CITIZENS UTILITIES COMPANY
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1999
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, 1999 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
--------------------------
(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)
Registrant's telephone number, including area code: (203) 614-5600
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Securities registered pursuant to Section 12(b) of the Act:
Common Stock, 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 12 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 90 days.
Yes X No
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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. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of February 29, 2000 was $3,895,575,671.
The number of shares outstanding of the registrant's Common Stock as of February
29, 2000 was 262,924,506.
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement for the registrant's 2000 Annual Meeting of Stockholders to
be held on May 18, 2000 is incorporated by reference into Part III of this Form
10-K.
TABLE OF CONTENTS
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
Electric Lightwave 5
Acquisitions and Investments 8
General 8
Financial Information about Foreign and Domestic
Operations and Export Sales 9
Item 2. Description of Property 9
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to Vote of Security Holders 11
Executive Officers 11
PART II
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Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters 13
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 25
Item 8. Financial Statements and Supplementary Data 25
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 25
PART III Incorporation by Reference to the 2000 Proxy Statement 25
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PART IV
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Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 25
Signatures 29
Index to Consolidated Financial Statements F-1
-1-
PART I
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 provides,
through subsidiaries, communications services primarily to rural and suburban
customers throughout the United States, and competitive local exchange carrier
(CLEC) services to retail business customers and to other communications
carriers through its 82% owned subsidiary, Electric Lightwave Inc. (ELI).
The Company was incorporated in Delaware in 1935 to acquire the assets and
business of a predecessor public utility corporation. Since then, the Company
has grown as a result of investment in owned operations and from numerous
acquisitions of additional communications and public utility operations.
During 1998, the Company announced its intent to separate its telecommunications
and public utility operations into two stand-alone publicly traded companies.
This separation was being made in recognition of the different investment
features, performance criteria, capital structures, dividend policies, customer
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. During 1999, opportunities became available to acquire
telephone access lines that meet the Company's investment criteria while the
private market valuations for public utility operations increased. Accordingly,
the Company abandoned its separation strategy and announced its intention to
acquire telephone access lines and divest its public utility operations by sale.
The Company continues to expand through internal investment in its telephone and
CLEC operations and acquisition of additional communications operations. The
Company's new subsidiary, Citizens Capital Ventures will explore opportunities
to build and support internet based communications solutions to achieve
synergies with the systems and content sides of our business. To enable the
strategy, the Company has assembled a management team skilled in wireline,
wireless, cable and Internet technology and marketing skills.
Between May and December 1999, the Company announced that it had entered into
agreements to purchase approximately 911,000 telephone access lines for $2.8
billion (See Acquisitions and Investments in section (c) below). In October
1999, the Company announced the sale of its water and wastewater treatment
businesses for $835 million and in February 2000 announced the sale of its
electric businesses for $535 million. The proceeds from these sales, along with
the planned sale of the Company's gas businesses, will be used to permanently
fund telephone access line purchases. The Company's financial resources and
operating performance enable it to make the investments and conduct the
operations necessary to serve growing areas and to expand through acquisitions.
(b) Financial Information about Industry Segments
---------------------------------------------
The Company traditionally measured its segments by service (Communications, ELI,
Gas, Electric, Water and Wastewater). The Gas, Electric, Water and Wastewater
segments have been discontinued and are no longer presented. As the Company
becomes solely a telecommunications provider, the measurement of segments will
evolve to be more representative of the Company's business activities.
Note 16 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
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COMMUNICATIONS
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Through its subsidiaries, collectively known as Citizens Communications, the
Company provides both regulated and competitive communications services to
residential, business and wholesale customers. Communications services consist
of local network services, network access services, long distance services,
directory advertising, centrex, custom calling and caller ID services, paging,
cellular, Internet access, voice mail and conference calling and cable
television services. The Company provides local network services to the
following approximate number of access lines in the following states:
Local Network
State Access Lines
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New York 330,500
West Virginia 152,200
Arizona 147,900
California 136,500
Tennessee 101,800
Nevada 27,300
Wisconsin 25,700
Utah 22,800
Idaho 21,100
Oregon 14,800
Montana 8,600
New Mexico 6,200
Pennsylvania 1,400
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Total 996,800
========
The Company provides network access services and billing and collections
services primarily to AT&T Corporation, MCI WorldCom, Inc. and Sprint
Corporation. The Company is also enhancing its network support systems to offer
local resale capabilities in its local exchange franchise serving areas to
emerging CLECs.
The Company owns a one-third interest and is general managing partner of Mohave
Cellular, a cellular limited partnership, currently operating twelve cell sites
in Arizona. By year-end 2000 the partnership expects to be operating seven
additional sites.
Strategy
The Company's traditional telephone operations and those of ELI will be operated
in close conjunction with each other to become a total communications provider
of voice, data, text and image services to enable our communities to have
24-hour access to the world, with the Company having the ability to satisfy all
of its customer's communications needs. The Company is increasing service
levels, product availability and adding customers through customer growth,
acquisitions and the planned expanded use of ELI's national broadband network
(see ELI discussion). To better serve our expanding customer base, the Company
is migrating to a regional operational structure. This will put management and
operating resources closer to the customer and solidify commitments to
communities served.
Regulatory Environment
Local Exchange Competition
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The Telecommunications Act of 1996 (the 1996 Act), which became law in February
1996, is dramatically changing the telecommunications marketplace, including the
rural areas served by the Company. The Federal Communications Commission (FCC)
and many state regulatory agencies are conducting extensive rule-making
proceedings to implement the Act. New and proposed FCC and state rules have
impacted, and will continue to impact, the Company's operations.
The primary thrust of the 1996 Act was to open local telecommunications markets
to competition while preserving universal telecommunications service. The 1996
Act and subsequent FCC interconnection decisions established the relationships
between Incumbent Local Exchange Carriers (ILECs), such as the Company and
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Competitive Local Exchange Carriers (CLECs), such as the Company's subsidiary
ELI, and the mechanisms for competitive market entry. Though smaller carriers
like Citizens, who serve predominantly rural markets, did receive a qualified
exemption from some of the technical requirements imposed upon all ILECs for
interconnection arrangements, the Company did not receive an exemption from
interconnection or local exchange competition in general. The exemption, which
is known as the rural telephone company exemption, continues until a bona fide
request for interconnection is received from a CLEC, and a state regulatory
commission with jurisdiction determines that discontinuance of the exemption is
warranted. The state commission must determine that discontinuing the exemption
will not adversely impact the availability of universal service in the state nor
impose an undue economic hardship on the Company, and that the requested
interconnection is technically feasible.
Under the 1996 Act and subsequent FCC rules, a CLEC can compete using one or
more of three mechanisms. The first is by construction of its own local exchange
facilities, in which case the ILEC's sole obligation is interconnection for
purposes of traffic interchange. The second allows CLECs to purchase unbundled
network elements (UNEs) at cost from the ILEC and assemble them into local
exchange services and/or supplement the facilities it already owns. The third is
by resale of the ILEC's retail services purchased at wholesale rates from the
ILEC. Since passage of the 1996 Act, Citizens has received over 172 requests for
interconnection. Over 50 individual competitors are operating in the Company's
markets. These competitors are mainly serving internet service providers and a
few large business customers. Some competitors have taken advantage of the
ILEC's requirement to pay the CLEC reciprocal compensation for traffic delivered
to the CLEC. The explosion of the internet has provided CLECs with an immediate
mechanism to build traffic and reciprocal compensation revenues. The Company's
rural markets have limited the impact of reciprocal compensation, but additional
threats are expected as CLECs begin to move into second and third tier markets.
In 1999, the Company paid approximately $160,000 in reciprocal compensation.
However, the Company has signed additional reciprocal compensation agreements
and has several pending that will increase reciprocal compensation in 2000.
While Citizens Communications is a reciprocal compensation payor, ELI is a
reciprocal compensation receiver. The Company expects the impact of reciprocal
compensation in the future to be somewhat mitigated by lower interconnection
rates and the spread of Digital Subscriber Line (DSL) and other network services
that allow customers to obtain a direct link to the internet at a lower cost.
These types of non-switch arrangements are not expected to be subject to
reciprocal compensation.
After being overturned by the United States Court of Appeals for the Eighth
Circuit, the FCC's rules providing guidance to the states on the minimum
required UNEs and the pricing of interconnection services were reinstated by the
United States Supreme Court (the Court) in 1999. The Court's decision also
remanded to the FCC for further consideration the articulation of the minimum
required UNEs. Late in 1999, the FCC issued its order on the remand. That order
designated almost all of the earlier designated UNEs as a minimum requirement
and promulgated several new ones. Of the newly designated UNEs, the one that
could have the greatest impact upon the Company is known as line sharing. Line
sharing requires the Company to make the necessary arrangements to allow
competitive DSL providers to access the data portion of each of the Company's
local dial tone lines. What this means is that competitors could provide DSL
service to Company's customers without having to also provide voice grade
services.
Universal Service Reform
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Under the 1996 Act, the FCC was charged with the task of transforming the
historical implicit subsidy mechanisms into an explicit arrangement, which would
be funded in a nondiscriminatory manner by all telecommunications providers.
Historically, ILEC rates for non-basic services were set high to offset below
cost rates for basic services, predominantly local residential services.
However, regulatory and legislative mandates combined with competitive pressures
dictate that prices for all telecommunications services become more aligned with
their cost. In October 1999, the FCC established a new universal service
mechanism for non-rural carriers. As a rural carrier, the Company is not subject
to the new mechanism, and will continue to receive universal service funds under
the current embedded cost based universal service fund. In 2000, the FCC is
expected to begin reviewing alternatives for a new universal service program for
rural carriers.
Price Cap Reform
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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 a mechanism contained in the FCC's rules. The mechanism adjusts
rates each year by the inflation rate less a productivity factor known as the
X-factor. The FCC last set the X-factor at 6.5% effective on July 1, 1996 by the
Price Cap Reform Order issued in May 1997. Price cap carriers are allowed to
retain all earnings generated by operating at or below the capped rates. In this
manner, affected ILECs are rewarded for achieving operating efficiencies. The
Company has elected to be subject to price cap regulation.
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In 1999 the Court, in a decision that will take effect on April 1, 2000, vacated
the FCC's May 1997 Price Cap Reform Order. The Court found that the FCC had not
properly supported their calculation of the 6.5% X-factor and then remanded the
calculation of the X-factor to the FCC for further consideration and
articulation. The FCC is currently reviewing this matter and is expected to
issue an order before April 1, 2000 establishing a revised X-factor. The revised
factor should become effective on July 1, 2000. It is possible, but unlikely
that, the new factor will be retroactively applied to July 1, 1996.
Regional Bell Operating Company Long Distance Entry
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Under the 1996 Act the Regional Bell Operating Companies (RBOCs) were precluded
from competing in most long distance markets until they satisfied the state
regulatory authority with jurisdiction and the FCC that their markets had been
sufficiently opened to local exchange competition. In October 1999, the New York
Public Service Commission (NYPSC) determined that Bell Atlantic's markets in the
state were sufficiently open to local exchange competition, and recommended to
the FCC that Bell Atlantic be granted approval to enter all long distance
markets in the state. In December 1999, the FCC concurred and allowed Bell
Atlantic to begin offering all long distance services to its customers in New
York. Since the Company currently offers long distance service in New York, it
is possible that the entry of Bell Atlantic into this market could impact the
Company's operations. The FCC and other states may take similar actions for
other RBOCs and states during 2000.
Competition
As discussed more fully in Regulatory Environment, in each of the Company's
markets, there is the potential for competition from several sources including,
but not limited to, other ILECs for local network services; CLECs for enhanced
data and Internet services; Long distance providers including AT&T Corporation,
MCI WorldCom and Sprint Corporation, as well as, other communications businesses
who provide an array of other communications services including cable television
companies (CATVs), electric utilities, international carriers, satellite
carriers, teleports, microwave carriers, wireless telephone system operators and
private networks built by large end users. Although the potential for
competition exists in many forms, the Company is the dominant ILEC in all of its
service territories, and believes itself to be well positioned to manage
competitive threats.
ELECTRIC LIGHTWAVE
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ELI is a facilities-based integrated communications provider providing a broad
range of communications services to businesses. ELI provides the full range of
products and services, including switched local and long distance voice
services, enhanced data communications services and dedicated point-to-point
services, in the western United States. ELI markets in the western United States
to retail business customers, who are primarily communications-intensive
organizations, and nationally to wholesale customers, who are communications
carriers themselves.
ELI currently provides the full range of its services in seven major cities and
their surrounding areas, including:
Boise, Idaho Phoenix, Arizona
Portland, Oregon Sacramento, California
Salt Lake City, Utah Seattle, Washington
Spokane, Washington
The major cities include an extensive network of approximately 1,871 route miles
of fiber optic cable installed to create a series of Synchronous Optical Network
(SONET) rings, which provide a higher degree of stability and dependability.
Switched service, including local dial tone, is provided from 8 Nortel DMS 500
switches in the primary major cities. ELI also has transmission equipment
colocated with switches of the ILEC at 55 locations.
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ELI has broadband data points of presence in its major cities as well as other
strategic cities across the United States, including:
Atlanta, Georgia Austin, Texas
Chicago, Illinois Cleveland, Ohio
Dallas, Texas Denver, Colorado
Houston, Texas Las Vegas, Nevada
Los Angeles, California New York, New York
Philadelphia, Pennsylvania San Diego, California
San Francisco, California Washington, D.C.
ELI has developed an Internet backbone network with 42 routers providing
Internet connectivity in each of its markets, including presence at all major
network access points and over 125 "peering arrangements" with other Internet
backbone service providers. A peering arrangement is an agreement where Internet
backbone service providers agree to allow each other direct access to Internet
data contained on their networks. In addition, ELI's broadband network consists
of 32 frame relay switches, 23 Asynchronous Transfer Mode (ATM) switches and 77
network-to-network interfaces. National and international coverage is provided
through strategic relationships with other communications providers.
ELI owns or leases broadband long-haul fiber optic network connections between
its major cities in the west and its strategic markets across the nation. By
carrying traffic on ELI's own facilities, ELI is able to maximize the
utilization of its network facilities and minimize network access and certain
interconnection costs. As of December 31, 1999, ELI operated long-haul networks
with a total route mileage of 2,181 miles, including routes between Phoenix and
Las Vegas; Portland and Seattle; Portland and Spokane; Portland and Eugene;
Portland and Boise and Boise and Salt Lake City. During 1998, ELI began
construction of what it believes will be the largest ringed SONET in the western
United States. The approximately 3,200 mile self-healing ring is expected to be
completed in 2000 and will connect Portland, Sacramento, San Francisco, Los
Angeles, Las Vegas, Salt Lake City and Boise and will include Dense Wave
Division Multiplexing (DWDM) equipment. DWDM is a technique for transmitting 16
or more different light-wave frequencies on a single fiber to increase
transmission capacity.
In the development of ELI's long-haul facilities, ELI has formed strategic
relationships with utility companies that enable ELI to (i) utilize existing
rights-of-way and fiber optic facilities, (ii) leverage their construction
expertise and local permitting experience and (iii) minimize capital
requirements in order for ELI to extend its network infrastructure more quickly
and economically. In addition to the long-haul agreements, another agreement
provides for a fiber optic network in the Phoenix, Arizona metropolitan area.
ELI entered into a fiber-swap agreement during 1999 which exchanges unused fiber
on its network for unused fiber on another carrier's network. This exchange will
provide ELI with a fiber route from Salt Lake City to Denver and continuing on
to Dallas. ELI anticipates incorporating the other carrier's fiber into its
network during 2000.
US West Communications, Inc. (US West) accounted for approximately 19% of ELI's
revenue in 1999. The revenue from US West consisted primarily of reciprocal
compensation relating to the transport and termination of traffic between US
West's network and ELI's network and an 18 month take-or-pay agreement.
The following table represents certain operating information relating to ELI:
1999 1998 1997
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Route miles* 4,052 3,091 2,494
Fiber miles* 214,864 181,368 140,812
Buildings connected 824 766 610
Access line equivalents 161,555 74,924 34,328
Switches and routers
installed:
Voice 8 7 5
Frame Relay 32 23 20
Internet 42 24 17
ATM 23 14 8
Customers 2,371 1,644 1,165
* Route miles and fiber miles also include those to which ELI has exclusive use
pursuant to license and lease arrangements.
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Strategy
While ELI expects additional network growth in 2000, especially with the
completion of its long-haul routes, the primary focus in the next year is
targeted at increasing the use of its installed asset base. ELI expects a
substantial portion of its growth to come from increased penetration of existing
on-net buildings, a focus on sales to customers that are connected to the
network and an increase in market share in ELI's seven major cities and
surrounding areas. ELI anticipates a higher volume of sales to other carriers
with the completion of its long-haul routes.
Regulatory Environment
As a common carrier, ELI is subject to federal, state and local regulation. The
FCC exercises jurisdiction over all interstate communications services. State
commissions retain jurisdiction over all intrastate communications services.
Local governments may require ELI to obtain licenses or franchises regulating
the use of public rights-of-way necessary to install and operate its networks.
Telecommunications Act of 1996
- ------------------------------
With the passage of the Telecommunications Act of 1996, 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 in the last five years. This
includes expanding the number of local fiber networks from two to seven cities
in the west and development of the data and Internet network across the U.S.
(See additional information related to Telecommunications Act of 1996 in
Communications section above).
ELI has various interconnection agreements in the states in which it operates.
These agreements govern reciprocal compensation relating to the transport and
termination of traffic between the ILEC's and ELI's networks. 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. The FCC gave the states authority to interpret existing
interconnection agreements. Since the FCC order, Oregon, Washington, California
and Arizona have ruled that calls terminated to ISPs should be included in the
calculation to determine reciprocal compensation.
State Regulation
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Most state public utilities commissions require communications providers, such
as ELI, to obtain operating authority prior to initiating intrastate services.
Most states also require the filing of tariffs or price lists and/or
customer-specific contracts. In the states in which ELI currently operates, ELI
is not subject to rate-of-return or price regulation. ELI is subject, however,
to state-specific quality of service, universal service, periodic reporting and
other regulatory requirements, although the extent of such requirements is
generally less than that applicable to ILECs.
Competition
ILEC Competition
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ELI faces significant competition from the ILECs in each of its facilities-based
markets. The ILECs currently dominate the local exchange market and are a de
facto monopoly provider of local switched voice services. Primary ILEC
competitors are US West, PacBell and GTE Corp. (GTE). ILECs have long-standing
relationships with their customers and have financial and technical resources
substantially greater than those available to ELI.
CLEC Competition
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Facility-based operational CLEC competitors in ELI's markets include, among
others: AT&T Local Services, GST Telecommunications, MCI WorldCom, Inc. 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, generally at similar prices.
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Competition From Others
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Potential and actual new market entrants in the local communications services
business include RBOCs entering new geographic markets, Inter Exchange Carriers
(IXCs), CATVs, electric utilities, international carriers, satellite carriers,
teleports, microwave carriers, wireless telephone system operators and private
networks built by large end users. 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, 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.
Network Services
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Competition for network services is based on price, quality, network
reliability, customer service, service features and responsiveness to the
customer's needs. ELI's fiber optic networks provide both diverse access routing
and redundant electronics, which affords ELI a competitive advantage.
High-Speed Data Service
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Competitors for high-speed data services include major IXCs, other CLECs and
various providers of niche services (e.g., Internet access providers, router
management services and systems integrators). The interconnectivity of ELI's
markets may create additional competitive advantages over other data service
providers that must obtain local access from the ILEC or another CLEC in each
market or that cannot obtain intercity transport rates on terms as favorable as
those available to ELI.
Internet Services
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The market for Internet access and related services in the United States is
extremely competitive, with barriers to entry related to capital costs,
bandwidth capacity and internal provisioning and operations processes.
Competition is expected to intensify as existing services and network providers
and new entrants compete for customers. In addition, new enhanced Internet
services such as managed router service and web hosting are constantly under
development in the market, and additional innovation in this market is expected
by a range of competitors. ELI's current and future competitors include
communications companies, including the RBOCs, IXCs, CLECs and CATVs, and other
Internet access providers.
ACQUISITIONS AND INVESTMENTS
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In January 1999, Centennial Cellular Corp. was merged into a corporation created
by Welsh, Carson, Anderson & Stowe. The Company received approximately
$205,600,000 in cash for all its Common Stock interests and approximately
$17,500,000 related to accrued dividends on the preferred stock.
On May 27, September 21 and December 16, 1999, the Company announced that it had
entered into definitive agreements with GTE to purchase approximately 366,000
(as of December 31, 1999) access lines located in Arizona, California, Illinois,
Minnesota and Nebraska. The aggregate purchase price is expected to be
approximately $1,171,000,000 in cash. The Company expects that these
acquisitions, which are subject to various state and federal regulatory
approvals, will occur on a state-by-state basis and will begin closing in the
third quarter 2000.
On June 16, 1999, the Company announced that it had entered into definitive
agreements with US West providing for the purchase of approximately 545,000 (as
of December 31, 1999) telephone access lines located in Arizona, Colorado,
Idaho, Iowa, Minnesota, Montana, Nebraska, North Dakota and Wyoming for
approximately $1,650,000,000 in cash. The Company expects that these
acquisitions, which are subject to various state and federal regulatory
approvals, will occur on a state-by-state basis and will begin closing in the
third quarter 2000.
In October 1999, Century Communications Corporation (Century) was merged into
Adelphia Communication Corporation (Adelphia). The Company received
approximately $213,000,000 of proceeds, including approximately $39,000,000 in
cash and $174,000,000 in shares of Adelphia Class A Common Stock, for the
Company's interest in Century and for the Company's interest in a cable joint
venture with Century.
GENERAL
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Order backlog is not a significant consideration in the Company's businesses 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
are of varying duration. The Company also holds Certificates granted by various
state commissions which are generally of indefinite duration. The Company has no
special working capital practices, and the Company's research and development
-8-
activities are not material. The Company holds no patents, trademarks, licenses
or concessions that are material.
The Company had approximately 6,700 employees, of which 4,900 were associated
with continuing operations and 1,800 were associated with discontinued
operations, at December 31, 1999.
(d) Financial Information about Foreign and Domestic Operations and Export Sales
----------------------------------------------------------------------------
In 1995, the Company made an initial investment in and entered into definitive
agreements with Hungarian Telephone and Cable Corp. (HTCC). The investment in
HTCC had 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 in Other
income (loss), net in the 1998 statements of income and comprehensive income.
In May 1999, in connection with HTCC's debt restructuring, the Company cancelled
a note obligation from HTCC to the Company and a seven-year consulting services
agreement in exchange for the issuance by HTCC to the Company of 1,300,000
shares of HTCC Common Stock and 30,000 shares of HTCC's 5% convertible preferred
stock. Each share of HTCC convertible preferred stock has a liquidation value of
$70 and is convertible at the option of the Company into 10 shares of HTCC
Common Stock. To the extent the 1,300,000 HTCC common shares and the 300,000
HTCC common shares underlying the HTCC convertible preferred stock do not
achieve an average market closing price of at least $7 per share for the twenty
trading days ending March 31, 2000, HTCC has agreed to issue additional HTCC
convertible preferred shares with a value equal to any such shortfall. As of
March 15, 2000, the stock was trading at $8 13/16 per share.
At December 31, 1999, the Company owns approximately 19% of the HTCC shares
presently outstanding. The Company's investment in HTCC is classified as an
available for sale security and accounted for using the cost method of
accounting. Additionally, the Company has exercised its right to nominate one
member of the Board of Directors of HTCC.
Item 2. Description of Property
-----------------------
The Administrative Office of the Company is located at 3 High Ridge Park,
Stamford, CT 06905 and is leased. The operations support office for Citizens
Communications relocated from a leased facility in Dallas, Texas in November
1999 to a new 250,000 square foot owned facility located in Legacy Park at 5600
Headquarters Drive, Plano, TX 75024. The new facility accommodates approximately
1,100 employees and has the acreage necessary for phased expansion up to 750,000
square feet. Citizens Communications is expanding its Call Center operations to
meet the needs arising from the integration of access lines being purchased from
US West and GTE. New leased call center facilities are currently under
construction in Elk Grove, CA and Gloversville, NY. Also under renovation is an
81,700 square foot facility that was purchased in Kingman, AZ for call center
expansion. The Company is evaluating an additional call center facility in the
Midwest region of the country.
The operations support office for ELI is located at 4400 NE 77th Avenue,
Vancouver, WA 98662 in an approximately 98,000 square foot office building which
is owned. This building is fully utilized, and ELI leases an additional 93,000
square feet of office space in Vancouver. In addition, ELI has leased local
office space in various markets throughout the United States, and also maintains
a warehouse facility in Portland, Oregon. ELI leases network hub and network
equipment installation sites in various locations throughout the areas in which
ELI provides services. The office, warehouse and other facilities leases expire
on various dates through October 2008.
Citizens Communications and ELI own property including: telecommunications
outside plant, central office, fiber-optic and microwave radio facilities. (See
description of business for listing of locations).
-9-
Item 3. Legal Proceedings
-----------------
In November 1995, the Company's Vermont electric division was permitted an 8.5%
rate increase. Subsequently, the Vermont Public Service Board (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. 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 15, 1998. In October 1998, the Company filed an appeal in the
Vermont Supreme Court challenging certain of the penalties imposed by the VPSB.
The appeal has been fully briefed and argued and the Company is awaiting the
Court's decision.
In August 1997, a lawsuit was filed in the United States District Court for the
District of Connecticut (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 alleged 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, which are alleged to 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 sought to
recover unspecified compensatory damages. The Company and the individual
defendants believed the allegations are unfounded and filed a motion to dismiss
on March 27, 1998 and on March 30, 1999 the Court dismissed the action. On April
29, 1999 the plaintiffs filed a notice of appeal with the Court of Appeals for
the Second Circuit. The parties have entered into a settlement stipulation which
is subject to the District Court's approval.
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 a director, on behalf
of all purchasers of the Company's Common Stock between May 6, 1996 and August
7, 1997, inclusive. The complaint alleges that the Company and the individual
defendants, during such period, violated Sections 10(b) and 20(a) of the
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 disclose material
information necessary to render prior statements not misleading. The plaintiff
seeks to recover unspecified compensatory damages. The Company and the
individual defendants believe that the allegations are unfounded and filed a
motion to 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 motion to dismiss the amended complaint was filed on October 13, 1998
and the Court dismissed the action with prejudice on June 28, 1999. The
Plaintiffs filed a notice of appeal with the Court of Appeals for the Second
Circuit, briefing has been completed and oral argument has been scheduled for
April 10, 2000.
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 opened 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 party to various other legal proceedings arising in
the normal course of business. The outcome of individual matters is not
predictable. However, management believes that the ultimate resolution of all
such matters, including those discussed above, after considering insurance
coverages, will not have a material adverse effect on the Company's financial
position, results of operations, or its cash flows.
-10-
Item 4. Submission of Matters to Vote of Security Holders
-------------------------------------------------
None in fourth quarter 1999.
Executive Officers
- ------------------
Information as to Executive Officers of the Company as of March 1, 2000 follows:
Name Age Current Position and Office
---- -- ---------------------------
Leonard Tow 71 Chairman of the Board and Chief Executive Officer
Rudy J. Graf 50 President and Chief Operating Officer
Robert Braden 54 Vice President, Business Development
John H. Casey, III 43 Vice President and Chief Operating Officer, Communications Sector
Robert J. DeSantis 44 Vice President and Chief Financial Officer
Michael G. Harris 53 Vice President, Engineering and New Technology
F. Wayne Lafferty 39 Vice President, Regulatory Affairs
J. Michael Love 48 Vice President and President, Citizens Public Services Sector
L. Russell Mitten 48 Vice President, General Counsel and Assistant Secretary
Livingston E. Ross 51 Vice President and Chief Accounting Officer
Scott N. Schneider 42 Executive Vice President and President, Citizens Capital Ventures
David B. Sharkey 50 Vice President and Chief Operating Officer, Electric Lightwave Sector
Steven D. Ward 33 Vice President, Information Technology
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. He was also Chief Financial Officer from October 1991 through November
1997. He was a Director and Chief Executive Officer of Century Communications
Corp. from its incorporation in 1973 and Chairman of its Board of Directors from
October 1989 until October 1999. He is Director of Hungarian Telephone and Cable
Corp., Chairman of the Board of Electric Lightwave, Inc. and is a Director of
the United States Telephone Association.
RUDY J. GRAF has been associated with the Registrant since September 1999. He is
currently President and Chief Operating Officer of the Registrant. He is also
Director and Chief Executive Officer of Electric Lightwave, Inc. Prior to
joining the Registrant, he was Director, President and Chief Operating
Officer of Centennial Cellular Corp. and Chief Executive Officer of Centennial
DE Puerto Rico from November 1990 to August 1999.
ROBERT BRADEN has been associated with the Registrant since November 1999. He
was elected as Vice President, Business Development in February 2000. Prior to
joining the Registrant, he was Vice President, Business Development at
Century Communications Corp. from January 1999 to October 1999. He was
Senior Vice President, Business Development at Centennial Cellular Corp. from
June 1996 to January 1999 and held other officer positions with Centennial since
November 1993.
JOHN H. CASEY, III has been associated with the Registrant since November 1999.
He is currently Vice President of the Company and Chief Operating Officer of the
Communications Sector. Prior to joining the Registrant, he was Vice President,
Operations from January 1995 to January 1997 and then Senior Vice President,
Administration of Centennial Cellular until November 1999.
ROBERT J. DESANTIS has been associated with the Registrant since January 1986.
He was Vice President and Treasurer since October 1991, and Vice President and
Chief Financial Officer since November 1997. He is currently Chief Financial
Officer, Vice President and Treasurer of Electric Lightwave, Inc.
MICHAEL G. HARRIS has been associated with the Registrant since December 1999.
He is currently Vice President, Engineering and New Technology. Prior to joining
the Registrant, he was Senior Vice President, Engineering of Centennial Cellular
-11-
from August 1991 to December 1999. He was also Senior Vice President, Engineer-
ing of Century Communications Corp. from June 1991 to October 1999.
F. WAYNE LAFFERTY has been associated with the Registrant since 1994. He was
elected Vice President, Regulatory Affairs in February 2000. Prior to that date,
he served as Vice President of the Communications subsidiaries since January
1998. Since 1995, he has held senior positions overseeing regulatory affairs of
the Communications subsidiaries of the Registrant.
J. MICHAEL LOVE has been associated with the Registrant since May 1990 and from
November 1984 through January 1988. He was Vice President, Corporate Planning
from March 1991 through January 1997. He was appointed Vice President, Public
Services in January 1997. In January 1999, he was also appointed President,
Citizens Public Services Sector.
L. RUSSELL MITTEN has been associated with the Registrant since June 1990. He
was General Counsel until June 1991. He has been Vice President, General Coun-
sel and Assistant Secretary since June 1991.
LIVINGSTON E. ROSS has been associated with the Registrant since August 1977.
He was Vice President and Controller from December 1991 through December 1999.
He is currently Vice President and Chief Accounting Officer.
SCOTT N. SCHNEIDER has been associated with the Registrant since October 1999.
He is currently Executive Vice President and President, Citizens Capital
Ventures, a wholly owned subsidiary of Citizens. He has been a Director of
Electric Lightwave, Inc. since December 1999. Prior to joining the Registrant,
he was Director (from October 1994 to October 1999), Chief Financial Officer
(from December 1996 to October 1999), Senior Vice President and Treasurer (from
June 1991 to October 1999) of Century Communications Corp. He also served as
Director, Chief Financial Officer, Senior Vice President and Treasurer of
Centennial Cellular from August 1991 to October 1999.
DAVID B. SHARKEY has been associated with the Registrant since August 1994 as
President of Electric Lightwave, Inc. He has been President and Chief Operating
Officer of Electric Lightwave, Inc. since October 1997 and is Director of
Electric Lightwave, Inc. Additionally, he has been Vice President and Chief
Operating Officer, Electric Lightwave Sector of the Registrant since February
2000. Prior to joining Electric Lightwave, Inc., he was Vice President and
General Manager of Metromedia Paging, a wireless company headquartered in New
Jersey, from August 1989 through July 1994.
STEVEN D. WARD has been associated with the Registrant since January 2000 and
was elected Vice President, Information Technology in February 2000. Prior to
joining the Registrant, he was Vice President, Information Systems for Century
Communications Corp. from June 1996 to December 1999 and Director, Information
Services from March 1991 to June 1996.
-12-
PART II
-------
Item 5.Market for the Registrant's Common Equity 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. The following table indicates the high and low prices per share as
taken from the daily quotations published in "The Wall Street Journal" during
the periods indicated. Prior year prices have been adjusted for stock dividends
declared through December 31, 1998, rounded to the nearest 1/16th. (See Note 9
of Notes to Consolidated Financial Statements.)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------------- ----------------- ----------------- ----------------
High Low High Low High Low High Low
---- --- ---- --- ---- --- ---- ---
1999:
- ----
CZN $8 1/2 $7 1/4 $11 1/2 $7 11/16 $12 7/16 $10 7/8 $14 5/16 $10 15/16
1998:
- ----
CZN $10 7/8 $8 7/8 $11 3/16 $9 1/2 $10 $6 7/8 $9 1/16 $7 1/4
As of February 29, 2000, the approximate number of record security holders of
the Company's Common Stock was 41,020. This information was obtained from the
Company's transfer agent.
DIVIDENDS
The amount and timing of dividends payable on Common Stock are within the sole
discretion of the Company's Board of Directors. The Board of Directors had
undertaken an extensive review of the Company's dividend policy in conjunction
with its strategic plans to become a telecommunications company. Resulting from
this review, the Board concluded that the Company discontinue dividends after
the payment of the December 1998 stock dividend. Quarterly stock dividends
declared and issued on Common Stock were .75% for each quarter of 1998.
RECENT SALES OF UNREGISTERED SECURITIES, USE OF PROCEEDS FROM REGISTERED
SECURITIES
None
-13-
Item 6. Selected Financial Data ($ in thousands, except for per-share amounts)
----------------------------------------------------------------------
Year Ended December 31,
---------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Revenues (1) $ 1,087,428 $ 932,858 $ 860,332 $ 786,307 $ 616,747
Income (loss) before discontinued
operations and cumulative effect
of change in accounting
principle $ 117,127 $ 22,866 $ (3,923) $ 150,300 $ 117,501
Basic income (loss) per-share of
Common Stock before discontinued
operations and cumulative
effect of change in accounting
principle (2) $ .45 $ .09 $ (.02) $ .58 $ .47
Net income $ 144,486 $ 57,060 $ 10,100 $ 178,660 $ 159,536
Basic net income per common
share (2) $ .55 $ .22 $ .04 $ .68 $ .64
Stock dividends declared on Common
Stock (3) - 3.03% 5.30% 6.56% 6.35%
As of December 31,
---------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Total assets $ 5,771,745 $ 5,292,932 $ 4,872,852 $ 4,523,148 $ 3,918,187
Long-term debt $ 2,107,460 $ 1,775,338 $ 1,583,902 $ 1,409,512 $ 1,095,211
Equity(4) $ 2,121,185 $ 1,994,021 $ 1,880,461 $ 1,879,433 $ 1,559,913
(1) Represents revenues from continuing operations.
(2) 1997, 1996 and 1995 are adjusted for subsequent stock dividends.
(3) Compounded annual rate of quarterly stock 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, 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, remaining Y2K issues, the effects of
acquisitions and dispositions and the ability to effectively integrate
businesses acquired. Readers should consider these important factors in
evaluating any statement in this Form 10-K or otherwise 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.
(a) Liquidity and Capital Resources
-------------------------------
The Company considers its operating cash flows and its ability to raise debt and
equity capital as the principal indicators of its liquidity. For the twelve
months ended December 31, 1999, the Company used cash flow from operations and
proceeds from net financings and advances from parties desiring utility services
to fund capital expenditures. Funds requisitioned from the Industrial
Development Revenue Bond construction fund trust accounts were used to partially
fund the construction of utility plant.
In October 1999, the Company arranged for a committed $3,000,000,000 revolving
bank credit facility. This credit facility is in addition to credit commitments
under which the Company may borrow up to $400,000,000. There were no amounts
outstanding under these commitments at December 31, 1999. ELI has committed
revolving lines of credit with commercial banks under which it may borrow up to
$400,000,000. The Company has guaranteed all of ELI's obligations under these
revolving lines of credit. As of December 31, 1999, $260,000,000 was outstanding
under ELI's revolving lines of credit.
-14-
In April 1999, ELI completed an offering of $325,000,000 of five-year senior
unsecured notes. The notes have an interest rate of 6.05% and mature on May 15,
2004. The Company has guaranteed the payment of principal and any premium and
interest on the notes when due.
Net capital expenditures, by sector, have been and are budgeted as follows:
Actual
Budget --------------------------------------
2000 1999 1998 1997
------- ------- ------- -------
($ in thousands)
Communications (1) $ 396,800 $ 227,200 $ 201,400 $ 263,000
ELI (2) 200,000 245,700 200,000 124,500
General 3,000 6,700 25,100 33,300
-------- -------- -------- --------
$ 599,800 $ 479,600 $ 426,500 $ 420,800
Discontinued operations (3) $ 169,900 $ 135,800 $ 95,500 $ 103,700
-------- -------- -------- --------
$ 769,700 $ 615,400 $ 522,000 $ 524,500
======== ======== ======== ========
(1) Includes approximately $30,500,000 and $7,700,000 in 1999 and
1998, respectively, for the construction of an operations support
office. Includes $176,000,000 in 2000 for the properties to be
acquired from GTE and US West.
(2) Includes approximately $38,000,000 and $60,000,000 in 2000 and
1999, respectively, of non-cash capital lease additions.
(3) The 2000 budget assumes full year ownership of discontinued opera-
tions and includes approximately $41,900,000 for a special water
pipeline project.
The Company anticipates that the funds necessary for its 2000 capital
expenditures will be provided from operations; from advances of Rural Utilities
Service loan contracts; from commercial paper notes payable; from debt, equity
and other financing at appropriate times and from short-term borrowings under
bank credit facilities. Until disposed, the Company's discontinued operations
capital expenditures will also be funded through requisitions of Industrial
Development Revenue Bond construction fund trust accounts and from parties
desiring utility service. Upon disposition, the Company will receive
reimbursement of certain 1999 actual and all 2000 budgeted water and wastewater
and electric sector capital expenditures pursuant to the terms of the respective
sales agreements for these businesses.
Acquisitions
- ------------
On May 27, September 21, and December 16, 1999, the Company announced that it
had entered into definitive agreements to purchase from GTE Corp. (GTE)
approximately 366,000 telephone access lines (as of December 31, 1999) in
Arizona, California, Illinois, Minnesota and Nebraska for approximately
$1,171,000,000 in cash. The Company expects that these acquisitions, which are
subject to various state and federal regulatory approvals, will occur on a
state-by-state basis and will begin closing in the third quarter 2000.
On June 16, 1999, the Company announced that it had entered into definitive
agreements to purchase from US West Communications, Inc. (US West) approximately
545,000 telephone access lines (as of December 31, 1999) in Arizona, Colorado,
Idaho, Iowa, Minnesota, Montana, Nebraska, North Dakota and Wyoming for
approximately $1,650,000,000 in cash. The Company expects that these
acquisitions, which are subject to various state and federal regulatory
approvals, will occur on a state-by-state basis and will begin closing in the
third quarter 2000.
The Company expects to temporarily fund these telephone access line purchases
with cash and investment balances and proceeds from commercial paper issuances,
backed by the committed bank credit facilities. Permanent funding is expected to
be from cash and investment balances and the proceeds from the divestiture of
the Company's public services businesses.
Divestiture
- -----------
On August 24, 1999, the Company's Board of Directors approved a plan of
divestiture for the Company's public services properties, which include gas,
electric and water and wastewater businesses. The proceeds from the sales of the
public services properties will be used to fund the telephone access line
purchases. The Company has accounted for the planned divestiture of the public
services properties as a discontinued operation. Discontinued operations in the
consolidated statements of income and comprehensive income reflect the results
-15-
of operations of the public services properties including allocated interest
expense for the periods presented. Interest expense was allocated to the
discontinued operations based on the outstanding debt specifically identified
with these businesses.
On October 18, 1999, the Company announced that it had agreed to sell its water
and wastewater operations to American Water Works, Inc. for an aggregate
purchase price of $835,000,000. The transaction is expected to close in 2000
following regulatory approvals.
On February 15, 2000, the Company announced that it had agreed to sell its
electric utility operations. The Arizona and Vermont electric divisions will be
sold to Cap Rock Energy Corp. and the Kauai (Hawaii) Electric Division will be
sold to Kauai Island Electric Co-op for an aggregate purchase price of
$535,000,000. The transactions are expected to close in 2000 following
regulatory approvals.
Sale of Investments
- -------------------
In January 1999, Centennial Cellular Corp. (Centennial) was merged 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 of Centennial, the Company was required
to convert the preferred stock into approximately 2,972,000 shares of Class B
Common Stock. The Company received approximately $205,600,000 in cash for all of
its Common Stock interests and approximately $17,500,000 related to accrued
dividends on the preferred stock. The Company realized and reported a pre-tax
gain of approximately $69,500,000 in the first quarter 1999 in Investment
income.
On October 1, 1999, Adelphia Communication Corp. (Adelphia) was merged with
Century Communications Corp. (Century). The Company owned 1,807,095 shares of
Century Class A Common Stock. Pursuant to this merger agreement, Century Class A
Common shares were exchanged for $10,832,000 in cash and 1,206,705 shares of
Adelphia Class A Common Stock (for a total market value of $79,600,000 based on
Adelphia's October 1, 1999 closing price of $57.00). The Company realized and
reported a pre-tax gain of approximately $67,600,000 in the fourth quarter of
1999 in Investment income.
A subsidiary of the Company, in a joint venture with a subsidiary of Century,
owned and operated four cable television systems in southern California serving
over 90,000 basic subscribers. In July 1999, the Company entered into a separate
agreement with Adelphia to sell its interest in the joint venture. Pursuant to
this agreement on October 1, 1999, the Company received approximately
$27,700,000 in cash and 1,852,302 shares of Adelphia Class A Common Stock (for a
total market value of $133,300,000 based on Adelphia's October 1, 1999 closing
price of $57.00). The Company realized and reported a pre-tax gain of
approximately $83,900,000 in the fourth quarter of 1999 in Investment income.
Hungarian Telephone and Cable Corp.
- -----------------------------------
In May 1999, in connection with HTCC's debt restructuring, the Company cancelled
a note obligation from HTCC to the Company and a seven-year consulting services
agreement in exchange for the issuance by HTCC to the Company of 1,300,000
shares of HTCC Common Stock and 30,000 shares of HTCC's 5% convertible preferred
stock. Each share of HTCC convertible preferred stock has a liquidation value of
$70 and is convertible at the option of the Company into 10 shares of HTCC
Common Stock. To the extent the 1,300,000 HTCC common shares and the 300,000
HTCC common shares underlying the HTCC convertible preferred stock do not
achieve an average market closing price of at least $7 per share for the twenty
trading days ending March 31, 2000, HTCC has agreed to issue additional HTCC
convertible preferred shares with a value equal to any such shortfall. As of
March 15, 2000, the stock was trading at $8 13/16 per share.
Regulatory Environment
- ----------------------
In December 1999, the Company entered into an agreement (the Agreement) with the
Staff and Consumer Advocate Division of the West Virginia Public Service
Commission (WVPSC) to continue the Company's incentive regulation Plan (IRP)
through 2002. Under the Agreement the Company will reduce access and other
service rates by $3.5 million annually beginning in February 2000. In return the
Company will be free of earnings regulation for three years and have some
pricing flexibility for non-basic services.
Impact of Year 2000
- -------------------
The Y2K issue resulted from computer programs using a two-digit format, as
opposed to four, to indicate the year. Such computer systems were unable to
interpret dates beyond the year 1999, which could have caused system failures or
other computer errors. In late 1997, the Company developed a program to address
the Y2K issue. The program was designed to protect the safety and continuity of
the Company's service delivery and support capabilities, computer systems and
-16-
other critical functions. The Company's Y2K program addressed problems that
could arise: (1) in Information Technology (IT) areas including information
systems and technologies; (2) in non-IT areas such as communications 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. Each of the Company's sectors had a program office that
managed the progress of the Y2K efforts. The Company had determined priorities
for taking corrective actions on mission critical systems and products so as to
ensure continued delivery of core business activities.
The Company's systems, products and services proved Y2K ready, as there were no
system or customer impacting failures on mission critical systems. The Company's
successful entry into the year 2000 was a culmination of a two-year preparation
program. The Y2K plan called for inventory, assessment, renovation and testing
to ensure that the impact to our business would be minimal and manageable. The
Company will continue to monitor Y2K related exposures both internally and with
its suppliers, customers and other business partners. The Company's Y2K efforts
were essentially complete by the end of the third quarter of 1999. The
completion of the Company's Y2K efforts coupled with its contingency plans
ensured that the established and expected levels of customer service were
maintained without interruption during the millennium transition.
For the twelve months ended December 31, 1999, the Company spent approximately
$23,495,000 on its Y2K efforts of which $16,089,000 related to continuing
operations and $7,406,000 related to discontinued operations. For the twelve
months ended December 31, 1999, continuing operations Y2K efforts include
approximately $15,628,000 on IT efforts and $461,000 on non-IT efforts. For the
twelve months ended December 31, 1999, discontinued operations Y2K efforts
include approximately $2,835,000 on IT efforts and $4,571,000 on non-IT efforts.
The Company expects to spend an additional $1,600,000 in 2000 on its remaining
Y2K efforts.
Certain state regulatory commissions where the Company operates have issued
orders allowing the deferral of Y2K costs for consideration in future rate
proceedings. In accordance with these orders, the Company has deferred
approximately $5,767,000 of the $23,495,000 1999 Y2K expenses, of which
$3,000,000 are related to its continuing operations and $2,767,000 are related
to its discontinued operations.
New Accounting Pronouncements
- -----------------------------
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 requires companies to
record derivatives on the balance sheet as assets or liabilities measured at
fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. The key criterion for hedge
accounting is that the hedging relationship must be highly effective in
achieving offsetting changes in fair value or cash flows. In May 1999, the FASB
issued SFAS 137 "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133," which
deferred the effective date of SFAS 133 by one year. This statement makes SFAS
133 effective for all fiscal quarters of all fiscal years beginning after June
15, 2000. The Company has not fully evaluated the impact of the adoption of SFAS
133.
-17-
(b) Results of Operations
---------------------
REVENUES
--------
Telecommunications revenues increased $154.6 million, or 17%, in 1999 and $72.5
million, or 8%, in 1998. The increase in 1999 was primarily due to increased
communications network access services revenues and ELI revenues. The increase
in 1998 was primarily due to increased communications network access services
revenues and ELI local telephone services revenues.
1999 1998 1997
-------------------- ----------------------- -------
Change from Change from
Amount Prior year Amount Prior year Amount
------ ---------- ------ ----------- -------
Communications revenues ($ in thousands)
- ------------------------
Network access services $ 503,365 17% $ 432,018 7% $ 403,990
Local network services 287,616 10% 262,239 5% 250,521
Long distance and data services 76,495 (21%) 96,584 6% 90,747
Directory services 33,449 6% 31,691 (1%) 31,982
Other 48,343 8% 44,914 (8%) 48,922
Eliminations (46,031) 42% (32,407) 37% (23,573)
-------- -------- --------
Total $ 903,237 8% $ 835,039 4% $ 802,589
======== ======== ========
Network access services revenues increased $71.3 million, or 17%, in 1999
primarily due to increased minutes of use, increased special access revenues, a
universal service fund settlement and the acquisition of Rhinelander
Telecommunications, Inc. (RTI) in November 1998. Network access services
revenues increased $28 million, or 7%, in 1998 primarily due to increased
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.
Local network services revenues increased $25.4 million, or 10%, in 1999
primarily due to business and residential access line growth, increased customer
calling features and private line sales and the acquisition of RTI. Local
network services revenues increased $11.7 million, or 5%, in 1998 primarily due
to business and residential access line growth and increased custom calling
features and private line sales.
Long distance and data services revenues decreased $20.1 million, or 21%, in
1999 primarily due to the elimination of long distance product offerings to
out-of-territory customers, partially offset by increased long distance minutes
of use by in-territory customers. Long distance and data services revenues
increased $5.8 million, or 6%, in 1998 primarily due to the curtailment of
certain communications sector long distance service operations in adjacent
markets beginning in 1997.
The directory services revenues increased $1.8 million, or 6%, in 1999 primarily
due to the acquisition of RTI and increased advertising revenue.
Other revenues increased $3.4 million, or 8%, in 1999 primarily due to increased
billing and collections revenues, partially offset by the phasing out of certain
surcharges resulting from rate case decisions in California and New York. Other
revenues decreased $4 million, or 8%, in 1998 primarily due to the phasing out
of certain surcharges resulting from rate case decisions in California and New
York.
Eliminations represent network access revenues received by the Company's local
exchange operations from its long distance operations and ELI.
-18-
1999 1998 1997
-------------------- ----------------------- -------
Change from Change from
Amount Prior year Amount Prior year Amount
------ ---------- ------ ----------- -------
ELI revenues ($ in thousands)
- ------------
Network services $ 53,249 46% $ 36,589 9% $ 33,522
Local telephone services 77,591 103% 38,169 261% 10,565
Long distance services 26,698 117% 12,309 51% 8,140
Data services 29,470 113% 13,813 56% 8,857
Eliminations (2,817) (8%) (3,061) (8%) (3,341)
-------- -------- --------
Total $ 184,191 88% $ 97,819 69% $ 57,743
======== ======== ========
Network services revenues increased $16.7 million, or 46%, in 1999 primarily due
to network expansion and sales of additional circuits to new and existing
customers. Network services revenues increased $3.1 million, or 9%, in 1998
primarily due to sales of additional circuits to new and existing customers,
partially offset by the expiration of a short-term contract with a significant
customer.
Local telephone services revenues increased $39.4 million, or 103%, in 1999
primarily due to increased reciprocal compensation revenues resulting from the
establishment of interconnection agreements in several new states and increased
traffic. In addition, increased sales of the integrated service digital network
(ISDN) product to the ISPs and increased access line equivalents contributed to
the increase. Local telephone services revenues increased $27.6 million, or
261%, in 1998 primarily due to increased reciprocal compensation revenues,
increased access line equivalents and increased sales of the ISDN product.
Long distance services revenues increased $14.4 million, or 117%, in 1999
primarily due to increased revenues resulting from the bundling of sales of long
distance with other products, the addition of new customers and increased
prepaid services revenue. The Company exited the prepaid services market in the
third quarter of 1999, a result of the decision to focus on higher margin
products. Long distance services revenues increased $4.2 million, or 51%, in
1998 primarily due to increased 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 partially offset by a decrease in wholesale long distance revenues
primarily due to the elimination of a large customer with credit problems.
Data services revenues increased $15.7 million, or 113%, in 1999 primarily due
to increased sales of Internet and frame relay services in new and existing
markets. Data services revenues increased $5 million, or 56%, in 1998 primarily
due to increased sales of Internet and frame relay services in new and existing
markets, and the introduction of new products such as ATM and RSVP.
Eliminations reflect revenues received by ELI from the Company's communications
operations.
-19-
NETWORK ACCESS EXPENSE
----------------------
1999 1998 1997
-------------------- ----------------------- -------
Change from Change from
Amount Prior year Amount Prior year Amount
------ ---------- ------ ----------- -------
($ in thousands)
Network access $ 160,267 14% $ 140,471 3% $ 136,971
Eliminations (48,848) 38% (35,468) 32% (26,914)
-------- --------- --------
Total $ 111,419 6% $ 105,003 (5%) $ 110,057
======== ========= ========
Network access expense increased $19.8 million, or 14%, in 1999 primarily due to
expenses related to the ELI national data expansion, partially offset by
decreased communications sector long distance minutes of use from
out-of-territory long distance customers. Network access expense increased $3.5
million, or 3%, in 1998 primarily due to ELI revenue growth, ELI national data
expansion efforts, and significant growth in ELI long distance services,
partially offset by lease terminations as a result of the curtailment of certain
communications sector long distance service operations in 1997.
Eliminations represent network access expense incurred by the Company's long
distance operation for services provided by its local exchange operations and
expense incurred by the Company's communications operations for services
provided by ELI.
DEPRECIATION AND AMORTIZATION EXPENSE
-------------------------------------
1999 1998 1997
-------------------- ----------------------- -------
Change from Change from
Amount Prior year Amount Prior year Amount
------ ---------- ------ ----------- -------
($ in thousands)
Depreciation and amortization $ 262,430 32% $ 198,658 7% $ 186,530
Depreciation and amortization expense increased $63.8 million, or 32%, in 1999
primarily due to increased property, plant and equipment and the acquisition of
RTI in November 1998. The increase also includes $4.8 million of accelerated
depreciation related to the change in useful life of an operating system in the
communications sector. Depreciation and amortization expense increased $12.1
million, or 7%, in 1998 primarily due to increased property, plant and equipment
balances.
-20-
OTHER OPERATING EXPENSES
------------------------
1999 1998 1997
-------------------- ----------------------- -------
Change from Change from
Amount Prior year Amount Prior year Amount
------ ---------- ------ ----------- ------
($ in thousands)
Operating expenses $ 569,163 28% $ 444,385 (12%) $ 503,762
Taxes other than income 64,469 15% 55,843 - 55,871
Sales and marketing 71,879 52% 47,325 (14%) 54,893
-------- -------- --------
Total $ 705,511 29% $ 547,553 (11%) $ 614,526
======== ======== ========
Operating expenses increased $124.8 million, or 28%, in 1999. Of this increase,
$52.3 million was due to the following items: asset impairment charges of $36.1
million related to the discontinuation of the development of certain operational
systems and certain regulatory assets deemed to be no longer recoverable;
restructuring charges allocated to continuing operations of $4.1 million related
to the Company's corporate office; pre-acquisition integration costs of $3.9
million; separation costs allocated to continuing operations of $3.5 million and
costs associated with an executive retirement agreement allocated to continuing
operations of $4.7 million. The remaining $72.5 million increase is primarily
due to Y2K costs, the full year impact of RTI and ELI expenses relating to the
expansion of data services and product exit costs. Operating expenses decreased
$59.4 million, or 12%, in 1998 primarily due to 1997 pre-tax charges to
earnings, partially offset by increased ELI operating costs, Y2K costs and
separation costs allocated to continuing operations.
Taxes other than income increased $8.6 million, or 15%, in 1999 primarily due to
increases in payroll and property taxes.
Sales and marketing expenses increased $24.6 million, or 52%, in 1999 primarily
due to increased personnel and product advertising to support the delivery of
services in existing and new markets including the expansion of ELI data
services and products. Sales and marketing expenses decreased $7.6 million, or
14%, in 1998 primarily due to the curtailment of certain communications sector
long distance service operations in adjacent markets beginning in 1997.
INCOME FROM OPERATIONS
----------------------
1999 1998 1997
-------------------- ----------------------- -------
Change from Change from
Amount Prior year Amount Prior year Amount
------ ----------- ------ ----------- ------
($ in thousands)
Communications $ 103,727 (34%) $ 157,567 6,207% $ (2,580)
ELI (95,659) (26%) (75,923) (58%) (48,201)
-------- -------- --------
Income (loss) from operations $ 8,068 (90%) $ 81,644 261% $ (50,781)
======== ======== ========
Income from operations decreased $73.6 million, or 90%, in 1999. Of this
decrease, $57.1 million was due to the following items: asset impairment charges
of $36.1 million, restructuring charges allocated to continuing operations of
$4.1 million, pre-acquisition integration costs of $3.9 million, separation
costs allocated to continuing operations of $3.5 million, costs associated with
an executive retirement agreement allocated to continuing operations of $4.7
million and accelerated depreciation of $4.8 million. The remaining decrease is
primarily due to increased ELI losses and $9.1 million of increased Y2K costs.
Income from operations increased $132.4 million, or 261%, in 1998 primarily due
to 1997 pre-tax charges to earnings, partially offset by increased ELI losses,
Y2K costs and separation costs.
-21-
INVESTMENT AND OTHER INCOME
---------------------------
1999 1998 1997
-------------------- ----------------------- --------
Change from Change from
Amount Prior year Amount Prior year Amount
------ ---------- ------- ----------- --------
($ in thousands)
Non operating gain on sale of
subsidiary stock $ - N/A $ - N/A $ 78,734
Investment income 243,621 660% 32,038 (4%) 33,397
Other income (loss), net (20) 100% (26,746) (434%) 7,999
------- ------- -------
$ 243,601 4,503% $ 5,292 (96%) $ 120,130
======= ======= =======
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 increased $211.6 million, or 660%, in 1999. Of this increase,
$221 million was due to the $69.5 million gain on the sale of the Company's
investment in Centennial in January 1999, the $67.6 million gain on the sale of
the Company's investment in Century in October 1999 and the $83.9 million gain
on the sale of the Company's investment in the cable joint venture in October
1999. Investment income decreased $1.4 million, or 4%, in 1998 primarily due to
lower average investment balances.
Other income (loss), net increased $26.7 million, or 100%, in 1999 and decreased
$34.7 million, or 434%, in 1998 primarily due to the recognition of a $31.9
million loss resulting from the decline in value of the HTCC investment in 1998.
MINORITY INTEREST
-----------------
1999 1998 1997
-------------------- ----------------------- --------
Change from Change from
Amount Prior year Amount Prior year Amount
------ ---------- ------- ----------- --------
($ in thousands)
Minority interest $ 23,227 66% $ 14,032 2,076% $ 645
Minority interest is a result of ELI's initial public offering in November 1997
and it represents the minority's share of ELI's loss before income tax.
INTEREST EXPENSE
----------------
1999 1998 1997
-------------------- ----------------------- --------
Change from Change from
Amount Prior year Amount Prior year Amount
------ ---------- ------- ----------- --------
($ in thousands)
Interest expense $ 86,972 28% $ 67,944 3% $ 65,779
Interest expense increased $19 million, or 28%, in 1999 primarily due to
increased ELI net borrowings, partially offset by decreased short-term debt
balances. Interest expense increased $2.2 million, or 3%, in 1998 primarily due
to increased ELI net borrowings, partially offset by an increase in the debt
component of AFUDC.
-22-
INCOME TAXES
------------
1999 1998 1997
-------------------- ----------------------- -------
Change from Change from
Amount Prior year Amount Prior year Amount
------ ---------- ------- ----------- -------
($ in thousands)
Income taxes $ 64,587 1,536% $ 3,948 105% $ 1,928
Income taxes increased $60.6 million, or 1,536%, in 1999 primarily due to
increased taxable income and an increase in the effective tax rate. The
effective tax rate for 1999 reflects the impact of increased pre-tax income
resulting from the sale of investments included in Investment income. Income
taxes increased $2 million, or 105%, in 1998 primarily due to an increase in
pre-tax income.
DISCONTINUED OPERATIONS
-----------------------
1999 1998 1997
-------------------- ----------------------- --------
Change from Change from
Amount Prior year Amount Prior year Amount
------ ---------- ------- ----------- --------
($ in thousands)
Revenues $ 613,216 1% $ 609,514 14% $ 533,287
Operating income $ 82,179 (15%) $ 96,525 45% $ 66,623
Net income $ 27,359 (25%) $ 36,528 160% $ 14,023
Revenues from discontinued operations increased $3.7 million, or 1%, in 1999
primarily due to increased consumption and customer growth in the electric
sector, partially offset by lower purchased gas and fuel costs passed on to
customers in the gas and electric sectors and a decrease in customer usage due
to warmer weather conditions in the gas sector. Revenues from discontinued
operations increased $76.2 million, or 14%, in 1998 primarily due to the
acquisition in October 1997 of The Gas Company (TGC) and increased consumption
and customer growth in the gas and water/wastewater sectors, partially offset by
a decrease in gas revenues resulting from warmer weather conditions and lower
purchased gas and fuel costs passed on to customers in the gas and electric
sectors.
Operating income from discontinued operations decreased $14.3 million, or 15%,
and net income from discontinued operations decreased $9.2 million, or 25%, in
1999 primarily due to restructuring charges, separation costs, costs associated
with an executive retirement agreement, commission ordered customer refunds in
Arizona and increased Y2K costs, partially offset by an increase in gross
margins and a decrease in income taxes. Operating income from discontinued
operations increased $29.9 million, or 45%, and net income from discontinued
operations increased $22.5 million, or 160%, in 1998 primarily due to the 1997
charges to earnings, partially offset by Y2K and separation costs.
-23-
NET INCOME AND NET INCOME PER COMMON SHARE
------------------------------------------
1999 1998 1997
-------------------- ----------------------- --------
Change from Change from
Amount Prior year Amount Prior year Amount
------ ---------- ------- ----------- --------
($ in thousands)
Net Income $144,486 153% $ 57,060 465% $ 10,100
Net Income Per Common Share $ .55 150% $ .22 450% $ .04
1999 net income and net income per share were impacted by the following after
tax items: gains on the sales of investments of $136.4 million, or 52(cent) per
share, asset impairment charges of $22.3 million, or 9(cent) per share, an
executive retirement agreement of $4.1 million, or 2(cent) per share,
restructuring charges of $3.6 million, or 1(cent) per share, separation costs of
$3.1 million, or 1(cent) per share, accelerated depreciation of $3 million, or
1(cent) per share, and pre-acquisition integration costs of $2.4 million, or
1(cent) per share. 1999 net income and net income per share were also impacted
by after tax net losses from ELI of $54.1 million, or 21(cent) per share, and
after tax Y2K costs of $12.2 million, or 5(cent) per share.
1998 net income and net income per share were impacted by the following after
tax items: the non-cash write down of the Company's investment in HTCC of $19.7
million, or 7(cent) per share, the cumulative effect of a change in accounting
principle at ELI of $2.3 million, or 1(cent) per share, and separation costs of
$1.3 million, or 1(cent) per share. 1998 net income and net income per share
were also impacted by after tax net losses from ELI of $34.8 million, or
14(cent) per share, and after tax Y2K costs of $5.3 million, or 2(cent) per
share.
1997 net income was impacted by after tax charges to earnings of $135.1 million
of which $105.1 million related to continuing operations and $30 million to
discontinued operations. For continuing operations, the charges resulted from a
re-evaluation of certain business strategies including its out-of-territory long
distance aggressive growth strategy, accounting policy changes at ELI in
anticipation of its initial public offering and curtailment of certain employee
benefit plans. For discontinued operations, the charges resulted from public
utility regulatory commission orders and the curtailment of certain employee
benefit plans.
-24-
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
---------------------------------------------------------------
The Company is exposed to the impact 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 maintains
fixed rate debt on a majority of its borrowings and refinances debt when
advantageous. In an effort to reduce interest rate risk ELI issued fixed
interest rate $325 million, five-year senior unsecured notes in April 1999 that
are guaranteed by the Company. The net proceeds from the issuance were used to
repay outstanding borrowings under ELI's floating rate bank credit facility. The
Company maintains a portfolio of investments consisting of both equity and debt
financial instruments. The Company's equity portfolio is primarily comprised of
investments in communications companies. The Company's bond portfolio consists
of government, corporate and municipal fixed-income securities. The Company does
not hold or issue derivative or other financial instruments for trading
purposes. The Company purchases monthly gas futures contracts to manage
well-defined commodity price fluctuations, caused by weather and other
unpredictable factors, associated with the Company's commitments to deliver
natural gas to certain industrial customers at fixed prices. This derivative
financial instrument activity relates to the discontinued operations and is not
material to the Company's consolidated financial position, results of operations
or cash flows.
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
The following documents are filed as part of this Report:
1.Financial Statements, See Index on page F-1.
2.Supplementary Data, Quarterly Financial Data is included in the
Financial Statements (see 1. above).
Item 9. Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure
--------------------
None
PART III
--------
The Company intends to file with the Commission a definitive proxy statement for
the 2000 Annual Meeting of Stockholders pursuant to Regulation 14A not later
than 120 days after December 31, 1999. 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
---------------------------------------------------------------
(a) The exhibits listed below are filed as part of this Report:
Exhibit
No. Description
- ----- -----------
3.200.1 Restated Certificate of Incorporation of Citizens Utilities Company,
with all amendments to May 21, 1998, as restated July 2, 1998.
3.200.2 By-laws of the Company, as amended to-date of Citizens Utilities
Company, with all amendments to May 20, 1999, (incorporated by
reference to Exhibit 3.200.2 to the Registrant's Quarterly Report on
Form 10-Q for the six months ended June 30, 1999, 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).
-25-
Exhibit
No. Description
- ------ -----------
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).
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).
-26-
Exhibit
No. Description
- ------ -----------
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).
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).
10.6.2 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, (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).
10.19 Citizens Executive Deferred Savings Plan dated January 1, 1996.
10.20 Citizens Incentive Plan restated as of March 21, 2000.
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).
10.22 Competitive Advance and Revolving Credit Facility Agreement between
Citizens Utilities Company and Chase Manhattan Bank dated October 29,
1999.
10.24.1 Indenture from ELI to Citibank, N.A., dated April 15, 1999, with
respect to ELI's 6.05% Senior Unsecured Notes due 2004, (incorporated
by reference to Exhibit 10.24.1 of ELI's Annual Report on Form 10-K
for the year ended December 31, 1999, File No. 0-23393).
10.24.2 First Supplemental Indenture from ELI, Citizens Utilities Company and
Citizens Newco Company to Citibank, N.A. dated April 15, 1999, with
respect to the 6.05% Senior Unsecured Notes due 2004, (incorporated by
reference to Exhibit 10.24.2 of ELI's Annual Report on Form 10-K for
the year ended December 31, 1999, File No. 0-23393).
10.24.3 Form of ELI's 6.05% Senior Unsecured Notes due 2004, (incorporated by
reference to Exhibit 10.24.3 of ELI's Annual Report on Form 10-K for
the year ended December 31, 1999, File No. 0-23393).
10.24.4 Letter of Representations to the Depository Trust Company dated April
28, 1999, with respect to ELI's 6.05% Senior Unsecured Notes due 2004,
(incorporated by reference to Exhibit 10.24.4 of ELI's Annual Report
on Form 10-K for the year ended December 31, 1999, File No. 0-23393).
10.25 Asset Purchase Agreements between Citizens Utilities Company and GTE
Corporation dated May 27 and September 21, 1999.
10.26 Asset Purchase Agreements between Citizens Utilities Company and
US West Communications, Inc. dated June 16, 1999.
10.27 Asset Purchase Agreements between Citizens Utilities Company and
American Water Works dated October 15, 1999.
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 10.6, 10.6.2, 10.16.1, 10.17, 10.18, 10.19, 10.20 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
Utilities 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.; copies of separate loan agreements and indentures
governing various Industrial Development Revenue Bonds; copies of documents
relating to indebtedness of subsidiaries acquired during 1996, 1997 and 1998,
and copies of the credit agreement between Electric Lightwave, Inc. and
Citibank, N. A. dated November 21, 1997. The Company agrees to furnish to the
Commission upon request copies of schedules and exhibits to items 10.25, 10.26
and 10.27.
-27-
(b) Reports on Form 8-K:
The Company filed on Form 8-K dated October 18, 1999, under Item 5 "Other
Events" and Item 7 "Exhibits," a press release announcing that it had agreed
to sell its water and wastewater operations to American Water Works, Inc.
The Company filed on Form 8-K dated November 10, 1999, under Item 7
"Exhibits," a press release announcing financial results for third quarter
ended September 30, 1999 and operating data.
The Company filed on Form 8-K dated December 20, 1999, under Item 5 "Other
Events" and Item 7 "Exhibits," a press release announcing a definitive
agreement to purchase 106,850 telephone access lines from GTE Corp.
-28-
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;
Member, Executive Committee and Director
March 22, 2000
-29-
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 22nd day of March 2000.
Signature Title
--------- -----
/s/ Robert J. DeSantis Vice President and Chief Financial Officer
- ---------------------------------------
(Robert J. DeSantis)
/s/ Livingston E. Ross Vice President and Chief Accounting Officer
- ---------------------------------------
(Livingston E. Ross)
Norman I. Botwinik* Director
- ---------------------------------------
(Norman I. Botwinik)
Aaron I. Fleischman* Member, Executive Committee and Director
- ---------------------------------------
(Aaron I. Fleischman)
Stanley Harfenist* Member, Executive Committee and Director
- ---------------------------------------
(Stanley Harfenist)
Andrew N. Heine* Director
- ---------------------------------------
(Andrew N. Heine)
John L. Schroeder* Director
- ---------------------------------------
(John L. Schroeder)
Robert D. Siff* Director
- ---------------------------------------
(Robert D. Siff)
Robert A. Stanger* Member, Executive Committee and Director
- ---------------------------------------
(Robert A. Stanger)
Charles H. Symington, Jr.* Director
- ---------------------------------------
(Charles H. Symington, Jr.)
Edwin Tornberg* Director
- ---------------------------------------
(Edwin Tornberg)
Claire L. Tow* Director
- ---------------------------------------
(Claire L. Tow)
*By: /s/ Robert J. DeSantis
--------------------------
(Robert J. DeSantis)
Attorney-in-Fact
-30-
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
Index to Consolidated Financial Statements
Item Page
- ---- ----
Independent Auditors' Report F-2
Consolidated balance sheets as of December 31, 1999, 1998 and 1997 F-3
Consolidated statements of income and comprehensive income for the years ended
December 31, 1999, 1998 and 1997 F-4
Consolidated statements of shareholders' equity for the years ended
December 31, 1999, 1998 and 1997 F-6
Consolidated statements of cash flows for the years ended
December 31, 1999, 1998 and 1997 F-7
Notes to consolidated financial statements F-8
F-1
Independent Auditors' Report
The Board of Directors and Shareholders
Citizens Utilities Company:
We have audited the accompanying consolidated balance sheets of Citizens
Utilities Company and subsidiaries as of December 31, 1999, 1998 and 1997, 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 as of December 31, 1999, 1998 and 1997, 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(m) to the consolidated 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 LLP
New York, New York
March 14, 2000
F-2
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999, 1998 and 1997
($ in thousands)
1999 1998 1997
--------- --------- ---------
Assets
Current assets:
Cash $ 37,141 $ 31,922 $ 35,163
Accounts receivable:
Customers 213,457 175,074 170,191
Other 56,340 77,009 46,487
Less allowance for doubtful accounts 28,278 18,348 25,254
--------- ---------- ---------
Net accounts receivable 241,519 233,735 191,424
Materials and supplies 12,624 13,706 11,411
Other current assets 17,340 27,199 43,871
--------- ---------- ---------
Total current assets 308,624 306,562 281,869
--------- ---------- ---------
Property, plant and equipment 4,458,654 4,045,752 3,576,434
Less accumulated depreciation 1,569,936 1,340,665 1,181,647
---------- ---------- -----------
Net property, plant and equipment 2,888,718 2,705,087 2,394,787
---------- ---------- -----------
Investments 591,386 464,146 447,695
Regulatory assets 184,942 189,866 194,257
Deferred debits and other assets 141,661 113,223 115,038
Assets of discontinued operations 1,656,414 1,514,048 1,439,206
---------- ---------- -----------
Total assets $ 5,771,745 $ 5,292,932 $ 4,872,852
========== ========== ===========
Liabilities and Shareholders' Equity
Current liabilities:
Long-term debt due within one year $ 31,156 $ 7,672 $ 5,089
Short-term debt - 110,000 -
Accounts payable 187,984 175,304 214,713
Income taxes accrued 75,161 53,599 45,064
Other taxes accrued 27,823 22,091 21,243
Interest accrued 30,788 27,459 24,841
Customers' deposits 32,842 30,797 19,401
Other current liabilities 81,258 63,676 74,907
--------- ---------- ---------
Total current liabilities 467,012 490,598 405,258
Deferred income taxes 460,208 442,908 420,708
Customer advances for construction 172,067 187,502 151,307
Deferred credits and other liabilities 87,668 77,967 105,880
Contributions in aid of construction 7,764 7,407 6,604
Regulatory liabilities 27,000 19,120 20,881
Long-term debt 2,107,460 1,775,338 1,583,902
Liabilities of discontinued operations 310,269 268,286 261,225
Minority interest in subsidiary 11,112 29,785 36,626
Company obligated mandatorily redeemable
convertible preferred securities * 201,250 201,250 201,250
Shareholders' equity 1,919,935 1,792,771 1,679,211
---------- ---------- ----------
Total liabilities and shareholders'
equity $ 5,771,745 $ 5,292,932 $ 4,872,852
========== ========== ==========
* 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, 1999, 1998 and 1997
($ in thousands, except for per-share amounts)
1999 1998 1997
--------- -------- --------
Revenues $1,087,428 $ 932,858 $ 860,332
Operating expenses:
Network access 111,419 105,003 110,057
Depreciation and amortization 262,430 198,658 186,530
Other operating expenses 705,511 547,553 614,526
--------- -------- ---------
Total operating expenses 1,079,360 851,214 911,113
--------- -------- ---------
Income (loss) from operations 8,068 81,644 (50,781)
Non operating gain on sale of subsidiary stock - - 78,734
Investment income 243,621 32,038 33,397
Other income (loss), net (20) (26,746) 7,999
Minority interest 23,227 14,032 645
Interest expense 86,972 67,944 65,779
--------- -------- ----------
Income before income taxes, dividends
on convertible preferred securities,
discontinued operations and cumulative
effect of change in accounting principle 187,924 33,024 4,215
Income taxes 64,587 3,948 1,928
--------- -------- ----------
Income before dividends on convertible
preferred securities, discontinued
operations and cumulative effect of change
in accounting principle 123,337 29,076 2,287
Dividends on convertible preferred securities,
net of income tax benefit 6,210 6,210 6,210
--------- -------- ----------
Income (loss) before discontinued operations
and cumulative effect of change in
accounting principle 117,127 22,866 (3,923)
Income from discontinued operations, net of tax 27,359 36,528 14,023
--------- -------- ----------
Income before cumulative effect of change in
accounting principle 144,486 59,394 10,100
Cumulative effect of change in accounting
principle, net of income tax benefit and
related minority interest - 2,334 -
--------- -------- ----------
Net income 144,486 57,060 10,100
Other comprehensive income (loss),
net of tax and reclassification adjustments (41,769) 52,872 10,832
--------- -------- ----------
Total comprehensive income $ 102,717 $ 109,932 $ 20,932
========= ======== ==========
The accompanying Notes are an integral part of these Consolidated Financial Statements.
F-4
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (Continued)
($ in thousands, except for per-share amounts)
Income (loss) before discontinued operations and 1999 1998 1997*
cumulative effect of change in accounting -------- --------- ---------
principle per common share:
Basic $ .45 $ .09 $ (.02)
Diluted $ .45 $ .09 $ (.02)
Income from discontinued operations per
common share:
Basic $ .10 $ .14 $ .05
Diluted $ .10 $ .14 $ .05
Income before cumulative effect of change in
accounting principle per common share:
Basic $ .55 $ .23 $ .04
Diluted $ .55 $ .23 $ .04
Net income per common share:
Basic $ .55 $ .22 $ .04
Diluted $ .55 $ .22 $ .04
* Adjusted for subsequent stock dividends.
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
F-5
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 and 1997
($ in thousands, except for per-share amounts)
Accumulated
Common Additional Other Total
Stock Paid-In Retained Comprehensive Shareholders'
($.25) Capital Earnings Income (Loss) Equity
----------- ---------- -------- ----------- -----------
Balance January 1, 1997 $ 59,788 $ 1,381,341 $ 244,066 $ (7,012) $ 1,678,183
Acquisitions 604 2,736 8,318 11,658
Common stock buybacks (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 reclassi- 10,832 10,832
fication adjustment
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 (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 reclassi-
fication 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
----------- ---------- --------- ----------- ------------
Common stock buybacks (157) (6,468) (6,625)
Stock plans 638 20,475 21,113
Stock issuances to fund
EPPICS dividends 251 9,708 9,959
Net income 144,486 144,486
Other comprehensive loss,
net of tax benefit and
reclassification adjustment (41,769) (41,769)
----------- ---------- --------- ------------- ------------
Balance December 31, 1999 $ 65,519 $ 1,577,903 $ 261,590 $ 14,923 $ 1,919,935
=========== ========== ========= ============= ============
The accompanying Notes are an integral part of these Consolidated Financial Statements.
F-6
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 and 1997
($ in thousands)
1999 1998 1997
---------- --------- ---------
Net cash provided by continuing
operating activities $ 347,509 $ 156,098 $ 139,856
---------- ---------- ----------
Cash flows used for investing
activities:
Securities matured 7,435 2,000 16,205
Securities sold 1,084,190 992,761 578,322
Securities purchased (1,068,450) (952,628) (434,030)
Construction expenditures (484,776) (353,176) (414,656)
Business acquisitions - (89,234) -
Other (2,786) (1,052) 25,686
---------- ----------- ---------
(464,387) (401,329) (228,473)
---------- ----------- ---------
Cash flows from financing activities:
Long-term debt borrowings 341,471 242,647 143,801
Issuance of common stock 21,113 7,101 4,825
Issuance of subsidiary stock - - 118,554
Short-term debt borrowings (110,000) 42,000 -
(repayments)
Common stock buybacks to fund stock (6,625) (14,823) (48,552)
dividends
Long-term debt principal payments (45,286) (4,574) (3,234)
Other (2,552) - (1,380)
---------- ---------- ---------
198,121 272,351 214,014
---------- ---------- ---------
Cash used for discontinued operations (76,024) (30,361) (114,464)
---------- ---------- ---------
Increase (decrease) in cash 5,219 (3,241) 10,933
Cash at January 1, 31,922 35,163 24,230
---------- ----------- ----------
Cash at December 31, $ 37,141 $ 31,922 $ 35,163
========== =========== ==========
The accompanying Notes are an integral part of these Consolidated Financial Statements.
F-7
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies:
(a) Description of Business:
------------------------
The Company provides both regulated and competitive communications
services to residential, business and wholesale customers through
subsidiaries and Electric Lightwave, Inc. (ELI). ELI is a facilities based
integrated communications provider providing a broad range of
communications services throughout the United States. The Company is not
dependent upon any single geographic area or single customer for its
revenues.
In May 1998, the Company announced its plans to separate its
communications businesses and public services businesses into two
stand-alone publicly traded companies. The Company discontinued its
separation plans when opportunities became available in 1999 to acquire
telecommunications properties. During 1999, the Company announced that it
had entered into various agreements to purchase approximately 911,000
telephone access lines from GTE Corp. (GTE) and US West Communications,
Inc. (US West) for approximately $2,821,000,000 in cash. In August 1999,
the Company's Board of Directors approved a plan of divestiture by sale
for the Company's public services properties, which include gas, electric
and water and wastewater businesses.
On October 18, 1999, the Company announced that it had agreed to sell its
water and wastewater operations to American Water Works, Inc. for an
aggregate purchase price of $835,000,000. The transaction is expected to
close in 2000 following regulatory approvals.
On February 15, 2000, the Company announced that it had agreed to sell its
electric utility operations. The Arizona and Vermont electric divisions
will be sold to Cap Rock Energy Corp. and the Kauai (Hawaii) electric
division will be sold to Kauai Island Electric Co-op for an aggregate
purchase price of $535,000,000. The transactions are expected to close in
2000 following regulatory approvals.
The Company expects to temporarily fund these telephone access line
purchases with cash and investment balances and proceeds from commercial
paper issuances, backed by committed bank credit facilities. Permanent
funding is expected to be from cash and investment balances and the
proceeds from the divestiture of the Company's public services businesses.
(b) Principles of Consolidation and Use of Estimates:
------------------------------------------------
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles and include the accounts of
Citizens Utilities Company and its 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 when services are provided. Certain
communications 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) for regulated businesses and capitalized interest for unregulated
businesses. Maintenance and repairs are charged to operating expenses as
incurred.
AFUDC represents the borrowing costs and a return on common equity of
funds used to finance 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 regulated 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 ($2,547,000, $2,700,000 and
$4,566,000 for 1999, 1998 and 1997, respectively) and the amount relating
to borrowings is included as a reduction of interest expense ($2,330,000,
$1,726,000 and $1,122,000 for 1999, 1998 and 1997, respectively). The book
value, net of salvage, of routine property, plant and equipment
dispositions is charged against accumulated depreciation for regulated
operations.
F-8
Capitalized interest for unregulated construction activities credited to
interest expense related to ELI's capital expenditure program amounted to
$8,681,000, $10,444,000 and $4,693,000 for 1999, 1998 and 1997,
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 represents approximately 7%, 6% and 6% for 1999,
1998 and 1997, respectively, of the gross depreciable property, plant and
equipment.
(f) Regulatory Assets and Liabilities:
---------------------------------
The Company's regulated operations are subject to the provisions of
Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for
the Effects of Certain Types of Regulation." SFAS 71 requires regulated
entities to record regulatory assets and liabilities as a result of
actions of regulators.
The Company continuously monitor 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 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. 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 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 is
measured by the amount by which the carrying amount of the assets exceed
the fair value. During the fourth quarter of 1999, the Company determined
that certain long-lived assets in the Communications sector were impaired.
As a result, the Company recorded $36,136,000 of pre-tax charges as part
of other operating expenses, including approximately $15,369,000 related
to a decision made by management to discontinue development of certain
operational systems and approximately $20,767,000 related to certain
regulatory assets deemed to be no longer recoverable.
(h) Investments and Short-Term Debt:
-------------------------------
Investments include high credit quality, short- and intermediate-term
fixed-income securities (primarily state and municipal debt obligations)
and equity securities. The Company classifies its investments at purchase
as available-for-sale or held-to-maturity. The Company does not maintain
a trading portfolio.
Securities classified as available-for-sale are carried at estimated fair
market value. These securities are held for an indefinite period of time,
but might be sold in the future as changes in market conditions or
economic factors occur. Net aggregate unrealized gains and losses related
to such securities, net of taxes, are included as a separate component of
shareholders' equity. Held-to-maturity securities represented those which
the Company had the ability and intent to hold to maturity and were
carried at amortized cost, adjusted for amortization of premiums/discounts
and accretion over the period to maturity. Interest, dividends and gains
and losses realized on sales of securities are reported in Investment
income.
The Company evaluates its investments periodically to determine whether
any decline in fair value, below the amortized cost basis, is other than
temporary. If the Company determines that a decline in fair value is other
than temporary, the cost basis of the individual investment is written
down to fair value which becomes the new cost basis. The amount of the
write down is included in earnings as a loss.
Commercial paper notes payable is classified as long-term debt when it is
intended to be refinanced with long-term debt securities. In 1998,
short-term debt represented commercial paper notes payable which were
repaid in January 1999 with the proceeds from the sale of the Company's
investment in Centennial Cellular Corp. (Centennial) (see Note 5).
F-9
(i) 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, de-
ferred income taxes are recorded for the tax effect of temporary
differences between the financial statement and the tax bases of assets
and Liabilities using tax rates expected to be in effect when the tem-
porary differences are expected to turn around. Regulatory assets and
liabilities (see Note 1(f)) include income tax benefits previously flowed
through to customers and from the allowance for funds used during con-
struction, 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 regulated operations, as defined by applicable
regulatory authorities, have been deferred and are being amortized to
income over the lives of the related properties.
(j) 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
net income per common share disclosures 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 10). Fair value of options granted is computed
using the Black Scholes option pricing model.
(k) 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 retains approximately 98%
of the voting interest and approximately 82% of the economic ownership in
ELI.
Minority interest represents the minority's share of ELI's loss before
income tax benefit as of December 31, 1999. The Company will be able to
record minority interest income only to the extent of the minority
interest. If ELI becomes profitable, its earnings will be recognized in
full by the Company until losses the Company recognized in excess of its
economic ownership percentage are recovered. After such recovery, the
Company will record minority interest expense on the consolidated
statement of income and comprehensive income and will again record
minority interest on its balance sheet.
(l) Net Income Per Common Share:
---------------------------
Basic net income per common share is computed using the weighted average
number of common shares outstanding during the period being reported on.
Diluted net income per common share 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 net income per common share
calculations for 1997 are presented with adjustments for subsequent stock
dividends. There were no stock dividends declared in 1999 (see Note 14).
(m) Changes in Accounting Principles:
--------------------------------
In March 1998, the Accounting Standards Executive Committee of the AICPA
released Statement of Position (SOP) 98-1, "Accounting for the Costs 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 software and costs for the preliminary project stage
and the post-implementation/operations stage of an 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 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
F-10
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
$483,000.
(2) Property, Plant and Equipment:
-----------------------------
The components of property, plant and equipment at December 31, 1999,
1998 and 1997 are as follows:
1999 1998 1997
--------- ---------- ---------
($ in thousands)
Telephone outside plant $ 2,244,808 $ 2,067,566 $ 1,963,187
Telephone central office equipment 1,272,647 1,076,030 979,870
Information systems and other
administrative assets 619,865 501,870 273,869
Construction work in progress 286,836 372,248 339,305
Other 34,498 28,038 20,203
---------- --------- ---------
$ 4,458,654 $ 4,045,752 $ 3,576,434
========== ========== ===========
(3) Mergers and Acquisitions:
-------------------------
On May 27, September 21, and December 16, 1999, the Company announced that it
had entered into definitive agreements to purchase from GTE approximately
366,000 telephone access lines (as of December 31, 1999) in Arizona,
California, Illinois, Minnesota and Nebraska for approximately $1,171,000,000
in cash. The Company expects that these acquisitions, which are subject to
various state and federal regulatory approvals, will begin closing in the
third quarter 2000.
On June 16, 1999, the Company announced that it had entered into a series of
definitive agreements to purchase from US West approximately 545,000
telephone access lines (as of December 31, 1999) in Arizona, Colorado, Idaho,
Iowa, Minnesota, Montana, Nebraska, North Dakota and Wyoming for
approximately $1,650,000,000 in cash. The Company expects that these
acquisitions, which are subject to various state and federal regulatory
approvals, will occur on a state-by-state basis and will begin closing in the
third quarter 2000.
In November 1998, the Company acquired all of the stock of Rhinelander
Telecommunication, Inc. (RTI) for approximately $84,000,000 in cash. RTI is a
diversified telecommunications company engaged in providing local exchange,
long distance, Internet access, wireless and cable television services to
rural markets in Wisconsin. This transaction was accounted for using the
purchase method of accounting and the results of operations of RTI have been
included in the accompanying financial statements from the date of
acquisition.
In December 1997, the Company acquired Ogden Telephone Company (Ogden) in a
stock for stock transaction. In 1997, the Company issued 2,308,262 shares of
Common Stock to effect the merger. In 1998, 288,554 additional shares of the
Company's Common Stock were issued in connection with this transaction. Ogden
was an independent telephone operating company providing services to
residential and commercial customers in Monroe County, New York. This
transaction was accounted for using the pooling of interests method of
accounting and the results of operations of Ogden have been included in the
accompanying consolidated financial statements since the beginning of the
1997 year.
The following pro forma financial information presents the combined results
of operations of the Company and RTI as if the acquisition had occurred on
January 1 of the year preceding the date of acquisition. The pro forma
financial information does not necessarily reflect the results of operations
that would have occurred had the Company and RTI constituted a single entity
during such periods.
F-11
1998 1997
---------- ----------
($ in thousands, except for per share amounts)
Revenues $ 950,000 $ 878,000
Net income $ 56,000 $ 9,000
Basic net income per common share $ .22 $ .03
Diluted net income per common share $ .22 $ .03
(4) Discontinued Operations:
-----------------------
On August 24, 1999, the Company's Board of Directors approved a plan of
divestiture by sale of the Company's public services properties, which
include gas, electric and water and wastewater businesses. The proceeds from
the sales of the public services properties will be used to fund the
telephone access line purchases. The Company has accounted for the planned
divestiture of the public services properties as a discontinued operation.
Discontinued operations in the consolidated statements of income and
comprehensive income reflect the results of operations of the public services
properties including allocated interest expense for the periods presented.
Interest expense was allocated to discontinued operations based on debt
issued for these businesses. The debt presented in liabilities of
discontinued operations represents only debt to be transferred pursuant to
the water and wastewater and electric asset sale agreements.
On October 18, 1999, the Company announced that it had agreed to sell its
water and wastewater operations to American Water Works, Inc. for an
aggregate purchase price of $835,000,000. The transaction is expected to
close in 2000 following regulatory approvals.
On February 15, 2000, the Company announced that it had agreed to sell its
electric utility operations. The Arizona and Vermont electric divisions will
be sold to Cap Rock Energy Corp. and the Kauai (Hawaii) electric division
will be sold to Kauai Island Electric Co-op for an aggregate purchase price
of $535,000,000. The transactions are expected to close in 2000 following
regulatory approvals.
Summarized financial information for the discontinued operations is set forth
below:
1999 1998 1997
--------------------------------
($ in thousands)
Current assets $ 109,250 $ 107,478 $ 95,410
Net property, plant and equipment 1,459,958 1,343,536 1,273,006
Other assets 87,206 63,034 70,790
--------- --------- ---------
Total assets $ 1,656,414 $1,514,048 $1,439,206
========= ========= =========
Current liabilities $ 18,040 $ 17,133 $ 12,613
Long-term debt 133,817 124,908 122,630
Other liabilities 158,412 126,245 125,982
-------- -------- ---------
Total liabilities $ 310,269 $ 268,286 $ 261,225
======== ======== =========
Revenues $ 613,216 $ 609,514 $ 533,287
Operating income 82,179 96,525 66,623
Income taxes 14,230 18,389 5,455
Net income $ 27,359 $ 36,528 $ 14,023
F-12
(5) Investments:
-------------
The components of investments at December 31, 1999, 1998 and 1997 are as
follows:
1999 1998 1997
-----------------------------
($ in thousands)
State and municipal securities $ 233,021 $ 141,202 $ 212,743
Centennial Preferred Security - 107,679 107,679
Marketable equity securities 243,591 163,661 75,855
Joint Venture with subsidiary of Century - 49,385 49,196
Other fixed income securities 114,774 2,219 2,222
-------- -------- --------
Total $ 591,386 $ 464,146 $ 447,695
======== ======== ========
In January 1999, Centennial was merged 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 of Centennial, the Company was required to convert the
preferred stock into approximately 2,972,000 shares of Class B Common Stock.
The Company received approximately $205,600,000 in cash for all of its Common
Stock interests and approximately $17,500,000 related to accrued dividends on
the preferred stock. The Company realized and reported a pre-tax gain of
approximately $69,500,000 in the first quarter 1999 in Investment income.
On October 1, 1999, Adelphia Communication Corp. (Adelphia) was merged with
Century Communications Corp. (Century). The Company owned 1,807,095 shares of
Century Class A Common Stock. Pursuant to this merger agreement, Century
Class A Common shares were exchanged for $10,832,000 in cash and 1,206,705
shares of Adelphia Class A Common Stock (for a total market value of
$79,600,000 based on Adelphia's October 1, 1999 closing price of $57.00). The
Company realized and reported a pre-tax gain of approximately $67,600,000 in
the fourth quarter of 1999 in Investment income.
A subsidiary of the Company, in a joint venture with a subsidiary of Century,
owned and operated four cable television systems in southern California
serving over 90,000 basic subscribers. In July 1999, the Company entered into
a separate agreement with Adelphia to sell its interest in the joint venture.
Pursuant to this agreement on October 1, 1999, the Company received
approximately $27,700,000 in cash and 1,852,302 shares of Adelphia Class A
Common Stock (for a total market value of $133,300,000 based on Adelphia's
October 1, 1999 closing price of $57.00). The Company realized and reported a
pre-tax gain of approximately $83,900,000 in the fourth quarter of 1999 in
Investment income. During 1999, the Company reclassified the cost related to
the Company's joint venture with a subsidiary of Century from other assets to
investments. Prior year presentations have been restated to conform to the
current year presentation.
The Chairman and Chief Executive Officer of the Company was also Chairman and
Chief Executive Officer of Century prior to its merger with Adelphia.
Centennial was a subsidiary of Century until it was sold.
The following summarizes the amortized cost, gross unrealized holding gains
and losses and fair market value for investments.
Amortized Unrealized Holding Aggregate Fair
Investment Classification Cost Gains (Losses) Market Value
- ------------------------- ------------ ----- -------- --------------
($ in thousands)
As of December 31, 1999
- -----------------------
Available-For-Sale $ 567,208 $ 37,025 $ (12,847) $ 591,386
As of December 31, 1998
- -----------------------
Held-To-Maturity $ 107,679 $ 15,673 $ - $ 123,352
Available-For-Sale 215,228 100,329 (8,475) 307,082
Joint Venture with Century 49,385 - - 49,385
As of December 31, 1997
- -----------------------
Held-To-Maturity $ 107,679 $ 78,608 $ - $ 186,287
Available-For-Sale 284,630 19,673 (13,483) 290,820
Joint Venture with Century 49,196 - - 49,196
F-13
The amortized cost of held-to-maturity securities plus 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.
Marketable equity securities for 1999, 1998 and 1997 include the Company's
investment in Hungarian Telephone and Cable Corp. (HTCC). The Chairman and
Chief Executive Officer of the Company is also a member of the Board of
Directors of HTCC.
In 1995, the Company made an initial investment in and entered into
definitive agreements with HTCC. The investment in HTCC had 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 in Other income (loss), net in 1998.
In May 1999, in connection with HTCC's debt restructuring, the Company
cancelled a note obligation from HTCC to the Company and a seven-year
consulting services agreement in exchange for the issuance by HTCC to the
Company of 1,300,000 shares of HTCC Common Stock and 30,000 shares of HTCC's
5% convertible preferred stock. Each share of HTCC convertible preferred
stock has a liquidation value of $70 and is convertible at the option of the
Company into 10 shares of HTCC Common Stock. To the extent the 1,300,000 HTCC
common shares and the 300,000 HTCC common shares underlying the HTCC
convertible preferred stock do not achieve an average market closing price of
at least $7 per share for the twenty trading days ending March 31, 2000, HTCC
has agreed to issue additional HTCC convertible preferred shares with a value
equal to any such shortfall.
At December 31, 1999, the Company owns approximately 19% of the HTCC shares
presently outstanding. The Company's investment in HTCC is classified as an
available for sale security and accounted for using the cost method of
accounting. Additionally, the Company has exercised its right to nominate one
member of the Board of Directors of HTCC.
(6) Fair Value of Financial Instruments:
------------------------------------
The following table summarizes the carrying amounts and estimated fair values
for certain of the Company's financial instruments at December 31, 1999, 1998
and 1997. For the other financial instruments, representing cash, accounts
and notes receivables, short-term debt, accounts payable and other accrued
liabilities, the carrying amounts approximate fair value due to the
relatively short maturities of those instruments.
1999 1998 1997
--------------------- ----------------------- ------------------------
Carrying Carrying Carrying
Amount Fair Value Amount Fair Value Amount Fair Value
-------- ---------- --------- ---------- ------- ----------
($ in thousands)
Investments $ 591,386 $ 591,386 $ 464,146 $ 479,819 $ 447,695 $ 526,303
Long-term debt 2,107,460 2,046,541 1,775,338 1,884,631 1,583,902 1,665,897
EPPICS 201,250 226,909 201,250 171,566 201,250 192,194
The fair value of the above financial instruments are based on quoted prices
at the reporting date for those financial instruments except for the
investment in the Centennial Preferred Security and the Joint Venture with
Century. The fair value of the Centennial Preferred Security was estimated to
be its accreted value at December 31, 1997 and its conversion value at
December 31, 1998. The fair value of the Joint Venture with Century was
estimated to be its book value (see Note 5).
F-14
(7) Long-term Debt:
--------------
Weighted average December 31,
interest rate at ---------------------------------------
December 31, 1999 Maturities 1999 1998 1997
----------------- --------- ---------------------------------------
($ in thousands)
Debentures 7.34% 2001-2046 $ 1,000,000 $ 1,000,000 $ 1,000,000
Industrial development
revenue bonds 5.39% 2015-2033 353,494 337,922 320,281
Senior unsecured notes 6.25% 2004-2012 361,000 36,000 36,000
ELI bank credit facility 6.63% 2002 260,000 284,000 60,000
Rural Utilities Service
Loan Contracts 5.85% 2001-2027 87,100 91,078 87,053
Other long-term debt 8.86% 2000-2027 45,866 26,338 12,568
Commercial paper notes
payable - - 68,000
---------- ----------- ----------
Total long-term debt $ 2,107,460 $ 1,775,338 $ 1,583,902
========== =========== ==========
The total principal amounts of industrial development revenue bonds were
$369,935,000 in 1999 and 1998 and $349,935,000 in 1997. Funds from industrial
development revenue bond issuances are held by a trustee until qualifying
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, 1999, 1998 and 1997, respectively.
On December 31, 1997, certain commercial paper notes payable were classified
as long-term debt because the obligations were refinanced with long-term debt
securities.
The Company has available lines of credit with financial institutions in the
amounts of $3,000,000,000, with associated facility fees of 0.06% per annum
and $200,000,000 with no associated facility fees, which expire on October
27, 2000, and another $200,000,000 with associated facility fees of 0.07625%
per annum which expires on December 16, 2003. The terms of the latter line of
credit provide the Company with extension options. There were no amounts
outstanding under these commitments at December 31, 1999. ELI has committed
lines of credit with commercial banks under which it may borrow up to
$400,000,000 which are guaranteed by the Company and expire November 21,
2002. The ELI credit facility has an associated facility fee of 0.05% per
annum. As of December 31, 1999, $260,000,000 was outstanding under ELI's
lines of credit.
In April 1999, ELI completed an offering of $325,000,000 of five-year senior
unsecured notes. The notes have an interest rate of 6.05% and mature on May
15, 2004. The Company has guaranteed the payment of principal and any premium
and interest on the notes when due.
The Company's installment principal payments, capital leases and maturities
of long-term debt for the next five years are as follows:
2000 2001 2002 2003 2004
------- -------- -------- -------- --------
($ in thousands)
Installment principal
payments $ 5,258 $ 4,839 $ 4,953 $ 5,051 $ 5,107
Capital leases 25,898 22,707 442 477 515
Maturities - 50,000 260,000 - 425,000
------- --------- --------- -------- --------
$ 31,156 $ 77,546 $ 265,395 $ 5,528 $ 430,622
======= ========= ========= ======== ========
Holders of certain industrial development revenue bonds may tender at par
prior to maturity. The next tender date is April 1, 2001 for $14,400,000 of
principal amount of bonds. The Company expects to remarket all such bonds
which are tendered. In the years 1999, 1998 and 1997, interest payments on
short- and long-term debt were $93,017,000, $77,038,000 and $69,566,000,
respectively.
F-15
(8) 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
previous acquisitions of telecommunications properties.
In accordance with the terms of the issuances, the Company paid the 5%
interest on the Convertible Subordinated Debentures in Citizens' Common
Stock. During 1999, 1,004,961 shares of Common Stock were issued to the
Partnership in payment of interest of which 976,464 shares were sold by the
Partnership to satisfy cash dividend payment elections by the holders of the
EPPICS. The sales proceeds and the remaining 28,497 shares of Common Stock
were distributed by the Partnership to the Trust. 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. The Trust
distributed the cash and shares as dividends to the holders of the EPPICS in
1999, 1998 and 1997.
(9) Capital Stock:
--------------
The Company is authorized to issue up to 600,000,000 shares of Common Stock.
Quarterly stock dividends had been declared and issued on Common Stock and
shareholders had the option of enrolling in the "Common Stock Dividend Sale
Plan." The plan offered shareholders the opportunity to have their stock
dividends sold by the plan broker and the net cash proceeds of the sale
distributed to them quarterly.
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
had undertaken an extensive review of the Company's dividend policy in
conjunction with its review of strategic options for the Company in 1998.
Resulting from this review, the Board concluded that the Company discontinue
dividends after the payment of the December 1998 stock dividend.
Quarterly and annual stock dividend rates declared and annual stock dividend
cash equivalents (adjusted for all stock dividends declared through December
31, 1998, and rounded to the nearest 1/16th) considered by the Board have
been as follows:
Dividend Rates
--------------------
1998 1997
--------------------
First quarter .75% 1.6 %
Second quarter .75% 1.6 %
Third quarter .75% 1.0 %
Fourth quarter .75% 1.0 %
------- --------
Total 3.0% 5.2 %
======= ========
Compounded Total 3.03% 5.30%
======= ========
Cash Equivalent 28 5/16(cent) 51 1/4(cent)
=========================
F-16
The Company purchased 631,000 shares at a cost of $6,625,000 in 1999. The
Company purchased 1,811,000 shares at a cost of $14,826,000 in 1998 and
4,904,000 shares at a cost of $48,552,000 in 1997 to pay common stock
dividends.
In December 1999, the Company's Board of Directors authorized the purchase,
from time to time, of up to $100,000,000 worth of shares of the Company's
common stock.
The activity in shares of outstanding common stock during 1999, 1998 and 1997
is summarized as follows:
Number of Shares
----------------
Balance at January 1, 1997 239,148,000
Acquisitions 2,417,000
Common stock dividends 12,591,000
Common stock buybacks (4,904,000)
Common stock issued to fund EPPICS dividends 986,000
Stock plans 756,000
-----------
Balance at December 31, 1997 250,994,000
Acquisitions 532,000
Common stock dividends 7,657,000
Common stock buybacks (1,811,000)
Common stock issued to fund EPPICS dividends 1,093,000
Stock plans 684,000
-----------
Balance at December 31, 1998 259,149,000
Common stock buybacks (631,000)
Common stock issued to fund EPPICS dividends 1,005,000
Stock plans 2,553,000
-----------
Balance at December 31, 1999 262,076,000
===========
The Company has 50,000,000 authorized but unissued shares of preferred stock
($.01 par).
(10) Stock Plans:
-----------
At December 31, 1999, the 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), 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 $481,540, $463,798 and
$352,017 in 1999, 1998 and 1997, respectively. Had the Company determined
compensation cost based on the fair value at the grant date for its MEIP,
EIP, ESPP, ELI ESPP and ELI EIP, the Company's pro forma Net income and Net
income per common share would have been as follows:
1999 1998 1997
--------------------------
($ in thousands)
Net Income As reported $144,486 $57,060 $10,100
Pro forma 130,613 46,005 7,717
Net Income per common share As reported:
Basic $.55 $.22 $.04
Diluted .55 .22 .04
Pro forma:
Basic $.50 $.18 $.03
Diluted .50 .18 .03
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
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 Common 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), 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% (13,103,812 as of December 31, 1999) of the
Company's common stock 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 for 1997. There were no stock
dividends declared in 1999.
Shares Weighted
Subject to Average Option
Option Price Per Share
---------- ---------------
Balance at January 1, 1997 10,800,000 $ 11.02
Options granted 1,641,000 8.53
Options exercised (106,000) 10.81
Options canceled,forfeited 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
Options granted 1,844,000 8.00
Options exercised (602,000) 8.20
Options canceled,forfeited or lapsed (396,000) 8.08
-----------
Balance at December 31, 1999 10,281,000 $ 9.73
===========
F-18
In 1998, 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 canceled
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, 1999.
Options Outstanding Options Exercisable
- ------------------------------------------------------------------ ---------------------------
Weighted Average Weighted
Number Range of Weighted Average Remaining Number Average
Outstanding Exercise Price Excercise Price Life in Years Exercisable Exercise Price
----------- -------------- ---------------- ---------------- ----------- --------------
14,000 $ 4 - 5 $ 4 5 14,000 $ 4
3,601,000 7 - 8 8 6 1,889,000 8
1,330,000 8 - 10 9 8 866,000 9
2,199,000 10 - 11 11 5 1,960,000 11
2,578,000 11 - 14 12 4 2,343,000 12
559,000 14 - 15 14 4 559,000 14
---------- ----------
10,281,000 $ 4 - 15 $ 10 5 7,631,000 $ 10
========== ==========
The weighted average fair value of options granted during 1999, 1998 and 1997
were $3.17, $2.27 and $4.23, 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 1999, 1998 and 1997:
1999 1998 1997
---- ---- ----
Dividend yield - - -
Expected volatility 29% 26% 32%
Risk-free interest rate 5.32% 4.43% 6.13%
Expected life 6 years 4 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,
1999, 559,974 shares of restricted stock were outstanding. Compensation
expense of $1,268,000, $1,288,000 and $1,302,000 for the years ended December
31, 1999, 1998 and 1997, 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 for 1997. There were no stock dividends declared
in 1999. 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
The following is a summary of share activity subject to option under the EIP
adjusted for subsequent stock dividends for 1997. There were no stock
dividends declared in 1999.
Shares Weighted
Subject to Average Option
Option Price Per Share
---------- ---------------
Balance at January 1, 1997 - $ -
Options granted 2,197,000 8.55
Options canceled, forfeited or lapsed (3,000) 8.53
----------
Balance at December 31, 1997 2,194,000 8.55
Options granted 4,683,000 9.34
Options canceled,forfeited or lapsed (2,745,000) 10.14
----------
Balance at December 31, 1998 4,132,000 8.51
Options granted 3,487,000 8.64
Options exercised (361,000) 8.46
Options canceled, forfeited or lapsed (679,000) 8.40
----------
Balance at December 31, 1999 6,579,000 $ 8.59
==========
As 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 canceled in exchange
for 1,606,000 new options with an exercise price of $7.75.
The following table summarizes information about shares subject to options
under the EIP at December 31, 1999.
Options Outstanding Options Exercisable
- ----------------------------------------------------------------- ------------------------------
Weighted Average
Number Range of Weighted Average Remaining Number Weighted Average
Outstanding Exercise Price Exercise Price Life in Years Exercisable Exercise Price
- ------------ -------------- ---------------- ---------------- ----------- -----------------
3,625,000 $ 7 - 8 $ 8 9 635,000 $ 8
1,504,000 8 - 9 9 8 1,026,000 9
133,000 9 - 10 9 8 35,000 9
417,000 10 - 11 10 8 136,000 10
900,000 11 - 13 12 10 - -
- ------------ ---------
6,579,000 $ 7 - 13 $ 9 9 1,832,000 $ 8
============ =========
The weighted average fair value of options granted during 1999, 1998 and 1997
was $3.46, $3.54 and $4.25, 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 1999, 1998 and 1997:
1999 1998 1997
----------------------------
Dividend yield - - -
Expected volatility 29% 26% 32%
Risk-free interest rate 5.47% 5.15% 6.14%
Expected life 6 years 6 years 7 years
During 1999, 1998 and 1997, the Company granted restricted stock awards to
key employees in the form of the Company's Common Stock. The number of shares
issued as restricted stock awards during 1999, 1998 and 1997 were 901,200,
464,409 and 23,018, respectively (adjusted for subsequent stock dividends in
1997). None of the restricted stock awards may be sold, assigned, pledged or
otherwise transferred, voluntarily or involuntarily, by the employees until
the restrictions lapse. The restrictions are both time and performance based.
At December 31, 1999, 946,976 shares of restricted stock were outstanding.
Compensation expense of $1,305,652, $808,000 and $27,000 for the years ended
December 31, 1999, 1998 and 1997, respectively, has been recorded in
connection with these grants.
F-20
Employee Stock Purchase Plan
----------------------------
The Company's ESPP was approved by shareholders on June 12, 1992 and amended
on May 22, 1997. Under the ESPP, eligible employees of the Company and its
subsidiaries have the right to subscribe to purchase shares of Common Stock
at the lesser of 85% of the mean between 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 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, 1999, there were 6,407,195 shares of Common Stock reserved for issuance
under the 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 ESPP is administered by the Compensation Committee of
the Board of Directors. As of December 31, 1999, the number of employees
enrolled and participating in the ESPP was 2,066 and the total number of
shares purchased under the ESPP was 3,201,887. 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 1999, 1998 and 1997:
1999 1998 1997
-----------------------------
Dividend yield - - -
Expected volatility 29% 26% 32%
Risk-free interest rate 5.28% 4.91% 5.45%
Expected life 6 months 6 months 6 months
The weighted average fair value of those purchase rights granted in 1999,
1998 and 1997 was $2.52, $2.05 and $2.28, 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, 1999, there were 1,950,000 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, 1999, the number of employees enrolled and participating in
the ELI ESPP was 691 and the total number of shares purchased under the ELI
ESPP was 328,664. 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 1999 and 1998:
1999 1998
---- ----
Dividend yield - -
Expected volatility 66% 71%
Risk-free interest rate 5.25% 4.92%
Expected life 6 months 6 months
The weighted average fair value of those purchase rights granted in 1999 and
1998 was $4.97 and $3.82, respectively.
F-21
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 6,670,600 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
Subject to Average Option
Option Price Per 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 and lapsed (1,649,000) 16.21
----------
Balance at December 31, 1998 2,331,000 12.14
Options granted 1,989,000 9.51
Options exercised (116,000) 9.73
Options canceled, forfeited and lapsed (680,000) 10.12
----------
Balance at December 31, 1999 3,524,000 $ 10.96
==========
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 canceled
in exchange for 880,000 new options in August 1998.
The following table summarizes information about shares subject to options
under the EIP at December 31, 1999.
Options Outstanding Options Exercisable
- ------------------------------------------------------------------- ------------------------------
Weighted-Average
Number Range of Weighted Average Remaining Number Weighted Average
Outstanding Exercise Prices Exercise Price Life in Years Exercisable Excercise Price
- ----------- --------------- ---------------- ---------------- ----------- ----------------
41,000 $ 5 - 8 $ 7 9 12,000 $ 7
2,309,000 8 - 9 9 9 675,000 9
311,000 10 - 15 13 9 58,000 13
863,000 15 - 18 16 8 594,000 16
- ------------ ---------
3,524,000 $ 5 - 18 $ 11 9 1,339,000 $ 12
============ =========
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 1999, 1998 and 1997:
1999 1998 1997
-----------------------------
Dividend yield - - -
Expected volatility 66% 71% 13%
Risk-free interest rate 5.34% 5.44% 5.87%
Expected life 6 years 6 years 7 years
The weighted-average fair value of those options granted in 1999, 1998 and
1997 were $6.16, $6.94 and $5.13, respectively.
F-22
ELI has granted 610,000 restricted stock awards to key employees in the form of
Class A Common Stock since its IPO. These restrictions lapse based on meeting
specific performance targets. At December 31, 1999, 581,000 shares of this stock
were outstanding, of which 259,000 shares are no longer restricted. Compensation
expense was recorded in connection with these grants in the amounts of
$2,559,000, $4,666,000 and $219,000 for the years ended December 31, 1999, 1998
and 1997, respectively.
Directors' Deferred Fee Equity Plan
-----------------------------------
The Company's Non-Employee Directors' Deferred Fee Equity Plan (the Directors'
Plan) was approved by shareholders on May 19, 1995 and subsequently amended. The
Directors' Plan includes an Option Plan, a Stock Plan and a Formula 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 stock which the
Plan may be obligated to deliver pursuant to the Stock Plan and the maximum
number of shares of common 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%) of the
total outstanding shares of Common Stock 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 were 10 directors participating in the Directors'
Plan in 1999. In 1999, the total Options and Plan Units earned were 153,969 and
15,027, respectively. In 1998, the total Options and Plan Units earned were
185,090 and 16,661, respectively. In 1997, the total Options and Plan Units
earned were 188,838 and 18,817, respectively (adjusted for subsequent stock
dividends). At December 31, 1999, 671,477 options were exercisable at a weighted
average exercise price of $9.66.
On December 31, 1999, the Option Plan and the Stock Plan of the Deferred Fee
Equity Plan expired in accordance with the plan's terms. In replacement of these
plans, the non-employee directors now have the choice to receive 50% or 100% of
their future fees in either stock or stock units. If stock is elected, the stock
will be purchased at the average of the high and low on the first trading date
of the year (Initial Market Value). If the average price is lower on the last
trading day of November (Final Market Value), an adjustment will be made by
payment of additional stock to bring the shares paid up to the number of shares
purchasable at the Final Market Price. If stock units are elected, they will be
purchased at 85% of the Initial Market Value. In the event of a lower Final
Market Value, an adjustment will be made by payment of additional stock to bring
the shares paid up to the number of shares purchasable at the Final Market
Price. Stock units (except in an event of hardship) are held by the Company
until retirement or death.
The Company had also maintained a Non-Employee Directors' Retirement Plan
providing for the payment of specified sums annually to non-employee directors
of the Company, or their designated beneficiaries, starting at their retirement,
death or termination of directorship of each individual director. In 1999, the
Company terminated this Plan. In connection with the termination, the value as
of May 31, 1999, of the vested benefit of each non-employee director was
credited to him/her in the form of stock units. Such benefit will be payable
upon retirement, death or termination of the directorship. Each participant had
until July 15, 1999 to elect whether the value of the stock units awarded would
be payable in common stock of the Company (convertible on a one for one basis)
or in cash. As of December 31, 1999, the liability for such payments was $3.7
million of which $1.6 million will be payable in stock (based on the July 15,
1999 stock price) and $2.1 million will be payable in cash. While the number of
shares of stock payable to those directors electing to be paid in stock was
fixed, the amount of cash payable to those directors electing to be paid in cash
will be based on the number of stock units awarded times the stock price at the
payment date.
F-23
(11) 1999 Restructuring Charges:
--------------------------
In the fourth quarter of 1999, the Company approved a plan to restructure the
Company's corporate office activities. In connection with this plan, the
Company recorded a pre-tax charge of $5,760,000 in other operating expenses.
The restructuring results in the reduction of 49 corporate employees. As part
of this process, certain job functions are being outsourced and others
eliminated. All affected employees were communicated to in the early part of
November 1999.
As of December 31, 1999, approximately $221,000 of the costs had been paid
and 17 employees were terminated. The remaining accrual of approximately
$5,539,000 is recorded in other current liabilities. These costs are expected
to be paid in 2000 and the remaining employees will be terminated in 2000.
(12) 1997 Charges to Earnings:
------------------------
During the second quarter of 1997, the Company recorded approximately
$197,300,000 of pre-tax charges to earnings of which $153,500,000 related to
continuing operations and $43,800,000 to discontinued operations. For
continuing operations, the charges resulted from a re-evaluation of certain
business strategies including its out-of-territory long distance aggressive
growth strategy, accounting policy changes at ELI in anticipation of its
initial public offering and curtailment of certain employee benefit plans.
For discontinued operations, the charges resulted from public utility
regulatory commission orders and the curtailment of certain employee benefit
plans.
(13) Income Taxes:
-------------
The following is a reconciliation of the provision for income taxes computed
at federal statutory rates to the actual amount:
1999 1998 1997
-------- --------- --------
($ in thousands)
Consolidated tax provision at federal statutory rate $ 65,773 $ 11,558 $ 1,475
State income tax provisions (benefit), net of
federal income tax 1,266 (495) 1,352
Allowance for funds used during construction (1,072) (1,322) (1,441)
Nontaxable investment income (2,609) (2,932) (4,726)
Amortization of investment tax credits (613) (548) (657)
Flow through depreciation 5,706 4,870 3,946
Tax reserve adjustment 1,455 (4,760) 564
Company owned life insurance 2,599 561 1,290
Minority interest (8,290) (2,433) -
All other, net 372 (551) 125
-------- -------- --------
$ 64,587 $ 3,948 $ 1,928
======== ======== ========
As of December 31, 1999, 1998 and 1997, accumulated deferred income taxes
amounted to $450,903,000, $432,299,000 and $408,310,000, respectively, and
the unamortized deferred investment tax credits amounted to $9,305,000,
$10,609,000 and $12,398,000, respectively. Income taxes paid during the year
were $885,000, $5,434,000 and $17,765,000 for 1999, 1998 and 1997,
respectively.
F-24
The components of the net deferred income tax liability at December 31, are
as follows:
1999 1998 1997
---- ---- ----
($ in thousands)
Deferred income tax liabilities:
- -------------------------------
Property, plant and equipment basis differences $ 381,278 $ 334,296 $ 338,170
Regulatory assets 69,757 73,724 76,504
Other, net 20,523 47,572 20,101
--------- --------- ----------
471,558 455,592 434,775
--------- --------- ----------
Deferred income tax assets:
- --------------------------
Regulatory liabilities 7,663 8,431 9,236
Deferred investment tax credits 3,687 4,253 4,831
--------- --------- ----------
11,350 12,684 14,067
--------- --------- ----------
Net deferred income tax liability $ 460,208 $ 442,908 $ 420,708
========= ========= ==========
The provision for federal and state income taxes, as well as the taxes
charged or credited to shareholders' equity, includes amounts both payable
currently and deferred for payment in future periods as indicated below:
1999 1998 1997
---- ----- ----
($ in thousands)
Income taxes charged (credited) to the income statement
for continuing operations:
Current:
Federal $ 39,735 $ (17,866) $ 11,081
State 1,394 (2,171) (353)
-------- ---------- ----------
Total current 41,129 (20,037) 10,728
-------- ---------- ----------
Deferred:
Federal 23,517 23,124 (10,576)
Investment tax credits (613) (547) (657)
State 554 1,408 2,433
-------- ---------- ----------
Total deferred 23,458 23,985 (8,800)
-------- ---------- ----------
Subtotal 64,587 3,948 1,928
-------- ---------- ----------
Income taxes charged (credited) to the income statement
for discontinued operations:
Current:
Federal 6,170 16,222 2,577
State 937 2,464 391
-------- ---------- ----------
Total current 7,107 18,686 2,968
Deferred:
Federal 6,662 676 2,902
Investment tax credits (1,073) (1,079) (1,083)
State 1,534 106 668
-------- ---------- ----------
Total deferred 7,123 (297) 2,487
-------- ---------- ----------
Subtotal 14,230 18,389 5,455
-------- ---------- ----------
Income tax benefit on dividends on convertible
preferred securities:
Current:
Federal (3,344) (3,344) (3,344)
State (508) (508) (508)
-------- ---------- ----------
Subtotal (3,852) (3,852) (3,852)
-------- ---------- ----------
Income tax benefit on cumulative effect of change
in accounting principle:
Current:
Federal - (478) -
State - - -
-------- ---------- ----------
Subtotal - (478) -
-------- ---------- ----------
Total Income taxes charged to the income
statement (a) 74,965 18,007 3,531
-------- ---------- ----------
F-25
1999 1998 1997
---- ---- ----
($ in thousands)
Income taxes charged (credited) to shareholders' equity:
Deferred income taxes (benefits) on unrealized
gains or losses on securities classified as
available-for-sale $(25,906) $ 32,792 $ 6,718
Current benefit arising from stock options exercised (1,262) (35) (164)
-------- -------- ---------
Income taxes charged (credited) to
shareholders' equity (b) (27,168) 32,757 6,554
-------- -------- ---------
Total income taxes: (a) plus (b) $ 47,797 $ 50,764 $ 10,085
======== ======== =========
The Company's alternative minimum tax credit as of December 31, 1999 is
$92,114,000, which can be carried forward indefinitely to reduce future
regular tax liability. This benefit is included as a debit against accrued
income taxes.
(14) Net Income Per Common Share:
---------------------------
The reconciliation of the net income per common share calculation for the
years ended December 31, 1999, 1998 and 1997 is as follows:
1999 1998 1997
------------------------------------------------------------- -----------------------
($ 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 $144,486 260,613 $ .55 $57,060 258,879 $ .22 $10,100 260,226 $ .04
Effect of dilute options - 1,779 - - 742 - - 598 -
Diluted $144,486 262,392 $ .55 $57,060 259,621 $ .22 $10,100 260,824 $ .04
All share amounts represent weighted average shares outstanding for each
respective period. All per share amounts have been adjusted for subsequent
stock dividends for 1997. There were no stock dividends declared in 1999. 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 7,756,406 potentially dilutive stock options at a range
of $10.54 to $14.24 per share. These items were adjusted for subsequent stock
dividends and were not included in the diluted net income per common share
calculation for any of the above periods as their effect was antidilutive.
(15) Comprehensive Income (Loss):
---------------------------
The Company's other comprehensive income (loss) for the years ended December
31, 1999 and 1998 is as follows:
Year Ended December 31, 1999
----------------------------
Before-Tax Tax Expense/ Net-of-Tax
Amount (Benefit) Amount
------------ ------------ ------------
($ in thousands)
Net unrealized gains on securities:
Net unrealized holding gains
arising during period $ 56,746 $ 21,722 $ 35,024
Less: Reclassification adjustment
for net gains realized in net
income 124,421 47,628 76,793
------------ ------------ ------------
Other comprehensive loss $ (67,675) $ (25,906) $ (41,769)
============ ============ ============
F-26
Year Ended December 31, 1998
----------------------------
Before-Tax Tax Expense/ Net-of-Tax
Amount Benefit Amount
------------ ------------ -----------
($ in thousands)
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 net
income 29,167 11,165 18,002
---------- ------------ ------------
Other comprehensive income $ 85,664 $ 32,792 $ 52,872
========== ============ ============
(16) Segment Information:
-------------------
The Company is segmented into communications and ELI. The communications
segment provides both regulated and competitive communications services to
residential, business and wholesale customers. ELI is a facilities based
integrated communications provider providing a broad range of communications
services throughout the United States.
EBITDA for each segment consists of segment operating income plus
depreciation, all excluding special items. 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 comparable to similarly titled measures of other
companies. Special items for 1999 include the following: gains on the sales
of investments, asset impairment charges, accelerated depreciation related to
the change in useful life of an operating system, costs associated with an
executive retirement agreement, restructuring charges, pre-acquisition
integration costs and separation costs. Special items for 1998 include
separation costs and the HTCC investment write-off. Special items for 1997
include the 1997 charges to earnings.
Year Ended December 31,
--------------------------------
1999 1998 1997
-------------------------------------
($ in thousands)
Communications:
- --------------
Revenues excluding special items $ 949,268 $ 867,446 $ 840,329*
Inter-segment revenues (46,031) (32,407) (23,573)
Revenues as reported 903,237 835,039 802,589
Depreciation 226,141 181,656 175,363
Operating income (loss) 103,727 157,567 (2,580)
EBITDA 380,465 340,642 315,506
Capital expenditures, net 227,176 201,453 263,011
Total segment assets 2,422,572 2,438,978 2,313,535
* Excludes $14,167,000 of the 1997 charges to earnings.
ELI:
- ---
Revenues $ 187,008 $ 100,880 $ 61,084
Inter-segment revenues (2,817) (3,061) (3,341)
Revenues as reported 184,191 97,819 57,743
Depreciation 36,289 17,002 11,167
Operating loss (95,659) (75,923) (48,201)
EBITDA (57,698) (58,921) (26,269)
Capital expenditures, net 245,695* 200,000 124,549
Total segment assets 775,234 532,309 359,962
* Includes $60,000,000 in non-cash capital lease additions.
F-27
The following table is a reconciliation of certain segment items to the total
consolidated amount.
Year Ended December 31,
------------------------------
1999 1998 1997
------------------------------------
($ in thousands)
EBITDA
- ------
Total segment EBITDA $ 322,767 $ 281,721 $ 289,237
Investment and other income 22,513 37,197 41,396
Non operating gain on sale of
subsidiary stock - - 78,734
Special items 168,819 (33,324) (153,488)
Discontinued operations 148,190 158,399 112,310
----------- ---------- -----------
Consolidated EBITDA $ 662,289 $ 443,993 $ 368,189
=========== ========== ===========
Capital expenditures
- --------------------
Total segment capital expenditures $ 472,871 $ 401,453 $ 387,560
General capital expenditures 6,741 25,123 33,334
Discontinued operations capital 135,804 95,456 103,595
expenditures ---------- --------- ----------
Consolidated reported capital
expenditures $ 615,416 $ 522,032 $ 524,489
========== ========= ==========
Assets
- ------
Total segment assets $ 3,197,806 $ 2,971,287 $ 2,673,497
General assets 917,525 807,597 760,149
Discontinued operations assets 1,656,414 1,514,048 1,439,206
---------- --------- ----------
Consolidated reported assets $ 5,771,745 $ 5,292,932 $ 4,872,852
========== ========= ==========
(17) Quarterly Financial Data (unaudited):
------------------------------------
Net Income Per
Common Share
-----------------
Revenues Net Income Basic Dilutive
-------- ---------- ----- --------
1999 ($ in thousands)
----
First quarter $ 264,750 $ 54,625 $.21 $.21
Second quarter 273,946 7,753 .03 .03
Third quarter 271,517 11,908 .05 .05
Fourth quarter 277,215 70,200 .27 .26
Net Income Per
Common Share
-----------------
Revenues Net Income Basic Dilutive
-------- ---------- ------ --------
1998 ($ in thousands)
----
First quarter $ 224,540 $ 26,779 $.10 $.10
Second quarter 224,511 14,462 .06 .06
Third quarter 236,324 14,461 .06 .06
Fourth quarter 247,483 1,358 .01 .01
First quarter 1999 results include an after tax gain of approximately
$42,900,000 on the sale of Centennial Cellular stock (see Note 5). Fourth
quarter 1999 results include an after tax gain of approximately $41,700,000
on the sale of Century stock and an after tax gain of approximately
$51,800,000 on the sale of the Company's interest in a cable joint venture
(see Note 5), offset by after tax asset impairment charges of approximately
$22,300,000 (see Note 1(g)), after tax costs of an executive retirement
agreement of $4,100,000, after tax restructuring charges of approximately
$3,600,000 (see Note 11), after tax impact of accelerated depreciation of
approximately $3,000,000 related to the change in useful life of an operating
system and after tax pre-acquisition integration costs of approximately
$2,400,000 (see Note 3).
F-28
First quarter 1998 results include an after tax cumulative effect of change
in accounting principle, net of related minority interest of approximately
$2,334,000 (see Note 1(k)). Fourth quarter 1998 results include an after tax
write-off of the HTCC investment of approximately $19,700,000 (see Note 5).
The quarterly net income per common share amounts are rounded to the nearest
cent. Annual net income per common share may vary depending on the effect of
such rounding.
(18) Supplemental Cash Flow Information:
----------------------------------
The following is a schedule of net cash provided by operating activities for
the years ended December 31, 1999, 1998 and 1997:
1999 1998 1997
---- ---- ----
($ in thousands)
Income (Loss) from continuing operations $ 117,127 $ 20,532 $ (3,923)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense 262,430 198,658 186,530
Non cash charges to earnings 36,136 - 122,735
Investment gains (221,088) - -
Non cash HTCC investment write-off - 31,905 -
Cumulative effect of change in accounting
principle - 3,394 -
Gain on sale of subsidiary stock - - (78,734)
Allowance for equity funds used during
construction (2,547) (2,700) (4,566)
Deferred income tax and investment tax credit 30,581 23,687 (6,373)
Change in operating accounts receivable (7,783) (40,770) (41,745)
Change in accounts payable and other 91,088 (112,809) (27,982)
Change in accrued taxes and interest 30,624 17,996 (4,458)
Change in other assets 10,941 16,205 (1,628)
--------- -------- ---------
Net cash provided by continuing operating
activities $ 347,509 $ 156,098 $ 139,856
========= ======== =========
In conjunction with the acquisitions described in Note 3 the Company assumed
debt of $13,800,000 and $8,400,000 in 1998 and 1997, respectively, at
weighted average interest rates of 5.6% and 6.2%, respectively.
(19) Retirement Plans:
-----------------
Pension Plan
------------
The Company and its subsidiaries have a noncontributory pension plan covering
all employees who have met certain service and age requirements. The benefits
are based on years of service and final average pay or career average pay.
Contributions are made in amounts sufficient to fund the plan's net periodic
pension cost while considering tax deductibility. Plan assets are invested in
a diversified portfolio of equity and fixed-income securities.
The following tables set forth the plan's benefit obligations and fair values
of plan assets as of December 31, 1999 and 1998.
1999 1998
----- -----
Change in benefit obligation ($ in thousands)
----------------------------
Benefit obligation at beginning of year $ 252,914 $ 208,520
Service cost 13,234 10,747
Interest cost 17,200 15,703
Amendments (1,877) (1,487)
Actuarial (gain)/loss (33,039) 27,941
Acquisitions - 8,344
Benefits paid (20,830) (16,854)
--------- --------
Benefit obligation at end of year $ 227,602 $ 252,914
========= ========
F-29
1999 1998
---- ----
Change in plan assets ($ in thousands)
- ---------------------
Fair value of plan assets at beginning of year $ 232,536 $ 201,834
Actual return on plan assets 21,760 24,749
Acquisitions - 10,875
Employer contribution 5,420 11,932
Benefits paid (20,830) (16,854)
-------- --------
Fair value of plan assets at end of year $ 238,886 $ 232,536
======== ========
(Accrued)/Prepaid benefit cost
- -----------------------------
Funded status $ 11,284 $ (20,378)
Unrecognized net liability 146 189
Unrecognized prior service cost 1,673 3,682
Unrecognized net actuarial (gain)/loss (13,911) 21,807
-------- ---------
(Accrued)/Prepaid benefit cost $ (808) $ 5,300
======== =========
Components of net periodic benefit cost
- ---------------------------------------
Service cost $ 13,234 $ 10,747
Interest cost on projected benefit obligation 17,200 15,703
Return on plan assets (19,081) (17,241)
Net amortization and deferral 175 400
-------- ---------
Net periodic benefit cost $ 11,528 $ 9,609
======== =========
Assumptions used in the computation of pension costs/ year-end benefit
obligations were as follows:
1999 1998
---- ----
Discount rate 7.0%/8.0% 7.5%/7.0%
Expected long-term rate of return on plan assets 8.25%/N/A 8.25%/N/A
Rate of increase in compensation levels 4.0%/4.0% 4.0%/4.0%
In November 1998, the Company acquired Rhinelander Telecommunications, Inc.,
including its pension benefit plans. The acquisition increased the pension
benefit obligation by $3,974,000 and the fair value of plan assets by
$4,884,000 as of December 31, 1998.
In June 1998, the Company acquired The Gas Company (TGC), including its
non-collectively bargained pension benefit plan. The acquisition increased
the pension benefit obligation by $4,370,000 and the fair value of plan
assets by $5,991,000 as of December 31, 1998.
F-30
Postretirement Benefits Other Than Pensions
-------------------------------------------
The Company provides certain medical, dental and life insurance benefits for
retired employees and their beneficiaries and covered dependents.
The following table sets forth the plan's benefit obligations and the
postretirement benefit liability recognized on the Company's balance sheets
at December 31, 1999 and 1998:
1999 1998
---- ----
Change in benefit obligation ($ in thousands)
- ----------------------------
Benefit obligation at beginning of year $ 51,983 $ 49,110
Service cost 781 980
Interest cost 3,431 3,523
Plan participants' contributions 629 596
Amendments - (4,734)
Actuarial (gain)/loss (8,590) 4,503
Acquisitions - 651
Benefits paid (2,706) (2,646)
-------- --------
Benefit obligation at end of year $ 45,528 $ 51,983
======== ========
Change in plan assets
- ---------------------
Fair value of plan assets at beginning of year $ 18,710 $ 6,661
Actual return on plan assets 1,200 677
Benefits paid (948) -
Employer contribution 1,498 11,372
-------- --------
Fair value of plan assets at end of year $ 20,460 $ 18,710
======== ========
Accrued benefit cost
- ---------------------
Funded status $ (25,068) $(33,273)
Unrecognized transition obligation 359 386
Unrecognized prior service cost - -
Unrecognized (gain) (14,953) (7,562)
------- ----------
Accrued benefit cost $ (39,662) $(40,449)
======= ==========
Components of net periodic postretirement benefit cost
- -------------------------------------------------------
Service cost $ 781 $ 980
Interest cost on projected benefit obligation 3,431 3,523
Return on plan assets (1,544) (549)
Net amortization and deferral (828) (947)
Curtailment gain - (2,003)
------- ----------
Net periodic postretirement benefit cost $ 1,840 $ 1,004
======= ==========
For purposes of measuring year end benefit 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 medical benefits, gradually
decreasing to 5% in the year 2040 and remaining at that level thereafter. The
effect of a 1% increase in the assumed 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 $378,000 and the effect on the
accumulated postretirement benefit obligation for health benefits would be
$3,845,000. The effect of a 1% decrease in the assumed 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 $(338,000) and
the effect on the accumulated postretirement benefit obligation for health
benefits would be $(3,486,000).
In August 1999, the Company's Board of Directors approved a plan of
divestiture for the public services properties. As such, any pension and/or
postretirement gain or loss associated with the divestiture of these
properties will be recognized when realized.
F-31
401(k) Savings Plans
--------------------
The Company sponsors employee savings plans under section 401(k) of the
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
$5,850,000, $5,795,000 and $4,883,000 for 1999, 1998 and 1997, respectively.
(20) Commitments and Contingencies:
-----------------------------
The Company has budgeted capital expenditures in 2000 of approximately
$599,800,000 (including $38,000,000 of non-cash capital lease additions) for
continuing operations and $169,900,000 for discontinued operations and
certain commitments have been entered into in connection therewith.
In December 1999, the Company entered into an agreement with Nortel to
outsource elements of DMS central office engineering and commissioning of the
Company's network. The Company's commitment under this three year agreement
is approximately $69,000,000 for 2000, $37,000,000 for 2001 and $35,000,000
for 2002. The 2000 capital cost of this contract is included in the 2000
budgeted capital expenditures.
The Company conducts certain of its operations in leased premises and also
leases certain equipment and other assets pursuant to operating leases.
Future minimum rental commitments for all long-term noncancelable operating
leases for continuing operations are as follows:
Year Amount
------------- -------------
($ in thousands)
2000 $ 26,363
2001 25,610
2002 17,237
2003 12,342
2004 9,219
thereafter 13,972
-----------
Total $ 104,743
===========
Total rental expense included in the Company's results of operations for the
years ended December 31, 1999, 1998 and 1997 was $30,855,000, $27,964,000 and
$19,076,000, respectively. The Company subleases, on a month to month basis,
certain office space in its corporate office to a charitable foundation
formed by its Chairman.
In 1995, ELI entered into a $110 million construction agency agreement and an
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, 1999 and 1998, ELI was leasing assets
under this agreement with an original cost of approximately $108,541,000 and
$87,426,000 at December 31, 1997. 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, a final payment of 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 $88 million) of the lessor's investment. The Company has
guaranteed all obligations of ELI under this operating lease.
ELI has entered into various capital and operating leases for fiber optic
cable to interconnect ELI's local networks with long-haul fiber optic routes.
The terms of the various agreements covering these routes range from 20 to 25
years, with varying optional renewal periods. For certain contracts, rental
payments are based on a percentage of ELI's leased traffic, and are
exclusive, subject to certain minimums. For other contracts, certain minimum
payments are required.
ELI has also entered into certain operating and capital leases in order to
develop ELI's local networks, including an operating lease to develop a local
network in Phoenix and a capital lease in San Francisco. The operating lease
in Phoenix provides for rental payments based on a percentage of the
network's operating income for a period of 15 years. The capital lease in San
F-32
Francisco is a 30-year indefeasible and exclusive right to use agreement for
optical fibers in the San Francisco Bay Area. The Phoenix operating lease
network is currently operational, and the San Francisco capital lease network
is expected to become operational in 2000.
Minimum payments on operating leases are included in the table above. For
payments on capital leases, see Note 7.
The Company is also a party to contracts with several unrelated long distance
carriers. The contracts provide fees based on leased traffic subject to
minimum monthly fees aggregating as follows:
Year Amount
------------- -------------
($ in thousands)
2000 $ 36,840
2001 31,490
2002 6,120
2003 5,960
2004 4,200
thereafter 12,600
-----------
Total $ 97,210
===========
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 purchase 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, 1999 and 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 results
of the Company. The purchaser of the Company's Vermont Electric Division has
agreed at closing to assume the Company's power purchase obligations under
the Hydro-Quebec agreement, and the Company has agreed to indemnify that
purchaser against losses resulting from the "step-up" provision in that
agreement.
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