<PAGE>
CITIZENS UTILITIES COMPANY
--------------------------
FORM 10-K/A
-----------
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
---------------------------------------------
OF THE SECURITIES EXCHANGE ACT OF 1934
--------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1992
------------------------------------
<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A-2
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1992 Commission file number 0-1291
----------------- ------
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 of principal executive offices) (Zip Code)
(203) 329-8800
Registrant's telephone number, including area code ----------------------------
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
- --------------------------------------------------------------------------------
(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_____
-----
State the aggregate market value of the voting stock held by nonaffiliates of
the registrant as of January 29, 1993: $2,566,615,786.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of January 29, 1993.
Common Stock Series A 64,029,813
Common Stock Series B 22,750,365
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement for the registrant's 1993 Annual Meeting of Stockholders is
incorporated by reference into Part III of this Report.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
<PAGE>
-1-
PART I
Item 1. Description of Business
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(a) General Development of Business
-------------------------------
The "company" includes Citizens Utilities Company and its
subsidiaries (all subsidiaries, except Electric Lightwave, Inc., which
is majority owned, are wholly-owned) except where the context or
statement indicates otherwise. The company was incorporated in
Delaware in 1935 to acquire the assets and business of a predecessor
public utility corporation. Since then, the company has grown as a
result of investment in owned utility operations and numerous
acquisitions of additional utility operations. It continues to
consider business expansion by acquisitions or joint ventures in
traditional public utility and related fields including
telecommunications services.
The company directly, or through subsidiaries, provides
telecommunications, electric, gas and water/wastewater services to
more than 800,000 connections in areas of thirteen states: Arizona,
California, Colorado, Hawaii, Idaho, Illinois, Indiana, Louisiana,
Ohio, Oregon, Pennsylvania, Vermont and Washington. There have not
been any material changes in the business of the company during the
past fiscal year. The company's business expansion plan emphasizes
expansion in service areas with growth potential and diversification
by operating in multiple states and public utility services. The
company has strong financial resources and consistent operating
performance to enable it to make the investments and conduct the
operations necessary to serve these growing areas and to make
acquisitions consistent with this business expansion plan. The
company has embarked upon a continuous improvement program driven to
provide services that exceed customer expectations.
(b) Financial Information about Industry Segments
---------------------------------------------
The Consolidated Statements of Income and Note 10 of the Notes to
Consolidated Financial Statements included herein sets forth financial
information about industry segments of the company for the last three
fiscal years.
(c) Narrative Description of Business
---------------------------------
Telecommunications
------------------
The company provides telecommunications services in Arizona,
California, Oregon, Pennsylvania and Washington to approximately
142,000 customer connections as of December 31, 1992.
Telecommunications services consist of local service, centrex service,
network access service, long distance service, competitive access
service and other related services. The company's telecommunications
services and/or rates are subject to the jurisdiction of federal,
state and local regulatory agencies.
The Public Utility Commission of the State of California ("CPUC")
continues with its efforts to open the California telecommunications
markets to competition. The proceedings call for, among other things,
authorized competition for intrastate intraLATA switched toll
services; alternative regulatory frameworks for local exchange
carriers; less regulation of radio telephone utilities and the
elimination of the toll settlement pools for mid-sized local exchange
carriers. In support of these CPUC efforts, the company's California
telephone subsidiary exited the intrastate toll settlement pools in
1991 and entered into a transition contract with Pacific
Bell. Pursuant to the contract, Pacific Bell has agreed to make
payments to the company through December 31, 1994, at which time the
company expects to have concluded a general rate case permitting the
implementation of new higher rates. In the event a general rate case
is concluded prior to December 31, 1994, the Pacific Bell payments
would be reduced. Such a reduction, if any, would not materially
affect 1994 consolidated revenues or earnings. The Pacific Bell
contract was designed to partially offset the declines in revenues and
earnings which resulted from exiting the intrastate toll settlement
pools. The Pacific Bell contract payments, which are received in lieu
of revenues from the intrastate toll settlement pools, are included in
their entirety in the company's telecommunications revenues and income
from operations. The introduction of competition for intrastate
intraLATA switched toll services once the CPUC's decision to authorize
intrastate intraLATA switched toll competition is implemented could
have a negative impact on the California subsidiary's revenues and
earnings; however, the subsidiary's properties should be least
effected by such competition since they are located in small- and
medium-size towns and communities and the CPUC's decision will allow
the company to compete for switched toll revenues and earnings in
markets that it is not currently allowed to serve. In addition, the
CPUC will be presented, as required by these proceedings, with an
Incentive Regulatory Framework ("IRF") for the California telephone
subsidiary. The IRF will provide the California telephone subsidiary
with pricing flexibility, volume and term discount contracting
authority and other earnings incentives. A start-up revenue adjustment
is possible sometime in 1994 or 1995 when the IRF
<PAGE>
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is effected. While these changes create regulatory risks and adverse
revenue and earnings pressure on the subsidiary, competition will most
likely result in more creative and innovative uses of the market. The
California telephone subsidiary represented 19% of the company's 1992
operating revenues.
During the past two years, the company took actions to position
itself for the future competitive environment in telecommunications.
In addition to the contract with Pacific Bell, the California
telephone subsidiary was restructured and has designed and implemented
efficiency standards, customer surveys and employee attitude surveys
to ensure that services provided exceed customer expectations. The
company continues to invest in Electric Lightwave, Inc., a competitive
access provider in Oregon and Washington. The Federal Communications
Commission has granted the company a permit to construct a fiber-optic
route from Nevada to Arizona which will provide centralized equal
access service for the company's telecommunications customers in
Arizona. This project will allow the company to interface with any
carrier desiring equal access in the service area and make it possible
for the company to enter the long distance market as a competitor.
The company believes that the above actions will significantly offset
the negative impact of the CPUC initiatives. At the same time, the
company will continue to aggressively pursue new business
opportunities resulting from the changing environment in the
telecommunications industry.
Electric
--------
Operating divisions of the company provide electric services to
approximately 92,000 residential, commercial and industrial customers
in Arizona, Hawaii and Vermont as of December 31, 1992. The provision
of services and/or rates charged are subject to the jurisdiction of
federal, state and local regulatory agencies. The company purchases
over 80% of needed electric supplies, the supply of which is believed
to be adequate to meet current demands and to provide for additional
sales to new customers. As a whole, the company's electric segment
does not experience material seasonal fluctuations. In response to
regulatory initiatives, the company's electric divisions are all
proceeding with demand-side management programs and integrated
resource planning techniques designed to promote the most efficient
use of electricity and to reduce the environmental impacts associated
with new generation facilities. In December 1992, the company sold a
small electric property in Idaho. These changes are not material to
the electric operations or company as a whole.
The United States Environmental Protection Agency ("EPA") named the
company a potentially responsible party ("PRP") with respect to three
sites which have been designated for federally supervised clean-up
under the Comprehensive Environmental Response, Compensation and
Liability Act. These three sites are Missouri Electric Works in Cape
Girardeau, Missouri; Northwest Transformer in Everson, Washington; and
Rose Chemicals in Holden, Missouri. The EPA has determined that the
electric divisions' participation in each site is less than 0.3%. The
number of named PRP's ranges from 40 to 700. Significant parties have
accepted responsibility and are currently funding the clean-up
activity, as required. The company's combined financial
responsibility is estimated to be less than $235,000.
The company's Kauai Electric Division ("KED") sustained significant
damage to its transmission and distribution lines, poles and equipment
and moderate damage to other property as a result of Hurricane Iniki
on September 11, 1992. Hurricane Iniki destroyed approximately 32% of
KED's transmission system and between 30% and 35% of its distribution
system. Service was disrupted to 100% of KED's customers. As of
December 31, 1992, all customers whose facilities were capable of
receiving service (approximately 22,000 of KED's 24,500 pre-hurricane
customers) were reconnected.
Natural Gas
-----------
Operating divisions of the company provide gas transmission and
distribution services to residential, commercial and industrial
customers in Arizona, Colorado and Louisiana. Total number of gas
customers served as of December 31, 1992 was approximately 328,000.
The provision of services and/or rates charged are subject to the
jurisdiction of federal, state and local regulatory agencies. The
company purchases all needed gas supplies, the supply of which is
believed to be adequate to meet current demands and to provide for
additional sales to new customers. The gas industry is subject to
<PAGE>
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seasonal demand, with the peak demand occurring during the heating
season of November 1 through March 31. The gas division experiences
third party competition from fuel oil, propane, and other natural gas
suppliers for most of its large consumption customers and from
electricity for all of its customer base. The competitive position of
natural gas at any given time depends primarily on the relative prices
of natural gas and these other energy sources. Various federal and
state tax incentive programs call for replacing other fuels with
compressed natural gas. However, these regulations may, in certain
circumstances, promote the use of other fuels to replace natural gas.
Water/Wastewater
----------------
The company provides water and/or wastewater services to
approximately 249,000 customer connections in Arizona, California,
Idaho, Illinois, Indiana, Ohio and Pennsylvania as of December 31,
1992. The provision of these services and/or rates charged are
subject to a wide variety of federal, state and local regulatory
agencies. A significant portion of the company's water/wastewater
construction expenditures necessary to serve new customers are made
under agreements with land developers who generally advance
construction monies to the company that are later refunded in part as
new customers are added in their developments.
Water/wastewater public utility property of the company, from time
to time, has been subjected to condemnation proceedings initiated by
municipalities or utility districts seeking to acquire and take over
the operation of such property. During 1992, one operation in
Illinois became subject to such proceeding; this condemnation is being
contested by the company. During 1992, condemnation proceedings
against one operation in California was concluded, the company
recorded a gain on the disposition of the property. The loss of this
property is not material to the company's water/wastewater operations.
Pursuant to the 1972 Clean Water Act, as amended, National Pollutant
Discharge Elimination System ("NPDES") permits are required for
wastewater treatment facilities which discharge to surface waters.
During October 1991, the United States Environmental Protection Agency
("EPA") commenced a legal action, in the United States District Court
for the Southern District of Ohio, against the company's Ohio
subsidiary with respect to NPDES permit requirements. In October
1992, the Government's claims were settled for $525,000 in civil
penalties. In addition, the Ohio subsidiary agreed to accelerate
certain plant improvements estimated to cost approximately $1,151,000;
the company anticipates that those improvements, which are presently
under design and construction should be completed by the end of 1995
and the cost of those plant improvements will be recoverable in rates.
During September 1992, the EPA filed a complaint with the United
States District Court for the Northern District of Illinois relating
to alleged violations by the company's Illinois subsidiary with
respect to NPDES permit requirements. The Illinois subsidiary's
motion to dismiss the major issues raised by this complaint is
presently pending before the court. The company is unable to estimate
exposure at this time, but believes the Illinois subsidiary has
meritorious defenses and will vigorously defend this action.
General
-------
The company's public utility operations are conducted primarily in
small communities and in suburban and rural areas. No material part
of the company's business is dependent upon a single customer or upon
a small group of customers, the loss of one or more of which would
have a material adverse effect on results of operations. As a result
of its diversification, the company is not dependent upon any single
geographic area or upon any one type of utility service for its
revenues. Due to this diversity, no single regulatory body regulates
a utility service of the company accounting for more than 18% of its
1992 revenues.
The company is subject to regulation by respective state Public
Utility Commissions 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 with local
governmental bodies, which vary in durations. The company also holds
certificates of convenience and necessity granted by various state
commissions which are 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.
<PAGE>
-4-
The company employed 2,335 full time and 36 part time employees at
December 31, 1992.
(d) Financial Information about Foreign and Domestic Operations and Export
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Sales
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The company does not have any material foreign operations or export
sales.
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: telephone - 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 as 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
Hawaii Electric
Idaho Water
Illinois Water, Wastewater
Indiana Water
Louisiana** Natural Gas
Ohio Water, Wastewater
Oregon Telecommunications
Pennsylvania Telecommunications, Water
Vermont Electric
Washington Telecommunications
* Certain telecommunications properties are subject to a mortgage deed.
**Certain public utility properties are subject to lien of mortgage
indenture.
<PAGE>
-5-
Item 3. Legal Proceedings
- ------- -----------------
Pursuant to the 1972 Clean Water Act, as amended, National Pollutant
Discharge Elimination System ("NPDES") permits are required for
wastewater treatment facilities which discharge to surface waters.
During October 1991, the United States Environmental Protection Agency
("EPA") commenced a legal action, in the United States District Court
for the Southern District of Ohio, against the company's Ohio
subsidiary with respect to NPDES permit requirements. In October
1992, the Government's claims were settled for $525,000 in civil
penalties. In addition, the Ohio subsidiary agreed to accelerate
certain plant improvements estimated to cost approximately $1,151,000;
the company anticipates that the cost of those plant improvements will
be recoverable in rates. During September 1992, the EPA filed a
complaint with the United States District Court for the Northern
District of Illinois relating to alleged violations by the company's
Illinois subsidiary with respect to NPDES permit requirements. The
Illinois subsidiary's motion to dismiss the major issues raised by
this complaint is presently pending before the court. The company is
unable to estimate exposure at this time, but believes the Illinois
subsidiary has meritorious defenses and will vigorously defend this
action. On February 19, 1993, the company was served with a summons
and complaint in an action brought by the Sun City Taxpayers'
Association in the United States District Court for the District of
Connecticut. Plaintiff alleges that the company, through its Sun City
Water Company and Sun City Sewer Company subsidiaries, misrepresented
rate-base investment in rate applications submitted to the Arizona
Corporation Commission ("ACC") between 1968 and 1978. The action
purports to state a claim under the Racketeer Influenced and Corrupt
Organization Act and claims damages of $65 million before trebling.
The plaintiff made substantially the same allegations in a regulatory
proceeding before the ACC in 1986. The ACC rejected those
allegations. The company believes this action lacks merit and intends
to vigorously defend against all claims asserted. The company also
believes there are various substantive and procedural defenses to
plaintiff's claims and intends to file a motion to dismiss the
complaint. The company believes the risk of material loss from these
actions is remote.
Item 4. Submission of Matters to Vote of Security Holders
-------------------------------------------------
None in fourth quarter 1992.
<PAGE>
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Executive Officers
------------------
Information as to Executive Officers of the company as of January 29, 1993,
follows:
<TABLE>
<CAPTION>
Name Age Current Position and Office
---- --- ---------------------------
<S> <C> <C>
Leonard Tow 64 Chairman of the Board, Chief Executive Officer
and Chief Financial Officer
Daryl A. Ferguson 54 President and Chief Operating Officer
Robert J. DeSantis 37 Vice President and Treasurer
Charles R. Aldrich 52 Vice President, Gas Operations
James P. Avery 36 Vice President, Electric Operations
J. Michael Love 41 Vice President, Corporate Planning
Robert L. O'Brien 50 Vice President, Regulatory Affairs
Donald K. Roberton 51 Vice President, Telecommunications
Livingston E. Ross 44 Vice President and Controller
Ronald E. Walsh 53 Vice President, Water and Wastewater Operations
</TABLE>
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
Corporation 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.
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.
CHARLES R. ALDRICH has been associated with the Registrant since December
1990 as Vice President of the Registrant's Gas Operations. He was associated
with Louisiana General Services, Inc. from 1971 until that company was merged
with the Registrant in December 1990. He served as President of LGS Pipeline,
Inc. from January 1983 through June 1988 and President of Louisiana Gas Service
Company from July 1988 through December 1990.
JAMES P. AVERY has been associated with the Registrant since August 1981.
He was Project Manager, Electric through June 1988, Assistant Vice President,
Electric Operations from June 1988 through December 1990 and Acting Vice
President from December 1990 through April 1991. He has been Vice President,
Electric Operations since May 1991.
<PAGE>
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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 May 1990
and was Assistant Vice President, Corporate Planning from June 1990 through
March 1991. He has been Vice President, Corporate Planning since March 1991.
ROBERT L. O'BRIEN has been associated with the Registrant since March 1975.
He has been Vice President, Regulatory Affairs since June 1981.
DONALD K. ROBERTON has been associated with the Registrant since January
1991 and has been Vice President, Telecommunications since that date. Prior to
joining the Registrant, he was Vice President, Western Operations at Henkels &
McCoy from December 1989 through December 1990. From January 1984 through
November 1989, he was a Vice President with Centel Communications Systems.
LIVINGSTON E. ROSS has been associated with the Registrant since August
1977. He was Manager of Reporting from September 1984 through March 1988,
Manager of General Accounting from April 1988 through September 1990 and
Assistant Controller from October 1990 through November 1991. He has been Vice
president and Controller since December 1991.
RONALD E. WALSH has been associated with the Registrant since January 1986.
He was Attorney and Assistant Secretary from November 1987 through August 1992.
He has been Vice President, Water and Wastewater Operations since August 1992.
<PAGE>
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PART II
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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 are adjusted for intervening stock dividends and
the July 24, 1992 3-for-2 stock split rounded to the nearest 1/8th. (See
Note 7 of Notes to Consolidated Financial Statements.)
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
-------------- -------------- -------------- --------------
High Low High Low High Low High Low
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1992:
----
Series A 25-7/8 22 25-3/8 23 28-3/8 22-1/2 30-3/8 25-1/8
Series B 25-3/8 21-3/4 25-3/8 22-1/4 28-1/2 22-1/4 30-3/8 25-1/8
1991:
----
Series A 17-5/8 13-5/8 17-1/8 15-3/8 20-1/8 15-3/8 23-1/2 18-3/4
Series B 17-5/8 13-1/2 17 15-3/8 20 15 23-1/2 18-1/4
</TABLE>
The December 31, 1992 prices were: Series A $29 high, $28.125 low;
Series B $28.875 high, $28.25 low.
As of January 29, 1993, the approximate number of record security holders
of the company's Series A and Series B Common Stock was 28,381. This
information was obtained from the company's transfer agent.
DIVIDENDS
Quarterly stock dividends declared and issued on both Series A and Series
B Common Stock were 1.6% for the first quarter of 1992, 1.5% for the second
quarter of 1992 and 1.2% for each of the third and fourth quarters of 1992.
Quarterly stock dividends declared and issued on both Series A and Series B
Common Stock were 2.0% for the first quarter of 1991 and 1.9% for each of
the second, third and fourth quarters of 1991. An annual cash dividend
equivalent rate of $1.41 and $1.29 (adjusted for the July 24, 1992 3-for-2
stock split) was considered by the company's Board of Directors in
establishing the Series A and Series B stock dividends during 1992 and
1991, respectively. (See Note 7 of Notes to Consolidated Financial
Statements.)
<PAGE>
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Item 6. Selected Financial Data (In thousands, except for per-share amounts)
--------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------
1992 1991 1990 1989 1988
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Operating revenues $ 580,464 $ 545,025 $ 528,251 $ 483,582 $ 460,359
Income from continuing
operations $ 115,013 $ 112,354 $ 105,624 $ 97,768 $ 86,660
Earnings per-share of common
stock from continuing
operations, adjusted for
intervening stock dividends:/(1)/
Series A $ 1.37 $ 1.35 $ 1.25 $ 1.11 $ 0.95
Series B $ 1.37 $ 1.35 $ 1.25 $ 1.11 $ 0.99
Dividends declared on common
stock:
Series A in stock/(2)/ 5.61% 7.93% 6.54% 3.84% 4.16%
Series B
In stock/(2)/ 5.61% 7.93% 6.54% -- --
In cash/(3)/ $ -- $ -- $ 0.32 $ 1.32 $ 1.15
Total assets $1,887,981 $1,721,452 $1,491,199 $1,365,534 $1,260,673
Long-term debt $ 522,699 $ 484,021 $ 412,348 $ 379,729 $ 346,499
(1) No adjustment has been made for the company's 1.2% first quarter 1993 stock dividend because the effect is immaterial.
(2) Annual rate of quarterly stock dividends compounded.
(3) The 1990 amount represents cash dividend payments by Louisiana General Services, Inc. prior to its merger into the
company on December 4, 1990.
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
(a) Liquidity and Capital Resources
-------------------------------
The company's primary source of funds was from operations. The
company considers operating cash flows and its ability to raise
debt and equity capital as the principal indicators of its
liquidity. Although the level of working capital is not
considered to be an indicator of the company's liquidity, the
company experienced a 46% decrease in its working capital at
December 31, 1992. This decrease is primarily due to an increase
in expenditures to rebuild the company's Kauai Electric Division
as a result of Hurricane Iniki. Funds requisitioned from the
1992, 1991 and 1988 Series Industrial Development Revenue Bond
construction fund trust accounts and funds from advances for
specific capital expenditures from parties desiring utility
service were used to pay for the construction of utility plant.
Funds from the January 15, 1992 issuance of $100,000,000 of 7.45%
Debentures were used to repay $70,000,000 of higher-coupon first
mortgage bonds and to repay commercial paper. On July 1, 1992,
the company issued $10,000,000 of 1992 Series Special Purpose
Revenue Bonds; the bonds were issued as demand purchase bonds
bearing interest at 6.60% and mature on July 1, 2022. Commercial
paper notes payable in the amount of $62,680,000 were outstanding
as of December 31, 1992. On March 10, 1993, the company issued
$42,560,000 of 1993 Series Industrial Development Revenue Bonds.
The bonds were issued as money market bonds with an initial
interest rate of 2.25% and an ultimate maturity date of December
1, 2027. The company has effective shelf-registration statements
filed with the Securities and Exchange Commission permitting it to
offer, from time to time, up to $150,000,000 of long-ter m debt on
terms to be determined at the time of each offering. All such
bonds may be issued in one or more series with the same or
differing maturities. Proceeds of these bonds, when and if sold,
will be used primarily to repay debt and to reimburse the
company's treasury for funds spent on the construction,
improvement or acquisition of
<PAGE>
-10-
utility and related facilities and properties. A subsidiary of the
company received approval of its application for an additional
$28,016,000 under its loan contract with the Rural Telephone Bank.
Proceeds from this borrowing will be used to reimburse the company's
treasury for funds spent on the construction or improvement of qualifying
Arizona telecommunications facilities.
Capital expenditures for the years 1992, 1991 and 1990, respectively,
were $148,027,000, $115,884,000 and $147,158,000, and for 1993 are
expected to be approximately $156,400,000. These expenditures were, and
in 1993 will be, for utility and related facilities and properties.
The company anticipates that the funds necessary for its 1993 capital
expenditures will be provided from operations; from 1991, 1992 and 1993
Series Industrial Development Revenue Bond construction fund trust
account requisitions; from Rural Telephone Bank loan contract advances;
from commercial paper notes payable; from parties desiring utility
service; from debt and other financing at appropriate times; and, if
deemed advantageous, from short-term borrowings under bank credit lines.
The company has committed lines of credit with banks under which it may
borrow up to $200,000,000.
In March 1993, the company signed an agreement to purchase, through a
joint venture with Century Communications Corp., the assets of two cable
television systems serving approximately 45,000 subscribers in
California. The purchase is expected to be consummated in 1993.
Regulatory Matters
------------------
Pursuant to the 1972 Clean Water Act, as amended, National Pollutant
Discharge Elimination System ("NPDES") permits are required for
wastewater treatment facilities which discharge to surface waters.
During October 1991, the United States Environmental Protection Agency
("EPA") commenced a legal action, in the United States District Court for
the Southern District of Ohio, against the company's Ohio subsidiary with
respect to NPDES permit requirements. In October 1992, the Government's
claims were settled for $525,000 in civil penalties. In addition, the
Ohio subsidiary agreed to accelerate certain plant improvements estimated
to cost approximately $1,151,000; the company anticipates that those
improvements, which are presently under design and construction should be
completed by the end of 1995 and the cost of those plant improvements
will be recoverable in rates. During September 1992, the EPA filed a
complaint with the United States District Court for the Northern District
of Illinois relating to alleged violations by the company's Illinois
subsidiary with respect to NPDES permit requirements. The Illinois
subsidiary's motion to dismiss the major issues raised by this complaint
is presently pending before the court. The company is unable to estimate
exposure at this time, but believes the Illinois subsidiary has
meritorious defenses and will vigorously defend this action. On February
19, 1993, the company was served with a summons and complaint in an
action brought by the Sun City Taxpayers' Association in the United
States District Court for the District of Connecticut. Plaintiff alleges
that the company, through its Sun City Water Company and Sun City Sewer
Company subsidiaries, misrepresented rate-base investment in rate
applications submitted to the Arizona Corporation Commission ("ACC")
between 1968 and 1978. The action purports to state a claim under the
Racketeer Influenced and Corrupt Organization Act and claims damages of
$65 million before trebling. The plaintiff made substantially the same
allegations in a regulatory proceeding before the ACC in 1986. The ACC
rejected those allegations. The company believes this action lacks merit
and intends to vigorously defend against all claims asserted. The
company also believes there are various substantive and procedural
defenses to plaintiff's claims and intends to file motions to dismiss the
complaint. The company believes the risk of material loss from these
actions is remote.
The EPA named the company a potentially responsible party ("PRP") with
respect to three sites which have been designated for federally
supervised clean-up under the Comprehensive Environmental Response,
Compensation and Liability Act. These three sites are Missouri Electric
Works in Cape Girardeau, Missouri; Northwest Transformer in Everson,
Washington; and Rose Chemicals in Holden, Missouri. The EPA has
determined that the company's participation in each site is less than
0.3%. The number of named PRP's ranges from 40 to 700. Significant
parties have accepted responsibility and are currently funding the clean-
up activity, as required. The company's combined financial
responsibility is estimated to be less than $235,000.
The Public Utility Commission of the State of California ("CPUC")
continues with its efforts to open
<PAGE>
-11-
the California telecommunications markets to competition. The proceedings
call for, among other things, authorized competition for intrastate
intraLATA switched toll services; alternative regulatory frameworks
for local exchange carriers; less regulation of radio telephone
utilities; and the elimination of the toll settlement pools for mid-sized
local exchange carriers. In support of these CPUC efforts, the company's
California telephone subsidiary exited the intrastate toll settlement
pools in 1991 and entered into a transition contract with Pacific Bell.
Pursuant to the contract, Pacific Bell has agreed to make payments to the
company through December 31, 1994, at which time the company expects to
have concluded a general rate case permitting the implementation of new
higher rates. In the event a general rate case is concluded prior to
December 31, 1994, the Pacific Bell payments would be reduced. Such a
reduction, if any, would not materially affect 1994 consolidated revenues
or earnings. The Pacific Bell contract was designed to partially offset
the declines in revenues and earnings which resulted from exiting the
intrastate toll settlement pools. The Pacific Bell contract payments,
which are received in lieu of revenues from the intrastate toll
settlement pools, are included in their entirety in the company's
telecommunications revenues and income from operations. The introduction
of competition for intrastate intraLATA switched toll services once the
CPUC's decision to authorize intrastate intraLATA switched toll
competition is implemented could have a negative impact on the California
subsidiary's revenues and earnings; however, the subsidiary's properties
should be least effected by such competition since they are located in
small and medium-size towns and communities and the CPUC'S decision will
allow the company to compete for switched toll revenues and earnings in
markets that it is not currently allowed to serve. In addition, the CPUC
will be presented, as required by these proceedings, with an Incentive
Regulatory Framework ("IRF") for the California telephone subsidiary. IRF
will provide the California telephone subsidiary with pricing
flexibility, volume and term discount contracting authority and other
earnings incentives. A start-up revenue adjustment is possible sometime
in 1994 or 1995 when the IRF is effected. While these changes create
regulatory risks and adverse revenue and earnings pressure on the
subsidiary, competition will most likely result in more creative and
innovative uses of the market. The California telephone subsidiary
represented 19% of the company's 1992 revenues.
During the past two years, the company took actions to position itself
for the future competitive environment in telecommunications. In addition
to the contract with Pacific Bell, the California telephone subsidiary
was restructured and has designed and implemented efficiency standards,
customer surveys and employee attitude surveys to ensure that services
provided exceed customer expectations.
The company continues to invest in Electric Lightwave, Inc., a
competitive access provider in Oregon and Washington. The Federal
Communications Commission has granted the company a permit to construct a
fiber-optic route from Nevada to Arizona which will provide centralized
equal access service for the company's telecommunications customers in
Arizona. This project will allow the company to interface with any
carrier desiring equal access in the service area and make it possible
for the company to enter the long distance market as a competitor. The
company believes that the above actions will significantly offset the
negative impact of the CPUC initiatives. At the same time, the company
will continue to aggressively pursue new business opportunities resulting
from the changing environment in the telecommunications industry.
During the year ended December 31, 1992, the company was authorized net
increases in annual revenues for properties in Arizona, California,
Hawaii, Louisiana, Ohio and Pennsylvania totaling $17,889,000. The
company has requests for increases in annual revenues pending before
regulatory commissions in Arizona, California, Illinois, Ohio and
Pennsylvania.
New Accounting Pronouncements
-----------------------------
The Financial Accounting Standards Board ("FASB") has issued Statement
of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes," effective for fiscal years beginning after December 15,
1992. SFAS No. 109 requires a change from the deferred to the liability
method of computing deferred income taxes. Upon adoption in the first
quarter of 1993, the company plans to apply the provisions of SFAS No.
109 without restating prior years' financial statements. Due to the
effects of regulation, adoption of SFAS No. 109 will not have a material
impact on the consolidated financial statements.
In December 1990, the FASB issued SFAS No. 106, "Employers' Accounting
for Postretirement Benefits Other than Pensions," effective for fiscal
years beginning after December 15, 1992. Adoption of SFAS No. 106 will
require accrual of the expected costs of providing postretirement
benefits to an employee and to the employee's beneficiaries and covered
dependents, during the years that the employee renders the necessary
service. The company recorded approximately $800,000 of expense in 1992
under the pay-as-you-go method, which is a cash-basis method. Upon the
adoption of SFAS No. 106, the company estimates 1993 cost to be
approximately $3,400,000, of which approximately $500,000
<PAGE>
-12-
will be deferred for states whose regulatory commissions to date have not
but will likely allow recovery of accrued costs in future rate
proceedings. Regulatory commissions that have adopted the SFAS No. 106
accrual method recommend 20-year prospective recognition of the
associated transition obligation. The company's transition obligation
was approximately $20,400,000 at January 1, 1993.
The FASB has issued SFAS No. 112, "Employers' Accounting for
Postemployment Benefits," effective for fiscal years beginning after
December 15, 1993. Adoption of SFAS No. 112 will require accrual of the
expected cost of providing benefits, if any, to former or inactive
employees after termination of employment for reasons other than
retirement. Adoption of SFAS No. 112 will not have a material effect on
the consolidated financial statements.
(b) Results of Operations
---------------------
Natural gas revenues increased 26% in 1992 primarily due to $29,333,000
of increased revenues from northern Arizona gas properties acquired by
the company on December 3, 1991, $5,430,000 from increased rates and
$11,463,000 from increased gas pass-ons to residential and commercial
customers. These increases were partially offset by decreased
consumption due to warmer weather conditions. Pass-ons are required
under tariff provisions and do not affect net income. Natural gas
revenues decreased 3% in 1991, primarily due to decreased average revenue
per million cubic feet of gas sold to industrial customers and decreased
gas pass-ons to residential and commercial customers. These decreases
were offset in part by increased volume sold to industrial customers,
increased consumption due to customer growth and revenues from northern
Arizona gas properties. Electric revenues increased 5% in 1992 and 1% in
1991, primarily because of increased consumption resulting from increased
customer usage due to warmer weather conditions in 1992 and customer
growth in 1991. Telecommunications revenues decreased 6% in 1992,
primarily due to regulatory changes in the state of California as
discussed in the "Regulatory Matters:" section. Telecommunications
revenues increased 11% in 1991, primarily due to increased toll revenues
and customer growth. Water/wastewater revenues increased 3% in 1992 and
1% in 1991, primarily due to rate increases.
Electric energy and fuel oil purchased costs increased 7% in 1992 and
2% in 1991. Electric energy purchased costs for 1992 totaled
$64,077,000, a 13% increase over the 1991 amount of $55,480,000, which
was a 3% increase over the 1990 cost of $54,096,000. The increased cost
of electricity purchased in 1992 was primarily due to increased customer
demand and increased supplier prices, and was partially offset by a
decline in customer consumption at the company's Kauai Electric Division
due to Hurricane Iniki. Electric energy purchased increased in 1991
primarily due to increased volume to satisfy increased customer
consumption. Due to decreasing supplier prices, fuel oil purchased costs
in 1992 of $12,209,000 decreased 23% from the 1991 amount of $15,843,000,
a 2% decrease from the 1990 expense. Natural gas purchased costs
increased 26% in 1992, primarily due to the acquisition of northern
Arizona gas properties. Natural gas purchased costs decreased 7% in
1991, primarily due to decreased supplier prices. Under tariff
provisions, changes in the company's wholesale costs of electric energy,
fuel oil and natural gas purchased are largely passed on to customers.
Operating expenses increased 4% in 1992, primarily due to the
acquisition of northern Arizona gas properties. In addition, the
company's operations were impacted by several natural disasters: forest
fires in northern California, Hurricane Andrew in Louisiana and Hurricane
Iniki on Kauai. The company's 1992 net income of $115,013,000 includes a
pre-tax charge of $6,500,000 for any non-recoverable impact from
Hurricane Iniki. Operating expenses increased 7% in 1991, primarily due
to costs associated with consolidation of the Arizona/California
telephone operations and increased employee benefits. Depreciation
expense increased 6% in 1992 and 4% in 1991, primarily due to increased
investment in plant in service. Adding to this increase in 1992 was an
increase in the authorized depreciation rate for the company's California
telephone operations.
Taxes other than income increased by 7% in 1992 and 9% in 1991,
primarily due to increased real estate and sales taxes resulting from
higher tax rates and assessment values, and, in 1992 because of the
acquisition of northern Arizona gas properties. Income taxes increased
1% in 1992, primarily due to increased taxable income.
Interest expense increased 17% in 1992 and 5% in 1991, primarily due to
additional industrial
<PAGE>
-13-
development revenue bond construction fund requisitions and interest on
debentures issued in January 1992, the proceeds of which were used to
redeem higher-coupon debt in February and March 1992. Investment income
increased in 1992, primarily due to the temporary investment of debenture
proceeds, increased industrial development revenue bond proceeds
held-in-trust and income from the company's Centennial investment.
Cost increases, including those due to inflation, are offset in due
course by increases in revenues obtained under established regulatory
procedures.
(c) Kauai Electric Division
-----------------------
The company's Kauai Electric Division ("KED") sustained significant
damage to its transmission and distribution lines, poles and equipment
and moderate damage to other property as a result of Hurricane Iniki on
September 11, 1992. Service was disrupted to 100% of KED's customers.
As of December 31, 1992, all customers whose facilities were capable of
receiving service (approximately 22,000 of the KED's 24,500 pre-hurricane
customers) were reconnected.
The company estimates that expenditures necessary to restore service
and the system will not exceed $45,000,000. These costs are being
capitalized as deferred debits, and allowed restoration costs will
ultimately be included in property, plant and equipment. Funding of the
restoration costs will be from a combination of insurance proceeds and
corporate funds. The company is assessing and documenting damages and
expenditures in conjunction with its insurer to maximize its insurance
recovery. The company has sufficient reserves and access to financing to
fund restoration costs without adversely affecting the company's
financial position.
On November 4, 1992, the Hawaii Public Utilities Commission ("HPUC")
issued an Interim Order in KED's general rate application granting an
annual increase in revenues of $8,000,000. This increase substantially
offsets the financial impact of Hurricane Iniki on KED's 1992 results of
operations.
On December 9, 1992, the HPUC approved a stipulation among KED,
Department of Commerce and Consumer Affairs - Division of Consumer
Advocacy and the United States Department of Defense. This stipulation,
sponsored by KED, calls for regulatory treatment of certain costs
associated with the restoration to mitigate the financial impact of
Hurricane Iniki on KED's customers and its results of operations. As
part of this stipulation, KED agreed to defer its next general rate
increase application until 1994 with rates becoming effective no earlier
than January 1, 1995 ("deferred rate case"). Under the terms of this
stipulation, KED is authorized to earn an allowance for funds used during
construction ("AFUDC") on the restoration costs. The allowed restoration
costs as of December 31, 1992, of $38,344,000, plus associated AFUDC
earnings of $900,000, will be included in rate base to be recovered in
the deferred rate case. Restoration costs, plus associated AFUDC
earnings, not ultimately allowed in rate base should be recovered by the
company in the deferred rate case over an amortization period to be
determined in that case. Depreciation expense on the restoration plant
will be deferred and will be amortized over the remaining useful lives of
the restoration plant when rates are approved in the deferred rate case.
Lost gross margin and interest, compounded monthly, on the lost gross
margin is authorized to be accrued and is subject to recovery in the
deferred rate case.
The company believes that this stipulation is in the best interest of
KED's customers and the company's shareholders. The company's 1992 net
income of $115,013,000 includes a pre-tax charge of $6,500,000 for any
non-recoverable impact from Hurricane Iniki. The company's strong
geographic and utility service diversification ensures that the damages
suffered by KED will not have a material financial impact on the company
as a whole.
<PAGE>
-14-
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
The following documents are filed as part of this Report:
1. Financial Statements:
See Index on page F-1.
2. Supplementary Data:
Quarterly Financial Data is included in the Financial
Statements (see 1. above).
Item 9. Disagreements with Auditors on Accounting and Financial Disclosure
------------------------------------------------------------------
None
<PAGE>
-15-
PART III
--------
The company intends to file with the Commission a definitive proxy
statement for the 1993 Annual Meeting of Stockholders pursuant to
Regulation 14A not later than 120 days after December 31, 1992. 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 following documents are filed as part of this Report:
1. The financial statements indexed on page F-1 of this Report.
2. The financial statement schedules required to be filed by Item
8 will be filed as a Form 8 amendment to this Report on or
before April 30, 1993.
3. The Exhibits listed below:
Exhibit
No. Description
- ------- -----------
3.1 Certificate of Incorporation
3.2 By-laws
3.2.1 Amendment dated April 14, 1992, to the By-laws
4.1 Indenture of Mortgage and Deed of Trust, dated as of March 1, 1947,
to The Marine Midland Trust Company of New York and Baldwin Maull, as
Trustees (First Interstate Bank of California, Successor Corporate
Trustee and Donald R. McEachren, Successor Individual Trustee)
4.13 Twelfth Supplemental Indenture, dated September 11, 1962
4.17 Sixteenth Supplemental Indenture, dated March 1, 1975
4.24 Eighteenth Supplemental Indenture, dated April 15, 1986
4.25 Instrument in Writing, dated June 6, 1986, appointing a Successor
Corporate Trustee and a Successor Individual Trustee
4.26 Instrument in Writing, dated March 26, 1988, appointing a Successor
Individual Trustee
4.100.1 Copy of Indenture of Securities, dated as of August 15, 1991,
to Chemical Bank, as Trustee
4.100.2 First Supplemental Indenture, dated August 15, 1991
4.100.3 Letter of Representations, dated August 20, 1991, from Citizens
Utilities Company and Chemical Bank, as Trustee, to Depository
Trust Company ("DTC") for deposit of securities with DTC
4.100.4 Second Supplemental Indenture, dated January 15, 1992, to Chemical
Bank, as Trustee
4.100.5 Letter of Representations, dated January 29, 1992, from
Citizens Utilities Company and Chemical Bank, as Trustee, to DTC, for
deposit of securities with DTC
The company agrees to furnish to the Commission upon request copies of
the Realty and Chattel Mortgage, dated as of March 1, 1965, made by
Citizens Utilities Rural Company, Inc., to the United States of
America (the Rural Electrification Administration and Rural Telephone
Bank) and the Mortgage Notes which that mortgage secures; and the
several subsequent supplemental Mortgages and Mortgage Notes; copies
of the instruments governing the long-term debt of Louisiana General
Services, Inc.; and copies of separate loan agreements and indentures
governing various Industrial development revenue bonds.
<PAGE>
-16-
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
10.9 Management Equity Incentive Plan, effective June 22, 1990
10.10 LGS 1979 Option Incentive Plan, as amended
10.11 LGS 1981 Incentive Option Plan, as amended
10.12 LGS 1981 Stock Option Plan, as amended
10.13 LGS Supplemental Executive Retirement Plan
10.14 Letter agreement between LGS and James W. Swenson, dated May
18, 1979
10.15 Termination agreement, dated March 14, 1986, between LGS and
James W. Swenson
10.16 Employment Agreement between Citizens Utilities Company and
Leonard Tow
10.17 1992 Employee Stock Purchase Plan
23. Auditors' Consent
Exhibit number 4.24 is incorporated by reference to the same
exhibit designation in the Registrant's Form 8-K Current Report
filed April, 1986. Exhibit number 4.25 is incorporated by
reference to the same exhibit designation in the Registrant's
Form S-3 No. 33-6455 filed June, 1986. Exhibit number 4.26 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, 1988. Exhibit number 10.6 is incorporated by
reference to the same exhibit designation in the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1984.
Exhibit number 10.6.1 is incorporated by reference to the same
exhibit designation in the Registrant's Annual Report on Form
10-K for the year ended December 31, 1989. Exhibit number 10.9
is incorporated by reference to Appendix A to the Registrant's
Proxy Statement dated May 14, 1990. Exhibit numbers 10.10,
10.11, 10.12, 10.13, 10.14 and 10.15 are incorporated by
reference to the same exhibit designation in the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1990.
Exhibit numbers 4.100.1, 4.100.2 and 4.100.3 are incorporated by
reference to the same exhibit designation in the Registrant's
Quarterly Report on Form 10-Q for the nine months ended
September 30, 1991. Exhibit numbers 3.1, 3.2, 4.1, 4.100.4 ,
4.100.5, 4.13, 4.17, 10.1 and 10.16 are incorporated by
reference to the same exhibit designation in the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1991.
The Registrant's Annual Reports on Form 10-K and Form 8-K
Current Reports bear SEC File Number Reference 0-1291.
(b) No Form 8-K was required during the three months ended December
31, 1992.
<PAGE>
-17-
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 14, 1994
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 14th day of March 1994.
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*
- ----------------------------- Member, Executive Committee and Director
(Norman I. Botwinik)
Aaron I. Fleischman* Member, Executive Committee and Director
- -----------------------------
(Aaron I. Fleischman)
Stanley Harfenist* Member, Executive Committee and Director
- -----------------------------
(Stanley Harfenist)
Andrew N. Heine*
- ----------------------------- Director
(Andrew N. Heine)
Elwood A. Rickless* Director
- -----------------------------
(Elwood A. Rickless)
John L. Schroeder* Director
- -----------------------------
(John L. Schroeder)
Robert D. Siff* Director
- -----------------------------
(Robert D. Siff)
Robert A. Stanger* Director
- -----------------------------
(Robert A. Stanger)
Edwin Tornberg* Director
- -----------------------------
(Edwin Tornberg)
*By: /s/Robert J. DeSantis
-------------------------
(Robert J. DeSantis)
Attorney-in-Fact
<PAGE>
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
Index to Financial Statements
<TABLE>
<S> <C>
Independent Auditors' Report F-2
Consolidated balance sheets as of December 31, 1992, 1991 and 1990 F-3
Consolidated statements of income for the three years ended
December 31, 1992 F-4
Consolidated statements of shareholders' equity for the three
years ended December 31, 1992 F-5
Consolidated statements of cash flows for the three years
ended December 31, 1992 F-6
Notes to consolidated financial statements F-7 - F-18
</TABLE>
F-1
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders
Citizens Utilities Company:
We have audited the consolidated financial statements of Citizens Utilities
Company and subsidiaries as listed in the accompanying index. 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 financial statements referred to above present fairly, in
all material respects, the financial position of Citizens Utilities Company and
subsidiaries at December 31, 1992, 1991 and 1990, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
KMPG Peat Marwick
KMPG Peat Marwick
New York, New York
March 15, 1993
<PAGE>
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1992, 1991 and 1990
(In thousands)
<TABLE>
<CAPTION>
1992 1991 1990
---- ---- ----
ASSETS
------
<S> <C> <C> <C>
Current assets:
Cash $ 19,752 $ 42,229 $ 28,118
Accounts receivable:
Utility service 75,754 60,668 42,585
Other 15,932 18,559 13,973
Less allowance for doubtful accounts 441 354 410
---------- ---------- ----------
91,245 78,873 56,148
---------- ---------- ----------
Materials and supplies 7,794 10,842 10,232
Other current assets 4,400 4,908 3,889
---------- ---------- ----------
123,191 136,852 98,387
---------- ---------- ----------
Property, plant and equipment 1,503,471 1,399,176 1,269,545
Less accumulated depreciation 406,833 371,880 349,820
---------- ---------- ----------
1,096,638 1,027,296 919,725
---------- ---------- ----------
Investments 561,062 480,727 395,629
Net assets of discontinued
oil and gas operations 0 0 12,583
Deferred debits and other assets 107,090 76,577 64,875
---------- ---------- ----------
$1,887,981 $1,721,452 $1,491,199
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C> <C>
Current liabilities:
Accounts payable $ 87,298 $ 88,682 $ 72,581
Income taxes accrued 59,947 42,466 27,693
Long-term debt due within one year 10,850 11,784 18,172
Customers' deposits 17,150 17,709 16,151
Interest accrued 12,943 10,776 7,258
Other current liabilities 36,300 34,871 35,049
---------- -------- ----------
224,488 206,288 176,904
Customer advances for construction 140,309 134,878 125,383
Contributions in aid of construction 39,549 41,620 36,581
Deferred income taxes 95,222 107,767 114,741
Deferred credits 28,443 27,202 19,013
Long-term debt 522,699 484,021 412,348
Shareholders' equity 837,271 719,676 606,229
$1,887,981 $ 1,721,452 $1,491,199
========== ========= ==========
</TABLE>
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
F-3
<PAGE>
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE YEARS ENDED DECEMBER 31, 1992
(In thousands, except for per-share amounts)
<TABLE>
<CAPTION>
1992 1991 1990
---------- --------- ---------
<S> <C> <C> <C>
Revenues:
Telecommunications $183,511 $195,244 $176,427
Natural gas 189,812 151,165 155,574
Electric 145,032 137,781 136,242
Water/Wastewater 59,388 57,642 56,991
Other 2,721 3,193 3,017
-------- -------- --------
580,464 545,025 528,251
-------- -------- --------
Operating expenses:
Electric energy and fuel oil purchased 76,286 71,323 70,239
Natural gas purchased 102,556 81,402 87,411
Operating expenses 141,954 135,924 127,158
Maintenance expenses 24,893 28,376 31,842
Depreciation 50,127 47,212 45,262
Taxes other than income 34,174 31,935 29,183
-------- -------- --------
429,990 396,172 391,095
-------- -------- --------
Income from operations 150,474 148,853 137,156
Investment income 40,072 32,248 32,218
Other income - net 7,278 8,073 9,129
Interest expense 39,044 33,249 31,816
-------- -------- --------
Income before income taxes 158,780 155,925 146,687
Income taxes 43,767 43,571 41,063
-------- -------- --------
Net income $115,013 $112,354 $105,624
======== ======== ========
Earnings per share of common stock:
Series A $1.37 $1.35 $1.25
===== ===== =====
Series B $1.37 $1.35 $1.25
===== ===== =====
</TABLE>
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
F-4
<PAGE>
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1992
(In thousands, except for per-share amounts)
<TABLE>
<CAPTION>
Common Stock ($.25) Unrealized ESOP
Series A Series B Gain (Loss) Shares
-------- -------- on Purchased
(Authorized 100,000) (Authorized 130,000) Additional Marketable with
Shares Par Shares Par Paid-in Retained Equity Guaranteed
Issued Value Issued Value Capital Earnings Securities Debt Total
--------- -------- --------- --------- ----------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1989 36,972 $ 9,243 11,562 $2,890 $324,945 $ 206,120 $ 123 ($2,003) $541,318
Net income 105,624 105,624
Cash dividends of merged
company (3,942) (3,942)
Stock dividends in
shares of Common Stock
Series A and Series B 1,538 384 480 120 47,141 (78,470) (30,825)
Conversions of Series A
to Series B (80) (20) 80 20 0
Transactions of merged
company (103) (25) (2,615) (313) (919) (2,074) (5,946)
------ -------- ------- ------- --------- ---------- -------- -------- ---------
Balance December 31, 1990 38,430 $ 9,607 12,019 $3,005 $369,471 $ 229,019 ($796) ($4,077) $606,229
Adjustment to change
fiscal year-end of
merged company 261 (4,092) 1,062 235 (2,534)
Net income 112,354 112,354
Stock dividends in
shares of Common Stock
Series A and Series B 3,039 760 860 215 97,088 (100,621) (2,558)
Stock options exercised 159 40 1,690 1,730
Tax benefit arising from
stock options exercised 977 977
Cancelled treasury shares (52) (13) (1,380) (1,393)
Conversions of Series A
to Series B (303) (76) 303 76 0
Net unrealized investment
gain 1,102 1,102
Reduction of indebtedness 3,769 3,769
------ -------- ------- ------- --------- ---------- -------- -------- ---------
Balance December 31, 1991 41,166 $10,291 13,289 $3,323 $468,107 $ 236,660 $ 1,368 ($ 73) $719,676
Net income 115,013 115,013
Stock dividends in
shares of Common Stock
Series A and Series B 2,799 700 950 237 117,454 (118,391) 0
3-for-2 stock split 21,078 5,270 7,134 1,783 (7,053) 0
Stock options exercised 113 28 1,669 1,697
Tax benefit arising from
stock options exercised 531 531
Restricted stock 231 58 8,184 8,242
Non-vested restricted
stock (6,593) (6,593)
Conversions of Series A
to Series B (887) (222) 887 222 0
Reversal of unrealized
investment gain (1,368) (1,368)
Reduction of indebtedness 73 73
------ -------- ------- ------- --------- ---------- -------- -------- ---------
Balance December 31, 1992 64,156 $16,039 22,604 $5,651 $582,299 $ 233,282 $ 0 $ 0 $837,271
====== ======= ====== ====== ======== ========= ======= ======== =========
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
</TABLE>
F-5
<PAGE>
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS ENDED DECEMBER 31, 1992
(In thousands)
<TABLE>
<CAPTION>
1992 1991 1990
---- ---- ----
<S> <C> <C> <C>
Net cash provided by operating activities $150,795 $165,013 $130,758
-------- -------- --------
Cash flows from investing activities:
Construction expenditures (148,563) (113,981) (134,575)
Customer advances for construction and
contributions in aid of construction 5,033 15,144 13,675
Securities purchases (356,816) (253,018) (170,561)
Securities sales 212,634 113,560 65,920
Securities maturities 72,651 67,383 79,051
Business acquisitions 0 (41,893) 0
Change in net assets of
discontinued operations 0 4,226 7,537
-------- -------- --------
(215,061) (208,579) (138,953)
-------- -------- --------
Cash flows from financing activities:
Long-term debt borrowings 135,672 119,371 65,029
Long-term debt principal payments (95,365) (56,731) (20,509)
Common stock purchased for payment
of stock dividends 0 (3,951) (24,837)
Other 1,482 (1,012) (7,057)
-------- -------- --------
41,789 57,677 12,626
-------- -------- --------
Increase (decrease) in cash (22,477) 14,111 4,431
Cash at January 1, 42,229 28,118 23,687
-------- -------- --------
Cash at December 31, $ 19,752 $42,229 $28,118
======== ======= ========
</TABLE>
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
F-6
<PAGE>
(1) Summary of Significant Accounting Policies:
------------------------------------------
(a) Principles of Consolidation:
The consolidated financial statements include the accounts of
Citizens Utilities Company and all subsidiaries after elimination of
intercompany balances and transactions. Certain reclassi-fications of
balances previously reported have been made to conform to current
presentation. On December 4, 1990, Louisiana General Services, Inc.
("LGS") was merged with and into the company. The company's
consolidated financial statements for 1990 include LGS' balance sheet,
as of September 30, 1990, and related statements of income, cash flows
and shareholders' equity, all for LGS' fiscal year ended September 30,
1990. During 1991, the company changed the fiscal year end of LGS
from September 30 to December 31. This change was made to be
consistent with the company's reporting of its operations. The result
of this change is included as an adjustment, in 1991, to shareholders'
equity.
(b) Construction Costs and Maintenance Expense:
Property, plant and equipment are stated at original cost, including
general overhead and an allowance for funds used during construction
("AFUDC"). AFUDC represents the borrowing costs and a reasonable
return on common equity of funds used to finance construction. AFUDC
is capitalized as a component of additions to property, plant and
equipment and is credited to income. AFUDC does not represent current
cash earnings; however, under established regulatory rate-making
practices, after the related plant is placed in service, the company
is permitted to include in the rates charged for utility services a
fair return on and depreciation of such AFUDC included in plant in
service. The amount relating to equity is included in other income
($6,398,000, $7,250,000 and $6,794,000 for 1992, 1991 and 1990,
respectively) and the amount relating to borrowings is a reduction of
interest expense ($1,805,000, $2,045,000 and $1,698,000 for 1992, 1991
and 1990, respectively). The weighted average rates used to calculate
AFUDC were 14%, 13% and 14% in 1992, 1991 and 1990, respectively.
Maintenance and repairs are charged to operating expenses as incurred.
The cost, net of salvage, of routine property dispositions is charged
against accumulated depreciation.
(c) Depreciation Expense:
Depreciation expense, calculated using the straight-line method, is
based upon the estimated service lives of various classifications of
property, plant and equipment and represented approximately 4% of the
gross depreciable property, plant and equipment for 1992, 1991 and
1990.
(d) Deferred Income Taxes and Investment Tax Credits:
Deferred income taxes result from the tax effect of using
accelerated depreciation methods and certain other timing differences
between income reported on the consolidated financial statements and
taxable income reported on the company's income tax returns. The
investment tax credits relating to utility properties, as defined by
applicable regulatory authorities, have been deferred and are being
amortized to income over the life of the related properties. The
preceding procedures are consistent with accepted rate-making
procedures in many states where the company's operations are
conducted.
The Financial Accounting Standards Board ("FASB") has issued
Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes," effective for fiscal years beginning
after December 15, 1992. SFAS No. 109 requires a change from the
deferred to the liability method of computing deferred income taxes.
Upon adoption in the first quarter of 1993, the company plans to apply
the provisions of SFAS No. 109 without restating prior years'
financial statements. Due to the effects of regulation, adoption of
SFAS No. 109 will not have a material impact on the consolidated
financial statements.
F-7
<PAGE>
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies: (continued)
------------------------------------------
(e) Revenues:
Electric, natural gas and water/wastewater - The company records
revenues from electric, natural gas and water/wastewater customers when
billed. These customers are billed on a cycle basis based on monthly
meter readings. The company accrues unbilled revenues earned from the
dates customers were last billed to the end of the accounting period.
Telecommunications - The company records revenues from
telecommunications services when earned. Revenues from local service
are primarily derived from providing local telephone services.
Revenues from long-distance service are derived from charges for access
to the company's local exchange network, subscriber line charges and
contractual arrangements. Certain toll and access services revenues
are estimated under cost separation procedures that base revenues on
current operating costs and investments in facilities to provide such
services.
(f) Investment in Centennial Cellular Corp.:
The Company recorded its investment in Centennial Cellular
Corp. Convertible Redeemable Preferred Stock (the "Preferred Security")
and Class B Common Stock at the historical cost of the Company's
investment in Citizens Cellular Company. The terms of the Preferred
Security provide that the Preferred Security accretes a liquidation
value preference at a fixed dividend rate of 7.5%, compounded
quarterly, on an initial liquidation value preference of $125.7 million
until the Preferred Security reaches a liquidation value preference of
$186 million on August 31, 1996. The Company recognizes the accretion
as it is earned in each period as Investment income and increases the
book value of its investment in Centennial by the same amount. On a
quarterly basis, the company assesses whether the book value of the
Preferred Security can be realized by comparing such book value to the
market value of Centennial's common equity and by evaluating other
relevant indicators of realizability, including Centennial's ability to
redeem the Preferred Security. The book value of the Preferred Security
would be deemed impaired to the extent that such book value exceeds the
estimated realizability of the Preferred Security based on all existing
facts and circumstances, including the company's assessment of its
ability to realize the book value of the Preferred Security through
mandatory redemption. (See Notes 3 and 5 of Notes to Consolidated
Financial Statements)
(g) Earnings Per Share:
Earnings per share is based on the average number of outstanding
shares. Earnings per share is presented for each Series separately,
with historical adjustment for stock dividends and stock splits for
each Series. The calculation is not adjusted for the 1.2% stock
dividend declared on February 17, 1993, 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, 1992,
1991 and 1990 are as follows:
<TABLE>
<CAPTION>
Classifications 1992 1991 1990
- --------------- ---- ---- ----
<S> <C> <C> <C>
Transmission and distribution
facilities $1,032,426,000 $968,717,000 $882,501,000
Production and generating facilities 222,594,000 209,540,000 175,192,000
Pumping, storage and purification
facilities 71,238,000 67,967,000 64,828,000
Intangibles 3,145,000 2,507,000 1,571,000
Other 128,452,000 126,737,000 114,078,000
Construction work in progress 45,616,000 23,708,000 31,375,000
</TABLE>
F-8
<PAGE>
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) Mergers and Acquisitions:
------------------------
On December 4, 1990, the company issued 4,182,000 Series B shares in
exchange for all the outstanding shares of LGS, a company engaged in
residential, commercial and industrial gas operations in the state of
Louisiana. The acquisition was accounted for as a pooling of interests.
Revenues and income from continuing operations included in the 1990
consolidated statements of income were as follows:
<TABLE>
<CAPTION>
<S> <C>
Revenues:
---------
Company $383,654,000
LGS 144,597,000
------------
Combined $528,251,000
============
Income from continuing operations:
---------------------------------
Company $ 96,789,000
LGS 8,835,000
------------
Combined $105,624,000
============
</TABLE>
On December 3, 1991, the company acquired Southern Union Company's northern
Arizona gas utility operations, which serves more than 65,000 customers, for
a purchase price of $46 million. The purchase price was comprised of
approximately $39 million in cash, allocated to utility plant, and $7 million
in net liabilities assumed.
On August 30, 1991, the company and Century Communications Corp. completed
the merger of their respective interests in the cellular telephone field.
The combination was effected through a merger of Citizens Cellular Company, a
subsidiary of the company having an adjusted book value of $69,668,000,
with and into Century Cellular Corp., a wholly-owned subsidiary of Century
Communications Corp. In connection with the merger, the company received
Centennial Cellular Corp. (formerly Century Cellular Corp.) Convertible
Redeemable Preferred Stock with an initial liquidation value preference of
$125.7 million and Class B Common Stock representing 13% of the currently
outstanding common equity of Centennial Cellular Corp. These securities are
included in the investments caption of the consolidated balance sheet.
In March 1993, the company signed an agreement to purchase, through a joint
venture with Century Communications Corp., the assets of two cable television
systems serving approximately 45,000 subscribers in California. The purchase
is expected to be consummated in 1993. The chairman and chief executive
officer of the company is also chairman and chief executive officer of
Century Communications Corp.
(4) Discontinued Operations and Dispositions:
----------------------------------------
In 1989, prior to its merger with the company, the Board of Directors of
LGS approved a plan of disposition relating to the oil and gas exploration
and production operation of LGS. Accordingly, the assets and operating
results were classified as discontinued operations.
The net assets related to the discontinued operations, consisting primarily
of oil and gas properties, were reduced to net realizable value and were
segregated in the 1990 consolidated balance sheet under the caption "Net
assets of discontinued oil and gas operations." The company has disposed of
substantially all of these assets.
During 1992, the company disposed of two water properties in California.
One property was transferred to a municipality through condemnation
proceedings. The company received net proceeds of $3,400,000 and had a net
investment of $1,877,000. The other property was sold for net proceeds of
$6,618,000; the company's net investment was $4,160,000. In December 1992,
the company disposed of its Idaho electric operations. The company received
$1,177,500 and had a net investment of $706,000. The resulting gains on
dispositions are included in other income.
F-9
<PAGE>
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) Investments:
-----------
Investments include high-grade, short and intermediate term, fixed-income
securities (primarily state and municipal debt obligations) and equity
securities to be liquidated for additions and improvements to the company's
utility facilities, acquisitions and other corporate purposes. Fixed-income
securities are stated at cost. Marketable equity securities are stated at
the lower of cost or market.
The Company's investment in Centennial Cellular Corp. (See Note 3 of Notes
to Consolidated Financial Statements) includes 102,187 Convertible Redeemable
Preferred Shares and 1,367,099 Class B Common Shares. The liquidation value
preference earned on the Convertible Redeemable Preferred Stock for 1992 and
1991 was $8,803,000 and $2,563,000, respectively, and recorded as Investment
income. The book value of the investment in Centennial at December 31, 1992,
as presented in the table below, represents the initial book value of the
investment of $69,668,000 ($19,826 of which relates to the Class B common
shares) plus $11,366,000 of liquidation value preference earned on the
Preferred Security by the company to date. The Preferred Security is
mandatorily redeemable in the year 2007. The company believes it can realize
its investment in Centennial either by cash redemption by the issuer funded
through refinancing by the issuer, by temporary conversion to common equity
securities followed by the sale of the common equity securities, or by sale
of its current investment holdings.
The aggregate market value of marketable equity securities at December 31,
1992, was $19,266,000. Total unrealized gains and losses on marketable
equity securities at December 31, 1992, were $5,332,000 and $0, respectively.
Net realized gains on marketable equity securities included in the
determination of net income for the years 1992, 1991 and 1990, respectively,
were $259,000, $670,000 and $17,000. The cost of securities sold was based
on the actual cost of the shares of each security held at the time of sale.
Marketable equity securities at December 31, 1992, includes 1,622,250 shares
(adjusted for stock dividends) of Class A Common Stock of Century
Communications Corp. These shares represent 1.8% of the outstanding common
stock of Century Communications Corp. The chairman and chief executive
officer of the company is also chairman and chief executive officer of
Century Communications Corp.
The components of investments at December 31, 1992, 1991 and 1990 are as
------------------------------------------------------------------------
follows:
--------
<TABLE>
<CAPTION>
1992 1991 1990
------------ ------------ ------------
<S> <C> <C> <C>
State and municipal securities $448,605,000 $369,170,000 $367,645,000
Investment in Centennial 81,034,000 72,231,000 -
Other fixed income securities 10,680,000 21,807,000 9,817,000
Marketable equity securities 13,934,000 10,968,000 14,498,000
Other 6,809,000 6,551,000 3,669,000
------------ ------------ ------------
Total $561,062,000 $480,727,000 $395,629,000
============ ============ ============
</TABLE>
The fair value of investments, presented as required by SFAS No. 107, was
$649,366,000 at December 31, 1992, based on relative market information about
each financial instrument.
F-10
<PAGE>
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
(6) Long-term Debt:
--------------
Weighted average December 31,
interest rate at ------------------------------------
December 31, 1992 Maturities 1992 1991 1990
----------------- ---------------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
($ in thousands)
Industrial development
revenue bonds 6.53% 2015 - 2028 $242,391 $209,208 $162,977
Debentures 7.78% 2001 & 2004 150,000 50,000 14,033
Commercial paper notes
payable 3.33% Variable 62,680 77,565 57,665
Rural Electrification
Administration and Rural
Telephone Bank notes 6.50% 2006 - 2015 43,494 44,851 41,716
Subordinated notes of
merged company 10.84% 1995 - 1998 12,261 20,784 26,046
First Mortgage and first
mortgage and collateral
trust bonds 9.50% 2008 11,489 81,215 107,078
Other long-term debt 7.47% 1994 - 1999 384 398 2,833
----- -------- ---------- --------
6.74% $522,699 $ 484,021 $412,348
===== ======== ========== ========
</TABLE>
F-11
<PAGE>
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(6) Long-term Debt: (continued)
--------------
Commercial paper notes payable have been classified as long-term debt
because these obligations are expected to be refinanced ultimately through
the issuance of long-term securities. The company has available lines of
credit with banks totaling $200,000,000, which expire on April 8, 1994, and
incurs a facility fee of one tenth of one percent per annum.
The total principal amounts of industrial development revenue bonds at
December 31, 1992, 1991 and 1990, respectively, were $274,030,000,
$264,030,000 and $169,580,000. Amounts presented in the table above have
been reduced by funds held by trustees to be used for payment of qualifying
construction expenditures. Holders of certain industrial development revenue
bonds may tender at par prior to maturity. The next tender date is August 1,
1997, for $30,350,000 of principal amount of bonds.
In the years 1992, 1991 and 1990, respectively, interest payments were
$37,913,000, $34,645,000 and $33,712,000.
The fair value of long-term debt, presented as required by SFAS No. 107, is
$550,724,000 at December 31, 1992, based on relative market information and
information about each financial instrument.
The installment principal payments and maturities of long-term debt for the
next five years are as follows:
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
-------------- ------- ------- ------- -------
($ in thousands)
<S> <C> <C> <C> <C> <C>
Installment principal payments $ 1,680 $1,614 $ 1,323 $1,409 $1,504
Maturities 9,170 0 10,247 756 106
------- ------ ------- ------ ------
$10,850 $1,614 $11,570 $2,165 $1,610
======= ====== ======= ====== ======
</TABLE>
(7) Capital Stock:
--------------
The common stock of the company is in two series, Series A and Series B.
Quarterly stock dividends are declared and issued at the same rate on both
Series A and Series B Common Stock. The series differ in that, beginning
in 1992, Series B shareholders have the annual 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 quarterly
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 at all times. Series B shares, however, are not convertible
into Series A. In all other respects, the shares of both series have
identical voting rights and participate ratably in liquidation. On April
14, 1992, the company declared a 3-for-2 stock split of its Series A and
Series B Common Stock. The stock split was distributed on July 24, 1992,
to shareholders of record on July 1, 1992. Quarterly stock dividend rates
declared on Series A and Series B Common Stock are based upon cash
equivalent rates and share market prices, and have been as follows:
<TABLE>
<CAPTION>
Dividend Rates
-------------------
1992 1991 1990
----- ----- -----
<S> <C> <C> <C>
First quarter 1.6% 2.0% 1.33%
Second quarter 1.5% 1.9% 1.33%
Third quarter 1.2% 1.9% 1.33%
Fourth quarter 1.2% 1.9% 2.40%
</TABLE>
F-12
<PAGE>
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(7) Capital Stock: (continued)
-------------
Annualized stock dividend cash equivalent rates considered by the
company's Board of Directors in establishing the stock dividends during 1992,
1991 and 1990, respectively, were $1.41, $1.29 and $1.17 (as adjusted for the
July 24, 1992, 3-for-2 stock split).
The company, from time to time, purchased Series A and Series B shares for
use in partial payment of the 1991 and 1990 stock dividends. The table below
shows the sources of shares used in partial payment of the stock dividends
during the periods shown:
<TABLE>
<CAPTION>
Purchased Shares New shares Total
--------------------
Cost Shares issued dividend shares
----------- ------- ---------- ---------------
<S> <C> <C> <C> <C>
1992 - - 3,749,000 3,749,000
1991 $ 2,558,000 93,000 3,899,000 3,992,000
1990 $30,825,000 833,000 2,018,000 2,851,000
</TABLE>
The company has 50 million authorized shares of preferred stock ($.01
par), none of which has been issued. The preferred stock may be issued by
the Board of Directors (without further approval by shareholders) in one or
more series, having such attributes as may be designated by the Board of
Directors at the time of issuance.
The indenture securing long-term debt of the company provides, among other
things, that the company will not declare or pay a cash dividend on the
common stock if the aggregate amount declared or paid after December 31,
1946, shall exceed $613,000 plus the aggregate consolidated net earnings of
the company and its subsidiaries subsequent to December 31, 1946. At
December 31, 1992, the entire retained earnings were available for dividends.
(8) Employee Stock Plans:
--------------------
On June 22, 1990, shareholders approved the Citizens Utilities Company
Management Equity Incentive Plan ("MEIP"). Under the MEIP, awards of the
company's Series A or Series B Common Stock may be granted to eligible
officers and other management employees of the company and its subsidiaries
in the form of incentive stock options, non-qualified stock options, stock
appreciation rights, restricted stock or other stock-based awards. The MEIP
is administered by the Compensation Committee of the Board of Directors.
The maximum number of shares of common stock which may be issued pursuant
to awards at any time is 5% of the company's common stock outstanding from
time to time; provided that no more than 3,903,000 shares (adjusted for stock
dividends and stock split) will be issued pursuant to incentive stock options
under the MEIP. No awards will be granted more than ten years after the
effective date of the MEIP. The exercise price of stock options and stock
appreciation rights ("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 over a vesting
period.
Some options were awarded in tandem with related SARs. SARs provide the
MEIP participant with the alternative of electing not to exercise the related
stock option, but to receive instead an amount in cash or in common stock
equal to the difference between the option price and the fair market value of
the common stock on the date the SAR is exercised. Either the SAR or the
related option may be exercised, but not both. During 1992, 612,788 SARs
(adjusted for stock dividends and stock split) were exercised at an average
exercise price of $12.21 per share. This resulted in the cancellation of
612,788 tandem stock options. At December 31, 1992, no SARs were
outstanding.
Under the terms of the MEIP, subsequent stock dividends and stock splits
have the effect of increasing the option shares outstanding, which
correspondingly decreases the average exercise price of outstanding options.
The following summary of shares subject to option under the MEIP reflects the
original shares granted at original option prices.
F-13
<PAGE>
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) Employee Stock Plans: (continued)
--------------------
Average option
Shares subject to option price per share
------------------------ ---------------
Balance at January 1, 1990 - -
[S] [C] [C]
Options granted 478,000 $21.40
Conversion of LGS plans 230,809 12.78
---------
Balance at December 31, 1990 708,809 18.59
Options granted 398,000 32.17
Options cancelled or lapsed (31,160) 20.18
Options exercised (159,056) 10.87
Adjustment for stock dividends* 60,427 -
---------
Balance at December 31, 1991 977,020 24.18
Options granted 1,177,488 29.96
Options exercised (112,500) 15.08
Options cancelled or lapsed (644,526) 12.46
Adjustment for stock dividends
and stock split* 562,513 -
---------
Balance at December 31, 1992 1,959,995 $25.09
=========
Options exercisable at end of year 237,298 $14.93
=========
*Represents adjustment to outstanding option shares to reflect stock
dividends and stock split during the respective years.
During 1992, the company granted restricted stock awards to key employees
in the form of the company's Series B Common Stock. The number of Series B
Common Stock issued as restricted stock awards during 1992 was 231,000
(before adjustment for stock dividends and stock split). None of the
restricted stock awards may be sold, assigned, pledged or otherwise
transferred, voluntarily or involuntarily, by the employee. The restrictions
lapse on 20% of the restricted stock awards each year over a five-year
period. At December 31, 1992, 288,437 shares (adjusted for stock dividends
and stock split) of restricted stock were outstanding.
On June 12, 1992, shareholders approved the Citizens Utilities Company 1992
Employee Stock Purchase Plan ("ESP Plan"). Under the ESP Plan, eligible
employees of the company and its subsidiaries may subscribe to purchase
shares of Series B Common Stock at 85% of the average market price on the
last business day prior to the commencement of the purchase period. An
employee may elect to have up to 20% of his/her annual base pay withheld in
equal installments throughout the designated payroll-deduction period for the
purchase of shares. The value of their subscription may not exceed $25,000
in any one calendar year. There are 759,000 shares (adjusted for stock
dividends and stock split) of Series B Common Stock reserved for issuance
under the ESP Plan. These shares will be adjusted for any future stock
dividends or stock splits. The ESP Plan will terminate when all 759,000
shares reserved have been subscribed for, unless terminated earlier by the
Board of Directors. The ESP Plan is administered by a committee of the Board
of Directors. As of January 1, 1993, the number of employees participating
in the ESP Plan was 1,058, and the number of shares subscribed for was 87,121
at a price of $24.28 (which reflects the 15% discount) per share.
F-14
<PAGE>
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(9) Income Taxes:
------------
The following is a reconciliation of the provision for income taxes at
federal statutory rates to the reported provision for income taxes:
<TABLE>
<CAPTION>
1992 1991 1990
-------------- -------------- --------------
($ in thousands)
<S> <C> <C> <C> <C> <C> <C>
Consolidated tax provision
at federal statutory rate $53,985 34.0% $53,014 34.0% $49,874 34.0%
Allowance for funds used
during construction (2,789) (1.8%) (3,160) (2.0%) (2,887) (2.0%)
Amortization of investment
tax credits (2,140) (1.3%) (2,292) (1.5%) (2,358) (1.6%)
State income tax provisions, net
of federal income tax benefit 4,989 3.1% 5,399 3.4% 5,568 3.8%
Nontaxable investment income (8,490) (5.3%) (8,229) (5.3%) (8,528) (5.8%)
All other - net (1,788) (1.1%) (1,161) (0.8%) (606) (0.4%)
------- ------ ------- ------ ------ -----
Total $43,767 27.6% $43,571 27.8% $41,063 28.0%
======= ===== ======= ===== ======= =====
</TABLE>
For 1992, 1991 and 1990, accumulated deferred income taxes amounted to
$72,969,000, $83,157,000 and $87,757,000, respectively, and the unamortized
deferred investment tax credits amounted to $22,253,000, $24,610,000 and
$26,984,000, respectively. Income taxes paid during the year, which included
balances due for prior years and estimated payments for the current year,
were $22,798,000, $29,309,000 and $35,730,000 for 1992, 1991 and 1990,
respectively. At December 31, 1992, the cumulative amount of timing
differences for which deferred income taxes have not been provided was
$148,811,000.
The FASB issued SFAS No. 109, "Accounting for Income Taxes," effective for
fiscal years beginning after December 15, 1992. SFAS No. 109 requires a
change from the deferred to the liability method of computing deferred income
taxes. Upon adoption in the first quarter of 1993, the company plans to
apply the provisions of SFAS No. 109 without restating prior years' financial
statements. Due to the effects of regulation, adoption of SFAS No. 109 will
not have a material impact on the consolidated financial statements.
The provision for federal and state income taxes includes amounts both
payable currently and deferred for payment in future periods because of the
timing of when income or expense is recognized for financial statement and
income tax purposes. The company and its subsidiaries are included in a
consolidated federal income tax return using a calendar year reporting
period.
<TABLE>
<CAPTION>
1992 1991 1990
---- ---- ----
($ in thousands)
<S> <C> <C> <C>
Current
-------
Federal $37,501 $38,863 $38,152
State 7,118 8,377 9,115
------- ------- -------
44,619 47,240 47,267
------- ------- -------
Deferred
--------
Federal 847 (1,178) (3,167)
Investment tax credits (2,140) (2,293) (2,358)
State 441 (198) (679)
------- ------ -------
(852) (3,669) (6,204)
------- ------ -------
Total $43,767 $43,571 $41,063
======= ======== =======
</TABLE>
F-15
<PAGE>
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(10) Segment Information:
-------------------
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1992 1991 1990
------------ ------------ ------------
<S> <C> <C> <C>
Telecommunications:
------------------
Revenues $183,511,000 $195,244,000 $176,427,000
Assets 325,618,000 326,568,000 322,451,000
Depreciation 22,256,000 20,031,000 20,584,000
Capital expenditures 20,672,000 29,344,000 59,993,000
Operating income before
income taxes 85,687,000 95,217,000 78,807,000
Natural gas:
-----------
Revenues $189,812,000 $151,165,000 $155,574,000
Assets 243,582,000 233,189,000 156,659,000
Depreciation 10,106,000 10,138,000 10,051,000
Capital expenditures 22,280,000 8,922,000 9,640,000
Operating income before
income taxes 26,952,000 19,992,000 14,870,000
Electric:
--------
Revenues $145,032,000 $137,781,000 $136,242,000
Assets 356,829,000 286,661,000 252,439,000
Depreciation 11,038,000 10,171,000 8,281,000
Capital expenditures 74,502,000 41,268,000 46,954,000
Operating income before
income taxes 18,999,000 22,283,000 27,732,000
Water/Wastewater:
---------------
Revenues $ 59,388,000 $ 57,642,000 $ 56,991,000
Assets 320,985,000 308,527,000 290,715,000
Depreciation 6,531,000 6,786,000 6,284,000
Capital expenditures 25,456,000 21,979,000 28,338,000
Operating income before
income taxes 18,529,000 10,656,000 15,220,000
</TABLE>
(11) Quarterly Financial Data (unaudited):
------------------------------------
<TABLE>
<CAPTION>
Revenues Net Income
-------- ------------------------------------
Per Share
----------------------
1992 Amount Amount Series A Series B
---- ------ ------ -------- --------
<S> <C> <C> <C> <C>
First quarter $153,133,000 $ 25,396,000 $ 0.30 $ 0.30
Second quarter 133,695,000 32,430,000 0.38 0.38
Third quarter 139,384,000 31,723,000 0.37 0.37
Fourth quarter 154,252,000 25,464,000 0.30 0.30
<CAPTION>
Revenues Net Income
-------- ----------------------------------------
Per Share
---------------------
1991 Amount Amount Series A Series B
---- ------ ------ -------- --------
<S> <C> <C> <C> <C>
First quarter $137,207,000 $ 23,953,000 $ 0.28 $ 0.28
Second quarter 126,677,000 30,354,000 0.36 0.36
Third quarter 129,038,000 29,871,000 0.35 0.35
Fourth quarter 152,103,000 28,176,000 0.33 0.33
</TABLE>
F-16
<PAGE>
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(12) Supplemental Cash Flow Information:
-----------------------------------
Schedule of net cash provided by operating activities for the years
ended December 31,
<TABLE>
<CAPTION>
1992 1991 1990
---- ---- ----
<S> <C> <C> <C>
Net income $115,013,000 $112,354,000 $105,624,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 50,127,000 47,212,000 45,262,000
Deferred income taxes and
amortization of investment tax credits (852,000) (3,669,000) (6,204,000)
Allowance for equity funds used
during construction (6,398,000) (7,250,000) (6,794,000)
Change in accounts receivable (12,371,000) (14,615,000) (5,596,000)
Change in accounts payable (4,607,000) 5,298,000 (4,178,000)
Change in accrued taxes and
accrued interest 19,672,000 20,643,000 13,751,000
Centennial investment income (8,803,000) (2,563,000) --
Other (986,000) 7,603,000 (11,071,000)
------------ ------------ ------------
$150,795,000 $165,013,000 $130,758,000
------------ ------------ ------------
</TABLE>
(13) Pension and Retirement Plans:
----------------------------
The company and its subsidiaries have noncontributory pension plans
covering all employees who have met certain service and age requirements.
The benefits are based on years of service and final average pay or pay rate.
Contributions are made in amounts sufficient to fund the plans' current
service costs and to provide for benefits expected to be earned in the
future. Plan assets are invested in a diversified portfolio of equity and
fixed-income securities.
Pension costs for 1992, 1991 and 1990 included the following components:
<TABLE>
<CAPTION>
1992 1991 1990
----------- ----------- -----------
<S> <C> <C> <C>
Service cost $ 3,277,000 $ 3,481,000 $ 3,679,000
Interest cost on projected
benefit obligations 4,544,000 4,704,000 3,299,000
Net amortization and deferral 132,000 5,091,000 (3,097,000)
(Return) loss on plan assets (5,438,000) (9,897,000) 417,000
----------- ----------- ----------
Net pension cost $ 2,515,000 $ 3,379,000 $ 4,298,000
=========== =========== ===========
</TABLE>
Assumptions used in the computation of pension costs and the actuarial
present value of projected benefit obligations included the following:
<TABLE>
<CAPTION>
1992 1991 1990
----- ----- -----
<S> <C> <C> <C>
Discount rate 8% 8% 8%
Expected long-term rate of
return on plan assets 8.5% 9% 8-9%
Rate of increase in
compensation levels 5% 5-6% 6%
</TABLE>
As of December 31, 1992, 1991 and 1990, respectively, the fair values of
plan assets were $68,506,000, $63,654,000 and $55,697,000 ($36,105,000 in
overfunded plans and $19,592,000 in underfunded plans). The actuarial present
values of the accumulated benefit obligations were $48,661,000, $44,513,000
and $44,043,000 ($20,494,000 in overfunded plans and $23,549,000 in
F-17
<PAGE>
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(13) Pension and Retirement Plans: (continued)
----------------------------
underfunded plans) for 1992, 1991 and 1990, respectively. The actuarial
present values of the vested accumulated benefit obligation for 1992, 1991
and 1990, respectively, were $46,819,000, $43,484,000 and $42,964,000
($19,496,000 for overfunded plans and $23,468,000 for underfunded plans).
The total projected benefit obligations for 1992, 1991 and 1990,
respectively, were $63,199,000, $62,915,000 and $64,044,000 ($39,081,000 for
overfunded plans and $24,963,000 for underfunded plans).
The company provides certain medical, dental and life insurance benefits
for retired employees and their beneficiaries and covered dependents. The
company recorded approximately $800,000 of expense in 1992 under the pay-as-
you-go method, which is a cash-basis method. In December 1990, the FASB
issued SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other
than Pensions," effective for fiscal years beginning after December 15, 1992.
Adoption of SFAS No. 106 will require accrual of the expected costs of
providing postretirement benefits to an employee and to the employee's
beneficiaries and covered dependents, during the years that the employee
renders the necessary service. Upon adoption of SFAS No. 106, the company
estimates its 1993 cost to be approximately $3,400,000, of which
approximately $500,000 will be deferred for states whose regulatory
commissions to date have not but will likely allow recovery of accrued costs
in future rate proceedings. Regulatory commissions that have adopted the
SFAS No. 106 accrual method recommend 20-year prospective recognition of the
associated transition obligation. The company's transition obligation was
approximately $20,400,000 at January 1, 1993.
(14) Commitments and Contingencies:
-----------------------------
The company has budgeted expenditures for facilities in 1993 of
approximately $156,400,000 and certain commitments have been entered into in
connection therewith. The company's 1992 net income of $115,013,000 includes
a pre-tax charge of $6,500,000 for any non-recoverable impact from Hurricane
Iniki.
F-18
<PAGE>
EXHIBIT INDEX
-------------
DESCRIPTION
- -----------
Exhibit No.23 Auditors' Consent
<PAGE>
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 and in the Registration Statement (No. 33-51529) on Form S-3
of Citizens Utilities Company of our report dated March 15, 1993, relating to
the consolidated balance sheets of Citizens Utilities Company and subsidiaries
as of December 31, 1992, 1991, and 1990 and the related consolidated statements
of income, shareholders' equity, and cash flows for the years then ended, which
report appears in the amended December 31, 1992 annual report on Form 10-K/A-2
of Citizens Utilities Company.
/s/ KPMG PEAT MARWICK
KPMG PEAT MARWICK
New York, New York
March 23, 1994
