Exhibit 16(c)
Confidential
Citizens Communications [LOGO]
PRESENTATION TO THE BOARD OF DIRECTORS
May 16, 2002
Confidential Material Presented to the Board of Directors of
Citizens Communications Company
MATERIAL FOR THE BOARD OF DIRECTORS OF CITIZENS COMMUNICATIONS COMPANY
The following pages contain material provided to the Board of Directors of
Citizens Communications Company ("Citizens") by Salomon Smith Barney Inc.
("Salomon Smith Barney") in response to Citizens' request for a valuation
analysis of Electric Lightwave. The information contained in this material was
obtained from Citizens, Electric Lightwave and other sources. Any estimates and
projections for such companies contained herein have been prepared or adopted by
Citizens or Electric Lightwave management or are based upon such estimates and
projections, and involve numerous and significant subjective determinations,
which may or may not be correct. No representation or warranty, expressed or
implied, is made as to the accuracy or completeness of such information and
nothing contained herein is, or shall be relied upon as, a representation,
whether as to the past or the future. This material was not prepared for use by
readers not as familiar with the business and affairs of Citizens as the Board
of Directors of Citizens and, accordingly, none of Citizens or Salomon Smith
Barney nor their respective legal or financial advisors or accountants take any
responsibility for the accompanying material when used by persons other than the
Board of Directors of Citizens. None of Citizens or Salomon Smith Barney
undertakes any obligation to update or otherwise revise the accompanying
materials.
Salomon Smith Barney [LOGO]
Situation Overview
> Citizens Communications Co. ("Citizens") owns an 84.7% economic stake
(96.0% voting) in Electric Lightwave ("ELIX"), a facilities-based
competitive local exchange carrier ("CLEC") operating primarily in the
western portion of the U.S.
> ELIX, along with many other CLECs, has produced disappointing results
o Many CLECs have reorganized through Chapter 11 or liquidated for
cents on the dollar
> Citizens has supported ELIX via debt guarantees and the direct
provision of funds as a lender
> During 2002, approximately $510 million of ELIX debt matures, all of
which is guaranteed by Citizens
o $400 million third party revolving credit facility and $110
million of operating lease agreements
- $110 million matured on April 30 and was repaid through a
draw down on ELIX's credit facility from Citizens
o ELIX has no ability to access the capital markets to refinance
the remaining $400 million obligation
> SSB's valuation analysis concludes that ELIX's equity is worthless:
(Dollars in millions)
- -------------------------------------------------------------------------------------------------------------------------
Enterprise Value Reference Range
----------------------------------
Methodology Low High Implied Equity Value
- ------------------------------------------------------------------------------------------------------------------------
CLEC Trading Multiples $100 $250 $0
Discounted Cash Flow Analysis:
Hypothetical Cost of Private Capital 70 110 0
Hypothetical Public Market Capital Structure 260 330 0
Distressed Precedents 80 250 0
- ------------------------------------------------ -----------------------------------------------------------------------
Salomon Smith Barney [LOGO]
1
Telecom Capital Markets Update
THE TELECOM SECTOR HAS EXPERIENCED A TREMENDOUS DECLINE DURING THE PAST 18
MONTHS
(The table below was represented as a bar graph in the printed material)
- ---------------------------------------------
STOCK MARKET PERFORMANCE SINCE 01/01/01(a)(b)
- ---------------------------------------------
CLEC (96.0%)
Fiber (95.1%)
Wireless (64.0%)
Long Distance (45.8%)
RBOCs (39.2%)
NASDAQ (32.1%)
S&P 500 (17.7%)
RLECs (16.3%)
(The table below was represented as a bar graph in the printed material)
- ----------------------------------------------
SELECTED CLEC YIELDS AND PRICES(C)
- ----------------------------------------------
Yield Price
- -----------------------------------------------------------------
TWTC 10.125% Sr. Nts. 23% $53
TWTC 9.750% Sr. Nts. 25% $53
ALGX 12.875% Sr. Nts. 60% $25
FCOM 11.875% Sr. Nts. 56% $23
ALGX 11.750% Sr. Disc. Nts. 65% $15
XOXO 10.750% Sr. Nts. 97% $11
(The table below was represented as a bar graph in the printed material)
- ----------------------------------------------
INVESTMENT GRADE TRADING SPREADS
- ----------------------------------------------
1/4/2002 5/13/2002
- -----------------------------------------------------------------
WCOM 7.500% Sr. Nts. 193 1,615
Q 7.250% Sr. Nts. 230 582
T 7.300% Sr. Nts. 180 386
FON 8.375% Sr. Nts. 174 396
CZN 9.250% Sr. Nts. 250 310
VZ 7.250% Sr. Nts. 112 192
SBC 6.250% Sr. Nts. 85 132
BLS 6.000% SR. Nts. 88 128
- ------------------
CLEC SECTOR NOTES
- ------------------
> Current market capitalization of the entire CLEC sector is approximately
$1.2 billion, representing a 96% decline from $29.0 billion at year-end
2000
> The emerging telecom sector continues to experience pressure as numerous
companies have conducted restructurings or have filed for bankruptcy
o XO, Focal, NorthPoint, E.spire, Winstar, Teligent, Rhythms, Adelphia,
McLeod, Global Crossing, Williams
> The only new capital being invested in the CLEC sector is from existing
private equity sponsors attempting to salvage their previous investments
- --------------------------------------------------------------------------------
(a) CLEC (RCN, ELIX, CLEC, ALGX, FCOM, TWTC, COVD, DSLN, NAS, CWON, PACW);
Fiber (LVLT, BRW); Wireless (WWCA, NXTL, PCS, AWE, AT, RCCC, USM, TPC,
DCEL, PCSA, APS, NXTP, UPCS, UNWR, LWIN); Long Distance (T, WCOM, FON);
RBOCs (BLS, SBC, VZ, Q); RLECs (CTL, TDS, CZN).
(b) Based on closing prices as of May 15, 2002.
(c) Trading values as of May 13, 2002.
Salomon Smith Barney [LOGO]
2
Electric Lightwave - Stock Price Performance
After reaching a peak of approximately $26.00 in early 2000, ELIX's stock price
has declined steadily through the $1.00 threshold. ELIX's average closing price
for the last six months is $0.44.
- ------------------------------------------
ELECTRIC LIGHTWAVE STOCK PRICE PERFORMANCE
- ------------------------------------------
LINE GRAPH OF WEEKLY DATA: NOVEMBER 26, 1997 THROUGH MAY 15, 2002 APPEARS HERE
- ---------------------------------------------------
ELECTRIC LIGHTWAVE RELATIVE STOCK PRICE PERFORMANCE
- ---------------------------------------------------
LINE GRAPH OF WEEKLY DATA: NOVEMBER 26, 1997 THROUGH MAY 15, 2002 APPEARS HERE
- --------------------------------------------------------------------------------
Salomon Smith Barney [LOGO]
3
Enterprise Valuation Summary
SSB estimates the enterprise value
of ELIX to be no greater than approximately
$330 million.
At these levels, there is no
value in ELIX's equity.
Range of Values
-----------------------------
Enterprise Value ($ in millions)
CLEC Trading Multiples $100 - $250
DCF - Hypothetical Cost of
Private Capital (a) $ 70 - $110
DCF - Hypothetical Public Market
Capital Stucture (a) $260 - $330
Distressed Precedents $ 80 - $250
(a) Before restructuring costs.
Salomon Smith Barney [LOGO]
4
Selected Historical Financial Results
(Dollars in millions, except per share data)
- --------------------------------------------------------------------------------------- --------------------------------------------
2000A 2001A
------------------------------------ --------------------------------------------
Q1 Q2 Q3 Q4 2000A Q1 Q2 Q3 Q4 2001A
- ------------------------------------------------------------------------------------------------------------------------------------
Network Services $16 $17 $22 $23 $77 $26 $26 $26 $23 $101
Local Telephone Services 24 26 25 23 99 22 22 14 15 73
Long Distance Services 5 4 4 4 16 3 3 3 3 12
Data Services 12 13 13 13 52 12 9 10 9 40
---------- --------- ---------- ---------- ---------- -------- -------- -------- --------- -------
---------- --------- ---------- ---------- ---------- -------- -------- -------- --------- -------
Revenues $57 $61 $64 $63 $244 $62.6 $60.4 $53 $50 $227
Revenue Growth -- 7% 5% (1%) (1%) (3%) (12%) (6%)
Network Access Costs (21) (18) (18) (17) (74) (17) (17) (17) (21) (72)
---------- --------- ---------- ---------- ---------- -------- -------- -------- --------- -------
---------- --------- ---------- ---------- ---------- -------- -------- -------- --------- -------
Gross Profit $36 $42 $46 $46 $170 $46 $43 $36 $30 $155
Gross Margin 64% 70% 72% 73% 70% 73% 72% 68% 59% 68%
Operations (12) (13) (13) (14) (53) (12) (14) (14) (11) (51)
SG&A (31) (30) (28) (26) (115) (30) (26) (24) (18) (98)
---------- --------- ---------- ---------- ---------- -------- -------- -------- --------- -------
---------- --------- ---------- ---------- ---------- -------- -------- -------- --------- -------
EBITDA ($7) ($1) $5 $5 $2 $3 $4 ($2) $1 $6
EBITDA Margin NM NM 8% 8% 1% 5% 7% NM 1% 3%
D&A (13) (15) (16) (18) (62) (19) (20) (20) (20) (79)
Interest Expense and Other (15) (19) (21) (22) (76) (15) (24) (25) (26) (91)
Income Tax Expense (0) (0) (0) 1 (0) (0) (0) (0) (1) (1)
---------- --------- ---------- ---------- ---------- -------- -------- -------- --------- -------
---------- --------- ---------- ---------- ---------- -------- -------- -------- --------- -------
Net Loss ($35) ($35) ($33) ($34) ($136) ($31) ($40) ($47) ($46) ($165)
Net Loss per Common Share (0.70) (0.69) (0.64) (0.67) (2.71) (0.74) (0.79) (0.92) (0.91) (3.37)
Capex $25 $45 $21 $18 $109 $20 $15 $9 $11 $55
EBITDA - Capex (32) (46) (16) (13) (107) (17) (11) (11) (10) (49)
- ------------------------------------------------------------------------------------------------------------------------------------
Source: Company filings.
Salomon Smith Barney [LOGO]
5
Valuation Based on CLEC Trading Multiples
Comparable CLEC valuation metrics
derived from the public markets yield
a value for Electric Lightwave that is
significantly less than its outstanding debt.
(Dollars in millions, except per access line data)
- ----------------------------------------------------------------------------------------------------------------
Selected Range(a) Implied ELIX Valuation
ELIX ----------------------- --------------------------
Metric Low High Low High
- ----------------------------------------------------------------------------------------------------------------
Enterprise Value /
2001A Revenue $227 0.70x 1.40x $159 $317
2002E Revenue(b) 179 0.50 0.90 90 161
2003E Revenue(b) 199 0.30 0.70 60 139
Net PP&E(c) 815 0.20 0.60 163 489
Access Lines(d) 148,787 $600 $1,000 89 149
- ----------------------------------------------------------------------------------------------------------------
Selected Enterprise Value Reference Range $100 $250
- ----------------------------------------------------------------------------------------------------------------
Less: FMV Debt (e) (833) (833)
Plus: Cash (c) 4 4
---------------------------
Implied Equity Value Shortfall ($729) ($579)
- ----------------------------------------------------------------------------------------------------------------
Notes: The following companies were used to determine firm value multiples:
TWTC, ALGX, FCOM, CWON, CLEC, XOXO, MCLD.
(a) Comparable firm value multiples are based on market value of debt.
(b) ELIX projections are based on Electric Lightwave management estimates.
(c) Financial data as of March 31, 2002.
(d) Access line data as of December 31, 2001.
(e) Debt is based on fair market value of long-term debt of $425.5 million
(book value $666.9 million) plus current bank credit facility of $400.0
million, plus current capital lease obligations of $7.5 million, all as of
March 31, 2002.
Salomon Smith Barney [LOGO]
6
CLEC Trading Multiples
ELIX's trading
multiples reflect
Citizens' guarantee of its debt.
- -----------------------------------------------------------------------------------------------------------------------------------
TRADING MULTIPLES - DEBT VALUED AT MARKET
($ in millions, except per share and per access line data)
- -----------------------------------------------------------------------------------------------------------------------------------
Enterprise Value as a Multiple of:
Price Equity Enterprise ----------------------------------------------------------
Company Name Ticker 5/15/02 Value Value 2001A Rev. 2002E Rev. 2003E Rev. Acc. Lines Net PP&E
- -----------------------------------------------------------------------------------------------------------------------------------
Tier I CLECs
Time Warner Telecom TWTC $2.55 $293 $649 0.9x 0.9x 0.7x NA 0.4x
Allegiance Telecom ALGX 1.39 161 221 0.4 0.3 0.2 $194 0.2
Median 0.7x 0.6x 0.4x $194 0.3x
Tier II CLECs
Focal Communications FCOM $5.00 $25 $172 0.5x 0.5x 0.4x $244 0.4x
Choice One CWON 1.27 56 213 1.3 0.6 0.4 494 0.6
US LEC CLEC 2.99 79 78 0.4 0.4 0.3 359 0.4
XO Communications XOXO 0.05 22 1,159 0.9 NA NA NA 0.3
McLeodUSA MCLD 0.86 281 1,112 0.6 NA NA NA 0.4
Median 0.6x 0.5x 0.4x $359 0.4x
CLEC Median 0.6x 0.5x 0.4x $301 0.4x
- ----------------------------------------------------------------------------------------------------------------------------------
Electric Lightwave (a) ELIX $0.34 $17 $846 3.7x 4.7x 4.3x $5,688 1.0x
- ----------------------------------------------------------------------------------------------------------------------------------
OPERATING DATA
- -----------------------------------------------------------------------------------------------------------------------
Access
Switches Gross EBITDA 2001A 2002E 2003E Lines Net
Company Name (b) Margin(c) Margin(c) Rev. Rev. Rev. ('000)(b) PP&E(d)
- -----------------------------------------------------------------------------------------------------------------------
Tier I CLECs
Time Warner Telecom 44 56.5% 22.9% $699 $758 $975 NA $1,791
Allegiance Telecom 31 49.4 NM 500 764 1,015 1,139 1,015
Median 38 52.9% 22.9% $600 $761 $995 1,139 $1,403
Tier II CLECs
Focal Communications 28 51.8% NM $332 $347 $438 704 $439
Choice One 26 40.2 NM 165 341 473 430 354
US LEC 26 49.4 NM 179 221 288 217 189
XO Communications NA 57.9 NM 1,259 NA NA NA 3,633
McLeodUSA 50 42.4 6.5% 1,811 NA NA NA 2,536
Median 27 49.4% 6.5% $332 $341 $438 430 $439
CLEC Median 30 49.4% 14.7% $500 $347 $473 567 $1,015
- -----------------------------------------------------------------------------------------------------------------------
Electric Lightwave 8 47.2% NM $227 $179 $199 149 $815
- -----------------------------------------------------------------------------------------------------------------------
Note: Projections for comparable companies are based on Wall Street research.
ELIX projections are based on Electric Lightwave management estimates.
(a) Electric Lightwave's enterprise value is based on fair market value for its
long-term debt of $425.5 million (book value of $666.9 million), plus
current bank credit facility of $400.0 million, plus current capital lease
obligations of $7.5 million, less cash of $4.0 million.
(b) Switch and access line data as of December 31, 2001.
(c) Margins for the three months ended March 31, 2002. The calculation for
Gross Margin is based on revenue less cost of services. In the case of
Electric Lightwave, cost of services includes Network Access and Operations
expenses.
d) Net PP&E as of March 31, 2002.
Salomon Smith Barney [LOGO]
7
Discounted Cash Flow Analysis - Management Estimates
Estimation of WACC for ELIX is hindered
by the extremely high debt yields and
distressed equity conditions found in
the CLEC sector today.
The cases presented herein assume hypothetical
capital structures which are achievable
only via significant financial
restructuring.
The ability of ELIX to access arm's
length capital at pricing consistent
with the assumptions underlying our
analysis, even assuming a significant
financial restructuring, is subject to
considerable uncertainty.
(Dollars in millions)
Terminal EBITDA Multiple Range
-----------------------------------------------------
5.0x 5.5x 6.0x 6.5x 7.0x
----------------------------------------------------
HYPOTHETICAL COST OF PRIVATE CAPITAL
WACC Enterprise Value as of 5/15/02
--------------------------------------------------------------
25.0% $113 $118 $123 $128 $134
27.5% 96 100 104 108 113
30.0% 81 85 88 92 95
32.5% 69 72 75 78 81
35.0% 59 61 64 66 69
---------------------------------------------------------------
WACC Implied Equity Value as of 5/15/02(a)
--------------------------------------------------------------
25.0% ($957) ($952) ($947) ($942) ($937)
27.5% (975) (970) (966) (962) (958)
30.0% (989) (986) (982) (979) (975)
32.5% (1,001) (998) (995) (992) (989)
35.0% (1,012) (1,009) (1,007) (1,004) (1,002)
Terminal EBITDA Multiple Range
-----------------------------------------------------
5.0x 5.5x 6.0x 6.5x 7.0x
-----------------------------------------------------
HYPOTHETICAL PUBLIC MARKET CAPITAL STRUCTURE
WACC Enterprise Value as of 5/15/02
--------------------------------------------------------------
11.0% $308 $324 $340 $357 $373
12.0% 285 300 315 330 345
13.0% 264 278 292 306 319
14.0% 245 258 271 283 296
15.0% 228 239 251 263 274
WACC Implied Equity Value as of 5/15/02(a)
--------------------------------------------------------------
11.0% ($763) ($746) ($730) ($714) ($697)
12.0% (785) (770) (755) (740) (725)
13.0% (806) (792) (778) (765) (751)
14.0% (825) (812) (800) (787) (775)
15.0% (842) (831) (819) (808) (796)
Note: Based on Electric Lightwave management projections.
(a) Equity value equals enterprise value less debt of $1,074.4 million, plus
cash of $4.0 million.
Salomon Smith Barney [LOGO]
8
Distressed Precedent Transaction List
The average Net PP&E recovery rate
associated with distressed telecom
reorganizations and liquidations in
emerging telecom has been approximately
20 cents on the dollar.
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in millions, except value recovery per dollar of Net PP&E)
- -----------------------------------------------------------------------------------------------------------------------------------
Bankruptcy Reported Value Recovery per
Company Filing Date Net PPE Value Recovery Dollar of Net PP&E Commentary
- -----------------------------------------------------------------------------------------------------------------------------------
GST Telecommunications 5/17/00 $780 $690.0 $0.88 Last reorganization before
CLEC sector collapse
Northpoint Communications 1/16/01 455 135.0 0.30
Winstar Communications 4/18/01 2,987 42.5 0.01
Viatel 5/2/01 1,386 80.3 0.06 Proposed restructuring
Teligent Corporation 5/21/01 561 72.5 0.13 Auction in process, based
on latest bid (10/25/01)
Rhythms NetConnections 8/1/01 254 31.0 0.12
Exodus Communications 9/26/01 2,785 850.0 0.31
Global Crossing 1/28/02 12,058 1,656.0 0.14 Auction in process, based
on latest bid (1/28/02)
Prepackaged bankruptcy;
recovery value enhanced
by ILEC and yellow pages
assets
McLeodUSA 1/30/02 2,583 1,575.7 0.61
Network Plus 2/4/02 364 15.8 0.04
- ------------------------------------------------------------------------------------------------------------------------------------
Mean $0.26
Median 0.13
Mean (w/o GST) 0.19
Median (w/o GST) 0.13
- ------------------------------------------------------------------------------------------------------------------------------------
Selected Recovery Value Range
-----------------------------------------------
Selected Range $0.10 $0.30
ELIX Net PP&E(a) 815 815
-----------------------------------------------
Implied Value $82 $245
Less: Net Debt(a) (1,070) (1,070)
-----------------------------------------------
Implied Equity Shortfall ($989) ($826)
-----------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Financial data as of March 31, 2002.
Salomon Smith Barney [LOGO]
9