cash capital lease additions) and
certain commitments have been entered into in connection therewith.
The Company conducts certain of its operations in leased premises and also
leases certain equipment and other assets pursuant to operating leases.
Terms of the leases, including purchase option and
obligations, renewals and maintenance costs, vary by lease.
Future minimum rental commitments for all long-term noncancellablenoncancelable operating
leases are as follows:
Year Amount
---- ------
1996 $9,762,000
1997 8,830,000
1998 8,196,000----------------- ------------------
($ in thousands)
1999 7,819,000$ 29,393
2000 7,890,00028,434
2001 to 2020 30,215,000
-----------26,620
2002 20,137
2003 18,077
thereafter 38,003
---------------
Total $72,712,000
===========$ 160,664
===============
Total rental expense included in the Company's results of operations for
the years ended December 31, 1998, 1997 and 1996 was $31,645,000,
$24,207,000 and $13,146,000, respectively.
In 1995, 1994ELI entered into a $110 million construction agency agreement and
1993an operating lease agreement in connection with the construction of certain
communications networks and fiber cable links. ELI served as agent for the
construction of these projects and, upon completion of each project, leased
the facilities for a three year term, with one year renewals available
through April 30, 2002. At December 31, 1998 and 1997, ELI was $6,778,000,
$3,913,000leasing
assets with an original cost of approximately $108,541,000 and $2,098,000, respectively.
A subsidiary$87,426,000,
respectively, under this agreement. ELI has the option to purchase the
facilities at the end of the lease terms for the amount of the lessor's
average investment in the facilities. Payments under the lease depend on
current interest rates, and assuming continuation of current interest
rates, payments would approximate $6.1 million annually through April 30,
2002 and, assuming exercise of the purchase option, approximately $110
million in 2002. In the event ELI chooses not to exercise this option, ELI
is obligated to arrange for the sale of the facilities to an unrelated
party and is required to pay the lessor any difference between the net
sales proceeds and the lessor's investment in the facilities. However, any
amount required to be paid to the lessor is subject generally to a maximum
of 80% (approximately $88 million) of the lessor's investment. The Company
was the guarantorhas guaranteed all obligations of a $33,200,000
bank loan to Hungarian Telephone and Cable Corp. ("HTCC"). In
addition, the CompanyELI under this operating lease. ELI has
agreed to pay the Company a guarantee fee at the rate of 3.25% per annum
based on the amount of the lessor's investment in the leased assets.
In June 1998, ELI entered into a private line services agreement with a
third party, which allows ELI to utilize the third party's national fiber
optic network for a period of nine years. ELI has a total minimum
commitment of $122 million over the term of the agreement, including $11.6
million in 1999. A portion of the network was operational as of December
31, 1998, with construction on the remainder of the network scheduled for
completion in 1999.
F-32
Citizens Utilities Company and Subsidiaries
Notes to Consolidated Financial Statements
The Company is also a party to contracts with several unrelated long
distance carriers. The contracts provide upfees based on leased traffic
subject to $20,000,000minimum monthly fees aggregating $55,300,000, $31,200,000 and
$21,200,000 for 1999, 2000, and 2001, respectively.
Under various contracts the Company purchases capacity and associated
energy and water from various electric energy, natural gas and water
suppliers. Some of additional financial supportthese contracts obligate the Company to HTCC. No amount has
been accruedpay certain
capacity costs whether or not energy or water purchases are made. These
contracts are intended to complement the other components in the Company's
power and water supply to achieve the most economic supply mix reasonably
available. The capacity costs for which the Company is obligated are
associated with energy and water purchases that approximate 40% of the
Company's total annual energy and water costs for 1998. The Company expects
this percentage to be no less in future years. At December 31, 1998, the
estimated future payments for capacity, energy and water that the Company
is obligated to buy under these contracts are as follows:
Year Amount
----------------- ------------------
($ in thousands)
1999 $ 107,095
2000 95,744
2001 93,372
2002 82,218
2003 63,175
thereafter 539,349
---------------
Total $ 980,953
===============
The Vermont Joint Owners (VJO), a consortium of 14 Vermont utilities,
including the Company, have entered into a purchase power agreement with
Hydro-Quebec. The agreement contains "step-up" provisions that state that
if any VJO member defaults on its obligation under the contract to purchase
power from Hydro-Quebec the other VJO participants will assume
responsibility for the guaranteedefaulting party's share on a pro-rata basis. As of
December 31, 1998, the Company's obligation under the agreement is
approximately 10% of the total contract. The two largest participants in
the VJO represent approximately 46% and 37% of the total contract,
respectively. During 1998, these two major participants have each
experienced regulatory disallowances that have resulted in credit rating
downgrades and stock price declines. Both of these participants are in the
process of appealing the regulatory disallowances; however, both companies
have stated that an unfavorable ruling could jeopardize their ability to
continue as going concerns. If either or both of these companies default on
their obligations under the Hydro-Quebec agreement, the remaining members
of the VJO, including the Company, may be required to pay for a
substantially larger share of the VJO's total power purchase obligation for
the remainder of the agreement. Such a result could have a materially
adverse effect on the financial support commitments.results of the Company's Vermont Electric
Division and on the Company as a whole.
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters, after considering insurance coverages, will
not have a material adverse effect on the Company's consolidated financial
position, results of operations or liquidity.
F-33