-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Wfs9JKw6/Q+7epaaaPFPInomGyHqP+n1yveYHZhFisgyUSvk7cWsBX0fGAk3HaLM AVmU1OyjBTZvSMaZViK+Ww== 0000020520-97-000004.txt : 19970508 0000020520-97-000004.hdr.sgml : 19970508 ACCESSION NUMBER: 0000020520-97-000004 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970317 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CITIZENS UTILITIES CO CENTRAL INDEX KEY: 0000020520 STANDARD INDUSTRIAL CLASSIFICATION: 4931 IRS NUMBER: 060619596 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-11001 FILM NUMBER: 97557701 BUSINESS ADDRESS: STREET 1: HIGH RIDGE PK BLDG 3 STREET 2: P O BOX 3801 CITY: STAMFORD STATE: CT ZIP: 06905 BUSINESS PHONE: 2033298800 MAIL ADDRESS: STREET 1: HIGH RIDGE PARK BLDG NO 3 CITY: STAMFORD STATE: CT ZIP: 06905 10-K405 1 1996 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 Commission file number 001-11001 ----------------- OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 CITIZENS UTILITIES COMPANY -------------------------- (Exact name of registrant as specified in its charter) Delaware 06-0619596 - - -------------------------------- ----------------------------------- (State or other jurisdiction of (I.R.S.Employer Identification No.) incorporation or organization) High Ridge Park P.O. Box 3801 Stamford, Connecticut 06905 -------------------------------------------------- (Address, zip code of principal executive offices) Registrant's telephone number, including area code: (203) 329-8800 Securities registered pursuant to Section 12(b) of the Act: Common Stock Series A, par value $.25 per share New York Stock Exchange Common Stock Series B, par value $.25 per share New York Stock Exchange Guarantee of Convertible Preferred Securities of Citizens Utilities Trust New York Stock Exchange Citizens Convertible Debentures Guarantee of Partnership Preferred Securities of Citizens Utilities Capital L.P. - - ------------------------------ -------------------------------------- (Title of each class) (Name of exchange on which registered) Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by nonaffiliates of the registrant as of February 28, 1997 was $2,709,973,572 The number of shares outstanding of each of the registrant's classes of common stock as of February 28, 1997 were: Common Stock Series A 154,236,035 Common Stock Series B 85,513,449 DOCUMENTS INCORPORATED BY REFERENCE The Proxy Statement for the registrant's 1997 Annual Meeting of Stockholders to be held on May 22, 1997, is incorporated by reference into Part III of this Form 10-K. Item 1. Description of Business (a) General Development of Business The "Company" includes Citizens Utilities Company and its subsidiaries except where the context or statement indicates otherwise. The Company is a communications and public services company which provides, either directly or through subsidiaries, telecommunications, electric transmission and distribution, natural gas transmission and distribution, water distribution and wastewater treatment services to customers in areas of 22 states. The Company was incorporated in Delaware in 1935 to acquire the assets and business of a predecessor corporation. Since then, the Company has grown as a result of investment in owned communications and public services operations and from numerous acquisitions of additional communications and public services operations. It continues to expand through internal investment, acquisitions and joint ventures in the rapidly evolving telecommunications industry and in traditional public services and related fields. The Company's strong financial resources and consistent operating performance enable it to make the investments and conduct the operations necessary to serve growing areas and to expand through acquisitions. (b) Financial Information about Industry Segments The Consolidated Statements of Income and Note 11 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 TELECOMMUNICATIONS Through subsidiaries, the Company provides both regulated and competitive telecommunications services to all segments of the marketplace. Telecommunications services consist of local network service, network access service, long distance service, competitive access service, directory advertising, centrex, paging, cellular, internet access, conference call, and direct broadcast satellite. The Company provides local network services to the following approximate number of primarily residential access lines in the following states: State Access Lines ------ ------------ New York 285,100 West Virginia 134,000 Arizona 125,800 California 115,100 Tennessee 87,600 Nevada 23,600 Utah 19,100 Idaho 18,800 Oregon 13,100 Montana 7,400 New Mexico 4,600 ---------- Total 834,200 ========== The Company also provides long distance services to 179,100 of its local network services access lines and to 40,000 access lines outside its franchised service territories. Cable television services are provided to approximately 6,300 customers in Arizona, Nevada and New Mexico. Competitive access services, such as enhanced network, data and video services, are provided to primarily medium and large corporate and exchange carrier customers through fiber optic networks in the following service areas: Phoenix, Arizona; Sacramento, California; Portland, Oregon; Salt Lake City, Utah; and Seattle, Washington. In February 1996, the Telecommunications Act of 1996 (the "Act") became law. The Act provides for the removal of barriers that currently prevent telephone, cable television and broadcast companies from entering each other's business. The Act addresses various aspects of competition and regulation within the communications industry including elimination of barriers to compete in the local network services market and the creation of interconnection obligations and related pricing guidelines. 1 The Federal Communications Commission's ("FCC") Interconnection Order issued in August 1996, the first of three expected competition-related orders, is designed to regulate the local network services market competition provisions of the Act. Subject to the rural telephone company exemption discussed below, the Interconnection Order affects the Company's local network services business as follows: (a) Local Exchange Companies ("LECs") must provide interconnection to any new local network services competitor upon request. This interconnection must be at least equal in quality to that provided by the LEC to itself or its affiliates. Also, the order mandates that the LEC provide this interconnection at just, reasonable and nondiscriminatory rates, terms and conditions. (b) LECs must provide unbundled network elements, including support systems, to telecommunications carriers that intend to provide local network services or network-access services in their markets. These network elements include network interface devices; local loops; local and tandem switches (including all related software-based features); interoffice transmission facilities; signaling and call-related database facilities; and operations support systems and information. (c) LECs must make retail services available to competitors at wholesale rates. The Order contains pricing guidelines for wholesale services and interconnection and unbundled elements. Should pricing negotiations between LECs and new entrants become deadlocked, the Order also provides a standard for arbitration to be applied by the respective State Commissions. Several local exchange companies filed petitions to review the Interconnection Order with the Federal Courts and requested that the pricing provisions of the Interconnection Order be stayed pending full judicial review. On October 15, 1996, the Eighth Circuit Court of Appeals entered an order which stayed the effectiveness of the pricing and other provisions of the Interconnection Order. The FCC and certain telecommunications companies requested review of the Eighth Circuit's Stay Order by the United States Supreme Court; however, the Supreme Court declined to make such a review. The portions of the Interconnection Order which were not stayed remain effective. Because of its smaller size and smaller market service areas, the Company's local network services business has a qualified exemption from the FCC Interconnection Order. That exemption continues until a bona fide request for interconnection is received and a State Commission with jurisdiction determines that discontinuation of the exemption is technically feasible. This is consistent with universal service principles and will not impose an undue economic hardship on the Company. The Company is pursuing an aggressive growth strategy to take advantage of opportunities in the emerging telecommunications marketplace. This strategy includes expansion of the Company's customer base and telecommunications services provided. The Company's customer base expansion is focused on its franchised service territories, markets adjacent to these franchised service territories and customers of affiliated companies. The Company's objective in expanding its telecommunications services is to become a full service telecommunications provider offering customers an integrated package of products and services. The Company is expanding into additional markets by offering its long distance service in combination with other value-added services such as CLASS services including caller ID, voice mail, conference calling, centrex, cellular, paging, direct broadcast satellite, and internet access. The Company sells its products using multiple sales distribution channels and a marketing organization structured around product management and customer segmentation. The Company owns a one-third interest and is general managing partner of Mohave Cellular, a cellular limited partnership operating eight cell sites in Arizona. In order to meet the growth in the local network services, network access services and long distance businesses , the Company is modernizing its local networks. In certain areas, the Company is upgrading its digital switches and replacing analog and microwave facilities with fiber optics and digital microwave. Signaling System 7 ("SS7") capabilities will be extended to nearly all digital switches. Telemarketing and conference calling capabilities are being further enhanced and the Company plans to expand internet access service into several markets in 1997. 2 The Company completed construction of a fiber-optic route from Las Vegas, Nevada to Phoenix, Arizona which provides the Company with fiber-optic capacity for its operations as well as for other telecommunications carriers. The Company has established the foundation of an internet backbone service by providing frame relay connectivity in Washington, Oregon, California, Utah, Nevada and Arizona; and also provides private line, Local Area Network to Local Area Network and video teleconferencing services. The Company has established alliances and is negotiating additional alliances with power utilities to open long haul routes and access new markets. The Company currently provides wholesale network access services and billing and collections services primarily to AT&T Corp., MCI Communications Corp. and Sprint Corp. The Company is expanding its network to offer distribution capability to independent telephone companies and emerging competitive local exchange providers and wireless companies. The Company is expanding its network access services business to also offer marketing services, operator services, and network monitoring. The Company currently contracts for advertising sales, printing and distribution for its 75 telephone directories with a circulation of approximately 1,500,000. In 1996, the Company implemented Audiotex, an electronic information service which is available 24-hours per day, seven days per week and is free to its customers. Audiotex provides consumer tips; Add Talk, which allows advertisers to update and expand printed advertising information; Teletips, which provides frequently updated information like news, weather, sports and entertainment; and point of purchase guides with approximately fifty available information categories on topics such as medical, dental, legal and insurance. Audiotex is currently operating in seven major markets. The Company plans to expand this service to four more markets in 1997. Audiotex creates new customer opportunities such as fax-on-demand and phone-poll services. A subsidiary of the Company, in a joint venture with a subsidiary of Century Communications, Corp. ("Century"), acquired and operates two cable television systems in southern California serving 49,500 subscribers. Century is a cable television company of which Leonard Tow, the Chairman, Chief Executive Officer and Chief Financial Officer of the Company, is Chairman and Chief Executive Officer. In addition, Claire Tow, a director of the Company, is a 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. A subsidiary of Century (the "Manager") manages the day-to-day operations of the systems. The Manager does not receive a management fee but is 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 August 19, 1996, the joint venture entered into agreements to acquire three additional cable television systems serving a total of 76,000 subscribers in southern California for approximately $140,000,000. The acquisitions are subject to regulatory approval and are expected to close in the first half of 1997. On December 2, 1996, the Company acquired Conference-Call USA, Inc. in a stock for stock transaction. Conference-Call USA, Inc. provides nationwide conference calling services and its subsidiary, Dial, Inc., provides international dial-back services. On February 3, 1997, the Company entered into a definitive agreement to acquire Ogden Telephone Company in a stock for stock transaction. Ogden Telephone Company serves approximately 20,000 customers in the suburban Rochester, New York area. The agreement is subject to pending New York State Public Service Commission and federal regulatory approvals. NATURAL GAS - - ----------- Operating divisions of the Company provide natural gas transmission and distribution services to the following approximate number of primarily residential customers in the following states: State Customers ------------ Louisiana 264,100 Arizona 94,500 Colorado 12,600 ------- Total 371,200 ======= The provision of services and/or rates charged are subject to the jurisdiction of federal and state regulatory agencies. The Company purchases all needed 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 electric suppliers for all of its customer base. The competitive position of natural gas at any given time depends primarily on the relative prices of natural gas and these other energy sources. 3 The Company continues to expand its Arizona natural gas transmission and distribution service areas. The service areas have grown from 65,300 customers at December 31, 1991 to 94,500 customers as of December 31, 1996. On January 9, 1997, the Company entered into a definitive agreement to purchase all of the outstanding stock of Gasco, Inc., a subsidiary of BHP Hawaii, Inc., for approximately $100,000,000. Gasco Inc. is a gas distribution company serving 70,000 customers in Hawaii. The transfer of ownership is expected to be completed in the second half of 1997, pending Hawaii Public Utilities Commission and federal regulatory approvals. ELECTRIC - - -------- Operating divisions of the Company provide electric transmission and distribution services to the following approximate number of primarily residential customers in the following states: State Customers ------------ Arizona 60,400 Hawaii 29,300 Vermont 20,100 ----------- Total 109,800 =========== The provision of services and/or rates charged are subject to the jurisdiction of federal and state regulatory agencies. The Company purchases approximately 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. Generally, the Company's electric sector does not experience material seasonal fluctuations. The electric industry is in the process of moving to a more competitive business through changes in both federal and state regulation and legislation. The industry is shifting toward electric customers being able to choose their energy provider much like telephone customers are able to choose their long distance provider. The electric distribution component of the business will likely remain a state regulated monopoly while many other portions of the business, such as power supply, will either be deregulated or regulations will be significantly modified. Deregulation could potentially result in stranded plant investments, stranded costs for supply contracts and stranded costs associated with programs to promote the most efficient use of electricity and reduce the environmental impact of generation facilities. The states in which the Company currently operates are moving at varying speeds toward a more competitive industry. While the Company cannot predict the impact of competition on all components of its electric operations, or whether its electric operations will eventually be subject to deregulation, the Company's efficient operations, limited investment in generation and capability to deliver multiple, diverse services should place it in an excellent position to excel in a competitive environment. WATER AND WASTEWATER - - -------------------- Through subsidiaries, the Company provides water distribution, wholesale water transmission, wastewater treatment, public works consulting, marketing and billing services to the following approximate number of primarily residential customers in the following states: State Customers ----------- Arizona 110,600 Illinois 69,800 California 59,400 Pennsylvania 28,600 Ohio 14,700 Indiana 1,300 ---------- Total 284,400 ========== 4 The provision of 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 serving new customers are made under agreements with land developers who generally advance plant and/or funds for construction to the Company that are later refunded in part by the Company as new customers and revenues are added in the respective land developments. In addition to increasing customers through agreements with land developers, the Company acquires water and/or wastewater operations from municipalities and private companies. Through its subsidiary, Citizens Public Works Service Company, the Company plans to provide water and wastewater operations and maintenance services to municipalities in the United States and abroad. Privatization opportunities are increasing as the water and wastewater industries in the United States continue to face significant changes due to increasing demands for advanced technical expertise and capital to meet the requirements of more stringent environmental regulations. Internationally, developing countries are looking to the expertise of existing water and wastewater companies to provide a sound infrastructure of water and wastewater systems. Citizens' geographic and service diversity and decades of experience in the water and wastewater industry provide a strong platform to successfully meet these needs and respond to the increasing trend for privatization. The Company's water and wastewater treatment operations are regulated under the Safe Drinking Water Act and the Clean Water Act. In August 1996, the 1996 Safe Drinking Water Act Amendments became Law. There are several new requirements under the Amendments, including reports to consumers on water quality, operator certification, and source water protection. The greatest impact to the water sector will be the processes regulators will use to establish standards for new contaminants. With this new approach, regulators are given the flexibility to set priorities in contaminant selection rather than follow a fixed schedule. The Company's water distribution and wastewater treatment operations are strengthening its environmental management system by implementing the ISO 14000 Standard for Environmental Management Systems. ISO 14000 is a total quality management tool for activities that affect the environment. Compliance with ISO 14000 benefits the Company by improving environmental management, minimizing risk and creating a framework for improved relations with regulators. Once implemented, the program will be integrated into the Company's activities. Many of the procedures required by ISO 14000 are already in place at the Company's water and wastewater operations. There are no capital requirements for this effort. General - - ------- The Company's operations are conducted primarily in small and medium size towns and communities. No material part of the Company's business is dependent upon a single customer or small group of customers for its revenues. As a result of its diversification, the Company is not dependent upon any single geographic area for its revenues. Due to this diversity, no single regulatory body regulates a service of the Company accounting for more than 20% of its 1996 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 approximately 5,400 employees at December 31, 1996. (d) Financial Information about Foreign and Domestic Operations and Export ----------------------------------------------------------------------- Sales ----- In 1995, the Company made a $4,200,000 investment in and entered into definitive agreements with Hungarian Telephone and Cable Corp. ("HTCC"), a Delaware corporation, which owns and operates local telephone concessions in Hungary. Pursuant to these agreements, as amended, (i) the Company has rights to purchase up to 58% of HTCC common stock, (ii) provides certain management services to HTCC on a cost-plus basis, (iii) has the right to and has designated one member, out of seven, of the HTCC Board of Directors, and (iv) provided HTCC with guarantees and financial support. The management services fee payable by HTCC to the Company is the greater of 5% of adjusted gross revenues of HTCC or a monthly fixed amount. In addition, expenses incurred by the Company in providing such services, including certain allocable overhead items, are reimbursed by HTCC. The Company has been compensated for all guarantees and financial support which it has provided to HTCC. The Company's investment in HTCC is accounted for using the cost method of accounting. 5 Item 2. Description of Property 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 ------ ------------------- Arizona Electric, Natural Gas, Telecommunications,* Water, Wastewater California Telecommunications, Water Colorado Natural Gas Florida Telecommunications Hawaii Electric Idaho Telecommunications Illinois Water, Wastewater, Telecommunications Indiana Water Louisiana Natural Gas Maryland Telecommunications Montana Telecommunications Nevada Telecommunications New Mexico Telecommunications New York Telecommunications Ohio Water, Wastewater Oregon Telecommunications Pennsylvania Water Tennessee Telecommunications Utah Telecommunications Vermont Electric Washington Telecommunications West Virginia Telecommunications* * Certain properties are subject to mortgage deeds pursuant to Rural Utilities Service borrowings. 6 Item 3. Legal Proceedings In November 1995, the Company's electric operation in Vermont was permitted an 8.5% rate increase. Subsequently the Vermont Public Service Board has called into question the level of rates awarded in connection with its formal review of allegations made by the Department of Public Service (the "DPS"), the consumer advocate in Vermont, and a former Citizens employee seeking penalties and other relief. The major issues in this proceeding commenced on September 1, 1995 and involve proper classification of certain costs to property, plant and equipment accounts and the Company's Demand Side Management ("DSM") program. In addition, the DPS believes that the Company should have sought and received regulatory approvals prior to construction of certain facilities in prior years. Hearings commenced in November 1996 and should conclude by the end of the first half of 1997. The final outcome of the various allegations is to be decided by the Vermont Public Service Board and such decision is expected by June 1997. Although the Company believes that there will not be a material effect on the Company's financial condition or results of operations as a result of this proceeding and the practices complained of have been rectified, it is possible that the decision of the Vermont Public Service Board could be unfavorable to the Company. The Company has provided a reserve of approximately $800,000 for the potential effects of this proceeding. Item 4. Submission of Matters to Vote of Security Holders None in fourth quarter 1996. 7 Executive Officers Information as to Executive Officers of the Company as of February 28, 1997 follows: Name Age Current Position and Office ---- --- --------------------------- Leonard Tow 68 Chairman of the Board, Chief Executive Officer and Chief Financial Officer Daryl A. Ferguson 58 President and Chief Operating Officer Robert J. DeSantis 41 Vice President and Treasurer J. Michael Love 45 Vice President, Citizens Public Services Robert L. O'Brien 54 Vice President, Regulatory Affairs Livingston E. Ross 48 Vice President and Controller David B. Sharkey 47 President, Electric Lightwave, Inc. Ronald E. Spears 48 Vice President, Telecommunications 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. 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 was Vice President, Corporate Planning from March 1991 through January 1997. He was appointed Vice President, Citizens Public Services in January 1997. ROBERT L. O'BRIEN has been associated with the Registrant since March 1975. He has been Vice President, Regulatory Affairs since June 1981. LIVINGSTON E. ROSS has been associated with the Registrant since August 1977. He was Manager of Reporting from September 1984 through March 1988, Manager of General Accounting from April 1988 through September 1990 and Assistant Controller from October 1990 through November 1991. He has been Vice President and Controller since December 1991. DAVID B. SHARKEY has been associated with the Registrant since August 1994 and has been President of Electric Lightwave, Inc. since that date. Prior to joining the Registrant, he was Vice President and General Manager of MobilMedia, a wireless company headquartered in New Jersey from August 1989 through July 1994. RONALD E. SPEARS has been associated with the Registrant since June 1995 and has been Vice President, Telecommunications since that date. Prior to joining the Registrant, he was Managing Director at Russell Reynolds Associates, an executive recruiting firm from April 1994 to May 1995. He was Chairman and Chief Executive Officer, and prior to that, President and Chief Operating Officer of Videocart, Inc. from February 1991 to March 1994. He served as President, MCI Midwest, an operating division of MCI Telecommunications from September 1984 to January 1991. He is currently a Director of Hungarian Telephone and Cable Corp. 8 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 subsequent stock dividends, rounded to the nearest 1/8th. (See Note 8 of Notes to Consolidated Financial Statements.)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter High Low High Low High Low High Low ---- --- ---- --- ---- --- ---- --- 1996: - - ---- Series A $12 1/8 $10 1/8 $11 3/4 $10 1/4 $12 1/8 $10 1/4 $12 $10 1/2 Series B $12 1/8 $10 1/4 $11 7/8 $10 1/4 $12 1/8 $10 5/8 $12 1/8 $10 1/2 1995: - - ---- Series A $12 3/4 $11 $11 5/8 $ 9 5/8 $10 3/4 $ 9 7/8 $12 3/8 $ 9 7/8 Series B $12 3/4 $10 7/8 $11 5/8 $ 9 3/4 $10 3/4 $10 $12 1/2 $ 9 7/8
As of February 28, 1997, the approximate number of record security holders of the Company's Common Stock Series A and Series B was 27,559 and 23,683, respectively. 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 1.6% for each quarter of 1996. Quarterly stock dividends declared and issued on both Common Stock Series A and Series B were 1.5% for the first and second quarters of 1995 and 1.6% for the third and fourth quarters of 1995. An annual cash dividend equivalent rate of 71 3/4 and 67 3/4 per share (adjusted for all stock dividends paid subsequent to all dividends declared through December 31, 1996, 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 1996 and 1995, respectively. (See Note 8 of Notes to Consolidated Financial Statements.) RECENT SALES OF UNREGISTERED SECURITIES During 1996, the Company sold securities that were not registered under the Securities Act of 1933, in the transactions described below, pursuant to the exemption contained in section 3 (a) (2). The proceeds of each of the following issuances are used to fund qualifying construction expenditures. On August 1, 1996, Berks County Industrial Development Authority (Pennsylvania), on behalf of the Company, issued $16,700,000 aggregate principal amount of its Industrial Development Revenue Bonds 1996 Series. The underwriters were Lehman Brothers Inc. and Morgan Stanley & Co. Incorporated. The Department of Budget and Finance of the State of Hawaii remarketed the following Special Purpose Revenue Bonds on behalf of the Company on the following dates. ~ On January 18, 1996, $10,000,000 aggregate principal amount of Special Purpose Revenue Bonds 1988 Series B, remarketed by Lehman Brothers Inc. ~ On October 1, 1996, $14,000,000 aggregate principal amount of Special Purpose Revenue Bonds 1988 Series A, remarketed by Morgan Stanley & Co. Incorporated and Lehman Brothers Inc. ~ On October 1, 1996, $10,000,000 aggregate principal amount of Special Purpose Revenue Bonds 1988 Series C, remarketed by Morgan Stanley & Co. Incorporated and Lehman Brothers Inc. ~ On November 19, 1996, $9,400,000 aggregate principal amount of Special Purpose Revenue Bonds 1985 Series, remarketed by Lehman Brothers Inc. and Morgan Stanley & Co. Incorporated. On September 3, 1996, Northampton County Industrial Development Authority (Pennsylvania) remarketed $18,250,000 aggregate principal amount of Industrial Development Revenue Bonds 1988 Series, on behalf of the Company. The remarketing agents were Morgan Stanley & Co. Incorporated and Lehman Brothers Inc. Aggregate underwriting commissions paid in connection with the above described issuances were $33,400. 9 Item 6. Selected Financial Data (In thousands, except for per-share amounts) --------------------------------------------------------------------
Year Ended December 31, --------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Operating revenues $ 1,306,517 $ 1,069,032 $ 906,150 $ 613,099 $ 576,881 Net income $ 178,660 $ 159,536 $ 143,997 125,630 $ 115,013 Earnings per-share of Common Stock Series A and Series B(1) $ .77 $ .69 $ .68 .60 $ .55 Stock dividends declared on Common Stock Series A and Series B (2) 6.56% 6.35% 5.04% 4.37% 5.61% As of December 31, --------------------------------------------------------------------------- Total assets $ 4,523,148 $ 3,918,187 $ 3,576,566 2,627,118 $ 1,887,981 Long-term debt $ 1,509,697 $ 1,187,000 $ 994,189 547,673 $ 522,699 Equity(3) $ 1,879,433 $ 1,559,913 $ 1,156,896 974,486 $ 837,271
(1) Adjusted for subsequent stock dividends and splits; no adjustment has been made for the Company's 1.6% first quarter 1997 stock dividend because the effect is immaterial. (2) Compounded annual rate of quarterly stock dividends. (3) Includes EPPICS (see Item 7(a) below). Item 7. Management's Discussion and Analysis of Financial Condition and Results ----------------------------------------------------------------------- of Operations ------------- (a) Liquidity and Capital Resources In 1996, the Company's primary source of funds was from operations. Funds requisitioned from the 1996, 1995, 1994 and 1993 Series Industrial Development Revenue Bond construction fund trust accounts were used to pay for the construction of qualifying utility plant. On January 22, 1996, a subsidiary of the Company issued 4,025,000 shares of 5% Company Obligated Mandatorily Redeemable Convertible Preferred Securities (also known as Equity Providing Preferred Income Convertible Securities or "EPPICS") having a liquidation preference of $50 per security and a maturity date of January 15, 2036. Each security is currently convertible into 3.465 shares of the Company's Common Stock Series A at a conversion price of $14.429 per share (as adjusted for subsequent stock dividends paid on Series A Common Stock). The $196,722,000 of net proceeds from the sale of these securities was used to permanently fund a portion of the purchase price of properties acquired from GTE Corp. and ALLTEL Corporation. Proceeds from the following additional security issuances and borrowings during 1996 were used to repay outstanding commercial paper, fund and/or prefund expenditures for the construction, extension and improvement of the Company's facilities and for general corporate purposes.
Date Security/Borrowing Amount Rate Maturity - - ---- ------------------ ------ ---- -------- January 22 Rural Utilities Service Loan Contract $ 4,464,000 5.83% December 31, 2027 June 11 Debentures 100,000,000 6.80% August 15, 2026 August 1 Industrial Development Revenue Bonds 16,700,000 3.67% July 1, 2031 September 25 Rural Utilities Service Loan Contract 4,515,000 6.08% December 31, 2027 November 12 State of California Department of Water Resources Loan 2,166,000 2.42% November 30, 2026 December 6 Debentures 200,000,000 7.05% October 1, 2046
10 The following Fixed Rate Industrial Development and Special Purpose Revenue Bonds were converted and remarketed to Weekly Rate or Money Market Bonds during 1996:
Initial Interest Date Bonds Amount Rate Maturity Date - - ---- ------------------------------------ ----------- -------- ------------- January 18 7.25% 1988 Series B, Special Purpose Revenue Bonds $10,000,000 3.31% September 1, 2018 September 3 7% 1988 Series Industrial Development Revenue Bonds 18,250,000 3.35% September 1, 2018 October 1 7.9% 1988 Series A, Special Purpose Revenue Bonds 14,000,000 3.63% September 1, 2018 October 1 7.375% 1988 Series C, Special Purpose Revenue Bonds 10,000,000 3.63% September 1, 2018 November 19 7.375% 1985 Series Special Purpose Revenue Bonds 9,400,000 3.53% November 1, 2015
On September 27, 1996, a subsidiary of the Company received approval for an additional $41,200,000 of borrowings under loan contracts with the Rural Utilities Service. Proceeds from those borrowings will be used to reimburse the Company's treasury for funds spent on the construction or improvement of qualifying telecommunications facilities in Arizona. On December 4, 1996, the Company acquired Conference-Call USA, Inc. ("Conference-Call") in a stock for stock transaction. The Company issued 1,289,133 shares of Common Stock Series A in exchange for all of the common and preferred shares of Conference-Call. If Conference-Call achieves specified financial results in future periods, the Company may issue up to 1,443,299 additional shares of Common Stock Series A. On January 9, 1997, the Company entered into a definitive agreement to purchase all of the outstanding stock of Gasco, Inc., a subsidiary of BHP Hawaii, Inc., for approximately $100,000,000. The transfer of ownership is expected to be completed in the second half of 1997, pending Hawaii Public Utilities Commission and federal regulatory approvals. On February 3, 1997, the Company entered into a definitive agreement to acquire Ogden Telephone Company in a stock for stock transaction. The agreement is subject to pending New York State Public Service Commission and federal regulatory approvals. The Company considers its operating cash flows and its ability to raise debt and equity capital as the principal indicators of its liquidity. Although working capital is not considered to be an indicator of the Company's liquidity, the Company experienced an increase in its working capital at December 31, 1996. The increase is primarily due to the repayment of outstanding commercial paper with the proceeds from the issuance of the EPPICS. The Company has committed lines of credit with commercial banks under which it may borrow up to $600,000,000. There were no amounts outstanding under these lines at December 31, 1996. Net capital expenditures, by sector, have been and are budgeted as follows:
Budget Actual ---------------------------------------- 1997 1996 1995 1994 ----------- ---------- ----------- ----------- (in thousands) Communications $463,000 $225,600 $141,100 $173,200 Public Services: Natural Gas 43,000 27,700 28,700 26,200 Electric 25,000 24,600 32,800 34,400 Water and Wastewater 36,000 21,000 28,000 22,300 General 46,000 18,900 10,100 20,800 ----------- ----------- ----------- ----------- $613,000 $317,800 $240,700 $276,900 =========== =========== =========== ===========
The Company anticipates that the funds necessary for its 1997 capital expenditures will be provided from operations; from 1993, 1994, 1995 and 1996 Series Industrial Development Revenue Bond construction fund trust account requisitions; advances from Rural Utilities Service loan contracts; 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. 11 During 1996, the Company was authorized increases in annual revenues for properties in Arizona, Pennsylvania, Hawaii and Louisiana totaling $22,300,000; $6,000,000 of such increases were granted in an interim order dated June 1995. The Company currently has requests for $22,100,000 of increases in annual revenues pending before regulatory commissions in Arizona and California. Regulatory Environment - - ---------------------- In February 1996, the Telecommunications Act of 1996 (the "Act") became law. The Act provides for the removal of barriers that currently prevent telephone, cable television and broadcast companies from entering each other's business. The Act addresses various aspects of competition and regulation within the communications industry including elimination of barriers to compete in the local network services market and the creation of interconnection obligations and related pricing guidelines. The Federal Communications Commission's ("FCC") Interconnection Order issued in August 1996, the first of three expected competition-related orders, is designed to regulate the local network services market competition provisions of the Act. Subject to the rural telephone company exemption discussed below, the Interconnection Order affects the Company's local network services business as follows: (a) Local Exchange Companies ("LECs") must provide interconnection to any new local network services competitor upon request. This interconnection must be at least equal in quality to that provided by the LEC to itself or its affiliates. Also, the order mandates that the LEC provide this interconnection at just, reasonable and nondiscriminatory rates, terms and conditions. (b) LECs must provide unbundled network elements, including support systems, to telecommunications carriers that intend to provide local network services or network-access services in their markets. These network elements include network interface devices; local loops; local and tandem switches (including all related software-based features); interoffice transmission facilities; signaling and call-related database facilities; and operations support systems and information. (c) LECs must make retail services available to competitors at wholesale rates. The Order contains pricing guidelines for wholesale services and interconnection and unbundled elements. Should pricing negotiations between LECs and new entrants become deadlocked, the Order also provides a standard for arbitration to be applied by the respective State Commissions. Several local exchange companies filed petitions to review the Interconnection Order with the Federal Courts and requested that the pricing provisions of the Interconnection Order be stayed pending full judicial review. On October 15, 1996, the Eighth Circuit Court of Appeals entered an order which stayed the effectiveness of the pricing and other provisions of the Interconnection Order. The FCC and certain telecommunications companies requested review of the Eighth Circuit's Stay Order by the United States Supreme Court; however, the Supreme Court declined to make such a review. The portions of the Interconnection Order which were not stayed remain effective. Because of its smaller size and smaller market service areas, the Company's local network services business has a qualified exemption from the FCC Interconnection Order. That exemption continues until a bona fide request for interconnection is received and a State Commission with jurisdiction determines that discontinuation of the exemption is technically feasible. This is consistent with universal service principles and will not impose an undue economic hardship on the Company. The electric industry is in the process of moving to a more competitive business through changes in both federal and state regulation and legislation. The industry is shifting toward electric customers being able to choose their energy provider much like telephone customers are able to choose their long distance provider. The electric distribution component of the business will likely remain a state regulated monopoly while many other portions of the business, such as power supply, will either be deregulated or regulations will be significantly modified. Deregulation could potentially result in stranded plant investments, stranded costs for supply contracts and stranded costs associated with programs to promote the most efficient use of electricity and reduce the environmental impact of generation facilities. The states in which the Company currently operates are moving at varying speeds toward a more competitive industry. While the Company cannot predict the impact of competition on all components of its electric operations, or whether its electric operations will eventually be subject to deregulation, the Company's efficient operations, limited investment in generation and capability to deliver multiple diverse services should place it in an excellent position to excel in a competitive environment. During 1996, the Company's Vermont operations have been the subject of a comprehensive rate review. Although the Company believes that there will not be a material effect on the Company's financial condition or results of operations as a result of this proceeding, the Company has provided a reserve of approximately $800,000 for the potential impact of this proceeding. 12 The Company's water and wastewater treatment operations are regulated under the Safe Drinking Water Act and the Clean Water Act. In August 1996, the 1996 Safe Drinking Water Act Amendments became Law. There are several new requirements under the Amendments, including reports to consumers on water quality, operator certification, and source water protection. The greatest impact to the water sector will be the processes regulators will use to establish standards for new contaminants. With this new approach, regulators are given the flexibility to set priorities in contaminant selection rather than follow a fixed schedule. (b) Results of Operations ---------------------- REVENUES -------- Revenues increased $237.5 million, or 22%, in 1996 and $162.9 million, or 18%, in 1995. The increase in 1996 was primarily due to increased communications and natural gas revenues. The increase in revenues in 1995 was primarily due to increased communications revenues.
Communications Revenues 1996 1995 1994 - - ----------------------- ------------------- -------------------------- -------- Increase over Increase over Amount Prior year Amount Prior year Amount Telecommunications Revenues ($ in thousands) - - ------------------ ---------- ------------ --------- ------------- ------ Network Access Services $ 394,821 15% $ 343,761 26% $ 272,573 Local Network Services 235,043 19% 197,947 41% 139,896 Long Distance Service 67,634 328% 15,800 n/a 0 Directory Service 30,248 22% 24,866 39% 17,843 Other 58,561 70% 34,373 29% 26,563 ---------- --------- --------- ------- ---------- $ 786,307 27% $ 616,747 35% $ 456,875 =========== ========= ========== ======== ===========
Revenues from Network Access Services grew $51.1 million, or 15%, over 1995 primarily due to the properties acquired from ALLTEL in 1996 and 1995, increased switched and special access revenues, and increased billing and collections revenue. Revenues from Local Network Services increased $37.1 million, or 19%, over 1995 primarily due to the properties acquired from ALLTEL in 1996 and 1995, customer growth, increased usage and the sale of other enhanced services. Long Distance Service revenues grew by $51.8 million, or 328%, from 1995, primarily due to a strong in-territory focus on converting existing local network services customers to the Company's long distance service. Market share penetration in December 1996, in terms of minutes of use, approximated 16%, up from a market share of 2% in December 1995. In addition, the Company's retail sales force began selling in adjacent markets, acquiring both long distance and reselling dialtone market share. Revenues from Directory Service increased $5.4 million, or 22%, over 1995 primarily due to an increase in the number of directories acquired from ALLTEL in 1996 and 1995, and an increase in advertising revenues. Other communications revenues increased $24.2 million, or 70%, over 1995 primarily due to the properties acquired from ALLTEL in 1996 and 1995. The revenue increases for 1995 as compared with 1994 were primarily due to the properties acquired from GTE and ALLTEL.
Public Services Revenues 1996 1995 1994 - - ------------------------ ----------------------- -------------------------- ------- Increase over Increase over Amount Prior year Amount Prior year Amount ------ ---------- ------ ---------- ------ Natural Gas Revenues ($ in thousands) - - -------------------- Residential $ 134,888 22% $ 110,146 (6%) $ 117,266 Commercial 49,633 22% 40,614 (7%) 43,497 Industrial 40,230 14% 35,244 0% 35,342 Transportation 5,519 30% 4,255 11% 3,846 Other 9,349 22% 7,643 (15%) 8,989 ----------- -------- ---------- -------- ---------- $ 239,619 21% $ 197,902 (5%) $ 208,940 =========== ======== ========== ======== ===========
The increase in natural gas revenues in 1996 was primarily the result of rate increases in Louisiana and Arizona. In addition to the rate increases, there was increased consumption by residential customers in Louisiana due to colder than normal weather conditions which was partially offset by decreased usage in Arizona due to milder than expected weather conditions and decreased consumption by industrial customers in Louisiana due to rising gas prices. The decrease in revenues in 1995 was primarily due to lower average revenue per MCF of gas sold which resulted from pass-ons to customers of lower average gas costs from suppliers; this decrease was partially offset by increased consumption. Pass-ons are a reduction in the cost of gas sold which savings is passed on to customers and therefore does not affect net income. 13
Public Services Revenues (cont'd) 1996 1995 1994 - - --------------------------------- ------------------------ ------------------------- ------- Increase over Increase over Amount Prior year Amount Prior year Amount --------- ----------- ------- ----------- ------ ($ in thousands) Electric Revenues - - ----------------- Residential $ 79,893 10% $ 72,460 2% $ 71,322 Commercial 55,826 7% 52,152 5% 49,597 Industrial 44,165 12% 39,362 11% 35,376 Other 12,413 9% 11,377 (2%) 11,645 ---------- -------- ----------- ------- ----------- $ 192,297 10% $ 175,351 4% $ 167,940 ========== ======== =========== ======= =========== The increase in electric revenues in 1996 was primarily due to rate increases in Hawaii and Vermont and increased consumption at the Company's Arizona electric operations resulting from customer growth. The increase in revenues in 1995 was primarily due to a rate increase in Hawaii and increased consumption in Hawaii and Arizona.
1996 1995 1994 ------------------------ ------------------------- ------- Increase over Increase over Amount Prior year Amount Prior year Amount --------- ----------- ------- ----------- ------ ($in thousands) Water and Wastewater Revenues - - ----------------------------- Residential $ 70,845 12% $ 63,377 8% $ 58,414 Commercial 13,801 12% 12,279 12% 10,953 Industrial 843 46% 576 (6%) 615 Other 2,805 0% 2,800 16% 2,413 -------- ------- --------- -------- --------- $ 88,294 12% $ 79,032 9% $ 72,395 ======== ======= ========= ======== =========
The increase in water and wastewater treatment revenues in 1996 and 1995 was primarily the result of rate increases as well as increased residential and commercial consumption at the Company's California and Arizona Water properties. EXPENSES --------
1996 1995 1994 ------------------------ ------------------------- ------- Increase over Increase over Amount Prior year Amount Prior year Amount --------- ----------- ------- ----------- ------ ($ in thousands) Operating Expenses - - ------------------ Operating expenses $ 413,841 35% $ 306,734 25% $ 244,877 Depreciation 193,733 22% 158,935 38% 115,175 Natural gas purchased 127,913 18% 108,385 (7%) 116,419 Maintenance expense 101,206 16% 87,255 41% 61,779 Electric energy and fuel oil purchased 93,191 9% 85,168 5% 80,931 Taxes other than income 80,947 18% 68,382 16% 58,845 ----------- -------- ---------- -------- ----------- $ 1,010,831 24% $ 814,859 20% $ 678,026 ============ ======== =========== ======== ===========
The increases in operating expenses in both 1996 and 1995 were primarily due to expenses related to acquired telecommunications properties and marketing costs associated with long distance and other new service offerings. The increases in depreciation expense in both 1996 and 1995 were due to an increase in depreciable plant primarily as a result of acquisitions. The increase in 1996 and decrease in 1995 in the cost of natural gas purchased are primarily due to fluctuations in the price of natural gas. Under tariff provisions, increases and decreases in the Company's costs of natural gas purchased are passed-on to customers. In addition, there was increased consumption by residential customers in Louisiana due to colder than normal weather conditions which was partially offset by decreased usage in Arizona due to milder than expected weather conditions and decreased consumption by industrial customers in Louisiana due to rising gas prices. The increases in maintenance expenses in 1996 and 1995 were primarily due to the telecommunications properties acquired. 14 The increase in electric energy and fuel oil purchased in 1996 was primarily due to an increase in consumption driven by an increase in demand and customer growth. The increase in electric energy and fuel oil in 1995 was primarily due to an increase in demand, customer growth and an increase in fuel oil prices. Under tariff provisions, increases and decreases in the Company's costs of electric energy and fuel oil purchased are passed-on to customers. Taxes other than income increased in both 1996 and 1995 primarily due to increased payroll and gross receipts taxes associated with the acquired telecommunications properties. OTHER INCOME/INTEREST EXPENSE/INCOME TAXES ------------------------------------------
1996 1995 1994 --------------------- -------------------- --------- Amount Prior year Amount Prior year Amount ------ ---------- ------ ---------- ------ ($ in thousands) Investment income $ 48,972 18% $ 41,667 3% $ 40,454
The increase in investment income in 1996 is primarily due to $22 million earned from Hungarian Telephone and Cable Corp. for guarantees and financial support provided by the Company. Investment income in 1995 included $14.4 million of realized gains on investments sold to permanently fund telecommunications acquisitions partially offset by the effect of a decrease in the funds available for investment by the Company.
1996 1995 1994 --------------------- -------------------- --------- Increase over Increase over Amount Prior year Amount Prior year Amount ------ ---------- ------ ---------- ------ ($ in thousands) Interest expense $ 92,695 6% $ 87,775 21% $ 72,744
The increases in interest expense in 1996 and 1995 were primarily due to the issuance of additional debt to fund acquisitions and capital expenditures. These increases were partially offset by the refinancing of outstanding debt at lower interest rates.
1996 1995 1994 --------------------- -------------------- --------- Increase over Increase over Amount Prior year Amount Prior year Amount ------ ---------- ------ ---------- ------ ($ in thousands) Income taxes $ 84,937 27% $ 66,817 4% $ 64,323
The increase in income tax expense in 1996 was primarily due to an increase in taxable income and a 2% higher effective tax rate. NET INCOME AND EARNINGS PER SHARE ---------------------------------
1996 1995 1994 --------------------- -------------------- --------- Increase over Increase over Amount Prior year Amount Prior year Amount ------ ---------- ------ ---------- ------ ($ in thousands) Net Income $ 178,660 12% $ 159,536 11% $ 143,997 Earnings Per Share $ .77 12% $ .69 1% $ .68
Net income and earnings per share increased in 1996 primarily due to increased income from operations and investment income. This was partially offset by $17,300,000 of a noncash charges to pre-tax income for the write off assets which were no longer deemed recoverable in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"; and $5,849,000 of dividends on Convertible Preferred Securities (EPPICS). Net income increased in 1995 despite the loss of $38,000,000 of operating income reported in 1994 which was derived from the discontinued subsidy revenues from Pacific Bell which had been received annually through the end of 1994. Earnings per share increased in 1995 despite the loss of $.11 per share (adjusted for subsequent stock dividends) reported in 1994 which was derived from the discontinued Pacific Bell subsidy and despite the issuance in January 1995 of 19,000,000 additional shares of Common Stock Series A. 15 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). 16 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 1997 Annual Meeting of Stockholders pursuant to Regulation 14A not later than 120 days after December 31, 1996. The information called for by this Part III is incorporated by reference to that proxy statement. PART IV ------- Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K --------------------------------------------------------------- (a) The exhibits listed below are filed as part of this Report: Exhibit No. Description - - ------- ----------- 3.200.1 Restated Certificate of Incorporation of Citizens Utilities Company, with all amendments to March 4, 1996 3.200.2 By-laws of the Company, as amended to-date of Citizens Utilities Company, with all amendments to December 17, 1996 4.100.1 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 4.100.8 Fifth Supplemental Indenture, dated as of June 15, 1995, to Chemical Bank , as Trustee 4.100.9 Sixth Supplemental Indenture, dated as of October 15, 1995, to Chemical Bank, as Trustee 4.100.11 Seventh Supplemental Indenture, dated as of June 1, 1996 4.100.12 Eighth Supplemental Indenture, dated as of December 1, 1996 4.200.1 Indenture dated as of January 15, 1996, between Citizens Utilities Company and Chemical Bank, as indenture trustee. 4.200.2 First Supplemental Indenture dated as of January 15, 1996, between Citizens Utilities Company and Chemical Bank, as indenture trustee. 4.200.3 5% Convertible Subordinated Debenture due 2036 (contained as Exhibit A to Exhibit 4.200.2). 4.200.4 Amended and Restated Declaration of Trust dated as of January 15, 1996, of Citizens Utilities Trust. 4.200.5 Convertible Preferred Security Certificate (contained as Exhibit A-1 to Exhibit 4.200.4) 4.200.6 Amended and Restated Limited Partnership Agreement dated as of January 15, 1996 of Citizens Utilities Capital L.P. 4.200.7 Partnership Preferred Security Certificate (contained as Annex A to Exhibit 4.200.6) 4.200.8 Convertible Preferred Securities Guarantee Agreement dated as of January 15, 1996 between Citizens Utilities Company and Chemical Bank, as guarantee trustee. 4.200.9 Partnership Preferred Securities Guarantee Agreement dated as of January 15, 1996 between Citizens Utilities Company and Chemical Bank, as guarantee trustee 4.200.10 Letter of Representations, dated January 18, 1996, from Citizens Utilities Company and Chemical Bank, as trustee, to DTC, for deposit of Convertible Preferred Securities with DTC 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 10.16.1 Employment Agreement between Citizens Utilities Company and Leonard Tow, effective July 11, 1996 10.17 1992 Employee Stock Purchase Plan 10.18 Amendment dated May 21, 1993, to the 1992 Employee Stock Purchase Plan 10.20 Asset Purchase Agreements, dated November 28, 1994 17 10.21 1996 Equity Incentive Plan 12. Computation of ratio of earnings to fixed charges (this item is included herein for the sole purpose of incorporation by reference) 21. Subsidiaries of the Registrant 23. Auditors' Consent 24. Powers of Attorney 27. Financial Data Schedule Exhibits 10.1, 10.6, 10.6.1, 10.6.2, 10.16.1, 10.17 and 10.18 are management contract or compensatory plans or arrangements. The Company agrees to furnish to the Commission upon request copies of the Realty and Chattel Mortgage, dated as of March 1, 1965, made by Citizens Utilities Rural Company, Inc., to the United States of America (the Rural Utilities Services and Rural Telephone Bank) and the Mortgage Notes which that mortgage secures; and the several subsequent supplemental Mortgages and Mortgage Notes; copies of the instruments governing the long-term debt of Louisiana General Services, Inc.; and copies of separate loan agreements and indentures governing various Industrial development revenue bonds; and copies of documents relating to indebtedness of subsidiaries acquired during 1996. 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 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 4.100.4, 4.100.5 and 10.1 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 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 numbers 4.100.6 and 4.100.7 are incorporated by reference to the Registrant's Form 8-K Current Reports filed on July 5, 1994 and January 3, 1995, respectively. Exhibit number 10.20 is incorporated by reference to the same exhibit designation in the Registrant's Form 10-K for the year ended December 31, 1994. Exhibit number 10.6.2 is incorporated by reference to the Registrant's Proxy Statement, dated April 4, 1995. Exhibits numbers 4.100.8 and 4.100.9 are incorporated by reference to the Registrant's Form 8-K Current Reports filed March 29, 1996. Exhibit number 3.200.1 is incorporated by reference to the same exhibit designation in the Registrant's Form S-3 filed June 27, 1996. Exhibit number 10.21 is incorporated by reference to the Registrant's Proxy Statement dated March 29, 1996. Exhibits numbers 4.200.1, 4.200.2, 4.200.3, 4.200.4, 4.200.5, 4.200.6, 4.200.7, 4.200.8, 4.200.9 and 4.200.10 are incorporated by reference to the Registrant's Form 8-K Current Report filed May 28, 1996. Exhibit number 10.16.1 is 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, 1996. Exhibit number 3.200.2 is incorporated by reference to the Registrant's Form 8-K Current Report filed December 23, 1996. (b) The Company filed on Form 8-K dated December 17, 1996, under Item 7 "Financial Statements, Pro Forma Financial Information and Exhibits", the amended Bylaws of Citizens Utilities Company. 18 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 17, 1997 19 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 17th day of March 1997. Signature Title --------- ----- /s/ Robert J. DeSantis - - ----------------------------------- Vice President and Treasurer (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) James C. Goodale* Director - - ----------------------------------- (James C. Goodale) Stanley Harfenist* Member, Executive Committee and - - ----------------------------------- Director (Stanley Harfenist) Andrew N. Heine* Director - - ----------------------------------- (Andrew N. Heine) Elwood A. Rickless* Director - - ----------------------------------- (Elwood A. Rickless) John L. Schroeder* Member, Executive Committee and - - ----------------------------------- Director (John L. Schroeder) Robert D. Siff* Director - - ----------------------------------- (Robert D. Siff) Robert A. Stanger* Director - - ----------------------------------- (Robert A. Stanger) Edwin Tornberg* Director - - ----------------------------------- (Edwin Tornberg) Claire L. Tow* Director - - ----------------------------------- (Claire L. Tow) Charles H. Symington, Jr* Director - - ------------------------------------ (Charles H. Symington, Jr.) *By: /s/ Robert J. Desantis -------------------------------- (Robert J. DeSantis) Attorney-in-Fact 20 CITIZENS UTILITIES COMPANY AND SUBSIDIARIES Index to Financial Statements Item Page ---- ---- Independent Auditors' Report F-2 Consolidated balance sheets as of December 31, 1996, 1995 and 1994 F-3 Consolidated statements of income for the years ended December 31, 1996, 1995 and 1994 F-4 Consolidated statements of shareholders' equity for the years ended December 31, 1996, 1995 and 1994 F-5 Consolidated statements of cash flows for the years ended December 31, 1996, 1995 and 1994 F-6 Notes to consolidated financial statements F-7 F-1 Independent Auditors' Report The Board of Directors and Shareholders Citizens Utilities Company: We have audited the accompanying consolidated balance sheets of Citizens Utilities Company and subsidiaries as of December 31, 1996, 1995 and 1994, 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 as of December 31, 1996, 1995 and 1994, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP New York, New York February 28, 1997 F-2 CITIZENS UTILITIES COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996, 1995 and 1994 (In thousands)
1996 1995 1994 ---- ---- ---- Assets Current assets: Cash $ 24,230 $ 17,922 $ 14,224 Temporary investments 0 0 108,818 Accounts receivable: Customers 198,138 164,798 142,873 Other 88,320 37,754 26,350 Less allowance for doubtful accounts 4,808 2,739 2,428 ------------ ----------- ------------ Total accounts receivable 281,650 199,813 166,795 Materials and supplies 27,159 18,191 18,330 Other current assets 36,731 16,776 5,887 ------------ ----------- ------------ Total current assets 369,770 252,702 314,054 ------------ ----------- ------------ Property, plant and equipment 4,582,869 4,187,354 3,583,723 Less accumulated depreciation 1,444,817 1,279,324 1,014,068 ------------ ----------- ------------ Net property, plant and equipment 3,138,052 2,908,030 2,569,655 ------------ ----------- ------------ Investments 539,152 329,090 325,011 Regulatory assets 174,196 180,572 177,414 Deferred debits and other assets 301,978 247,793 190,432 ============ =========== ============ Total assets $ 4,523,148 $ 3,918,187 $ 3,576,566 ============ =========== ============ Liabilities and Shareholders' Equity Current liabilities: Long-term debt due within one year $ 3,593 $ 3,865 $ 13,986 Short-term debt 0 140,650 515,200 Accounts payable 168,299 178,384 122,404 Income taxes accrued 90,317 72,494 92,366 Interest accrued 24,522 22,527 15,841 Customers' deposits 21,400 20,501 19,919 Other current liabilities 101,358 65,257 72,105 ------------ ----------- ------------ Total current liabilities 409,489 503,678 851,821 Deferred income taxes 347,975 314,094 248,150 Customer advances for construction 154,324 150,000 145,150 Deferred credits 115,291 101,300 77,950 Contributions in aid of construction 84,129 73,923 71,580 Regulatory liabilities 22,810 28,279 30,830 Long-term debt 1,509,697 1,187,000 994,189 Company obligated mandatorily redeemable convertible preferred securities * 201,250 0 0 Shareholders' equity 1,678,183 1,559,913 1,156,896 ------------ ----------- ------------ Total liabilities and shareholders' equity $ 4,523,148 $ 3,918,187 $ 3,576,566 ============ =========== ============
* Represents securities of a subsidiary trust, the sole assets of which are securities of a subsidiary partnership, substantially all the assets of which are convertible debentures of the Company. The accompanying Notes are an integral part of these Consolidated Financial Statements. F-3 CITIZENS UTILITIES COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 and 1994 (In thousands, except for per-share amounts)
1996 1995 1994 ---- ---- ---- Revenues: Communications $ 786,307 $ 616,747 $ 456,875 Public Services 520,210 452,285 449,275 ----------- ----------- ----------- Total revenues 1,306,517 1,069,032 906,150 ----------- ----------- ----------- Operating expenses: Operating expenses 413,841 306,734 244,877 Depreciation 193,733 158,935 115,175 Natural gas purchased 127,913 108,385 116,419 Maintenance expenses 101,206 87,255 61,779 Electric energy and fuel oil purchased 93,191 85,168 80,931 Taxes other than income 80,947 68,382 58,845 ----------- ----------- ----------- Total operating expenses 1,010,831 814,859 678,026 ----------- ----------- ----------- Income from operations 295,686 254,173 228,124 Investment income 48,972 41,667 40,454 Other income - net 17,483 18,288 12,486 Interest expense 92,695 87,775 72,744 ----------- ----------- ----------- Income before income taxes 269,446 226,353 208,320 Income taxes 84,937 66,817 64,323 ----------- ----------- ----------- Income before dividends on convertible preferred securities 184,509 159,536 143,997 Dividends on convertible preferred securities, net of income tax benefit 5,849 0 0 ----------- ----------- ----------- Net income $ 178,660 $ 159,536 $ 143,997 =========== =========== =========== Earnings per share of Common Stock Series A and Series B $ .77 $ .69 $ .68 =========== =========== ===========
The accompanying Notes are an integral part of these Consolidated Financial Statements. F-4 CITIZENS UTILITIES COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 and 1994 (In thousands, except for per-share amounts)
Unrealized gain Additional (loss) on available- Common stock ($.25) paid-in Retained for-sale Series A Series B capital earnings securities Total -------- -------- ------- ------- --------- ----- Balance January 1, 1994 $ 32,447 $ 13,119 $ 698,688 $ 230,232 $ 0 $ 974,486 Acquisitions 126 4,646 3,231 8,003 Net income 143,997 143,997 Stock dividends in shares of Common Stock Series A and Series B 1,621 686 137,736 (140,043) 0 Stock plans 88 281 20,911 21,280 Conversions of Series A to Series B (570) 570 0 Change in unrealized gain (loss) on securities classified as available- for-sale, net of income taxes 9,130 9,130 ---------- ----------- ------------- ----------- ---------- ----------- Balance December 31, 1994 $ 33,586 14,782 $ 861,981 $ 237,417 $ 9,130 $ 1,156,896 ---------- ----------- ------------- ----------- ---------- ----------- Acquisitions 222 (4,485) 374 (3,889) Net income 159,536 159,536 Stock dividends in shares of Common Stock Series A and Series B 2,374 1,024 158,693 (162,091) 0 Common stock buybacks to fund stock dividends (115) (352) (21,561) (22,028) Stock issuance 4,750 238,830 243,580 Stock plans 150 475 30,236 30,861 Conversions of Series A to Series B (1,906) 1,906 0 Change in unrealized gain (loss) on securities classified as available- for-sale, net of income taxes (5,043) (5,043) --------- ----------- ------------- ----------- ---------- ----------- Balance December 31, 1995 $ 38,839 18,057 $ 1,263,694 $ 235,236 $ 4,087 $ 1,559,913 --------- ----------- ------------- ----------- ---------- ----------- Acquisitions 322 15,308 15,630 Net income 178,660 178,660 Stock dividends in shares of Common Stock Series A and Series B 2,455 1,246 166,129 (169,830) 0 Common stock buybacks to fund stock dividends (339) (1,300) (73,842) (75,481) Stock plans 127 203 6,959 7,289 Stock issuances to fund EPPICS dividends 178 7,621 7,799 EPPICS issuance cost (4,528) (4,528) Conversions of Series A to Series B (2,771) 2,771 0 Change in unrealized gain (loss) on securities classified as available- for-sale, net of income taxes (11,099) (11,099) --------- ----------- ------------- ----------- ---------- ----------- Balance December 31, 1996 $ 38,811 $ 20,977 $ 1,381,341 $ 244,066 $ (7,012) $ 1,678,183 ========= =========== ============= =========== ========== ===========
The accompanying Notes are an integral part of these Consolidated Financial Statements. F-5 CITIZENS UTILITIES COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 and 1994 (In thousands)
1996 1995 1994 ---- ---- ---- Net cash provided by operating activities $ 375,181 $ 338,611 $ 262,316 ------------ ------------ ------------ Cash flows used for investing activities: Securities matured 43,608 120,691 89,885 Securities sold 87,447 92,224 23,478 Construction expenditures (348,379) (245,241) (263,162) Securities purchased (332,332) ( 86,058) ( 18,219) Business acquisitions (87,683) (223,926) (700,222) Other (47,802) 55 (13,795) ------------ ------------ ------------ (685,141) (342,255) (882,035) ------------ ------------ ------------ Cash flows from financing activities: Long-term debt borrowings 351,053 321,280 458,589 Issuance of EPPICS 196,722 0 0 Issuance of common stock 6,049 272,687 18,465 Short-term debt (repayments) borrowings (140,650) (374,550) 135,200 Common stock buybacks to fund stock dividends (75,481) (22,028) 0 Long-term debt principal payments (20,243) (192,030) ( 1,268) Other (1,182) 1 ,983 1,219 ------------ ------------ ------------ 316,268 7,342 612,205 ------------ ------------ ------------ Increase (decrease) in cash 6,308 3,698 (7,514) Cash at January 1, 17,922 14,224 21,738 ============ ============ ============ Cash at December 31, $ 24,230 $ 17,922 $ 14,224 ============ ============ ============
The accompanying Notes are an integral part of these Consolidated Financial Statements. F-6 CITIZENS UTILITIES COMPANY AND SUBSIDIARIES Notes to Financial Statements (1) Summary of Significant Accounting Policies: ------------------------------------------- (a) Description of Business: ------------------------ The Company is a diversified communications and public services company which provides, either directly or through subsidiaries, telecommunications, electric transmission and distribution, natural gas transmission and distribution, water distribution and wastewater treatment services to customers in areas of 22 states. The Company is not dependent upon any single customer or geographic area for its revenues. No single regulatory body regulates a service of the Company accounting for more than 20% of its 1996 revenues. (b) Principles of Consolidation and Use of Estimates: ------------------------------------------------- The consolidated financial statements have been prepared in accordance with Generally Accepted Accounting Principles and include the accounts of Citizens Utilities Company and all of its subsidiaries, after elimination of intercompany balances and transactions. The preparation of financial statements in conformity with Generally Accepted Accounting Principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (c) Revenues: --------- The Company records revenues from communications and public services customers when earned. The Company accrues unbilled revenues earned from the dates customers were last billed to the end of the accounting period. Public services customers are billed on a cycle basis based on meter readings. Certain communications revenues are estimated under cost separation procedures that base revenues on current operating costs and investments in facilities to provide such services. (d) Construction Costs and Maintenance Expense: ------------------------------------------- Property, plant and equipment are stated at original cost, including general overhead and an allowance for funds used during construction ("AFUDC") for regulated businesses and capitalized interest for unregulated businesses. AFUDC represents the borrowing costs and a return on common equity of funds used to finance construction of regulated assets. AFUDC is capitalized as a component of additions to property, plant and equipment and is credited to income. AFUDC does not represent current cash earnings; however, under established regulatory rate-making practices, after the related plant is placed in service, the Company is permitted to include in the rates charged for 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 ($8,704,000, $10,545,000 and $11,402,000 for 1996, 1995 and 1994, respectively) and the amount relating to borrowings is included as a reduction of interest expense ($3,385,000, $4,101,000 and $3,031,000 for 1996, 1995 and 1994, respectively). Capitalized interest for unregulated construction activities amounted to $3,109,000, $330,000 and $0 in 1996, 1995 and 1994, respectively. The weighted average rates used to calculate AFUDC were 10%, 11% and 12% in 1996, 1995 and 1994, respectively. Maintenance and repairs are charged to operating expenses as incurred. The book value, net of salvage, of routine property, plant and equipment dispositions is charged against accumulated depreciation for regulated operations. (e) Depreciation Expense: --------------------- Depreciation expense, calculated using the straight-line method, is based upon the estimated service lives of various classifications of property, plant and equipment and represents approximately 5% of the gross depreciable property, plant and equipment for 1996 and 4% of the gross depreciable property, plant and equipment for 1995 and 1994. F-7 (f) Regulatory Assets and Liabilities: ---------------------------------- The Company's regulated operations are subject to the provisions of Statement of Financial Accounting Standards ("SFAS") No. 71; "Accounting for the Effects of Certain Types of Regulation". SFAS 71 requires regulated entities to record regulatory assets and liabilities as a result of actions of regulators. Regulatory assets of $16,648,000, $25,006,000 and $24,669,000 at December 31, 1996, 1995 and 1994, respectively, related to Postretirement Benefits Other than Pensions (see Note 14). Regulatory assets of $157,548,000, $155,566,000 and $152,745,000 and regulatory liabilities of $22,810,000, $28,279,000 and $30,830,000 at December 31, 1996, 1995 and 1994, respectively, were carried as an offset to deferred income taxes (see Note 1(j)). The Company continuously monitors the applicability of SFAS 71 to its regulated operations. SFAS 71 may, at some future date, be deemed inapplicable due to changes in the regulatory and competitive environments and/or a decision by the Company to accelerate deployment of new technology. If the Company were to discontinue the application of SFAS 71 to one or more of its regulated operations, the Company would be required to write off its regulatory assets and regulatory liabilities associated with such operation(s) and would be required to adjust the carrying amount of any other assets, including property, plant and equipment, that would be deemed not recoverable. The Company believes its regulated operations continue to meet the criteria for SFAS 71 and that the carrying value of its regulated property, plant and equipment is recoverable in accordance with established rate-making practices. (g) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed -------------------------------------------------------------------- Of: --- The Company adopted the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," on January 1, 1996. This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.In 1996, the Company recorded $17,300,000 of noncash charges to pre-tax income for the write off of assets which were no longer deemed recoverable in accordance with SFAS 121. (h) 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. The Company classifies its investments at purchase as available-for-sale or held-to-maturity. The Company does not maintain a trading portfolio. 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. Interest, dividends and gains and losses realized on sales of securities are reported in Investment income. Temporary investments in 1994 represented investments in state and municipal securities which matured in less than one year, the proceeds of which were intended to be and were used to repay a portion of the short-term debt issued to partially and temporarily fund the acquisitions of the GTE and ALLTEL Telecommunications Properties (see Note 3). Such investments were considered held-to-maturity and were carried at amortized cost. Short-term debt outstanding was issued in the form of commercial paper notes payable to temporarily and partially fund the acquisition of the GTE and ALLTEL Telecommunications Properties. This short-term debt was repaid with the maturity proceeds of company investments and with proceeds from the issuance of Equity Providing Preferred Income Convertible Securities ("EPPICS," see Note 7). F-8 (i) Investment in Centennial Cellular Corp.: ---------------------------------------- The Company recorded its initial investment in 102,187 shares of Centennial Cellular Corp. ("Centennial") Convertible Redeemable Preferred Stock (the "Preferred Security") at $49,842,000 and 1,367,099 shares of Centennial Class B Common Stock at $19,826,000, which in the aggregate represented the historical cost of the Company's investment in its subsidiary, Citizens Cellular Company, prior to its merger with Centennial. During 1994, the Company purchased 615,195 additional shares of Centennial Class B Common Stock for $8,613,000 pursuant to a Centennial rights offering. The terms of the Preferred Security provide that the Preferred Security may be converted by the holder into Centennial common stock and that it accreted a liquidation value preference through August 31, 1996 at a fixed annual dividend rate of 7.5%, compounded quarterly, until the Preferred Security reached a liquidation value preference of $186,287,000 on August 31, 1996. The Company recognized the non-cash accretion on the Preferred Security as it was earned in each period through August 31, 1996 as investment income and increased the book value of its investment in Centennial by the same amount. The liquidation value preferences earned on the Preferred Security for 1996, 1995 and 1994 were $8,993,000, $14,353,000 and $13,481,000, respectively. From inception through August 31, 1996, $57,787,000 of such accretion was accounted for in this manner. The Preferred Security is mandatorily redeemable on August 30, 2006. Commencing September 1, 1996, Centennial has the option to either (a) declare and pay or accumulate an 8.5% annual dividend on the Preferred Security's $186,287,000 liquidation value or (b) redeem the Preferred Security for $186,287,000 in cash or in Centennial common stock. Centennial declared the required $3,959,000 dividend for the quarter ended November 30, 1996 and paid the dividend on December 19, 1996. 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 carrying value of the Preferred Security would be deemed impaired to the extent that such carrying value exceeds the estimated realizability of the Preferred Security based on all existing facts and circumstances including the Company's assessment of its ability to realize the carrying value of the Preferred Security through mandatory redemption. 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. (j) Income Taxes, Deferred Income Taxes and Investment Tax Credits: --------------------------------------------------------------- The Company and its subsidiaries are included in a consolidated federal income tax return. The Company utilizes the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes reflect the tax effect of temporary differences between the financial statement and the tax bases of assets and liabilities using presently enacted tax rates. Regulatory assets and liabilities (see Note 1(f)) include income tax benefits previously flowed through to customers and from the allowance for funds used during construction, the effects of tax law changes and the tax benefit associated with unamortized deferred investment tax credits. These regulatory assets and liabilities represent the probable net increase in revenues that will be reflected through future ratemaking proceedings. The investment tax credits relating to utility properties, as defined by applicable regulatory authorities, have been deferred and are being amortized to income over the lives of the related properties. F-9 (k) Employee Stock Plans: --------------------- Prior to January 1, 1996, the Company accounted for its employee stock option plans in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. As such, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted SFAS 123, " Accounting for Stock-Based Compensation", which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value based method defined in SFAS 123 had been applied. The Company elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS 123 (see Note 9). (l) 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. The calculation has not been adjusted for the 1.6% stock dividend declared on February 18, 1997, 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, 1996, 1995 and 1994 are as follows:
1996 1995 1994 ---- ---- ---- ($ in thousands) Transmission and distribution facilities $2,923,630 $2,641,594 $2,159,452 Production and generating facilities 960,422 868,119 818,927 Administrative facilities 368,178 337,196 285,445 Construction work in progress 187,692 212,892 210,213 Pumping, storage and purification facilities 122,340 107,653 93,942 Intangibles and other 20,607 19,900 15,744 ------------- ------------- ------------- $4,582,869 $4,187,354 $3,583,723 ============= ============= =============
(3) Mergers and Acquisitions: ------------------------- In December 1996, the Company acquired Conference-Call USA, Inc. ("Conference-Call") in a stock for stock transaction. Conference-Call provides nationwide conference calling services and its subsidiary, Dial, Inc. ("Dial"), provides international dial-back services. The Company issued 1,289,133 shares of common stock in exchange for all of the common and preferred stock of Conference-Call. If Conference-Call and/or Dial achieves specified financial results in future periods, the Company may be required to issue up to 1,443,299 additional shares of common stock. This transaction was accounted for using the purchase method of accounting and the results of operations of Conference-Call have been included in the accompanying financial statements from the date of acquisition. In July 1995, the Company acquired Flex Communications ("Flex") in a stock for stock transaction. Flex was a switch-based, inter-exchange carrier providing long distance, 800 Inbound long-distance, voice mail, paging, private data networks and cellular services to approximately 5,500 customers in upstate New York. The Company issued 855,953 shares of Common Stock Series B for all of the outstanding shares of Flex. This transaction was accounted for using the pooling of interests method of accounting. Prior year financial statements were not restated as the amounts were not significant. In March 1995, the Company acquired Douglassville Water Company ("Douglassville") for $173,000 and 31,928 shares of Common Stock Series B. Douglassville provided water utility services in Pennsylvania to approximately 870 customers. This transaction was accounted for using the purchase method of accounting and the results of operations of Douglassville have been included in the accompanying financial statements from the date of acquisition. F-10 In February 1995, the Company acquired from the town of Youngtown, Arizona, for $1,192,000, the town's water and wastewater systems which served approximately 3,400 customers. This acquisition was accounted for using the purchase method of accounting and the results of operations of Youngtown have been included in the accompanying financial statements from the date of acquisition. In November 1994, the Company and ALLTEL Corporation signed definitive agreements pursuant to which the Company agreed to acquire from ALLTEL certain telecommunications properties in eight states serving approximately 110,000 local telephone access lines and certain cable television systems serving approximately 7,000 subscribers ("ALLTEL Telecommunications Properties"). The purchase price of the ALLTEL Telecommunications Properties (net of 3,600 of the Company's telephone access lines which were valued at $10 million and transferred to ALLTEL in a tax free exchange) was $282 million. All such access lines were transferred to the Company on or before March 31, 1996. These transactions were accounted for using the purchase method of accounting and the results of operations of the ALLTEL Telecommunications Properties have been included in the accompanying financial statements from their respective dates of acquisition. In August 1994, the Company acquired RHC, Inc. ("Metro Utility Co.") in a stock for stock transaction. Metro Utility Co. provided water and wastewater treatment services to approximately 10,000 customers in the suburban Chicago area. The Company issued 504,807 shares of Common Stock Series B for all of the outstanding shares of Metro Utility Co. This transaction was accounted for using the pooling of interests method of accounting. In May 1993, the Company and GTE Corp. ("GTE") signed definitive agreements pursuant to which the Company agreed to acquire from GTE, for approximately $1.1 billion in cash, certain GTE telecommunications properties serving approximately 500,000 local telephone access lines in eight states ("GTE Telecommunications Properties"). All such access lines were transferred to the Company on or before December 30, 1994. These transactions were accounted for using the purchase method of accounting and the results of operations of the GTE Telecommunications Properties have been included in the accompanying financial statements from their respective dates of acquisition. The following unaudited pro forma financial information presents the combined results of operations of the Company and the GTE and ALLTEL Telecommunications Properties acquired as if the acquisitions had occurred on January 1 of the year preceding the respective dates acquired. The effects of the other acquisitions described above would not significantly impact the pro forma results. The pro forma financial information does not necessarily reflect the results of operations that would have occurred had the Company and the GTE and ALLTEL Telecommunications Properties constituted a single entity during such periods. 1996 1995 1994 ---- ---- ---- ($ in thousands, except for per-share amounts) Revenues $1,311,000 $1,159,000 $1,138,000 Net Income $180,000 $175,000 $172,000 Earnings per share $.77 $.74 $.73 A subsidiary of the Company, in a joint venture with a subsidiary of Century Communications, Corp. ("Century"), acquired and operates two cable television systems in southern California serving 49,500 subscribers. Century is a cable television company of which Leonard Tow, the Chairman, Chief Executive Officer and Chief Financial Officer of the Company, is Chairman and Chief Executive Officer. In addition, Claire Tow, a director of the Company, is a 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. A subsidiary of Century (the "Manager") manages the day-to-day operations of the systems. The Manager does not receive a management fee but is 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%. The Company accounts for the joint venture following the equity method of accounting. On August 19, 1996, the joint venture entered into agreements to acquire three additional cable television systems serving a total of 76,000 subscribers in southern California for approximately $140 million. The acquisitions are subject to regulatory approval and are expected to close in the first half of 1997. F-11 (4) Investments: ------------ The components of investments at December 31, 1996, 1995 and 1994 are as follows: 1996 1995 1994 ---- ---- ---- ($ in thousands) State and municipal securities 370,783 $ 172,518 $ 174,790 Centennial Preferred Security 107,629 98,636 84,283 Marketable equity securities 58,351 57,528 65,527 Other fixed income securities 2,389 408 411 ----------- ---------- ---------- Total 539,152 $ 329,090 $ 325,011 =========== ========== ========== Marketable equity securities for 1996 and 1995 include the Company's investments in Hungarian Telephone and Cable Corp. ("HTCC"), Centennial Class B Common Stock (see Note 1 (i)) and Century Class A Common Stock. For 1994, marketable equity securities include the Centennial Class B Common Stock and Century Class A Common Stock. The investment in the shares of Century Class A Common Stock represents approximately 2% of the total outstanding common stock of Century. The Chairman, Chief Executive Officer and Chief Financial Officer of the Company is also Chairman and Chief Executive Officer of Century. Net realized gains on marketable equity securities included in the determination of net income for the years 1996, 1995 and 1994, respectively, were $0, $13,904,000, and $3,760,000. The cost of marketable equity securities sold during 1996, 1995 and 1994, respectively, was $0, $9,863,000, and $384,000. The cost of securities sold was based on the actual cost of the shares of each security held at the time of sale. The Company recognized $22,138,000 in investment income in 1996 for guarantees and financial support provided by the Company to HTCC. The following summarizes the amortized cost, gross unrealized holding gains and losses and fair market value for investments.
Unrealized Holding Aggregate Fair Investment Classification Amortized Cost Gains (Losses) Market Value - - ------------------------- -------------- ------ -------- ------------ ($ in thousands) As of December 31, 1996 Held-To-Maturity $ 107,629 $ 78,658 $ 0 $ 186,287 Available-For-Sale 442,884 2,903 (14,264) 431,523 As of December 31, 1995 Held-To-Maturity $ 244,982 $ 79,808 $ (59) $ 324,731 Available-For-Sale 77,485 8,422 (1,799) 84,108 As of December 31, 1994 Held-To-Maturity $ 259,484 $ 80,293 $ (3,055) $ 336,722 Available-For-Sale 50,809 14,718 0 65,527
The amortized cost of held-to-maturity securities plus the aggregate fair market value of available-for-sale securities for each year presented above equals the total of investments presented in the foregoing investments table. As of December 31, 1996 all investments except the Centennial Preferred Security have been classified as available-for-sale. F-12 The Company sold $68,458,000 and $19,335,000 of securities classified as held-to-maturity during 1995 and 1994, respectively, for the purpose of financing a portion of the acquisition of the GTE and ALLTEL Telecommunications Properties; gross realized gains on such sales for 1995 and 1994, respectively, were $474,000 and $372,000, while gross realized losses were $8,000 and $94,000 for 1995 and 1994, respectively. (5) Fair Value of Financial Instruments: ------------------------------------ The following table summarizes the carrying amounts and estimated fair values for certain of the Company's financial instruments at December 31, 1996, 1995 and 1994. For the other financial instruments, representing cash and cash equivalents, accounts and notes receivables, short-term debt, accounts payable and other accrued liabilities, the carrying amounts approximate fair value due to the relatively short maturities of those instruments.
1996 1995 1994 ------------------------------------ ------------------------- ---------- Carrying Carrying Carrying Amount Fair Value Amount Fair Value Amount Fair Value ------ ---------- ------ ---------- ------ ---------- ($ in thousands) Temporary Investments $ 0 $ 0 $ 0 $ 0 $ 108,818 $ 108,935 Investments 539,152 617,810 329,090 408,839 325,011 402,249 Long-term Debt 1,509,697 1,532,251 1,187,000 1,263,000 994,189 992,349 EPPICS 201,250 192,194 0 0 0 0
The fair value of the above financial instruments, except for the investment in the Centennial Preferred Security and certain options on marketable equity securities, are based on quoted prices at the reporting date for those financial instruments. The fair value of the Centennial Preferred Security is estimated to be its accreted value at the respective reporting dates (see Note 1(i)) while the fair value of certain options on marketable equity securities is based on the Black-Scholes option pricing model. (6) Long-term Debt: ---------------
Weighted average interest rate at December 31, 1996 December 31, 1996 Maturities ------------------------------------------- ----------------- ---------- 1996 1995 1994 ---- ---- ---- ($ in thousands) Debentures 7.34% 2001 - 2046 $ 1,000,000 $ 700,000 $ 425,000 Industrial development revenue bonds 5.62% 2015 - 2031 391,789 374,089 325,125 Rural Utilities Service Loan Contracts 5.89% 1998 - 2027 77,909 71,609 47,106 Senior unsecured notes 8.05% 2012 36,000 23,000 0 Other long-term debt 6.82% 1998 - 2027 3,999 2,202 9,158 Commercial paper notes payable - - 0 16,100 187,800 ---------- ---------- ---------- Total long-term debt $ 1,509,697 $ 1,187,000 $ 994,189 =========== =========== ===========
The total principal amounts of industrial development revenue bonds at December 31, 1996, 1995 and 1994 were $422,780,000, $406,080,000, and $392,530,000, respectively. Industrial development revenue bond funds issued are held by a trustee until used for payment of qualifying construction. The amounts presented in the table above represent funds that have been used for construction through December 31, 1996, 1995 and 1994, respectively. On December 31, 1995 and 1994, certain commercial paper notes payable were classified as long-term debt because these obligations were expected to and have been refinanced with long-term debt securities. The Company has available lines of credit with commercial banks in the amounts of $400,000,000 and $200,000,000, which expire on December 10, 1997 and December 16, 2002, respectively, and have associated facility fees of one-thirty third of one percent (0.03%) per annum and one-twentieth of one percent (0.05%) per annum, respectively. The terms of the lines of credit provide the Company with extension options. F-13 The installment principal payments and maturities of long-term debt for the next five years are as follows:
1997 1998 1999 2000 2001 ---- ---- ---- ----- ---- ($ in thousands) Installment principal payments $3,460 $2,795 $2,821 $2,967 $ 3,100 Maturities 133 5,965 0 274 50,000 ------- ------ ------ ------- ------- $3,593 $8,760 $2,821 $3,241 $53,100 ======= ====== ====== ======= =======
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. The Company expects to remarket all such bonds which are tendered. In the years 1996, 1995 and 1994, respectively, interest payments on short- and long-term debt were $93,274,000, $78,659,000 and $74,803,000. (7) Company Obligated Mandatorily Redeemable Convertible Preferred -------------------------------------------------------------- Securities: ----------- During the first quarter of 1996 a consolidated wholly-owned subsidiary of the Company, Citizens Utilities Trust (the "Trust"), issued, in an underwritten public offering, 4,025,000 shares of 5% Company Obligated Mandatorily Redeemable Convertible Preferred Securities due 2036 ("Trust Convertible Preferred Securities" or "EPPICS"), representing preferred undivided interests in the assets of the Trust, with a liquidation preference of $50 per security (for a total liquidation amount of $201,250,000). The proceeds from the issuance of the Trust Convertible Preferred Securities and a Company capital contribution were used to purchase $207,475,000 aggregate liquidation amount of 5% Partnership Convertible Preferred Securities due 2036 from another wholly owned consolidated subsidiary, Citizens Utilities Capital L.P. (the "Partnership"). The proceeds from the issuance of the Partnership Convertible Preferred Securities and a Company capital contribution were used to purchase from the Company $211,756,050 aggregate principal amount of 5% Convertible Subordinated Debentures Due 2036. The sole assets of the Trust are the Partnership Convertible Preferred Securities, and the Company's Convertible Subordinated Debentures are substantially all the assets of the Partnership. The Company's obligations under the agreements related to the issuances of such securities, taken together, constitute a full and unconditional guarantee by the Company of the Trust's obligations relating to the Trust Convertible Preferred Securities and the Partnership's obligations relating to the Partnership Convertible Preferred Securities. The $196,722,000 of net proceeds from the issuances was used to permanently fund a portion of the acquisition of the GTE and ALLTEL Telecommunications Properties. In accordance with the terms of the issuances, the Company paid the 5% interest on the Convertible Subordinated Debentures in Citizens' Common Stock Series A. During 1996, 709,748 shares of Common Stock Series A were issued to the Partnership in payment of interest of which 654,119 shares were sold by the Partnership to satisfy cash dividend payment elections by the holders of the EPPICS. The sales proceeds and the remaining 55,629 shares of Common Stock Series A were distributed by the Partnership to the Trust. The Trust distributed the cash and shares as dividends to the holders of the EPPICS. (8) 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 250,000,000 shares of Common Stock Series A and 350,000,000 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. F-14 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 --------------------------------- 1996 1995 1994 ---- ---- ---- First quarter 1.6 % 1.5 % 1.1 % Second quarter 1.6 % 1.5 % 1.15 % Third quarter 1.6 % 1.6 % 1.3 % Fourth quarter 1.6 % 1.6 % 1.4 % ----- ------ ------ Total 6.4 % 6.2 % 4.95 % ====== ====== ====== Compounded Total 6.56% 6.35% 5.04 % ====== ====== ====== Annualized stock dividend cash equivalent rates considered by the Company's Board of Directors in declaring stock dividends for 1996, 1995 and 1994, respectively, were 71 3/4, 67 3/4 and 64 5/8 per share (adjusted for all stock dividends paid subsequent to all dividends declared through December 31, 1996 and rounded to the nearest 1/8th). On January 30, 1995, the Company, pursuant to an underwritten public offering, issued 19,000,000 shares of its Common Stock Series A at an issuance price of $13 3/8 per share (not adjusted for subsequent stock dividends). The $244,200,000 of net proceeds from the issuance was used to permanently fund a portion of the acquisition of the GTE Telecommunications Properties. In May 1996 and 1995, the Board of Director's authorized the buyback of up to $75 million and $50 million, respectively, of Common Stock Series A and Series B shares solely for purposes of funding the Company's stock dividend policy. Shares have been and will be purchased on the open market from time to time. The Company purchased 6,554,000 shares at a cost of $75,481,000 in 1996 and 1,865,000 shares at a cost of $22,028,000 in 1995. All purchased shares have been used to pay stock dividends. The activity in shares of outstanding common stock for Series A and Series B during 1996, 1995 and 1994 is summarized as follows:
Number of Shares ---------------- Series A Series B -------- -------- Balance at January 1, 1994 129,785,000 52,477,000 Acquisition 0 505,000 Common stock dividends 6,484,000 2,744,000 Stock plans 355,000 1,122,000 Conversion of Series A to Series B (2,278,000) 2,278,000 ----------- ---------- Balance at December 31,1994 134,346,000 59,126,000 Acquisitions 0 888,000 Common stock issuance 19,000,000 0 Common stock dividends 9,499,000 4,098,000 Common stock buybacks to fund stock dividends (462,000) (1,403,000) Stock plans 601,000 1,894,000 Conversions of Series A to Series B (7,626,000) 7,626,000 ------------ ---------- Balance at December 31, 1995 155,358,000 72,229,000 Acquisition 1,289,000 0 Common stock dividends 9,819,000 4,984,000 Common stock issued to fund EPPICS dividends 710,000 0 Common stock buybacks to fund stock dividends (1,356,000) (5,198,000) Stock plans 508,000 805,000 Conversions of Series A to Series B (11,086,000) 11,086,000 ------------ ----------- Balance at December 31, 1996 155,242,000 83,906,000 ============ ===========
The Company has 50,000,000 authorized but unissued shares of preferred stock ($.01 par). F-15 (9) Stock Plans: ------------ At December 31, 1996, the Company had four stock based compensation plans which are described below. The Company applies APB Opinion No. 25 and related interpretations in accounting for its employee stock plans. Accordingly, no compensation cost has been recognized in the financial statements for options issued pursuant to the Management Equity Incentive Plan ("MEIP"), Equity Incentive Plan ("EIP") or Employee Stock Purchase Plan ("ESPP"). Compensation cost recognized for its Directors' Deferred Fee Equity Plan was $161,231 in 1996, $71,293 in 1995, and $38,971 in 1994. Had the Company determined compensation cost based on the fair value at the grant date for its MEIP, EIP and ESPP under SFAS 123, the Company's net pro forma income and Earnings Per Share would have been as follows:
1996 1995 ---- ---- ($ in thousands) Net Income As reported $178,660 $159,536 Pro forma $177,426 $159,072 Earnings per share As reported $.77 $.69 Pro forma $.76 $.68
Pro forma net income reflects only the vested portion of options granted in 1996 and 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS 123 is not reflected in the pro forma amounts above because pro forma compensation cost only includes costs associated with the vested portion of options granted pursuant to the MEIP, EIP and ESPP on or after January 1, 1995. Management Equity Incentive Plan -------------------------------- Under the MEIP, awards of the Company's Common Stock Series A or Series B 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% (11,957,000 as of December 31, 1996) of the Company's common stock outstanding . No awards will be granted more than 10 years after the effective date (June 22, 1990) of the MEIP. The exercise price of stock options and SARs shall be equal to or greater than the fair market value of the underlying common stock on the date of grant. Stock options are generally not exercisable on the date of grant but vest over a period of time. Under the terms of the MEIP, subsequent stock dividends and stock splits have the effect of increasing the option shares outstanding, which correspondingly decreases the average exercise price of outstanding options. The following summary of shares subject to option under the MEIP presents option share activity adjusted for subsequent stock dividends.
Shares Weighted Subject to Average Option Option Price Per Share ------ --------------- Balance at January 1, 1994 6,808,000 $11.88 Options granted 1,770,000 11.53 Options exercised (169,000) 7.10 Options canceled or lapsed (78,000) 12.50 ------------- Balance at December 31, 1994 8,331,000 11.89 Options granted 105,000 10.38 Options exercised (276,000) 6.33 Options canceled or lapsed (115,000) 13.29 ------------- Balance at December 31, 1995 8,045,000 12.05 Options granted 2,842,000 11.44 Options exercised (361,000) 7.23 Options canceled or lapsed (558,000) 12.18 ============= Balance at December 31, 1996 9,968,000 $11.96 =============
F-16 The following table summarizes information about shares subject to options under the MEIP at December 31, 1996.
Options Outstanding Options Exercisable ---------------------------------------------------------- ------------------------------- Weighted- Average Number Range of Weighted-Average Remaining Number Weighted-Average Outstanding Exercise Prices Exercise Price Life in Years Exercisable Exercise Price ----------- --------------- -------------- ------------- ----------- -------------- 26,000 $ 3 - 5 $ 4 3.8 26,000 $ 4 834,000 8 - 10 8 4.9 834,000 8 5,604,000 10 - 12 12 8.1 1,746,000 12 2,196,000 12 - 14 13 8.2 2,166,000 13 1,308,000 14 - 16 15 6.9 824,000 15 - - -------------- ------------ 9,968,000 3 - 16 12 7.7 5,596,000 12 ============== =============
The weighted-average fair value of options granted during 1996 and 1995 were $1.51 and $1.80, respectively. For purposes of the pro forma calculation under SFAS 123, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 1996 and 1995: 1996 1995 ---- ---- Dividend yield 6.2% 5.6% Expected volatility 20% 20% Risk-free interest rate 5.63% 6.25% Expected life 7 years 7 years During 1996 and 1995, the Company granted restricted stock awards to key employees in the form of the Company's Common Stock Series B. There were no restricted stock award grants in 1994. The number of Series B shares issued as restricted stock awards during 1996 and 1995 were 522,322 and 9,831, respectively (adjusted for subsequent stock dividends). None of the restricted stock awards may be sold, assigned, pledged or otherwise transferred, voluntarily or involuntarily, by the employee until the restrictions lapse. The restrictions lapse over six-month through five-year periods. At December 31, 1996, 834,673 shares (adjusted for subsequent stock dividends and stock splits) of restricted stock were outstanding. Equity Incentive Plan --------------------- On May 23, 1996, the shareholders of the Company voted to approve the EIP. Under the EIP, awards of the Company's Series A or Series B Common Stock may be granted to eligible officers, management employees and non-management employees of the Company and its subsidiaries in the form of incentive stock options, non-qualified stock options, SARs, restricted stock or other stock-based awards. The EIP is administered by the Compensation Committee of the Board of Directors. The maximum number of shares of common stock which may be issued pursuant to awards at any time is 11,300,000 shares. No awards will be granted more than 10 years after the effective date (May 23, 1996) of the EIP. The exercise price of stock options and SARs shall be equal to or greater than the fair market value of the underlying common stock on the date of grant. Stock options are generally not exercisable on the date of grant but vest over a period of time. Under the terms of the EIP, subsequent stock dividends and stock splits have the effect of increasing the option shares outstanding, which correspondingly decrease the average exercise price of outstanding options. As of December 31, 1996, there have been no awards granted under the EIP. F-17 Employee Stock Purchase Plan ---------------------------- The Company's ESPP was approved by shareholders on June 12, 1992 and amended on May 21, 1993. Under the ESPP, eligible employees of the Company and its subsidiaries may subscribe to purchase shares of Common Stock Series B at 85% of the lower 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, 1996, there were 1,931,000 shares of Common Stock Series B reserved for issuance under the ESPP. These shares will be adjusted for any future stock dividends or stock splits. The ESPP will terminate when all 1,931,000 shares reserved have been subscribed for, unless terminated earlier or extended by the Board of Directors. The ESPP is administered by the Compensation Committee of the Board of Directors. As of December 31, 1996, the number of employees participating in the ESPP was 2,041 and the total number of shares subscribed for under the ESPP was 1,277,580. For purposes of the pro forma calculation under SFAS 123, compensation cost is recognized for the fair value of the employees' purchase rights, which was estimated using the Black-Scholes Model with the following assumptions for subscription periods beginning in 1996 and 1995: 1996 1995 ---- ---- Dividend yield 6.4% 6.2% Expected volatility 20% 20% Risk-free interest rate 5.30% 5.56% Expected life 6 months 6 months The weighted-average fair value of those purchase rights granted in 1996 and 1995 was $3.20 and $3.27, respectively. Directors' Deferred Fee Equity Plan ----------------------------------- The Company's non-employee Directors' Deferred Fee Equity Plan (the "Directors' Plan") was approved by shareholders on May 19, 1995 and amended on August 20, 1996. The Directors' Plan includes an Option Plan, a Stock Plan and a Formula Plan. Through the Option Plan, an eligible director may elect to receive up to $30,000 per annum of his or her director's fees for a period of up to five years in the form of options to purchase Company common stock, the number of such options being equal to such fees divided by 20% of the fair market value of Company common stock on the effective date of the options. Through the Stock Plan, an eligible director may elect to receive all or a portion of his or her director's fees in the form of Plan Units, the number of such Plan Units being equal to such fees divided by the fair market value of Company common stock on certain specified dates. The Formula Plan provides each Director of the Company options to purchase 5,000 shares of common stock on the first day of each year beginning in 1997 and continuing through 2002 regardless of whether the Director is participating in the Option Plan or Stock Plan. In addition, on September 1, 1996, options to purchase 2,500 shares of common stock were granted to each Director. The exercise price of the options are 100% of the fair market value on the date of grant and the options are excercisable six months after the grant date and remain exercisable for ten years after the grant date. In the event of termination of Directorship, a Stock Plan participant will receive the value of such Plan Units in either stock or cash or installments of cash as selected by the Participant at the time of the related Stock Plan election. As of any date, the maximum number of shares of common stock which the Plan may be obligated to deliver pursuant to the Stock Plan and the maximum number of shares of common stock which shall have been purchased by Participants pursuant to the Option Plan and which may be issued pursuant to outstanding options under the Option Plan shall not be more than one percent (1%) of the total outstanding shares of Common Stock Series A and Series B of the Company as of such date, subject to adjustment in the event of changes in the corporate structure of the Company affecting capital stock. There are currently 12 directors participating in the Directors'Plan. In 1996, the total Options and Plan Units earned were 147,611, and 14,364, respectively. In 1995, the total Options and Plan Units earned were 100,818, and 6,770, respectively (adjusted for stock dividends). At December 31, 1996, 144,312 options were exercisable at a weighted average exercise price of $11.25. F-18 (10) Income Taxes: ------------- The following is a reconciliation of the provision for income taxes at federal statutory rates to the effective rates:
1996 1995 1994 ----------- ----------- ------------ Consolidated tax provision at federal statutory rate 35.0% 35.0% 35.0% State income tax provisions, net of federal income tax benefit 0.5% 2.1% 2.5% Allowance for funds used during construction (2.0%) (2.3%) (2.4%) Nontaxable investment income (1.7%) (1.7%) (2.9%) Amortization of investment tax credits (0.7%) (0.9%) (0.9%) All other - net 0.4% (2.7%) (0.4%) ----------- ----------- ------------ 31.5% 29.5% 30.9% =========== =========== ============
As of December 31, 1996, 1995 and 1994, accumulated deferred income taxes amounted to $334,117,000, $298,424,000 and $230,556,000, respectively, and the unamortized deferred investment tax credits amounted to $13,858,000, $15,670,000, and $17,594,000, respectively. Income taxes paid during the year were $22,525,000, $39,425,000, and $30,395,000 for 1996, 1995 and 1994, respectively. The components of the net deferred income tax liability at December 31, are as follows:
1996 1995 1994 ---- ---- ---- ($ in thousands) Deferred income tax liabilities: -------------------------------- Property, plant and equipment basis differences $ 285,673 $ 246,128 $ 177,549 Regulatory assets 63,447 63,871 62,578 Other - net 14,469 22,741 28,704 ----------- ---------- ---------- 363,589 332,740 268,831 ----------- ---------- ---------- Deferred income tax assets: --------------------------- Regulatory liabilities 10,076 12,415 13,498 Deferred investment tax credits 5,538 6,231 7,183 ----------- ---------- ----------- 15,614 18,646 20,681 ----------- ---------- ----------- Net deferred income tax liabitlity $ 347,975 $ 314,094 $ 248,150 =========== ========== ===========
F-20 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:
1996 1995 1994 ---- ---- ---- ($ in thousands) Income taxes charged (credited) to the income statement Current: Federal $ 19,775 $ 13,297 $ 28,347 State (3,256) 1,014 3,595 ---------- ----------- ------------ Total current 16,519 14,311 31,942 ---------- ----------- ------------ Deferred: Federal 64,895 48,168 29,829 Investment tax credits (1,865) (2,057) (1,949) State 5,388 6,395 4,501 ---------- ----------- ------------ Total deferred 68,418 52,506 32,381 ---------- ----------- ------------ 84,937 66,817 64,323 ---------- ----------- ------------ Income tax benefit on dividends on convertible preferred securities Current: Federal (3,149) 0 0 State (479) 0 0 ---------- ----------- ------------ Total (3,628) 0 0 ---------- ----------- ------------ Income taxes charged to the income statement (a) 81,309 66,817 64,323 ---------- ----------- ------------ Income taxes charged (credited) to shareholders' equity - - ---------------------------------------------------------- Deferred income taxes (benefits) on unrealized gains or losses on securities classified as available-for-sale (6,884) (3,052) 5,588 Current benefit arising from stock options exercised (345) (406) (137) ---------- ----------- ------------ Income taxes charged (credited) to shareholders' equity (b) (7,229) (3,458) 5,451 ========== =========== ============ Total income taxes (a) plus (b) $ 74,080 $ 63,359 $ 69,774 ========== =========== ============
The Company's alternative minimum tax credit as of December 31, 1996 is $65,056,000 which can be carried forward indefinitely to reduce future regular tax liability. Such amount is included as a debit against accrued income taxes. F-20 (11) Segment Information: --------------------
Year Ended December 31, ------------------------------------------- 1996 1995 1994 ---- ---- ---- ($ in thousands) Communications: - - --------------- Revenues $ 786,307 $ 616,747 $ 456,875 Operating income 206,537 174,196 148,720 Depreciation 153,571 120,608 81,659 Capital expenditures, net 225,648 141,063 173,225 Assets 2,412,382 2,097,277 1,805,893 Public Services: - - ---------------- Natural gas: ------------ Revenues $ 239,619 $ 197,902 $ 208,940 Operating income 33,756 25,874 30,205 Depreciation 10,953 12,155 10,827 Capital expenditures, net 27,691 28,659 26,247 Assets 381,740 344,036 306,979 Electric: --------- Revenues $ 192,297 $ 175,351 $ 167,940 Operating income 24,805 30,060 31,221 Depreciation 18,718 17,035 15,251 Capital expenditures, net 24,591 32,849 34,379 Assets 482,194 487,893 458,457 Water and Wastewater: --------------------- Revenues $ 88,294 $ 79,032 $ 72,395 Operating income 30,588 24,043 17,978 Depreciation 10,491 9,137 7,438 Capital expenditures, net 21,048 27,958 22,276 Assets 511,628 505,851 455,312
(12) Quarterly Financial Data (unaudited): -------------------------------------
Net Income --------------------------------------------------- ($ in thousands) Per Share ---------------- ---------------------------- 1996 Revenues Amount Series A Series B ---- -------- ------ -------- -------- First quarter $329,138 $38,856 $.16 $.16 Second quarter 318,128 46,251 .19 .19 Third quarter 319,959 46,032 .20 .20 Fourth quarter 339,292 47,521 .20 .20
Net Income --------------------------------------------------- ($ in thousands) Per Share ---------------- ----------------------------- 1995 Revenues Amount Series A Series B ---- -------- ------ -------- -------- First quarter $267,034 $33,903 $.15 $.15 Second quarter 251,678 41,939 .17 .17 Third quarter 259,732 45,061 .19 .19 Fourth quarter 290,588 38,633 .16 .16
The quarterly net income per share amounts are rounded to the nearest cent. Annual earnings per share may vary depending on the effect of such rounding. F-21 (13) Supplemental Cash Flow Information: ----------------------------------- The following is a schedule of net cash provided by operating activities for the years ended December 31, 1996, 1995 and 1994.
1996 1995 1994 ---- ---- ---- ($ in thousands) Net income $ 178,660 $ 159,536 $ 143,997 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense 193,733 158,935 115,175 Deferred income taxes and other current liabilities 68,418 52,506 32,381 Change in operating accounts payable 49,020 11,247 21,520 SFAS 121 noncash charge 17,321 0 0 Change in operating accounts receivable (46,342) (22,684) (20,663) Change in other assets (27,979) (8,557) 14,054 HTCC noncash investment income (21,692) 0 0 Centennial noncash investment income (8,993) (14,353) (13,481) Allowance for equity funds used during construction (8,704) (10,545) (11,402) Change in accrued taxes and interest (4,997) (6,923) 13,024 Other (13,264) 19,449 (32,289) ----------- ----------- ----------- Net cash provided by operating activities $ 375,181 $ 338,611 $ 262,316 =========== =========== ============
In conjunction with the acquisitions of the ALLTEL Telecommunications Properties, the Company assumed debt of $13,000,000 and $41,447,000, in 1996 and 1995, respectively, at weighted average interest rates of 8.05% and 6.59%, respectively. (14) Retirement Plans: ----------------- Pension Plan ------------ The Company and its subsidiaries have a noncontributory pension plan covering all employees who have met certain service and age requirements. The benefits are based on years of service and final average pay or career average pay. Contributions are made in amounts sufficient to fund the plan's net periodic pension cost while considering tax deductibility. Plan assets are invested in a diversified portfolio of equity and fixed-income securities. Pension costs for 1996, 1995 and 1994 are comprised of the following components:
1996 1995 1994 ---- ---- ---- ($ in thousands) Service cost $ 7,896 $ 6,549 $ 5,777 Interest cost on projected benefit obligation 11,309 10,735 8,166 Return on plan assets (11,268) (11,784) (9,754) Net amortization and deferral 488 335 172 ========== ========== =========== Net pension cost $ 8,425 $ 5,835 $ 4,361 ========== ========== ===========
F-22 The following table sets forth the plan's benefit obligations and fair values of plan assets as of December 31, 1996, 1995 and 1994.
1996 1995 1994 ---- ---- ---- ($ in thousands) Projected benefit obligation $ (151,507) $ (145,008) $ (125,943) =========== ============ ============= Accumulated benefit obligation: Vested $ (87,089) $ (86,260) $ (77,053) Non vested (9,886) (14,107) (9,133) =========== ============ ============= Total accumulated benefit obligation $ (96,975) $ (100,367) $ (86,186) =========== ============ ============= Plan assets at fair value $ 151,100 $ 133,700 $ 133,964 =========== ============ =============
Assumptions used in the computation of pension costs/ year end benefit obligations were as follows:
1996 1995 1994 ---- ---- ---- Discount rate 7.5%/ 8.0% 8.25%/ 7.5% 8.0%/ 8.0% Expected long-term rate of return on plan assets 8.0%/ N/A 8.75%/ N/A 8.5%/ N/A Rate of increase in compensation levels 4.0%/ 4.0% 4.5 %/ 4.0% 4.5%/ 4.5%
Postretirement Benefits Other Than Pensions ------------------------------------------- The Company provides certain medical, dental and life insurance benefits for retired employees and their beneficiaries and covered dependents. The components of the net periodic postretirement benefit costs for the years ended December 31, 1996, 1995 and 1994 are as follows:
1996 1995 1994 ---- ---- ---- ($ in thousands) Service cost $ 1,786 $ 2 ,038 $ 1,826 Interest cost on the projected benefit 3,692 4,023 3,418 obligation Amortization of transition obligation 1,038 1,038 1,048 Other (489) 467 313 --------- --------- -------- Net periodic postretirement benefit cost $ 6,027 $ 7,566 $ 6,605 ========= ========= ========
Of the net periodic postretirement benefit cost presented above, the Company recorded $2,529,000, $2,781,000 and $4,621,000 in 1996, 1995 and 1994, respectively, as regulatory assets for states whose regulatory commissions to date have not but will likely allow recovery of accrued costs in future rate proceedings. The Company's annual cost includes 20-year prospective recognition of the transition obligation. The following table sets forth the plan's benefit obligations and the postretirement benefit liability recognized on the Company's balance sheets at December 31, 1996, 1995 and 1994:
1996 1995 1994 ---- ---- ---- ($ in thousands) Accumulated postretirement benefit obligation: Retirees $ (18,990) $ (19,736) $ (14,946) Fully eligible active plan participants (9,049) (9,964) (7,158) Other active plan participants (21,876) (30,304) (32,882) ----------- ------------ ----------- Total accumulated postretirement benefit (49,915) (60,004) (54,986) obligation Plan assets at fair value 3,156 912 0 Unrecognized transition obligation 16,600 17,638 18,676 Unrecognized prior service cost 4,615 3,480 2,932 Unrecognized net (gain) loss (17,570) (2,961) (1,914) ----------- ----------- ----------- Net accumulated postretirement benefit obligation $ (43,114) $ (40,935) $ (35,292) =========== ============ ===========
F-23 For purposes of measuring year end benefit obligations, the Company used the same discount rates as were used for the pension plan and a 7% annual rate of increase in the per-capita cost of covered health-care benefits, gradually decreasing to 5% in the year 2040 and remaining at that level thereafter. The effect of a 1% increase in the assumed health-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 $548,000 and the effect on the accumulated postretirement benefit obligation for health benefits would be $4,991,000. 401(k) Savings Plans -------------------- The Company sponsors employee savings plans under section 401(k) of the Internal Revenue Code. The plans cover substantially all full-time employees. Under the plans, the Company provides matching contributions based on qualified employee contributions. Matching contributions were $4,248,000, $3,688,000 and $2,156,000 for 1996, 1995 and 1994, respectively. (15) Commitments and Contingencies: ------------------------------ The Company has budgeted expenditures for facilities in 1997 of approximately $613,000,000 and certain commitments have been entered into in connection therewith. The Company conducts certain of its operations in leased premises and also leases certain equipment and other assets pursuant to operating leases. Terms of the leases, including purchase options and obligations, renewals and maintenance costs, vary by lease. Future minimum rental commitments for all long-term noncancellable operating leases are as follows: Year Amount 1997 $18,197,000 1998 19,836,000 1999 14,035,000 2000 14,183,000 2001 6,382,000 2002 to 2020 18,869,000 ---------- Total $91,502,000 Total rental expense included in the Company's results of operations for the years ended December 31, 1996, 1995 and 1994 was $13,146,000, $6,778,000, and $3,913,000 respectively. The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. F-24 EX-4 2 4.100.11 SEVENTH SUPPLEMENTAL INDENTURE SEVENTH SUPPLEMENTAL INDENTURE, dated as of June 1, 1996, between CITIZENS UTILITIES COMPANY, a corporation duly organized and existing under the laws of the State of Delaware (herein called the "Company"), having its principal administrative offices at High Ridge Park, Building No. 3, Stamford, Connecticut 06905, to CHEMICAL BANK, a New York banking corporation, as Trustee (herein called the "Trustee"), having its principal corporate trust office at 450 West 33rd Street, New York, New York 10001. RECITALS WHEREAS, the Company has entered into an Indenture dated as of August 15, 1991 (the "Indenture"), with the Trustee to provide for the issuance from time to time of the Company's debentures, notes or other evidences of indebtedness (herein called the "Securities"), to be issued in one or more series; and WHEREAS, the Company has entered into a First Supplemental Indenture dated as of August 15, 1991 (the "First Supplemental Indenture") with the Trustee to establish the form and terms of a series of Securities designated "8.45% Debentures Due 2001"; and WHEREAS, the Company has entered into a Second Supplemental Indenture dated as of January 15, 1992 (the "Second Supplemental Indenture") with the Trustee to establish the form and terms of a series of Securities designated "7.45% Debentures Due 2004";and WHEREAS, the Company has entered into a Third Supplemental Indenture dated as of April 15, 1994 (the "Third Supplemental Indenture") with the Trustee to establish the form and terms of a series of Securities designated "7.60% Debentures Due 2006"; and WHEREAS, the Company has entered into a Fourth Supplemental Indenture dated as of October 1, 1994 (the "Fourth Supplemental Indenture") with the Trustee to establish the form and terms of a series of Securities designated "7.68% Debentures Due 2034"; and WHEREAS, the Company has entered into a Fifth Supplemental Indenture dated as of June 15, 1995 (the "Fifth Supplemental Indenture") with the Trustee to establish the form and terms of a series of Securities designated "7.45% Debentures Due 2035"; and WHEREAS, the Company has entered into a Sixth Supplemental Indenture dated as of October 15, 1995 (the "Sixth Supplemental Indenture") with the Trustee to establish the form and terms of a series of Securities designated "7% Debentures Due 2025"; and WHEREAS, Section 901 of the Indenture provides, among other things, that the Company and the Trustee may enter into indentures supplemental to the Indenture for, among other things, the purpose of establishing the form and terms of the Securities of any series as permitted in Sections 201 and 301 of the Indenture and adding to the covenants of the Company for the benefit of the Holders of any series of Securities; and -2- WHEREAS, the Company by corporate action duly taken has authorized the issuance of a seventh series of Securities designated as the 6.80% Debentures Due 2026 (hereinafter sometimes called the "Debentures"), which series is limited in aggregate principal amount to $100,000,000, such Debentures to contain such provisions as have been caused to be determined by or at the direction of, the Board of Directors of the Company and as are set forth in this Seventh Supplemental Indenture to the Indenture; and WHEREAS, all conditions have been complied with, all actions have been taken and all things have been done which are necessary to make the Debentures, when executed by the Company and authenticated by or on behalf of the Trustee and when delivered as herein and in the Indenture provided, the valid obligations of the Company, and to make this Seventh Supplemental Indenture a valid and binding supplemental indenture. NOW, THEREFORE, THIS SEVENTH SUPPLEMENTAL INDENTURE WITNESSETH: For and in consideration of the premises and the purchase of the Debentures by the holders thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all holders of the Debentures, as follows: -3- Section 1. Definitions. For all purposes of this Seventh Supplemental ------------ Indenture, except as otherwise herein expressly provided or unless the context otherwise requires: (1) terms used herein in capitalized form and defined in the Indenture shall have the meanings specified in the Indenture; (2) the words "herein", "hereof" and "hereto" and other words of similar import used in this Seventh Supplemental Indenture refer to this Seventh Supplemental Indenture as a whole and not to any particular Section or other subdivision of this Seventh Supplemental Indenture; (3) the provisions of this Seventh Supplemental Indenture shall be read in conjunction with the provisions of the Indenture only with respect to the Debentures and the provisions of the Indenture and the First, Second, Third, Fourth, Fifth and Sixth Supplemental Indentures shall not be modified by this Seventh Supplemental Indenture with respect to any series of the Securities outstanding or to be outstanding under the Indenture, other than the Debentures; and (4) terms defined in this Sevent Supplemental Indenture shall apply only to this Seventh Supplemental Indenture -4- and the Debentures hereunder, and such definitions shall not apply to any supplemental indenture other than this Seventh Supplemental Indenture or to any Securities outstanding or to be outstanding under the Indenture, other than the Debentures. Except as otherwise expressly provided or unless the context otherwise requires, "Seventh Supplemental Indenture" means this instrument as originally executed or, if amended or supplemented pursuant to the applicable provisions of the Indenture, as amended or supplemented. Section 2. Forms of the Debentures. The Debentures shall be in --------------------------- substantially the form set forth in Exhibit A to this Seventh Supplemental Indenture, as such form may be completed pursuant to Section 3 hereof, the terms of which Exhibit A are herein incorporated by reference and made a part of this Seventh Supplemental Indenture. Section 3. Terms of the Debentures. The terms of the Debentures shall ----------------------- be as follows: (1) the Securities to be issued under the Indenture and this Seventh Supplemental Indenture shall be the Debentures and shall be designated as the "6.80% Debentures Due 2026"; -5- (2) the Debentures shall constitute a single series of the Securities under the Indenture, which series is limited in aggregate principal amount to $100,000,000; (3) so long as any Debentures are registered in the name of CEDE & Co., or any other nominee of The Depository Trust Company, and are intended to be Book-Entry Securities, the provisions of Section 311 of the Indenture shall apply to such Debentures. Thereafter the Debentures may be subjected to the requirements of a successor book-entry securities system that may be adopted by the Company in accordance with the provisions of the Indenture and this Seventh Supplemental Indenture; (4) interest on each of the Debentures shall be payable at the rate per annum specified in the designation of the Debenture from June 11, 1996, or from the most recent Interest Payment Date to which interest has been paid or duly provided for, semi-annually, on February 15 and August 15 in each year, commencing on August 15, 1996. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will be paid to the Person in whose name such Debenture (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be the February 1 or August 1 (whether or not a Business Day), as the case may be, next preceding such Interest Payment -6- Date. Any interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date by virtue of having been such a Holder and shall be paid by the Company as provided in Section 307 of the Indenture; (5) unless otherwise provided with respect to a Book-Entry Security or pursuant to any successor book-entry security system or similar system, payments of interest will be made by check mailed to the Holder of each Debenture at the address shown in the Security Register or, at the option of the Holder, to such other place in the United States of America as the Holder shall designate to the Trustee in writing. The principal amount of the Debentures will be paid at Maturity by check against presentation of the Debentures at the office or agency of Chemical Bank, as Trustee, in New York, New York, or such other address in New York, New York, as the Trustee shall designate by written notice to the Holders of the Debentures; (6) the Debentures shall be issued in registered form only and in denominations of $1,000 or any amount in excess thereof which is an integral multiple of $1,000; (7) principal and interest on the Debentures shall be payable in the coin or currency of the United States of America, which, at the time of payment, is legal tender for public and private debts; and -7- (8) the Debentures shall be subject to defeasance, at the Company's option, as provided for in Sections 1302 and 1303 of the Indenture. Upon the Company's exercise of the option to effect such defeasance under Section 1302 and 1303 of the Indenture in accordance with and subject to the terms thereof, the Company shall be released from its obligations with respect to the Debentures as provided in the applicable Section and other relevant provisions of the Indenture. Section 4. No Redemption by the Company. The Debentures will not be ----------------------------- redeemable at the option of the Company prior to maturity and will not be subject to any sinking fund. Section 5. Redemption at Option of Holder. (a) Each Holder shall have ------------------------------- the right, at such Holder's option, exercisable at any time prior to July 15, 2003 and subsequent to June 15, 2003, to require the Company to redeem, and upon the exercise of such right the Company shall redeem, all or any part of such Holder's Debentures that is $1,000 or any integral multiple thereof in principal amount, on August 15, 2003 (the "Redemption Date") at a redemption price in cash equal to 100% of the principal amount of such Debenture (the "Redemption Price"), together with accrued and unpaid interest to the Redemption Date. (b) To exercise a redemption right, a Holder of Debentures shall deliver (i), to the Company and to the Trustee, -8- irrevocable written notice of the Holder's election to exercise such right (the "Holder's Notice"), which shall set forth the name of the Holder, the amount of Debentures to be redeemed and a statement that an election to exercise the redemption right is being made thereby and (ii), to the Trustee, the Debentures with respect to which the redemption right is being exercised, duly endorsed for transfer to the Company if required by the Trustee or the Company. Debentures held by a securities depositary may be delivered in such other manner as may be agreed to by such securities depositary and the Company and the Trustee. Such written notice shall be irrevocable. The Debentures surrendered for redemption shall, on the Redemption Date, become due and payable at the Redemption Price, and from and after such date (unless the Company shall default in the payment of the Redemption Price and accrued interest) such Debentures shall cease to bear interest. Upon surrender of any such Debentures for redemption in accordance with the Holder's Notice, such Debentures shall be paid by the Company at the Redemption Price plus accrued interest to the Redemption Date; provided, --------- however, that installments of interest whose Stated Maturity is prior to the - - -------- Redemption Date shall be payable to the Holders of such Debentures, or one or more Predecessor Securities, according to the terms and provisions of Section 307. -9- (c) On or before the Redemption Date, the Company shall deposit with the Trustee an amount of money sufficient to pay the Redemption Price of, and (except if the Redemption Date shall be an Interest Payment Date) accrued interest on, all the Debentures which are to be repurchased on that date. (d) If any Debenture surrendered for redemption shall not be so paid on the Redemption Date, such Debenture shall, until paid, continue to bear interest to the extent permitted by applicable law from the Redemption Date at the same rate as the rate borne by such Debenture. The Company shall pay to the Holder of such Debenture the additional amounts of interest arising from this subsection at the same time that it pays the Redemption Price. (e) If any Debenture which is to be redeemed only in part shall be surrendered at any office or agency of the Company (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or his attorney duly authorized in writing), the Company shall execute, and the Trustee shall authenticate and deliver to the Holder of such Security without service charge, a new Debenture or Debentures, of any authorized denomination as requested by such Holder, in an aggregate principal amount equal to and in -10- exchange for the unredeemed portion of the Debenture so surrendered. Section 6. Amendment to Indenture for Purposes of Seventh Series of -------------------------------------------------------------------- Debentures. ----------- For all purposes of the Debentures and for no other purposes, subsection (4) of Section 501 shall read: "(4) default in the performance, or breach, of any covenant or warranty of the Company in this Indenture (other than a covenant or warranty a default in whose performance or whose breach is elsewhere in this Section specifically dealt with or which has expressly been included in this Indenture solely for the benefit of a series of Securities other than that series), and continuance of such default or breach for a period of 90 days after there has been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the Holders of a majority in principal amount of the Outstanding Securities of that series a written notice specifying such default or breach and -11- requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or" For all purposes of the Debentures and for no other purposes, the first paragraph of Section 502 shall read: "If an Event of Default with respect to Securities of any series at the time Outstanding occurs and is continuing, then and in every such case the Trustee or the Holders of a majority in principal amount of the Outstanding Securities of that series may declare the principal amount (or, if any of the Securities of that series are Original Issue Discount Securities, such portion of the principal amount of such Securities as may be specified in the terms thereof) of all of the Securities of that series to be due and payable immediately, by a notice in writing to the Company (and to the Trustee if given by Holders), and upon any such declaration such principal amount (or specified amount) shall become immediately due and payable." -12- For all purposes of the Debentures and for no other purposes, subsection (2) of Section 507 shall read: "(2) the Holders of a majority in principal amount of the Outstanding Securities of that series shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder;" For all purposes of the Debentures and for no other purposes, subsection (5) of Section 507 shall read: "(5) no direction inconsistent with such written request has been given to the Trustee during such 90-day period by the Holders of 66-2/3% in principal amount of the Outstanding Securities of that series." Section 7. Incorporation of Indenture. From and after the date hereof, ---------------------------- the Indenture, as supplemented by this Seventh Supplemental Indenture, shall be read, taken and construed as one and the same instrument with respect to the Debentures. Section 8. Acceptance of Trust. The Trustee accepts the trusts created -------------------- by the Indenture, as heretofore supplemented by the First Supplemental Indenture, Second Supplemental Indenture, Third Supplemental Indenture, Fourth Supplemental Indenture, -13- Fifth Supplemental Indenture and Sixth Supplemental Indenture and as hereby supplemented by this Seventh Supplemental Indenture, and agrees to perform the same upon the terms and conditions in the Indenture, as so supplemented. Section 9. Conflict with Trust Indenture Act. If any provision hereof ----------------------------------- limits, qualifies or conflicts with a provision of the Trust Indenture Act that is required under such Act to be a part of and govern this Seventh Supplemental Indenture, such provision of the Act shall control. If any provision of this Seventh Supplemental Indenture modifies or excludes any provision of the Trust Indenture Act that may be so modified or excluded, such provision of the Act shall be deemed to apply to this Seventh Supplemental Indenture only as so modified and if not so excluded, as the case may be. Section 10. Governing Law. This Seventh Supplemental Indenture, and the -------------- Debentures, shall be governed by and construed in accordance with the laws of the State of New York. Section 11. Recitals. The recitals contained in the Indenture, this --------- Seventh Supplemental Indenture and the Debentures, except the Trustee's certificate of authentication, shall be taken as statements of the Company, and the Trustee assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of the -14- Indenture, as supplemented by this Seventh Supplemental Indenture. Section 12. Amendments. Notwithstanding any other provisions hereof, ----------- all amendments to the Indenture made hereby shall have effect only with respect to the Debentures, and not with respect to the Securities of any other series created subsequent to the date hereof. Section 13. Counterparts. This Seventh Supplemental Indenture may be ------------- executed in any number of counterparts, each of which when so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. -15- IN WITNESS WHEREOF, the parties hereto have caused this Seventh Supplemental Indenture to be duly executed, and their respective corporate seals to be hereunto affixed and attested, all as of the date first above written. CITIZENS UTILITIES COMPANY By: /s/Robert J. DeSantis --------------------- Title: Vice President and Treasurer Attest: /s/Charles J. Weiss - - -------------------------- Secretary CHEMICAL BANK, as Trustee By: /s/Thomas J. Foley ------------------ Title: Vice President Attest: Gregory P. Shea - - -------------------------- -16- County of Fairfield ) ) ss.: State of Connecticut ) On the 11th day of June, 1996, before me personally came Robert DeSantis, to me known, who, being by me duly sworn, did depose and say that he is Vice President and Treasurer of CITIZENS UTILITIES COMPANY, one of the corporations described in and which executed the foregoing instrument; that he knows the seal of said corporations; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation, and that he signed his name thereto by like authority. ---------------------------------- Notary Public, State of Connecticut -17- County of New York ) ) ss.: State of New York ) On this 11th day of June, in the year of 1996 before me personally came T.J. Foley to me personally known, who being by me duly sworn ----------- did depose and say that he resides at Bethpage, N.Y. , that he is Vice President ---------------- of CHEMICAL BANK, one of the corporations described in and which executed the foregoing indenture; that he knows the seal of said corporation; that the seal affixed to said instrument opposite the execution thereof on behalf of said corporation is the corporate seal of said corporation; that said instrument was signed and said corporate seal was so affixed on behalf of said corporation by authority and order of its board of directors; that he signed his name thereto by like authority; and he acknowledged said instrument to be his free act and deed and the free act and deed of said Chemical Bank. IN WITNESS WHEREOF I have hereunder set my hand and affixed my official seal, at New York in said State of New York, the day and year first above written. ---------------------------------- Notary Public, State of New York -18- EXECUTION COPY ================================================================================ CITIZENS UTILITIES COMPANY TO CHEMICAL BANK (Trustee) - - -------------------------------------------------------------------------------- SEVENTH SUPPLEMENTAL INDENTURE Dated as of June 1, 1996 - - -------------------------------------------------------------------------------- Supplemental to the Indenture Dated as of August 15, 1991 ================================================================================ EX-4 3 EXHIBIT 4.100.12 EIGHTH SUPPLEMENTAL INDENTUR EIGHTH SUPPLEMENTAL INDENTURE, dated as of December 1, 1996, between CITIZENS UTILITIES COMPANY, a corporation duly organized and existing under the laws of the State of Delaware (herein called the "Company"), having its principal administrative offices at High Ridge Park, Building No. 3, Stamford, Connecticut 06905, to THE CHASE MANHATTAN BANK (formerly known as Chemical Bank), a New York banking corporation, as Trustee (herein called the "Trustee"), having its principal corporate trust office at 450 West 33rd Street, New York, New York 10001. RECITALS WHEREAS, the Company has entered into an Indenture dated as of August 15, 1991 (the "Indenture"), with the Trustee to provide for the issuance from time to time of the Company's debentures, notes or other evidences of indebtedness (herein called the "Securities"), to be issued in one or more series; and WHEREAS, the Company has entered into a First Supplemental Indenture dated as of August 15, 1991 (the "First Supplemental Indenture") with the Trustee to establish the form and terms of a series of Securities designated "8.45% Debentures Due 2001"; and WHEREAS, the Company has entered into a Second Supplemental Indenture dated as of January 15, 1992 (the "Second Supplemental Indenture") with the Trustee to establish the form and terms of a series of Securities designated "7.45% Debentures Due 2004"; and WHEREAS, the Company has entered into a Third Supplemental Indenture dated as of April 15, 1994 (the "Third Supplemental Indenture") with the Trustee to establish the form and terms of a series of Securities designated "7.60% Debentures Due 2006"; and WHEREAS, the Company has entered into a Fourth Supplemental Indenture dated as of October 1, 1994 (the "Fourth Supplemental Indenture") with the Trustee to establish the form and terms of a series of Securities designated "7.68% Debentures Due 2034"; and WHEREAS, the Company has entered into a Fifth Supplemental Indenture dated as of June 15, 1995 (the "Fifth Supplemental Indenture") with the Trustee to establish the form and terms of a series of Securities designated "7.45% Debentures Due 2035"; and WHEREAS, the Company has entered into a Sixth Supplemental Indenture dated as of October 15, 1995 (the "Sixth Supplemental Indenture") with the Trustee to establish the form and terms of a series of Securities designated "7% Debentures Due 2025"; and WHEREAS, the Company has entered into a Seventh Supplemental Indenture dated as of June 1, 1996 (the "Seventh Supplemental Indenture") with the Trustee to establish the form and terms of a series of Securities designated "6.80% Debentures Due 2026"; and WHEREAS, Section 901 of the Indenture provides, among other things, that the Company and the Trustee may enter into indentures supplemental to the Indenture for, among other things, 2 the purpose of establishing the form and terms of the Securities of any series as permitted in Sections 201 and 301 of the Indenture and adding to the covenants of the Company for the benefit of the Holders of any series of Securities; and WHEREAS, the Company by corporate action duly taken has authorized the issuance of an eighth series of Securities designated as the 7.05% Debentures Due 2046 (hereinafter sometimes called the "Debentures"), which series is limited in aggregate principal amount to $200,000,000, such Debentures to contain such provisions as have been caused to be determined by or at the direction of, the Board of Directors of the Company and as are set forth in this Eighth Supplemental Indenture to the Indenture; and WHEREAS, all conditions have been complied with, all actions have been taken and all things have been done which are necessary to make the Debentures, when executed by the Company and authenticated by or on behalf of the Trustee and when delivered as herein and in the Indenture provided, the valid obligations of the Company, and to make this Eighth Supplemental Indenture a valid and binding supplemental indenture. NOW, THEREFORE, THIS EIGHTH SUPPLEMENTAL INDENTURE WITNESSETH: 3 For and in consideration of the premises and the purchase of the Debentures by the holders thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all holders of the Debentures, as follows: Section 1. Definitions. For all purposes of this Eighth Supplemental ------------ Indenture, except as otherwise herein expressly provided or unless the context otherwise requires: (1) terms used herein in capitalized form and defined in the Indenture shall have the meanings specified in the Indenture; (2) the words "herein", "hereof" and "hereto" and other words of similar import used in this Eighth Supplemental Indenture refer to this Eighth Supplemental Indenture as a whole and not to any particular Section or other subdivision of this Eighth Supplemental Indenture; (3) the provisions of this Eighth Supplemental Indenture shall be read in conjunction with the provisions of the Indenture only with respect to the Debentures and the provisions of the Indenture and the First, Second, Third, Fourth, Fifth, Sixth and Seventh Supplemental Indentures shall not be modified by this Eighth Supplemental Indenture with respect to any series of 4 the Securities outstanding or to be outstanding under the Indenture, other than the Debentures; and (4) terms defined in this Eighth Supplemental Indenture shall apply only to this Eighth Supplemental Indenture and the Debentures hereunder, and such definitions shall not apply to any supplemental indenture other than this Eighth Supplemental Indenture or to any Securities outstanding or to be outstanding under the Indenture, other than the Debentures. Except as otherwise expressly provided or unless the context otherwise requires, "Eighth Supplemental Indenture" means this instrument as originally executed or, if amended or supplemented pursuant to the applicable provisions of the Indenture, as amended or supplemented. Section 2. Forms of the Debentures. The Debentures shall be in --------------------------- substantially the form set forth in Exhibit A to this Eighth Supplemental Indenture, as such form may be completed pursuant to Section 3 hereof, the terms of which Exhibit A are herein incorporated by reference and made a part of this Eighth Supplemental Indenture. Section 3. Terms of the Debentures. The terms of the Debentures shall ------------------------ be as follows: 5 (1) the Securities to be issued under the Indenture and this Eighth Supplemental Indenture shall be the Debentures and shall be designated as the "7.05% Debentures Due 2046"; (2) the Debentures shall constitute a single series of the Securities under the Indenture, which series is limited in aggregate principal amount to $200,000,000; (3) so long as any Debentures are registered in the name of CEDE & Co., or any other nominee of The Depository Trust Company, and are intended to be Book-Entry Securities, the provisions of Section 311 of the Indenture shall apply to such Debentures. Thereafter the Debentures may be subjected to the requirements of a successor book-entry securities system that may be adopted by the Company in accordance with the provisions of the Indenture and this Eighth Supplemental Indenture; (4) interest on each of the Debentures shall be payable at the rate per annum specified in the designation of the Debenture from December 6, 1996, or from the most recent Interest Payment Date to which interest has been paid or duly provided for, semi-annually, on April 1 and October 1 in each year, commencing on April 1, 1997. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will be paid to the Person in whose name such Debenture (or one or more Predecessor Securities) is registered at the close of 6 business on the Regular Record Date for such interest, which shall be the March 15 or September 15 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. Any interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date by virtue of having been such a Holder and shall be paid by the Company as provided in Section 307 of the Indenture; (5) unless otherwise provided with respect to a Book- Entry Security or pursuant to any successor book-entry security system or similar system, payments of interest will be made by check mailed to the Holder of each Debenture at the address shown in the Security Register or, at the option of the Holder, to such other place in the United States of America as the Holder shall designate to the Trustee in writing. The principal amount of the Debentures will be paid at Maturity by check against presentation of the Debentures at the office or agency of The Chase Manhattan Bank, as Trustee, in New York, New York, or such other address in New York, New York, as the Trustee shall designate by written notice to the Holders of the Debentures; (6) the Debentures shall be issued in registered form only and in denominations of $1,000 or any amount in excess thereof which is an integral multiple of $1,000; 7 (7) principal and interest on the Debentures shall be payable in the coin or currency of the United States of America, which, at the time of payment, is legal tender for public and private debts; and (8) the Debentures shall be subject to defeasance, at the Company's option, as provided for in Sections 1302 and 1303 of the Indenture. Upon the Company's exercise of the option to effect such defeasance under Section 1302 and 1303 of the Indenture in accordance with and subject to the terms thereof, the Company shall be released from its obligations with respect to the Debentures as provided in the applicable Section and other relevant provisions of the Indenture. Section 4. No Redemption. The Debentures will not be redeemable prior -------------- to maturity and will not be subject to any sinking fund. Section 5. Amendment to Indenture for Purposes of Eighth Series of ------------------------------------------------------- Debentures. ----------- For all purposes of the Debentures and for no other purposes, subsection (4) of Section 501 shall read: "(4) default in the performance, or breach, of any covenant or warranty of the Company in this Indenture (other than a covenant or warranty a default in whose performance or 8 whose breach is elsewhere in this Section specifically dealt with or which has expressly been included in this Indenture solely for the benefit of a series of Securities other than that series), and continuance of such default or breach for a period of 90 days after there has been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the Holders of a majority in principal amount of the Outstanding Securities of that series a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or" For all purposes of the Debentures and for no other purposes, the first paragraph of Section 502 shall read: "If an Event of Default with respect to Securities of any series at the time Outstanding occurs and is continuing, then and in every such case the Trustee or the Holders of a majority in principal amount of 9 the Outstanding Securities of that series may declare the principal amount (or, if any of the Securities of that series are Original Issue Discount Securities, such portion of the principal amount of such Securities as may be specified in the terms thereof) of all of the Securities of that series to be due and payable immediately, by a notice in writing to the Company (and to the Trustee if given by Holders), and upon any such declaration such principal amount (or specified amount) shall become immediately due and payable." For all purposes of the Debentures and for no other purposes, subsection (2) of Section 507 shall read: "(2) the Holders of a majority in principal amount of the Outstanding Securities of that series shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder;" For all purposes of the Debentures and for no other purposes, subsection (5) of Section 507 shall read: 10 "(5) no direction inconsistent with such written request has been given to the Trustee during such 90-day period by the Holders of 66-2/3% in principal amount of the Outstanding Securities of that series." Section 6. Incorporation of Indenture. From and after the date hereof, --------------------------- the Indenture, as supplemented by this Eighth Supplemental Indenture, shall be read, taken and construed as one and the same instrument with respect to the Debentures. Section 7. Acceptance of Trust. The Trustee accepts the trusts created -------------------- by the Indenture, as heretofore supplemented by the First Supplemental Indenture, Second Supplemental Indenture, Third Supplemental Indenture, Fourth Supplemental Indenture, Fifth Supplemental Indenture, Sixth Supplemental Indenture and Seventh Supplemental Indenture and as hereby supplemented by this Eighth Supplemental Indenture, and agrees to perform the same upon the terms and conditions in the Indenture, as so supplemented. Section 8. Conflict with Trust Indenture Act. If any provision hereof ----------------------------------- limits, qualifies or conflicts with a provision of the Trust Indenture Act that is required under such Act to be a part of and govern this Eighth Supplemental Indenture, such provision of the Act shall control. If any provision of this 11 Eighth Supplemental Indenture modifies or excludes any provision of the Trust Indenture Act that may be so modified or excluded, such provision of the Act shall be deemed to apply to this Eighth Supplemental Indenture only as so modified and if not so excluded, as the case may be. Section 9. Governing Law. This Eighth Supplemental Indenture, and the -------------- Debentures, shall be governed by and construed in accordance with the laws of the State of New York. Section 10. Recitals. The recitals contained in the Indenture, this --------- Eighth Supplemental Indenture and the Debentures, except the Trustee's certificate of authentication, shall be taken as statements of the Company, and the Trustee assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of the Indenture, as supplemented by this Eighth Supplemental Indenture. Section 11. Amendments. Notwithstanding any other provisions hereof, ----------- all amendments to the Indenture made hereby shall have effect only with respect to the Debentures, and not with respect to the Securities of any other series created subsequent to the date hereof. Section 12. Counterparts. This Eighth Supplemental Indenture may be ------------- executed in any number of counterparts, each of which when so executed shall be deemed to be an original, but all 12 such counterparts shall together constitute but one and the same instrument. 13 IN WITNESS WHEREOF, the parties hereto have caused this Eighth Supplemental Indenture to be duly executed, and their respective corporate seals to be hereunto affixed and attested, all as of the date first above written. CITIZENS UTILITIES COMPANY By: /s/ Robert J. DeSantis ----------------------- Title: Vice President and Treasurer Attest: /s/Edward O. Kipperman - - ---------------------- Edward O. Kipperman Vice President, Tax THE CHASE MANHATTAN BANK, as Trustee By: /s/ Thomas J. Foley -------------------- Title: Vice President Attest: /s/R. Lorenze - - ------------- 14 County of Fairfield ) ) ss.: State of Connecticut ) On the 5th day of December, 1996, before me personally came Robert DeSantis, to me known, who, being by me duly sworn, did depose and say that he is Vice President and Treasurer of CITIZENS UTILITIES COMPANY, one of the corporations described in and which executed the foregoing instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation, and that he signed his name thereto by like authority. ---------------------------------- Notary Public, State of Connecticut 15 County of New York ) ) ss.: State of New York ) On this 5th day of December, in the year of 1996 before me personally came Thomas Foley, to me personally known, who being by me duly sworn did depose and say that he resides at Bethpage, New York, that he is Vice President of The Chase Manhattan Bank, one of the corporations described in and which executed the foregoing indenture; that he knows the seal of said corporation; that the seal affixed to said instrument opposite the execution thereof on behalf of said corporation is the corporate seal of said corporation; that said instrument was signed and said corporate seal was so affixed on behalf of said corporation by authority and order of its board of directors; that he signed his name thereto by like authority; and he acknowledged said instrument to be his free act and deed and the free act and deed of said Bank. IN WITNESS WHEREOF I have hereunder set my hand and affixed my official seal, at New York in said State of New York, the day and year first above written. ---------------------------------- Notary Public, State of New York 16 EXECUTION COPY =============================================================================== CITIZENS UTILITIES COMPANY TO THE CHASE MANHATTAN BANK (Trustee) - - -------------------------------------------------------------------------------- EIGHTH SUPPLEMENTAL INDENTURE Dated as of December 1, 1996 - - -------------------------------------------------------------------------------- Supplemental to the Indenture Dated as of August 15, 1991 ================================================================================ EX-12 4 RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT No. 12 CITIZENS UTILITIES COMPANY AND SUBSIDIARIES Statement Showing Computation of Ratio of Earnings to Fixed Charges and Earnings to Combined Fixed Charges for the year ended December 31, 1996 (DOLLARS IN THOUSANDS)
Ration of Ration of Earnings to Earnings to Combined Fixed Fixed Charges Charges ----------------------------------- Net Income (A) $178,660 $178,660 Dividends on convertible preferred securities,net of income tax benefit (B) 5,849 0 ----------------------------------- (A+B) (C) 184,509 178,660 Taxes based on income or profits (D) 84,937 81,309 ----------------------------------- Earnings, before income taxes and fixed charges (C+D) (E) 269,446 259,969 Fixed Charges (F) 101,332 110,809 ----------------------------------- Earnings before income taxes and fixed charges (E + F) (G) $370,778 $370,778 Ratio of Pre-tax Income to Net Income (E / C) 1.46 1.46 Ratio of Earning to Fixed Charges (G/F) 3.66 3.35
EX-21 5 LISTING OF SUBSIDIARIES EXHIBIT NO. 21 21. SUBSIDIARIES (all wholly-owned, except where State of otherwise indicated) Incorporation Name AAlert Paging Company Delaware Subsidiaries of AAlert Paging Company: AAlert Paging Company of Sacramento California AAlert Paging Company of San Diego California AAlert Paging Company of San Francisco California Citizens Business Services Company Illinois Citizens Cable Company Delaware Citizens Conference Call Company Delaware Citizens Consumers Services, Inc. California Citizens Directory Services Company L.L.C. Delaware* Citizens Directory Services Company, Inc. Delaware Citizens International Management Services Company Delaware Citizens Mohave Cellular Company Delaware Citizens Mountain State Telephone Company West Virginia Citizens Public Works Service Company Delaware Citizens Resources Company Delaware Citizens Telecom Services Company L.L.C. Delaware* Citizens Telecommunications Company Delaware Citizens Telecommunications Company of Arizona L.L.C. Delaware* Citizens Telecommunications Company of California, Inc. California Citizens Telecommunications Company of Idaho Delaware Citizens Telecommunications Company of Montana Delaware Citizens Telecommunications Company of Nevada Nevada Citizens Telecommunications Company of New York, Inc. New York Citizens Telecommunications Company of Ogden, Inc. New York Citizens Telecommunications Company of Oregon Delaware Citizens Telecommunications Company of Tennessee L.L.C. Delaware* Citizens Telecommunications Company of the Golden State California Citizens Telecommunications Company of the Navajo Nation L.L.C. Delaware* Citizens Telecommunications Company of the Volunteer State L.L.C. Delaware* Citizens Telecommunications Company of the White Mountains L.L.C. Delaware* Citizens Telecommunications Company of the White Mountains, Inc. Delaware Citizens Telecommunications Company of Tuolumne California Citizens Telecommunications Company of Utah Delaware Citizens Telecommunications Company of West Virginia Delaware Citizens Utilities Company of California California Citizens Utilities Company of Illinois Illinois Citizens Utilities Company of Ohio Ohio Citizens Utilities Company of Pennsylvania Pennsylvania Citizens Utilities Rural Company Delaware Citizens Utilities Water Company of Pennsylvania Delaware Citizens Water Resources Company Illinois CU CapitalCorp Delaware Subsidiary of CU CapitalCorp: Electric Lightwave, Inc. Delaware Subsidiary of Electric Lightwave, Inc.: Telecard Services International, Inc. Delaware CU Wireless Management L.L.C. Delaware* Electric Energy Export Corp. Arizona Flowing Wells, Inc. Indiana Havasu Water Company, Inc. Arizona LGS Concord Corporation Minnesota LGS Natural Gas Company Louisiana LGS Securities, Inc. Louisiana Navajo Communications Company, Inc. New Mexico NCC Systems, Inc. Texas Southwestern Capital Corporation Delaware Southwestern Investments, Inc. Nevada Sun City Sewer Company Arizona Sun City Water Company Arizona Sun City West Utilities Company Arizona Tubac Valley Water Company, Inc. Arizona * Formed in the state of Delaware. EX-23 6 AUDITORS' CONSENT Exhibit 23 ---------- Independent Auditors' Consent ----------------------------- The Board of Directors Citizens Utilities Company: We consent to the incorporation by reference in the Registration Statement (No. 33-37602) on Form S-8, in the Registration Statement (No. 33-39566) on Form S-8, in the Registration Statement (No. 33-39455) on Form S-8, in the Registration Statement (No. 33-41682) on Form S-8, in the Registration Statement (No. 33-42972) on Form S-8, in the Registration Statement (No. 33-48683) on Form S-8, in the Registration Statement (No. 33-54376) on Form S-8, in the Registration Statement (No. 33-44069) on Form S-3, in the Registration Statement (No. 33-44068) on Form S-3, in the Registration Statement (No. 33-51529) on Form S-3, in the Registration Statement (No. 33-55075) on Form S-3, in the Registration Statement (No. 33-52873) on Form S-3, and in the Registration Statement (No. 33-63615) on Form S-3, in the Registration Statement (No. 333-7047) on Form S-3 and in the Registration Statement (No. 333-18049) on Form S-3 of Citizens Utilities Company of our report dated February 28, 1997, relating to the consolidated balance sheets of Citizens Utilities Company and subsidiaries as of December 31, 1996, 1995, and 1994 and the related consolidated statements of income, shareholders' equity, and cash flows for the years then ended, which report appears in the December 31, 1996 annual report on Form 10-K of Citizens Utilities Company. KPMG PEAT MARWICK LLP New York, New York February 28, 1997 EX-24 7 POWER OF ATTORNEY EXHIBIT No. 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Citizens Utilities Company constitutes and appoints Robert J. DeSantis and Livingston E. Ross, jointly and severally, for him in any and all capacities to sign on Form 10-K for the fiscal year 1996 for Citizens Utilities Company, and any and all amendments to said Form 10-K, and to file the same, with the Securities and Exchange Commission, hereby ratifying and conforming all that each of said attorneys-in-fact, or his substitute or substitutes may do or cause to be done by virtue hereof. /s/ Norman I. Botwinik -------------------------- Norman I. Botwinik February 18, 1997 EXHIBIT No. 24 POWEROFATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Citizens Utilities Company constitutes and appoints Robert J. DeSantis and Livingston E. Ross, jointly and severally, for him in any and all capacities to sign on Form 10-K for the fiscal year 1996 for Citizens Utilities Company, and any and all amendments to said Form 10-K, and to file the same, with the Securities and Exchange Commission, hereby ratifying and conforming all that each of said attorneys-in-fact, or his substitute or substitutes may do or cause to be done by virtue hereof. /s/ Aaron I. Fleischman -------------------------- Aaron I. Fleischman February 18, 1997 EXHIBIT No. 24 POWEROFATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Citizens Utilities Company constitutes and appoints Robert J. DeSantis and Livingston E. Ross, jointly and severally, for him in any and all capacities to sign on Form 10-K for the fiscal year 1996 for Citizens Utilities Company, and any and all amendments to said Form 10-K, and to file the same, with the Securities and Exchange Commission, hereby ratifying and conforming all that each of said attorneys-in-fact, or his substitute or substitutes may do or cause to be done by virtue hereof. /s/ James C. Goodale -------------------------- James C. Goodale February 18, 1997 EXHIBIT No. 24 POWEROFATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Citizens Utilities Company constitutes and appoints Robert J. DeSantis and Livingston E. Ross, jointly and severally, for him in any and all capacities to sign on Form 10-K for the fiscal year 1996 for Citizens Utilities Company, and any and all amendments to said Form 10-K, and to file the same, with the Securities and Exchange Commission, hereby ratifying and conforming all that each of said attorneys-in-fact, or his substitute or substitutes may do or cause to be done by virtue hereof. /s/ Stanley Harfenist -------------------------- Stanley Harfenist February 18, 1997 EXHIBIT No. 24 POWEROFATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Citizens Utilities Company constitutes and appoints Robert J. DeSantis and Livingston E. Ross, jointly and severally, for him in any and all capacities to sign on Form 10-K for the fiscal year 1996 for Citizens Utilities Company, and any and all amendments to said Form 10-K, and to file the same, with the Securities and Exchange Commission, hereby ratifying and conforming all that each of said attorneys-in-fact, or his substitute or substitutes may do or cause to be done by virtue hereof. /s/ Andrew N. Heine -------------------------- Andrew N. Heine February 18, 1997 EXHIBIT No. 24 POWEROFATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Citizens Utilities Company constitutes and appoints Robert J. DeSantis and Livingston E. Ross, jointly and severally, for him in any and all capacities to sign on Form 10-K for the fiscal year 1996 for Citizens Utilities Company, and any and all amendments to said Form 10-K, and to file the same, with the Securities and Exchange Commission, hereby ratifying and conforming all that each of said attorneys-in-fact, or his substitute or substitutes may do or cause to be done by virtue hereof. /s/ Elwood A. Rickless -------------------------- Elwood A. Rickless February 18, 1997 EXHIBIT No. 24 POWEROFATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Citizens Utilities Company constitutes and appoints Robert J. DeSantis and Livingston E. Ross, jointly and severally, for him in any and all capacities to sign on Form 10-K for the fiscal year 1996 for Citizens Utilities Company, and any and all amendments to said Form 10-K, and to file the same, with the Securities and Exchange Commission, hereby ratifying and conforming all that each of said attorneys-in-fact, or his substitute or substitutes may do or cause to be done by virtue hereof. /s/ John L. Schroeder -------------------------- John L. Schroeder February 18, 1997 EXHIBIT No. 24 POWEROFATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Citizens Utilities Company constitutes and appoints Robert J. DeSantis and Livingston E. Ross, jointly and severally, for him in any and all capacities to sign on Form 10-K for the fiscal year 1996 for Citizens Utilities Company, and any and all amendments to said Form 10-K, and to file the same, with the Securities and Exchange Commission, hereby ratifying and conforming all that each of said attorneys-in-fact, or his substitute or substitutes may do or cause to be done by virtue hereof. /s/ Robert D. Siff -------------------------- Robert D. Siff February 18, 1997 EXHIBIT No. 24 POWEROFATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Citizens Utilities Company constitutes and appoints Robert J. DeSantis and Livingston E. Ross, jointly and severally, for him in any and all capacities to sign on Form 10-K for the fiscal year 1996 for Citizens Utilities Company, and any and all amendments to said Form 10-K, and to file the same, with the Securities and Exchange Commission, hereby ratifying and conforming all that each of said attorneys-in-fact, or his substitute or substitutes may do or cause to be done by virtue hereof. /s/ Robert A. Stanger -------------------------- Robert A. Stanger February 18, 1997 EXHIBIT No. 24 POWEROFATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Citizens Utilities Company constitutes and appoints Robert J. DeSantis and Livingston E. Ross, jointly and severally, for him in any and all capacities to sign on Form 10-K for the fiscal year 1996 for Citizens Utilities Company, and any and all amendments to said Form 10-K, and to file the same, with the Securities and Exchange Commission, hereby ratifying and conforming all that each of said attorneys-in-fact, or his substitute or substitutes may do or cause to be done by virtue hereof. /s/ Charles H. Symington, Jr. ----------------------------- Charles H.Symington, Jr. February 18, 1997 EXHIBIT No. 24 POWEROFATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Citizens Utilities Company constitutes and appoints Robert J. DeSantis and Livingston E. Ross, jointly and severally, for him in any and all capacities to sign on Form 10-K for the fiscal year 1996 for Citizens Utilities Company, and any and all amendments to said Form 10-K, and to file the same, with the Securities and Exchange Commission, hereby ratifying and conforming all that each of said attorneys-in-fact, or his substitute or substitutes may do or cause to be done by virtue hereof. /s/ Edwin Tornberg -------------------------- Edwin Tornberg February 18, 1997 EXHIBIT No. 24 POWEROFATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Citizens Utilities Company constitutes and appoints Robert J. DeSantis and Livingston E. Ross, jointly and severally, for him in any and all capacities to sign on Form 10-K for the fiscal year 1996 for Citizens Utilities Company, and any and all amendments to said Form 10-K, and to file the same, with the Securities and Exchange Commission, hereby ratifying and conforming all that each of said attorneys-in-fact, or his substitute or substitutes may do or cause to be done by virtue hereof. /s/ Leonard Tow -------------------------- Leonard Tow February 18, 1997 EXHIBIT No. 24 POWEROFATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Citizens Utilities Company constitutes and appoints Robert J. DeSantis and Livingston E. Ross, jointly and severally, for her in any and all capacities to sign on Form 10-K for the fiscal year 1996 for Citizens Utilities Company, and any and all amendments to said Form 10-K, and to file the same, with the Securities and Exchange Commission, hereby ratifying and conforming all that each of said attorneys-in-fact, or his substitute or substitutes may do or cause to be done by virtue hereof. /s/ Claire Tow -------------------------- Claire Tow February 18, 1997 EX-27 8 SCHEDULE UT FDS FOR THE YEAR ENDED 12/31/96
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CITIZENS UTILITIES COMPANY AND SUBSIDIARIES' CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31,1996 ABD IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000020520 CITIZENS UTILITIES COMPANY 1,000 YEAR DEC-31-1996 DEC-31-1996 PER-BOOK 3,138,052 539,152 369,770 174,196 301,978 4,523,148 59,788 1,381,341 244,066 1,678,183 201,250 0 1,509,697 0 0 0 3,593 0 0 0 2,640,122 4,523,148 1,306,517 84,937 221,104 1,010,831 295,686 66,455 362,141 92,695 178,660 5,849 178,660 0 0 375,181 .77 .77 REPRESENTS INVESTMENT FUNDS. REPRESENTS REGULATORY ASSETS. DEFERRED DEBITS AND OTHER ASSETS. COMPANY OBLIGATED MADATORILY REDEEMABLE CONVERTIBLE PREFERRED SECURITIES OF A SUBSIDIARY TRUST, THE SOLE ASSETS OF WHICH ARE SECURITIES OF A SUBSIDIARY PARTNERSHIP, SUBSTANTIALLY ALL THE ASSETS OF WHICH ARE CONVERTIBLE DEBENTURES OF THE COMPANY. REPRESENTS COMMODITIES PURCHASED
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