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CITIZENS UTILITIES COMPANY
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
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OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE YEAR ENDED DECEMBER 31, 1994
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1994 Commission file number 0-1291
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CITIZENS UTILITIES COMPANY
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(Exact name of registrant as specified in its charter)
Delaware 06-0619596
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
High Ridge Park
P.O. Box 3801
Stamford, Connecticut 06905
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (203) 329-8800
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Securities registered pursuant to Section 12(b) of the Act:
Common Stock Series A, par value $.25 per share New York Stock Exchange
Common Stock Series B, par value $.25 per share New York Stock Exchange
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(Title of each class) (Name of exchange on
which registered)
Securities registered pursuant to Section 12(g) of the Act:
NONE
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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 twelve 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 ninety days.
Yes X No
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State the aggregate market value of the voting stock held by nonaffiliates
of the registrant as of January 31, 1995: $2,808,214,408.
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of January 31, 1995.
Common Stock Series A 152,700,792
Common Stock Series B 60,137,151
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement for the registrant's 1995 Annual Meeting of Stockholders
is incorporated by reference into Part III of this Report.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Item 1. Description of Business
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(a) General Development of Business
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The "Company" includes Citizens Utilities Company and its subsidiaries
except where the context or statement indicates otherwise. The Company was
incorporated in Delaware in 1935 to acquire the assets and business of a
predecessor public utility corporation. Since then, the Company has grown as
a result of investment in owned utility operations and numerous acquisitions
of additional utility operations. It continues to consider and carry out
business expansion through significant acquisitions and joint ventures in
traditional public utility and related fields and the rapidly evolving
telecommunications and cable television industries.
The Company directly, or through subsidiaries, provides
telecommunications, electric distribution, natural gas transmission and
distribution and water and wastewater treatment services to more than
1,400,000 customer connections in areas of eighteen states. Other than the
transfer to the Company of the GTE Telephone Properties discussed below,
there have not been any material changes in the business of the Company
during the past fiscal year. The Company's strong financial resources and
consistent operating performance enable it to make the investments and
conduct the operations necessary to serve growing areas and to expand through
acquisitions.
On May 19, 1993, the Company and GTE Corporation announced the signing
of ten definitive agreements pursuant to which the Company agreed to acquire
from GTE Corporation, for $1.1 billion, certain telephone properties serving
approximately 500,000 local telephone access lines in nine states ("the GTE
Telephone Properties"). On December 31, 1993, 189,123 access lines in Idaho,
Tennessee, Utah and West Virginia were transferred to the Company. On June
30, 1994, 270,883 local telephone access lines in New York were transferred
to the Company. On November 30, 1994, 37,802 local telephone access lines in
Arizona and Montana were transferred to the Company and on December 30, 1994,
5,440 local telephone access lines in California were transferred to the
Company. The remaining GTE Telephone Property is located in Oregon and is
expected to be transferred to Citizens in 1995.
On November 29, 1994, the Company and ALLTEL Corporation ("ALLTEL")
announced the signing of eight definitive agreements pursuant to which
Citizens agreed to acquire from ALLTEL for $292,000,000, certain telephone
properties servicing approximately 110,000 local telephone access lines and
certain cable television systems servicing approximately 7,000 subscribers.
The properties are located in eight states: Arizona, California, Nevada, New
Mexico, Oregon, Tennessee, Utah and West Virginia ("ALLTEL Telephone
Properties"). The closings are expected to occur state by state throughout
1995 and the first half of 1996.
(b) Financial Information about Industry Segments
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The Consolidated Statements of Income and Note 10 of the Notes to
Consolidated Financial Statements included herein sets forth financial
information about industry segments of the Company for the last three fiscal
years.
(c) Narrative Description of Business
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TELECOMMUNICATIONS
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The Company provides telecommunications services in Arizona,
California, Idaho, Montana, New York, Oregon, Pennsylvania, Tennessee, Utah,
Washington and West Virginia to primarily residential customers served by
more than 706,000 access lines as of December 31, 1994. The Company will
provide telecommunications services to customers served by approximately
126,000 additional access lines in Arizona, California, Nevada, New Mexico,
Oregon, Tennessee, Utah and West Virginia and cable television service to
approximately 7,000 subscribers in California upon the transfer to the
Company of the remaining GTE and ALLTEL Telephone Properties.
Telecommunications services consist of local exchange service, centrex
service, network access service, long distance service, interexchange
service, competitive access service, competitive local exchange service,
cellular service, cable television service and other related services. The
Company's telecommunications services and/or rates are subject to the
jurisdiction of the Federal Communications Commission and state regulatory
agencies.
Various state regulatory agencies, state legislatures and the federal
government have initiated proceedings to promote the development of
competition in telecommunications markets. These proceedings are focussed on
removing the regulatory and legal barriers to competitive entry into the
interLATA toll, intrastate intraLATA toll and local exchange markets;
developing rules to govern the relationship between competitors; and
designing rebalanced rate structures for the incumbent local exchange company
("LEC") which would allow LECs the opportunity to effectively compete in
these markets while protecting the public's interest and access to
telecommunication services. Simultaneously, many states are investigating or
have implemented procedures for LECs to enter into incentive regulatory
frameworks ("IRF") as an alternative to traditional rate base, rate of return
regulation, and/or classifying services on the basis of the presence of
competition and allowing deregulation or flexible pricing regulation for the
services deemed competitive.
The Public Utility Commission of the State of California ("CPUC")
issued an order, effective January 1, 1995, authorizing competition for
intrastate intraLATA switched toll services, rebalancing local exchange and
toll rates, establishing more specific procedures for local exchange carriers
to enter into incentive regulatory frameworks ("IRF") and providing a
timetable for the elimination of the intrastate toll settlement pools for
mid-sized local exchange carriers. In support of CPUC efforts which preceded
its order, the Company's California telephone subsidiary (the "Subsidiary")
exited the toll settlement pools in 1991 and entered into a transition
contract with Pacific Bell. Pursuant to this contract, Pacific Bell agreed
to pay the Subsidiary $38,000,000 annually through the end of 1994 to
partially offset the decline in revenues which resulted from exiting the toll
settlement pools. The Subsidiary expected to conclude a general rate case
permitting the implementation of rebalanced, competitive rates effective
January 1, 1995 intended to protect the Subsidiary's overall revenues, other
than the $38,000,000 Pacific Bell contract payment, by enabling it to
effectively compete in the intrastate intraLATA switched toll services
market. Although this general rate case has not been finalized, the CPUC has
issued an interim rate order which became effective January 1, 1995 and
authorizes rebalanced competitive rates for the Subsidiary. In its general
rate case, the Subsidiary requested approval of an IRF which would allow it
to earn up to 5% in excess of its authorized rate of return. It is expected
that the approved IRF will be effective when the final rate order is issued
later in 1995.
The Company continues to invest in its subsidiary, Electric Lightwave,
Inc. ("ELI"), a competitive access provider in Arizona, California, Oregon,
Utah and Washington. Through ELI, the Company has been granted authority in
Washington to provide competitive local exchange service and has filed
applications to provide competitive local exchange service in Utah and
Oregon. The Company has completed construction of a fiber-optic route from
Las Vegas, Nevada to Phoenix, Arizona which will provide the Company's other
telecommunications operations in Arizona centralized equal access to long
distance carriers and will provide the Company with the fiber optic capacity
to provide transport services to other carriers along this route. The Company
has invested approximately $110,300,000 in ELI through the year ended
December 31, 1994.
The Company's Mohave Cellular subsidiary holds a one-third interest and
is general managing partner of a cellular limited partnership operating six
cell sites in Arizona.
On September 22, 1994, a subsidiary of the Company and a subsidiary of
Century Communications Corp. ("Century") entered into a joint venture
agreement for the purpose of acquiring, for approximately $89 million, and
operating two cable television systems in southern California (the
"Systems"). Century is a cable television company of which Leonard Tow, the
Chairman and Chief Executive Officer of the Company, is Chairman, Chief
Executive Officer, Chief Financial Officer and a director. In addition,
Claire Tow, a director of the Company is Senior Vice President and a director
of Century and Robert Siff, a director of the Company is a director of
Century. The joint venture is governed by a management board on which the
Company and Century are equally represented. The joint venture has entered
into an agreement pursuant to which a subsidiary of Century (the "Manager")
will manage the day-to-day operations of the Systems. The Manager will not
receive a management fee but will be reimbursed only for the actual costs it
incurs on behalf of the joint venture. With respect to the purchase of any
service or asset for the joint venture for use in the Systems, the Manager
is obligated to pass through to the joint venture any discount, up to 5%, off
the published prices of vendors and is entitled to retain any discount in
excess of 5%. On September 30, 1994, the joint venture acquired one of the
systems serving approximately 26,500 subscribers. The purchase of the second
system, serving approximately 19,200 subscribers, remains subject to
regulatory approval for the transfer of licenses.
Through a subsidiary, the Company intends to provide new
telecommunications toll services. State regulatory agencies have granted
authority for the Company to provide intrastate intraLATA and interLATA toll
services in New York and West Virginia and intrastate interLATA toll services
in California. The Company also intends to provide intrastate intraLATA and
interLATA toll services in Idaho, Tennessee and Utah where such authority is
not required. Upon receipt of required authority, the Company intends to
provide authorized intrastate toll services in Arizona, Montana, Nevada,
Oregon and Washington. The Company has authority and intends to provide
interstate toll services initially in its local telephone service areas.
In January 1995, the Company entered into a definitive agreement to
acquire Flex Communications by merger in a stock-for-stock transaction. Flex
is a switch-based, inter-exchange carrier providing long-distance, 800
Inbound long-distance, voice mail, paging, private data networks and cellular
services to approximately 3,500 customers in upstate New York. The
transaction is expected to close in 1995.
The GTE Telephone Properties acquired and to be acquired and the ALLTEL
Telephone Properties to be acquired increase the Company's number of local
exchange access lines serving customers to approximately 832,000. To better
manage its telecommunications properties, the Company is consolidating its
telecommunications operations support services and establishing a centralized
telecommunications infrastructure to manage these services. In this regard,
the Company has entered into an agreement with ALLTEL's information services
subsidiary, ALLTEL Information Services, Inc. ("AISI"), pursuant to which
AISI will provide certain operational support systems in a service bureau
environment for all of the Company's local telephone exchange operations;
such support systems include customer billing and customer service and
engineering information data bases. AISI will also provide network
management, data center operations and ongoing software modernization for
existing systems to meet new business requirements. This agreement is
expected to enhance significantly the Company's management and operation of
all of its local telephone exchange operations. Although such agreement
contemplates a multi-year arrangement, the Company has the unilateral right
to terminate such agreement if the parties do not execute a separate
agreement which involves the development of certain new operating support
systems.
NATURAL GAS
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Operating divisions of the Company provide natural gas transmission and
distribution services to primarily residential customers in Arizona, Colorado
and Louisiana. The total number of natural gas customers served as of December
31, 1994 was approximately 356,000. The provision of services and/or rates
charged are subject to the jurisdiction of federal and state regulatory
agencies. The Company purchases all needed natural gas, the supply of which
is believed to be adequate to meet current demands and to provide for
additional sales to new customers. The natural gas industry is subject to
seasonal demand, with the peak demand occurring during the heating season of
November 1 through March 31. The Company's natural gas sector experiences
third party competition from fuel oil, propane, and other natural gas
suppliers for most of its large consumption customers (of which there are
few) and from electricity for all of its customer base. The competitive
position of natural gas at any given time depends primarily on the relative
prices of natural gas and these other energy sources. Various federal and
state tax incentive programs call for replacing other fuels with compressed
natural gas. However, these regulations may, in certain circumstances, also
promote the use of other fuels to replace natural gas.
The Company continues to expand its northern Arizona natural gas
transmission and distribution service area. The service area has grown from
63,000 customers prior to expansion to 77,000 customers as of December 31,
1994.
ELECTRIC
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Operating divisions of the Company provide electric distribution
services to primarily residential customers in Arizona, Hawaii and Vermont.
Total number of electric customers served as of December 31, 1994 was
approximately 105,000. The provision of services and/or rates charged are
subject to the jurisdiction of federal and state regulatory agencies. The
Company purchases over 80% of needed electric energy, the supply of which is
believed to be adequate to meet current demands and to provide for additional
sales to new customers. As a whole, the Company's electric sector does not
experience material seasonal fluctuations. In response to regulatory
initiatives, the Company's electric sector is proceeding with demand-side
management programs and integrated resource planning techniques designed to
promote the most efficient use of electricity and to reduce the environmental
impacts associated with new generation facilities.
The Company's Kauai Electric Division ("KED") has restored all
transmission and distribution lines, poles and equipment that were damaged
as a result of Hurricane Iniki in September 1992. The Hawaii Public Utilities
Commission ("HPUC") approved a stipulation on December 9, 1992 which
addresses the regulatory treatment of certain costs associated with the
restoration of KED facilities. As part of this stipulation, KED agreed to
defer its next general rate increase application until 1994 with rates
becoming effective no earlier than January 1, 1995 (the "deferred rate
case"). Under the terms of this stipulation, KED is authorized to earn an
allowance for funds used during construction ("AFUDC") on the restoration
costs. The allowed restoration costs, plus associated AFUDC earnings, will
be included in rate base and recovered in the deferred rate case. Restoration
costs plus associated AFUDC earnings not ultimately allowed in rate base
should be recovered by the Company in the deferred rate case over an
amortization period to be determined in that case. Depreciation expense on
the restoration plant is being deferred and will be amortized over the
remaining useful life of the restored plant when rates are approved in the
deferred rate case. Lost gross margin (unrecovered costs of service and the
allowed return on investment based on the rate award received by the KED in
November, 1992) and interest, compounded monthly, on the lost gross margin
is authorized to be accrued and is subject to recovery in the deferred rate
case. KED made final modifications to its filed deferred rate case in July
1994 using a future test year of 1995. The deferred rate case requested an
increase in rates of $23,600,000, with the rate increase to be phased-in over
three steps ending in April of 1996. A final order from the HPUC regarding
the deferred rate case is currently expected later in 1995.
Prior to 1992, the United States Environmental Protection Agency
("EPA") named the Company a potentially responsible party ("PRP") with
respect to three sites which have been designated for federally supervised
clean-up under the Comprehensive Environmental Response, Compensation and
Liability Act. These three sites are Missouri Electric Works in Cape
Girardeau, Missouri; Northwest Transformer in Everson, Washington; and Rose
Chemicals in Holden, Missouri. The EPA has determined that the Company's
electric sector's participation in each site is less than 0.5%. The number
of named PRP's ranges from 40 to 700 at each site. Significant parties have
accepted responsibility and are currently funding the clean-up activity as
required. The Company's remaining financial liability is estimated to be
approximately $140,000.
WATER/WASTEWATER
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The Company provided water and/or wastewater treatment services to
approximately 270,000 primarily residential customer connections in Arizona,
California, Illinois, Indiana, Ohio and Pennsylvania as of December 31, 1994.
The provision of these services and/or rates charged are subject to the
jurisdiction of federal, state and local regulatory agencies. A significant
portion of the Company's water/wastewater treatment sector construction
expenditures necessary to serve new customers are made under agreements with
land developers who generally advance funds for construction and/or plant to
the Company that are later refunded by the Company in part as developers add
new customers and revenues are added in their developments.
The Company's water/wastewater treatment public utility properties
can become subjected to condemnation proceedings initiated by municipalities
or utility districts seeking to acquire and take control of the operation of
such property. During 1992, one operation in Illinois became subject to such
proceeding. This condemnation is being contested by the Company.
On August 31, 1994, RHC, Inc. ("Metro Utility Co."), an operator of
water and wastewater utilities serving portions of the suburban Chicago area,
was merged into the Company. The acquired operations serve approximately
10,000 customers, increasing the number of the Company's water/wastewater
treatment customers in Illinois to over 65,000. The Company issued 504,807
shares of Common Stock Series B in exchange for all of the common stock of
Metro Utility Co. The transaction was accounted for as a pooling of
interests.
In September 1992, the EPA filed a complaint with the United States
District Court for the Northern District of Illinois relating to alleged
violations by the Company's Illinois subsidiary with respect to National
Pollutant Discharge Elimination System permit requirements. The Company has
negotiated a proposed settlement of this action. Such settlement is now
undergoing the approval process within the EPA; once it is approved, it will
be submitted to the District Court for final approval. Under the settlement,
the Company will pay a fine of $490,000 and it will also make certain plant
improvements with an estimated cost of $2,200,000. These improvements are
presently under design. Construction is expected to begin in 1995 and be
completed before the end of 1996. The improvements are required in order to
comply with new discharge limits reached under the settlement. As a regulated
entity, the Company is entitled to earn a fair rate of return on these
improvements that are placed in service for the benefit of its customers. The
Company believes that the cost of these improvements will be recovered
through customer rates.
General
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The Company's public utility operations are conducted primarily in
small-and medium-size towns and communities. No material part of the
Company's business is dependent upon a single customer or upon a small group
of customers. The loss of one or more of such customers would not have a
material adverse effect on operating income. As a result of its
diversification, the Company is not dependent upon any single geographic area
or upon any one type of utility service for its revenues. Due to this
diversity, no single regulatory body regulates a utility service of the
Company accounting for more than 13% of its 1994 revenues.
The Company is subject to regulation by the respective state regulatory
agencies and federal regulatory agencies. The Company is not subject to the
Public Utility Holding Company Act. Order backlog is not a significant
consideration in the Company's business, and the Company has no contracts or
subcontracts which may be subject to renegotiation of profits or termination
at the election of the federal government. The Company holds franchises from
local governmental bodies, which vary in duration. The Company also holds
certificates of convenience and necessity granted by various state
commissions which are generally of indefinite duration. The Company has no
special working capital practices. The Company's research and development
activities are not material. There are no patents, trademarks, licenses or
concessions held by the Company that are material.
The Company had 4,294 employees at December 31, 1994.
(d) Financial Information about Foreign and Domestic Operations and Export
Sales
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The Company does not have any foreign operations or material export
sales.
Item 2. Description of Property
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The administrative offices of the Company are located at High
Ridge Park, Stamford, Connecticut, 06905 and are leased. The Company owns
property including: telecommunications outside plant, central office,
microwave radio and fiber-optic facilities; electric generation, transmission
and distribution facilities; gas transmission and distribution facilities;
water production, treatment, storage, transmission and distribution
facilities; and wastewater treatment, transmission, collection and discharge
facilities; all of which are necessary to provide services at the locations
listed below.
State Service(s) Provided
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Arizona Electric, Natural Gas, Telecommunications,*
Water, Wastewater treatment
California Telecommunications, Water
Colorado Natural Gas
Hawaii Electric
Idaho Telecommunications
Illinois Water, Wastewater treatment
Indiana Water
Louisiana Natural Gas
Ohio Water, Wastewater
Oregon Telecommunications
Montana Telecommunications
New York Telecommunications
Pennsylvania Telecommunications, Water
Tennessee Telecommunications
Utah Telecommunications
Vermont Electric
Washington Telecommunications
West Virginia Telecommunications
* Certain properties are subject to a mortgage deed pursuant to Rural
Electrification Administration and Rural Telephone Bank borrowings.
Item 3. Legal Proceedings
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In September 1992, the United States Environmental Protection
Agency filed a complaint with the United States District Court for the
Northern District of Illinois relating to alleged violations by the Company's
Illinois subsidiary with respect to National Pollutant Discharge Elimination
System permit requirements. The Company has negotiated a proposed settlement
of this action. Such settlement is now undergoing the approval process within
the Environmental Protection Agency; once it is approved, it will be
submitted to the District Court for final approval. Under the settlement, the
Company will pay a fine of $490,000 and it will also make certain plant
improvements with an estimated cost of $2,200,000. These improvements are
presently under design. Construction is expected to begin in 1995 and be
completed before the end of 1996. The improvements are required in order to
comply with new discharge limits reached under the settlement. As a regulated
entity, the Company is entitled to earn a fair rate of return on these
improvements that are placed in service for the benefit of its customers. The
Company believes that the cost of these improvements will be recovered
through customer rates.
On February 19, 1993, the Company was served with a summons and
complaint in an action brought by the Sun City Taxpayers' Association in the
United States District Court for the District of Connecticut. The plaintiff
alleged that the Company, through its Sun City Water Company and Sun City
Sewer Company subsidiaries, misrepresented rate-base investment in rate
applications submitted to the Arizona Corporation Commission ("ACC") between
1968 and 1978 and claimed damages of $65,000,000 before trebling. The
plaintiff made substantially the same allegations in a regulatory proceeding
before the ACC in 1986 and the ACC rejected those allegations. On February
1, 1994, the Company's motion to dismiss this action was granted and the
complaint was dismissed by an opinion and order of the District Court. On
February 9, 1994, plaintiff filed a notice of appeal seeking review of the
court's ruling by the United States Court of Appeals for the Second Circuit.
The Second Circuit denied the appeal on January 23, 1995 and the Plaintiff
filed a Writ of Certiorari to the United States Supreme Court on February 14,
1995.
In June 1993, several stockholders commenced purported derivative
actions in the Delaware Court of Chancery against the Company's Board of
Directors. These actions have since been consolidated (the "Consolidated
Action"). These stockholders allege that the compensation approved by the
Board of Directors for the Company's Chairman is excessive and seek, among
other things, an accounting for alleged corporate waste and a declaration
that the Chairman's employment agreement and existing stock options are
invalid. These stockholders further allege that certain corporate
transactions involving the Company and Century Communications Corp.
("Century") benefitted Century to the detriment of the Company. In February
1994, a memorandum of understanding was executed among counsel for the
stockholders in the Consolidated Action and counsel for the Company's Board
of Directors. The memorandum of understanding contemplates that the parties
will attempt to agree upon and execute a stipulation of settlement resolving
all of the claims in the Consolidated Action. Consummation of the proposed
settlement will be subject to: (a) the completion by plaintiffs of
appropriate confirmatory discovery in the Consolidated Action; (b) the
drafting and execution of a stipulation of settlement; (c) notice to all
stockholders of the Company of the terms of the proposed settlement; and (d)
final approval of the stipulation of settlement by the Delaware Court of
Chancery and dismissal of the Consolidated Action with prejudice. It is
contemplated that the stipulation of settlement will provide for certain
modifications to the Chairman's compensation arrangements and for the
complete release and settlement of all claims of the plaintiffs and all
derivative claims of the Company against the Company's Board of Directors
arising out of the allegations in the Consolidated Action. The plaintiffs in
the Consolidated Action have completed their confirmatory discovery, and the
terms of the stipulation of settlement are being negotiated. Plaintiffs'
counsel will seek an award of attorneys' fees and expenses in connection with
the settlement. No understanding has been reached with respect to the amount
of fees and expenses to be sought, but the Company expects to recover the
fees and expenses, if any, to be awarded by the Delaware Court of Chancery
to plaintiffs' counsel under the Company's Directors' and Officers' liability
insurance policy.
Another action ("Thorpe") was filed in June 1993 in the Delaware
Court of Chancery. Like the plaintiffs in the Consolidated Action, plaintiffs
in Thorpe allege derivative claims challenging the Chairman's compensation as
excessive and the validity of certain stock options granted to the Chairman
and other members of the Company's Board of Directors. The plaintiffs in
Thorpe also assert derivative claims challenging the fairness of the 1991
merger between the cellular subsidiaries of the Company and Century. In
addition, these plaintiffs have alleged that the Chairman and Century paid a
premium to purchase control of the Company from the former Chairman, Richard
L. Rosenthal, and others. The plaintiffs in Thorpe have also asserted
individual and purported class claims challenging the disclosures made by the
defendants relating to the above matters and the allegedly improper accounting
treatment with respect to the Company's investment in Centennial Cellular
Corp. These plaintiffs seek, among other things, an accounting for alleged
corporate waste, a declaration that the Chairman's employment agreement
and existing stock options are invalid and unspecified monetary damages from
the director defendants. In November 1993, another purported derivative
action ("Biggs") was filed in the Delaware Court of Chancery against the
Company's Board of Directors and Century. The plaintiffs in Biggs challenge the
Chairman's compensation, the grant of stock options to the Chairman and
other members of the Company's Board of Directors and the 1991 cellular
subsidiary merger and the service agreement between Century and Centennial.
The Company's Board of Directors has moved to dismiss the complaints in these
derivative actions for failure to state a claim and for failure to comply
with the demand requirements applicable to a derivative suit. The motions
are currently pending. In May 1994, the Delaware Court of Chancery stayed
proceedings in the Thorpe and Biggs actions pending presentation of the
proposed stipulation of settlement of the Consolidated Action for approval by
the Court.
In June 1993, a stockholder of the Company ("Berlin") commenced a
purported class action in the United States District Court for the District
of Delaware against the Company and the Company's Board of Directors. The
stockholder's complaint, amended in July 1993, alleged that the proxy
statements disseminated by the Company from 1990 to 1993 failed to disclose
material information regarding, among other things, the Chairman's
compensation and certain purported related-party transactions and thereby
violated federal and state disclosure requirements. The relief sought
included a declaration that the results of the 1993 Annual Meeting of the
stockholders are null and void, a declaration that the Chairman's Employment
Agreement is invalid and unspecified damages. In September 1994, the District
Court granted in part and denied in part defendants' motion to dismiss the
amended complaint and denied defendants' motion for summary judgment. In
October 1994, defendants moved for summary judgment dismissing the remainder
of the claim. This motion is currently pending. In November 1994, plaintiff
moved to supplement her amended complaint to add a claim seeking to
invalidate the results of the 1994 Annual Meeting of Citizens stockholders
on the grounds that the Company's 1994 proxy statement allegedly failed to
disclose the amount of the management fee then proposed to be paid to Century
in connection with a proposed cable television joint venture. The proposed
supplemental complaint also seeks unspecified monetary damages. This motion
is currently pending.
In October 1994, the Company and eight other companies were served with
a Summons and Complaint by the Town of Walkill, New York ("the Town") in the
United States District Court for the Southern District of New York. The Town
seeks to recover an unspecified amount representing response costs resulting
from the release or threatened release of hazardous substances at the Town's
Landfill, and damages and restitution under common law theories for other
costs associated with environmental conditions at the Town's Landfill. The
Town also seeks a declaratory judgement under CERCLA that the Defendants are
strictly, jointly and severally liable for future necessary response costs.
The Company notified GTE Corporation of this action since any potential
liability for this matter has been retained by GTE Corporation pursuant to
the Asset Purchase Agreement dated May 18, 1993. GTE Corporation has assumed
the Company's defense in this action.
The Company believes the risk of material loss from the above actions
is remote.
Item 4. Submission of Matters to Vote of Security Holders
-------------------------------------------------
None in fourth quarter 1994.
Executive Officers
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Information as to Executive Officers of the Company as of January
31, 1995, follows:
Name Age Current Position and Office
- ---------- --- ---------------------------
Leonard Tow 66 Chairman of the Board, Chief
Executive Officer and Chief
Financial Officer
Daryl A. Ferguson 56 President and Chief Operating
Officer
Robert J. DeSantis 39 Vice President, Treasurer and
Assistant Secretary
James P. Avery 38 Vice President, Energy
Richard A. Faust,Jr. 48 Vice President, Mohave County and
Assistant Secretary
J. Michael Love 43 Vice President, Corporate
Planning
Robert L. O'Brien 52 Vice President, Regulatory
Affairs
Donald K. Roberton 53 Vice President,
Telecommunications
Livingston E. Ross 46 Vice President and Controller
Ronald E. Walsh 55 Vice President, Water/Wastewater
and Assistant Secretary
There is no family relationship between any of the officers of the
Registrant. The term of office of each of the foregoing officers of the
Registrant will continue until the next annual meeting of the Board of
Directors and until a successor has been elected and qualified.
LEONARD TOW has been associated with the Registrant since April 1989
as a Director. In June 1990, he was elected Chairman of the Board and Chief
Executive Officer. In October 1991, he was appointed to the additional
position of Chief Financial Officer of the Registrant. He has also been a
Director, Chief Executive Officer and Chief Financial Officer of Century
Communications Corp. since its incorporation in 1973, and Chairman of its
Board of Directors since October 1989.
DARYL A. FERGUSON has been associated with the Registrant since July
1989. He was Vice President, Administration from July 1989 through March 1990
and Senior Vice President, Operations and Engineering from March 1990 through
June 1990. He has been President and Chief Operating Officer since June 1990.
During the period April 1987 through July 1989, he was President and Chief
Executive Officer of Microtecture Corporation. He is currently a Director of
Centennial Cellular Corp.
ROBERT J. DeSANTIS has been associated with the Registrant since
January 1986. He was Assistant to the Treasurer through May 1986 and
Assistant Treasurer from June 1986 through September 1991. He has been Vice
President and Treasurer since October 1991 and Assistant Secretary since May
1993.
JAMES P. AVERY has been associated with the Registrant since August
1981. He was Project Manager, Electric through June 1988, Assistant Vice
President, Electric Operations from June 1988 through December 1990 and Vice
President, Electric from December 1990 through May 1994. He has been Vice
President, Energy since June 1994.
RICHARD A. FAUST, JR. has been associated with the Registrant since
December 1990. He was associated with Louisiana General Services, Inc. from
1972 until that Company was merged with the Registrant in December 1990. He
served as Vice President, General Counsel and Secretary of Louisiana General
Services, Inc. from March 1984 through May 1993. He was elected Assistant
Secretary for the Registrant in June 1991 and Vice President, Mohave County,
(Arizona) in June 1993.
J. MICHAEL LOVE has been associated with the Registrant since May 1990
and from November 1984 through January 1988. He was Assistant Vice President,
Regulatory Affairs and Community Relations from June 1986 through January
1988. He left the Registrant in January 1988 to become President and General
Counsel of Southern New Hampshire Water Company. He rejoined the Registrant
in April 1990 and was Assistant Vice President, Corporate Planning from June
1990 through March 1991. He has been Vice President, Corporate Planning since
March 1991.
ROBERT L. O'BRIEN has been associated with the Registrant since March
1975. He has been Vice President, Regulatory Affairs since June 1981.
DONALD K. ROBERTON has been associated with the Registrant since
January 1991 and has been Vice President, Telecommunications since that date.
Prior to joining the Registrant, he was Vice President, Western Operations
at Henkels & McCoy from December 1989 through December 1990. From January
1984 through November 1989, he was Vice President with Centel
Communications Systems.
LIVINGSTON E. ROSS has been associated with the Registrant since August
1977. He was Manager of Reporting from September 1984 through March 1988,
Manager of General Accounting from April 1988 through September 1990 and
Assistant Controller from October 1990 through November 1991. He has been
Vice President and Controller since December 1991.
RONALD E. WALSH has been associated with the Registrant since January
1986. He was Attorney and Assistant Secretary from November 1987 through
August 1992. He has been Vice President, Water/Wastewater since August 1992.
PART II
-------
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters
----------------------------------------------------------------
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the New York Stock Exchange
under the symbols CZNA and CZNB for Series A and Series B, respectively. The
following table indicates the high and low prices per share as taken from the
daily quotations published in the "Wall Street Journal" during the periods
indicated. Prices have been adjusted retroactively for intervening stock
dividends, and the August 31, 1993 2-for-1 stock split, rounded to the
nearest 1/8th. (See Note 7 of Notes to Consolidated Financial Statements.)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ------------ ------------ -----------
High Low High Low High Low High Low
------------ ------------ ------------ ------------
1994:
- -----
Series A 17 1/8 14 15 7/8 13 1/4 14 1/2 13 1/4 13 3/4 12 1/2
Series B 17 1/4 13 7/8 15 7/8 13 1/4 14 1/2 13 1/4 13 3/4 12 5/8
1993:
- -----
Series A 16 3/4 12 3/4 17 1/2 15 1/8 17 1/4 12 5/8 18 7/8 15 3/8
Series B 16 3/4 12 7/8 17 1/2 15 17 1/4 12 5/8 18 3/4 15 3/8
The December 30, 1994 prices were: Series A $12.875 high, $12.50 low;
Series B $12.875 high, $12.625 low.
As of January 31, 1995, the approximate number of record security
holders of the Company's Common Stock Series A and Series B was 43,989. This
information was obtained from the Company's transfer agent.
DIVIDENDS
Quarterly stock dividends declared and issued on both Common Stock
Series A and Series B were 1.1% for the first quarter of 1994, 1.15% for the
second quarter of 1994, 1.3% for the third quarter of 1994 and 1.4% for the
fourth quarter of 1994. Quarterly stock dividends declared and issued on both
Common Stock Series A and Series B were 1.2% for the first quarter of 1993,
1.0% for the second quarter of 1993 and 1.1% for the third quarter of 1993
and 1.0% for the fourth quarter of 1993. An annual cash dividend equivalent
rate of .733 and .691 per share (adjusted for all stock splits and stock
dividends paid subsequent to all dividends declared through December 31, 1994
and rounded to the nearest 1/8th) was considered by the Company's Board of
Directors in establishing the Series A and Series B stock dividends during
1994 and 1993, respectively. (See Note 7 of Notes to Consolidated Financial
Statements.)
Item 6. Selected Financial Data (In thousands, except for per-share amounts)
--------------------------------------------------------------------
Year Ended December 31,
----------------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
Operating revenues $916,014 $619,392 $580,464 $545,025 $528,251
Income from continuing
operations $143,997 $125,630 $115,013 $112,354 $105,624
Earnings per-share of
Common Stock Series A
and Series B(1) $.77 $.67 $.63 $.62 $.57
Stock dividends
declared on Common
Stock Series A and
Series B(2) 5.04% 4.37% 5.61% 7.93% 6.54%
Total assets $3,576,566 $2,627,118 $1,887,981 $1,721,452 $1,491,199
Long-term debt $ 994,189 $ 547,673 $ 522,699 $ 484,021 $ 412,348
(1) Adjusted for subsequent stock dividends and splits; no adjustment has been
made for the Company's 1.5% first quarter 1995 stock dividend because
the effect is immaterial.
(2) Annual rate of quarterly stock dividends compounded. Cash dividends of
$.32 per share were paid by Louisiana General Services, Inc. in 1990
prior to its merger into the Company on December 4, 1990.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
---------------------------------------------------------------
(a) Liquidity and Capital Resources
-------------------------------
In 1994, the Company's primary sources of funds were from operations
and borrowings. Funds requisitioned from the 1994, 1993, 1992 and 1991 Series
Industrial Development Revenue Bond construction fund trust accounts were
used to pay for the construction of utility plant. Commercial paper notes
payable in the amount of $703,000,000 were outstanding as of December 31,
1994, of which $515,200,000 is classified as short-term debt as it represents
the balance of the amount that was issued to temporarily and partially fund
the acquisition of the GTE Telephone Properties; this debt is expected to be
repaid from maturing temporary investments, funds from operations and
proceeds from the issuance of equity securities.
On April 26, 1994, the Company issued $175,000,000 of debentures at
par with an interest rate of 7.6% and a maturity date of June 1, 2006. On
October 6, 1994, the Company issued $100,000,000 of debentures at par with an
interest rate of 7.68% and a maturity date of October 1, 2034. The proceeds
from the sale of the debentures were used to permanently fund the acquisition
of the GTE Telephone Properties. On June 16, 1994 and on September 9, 1994,
Citizens Utilities Rural Telephone Company, Inc., a subsidiary of the
Company, under its Rural Telephone Bank loan contract, was advanced
$2,394,000 and $3,848,000, respectively. These funds bear interest at a rate
of 5.3% and have an ultimate maturity date of December 31, 2027. On September
28, 1994, the Company arranged for the composite issuance of $14,640,000 of
1994 Series Industrial Development Revenue Bonds; the bonds were issued as
demand purchase bonds with an interest rate of 6.6% and mature on May 1,
2029.
On August 16, 1994, the Company filed a shelf-registration statement
with the Securities and Exchange Commission to register up to 1,600,000
shares of common stock Series B to fund acquisitions, from which 504,807
shares were issued on August 31, 1994 to fund the acquisition of Metro
Utility Co. and 622,500 restricted shares, previously issued for the 1993
acquisitions of Natural Gas Company of Louisiana and Franklin Electric Light
Company, Incorporated, were registered. On January 30, 1995, the Company,
pursuant to an underwritten public offering, issued 19,000,000 shares of its
Common Stock Series A at an issuance price of $13 3/8 per share and realized
$244,200,000 in net proceeds. These proceeds were used to repay short-term
debt.
The Company considers its operating cash flows and its ability to
raise debt and equity capital as the principal indicators of its liquidity.
Although working capital is not considered to be an indicator of the
Company's liquidity, the Company experienced a decrease in its working
capital at December 31, 1994. The decrease is primarily due to the issuance
of short-term debt to temporarily and partially fund the acquisition of the
GTE Telephone Properties.
Capital expenditures for the years 1994, 1993 and 1992 were
$311,420,000, $182,480,000 and $148,027,000, respectively, and for 1995 are
expected to be approximately $262,000,000. These expenditures were, and in
1995 will be, for utility and related facilities and properties, including
the GTE Telephone Properties acquired.
The Company anticipates that the funds necessary for its 1995 capital
expenditures will be provided from operations; from 1991, 1993 and 1994
Series Industrial Development Revenue Bond construction fund trust account
requisitions; from Rural Telephone Bank loan contract advances; from
commercial paper notes payable; from parties desiring utility service; from
debt, equity and other financings at appropriate times; and, if deemed
advantageous, from short-term borrowings under bank credit facilities. The
Company has committed lines of credit with banks under which it may borrow
up to $1,200,000,000.
During 1994, the Company was authorized net increases in annual
revenues for properties in Arizona, California, Pennsylvania and Vermont
totaling $7,206,000. The Company has requests for increases pending before
regulatory commissions in Arizona, California, Hawaii and Ohio.
Regulatory Matters
- ------------------
In September 1992, the United States Environmental Protection Agency
("EPA") filed a complaint with the United States District Court for the
Northern District of Illinois relating to alleged violations by the Company's
Illinois subsidiary with respect to National Pollutant Discharge Elimination
System permit requirements. The Company has negotiated a proposed settlement
of this action. Such settlement is now undergoing the approval process within
the EPA; once it is approved, it will be submitted to the District Court for
final approval. Under the settlement, the Company will pay a fine of $490,000
and it will also make certain plant improvements with an estimated cost of
$2,200,000. These improvements are presently under design. Construction is
expected to begin in 1995 and be completed before the end of 1996. The
improvements are required in order to comply with new discharge limits
reached under the settlement. As a regulated entity, the Company is entitled
to earn a fair rate of return on these improvements that are placed in
service for the benefit of its customers. The Company believes that the cost
of these improvements will be recovered through customer rates.
On February 19, 1993, the Company was served with a summons and
complaint in an action brought by the Sun City Taxpayers' Association in the
United States District Court for the District of Connecticut. The plaintiff
alleged that the Company, through its Sun City Water Company and Sun City
Sewer Company subsidiaries, misrepresented rate-base investment in rate
applications submitted to the Arizona Corporation Commission ("ACC") between
1968 and 1978 and claimed damages of $65,000,000 before trebling. The
plaintiff made substantially the same allegations in a regulatory proceeding
before the ACC in 1986 and the ACC rejected those allegations. On February
1, 1994, the Company's motion to dismiss this action was granted and the
complaint was dismissed by an opinion and order of the District Court. On
February 9, 1994, plaintiff filed a notice of appeal and is seeking review
of the court's ruling by the United States Court of Appeals for the Second
Circuit. The Second Circuit denied the appeal on January 23, 1995 and the
Plaintiff filed a Writ of Certiorari to the United States Supreme Court on
February 14, 1995.
Prior to 1992, the EPA named the Company a potentially responsible
party ("PRP") with respect to three sites which have been designated for
federally supervised clean-up under the Comprehensive Environmental Response,
Compensation and Liability Act. These three sites are Missouri Electric Works in
Cape Girardeau, Missouri; Northwest Transformer in Everson, Washington; and Rose
Chemicals in Holden, Missouri. The EPA has determined that the Company's
electric sector's participation in each site is less than 0.5%. The number
of named PRP's ranges from 40 to 700 at each site. Significant parties have
accepted responsibility and are currently funding the clean-up activity as
required. The Company's remaining financial liability is estimated to be
approximately $140,000.
Various state regulatory agencies, state legislatures and the federal
government have initiated proceedings intending to promote the development
of competition in telecommunications markets. These proceedings are focused
on removing the regulatory and legal barriers to competitive entry into the
interLATA toll, intrastate intraLATA toll and local exchange markets;
developing rules to govern the relationship between competitors; and
designing rebalanced rate structures for the incumbent local exchange company
("LEC") which would allow LECs the opportunity to compete effectively in
these markets while protecting the public's interest and access to
telecommunication services. Simultaneously, many states are investigating or
have implemented procedures for LECs to enter into incentive regulatory
frameworks ("IRF") as an alternative to traditional rate base, rate of return
regulation, and/or classifying services on the basis of the presence of
competition and allowing deregulation or flexible pricing regulation for the
services deemed competitive.
The Public Utility Commission of the State of California ("CPUC")
issued an order, effective January 1, 1995, authorizing competition for
intrastate intraLATA switched toll services, rebalancing local exchange and
toll rates, establishing more specific procedures for local exchange carriers
to enter into incentive regulatory frameworks ("IRF") and providing a
timetable for the elimination of the intrastate toll settlement pools for
mid-sized local exchange carriers. In support of CPUC efforts which preceded
its order, the Company's California telephone subsidiary (the "Subsidiary")
exited the toll settlement pools in 1991 and entered into a transition
contract with Pacific Bell. Pursuant to this contract, Pacific Bell agreed
to pay the Subsidiary $38,000,000 annually through the end of 1994 to
partially offset the decline in revenues which resulted from exiting the toll
settlement pools. The Subsidiary expected to conclude a general rate case
permitting the implementation of rebalanced, competitive rates effective
January 1, 1995 intended to protect the Subsidiary's overall revenues, other
than the $38,000,000 Pacific Bell contract payment, by enabling it to
compete effectively in the intrastate intraLATA switched toll services
market. Although this general rate case has not been finalized, the CPUC has
issued an interim rate order which became effective January 1, 1995 and
authorizes rebalanced competitive rates for the Subsidiary. In its general
rate case, the Subsidiary requested approval of an IRF which would allow it
to earn up to 5% in excess of its authorized rate of return. It is expected
that the approved IRF will be effective when the final rate order is issued
later in 1995.
The Company continues to invest in its subsidiary, Electric Lightwave,
Inc. ("ELI"), a competitive access provider in Arizona, California, Oregon,
Utah and Washington. Through ELI, the Company has been granted authority in
Washington to provide competitive local exchange service and has filed
applications to provide competitive local exchange service in Utah and
Oregon. The Company has completed construction of a fiber-optic route from
Las Vegas, Nevada to Phoenix, Arizona which will provide the Company's other
telecommunications operations in Arizona centralized equal access to long
distance carriers and will provide the Company with the fiber optic capacity
to provide transport services to other carriers along this route. The Company
has invested approximately $110,300,000 in ELI through the year ended
December 31, 1994.
The Company's Mohave Cellular subsidiary holds a one-third interest
and is general managing partner of a cellular limited partnership operating
six cell sites in Arizona.
Through a subsidiary, the Company intends to provide new
telecommunications toll services. State regulatory agencies have granted
authority for the Company to provide intrastate intraLATA and interLATA toll
services in New York and West Virginia and intrastate interLATA toll services
in California. The Company also intends to provide intrastate intraLATA and
interLATA toll services in Idaho, Tennessee and Utah where such authority is
not required. Upon receipt of required authority, the Company intends to
provide authorized intrastate toll services in Arizona, Montana, Nevada,
Oregon and Washington. The Company has authority and intends to provide
interstate toll services initially in its local telephone service areas.
New Accounting Pronouncements
- -----------------------------
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards ("SFAS") 112, "Employers' Accounting for Postemployment
Benefits" and SFAS 115, "Accounting for Certain Investments in Debt and
Equity Securities". The Company applied the provisions of these accounting
standards prospectively. Adoption of SFAS 112 did not have a material effect
on the Consolidated Financial Statements.
SFAS 115 requires fair value reporting for certain investments in debt
and equity securities with the unrealized gain or loss, net of tax effect,
recorded as a separate element of Shareholders' Equity. See Note 5 of Notes
to the Consolidated Financial Statements.
In October 1994, the Financial Accounting Standards Board issued SFAS
119, "Disclosure about Derivative Financial Instruments and Fair Value of
Financial Instruments", effective for fiscal years ending after December 15,
1994. The Company has only limited involvement with gas futures contracts and
does not use these instruments for investment or trading purposes. Gas
futures contracts are used on a very limited and select basis to manage
well-defined commodity price risks associated with Company commitments to
deliver natural gas to customers at fixed prices. The Company's exposure
under such contracts at December 31, 1994 was immaterial.
(b) Results of Operations
---------------------
Telecommunications generated revenues of $461,094,000 in 1994 compared
with $177,500,000 in 1993 and $186,200,000 in 1992. The 1994 results reflect
revenues derived from operating the GTE Telephone Properties acquired on
December 31, 1993, June 30, 1994 and November 30, 1994. Operating the GTE
Telephone Properties during 1994 generated revenues of $261,700,000.
Telecommunications revenues decreased 5% in 1993, primarily due to regulatory
changes in the state of California. The decrease was partially offset by
$2,626,000 of increased local revenues as a result of customer growth and
$2,548,000 of increased toll revenues as a result of increased toll volume.
Natural gas revenues decreased $3,000,000 in 1994 due to a decrease in
transportation revenues. This decrease was partially offset by increased
industrial gas revenues and increased residential and commercial revenues
from the Company's Northern Arizona Gas operations. Natural gas revenues in
1993 increased 12% over 1992 primarily due to $7,100,000 of revenues from
Natural Gas Company of Louisiana ("NGL"), which was acquired by the Company
in 1993; $3,600,000 from increased revenue per MCF of gas sold to industrial
customers; $5,200,000 from increased average revenue per MCF of gas sold to
residential and commercial customers; and $9,300,000 from pass-ons to
residential and commercial customers of increases in the wholesale costs of
commodities purchased. Pass-ons are required under tariff provisions and do
not affect net income.
The Company's electric sector revenues increased 6% over 1993, and 1993
revenues increased 13% over 1992 primarily due to increased consumption of
$11,900,000 in 1994 and $4,700,000 in 1993; these increases were primarily
as a result of customer growth.
Revenues earned by the Company's water/wastewater treatment sector
increased 11% or $7,000,000 in 1994. This increase is primarily due to
favorable rate increases which contributed $4,800,000 in water revenues and
revenues of $2,800,000 generated by Metro Utility Co. acquired by merger in
August 1994. Water/Wastewater treatment sector revenues increased 10% in 1993
primarily due to $2,800,000 of rate increases, $2,000,000 from increased
customer usage and $1,300,000 of revenues received from a water property
acquisition in December 1992.
Electric energy and fuel oil purchased costs increased 4% in 1994 and
9% in 1993. Electric energy purchased costs for 1994 totaled $72,400,000, a
6% increase over the 1993 amount of $68,200,000, which was a 6% increase over
the 1992 cost of $64,100,000. The increased cost of electricity purchased in
1994 and 1993 was primarily due to increased customer demand; the increase
in 1993 was also partially due to increased supplier prices. Fuel oil
purchased in 1994 of $14,200,000 decreased from the 1993 amount of
$14,900,000 primarily due to a decrease in supplier prices. Fuel oil
purchased costs in 1993 increased 22% from the 1992 amount of $12,200,000,
primarily due to higher supplier prices and increased volume to satisfy
increased customer consumption. Natural gas purchased costs decreased
$1,300,000 in 1994, primarily due to a decrease in supplier prices. Natural
gas purchased costs increased 15% in 1993, primarily due to higher supplier
prices. Under tariff provisions, increases and decreases in the Company's
wholesale costs of electric energy, fuel oil and natural gas purchased are
passed on to customers.
Operating and maintenance expenses increased by 86% or $143,300,000 in
1994, primarily due to the acquisition of the GTE Telephone Properties.
Depreciation expense of $115,200,000 more than doubled the 1993 amount
of $54,700,000. The increase is attributable to increases in depreciable
plant as a result of the acquisitions of the GTE Telephone Properties.
Taxes other than income increased $23,700,000 or 67% over the 1993
period due to increased taxes on the newly acquired GTE Telephone Properties.
Interest expense for the year ended December 31, 1994 increased
$35,300,000 over the 1993 period as a result of the issuance of debt
securities, the proceeds of which were used to partially finance the
acquisition of the GTE Telephone Properties and an increase in industrial
development revenue bond borrowings. Interest expense decreased 4% in 1993,
primarily due to the refinancing of higher-coupon First Mortgage Bonds with
lower cost debentures and increased allowance for funds used during
construction related to borrowings, which is a reduction to interest expense.
Investment income decreased to $40,500,000 from $42,100,000 in 1993,
representing a 4% decline. This decrease is due to the liquidation of
investments to fund the GTE acquisition, partially offset by an increase in
income from the Company's Centennial investment. Investment income increased
5% in 1993, primarily due to the realization of gains on sales of securities
and an increase in income from the Company's Centennial investment, partially
offset by lower investment balances and market yields.
Income taxes increased 23% in 1994 and 19% in 1993, primarily due to
increased taxable income.
Cost increases, including those due to inflation, are expected to be
offset in due course by increases in revenues obtained under established
regulatory procedures.
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. Disagreements with Auditors on Accounting and Financial Disclosure
------------------------------------------------------------------
None
PART III
--------
The Company intends to file with the Commission a definitive proxy
statement for the 1995 Annual Meeting of Stockholders pursuant to Regulation
14A not later than 120 days after December 31, 1994. 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
- -------- -----------------
3.1 Certificate of Incorporation
3.2 By-laws
3.2.1 Amendment dated April 14, 1992, to the By-laws
3.200.1 Restated Certificate of Incorporation of Citizens Utilities
Company, with all amendments to March 9, 1994
3.200.2 By-laws of the Company, as amended to-date of Citizens Utilities
Company, with all amendments to March 9, 1994
4.100.1 Copy of Indenture of Securities, dated as of August 15, 1991, to
Chemical Bank, as Trustee
4.100.2 First Supplemental Indenture, dated August 15, 1991
4.100.3 Letter of Representations, dated August 20, 1991, from Citizens
Utilities Company and Chemical Bank, as Trustee, to Depository
Trust Company ("DTC") for deposit of securities with DTC
4.100.4 Second Supplemental Indenture, dated January 15, 1992, to
Chemical Bank, as Trustee
4.100.5 Letter of Representations, dated January 29, 1992, from Citizens
Utilities Company and Chemical Bank, as Trustee, to DTC, for
deposit of securities with DTC
4.100.6 Third Supplemental Indenture, dated April 15, 1994, to Chemical
Bank, as Trustee
4.100.7 Fourth Supplemental Indenture, dated October 1, 1994, to Chemical
Bank, as Trustee
The Company agrees to furnish to the Commission upon request copies of the
Realty and Chattel Mortgage, dated as of March 1, 1965, made by Citizens
Utilities Rural Company, Inc., to the United States of America (the Rural
Electrification Administration and Rural Telephone Bank) and the Mortgage
Notes which that mortgage secures; and the several subsequent supplemental
Mortgages and Mortgage Notes; copies of the instruments governing the long-
term debt of Louisiana General Services, Inc.; and copies of separate loan
agreements and indentures governing various Industrial development revenue
bonds.
10.1 Incentive Deferred Compensation Plan, dated April 16, 1991
10.6 Deferred Compensation Plans for Directors, dated November 26,
1984 and December 10, 1984
10.6.1 Directors' Retirement Plan, effective January 1, 1989
10.6.2 Non-Employee Directors' Deferred Fee Equity Plan, dated as of
June 28, 1994
10.9 Management Equity Incentive Plan, effective June 22, 1990
10.10 LGS 1979 Option Incentive Plan, as amended
10.11 LGS 1981 Incentive Option Plan, as amended
10.12 LGS 1981 Stock Option Plan, as amended
10.13 LGS Supplemental Executive Retirement Plan
10.16 Employment Agreement between Citizens Utilities Company and
Leonard Tow
10.17 1992 Employee Stock Purchase Plan
10.18 Amendment dated May 21, 1993, to the 1992 Employee Stock Purchase
Plan
10.19 Asset Purchase Agreements, dated May 18, 1993
10.20 Asset Purchase Agreements, dated November 28, 1994
12. Computation of ratio of earnings to fixed charges (this item is
included herein for the sole purpose of incorporation by
reference)
21. Subsidiaries of the Registrant
23. Auditors' Consent
24. Powers of Attorney
Exhibit number 10.6 is incorporated by reference to the same exhibit designation
in the Registrant's Annual Report on Form 10-K for the year ended December 31,
1984. Exhibit number 10.6.1 is incorporated by reference to the same exhibit
designation in the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1989. Exhibit number 10.9 is incorporated by reference to
Appendix A to the Registrant's Proxy Statement dated May 14, 1990.
Exhibit numbers 10.10, 10.11, 10.12 and 10.13 are incorporated by
reference to the same exhibit designation in the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1990.
Exhibit numbers 4.100.1, 4.100.2 and 4.100.3 are incorporated by
reference to the same exhibit designation in the Registrant's
Quarterly Report on Form 10-Q for the nine months ended September
30, 1991. Exhibit numbers 3.1, 3.2, 4.100.4, 4.100.5, 10.1 and
10.16 are incorporated by reference to the same exhibit designation
in the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1991. Exhibit number 3.2.1 and 10.17 is incorporated
by reference to the same exhibit designation in the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1992.
Exhibit number 10.18 is incorporated by reference to the
Registrant's Proxy Statement, dated March 31, 1993. Exhibit number
10.19 is incorporated by reference to exhibit number 2.1 in the
Registrant's Form 8-K Current Report filed June 30, 1993. Exhibit
numbers 4.100.6 and 4.100.7 are incorporated by reference to the
Registrant's Form 8-K Current Reports filed on July 5, 1994 and
January 3, 1995, respectively. Exhibit numbers 3.200.1 and 3.200.2
are incorporated by reference to the same exhibit designation in
the Registrant's Form S-3 filed December 16, 1993. The Registrant's
Annual Reports on Form 10-K and Form 8-K Current Reports bear SEC
File Number Reference 0-1291.
(b) The Company filed on Form 8-K dated December 7, 1994, under Item 5 "Other
Events", a press release announcing the proposed ALLTEL acquisitions.
The Company filed on Form 8-K dated December 21, 1994, under Item 5 "Other
Events", and Item 7 "Financial Statements and Exhibits", the financial
statements of the ALLTEL properties to be acquired.
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
CITIZENS UTILITIES COMPANY
--------------------------
(Registrant)
By: /s/ Leonard Tow
-----------------
Leonard Tow
Chairman of the Board; Chief Executive Officer;
Chief Financial Officer; Member, Executive Committee and Director
March 15, 1995
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 15th day of March 1995.
Signature Title
- --------- -----
/s/ Robert J. DeSantis Vice President, Treasurer
__________________________________________ and Assistant Secretary
(Robert J. DeSantis)
/s/ Livingston E. Ross
_________________________________________ Vice President and Controller
(Livingston E. Ross)
Norman I. Botwinik* Director
- -----------------------------------------
(Norman I. Botwinik)
Aaron I. Fleischman* Member, Executive Committee
- ----------------------------------------- and Director
(Aaron I. Fleischman)
Stanley Harfenist* Member, Executive Committee
- ------------------------------------------ and Director
(Stanley Harfenist)
Andrew N. Heine* Director
- ------------------------------------------
(Andrew N. Heine)
Elwood A. Rickless* Director
- ------------------------------------------
(Elwood A. Rickless)
John L. Schroeder* Member, Executive Committee
- ------------------------------------------ and Director
(John L. Schroeder)
Robert D. Siff* Director
- ------------------------------------------
(Robert D. Siff)
Robert A. Stanger* Director
- ------------------------------------------
(Robert A. Stanger)
Edwin Tornberg* Director
- ------------------------------------------
(Edwin Tornberg)
Claire L. Tow* Director
- ------------------------------------------
(Claire L. Tow)
/s/ Robert J. DeSantis
*By: -------------------------------
(Robert J. DeSantis)
Attorney-in-Fact
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
Index to Financial Statements
Independent Auditors' Report F-2
Consolidated balance sheets as of December 31, 1994, 1993 and 1992 F-3
Consolidated statements of income for the years ended
December 31, 1994, 1993 and 1992 F-4
Consolidated statements of shareholders' equity for the years
ended December 31, 1994, 1993 and 1992 F-5
Consolidated statements of cash flows for the years
ended December 31, 1994, 1993 and 1992 F-6
Notes to consolidated financial statements F-7 - F-21
Independent Auditors' Report
----------------------------
The Board of Directors and Shareholders
Citizens Utilities Company:
We have audited the consolidated financial statements of Citizens Utilities
Company and subsidiaries as of December 31, 1994, 1993 and 1992, and the
related consolidated statements of income, shareholders' equity and cash
flows for the years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Citizens
Utilities Company and subsidiaries at December 31, 1994, 1993 and 1992, and
the results of their operations and their cash flows for the years then
ended, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards (SFAS) 115, "Accounting
for Certain Investments in Equity and Debt Securities", effective January 1,
1994. As discussed in Notes 1 and 13 to the consolidated financial
statements, the Company adopted SFAS 109, "Accounting for Income Taxes", and
SFAS 106, "Employers' Accounting for Postretirement Benefits Other than
Pensions", effective January 1, 1993.
KPMG Peat Marwick LLP
New York, New York
March 8, 1995
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994, 1993 and 1992
(In thousands)
1994 1993 1992
---- ---- ----
ASSETS
- ------
Current assets:
Cash $ 14,224 $ 21,738 $ 19,752
Temporary investments 108,818 89,752 0
Accounts receivable:
Utility service 134,510 99,684 75,754
Other 34,713 15,088 15,932
Less allowance for
doubtful accounts 2,428 459 441
---------- --------- ----------
Total accounts receivable 166,795 114,313 91,245
---------- --------- ----------
Materials and supplies 18,330 10,061 7,794
Other current assets 5,887 4,873 4,400
---------- --------- ----------
Total current assets 314,054 240,737 123,191
---------- --------- ----------
Property, plant and equipment 3,583,723 2,153,891 1,503,471
Less accumulated depreciation 1,014,068 461,924 406,833
---------- --------- ----------
Net property, plant and
equipment 2,569,655 1,691,967 1,096,638
---------- --------- ----------
Investments 325,011 411,022 561,062
Regulatory assets 177,414 146,207 0
Deferred debits and other
assets 190,432 137,185 107,090
---------- --------- ----------
Total assets $3,576,566 $2,627,118 $1,887,981
========== ========== ==========
LIABILITIES AND SHAREHOLDERS'
EQUITY
- -----------------------------
Current liabilities:
Accounts payable $ 122,404 $ 84,015 $ 87,298
Income taxes accrued 92,366 82,632 59,947
Long-term debt due
within one year 13,986 1,620 10,850
Customers' deposits 19,919 19,436 17,150
Interest accrued 15,841 12,731 12,943
Other current liabilities 99,461 47,791 36,300
Short-term debt 515,200 380,000 0
------------ ---------- ----------
Total current liabilities 879,177 628,225 224,488
Customer advances
for construction 145,150 137,012 140,309
Contributions in aid of
construction 71,580 47,241 39,549
Deferred income taxes 248,150 213,471 95,222
Regulatory liabilities 30,830 28,376 0
Deferred credits 50,594 50,634 28,443
Long-term debt 994,189 547,673 522,699
Shareholders' equity 1,156,896 974,486 837,271
------------- ----------- ----------
Total liabilities and
shareholders' equity $3,576,566 $2,627,118 $1,887,981
============= =========== ==========
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 and 1992
(In thousands, except for per-share amounts)
1994 1993 1992
---- ---- ----
Revenues:
Telecommunications $461,094 $177,497 $186,232
Natural gas 208,940 211,892 189,812
Electric 173,585 164,515 145,032
Water/Wastewater treatment 72,395 65,488 59,388
-------- -------- --------
Total revenues 916,014 619,392 580,464
-------- -------- --------
Operating expenses:
Natural gas purchased 116,419 117,724 102,556
Electric energy and fuel
oil purchased 86,576 83,119 76,286
Operating expenses 249,096 142,718 141,954
Maintenance expenses 61,779 24,816 24,893
Depreciation 115,175 54,698 50,127
Taxes other than income 58,845 35,157 34,174
-------- -------- -------
Total operating expenses 687,890 458,232 429,990
-------- -------- -------
Income from operations 228,124 161,160 150,474
Investment income 40,454 42,097 40,072
Other income - net 12,486 12,102 7,278
Interest expense 72,744 37,431 39,044
-------- ------- -------
Income before income taxes 208,320 177,928 158,780
Income taxes 64,323 52,298 43,767
-------- ------- -------
Net income $143,997 $125,630 $115,013
======== ======== ========
Earnings per share of
Common Stock Series A
and Series B $.77 $.67 $.63
==== ==== ====
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 and 1992
(In thousands, except for per-share amounts)
Additional
Common Stock ($.25) Paid-in Retained
Series A Series B Capital Earnings Other Total
-------- -------- ---------- -------- ----- -----
Balance December 31, 1991 $10,291 $3,323 $468,107 $236,660 $1,295 $719,676
Net income 115,013 115,013
Stock dividends in shares of
Common Stock Series A and
Series B 700 237 117,454 (118,391) 0
Stock split (3-for-2) 5,270 1,783 (7,053) 0
Stock plans 86 9,853 9,939
Tax benefit arising from stock
options exercised 531 531
Non-vested restricted stock (6,593) (6,593)
Conversions of Series A to
Series B (222) 222 0
Other (1,295) (1,295)
-------- -------- --------- ------- -------- --------
Balance December 31, 1992 $16,039 $5,651 $582,299 $233,282 $ 0 $837,271
NGL merger 142 497 2,949 3,588
Franklin merger 13 505 (35) 483
Net income 125,630 125,630
Stock dividends in shares of
Common Stock Series A and
Series B 1,029 387 129,963 (131,594) (215)
Stock split (2-for-1) 16,155 6,036 (22,191) 0
Stock plans 114 5,854 5,968
Tax benefit arising from stock
options exercised 537 537
Non-vested restricted stock 1,224 1,224
Conversions of Series A to
Series B (776) 776 0
-------- ----- ------- ------- ------- -------
Balance December 31, 1993 $ 32,447 $ 13,119 $ 698,688 $ 230,232 $ 0 $974,486
Metro Utility Co. merger 126 4,646 3,231 8,003
Net income 143,997 143,997
Stock dividends in shares of
Common Stock Series A and
Series B 1,621 686 137,736 (140,043) 0
Stock plans 88 281 18,759 19,128
Tax benefit arising from stock
options exercised 137 137
Non-vested restricted stock 2,015 2,015
Conversions of Series A to
Series B (570) 570 0
Unrealized gain on securities
classified as available-for-
sale, net of taxes 9,130 9,130
------- ----- ------ --------- ----- -----
Balance December 31, 1994 $33,586 $14,782 $861,981 $237,417 $9,130 $1,156,896
======= ======= ======== ======== ====== ==========
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 and 1992
(In thousands)
1994 1993 1992
---- ---- ----
Net cash provided by
operating activities $262,316 $194,949 $131,040
-------- -------- --------
Cash flows used for
investing activities:
Business acquisitions (700,222) (481,257) 0
Construction expenditures (287,708) (175,308) (148,563)
Securities purchases (18,219) (254,203) (356,816)
Securities sales 23,478 269,624 212,634
Securities maturities 89,885 54,465 72,651
Customer advances for
construction and
contributions in aid
of construction 24,546 6,959 5,033
Other (13,795) (7,086) 19,755
-------- -------- -------
(882,035) (586,806) (195,306)
-------- -------- -------
Cash flows from financing
activities:
Long-term debt borrowings 458,589 34,733 135,672
Long-term debt principal
payments (1,268) (26,644) (95,365)
Short-term debt borrowings 135,200 380,000 0
Issuance of Common Stock 18,465 3,780 989
Other 1,219 1,974 493
-------- ------- --------
612,205 393,843 41,789
-------- ------- --------
Increase (decrease) in cash (7,514) 1,986 (22,477)
Cash at January 1, 21,738 19,752 42,229
-------- ------- --------
Cash at December 31, $ 14,224 $ 21,738 $ 19,752
======== ========= =========
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
CITIZENS UTILITIES COMPANY and SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------------
(1) Summary of Significant Accounting Policies:
-------------------------------------------
(a) Principles of Consolidation:
----------------------------
The Consolidated Financial Statements include the accounts of Citizens
Utilities Company and all subsidiaries after elimination of intercompany
balances and transactions. Certain reclassifications of balances previously
reported have been made to conform to current presentation.
(b) Revenues:
---------
Electric, natural gas and water/wastewater treatment - The Company records
revenues from electric, natural gas and water/wastewater treatment customers
when billed. These customers are billed on a cycle basis based on monthly
meter readings. The Company accrues unbilled revenues earned from the dates
customers were last billed to the end of the accounting period.
Telecommunications - The Company records revenues from telecommunications
services when earned. Revenues from local service are primarily derived from
providing local telephone services. Revenues from long-distance service are
derived from charges for access to the Company's local exchange network,
subscriber line charges and contractual arrangements. Certain toll and access
services revenues are estimated under cost separation procedures that base
revenues on current operating costs and investments in facilities to provide
such services.
(c) Construction Costs and Maintenance Expense:
-------------------------------------------
Property, plant and equipment are stated at original cost, including general
overhead and an allowance for funds used during construction ("AFUDC"). AFUDC
represents the borrowing costs and a return on common equity of funds used
to finance construction. AFUDC is capitalized as a component of additions to
property, plant and equipment and is credited to income. AFUDC does not
represent current cash earnings; however, under established regulatory rate-
making practices, after the related plant is placed in service, the Company
is permitted to include in the rates charged for utility services a fair
return on and depreciation of such AFUDC included in plant in service. The
amount relating to equity is included in other income ($11,402,000,
$10,123,000 and $6,398,000 for 1994, 1993 and 1992, respectively) and the
amount relating to borrowings is a reduction of interest expense ($3,031,000,
$2,678,000 and $1,805,000 for 1994, 1993 and 1992, respectively). The
weighted average rates used to calculate AFUDC were 12% in 1994 and 1993, and
14% in 1992. 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.
(d) Depreciation Expense:
---------------------
Depreciation expense, calculated using the straight-line method, is based
upon the estimated service lives of various classifications of property,
plant and equipment and represented approximately 4% of the gross depreciable
property, plant and equipment for 1994, 1993 and 1992.
(e) Regulatory Assets and Liabilities:
----------------------------------
The Company's regulated operations are subject to the provisions of
Statement of Financial Accounting Standards ("SFAS") 71; "Accounting for the
Effects of Certain Types of Regulation". SFAS 71 requires regulated entities
to record regulatory assets and liabilities as a result of actions of
regulators. Regulatory assets of $24,669,000 at December 31, 1994 were
recorded in connection with the provisions of SFAS 106, "Employers' Accounting
for Postretirement Benefits Other than Pensions" (see Note 13 ). In
connection with the provisions of SFAS 109, "Accounting for Income Taxes", the
Company's regulatory assets were $152,745,000 and regulatory liabilities were
$30,830,000 at December 31, 1994. The regulatory assets and liabilities
related to SFAS 109 were recorded to offset deferred income taxes which
were recorded primarily as a result of the income tax benefits that were
previously flowed through to customers and to the allowance for funds used
during construction, partially offset by the effects of tax law changes and
the tax benefit of unamortized deferred investment tax credits.
The Company continuously monitors the applicability of SFAS 71 to its
regulated operations. SFAS 71 may, at some future date, be deemed
inapplicable due to changes in the regulatory and competitive environments
and/or a decision by the Company to accelerate deployment of new technology.
If the Company were to discontinue the application of SFAS 71 to one or more
of its regulated operations, the Company would be required to write off its
regulatory assets and regulatory liabilities associated with such
operation(s) and would be required to adjust the carrying amount of any
property, plant and equipment that would be deemed not recoverable. The
Company believes its regulated operations continue to meet the criteria for
SFAS 71.
(f) Accounting for Investments, Temporary Investments and Short-Term
Debt:
----------------------------------------------------------------
Investments include high credit quality, short- and intermediate-term
fixed-income securities (primarily state and municipal debt obligations) and
equity securities.
Prior to the adoption of SFAS 115, fixed income securities were stated at
amortized cost and marketable equity securities were stated at the lower of
cost or market. The Company adopted SFAS 115, "Accounting for Certain
Investments in Debt and Equity Securities" as of January 1, 1994. SFAS 115
requires, among other things, that securities be designated as available-for-
sale, held-to-maturity or trading.
Securities which the Company will hold for an indefinite period of time,
but which might be sold in the future as changes in market conditions or
economic factors occur, are classified as available-for-sale and are carried
at estimated fair market value. Net aggregate unrealized gains and losses
related to such securities, net of taxes, are included as a separate
component of Shareholders' Equity. Securities for which the Company has the
intent and ability to hold to maturity are designated as held-to-maturity and
are carried at amortized cost, adjusted for amortization of premiums and
accretion of discounts over the period to maturity. Securities are designated
as available-for-sale or held-to-maturity at the time of acquisition.
Interest, dividends and gains and losses realized on sales of securities are
reported in Investment income. The Company does not invest in securities
which would be designated as trading.
Temporary investments are investments in state and municipal securities
which mature in less than one year, the proceeds of which are to be used to
repay a portion of the short-term debt issued to partially and temporarily
fund the acquisition of the GTE Telephone Properties (see Note 3). Such
investments are considered held-to-maturity and are carried at amortized
cost. The fair value of temporary investments at December 31, 1994 and 1993
was $108,935,000 and $93,438,000, respectively.
Short-term debt outstanding was issued in the form of commercial paper
notes payable to temporarily and partially fund the acquisition of the GTE
Telephone Properties. This short-term debt had a weighted average interest
rate of 5.75% at December 31, 1994 and is expected to be repaid from maturing
temporary investments, funds from operations and proceeds from the issuance
of equity securities. The fair value of short-term debt at December 31, 1994
and 1993, was $515,200,000 and $380,000,000, respectively.
(g) Investment in Centennial Cellular Corp.:
----------------------------------------
The Company recorded its initial investment in Centennial Cellular Corp.
("Centennial") Convertible Redeemable Preferred Stock (the "Preferred
Security") and Class B Common Stock at the historical cost of the Company's
investment in Citizens Cellular Company, prior to its merger with Century
Cellular Corp. During 1994, the Company purchased 615,195 additional shares
of Centennial Class B Common Stock for $8,613,000 pursuant to a Centennial
rights offering. Pursuant to SFAS 115, beginning January 1, 1994, the
investment in the Centennial Class B Common Shares was classified as
available-for-sale and is carried at fair market value. The terms of the
Preferred Security provide that the Preferred Security accretes a liquidation
value preference at a fixed dividend rate of 7.5%, compounded quarterly, on
an initial liquidation value preference of $125,700,000 until the Preferred
Security reaches a liquidation value preference of $186,000,000 on August 31,
1996. The Company recognizes the non-cash accretion as it is earned in each
period as investment income and increases the book value of its investment
in Centennial by the same amount. On a quarterly basis, the Company assesses
whether the book value of the Preferred Security can be realized by comparing
such book value to the market value of Centennial's common equity and by
evaluating other relevant indicators of realizability, including Centennial's
ability to redeem the Preferred Security. The book value of the Preferred
Security would be deemed impaired to the extent that such book value exceeds
the estimated realizability of the Preferred Security based on all existing
facts and circumstances, including the Company's assessment of its ability
to realize the book value of the Preferred Security through mandatory
redemption (see Note 5).
(h) Income Taxes and Investment Tax Credits:
----------------------------------------
The Company and its subsidiaries are included in a consolidated federal
income tax return using a calendar year reporting period.
The Company adopted SFAS 109 in 1993 without restating prior years'
financial statements; the adoption of SFAS 109 had no material effect on net
income in 1993. SFAS 109 required a change from the deferred to the liability
method of computing deferred income taxes. Adoption of SFAS 109 resulted in
recording a net increase in the liability for deferred income taxes of
$115,437,000 at December 31, 1993. Such increase resulted principally from
income tax benefits previously flowed through to customers and to the
allowance for funds used during construction; partially offsetting these
items were the effects of tax law changes and the tax benefit associated with
the unamortized deferred investment tax credits. Due to the effects of
utility regulation, the Company recorded regulatory assets and liabilities
of $143,813,000 and $28,376,000, respectively, as offsets to the increase in
the deferred income taxes at December 31, 1993. Prior to the adoption of SFAS
109, deferred income taxes resulted from the tax effect of using accelerated
depreciation methods and certain other timing differences between income
reported on the Consolidated Financial Statements and taxable income reported
on the Company's income tax returns.
The investment tax credits relating to utility properties, as defined by
applicable regulatory authorities, have been deferred and are being amortized
to income over the lives of the related properties.
(i) Earnings Per Share:
-------------------
Earnings per share is based on the average number of outstanding shares.
Earnings per share is presented with adjustment for subsequent stock
dividends and stock splits. The calculation has not been adjusted for the
1.5% stock dividend declared on February 7, 1995, because its effect is
immaterial. The effect on earnings per share of the exercise of dilutive
options is immaterial.
(2) Property, Plant and Equipment:
------------------------------
The components of property, plant and equipment at December 31, 1994,
1993 and 1992 are as follows:
1994 1993 1992
---- ---- ----
($ in thousands)
Transmission and distribution
facilities $2,159,452 $1,417,320 $1,032,426
Production and generating
facilities 818,927 414,743 222,594
Pumping, storage and
purification facilities 93,942 80,175 71,238
Construction work in progress 210,213 68,868 45,616
Intangibles 7,773 5,968 3,145
Other 293,416 166,817 128,452
---------- ---------- ----------
$3,583,723 $2,153,891 $1,503,471
========== ========== ==========
(3) Mergers and Acquisitions:
-------------------------
The Company and GTE Corporation announced the signing of 10 definitive
agreements pursuant to which the Company agreed to acquire from GTE
Corporation, for $1.1 billion, certain telephone properties serving
approximately 500,000 local telephone access lines in nine states ("the GTE
Telephone Properties"). On December 31, 1993, 189,123 local telephone access
lines in Idaho, Tennessee, Utah and West Virginia were transferred to the
Company. On June 30, 1994, 270,883 local telephone access lines in New York
were transferred to the Company. On November 30, 1994, 37,802 local telephone
access lines in Arizona and Montana were transferred to the Company. On
December 30, 1994, 5,440 local telephone access lines in California were
transferred to the Company. The remaining GTE Telephone Property is located in
Oregon and is expected to be transferred to Citizens in 1995. The acquisitions
were accounted for using the purchase method of accounting and the results of
operations of the GTE Telephone Properties acquired have been included in the
accompanying financial statements from the dates of their acquisition.
The following unaudited pro forma financial information presents the
combined results of operations of the Company and the GTE Telephone
Properties acquired as if the acquisitions had occurred on January 1, 1993.
The pro forma financial information does not necessarily reflect the results
of operations that would have occurred had the Company and the GTE Telephone
Properties constituted a single entity during such periods.
1994 1993
---- ----
($ in thousands, except for per-share amounts)
Revenues $1,054,000 $1,016,000
Net Income $165,000 $153,000
Earnings per share $.77 $.72
On August 31, 1994, RHC, Inc. ("Metro Utility Co."), an operator of water
and wastewater treatment utilities serving portions of the suburban Chicago
area, was merged into the Company. The acquired operations serve
approximately 10,000 customers, increasing the number of the Company's
water/wastewater treatment customers in Illinois to over 65,000. The
transaction was accounted for as a pooling of interests. Prior year financial
statements were not restated as the amounts are not significant.
On November 29, 1994, the Company and ALLTEL Corporation ("ALLTEL")
announced the signing of eight definitive agreements pursuant to which
Citizens agreed to acquire from ALLTEL, for $292,000,000, certain telephone
properties servicing approximately 110,000 local telephone access lines and
certain cable television systems servicing approximately 7,000 subscribers.
The properties are located in eight states: Arizona, California, Nevada, New
Mexico, Oregon, Tennessee, Utah and West Virginia. The closings are expected
to occur state by state throughout 1995 and the first half of 1996.
On September 22, 1994, a subsidiary of the Company and a subsidiary of
Century Communications Corp. ("Century") entered into a joint venture
agreement for the purpose of acquiring, for approximately $89 million, and
operating two cable television systems in southern California (the
"Systems"). Century is a cable television company of which Leonard Tow, the
Chairman and Chief Executive Officer of the Company, is Chairman, Chief
Executive Officer, Chief Financial Officer and a director. In addition,
Claire Tow, a director of the Company is Senior Vice President and a director
of Century and Robert Siff, a director of the Company is a director of
Century. The joint venture is governed by a management board on which the
Company and Century are equally represented. The joint venture has entered
into an agreement pursuant to which a subsidiary of Century (the "Manager")
will manage the day-to-day operations of the Systems. The Manager will not
receive a management fee but will be reimbursed only for the actual costs it
incurs on behalf of the joint venture. With respect to the purchase of any
service or asset for the joint venture for use in the Systems, the Manager
is obligated to pass through to the joint venture any discount, up to 5%, off
the published prices of vendors and is entitled to retain any discount in
excess of 5%. On September 30, 1994, the joint venture acquired one of the
systems serving approximately 26,500 subscribers. The purchase of the second
system, serving approximately 19,200 subscribers, remains subject to
regulatory approval for the transfer of licenses. The Company's interest
in the joint venture is accounted for under the equity method of accounting.
In January 1995, the Company entered into a definitive agreement to acquire
Flex Communications by merger in a stock-for-stock transaction. Flex is a
switch-based, inter-exchange carrier providing long-distance, 800 Inbound
long-distance, voice mail, paging, private data networks and cellular
services to approximately 3,500 customers in upstate New York. The
transaction is expected to close in 1995.
In 1993, the Company separately acquired Natural Gas Company of Louisiana
("NGL") and Franklin Electric Light Company, Incorporated ("Franklin") by
merger. In these mergers, the Company issued 568,748 shares and 51,500 shares
of Series B Common Stock for all of the common stock of NGL and Franklin,
respectively. The acquisitions were accounted for as poolings of interests.
Prior years' financial statements were not restated for the effects of these
transactions because the amounts were not significant.
(4) Dispositions:
-------------
The Company has agreed to transfer, in the form of a tax-free exchange, its
Pennsylvania Telephone property as partial consideration in the acquisition
of the ALLTEL Telephone Properties. The agreed-upon value for this property
is approximately $10,000,000.
During 1993, the Company disposed of its Santa Cruz County, Arizona water
and wastewater treatment properties, Idaho water property and Aalert Paging
Company. The sale of the Santa Cruz properties yielded net proceeds of
$1,694,000 and had a net investment of $94,000. The Company received net
proceeds of $1,221,000 from the sale of the Idaho water property and had a
net investment of $1,249,000. The sale of Aalert Paging Company yielded net
proceeds of $5,498,000 and had a net investment of $5,287,000. The resulting
gains and losses are included in Other income - net.
During 1992, the Company disposed of two water properties in California.
One property was transferred to a municipality through condemnation
proceedings. The Company received net proceeds of $3,400,000 and had a net
investment of $1,877,000. The other property was sold for net proceeds of
$6,618,000; the Company's net investment was $4,160,000. In December 1992,
the Company disposed of its Idaho electric operations. The Company received
$1,177,500 and had a net investment of $706,000. The resulting gains on
dispositions are included in other income-net.
(5) Investments:
------------
The components of investments at December 31, 1994, 1993 and 1992 are as
follows:
1994 1993 1992
---- ---- ----
($ in thousands)
State and municipal securities $174,790 $296,371 $448,605
Investment in Centennial 117,982 90,628 81,034
Other fixed income securities 411 7,670 10,680
Marketable equity securities 31,828 13,282 13,934
Other 0 3,071 6,809
-------- -------- --------
Total $325,011 $411,022 $561,062
======== ======== ========
The Company's investment in Centennial at December 31, 1994, includes
102,187 shares of Convertible Redeemable Preferred Stock ("the Preferred
Security") and 1,982,294 Class B Common Shares. The liquidation value
preference earned on the Preferred Security for 1994, 1993 and 1992 was
$13,481,000, $9,594,000 and $8,803,000, respectively, and was recorded as
investment income. The carrying value of the investment in Centennial at
December 31, 1994, as presented in the table above, represents the historical
book value of the Preferred Security of $49,842,000 plus $34,441,000 of
liquidation value preference earned on the Preferred Security through
December 31, 1994 and the market value of the Class B Common Stock of
Centennial of $33,699,000. The Preferred Security is mandatorily redeemable
in the year 2006. The Company believes it can realize its investment in
Centennial either by cash redemption by the issuer funded through refinancing
by the issuer, by temporary conversion to common equity securities followed
by the sale of the common equity securities, or by sale of its current
investment holdings.
The aggregate market value of marketable equity securities at December 31,
1993 was $27,492,000 and total unrealized gains were $14,210,000. Net
realized gains on marketable equity securities included in the determination
of net income for the years 1994, 1993 and 1992, respectively, were
$3,760,000, $0 and $259,000. The cost of securities sold was based on the
actual cost of the shares of each security held at the time of sale.
Marketable equity securities for each year include 1,807,095 shares
(1,500,000 original shares adjusted for stock dividends) of Class A Common
Stock of Century. These shares represent less than 2% of the total
outstanding common stock of Century. The Chairman and Chief Executive Officer
of the Company is also Chairman and Chief Executive Officer of Century.
Pursuant to the provisions of SFAS 115, the Company classified its
Investments into two categories: "held-to-maturity" and "available-for-sale"
at January 1, 1994. The Company recorded unrealized holding gains on
securities classified as available-for-sale as an increase to Investments.
The fair value of Investments at December 31, 1993 and 1992 were $534,496,000
and $649,366,000, respectively, based on relative market information about
each financial instrument.
The following summarizes the cost, unrealized gains and fair market value
for investments at December 31, 1994.
Unrealized Aggregate Fair
Investment Classification Amortized Cost Holding Gains Value
- ------------------------- -------------- ------------- --------------
($ in thousands)
Held-To-Maturity $259,484 $77,238 $336,722
Available-For-Sale 50,809 14,718 65,527
Held-to-Maturity Securities
---------------------------
Investment Maturities Amortized Cost Fair Value
- --------------------- -------------- ----------
($ in thousands)
2-5 years $141,030 $139,567
6-10 years 34,171 33,656
Thereafter 84,283 163,499
-------- ---------
$259,484 $336,722
======== =========
The Company sold $19,335,000 of securities classified as held-to-maturity
during 1994 for the purpose of financing the acquisition of the GTE Telephone
Properties; gains and losses of $372,000 and $94,000, respectively, were
realized on such sales. The amortized cost and related gains on available-
for-sale securities sold during 1994 were $384,000 and $3,760,000,
respectively.
(6) Long-term Debt:
---------------
Weighted average
interest rate at December 31,
December 31, 1994 Maturities 1994 1993 1992
----------------- ---------- ---- ---- ----
($ in thousands)
Debentures 7.68% 2001-2034 $425,000 $150,000 $150,000
Industrial development
revenue bonds 5.93% 2015-2029 325,125 284,777 242,391
Commercial paper notes
payable 5.75% Variable 187,800 58,953 62,680
Rural Electrification
Administration and Rural
Telephone Bank notes 5.80% 2006-2027 47,106 42,237 43,494
Subordinated notes 10.83% 1995-1998 2,045 11,692 12,261
Other long-term debt 8.18% 1998-2000 7,113 14 11,873
------- -------- -------- --------
6.67% $994,189 $547,673 $522,699
======= ======== ======== ========
Certain commercial paper notes payable have been classified as long-term
debt because these obligations are expected to be refinanced with long-term
debt securities. The Company has available lines of credit with commercial
banks in the amounts of $1,000,000,000 and $200,000,000, which expire on
December 13, 1995 and December 16, 1997, respectively, and have associated
facility fees of one-twentieth of one percent per annum and one-twelfth of
one percent per annum, respectively. The terms of the lines of credit provide
the Company with extension options.
The total principal amounts of industrial development revenue bonds at
December 31, 1994, 1993 and 1992, were $392,530,000, $377,890,000 and
$274,030,000, respectively. Amounts presented in the table above have been
reduced by funds held by trustees to be used for payment of qualifying
construction expenditures. Holders of certain industrial development revenue
bonds may tender at par prior to maturity. The next tender date is August 1,
1997, for $30,350,000 of principal amount of bonds. In the years 1994, 1993
and 1992, respectively, interest payments on short- and long-term debt were
$74,803,000, $40,217,000 and $37,913,000.
The fair value of long-term debt, presented as required by SFAS 107 at
December 31, 1994, 1993 and 1992, respectively, was $992,349,000, $602,710,000
and $550,724,000 based on relative market information and information about
each financial instrument.
The installment principal payments and maturities of long-term debt for the
next five years are as follows:
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
($ in thousands)
Installment principal
payments $ 4,233 $4,311 $3,963 $3,021 $2,156
Maturities 9,753 845 118 1,334 -
------- ------ ------ ------ ------
$13,986 $5,156 $4,081 $4,355 $2,156
======= ====== ====== ====== ======
(7) Capital Stock:
--------------
The common stock of the Company is in two series, Series A and Series B.
The Company is authorized to issue up to 200,000,000 shares of Common Stock
Series A and 300,000,000 shares of Common Stock Series B. Quarterly stock
dividends are declared and issued at the same rate on both Series A and
Series B. Series B shareholders have the option of enrolling in the "Series
B Common Stock Dividend Sale Plan." The Plan offers Series B 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. Series A shares are
convertible share-for-share into Series B shares. Series B shares are not
convertible into Series A. Both series are the same in all other respects.
On April 14, 1992, the Company declared a 3-for-2 stock split of its Series
A and Series B Common Stock. The stock split was distributed on July 24,
1992, to shareholders of record on July 1, 1992. On May 21, 1993, the Company
declared a 2-for-1 stock split of its Series A and Series B common stock. The
stock split was distributed on August 31, 1993, to shareholders of record on
August 16, 1993.
On January 30, 1995, the Company, pursuant to an underwritten public
offering, issued 19,000,000 shares of its Common Stock Series A at an
issuance price of $13 3/8 per share. The $244,200,000 of net proceeds from the
issuance were used to permanently fund the acquisition of the GTE Telephone
Properties.Quarterly stock dividend rates declared on Common Stock Series A and
Series B are based upon cash equivalent rates and share market prices, and have
been as follows:
Dividend Rates
--------------
1994 1993 1992
---- ---- ----
First quarter 1.1% 1.2% 1.6%
Second quarter 1.15% 1.0% 1.5%
Third quarter 1.3% 1.1% 1.2%
Fourth quarter 1.4% 1.0% 1.2%
----- ----- -----
Total 4.95% 4.3% 5.5%
===== ===== =====
Compounded Total 5.04% 4.37% 5.61%
===== ===== =====
Annualized stock dividend cash equivalent rates considered by the Company's
Board of Directors in declaring stock dividends for 1994, 1993 and 1992,
respectively, were .733, .691 and .624 per share (adjusted for all stock
splits and stock dividends paid subsequent to all dividends declared through
December 31, 1994 and rounded to the nearest 1/8th).
The activity in shares of outstanding common stock for Series A and Series B
during 1994, 1993 and 1992 is summarized as follows:
Number of Shares
----------------
Series A Series B
-------- --------
Balance at January 1, 1992 41,166,000 13,289,000
Stock dividends 2,799,000 950,000
Stock split (3-for-2) 21,078,000 7,134,000
Stock plans 0 344,000
Conversions of Series A
to Series B (887,000) 887,000
----------- ----------
Balance at December 31, 1992 64,156,000 22,604,000
NGL merger 0 569,000
Franklin merger 0 52,000
Stock dividends 4,114,000 1,548,000
Stock split (2-for-1) 64,620,000 24,142,000
Stock plans 0 457,000
Conversions of Series A
to Series B (3,105,000) 3,105,000
------------ ----------
Balance at December 31, 1993 129,785,000 52,477,000
Metro Utility Co. merger 0 505,000
Stock dividends 6,484,000 2,744,000
Stock plans 355,000 1,122,000
Conversions of Series A
to Series B (2,278,000) 2,278,000
------------ ----------
Balance at December 31, 1994 134,346,000 59,126,000
============ ==========
The Company used 7,000 Series B shares (not adjusted for subsequent stock
dividends and a stock split) acquired from employees pursuant to the
Management Equity Incentive Plan in partial payment of the 1993 stock
dividend. These shares had a cost of $215,000.
The Company has 50,000,000 authorized shares of preferred stock ($.01 par),
none of which has been issued. The preferred stock may be issued by the
Board of Directors (without further approval by shareholders) in one or
more series, having such attributes as may be designated by the Board
of Directors at the time of issuance.
(8) Employee Stock Plans:
---------------------
On June 22, 1990, shareholders approved the Citizens Utilities Company
Management Equity Incentive Plan ("MEIP"). Under the MEIP, awards of the
Company's Series A or Series B common stock may be granted to eligible
officers, management employees and non-management exempt employees of the
Company and its subsidiaries in the form of incentive stock options, non-
qualified stock options, stock appreciation rights ("SARs"), restricted stock
or other stock-based awards. The MEIP is administered by the Compensation
Committee of the Board of Directors.
The maximum number of shares of common stock which may be issued pursuant
to awards at any time is 5% of the Company's common stock outstanding
provided that no more than 8,558,000 shares (adjusted for subsequent stock
dividends and stock splits) will be issued pursuant to incentive stock options
under the MEIP. No awards will be granted more than 10 years after the effective
date of the MEIP. The exercise price of stock options and SARs shall be equal to
or greater than the fair market value of the underlying common stock on the
date of grant. Stock options are generally not exercisable on the date of
grant but vest over a period of time.
Some options were awarded in tandem with related SARs. SARs provide the
MEIP participant with the alternative of electing not to exercise the related
stock option, but to receive instead an amount in cash or in common stock
equal to the difference between the option price and the fair market value
of the common stock on the date the SAR is exercised. Either the SAR or the
related option may be exercised, but not both. There were no SARs granted
during 1994 or 1993. During 1992, 613,000 SARs were exercised at an average
exercise price of $12.21 per share (not adjusted for subsequent stock
dividends and stock splits). This resulted in the cancellation of the 613,000
tandem stock options. At December 31, 1994, 1993 and 1992, no SARs were
outstanding.
Under the terms of the MEIP, subsequent stock dividends and stock splits
have the effect of increasing the option shares outstanding, which
correspondingly decreases the average exercise price of outstanding options.
The following summary of shares subject to option under the MEIP reflects the
original options granted, adjusted for subsequent stock splits, at original
option prices which have also been adjusted for subsequent stock splits.
Average option
Shares subject to option price per share
------------------------ ---------------
Balance at January 1, 1992 2,931,000 $ 8.06
Options granted 2,367,000 14.90
Options exercised (257,000) 6.60
Options cancelled or lapsed (1,294,000) 6.28
Adjustment for stock dividends* 173,000 -
------------ ------
Balance at December 31, 1992 3,920,000 12.54
Options granted 1,862,000 18.06
Options exercised (239,000) 7.62
Options cancelled or lapsed (25,000) 5.44
Adjustment for stock dividends* 201,000 -
------------ -----
Balance at December 31, 1993 5,719,000 14.14
Options granted 1,562,000 13.06
Options exercised (149,000) 8.04
Options cancelled or lapsed (69,000) 14.17
Adjustment for stock dividends* 287,000 -
----------- ------
Balance at December 31, 1994 7,350,000 $14.07
=========== ======
Options exercisable at
end of year 1,667,000 $11.85
=========== ======
* Represents adjustment to outstanding option shares to reflect stock
dividends.
During 1993 and 1992, the Company granted restricted stock awards to key
employees in the form of the Company's Common Stock Series B. There were no
restricted stock awards during 1994. The number of Series B shares issued as
restricted stock awards during 1993 and 1992 was 149,000 and 792,000,
respectively (adjusted for subsequent stock dividends and stock splits). None
of the restricted stock awards may be sold, assigned, pledged or otherwise
transferred, voluntarily or involuntarily, by the employee. The restrictions
lapse over three- and five-year periods. At December 31, 1994, 482,618 shares
(adjusted for subsequent stock dividends and stock splits) of restricted stock
were outstanding.
The Company's Employee Stock Purchase Plan ("ESP Plan") was approved by
shareholders on June 12, 1992 and amended on May 21, 1993. Under the ESP
Plan, eligible employees of the Company and its subsidiaries may subscribe
to purchase shares of Series B common stock at the lower of 85% of the
average market price 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 $25,000 in any one calendar year. As of December
31, 1994, there are 1,278,000 shares of Series B common stock reserved for
issuance under the ESP Plan. These shares will be adjusted for any future
stock dividends or stock splits. The ESP Plan will terminate when all
1,278,000 shares reserved have been subscribed for, unless terminated earlier
by the Board of Directors. The ESP Plan is administered by a committee of the
Board of Directors. As of December 31, 1994, the number of employees
participating in the ESP Plan was 1,561 and the total number of shares
subscribed for under the ESP Plan was 240,640.
(9) Income Taxes:
-------------
The following is a reconciliation of the provision for income taxes at
federal statutory rates to the reported provision for income taxes:
1994 1993 1992
------------- --------------- ----------------
($ in thousands)
Consolidated tax
provision at
federal statutory
rate $72,912 35.0% $62,275 35.0% $53,985 34.0%
Allowance for funds
used during
construction (5,051) (2.4%) (4,480) (2.5%) (2,789) (1.8%)
Amortization of
investment tax
credits (1,949) (0.9%) (2,086) (1.2%) (2,140) (1.3%)
State income tax
provisions, net of
federal income tax
benefit 5,262 2.5% 6,432 3.6% 4,989 3.1%
Nontaxable investment
income (6,032) (2.9%) (8,339) (4.7%) (8,490) (5.3%)
All other - net (819) (0.4%) (1,504) (0.8%) (1,788) (1.1%)
-------- ------ -------- ------ -------- ------
$64,323 30.9% $52,298 29.4% $43,767 27.6%
======== ====== ======== ====== ======== ======
For 1994, 1993 and 1992, accumulated deferred income taxes amounted to
$230,556,000, $194,165,000 and $72,969,000, respectively, and the unamortized
deferred investment tax credits amounted to $17,594,000, $19,306,000 and
$22,253,000, respectively. Income taxes paid during the year were
$30,395,000, $24,139,000 and $22,798,000 for 1994, 1993 and 1992,
respectively.
The components of the net deferred income tax liability at December 31,
are as follows:
1994 1993
---- ----
($ in thousands)
Deferred tax liabilities
- ------------------------
Property, plant and equipment basis
differences $177,549 $148,756
Regulatory assets 62,578 57,134
Other-net 28,704 25,365
-------- --------
268,831 231,255
-------- --------
Deferred tax assets
- -------------------
Deferred investment tax credits 7,183 6,649
Regulatory liabilities 13,498 11,135
-------- -------
20,681 17,784
-------- -------
Valuation Allowance 0 0*
-------- --------
Deferred income taxes $248,150 $213,471
======== ========
* There was no change in the valuation allowance during 1993.
The provision for federal and state income taxes, as well as the taxes
charged or credited to Shareholders equity, includes amounts both payable
currently and deferred for payment in future periods as indicated below.
1994 1993 1992
---- ---- ----
Income Taxes Included in
the Income Statements: ($ in thousands)
- ------------------------
Current
Federal $28,347 $39,571 $37,501
State 3,595 8,682 7,118
------- ------- -------
31,942 48,253 44,619
------- ------- -------
Deferred
Federal 29,829 4,917 847
Investment tax credits (1,949) (2,086) (2,140)
State 4,501 1,214 441
------- ------ ------
32,381 4,045 (852)
------- ------ ------
Income taxes included in the
Income Statement 64,323 52,298 43,767
------- ------ ------
Income Taxes Included in
Shareholders' Equity:
- ------------------------
Deferred income taxes on
unrealized gains on
securities classified
as available-for-sale 5,588 - -
Current benefit arising
from stock options exercised (137) (537) (531)
-------- -------- --------
Income taxes included in
Shareholders' Equity 5,451 (537) (531)
-------- -------- --------
Total income taxes $69,774 $51,761 $43,236
======== ======== =========
(10) Segment Information:
--------------------
Year Ended December 31,
-----------------------------------
1994 1993 1992
---- ---- ----
($ in thousands)
Telecommunications:
- -------------------
Revenues $461,094 $177,497 $186,232
Assets 1,805,893 910,276 325,618
Depreciation 81,659 22,744 22,452
Capital expenditures 177,419 66,619 20,672
Operating income before
income taxes 148,720 85,934 85,994
Natural gas:
- ------------
Revenues $208,940 $211,892 $189,812
Assets 306,979 289,121 243,582
Depreciation 10,827 10,646 10,106
Capital expenditures 31,235 25,677 22,280
Operating income before
income taxes 30,205 28,971 26,952
Electric:
- ---------
Revenues $173,585 $164,515 $145,032
Assets 458,457 446,284 356,829
Depreciation 15,251 12,924 11,038
Capital expenditures 43,132 43,673 74,502
Operating income before
income taxes 31,221 30,660 18,999
Water/Wastewater:
- -----------------
Revenues $ 72,395 $ 65,488 $ 59,388
Assets 455,312 400,288 320,985
Depreciation 7,438 8,384 6,531
Capital expenditures 38,884 37,426 25,456
Operating income before
income taxes 17,978 15,595 18,529
(11) Quarterly Financial Data (unaudited):
-------------------------------------
Net Income
----------------------------------
($ in thousands) Per Share
- ---------------- --------------------
1994 Revenues Amount Series A Series B
---- -------- ------ -------- --------
First quarter $223,896 $31,655 $.17 $.17
Second quarter 188,674 38,016 .20 .20
Third quarter 242,309 38,687 .20 .20
Fourth quarter 261,135 35,639 .19 .19
Net Income
-----------------------------------
($ in thousands) Per Share
- ---------------- --------------------
1993 Revenues Amount Series A Series B
---- -------- ------ -------- --------
First quarter $165,915 $28,239 $.15 $.15
Second quarter 146,170 34,682 .18 .18
Third quarter 145,315 34,269 .18 .18
Fourth quarter 161,992 28,440 .15 .15
The quarterly net income per share amounts are rounded to the nearest
cent. Annual earnings per share may vary depending on the effect of such
rounding.
(12) Supplemental Cash Flow Information:
-----------------------------------
Schedule of net cash provided by operating activities for the years
ended December 31,
1994 1993 1992
---- ---- ----
($ in thousands)
Net income $143,997 $125,630 $115,013
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and
amortization 115,175 54,698 50,127
Deferred income taxes
and amortization of
investment tax credits 32,381 4,045 (852)
Centennial investment
income (13,481) (9,594) (8,803)
Allowance for equity
funds used during
construction (11,402) (10,123) (6,398)
Change in accounts
receivable (20,663) (23,068) (12,372)
Change in accounts
payable 21,520 (3,773) (4,607)
Change in accrued
taxes and accrued
interest 13,024 24,960 19,672
Other (18,235) 32,174 (20,740)
--------- -------- ---------
Net cash provided
by operating
activities $262,316 $194,949 $131,040
========= ======== =========
(13) Pension and Retirement Plans:
-----------------------------
The Company and its subsidiaries have noncontributory pension plans
covering all employees who have met certain service and age requirements. The
benefits are based on years of service and final average pay or pay rate.
Contributions are made in amounts sufficient to fund the plans' current
service costs and to provide for benefits expected to be earned in the
future. Plan assets are invested in a diversified portfolio of equity and
fixed-income securities.
Pension costs for 1994, 1993 and 1992 include the following components:
1994 1993 1992
---- ---- ----
($ in thousands)
Service cost $5,777 $3,585 $3,277
Interest cost on projected
benefit obligations 8,166 5,038 4,544
Net amortization and deferral 172 1,751 132
Return on plan assets (9,754) (6,945) (5,438)
-------- ------- -------
Net pension cost $4,361 $3,429 $2,515
======== ======= ========
Assumptions used in the computation of pension costs and the actuarial
present value of projected benefit obligations included the following:
1994 1993 1992
---- ---- ----
Discount rate 8% 7.5% 8%
Expected long-term rate of
return on plan assets 8.5% 8% 8.5%
Rate of increase in
compensation levels 4.5% 4.5% 5%
As of December 31, 1994, 1993 and 1992, respectively, the fair values of
plan assets were $133,964,000, $73,233,000 and $68,506,000. The actuarial
present values of the accumulated benefit obligations were $86,186,000,
$57,216,000 and $48,661,000 for 1994, 1993 and 1992, respectively. The
actuarial present values of the vested accumulated benefit obligation for
1994, 1993 and 1992, respectively, were $77,053,000, $54,591,000 and
$46,819,000. The total projected benefit obligations for 1994, 1993 and 1992,
respectively, were $125,943,000, $75,531,000 and $63,199,000.
The Company provides certain medical, dental and life insurance benefits
for retired employees and their beneficiaries and covered dependents. In
January 1993, the Company implemented SFAS 106, "Employers' Accounting for
Postretirement Benefits Other than Pensions". SFAS 106 requires the Company
to accrue the expected costs of providing postretirement benefits to
employees and to employees' beneficiaries and covered dependents during the
years the employee renders the necessary service. The Company's 1994 and 1993
annualized costs were approximately $6,605,000 and $3,671,000, respectively,
of which approximately $4,261,000 and $1,601,000 were recorded as regulatory
assets for states whose regulatory commissions to date have not but will
likely allow recovery of accrued costs in future rate proceedings. The
Company's annual cost includes 20-year prospective recognition of the
transition obligation. The Company's accumulated postretirement benefit
obligation at December 31, 1994 was approximately $54,986,000. The Company
is currently assessing the costs and benefits of alternative funding methods.
For measurement purposes, the Company used an 8% discount rate and a 9%
annual rate of increase in the per-capita cost of covered health-care
benefits, gradually decreasing to 6% in the year 2030 and remaining at that
level thereafter. The effect of a 1% increase in the assumed health-care 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 $529,000
and the effect on the accumulated postretirement benefit obligation for
health benefits would be $5,332,000. The Company recorded $27,357,000 of
accumulated postretirement benefit obligation pursuant to the acquisition of
the GTE Telephone Properties.
The components of the net periodic postretirement benefit cost for the
years ended December 31, 1994 and 1993 are as follows:
1994 1993
---- ----
($ in thousands)
Service cost $1,826 $ 845
Interest cost 3,418 1,710
Amortization of transition obligation 1,048 1,116
Other 313 0
------ ------
Net periodic postretirement
benefit cost $6,605 $3,671
====== ======
The following table sets forth the accrued postretirement benefit liability
recognized in the Company's balance sheets at December 31, 1994 and 1993:
1994 1993
---- ----
($ in thousands)
Accumulated postretirement benefit obligation:
Retirees ($14,946) ($13,919)
Fully eligible active plan participants (7,158) (2,749)
Other active plan participants (32,882) (7,328)
--------- --------
Total accumulated postretirement benefit
obligation (54,986) (23,996)
Unrecognized net (gain) loss (1,914) 1,563
Unrecognized prior service cost 2,932 (1,477)
Unrecognized transition obligation 18,676 21,201
--------- --------
Net accumulated postretirement benefit
obligation ($35,292) ($2,709)
========= ========
(14) Commitments and Contingencies:
------------------------------
The Company has budgeted expenditures for facilities in 1995 of
approximately $262,000,000 and certain commitments have been entered into in
connection therewith. On November 29, 1994, the Company and ALLTEL
Corporation announced the signing of eight definitive agreements pursuant to
which Citizens agreed to acquire from ALLTEL, for $292,000,000, certain
properties servicing approximately 110,000 local telephone access lines, and
certain cable television systems servicing approximately 7,000 subscribers.
The properties are located in eight states: Arizona, California, Nevada, New
Mexico, Oregon, Tennessee, Utah and West Virginia. The closings are expected
to occur state by state throughout 1995 and the first half of 1996.