High Ridge Park
Telephone: (203) 329-8800
Fax: (203) 329-4602
Sales: &Dollar;589.3 million
Stock Exchange: New York
SICs: 4813 Telephone Communications Except Radiotelephone; 4911 Electric Services; 4923 Gas Transmission & Distribution; 4941 Water Supply
Citizens Utilities Company is likely the most fully diversified utility company in the United States. The company provides telecommunications, electric power, gas, water, and wastewater treatment services to more than 800,000 customers in 13 states. Through such operational and geographic diversity, Citizens as managed to de-emphasize the effects of crisis and regulation in any one area of jurisdiction. For example, disastrous weather or heavy regulation impacting one region is largely offset by the performance of another operation.
Citizens Utilities was created in 1935 during a government reorganization of the utilities industries. The company was formed from several smaller utilities companies previously controlled by the Public Utilities Consolidated Corporation which, like Citizens Utilities, was a highly diversified company. Public Utilities was assembled by W. B. Foshay. During the 1920s, Foshay had a relatively easy time acquiring utility assets and other properties with unsecured debt. The company owned telephone, electric power, and gas operations in several states and controlled additional businesses in Alaska and Nicaragua. Unable to sustain his business, however, Foshay's company was forced to reorganize in 1928 in order to avoid bankruptcy.
The financial crisis in 1929 that began the Great Depression was caused by thousands of investors whose holdings were financed with up to 90 percent debt. When confidence in this huge debt collapsed, capital markets dried up, forcing companies like Public Utilities to fail almost immediately; the company went into reorganization. Still based in Minneapolis, the reconstituted company was incorporated in 1935 in Delaware as the Citizens Utilities Company. The company--under essentially the same management, including president Joseph Chapman--continued operation for several years during the Depression, maintaining stable performance but unimpressive growth through most of the war years.
In 1945, however, Citizens was discovered by a group of New York financiers. With a reasonable rate of return on investment and with a mandate that precluded competition, Citizens presented this group of investors with a high potential for improvement and financial growth. After securing interest from the existing board members, the financiers hired Richard Rosenthal to over see their investment. Rosenthal, at that time a 29-year old financial consultant who was born in Canada and raised in Brooklyn, had studied finance at New York University and, after stints as an analyst with several Wall Street firms, set up his own consulting firm specializing in utility acquisitions.
During his first year in Minneapolis, as a director for Citizens Utilities, Rosenthal doubled shareholders' dividends and proposed so many changes in the company that he and his backers successfully waged a proxy fight to have him installed as president of the company. In 1946 Rosenthal, at age 30, became the youngest company president in the industry at the time.
During his first ten years as president, Rosenthal doubled revenues and net income and reduced long-term debt from 85 percent of capitalization to 60 percent. Rosenthal's financial approach to the industry was unusual at the time for an industry dominated by engineers. But running a regulated company did present Rosenthal with new problems. At every turn, his management decisions were second-guessed by state public utility commissions. He responded in a way that was to become his trademark: when commissions tried to stop him, he fought until he prevailed; this bulldog approach quite often succeeded, making him the nemesis of regulators.
Rosenthal felt Citizens Utilities should be in the business of serving the public, not battling the government. He worked diligently to reduce unit costs and raise shareholder equity. But Rosenthal, a self-described "financial type," recognized the limited benefits from these efforts and set out to do more for shareholders.
Regulatory commissions rejected the idea of raising rates to increase shareholder dividends, so Rosenthal investigated other ways to maximize shareholder value. He found a method in the federal tax code. After having moved the company to Connecticut, first to Greenwich and then to Stamford, Rosenthal in 1955 asked the Treasury Department to rule on a proposal to reclassify Citizens' common stock into two classes: one paying cash and the other paying dividends in the form of tax-deferred issues of additional stock. These stock dividends, earned as interest, would only be subject to taxation when they were sold, and then only as a capital gain. Despite this highly unconventional approach, the Treasury Department allowed Rosenthal's plan.
The following year the company queried its shareholders as to how they would prefer to receive their dividends, all in cash, all in stock, or a bit of both. Seventy-five percent of Citizens Utilities shareholders opted to receive stock-based dividends, for which they were issued new Series A shares. The remainder held the cash-paying stock, which under the reclassification was renamed Series B. Under the reclassification arrangement, the stock dividend paid on Series A was equal in fair market value to the cash dividend paid on Series B.
Thereafter, every year when Citizens Utilities distributed a stock dividend, it created additional shares of Series A stock. This enabled the company to plow cash back into the business for maintenance, improvements and acquisitions, while avoiding the paperwork and costs of floating additional shares.
While the idea was quite unusual, Citizens received a favorable ruling on its tow-series structure from the Internal Revenue Service, which was subsequently barraged with similar requests from other companies. At this point the Internal Revenue Service decided that a Pandora's box had been opened, and that unless the process was amended, the government would suffer huge losses in tax revenue. The Congress held a series of hearings from 1956 to 1959, at which Rosenthal personally defended the plan. Congress later amended the earlier Treasury Department ruling to prevent other companies from issuing stock as a tax-deferred dividend while also paying a cash dividend. However, Citizens Utilities was allowed to continue its unique arrangement under a grandfather clause, which expired in 1990 and was not renewed. In 1990 Citizens initiated stock dividends on its Series B, because by paying stock dividends on both its Series A and Series B stock, those stock dividends could remain tax deferred, taxed only when sold. In addition, the company in 1992 introduced an optional plan for Series B shareholders that enables them to receive cash by having their quarterly stock dividends sold in the market and the cash sent to them each quarter. As of 1992, three quarters of the outstanding common stock was in Series A and the remainder in Series B.
During the 1950s, 1960s, and well into the 1970s, Citizens Utilities went on an acquisition binge, snapping up numerous rural utilities in Arizona, California, Hawaii, Illinois, Indiana, Ohio, and Pennsylvania. While the majority of these were small water utilities, the company expanded in every area of its business, including its electric, gas, and telephone operations as well as its cold storage business in Alaska, which it eventually sold in 1976 because it was neither a core business nor strategically related to its other businesses.
In the early and mid-1960s, when nuclear power generation was growing in popularity, Citizens elected to stay out of the business. Rosenthal refused to believe that the projected costs of nuclear plants would not rise. The cost of nuclear plants did in fact rise, and exploded into impracticality fifteen years later when a partial meltdown at Three Mile Island led to a virtual moratorium on new plants. Nevertheless, instead of "going nuclear," Citizens Utilities continued to develop fossil fuel and hydro plants in partnership with other electric power companies.
The most notable growth in the company's electric power business came in 1969, when Citizens Utilities acquired the Kauai Electric Company for &Dollar;10 million. This company, which serves the entire island of Kauai, northernmost in the Hawaiian chain, marked Citizens' largest acquisition to date, and its move into yet another state. The company also won the unofficial title of "super utility," operating 27 subsidiaries in five different industries in nearly a dozen states, from Vermont to Hawaii. From 1945 to 1970 Citizens experienced impressive growth, with its number of customers increasing from 28,000 to 177,000. Revenues grew from &Dollar;2 million to &Dollar;31 million, and profits rose from &Dollar;179,000 to &Dollar;7 million. By 1970, Citizens was operating in ten states.
In 1970 Rosenthal was elected chairman (also continuing as CEO), and Ishier Jacobson, who had joined Citizens in 1954 in an administrative management position, became president and chief operating officer. Later, in 1981, Jacobson assumed the CEO position.
By the mid 1970s, Citizens Utilities' electric power business grew to 40 percent of total earnings. The lucrative three-state telephone operation contributed 31 percent, while water constituted 15 percent, and gas and sewage each registered seven percent.
Although heavily diversified, both operationally and geographically, Citizens was not immune to inflation, and particularly to the skyrocketing costs of construction. Unable to win timely rate increases to meet these conditions, many utility companies were hit hard. Virtually all suffered reduced earning credit downgrades.
Citizens' unique stock dividend policy was critical to the company's strong performance. Other companies, unable to secure loans, were forced to issue new shares of stock. These substantial issues, however, diluted the value of existing stock, depressing the value of all shares. However, because it created shares gradually, on the basis of earnings, Citizens Utilities suffered no depression in share value, even on a short-term basis. In addition, as funding became especially difficult, the two-series capital structure enabled the company to devote much of its cash profit to servicing existing debt or financing new construction. As a result, Citizens was the only one of 33 utility companies to avoid a credit downgrade. In fact, its credit rating was promoted, further lowering the company's cost of borrowing.
By 1984, the company had received Standard & Poor's and Moody's highest credit ratings as well as Standard & Poor's highest common stock ranking. As of 1992, these ratings remained intact, with the exception of Citizens' Debentures, whcih received Moody's second-highest rating.
After the divestiture of AT & T in 1984 and the rise of new competitive ventures in telecommunications, the profitability of telephone operations began to rise. Those run by Citizens Utilities constituted the fastest growing segment in the company, overtaking even Citizens' traditionally large electric sector.
In 1989, after 44 years at the helm of Citizens, Rosenthal retired as chairman of the company. One year later, Jacobson retired as president and chief executive. As a result of the two-series capital structure he put in place in 1956, Rosenthal's holdings in Citizens had grown to about two percent ownership, making him the company's largest shareholder. concurrent with his retirement, Rosenthal sold the substantial portion of his holdings to Century Communications Corp. (ASE), a cable television and cellular telephone company. Century also acquired two other blocks of Citizens' stock, bringing its total purchase to more than 900,000 Series A shares.
In 1989, Century Communications' founder and chairman, Leonard Tow, was elected to Citizens' board of directors. In 1990, recognizing Tow's ability to aggressively expand businesses into growing markets and his management philosophy of emphasizing the highest quality of service to customers, the board named him chairman and chief executive officer. When Citizens being customer-driven, to continue the company's uninterrupted record of increased earnings and dividends (48 straight years as of 1992), and to generate more growth through acquisitions. Also, in 1990 Daryl Ferguson, who had joined Citizens in 1989 after having served as a vice-president of Centel Corporation, was elected president and CEO of Citizens.
Quick to seize on growth opportunities under Tow's direction, in 1990 Citizens acquired, by merger, Louisiana General Services, Inc. (LGS), the largest natural gas distribution company is Louisiana. This expanded Citizens' geographic spread into a 13th state and significantly increased its presence int he natural gas business. To date, the LGS purchase, a stock swap valued at about &Dollar;94 million, represents Citizens' largest acquisition. The company continued growth through acquisitions when it took over Southern Union Company's northern Arizona gas operations in 1991 for &Dollar;46 million in cash and assumed liabilities and acquired two water/wastewater utilities in the suburban Chicago area.
In the mid-1980s Citizens had acquired several licenses to provide, through partnerships, cellular telephone service in areas of Arizona, California, and Nevada. Cellular operations, however, quickly became overvalued and most, including Citizens', were too small to delvier high returns on a larger scale. In order to affect higher rates of growth and take advantage of more favorable economies of scale, in 1991 Citizens merged its Citizens Cellular subsidiary into Century Cellular, a subsidiary of Century Communications Corp. Citizens Utilities retained a 32 percent residual equity position in the new company, called Centennial Cellular Corp. (NASDAQ), marking yet another of many consolidations in the cellular field.
In an acquisition closely related to the cellular field, Citizens acquired AAlert Paging Company in 1986, a company providing mobile pager services in several western cities, including Sacramento, San Francisco, San Diego, Tucson, Phoenix, and Salt Lake City. Citizens, however, sold its paging business in 1993 because it had not met its growth expectations.
In telecommunications, Citizens Utilities has invested in bypass operations, those secondary telephone networks that may be used instead of the local telephone company. In the early 1990s, the company's bypass operations remained limited to the Pacific Northwest, in Seattle and Portland. The company has plans, though, to construct a fiber-optic route from Nevada to Arizona that will give its Arizona telephone customers centralized equal access service and make it possible for the company to enter the long-distance market as a competitor.
In 1992 telecommunications represented 33 percent of the company's revenues, followed by gas with 32 percent, electric with 25 percent, and water/wastewater with 10 percent. While it operates in 13 states (Arizona, California, Colorado, Hawaii, Idaho, Illinois, Indiana, Louisiana, Ohio, Oregon, Pennsylvania, Vermont, and Washington), it is most heavily concentrated in Arizona, where it provides all five utility services, and in California, where it has telecommunications and water operations. Citizens provides no services in Connecticut, the state in which it is headquartered.
Principal Subsidiaries: Citizens Communications Services, Inc.; Citizens Resources Company; Citizens Utilities Company of California; Citizens Utilities Company of Illinois; Citizens Utilities Company of Pennsylvania; Citizens Utilities Home Water Company; Citizens Utilities Rural Company, Inc.; Citizens Utilities Water Company of Pennsylvania; Blue Mountain Consolidated Water Company; DuPage Utility Company; Derby Meadows Utility Company; CU CapitalCorp; LGS Natural Gas Company; Citizens Utilities Company of Ohio; Southwestern Capital Corporation; Southwestern Investments, Inc.; Sun City Sewer Company; Sun City Water Company; Sun City West Utilities Company; Citizens Mohave Cellular Company.
"Along the Highways and Byways of Finance," New York Times, June 11, 1950.
"Mighty Midget," Forbes, May 15, 1955.
"Citizens Utilities Company," Harvard Business School Case Study, 1959.
"Richard Rosenthal Runs His Utility Like a Business," Fortune, September 25, 1978.
"Light and Heat," Barron's, August 18, 1980.
"Profile," Fairfield County, September, 1981.
"Richard Rosenthal--Utility Dynamo," NYU Business, Fall 1982.
interview with Leonard Tow, Wall Street Transcript, September 14, 1992.
Citizens Utilities Company Annual Reports, 1936, 1988, 1990, and 1991.
Source: International Directory of Company Histories, Vol. 7. St. James Press, 1993.