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CITIZENS COMMUNICATIONS 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, 2000
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, 2000 Commission file number 001-11001
----------------- ---------
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
CITIZENS COMMUNICATIONS COMPANY
(Exact name of registrant as specified in its charter)
Delaware 06-0619596
------------------------------ ------------------------
(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
---------------------------
(Address, zip code of principal executive offices)
Registrant's telephone number, including area code: (203) 614-5600
---------------
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
- -------------------------------------------------------------------------------- -----------------------
(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
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 28, 2001 was $3,950,663,535.
The number of shares outstanding of the registrant's Common Stock as of February
28, 2001 was 266,372,768.
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement for the registrant's 2001 Annual Meeting of Stockholders to
be held on May 17, 2001 is incorporated by reference into Part III of this Form
10-K.
TABLE OF CONTENTS
Page
----
PART I
- ------
Item 1. Business 2
Recent Developments 2
Financial Information about Industry Segments 2
Description of Business 3
ILEC 3
Electric Lightwave, Inc. 6
Public Services 9
Acquisitions and Divestitures 11
General 12
Financial Information about Foreign and Domestic
Operations and Export Sales 12
Item 2. Properties 12
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to Vote of Security Holders 14
Executive Officers 14
PART II
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Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters 16
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 30
Item 8. Financial Statements and Supplementary Data 31
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 31
PART III Incorporation by Reference to the 2001 Proxy Statement 31
- --------
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 31
Signatures 35
Index to Consolidated Financial Statements F-1
PART I
Item 1. Business
--------
This annual report on Form 10-K contains forward-looking statements that are
subject to risks and uncertainties that 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. Citizens Communications Company and its subsidiaries
will be referred to as "we", "us" or "our" throughout this report.
(a) Recent Developments
-------------------
Citizens Communications Company (Citizens) is a telecommunications company
providing wireline communications services primarily to rural areas, small and
medium sized cities and towns throughout the United States as an incumbent local
exchange carrier (ILEC). In addition, we provide competitive local exchange
carrier (CLEC) services to business customers and to other communications
carriers in the western United States through our 85% owned subsidiary, Electric
Lightwave Inc. (ELI). We also provide public services including natural gas
transmission and distribution, electric transmission and distribution and water
distribution and wastewater treatment services to primarily rural and suburban
customers throughout the United States.
In recent years, we have focused our efforts and resources toward transforming
ourselves into a telecommunications provider. In order to execute this strategy,
we announced our intention to acquire telephone access lines and to partially
fund our future expansion into the telecommunications business through the
divestiture of our public utility operations. During 1999, opportunities became
available to acquire a significant number of telephone access lines that met our
investment criteria. These acquisitions are consistent with our strategy to
broaden our geographic profile and to acquire and operate ILEC businesses in
small and medium sized cities and towns. They provide us with the opportunity to
further achieve critical mass as well as economies of scale throughout the
United States and will enable us to improve operating efficiencies. Between May
1999 and July 2000, we announced that we had entered into agreements to purchase
approximately 2,034,700 telephone access lines (as of December 31, 2000) for
approximately $6.5 billion in cash (see Acquisitions and Divestitures below).
During 1999, our Board of Directors also approved a plan of divestiture for our
public services properties. Currently, we have agreements to sell all of our
water and wastewater treatment businesses, one of our electric businesses and
one of our gas businesses for approximately $1.5 billion in cash plus the
assumption of certain liabilities (see Acquisitions and Divestitures below). In
1999, we initially accounted for the planned divestiture of public services as
discontinued operations. As of December 31, 2000, we had not yet completed our
plan of disposal for our gas and electric assets. In the third and fourth
quarters of 2000, we reclassified all of our gas and electric assets to "assets
held for sale", and their related liabilities to "liabilities related to assets
held for sale", we also reclassified the results of these operations from
discontinued operations to their original income statement captions as part of
continuing operations, and restated the 1999 balance sheet to conform to the
current presentation. We are continuing to actively pursue buyers for our gas
and electric businesses that are not currently contracted for.
The Arizona and Vermont electric divisions were under contract to be sold to Cap
Rock Energy Corp. This agreement was terminated on March 7, 2001 as a result of
Cap Rock Energy Corp.'s inability to obtain the required financing in a timely
manner.
(b) Financial Information about Industry Segments
---------------------------------------------
We traditionally measured our segments by service (ILEC, ELI, Gas, Electric,
Water and Wastewater). Currently, the water and wastewater segment is no longer
presented as a segment but is included in discontinued operations. Although the
gas and electric segments have been classified as "assets held for sale" and
"liabilities related to assets held for sale" and it is our intention to divest
of these operations, we are classifying these businesses as continuing
operations and are presenting these operations in our segment footnote as
required. As we divest our gas and electric operations and become solely a
telecommunications provider, the measurement of segments will evolve to be
representative of our then current business activities. Note 16 of the Notes to
Consolidated Financial Statements included herein sets forth financial
information about our industry segments for the last three fiscal years.
2
(c) Description of Business
-----------------------
ILEC
- ----
We operate as an ILEC that provides both regulated and competitive
communications services to residential, business and wholesale customers. Our
ILEC services consist of local network services, network access services, long
distance services, directory advertising, Centrex, custom calling, voice mail
and conference calling and caller ID services. In addition, we offer limited
paging, cellular, Internet access and cable television services.
Strategy
Our strategy is to focus our efforts and resources toward transforming ourselves
into a pure telecommunication provider. As a result, in 1999 and 2000 we
announced our intention to acquire telephone access lines from Verizon
Communications, formerly GTE Corp. (Verizon); Qwest Communications, formerly US
West (Qwest); and 100% of the stock of Frontier Corp. (Frontier), a subsidiary
of Global Crossing Ltd. (Global). If all announced acquisitions are finalized,
we will be among the largest independent wireline telephone operators in the
United States with approximately three million local (network) access lines
located in 27 states as follows:
ILEC Pro-Forma Access lines as of December 31, 2000
Verizon(2) Qwest(2) Frontier(2)
State Citizens(1) Acquisition Acquisition Acquisition Total
-------------------- --------------- ------------- ------------- -------------- ------------
New York 339,100 - - 698,200 1,037,300
Minnesota 142,400 - 187,100 129,600 459,100
Arizona 163,000 8,600 171,500 - 343,100
California 145,600 55,100 - - 200,700
West Virginia 153,200 - - - 153,200
Illinois 112,200 - - 20,100 132,300
Iowa - - 53,200 60,400 113,600
Tennessee 102,500 - - - 102,500
Nebraska 62,200 - 14,900 - 77,100
Wisconsin 27,800 - - 44,800 72,600
Idaho 21,700 - 33,900 - 55,600
Colorado - - 51,400 - 51,400
Pennsylvania 1,500 - - 42,900 44,400
Georgia - - - 29,000 29,000
Nevada 28,300 - - - 28,300
Alabama - - - 27,700 27,700
Michigan - - - 27,200 27,200
Utah 23,700 - - - 23,700
Montana 9,000 - 11,900 - 20,900
North Dakota 17,000 - - - 17,000
Oregon 15,100 - - - 15,100
Washington - - 10,000 - 10,000
New Mexico 6,900 - - - 6,900
Mississippi - - - 6,500 6,500
Wyoming - - 5,900 - 5,900
Indiana - - - 5,700 5,700
Florida - - - 4,600 4,600
--------------- ------------- ------------- -------------- ------------
Total 1,371,200 63,700 539,800 1,096,700 3,071,400
(1) Represents our prior telephone access lines plus telephone access lines
acquired through December 31, 2000 from Verizon (Nebraska, Minnesota and
Illinois/Wisconsin) and Qwest (North Dakota).
(2) Represents telephone access line acquisitions pending as of December 31,
2000.
3
We intend to fully integrate our acquisitions with existing core telephone
access line holdings by the end of the first fiscal quarter of 2002. We are
acquiring telephone access lines on a state by state basis from each of Verizon
and Qwest. As of December 31, 2000, we have closed on several Verizon states,
including Nebraska (62,200 access lines), Minnesota (142,400 access lines),
Illinois/Wisconsin (112,900 access lines), and one Qwest state, North Dakota
(17,000 access lines). We expect the Frontier acquisition to close as a single
transaction during the second half of 2001.
As each acquisition becomes fully integrated into our operations, we will seek
to increase the penetration of value added services such as second lines and
enhanced services (such as call forwarding, conference calling, caller
identification, Internet, voicemail, call waiting, etc.). Currently, the
penetration rates for enhanced services in these markets are below industry
averages. If we are successful in increasing the penetration of these
value-added services, in addition to increasing our revenue, we may be able to
achieve higher operating margins due to the relatively low levels of operating
costs necessary to maintain such services.
We intend to market these value-added services through direct mail and
telemarketing programs. We recently introduced "Citizens Select" and "Citizens
Select Plus" as a branded bundle of telecommunications services directed at our
retail customer base in a majority of the states in which we operate. For one
flat rate, customers can bundle their residential line with Custom Local Area
Signaling Services (CLASS) and custom calling features. Citizens Select allows
customers to choose up to seven features with their residential line while
Citizens Select Plus allows customers to bundle as many features as desired plus
voicemail. We believe that our ability to integrate value added services with
our core Local Exchange Carrier (LEC) service would provide us with the
opportunity to capture an increasing percentage of our customers'
telecommunications expenditures.
In addition, as we upgrade and extend our physical plant and operations over the
next several years, the installation of digital switches and related software
will continue to be an important component of our strategy. In December 1999 we
entered into a three-year agreement to outsource elements of central office
engineering and commissioning of our network. This agreement provides for the
immediate provisioning of current technology and continuing upgrade of software
for our core network platform, deploying the latest switch software throughout
our network, provisioning of switch capacity to support network growth,
integrating acquired properties onto a common network platform and providing
other project management and service support resources. These improvements to
our network will allow us to continue to offer enhanced services and other
high-speed premium-priced data services to our existing and future customer
base.
Regulatory Environment
The Telecommunications Act of 1996 (the 1996 Act) dramatically changed the
landscape of the telecommunications industry. The main thrust of the 1996 Act
was to open local telecommunications marketplaces to competition while enhancing
universal service. We expect the 1996 Act, subsequent state and federal
regulatory rulings and technological changes to lead to reductions in the level
of regulation for the telecommunications industry. Though the majority of our
operations continue to be regulated extensively by various state regulatory
agencies (often called public service commissions) and the Federal
Communications Commission (FCC), we expect reductions in the level of regulation
for some of our operations in the future. However, we are currently unable to
determine the ultimate degree of change in regulation in our operating
territories.
State Regulation
- ----------------
Many of our properties continue to be regulated under a rate of return regime
which sets prices for a specific property based on its level of earnings.
However, in recent years, state legislatures have passed statutes enabling state
regulators to reduce the degree of regulation. As a result, in certain states
and at the federal level we have entered incentive regulation plans under which
prices are capped in return for elimination or relaxation of earnings oversight.
Some states also allow us more flexibility in price changes for optional
services and relaxed reporting requirements. The goal of these incentive
regulation plans is to provide incentives to improve efficiencies and increase
pricing flexibility for non-monopoly services while ensuring that customers
receive reasonable rates for basic services that continued to be deemed monopoly
while still allowing us to continue to recover our costs in rates.
Approximately 85% of our ILEC sector revenue is regulated. The FCC regulates
approximately 34% of our revenue while the various state regulatory agencies
regulate approximately 51%. We expect state lawmakers to continue to review the
statutes governing the level and type of regulation for ILEC services. Over the
next few years, legislative and regulatory actions are expected to provide
opportunities to restructure rates, introduce more flexible incentive regulation
programs and possibly reduce the overall level of regulation. While we still
4
believe that any actions will nonetheless allow us to recover our costs in
rates, we expect the election of incentive regulation plans and the expected
reduction in the overall level of regulation to allow us to introduce new
services more expeditiously than in the past.
Interstate Regulation - CALLs Plan
- ----------------------------------
For interstate services regulated by the FCC, we have elected a form of
incentive regulation known as price caps. Under price caps, interstate access
rates are capped and adjusted annually by the difference between the level of
inflation and a productivity factor. Most recently the productivity factor was
set at 6.5%. Given the relatively low inflation rate in recent years, interstate
access rates have been adjusted downward annually. In May 2000, the FCC adopted
a revised methodology for regulating the interstate access rates of price cap
companies for the next five years. The new program, known as the Coalition for
Affordable Local and Long Distance Services (CALLs) plan, establishes a price
floor for interstate-switched access services and phases out many of the
subsidies in interstate access rates. Though end-user charges and an expanded
universal service program will continue to benefit rural service providers such
as our ILEC, they will also offset much of the reduction in interstate access
rates. Annual adjustments based on the difference between inflation and the 6.5%
productivity factor will continue for several years until the price floor for
interstate switched access services is reached.
The CALLs plan has significant benefits for us in the long term. Though some of
the required rate reductions are front loaded, the price floor provides a degree
of certainty that rate reductions will be curtailed in the future. We were
successful in negotiating a price floor that recognized the unique cost
characteristics of rural telecommunications providers as opposed to being forced
into a one-size-fits-all program designed for larger companies. Under the CALLs
plan, for many of our properties, the price floor is higher than the rate level
that would have been required over time under the previous rate programs. In
addition, shifting revenue from interstate access services to end user customers
and universal service programs provides us more control over future revenue as
access customers seek alternatives to switched access services.
Federal Universal Service
- -------------------------
In 1998, the FCC determined that the federal universal service fund (USF) for
non-rural companies would be based on a forward looking cost methodology, but
chartered a Rural Task Force (RTF) to develop a recommendation for the funding
methodology for rural companies. Since our properties are classified as rural,
our federal USF will be driven by the rural methodology that is still under
development. In October 2000, the RTF recommended the use of embedded cost
instead of forward-looking costs to determine the USF for rural companies. In
addition, the RTF suggested the FCC should adjust the caps on the USF to
recognize inflation and allow rural companies the opportunity to recover some of
the costs associated with incremental investment. In December 2000, the
Federal/State Universal Service Joint Board (Joint Board) recommended that the
FCC adopt the RTF recommendations. Although, the final FCC decision is still
uncertain, if the FCC agrees with the Joint Board, the combination of the
embedded cost methodology and some relief on the caps should provide rural
providers like us with a more stable source of USF money over the next several
years.
Access Charge Reform
- --------------------
Another goal of the 1996 Act was to remove implicit subsidies from the rates
charged by local telecommunications companies. The CALLs plan addressed this
requirement for interstate services. State legislatures and regulatory agencies
are beginning to reduce the implicit subsidies in intrastate rates. The most
common subsidies are in access rates that historically have been priced above
their costs to allow basic local rates to be priced below cost. Legislation has
been considered in several states to require regulators to eliminate these
subsidies and implement state universal service programs to maintain reasonable
basic local rates. In Tennessee, for example, as a result of such legislation,
we will be reducing intrastate access rates by $1 million per year for three
years beginning in 2001. We anticipate additional state legislative and
regulatory pressure to lower intrastate access rates in the near future.
However, regulators are cognizant of the potential impact on basic local rates
and are moving cautiously. Many states are embracing the need for state
universal service funds to ensure protection for customers while ensuring that
local telecommunications companies continue to have the incentive to recover in
rates their investment in their networks and new services.
Unserved Areas
- --------------
State legislatures and regulators are also examining the provision of
telecommunications services to previously unserved areas. Since many unserved
areas are located in rural markets, we may be required to expand our service
territory into some of these areas. Given the start-up costs involved with
territory expansion, we expect legislatures and regulators to continue to move
cautiously and provide some method of recovery for the costs associated with
serving these new areas.
5
Competition
In each of our markets there is the potential for competition from a variety of
sources. However, the geographic and demographic characteristics of the small to
mid-size communities that we serve make the entrance of competitors difficult
because of the significant capital investment required, the limited market size
and the lack of brand recognition. Accordingly, it is our goal to provide a
level of products and services that continue to position us as the preferred
provider of communications in our markets.
As previously mentioned, one of the primary goals of the 1996 Act was to open
local telecommunications markets to competition. The 1996 Act and subsequent FCC
interconnection decisions have established the relationships between ILECs such
as us, and CLECs such as ELI, and the mechanisms for competitive market entry.
Though carriers like us, who serve predominantly rural markets, did receive a
qualified exemption from some of the technical requirements imposed upon all
ILECs for interconnection arrangements, we did not receive an exemption from
interconnection or local exchange competition in general.
Under the 1996 Act and subsequent FCC and state rules, competitors can compete
using one or more of three mechanisms:
o Construction of its own local exchange facilities, in which case the ILEC's
sole obligation is interconnection for purposes of traffic interchange;
o Purchase unbundled network elements(UNEs)at cost from the ILEC and assemble
them into local exchange services and/or supplement the facilities it al-
ready owns;
o Resale of the ILEC's retail services purchased at wholesale rates from
the ILEC.
Some competitors have taken advantage of the ILEC's requirement to pay the CLEC
reciprocal compensation for traffic delivered to the CLEC. The increase of
traffic over the Internet has provided CLECs with an immediate mechanism to
build traffic and reciprocal compensation revenues. It is important to note that
while we are a reciprocal compensation payor, ELI is a reciprocal compensation
receiver. We expect the spread of Digital Subscriber Line (DSL) and other high
speed network services that give customers a dedicated link to the internet and
expected actions by the FCC and/or the United States Congress to limit the
future growth of reciprocal compensation.
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 and the FCC that their markets had been sufficiently opened
to local exchange competition. Beginning in 1999, state regulators and the FCC
began to allow the RBOCs to enter the long distance market in some states. By
the end of 2000, RBOC long distance entry was only allowed in New York and
Texas. However, we expect additional states to follow suit in the near future.
Since we currently offer long distance service in New York and other states, it
is possible that the entry of the RBOCs into this market could adversely impact
our operations.
Though much of the initial competition in local telecommunications has been in
more densely populated urban areas, we have begun to experience competition in
some of our suburban markets. As of December 31, 2000, we had entered into
eighty-eight interconnection agreements. These competitors are mainly serving
internet service providers and a few large business customers. Competition for
residential customers is present in isolated areas.
ELECTRIC LIGHTWAVE, INC.
- ------------------------
ELI is a facilities-based CLEC that provides a broad range of communications
services to businesses. ELI provides the full range of wireline
telecommunications products and services, including switched local and long
distance voice services, data communications services and dedicated
point-to-point services, in the western United States. ELI markets to retail
business customers regionally and nationally to wholesale communications
customers.
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
6
The major cities include a network of approximately 2,065 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 collocated with
switches of the ILEC at 55 locations.
ELI has broadband data points of presence in its major cities as well as other
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 65 routers providing
Internet connectivity in each of its markets, including presence at all major
network access points and include "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 frame relay switches, Asynchronous Transfer Mode (ATM) switches and
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. To the
extent that traffic is carried on ELI's own facilities, ELI is able to maximize
the utilization of its network facilities and minimize network access and
certain interconnection costs. During 2000, ELI completed construction of a
SONET ring in the western United States. This self-healing ring connects
Portland, Sacramento, San Francisco, Los Angeles, Las Vegas, Salt Lake City and
Boise.
In the development of ELI's long-haul facilities, ELI has formed strategic
relationships with utility companies that enable ELI to:
o Utilize existing rights-of-way and fiber optic facilities;
o Utilize their construction expertise and local permitting experience;
o Minimize near term cash requirements in order for ELI to extend its network
infrastructure more quickly and economically.
During 1999, ELI entered into a fiber-swap agreement, that 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 the fiber network and the exchange to
be completed in 2001.
The following table represents certain operating information relating to ELI:
2000 1999 1998
---- ---- ----
Route miles* 5,924 4,052 3,091
Fiber miles* 297,284 214,864 181,368
Buildings connected 851 824 766
Access line equivalents 200,231 161,555 74,924
Switches and routers installed:
Voice 8 8 7
Frame Relay 32 32 23
Internet 65 42 24
ATM 23 23 14
Customers 2,401 2,147 1,644
* Route miles and fiber miles also include those to which ELI has exclusive use
pursuant to license and lease arrangements.
7
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
- ------------------------------
Since the passage of the 1996 Act, ELI has substantially expanded the breadth of
its product offering and its geographic reach. It has expanded the number of its
local fiber networks from two to seven cities in the west and developed its data
and Internet network across the nation (see additional information related to
the 1996 Act in the ILEC 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 the existing
interconnection agreements and the state decisions that have defined them bind
ILECs. The FCC gave the states authority to interpret existing interconnection
agreements. Since this FCC order, Oregon, Washington, California, Utah and
Arizona have ruled that calls terminated to ISPs should be included in the
calculation to determine reciprocal compensation.
State Regulation
- ----------------
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
- ----------------
ELI's operations are designed to significantly compete with the ILECs in each of
its facilities-based markets. The ILECs currently dominate the local exchange
market and have historically been a de facto monopoly provider of local switched
voice services. Primary ILEC competitors include Qwest, PacBell and Verizon.
CLEC Competition
- ----------------
In each of the markets where ELI operates, at least one and in some cases
several, other CLECs offer many of the same local communications services,
generally at prices similar to those offered by ELI. Facility and non-facility
based operational CLEC competitors in ELI's markets include AT&T Local Services,
Time Warner Telecom, WorldCom, Inc. and XO Communications.
Competition From Others
- -----------------------
Potential and actual new market entrants in the local communications services
business include RBOCs entering new geographic markets, Inter Exchange Carriers
(IXCs), 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. 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
- ----------------
Competition for network services is based on price, quality, network
reliability, customer service, service features and responsiveness to the
customer's needs. As a point of differentiation from the ILECs, ELI's fiber
optic networks provide both diverse access routing and redundant electronics,
design features not widely deployed within the ILEC's networks.
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High-Speed Data Service
- -----------------------
ELI's competitors for high-speed data services include major IXCs, other CLECs
and various providers of niche services (such as 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
- -----------------
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. We expect
that competition will 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 we expect additional innovation in this market by a range of
competitors. ELI's current and future competitors include the RBOCs, IXCs, CLECs
and CATVs, and other Internet access providers.
In general, many of the competitors listed above have resources substantially
greater than those available to ELI.
PUBLIC SERVICES
- ---------------
We provide public services including natural gas transmission and distribution,
electric transmission and distribution and water distribution and wastewater
treatment services to primarily rural and suburban customers throughout the
United States.
On August 24, 1999, our Board of Directors approved a plan of divestiture for
our public services properties. In 1999, we initially accounted for the planned
divestiture of public services as discontinued operations. As of December 31,
2000, we do not have agreements to sell our entire gas and electric segments.
Consequently, in the third and fourth quarters of 2000, we reclassified all gas
and electric assets and their related liabilities to "assets held for sale" and
"liabilities related to assets held for sale", respectively. As a result, our
discontinued operations only reflect the assets and related liabilities of the
water and wastewater businesses.
Natural Gas
- -----------
Our natural gas operating divisions provide natural gas transmission and
distribution services (including synthetic natural gas and propane to our
customers in Hawaii) in four states primarily to residential customers, as set
forth below:
Number of
State Customers
------------
Louisiana 278,200
Arizona 115,200
Hawaii 66,300
Colorado 13,800
------------
Total 473,500
============
The provision of services and/or rates charged are subject to the jurisdiction
of federal and state regulatory agencies, except for the non-regulated propane
rates charged to customers in Hawaii. We purchase all needed gas supply (except
for our production of synthetic natural gas in Hawaii). We believe our supply is
adequate to meet current demands and to provide for additional sales to new
customers. The gas industry is subject to seasonal demand (except in Hawaii),
with the peak demand occurring during the heating season of November 1 through
March 31. Our gas sector experiences third party competition from fuel oil,
propane and other gas suppliers for most of our large consumption customers (of
which there are few) and from electric suppliers for all of our customer base.
The competitive position of gas at any given time depends primarily on the
relative prices of gas and these other energy sources.
On April 13, 2000, we announced an agreement to sell our Louisiana Gas
operations to Atmos Energy Corporation for $365,000,000 in cash plus the
assumption of certain liabilities. This transaction is expected to close in the
first half of 2001 following regulatory approvals (see Acquisitions and
Divestitures below).
In the fourth quarter of 2000, we settled a proceeding with the Louisiana Public
Service Commission. As a result, our Louisiana Gas Service subsidiary refunded
approximately $27 million to ratepayers during the month of January 2001. The
refund was effected as a credit on customers' bills. The entire refund
represents amounts that had been collected by us through our purchase adjustment
clause, plus interest, for the period 1992-1997 and was recorded by us in the
fourth quarter of 2000 as a reduction to revenue. Related legal fees of
9
approximately $2.7 million were also recorded in that period.
Electric
- --------
Our operating divisions provide electric transmission and distribution services
in three states primarily to residential customers, as set forth below:
Number of
State Customers
----- ----------
Arizona 72,100
Hawaii 30,700
Vermont 20,700
------------
Total 123,500
============
The provision of services and/or rates charged is subject to the jurisdiction of
federal and state regulatory agencies. We purchase approximately 81% of needed
electric energy. We believe our supply is adequate to meet current demands and
to provide for additional sales to new customers. The majority of our generating
facilities are on Kauai, Hawaii. We have smaller generating facilities in
Arizona and Vermont, which are used mainly for back-up power supply. Generally,
our electric sector does not experience material seasonal fluctuations.
The electric utility industry in the United States is undergoing fundamental
changes. For many years, electric utilities have been vertically integrated
entities responsible for the generation, transmission and distribution of
electric power in a franchise territory. In return for monopoly status, electric
utilities have been subject to comprehensive regulation at the state and federal
level. The industry is now shifting toward electric customers being able to
choose their energy provider much like telephone customers are able to choose
their long distance provider. Generally, this involves splitting apart the
generation and transmission of power from the remainder of the business, and
having generators compete with one another in the sale of power directly to
retail customers. The interconnected regional transmission grids will be
operated independently, continuing as a federally regulated monopoly. Local
transmission and distribution facilities would continue as state-regulated
monopolies. This change in the industry is in various stages of development
around the United States.
During the past year the decrease in the availability of power has caused power
supply costs to increase substantially, forcing companies to pay higher
operating costs to operate their electric businesses. As a result, companies
have attempted to offset these increased costs by either renegotiating prices
with their power suppliers or passing these additional costs on to their
customers through a rate proceeding. In Arizona, we are currently disputing
excessive power costs charged by our power supplier in the amount of
approximately $57 million through December 31, 2000. We are allowed to recover
these charges from ratepayers through the Purchase Power Fuel Adjustment clause.
In an attempt to limit "rate shock" to our customers, we have requested that
this deferred amount, plus interest, be recovered over a three-year period. As a
result, we have deferred these costs on the balance sheet in anticipation of
recovering certain amounts either through renegotiations or through the
regulatory process.
On February 15, 2000, we announced that we had agreed to sell our electric
utility operations. The Arizona and Vermont electric divisions were under
contract to be sold to Cap Rock Energy Corp. Cap Rock Energy Corp. has failed to
raise the required financing and obtain the required regulatory approval
necessary to meet its obligations under the contract for sale. The agreement
with Cap Rock Energy Corp. was terminated on March 7, 2001. The Kauai electric
division is under contract to be sold to Kauai Island Electric Co-Op (see
Acquisitions and Divestitures below).
In Kauai, historically, we received approximately 13% of our power from a third
party provider. As of January 2001, this third party provider will no longer
provide power due to the closure of their sugar operations. In order to avoid
power outages, we have completed negotiations with a new third party provider
for a new purchase power agreement. This agreement is subject to approval by the
Hawaii Public Utility Commission (HPUC). Current forecasts report that Kauai
will require additional electrical generating capacity in 2002. As a result, we
have entered into a 25-year purchase power agreement with Kauai Power Partners
(KPP), an independent power producer, to provide firm power by July 2002. This
agreement was recently approved by the HPUC.
10
ACQUISITIONS AND DIVESTITURES
- -----------------------------
Acquisitions
From May 27, 1999 through July 12, 2000 we entered into several agreements to
acquire approximately 2,034,700 telephone access lines (as of December 31, 2000)
for approximately $6.5 billion in cash. These transactions have been and will be
accounted for using the purchase method of accounting. The results of operations
of the acquired properties have been and will be included in our financial
statements from the date of acquisition of each property. These agreements and
the status of each transaction are described as follows:
On May 27, September 21, and December 16, 1999, we announced definitive
agreements to purchase from Verizon approximately 381,200 telephone
access lines (as of December 31, 2000) in Arizona, California,
Illinois/Wisconsin, Minnesota and Nebraska for approximately
$1,171,000,000 in cash. These acquisitions are subject to various state
and federal regulatory approvals. On June 30, 2000, we closed on the
Nebraska purchase of approximately 62,200 telephone access lines for
approximately $205,000,000 in cash. On August 31, 2000, we closed on the
Minnesota purchase of approximately 142,400 telephone access lines for
approximately $439,000,000 in cash. On November 30, 2000, we closed on
the Illinois/Wisconsin purchase of approximately 112,900 telephone access
lines for approximately $304,000,000 in cash. We expect that the
remainder of the Verizon transactions will close on a state-by-state
basis in the first half of 2001.
On June 16, 1999, we announced a series of definitive agreements to
purchase from Qwest approximately 556,800 telephone access lines (as of
December 31, 2000) in Arizona, Colorado, Idaho/Washington, Iowa,
Minnesota, Montana, Nebraska, North Dakota and Wyoming for approximately
$1,650,000,000 in cash and the assumption of certain liabilities. On
October 31, 2000, we closed on the North Dakota purchase of approximately
17,000 telephone access lines for approximately $38,000,000 in cash. We
expect that the remainder of the Qwest acquisitions, which are subject to
various state and federal regulatory approvals, will occur on a
state-by-state basis by the end of the first quarter of 2002.
On July 12, 2000, we announced a definitive agreement to purchase from
Global 100% of the stock of Frontier Corp., which owns approximately
1,096,700 telephone access lines (as of December 31, 2000) in
Alabama/Florida, Georgia, Illinois, Indiana, Iowa, Michigan, Minnesota,
Mississippi, New York, Pennsylvania and Wisconsin, for approximately
$3,650,000,000 in cash. We expect that this transaction, which is subject
to various state and federal regulatory approvals, will be completed in
the second half of 2001.
We have and/or expect to temporarily fund these telephone access line purchases
with cash and investment balances, proceeds from commercial paper issuances
backed by the credit commitments, and borrowings under lines of credit, as
described in Management's Discussion and Analysis of Financial Condition and
Results of Operations (Liquidity and Capital Resource section) below. Permanent
funding is expected to include, but not be limited to, cash and investment
balances, the proceeds from the divestiture of our public services businesses,
direct drawdowns from certain of the credit facilities and issuances of debt and
equity securities, or other financing arrangements.
Divestitures
On August 24, 1999, our Board of Directors approved a plan of divestiture for
our public services businesses, which include gas, electric and water and
wastewater businesses. The proceeds from the sales of these public services
businesses will be used to partially fund the telephone access line purchases
discussed above.
Currently, we have agreements to sell all our water and wastewater operations,
one of our electric operations and one of our natural gas operations. The
proceeds from these agreements will include approximately $1,470,000,000 in cash
plus the assumption of certain liabilities. These agreements and the status of
each transaction are described as follows:
On October 18, 1999, we announced the agreement to sell our water and
wastewater operations to American Water Works, Inc. for $745,000,000 in
cash and $90,000,000 of assumed debt. This transaction is currently
expected to close in the second half of 2001 following regulatory
approvals.
On February 15, 2000, we announced that we had agreed to sell our electric
utility operations. The Arizona and Vermont electric divisions were under
contract to be sold to Cap Rock Energy Corp. (Cap Rock). Cap Rock has
11
failed to raise the required financing and obtain the required regulatory
approval necessary to meet its obligations under the contract for sale. The
agreement with Cap Rock was terminated on March 7, 2001. It is our
intention to pursue the disposition of the Vermont and Arizona electric
divisions with alternative buyers. In August 2000, the HPUC denied the
initial application requesting approval of the purchase of our Kauai
electric division by the Kauai Island Electric Co-Op for $270,000,000 in
cash including the assumption of certain liabilities. We are considering a
variety of options, including the filing of a request for reconsideration
of the decision, which may include the filing of a new application.
On April 13, 2000, we announced the agreement to sell our Louisiana Gas
operations to Atmos Energy Corporation for $365,000,000 in cash plus the
assumption of certain liabilities. This transaction is expected to close in
the first half of 2001 following regulatory approvals.
GENERAL
- -------
Order backlog is not a significant consideration in our businesses and we have
no contracts or subcontracts, which may be subject to renegotiations of profits
or termination at the election of the Federal government. We hold franchises
from local governmental bodies, which are of varying duration. We also hold
Certificates granted by various state commissions, which are generally of
indefinite duration. We have no special working capital practices, and our
research and development activities are not material. We hold no patents,
trademarks, licenses or concessions that are material. We had approximately
7,191 employees, of whom 6,840 were associated with continuing operations and
351 were associated with discontinued operations, at December 31, 2000. We
consider our relations with our employees to be good.
(d) Financial Information about Foreign and Domestic Operations and Export Sales
----------------------------------------------------------------------------
In 1995, we 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, we 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, we cancelled a note
obligation from HTCC and a seven-year consulting services agreement in exchange
for the issuance by HTCC to us 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
our option into 10 shares of HTCC Common Stock.
At December 31, 2000, we own approximately 19 % of the HTCC shares presently
outstanding. Our investment in HTCC is classified as an available for sale
security and accounted for using the cost method of accounting. Additionally, we
have exercised our right to nominate one member of the Board of Directors of
HTCC.
Item 2. Properties
----------
We lease our Administrative Office located at 3 High Ridge Park, Stamford, CT
06905.
The operations support office for the ILEC is located in Legacy Park at 5600
Headquarters Drive, Plano, TX 75024. This owned facility accommodates
approximately 1,100 employees in approximately 250,000 square feet. In addition,
the ILEC has leased and owned office space in various markets throughout the
United States.
The operations support office for ELI is located at 4400 NE 77th Avenue,
Vancouver, WA 98662. This building is owned by ELI and accommodates
approximately 700 employees in 98,000 square feet. 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 also leases network hub
and network equipment installation sites in various locations throughout the
areas in which ELI provides services.
The ILEC and ELI own property including, but not limited to: telecommunications
outside plant, central office, fiber-optic and microwave radio facilities. (See
description of business for listing of locations). We believe that substantially
all of our existing properties are in good condition and are suitable for the
conduct of our business.
12
Item 3. Legal Proceedings
-----------------
In November 1995, our 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 us 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 our Demand Side Management program. In addition, the DPS
believed that we should have sought and received regulatory approvals prior to
construction of certain facilities in prior years. On June 16, 1997, the VPSB
ordered us to reduce our 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 then authorized by the
VPSB. In addition, the VPSB assessed statutory penalties totaling $60,000 and
placed us on regulatory probation for a period of at least five years. During
this probationary period, we could lose our franchise to operate in Vermont if
we violate 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, we filed an appeal in the Vermont Supreme Court challenging
certain of the penalties imposed by the VPSB. On December 15, 2000, the Vermont
Supreme Court denied our appeal and affirmed all penalties imposed by the VPSB.
In August 1997, a lawsuit was filed in the United States District Court for the
District of Connecticut (Leventhal vs. Tow, et al.) against us and five of our
then existing 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 our Common
Stock between September 5, 1996 and July 11, 1997, inclusive. On February 9,
1998, the plaintiffs filed an amended complaint. The complaint alleged that we
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 us, 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. We and the individual defendants believe 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 was approved by the
District Court on January 31, 2001. Under the terms of the settlement, we have
agreed, without any admission of guilt or responsibility, to pay $2.5 million to
injured class members in full and final settlement of all claims. The entire
amount of the settlement is covered by one or more of our insurance policies.
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
us and three of our then existing officers, one of whom is also a director, on
behalf of all purchasers of our Common Stock between May 6, 1996 and August 7,
1997, inclusive. The complaint alleges that we 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 our 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. We 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 us on July 24, 1998. Our 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 took place April
10, 2000. The parties have entered into a settlement stipulation, which is
subject to the District Court's approval. Under the terms of the proposed
settlement, we have agreed, without any admission of guilt or responsibility, to
pay $2.5 million to injured class members in full and final settlement of all
claims. The entire amount of the proposed settlement is covered by one or more
of our insurance policies.
In November 1998, a class action lawsuit was filed in state District Court for
Jefferson Parish, Louisiana, against our subsidiary, LGS Natural Gas Company,
and us. The lawsuit alleged that we and the other named defendants passed
through in rates charged to Louisiana customers certain costs that plaintiffs
contend were unlawful. The lawsuit sought 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 had opened an investigation into the
allegations raised in the lawsuit. Without admitting any wrongdoing, we agreed
to refund customers a total of $27 million, which represents amounts collected
through our purchase gas adjustment clause, including interest for the period
1992-1997. In addition, we agreed to pay attorneys' fees to counsel representing
the class action plaintiffs in both the lawsuit and the Commission
investigation. The Louisiana Public Service Commission approved an agreement to
settle both the Commission investigation and the class action lawsuit and
concluded its investigation by order dated December 13, 2000. The District Court
13
approved the settlement agreement and entered its order dismissing the class
action on January 4, 2001.
In addition, we are party to other proceedings arising in the normal course of
business. The outcome of individual matters is not predictable. However, we
believe that the ultimate resolution of all such matters, including those
discussed above, after considering insurance coverage, will not have a material
adverse effect on our financial position, results of operations, or our cash
flows.
Item 4. Submission of Matters to Vote of Security Holders
-------------------------------------------------
None in fourth quarter 2000.
Executive Officers
- ------------------
Information as to Executive Officers of the Company as of March 1, 2001 follows:
Name Age Current Position and Office
---- --- ---------------------------
Leonard Tow 72 Chairman of the Board and Chief Executive Officer
Rudy J. Graf 52 Vice Chairman of the Board, President and Chief Operating Officer,
and Director
Scott N. Schneider 43 Vice Chairman of the Board, Executive Vice President, Chairman of
Citizens Capital Ventures and Director
Donald B. Armour 53 Vice President, Finance and Treasurer
Robert Braden 55 Vice President and Chief Operating Officer, Electric Lightwave Sector
John H. Casey, III 44 Vice President and Chief Operating Officer, ILEC Sector
Michael G. Harris 54 Vice President, Engineering and New Technology
Edward O. Kipperman 49 Vice President, Tax
Robert J. Larson 41 Vice President and Chief Accounting Officer
L. Russell Mitten 49 Vice President, General Counsel and Secretary
Richard Reice 41 Vice President, Human Resources, Labor and Employment Law
Livingston E. Ross 52 Vice President, Reporting and Audit
Steven D. Ward 34 Vice President, Information Technology
Michael Zarella 41 Vice President, Corporate Development
There is no family relationship between any of the officers of Citizens. The
term of office of each of the foregoing officers of Citizens 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 Citizens 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 Citizens since September 1999. In February
2001, he was elected Vice Chairman of the Board. In July 2000, he was elected
Director of Citizens. He is currently Vice Chairman of the Board, Director,
President and Chief Operating Officer of Citizens. He is also Director and Chief
Executive Officer of Electric Lightwave, Inc. Prior to joining Citizens, 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.
SCOTT N. SCHNEIDER has been associated with Citizens since October 1999. In
February 2001, he was elected Vice Chairman of the Board. In July 2000, he was
elected Director of Citizens. He is currently Vice Chairman of the Board,
Director and Executive Vice President of Citizens and Chairman of Citizens
Capital Ventures, a wholly owned subsidiary of Citizens. He is currently
Director and Executive Vice President of Electric Lightwave, Inc. Prior to
joining Citizens, 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.
14
DONALD ARMOUR has been associated with Citizens since October 2000. He is
currently Vice President, Finance and Treasurer. He also currently serves as
Vice President and Treasurer of Electric Lightwave, Inc. Prior to joining
Citizens, he was the Treasurer of the cable television division of Time Warner
Inc. from January 1994 to September 2000. He was also Assistant Treasurer from
August 1992 to January 1994. From August 1991 to March 1992, he was a consultant
to the health care industry.
ROBERT BRADEN has been associated with Citizens since November 1999. In January
2001, he was elected President, Chief Operating Officer and Director of Electric
Lightwave, Inc. He was also Vice President Business Development of Citizens from
February 2000 to January 2001. Prior to joining Citizens, 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 Citizens since November 1999. He is
currently Vice President of Citizens and Chief Operating Officer of the ILEC
Sector. Prior to joining Citizens, he was Vice President, Operations from
January 1995 to January 1997 and then Senior Vice President, Administration of
Centennial Cellular until November 1999.
MICHAEL G. HARRIS has been associated with Citizens since December 1999. He is
currently Vice President, Engineering and New Technology. Prior to joining
Citizens, he was Senior Vice President, Engineering of Centennial Cellular from
August 1991 to December 1999. He was also Senior Vice President, Engineering of
Century Communications Corp. from June 1991 to October 1999.
EDWARD O. KIPPERMAN has been associated with Citizens since February 1985. He is
currently Vice President, Tax. He was Assistant Treasurer from June 1989 to
September 1991.
ROBERT J. LARSON has been associated with Citizens since July 2000. He is
currently Vice President and Chief Accounting Officer of Citizens and of
Electric Lightwave, Inc. Prior to joining Citizens, he was Vice President and
Controller of Century Communications Corp. from October 1994 to October 1999. He
was also Vice President, Accounting and Administration of Centennial Cellular
from March 1995 to October 1999.
L. RUSSELL MITTEN has been associated with Citizens since June 1990. He is
currently Vice President, General Counsel and Secretary. He was Vice President,
General Counsel and Assistant Secretary from June 1991 to September 2000. He was
General Counsel until June 1991.
RICHARD REICE was elected Citizens Vice President, Human Resources, Labor and
Employment Law in June 2000. Previously, he had been a shareholder in the law
firm of Greenberg Traurig in its New York City office since June 1999. Prior to
joining Greenberg Traurig, he worked for Citizens as the Associate General
Counsel for Labor and Employment Law.
LIVINGSTON E. ROSS has been associated with Citizens since August 1977. He is
currently Vice President, Reporting and Audit. He was Vice President and Chief
Accounting Officer from December 1999 to July 2000 and Vice President and
Controller from December 1991 to December 1999.
STEVEN D. WARD has been associated with Citizens since January 2000 and was
elected Vice President, Information Technology in February 2000. Prior to
joining Citizens, 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.
MICHAEL ZARELLA has been associated with Citizens since December 1999. He was
elected Vice President, Corporate Development in October 2000. Prior to joining
Citizens, he was Group Vice President of Finance for Century Communications
Corp. from June 1996 to December 1999 and Director, Financial Analysis from
October 1990 to June 1996.
15
PART II
-------
Item 5. Market for the Registrant's Common Equity and Related Stockholder
-----------------------------------------------------------------
Matters
-------
PRICE RANGE OF COMMON STOCK
Our 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.
2000 1999
-------------------------- ----------------------------
High Low High Low
-------------- ----------- ------------ ---------------
First quarter $ 17.06 $ 13.75 $ 8.50 $ 7.25
Second quarter $ 18.00 $ 14.31 $ 11.50 $ 7.69
Third quarter $ 19.00 $ 13.00 $ 12.44 $ 10.88
Fourth quarter $ 15.31 $ 12.50 $ 14.31 $ 10.94
As of February 28, 2001, the approximate number of record security holders of
our Common Stock was 37,753. This information was obtained from our transfer
agent.
DIVIDENDS
The amount and timing of dividends payable on Common Stock are within the sole
discretion of our Board of Directors. Our Board of Directors discontinued the
payment of dividends after the payment of the December 1998 stock dividend.
RECENT SALES OF UNREGISTERED SECURITIES, USE OF PROCEEDS FROM
REGISTERED SECURITIES
None
Item 6. Selected Financial Data
-----------------------
($ in thousands, except per share amounts) Year Ended December 31,
----------------------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ------------ ------------ ----------- ------------
Revenue (1) $ 1,802,358 $ 1,598,236 $ 1,448,588 $ 1,303,901 $ 1,218,222
Income (loss) from continuing operations before
cumulative effect of change in accounting principle $ (40,071) $ 136,599 $ 46,444 $ 2,066 $ 160,483
Net income (loss) $ (28,394) $ 144,486 $ 57,060 $ 10,100 $ 178,660
Basic income (loss) per share of Common Stock
from continuing operations before cumulative
effect of change in accounting principle $ (0.15) $ 0.52 $ 0.18 $ 0.01 $ 0.61
Basic net income (loss) per common share (2) $ (0.11) $ 0.55 $ 0.22 $ 0.04 $ 0.68
Stock dividends declared on Common Stock (3) - - 3.03% 5.30% 6.56%
As of December 31,
----------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------- ------------- -------------- ------------ ------------
Total assets $ 6,955,006 $ 5,771,745 $ 5,292,932 $ 4,872,852 $ 4,523,148
Long-term debt $ 3,062,289 $ 2,107,460 $ 1,819,555 $ 1,627,388 $ 1,454,421
Shareholders' equity $ 1,720,001 $ 1,919,935 $ 1,792,771 $ 1,679,211 $ 1,678,183
(1) Represents revenue from continuing operations.
(2) 1997 and 1996 are adjusted for subsequent stock dividends.
(3) Compounded annual rate of quarterly stock dividends.
16
Item 7. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operation
------------------------
This annual report on Form 10-K contains forward-looking statements that are
subject to risks and uncertainties that could cause actual results to differ
materially from those expressed or implied in the statements. Statements that
are not historical facts are forward-looking statements made pursuant to the
Safe Harbor Provisions of the Litigation Reform Act of 1995. In addition, words
such as "believes", "anticipates", "expects" and similar expressions are
intended to identify "forward-looking statements". Forward-looking statements
(including oral representations) are only predictions or statements of current
plans, which we review continuously. Forward-looking statements may differ from
actual future results due to, but not limited to, any of the following
possibilities:
o Our ability to timely consummate our pending acquisitions and effectively
manage our growth including, but not limited to, the integration of newly
acquired operations into our operations and otherwise monitor our
operations, costs, regulatory compliance and service quality;
o Our ability to divest our public services businesses;
o Our ability to successfully introduce new product offerings on a timely and
cost effective basis including, but not limited to, our ability to offer
bundled service packages on terms attractive to our customers and our
ability to offer second lines and enhanced services to markets currently
under-penetrated;
o Our ability to expand through attractively priced acquisitions;
o Our ability to identify future markets and successfully expand existing
ones;
o Our ability to obtain new financing on favorable terms;
o The effects of greater than anticipated competition requiring new pricing,
marketing strategies or new product offerings and the risk that we will not
respond on a timely or profitable basis;
o ELI's ability to complete a public or private financing that would provide
the funds necessary to finance its cash requirements;
o The effects of rapid technological changes including, but not limited to,
the lack of assurance that our ongoing network improvements will be
sufficient to meet or exceed the capabilities and quality of competing
networks;
o The effects of changes in regulation in the telecommunications industry as
a result of the 1996 Act and other similar federal and state legislation
and regulation;
o The future applicability of Statement of Financial Accounting Standard No.
71, "Accounting for Certain Types of Regulation" to certain of our ILEC
subsidiaries;
o The effects of more general factors including, but not limited to, changes
in economic conditions; changes in the capital markets; changes in industry
conditions; changes in our credit rating; and changes in accounting
policies or practices adopted voluntarily or as required by generally
accepted accounting principles.
You should consider these important factors in evaluating any statement in this
Form 10-K or otherwise made by us or on our behalf. The following information
should be read in conjunction with the consolidated financial statements and
related notes included in this report. We have no obligation to update or revise
these forward-looking statements.
(a) Liquidity and Capital Resources
-------------------------------
For the year ended December 31, 2000, we used cash flow from operations and
proceeds from net financings to fund capital expenditures and acquisitions.
17
We have available lines of credit with financial institutions in the amounts of
$5.7 billion, with associated facility fees of 0.10% per annum and $450 million
with no associated facility fees. These lines of credit expire on October 26,
2001 and provide us with one-year term-out options. These credit facilities are
in addition to credit commitments under which we may borrow up to $200 million,
with associated facility fees of 0.12% per annum, which expire on December 16,
2003. As of December 31, 2000, there was $765 million outstanding under the $5.7
billion credit facility, as well as $109 million in commercial paper backed by
the $5.7 billion credit facility. We intend to raise capital through public or
private debt or equity financings, or other financing arrangements to replace a
portion of this indebtedness.
ELI has $400 million of committed revolving lines of credit with commercial
banks, which expire November 21, 2002, under which it has borrowed $400 million
at December 31, 2000. The ELI credit facility has an associated facility fee of
0.08% per annum. We have guaranteed all of ELI's obligations under these
revolving lines of credit.
We have committed to continue to finance ELI's cash requirements until the
earlier of the completion of a public or private financing which would provide
the funds necessary to support their cash requirements. We extended a revolving
credit facility to ELI for $450 million with an interest rate of 15% and a final
maturity of October 30, 2005. Funds of $260 million for general corporate
purposes are available to be drawn until March 31, 2002. The remaining balance
may be drawn by ELI to pay interest expense due under the facility. In 2000, we
advanced $38 million to ELI.
In June, August and November 2000, we completed the purchase of approximately
62,200, 142,400 and 112,900 telephone access lines (as of December 31, 2000) in
Nebraska, Minnesota, and Illinois/Wisconsin, respectively, from Verizon. These
transactions totaled approximately $205 million, $439 million and $304 million,
respectively, and were funded from direct drawdowns on our credit line,
commercial paper issuances and proceeds from sales of investments.
In October 2000, we completed the purchase of approximately 17,000 telephone
access lines (as of December 31, 2000) in North Dakota from Qwest. This
transaction totaled approximately $38 million and was funded from commercial
paper issuances.
In June 2000, we arranged for the issuance of $19.6 million of 2000 Series
special purpose revenue bonds as money market bonds with an initial interest
rate of 4.6% and a maturity date of December 1, 2020. The proceeds were used to
fund and/or pre-fund expenditures for construction, extension, improvement and
purchase of facilities of the gas division in Hawaii.
In August and October 2000, one of our subsidiaries, Citizens Utilities Rural
Company, was advanced $.3 million and $2.7 million, respectively, under its
Rural Utilities Services Loan Contract. The initial interest rate on the
advances was 5.78% with an ultimate maturity date of November 1, 2016.
At December 31, 2000, we have classified $150 million of debentures as long term
debt due within one year on our balance sheet. Of this amount, $50 million will
mature on September 1, 2001 and $100 million is redeemable at par at the option
of the holders on October 1, 2001.
We have budgeted approximately $750 million for our 2001 capital projects,
including approximately $654 million for ILEC and ELI and approximately $96
million for public services. We anticipate that the funds necessary for our 2001
capital expenditures will be provided from operations and from advances of Rural
Utilities Service loan contracts. If required, we may use funding from
additional sources: commercial paper notes payable, debt, equity and other
financing at appropriate times and borrowings under bank credit facilities.
Capital expenditures for discontinued operations and assets held for sale will
also be funded through requisitions of Industrial Development Revenue Bond
construction fund trust accounts and from parties desiring utility service. Upon
disposition, we will receive reimbursement of certain 1999 and 2000 actual
capital expenditures and certain 2001 budgeted capital expenditures pursuant to
the terms of each respective sales agreement.
18
Acquisitions
From May 27, 1999 through July 12, 2000 we entered into several agreements to
acquire approximately 2,034,700 telephone access lines (as of December 31, 2000)
for approximately $6,471,000,000 in cash. These transactions have been and will
be accounted for using the purchase method of accounting. The results of
operations of the acquired properties have been and will be included in our
financial statements from the dates of acquisition of each property. These
agreements and the status of each transaction are described as follows:
On May 27, September 21, and December 16, 1999, we announced definitive
agreements to purchase from Verizon approximately 381,200 telephone access
lines (as of December 31, 2000) in Arizona, California, Illinois/Wisconsin,
Minnesota and Nebraska for approximately $1,171,000,000 in cash. These
acquisitions are subject to various state and federal regulatory approvals.
On June 30, 2000, we closed on the Nebraska purchase of approximately
62,200 telephone access lines for approximately $205,000,000 in cash. On
August 31, 2000, we closed on the Minnesota purchase of approximately
142,400 telephone access lines for approximately $439,000,000 in cash. On
November 30, 2000, we closed on the Illinois/Wisconsin purchase of
approximately 112,900 telephone access lines for approximately $304,000,000
in cash. We expect that the remainder of the Verizon transactions will
close on a state-by-state basis in the first half of 2001.
On June 16, 1999, we announced a series of definitive agreements to
purchase from Qwest approximately 556,800 telephone access lines (as of
December 31, 2000) in Arizona, Colorado, Idaho/Washington, Iowa, Minnesota,
Montana, Nebraska, North Dakota and Wyoming for approximately
$1,650,000,000 in cash and the assumption of certain liabilities. On
October 31, 2000, we closed on the North Dakota purchase of approximately
17,000 telephone access lines for approximately $38,000,000 in cash. We
expect that the remainder of the Qwest acquisitions, which are subject to
various state and federal regulatory approvals, will occur on a
state-by-state basis by the end of the first quarter of 2002.
On July 12, 2000, we announced a definitive agreement to purchase from
Global 100% of the stock of Frontier Corp., which owns approximately
1,096,700 telephone access lines (as of December 31, 2000) in
Alabama/Florida, Georgia, Illinois, Indiana, Iowa, Michigan, Minnesota,
Mississippi, New York, Pennsylvania and Wisconsin, for approximately
$3,650,000,000 in cash. We expect that this transaction, which is subject
to various state and federal regulatory approvals, will be completed in the
second half of 2001.
We have and/or expect to temporarily fund these telephone access line purchases
with cash and investment balances, proceeds from commercial paper issuances,
backed by the credit commitments, and borrowings under lines of credit, as
described in the Liquidity and Capital Resource section above. Permanent funding
is expected to include, but not be limited to, cash and investment balances, the
proceeds from the divestiture of our public services businesses, direct
drawdowns from certain of the credit facilities and issuances of debt and equity
securities, or other financing arrangements.
Divestitures
On August 24, 1999, our Board of Directors approved a plan of divestiture for
our public services businesses, which include gas, electric and water and
wastewater businesses. The proceeds from the sales of these public services
businesses will be used to partially fund the telephone access line purchases
discussed above.
Currently, we have agreements to sell all our water and wastewater operations,
one of our electric operations and one of our natural gas operations. The
proceeds from these agreements will include approximately $1,470,000,000 in cash
plus the assumption of certain liabilities. These agreements and the status of
each transaction are described as follows:
On October 18, 1999, we announced the agreement to sell our water and
wastewater operations to American Water Works, Inc. for $745,000,000 in
cash and $90,000,000 of assumed debt. These transactions are currently
expected to close in the second half of 2001 following regulatory
approvals.
19
On February 15, 2000, we announced that we had agreed to sell our electric
utility operations. The Arizona and Vermont electric divisions were under
contract to be sold to Cap Rock Energy Corp. (Cap Rock). Cap Rock has
failed to raise the required financing and obtain the required regulatory
approval necessary to meet its obligations under the contract for sale. The
agreement with Cap Rock was terminated on March 7, 2001. It is our
intention to pursue the disposition of the Vermont and Arizona electric
divisions with alternative buyers. In August 2000, the HPUC denied the
initial application requesting approval of the purchase of our Kauai
electric division by the Kauai Island Electric Co-Op for $270,000,000 in
cash including the assumption of certain liabilities. We are considering a
variety of options, including filing a request for reconsideration of the
decision, which may include filing a new application.
On April 13, 2000, we announced the agreement to sell our Louisiana Gas
operations to Atmos Energy Corporation for $365,000,000 in cash plus the
assumption of certain liabilities. This transaction is expected to close in
the first half of 2001 following regulatory approvals.
Discontinued operations in the consolidated statements of income (loss) and
comprehensive income (loss) reflect the results of operations of the water and
wastewater 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. The
long-term debt presented in liabilities of discontinued operations represents
the only liability to be assumed by the buyer pursuant to the water and
wastewater asset sale agreements.
In 1999, we initially accounted for the planned divestiture of all the public
services properties as discontinued operations. As of December 31, 2000, we do
not have agreements to sell our entire gas and electric segments. Consequently,
in the third and fourth quarters of 2000, we reclassified all of our gas and
electric assets and their related liabilities to "assets held for sale" and
"liabilities related to assets held for sale", respectively, we also
reclassified the results of these operations from discontinued operations to
their original income statement captions as part of continuing operations and
restated the 1999 balance sheet to conform to the current presentation.
Additionally, because both our gas and electric operations are expected to be
sold at a profit, we ceased to record depreciation expense on the gas assets
effective October 1, 2000 and on the electric assets effective January 1, 2001.
We are continuing to actively pursue buyers for our remaining gas and electric
businesses.
Share Purchase Program
In December 1999, our Board of Directors authorized the purchase of up to
$100,000,000 worth of shares of our common stock. This share purchase program
was completed in early April 2000 and resulted in the acquisition or contract to
acquire approximately 6,165,000 shares of our common stock. Of those shares,
2,500,000 shares were purchased for approximately $40,959,000 in cash and we
entered into equity forward contracts for the acquisition of the remaining
3,665,000 shares.
In April 2000, our Board of Directors authorized the purchase of up to an
additional $100,000,000 worth of shares of our common stock. This share purchase
program was completed in July 2000 and resulted in the acquisition or contract
to acquire approximately 5,927,000 shares of our common stock. Of these shares,
452,000 shares were purchased for approximately $8,250,000 in cash and we
entered into equity forward contracts for the acquisition of the remaining
5,475,000 shares.
In addition to our share purchase programs described above, in April 2000, our
Board of Directors authorized the purchase of up to $25,000,000 worth of shares
of Class A common stock of ELI, our 85% owned subsidiary, on the open market or
in negotiated transactions. This ELI share purchase program was completed in
August 2000 and resulted in the acquisition of approximately 1,288,000 shares of
ELI common stock for approximately $25,000,000 in cash. In August 2000, our
Board of Directors authorized the purchase of up to an additional 1,000,000
shares of ELI on the open market or in negotiated transactions. The second ELI
share purchase program was completed in September 2000 and resulted in the
acquisition of approximately 1,000,000 shares of ELI common stock for
approximately $13,748,000 in cash.
20
Regulatory Environment
On October 19, 1999, we entered into an agreement with the Staff and Consumer
Advocate Division of the West Virginia Public Service Commission to continue our
incentive regulation plan through 2002. Under this agreement, we agreed to
reduce access rates beginning July 1, 2000 and other service rates beginning
February 28, 2000 by a total of $2.9 million annually. In return, we will be
free of earnings regulation for three years, commencing January 1, 2000, and
have some pricing flexibility for non-basic services.
During the past year the decrease in the availability of power in certain areas
of the country has caused power supply costs to increase substantially, forcing
companies to pay higher operating costs to operate their electric businesses. As
a result, companies have attempted to offset these increased costs by either
renegotiating prices with their power suppliers or passing these additional
costs on to their customers through a rate proceeding. In Arizona, we are
currently disputing excessive power costs charged by our power supplier in the
amount of approximately $57 million through December 31, 2000. We are allowed to
recover these charges from ratepayers through the Purchase Power Fuel Adjustment
clause. In an attempt to limit "rate shock" to our customers, we have requested
that this deferred amount, plus interest, be recovered over a three-year period.
As a result, we have deferred these costs on the balance sheet in anticipation
of recovering certain amounts either through renegotiations or through the
regulatory process.
In the fourth quarter of 2000, we settled a proceeding with the Louisiana Public
Service Commission. As a result, our Louisiana Gas Service subsidiary refunded
approximately $27 million to ratepayers during the month of January 2001. The
refund was effected as a credit on customers' bills. The entire refund
represents amounts that had been collected by us through our purchase adjustment
clause, plus interest, for the period 1992 - 1997 and was recorded by us in the
fourth quarter of 2000 as a reduction to revenue. Related legal fees of
approximately $2.7 million were also recorded in that period. The Louisiana Gas
Service business is to be sold to Atmos Energy Co. and the sale is expected to
close in the first half of 2001 following regulatory approval.
For interstate services regulated by the FCC, we have elected a form of
incentive regulation known as price caps. Under price caps, interstate access
rates are capped and adjusted annually by the difference between the level of
inflation and a productivity factor. Most recently the productivity factor was
set at 6.5%. Given the relatively low inflation rate in recent years, interstate
access rates have been adjusted downward annually. In May 2000, the FCC adopted
a revised methodology for regulating the interstate access rates of price cap
companies for the next five years. The new program, known as the CALLs plan,
establishes a price floor for interstate-switched access services and phases out
many of the subsidies in interstate access rates. Though end-user charges and an
expanded universal service program will continue to benefit rural service
providers such as our ILEC, they will also offset much of the reduction in
interstate access rates. Annual adjustments based on the difference between
inflation and the 6.5% productivity factor will continue for several years until
the price floor for interstate switched access services is reached.
Certain of our ILEC operations and all of our public services operations are
subject to the provisions of Statement of Financial Accounting Standards (SFAS)
No. 71, "Accounting for the Effects of Certain Types of Regulation". For these
entities, the actions of a regulator can provide reasonable assurance of the
existence of an asset or impose a regulatory liability. These regulatory assets
and liabilities are required to be reflected in the balance sheet in
anticipation of future recovery through the ratemaking process.
Our consolidated balance sheet as of December 31, 2000 included regulatory
assets of approximately $62.0 million and regulatory liabilities of
approximately $4.1 million associated with our local exchange telephone
operations. The remainder of the regulatory assets and regulatory liabilities on
the balance sheet are associated with assets and liabilities held for sale and
discontinued operations. In addition, property, plant and equipment for the
properties subject to SFAS 71 have been depreciated using the straight-line
method over plant lives approved by regulators. Such depreciable lives may
exceed the lives that would have been used if we did not operate in a regulated
environment.
21
SFAS No. 101 "Regulated Enterprises Accounting for the Discontinuance of
Application of SFAS No. 71" specifies the accounting required when the regulated
operations of an enterprise are no longer expected to meet the provisions of
SFAS 71 in the future due to changes in regulations, competition and the
operations of regulated entities. SFAS 101 would require the write-off of a
portion of our regulatory assets and liabilities as a net non-cash charge or
credit to income, if it were determined that the conditions requiring the use of
SFAS 71 no longer apply in the future. SFAS 101 further provides that the
carrying amount of property, plant and equipment would be adjusted to reflect
the use of shorter depreciation lives only to the extent that the net book value
of these assets are impaired.
The ongoing applicability of SFAS 71 to our regulated telephone operations is
continually monitored due to the changing regulatory, competitive and
legislative environment and the changes that may occur in our future operations
as we acquire and consolidate our local exchange telephone operations. It is
possible that future environmental changes, or changes in the demand for our
products and services could result in our telephone operations no longer being
subject to the provisions of SFAS 71. If discontinuation of SFAS 71 becomes
appropriate, the accounting may result in a material non-cash effect on our
results of operations and financial position that can not be estimated at this
time.
New Accounting Pronouncements
In September 2000, the Emerging Issues Task Force (EITF) issued EITF Issue
00-19, "Determination of Whether Share Settlement Is within the Control of the
Issuer for Purposes of Applying Issue No. 96-13, Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock." The EITF clarifies when financial instruments that are indexed to or
potentially settled in a company's own stock are to be classified as an asset or
liability and when they are to be classified as equity or temporary equity. The
EITF allows for a transition period for contracts existing at the date of the
consensus and remaining outstanding at June 30, 2001 in order to allow time for
contracts to be modified in order for a company to continue to account for
certain contracts as equity after June 30, 2001.
The equity forward contracts do not meet the requirements for presentation
within the stockholders' equity section at December 31, 2000. As a result, they
have been reflected as a reduction of Stockholders' equity and a component of
temporary equity for the gross settlement amount of the contracts. Current
accounting rules permit a transition period until June 30, 2001 to amend the
contracts to comply with the requirements for permanent equity presentation. If
an agreement with the counterparty to the contracts can be reached by June 30,
2001, the current impact of the classification to temporary equity will be
reversed and the gross settlement amount will again be presented in permanent
equity with no adjustment until final settlement. If an agreement with the
counterparty cannot be reached by June 30, 2001, not only will the current
impact be reversed as noted above, but we will be required to record the change
in fair value of the equity forward from inception to that date as an asset or a
liability with the offset recorded as a cumulative effect of change in
accounting principle with future changes to the fair value recorded in earnings.
If we were required to apply the guidance required at June 30, 2001, in the
accompanying financial statements based on the fair value of the contracts as of
December 31, 2000, it would have reflected a charge as a cumulative effect of a
change in accounting principle and an offsetting liability of approximately $30
million.
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement establishes accounting and reporting standards for derivative
instruments and hedging activities and, as amended, is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. The statement requires
balance sheet recognition of derivatives as assets or liabilities measured at
fair value. Accounting for gains and losses resulting from changes in the values
of derivatives is dependent on the use of the derivative and whether it
qualifies for hedge accounting. The adoption of SFAS 133 could increase the
volatility of reported earnings and other comprehensive income in the future. In
general, the amount of volatility will vary with the level of derivative
activities during any period. As of January 1, 2001, we have adopted SFAS 133
and have not identified any derivative instruments subject to the provisions of
SFAS 133. Therefore, SFAS 133 will not have any impact on our 2001 financial
statements upon adoption.
22
(b) Results of Operations
---------------------
REVENUE
Consolidated revenue increased $204.1 million, or 13%, in 2000 and $149.6
million, or 10%, in 1999. The increase in 2000 was primarily due to the
pass-through to customers of the increased cost of gas, electric energy and fuel
oil purchased as well as ILEC acquisitions and increased ELI revenue. The
increase in 1999 was primarily due to increased ILEC network access services
revenue and ELI revenue.
ILEC REVENUE
($ in thousands) 2000 1999 1998
---------------------- --------------------- ----------
Amount % Change Amount % Change Amount
---------- --------- --------- --------- ----------
Network access services $ 513,431 2% $ 503,634 17% $ 432,018
Local network services 314,343 14% 276,468 4% 266,558
Long distance and data services 83,703 9% 76,495 -21% 96,584
Directory services 32,266 15% 27,939 4% 26,934
Other 62,626 -3% 64,732 43% 45,352
Eliminations(1) (42,626) -7% (46,031) 42% (32,407)
---------- ---------- ---------
$ 963,743 7% $ 903,237 8% $ 835,039
========== ========== =========
(1) Eliminations represent network access revenue received by our local exchange
operations from our long distance operations.
We acquired the Verizon Nebraska access lines on June 30, 2000, the Verizon
Minnesota access lines on August 31, 2000, the Qwest North Dakota access lines
on October 31, 2000 and the Verizon Illinois/Wisconsin access lines on November
30, 2000 (collectively referred to as the Acquisitions). These Acquisitions
contributed $49.5 million of revenue in 2000.
Network access services revenue increased $9.8 million, or 2%, in 2000 primarily
due to the $23.9 million impact of the Acquisitions and $15.4 million related to
growth in minutes of use and special access revenue. These increases were
partially offset by a non-recurring $10.4 million interstate universal service
fund (USF) settlement received in the first quarter of 1999, the effect of CALLS
(see Regulatory Environment) of $14.8 million, settlements with long distance
carriers of $2.3 million in 1999, and the price effect of a July 1999 FCC tariff
adjustment of $1.8 million. Network access services revenue increased $71.6
million, or 17%, in 1999, primarily due to increased minutes of use, increased
special access revenue, a non-recurring $10.4 million interstate USF settlement
and a full year of revenue from the acquisition of Rhinelander
Telecommunications, Inc. (RTI) in November 1998.
Local network services revenue increased $37.9 million, or 14%, in 2000. The
Acquisitions contributed $23.8 million, enhanced services increased $6.3 million
due to increased demand for these services, access line growth of 26,000
contributed $5.0 million and frame relay, data and ISDN increased $4.0 million.
These increases were partially offset by an Extended Area Service revenue
phase-out in New York of $3.1 million. Local network services revenue increased
$9.9 million, or 4%, in 1999 primarily due to business and residential access
line growth, increased custom calling features and private line sales and the
acquisition of RTI.
Long distance and data services revenue increased $7.2 million, or 9%, in 2000
primarily due to increased Internet revenue of $4.0 million and increased remote
call forwarding of $2.7 million. Long distance and data services revenue
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.
Directory services revenue increased $4.3 million, or 15%, in 2000 primarily due
to increased directory advertising and listing sales. The Acquisitions
contributed $1.0 million to the increase in 2000. Directory services revenue
increased $1.0 million, or 4%, in 1999 primarily due to the acquisition of RTI
and increased advertising revenue.
23
Other revenue decreased $2.1 million, or 3%, in 2000 resulting from a decrease
in billing and collections revenue of $6.4 million and an increase in the
reserve for uncollectibles. These decreases were partially offset by increased
revenue from the Acquisitions of $0.8 million, an increase of $2.8 million in
conference call revenue and an increase of $0.3 million in cable revenue. Other
revenue increased $19.4 million, or 43%, in 1999 primarily due to increased
billing and collections revenue, partially offset by the phasing out of certain
surcharges resulting from rate case decisions in California and New York.
ELI REVENUE
($ in thousands) 2000 1999 1998
---------------------- ---------------------- ----------
Amount % Change Amount % Change Amount
---------- --------- ---------- --------- ----------
Network services $ 77,437 45% $ 53,249 46% $ 36,589
Local telephone services 98,643 27% 77,591 103% 38,169
Long distance services 16,318 -39% 26,698 117% 12,309
Data services 51,579 75% 29,470 113% 13,813
---------- --------- ---------
243,977 30% 187,008 85% 100,880
Intersegment revenue(1) (3,185) 13% (2,817) -8% (3,061)
---------- --------- ---------
$ 240,792 31% $ 184,191 88% $ 97,819
========== ========= =========
(1) Intersegment revenue reflects revenue received by ELI from our ILEC
operations.
Network services revenue increased $24.2 million, or 45%, in 2000 primarily due
to continued growth in our network and sales of additional high bandwidth, DS-3
and OC level circuits to new and existing customers. Network services revenue
increased $16.7 million, or 46%, in 1999 primarily due to the expansion of our
network and the sale of additional circuits to new and existing customers.
Local telephone services revenue increased $21.0 million, or 27%, in 2000 and
$39.4 million, or 103%, in 1999. Local telephone services include dial tone,
ISDN PRI, Carrier Access Billings and reciprocal compensation.
ISDN PRI revenue increased $11.5 million, or 52%, in 2000 and $12.7
million, or 135%, in 1999. Dial tone revenue increased $5.6 million, or
41%, in 2000 and $6.9 million, or 101%, in 1999. Increases in revenue for
both ISDN PRI and dial tone is the result of an increase in the average
access line equivalents of 64,206, or 46%, in 2000 and 86,631, or 115%, in
1999.
Carrier Access Billings revenue decreased $0.3 million, or 4% in 2000 and
increased $3.7 million, or 113%, in 1999. The change is due to an increase
in average monthly minutes processed of 15.0 million, or 77%, in 2000 and
11.2 million, or 133%, in 1999. For 2000, the increase in minutes processed
were offset by the effects of lower average rates per minute primarily due
to competitive pressures in the markets in which we operate. For 1999, the
increase in minutes processed was only partially offset by lower average
rates per minute due to competitive pressures in the markets in which we
operate.
Reciprocal compensation revenue increased $4.2 million, or 12%, in 2000 and
$16.1 million, or 87%, in 1999. The increase for 2000 is due to
interconnection agreements being in place with Verizon and PacBell during
all of 2000 that were not in place for all twelve months in 1999, partially
offset by lower rates applicable to new interconnection agreements
effective January 1, 2000. The increase for 1999 is due to new
interconnection agreements being in place with Qwest, Verizon and PacBell
during parts of 1999 that were not in place at all in 1998.
Long distance services revenue decreased $10.4 million, or 39%, in 2000 and
increased $14.4 million, or 117%, in 1999. Long distance services include retail
long distance, wholesale long distance and prepaid services.
Retail long distance revenue increased $2.3 million, or 35%, in 2000 and
$3.6 million, or 117%, in 1999. The increase is due to an increase in
average monthly minutes processed of 3.1 million, or 47%, in 2000 and 3.6
million, or 118%, in 1999, partially offset by lower average rates per
minute.
24
Wholesale long distance revenue increased $0.1 million, or 2%, in 2000 and
$2.9 million, or 86%, in 1999. The increase is due to an increase in
average monthly minutes processed of 0.9 million, or 6%, in 2000 and 10.3
million, or 174%, in 1999, partially offset by lower average rates per
minute.
Prepaid services revenue decreased $12.8 million, or 93%, in 2000 and
increased $7.9 million, or 134%, in 1999. The decrease in 2000 is due to
our decision to exit the prepaid services market in the third quarter of
1999. The increase in 1999 is primarily due to an increase in minutes
processed.
Data services revenue increased $22.1 million, or 75%, in 2000 and $15.6
million, or 113%, in 1999. Data services include Internet, RSVP and other
services.
Revenue from our Internet services product increased $6.1 million, or 53%,
in 2000 and $6.4 million, or 93%, in 1999. Revenue from our RSVP products
increased $2.5 million, or 227%, in 2000 and $1.0 million, or 684%, in
1999.
Data services revenue also increased $13.2 million, or 200%, in 2000 and
$6.6 million, or 100%, in 1999, as the result of an 18-month take-or-pay
contract with a significant customer that expired on February 28, 2001 and
which was not renewed. This take-or-pay contract provided $19.8 million in
2000 and $3.3 million in revenue for 2001.
GAS REVENUE
($ in thousands) 2000 1999 1998
--------------------- -------------------- ----------
Amount % Change Amount % Change Amount
--------------------- -------------------- ----------
Gas revenue $ 374,751 22% $ 306,986 -6% $ 325,423
Gas revenue increased $67.8 million, or 22%, in 2000 primarily due to higher
purchased gas costs passed on to customers, partially offset by a $27 million
settlement of a proceeding with the Louisiana Public Service Commission during
the fourth quarter of 2000. Gas revenue decreased $18.4 million, or 6%, in 1999
primarily due to lower purchased gas costs passed on to customers and decreased
unit sales due to warmer weather conditions. Under tariff provisions, increases
in our costs of gas purchased are largely passed on to customers.
ELECTRIC REVENUUE
($ in thousands) 2000 1999 1998
---------------------- --------------------- ----------
Amount % Change Amount % Change Amount
---------- --------- ---------- -------- ----------
Electric revenue $ 223,072 9% $ 203,822 7% $ 190,307
Electric revenue increased $19.3 million, or 9%, in 2000 primarily due to higher
supplier prices passed on to customers and increased consumption. Electric
revenue increased $13.5 million, or 7%, in 1999 primarily due to increased
consumption and customer growth. Under tariff provisions, increases in our costs
of electric energy and fuel oil purchased are largely passed on to customers.
During the past year the decrease in the availability of power in certain areas
of the country has caused power supply costs to increase substantially, forcing
companies to pay higher operating costs to operate their electric businesses. As
a result, companies have attempted to offset these increased costs by either
renegotiating prices with their power suppliers or passing these additional
costs on to their customers through a rate proceeding. In Arizona, we are
currently disputing excessive power costs charged by our power supplier in the
amount of approximately $57 million through December 31, 2000. We are allowed to
recover these charges from ratepayers through the Purchase Power Fuel Adjustment
clause. In an attempt to limit "rate shock" to our customers, we have requested
that this deferred amount, plus interest, be recovered over a three-year period.
As a result, we have deferred these costs on the balance sheet in anticipation
of recovering certain amounts either through renegotiations or through the
regulatory process.
25
COST OF SERVICES
($ in thousands) 2000 1999 1998
---------------------- --------------------- ----------
Amount % Change Amount % Change Amount
----------- -------- --------- -------- ----------
Gas purchased $ 229,538 50% $ 152,667 -8% $ 166,829
Electric energy and fuel oil purchased 113,965 16% 98,533 12% 87,930
Network access 151,239 -5% 159,454 14% 140,471
Eliminations(1) (45,621) -7% (48,848) 38% (35,468)
----------- --------- ---------
$ 449,121 24% $ 361,806 1% $ 359,762
=========== ========= =========
(1)Eliminations represent expenses incurred by our long distance operations
related to network access services provided by our local exchange operations and
expenses incurred by our ILEC operations related to network services provided by
ELI.
Gas purchased increased $76.9 million, or 50%, in 2000 primarily due to higher
purchased gas costs. Gas purchased decreased $14.2 million, or 8%, in 1999
primarily due to lower purchased gas costs. Under tariff provisions, increases
in our costs of gas purchased are largely passed on to customers.
Electric energy and fuel oil purchased increased $15.4 million, or 16%, in 2000
primarily due to higher supplier prices and increased consumption. Electric
energy and fuel oil purchased increased $10.6 million, or 12%, in 1999 primarily
due to increased consumption and customer growth. Under tariff provisions,
increases in our costs of electric energy and fuel oil purchased are largely
passed on to customers. Gas, electric energy and fuel oil purchased excludes
amounts deferred for future recovery in rates.
Network access expenses decreased $8.2 million, or 5%, in 2000 primarily due to
a reduction in costs related to the 1999 exit of ELI's prepaid services
business, partially offset by increased costs related to increased revenue
growth and network expansion at ELI. Network access expense increased $19.0
million, or 14%, in 1999 primarily due to expenses related to the ELI national
data expansion, partially offset by decreased ILEC sector long distance minutes
of use from out-of-territory long distance customers.
DEPRECIATION AND AMORTIZATION EXPENSE
($ in thousands) 2000 1999 1998
----------------------- --------------------- ----------
Amount % Change Amount % Change Amount
---------- --------- ---------- --------- ----------
Depreciation expense $ 369,930 20% $ 307,428 27% $ 242,791
Amortization expense 17,677 541% 2,757 3% 2,684
---------- ---------- ----------
$ 387,607 25% $ 310,185 26% $ 245,475
========== ========== ==========
Depreciation expense increased $62.5 million, or 20%, in 2000 primarily due to
higher plant in service balances for newly completed communications network
facilities and electronics at ELI, increased property, plant and equipment, the
impact of the Acquisitions of $14.6 million and an increase of $12.6 million in
accelerated depreciation related to the change in useful life of an operating
system in the ILEC sector. Depreciation expense was partially offset by $6.8
million of decreased depreciation expense resulting from the classification of
our gas sector as "assets held for sale." Depreciation on gross gas property,
plant and equipment was discontinued effective October 1, 2000. Depreciation
expense increased $64.7 million, or 27%, 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 ILEC sector.
Amortization expense increased $14.9 million, or 541%, in 2000 primarily due to
amortization of goodwill related to the Acquisitions of $13.6 million.
26
OTHER OPERATING EXPENSES
($ in thousands) 2000 1999 1998
----------------------- ----------------------- ---------
Amount % Change Amount % Change Amount
----------- -------- ---------- ---------- ---------
Operating expenses $ 645,731 -6% $ 683,322 23% $ 556,804
Taxes other than income taxes 100,101 -2% 102,357 15% 89,181
Sales and marketing 60,382 -10% 67,298 42% 47,325
Eliminations(1) (2,314) 130% (1,008) 9% (921)
----------- --------- ---------
$ 803,900 -6% $ 851,969 23% $ 692,389
=========== ========= =========
(1)Eliminations represent the elimination of intercompany administrative fees
charged to ELI.
Operating expenses decreased $37.6 million, or 6%, in 2000 primarily due to the
following items which were incurred in 1999: 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, Y2K
expenses of $17.3 million, restructuring charges related to our corporate office
of $5.2 million, costs associated with an executive retirement agreement of $6.0
million and separation costs of $4.6 million. The 2000 amount also decreased due
to $5.1 million of various expense reductions in the ILEC sector resulting from
outsourcing and productivity enhancements. The decreases were partially offset
by $15.1 million of increased operating expenses in 2000 related to the
Acquisitions, increased operating costs of $11.0 million at ELI to support the
expanded delivery of services and legal fees in the gas sector of $2.7 million
associated with the settlement of a proceeding with the Louisiana Public Service
Commission during the fourth quarter of 2000. Operating expenses increased
$126.5 million, or 23%, in 1999 primarily due to 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, Y2K expenses of $17.3 million, restructuring charges related to our
corporate office of $5.2 million, costs associated with an executive retirement
agreement of $6.0 million and separation costs of $4.6 million, the full year
impact of RTI and ELI expenses relating to the expansion of data services and
product exit costs.
Taxes other than income taxes decreased $2.3 million, or 2%, in 2000 primarily
due to decreased payroll taxes resulting from a reduction in headcount in the
gas and electric sectors, a payroll tax adjustment in the gas sector in 1999 and
a reduction in property taxes. Taxes other than income increased $13.2 million,
or 15%, in 1999 primarily due to increases in payroll and property taxes.
Sales and marketing expenses decreased $6.9 million, or 10%, in 2000 primarily
due to headcount reductions resulting from exiting ELI's prepaid services
business in 1999. Sales and marketing expenses increased $20.0 million, or 42%,
in 1999 primarily due to increased personnel and product advertising to support
the delivery of services in existing and new markets including the expansion of
ELI data services and products.
ACQUISITION ASSIMILATION EXPENSE
($ in thousands) 2000 1999 1998
--------------------- --------------------- --------
Amount % Change Amount % Change Amount
--------- --------- --------- --------- --------
Acquisition assimilation expense $ 39,929 920% $ 3,916 N/A $ -
Acquisition assimilation expense of $39.9 million and $3.9 million, in 2000 and
1999, respectively, is related to the completed and pending acquisitions of over
2 million telephone access lines. As we complete the acquisitions currently
under contracts, we will continue to incur additional assimilation costs into
2001.
27
INCOME FROM OPERATIONS
($ in thousands) 2000 1999 1998
---------------------- --------------------- ---------
Amount % Change Amount % Change Amount
---------- --------- ---------- -------- ---------
Income from operations $ 121,801 73% $ 70,360 -53% $ 150,962
Income from operations increased $51.4 million, or 73%, in 2000 primarily due to
the Acquisitions, decreased ELI operating losses and decreased operating
expenses, partially offset by increased acquisition assimilation expense, the
settlement of a proceeding with the Louisiana Public Service Commission and
increased depreciation expense. Income from operations for 1999 included the
$10.4 million USF settlement recorded. Income from operations decreased $80.6
million, or 53%, in 1999 primarily due to increased ELI losses and increased
operating expenses.
INVESTMENT AND OTHER LOSS, NET/MINORITY INTEREST/INTEREST EXPENSE/INCOME TAXES
($ in thousands) 2000 1999 1998
---------------------- ---------------------- ---------
Amount % Change Amount % Change Amount
----------- --------- ---------- --------- ---------
Investment income, net $ 4,736 -98% $ 243,885 654% $ 32,352
Other loss, net $ (1,386) -1475% $ (88) 100% $ (26,236)
Minority interest $ 12,222 -47% $ 23,227 66% $ 14,032
Interest expense $187,366 57% $ 119,675 18% $ 101,796
Income taxes (benefit) $(16,132) -122% $ 74,900 350% $ 16,660
Investment income decreased $239.1 million, or 98%, in 2000 primarily due to the
$69.5 million gain on the sale of our investment in Centennial Cellular Corp. in
January 1999, the $67.6 million gain on the sale of our investment in Century
Communication Corp. in October 1999 and the $83.9 million gain on the sale of
our investment in the cable joint venture in October 1999. The remaining
decrease is primarily due to realized losses of $18.3 million on sales of
available for sale securities to fund acquisitions. Investment income increased
$211.5 million, or 654%, in 1999 primarily due to the $69.5 million gain on the
sale of our investment in Centennial Cellular Corp. in January 1999, the $67.6
million gain on the sale of our investment in Century Communication Corp. in
October 1999 and the $83.9 million gain on the sale of our investment in the
cable joint venture in October 1999.
Other loss, net decreased $1.3 million, or 1,475%, in 2000 primarily due to a
decrease in the equity component of the allowance for funds used during
construction (AFUDC). Other loss, net increased $26.1 million, or 100%, in 1999
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 represents the minority's share of ELI's net loss (minority
interest in subsidiary, as presented on the balance sheet at December 31, 1999,
represents the minority's share of ELI's equity capital). Since ELI's public
offering, we recorded minority interest on our income statement and reduced
minority interest on our balance sheet by the amount of the minority interests'
share of ELI's losses. As of June 30, 2000, the minority interest on the balance
sheet had been reduced to zero, therefore, from that point going forward, we
discontinued recording minority interest income on our income statement as there
is no obligation for the minority interests to provide additional funding for
ELI. Therefore, we are recording ELI's entire loss in our consolidated results.
Interest expense increased $67.7 million, or 57%, in 2000 primarily due to a
$24.8 million increase in ELI's interest expense related to increased borrowings
and higher interest rates, $17.8 million increase due to an increase in our
commercial paper outstanding used to fund acquisitions, and $14.9 million for
amortization of costs associated with our committed bank credit facilities. A
reduction in capitalized interest of $4.0 million due to lower average capital
work in process balances at ELI also contributed to the increase. During the
year ended December 31, 2000, we had average long-term debt outstanding of $2.6
billion compared to $2.0 billion during the year ended December 31, 1999.
Interest expense increased $17.9 million, or 18%, in 1999 primarily due to
increased ELI net borrowings, partially offset by decreased short-term debt
balances. During the year ended December 31, 1999, we had average long-term debt
outstanding of $2.0 billion compared to $1.7 billion during the year ended
December 31, 1998.
28
Income taxes (benefit) decreased $91.0 million, or 122%, in 2000 primarily due
to changes in taxable income and taxes on the gains on the sales of our
investments in 1999. The estimated annual effective tax benefit rate for 2000 is
32.3% as compared with an effective tax rate of 34.4% for 1999. Income taxes
increased $58.2 million, or 350%, in 1999 primarily due to increased taxable
income and an increase in the effective tax rate. The effective tax rate for
1999 reflects the impact of increased pre-tax income resulting from the sales of
investments included in Investment income in 1999.
DISCONTINUED OPERATIONS
($ in thousands) 2000 1999 1998
---------------------- --------------------- --------
Amount % Change Amount % Change Amount
--------- --------- --------- -------- --------
Revenue $ 105,202 3% $ 102,408 9% $ 93,784
Operating income $ 27,415 38% $ 19,887 -27% $ 27,207
Net income $ 11,677 48% $ 7,887 -39% $ 12,950
Discontinued operations represents the operations of our water/wastewater
businesses.
Revenue from discontinued operations increased $2.8 million, or 3%, in 2000 and
$8.6 million, or 9%, in 1999 primarily due to increased consumption and customer
growth.
Operating income from discontinued operations increased $7.5 million, or 38%, in
2000 primarily due to increased revenue, decreased Y2K expenses, decreased
corporate overhead charges and lower payroll costs due to a reduction in the
staffing levels of support functions, partially offset by increased depreciation
expense due to increased property, plant and equipment. Operating income from
discontinued operations decreased $7.3 million, or 27%, in 1999 primarily due to
restructuring charges, separation costs, costs associated with an executive
retirement agreement and increased Y2K costs.
Net income from discontinued operations increased $3.8 million, or 48%, in 2000
and decreased $5.1 million, or 39%, in 1999, primarily due to the respective
changes in operating income.
NET INCOME (LOSS) / NET INCOME (LOSS) PER COMMON SHARE /
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX AND RECLASSIFICATION ADJUSTMENTS
($ in thousands) 2000 1999 1998
----------------------- -------------------- ---------
Amount % Change Amount % Change Amount
---------- --------- --------- -------- ---------
Net income (loss) $ (28,394) -120% $ 144,486 153% $ 57,060
Net income (loss) per common share $ (0.11) -120% $ 0.55 150% $ 0.22
Other comprehensive income (loss), net of
tax and reclassification adjustments $ (14,505) N/A $ (41,769) N/A $ 52,872
Net loss and net loss per share for 2000 were impacted by the following after
tax items: assimilation expenses of $24.6 million, or 9 cents per share, the
settlement of a proceeding with the Louisiana Public Service Commission of $18.4
million, or 7 cents per share, accelerated depreciation to change the useful
life of an operating system in the ILEC sector of $7.8 million, or 3 cents per
share, and the impact of the acquisitions of $6.9 million, or 3 cents per share.
Net income and net income per share for 1999 were impacted by the following
after tax items: gains on the sales of investments of $136.4 million, or 52
cents per share, asset impairment charges of $22.3 million, or 9 cents per
share, an executive retirement agreement of $4.1 million, or 2 cents per share,
restructuring charges of $3.6 million, or 1 cents per share, separation costs of
$3.1 million, or 1 cents per share, accelerated depreciation of $3 million, or 1
cents per share, and pre-acquisition integration costs of $2.4 million, or 1
cents 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 cents per share and after
tax Y2K costs of $12.2 million, or 5 cents per share.
Net income and net income per share for 1998 were impacted by the following
after tax items: the non-cash write down of our investment in HTCC of $19.7
million, or 7 cents per share, the cumulative effect of a change in accounting
principle at ELI of $2.3 million, or 1 cents per share, and separation costs of
$1.3 million, or 1 cents 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
cents per share, and after tax Y2K costs of $5.3 million, or 2 cents per share.
29
Other comprehensive loss, net of tax and reclassification adjustments during
2000 is primarily the result of higher unrealized losses on our investment
portfolio. Other comprehensive loss, net of tax and reclassification adjustments
during 1999 is primarily the result of the realization of the gain on the sale
of our investment in Centennial Cellular Corp. in January 1999, partially offset
by higher unrealized gains on our investment portfolio during the first quarter
1999.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
----------------------------------------------------------
We are exposed to market risk in the normal course of our business operations
due to our ongoing investing and funding activities. Market risk refers to the
risk of loss that may result from the potential change in fair value of a
financial instrument as a result of fluctuations in interest rates and equity
and commodity prices. We manage our exposure to these risks by entering into
long term debt obligations with appropriate price and term characteristics and
by utilizing derivative financial instruments when they make business sense as
follows:
Interest Rate Exposure
- ----------------------
Our objectives in managing our interest rate risk is to limit the impact of
interest rate changes on earnings and cash flows and to lower our overall
borrowing costs. To achieve these objectives, we maintain fixed rate debt on a
majority of our borrowings and refinance debt when advantageous by entering into
long term debt obligations, including but not limited to, debenture and
industrial development revenue bonds, which usually possess better than prime
interest rates. We have $5.7 billion in committed credit facilities for the
purpose of funding our pending acquisitions and supporting general corporate
activities. As of December 31, 2000 there was $765 million outstanding under
these facilities and $109 million in commercial paper backed by these
facilities. Once funds are drawn down on these facilities it is our intention to
permanently fund these amounts through cash and investment balances, proceeds
from the divestiture of our public services businesses and other debt and equity
instruments. Based upon our overall interest rate exposure at December 31, 2000
a near term change in interest rates would not materially affect our
consolidated financial position, results of operations or cash flows.
Equity Price Exposure
- ---------------------
In December 1999, our Board of Directors authorized the purchase of up to $100
million worth of shares of our common stock. In April 2000, our Board of
Directors authorized the purchase of up to an additional $100 million worth of
shares of our common stock. We purchased approximately $49.2 million worth of
our shares on the open market for cash and approximately $150 million worth of
our shares using equity forward contracts. These types of contracts are exposed
to equity price risk as these contracts are indexed to our common stock, which
is traded on stock exchanges. Based upon our overall equity price exposure at
December 31, 2000 a material near term change in the price of our common stock
could materially affect our consolidated financial position, results of
operations or cash flows.
Commodity Price Exposure
- ------------------------
During 2000, we purchased monthly gas future contracts to manage well defined
commodity price fluctuations, caused by weather and other unpredictable factors,
associated with our commitments to deliver natural gas to customers at fixed
prices. This commodity activity relates to our gas businesses and is not
material to our consolidated financial position, results of operations or cash
flows. As of December 31, 2000 we did not have any outstanding gas future
contracts. In addition, we purchase fixed and variable priced gas supply
contracts that are considered derivative instruments as defined by SFAS 133,
however such contracts are excluded from the provisions of SFAS 133 as they are
purchases made in the normal course of business and not for speculative
purposes.
During the past year the decrease in the availability of power in certain areas
of the country has caused power supply costs to increase substantially, forcing
companies to pay higher operating costs to operate their electric businesses. As
a result, companies have attempted to offset these increased costs by either
renegotiating prices with their power suppliers or passing these additional
costs on to their customers through a rate proceeding. In Arizona, we are
currently disputing excessive power costs charged by our power supplier in the
amount of approximately $57 million through December 31, 2000. We are allowed to
recover from ratepayers these charges through the Purchase Power Fuel Adjustment
clause. In an attempt to limit "rate shock" to our customers, we have requested
that this deferred amount, plus interest, be recovered over a three-year period.
As a result, we have deferred these costs on the balance sheet in anticipation
of recovering certain amounts either through renegotiations or through the
regulatory process.
30
We do not hold or issue derivative or other financial instruments for trading
purposes.
Finally, the carrying amount of cash, accounts receivable, current maturities of
long-term debt, accounts payable and other accrued liabilities approximate fair
value because of the short maturity of these instruments.
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
--------
We intend to file with the Commission a definitive proxy statement for the 2001
Annual Meeting of Stockholders pursuant to Regulation 14A not later than 120
days after December 31, 2000. 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 Communications Company, as restated May 19, 2000,
(incorporated by reference to Exhibit 3.200.1 to the Registrant's Quarterly Report on Form 10-Q for the six
months ended June 30, 2000, File No. 001-11001).
3.200.2 By-laws of Citizens Communications Company, with all amendments to July 18, 2000, (incorporated by reference to
Exhibit 3.200.2 to the Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30, 2000,
File No. 001-11001).
4.100.1 Indenture of Securities, dated as of August 15, 1991, to Chemical Bank, as Trustee, (incorporated by reference
to Exhibit 4.100.1 to the Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30,
1991, File No. 001-11001).
4.100.2 First Supplemental Indenture, dated August 15, 1991, (incorporated by reference to Exhibit 4.100.2 to the
Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30, 1991, File No. 001-11001).
4.100.3 Letter of Representations, dated August 20, 1991, from Citizens Utilities Company and Chemical Bank, as
Trustee, to Depository Trust Company (DTC) for deposit of securities with DTC, (incorporated by reference to
Exhibit 4.100.3 to the Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30, 1991,
File No. 001-11001).
4.100.4 Second Supplemental Indenture, dated January 15, 1992, to Chemical Bank, as Trustee, (incorporated by reference
to Exhibit 4.100.4 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991, File
No. 001-11001).
4.100.5 Letter of Representations, dated January 29, 1992, from Citizens Utilities Company and Chemical Bank, as
Trustee, to DTC, for deposit of securities with DTC, (incorporated by reference to Exhibit 4.100.5 to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1991, File No. 001-11001).
4.100.6 Third Supplemental Indenture, dated April 15, 1994, to Chemical Bank, as Trustee, (incorporated by reference to
Exhibit 4.100.6 to the Registrant's Form 8-K Current Report filed July 5, 1994, File No. 001-11001).
4.100.7 Fourth Supplemental Indenture, dated October 1, 1994, to Chemical Bank, as Trustee, (incorporated by reference
to Exhibit 4.100.7 to Registrant's Form 8-K Current Report filed January 3, 1995, File No. 001-11001).
4.100.8 Fifth Supplemental Indenture, dated as of June 15, 1995, to Chemical Bank, as Trustee, (incorporated by
reference to Exhibit 4.100.8 to Registrant's Form 8-K Current Report filed March 29, 1996, File No. 001-11001).
4.100.9 Sixth Supplemental Indenture, dated as of October 15, 1995, to Chemical Bank, as Trustee, (incorporated by
reference to Exhibit 4.100.9 to Registrant's Form 8-K Current Report filed March 29, 1996, File No. 001-11001).
4.100.11 Seventh Supplemental Indenture, dated as of June 1, 1996, (incorporated by reference to Exhibit 4.100.11 to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 001-11001).
4.100.12 Eighth Supplemental Indenture, dated as of December 1, 1996, (incorporated by reference to Exhibit 4.100.12 to
the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 001-11001).
4.200.1 Indenture dated as of January 15, 1996, between Citizens Utilities Company and Chemical Bank, as indenture
trustee (incorporated by reference to Exhibit 4.200.1 to the Registrant's Form 8-K Current Report filed May 28,
1996, File No. 001-11001).
4.200.2 First Supplemental Indenture dated as of January 15, 1996, between Citizens Utilities Company and Chemical
Bank, as indenture trustee, (incorporated by reference to Exhibit 4.200.2 to the Registrant's Form 8-K Current
Report filed May 28, 1996, File No. 001-11001).
4.200.3 5% Convertible Subordinated Debenture due 2036, (contained as Exhibit A to Exhibit 4.200.2), (incorporated by
reference to Exhibit 4.200.2 to the Registrant's Form 8-K Current Report filed May 28, 1996, File No.
001-11001).
4.200.4 Amended and Restated Declaration of Trust dated as of January 15, 1996, of Citizens Utilities Trust,
(incorporated by reference to Exhibit 4.200.4 to the Registrant's Form 8-K Current Report filed May 28, 1996,
File No. 001-11001).
4.200.5 Convertible Preferred Security Certificate, (contained as Exhibit A-1 to Exhibit 4.200.4), (incorporated by
reference to Exhibit 4.200.4 to the Registrant's Form 8-K Current Report filed May 28, 1996, File No.
001-11001).
4.200.6 Amended and Restated Limited Partnership Agreement dated as of January 15, 1996 of Citizens Utilities Capital
L.P., (incorporated by reference to Exhibit 4.200.6 to the Registrant's Form 8-K Current Report filed May 28,
1996, File No. 001-11001).
4.200.7 Partnership Preferred Security Certificate (contained as Annex A to Exhibit 4.200.6), (incorporated by
reference to Exhibit 4.200.6 to the Registrant's Form 8-K Current Report filed May 28, 1996, File No.
001-11001).
4.200.8 Convertible Preferred Securities Guarantee Agreement dated as of January 15, 1996 between Citizens Utilities
Company and Chemical Bank, as guarantee trustee, (incorporated by reference to Exhibit 4.200.8 to the
Registrant's Form 8-K Current Report filed May 28, 1996, File No. 001-11001).
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).
4.300.1 Basic Equity Acquisition Contract between Citibank, N.A. and Citizens Utilities Company.
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).
10.16.2 Employment Agreement between Citizens Communications Company and Leonard Tow, effective October 1, 2000.
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, (incorporated by reference to Exhibit 10.19 to
the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999, File No. 001-11001).
10.20 Citizens Incentive Plan restated as of March 21, 2000, (incorporated by reference to Exhibit 10.19 to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1999, File No. 001-11001).
10.21 1996 Equity Incentive Plan and amendment dated May 5, 1997 to 1996 Equity Incentive Plan, (incorporated by
reference to Exhibit A to the Registrant's Proxy Statement dated March 29, 1996 and Exhibit B to Proxy
Statement dated March 28, 1997, respectively, File No. 001-11001).
10.22 Competitive Advance and Revolving Credit Facility Agreement between Citizens Utilities Company and Chase
Manhattan Bank dated October 29, 1999, (incorporated by reference to Exhibit 10.22 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1999, File No. 001-11001).
10.23 Credit Facility Agreement between Citizens Communications Company and Chase Manhattan Bank dated October 27,
2000.
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, (incorporated by reference to Exhibit 10.25 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1999, File No. 001-11001).
10.26 Asset Purchase Agreements between Citizens Utilities Company and US West Communications, Inc. dated June 16,
1999, (incorporated by reference to Exhibit 10.26 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1999, File No. 001-11001).
10.27 Asset Purchase Agreements between Citizens Utilities Company and American Water Works dated October 15, 1999,
(incorporated by reference to Exhibit 10.27 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1999, File No. 001-11001).
10.28 Asset Purchase Agreement between Citizens Utilities Company and GTE Incorporated dated December 16, 1999,
(incorporated by reference to Exhibit 10.28 to the Registrant's Quarterly Report on Form 10-Q for the three
months ended March 31, 2000, File No. 001-11001).
10.29 Asset Purchase Agreement between Citizens Utilities Company and Cap Rock Energy Corp. dated February 11, 2000,
(incorporated by reference to Exhibit 10.29 to the Registrant's Quarterly Report on Form 10-Q for the three
months ended March 31, 2000, File No. 001-11001).
10.30 Asset Purchase Agreement between Citizens Utilities Company and Kauai Island Utility CO-OP dated February 11,
2000, (incorporated by reference to Exhibit 10.30 to the Registrant's Quarterly Report on Form 10-Q for the
three months ended March 31, 2000, File No. 001-11001).
10.31 Asset Purchase Agreement between Citizens Utilities Company and Atmos Energy Corporation dated April 13, 2000,
(incorporated by reference to Exhibit 10.31 to the Registrant's Quarterly Report on Form 10-Q for the six
months ended June 30, 2000, File No. 001-11001).
10.32 Stock Purchase Agreement among Citizens Communications Company, Global Crossing Ltd. and Global Crossing North
America, Inc. dated July 11, 2000, (incorporated by reference to Exhibit 10.32 to the Registrant's Quarterly
Report on Form 10-Q for the nine months ended September 30, 2000, File No. 001-11001).
10.33 2000 Equity Incentive Plan dated May 18, 2000.
10.34 Basic Equity Acquisition Contract dated February 24, 2000.
10.35 Intercompany Agreement between Citizens Communications Company and Electric Lightwave, Inc. dated September 11,
2000 (incorporated by reference to Exhibit 10.28 of ELI's Annual Report on Form 10-K for the year ended
December 31, 2000, File No. 0-23393).
10.36 Loan Agreement between Citizens Communications Company and Electric Lightwave, Inc. dated October 30, 2000
(incorporated by reference to Exhibit 10.29 of ELI's Annual Report on Form 10-K for the year ended December 31,
2000, File No. 0-23393).
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
Exhibits 10.6, 10.6.2, 10.16.1, 10.16.2, 10.17, 10.18, 10.19, 10.20, 10.21 and
10.33 are management contracts or compensatory plans or arrangements.
We agree 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. We agree to furnish to the Commission upon request copies of schedules
and exhibits to items 10.25, 10.26, 10.27, 10.28, 10.29, 10.30, 10.31, and
10.32.
(b) Reports on Form 8-K: We filed on Form 8-K dated August 31, 2000, under Item
7 "Financial Statements, Exhibits," financial statements of businesses
acquired and pro forma financial information.
We filed on Form 8-K dated November 13, 2000, under Item 7 "Exhibits," a
press release announcing financial results for third quarter ended
September 30, 2000 and operating data.
We filed on Form 8-K dated December 15, 2000, under Item 5 "Other Events"
and Item 7 "Exhibits," a press release announcing the settlement of a rate
proceeding with the Louisiana Public Service Commission.
34
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CITIZENS COMMUNICATIONS COMPANY
-------------------------------
(Registrant)
By: /s/ Leonard Tow
----------------
Leonard Tow
Chairman of the Board; Chief Executive Officer;
Chairman of Executive Committee and Director
March 8, 2001
35
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 8th day of March 2001.
Signature Title
--------- -----
/s/ Robert J. Larson Vice President and Chief Accounting Officer
------------------------------
(Robert J. Larson)
/s/ Norman I. Botwinik Director
------------------------------
(Norman I. Botwinik)
/s/ Rudy J. Graf Vice Chairman of the Board, President and Chief
------------------------------ Operating Officer, and Director
(Rudy J. Graf)
/s/ Aaron I. Fleischman Member, Executive Committee and Director
------------------------------
(Aaron I. Fleischman)
/s/ Stanley Harfenist Member, Executive Committee and Director
------------------------------
(Stanley Harfenist)
/s/ Andrew N. Heine Director
------------------------------
(Andrew N. Heine)
/s/ John L. Schroeder Director
------------------------------
(John L. Schroeder)
/s/ Robert D. Siff Director
------------------------------
(Robert D. Siff)
/s/ Scott N. Schneider Vice Chairman of the Board, Executive Vice President,
------------------------------ Chairman of Citizens Capital Ventures and Director
(Scott N. Schneider)
/s/ Robert A. Stanger Member, Executive Committee and Director
------------------------------
(Robert A. Stanger)
/s/ Charles H. Symington, Jr. Director
-------------------------------
(Charles H. Symington, Jr.)
/s/ Edwin Tornberg Director
-------------------------------
(Edwin Tornberg)
/s/ Claire L. Tow Director
-------------------------------
(Claire L. Tow)
36
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
Index to Consolidated Financial Statements
Item Page
- ---- ----
Independent Auditors' Report F-2
Consolidated balance sheets as of December 31, 2000 and 1999 F-3
Consolidated statements of income (loss) and comprehensive income (loss) for the years ended
December 31, 2000, 1999 and 1998 F-4
Consolidated statements of shareholders' equity for the years ended F-5
December 31, 2000, 1999 and 1998
Consolidated statements of cash flows for the years ended
December 31, 2000, 1999 and 1998 F-6
Notes to consolidated financial statements F-7
F-1
Independent Auditors' Report
The Board of Directors and Shareholders
Citizens Communications Company:
We have audited the accompanying consolidated balance sheets of Citizens
Communications Company and subsidiaries as of December 31, 2000 and 1999 and the
related consolidated statements of income (loss) and comprehensive income
(loss), shareholders' equity and cash flows for each of the years in the
three-year period ended December 31, 2000. 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 auditing standards generally accepted
in the United States of America. 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
Communications Company and subsidiaries as of December 31, 2000 and 1999 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.
KPMG LLP
New York, New York
March 8, 2001
F-2
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
($ in thousands)
2000 1999
---------- ----------
ASSETS
Current assets:
Cash $ 31,223 $ 37,141
Accounts receivable, net 243,304 241,519
Materials and supplies 10,945 12,624
Short-term investments 38,863 -
Other current assets 52,545 17,340
Assets held for sale 1,212,307 1,060,704
Assets of discontinued operations 673,515 595,710
----------- ----------
Total current assets 2,262,702 1,965,038
Property, plant and equipment, net 3,509,767 2,888,718
Investments 214,359 591,386
Goodwill and customer base, net 633,268 30,187
Regulatory assets 175,949 184,942
Other assets 158,961 111,474
----------- -----------
Total assets $6,955,006 $ 5,771,745
=========== ===========
LIABILITIES AND EQUITY
Current liabilities:
Long-term debt due within one year $ 181,014 $ 31,156
Accounts payable 171,002 187,984
Income taxes accrued 3,429 75,161
Other taxes accrued 31,135 27,823
Interest accrued 36,583 30,788
Customer deposits 18,683 32,842
Other current liabilities 69,551 81,258
Liabilities related to assets held for sale 290,575 139,157
Liabilities of discontinued operations 190,496 171,112
----------- -----------
Total current liabilities 992,468 777,281
Deferred income taxes 490,487 460,208
Customer advances for construction and contributions in aid of construction 205,604 179,831
Other liabilities 108,321 87,668
Regulatory liabilities 24,573 27,000
Long-term debt 3,062,289 2,107,460
Minority interest in subsidiary - 11,112
Equity forward contracts 150,013 -
Company Obligated Mandatorily Redeemable Convertible Preferred Securities* 201,250 201,250
Shareholders' equity 1,720,001 1,919,935
----------- -----------
Total liabilities and shareholders' equity $6,955,006 $ 5,771,745
=========== ===========
* 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 COMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 and 1998
($ in thousands, except for per-share amounts)
2000 1999 1998
----------- ---------- ----------
Revenue $1,802,358 $1,598,236 $1,448,588
Operating expenses:
Cost of services 449,121 361,806 359,762
Depreciation and amortization 387,607 310,185 245,475
Other operating expenses 803,900 851,969 692,389
Acquisition assimilation expense 39,929 3,916 -
------------ --------- ----------
Total operating expenses 1,680,557 1,527,876 1,297,626
------------ --------- ----------
Operating income 121,801 70,360 150,962
Investment income, net 4,736 243,885 32,352
Other loss, net (1,386) (88) (26,236)
Minority interest 12,222 23,227 14,032
Interest expense 187,366 119,675 101,796
------------ --------- ----------
Income (loss) from continuing operations before income taxes, dividends on convertible
preferred securities and cumulative effect of change in accounting principle (49,993) 217,709 69,314
Income tax expense (benefit) (16,132) 74,900 16,660
------------ --------- ----------
Income (loss) from continuing operations before dividends on convertible
preferred securities and cumulative effect of change in accounting principle (33,861) 142,809 52,654
Dividends on convertible preferred securities, net of income tax benefit 6,210 6,210 6,210
----------- --------- ----------
Income (loss) from continuing operations before cumulative effect of change
in accounting principle (40,071) 136,599 46,444
Income from discontinued operations, net of tax 11,677 7,887 12,950
----------- --------- ----------
Income (loss) before cumulative effect of change in accounting principle (28,394) 144,486 59,394
Cumulative effect of change in accounting principle, net of income tax and
related minority interest - - 2,334
----------- --------- ----------
Net income (loss) $ (28,394) $ 144,486 $ 57,060
=========== ========= ==========
Other comprehensive income (loss), net of income tax and reclassification adjustments (14,505) (41,769) 52,872
----------- --------- ----------
Total comprehensive income (loss) $ (42,899) $ 102,717 $ 109,932
=========== ========= ==========
Income (loss) from continuing operations before cumulative effect of change in
accounting principle per common share:
Basic $ (0.15) $ 0.52 $ 0.18
Diluted $ (0.15) $ 0.52 $ 0.18
Income from discontinued operations per common share:
Basic $ 0.04 $ 0.03 $ 0.05
Diluted $ 0.04 $ 0.03 $ 0.05
Income (loss) before cumulative effect of change in accounting principle per common share:
Basic $ (0.11) $ 0.55 $ 0.23
Diluted $ (0.11) $ 0.55 $ 0.23
Net income (loss) per common share:
Basic $ (0.11) $ 0.55 $ 0.22
Diluted $ (0.11) $ 0.55 $ 0.22
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
F-4
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 and 1998
($ in thousands, except for per-share amounts)
Accumulated
Common Additional Other Total
Stock Paid-In Retained Comprehensive Treasury Shareholders'
($0.25) Capital Earnings Income (Loss) Stock Equity
----------- -------------------------------------------------- -------------
Balance January 1, 1998 $ 62,749 $ 1,480,425 $ 132,217 $ 3,820 $ - $ 1,679,211
----------- -------------- ----------- ----------- -------- -------------
Acquisitions 133 2,150 - - - 2,283
Common stock buybacks to fund dividends (453) (14,370) - - - (14,823)
Stock plans 171 5,935 - - - 6,106
Stock issuances to fund EPPICS dividends 273 9,789 - - - 10,062
Net income - - 57,060 - - 57,060
Other comprehensive income, net
of tax and reclassification adjustment - - - 52,872 - 52,872
Stock dividends in shares of Common Stock 1,914 70,259 (72,173) - - -
----------- -------------- ----------- ----------- -------- -------------
Balance December 31, 1998 64,787 1,554,188 117,104 56,692 - 1,792,771
----------- -------------- ----------- ----------- -------- -------------
Common stock buybacks to fund EPPICS dividends (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 and reclassification adjustment - - - (41,769) - (41,769)
----------- -------------- ----------- ----------- -------- -------------
Balance December 31, 1999 65,519 1,577,903 261,590 14,923 - 1,919,935
----------- -------------- ----------- ----------- -------- -------------
Acquisitions 28 1,770 - - 1,861 3,659
Treasury stock acquisitions - - - - (49,209) (49,209)
Stock plans 895 42,156 - - (4,523) 38,528
Equity forward contracts - (150,013) - - - (150,013)
Net loss - - (28,394) - - (28,394)
Other comprehensive loss, net
of tax and reclassification adjustment - - - (14,505) - (14,505)
----------- -------------- ----------- ----------- --------- -------------
Balance December 31, 2000 $ 66,442 $ 1,471,816 $ 233,196 $ 418 $ (51,871) $ 1,720,001
=========== ============== =========== =========== ========== =============
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
F-5
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 and 1998
($ in thousands)
2000 1999 1998
---------- ---------- ----------
Net cash provided by continuing operating activities $ 308,144 $ 370,289 $ 249,899
Cash flows from investing activities:
Capital expenditures (536,639) (573,330) (477,976)
Securities purchased (101,427) (1,068,451) (952,628)
Securities sold 381,699 1,084,239 992,769
Securities matured 16,072 7,435 2,000
Acquisitions (986,133) - (88,863)
ELI share purchases (38,748) - -
Other (8,454) (2,833) (6,398)
---------- ----------- -----------
Net cash used by investing activities (1,273,630) (552,940) (531,096)
Cash flows from financing activities:
Short-term debt borrowings (repayments) - (110,000) 42,000
Long-term debt borrowings 1,063,158 340,503 240,485
Long-term debt principal payments (46,972) (46,619) (7,302)
Issuance of common stock 19,773 21,113 7,101
Common stock buybacks (49,209) (6,625) (14,823)
Other 30,684 (6,363) 40,232
---------- ---------- -----------
Net cash provided by financing activities 1,017,434 192,009 307,693
Cash used by discontinued operations (57,866) (4,139) (29,737)
Increase (decrease) in cash (5,918) 5,219 (3,241)
Cash at January 1, 37,141 31,922 35,163
---------- ---------- ----------
Cash at December 31, $ 31,223 $ 37,141 $ 31,922
========== ========== ==========
Non-cash investing and financing activities:
Increase in capital lease asset $ 102,192 $ 60,321 $ 7,987
Equity forward contracts 150,013 - -
Issuance of shares for acquisitions 3,659 - 2,283
Issuance of shares for dividends - 9,959 82,235
Debt assumed from acquisitions - - 13,800
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
F-6
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies:
(a) Description of Business:
-----------------------
Citizens Communications Company and its subsidiaries are referred to as
"we", "us" or "our" in this report. We provide wireline communications
services primarily to customers in rural areas and small and medium
sized cities and towns throughout the United States as an incumbent
local exchange carrier (ILEC). In addition, we provide competitive
local exchange carrier (CLEC) services to business customers and to
other communications carriers in the western United States through our
85% owned subsidiary, Electric Lightwave Inc. (ELI). We also provide
public services including natural gas transmission and distribution,
electric transmission and distribution and water distribution and
wastewater treatment services to primarily rural and suburban customers
throughout the United States. We are not dependent upon any single
geographic area or single customer for our revenue.
In recent years, we have focused our efforts and resources toward
transforming ourselves into a telecommunications provider. In order to
execute this strategy, we announced our intention to acquire telephone
access lines and to partially fund our future expansion into the
telecommunications business through the divestiture of our public
utility operations. During 1999, opportunities became available to
acquire a significant number of telephone access lines that met our
investment criteria. These acquisitions are consistent with our
strategy to broaden our geographic profile and to acquire and operate
ILEC businesses in small and medium sized cities and towns. They
provide us with the opportunity to further achieve critical mass as
well as economies of scale throughout the United States and will enable
us to improve operating efficiencies. Between May 1999 and July 2000,
we announced that we had entered into agreements to purchase
approximately 2,034,700 telephone access lines (as of December 31,
2000) for approximately $6,471,000,000 in cash (see Note 4). Also, we
have agreements to sell all of our water and wastewater treatment
businesses, one of our electric businesses and one of our gas
businesses for approximately $1,470,000,000 in cash plus the assumption
of certain liabilities (see Note 5).
(b) Principles of Consolidation and Use of Estimates:
-------------------------------------------------
Our consolidated financial statements have been prepared in accordance
with generally accepted accounting principles. 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 revenue and expenses during the reporting period. Actual
results could differ from those estimates.
(c) Revenue Recognition:
-------------------
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin 101 (SAB 101), "Revenue Recognition in
Financial Statements," which provides additional guidance in applying
generally accepted accounting principles for revenue recognition in
consolidated financial statements. SAB 101 was effective beginning in
the fourth quarter of 2000 and did not have a material impact on our
financial statements.
ILEC
----
Network access services - Monthly recurring network access service
charges are billed in advance with any portion that is billed but
unearned recorded as deferred revenue on the balance sheet as part of
accrued expenses which are then recognized as revenue over the period
that services are provided. Non-recurring network access services are
billed in arrears and recognized as revenue in the period services are
provided. Earned but unbilled network access service revenue is accrued
for and included in accounts receivable and revenue in the period
services are provided. Network access revenue primarily consists of
switched access revenue billed to other carriers. Switched access
revenue is billed in arrears and recognized as revenue in the period
services are provided based on originating and terminating minutes of
use. Network access revenue also contains special access revenue.
Special access revenue is billed in arrears and recognized in revenue
in the period services are provided.
Local services - Monthly recurring local line charges are billed to end
users in advance and recognized as revenue in the period of billing
with any portion that is billed but unearned recorded as deferred
revenue on the balance sheet as part of accrued expenses. Non-recurring
local services are billed in arrears and recognized as revenue in the
period services are provided. Earned but unbilled local service revenue
is accrued for and included in accounts receivable and revenue in the
period services are provided.
F-7
Long distance services - Long distance services are billed in arrears
and recognized as revenue in the period services are provided. Earned
but unbilled long distance revenue is accrued for and included in
accounts receivable and revenue in the period services are provided.
Directory services and Other - Revenue is recognized when services are
provided or when products are delivered to customers. Installation fees
and their related direct and incremental costs are initially deferred
and recognized as revenue and expense over the average term of a
customer relationship.
ELI - Revenue is recognized when the services are provided. Certain
revenue are deferred and recognized on a straight-line basis over the
terms of the related agreements. Installation fees and their related
direct and incremental costs are initially deferred and recognized as
revenue and expense over the average term of a customer relationship.
Public Services - Revenue is recognized when services are provided for
public services. Certain revenue is based upon consumption while other
revenue is based upon a flat fee. Earned but unbilled public services
revenue is accrued for and included in accounts receivable and revenue.
(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. The book value, net of salvage, of
routine property, plant and equipment dispositions is charged against
accumulated depreciation for regulated operations.
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, we are
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 loss, net
($3,257,000, $4,586,000 and $3,869,000 for 2000, 1999 and 1998,
respectively) and the amount relating to borrowings is included as a
reduction of interest expense ($3,504,000, $4,206,000 and $3,010,000
for 2000, 1999 and 1998, respectively). Capitalized interest for
unregulated construction activities amounted to $4,766,000, $8,681,000
and $10,444,000 for 2000, 1999 and 1998, respectively.
(e) Regulatory Assets and Liabilities:
---------------------------------
Certain of our local exchange telephone operations and all of our
public services operations are subject to the provisions of Statement
of Financial Accounting Standards (SFAS) No. 71, "Accounting for the
Effects of Certain Types of Regulation". For these entities, regulators
can establish regulatory assets and liabilities that are required to be
reflected in the balance sheet in anticipation of future recovery
through the ratemaking process.
Our consolidated balance sheet as of December 31, 2000 included
regulatory assets of approximately $62.0 million and regulatory
liabilities of approximately $4.1 million associated with our local
exchange telephone operations. The remainder of the regulatory assets
and regulatory liabilities on the balance sheet are associated with
assets and liabilities held for sale and discontinued operations. In
addition, property, plant and equipment for the properties subject to
SFAS 71 have been depreciated using the straight-line method over plant
lives approved by regulators. Such depreciable lives may exceed the
lives that would have been used if we did not operate in a regulated
environment.
SFAS No. 101 "Regulated Enterprises Accounting for the Discontinuance
of Application of SFAS No. 71" specifies the accounting required when
the regulated operations of an enterprise are no longer expected to
meet the provisions of SFAS 71 in the future due to changes in
regulations, competition and the operations of regulated entities. SFAS
101 would require the write-off of a portion of our regulatory assets
and liabilities, as a net non-cash charge or credit to income, if it
were determined that the conditions requiring the use of SFAS 71 no
longer apply in the future. SFAS 101 further provides that the carrying
amount of property, plant and equipment would be adjusted to reflect
the use of shorter depreciation lives only to the extent that the net
book value of these assets are impaired and that impairment shall be
measured as described in Note 1(f) below.
F-8
The ongoing applicability of SFAS 71 to our regulated telephone
operations is continually monitored due to the changing regulatory,
competitive and legislative environment and the changes that may occur
in our future operations as we acquire and consolidate our local
exchange telephone operations. It is possible that future environmental
changes, or changes in the demand for our products and services could
result in our telephone operations no longer being subject to the
provisions of SFAS 71. If discontinuation of SFAS 71 becomes
appropriate, the accounting may result in a material non-cash effect on
our results of operations and financial position that can not be
estimated at this time.
(f) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of:
------------------------------------------------------------------------
We review 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 undiscounted 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, we determined that certain long-lived ILEC assets were
impaired. As a result, we 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.
(g) Investments:
-----------
We classify our investments at purchase as available-for-sale or
held-to-maturity. We do 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 we have the ability and intent to hold to
maturity and are 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.
We evaluate our investments periodically to determine whether any
decline in fair value, below the amortized cost basis, is other than
temporary. If we determine 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.
(h) Income Taxes, Deferred Income Taxes and Investment Tax Credits:
---------------------------------------------------------------
We file a consolidated federal income tax return. We utilize the asset
and liability method of accounting for income taxes. Under the asset
and liability method, deferred 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 temporary differences are expected to turn around.
Regulatory assets and liabilities (see Note 1(e)) include income tax
benefits previously flowed through to customers and from the AFUDC, 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 revenue 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.
(i) Employee Stock Plans:
--------------------
We have various employee stock-based compensation plans. Awards under
these plans are granted to eligible officers, management employees and
non-management 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. As permitted by current
accounting rules, we recognize compensation expense in the financial
statements only if the market price of the underlying stock exceeds the
exercise price on the date of grant. We provide pro forma net income
(loss) and pro forma net income (loss) per common share disclosures for
employee stock option grants made in 1995 and thereafter based on the
fair value of the options at the date of grant (see Note 11). Fair
value of options granted is computed using the Black Scholes option
pricing model.
F-9
(j) Minority Interest and Minority Interest in Subsidiary:
------------------------------------------------------
Minority interest represents the minority's share of ELI's net loss
(minority interest in subsidiary, as presented on the balance sheet at
December 31, 1999, represents the minority's share of ELI's equity
capital). Since ELI's initial public offering, we recorded minority
interest on our income statement and reduced minority interest on our
balance sheet by the amount of the minority interests' share of ELI's
losses. As of June 30, 2000, the minority interest on the balance sheet
had been reduced to zero, therefore, from that point going forward, we
discontinued recording minority interest income on our income statement
as there is no obligation for the minority interests to provide
additional funding for ELI. Therefore, we are recording ELI's entire
loss in our consolidated results.
(k) 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.
(l) Goodwill and Customer Base:
---------------------------
Goodwill and customer base represents the excess of purchase price over
the fair value of identifiable assets acquired. We undertake studies to
determine the fair values of assets acquired and allocate purchase
prices to property, plant and equipment, goodwill and customer base,
accordingly. We depreciate the assets over their respective depreciable
lives and amortize goodwill and customer base by use of the
straight-line method (see Note 4 for current acquisitions). We
regularly examine the carrying value of our goodwill and customer base
to determine whether there is any impairment losses. See Note 1(f)
above related to our impairment policy.
(m) Changes in Accounting Principles:
---------------------------------
In September 2000, the Emerging Issues Task Force (EITF) issued EITF
Issue 00-19, "Determination of Whether Share Settlement Is within the
Control of the Issuer for Purposes of Applying Issue No. 96-13,
Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock." The EITF clarifies when
financial instruments that are indexed to or potentially settled in a
company's own stock are to be classified as an asset or liability and
when they are to be classified as equity. The EITF allows for a
transition period for contracts existing at the date of the consensus
and remaining outstanding at June 30, 2001 to allow time for contracts
to be modified in order for a company to continue to account for
certain contracts as equity after June 30, 2001. (see Note 10)
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement establishes accounting and reporting
standards for derivative instruments and hedging activities and, as
amended, is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. SFAS 133 requires balance sheet recognition of
derivatives as assets or liabilities measured at fair value. Accounting
for gains and losses resulting from changes in the values of
derivatives is dependent on the use of the derivative and whether it
qualifies for hedge accounting. We expect the adoption of SFAS 133
could increase the volatility of operating results in the future. In
general, the amount of volatility will vary with the level of
derivative activities during any period. We have adopted SFAS 133 as of
January 1, 2001. Based on our analysis of the statement, we have not
identified any derivative instruments subject to its provisions and
therefore, SFAS 133, upon adoption, will not have any impact on our
financial statements.
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 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. We 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 (loss) and comprehensive income
(loss) for the year ended December 31, 1998, net of an income tax
benefit of $577,000 and the related minority interest of $483,000.
F-10
(2) Accounts Receivable
-------------------
The components of accounts receivable, net at December 31, 2000 and
1999 are as follows:
($ in thousands) 2000 1999
--------------- ---------------
Customers $ 229,911 $ 213,457
Other 37,306 56,340
Less: Allowance for doubtful accounts (23,913) (28,278)
--------------- ---------------
Accounts receivable, net $ 243,304 $ 241,519
=============== ===============
(3) Property, Plant and Equipment:
------------------------------
The components of property, plant and equipment at December 31, 2000 and
1999 are as follows:
Estimated
($ in thousands) Useful Lives 2000 1999
------------------ ----------------- -----------------
Telephone outside plant 4 to 56 years $ 2,721,425 $ 2,244,808
Telephone central office equipment 5 to 20 years 1,644,302 1,272,647
Information systems and other administrative assets 4 to 58 years 635,752 619,865
Other 52,531 34,498
Construction work in progress 242,472 286,836
----------------- -----------------
5,296,482 4,458,654
Less: accumulated depreciation (1,786,715) (1,569,936)
----------------- -----------------
$ 3,509,767 $ 2,888,718
================= =================
Depreciation expense, calculated using the straight-line method, is based
upon the estimated service lives of various classifications of property,
plant and equipment. Depreciation expense was $369,930,000, $307,428,000
and $242,791,000 for the years ended December 31, 2000, 1999 and 1998,
respectively. We ceased to record depreciation expense on the gas assets
effective October 1, 2000 and on the electric assets effective January 1,
2001 (see Note 5).
(4) Mergers and Acquisitions:
-------------------------
From May 27, 1999 through July 12, 2000, we entered into several agreements
to acquire approximately 2,034,700 telephone access lines (as of December
31, 2000) for approximately $6,471,000,000 in cash. These transactions have
been and will be accounted for using the purchase method of accounting. As
a result, the results of operations of the acquired properties have been
and will be included in our financial statements from the dates of
acquisition of each property. These agreements and the status of each
transaction are described as follows:
On May 27, September 21, and December 16, 1999, we announced definitive
agreements to purchase from Verizon Communications, formerly GTE Corp.
(Verizon), approximately 381,200 telephone access lines (as of December
31, 2000) in Arizona, California, Illinois/Wisconsin, Minnesota and
Nebraska for approximately $1,171,000,000 in cash. These acquisitions
are subject to various state and federal regulatory approvals. On June
30, 2000, we closed on the Nebraska purchase of approximately 62,200
access lines for approximately $205,000,000 in cash. On August 31,
2000, we closed on the Minnesota purchase of approximately 142,400
access lines for approximately $439,000,000 in cash. On November 30,
2000, we closed on the Illinois/Wisconsin purchase of approximately
112,900 access lines for approximately $304,000,000 in cash. We expect
that the remainder of the Verizon transactions will close on a
state-by-state basis in the first half of 2001.
F-11
On June 16, 1999, we announced a series of definitive agreements to
purchase from Qwest Communications, formerly US West (Qwest),
approximately 556,800 telephone access lines (as of December 31, 2000)
in Arizona, Colorado, Idaho/Washington, Iowa, Minnesota, Montana,
Nebraska, North Dakota and Wyoming for approximately $1,650,000,000 in
cash and the assumption of certain liabilities. On October 31, 2000, we
closed on the North Dakota purchase of approximately 17,000 access
lines for approximately $38,000,000 in cash. We expect that the
remainder of the Qwest acquisitions, which are subject to various state
and federal regulatory approvals, will occur on a state-by-state basis
by the end of the first quarter of 2002.
On July 12, 2000, we announced a definitive agreement to purchase from
Global Crossing Ltd. (Global) 100% of the stock of Frontier Corp.,
which owns approximately 1,096,700 telephone access lines (as of
December 31, 2000) in Alabama/Florida, Georgia, Illinois, Indiana,
Iowa, Michigan, Minnesota, Mississippi, New York, Pennsylvania and
Wisconsin, for approximately $3,650,000,000 in cash. We expect that
this transaction, which is subject to various state and federal
regulatory approvals, will be completed in the second half of 2001.
In November 1998, we 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 October 1998, we acquired all of the stock of St. Charles Natural Gas
Company for approximately $5,000,000 in cash. St. Charles Natural Gas
Company was a natural gas distribution company serving 5,000 customers in
Louisiana and became part of our Louisiana Gas Services operations. This
transaction was accounted for using the purchase method of accounting and
the results of operations of St. Charles Natural Gas Company have been
included in the accompanying financial statements from the date of
acquisition.
The following summarizes the allocation of purchase prices for 2000, 1999
and 1998.
($ in thousands)
Number of Allocated to:
Purchase Properties --------------------------------------------
Year Price Acquired Plant Goodwill Net Other Total
---- ----- -------- ----- -------- --------- -----
2000 $986,133 4 $401,004 $584,306 $823 $986,133
1999 - - - - - -
1998 88,863 2 97,981 8,351 (17,469) 88,863
The following pro forma financial information for 2000 and 1999 presents
the combined results of our operations, the Verizon Nebraska, Minnesota and
Illinois/Wisconsin properties acquired on June 30, 2000, August 31, 2000
and November 30, 2000, respectively and the Qwest North Dakota property
acquired on October 31, 2000. The pro forma financial information for 1998
presents the combined results of our operations and RTI. The effect of St.
Charles Natural Gas Company is not material. The pro forma information
presents the combined results as if the acquisitions had occurred at the
beginning of the year prior to its acquisition. The pro forma financial
information does not necessarily reflect the results of operations that
would have occurred had we constituted a single entity during such periods.
($ in thousands, except per share amounts)
2000 1999 1998
--------------- -------------- --------------
Revenue $ 1,947,522 $ 1,795,222 $ 1,465,948
Net income (loss) $ (39,542) $ 116,665 $ 55,940
Net income (loss) per share $ (0.15) $ 0.45 $ 0.22
F-12
(5) Discontinued Operations and Assets Held for Sale:
--------------------------------------------------
On August 24, 1999, our Board of Directors approved a plan of divestiture
for our public services businesses, which include gas, electric and water
and wastewater businesses. The proceeds from the sales of these public
services businesses will be used to partially fund the telephone access
line purchases (see Note 4).
Currently, we have agreements to sell all our water and wastewater
operations, one of our electric operations and one of our natural gas
operations. The proceeds from these agreements will include approximately
$1,470,000,000 in cash plus the assumption of certain liabilities. These
agreements and the status of each transaction are described as follows:
On October 18, 1999, we announced the agreement to sell our water and
wastewater operations to American Water Works, Inc. for $745,000,000 in
cash and $90,000,000 of assumed debt. These transactions are currently
expected to close in the second half of 2001 following regulatory
approvals.
On February 15, 2000, we announced that we had agreed to sell our
electric utility operations. The Arizona and Vermont electric divisions
were under contract to be sold to Cap Rock Energy Corp. (Cap Rock). Cap
Rock has failed to raise the required financing and obtain the required
regulatory approval necessary to meet its obligations under the
contract for sale. The agreement with Cap Rock was terminated on March
7, 2001. It is our intention to pursue the disposition of the Vermont
and Arizona electric divisions with alternative buyers. In August 2000,
the HPUC denied the initial application requesting approval of the
purchase of our Kauai electric division by the Kauai Island Electric
Co-Op for $270,000,000 in cash including the assumption of certain
liabilities. We are considering a variety of options, including filing
a request for reconsideration of the decision, which may include filing
a new application.
On April 13, 2000, we announced the agreement to sell our Louisiana Gas
operations to Atmos Energy Corporation for $365,000,000 in cash plus
the assumption of certain liabilities. This transaction is expected to
close in the first half of 2001 following regulatory approvals.
Discontinued operations in the consolidated statements of income (loss) and
comprehensive income (loss) reflect the results of operations of the
water/wastewater 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. The long-term debt presented in liabilities of discontinued
operations represents the only liability to be assumed by the buyer
pursuant to the water and wastewater asset sale agreements.
In 1999, we initially accounted for the planned divestiture of all the
public services properties as discontinued operations. As of December 31,
2000, we did not have agreements to sell our entire gas and electric
segments. Consequently, in the third and fourth quarters of 2000, we
reclassified all of our gas and electric assets and their related
liabilities to "assets held for sale" and "liabilities related to assets
held for sale", respectively, we also reclassified the results of these
operations from discontinued operations to their original income statement
captions as part of continuing operations and restated the 1999 balance
sheet to conform to the current presentation. Additionally, because both
our gas and electric operations are expected to be sold at a profit, we
ceased to record depreciation expense on the gas assets effective October
1, 2000 and on the electric assets effective January 1, 2001. Such
depreciation expense would have been $6.8 million for the three months
ended December 31, 2000. We are continuing to actively pursue buyers for
our remaining gas and electric businesses.
F-13
Summarized financial information for the water/wastewater operations
(discontinued operations) is set forth below:
($ in thousands) 2000 1999
---------- ----------
Current assets $ 18,578 $ 18,074
Net property, plant and equipment 639,994 550,187
Other assets 14,943 27,449
---------- ----------
Total assets $ 673,515 $ 595,710
========== ==========
Current liabilities $ 21,062 $ 60
Long-term debt 90,546 89,826
Other liabilities 78,888 81,226
---------- ----------
Total liabilities $ 190,496 171,112
========== ----------
For the years ended December 31,
-------------------------------------
2000 1999 1998
---------- ---------- --------
Revenue $ 105,202 $ 102,408 $ 93,784
Operating income 27,415 19,887 27,207
Income taxes 5,721 3,917 5,677
Net income 11,677 7,887 12,950
Summarized financial information for the gas and electric operations
(assets held for sale) is set forth below:
($ in thousands) 2000 1999
-------------- --------------
Current assets $ 127,495 $ 91,176
Net property, plant and equipment 953,328 909,771
Other assets 131,484 59,757
-------------- --------------
Total assets held for sale $ 1,212,307 $ 1,060,704
============== ==============
Current liabilities $ 169,066 $ 17,980
Long-term debt 43,980 43,992
Other liabilities 77,529 77,185
-------------- --------------
Total liabilities related to assets held for sale $ 290,575 $ 139,157
============== ==============
(6) Investments:
-----------
The components of investments at December 31, 2000 and 1999 are as follows:
($ in thousands) 2000 1999
------------ ------------
Marketable equity securities $ 211,086 $ 243,591
Other fixed income securities 3,055 114,774
State and municipal securities 218 233,021
------------ ------------
$ 214,359 $ 591,386
============ ============
During 2000, we realized approximately $1,100,000 of gross gains and
$19,400,000 of gross losses resulting in approximately $397,800,000 of
proceeds associated with the sales of state and municipal securities and
other fixed income securities.
F-14
In January 1999, Centennial was merged with CCW Acquisition Corp., a
company organized at the direction of Welsh, Carson, Anderson & Stowe. We
were 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, we were required to convert the
preferred stock into approximately 2,972,000 shares of Class B Common
Stock. We received approximately $205,600,000 in cash for all of our Common
Stock interests and approximately $17,500,000 related to accrued dividends
on the preferred stock. As a result of the merger, we 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). We 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).
As a result of the merger, we realized and reported a pre-tax gain of
approximately $67,600,000 in the fourth quarter of 1999 in Investment
income.
One of our subsidiaries, 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, we entered into a
separate agreement with Adelphia to sell our interest in the joint venture.
Pursuant to this agreement on October 1, 1999, we 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). As a result of the sales, we realized and
reported a pre-tax gain of approximately $83,900,000 in the fourth quarter
of 1999 in Investment income.
Our Chairman and Chief Executive Officer was also Chairman and Chief
Executive Officer of Century prior to its merger with Adelphia. Centennial
was a majority-owned subsidiary of Century until it was sold. Our Chairman
and Chief Executive Officer is a significant holder of Adelphia shares.
The following summarizes the amortized cost, gross unrealized holding gains
and losses and fair market value for investments.
Unrealized Holding
---------------------------- Aggregate Fair
Investment Classification Amortized Cost Gains (Losses) Market Value
- ------------------------- --------------- ----------- ----------- ---------------
As of December 31, 2000
- -----------------------
Available-for-Sale $ 213,681 $ 17,853 $ (17,175) $ 214,359
As of December 31, 1999
- -----------------------
Available-for-Sale $ 567,208 $ 37,025 $ (12,847) $ 591,386
Marketable equity securities for 2000 and 1999 include an investment of 19%
of the equity in Hungarian Telephone and Cable Corp., a company of which
our Chairman and Chief Executive Officer is a member of the Board of
Directors. This investment declined in value during 1998 and in the fourth
quarter of 1998 management determined that the decline was other than
temporary. As a result, we recognized an impairment loss on this investment
of $31,900,000 in 1998.
In May 1999, in connection with a debt restructuring, we cancelled a note
obligation from this investment and a seven-year consulting services
agreement in exchange for the issuance to us of 1,300,000 shares of common
stock and 30,000 shares of convertible preferred stock. Each share of
convertible preferred stock has a liquidation value of $70 and is
convertible at our option into 10 shares of common stock.
(7) Fair Value of Financial Instruments:
------------------------------------
The following table summarizes the carrying amounts and estimated fair
values for certain of our financial instruments at December 31, 2000 and
1999. For the other financial instruments, representing cash, accounts
receivables, long-term debt due within one year, accounts payable and other
accrued liabilities, the carrying amounts approximate fair value due to the
relatively short maturities of those instruments.
F-15
($ in thousands) 2000 1999
------------------------------ -----------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
-------------- ------------ ------------- -----------
Investments $ 214,359 $ 214,359 $ 591,386 $ 591,386
Long-term debt $ 3,062,289 $ 2,815,850 $ 2,107,460 $ 2,046,541
EPPICS $ 201,250 $ 213,325 $ 201,250 $ 226,909
The fair value of the above financial instruments are based on quoted
prices at the reporting date for those financial instruments.
(8) Long-term Debt:
--------------
Weighted average
($ in thousands) interest rate at December 31,
December 31, 2000 Maturities 2000 1999
----------------- ----------- ------------- -------------
Debentures 7.23% 2001-2046 $ 1,000,000 $ 1,000,000
Industrial development revenue bonds 5.63% 2015-2033 385,483 353,494
Senior unsecured notes 6.25% 2004-2012 361,000 361,000
Citizens bank credit facility 7.19% 2002 765,000 -
ELI bank credit facility 6.93% 2002 400,000 260,000
Rural Utilities Service Loan Contracts 5.84% 2001-2027 90,129 91,106
Other long-term debt and capital leases 10.26% 2001-2027 132,546 73,016
Commercial paper notes payable 109,145 -
----------- ------------
Total long-term debt 3,243,303 2,138,616
Less: long-term debt due within one year 181,014 31,156
----------- ------------
Total debt $ 3,062,289 $ 2,107,460
=========== ============
The total principal amounts of industrial development revenue bonds were
$389,535,000 in 2000 and $369,935,000 in 1999. 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, 2000 and 1999, respectively.
At December 31, 2000, the commercial paper notes payable were classified as
long-term debt because the obligations are expected to be refinanced with
long-term debt securities.
We have available lines of credit with financial institutions in the
amounts of $5.7 billion, with associated facility fees of 0.10% per annum
and $450,000,000 with no associated facility fees. These lines of credit
expire on October 26, 2001 and provide us with one-year term-out options.
These credit facilities are in addition to credit commitments, under which
we may borrow up to $200,000,000, with associated facility fees of 0.12%
per annum, which expire on December 16, 2003. As of December 31, 2000,
there was $765,000,000 outstanding under the $5.7 billion credit facility,
as well as $109,000,000 in commercial paper backed by the $5.7 billion
credit facility. ELI has $400,000,000 of committed revolving lines of
credit with commercial banks, which expire November 21, 2002, under which
it has borrowed $400,000,000 at December 31, 2000. The ELI credit facility
has an associated facility fee of 0.08% per annum. We have guaranteed all
of ELI's obligations under these revolving lines of credit.
In June 2000, we arranged for the issuance of $19,600,000 of 2000 Series
special purpose revenue bonds as money market bonds with an initial
interest rate of 4.6% and a maturity date of December 1, 2020.
In April 1999, ELI completed an offering of $325,000,000 million of
five-year senior unsecured notes. The notes carry an interest rate of 6.05%
and mature on May 15, 2004. We have guaranteed the payment of principal and
any premium and interest on the notes when due.
F-16
Our installment principal payments, capital leases and maturities of
long-term debt for the next five years are as follows:
($ in thousands) 2001 2002 2003 2004 2005
---------------- --------------- ---------------- --------------- ---------------
Installment principal payments $ 2,024 $ 4,688 $ 4,802 $ 4,876 $ 5,135
Capital leases 28,990 4,721 2,353 2,599 2,872
Maturities 150,000 1,274,145 - 425,000 -
---------------- --------------- ---------------- --------------- ---------------
$ 181,014 $ 1,283,554 $ 7,155 $ 432,475 $ 8,007
================ =============== ================ =============== ===============
Our $100,000,000, 7.68% debentures are included in the 2001 maturities
since the debentures are redeemable at par at the option of the holders on
October 1, 2001.
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. We expect to remarket all such bonds which are
tendered. In the years 2000, 1999 and 1998, interest payments on short- and
long-term debt were $188,955,000, $127,757,000 and $111,038,000,
respectively.
(9) Company Obligated Mandatorily Redeemable Convertible Preferred Securities:
--------------------------------------------------------------------------
During the first quarter of 1996, our consolidated wholly-owned subsidiary,
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 us $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 our Convertible
Subordinated Debentures are substantially all the assets of the
Partnership. Our obligations under the agreements related to the issuances
of such securities, taken together, constitute a full and unconditional
guarantee by us of the Trust's obligations relating to the Trust
Convertible Preferred Securities and the Partnership's obligations relating
to the Partnership Convertible Preferred Securities.
In accordance with the terms of the issuances, we paid the 5% interest on
the Convertible Subordinated Debentures in 2000, 1999 and 1998. During
2000, only cash was paid to the Partnership in payment of the interest on
the Convertible Subordinated Debentures. The cash was then distributed by
the Partnership to the Trust and then by the Trust to the holders of the
EPPICS. 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. The Trust distributed the cash
and shares as dividends to the holders of the EPPICS in 1999 and 1998.
F-17
(10) Capital Stock:
--------------
We are authorized to issue up to 600,000,000 shares of Common Stock. Prior
to 1999, 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 our Board of Directors. Our Board of Directors
discontinued the payment of 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 for a compounded annual
total of 3.03% and an annual stock dividend cash equivalent of 28
5/16(cent) (rounded to the nearest 1/16th).
In December 1999, our Board of Directors authorized the purchase, from time
to time, of up to $100,000,000 worth of shares of our common stock. This
share purchase program was completed in April 2000 and resulted in the
acquisition or contract to acquire approximately 6,165,000 shares of our
common stock. Of those shares, 2,500,000 shares were purchased for
approximately $40,959,000 in cash and we entered into an equity forward
contract for the acquisition of the remaining 3,665,000 shares.
In April 2000, our Board of Directors authorized the purchase, from time to
time, of up to an additional $100,000,000 worth of shares of our common
stock. This share purchase program was completed in July 2000 and resulted
in the acquisition or contract to acquire approximately 5,927,000 shares of
our common stock. Of these shares, 452,000 shares were purchased for
approximately $8,250,000 in cash and we entered into an equity forward
contract for the acquisition of the remaining 5,475,000 shares.
The equity forward contracts do not meet the requirements for presentation
within the stockholders' equity section at December 31, 2000. As a result,
they have been reflected as a reduction of Stockholders' equity and a
component of temporary equity for the gross settlement amount of the
contracts. Current accounting rules permit a transition period until June
30, 2001 to amend the contracts to comply with the requirements for
permanent equity presentation. If an agreement with the counterparty to the
contracts can be reached by June 30, 2001, the current impact of the
classification to temporary equity will be reversed and the gross
settlement amount will again be presented in permanent equity with no
adjustment until final settlement. If an agreement with the counterparty
cannot be reached by June 30, 2001, not only will the current impact be
reversed as noted above, but we will be required to record the change in
fair value of the equity forward from inception to that date as an asset or
a liability with the offset recorded as a cumulative effect of change in
accounting principle with future changes to the fair value recorded in
earnings.
If we were required to apply the guidance required at June 30, 2001, in the
accompanying financial statements based on the fair value of the contracts
as of December 31, 2000, we would have reflected a charge as a cumulative
effect of a change in accounting principle and an offsetting liability of
approximately $30 million.
We also purchased 631,000 shares at a cost of $6,625,000 in 1999 to fund
EPPICS dividends and 1,811,000 shares at a cost of $14,823,000 in 1998 to
fund EPPICS dividends and pay common stock dividends.
In addition to our share purchase programs described above, in April 2000,
our Board of Directors authorized the purchase, from time to time, of up to
$25,000,000 worth of shares of Class A common stock of ELI, our 85% owned
subsidiary, on the open market or in negotiated transactions. This ELI
share purchase program was completed in August 2000 and resulted in the
acquisition of approximately 1,288,000 shares of ELI common stock for
approximately $25,000,000 in cash. In August 2000, our Board of Directors
authorized the purchase, from time to time, of up to an additional
1,000,000 shares of ELI on the open market or in negotiated transactions.
The second ELI share purchase program was completed in September 2000 and
resulted in the acquisition of approximately 1,000,000 shares of ELI common
stock for approximately $13,748,000 in cash.
F-18
The activity in shares of outstanding common stock during 2000, 1999, and
1998 is summarized as follows:
Number of Shares
--------------------
Balance at January 1, 1998 250,994,000
Acquisitions 532,000
Common stock dividends 7,657,000
Common stock buybacks (1,811,000)
Common stock issued to fund dividends 1,093,000
Stock plans 684,000
--------------------
Balance at December 31, 1998 259,149,000
Common stock buybacks (631,000)
Common stock issued to fund EPPICS dividends 1,005,000
Stock plans 2,553,000
--------------------
Balance at December 31, 1999 262,076,000
Acquisitions 111,000
Stock plans 3,581,000
--------------------
Balance at December 31, 2000 265,768,000
====================
As of December 31, 2000, we had 268,875,000 shares issued of which
3,107,000 shares were held as Treasury Stock. We have 50,000,000 authorized
but unissued shares of preferred stock ($.01 par).
(11) Stock Plans:
-----------
At December 31, 2000, we have four stock based compensation plans and ELI
has two stock based plans which are described below. We apply 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), 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 and no transactions or modifications which would
require a compensation charge have occurred subsequent to the grant. No
compensation cost has been recognized in the financial statements related
to the Employee Stock Purchase Plan (ESPP) and ELI Employee Stock Purchase
Plan (ELI ESPP) because the purchase price is 85% of the fair value.
Compensation cost recognized for our Directors' Deferred Fee Equity Plan
was $691,956, $481,540 and $463,798 in 2000, 1999 and 1998, respectively.
We have granted restricted stock awards to key employees in the form of our
Common Stock. The number of shares issued as restricted stock awards during
2000, 1999 and 1998 were 3,120,000, 901,200 and 464,000, respectively. 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, 2000, 4,262,000 shares of restricted stock were
outstanding. Compensation expense of $9,084,000, $2,574,000 and $2,096,000
for the years ended December 31, 2000, 1999 and 1998, respectively, has
been recorded in connection with these grants.
F-19
Had we determined compensation cost based on the fair value at the grant
date for its MEIP, EIP, ESPP, ELI ESPP and ELI EIP, our pro forma Net
income (loss) and Net income (loss) per common share would have been as
follows:
2000 1999 1998
------------ ------------ -----------
($ in thousands)
Net income (loss) As reported $(28,394) $144,486 $57,060
Pro forma (51,270) 130,613 46,005
Net income (loss) per common share As reported:
Basic $ (.11) $.55 $.22
Diluted (.11) .55 .22
Pro forma:
Basic $ (.20) $.50 $.18
Diluted (.20) .50 .18
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.
In November 1998, the Compensation Committee of our Board of Directors
approved a stock option exchange program pursuant to which current
employees (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 results and resulted in a net
reduction in shares subject to option of 546,000.
Both ELI and us repriced these employee stock options on August 7, 1998 and
December 11, 1998, respectively, 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 the repricing. Under
accounting rules promulgated subsequent to December 15, 1998, any future
repricings could be considered compensable and therefore would result in
compensation cost in the statement of income.
Management Equity Incentive Plan
--------------------------------
Under the MEIP, awards of our Common Stock may be granted to eligible
officers, management employees and non-management employees in the form of
incentive stock options, non-qualified stock options, stock appreciation
rights (SARs), restricted stock or other stock-based awards. The
Compensation Committee of the Board of Directors administers the MEIP.
The maximum number of shares of common stock which may be issued pursuant
to awards at any time is 5% (13,133,029 as of December 31, 2000) of our
common stock outstanding. Since the expiration date of the MEIP plan, no
awards can be granted under the MEIP. The exercise price of stock options
and SARs issued were 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.
F-20
The following is a summary of share activity subject to option under the
MEIP.
Shares Weighted
Subject to Average Option
Option Price Per Share
-------------- ---------------
Balance at January 1, 1998 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
Options granted 26,000 16.26
Options exercised (3,103,000) 9.96
Options canceled, forfeited or lapsed (283,000) 7.79
--------------
Balance at December 31, 2000 6,921,000 $ 9.72
==============
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, 2000.
Options Outstanding Options Exercisable
----------------------------------------------------------------------------- ----------------------------------
Weighted Average Weighted
Number Range of Weighted Average Remaining Number Average
Outstanding Exercise Prices Exercise Price Life in Years Exercisable Exercise Price
----------- --------------- -------------- -------------- ----------- --------------
14,000 $ 4 - 5 $ 4 4 14,000 $ 4
2,590,000 7 - 8 8 5 1,679,000 8
944,000 8 - 10 9 7 944,000 9
1,919,000 10 - 11 11 4 1,805,000 11
894,000 11 - 14 12 4 741,000 13
535,000 14 - 15 14 3 535,000 14
25,000 15 - 17 17 9 - -
---------------- --------------
6,921,000 $ 4 - 17 $ 10 5 5,718,000 $ 10
================ ==============
The weighted average fair value of options granted during 2000, 1999 and
1998 were $7.09, $3.17 and $2.27, 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 2000, 1999 and
1998:
2000 1999 1998
------------ ------------- -------------
Dividend yield - - -
Expected volatility 30% 29% 26%
Risk-free interest rate 6.27% 5.32% 4.43%
Expected life 6 years 6 years 4 years
Equity Incentive Plan
---------------------
In May 1996, our shareholders approved the EIP. Under the EIP, awards of
our Common Stock may be granted to eligible officers, management employees
and non-management employees in the form of incentive stock options,
non-qualified stock options, stock appreciation rights (SARs), restricted
stock or other stock-based awards. The Compensation Committee of the Board
of Directors administers the EIP.
F-21
The maximum number of shares of common stock which may be issued pursuant
to awards at any time is 12,858,000 shares, which has been adjusted for
subsequent stock dividends. No awards will be granted more than 10 years
after the effective date (May 23, 1996) of the EIP. The exercise price of
stock options and SARs shall be equal to or greater than the fair market
value of the underlying common stock on the date of grant. Stock options
are generally not exercisable on the date of grant but vest over a period
of time.
Under the terms of the EIP, subsequent stock dividends and stock splits
have the effect of increasing the option shares outstanding, which
correspondingly decrease the average exercise price of outstanding options.
The following is a summary of share activity subject to option under the
EIP.
Shares Weighted Average
Subject to Option Price Per
Option Share
--------------- ------------------
Balance at January 1, 1998 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
Options granted 5,758,000 13.31
Options exercised (1,023,000) 8.21
Options canceled, forfeited or lapsed (614,000) 10.27
----------------
Balance at December 31, 2000 10,700,000 11.37
================
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, 2000.
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------- --------------------------------
Weighted Average
Number Range of Weighted Average Remaining Number Weighted Average
Outstanding Exercise Prices Exercise Price Life in Years Exercisable Exercise Price
- ------------- --------------- -------------- -------------- ----------- ---------------
2,838,000 $ 7 - 8 $ 8 8 1,212,000 $ 8
1,091,000 8 - 9 9 7 1,079,000 9
102,000 9 - 10 9 7 48,000 9
289,000 10 - 11 10 7 178,000 10
6,240,000 11 - 15 14 10 604,000 13
140,000 15 - 19 18 10 - -
- ---------------- -------------
10,700,000 $ 7 - 19 $ 11 8 3,121,000 $ 9
================ =============
The weighted average fair value of options granted during 2000, 1999 and
1998 was $6.31, $3.46 and $3.54, 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 2000, 1999 and
1998:
2000 1999 1998
------------- ------------- -------------
Dividend yield - - -
Expected volatility 30% 29% 26%
Risk-free interest rate 5.82% 5.47% 5.15%
Expected life 6 years 6 years 6 years
F-22
Employee Stock Purchase Plan
----------------------------
Our ESPP was approved by shareholders on June 12, 1992 and amended on May
22, 1997. Under the ESPP, eligible employees have the right to subscribe to
purchase shares of our 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 our capital stock. As of December 31, 2000, 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 Compensation Committee of the Board of Directors administers the ESPP.
As of December 31, 2000, the number of employees enrolled and participating
in the ESPP was 2,172 and the total number of shares purchased under the
ESPP was 3,620,272. 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 2000, 1999 and
1998:
2000 1999 1998
------------- ------------- -------------
Dividend yield - - -
Expected volatility 30% 29% 26%
Risk-free interest rate 6.23% 5.24% 4.91%
Expected life 6 months 6 months 6 months
The weighted average fair value of those purchase rights granted in 2000,
1999 and 1998 was $3.26, $2.47 and $2.05, 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, 2000, 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 ELI 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, 2000, the number
of employees enrolled and participating in the ELI ESPP was 652 and the
total number of shares purchased under the ELI ESPP was 585,813. 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 2000, 1999 and 1998:
2000 1999 1998
------------ ------------- -------------
Dividend yield - - -
Expected volatility 87% 66% 71%
Risk-free interest rate 6.29% 5.25% 4.92%
Expected life 6 months 6 months 6 months
The weighted average fair value of those purchase rights granted in 2000,
1999 and 1998 was $4.59, $4.97 and $3.82, respectively.
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 Compensation Committee of the ELI Board of Directors
administers the ELI EIP. 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.
F-23
The following is a summary of share activity subject to option under the
ELI EIP.
Shares Weighted Average
Subject to Option Price Per
Option Share
-------------- ------------------
Balance at January 1, 1998 2,326,000 $ 16.00
Options granted 1,654,000 10.77
Options canceled, forfeited or lapsed (1,649,000) 16.21
--------------
Balance at December 31, 1998 2,331,000 12.14
Options granted 1,989,000 9.51
Options exercised (116,000) 9.73
Options canceled, forfeited or lapsed (680,000) 10.12
--------------
Balance at December 31, 1999 3,524,000 10.96
Options granted 2,720,000 19.08
Options exercised (456,000) 11.00
Options canceled, forfeited or lapsed (1,017,000) 13.63
--------------
Balance at December 31, 2000 4,771,000 15.05
==============
In 1998, 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 ELI EIP at December 31, 2000.
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------- --------------------------------
Weighted- Average
Number Range of Weighted Average Remaining Number Weighted Average
Outstanding Exercise Prices Exercise Price Life in Years Exercisable Exercise Price
- --------------- --------------- -------------- --------------- ----------- ----------------
29,000 $ 3 - 8 $ 6 9 3,000 $ 7
1,611,000 8 - 12 9 8 990,000 9
856,000 12 - 19 16 8 651,000 16
2,275,000 19 - 23 19 10 1,000 22
- ---------------- -------------
4,771,000 $ 3 - 23 $ 15 9 1,645,000 $ 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 2000, 1999 and 1998:
2000 1999 1998
------------- ------------- -------------
Dividend yield - - -
Expected volatility 87% 66% 71%
Risk-free interest rate 7.23% 5.34% 5.44%
Expected life 6 years 6 years 6 years
The weighted-average fair value of those options granted in 2000, 1999 and
1998 were $14.75, $6.16 and $6.94, respectively.
ELI has granted 725,000 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, 2000, 606,000
shares of this stock were outstanding, of which 396,000 shares are no
longer restricted. Compensation expense was recorded in connection with
these grants in the amounts of $1,422,000, $2,559,000 and $4,666,000 for
the years ended December 31, 2000, 1999 and 1998, respectively.
F-24
Directors' Deferred Fee Equity Plan
-----------------------------------
Effective June 30, 2000, the annual retainer paid to non-employee directors
was eliminated. In replacement, each non-employee director elected, by
August 1, 2000, to receive either 2,500 stock units or 10,000 stock
options. Starting in 2001, each non-employee director will elect, by
December 1 of the prior year, to receive either 5,000 stock units or 20,000
stock options. Directors making a stock unit election must also elect to
receive payment in either stock or cash upon retirement from the Board of
Directors. Stock options have an exercise price of the fair market value on
the date of grant, are exercisable six months after the date of grant and
have a 10-year term. Options granted pursuant to the June 30, 2000 plan are
subject to shareholder approval in 2001. The Formula Plan described below
also remains in effect until its expiration in 2002.
From January 1, 2000 through June 30, 2000, the non-employee directors had
the choice to receive 50% or 100% of their fees paid in either stock or
stock units. If stock was elected, the stock was granted at the average of
the high and low on the first trading date of the year (Initial Market
Value). If stock units were elected, they were purchased at 85% of the
Initial Market Value. Stock units (except in an event of hardship) are held
by us until retirement or death.
Our original Non-Employee Directors' Deferred Fee Equity Plan (the
Directors' Plan) was approved by shareholders on May 19, 1995 and
subsequently amended. The Directors' Plan included an Option Plan, a Stock
Plan and a Formula Plan. On December 31, 1999, the Option Plan and the
Stock Plan expired in accordance with the Plan's terms.
Through the Option Plan, an eligible director could have elected to receive
up to $30,000 per annum of his or her director's fee retainer, for a period
of up to five years, in the form of options to purchase our common stock.
The number of options granted was calculated by dividing the dollar amount
elected by 20% of the fair market value of our common stock on the
effective date of the options. The options are exercisable at 90% of the
fair market value of our common stock on the effective date of the options.
Through the Stock Plan, an eligible director elected 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 our common stock on certain specified dates. 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.
The Formula Plan provides each Director 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.
As of any date, the maximum number of shares of common stock which the Plan
was obligated to deliver pursuant to the Directors' Plan shall not be more
than one percent (1%) of the total outstanding shares of our Common Stock
as of such date, subject to adjustment in the event of changes in our
corporate structure affecting capital stock. There were 10 directors
participating in the Directors' Plan in 2000. In 2000, the total Options,
Plan Units and stock earned were 203,969, 52,521, and 2,860, respectively.
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. At December 31, 2000, 825,446 options were
exercisable at a weighted average exercise price of $11.41.
We had also maintained a Non-Employee Directors' Retirement Plan providing
for the payment of specified sums annually to our non-employee directors,
or their designated beneficiaries, starting at their retirement, death or
termination of directorship of each individual director. In 1999, we
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 our common stock (convertible on a one
for one basis) or in cash. As of December 31, 2000, the liability for such
payments was $3.4 million of which $1.6 million will be payable in stock
(based on the July 15, 1999 stock price) and $1.8 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-25
(12) 1999 Restructuring Charges:
---------------------------
In the fourth quarter of 1999, we approved a plan to restructure our
corporate office activities. In connection with this plan, we recorded a
pre-tax charge of $5,760,000 in other operating expenses in the fourth
quarter of 1999. The restructuring resulted in the reduction of 49
corporate employees. All affected employees were communicated with in the
early part of November 1999.
As of December 31, 2000, approximately $4,214,000 has been paid, 42
employees were terminated and 5 employees who were expected to be
terminated took other positions within the company. The remaining 2
employees will be terminated during 2001. At December 31, 2000, we adjusted
our original accrual down by $1,008,000 and the remaining accrual of
$538,000 is included in other current liabilities. These costs are expected
to be paid in the first quarter of 2001.
(13) Income Taxes:
-------------
The following is a reconciliation of the provision for income taxes
computed at federal statutory rates to the effective rates:
($ in thousands) 2000 1999 1998
-------------- --------------- ---------------
Consolidated tax provision at federal statutory rate 35.0% 35.0% 35.0%
State income tax provisions (benefit), net of federal income tax -6.4% 1.1% 1.0%
Allowance for funds used during construction 2.8% -0.8% -2.5%
Nontaxable investment income 5.4% -1.2% -4.4%
Amortization of investment tax credits 1.9% -0.6% -1.9%
Flow through depreciation -8.5% 2.8% 7.5%
Tax reserve adjustment -5.6% 0.6% -6.9%
Company owned life insurance -2.2% 1.2% 0.8%
Minority interest 8.7% -3.8% -3.5%
All other, net 1.2% 0.1% -1.1%
-------------- --------------- ---------------
32.3% 34.4% 24.0%
============== =============== ===============
As of December 31, 2000 and 1999, accumulated deferred income taxes
amounted to $482,278,000 and $450,903,000, respectively, and the
unamortized deferred investment tax credits amounted to $8,209,000 and
$9,305,000, respectively. Income taxes paid during the year were
$37,935,000, $885,000 and $5,434,000 for 2000, 1999 and 1998, respectively.
The components of the net deferred income tax liability at December 31 are
as follows:
($ in thousands) 2000 1999
-------------- ---------------
Deferred income tax liabilities:
Property, plant and equipment basis differences $ 424,378 $ 381,278
Regulatory assets 65,977 69,757
Other, net 10,597 20,523
-------------- ---------------
500,952 471,558
-------------- ---------------
Deferred income tax assets:
Regulatory liabilities 7,308 7,663
Deferred investment tax credits 3,157 3,687
-------------- ---------------
10,465 11,350
-------------- ---------------
Net deferred income tax liability $ 490,487 $ 460,208
============== ===============
F-26
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:
($ in thousands) 2000 1999 1998
-------------- --------------- ---------------
Income taxes charged (credited) to the income statement for
continuing operations:
Current:
Federal $ (66,759) $ 45,922 $ (5,284)
State (2,588) 2,334 (259)
-------------- --------------- ---------------
Total current (69,347) 48,256 (5,543)
Deferred:
Federal 46,647 26,584 22,217
Investment tax credits (931) (1,366) (1,312)
State 7,499 1,426 1,298
-------------- --------------- ---------------
Total deferred 53,215 26,644 22,203
-------------- --------------- ---------------
Subtotal (16,132) 74,900 16,660
Income taxes charged (credited) to the income statement for
discontinued operations:
Current:
Federal 2,749 (17) 3,640
State 418 (3) 553
-------------- --------------- ---------------
Total current 3,167 (20) 4,193
Deferred:
Federal 2,260 3,595 1,583
Investment tax credits (326) (320) (315)
State 620 662 216
-------------- --------------- ---------------
Total deferred 2,554 3,937 1,484
-------------- --------------- ---------------
Subtotal 5,721 3,917 5,677
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) (14,263) 74,965 18,007
Income taxes charged (credited) to shareholders' equity:
Deferred income taxes (benefits) on unrealized gains or losses on
securities classified as available-for-sale (8,997) (25,906) 32,792
Current benefit arising from stock options exercised (7,392) (1,262) (35)
-------------- --------------- ---------------
Income taxes charged (credited) to shareholders' equity (b) (16,389) (27,168) 32,757
-------------- --------------- ---------------
Total income taxes: (a) plus (b) $ (30,652) $ 47,797 $ 50,764
============== =============== ===============
Our alternative minimum tax credit as of December 31, 2000 is $91,370,000,
which can be carried forward indefinitely to reduce future regular tax
liability. This benefit is presented as a reduction of accrued income
taxes.
F-27
(14) Net Income (loss) Per Common Share:
----------------------------------
The reconciliation of the net income (loss) per common share calculation
for the years ended December 31, 2000, 1999 and 1998 is as follows:
($ in thousands, except per share amounts)
2000 1999 1998
--------------------------------- ------------------------------- -----------------------------
Loss Shares Per Share Income Shares Per Share Income Shares Per Share
----------- -------- --------- --------- -------- --------- -------- -------- ---------
Basic $ (28,394) 261,744 $ (0.11) $ 144,486 260,481 $ 0.55 $ 57,060 258,879 $ 0.22
Effect of dilutive options - 5,187 - - 1,779 - - 742 -
Diluted $ (28,394) 266,931 $ (0.11) $ 144,486 262,260 $ 0.55 $ 57,060 259,621 $ 0.22
All share amounts represent weighted average shares outstanding for each
respective period. The diluted net income (loss) per common share
calculation excludes the effect of potentially dilutive shares when their
exercise price exceeds the average market price over the period. We have
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 161,250 potentially
dilutive stock options at a range of $16.69 to $18.53 per share. These
items were not included in the diluted net income (loss) per common share
calculation for any of the above periods as their effect was antidilutive.
F-28
(15) Comprehensive Income (Loss):
---------------------------
Our other comprehensive income (loss) for the years ended December 31,
2000, 1999 and 1998 is as follows:
2000
---------------------------------------
Before-Tax Tax Expense/ Net-of-Tax
($ in thousands) Amount (Benefit) Amount
---------------------------------------
Net unrealized losses on securities:
Net unrealized holding losses arising during period $ (40,377) $ (15,457) $ (24,920)
Add: Reclassification adjustments for net losses
realized in net loss 16,875 6,460 10,415
------------- ----------- ----------
Other comprehensive loss $ (23,502) $ (8,997) $ (14,505)
============= =========== ==========
1999
----------------------------------------
Before-Tax Tax Expense/ Net-of-Tax
($ in thousands) Amount (Benefit) Amount
----------------------------------------
Net unrealized gains on securities:
Net unrealized holding gains arising during period $ 56,746 $ 21,722 $ 35,024
Less: Reclassification adjustments for net gains
realized in net income 124,421 47,628 76,793
------------ ----------- -----------
Other comprehensive loss $ (67,675) $ (25,906) $ (41,769)
============ =========== ===========
1998
----------------------------------------
Before-Tax Tax Expense/ Net-of-Tax
($ in thousands) Amount (Benefit) Amount
----------------------------------------
Net unrealized gains on securities:
Net unrealized holding gains arising during period $ 56,497 $ 21,627 $ 34,870
Add: Reclassification adjustments 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:
-------------------
We operate in four segments, ILEC, ELI, gas and electric. The ILEC segment
provides both regulated and competitive communications services to
residential, business and wholesale customers. ELI is a facilities based
integrated communications provider offering a broad range of communications
services in the western United States. We own 85% of ELI and guarantee all
of ELI's long-term debt, one of its capital leases and one of its operating
leases. Our gas and electric segments, which are intended to be sold and
are classified as "assets held for sale" and "liabilities related to assets
held for sale," were previously reported as discontinued operations (see
Note 5).
Adjusted EBITDA is operating income (loss) plus depreciation and
amortization. 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.
F-29
($ in thousands) For the year ended December 31, 2000
----------------------------------------------------------------------------------
Total
ILEC ELI Gas Electric Eliminations Segments
--------- ----------- ------------ ---------- --------------- ----------
Revenue $ 963,743 $ 243,977 $ 374,751 $ 223,072 $ (3,185)1 $ 1,802,358
Depreciation 276,250 61,663 19,228 28,629 1,837 2 387,607
Operating Income (Loss) 157,896 (59,876) 8,268 15,226 287 2,3 121,801
Adjusted EBITDA 434,146 1,787 27,496 43,855 2,124 3 509,408
Capital Expenditures, net 350,209 112,285 4 51,456 29,483 - 543,433
Assets 3,558,562 949,774 667,651 544,656 - 5,720,643
($ in thousands) For the year ended December 31, 1999
----------------------------------------------------------------------------------
Total
ILEC ELI Gas Electric Eliminations Segments
---------- ---------- ---------- ----------- -------------- ------------
Revenue $ 903,237 $ 187,008 $ 306,986 $ 203,822 $ (2,817)1 $ 1,598,236
Depreciation 226,141 36,505 22,203 25,552 (216) 310,185
Operating Income (Loss) 100,910 (94,066) 32,024 30,268 1,224 3 70,360
Adjusted EBITDA 327,051 (57,561) 54,227 55,820 1,008 3 380,545
Capital Expenditures, net 227,176 185,395 4 66,951 43,540 - 523,062
Assets 2,422,572 775,234 590,713 469,991 - 4,258,510
($ in thousands) For the year ended December 31, 1998
----------------------------------------------------------------------------------
Total
ILEC ELI Gas Electric Eliminations Segments
--------- ----------- ------------ ----------- ------------ -----------
Revenue $ 835,039 $ 100,880 $ 325,423 $ 190,307 $ (3,061)1 $ 1,448,588
Depreciation 181,656 17,002 24,084 22,733 - 2 245,475
Operating Income (Loss) 154,506 (73,783) 42,225 27,093 921 2,3 150,962
Adjusted EBITDA 336,162 (56,781) 66,309 49,826 921 3 396,437
Capital Expenditures, net 201,453 200,000 45,768 18,895 - 466,116
(1)Represents revenue received by ELI from our ILEC operations.
(2)Represents amortization of the capitalized portion of intercompany
interest related to our guarantees of ELI debt and leases and amortization
of goodwill related to our purchase of ELI stock (see Note 10).
(3)Represents the administrative services fee charged to ELI pursuant to the
management services agreement between ELI and us.
(4)Does not include approximately $102,000,000 and $60,000,000 of non-cash
capital lease additions in 2000 and 1999, respectively.
In the fourth quarter of 2000, we settled a proceeding with the Louisiana
Public Service Commission. Louisiana Gas Service, our subsidiary, refunded
approximately $27 million to ratepayers during the month of January 2001,
effected as a credit on customers' bills. As a result, we recorded
approximately $29.7 million of charges to earnings in the fourth quarter of
2000. This amount included a reduction to revenue for the refund to
customers of approximately $27 million and legal fees of approximately $2.7
million. The Louisiana Gas Service business is to be sold to Atmos Energy
Co. and the sale is expected to close in the first half of 2001 following
regulatory approval (see Note 5).
F-30
The following tables are reconciliations of certain sector items to the
total consolidated amount.
($ in thousands) For the year ended December 31,
2000 1999 1998
------------ ----------- -----------
Adjusted EBITDA
Total Segment Adjusted EBITDA $ 509,408 $ 380,545 $ 396,437
Discontinued Operations Adjusted EBITDA 45,640 36,218 39,576
------------ ----------- -----------
Consolidated Adjusted EBITDA $ 555,048 $ 416,763 $ 436,013
============ =========== ===========
Capital Expenditures
Total segment capital expenditures $ 543,433 $ 523,062 $ 466,116
General capital expenditures 1,396 6,599 25,122
Change in accrued construction work in progress (8,190) 43,669 (13,262)
------------ ----------- ----------
Consolidated reported capital expenditures $ 536,639 $ 573,330 $ 477,976
============ =========== ==========
December 31,
Assets 2000 1999
----------- ------------
Total segment assets $ 5,720,643 $ 4,258,510
General assets 560,848 917,525
Discontinued operations assets 673,515 595,710
----------- ------------
Consolidated reported assets $ 6,955,006 $ 5,771,745
=========== ============
F-31
For the year ended December 31, 2000
------------------------------------------------------------------------------
( $ in thousands) Discontinued Consolidated
ILEC ELI Gas Electric Operations Eliminations Total
--------- --------- --------- --------- ------------ ------------ ----------
Revenue $ 963,743 $243,977 $ 374,751 $ 223,072 $ - $ (3,185) $1,802,358
Operating expenses:
Cost of services 34,508 74,105 229,538 113,965 - (2,995) 449,121
Depreciation and amortization 276,250 61,663 19,228 28,629 - 1,837 387,607
Other operating expenses 455,160 168,085 117,717 65,252 - (2,314) 803,900
Acquisition assimilation expense 39,929 - - - - - 39,929
-------- -------- -------- ------- --------- -------- ----------
Total operating expenses 805,847 303,853 366,483 207,846 - (3,472) 1,680,557
-------- -------- -------- ------- --------- -------- ----------
Operating income (loss) 157,896 (59,876) 8,268 15,226 - 287 121,801
Investment income, net 4,423 - - 313 - - 4,736
Other income (loss), net (5,744) (402) 4,419 341 - - (1,386)
Minority interest 12,222 - - - - - 12,222
Interest expense 103,979 75,784 18,097 17,959 - (28,453) 187,366
-------- -------- -------- ------- -------- ------- ----------
Income (loss) from continuing operations
before income taxes and dividends on
convertible preferred securities 64,818 (136,062) (5,410) (2,079) - 28,740 (49,993)
Income tax expense (benefit) (14,115) 400 (1,746) (671) - - (16,132)
-------- -------- -------- -------- -------- -------- ----------
Income (loss) from continuing operations before
dividends on convertible preferred securities 78,933 (136,462) (3,664) (1,408) - 28,740 (33,861)
Dividends on convertible preferred securities,
net of income tax benefit 6,210 - - - - - 6,210
-------- -------- -------- ------- -------- -------- ----------
Income (loss) from continuing operations 72,723 (136,462) (3,664) (1,408) - 28,740 (40,071)
Income from discontinued operations, net of tax - - - - 11,677 - 11,677
-------- -------- -------- ------- ----------- -------- ----------
Net income (loss) $ 72,723 $ (136,462) $ (3,664) $ (1,408) $ 11,677 $ 28,740 $ (28,394)
======== ======== ======== ======== =========== ========= ==========
(17) Quarterly Financial Data (unaudited):
-------------------------------------
($ in thousands, except per share amounts)
Net Income (Loss) per Common Share
------------------------------------
2000 Revenue Net Income (Loss) Basic Diluted
----------- ------------------ --------------- ----------------
First quarter $ 448,702 $ 7,326 $ 0.03 $ 0.03
Second quarter 418,607 3,012 0.01 0.01
Third quarter 452,710 1,467 0.01 0.01
Fourth quarter 482,339 (40,199) (0.15) (0.15)
Net Income per Common Share
-----------------------------------
1999 Revenue Net Income Basic Diluted
----------- ----------------- -------------- ---------------
First quarter $ 414,780 $ 54,625 $ 0.21 $ 0.21
Second quarter 390,063 7,753 0.03 0.03
Third quarter 397,141 11,908 0.05 0.05
Fourth quarter 396,252 70,200 0.27 0.26
Fourth quarter 2000 results include an after tax charge of approximately
$18,400,000, or 9(cent) per share, related to the settlement of a
proceeding with the Louisiana Public Service Commission (see Note 20).
F-32
First quarter 1999 results include an after tax gain of approximately
$42,900,000, or 16(cent) per share, on the sale of Centennial Cellular
stock (see Note 6). Fourth quarter 1999 results include an after tax gain
of approximately $41,700,000, or 16(cent) per share, on the sale of Century
stock and an after tax gain of approximately $51,800,000, or 20(cent) per
share, on the sale of our interest in a cable joint venture (see Note 6),
offset by after tax asset impairment charges of approximately $22,300,000,
or 9(cent) per share, (see Note 1(f)), after tax costs of an executive
retirement agreement of $4,100,000, or 2(cent) per share, after tax
restructuring charges of approximately $3,600,000, or 1(cent) per share
(see Note 12), and after tax impact of accelerated depreciation of
approximately $3,000,000, or 1(cent) per share, related to the change in
useful life of an operating system.
The quarterly net income (loss) per common share amounts are rounded to the
nearest cent. Annual net income (loss) per common share may vary depending
on the effect of such rounding. Quarterly revenue has been retroactively
revised from their original presentations to conform to current
presentation.
(18) Supplemental Cash Flow Information:
----------------------------------
The following is a schedule of net cash provided by operating activities
for the years ended December 31, 2000, 1999 and 1998:
($ in thousands) 2000 1999 1998
------------- ------------- -------------
Income (loss) from continuing operations $ (40,071) $ 136,599 $ 44,110
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation expense 387,607 310,187 245,475
Non-cash charges to earnings - 36,136 -
Non-cash investment (gains)/losses 18,314 (221,088) -
Non-cash HTCC investment impairment charge - - 31,905
Cumulative effect of change in accounting principle - - 3,394
Allowance for equity funds used during construction (3,257) (4,586) (3,869)
Deferred income tax and investment tax credit 53,215 26,644 22,203
Change in operating accounts receivable (11,685) (1,966) (29,103)
Change in accounts payable and other (32,452) 52,066 (92,353)
Change in accrued taxes and interest (28,944) 29,867 19,305
Change in other assets (34,583) 6,430 8,832
------------- ------------- -------------
Net cash provided by continuing operating activities $ 308,144 $ 370,289 $ 249,899
============= ============= =============
(19) Retirement Plans:
-----------------
Pension Plan
------------
We 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.
F-33
The following tables set forth the plan's benefit obligations and fair
values of plan assets as of December 31, 2000 and 1999 and net periodic
benefit cost for the years ended December 31, 2000, 1999 and 1998.
($ in thousands) 2000 1999
---------- ----------
Change in benefit obligation
Benefit obligation at beginning of year $ 227,602 $ 252,914
Service cost 12,286 13,234
Interest cost 18,772 17,200
Amendments 275 (1,877)
Actuarial (gain)/loss 23,223 (33,039)
Acquisitions 11,300 -
Benefits paid (11,434) (20,830)
---------- -----------
Benefit obligation at end of year $ 282,024 $ 227,602
========== ===========
Change in plan assets
Fair value of plan assets at beginning of year $ 238,886 $ 232,536
Actual return on plan assets 7,155 21,760
Acquisitions 12,622 -
Employer contribution 2,171 5,420
Benefits paid (11,434) (20,830)
---------- -----------
Fair value of plan assets at end of year $ 249,400 $ 238,886
========== ===========
(Accrued)/Prepaid benefit cost
Funded status $ (32,624) $ 11,284
Unrecognized net liability 103 146
Unrecognized prior service cost 1,795 1,673
Unrecognized net actuarial (gain)/loss 21,900 (13,911)
---------- -----------
(Accrued)/Prepaid benefit cost $ (8,826) $ (808)
========== ===========
For the years ended December 31,
---------------------------------------
2000 1999 1998
----------- ------------ ----------
Components of net periodic benefit cost
Service cost $ 12,286 $ 13,234 $ 10,747
Interest cost on projected benefit obligation 18,772 17,200 15,703
Return on plan assets (19,743) (19,081) (17,241)
Net amortization and deferral 196 175 400
----------- ----------- -----------
Net periodic benefit cost $ 11,511 $ 11,528 $ 9,609
=========== =========== ===========
Assumptions used in the computation of pension costs/ year-end benefit
obligations were as follows:
2000 1999
---- ----
Discount rate 8.0%/7.5% 7.0%/8.0%
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 June and August 2000, we acquired Verizon Nebraska and Verizon
Minnesota, respectively, including their pension benefit plans. The
Nebraska acquisition increased the pension benefit obligation by $3,762,000
and the fair value of plan assets by $4,123,000 as of December 31, 2000.
The Minnesota acquisition increased the pension benefit obligation by
$7,538,000 and the fair value of plan assets by $8,499,000 as of December
31, 2000.
F-34
Postretirement Benefits Other Than Pensions
-------------------------------------------
We provide certain medical, dental and life insurance benefits for retired
employees and their beneficiaries and covered dependents. The following
table sets forth the plan's benefit obligations and the postretirement
benefit liability recognized on our balance sheets at December 31, 2000 and
1999 and net periodic postretirement benefit costs for the years ended
December 31, 2000, 1999 and 1998:
($ in thousands) 2000 1999
----------- -----------
Change in benefit obligation
Benefit obligation at beginning of year $ 45,528 $ 51,983
Service cost 652 781
Interest cost 3,943 3,431
Plan participants' contributions 700 629
Curtailments (812) -
Actuarial (gain)/loss 8,733 (8,590)
Acquisitions 3,441 -
Benefits paid (2,994) (2,706)
------------ ------------
Benefit obligation at end of year $ 59,191 $ 45,528
============ ============
Change in plan assets
Fair value of plan assets at beginning of year $ 20,460 $ 18,710
Actual return on plan assets 1,093 1,200
Benefits paid - (948)
Employer contribution 1,498 1,498
Acquisitions 2,361 -
----------- ------------
Fair value of plan assets at end of year $ 25,412 $ 20,460
=========== ============
Accrued benefit cost
Funded status $ (33,779) $ (25,068)
Unrecognized transition obligation 281 359
Unrecognized (gain) (4,832) (14,953)
----------- ------------
Accrued benefit cost $ (38,330) $ (39,662)
=========== ============
For the years ended December 31,
----------------------------------------
2000 1999 1998
------------- ---------- ----------
Components of net periodic postretirement benefit costs
Service cost $ 652 $ 781 $ 980
Interest cost on projected benefit obligation 3,943 3,431 3,523
Return on plan assets (1,688) (1,544) (549)
Net amortization and deferral (770) (828) (947)
Curtailment gain (757) - (2,003)
Acquisition (gain)/loss 581 - -
------------ ------------ ----------
Net periodic postretirement benefit cost $ 1,961 $ 1,840 $ 1,004
============ ============ ==========
For purposes of measuring year end benefit obligations, we used the same
discount rates as were used for the pension plan and a 9% annual rate of
increase in the per-capita cost of covered medical benefits, gradually
decreasing to 5% in the year 2050 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 $356,000 and
the effect on the accumulated postretirement benefit obligation for health
benefits would be $4,694,000. 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 ($316,000) and the effect on the accumulated postretirement
benefit obligation for health benefits would be ($4,193,000).
F-35
In August 1999, our 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.
In June and August 2000, we acquired Verizon Nebraska and Verizon
Minnesota, respectively, including their postretirement benefit plans. The
Nebraska acquisition increased the accumulated postretirement benefit
obligation by $1,095,000 as of December 31, 2000. The Minnesota acquisition
increased the accumulated postretirement benefit obligation by $1,765,000
and the fair value of plan assets by $2,361,000 as of December 31, 2000.
401(k) Savings Plans
--------------------
We sponsor employee savings plans under section 401(k) of the Internal
Revenue Code. The plans cover substantially all full-time employees. Under
the plans, we provide matching contributions in our stock based on
qualified employee contributions. Matching contributions were $5,973,000,
$5,850,000 and $5,795,000 for 2000, 1999 and 1998, respectively.
(20) Commitments and Contingencies:
-----------------------------
We have budgeted capital expenditures in 2001 of approximately $750
million, including $654 million for the ILEC and ELI, $57 million for gas
and electric, and $39 million for discontinued operations. Certain
commitments have been entered into in connection therewith.
In December 1999, we entered into a three-year agreement with Nortel to
outsource elements of DMS central office engineering and commissioning of
our network. Our commitment under this agreement is approximately
$37,000,000 for 2001 and $35,000,000 for 2002. The 2001 capital cost of
this contract is included in the 2001 budgeted capital expenditures,
presented above.
We conduct certain of our operations in leased premises and also lease
certain equipment and other assets pursuant to operating leases. Future
minimum rental commitments for all long-term noncancelable operating leases
for continuing operations are as follows:
($ in thousands) Year Amount
-------------- --------------
2001 $ 28,135
2002 18,584
2003 14,013
2004 11,439
2005 9,589
thereafter 53,875
--------------
Total $ 135,635
==============
Total rental expense included in our results of operations for the years
ended December 31, 2000, 1999 and 1998 was $33,042,000, $30,855,000 and
$27,964,000, respectively. We sublease, on a month to month basis, certain
office space in our corporate office to a charitable foundation formed by
our 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, 2000 and 1999, ELI was leasing
assets under this agreement with an original cost of approximately
$108,541,000. 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
$6.7 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 $88 million) of the lessor's investment. We have guaranteed
all obligations of ELI under this operating lease.
F-36
ELI has entered into various capital and operating leases for fiber optic
cable to interconnect ELI's local networks with long-haul fiber optic
routes. The terms of the various agreements covering these routes range
from 20 to 25 years, with varying optional renewal periods. For certain
contracts, rental payments are based on a percentage of ELI's leased
traffic, and are exclusive, subject to certain minimums. For other
contracts, certain minimum payments are required.
ELI has also entered into certain operating and capital leases in order to
develop ELI's local networks, including an operating lease to develop a
local network in Phoenix and a capital lease in San Francisco. The
operating lease in Phoenix provides for rental payments based on a
percentage of the network's operating income for a period of 15 years. The
capital lease in San Francisco is a 30-year indefeasible and exclusive
right to use agreement for optical fibers in the San Francisco Bay Area.
Minimum payments on operating leases are included in the table above. For
payments on capital leases, see Note 8.
We are a party to contracts with several unrelated long distance carriers.
The contracts provide fees based on leased traffic subject to minimum
monthly fees. We also purchase capacity and associated energy from various
electric energy and natural gas suppliers. Some of these contracts obligate
us to pay certain capacity costs whether or not energy purchases are made.
These contracts are intended to complement the other components in our
power supply to achieve the most economic mix reasonably available. At
December 31, 2000, the estimated future payments for long distance
contracts, and capacity and energy that we are obligated for are as
follows:
($ in thousands) Year Amount
-------------- --------------
2001 $ 155,111
2002 120,059
2003 74,340
2004 55,184
2005 55,178
thereafter 297,763
--------------
Total $ 757,635
==============
The Vermont Joint Owners (VJO), a consortium of 14 Vermont utilities,
including us, 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, 2000, 1999 and 1998, our 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. 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 us, 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 our
financial results.
In the fourth quarter of 2000, we settled a proceeding with the Louisiana
Public Service Commission. Louisiana Gas Service, our subsidiary, refunded
approximately $27 million to ratepayers during the month of January 2001,
effected as a credit on customers' bills. As a result, we recorded
approximately $29.7 million of charges to earnings in the fourth quarter of
2000. This amount included a reduction to revenue for the refund to
customers of approximately $27 million and legal fees of approximately $2.7
million. The Louisiana Gas Service business is to be sold to Atmos Energy
Co. and the sale is expected to close in the first half of 2001 following
regulatory approval (see Note 5).
We are involved in various other 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 our consolidated financial position,
results of operations or liquidity.
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