CITIZENS UTILITIES COMPANY FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE YEAR ENDED DECEMBER 31, 1995 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1995 Commission file number 001-11001 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) Registrant's telephone number, including area code (203) 329-8800 Securities registered pursuant to Section 12(b) of the Act: Common Stock Series A, par value $.25 per share New York Stock Exchange Common Stock Series B, par value $.25 per share New York Stock Exchange (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 31, 1996: $2,721,397,606. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of January 31, 1996. Common Stock Series A 154,679,357 Common Stock Series B 73,326,013 DOCUMENTS INCORPORATED BY REFERENCE The Proxy Statement for the registrant's 1996 Annual Meeting of Stockholders is incorporated by reference into Part III of this Report. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Item 1. Description of Business (a) General Development of Business The "Company" includes Citizens Utilities Company and its subsidiaries except where the context or statement indicates otherwise. The Company is a diversified operating public utility which provides, either directly or through subsidiaries, telecommunications, electric distribution, natural gas transmission and distribution and water or wastewater services to nearly 1,600,000 customer connections in areas of nineteen states. The Company was incorporated in Delaware in 1935 to acquire the assets and business of a predecessor corporation. Since then, the Company has grown as a result of investment in owned utility operations and numerous acquisitions of additional utility operations. It continues to consider and carry out business expansion through acquisitions and joint ventures in traditional public utility and related fields and the rapidly evolving telecommunications and cable television industries. The Company's strong financial resources and consistent operating performance enable it to make the investments and conduct the operations necessary to serve growing areas and to expand through acquisitions. In 1993 and 1994, the Company agreed to acquire from GTE Corp. and ALLTEL Corporation approximately 610,000 local telephone access lines and 7,000 cable subscribers in twelve states for approximately $1.4 billion. As of December 31, 1995 all but approximately 23,000 local telephone access lines in Nevada have been transferred to the Company. (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 to all segments of the marketplace. Telecommunications services consist of local exchange service, centrex service, network access service, intrastate and interstate toll services, competitive access services and directory services. The Company provides telecommunications services to the following approximate number of primarily residential customers in the following states: State Customers ----- --------- New York 295,600 West Virginia 139,400 Arizona 133,000 California 116,300 Tennessee 81,100 Idaho 18,600 Utah 18,300 Oregon 13,100 Montana 7,800 New Mexico 4,700 Louisiana 2,700 Washington 2,300 ------------ Total 832,900 ============ Various state regulatory agencies, state legislatures and the federal government have initiated proceedings to promote the development of competition in telecommunications markets. These proceedings are focused on removing the regulatory and legal barriers to competitive entry into the interLATA toll, intraLATA toll and local exchange markets and developing rules to govern the relationship among competitors in these markets. Simultaneously, many states are investigating or have implemented procedures for local exchange companies to enter into incentive regulatory frameworks ("IRF") as an alternative to traditional rate of return regulation and/or classifying services on the basis of the presence of competition and allowing deregulation or flexible pricing regulation for the services deemed competitive. Local exchange competition has been authorized in the following states in which the Company currently provides local exchange service: Arizona, California, New York, Oregon, Tennessee, Utah and West Virginia. On November 8, 1995, the California Public Utilities Commission issued a final order approving a restructuring of Citizens Telecom of California's ("CTCC") rates and an Incentive Regulatory Framework ("IRF"). The restructured rates allow CTCC to compete more effectively. Under the IRF, CTCC can earn and keep up to 1.5% above its authorized rate of return while earned returns greater than 1.5% and up to 5% above its authorized rate of return will be shared equally with customers. The Company has developed, and is implementing, an aggressive growth strategy to take advantage of opportunities in the emerging telecommunications marketplace. This strategy includes expansion of the Company's customer base and telecommunications services. The Company's customer base expansion is focused on its franchised service territories as well as markets adjacent to these franchised service territories, and includes customers of affiliated companies. The Company's expansion of telecommunications of services is with the objective of becoming a full service telecommunications provider, offering to customers an integrated package of products and services. The Company will expand into additional markets by offering its long distance service in combination with other value-added services such as Internet access, messaging and Centrex. The Company sells its products using multiple sales distribution channels and a marketing organization structured around product management and customer segmentation. The key products the Company offers or plans to offer are long-distance, or toll, services, advanced CLASS, voice mail, Internet access, data, cellular and paging services in addition to its traditional local exchange services. As required, approvals have been and are received, the Company has begun and intends to provide intrastate and interstate toll services in those markets it currently serves as well as several adjacent markets. Toll services include One plus, 800, calling card, 10XXX and prepaid calling card services. The Company is investigating other value-added services such as fax on demand, voice activated dialing, desktop video conferencing, cable modem and direct broadcast satellite. The Company currently contracts for advertising sales, printing and distribution for its 77 telephone directories with a circulation of approximately 1.7 million. The Company expects to expand and enhance its network in order to offer distribution capability to interexchange carriers and potentially to other long distance resellers, cellular companies, cable companies, and other independent telephone companies. The Company currently sells access primarily to AT&T Corp., MCI Communications Corp. and Sprint Corp. and provides billing and collection services to AT&T Corp. The Company continues to expand its subsidiary, Electric Lightwave, Inc. ("ELI"), a competitive access provider in Arizona, California, Oregon, Utah and Washington. Through ELI, the Company has been granted authority in Washington, Utah and Oregon to provide competitive local exchange service. The Company completed construction of a fiber-optic route from Las Vegas, Nevada to Phoenix, Arizona which provides the Company with fiber optic capacity for its long distance operations as well as for other telecommunications carriers. The Company owns a one-third interest and is general managing partner of Mohave Cellular, a cellular limited partnership operating six cell sites in Arizona. On September 22, 1994, a subsidiary of the Company and a subsidiary of Century Communications Corp. ("Century") entered into a joint venture agreement for the purpose of acquiring, for approximately $89 million, and operating two cable television systems in southern California (the "Systems"). Century is a cable television company of which Leonard Tow, the Chairman, Chief Executive Officer and Chief Financial Officer of the Company, is Chairman, Chief Executive Officer and Chief Financial Officer. In addition, Claire Tow, a director of the Company, is a Senior Vice President and a director of Century and Robert Siff, a director of the Company is a director of Century. The joint venture is governed by a management board on which the Company and Century are equally represented. The joint venture has entered into an agreement pursuant to which a subsidiary of Century (the "Manager") will manage the day-to-day operations of the Systems. The Manager will not receive a management fee but will be reimbursed only for the actual costs it incurs on behalf of the joint venture. With respect to the purchase of any service or asset for the joint venture for use in the Systems, the Manager is obligated to pass through to the joint venture any discount, up to 5%, off the published prices of vendors and is entitled to retain any discount in excess of 5%. On September 30, 1994, the joint venture acquired the first system serving approximately 26,500 subscribers. On November 30, 1995, the joint venture acquired the second system, serving approximately 20,700 subscribers. The Company has entered into a systems integration agreement with ALLTEL Corporation to reengineer all local exchange telephone billing and customer care business processes and to develop the next generation of telecommunications support systems. NATURAL GAS Operating divisions of the Company provide natural gas transmission and distribution services to the following approximate number of primarily residential customers in the following states. State Customers ----- --------- Louisiana 262,900 Arizona 88,100 Colorado 12,200 ------- Total 363,200 ======= The provision of services and/or rates charged are subject to the jurisdiction of federal and state regulatory agencies. The Company purchases all needed natural gas, the supply of which is believed to be adequate to meet current demands and to provide for additional sales to new customers. The natural gas industry is subject to seasonal demand, with the peak demand occurring during the heating season of November 1 through March 31. The Company's natural gas sector experiences third party competition from fuel oil, propane, and other natural gas suppliers for most of its large consumption customers (of which there are few) and from electric suppliers for all of its customer base. The competitive position of natural gas at any given time depends primarily on the relative prices of natural gas and these other energy sources. The Company continues to expand its northern Arizona natural gas transmission and distribution service area. The service area has grown from 65,000 customers in 1991 to 82,000 customers as of December 31, 1995. ELECTRIC Operating divisions of the Company provide electric transmission and distribution services to the following approximate number of primarily residential customers in the following states: State Customers ----- --------- Arizona 58,500 Hawaii 28,800 Vermont 20,000 ------ Total 107,300 ======= The provision of services and/or rates charged are subject to the jurisdiction of federal and state regulatory agencies. The Company purchases 80% of needed electric energy, the supply of which is believed to be adequate to meet current demands and to provide for additional sales to new customers. As a whole, the Company's electric sector does not experience material seasonal fluctuations. There have been federal and state regulatory activities with the aim of creating a more competitive environment in the electric utility industry. These federal and state regulatory activities are still in the investigation stage. The Company anticipates no material adverse impact on its electric sector should the industry be opened to competition since the Company is not a large generator of electric power and serves primarily residential customers. The advent of competition would most likely provide opportunities for expansion. In response to regulatory initiatives, the Company's electric sector is proceeding with demand-side management programs and integrated resource planning techniques designed to promote the most efficient use of electricity and to reduce the environmental impacts associated with new generation facilities. In 1994, the Company filed for a $19,153,000 rate increase with the Hawaii Public Utilities Commission ("HPUC"). Part of the requested increase is for the recovery of restoration and repair costs associated with Hurricane Iniki. In an effort to reduce the rate impact on its customers, the Company subsequently filed an application with the HPUC to recover $8,000,000 of the $19,153,000 through a statewide surcharge to partially recover Iniki restoration and repair costs under the provisions of Subsection 269-16.3 of the Hawaii Revised Statutes. If the HPUC approves the surcharge application, customers of all electric utility companies in Hawaii would pay a portion of the approved Iniki restoration and repair costs over a five year period and the Company's rate increase request will be reduced by $8,000,000. The HPUC issued an Interim Decision and Order which took effect on June 15, 1995 granting the Company a $5,983,000 interim increase in annual revenues. The second phase of the requested rate increase and the statewide surcharge is expected to be included in a final order from the HPUC. The Company expects a final order in the first half of 1996. WATER/WASTEWATER The Company provides water and/or wastewater treatment services to the following approximate number of primarily residential customers in the following states: State Customers ----- --------- Arizona 107,600 Illinois 68,700 California 59,600 Pennsylvania 27,200 Ohio 14,600 Indiana 1,300 ---------- Total 279,000 ========== The provision of services and/or rates charged are subject to the jurisdiction of federal, state and local regulatory agencies. A significant portion of the Company's water/wastewater treatment sector construction expenditures necessary to serve new customers are made under agreements with land developers who generally advance funds for construction and/or plant to the Company that are later refunded in part by the Company as new customers and revenues are added in the respective land developments. In addition to increasing customers through agreements with land developers, the Company acquires ongoing water/wastewater operations from municipalities and private companies. In 1995, the Company acquired approximately 4,300 customers of the water/wastewater systems in Youngtown, Arizona and Douglasville, Pennsylvania. In September 1992, the EPA filed a complaint with the United States District Court for the Northern District of Illinois relating to alleged violations by the Company's Illinois subsidiary with respect to National Pollutant Discharge Elimination System permit requirements. The Company settled this action on March 21, 1995 and paid a $490,000 fine. Under the settlement, the Company also agreed to construct plant improvements, with an estimated cost of $2,200,000, which would be required in order to comply with new discharge limits provided for by the settlement. Shortly after the action was settled, the Company entered into a tentative agreement with the Village of Bolingbrook to transfer flow from the Company's to the Village's nearby facilities for treatment. If this agreement with the Village is approved by the EPA and the Court, the Company's plant would be converted to a flow transfer station. The Company's financial obligations would be the same under either the plant improvement project or the flow transfer project. The agreement with the Village of Bolingbrook is now pending approval by the EPA and the court. As a regulated entity, the Company is entitled to earn a fair rate of return on improvements that are placed in service for the benefit of its customers. The Company believes that the cost of the above discussed improvements will be recovered through customer rates. General The Company's public utility operations are conducted primarily in small and medium size towns and communities. No material part of the Company's business is dependent upon a single customer or small group of customers for its revenues. 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 10.3% of its 1995 revenues. The Company is subject to regulation by the respective state regulatory agencies and federal regulatory agencies. The Company is not subject to the Public Utility Holding Company Act. Order backlog is not a significant consideration in the Company's business, and the Company has no contracts or subcontracts which may be subject to renegotiation of profits or termination at the election of the federal government. The Company holds franchises from local governmental bodies, which vary in duration. The Company also holds certificates of convenience and necessity granted by various state commissions which are generally of indefinite duration. The Company has no special working capital practices. The Company's research and development activities are not material. There are no patents, trademarks, licenses or concessions held by the Company that are material. The Company had 4,760 employees at December 31, 1995. (d) Financial Information about Foreign and Domestic Operations and Export Sales The Company does not have any foreign operations or material export sales except for the following: In 1995, the Company made a $4,200,000 investment in and entered into definitive agreements with Hungarian Telephone and Cable Corp. ("HTCC"), a Delaware corporation. Pursuant to these agreements (i) the Company has rights to purchase up to 54% of HTCC common stock, (ii) provides certain management services to HTCC on a cost-plus basis, (iii) has the right to and has designated one member of the HTCC Board of Directors, and (iv) has provided HTCC with guarantees and financial support. HTCC presently controls the rights to own, operate and expand certain telecommunications services in certain regions of Hungary. The management services fee payable by HTCC to the Company is the greater of 5% of adjusted gross revenues of HTCC or a monthly fixed amount. In addition, expenses incurred by the Company in providing such services, including certain allocable overhead items, are to be reimbursed by HTCC. A subsidiary of the Company is the guarantor of a $33,200,000 bank loan to HTCC. The Company has agreed to provide HTCC with up to $20,000,000 of additional financial support. The Company has been compensated for such guarantees and financial support. Item 2. Description of Property The administrative offices of the Company are located at High Ridge Park, Stamford, Connecticut, 06905 and are leased. The Company owns property including: telecommunications outside plant, central office, microwave radio and fiber-optic facilities; electric generation, transmission and distribution facilities; gas transmission and distribution facilities; water production, treatment, storage, transmission and distribution facilities; and wastewater treatment, transmission, collection and discharge facilities; all of which are necessary to provide services at the locations listed below. State Service(s) Provided Arizona Electric, Natural Gas, Telecommunications,* Water, Wastewater California Telecommunications, Water Colorado Natural Gas Hawaii Electric Idaho Telecommunications Illinois Water, Wastewater Indiana Water Louisiana Natural Gas, Telecommunications Montana Telecommunications New Mexico Telecommunications New York Telecommunications Ohio Water, Wastewater Oregon Telecommunications Pennsylvania Water Tennessee Telecommunications Utah Telecommunications Vermont Electric Washington Telecommunications West Virginia Telecommunications* * Certain properties are subject to mortgage deeds pursuant to Rural Utilities Services and Rural Telephone Bank borrowings. Item 3. Legal Proceedings In September 1992, the EPA filed a complaint with the United States District Court for the Northern District of Illinois relating to alleged violations by the Company's Illinois subsidiary with respect to National Pollutant Discharge Elimination System permit requirements. The Company settled this action on March 21, 1995 and paid a $490,000 fine. Under the settlement, the Company also agreed to construct plant improvements, with an estimated cost of $2,200,000, which would be required in order to comply with new discharge limits provided for by the settlement. Shortly after the action was settled, the Company entered into a tentative agreement with the Village of Bolingbrook to transfer flow from the Company's to the Village's nearby facilities for treatment. If this agreement with the Village is approved by the EPA and the Court, the Company's plant would be converted to a flow transfer station. The Company's financial obligations would be the same under either the plant improvement project or the flow transfer project. The agreement with the Village of Bolingbrook is now pending approval by the EPA and the court. As a regulated entity, the Company is entitled to earn a fair rate of return on improvements that are placed in service for the benefit of its customers. The Company believes that the cost of the above discussed improvements will be recovered through customer rates. Item 4. Submission of Matters to Vote of Security Holders None in fourth quarter 1995. Executive Officers Information as to Executive Officers of the Company as of January 31, 1996, follows: Name Age Current Position and Office Leonard Tow 67 Chairman of the Board, Chief Executive Officer and Chief Financial Officer Daryl A. Ferguson 57 President and Chief Operating Officer Robert J. DeSantis 40 Vice President and Treasurer James P. Avery 39 Vice President, Energy Richard A. Faust, Jr. 49 Vice President, Mohave County J. Michael Love 44 Vice President, Corporate Planning Robert L. O'Brien 53 Vice President, Regulatory Affairs Livingston E. Ross 47 Vice President and Controller David B. Sharkey 46 President, Electric Lightwave, Inc. Ronald E. Spears 47 Vice President, Telecommunications Ronald E. Walsh 56 Vice President, Water/Wastewater There is no family relationship between any of the officers of the Registrant. The term of office of each of the foregoing officers of the Registrant will continue until the next annual meeting of the Board of Directors and until a successor has been elected and qualified. LEONARD TOW has been associated with the Registrant since April 1989 as a Director. In June 1990, he was elected Chairman of the Board and Chief Executive Officer. In October 1991, he was appointed to the additional position of Chief Financial Officer of the Registrant. He has also been a Director, Chief Executive Officer and Chief Financial Officer of Century Communications Corp. since its incorporation in 1973, and Chairman of its Board of Directors since October 1989. DARYL A. FERGUSON has been associated with the Registrant since July 1989. He was Vice President, Administration from July 1989 through March 1990 and Senior Vice President, Operations and Engineering from March 1990 through June 1990. He has been President and Chief Operating Officer since June 1990. During the period April 1987 through July 1989, he was President and Chief Executive Officer of Microtecture Corporation. He is currently a Director of Centennial Cellular Corp. ROBERT J. DeSANTIS has been associated with the Registrant since January 1986. He was Assistant to the Treasurer through May 1986 and Assistant Treasurer from June 1986 through September 1991. He has been Vice President and Treasurer since October 1991. JAMES P. AVERY has been associated with the Registrant since August 1981. He was Project Manager, Electric through June 1988, Assistant Vice President, Electric Operations from June 1988 through December 1990 and Vice President, Electric from December 1990 through May 1994. He has been Vice President, Energy since June 1994. RICHARD A. FAUST, JR. has been associated with the Registrant since December 1990. He was associated with Louisiana General Services, Inc. from 1972 until that Company was merged with the Registrant in December 1990. He served as Vice President, General Counsel and Secretary of Louisiana General Services, Inc. from March 1984 through May 1993. He was elected Vice President, Mohave County, (Arizona) in June 1993. J. MICHAEL LOVE has been associated with the Registrant since May 1990 and from November 1984 through January 1988. He was Assistant Vice President, Regulatory Affairs and Community Relations from June 1986 through January 1988. He left the Registrant in January 1988 to become President and General Counsel of Southern New Hampshire Water Company. He rejoined the Registrant in April 1990 and was Assistant Vice President, Corporate Planning from June 1990 through March 1991. He has been Vice President, Corporate Planning since March 1991. ROBERT L. O'BRIEN has been associated with the Registrant since March 1975. He has been Vice President, Regulatory Affairs since June 1981. LIVINGSTON E. ROSS has been associated with the Registrant since August 1977. He was Manager of Reporting from September 1984 through March 1988, Manager of General Accounting from April 1988 through September 1990 and Assistant Controller from October 1990 through November 1991. He has been Vice President and Controller since December 1991. DAVID B. SHARKEY has been associated with the Registrant since August 1994 and has been President of Electric Lightwave, Inc. since that date. Prior to joining the Registrant, he was Vice President and General Manager of MobilMedia, a wireless company headquartered in New Jersey from August 1989 through July 1994. RONALD E. SPEARS has been associated with the Registrant since June 1995 and has been Vice President, Telecommunications since that date. Prior to joining the Registrant, he was Managing Director at Russell Reynolds Associates, an executive recruiting firm from April 1994 to May 1995. He was Chairman and Chief Executive Officer, and prior to that, President and Chief Operating Officer of Videocart, Inc. from February 1991 to March 1994. He served as President, MCI Midwest, an operating division of MCI Telecommunications from September 1984 to January 1991. RONALD E. WALSH has been associated with the Registrant since January 1986. He was Attorney and Assistant Secretary from November 1987 through August 1992. He has been Vice President, Water/Wastewater since August 1992. PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters PRICE RANGE OF COMMON STOCK The Company's Common Stock is traded on the New York Stock Exchange under the symbols CZNA and CZNB for Series A and Series B, respectively. The following table indicates the high and low prices per share as taken from the daily quotations published in the "Wall Street Journal" during the periods indicated. Prices have been adjusted retroactively for subsequent stock dividends and the August 31, 1993 2-for-1 stock split, rounded to the nearest 1/8th. (See Note 7 of Notes to Consolidated Financial Statements.) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter High Low High Low High Low High Low 1995: Series A $13 5/8 $11 3/4 $12 3/8 $10 1/4 $11 1/2 $10 5/8 $13 1/4 $10 5/8 Series B 13 5/8 11 3/4 12 3/8 10 1/2 11 1/2 10 3/4 13 3/8 10 5/8 1994: Series A 16 1/8 13 1/8 14 7/8 12 1/2 13 5/8 12 3/8 13 11 3/4 Series B 16 1/4 13 14 7/8 12 1/2 13 5/8 12 3/8 13 11 7/8 1993: Series A 15 3/4 12 16 1/2 14 1/4 16 3/8 11 7/8 17 3/4 14 3/8 Series B 15 3/4 12 1/8 16 1/2 14 1/8 16 3/8 11 7/8 17 5/8 14 3/8 1992: Series A 11 1/8 9 3/8 10 3/4 9 7/8 12 1/8 9 5/8 13 10 3/4 Series B 10 7/8 9 3/8 10 3/4 9 1/2 12 1/4 9 1/2 13 10 3/4 The December 29, 1995 prices were: Series A $12 7/8 high, $12 5/8 low; Series B $12 7/8 high, $12 5/8 low. As of January 31, 1996, the approximate number of record security holders of the Company's Common Stock Series A and Series B was 26,330 and 21,385, respectively. This information was obtained from the Company's transfer agent. DIVIDENDS Quarterly stock dividends declared and issued on both Common Stock Series A and Series B were 1.5% for each the first and second quarters and 1.6% for each the third and fourth quarters of 1995. Quarterly stock dividends declared and issued on both Common Stock Series A and Series B were 1.1% for the first quarter of 1994, 1.15% for the second quarter of 1994, 1.3% for the third quarter of 1994 and 1.4% for the fourth quarter of 1994. An annual cash dividend equivalent rate of 72 1/4 cents and 68 7/8 cents per share (adjusted for all stock dividends paid subsequent to all dividends declared through December 31, 1995 and rounded to the nearest 1/8th) was considered by the Company's Board of Directors in establishing the Series A and Series B stock dividends during 1995 and 1994, respectively. (See Note 7 of Notes to Consolidated Financial Statements.) Item 6. Selected Financial Data (In thousands, except for per-share amounts) Year Ended December 31, 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Operating revenues $1,069,032 $906,150 $613,099 $576,881 $545,025 Net income $159,536 $143,997 $125,630 $115,013 $112,354 Earnings per-share of Common Stock Series A and Series B(1) $.73 $.72 $.63 $.59 $.58 Stock dividends declared on Common Stock Series A and Series B(2) 6.35% 5.04% 4.37% 5.61% 7.93% Total assets $3,918,187 $3,576,566 $2,627,118 $1,887,981 $1,721,452 Long-term debt $1,187,000 $ 994,189 $ 547,673 $ 522,699 $ 484,021 (1) Adjusted for subsequent stock dividends and splits; no adjustment has been made for the Company's 1.6% first quarter 1996 stock dividend because the effect is immaterial. (2) Annual rate of quarterly stock dividends compounded. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (a) Liquidity and Capital Resources In 1995, the Company's primary source of funds was from operations. Funds requisitioned from the 1995, 1994, 1993 and 1991 Series Industrial Development Revenue Bond construction fund trust accounts were used to pay for the construction of qualifying utility plant. Commercial paper notes payable in the amount of $156,800,000 were outstanding as of December 31, 1995. $140,650,000 of such commercial paper was classified as short-term debt as it was issued to temporarily and partially fund the acquisition of the GTE and ALLTEL Telecommunications Properties (see Note 3) and was to be repaid with proceeds from the issuance of equity securities. All such short-term debt has been repaid with equity issuance proceeds. On May 3, 1995, the Company arranged for the issuance of $13,550,000 of Industrial Development Revenue Bonds; the bonds were issued as demand purchase bonds bearing interest at 6.2% and maturing on May 1, 2030. On May 12, 1995 and January 22, 1996, Citizens Utilities Rural Telephone Company, Inc., a subsidiary of the Company, under it's Rural Telephone Bank Loan Contract, was advanced $8,793,000 and $4,464,000, respectively. Such funds bear an initial interest rate of 6.52% and 5.83%, respectively, and have an ultimate maturity date of December 31, 2027. On January 18, 1996, $10,000,000 of the Company's 1988 Series Special Purpose Revenue Bonds, originally issued as 7.25% demand purchase bonds, were converted and remarketed as money market municipals, initially bearing interest at a rate of 3.31% and maturing on September 1, 2018. On June 15, 1995, the Company issued $125,000,000 of debentures at a price of 99.918% with an interest rate of 7.45% and a maturity date of July 1, 2035. On October 20, 1995, the Company issued $150,000,000 of debentures at a price of 99.125% with an interest rate of 7% and a maturity date of November 1, 2025. On January 22, 1996, a subsidiary of the Company issued 4,025,000 shares of 5% Equity Providing Preferred Income Convertible Securities ("EPPICS") having a liquidation preference of $50 per security and a maturity date of January 15, 2036. Each security is initially convertible into 3.252 shares of the Company's Common Stock Series A at a conversion price of $15.375 per share. The $196,722,000 in net proceeds from the sale of these securities were used to repay short-term debt, permanently fund a portion of the ALLTEL Telecommunications Properties to be acquired, and for other general corporate purposes. On January 30, 1995, the Company, pursuant to an underwritten public offering, issued 19,000,000 shares of its Common Stock Series A at an issuance price of $13 3/8 per share and realized $244,200,000 in net proceeds. These proceeds were used to repay short-term debt. On April 28, 1995, 31,928 shares of Series B Common Stock were issued to effect the merger of Douglasville Water Company into a subsidiary of the Company. On July 17, 1995, Flex Communications was merged into the Company requiring the issuance of 855,953 shares of Citizens Series B Common Stock. In conjunction with the acquisitions of the ALLTEL Telecommunications Properties, the Company assumed $41,447,000 in debt at a weighted average interest rate of 6.59%. The Company considers its operating cash flows and its ability to raise debt and equity capital as the principal indicators of its liquidity. Although working capital is not considered to be an indicator of the Company's liquidity, the Company experienced an increase in its working capital at December 31, 1995. The increase is primarily due to the repayment of short-term debt from proceeds from the maturity and sale of investments and the issuance of equity securities. The Company has committed lines of credit with commercial banks under which it may borrow up to $600,000,000. There were no amounts outstanding under these lines at December 31, 1995. In 1995, the Company made a $4,200,000 investment in and entered into definitive agreements with Hungarian Telephone and Cable Corp. ("HTCC"), a Delaware corporation. Pursuant to these agreements (i) the Company has rights to purchase up to 54% of HTCC common stock, (ii) provides certain management services to HTCC on a cost-plus basis, (iii) has the right to and has designated one member of the HTCC Board of Directors, and (iv) has provided HTCC with guarantees and financial support. HTCC presently controls the rights to own, operate and expand certain telecommunications services in certain regions of Hungary. The management services fee payable by HTCC to the Company is the greater of 5% of adjusted gross revenues of HTCC or a monthly fixed amount. In addition, expenses incurred by the Company in providing such services, including certain allocable overhead items, are to be reimbursed by HTCC. A subsidiary of the Company is the guarantor of a $33,200,000 bank loan to HTCC. The Company has agreed to provide HTCC with up to $20,000,000 of additional financial support. The Company has been compensated for such guarantees and financial support. The Company's investment in HTCC is accounted for using the cost method of accounting. Capital expenditures for the years 1995, 1994, and 1993 were $266,963,000, and $311,420,000, and $182,480,000, respectively, and for 1996 are expected to be approximately $340,000,000. These expenditures were, and in 1996 will be, for utility and related facilities and properties. The Company anticipates that the funds necessary for its 1996 capital expenditures will be provided from operations; from 1993, 1994 and 1995 Series Industrial Development Revenue Bond construction fund trust account requisitions; from Rural Telephone Bank loan contract advances; from commercial paper notes payable; from parties desiring utility service; from debt, equity and other financings at appropriate times; and, if deemed advantageous, from short-term borrowings under bank credit facilities. During 1995, the Company was authorized increases in annual revenues for properties in Hawaii, Illinois, Ohio and Vermont totaling $13,445,000. The Company has requests for additional increases pending before regulatory commissions in Arizona, Hawaii, Louisiana and Pennsylvania. Regulatory Matters In September 1992, the EPA filed a complaint with the United States District Court for the Northern District of Illinois relating to alleged violations by the Company's Illinois subsidiary with respect to National Pollutant Discharge Elimination System permit requirements. The Company settled this action on March 21, 1995 and paid a $490,000 fine. Under the settlement, the Company also agreed to construct plant improvements, with an estimated cost of $2,200,000, which would be required in order to comply with new discharge limits provided for by the settlement. Shortly after the action was settled, the Company entered into a tentative agreement with the Village of Bolingbrook to transfer flow from the Company's to the Village's nearby facilities for treatment. If this agreement with the Village is approved by the EPA and the Court, the Company's plant would be converted to a flow transfer station. The Company's financial obligations would be the same under either the plant improvement project or the flow transfer project. The agreement with the Village of Bolingbrook is now pending approval by the EPA and the court. As a regulated entity, the Company is entitled to earn a fair rate of return on improvements that are placed in service for the benefit of its customers. The Company believes that the cost of the above discussed improvements will be recovered through customer rates. Various state regulatory agencies, state legislatures and the federal government have initiated proceedings to promote the development of competition in telecommunications markets. These proceedings are focused on removing the regulatory and legal barriers to competitive entry into the interLATA toll, intraLATA toll and local exchange markets and developing rules to govern the relationship between competitors in these markets. Simultaneously, many states are investigating or have implemented procedures for local exchange companies to enter into incentive regulatory frameworks ("IRF") as an alternative to traditional rate of return regulation and/or classifying services on the basis of the presence of competition and allowing deregulation or flexible pricing regulation for the services deemed competitive. Local exchange competition has been authorized in the following states in which the Company currently provides local exchange service: Arizona, California, New York, Oregon, Tennessee, Utah and West Virginia. The Company continues to expand its subsidiary, Electric Lightwave, Inc. ("ELI"), a competitive access provider in Arizona, California, Oregon, Utah and Washington. Through ELI, the Company has been granted authority in Washington, Utah and Oregon to provide competitive local exchange service. The Company completed construction of a fiber-optic route from Las Vegas, Nevada to Phoenix, Arizona which provides the Company with fiber optic capacity for its long distance operations as well as for other telecommunications carriers. On November 8, 1995, the California Public Utilities Commission issued a final order approving a restructuring of Citizens Telecom of California's ("CTCC") rates and an Incentive Regulatory Framework ("IRF"). The restructured rates allow CTCC to compete more effectively. Under the IRF, CTCC can earn and keep up to 1.5% above its authorized rate of return while earned returns greater than 1.5% and up to 5% above its authorized rate of return will be shared equally with customers. There have been federal and state regulatory activities with the aim of creating a more competitive environment in the electric utility industry. These federal and state regulatory activities are still in the investigation stage. The Company anticipates no material adverse impact on its electric sector should the industry be opened to competition since the Company is not a large generator of electric power and serves primarily residential customers. The advent of competition would most likely provide opportunities for expansion. In response to regulatory initiatives, the Company's electric sector is proceeding with demand-side management programs and integrated resource planning techniques designed to promote the most efficient use of electricity and to reduce the environmental impacts associated with new generation facilities. In 1994, the Company filed for a $19,153,000 rate increase with the Hawaii Public Utilities Commission ("HPUC"). Part of the requested increase is for the recovery of restoration and repair costs associated with Hurricane Iniki. In an effort to reduce the rate impact on its customers, the Company subsequently filed an application with the HPUC to recover $8,000,000 of the $19,153,000 through a statewide surcharge to partially recover Iniki restoration and repair costs under the provisions of Subsection 269-16.3 of the Hawaii Revised Statutes. If the HPUC approves the surcharge application, customers of all electric utility companies in Hawaii would pay a portion of the approved Iniki restoration and repair costs over a five year period and the Company's rate increase request will be reduced by $8,000,000. The HPUC issued an Interim Decision and Order which took effect on June 15, 1995 granting the Company a $5,983,000 interim increase in annual revenues. The second phase of the requested rate increase and the statewide surcharge is expected to be included in a final order from the HPUC. The Company expects a final order in the first half of 1996. New Accounting Pronouncements In March 1995, the Financial Accounting Standards Board issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"), effective for fiscal years beginning after December 15, 1995. The Company will adopt SFAS 121 in the first quarter of 1996. Based on current facts and circumstances, the Company believes that SFAS 121 will not adversely affect the Company. In December 1995, the Financial Accounting Standards Board issued Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), effective for fiscal years beginning after December 15, 1995. Under SFAS 123, the Company may elect either a "fair value" based method or the current "intrinsic value" based method of accounting for its stock-based compensation arrangements. If the Company were to adopt the "fair value" based method, the Company would be required to charge compensation expense for all of its stock-based compensation arrangements. If the Company were to elect the "intrinsic value" based method, the Company would be required to disclose in the footnotes to the financial statements net income and earnings per share computed under the "fair value" based method. The Company will elect the "intrinsic value" based method. Accordingly, the adoption of SFAS 123 will not impact the Company's results of operations or financial condition. (b) Results of Operations Revenues Telecommunications revenues increased $159,872,000, or 35%, in 1995 and increased $279,378,000, or 157%, in 1994. These increases are primarily attributable to the acquired GTE and ALLTEL Telecommunications Properties. The increase in revenues in 1995 was offset in part by the loss of $38,000,000 of discontinued subsidy revenues from Pacific Bell which had been received annually through the end of 1994. Natural gas revenues had a net decrease of $11,038,000, or 5%, in 1995 primarily due to lower average revenue per MCF of gas sold which resulted from pass-ons to customers of lower average gas costs from suppliers; this decrease was partially offset by increased consumption. Natural gas revenues decreased $2,952,000, or 1%, in 1994 compared to 1993 due to a decrease in transportation revenues; this decrease was partially offset by increased residential and commercial revenues from the Company's Northern Arizona Gas operations and increased industrial gas revenues. Pass-ons are required under tariff provisions and do not affect net income. The Company's electric sector revenues had a net increase of $7,411,000, or 4%, in 1995 and $9,718,000, or 6% in 1994 primarily due to increased consumption and rate increases, partially offset by pass-ons to customers of lower commodity prices. Revenues earned by the Company's water/wastewater treatment sector increased $6,637,000, or 9%, in 1995, primarily due to increased consumption and rate increases. In 1994, revenues increased $6,907,000, or 11%, due to rate increases of $4,800,000 and $2,800,000 from acquired properties. Expenses Natural gas purchased costs decreased $8,034,000, or 7%, in 1995 and $1,305,000, or 1%, in 1994 primarily due to a decrease in supplier prices. Under tariff provisions, increases and decreases in the Company's wholesale costs of electric energy, fuel oil and natural gas purchased are passed on to customers. Electric energy purchased costs for 1995 totaled $68,900,000, an increase of $2,185,000, or 3% ,over the 1994 amount of $66,715,000 which was a $4,784,000, or 8%, increase over the 1993 cost of $61,931,000. The increase in electric energy purchased was primarily due to customer growth. The increased cost of electric energy purchased in 1994 was primarily due to increased customer demand. Fuel oil purchased in 1995 of $16,268,000 increased $2,052,000, or 14%, from the 1994 amount of $14,216,000 primarily due to an increase in supplier prices and increased volume to satisfy increased consumption. Fuel oil purchased cost in 1994 decreased $679,000, or 5%, from the 1993 amount of $14,895,000 due to a decrease in supplier prices. Operating and maintenance expenses increased $87,333,000, or 28%, in 1995 and $139,122,000, or 83%, in 1994 primarily due to operating expenses related to the telecommunications properties acquired. Depreciation expense increased $43,760,000, or 38%, in 1995 and $60,477,000, or 111%, in 1994 primarily due to increases in depreciable plant assets as a result of acquisitions. Taxes other than income increased $9,537,000, or 16%, in 1995 and $23,688,000, or 67% in 1994 primarily due to increased taxes on the newly acquired telecommunications properties. Interest expense for the year ended December 31, 1995 increased $15,031,000, or 21%, in 1995 and $35,313,000, or 94%, in 1994 primarily due to interest paid on the additional debt securities issued to finance the acquisitions of telecommunications properties as well as increased Industrial Development Revenue Bonds. Cost increases, including those due to inflation, are expected to be offset in due course by increases in revenues obtained under established regulatory procedures. Investment Income Investment income increased $1,213,000, or 3%, in 1995 primarily due to gains realized on investments sold to permanently fund telecommunications acquisitions. Investment income decreased $1,643,000, or 4%, in 1994 due to the liquidation of investments to fund the acquisitions of the telecommunications properties. Net Income and Earnings Per Share Net Income increased $15,539,000, or 11%, in 1995 despite the loss of $23,000,000 of net income reported in 1994 which was derived from the discontinued subsidy revenues from Pacific Bell which had been received annually through the end of 1994. Earnings per share increased $.01 in 1995 despite the loss of $.12 per share reported in 1994 which was derived from the discontinued Pacific Bell subsidy and despite the issuance in January 1995 of 19,000,000 additional shares of Common Stock Series A. Item 8. Financial Statements and Supplementary Data The following documents are filed as part of this Report: 1. Financial Statements: See Index on page F-1. 2. Supplementary Data: Quarterly Financial Data is included in the Financial Statements (see 1. above). Item 9. Disagreements with Auditors on Accounting and Financial Disclosure None PART III The Company intends to file with the Commission a definitive proxy statement for the 1996 Annual Meeting of Stockholders pursuant to Regulation 14A not later than 120 days after December 31, 1995. The information called for by this Part III is incorporated by reference to that proxy statement. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) The exhibits listed below are filed as part of this Report: Exhibit No. Description 3.1 Certificate of Incorporation 3.2 By-laws 3.2.1 Amendment dated April 14, 1992, to the By-laws 3.200.1 Restated Certificate of Incorporation of Citizens Utilities Company, with all amendments to March 4, 1996 3.200.2 By-laws of the Company, as amended to-date of Citizens Utilities Company, with all amendments to March 4, 1996 4.100.1 Copy of Indenture of Securities, dated as of August 15, 1991, to Chemical Bank, as Trustee 4.100.2 First Supplemental Indenture, dated August 15, 1991 4.100.3 Letter of Representations, dated August 20, 1991, from Citizens Utilities Company and Chemical Bank, as Trustee, to Depository Trust Company ("DTC") for deposit of securities with DTC 4.100.4 Second Supplemental Indenture, dated January 15, 1992, to Chemical Bank, as Trustee 4.100.5 Letter of Representations, dated January 29, 1992, from Citizens Utilities Company and Chemical Bank, as Trustee, to DTC, for deposit of securities with DTC 4.100.6 Third Supplemental Indenture, dated April 15, 1994, to Chemical Bank, as Trustee. 4.100.7 Fourth Supplemental Indenture, dated October 1, 1994, to Chemical Bank, as Trustee. 10.1 Incentive Deferred Compensation Plan, dated April 16, 1991 10.6 Deferred Compensation Plans for Directors, dated November 26, 1984 and December 10, 1984 10.6.1 Directors' Retirement Plan, effective January 1, 1989 10.6.2 Non-Employee Directors' Deferred Fee Equity Plan dated as of June 28, 1994 10.9 Management Equity Incentive Plan, effective June 22, 1990 10.13 LGS Supplemental Executive Retirement Plan 10.16 Employment Agreement between Citizens Utilities Company and Leonard Tow, as amended effective September 28, 1995 10.17 1992 Employee Stock Purchase Plan 10.18 Amendment dated May 21, 1993, to the 1992 Employee Stock Purchase Plan 10.20 Asset Purchase Agreements, dated November 28, 1994 12. Computation of ratio of earnings to fixed charges (this item is included herein for the sole purpose of incorporation by reference) 21. Subsidiaries of the Registrant 23. Auditors' Consent 24. Powers of Attorney 27. Financial Data Schedule Exhibits 10.1, 10.6, 10.6.1, 10.6.2, 10.9, 10.16, 10.17 and 10.18 are management contract or compensatory plans or arrangements. The Company agrees to furnish to the Commission upon request copies of the Realty and Chattel Mortgage, dated as of March 1, 1965, made by Citizens Utilities Rural Company, Inc., to the United States of America (the Rural 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; and copies of documents relating to indebtedness of subsidiaries acquired during 1995. Exhibit number 10.6 is incorporated by reference to the same exhibit designation in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1984. Exhibit number 10.6.1 is incorporated by reference to the same exhibit designation in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989. Exhibit number 10.9 is incorporated by reference to Appendix A to the Registrant's Proxy Statement dated May 14, 1990. Exhibit numbers 10.10, 10.11, 10.12 and 10.13 are incorporated by reference to the same exhibit designation in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990. Exhibit numbers 4.100.1, 4.100.2 and 4.100.3 are incorporated by reference to the same exhibit designation in the Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30, 1991. Exhibit numbers 3.1, 3.2, 4.100.4, 4.100.5, 10.1 and 10.16 are incorporated by reference to the same exhibit designation in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991. Exhibit number 3.2.1 and 10.17 is incorporated by reference to the same exhibit designation in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992. Exhibit number 10.18 is incorporated by reference to the Registrant's Proxy Statement, dated March 31, 1993. Exhibit number 10.19 is incorporated by reference to exhibit number 2.1 in the Registrant's Form 8-K Current Report filed June 30, 1993. Exhibit numbers 3.200.1 and 3.200.2 are incorporated by reference to the same exhibit designation in the Registrant's Form S-3 filed December 16, 1993. Exhibit numbers 4.100.6 and 4.100.7 are incorporated by reference to the Registrant's Form 8-K Current Reports filed on July 5, 1994 and January 3, 1995, respectively. Exhibit number 10.20 is incorporated by reference to the same exhibit designation in the Registrant's Form 10-K for the year ended December 31, 1994. Exhibit number 10.6.2 is incorporated by reference to the Registrant's Proxy Statement, dated April 4, 1995. (b) No Form 8-K was required during the three months ended December 31, 1995. 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:___________________________________________ Leonard Tow Chairman of the Board; Chief Executive Officer; Chief Financial Officer; Member, Executive Committee and Director March 6, 1996 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 6th day of March 1996. Signature Title ________________________________ Vice President and Treasurer (Robert J. DeSantis) ________________________________ Vice President and Controller (Livingston E. Ross) Norman I. Botwinik* Director - -------------------------------- (Norman I. Botwinik) Aaron I. Fleischman* Member, Executive Committee and - -------------------------------- Director (Aaron I. Fleischman) James C. Goodale* Director - -------------------------------- (James C. Goodale) Stanley Harfenist* Member, Executive Committee and - -------------------------------- Director (Stanley Harfenist) Andrew N. Heine* Director - -------------------------------- (Andrew N. Heine) Elwood A. Rickless* Director - -------------------------------- (Elwood A. Rickless) John L. Schroeder* Member, Executive Committee and - -------------------------------- Director (John L. Schroeder) Robert D. Siff* Director - -------------------------------- (Robert D. Siff) Robert A. Stanger* Director - -------------------------------- (Robert A. Stanger) Edwin Tornberg* Director - -------------------------------- (Edwin Tornberg) Claire L. Tow* Director - -------------------------------- (Claire L. Tow) Charles H. Symington, Jr* Director - -------------------------------- (Charles H. Symington, Jr.) *By: --------------------------- (Robert J. DeSantis) Attorney-in-Fact CITIZENS UTILITIES COMPANY AND SUBSIDIARIES Index to Financial Statements Independent Auditors' Report F-2 Consolidated balance sheets as of December 31, 1995, 1994 and 1993 F-3 Consolidated statements of income for the years ended December 31, 1995, 1994 and 1993 F-4 Consolidated statements of shareholders' equity for the years ended December 31, 1995, 1994 and 1993 F-5 Consolidated statements of cash flows for the years ended December 31, 1995, 1994 and 1993 F-6 Notes to consolidated financial statements F-7 - F-23 Independent Auditors' Report The Board of Directors and Shareholders Citizens Utilities Company: We have audited the consolidated financial statements of Citizens Utilities Company and subsidiaries as of December 31, 1995, 1994 and 1993, and the related consolidated statements of income, shareholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Citizens Utilities Company and subsidiaries at December 31, 1995, 1994 and 1993, and the results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP New York, New York March 1, 1996 CITIZENS UTILITIES COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1995, 1994 and 1993 (In thousands) 1995 1994 1993 ---- ---- ---- ASSETS Current assets: Cash $ 17,922 $ 14,224 $ 21,738 Temporary investments 0 108,818 89,752 Accounts receivable: Utility service 146,561 134,510 99,684 Other 55,991 34,713 15,088 Less allowance for doubtful accounts 2,739 2,428 459 --------------- -------------- --------------- Total accounts receivable 199,813 166,795 114,313 Materials and supplies 18,191 18,330 10,061 Other current assets 16,776 5,887 4,873 -------------- -------------- -------------- Total current assets 252,702 314,054 240,737 ------------- ------------ ------------ Property, plant and equipment 4,187,354 3,583,723 2,153,891 Less accumulated depreciation 1,279,324 1,014,068 461,924 ------------ ----------- ------------ Net property, plant and equipment 2,908,030 2,569,655 1,691,967 ------------ ----------- ----------- Investments 329,090 325,011 411,022 Regulatory assets 180,572 177,414 146,207 Deferred debits and other assets 247,793 190,432 137,185 ------------- ------------ ------------ Total assets $ 3,918,187 $3,576,566 $2,627,118 =========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term debt $ 140,650 $ 515,200 $ 380,000 Long-term debt due within one year 3,865 13,986 1,620 Accounts payable 178,384 122,404 84,015 Income taxes accrued 72,494 92,366 82,632 Interest accrued 22,527 15,841 12,731 Customers' deposits 20,501 19,919 19,436 Other current liabilities 65,257 72,105 47,791 -------------- -------------- ------------- Total current liabilities 503,678 851,821 628,225 Deferred income taxes 314,094 248,150 213,471 Regulatory liabilities 28,279 30,830 28,376 Deferred credits 101,300 77,950 50,634 Customer advances for construction 150,000 145,150 137,012 Contributions in aid of construction 73,923 71,580 47,241 Long-term debt 1,187,000 994,189 547,673 Shareholders' equity 1,559,913 1,156,896 974,486 ------------- --------------- ------------- Total liabilities and shareholders' equity $ 3,918,187 $ 3,576,566 $ 2,627,118 ============ =============== =========== The accompanying Notes are an integral part of these Consolidated Financial Statements. CITIZENS UTILITIES COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 and 1993 (In thousands, except for per-share amounts) 1995 1994 1993 ---- ---- ---- Revenues: Telecommunications $616,747 $456,875 $177,497 Natural gas 197,902 208,940 211,892 Electric 175,351 167,940 158,222 Water/Wastewater 79,032 72,395 65,488 --------- ---------- --------- Total revenues 1,069,032 906,150 613,099 ---------- --------- -------- Operating expenses: Natural gas purchased 108,385 116,419 117,724 Electric energy and fuel oil purchased 85,168 80,931 76,826 Operating expenses 306,734 244,877 142,718 Maintenance expenses 87,255 61,779 24,816 Depreciation 158,935 115,175 54,698 Taxes other than income 68,382 58,845 35,157 --------- ---------- --------- Total operating expenses 814,859 678,026 451,939 -------- --------- -------- Income from operations 254,173 228,124 161,160 Investment income 41,667 40,454 42,097 Other income - net 18,288 12,486 12,102 Interest expense 87,775 72,744 37,431 --------- ---------- --------- Income before income taxes 226,353 208,320 177,928 Income taxes 66,817 64,323 52,298 --------- ---------- ---------- Net income $159,536 $143,997 $125,630 ======== ======== ======== Earnings per share of Common Stock Series A and Series B $.73 $.72 $.63 ==== ==== ==== The accompanying Notes are an integral part of these Consolidated Financial Statements. CITIZENS UTILITIES COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 and 1993 (In thousands, except for per-share amounts) Unrealized gain Additional on Available- Common Stock ($.25) Paid-in Retained for-Sale Series A Series B Capital Earnings Securities Total Balance January 1, 1993 $ 16,039 $ 5,651 $ 582,299 $ 233,282 $ 0 $ 837,271 Acquisitions 155 1,002 2,914 4,071 Net income 125,630 125,630 Stock dividends in shares of Common Stock Series A and Series B 1,029 387 129,963 (131,594) (215) Stock split (2 for 1) 16,155 6,036 (22,191) 0 Stock plans 114 7,615 7,729 Conversions of Series A to Series B (776) 776 0 --------- --------- ---------- --------- ---------- ----------- Balance December 31, 1993 $ 32,447 $ 13,119 $ 698,688 $230,232 $ 0 $ 974,486 --------- --------- ---------- ---------- ---------- ----------- Acquisitions 126 4,646 3,231 8,003 Net income 143,997 143,997 Stock dividends in shares of Common Stock Series A and Series B 1,621 686 137,736 (140,043) 0 Stock plans 88 281 20,911 21,280 Conversions of Series A to Series B (570) 570 0 Change in unrealized gain on securities classified as available- for-sale, net of income taxes 9,130 9,130 --------- -------- ---------- --------- --------- ---------- Balance December 31, 1994 $ 33,586 $ 14,782 $ 861,981 $ 237,417 $ 9,130 $1,156,896 --------- -------- ---------- --------- --------- ---------- Acquisitions 222 (4,485) 374 (3,889) Net income 159,536 159,536 Stock dividends in shares of Common Stock Series A and Series B 2,374 1,024 158,693 (162,091) 0 Common stock buybacks (115) (352) (21,561) (22,028) Stock issuance 4,750 238,830 243,580 Stock plans 150 475 30,236 30,861 Conversions of Series A to Series B (1,906) 1,906 0 Change in unrealized gain on securities classified as available- for-sale, net of income taxes (5,043) (5,043) --------- ---------- ---------- ---------- --------- ----------- Balance December 31, 1995 $38,839 $18,057 $1,263,694 $235,236 $ 4,087 $1,559,913 ========= ========== ========== ========== ========= =========== The accompanying Notes are an integral part of these Consolidated Financial Statements. CITIZENS UTILITIES COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 and 1993 (In thousands) 1995 1994 1993 ---- ---- ---- Net cash provided by operating activities $ 338,374 $ 262,316 $ 194,949 --------- --------- --------- Cash flows used for investing activities: Business acquisitions (223,926) (700,222) (481,257) Construction expenditures (245,004) (263,162) (168,349). Securities purchased (86,058) ( 18,219) (254,203) Securities sold 92,224 23,478 269,624 Securities matured 120,691 89,885 54,465 Other 55 (13,795) (7,086) --------- ---------- ----------- (342,018) (882,035) (586,806) ---------- --------- ---------- Cash flows from financing activities: Long-term debt borrowings 321,280 458,589 34,733 Long-term debt principal payments (192,030) ( 1,268) (26,644). Short-term debt (repayments) borrowings (374,550) 135,200 380,000 Issuance of common stock 272,687 18,465 3,780 Common stock buybacks (22,028) 0 0 Other 1,983 1,219 1,974 ----------- -------- ----------- 7,342 612,205 393,843 ----------- --------- -------- Increase (decrease) in cash 3,698 (7,514) 1,986 Cash at January 1, 14,224 21,738 19,752 ----------- --------- -------- Cash at December 31, $ 17,922 $ 14,224 $ 21,738 =========== ========= ======== The accompanying Notes are an integral part of these Consolidated Financial Statements. CITIZENS UTILITIES COMPANY AND SUBSIDIARES Notes to Financial Statements (1) Summary of Significant Accounting Policies: (a) Description of Business: Citizens Utilities Company is a diversified operating public utility providing telecommunications , electric distribution, natural gas transmission and distribution and water/wastewater treatment services to nearly 1,600,000 customer connections in areas of nineteen states in the United States. The Company is not dependent upon any single customer, geographic area or upon any one type of utility service for its revenues. (b) Principles of Consolidation and Use of Estimates: The consolidated financial statements have been prepared in accordance with Generally Accepted Accounting Principles and include the accounts of Citizens Utilities Company and all of its subsidiaries, after elimination of intercompany balances and transactions. Certain reclassifications of balances previously reported have been made to conform to current presentation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (c) Revenues: The Company records revenues from telecommunications, natural gas, electric, and water/wastewater treatment customers when billed. The Company accrues unbilled revenues earned from the dates customers were last billed to the end of the accounting period. Natural gas, electric and water/wastewater treatment customers are billed on a cycle basis based on monthly meter readings. Certain telecommunications 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. (d) Construction Costs and Maintenance Expense: Property, plant and equipment are stated at original cost, including general overhead and an allowance for funds used during construction ("AFUDC"). AFUDC represents the borrowing costs and a return on common equity of funds used to finance construction. AFUDC is capitalized as a component of additions to property, plant and equipment and is credited to income. AFUDC does not represent current cash earnings; however, under established regulatory rate-making practices, after the related plant is placed in service, the Company is permitted to include in the rates charged for utility services a fair return on and depreciation of such AFUDC included in plant in service. The amount relating to equity is included in other income ($10,783,000, $11,402,000 and $10,123,000 for 1995, 1994 and 1993, respectively) and the amount relating to borrowings is included as a reduction of interest expense ($4,193,000, $3,031,000 and $2,678,000 for 1995, 1994 and 1993, respectively). The weighted average rates used to calculate AFUDC were 11% in 1995 and 12% in 1994 and 1993. Maintenance and repairs are charged to operating expenses as incurred. The book value, net of salvage, of routine property, plant and equipment dispositions is charged against accumulated depreciation. (e) Depreciation Expense: Depreciation expense, calculated using the straight-line method, is based upon the estimated service lives of various classifications of property, plant and equipment and represented approximately 4% of the gross depreciable property, plant and equipment for 1995, 1994 and 1993. (f) Regulatory Assets and Liabilities: The Company's regulated operations are subject to the provisions of Statement of Financial Accounting Standards ("SFAS") 71; "Accounting for the Effects of Certain Types of Regulation". SFAS 71 requires regulated entities to record regulatory assets and liabilities as a result of actions of regulators. Regulatory assets of $25,006,000, $24,669,000 and $1,601,000 at December 31, 1995, 1994 and 1993, respectively, were related to Postretirement Benefits Other than Pensions (see Note 13). Regulatory assets of $155,566,000, $152,745,000 and $143,813,000 and regulatory liabilities of $28,279,000, $30,830,000 and $28,376,000 at December 31, 1995, 1994 and 1993, respectively, were recorded to offset deferred income taxes (see note 1(i)). The Company continuously monitors the applicability of SFAS 71 to its regulated operations. SFAS 71 may, at some future date, be deemed inapplicable due to changes in the regulatory and competitive environments and/or a decision by the Company to accelerate deployment of new technology. If the Company were to discontinue the application of SFAS 71 to one or more of its regulated operations, the Company would be required to write off its regulatory assets and regulatory liabilities associated with such operation(s) and would be required to adjust the carrying amount of any property, plant and equipment that would be deemed not recoverable. The Company believes its regulated operations continue to meet the criteria for SFAS 71 and that the carrying value of its property, plant and equipment is recoverable in accordance with established rate-making practices. (g) Accounting for Investments, Temporary Investments and Short-Term Debt: Investments include high credit quality, short- and intermediate- term fixed-income securities (primarily state and municipal debt obligations) and equity securities. The Company adopted SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities" as of January 1, 1994. Under SFAS 115, the Company is required to classify its investments at acquisition as available- for-sale, held-to-maturity or trading. The Company does not invest in securities which would be designated as trading. Prior to the adoption of SFAS 115, fixed income securities were stated at amortized cost and marketable equity securities were stated at the lower of cost or market. Securities which the Company will hold for an indefinite period of time, but which might be sold in the future as changes in market conditions or economic factors occur, are classified as available-for-sale and are carried at estimated fair market value. Net aggregate unrealized gains and losses related to such securities, net of taxes, are included as a separate component of Shareholders' equity. Securities for which the Company has the intent and ability to hold to maturity are designated as held-to-maturity and are carried at amortized cost, adjusted for amortization of premiums and accretion of discounts over the period to maturity. Interest, dividends and gains and losses realized on sales of securities are reported in Investment income. Temporary investments in 1994 and 1993 represented investments in state and municipal securities which matured in less than one year, the proceeds of which were used to repay a portion of the short-term debt issued to partially and temporarily fund the acquisition of the GTE and ALLTEL Telecommunications Properties (see Note 3). Such investments were considered held-to-maturity and carried at amortized cost. Short-term debt outstanding was issued in the form of commercial paper notes payable to temporarily and partially fund the acquisition of the telecommunications properties. This short-term debt had a weighted average interest rate of 5.73% at December 31, 1995 and was repaid in early 1996 with proceeds from the issuance of Equity Providing Preferred Income Convertible Securities (see Note 7). (h) Investment in Centennial Cellular Corp.: The Company recorded its initial investment in 102,187 shares of Centennial Cellular Corp. ("Centennial") Convertible Redeemable Preferred Stock (the "Preferred Security") at $49,842,000 and 1,367,099 shares of Centennial Class B Common Stock at $19,826,000 which in the aggregate represented the historical cost of the Company's investment in Citizens Cellular Company, prior to its merger with Century Cellular Corp. During 1994, the Company purchased 615,195 additional shares of Centennial Class B Common Stock for $8,613,000 pursuant to a Centennial rights offering. The terms of the Preferred Security provide that the Preferred Security may be converted by the holder into Centennial common stock and accretes a liquidation value preference at a fixed dividend rate of 7.5%, compounded quarterly, on an initial liquidation value preference of $125,700,000 until the Preferred Security reaches a liquidation value preference of $186,000,000 on August 31, 1996. Commencing on September 1, 1996, Centennial may elect to pay an 8.5% cash dividend on the Preferred Security's $186,000,000 liquidation value preference or to redeem the Preferred Security for $186,000,000 in cash or in Centennial common stock. The Preferred Security is mandatorily redeemable on August 30, 2006. The Company recognizes the non-cash accretion as it is earned in each period as investment income and increases the book value of its investment in Centennial by the same amount. The liquidation value preference earned on the Preferred Security for 1995, 1994 and 1993 was $14,353,000, $13,481,000 and $9,594,000. From inception through December 31, 1995, $48,794,000 of such accretion has been accounted for in this manner. Pursuant to SFAS 115, beginning January 1, 1994, the investment in the Centennial Class B Common Stock has been classified as available-for-sale and is carried at fair market value while the Preferred Security has been classified as held-to-maturity and is carried at amortized cost. The fair market value of the Centennial Class B Common Stock at December 31, 1995 and 1994, was $33,947,000 and $33,699,000, respectively. On a quarterly basis, the Company assesses whether the book value of the Preferred Security can be realized by comparing such book value to the market value of Centennial's common equity and by evaluating other relevant indicators of realizability including Centennial's ability to redeem the Preferred Security. The carrying value of the Preferred Security would be deemed impaired to the extent that such carrying value exceeds the estimated realizability of the Preferred Security based on all existing facts and circumstances including the Company's assessment of its ability to realize the carrying value of the Preferred Security through mandatory redemption. The Company believes it can realize its investment in Centennial either by cash redemption by the issuer funded through refinancing by the issuer, by temporary conversion to common equity securities followed by the sale of the common equity securities, or by sale of its current investment holdings. (i) Income Taxes, Deferred Income Taxes and Investment Tax Credits: The Company and its subsidiaries are included in a consolidated federal income tax return. The Company utilizes the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes reflect the tax effect of temporary differences between the financial statement and the tax bases of assets and liabilities using presently enacted tax rates. Regulatory assets and liabilities represent income tax benefits previously flowed through to customers and from the allowance for funds used during construction, the effects of tax law changes and the tax benefit associated with unamortized deferred investment tax credits. These regulatory assets and liabilities represent the probable net increase in revenues that will be reflected through future ratemaking proceedings. The investment tax credits relating to utility properties, as defined by applicable regulatory authorities, have been deferred and are being amortized to income over the lives of the related properties. (j) Earnings Per Share: Earnings per share is based on the average number of outstanding shares. Earnings per share is presented with adjustment for subsequent stock dividends and stock splits. The calculation has not been adjusted for the 1.6% stock dividend declared on February 16, 1996, 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, 1995, 1994 and 1993 are as follows: 1995 1994 1993 ---- ---- ---- ($ in thousands) Transmission and distribution facilities $2,641,594 $2,159,452 $1,417,320 Production and generating facilities 868,119 818,927 414,743 Pumping, storage and purification facilities 107,653 93,942 80,175 Construction work in progress 212,892 210,213 68,868 Administrative facilities 337,196 285,445 160,423 Intangibles and other 19,900 15,744 12,362 ------------- ------------- ------------- $4,187,354 $3,583,723 $2,153,891 =========== ========== ========== (3) Mergers and Acquisitions: In July 1995, the Company acquired Flex Communications by merger. The Company issued 855,953 shares of Common Stock Series B for all of the outstanding shares of Flex. This transaction was accounted for using the pooling of interests method of accounting. Prior year financial statements were not restated as the amounts are not significant. Flex is a switch-based, inter-exchange carrier providing long distance, 800 Inbound long-distance, voice mail, paging, private data networks and cellular services to approximately 5,500 customers in upstate New York. In March 1995, the Company acquired Douglasville Water Company for $173,000 and 31,928 shares of Common Stock Series B. Douglasville provides water utility services in Pennsylvania to approximately 870 customers. This transaction was accounted for using the purchase method of accounting and the results of operations of Douglasville have been included in the accompanying financial statements from the date of acquisition. In February 1995, the Company acquired from the town of Youngtown, Arizona, the town's water and wastewater systems for $1,192,000, serving approximately 3,400 customers. This acquisition was accounted for using the purchase method of accounting and the results of operations of Youngtown have been included in the accompanying financial statements from the date of acquisition. In November 1994, the Company and ALLTEL Corporation signed definitive agreements pursuant to which the Company agreed to acquire from ALLTEL certain telecommunications properties in eight states serving approximately 110,000 local telephone access lines and certain cable television systems serving approximately 7,000 subscribers ("ALLTEL Telecommunications Properties"). The purchase price of the ALLTEL Telecommunications Properties (net of 3,600 of the Company's telephone access lines which were valued at $10 million and transferred to ALLTEL in a tax free exchange) is $282 million. On June 30, 1995, approximately 36,000 local telephone access lines in West Virginia and Oregon were transferred to the Company. On September 30, 1995, approximately 19,000 local telephone access lines in Tennessee were transferred to the Company. On October 31, 1995, approximately 18,000 local telephone access lines in Arizona, New Mexico and Utah and approximately 7,000 cable television lines in Arizona, New Mexico and California were transferred to the Company. On December 31, 1995, approximately 20,000 local telephone access lines in California were transferred to the Company and the Company's 3,600 local telephone access lines in Pennsylvania were transferred to ALLTEL. The remaining 23,000 local telephone access lines are located in Nevada and are expected to be transferred to the Company in early 1996. In August 1994, the Company acquired RHC, Inc. ("Metro Utility Co."). Metro Utility Co. provides water and wastewater treatment services to approximately 10,000 customers in the suburban Chicago area. The Company issued 504,807 shares of Common Stock Series B for all of the outstanding shares of Metro Utility Co. This transaction was accounted for using the pooling of interests method of accounting. Prior year financial statements were not restated as the amounts are not significant. In May 1993, the Company and GTE Corp. ("GTE") signed definitive agreements pursuant to which the Company agreed to acquire from GTE, for approximately $1.1 billion in cash, certain GTE telecommunications properties serving approximately 500,000 local telephone access lines in eight states ("GTE Telecommunications Properties"). On December 31, 1993, 189,123 local telephone access lines in Idaho, Tennessee, Utah and West Virginia were transferred to the Company. On June 30, 1994, 270,883 access lines in New York were transferred to the Company. On November 30, 1994, 37,802 access lines in Arizona and Montana were transferred to the Company and on December 30, 1994, 5,440 local telephone access lines in California were transferred to the Company. In 1993, the Company separately acquired Natural Gas Company of Louisiana ("NGL") and Franklin Electric Light Company, Incorporated ("Franklin") by merger. In these mergers, the Company issued 568,748 shares and 51,500 shares of Common Stock Series B for all of the common stock of NGL and Franklin, respectively. The acquisitions were accounted for using the poolings of interests method of accounting. The following unaudited pro forma financial information presents the combined results of operations of the Company and the GTE and ALLTEL Telecommunications Properties acquired to date as if the acquisitions had occurred on January 1 of the year preceding the respective dates acquired. The effects of the other acquisitions described above would not significantly impact the pro forma results. The pro forma financial information does not necessarily reflect the results of operations that would have occurred had the Company and the GTE and ALLTEL Telecommunications Properties constituted a single entity during such periods. 1995 1994 1993 ($ in thousands, except for per-share amounts) Revenues $1,141,000 $1,138,000 $1,016,000 Net Income $173,000 $172,000 $153,000 Earnings per share $.78 $.78 $.68 In September 1994, a subsidiary of the Company and a subsidiary of Century Communications Corp. ("Century") entered into a joint venture agreement for the purpose of acquiring, for approximately $89 million, and operating two cable television systems in southern California (the "Systems"). Century is a cable television company of which Leonard Tow, the Chairman, Chief Executive Officer and Chief Financial Officer of the Company, is Chairman, Chief Executive Officer and Chief Financial Officer. In addition, Claire Tow, a director of the Company, is a Senior Vice President and a director of Century and Robert Siff, a director of the Company is a director of Century. The joint venture is governed by a management board on which the Company and Century are equally represented. The joint venture has entered into an agreement pursuant to which a subsidiary of Century (the "Manager") will manage the day-to-day operations of the Systems. The Manager will not receive a management fee but will be reimbursed only for the actual costs it incurs on behalf of the joint venture. With respect to the purchase of any service or asset for the joint venture for use in the Systems, the Manager is obligated to pass through to the joint venture any discount, up to 5%, off the published prices of vendors and is entitled to retain any discount in excess of 5%. On September 30, 1994, the joint venture acquired the first system serving approximately 26,500 subscribers. On November 30, 1995, the joint venture acquired the second system, serving approximately 20,700 subscribers. These joint ventures are being accounted for using the equity method of accounting. (4) Investments: The components of investments at December 31, 1995, 1994 and 1993 are as follows: 1995 1994 1993 ---- ---- ---- ($ in thousands) State and municipal securities $172,518 $174,790 $296,371 Investment in Centennial 132,583 117,982 90,628 Other fixed income securities 408 411 7,670 Marketable equity securities 23,581 31,828 13,282 Other 0 0 3,071 -------- -------- -------- Total $329,090 $325,011 $411,022 ======== ======== ======== The Company's investment in Centennial at December 31, 1995, includes 102,187 shares of Convertible Redeemable Preferred Stock (the "Preferred Security") and 1,982,294 Class B Common Shares (see Note 1(h)). Centennial is a publicly traded subsidiary of Century. Net realized gains on marketable equity securities included in the determination of net income for the years 1995, 1994 and 1993, respectively, were $13,904,000, $3,760,000 and $0. The amortized cost of marketable equity securities sold during 1995, 1994 and 1993 were $9,863,000, $384,000 and $0. The cost of securities sold was based on the actual cost of the shares of each security held at the time of sale. The aggregate fair market value of marketable equity securities at December 31, 1993 was $27,492,000 and total unrealized gains were $14,210,000. Marketable equity securities for each year include 1,807,095 shares (1,500,000 original shares adjusted for stock dividends) of Class A Common Stock of Century. These shares represent less than 2% of the total outstanding common stock of Century. The Chairman, Chief Executive Officer and Chief Financial Officer of the Company is also Chairman, Chief Executive Officer and Chief Financial Officer of Century. Pursuant to the provisions of SFAS 115, the Company classified its Investments into two categories at January 1, 1994: "held-to-maturity" and "available-for-sale". The Company recorded unrealized holding gains on securities classified as available-for-sale as an increase to Investments and as a separate component of shareholders equity. The following summarizes the amortized cost, gross unrealized holding gains and losses and fair market value for investments. Unrealized Holding Aggregate Fair Investment Classification Amortized Cost Gains (Losses) Market Value ($ in thousands) As of December 31, 1995 Held-To-Maturity $244,982 $ 79,808 $ (59) $ 324,731 Available-For-Sale $ 77,485 $ 8,422 $(1,799) $ 84,108 As of December 31, 1994 Held-To-Maturity $259,484 $ 80,293 $(3,055) $ 336,722 Available-For-Sale $ 50,809 $ 14,718 $ 0 $ 65,527 The maturities of debt securities and redeemable preferred securities classified as held to maturity were as follows at December 31, 1995: Held-to-Maturity Securities Investment Maturities Amortized Cost Fair Market Value --------------------- ----------------------------- ------------------------ ($ in thousands) Due within 1 year $ 46,465 $ 46,724 Due after 1 through 5 years 72,505 73,627 Due after 5 through 10 years 22,565 23,500 Due after 10 years 103,447 180,880 --------- --------- $244,982 $324,731 ======== ======== The Company sold $68,458,000, and $19,335,000 of securities classified as held-to-maturity during 1995 and 1994, respectively, for the purpose of financing a portion of the acquisition of the GTE and ALLTEL Telecommunications Properties; gross realized gains on such sales for 1995 and 1994, respectively, were $474,000 and $372,000, gross realized losses were $8,000 and $94,000 for 1995 and 1994, respectively. (5) Fair Value of Financial Instruments: The following table summarizes the carrying amounts and estimated fair values for certain of the Company's financial instruments at December 31, 1995, 1994 and 1993. For the other financial instruments, representing cash and cash equivalents, accounts and notes receivables, short-term debt, accounts payable and other accrued liabilities, the carrying amounts approximate fair value due to the relatively short maturities of those instruments. 1995 1994 1993 ---- ---- ---- Carrying Carrying Carrying Amount Fair Value Amount Fair Value Amount Fair Value ($ in thousands) Temporary Investments $ 0 $ 0 $108,818 $108,935 $89,752 $93,438 Investments 329,090 408,839 325,011 402,249 411,022 534,496 Long-Term Debt 1,187,000 1,263,000 994,189 992,349 547,673 602,710 The fair value of the above financial instruments, except for the investment in the Centennial Preferred Securities, are based on quoted prices at the reporting date for those financial instruments. The fair value of the Centennial Preferred Security is estimated to be its accreted value at the respective reporting dates (see Note 1(h)). (6) Long-term Debt: Weighted average interest rate at December 31, -------------------------------- December 31, 1995 Maturities 1995 1994 1993 ----------------- ---------- ---- ---- ---- ($ in thousands) Debentures 7.50% 2001-2034 $ 700,000 $425,000 $150,000 Industrial development revenue bonds 5.87% 2015-2030 374,089 325,125 284,777 Rural Utility Services and Rural Telephone Bank notes 5.60% 1996-2027 71,609 47,106 42,237 Senior unsecured notes 8.05% 2012 23,000 0 0 Commercial paper notes payable 5.73% Variable 16,100 187,800 58,953 Other long-term debt 8.66% 1996-1998 2,202 9,158 11,706 ------- ------------ ----------- --------- 6.86% $1,187,000 $994,189 $547,673 ===== ========== ======== ======== The total principal amounts of industrial development revenue bonds at December 31, 1995, 1994 and 1993, were $406,080,000, $392,530,000 and $377,890,000, respectively. Industrial development revenue bond funds issued are held by a trustee until used for payment of qualifying construction. The amounts presented in the table above represent funds that have been used for construction through December 31, 1995, 1994 and 1993, respectively. Certain commercial paper notes payable have been classified as long-term debt because these obligations are expected to be refinanced with long-term debt securities. The Company has available lines of credit with commercial banks in the amounts of $400,000,000 and $200,000,000, which expire on December 14, 1996 and December 16, 2000, respectively, and have associated facility fees of one-twentieth of one percent (.05%) per annum and one-thirteenth of one percent (.075%) per annum, respectively. The terms of the lines of credit provide the Company with extension options. The installment principal payments and maturities of long-term debt for the next five years are as follows: 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- ($ in thousands) Installment principal payments $ 2,965 $2,935 $2,604 $2,710 $2,839 Maturities 900 125 1,428 - - --------- -------- ------- ---------- ----------- $ 3,865 $ 3,060 $4,032 $2,710 $2,839 ======== ======= ====== ====== ====== 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 1995, 1994 and 1993, respectively, interest payments on short- and long-term debt were $78,659,000, $74,803,000 and $40,217,000. (7) Capital Stock: The common stock of the Company is in two series, Series A and Series B. The Company is authorized to issue up to 200,000,000 shares of Common Stock Series A and 300,000,000 shares of Common Stock Series B. Quarterly stock dividends are declared and issued at the same rate on both Series A and Series B. Series B shareholders have the option of enrolling in the "Series B Common Stock Dividend Sale Plan." The Plan offers Series B shareholders the opportunity to have their stock dividends sold by the Plan Broker and the net cash proceeds of the sale distributed to them quarterly. Series A shares are convertible share-for-share into Series B shares. Series B shares are not convertible into Series A. Both series are the same in all other respects. On May 21, 1993, the Company declared a 2-for-1 stock split of its Series A and Series B common stock. The stock split was distributed on August 31, 1993, to shareholders of record on August 16, 1993. On January 30, 1995, the Company, pursuant to an underwritten public offering, issued 19,000,000 shares of its Common Stock Series A at an issuance price of $13 3/8 per share (not adjusted for subsequent stock dividends). The $244,200,000 of net proceeds from the issuance was used to permanently fund a portion of the acquisition of the GTE Telecommunications Properties. Quarterly stock dividend rates declared on Common Stock Series A and Series B are based upon cash equivalent rates and share market prices, and have been as follows: Dividend Rates 1995 1994 1993 First quarter 1.5% 1.1% 1.2% Second quarter 1.5% 1.15% 1.0% Third quarter 1.6% 1.3% 1.1% Fourth quarter 1.6% 1.4% 1.0% ----- ---- ---- Total 6.2% 4.95% 4.3% ==== ===== ==== Compounded Total 6.35% 5.04% 4.37% ===== ===== ===== Annualized stock dividend cash equivalent rates considered by the Company's Board of Directors in declaring stock dividends for 1995, 1994 and 1993, respectively, were 72 1/4 cents, 68 7/8 cents and 65 cents per share (adjusted for all stock splits and stock dividends paid subsequent to all dividends declared through December 31, 1995 and rounded to the nearest 1/8th). In May 1995, the Board of Director's authorized the buyback of up to $50 million of Common Stock Series A and Series B shares. Shares have been and will be purchased on the open market from time to time. The Company purchased 1,865,000 shares at a cost of $22,028,000 in 1995. Purchased shares are used to pay stock dividends. The Company used 7,000 shares (not adjusted for subsequent stock dividends and a stock split) acquired from employees pursuant to the Management Equity Incentive Plan in partial payment of the 1993 stock dividend. These shares had a cost of $215,000. The activity in shares of outstanding common stock for Series A and Series B during 1995, 1994 and 1993 is summarized as follows: Number of Shares Series A Series B Balance at January 1, 1993 64,156,000 22,604,000 Acquisitions 0 621,000 Stock dividends 4,114,000 1,548,000 Stock split (2 for 1) 64,620,000 24,142,000 Stock plans 0 457,000 Conversion of Series A to Series B (3,105,000) 3,105,000 ------------ ------------ Balance at December 31, 1993 129,785,000 52,477,000 Acquisitions 0 505,000 Stock dividends 6,484,000 2,744,000 Stock plans 355,000 1,122,000 Conversions of Series A to Series B (2,278,000) 2,278,000 ----------- ----------- Balance at December 31, 1994 134,346,000 59,126,000 Acquisitions 0 888,000 Stock issuance 19,000,000 0 Stock dividends 9,499,000 4,098,000 Common stock buybacks (462,000) (1,403,000) Stock plans 601,000 1,894,000 Conversions of Series A to Series B (7,626,000) 7,626,000 ------------ ----------- Balance at December 31, 1995 155,358,000 72,229,000 ============ =========== The Company used 7,000 Series B shares (not adjusted for subsequent stock dividends and a stock split) acquired from employees pursuant to the Management Equity Incentive Plan in partial payment of the 1993 stock dividend. These shares had a cost of $215,000. On January 22, 1996, pursuant to an underwritten public offering, a subsidiary of the Company issued 4,025,000 shares of 5% Equity Providing Preferred Income Convertible Securities ("EPPICS") having a liquidation preference of $50 per security and a maturity date of January 15, 2036. Each security is initially convertible into 3.252 shares of the Company's Common Stock Series A at a conversion price of $15.375 per share. The $196,722,000 in net proceeds from the sale of these securities were used to repay short-term debt, permanently fund a portion of the ALLTEL Telecommunications Properties to be acquired, and for other general corporate purposes. The Company has 50,000,000 of authorized but unissued shares of preferred stock ($.01 par). (8) Employee Stock Plans: Under the Citizens Utilities Company Management Equity Incentive Plan ("MEIP"), awards of the Company's Series A or Series B common stock may be granted to eligible officers, management employees and non-management exempt employees of the Company and its subsidiaries in the form of incentive stock options, non-qualified stock options, stock appreciation rights ("SARs"), restricted stock or other stock-based awards. The MEIP is administered by the Compensation Committee of the Board of Directors. The maximum number of shares of common stock which may be issued pursuant to awards at any time is 5% of the Company's common stock outstanding provided that no more than 9,100,000 shares (adjusted for subsequent stock dividends and stock splits) will be issued pursuant to incentive stock options under the MEIP. No awards will be granted more than 10 years after the effective date (June 22, 1990) of the MEIP. The exercise price of stock options and SARs shall be equal to or greater than the fair market value of the underlying common stock on the date of grant. Stock options are generally not exercisable on the date of grant but vest over a period of time. Under the terms of the MEIP, subsequent stock dividends and stock splits have the effect of increasing the option shares outstanding, which correspondingly decrease the average exercise price of outstanding options. The following summary of shares subject to option under the MEIP presents option share activity adjusted for subsequent stock splits and dividends through the end of the respective year presented. Weighted Average option Shares subject to option price per share Balance at January 1, 1993 3,920,000 $12.54 Options granted 1,862,000 18.06 Options exercised (239,000) 7.62 Options canceled or lapsed (25,000) 5.44 Adjustment for stock dividends* 201,000 - ------------ Balance at December 31, 1993 5,719,000 14.14 Options granted 1,562,000 13.06 Options exercised (149,000) 8.04 Options canceled or lapsed (69,000) 14.17 Adjustment for stock dividends* 287,000 - ------------- Balance at December 31, 1994 7,350,000 14.07 Options granted 99,000 11.06 Options exercised (260,000) 6.75 Options canceled or lapsed (107,000) 14.16 Adjustment for stock dividends* 456,000 - ------------- Balance at December 31, 1995 7,538,000 $14.30 ============= Options exercisable at end of year 4,472,000 $12.59 ============= * Represents adjustment to outstanding option shares to reflect stock dividends. During 1995 and 1993, the Company granted restricted stock awards to key employees in the form of the Company's Common Stock Series B. There were no restricted stock award grants in 1994. The number of Series B shares issued as restricted stock awards during 1995 and 1993 were 9,000 and 158,000, respectively, (adjusted for subsequent stock dividends and stock splits). None of the restricted stock awards may be sold, assigned, pledged or otherwise transferred, voluntarily or involuntarily, by the employee until the restrictions lapse. The restrictions lapse over six months, three year and five year periods. At December 31, 1995, 347,000 shares (adjusted for subsequent stock dividends and stock splits) of restricted stock were outstanding. The Company's Employee Stock Purchase Plan ("ESP Plan") was approved by shareholders on June 12,1992 and amended on May 21, 1993. Under the ESP Plan, eligible employees of the Company and its subsidiaries may subscribe to purchase shares of Common Stock Series B at 85% of the lower of the average market price on the first day of the purchase period or on the last day of the purchase period. An employee may elect to have up to 20% of annual base pay withheld in equal installments throughout the designated payroll-deduction period for the purchase of shares. The value of an employee's subscription may not exceed $25,000 in any one calendar year. As of December 31, 1995, there were 1,813,000 shares of Common Stock Series B reserved for issuance under the ESP Plan. These shares will be adjusted for any future stock dividends or stock splits. The ESP Plan will terminate when all 1,813,000 shares reserved have been subscribed for, unless terminated earlier by the Board of Directors. The ESP Plan is administered by the Compensation Committee of the Board of Directors. As of December 31, 1995, the number of employees participating in the ESP Plan was 1,768 and the total number of shares subscribed for under the ESP Plan was 400,923. The Company's non-employee Directors' Deferred Fee Equity Plan (the "Directors Plan") was approved by shareholders on May 19, 1995. The Directors Plan includes an Option Plan and a Stock Plan. Through the Option Plan, an eligible director may elect to receive his or her director's fees for a period of up to five years in the form of options to purchase Company common stock, the number of such options being equal to such fees divided by 20% of the fair market value of Company common stock on the effective date of the options. Through the Stock Plan, an eligible director may elect to receive his or her director's fees in the form of Plan Units, the number of such Plan Units being equal to such fees divided by the fair market value of Company common stock on certain specified dates. In the event of termination of Directorship, a Stock Plan participant will receive the value of such Plan Units in either stock or cash or installments of cash as selected by the Participant at the time of the related Stock Plan election. As of any date the maximum number of shares of Common Stock which the Plan may be obligated to deliver pursuant to the Stock Plan and the maximum number of shares of Common Stock which shall have been purchased by Participants pursuant to the Option Plan and which may be issued pursuant to outstanding options under the Option Plan shall not be more than one (1%) percent of the total outstanding shares of Common Stock Series A and Series B of the Company as of such date, subject to adjustment in the event of changes in the corporate structure of the Company affecting capital stock. There are currently 9 directors participating in the Directors Plan. In 1995, the total Options and Plan Units earned were 96,246, and 3,416, respectively. At December 31, 1995, 40,595 options were exercisable at a weighted average exercise price of $12.127. (9) Income Taxes The following is a reconciliation of the provision for income taxes at federal statutory rates to the effective rates: 1995 1994 1993 ----------- ----------- ----------- Consolidated tax provision at federal statutory rate 35.0% 35.0% 35.0% State income tax provisions, net of federal income tax benefit 2.1% 2.5% 3.6% Allowance for funds used during construction (2.3%) (2.4%) (2.5%) Amortization of investment tax credits (0.9%) (0.9%) (1.2%) Nontaxable investment income (1.7%) (2.9%) (4.7%) Accrual adjustment (2.9%) (0.2%) (0.3%) All other - net 0.2% (0.2%) (0.5%) ----- ------ ----- 29.5% 30.9% 29.4% ===== ====== ===== For 1995, 1994 and 1993, accumulated deferred income taxes amounted to $298,424,000, $230,556,000 and $194,165,000, respectively, and the unamortized deferred investment tax credits amounted to $15,670,000, $17,594,000 and $19,306,000, respectively. Income taxes paid during the year were $39,425,000, $30,395,000 and $24,139,000 for 1995, 1994 and 1993, respectively. The components of the net deferred income tax liability at December 31, are as follows: 1995 1994 1993 ---- ---- ---- ($ in thousands) Deferred income tax liabilities Property, plant and equipment basis differences $246,128 $177,549 $148,756 Regulatory assets 63,871 62,578 57,134 Other-net 22,741 28,704 25,365 ---------- ----------- ------------ 332,740 268,831 231,255 --------- ---------- ----------- Deferred income tax assets Deferred investment tax credits 6,231 7,183 6,649 Regulatory liabilities 12,415 13,498 11,135 ---------- ----------- ----------- 18,646 20,681 17,784 ---------- ----------- ----------- Net deferred income tax liability $314,094 $ 248,150 $ 213,471 ======== ========= ========= The provision for federal and state income taxes, as well as the taxes charged or credited to Shareholders' equity, includes amounts both payable currently and deferred for payment in future periods as indicated below: 1995 1994 1993 ---- ---- ---- Income taxes charged (credited) to the income statement: ($ in thousands) -------------------------------------------------------- Current: Federal $13,297 $28,347 $39,571 State 1,014 3,595 8,682 --------- ---------- --------- Total current 14,311 31,942 48,253 -------- ---------- --------- Deferred: Federal 48,168 29,829 4,917 Investment tax credits (2,057) (1,949) (2,086) State 6,395 4,501 1,214 -------- ---------- --------- Total deferred 52,506 32,381 4,045 -------- ---------- --------- Income taxes charged (credited) to the income statement $66,817 $64,323 $52,298 ======== ========== ========= Income taxes charged (credited) to shareholders' equity: Deferred income taxes on unrealized gains on securities classified as available-for-sale ($3,052) $5,588 $ 0 Current benefit arising from stock options exercised (406) (137) (537) -------- --------- ---------- Income taxes charged (credited) to shareholders' equity ($3,458) $5,451 $ (537) ======== ========= ========== Total income taxes $63,359 $69,774 $51,761 ======== ========= ========== (10) Segment Information: Year Ended December 31, 1995 1994 1993 ($ in thousands) Telecommunications: Revenues $616,747 $456,875 $177,497 Assets 2,097,277 1,805,893 910,276 Depreciation 120,608 81,659 22,744 Capital expenditures 144,613 177,419 66,619 Operating income before income taxes 174,196 148,720 85,934 Natural gas: Revenues $197,902 $208,940 $211,892 Assets 344,036 306,979 289,121 Depreciation 12,155 10,827 10,646 Capital expenditures 31,056 31,235 25,677 Operating income before income taxes 25,874 30,205 28,971 Electric: Revenues $175,351 $167,940 $158,222 Assets 487,893 458,457 446,284 Depreciation 17,035 15,251 12,924 Capital expenditures 39,829 43,132 43,673 Operating income before income taxes 30,060 31,221 30,660 Water/Wastewater: Revenues $ 79,032 $ 72,395 $ 65,488 Assets 505,851 455,312 400,288 Depreciation 9,137 7,438 8,384 Capital expenditures 41,261 38,884 37,426 Operating income before income taxes 24,043 17,978 15,595 (11) Quarterly Financial Data (unaudited): Net Income ($ in thousands) Per Share ---------------- ------------------- 1995 Revenues Amount Series A Series B ---- -------- ------ -------- -------- First quarter $267,034 $33,903 $.16 $.16 Second quarter 251,678 41,939 .19 .19 Third quarter 259,732 45,061 .20 .20 Fourth quarter 290,588 38,633 .18 .18 Net Income ($ in thousands) Per Share ---------------- -------------------- 1994 Revenues Amount Series A Series B ---- -------- ------ -------- -------- First quarter $222,156 $31,655 $.16 $.16 Second quarter 187,130 38,016 .19 .19 Third quarter 241,005 38,687 .19 .19 Fourth quarter 255,859 35,639 .17 .17 The quarterly net income per share amounts are rounded to the nearest cent. Annual earnings per share may vary depending on the effect of such rounding. (12) Supplemental Cash Flow Information: The following is a schedule of net cash provided by operating activities for the years ended December 31, 1995, 1994 and 1993. 1995 1994 1993 ---- ---- ---- ($ in thousands) Net income $159,536 $143,997 $125,630 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense 158,935 115,175 54,698 Deferred income taxes and amortization of investment tax credits 52,506 32,381 4,045 Centennial investment income (14,353) (13,481) (9,594) Allowance for equity funds used during construction (10,783) (11,402) (10,123) Change in accounts receivable (22,684) (20,663) (23,068) Change in accounts payable 11,247 21,520 (3,773) Change in accrued taxes and accrued interest (6,923) 13,024 24,960 Other 10,893 (18,235) 32,174 ----------- --------- --------- Net cash provided by operating activities $338,374 $262,316 $ 194,949 =========== ========= ========= In conjunction with the acquisitions of the ALLTEL Telecommunications Properties, the Company assumed $41,447,000 in debt at a weighted average interest rate of 6.59%. (13) Retirement Plans: Pension Plan The Company and its subsidiaries have a noncontributory pension plan covering all employees who have met certain service and age requirements. The benefits are based on years of service and final average pay or career average pay. Contributions are made in amounts sufficient to fund the plan's net periodic pension cost while considering its tax deductibility and the minimum funding requirement. Plan assets are invested in a diversified portfolio of equity and fixed-income securities. Pension costs for 1995, 1994 and 1993 include the following components: 1995 1994 1993 ---- ---- ---- ($ in thousands) Service cost $6,549 $ 5,777 $ 3,585 Interest cost on projected benefit obligations 10,735 8,166 5,038 Net amortization and deferral 335 172 1,751 Return on plan assets (11,784) (9,754) (6,945) -------- ------- -------- Net pension cost $5,835 $4,361 $ 3,429 ======== ======= ======== Assumptions used in the computation of pension costs/actuarial present value of projected benefit obligations included the following: 1995 1994 1993 ---- ---- ---- Discount rate 8.25% /7.50% 8.00% 7.50% Expected long-term rate of return on plan assets 8.75% 8.50% 8.00% Rate of increase in compensation levels 4.50%/4.00% 4.50% 4.50% As of December 31, 1995, 1994 and 1993, respectively, the fair values of plan assets were $133,700,000, $133,964,000 and $73,233,000. The actuarial present values of the accumulated benefit obligations were $100,367,000, $86,186,000 and $57,216,000 for 1995, 1994 and 1993, respectively. The actuarial present values of the vested accumulated benefit obligation for 1995, 1994 and 1993, respectively, were $86,260,000, $77,053,000 and $54,591,000. The total projected benefit obligations for 1995, 1994 and 1993, respectively, were $145,008,000, $125,943,000 and $75,531,000. In 1994, the Company recorded $34,199,000 of accumulated benefit obligation, $28,069,000 of vested accumulated benefit obligation and $54,166,000 of projected benefit obligation pursuant to the acquisition of the GTE Telecommunications Properties. Assets sufficient to fully fund these obligations were transferred to the plan from the GTE pension plan. Other Post-Retirement Benefit Plans The Company provides certain medical, dental and life insurance benefits for retired employees and their beneficiaries and covered dependents. The components of the net periodic postretirement benefit cost for the years ended December 31, 1995 , 1994 and 1993 are as follows: 1995 1994 1993 ---- ---- ---- ($ in thousands) Service cost $2,038 $1,826 $ 845 Interest cost 4,023 3,418 1,710 Amortization of transition obligation 1,038 1,048 1,116 Other 467 313 0 ------- ------ ------ Net periodic postretirement benefit cost $7,566 $6,605 $3,671 ======= ====== ====== The following table sets forth the accrued postretirement benefit liability recognized in the Company's balance sheets at December 31, 1995, 1994 and 1993: 1995 1994 1993 ---- ---- ---- ($ in thousands) Accumulated postretirement benefit obligation: Retirees ($19,736) ($14,946) ($13,919) Fully eligible active plan participants (9,964) (7,158) (2,749) Other active plan participants (30,304) (32,882) (7,328) ------------ ---------- ---------- Total accumulated postretirement benefit obligation (60,004) (54,986) (23,996) Plan assets at fair value 912 Unrecognized net (gain) loss (2,961) (1,914) 1,563 Unrecognized prior service cost 3,480 2,932 (1,477) Unrecognized transition obligation 17,638 18,676 21,201 ---------- ---------- --------- Net accumulated postretirement benefit obligation ($40,935) ($35,292) ($2,709) ========== ========== ========= Of the net periodic post retirement benefit cost presented above, the Company recorded $2,781,000, $4,621,000 and $1,601,000 in 1995, 1994 and 1993, respectively, as regulatory assets for states whose regulatory commissions to date have not but will likely allow recovery of accrued costs in future rate proceedings. The Company's annual cost includes 20-year prospective recognition of the transition obligation. In those states in which regulatory commissions have permitted recovery of accrued costs, the Company has established trusts to fund these future liabilities. For measurement purposes, the Company used the same discount rates as were used for the pension plan and a 7% annual rate of increase in the per-capita cost of covered health-care benefits, gradually decreasing to 5% in the year 2040 and remaining at that level thereafter. The effect of a 1% increase in the assumed health-care cost trend rates for each future year on the aggregate of the service and interest cost components of the total postretirement benefit cost would be $606,000 and the effect on the accumulated postretirement benefit obligation for health benefits would be $6,000,000. In 1994, the Company recorded $27,357,000 of accumulated postretirement benefit obligation pursuant to the acquisition of the GTE Telecommunications Properties. (14) Commitments and Contingencies: The Company has budgeted expenditures for facilities in 1996 of approximately $340,000,000 and certain commitments have been entered into in connection therewith. The Company conducts certain of its operations in leased premises and also leases certain equipment and other assets pursuant to operating leases. Terms of the leases, including purchase option and obligations, renewals and maintenance costs, vary by lease. Future minimum rental commitments for all long-term noncancellable operating leases are as follows: Year Amount ---- ------ 1996 $9,762,000 1997 8,830,000 1998 8,196,000 1999 7,819,000 2000 7,890,000 2001 to 2020 30,215,000 ----------- Total $72,712,000 =========== Total rental expense included in the Company's results of operations for the years ended December 31, 1995, 1994 and 1993 was $6,778,000, $3,913,000 and $2,098,000, respectively. A subsidiary of the Company was the guarantor of a $33,200,000 bank loan to Hungarian Telephone and Cable Corp. ("HTCC"). In addition, the Company has agreed to provide up to $20,000,000 of additional financial support to HTCC. No amount has been accrued for the guarantee and financial support commitments.