STATE OF ILLINOIS BEFORE THE ILLINOIS COMMERCE COMMISSION
GTE NORTH INCORPORATED GTE SOUTH INCORPORATED CITIZENS TELECOMMUNICATIONS COMPANY OF ILLINOIS
Joint Petition for the Approval of Purchase and Sale of Assets, and Related Agreements Pursuant to $$7-102 of the Public Utilities Act; the Issuance of Certificates of Interexchange Service, Service, and Exchange Service Authority Pursuant to §§I 3-403, 13-404, and 13-405 to Citizens Telecommunications Company of Illinois; the Discontinuance by GTE North Incorporated and Docket No, m-0197 GTE South Incorporated of Service Pursuant to §I 3-406 of the Public Utilities Act; the Issuance of an Order Approving Designation of Citizens Telecommunications Company of Illinois as an Eligible Telecommunications Carrier Covering the Service Area Consisting of the Exchanges to be Acquired from GTE North Incorporated and GTE South Incorporated Upon the Closing of this Purchase and Sale of Assets; the Issuance Of a Letter of Non-Opposition to Waiver of Study Areas; the Authorization of Citizens Telecommunications Company of Illinois to Maintain its Books and Records Outside of the State of Illinois; and the Granting of All Other Necessary and Appropriate Relief.
VERIFIED JOINT PETITION
J. William Roberts Lee Ann Conti Rendi Mann-Stadt Associate General Counsel HINSHAW & CULBERTSON CITIZENS UTILITIES COMPANY 400 South Ninth Street, Suite 200 1000 lnternationale Parkway Springfield, IL 62701 Woodridge, IL 60517 (217) 526-7375 (630) 739-8868
Attorneys for Sellers Attorney for Buyer GTE NORTH INCORPORATED CITIZENS GTE SOUTH INCORPORATED TELECOMMUNICATIONS COMPANY OF ILLINOIS TABLE OF CONTENTS
I. DESCRIPTION OF THE JOINT PETITIONERS .._...... ,..,.,...... 3
A. The Sellers-GTE North and GTE South . ..__...... ,,...... 3
B. The Buyer-Citizens Illinois ...... 4
2. DESCRIPTION OF THE PROPOSED TRANSACTION ...... _.__...... 7
3. NOTICES .,..,.,,..,..,.....,,.,,...... ,...... ,,..,,..,...... ,..,...... ,..,.,,...... 8
4. REQUEST OF CITIZENS ILLINOIS FOR CERTIFICATES OF INTEREXCHANGE SERVICE AUTHORITY, SERVICE AUTHORITY, AND EXCHANGE SERVICE AUTHORITY PURSUANT TO §§13-403,13-404 AND 13-405 OF THE PUBLIC UTILITIES ACT ...... ___...... 8
5. REQUEST OF GTE NORTH AND GTE SOUTH FOR AUTHORITY TO DISCONTINUE ITS SERVICES IN THE RELEVANT SERVICE AREA PURSUANT TO $j13-406 OF THE ACT _...... 9
6. REQUEST FOR ORDER APPROVING DESIGNATION OF CITIZENS ILLINOIS AS AN ETC FOR THE SERVICE AREA COVERING THOSE EXCHANGES IT WILL ACQUIRE UPON THE CLOSING OF THE PURCHASE AND SALE OF ASSETS, EFFECTIVE UPON THE CLOSING OF THE TRANSACTION .,,..,...,,..,...,...,...,..,,.,...... ,...... ,,...... 10
7. REQUEST FOR A LETTER FROM THIS COMMISSION TO THE FCC INDICATING NON-OPPOSITION FORASTUDY AREA WAIVER...... 10
8. REQUEST FOR APPROVAL FOR CITIZENS ILLINOIS TO MAINTAIN ITS BOOKS AND RECORDS OUTSIDE OF THE STATE OF ILLINOIS PURSUANT TO 83 ILLINOIS ADMINISTRATIVE CODE PART 250...... 11
LIST OF EXHIBITS...... __...... 14 STATE OF ILLINOIS BEFORE THE ILLINOIS COMMERCE COMMISSION
GTE NORTH INCORPORATED GTE SOUTH INCORPORATED CITIZENS TELECOMMUNICATIONS COMPANY OF ILLINOIS
Joint Petition for the Approval of Purchase and Sale of Assets, and Related Agreements Pursuant to §7-102 of the Public Utilities Act: the Issuance of Certificates of Interexchange Service, Service, and Exchange Service Authority Pursuant to $$13-403, 13-404, and 13-405 to Citizens Telecommunications Company of Illinois; the Discontinuance by GTE North Incorporated and Docket No. GTE South Incorporated of Service Pursuant to 313-406 of the Public Utilities Act; the Issuance of an Order Approving Designation of Citizens Telecommunications Company of Illinois asan Eligible Telecommunications Carrier Covering the Service Area Consisting of the Exchanges to be Acquired from GTE North Incorporated and GTE South Incorporated Upon the Closing of this Purchase and Sale of Assets; the Issuance Of a Letter of Non-Opposition to Waiver of Study Areas; the Authorization of Citizens Telecommunications Company of Illinois to Maintain its Books and Records Outside of the State of Illinois; and the Granting of All Other Necessary and Appropriate Relief.
VERIFIED JOINT PETITION OF GTE NORTH INCORPORATED, GTE SOUTH INCORPORATED AND CITIZENS TELECOMMUNICATIONS COMPANY OF ILLINOIS
Pursuant to 220 ILCS 5/7-102 of the Public Utilities Act (“Act”), GTE North
Incorporated (“GTE North”), GTE South Incorporated (“GTE South”) and Citizens
Telecommunications Company of Illinois (“Citizens Illinois”) (jointly, “Petitioners”) request that the Illinois Commerce Commission (“Commission”) approve the sale by GTE North and GTE South, and the purchase by Citizens Illinois, of certain
1 telephone properties and related assets used in the provision of telecommunications service in the State of Illinois. A complete list of the exchanges subject to the proposed transaction (“Transaction”) is attached as
Exhibit 23. In addition to approving GTE North and GTE South’s sale, and
Citizens Illinois’s purchase, of the aforementioned assets, in accordance with the
Asset Purchase Agreement (“Agreement”) filed separately as proprietary Exhibit
4, and such transition agreements contained therein, Petitioners also request that the Commission:
a) grant Citizens Illinois a Certificate of Exchange Service Authority,
pursuant to §13-405 of the Act, for the service area consisting of the
exchanges to be acquired from GTE North and GTE South upon the
closing of this purchase and sale of assets;
b) grant Citizens Illinois statewide Certificates of Interexchange Service
Authority and Service Authority pursuant to @13-403 and 13-404 of
the Act;
c) designate Citizens Illinois, for the purposes of subsequent application
to the Federal Communications Commission (“FCC”), as an eligible
telecommunications carrier (“ETC”) for the service area consisting of
the exchanges to be acquired from GTE North and GTE South upon
the closing of this purchase and sale of assets, effective upon the
closing of the purchase and sale of said exchanges;
d) authorize GTE North and GTE South to discontinue their respective
provision of non-competitive local exchange services under 513-406 of
2 the Act in the service area consisting of the exchanges to be sold to
Citizens Illinois upon the closing of this purchase and sale of assets;
e) issue a letter of non-opposition to the FCC regarding Petitioners’
request for a study area waiver pursuant to 47 CFR §36; and
f) authorize Citizens Illinois to maintain its books and records outside of
the State of Illinois pursuant to 83 Illinois Administrative Code, Part
250.
1. DESCRIPTION OF THE JOINT PETITIONERS
A. The Sellers-GTE North and GTE South
GTE North and GTE South are both wholly owned subsidiaries of GTE
Corporation (“GTE”), a corporation created and existing under the laws of the state of New York. Through its various subsidiaries, GTE provides customers with a wide variety of communications services on a regulated and unregulated basis throughout the United States and in several foreign countries. GTE’s local telephone subsidiaries serve 26.1 million access lines in twenty-eight states, including Illinois.
In 1998 GTE had revenues of more than $25 billion. GTE has a strong balance sheet and investment-grade credit rating. GTE’s Annual Report, Form
IOK, and Form IOQ are attached as Exhibits 14, 15 and 18.
GTE North is a Wisconsin corporation and GTE South is a Virginia corporation. GTE North and GTE South supply local exchange telephone service, access service, and intraLATA toll service throughout the State of
Illinois. GTE North and GTE South provide both regulated and competitive
3 communication services to residential, business, and wholesale customers,
Together, GTE North and GTE South currently serve approximately 900,000 customer access lines in Illinois.
The proposed Transaction that is the subject of this Joint Petition is the final sale of wireline properties that GTE identified in its repositioning initiative in
November 1998. GTE has reached agreement to sell slightly more than 1.6 million telephone lines in thirteen states to seven different purchasers. Along with the proceeds from the divestiture of GTE’s Government Systems businesses, proceeds of the repositioning initiative will be used for investment in other GTE strategic initiatives, such as the recently completed acquisition of
Ameritech wireless properties in Illinois and Missouri and other data and Internet business opportunities.
After closing of this Transaction, GTE North and GTE South will continue to own and operate more than 800,000 customer access lines in Illinois. GTE’s offering of long distance and Internet services to customers in Illinois will not be affected by the proposed Transaction with Citizens Illinois.
B. The Buver-Citizens Illinois
Citizens Illinois was incorporated in Illinois on February 2, 2000 for the purpose of acquiring and operating the access lines and associated property to be acquired from GTE North and GTE South. Upon issuance of the requested
Certificates of Service and Interexchange and Exchange Service Authority by the
Commission and the closing of the Transaction, Citizens Illinois will become a telecommunications carrier in the State of Illinois.
4 Citizens Illinois is a wholly owned subsidiary of Citizens Utilities Company
(“Citizens”), a diversified utility which, through its various operating divisions or subsidiaries, presently provides telecommunications, electric, gas, water and wastewater services to approximately 1.9 million customers in 22 states. In 1998,
Citizens had annual operating revenues of $1.542 billion. It has a strong income statement and balance sheet, with long-term debt rated A+ by Standard & Poor’s
Corporation and A2 by Moody’s Investors Service. Additional and detailed information regarding Citizens’ financial strength and stability may be found in the attached Annual Report and SEC Forms IOK and IOQ (See Exhibits 21 and 22).
Citizens has determined that it will now focus its business on acquiring and operating telecommunications businesses in small and medium-size communities. To that end, Citizens entered into definitive agreements on May
27, 1999 with GTE to acquire approximately 187,000 telephone access lines, including all of GTE’s local exchange properties in Arizona and Minnesota, and a portion of GTE’s properties in California. On June 16, 1999, Citizens and U S
WEST Communications, Inc., announced that they had entered into a series of definitive agreements for Citizens to purchase local-exchange telephone properties serving approximately 530,000 telephone access lines in nine states.
On September 21, 1999 Citizens entered into an agreement to purchase approximately 58,000 access lines from GTE in Nebraska. On December 16,
1999 Citizens and GTE announced that they had entered into a definitive agreement for Citizens to purchase 106,850 access lines in Illinois.
5 Citizens expects to temporarily fund these transactions with either cash and investment balances, or bank credit facilities. Permanent funding will come from the sale or other disposition of Citizens’ gas, electric and water properties.
Citizens does not presently anticipate a need to issue any long term securities as a result of these purchases.
Citizens has provided telephone service since its organization in 1935.
Citizens’ subsidiaries are experienced in the provision of telecommunications services and presently operate as incumbent local exchange carriers (“ILEC”) in thirteen states, providing local, intralata and long-distance services. Citizens also owns 82% of Electric Lightwave, Inc. (“ELI”), a leading full-service, facilities based, competitive local exchange carrier. The Commission issued ELI a certificate of interexchange service authority in Docket No. 96-0414 on
December 4, 1996. Citizens Telecommunications Company, a subsidiary of
Citizens, holds a certificate of interexchange service authority issued by the
Commission in Docket No. 950361 on November 7, 1995.
After closing of this Transaction, Citizens Illinois will become an ILEC in
Illinois. Citizens subsidiaries currently operate as ILECs in: Arizona, California,
Idaho, Montana, Nevada, New Mexico, New York, Oregon, Pennsylvania,
Tennessee, Utah, West Virginia, and Wisconsin, These subsidiaries serve approximately one million access lines.
Citizens Illinois will be a part of the Central Region Telecommunications organization, headed by John J. Lass. Mr. Lass, who joined Citizens in 1994, has extensive experience in the telecommunications industry. Citizens Illinois will
6 draw heavily on Citizens’ existing telecommunications management resources for planning, marketing, network, service development, provisioning and delivery, and legal and regulatory expertise.
2. DESCRIPTION OF THE PROPOSED TRANSACTION
The terms of the sale of the GTE North and GTE South exchanges to
Citizens Illinois are described in the Asset Purchase Agreement, filed separately as proprietary Exhibit 4. The net effect of the Transaction is that Citizens Illinois will acquire and operate 110 of GTE North and GTE South’s current exchanges, and all of the assets necessary to operate those exchanges, including relevant authorizations and licenses currently held by GTE North or GTE South.
Until the Transaction is complete, GTE North and GTE South will continue to operate as they do today. The Transaction will not be finalized until all necessary governmental and regulatory approvals and reviews have been obtained or completed, including those to be obtained from both the FCC and this Commission.
This Transaction clearly will serve the public convenience because
Citizens Illinois will maintain the existing local exchange service and local and intraLATA calling rates, retain existing employees, and continue to achieve of all
Commission mandated service quality standards.
7 3. NOTICES
All notices and communications regarding this Petition should be addressed to:
J. William Roberts Rendi Mann-Stadt HINSHAW & CULBERTSON 400 South Ninth Street, Suite 200 Springfield, IL 62701 (217) 528-7375
Attorneys for Sellers GTE NORTH INCORPORATED GTE SOUTH INCORPORATED
Lee Ann Conti Associate General Counsel CITIZENS UTILITIES COMPANY 1000 lnternationale Parkway Woodridge, IL 60517 (630) 739-8868
Attorney for Buyer CITIZENS TELECOMMUNICATIONS COMPANY OF ILLINOIS
4. REQUEST OF CITIZENS ILLINOIS FOR CERTIFICATES OF INTEREXCHANGE SERVICE AUTHORITY, SERVICE AUTHORITY, AND EXCHANGE SERVICE AUTHORITY PURSUANT TO §§13-403, 13-404 AND 13-405 OF THE PUBLIC UTILITIES ACT
Citizens Illinois hereby requests that this Commission grant it a Certificate of Exchange Service Authority and statewide Certificates of Interexchange
Service Authority and Service Authority for all of the exchanges it will acquire from GTE North and GTE South upon the closing of this purchase and sale of assets, Citizens Illinois possesses the necessary technical, financial and managerial resources and abilities to provide local exchange telecommunications
8 service in Illinois. Citizens Illinois will be the principal provider of local exchange services in this area, so that granting Citizens Illinois a Certificate of Exchange
Service Authority will not adversely affect prices, network design, or the financial viability of the principal provider of local exchange service in the area.
Citizens Illinois has an experienced management team with strong technical and managerial capabilities. Citizens Illinois also has strong equity resources and access to debt markets. Citizens Illinois will maintain continuity and stability in the provision of telecommunications service in the affected exchanges by offering employment to all of GTE North and GTE South’s employees currently working in the exchanges to be acquired from GTE North and GTE South. Citizens Illinois will acquire substantially all of the assets of
GTE North and GTE South in the exchanges to be acquired, including central office buildings and equipment, outside plant facilities, and other property used by GTE North and GTE South in those exchanges.
5. REQUEST OF GTE NORTH AND GTE SOUTH FOR AUTHORITY TO DISCONTINUE ITS SERVICES IN THE RELEVANT SERVICE AREA PURSUANT TO $13-406 OF THE ACT
Upon the close of the proposed Transaction, GTE North and GTE South will cease to have assets in the relevant exchanges and will no longer be able to provide noncompetitive local exchange service to subscribers in the exchanges purchased by Citizens Illinois. After the Transaction closes, Citizens Illinois will provide telecommunications service to the subscribers in this area. Accordingly, subscribers will not be deprived of any necessary or essential telecommunications service or access thereto. Therefore, GTE North and GTE
9 South request that the Commission find that it is in the public interest to grant them permission, pursuant to $513-406 of the Act, to discontinue providing noncompetitive services in those exchanges which Citizens Illinois will acquire at the closing of the Transaction.
6. REQUEST FOR ORDER APPROVING DESIGNATION OF CITIZENS ILLINOIS AS AN ETC FOR THE SERVICE AREA COVERING THOSE EXCHANGES IT WILL ACQUIRE UPON THE CLOSING OF THE PURCHASE AND SALE OF ASSETS, EFFECTIVE UPON THE CLOSING OF THE TRANSACTION
GTE North and GTE South are currently designated as ETCs, pursuant to
Section 214(e) of the Communications Act of 1934, as amended, 47 U.S.C. §
214(e), in the 110 exchanges that are the subject of the Transaction. Citizens
Illinois requests that this Commission designate Citizens Illinois as the ETC for the 1 IO exchanges it will acquire upon the approval and close of the Transaction.
7. REQUEST FOR A LETTER FROM THIS COMMISSION TO THE FCC INDICATING NON-OPPOSITION FOR A STUDY AREA WAIVER
This Transaction is conditioned upon receipt of all necessary approvals from both this Commission and the FCC. The approval Petitioners will seek from the FCC will include a petition for a study area waiver. The FCC’s policy regarding study area waivers is not to accept petitions for waiver until the state regulatory agency has stated that it does not object to changes in the study area boundaries. For this reason, Petitioners request that the Commission, as soon as practicable, issue an order or other statement indicating that it does not object to the FCC’s grant of the necessary study area waiver. The Petitioners request that, if possible, such order or other statement of non-objection be issued prior to
IO an order approving the Transaction. In this way, the parties can move on a parallel track at the FCC as the Commission considers this Petition. In the alternative, Petitioners request that the Commission’s order approving this
Transaction include a statement that the Commission does not object to the FCC granting study area waivers, nor to any reconfiguration of study area boundaries for the subject exchanges.
8. REQUEST FOR APPROVAL FOR CITIZENS ILLINOIS TO MAINTAIN ITS BOOKS AND RECORDS OUTSIDE OF THE STATE OF ILLINOIS PURSUANT TO 83 ILLINOIS ADMINISTRATIVE CODE PART 250
Citizens Illinois seeks authority from the Commission to maintain its books and records at its offices outside Illinois. In requesting such permission, Citizens
Illinois agrees, in accordance with §5-106 of the Act, to be liable for reasonable costs and expenses associated with the audit or inspection of Citizens Illinois’s books and records kept outside Illinois.
WHEREFORE, Petitioners request that the Commission enter an Order :
a) Approving GTE North and GTE South’s sale, and Citizens Illinois’s
purchase, of certain telephone properties and related assets used in
the provision of telecommunications service in the exchanges listed in
Exhibit 23, pursuant to §7-102 of the Act, on the terms and conditions
set forth in the Asset Purchase Agreement and such transition
agreements contained therein;
b) Granting Citizens Illinois a Certificate of Exchange Service Authority,
pursuant to §13-405 of the Act for the service area consisting of the
11 exchanges to be acquired from GTE North and GTE South upon the
closing of this purchase and sale of assets; c) Granting Citizens Illinois statewide Certificates of Interexchange
Service and Service Authority pursuant to §§I 3-403 and 13-404 of the
Act; d) Authorizing GTE North and GTE South to discontinue their respective
provision of non-competitive local exchange services under §I 3-406 of
the Act in the service area consisting of the exchanges to be sold to
Citizens Illinois upon the closing of this purchase and sale of assets; e) Designating Citizens Illinois, for the purposes of subsequent
application to the FCC, as an ETC for the service area consisting of
the exchanges to be acquired from GTE North and GTE South upon
the closing of this purchase and sale of assets, effective upon the
closing of the purchase and sale of said exchanges;
9 Authorizing issuance of a letter of non-opposition to the FCC regarding
Petitioners’ request for a study area waiver pursuant to 47 CFR §36; g) Authorizing Citizens Illinois to keep its books and records at its offices
outside Illinois, pursuant to 83 Administrative Code, Part 250; and h) Granting all other relief as the Commission may deem necessary and
appropriate.
12 Respectfully submitted,
Date a/as 00
GTE NORTH INCORPORATED GTE SOUTH INCORPORATED
lY One of its attorneys J. William Roberts Rendi Mann-Stadt HINSHAW & CULBERTSON 400 South Ninth Street Suite 200 Springfield, IL 62701 (217) 528-7375
CITIZENS TELECOMMUNICATIONS COMPANY OF ILLINOIS
Lee Ann Conti Associate General Counsel CITIZENS UTILITIES COMPANY 1000 Internationale Parkway Woodridge, IL 60517 (630) 739-8868
13 LIST OF EXHIBITS
EXHIBIT 1. Testimony of Brian W. McCormick
EXHIBIT 2. Testimony of F. Wayne Lafferty
EXHIBIT 3. Testimony of John J. Lass
EXHIBIT 4. Asset Purchase Agreement (Proprietary)
EXHIBIT 5. Certified Articles of Incorporation of GTE Corporation
EXHIBIT 6. Certified Articles of Incorporation for GTE North
EXHIBIT 7. Certified Articles of Incorporation for GTE South
EXHIBIT 8. Certificate of Good Standing for GTE North
EXHIBIT 9. Certificate of Good Standing for GTE South
EXHIBIT 10. Certified Resolutions of Board of Directors of GTE Approving Transaction
EXHIBIT 11. Certificate of Incorporation of Citizens Telecommunications Company of Illinois
EXHIBIT 12. Certificate of Good Standing for Citizens Telecommunications Company of Illinois
EXHIBIT 13. Certified Resolutions of Board of Directors of Citizens Utilities Company Approving Transaction
EXHIBIT 14. GTE Corporation 1998 Annual Report
EXHIBIT 15. GTE Corporation 1998 Form1 OK
EXHIBIT 16. GTE North 1998 Form IOK
EXHIBIT 17. GTE South 1998 Form IOK
EXHIBIT 18. GTE Corporation 1999 Third Quarter Form IOQ
EXHIBIT 19. GTE North 1999 Third Quarter Form IOQ
EXHIBIT 20. GTE South 1999 Third Quarter Form IOQ
EXHIBIT 21. Citizens Utilities Company 1998 Annual Report, Including 1998 Form IOK
EXHIBIT 22. Citizens Utilities Company 1999 Third Quarter Form IOQ
EXHIBIT 23. List of Affected Exchanges
EXHIBIT 24. List of Towns by Affected Exchange
EXHIBIT 25. Map of Affected Service Territory
14 State of Connecticut
County of Fairfield
VERIFICATION
L. Russell Mitten, Esq. being first duly sworn, states that he is Vice
President and General Counsel of Citizens Telecommunications Company of
Illinois and that he has examined the foregoing petition and that to the best of his knowledge, information and belief, all statements of fact contained in the said petition are true, and the said petition is a correct statement of the business and affairs of the above named petitioner in respect to each and every matter set forth therein.
Subscribed and Sworn before me, a Notary Public
< BG2 My Commission Exp. Oct. 31, 2001 iu,,n ti , this&?day of FN ( 2000. State of Illinois ss. County of McLean 1
VERIFICATION
James R. Hargrave being first duly sworn, states that he is Assistant Vice
President - Regulatory and Governmental Affairs - Illinois for GTE North
Incorporated and GTE South Incorporated and that he has examined the foregoing petition and that to the best of his knowledge, information, and belief, all statements of fact contained in the said petition are true, and the said petition is a correct statement of the business and affairs of the above named petitioner in respect to each and every matter set forth therein, CERTIFICATE OF SERVICE
On February 25,2000, a copy of the Joint Verified Petition of GTE North Incorporated,
GTE South Incorporated and Citizens Telecommunications Company of Illinois on behalf of
Joint Petitioners for approval of the sale of certain GTE exchanges and related relief was served on the following via hand delivery* or Federal Express:
Original and 3 filed with:
Donna Caton, Clerk *Frank Bodine Illinois Commerce Commission Assistant Manager 527 E. Capitol Telecommunications Division Springfield, IL 62701 Illinois Commerce Commission 527 E. Capitol Copies forwarded to: Springfield, IL 62701
G. Darryl Reed *Jeff Hoagg Office of General Counsel Illinois Commerce Commission Illinois Commerce Commission 527 E. Capitol 160 North LaSalle Street, Suite C-800 Springfield, IL 62701 Chicago, IL 60601-3104 *Doug Price *Charles E. Fisher Illinois Commerce Commission Executive Director 527 E. Capitol Illinois Commerce Commission Springfield, IL 62701 527 E. Capitol Springfield, IL 62701
*Patrick McLarney Manager Telecommunications Division Illinois Commerce Commission 527 E. Capitol Springfield, IL 62701 Exhibit 1 .OO Docket OO-
1 2 GTE NORTH INCORPORATED 3 GTE SOUTH INCORPORATED 4 5 6 DIRECT TESTIMONY OF BRIAN W. MCCORMICK 7 8 ICC DOCKET NO. OO- 9 10 11 Q. Please state your name and business address.
12 A. My name is Brian W. McCormick. My business address is 600 Hidden Ridge,
13 Irving, Texas 75038.
14 Q. By whom are you employed and in what capacity?
15 A. I am employed by GTE Network Services as Regulatory Director-Property
16 Repositioning.
17 Q. Please summarize your educational background and experience in the
18 telecommunications industry.
19 A. In 1963, I completed studies in accounting at Powelson Institute in Syracuse,
20 New York. Throughout my years with Contel and GTE, I’ve attended numerous
21 management courses, which concentrated on advanced management
22 techniques and business case studies.
23 I began my professional career in 1963 when I joined the Public Accounting
24 firm of Peat, Marwick, Mitchell and Co. as a Staff Accountant, My duties were
25 general audit and tax return preparation. In 1965, I entered the
26 telecommunications industry when I accepted a position as General Accountant
27 for Chanango and Unadilla Telephone Company. As General Accountant, I was
1 Exhibit 1 .OO Docket OO-
1 responsible for maintaining the books of the corporation and the preparation of
2 financial statements.
3 In 1966, I entered the US Army where I served for two years. In 1968, upon
4 separation from the Army, I was employed by Contel Corporation, then
5 Continental Telephone Company, which had acquired Chenango and Unadilla
6 Telephone Company in early 1968. Between 1968 and 1991, while employed by
7 Contel, I held numerous positions including Senior Accountant, Tax Manager,
a Revenue Requirements Manager, and Assistant Vice President-Regulatory. My
9 work experience throughout this twenty-three year period was concentrated in
10 the finance and regulatory disciplines. I supervised the accounting operations
11 for numerous telephone, cable television and radio companies. For ten years, I
12 managed Contel’s Eastern Region Tax Department with responsibility for all tax
13 compliance and tax accounting for Contel’s thirteen Eastern Region subsidiaries.
14 For six years, I managed rate case filings and other regulatory matters on behalf
15 of Contel’s subsidiaries throughout the Eastern Region. From 1986 to 1991 as
16 Assistant Vice President-Regulatory, I was responsible for all rate case, tariff,
17 pricing, cost of service, settlements and carrier access billing matters for Contel’s
18 northeast states, which included telephone companies in Maine, Vermont, New
19 Hampshire, New York, Pennsylvania, and West Virginia.
20 In 1991, with the merger of Contel and GTE, I became the Director-External
21 Affairs for GTE’s Northeast Region, headquartered in New York State. GTE’s
22 Northeast Region consisted of its merged Contel telephone properties located in
2 Exhibit 1 .OO Docket OO-
1 the states of New York, Maine, Vermont, and New Hampshire. During 1993 and
2 1994, I served on the Board of Directors of the New York State Telephone
3 Association.
4 In September 1994, I assumed the position of Director-Regulatory Accounting
5 and Compliance for GTE Service Corporation. I was also Assistant Controller for
6 the GTE Telephone Operating Companies, My principal duties included the
7 direction and supervision of the preparation of all accounting information in
8 support of tariff and rate filings for GTE’s telephone operating companies. I was
9 responsible for all regulatory reporting and compliance as required by the
10 regulatory agencies, In June 1998, I assumed my current position as Regulatory
11 Director-Property Repositioning.
12 Q. Have you previously testified before regulatory commissions?
13 A. Yes, I have testified before regulatory commissions in Maine, Vermont, New
14 Hampshire, New York, Pennsylvania, Virginia, West Virginia, North Carolina,
15 South Carolina, and Washington on various issues including results of
16 operations, capital structure, extended area service, affiliated interests, rate
17 design, product-specific cost of service, and property repositioning. I have also
18 submitted testimony in rate proceedings before the California Public Utilities
19 Commission, the Florida Public Service Commission, the Oklahoma Corporation
20 Commission, the Hawaii Public Utilities Commission, and the Oregon Public
21 Utility Commission.
3 Exhibit 1 .OO Docket OO-
1 PURPOSE
2 Q. What is the purpose of your testimony in this proceeding?
3 A. The purpose of my testimony in this proceeding is three-fold. I will briefly
4 describe GTE’s repositioning initiative and selection of property to be
5 repositioned. I will also explain how buyers have been selected, criteria, etc. and
6 I will identify the Illinois buyer and describe the transaction. Finally, I will discuss
7 why the proposed sale is in the public interest.
8 GTE’S REPOSITIONING INITIATIVE
9 Q. Please Explain GTE’s repositioning initiative.
10 A. On November 5, 1998, GTE announced its plan to sell or trade about 1.6
11 million switched access lines, approximately 8% of its domestic total,
12 The properties offered included all GTE wireline exchanges in the states of
13 Alaska, Arkansas, Arizona, Iowa, Minnesota, Nebraska, New Mexico, and
14 Oklahoma, and some of the GTE exchanges in California, Illinois, Missouri,
15 Texas, and Wisconsin.
16 This repositioning is intended to position GTE in markets that offer greater
17 efficiencies in operations and higher growth opportunities. Repositioning of
18 some of GTE’s properties is part of an overall corporate plan previously
19 announced in April 1998 to generate after-tax proceeds of $2 to $3 billion to be
20 used to pursue other strategic opportunities. Furthermore, repositioning will
21 allow the company to better defend and grow the strategic markets it currently
22 serves. The remaining rural territories, 25 % of GTE Network Services, will be
4 Exhibit 1.00 Docket OO-
1 well concentrated, putting GTE in a better position to fund capital requirements
2 for those properties.
3 Q. How did GTE identify the properties to be sold?
4 A. GTE formed a Network Services Property Repositioning Team to gather,
5 analyze, and evaluate information for packaging an overall marketing plan, which
6 was presented to GTE’s Board of Directors in September 1998. In evaluating
7 and determining the wireline properties to be sold, the Network Services team
8 considered a number of factors:
9 . financial and operational characteristics of the exchanges
10 . potential growth opportunities in those markets
11 . quality of GTE’s combined wireline/wireless footprint
12 . proximity to the top 50 markets in the U.S.
13 . regulatory environment and approval processes
14 l the ability to create geographic clusters of properties to attract buyers
15 . potential for improved operational efficiency.
16 GTE markets were ranked based upon the first two criteria above, market
17 conditions and financial characteristics. The remaining factors above were then
18 considered to identify the final package of properties.
19 BUYER SELECTION I ILLINOIS TRANSACTION
20 Q. Generally, how were buyers selected for the sale of property?
21 A. In November 1998, GTE sent out pre-qualification letters to over 200
22 interested buyers. These letters requested information necessary for GTE to
5 Exhibit 1 .OO Docket OO-
1 invite the best-qualified companies to receive further information on the
2 properties being offered and participate in the due diligence process.
3 Companies submitting information were requested to commit to employing all
4 employees directly supporting the purchased exchanges at the same or
5 comparable positions and at reasonably comparable salary and benefits
6 packages. The companies also had to be willing to assume the terms and
7 conditions of any bargaining unit agreement in effect for the sold properties.
8 Buyers were also required to provide evidence of financial viability. Finally,
9 buyers were required to provide information relating to their ability to successfully
10 operate the property and to obtain necessary regulatory approvals.
11 From the buyer’s submissions, GTE selected the best-qualified applicants to
12 receive more detailed state-specific offering documents and to participate in a
13 paper due diligence process. This process was spread over several months,
14 with regional clusters of property offered at regular intervals.
15 Upon completion of paper due diligence, buyers were given a specific date
16 upon which bids and contract terms were to be submitted to GTE. GTE
17 carefully evaluated the~bids and contract terms and further refined the list of
18 buyers to a small group, which was selected for the final negotiations and
19 physical due diligence process.
20 Q. Who is the buyer for GTE’s selected Illinois properties?
21 A. Citizens Utilities Company (“Citizens”) is the buyer of the Illinois exchanges
22 selected for repositioning. Citizens provides local exchange service to about a
6 Exhibit 1 .OO Docket OO-
1 million customer access lines in thirteen states across the country. Citizens also
2 owns 82 percent of Electric Lightwave, Inc., a leading full-service, facilities-based
3 integrated communications services provider of enhanced data service, frame
4 relay, ATM, and Internet access solutions to bandwidth-intensive businesses and
5 the e-commerce market.
6 In May 1999, GTE agreed to sell more than 186,000 access lines in
7 Minnesota, Arizona, and California to Citizens. This transaction represented all
8 of GTE’s operations in Minnesota and Arizona, and a fraction of GTE’s
9 operations in California.
10 In September 1999, GTE agreed to sell all of its 60,000 Nebraska access
11 lines to Citizens.
12 Q. Please describe the proposed transaction.
13 A. On December 16, 1999, GTE entered into a definitive agreement (the “Asset
14 Purchase Agreement”) with Citizens, whereby GTE agreed to sell 106,850
15 customer access lines in selected exchanges in Illinois to Citizens.
16 Under the terms of the Asset Purchase Agreement, GTE employees serving
17 the sold Illinois exchanges who are actively employed on the closing date will
18 become the employees of Citizens Illinois at the same or comparable total base
19 compensation they are receiving at that time. As announced, the GTE
20 employees include hourly and salaried employees.
21 Q. Please identify the individual exchanges in Illinois receiving service from
22 the assets that GTE is selling.
7 Exhibit 1 .OO Docket OO-
1 A. The proposed sale includes 1 IO Illinois exchanges. The exchanges are listed
2 in the attached Exhibit 23. As listed in Exhibit 1.01, as of December 31, 1999,
3 these exchanges had 87,618 residential lines and 22,934 business lines for a
4 total of 110,552 access lines.
5 Q. How will GTE account for this transaction?
6 A. GTE will utilize Part 32 Accounting and record this transaction in accordance
7 with Generally Accepted Accounting Procedures.
8 PUBLIC INTEREST
9 Q. Why is this sale to Citizens in the public interest?
10 A. Citizens is experienced in telecom operations and committed to building a
11 strong organization. Citizens specializes in serving rural exchanges and will
12 focus on the provision of excellent telephone service in Illinois.
13 The sale by GTE and the purchase by Citizens are a winning scenario for
14 GTE, Citizens, and all stockholders. The communities win because Citizens will
15 provide a concentrated focus on the areas associated with the acquired
16 properties.
17 The customers transferring to Citizens win because Citizens is primarily a
18 rural service company and its renewed focus on the areas associated with the
19 acquired properties should result in excellent customer service and attention.
20 GTE Shareholders win because the value of its’ retained investments should
21 increase with GTE’s improved ability to capitalize on marketplace opportunities,
22 The employees win because GTE is able to sharpen its focus on competing in
8 Exhibit 1 .OO Docket OO-
1 targeted markets and on growing the company; and those going to Citizens will
2 become part of company committed to serving the smaller, more rural
3 marketplace.
4 As GTE has made a strategic decision to redefine its telecommunications
5 markets, Citizens is dedicated to rural telecommunications service and the
6 Illinois customers will receive the benefit of this emphasis.
7 Q. Will the customers of GTE be detrimentally affected by the sale?
8 A. No, I understand that Citizens intends to take the facilities and customers in
9 place at current rates. The transaction should result in no immediate change for
10 the customers except for who the provider is, what the bill looks like and changes
11 in numbers to call for customer service.
12 Q. How will GTE coordinate with the buyers in the ownership changeover to
13 make certain that there are no disruptions of service to existing
14 customers?
15 A. GTE clearly recognizes the importance of ensuring a smooth transition in
16 ownership of the facilities and transfer of our customers to the buyers. We have
17 experienced network managers to manage and coordinate the tasks and
18 activities that need to be performed to ensure a smooth transition.
19 The repositioning team has designed a transition process that reflects our
20 experience with other states’ transitions. Subsequent to the sale, a team
21 representing all the impacted functional areas in GTE has been established to
22 implement the transition process for the Illinois sale exchanges.
9 Exhibit 1 .OO Docket OO-
1 Q. Will this sale disrupt or change existing network interconnection to the
2 public switched network by resellers, cellular providers, and independent
3 telephone companies?
4 A. No, the purchasers of the GTE exchanges will own the interoffice facilities
5 within the exchanges that they are purchasing. Like GTE and other independent
6 companies, the purchasers will be joint providers of the public switched network.
7 It is my understanding that Citizens Illinois will negotiate interconnection
8 agreements with all telecommunications service providers that currently have
9 interconnection agreements with GTE North and GTE South. If such
10 agreements cannot be negotiated prior to closing, Citizens Illinois will provide
11 interconnection services according to the terms of GTE’s approved
12 interconnection agreements, to the extent possible.
13 Q. Are there any effects on public safety services such as 911 or E-91 I?
14 A. No. Currently, 911 services are available in all of the exchanges being sold.
15 GTE required all potential purchasers to indicate their willingness to continue to
16 provide 911 and E-91 1 services in the purchased exchanges and to honor GTE’s
17 existing contractual agreements for these services. Because the buyers have
18 agreed to provide 911 and E-91 1 services, there will be no disruption or change
19 in the provision of emergency services as a result of these sales.
20 Q. What effect will the sale of these exchanges have on existing Extended
21 Area Service (EAS) routes?
22 A. The sale of these exchanges will have no effect on existing EAS routes. The
10 Exhibit 1 .OO Docket OO-
1 buyers have indicated they will continue to provide the EAS routes that are
2 currently in place.
3 SUMMARY
4 Q. Please summarize your testimony.
5 A. I have described GTE’s repositioning initiative and how the properties were
6 selected for sale. I have discussed how GTE was careful in selecting buyers for
7 the property by requiring that the parties demonstrate their capabilities and make
8 significant commitments to the employees in Illinois. I have identified Citizens as
9 the buyer and described the transaction. Finally, I have discussed why the
10 transaction is in the public interest.
11 Q. Does this conclude your direct testimony?
12 A. Yes it does.
11 Exhibit No. 1.01 Docket No. OO-
SWITCHED ACCESS LINE SUMMARY REPORT DECEMBER - ILLINOIS
1999 MONTHLY 1999 MONTHLY 1999 MONTHLY RESIDENTIAL LINES TOTAL LINES I,909 2,295 232 259 886 1,049 2,085 2,873 653 475
Page 1 of 3 Exhibit No. 1.01 Docket No. OO-
SWITCHED ACCESS LINE SUMMARY REPORT DECEMBER - ILLINOIS
1999 MONTHLY 1999 MONTHLY RESIDENTIAL LINES BUSINESS LINES 160 26 471 124 290 137 769 4,340 341 Exhibit No. 1.01 Docket No. OO-
SWITCHED ACCESS LINE SUMMARY REPORT DECEMBER - ILLINOIS
,999 MONTHLY 1999 MONTHLY 1999 MONTHLY RESIDENTIAL LINES BUSINESS LINES TOTAL LINES 1,147 470 1,617 17.4 4 no 571 60 63, 801 168 969 1,431 225 1,656 875 205 1,080 87,618 22,934 110,552 Exhibit 2.00 Docket No. OO- 1 CITIZENS TELECOMMUNICATIONS COMPANY OF ILLINOIS
2 DIRECT TESTIMONY OF F. WAYNE LAFFERTY
3 ICC DOCKET NO. 00--
4
5 Q. Please state your name and business address.
6 A. My name is F. Wayne Lafferty. My business address is 5600
7 Headquarters Drive, Plano, Texas 75024.
8
9 Q. By whom are you employed and in what capacity?
10 A. I am employed by Citizens Utilities Company (“Citizens”) as Vice
11 President, Regulatory and Government Affairs for the Communications
12 Sector.
13
14 Q. Please describe your current duties and responsibilities.
15 A. I am responsible for the complete management of regulatory and
16 government affairs for Citizens’ local exchange and long distance
17 telecommunications operations. My responsibilities include the
18 establishment and implementation of all regulatory policies, oversight of
19 all regulatory activities including Citizens’ rates and tariffs in both state
20 and interstate jurisdictions, interconnection policy and agreements, and
21 the management of state and federal regulatory and legislative
22 proceedings and relations.
1 . .
Exhibit 2.00 Docket No. OO-
1 Q, Please summarize your educational background.
2 A. I hold two degrees from Duke University: a Bachelor of Arts degree in
3 Economics and a MBA.
4
5 Q. Please describe your work experience.
6 A. I began working in telecommunications in 1986 with GTE in finance, later
7 moving to positions of increasing responsibility in regulatory, first in
8 Durham, North Carolina and later in Tampa, Florida. In January 1994, I
9 joined Citizens as Director of Regulatory and Public Affairs for the Eastern
10 Region of the Communications Sector of Citizens. In September 1995, I
11 assumed the position of Vice President - Regulatory for Citizens
12 Communications, the Communications Sector of Citizens. From October
13 1997 through October 1998, I held the position of Vice President
14 Marketing and Regulatory Affairs. I assumed my current position in
15 November 1998.
16
17 Q. Please describe generally Citizens’ businesses.
18 A. Citizens is a diversified public utility that, through its operating divisions
19 and subsidiaries, currently provides telecommunications, electric, gas,
20 water, and wastewater services to approximately 1.9 million customers in
21 22 states. Citizens provides these services through divisions and
22 subsidiaries divided into two businesses: (1) the Public Services Sector,
2 Exhibit 2.00 Docket No. OO-
1 which includes electric, gas, water, and wastewater services, and (2) the
2 Communications Sector, which provides both regulated and competitive
3 communications services to residential, business, and wholesale
4 customers. Through subsidiaries, Citizens operates as an incumbent
5 local exchange company (“ILEC”) in 13 states. Citizens also owns 82% of
6 Electric Lightwave, Inc., a leading full-service, facilities-based, competitive
7 local exchange carrier.
8
9 Q. What are the areas you will address in your testimony?
10 A. I will first describe the transaction set forth in the Asset Purchase
11 Agreement (“Agreement”) between Citizens and GTE North Incorporated
12 and GTE South Incorporated (collectively, “GTE”), dated December 16,
13 1999. I will also explain how the transaction comports with Citizens’
14 corporate vision, and identify the regulatory approvals required to
15 consummate the transaction. Next I will address why the transaction is in
16 the public interest. To that end, I will discuss: Citizens’ managerial,
17 technical and financial qualifications; the financing of the transaction; how
18 the transaction will affect customer services; regulatory issues relating to
19 the transaction; Citizens’ plans for public education and involvement; and
20 Citizens’ role as a corporate citizen.
21
22 Q. Have you reviewed the Joint Petition? Exhibit 2.00 Docket No. OO-
1 A. Yes, I have.
2 Q. Is the information contained in the Joint Petition true and correct?
3 A. Yes, to the best of my knowledge and belief.
4
5 Q. Please describe the transaction that is the subject of the Joint Verified
6 Petition.
7 A. Under the terms of the Agreement, Citizens will purchase from GTE
8 approximately 110,000 access lines in Illinois, comprising 1 IO exchanges.
9 As fully set forth in the Agreement, which has been provided as a
10 proprietary Exhibit 4 to the Joint Verified Petition, Citizens
11 Telecommunications Company of Illinois (“Citizens Illinois”) will acquire all
12 local exchange business, properties, assets and rights of GTE in the 110
13 designated exchanges on the closing date. The acquired assets include:
14 telephone plant, earned end-user accounts receivable, material and
15 supply inventories, FCC licenses and assigned permits, assigned
16 contracts, transferred books and records, real property interests, and all
17 other business, property, assets, work in process and rights that relate
18 primarily to the purchased exchanges.
19
20 Q. What is Citizens’ strategic vision?
21 A. Recently, Citizens has revised its strategic vision. Instead of continuing
22 its historical operation of a fully diversified range of public utility services,
4 Exhibit 2.00 Docket No. OO-
1 Citizens intends to divest its Public Services Sector properties and expand
2 its telecommunications operations. Citizens has determined that it must
3 increase the size of its telecommunications operations to compete with
4 alternate providers currently in and soon to enter the marketplace.
5 Further, Citizens has determined that it will concentrate its acquisitions
6 and operations on telecommunications businesses in small and medium-
7 size cities. As part of that strategy Citizens and GTE entered into the
8 Agreement described above. In addition to this agreement with GTE,
9 Citizens signed an agreement dated May 27, 1999, to purchase
10 approximately 190,000 access lines from GTE Corporation entities in
11 Arizona, California, and Minnesota. A second agreement was entered into
12 on September 21, 1999 with GTE to purchase approximately 60,000
13 additional access lines in Nebraska. On June 16, 1999, Citizens entered
14 into an agreement with U S West to acquire approximately 530,000
15 access lines in nine states’.
16
17 Q. How does this purchase from GTE advance Citizens’ overall business
18 vision?
19 A. The Illinois properties that Citizens will acquire from GTE will complement
20 recent acquisitions in Minnesota and Iowa, as well as Citizens’ existing
* The U S WEST access lines will include properties in Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, North Dakota, Wyoming and Washington.
5 Exhibit 2.00 Docket No. OO-
1 operations in Wisconsin.
2 Q How does Citizens Illinois fit into Citizens’ corporate structure?
3 A. Citizens Illinois is a wholly-owned subsidiary of Citizens, A copy of
4 Citizens’ organization chart is attached as Exhibit 2.01 to my testimony.
5
6 Q. Please describe Citizens’ experience in the telecommunications business.
7 A. Citizens has provided telephone service since its organization in 1935.
8 Through subsidiaries, Citizens currently operates as an ILEC in thirteen
9 states: Arizona, California, Idaho, Montana, Nevada, New Mexico, New
10 York, Oregon, Pennsylvania, Tennessee, Utah, West Virginia, and
11 Wisconsin. These subsidiaries serve approximately one million access
12 lines. In addition, Citizens has a subsidiary, Citizens Telecommunications
13 Company, that provides long distance service. Citizens also owns 82% of
14 Electric Lightwave, Inc., a full-service, facilities-based, competitive local
15 exchange carrier.
16
17 Q. Please describe Citizens’ management expertise and technical
18 qualifications to operate the acquired property.
19 A. As noted above, Citizens through its subsidiaries, has broad experience
20 in providing local exchange telecommunications services throughout the
21 United States, especially in smaller, more rural communities such as the
22 GTE exchanges being acquired. Citizens Illinois will draw heavily on
6 Exhibit 2.00 Docket No. OO-
1 Citizens’ telecommunications management resources for planning,
2 marketing, network, service development, provisioning and delivery, and
3 legal and regulatory assistance. In order to provide such services,
4 Citizens’ subsidiaries have received authority from state and federal
5 regulatory commissions to provide local exchange service in 13 states,
6 and have fully met the licensing requirements in each of those states.
7
8 Q. What is Citizens’ organizational structure for managing the Illinois
9 exchanges?
10 A. Regionalizing Citizens’ operations moves decisions closer to customers
11 and employees. Citizens Communications is made up of three regions:
12 East, Central, and West, each directed by a vice president. Each regional
13 vice president has responsibility for operations and customer service and
14 oversees all functions within the region that impact customers, such as
15 service, sales, and marketing. Functions such as engineering, accounting,
16 business support, marketing and human resources will be centralized at
17 Citizens’ Communications. The Illinois properties will be part of the Central
18 Region, which will be headed by Mr. John Lass, also testifying in this
19 proceeding. Mr. Lass is assembling an experienced management team to
20 manage the Central Region.
21
22 Q. How will Citizens pay for the acquisition of the telephone properties from
7 Exhibit 2.00 Docket No. OO-
1 GTE and U S West?
2 A. Citizens’ initial funding of the property acquisition(s) will be provided from
3 the Company’s cash and investment portfolio or from short-term
4 borrowings. At December 31, 1999, Citizens cash and investment
5 balances totaled more than $575 million. The Company also has the
6 ability to borrow the necessary funds either by issuing commercial paper
7 or by drawing on a $3 billion bank credit facility obtained for the purpose
8 of providing funding for property acquisitions. Permanent funding for the
9 acquisitions will be provided from Citizens’ cash and investment portfolio
10 and the proceeds from the sale of the company’s Public Services (gas,
11 electric and water) businesses. On October 18, 1999, Citizens announced
12 an agreement to sell all of its water and wastewater operations to
13 American Water Works, Company Inc. for an aggregate purchase price of
14 $835 million, On February 15, 2000, Citizens announced an agreement to
15 sell its Arizona and Vermont electric divisions to Cap Rock Energy
16 Corporation, and its Kauai, Hawaii electric division to Kauai Island Electric
17 Co-op for an aggregate purchase price of $535 million.
18
19 Q. How will Citizens capitalize its new telephone subsidiaries?
20 A. Citizens anticipates that the subsidiaries’ initial permanent capital will be
21 100% equity. The Company expects that the proceeds from the sale of
22 the Public Services businesses, combined with its cash and investment
8 Exhibit 2.00 Docket No. OO-
1 portfolio, will be sufficient to fund substantially all of its announced
2 acquisitions. Citizens does not expect to issue any new long-term debt as
3 a result of these transactions, In addition, the disposition of the Public
4 Services businesses is expected to result in the realization of a gain,
5 strengthening the consolidated balance sheet.
6
7 Q. Please describe Citizens’ overall financial condition.
8 A. In 1999, Citizens had annual operating revenues of $1.542 billion. It has
9 a strong income statement and balance sheet, with long-term debt rated
10 “A+” by Standard & Poor’s Corporation and “A2” by Moody’s Investors
11 Service. More detailed information about Citizens’ financial strength and
12 stability may be found in Citizens’ most recent Annual Report and
13 Citizens” Third Quarter SEC Form 1 OQ, attached to the Joint Verified
14 Petition as Exhibit 22. Further more, Citizens will be able to attract capital
15 on reasonable terms and maintain a reasonable capital structure following
16 the transaction, These strong investment grade rating should assure
17 Citizens access to public and private debt markets on reasonable terms
18 and conditions.
19
20 Q Have you provided the Commission with a proposed Capital Structure?
21 A. Yes. The projected year end 2000 capital structure of Citizens Utilities is
22 filed as proprietary Exhibit 2.02. The projected capital structure does
9 Exhibit 2.00 Docket No. OO-
1 include the impact of the pending GTE and US West acquisitions and the
2 disposition of the public service properties.
3
4 Q. Will the transaction have any effect on end user rates?
5 A. No. Citizens Illinois will adopt GTE’s local service rates and charges that
6 are in effect at the time of the closing of the transaction.
7
8 Q. Will the transactions have any effect on other carriers in the acquired
9 exchanges with which GTE currently has intercarrier agreements?
IO A. Citizens Illinois will adopt GTE’s intrastate tariff rates in effect at the time
11 of closing of the transaction. Citizens Illinois also intends to negotiate
12 interconnection agreements with all telecommunication service providers
13 that currently have interconnection agreements with GTE, and for which
14 GTE currently provides interconnection services in the subject exchanges.
15 Citizens Illinois expects to reach agreement with all such providers before
16 closing. If it does not, Citizens Illinois will provide interconnection services
17 to that provider according to the existing interconnection agreement with
18 GTE until Citizens Illinois and the provider have executed a new
19 interconnection agreement. All interconnection agreements between
20 Citizens Illinois and telecommunications services providers in the subject
21 exchanges will be submitted to the Commission for approval as required.
22
10 Exhibit 2.00 Docket No. OO-
1 Q. What are Citizens Illinois’s plans for offering intraLATA interexchange
2 services to the customers in the subject exchanges?
3 A. As provided in the Agreement, Citizens Illinois will acquire GTE’s existing
4 intraLATA interexchange customers in the subject exchanges.
5
6 Q. Will the exchanges that are being acquired from GTE be integrated into
7 Citizens’ service, management, billing, and other information systems?
8 A. Yes, for the most part. As identified in Article 9 of the Agreement, GTE
9 may provide certain services to the subject exchanges, including operator
10 services, directory assistance, SS7 services, and supply functions.
11
12 Q. Where will the Citizens Illinois’s books and records be located?
13 A. They will be maintained at the Citizens telephone operations headquarters
14 located at 5600 Headquarters Drive, Plano, Texas. Citizens has provided
15 books and records for the appropriate state and federal regulatory
16 agencies upon request in the past. Upon closing the Illinois transfer,
17 Citizens will provide the Illinois Commerce Commission (“Commission”)
18 appropriate access to these books and records. Citizens agrees to be
19 liable for reasonable costs and expenses associated with the audit or
20 inspection of Citizens Illinois’s books and records kept outside of Illinois.
21
22 Q. What written accounting policies and procedures and system of accounts
11 Exhibit 2.00 Docket No. OO-
1 will be used for Citizens Illinois?
2 A. Citizens has consistently followed the federal and state accounting
3 requirements for jurisdictions in which it has operated. Citizens will
4 continue to use the Federal Communications Commission (FCC) Part 32,
5 Uniform System of Accounts procedures and to apply them in Illinois in
6 accord with Commission Rules.
7
8 Q. How will Citizens Illinois account for and allocate time and expenses
9 between it and affiliated entities?
10 A. Citizens has a cost allocation manual (CAM) on file with the FCC in
11 compliance with the affiliate transaction requirements of FCC Part 64,
12 subpart I, Allocations of Costs. Citizens follows the FCC CAM to distribute
13 expenses between all its affiliates. Citizens will comply with Illinois laws
14 and regulations regarding affiliated interests.
15
16 Q. Is a “study area waiver” required in this transaction?
17 A. Yes.
18
19 Q. What is a “study area waiver?”
20 A. A study area is a geographical segment of a carrier’s telephone
21 operations. Generally, a study area corresponds to the carrier’s entire
22 service territory within a state. Carriers perform jurisdictional separations
12 Exhibit 2.00 Docket No. OO-
1 at the study area level. For jurisdictional separations purposes, the FCC
2 adopted a rule freezing study area boundaries, effective November 15,
3 1984. If a carrier wishes to sell an exchange or a number of exchanges
4 that constitute less than a study area, it must apply for a waiver of the
5 “frozen study area” rule because the sale would have the effect of
6 changing study area boundaries.
7
8 Q. Should the Commission formally state that it has no objection to Citizens’
9 request for a “study area waiver”?
10 A. Yes. To grant a study area waiver, the FCC requires that the state does
11 not object.
12
13 Q. Does Citizens Illinois require designation as an Eligible
14 Telecommunications Carrier under Section 214 of the Communications
15 Act of 1934, as amended?
16 A. Yes, any carrier seeking USF funding must be designated by the state
17 commission as being an Eligible Telecommunications Carrier (“ETC”).
18 GTE has been so designated for the exchanges being acquired. Citizens
19 Illinois will provide the same services as GTE after the acquisition and
20 requests the Commission to grant it the same eligible carrier status as
21 enjoyed by GTE prior to the acquisition.
22
13 Exhibit 2.00 Docket No. OO-
1 Q. Will Citizens meet all ETC criteria upon assuming operation of the
2 acquired exchanges?
3 A. Yes. it will.
4
5 Q. Will Citizens participate in the Illinois Telecommunications Access
6 Corporation (ITAC) and the Universal Telephone Assistance Corporation
7 (UTAC)?
8 A. Yes. Citizens will become a member of, and participate, in both the ITAC
9 and UTAC.
10
11 Q. Does Citizens have plans to educate the public and obtain public input
12 about the transaction?
13 A. Yes. Citizens intends to host Open House meetings at which customers
14 and other interested parties will be able to ask questions and provide
15 input. GTE and Citizens Illinois will continue to meet with community
16 leaders and government officials throughout the transition process.
17
18 Q. How does Citizens view its role as a corporate citizen and its employees’
19 involvement within the communities served?
20 A. Citizens, its divisions, and its subsidiaries have always participated in
21 various activities within each community served. Through the
22 sponsorship and participation in activities associated with organizations
14 Exhibit 2.00 Docket No. OO-
1 such as Junior Achievement, American Red Cross, Rotary Club, American
2 Cancer Society, and United Way, Citizens entities are recognized in many
3 areas as a major leader in the community. Citizens’ role as a corporate
4 citizen and its employees’ involvement within the communities further
5 demonstrates how the proposed transaction will serve the interest of the
6 Illinois public at large.
7
8 As part of the commitment to its communities, Citizens encourages
9 participation in volunteer and charitable activities. Many Citizens
10 employees give of their own time to assist with emergency services,
11 education, youth sports, and charitable organizations. Employees of
12 Citizens Illinois will be encouraged to continue this tradition.
13
14 Q. Please summarize your testimony.
15 A. My testimony demonstrates that the proposed transaction, whereby
16 Citizens has agreed to purchase 110 exchanges in Illinois from GTE, is in
17 the public interest. Citizens is a financially stable and experienced
18 provider of quality local telecommunications service in small and medium-
19 size rural communities, like the ones being acquired from GTE. Citizens
20 Illinois will adopt the current GTE local rates and charges. Therefore,
21 there will be no impact to customers’ rates at the time of closing. Citizens
22 Illinois will draw on Citizens’ existing management and technical expertise
15 Exhibit 2.00 Docket No. OO-
1 while expanding field forces, support systems and groups to meet the
2 needs of its customers and regulatory requirements, Citizens also plans
3 to invest $60 million over the next four years in infrastructure in the
4 acquired exchanges.
5 Citizens’ management employees will meet with key customers and hold
6 open houses in selected communities to explain the transaction and to
7 seek input on service issues and needs. Customers will be appropriately
8 notified as the approval process moves forward. Citizens’ role as a
9 corporate citizen and its employees’ involvement within the communities
10 further demonstrates how the proposed transaction will serve the interest
11 of the Illinois public at large.
12
13 In addition to the GTE and Citizens Illinois request for approval of the
14 acquisition, Citizens Illinois is seeking issuance of Certificates of
15 Exchange Service Authority and Interexchange Service Authority, and
16 designation as an Eligible Telecommunications Carrier status for the
17 exchanges being acquired. In addition, Citizens seeks a Commission
18 statement of non-opposition to a study area waiver.
19
20 Q. Does this conclude your direct testimony at this time?
21 A. Yes, it does.
16 -
r 1
The Confidential Portion of this
petition is too large to scan.
This material is available in the
Clerk’s Office for viewing for
parties who have authority to
access these documents. Exhibit 3.00 Docket No. OO- CITZENS TELECOMMUNICATIONS COMPANY OF ILLINOIS
DIRECT TESTIMONY OF JOHN LASS
ICC DOCKET NO. 00 -
8 Q. Please state your name and business address.
9 A. My name is John Lass. My business address is 3585 Lakeside Drive,
10 Minnetrista, MN 55364.
11
12 Q. By whom are you employed and in what capacity?
13 A. I am employed by Citizens Utilities Company (hereinafter referred to as
14 “Citizens”) as Vice President and General Manager, Central Region for the
15 Communications Sector, I am also a Vice President of Citizens
16 Telecommunications Company of Illinois (“Citizens Illinois”).
17
18 Q. Please describe your educational background.
19 A. I hold a Bachelor’s degree in civil engineering from Iowa State University.
20
21 Q. Please describe your prior work experience.
22 A. Prior to my current position, I was Vice President-Integration, responsible
23 for all aspects of acquisition-related integration efforts for Citizens
24 Communications. Other positions previously held include: Vice President-
25 Revenue Assurance and Regional Operations Vice President for New
26 York, Pennsylvania, Tennessee, and West Virginia. I joined Citizens as
1 Exhibit 3.00 Docket No. OO- 1 the Central District Telephone Operations Manager for the Sherburne,
2 New York area in 1994. Prior to that, I held a variety of operations
3 positions in New York and the Midwest with GTE and Contel.
4
5 Q. What are your responsibilities in your current position?
6 A. I am responsible for all facets of Citizens Communications Central Region
7 operations. The Central Region consists of the states of Iowa, Illinois,
8 Minnesota, Nebraska, North Dakota and Wisconsin. My responsibilities for
9 the Central Region include the oversight of all functions within the region
10 that impact customers, such as plant service, customer care, sales, and
11 marketing.
12
13 Q. What are the areas you will address in your testimony?
14 A. I will discuss the exchanges to be transferred, the experience Citizens will
15 bring to Illinois, and how Citizens Illinois will serve the transferred
16 exchanges.
17
18 Q. Have you reviewed the Joint Petition?
19 A. Yes. I have.
20
21 Q. Is the information contained in that Joint Petition true and correct?
22 A. Yes, to the best of my knowledge and belief.
23
2 Exhibit 3.00 Docket No. OO-
1 Q. Please identify the exchanges that Citizens Illinois will acquire.
2 A. GTE will transfer 110 exchanges in Illinois serving approximately 110,000
3 access lines. These have been specifically identified in Exhibit 23
4 attached to the Joint Verified Petition. Exhibit 25 to the Joint Verified
5 Petition shows the location of those exchanges in Illinois.
6
7 Q. How will Citizens Illinois handle customer service and other requests in
8 the acquired exchanges?
9 A. Operations offices will be located in Illinois to manage the installation,
10 repair and routine construction activities for Citizens Illinois customers.
11 Employees will be located in local areas as appropriate to meet the day to
12 day requirements, The Johnstown Customer Care Center and the
13 Sherburne Plant Service Center in New York are being expanded to
14 ensure efficiency and quality service. The Customer Care Center will
15 handle calls relating to service orders, billing inquiries, and other customer
16 inquiries, The Plant Service Center will handle all customer maintenance
17 and repair requests, As the transition progresses, further expansion and
18 organizational changes may take place. Citizens Illinois will keep this
19 Commission informed as plans evolve.
20
21 Q. What effect will the proposed transaction have on GTE employees in the
22 transferred exchanges?
23 A. All active employees employed in these exchanges will be transferred to
3 Exhibit 3.00 Docket No. OO- 1 Citizens Illinois, in the same or comparable positions, with the same or
2 comparable compensation, ensuring continuity in day-to-day operations.
3 Citizens Illinois will assume GTE’s obligations for Illinois employees under
4 the collective bargaining agreement in effect at the time of closing.
5
6 Q. Have GTE and Citizens developed procedures to facilitate the transfer of
7 the Illinois operations and to address the transition from GTE to Citizens?
8 A. Yes. The parties have met to develop appropriate procedures to ensure a
9 transfer of ownership that is transparent to customers. Under the
IO Agreement, GTE may provide, among other things, operator services,
11 directory assistance services, SS7 services, maintenance services, and
12 space and power leases, This means a smooth change of ownership fully
13 complying with applicable rules and regulatory orders, without disrupting
14 service provision or causing customer confusion or inconvenience.
15
16 Q. What else have GTE and Citizens done to ensure a seamless continuation
17 of services?
18 A. Citizens and GTE have analyzed GTE’s billing and customer services
19 systems. In addition, Citizens personnel will visit will the operating areas
20 to become familiar with the switching and network configurations in Illinois.
21 Teams have been formed to identify the specific steps necessary to
22 transition the customer services operations in a manner that will appear
23 seamless to the customers.
4 Exhibit 3.00 Docket No. OO- 1 Q. How is Citizens managing its acquisition process overall?
2 A. Citizens has established an Acquisition Integration Core Team to manage
3 the acquisitions from both GTE and US West. The Core Team members
4 are high level representatives from all relevant disciplines, who are
5 dedicated full time to ensuring that the acquisitions are successful for our
6 four major constituencies: customers, regulators, employees and
7 shareholders.
8
9 A successful transition is Citizens’ highest priority. Citizens’ top
10 management has emphasized to the entire organization that core-team
11 member requests to any employee are to be given the highest priority.
12 During the last 6 years, Citizens purchased properties in 13 states from
13 several companies including GTE and ALLTEL, successfully integrating
14 over 600,000 access lines.
15
16 Q. Will the transaction affect the provision of public safety services such as
17 911?
18 A. No. GTE and Citizens Illinois will work to ensure that public safety
19 services continue to be provided in the same manner, and without
20 interruption, to all customers in the affected exchanges.
21
22 Q. Will the transaction affect any of the existing Extended Area Services
23 (EAS) arrangements?
5 Exhibit 3.00 Docket No. OO- 1 A. The transaction will have no effect on existing EAS arrangements or
2 routes.
3
4 Q. Please describe Citizens’ experience in providing telecommunications
5 service.
6 A. Telephone service was a core business when Citizens began in 1935.
7 Citizens has nearly 65 years experience in telephony. Through
8 subsidiaries, Citizens currently operates as an incumbent local exchange
9 carrier (“ILEC”) in thirteen states: Arizona, California, Idaho, Montana,
10 Nevada, New Mexico, New York, Oregon, Pennsylvania, Tennessee,
11 Utah, West Virginia, and Wisconsin. These subsidiaries provide local and
12 intra-LATA service to approximately one million access lines. Citizens
13 Telecommunications Company, a subsidiary of Citizens, is authorized to
14 provide long distance telephone service in most states. Citizens also owns
15 82% of Electric Lightwave, Inc., a full-service, facilities-based, competitive
16 local exchange carrier. Both of these carriers are certified to provide
17 service in Illinois.
18
19 Q. What services will Citizens Illinois provide?
20 A. Immediately after the transfer of assets, Citizens Illinois will continue to
21 provide the same products and services to customers that GTE provides
22 in the subject exchanges. In addition, Citizens is able to offer its
23 customers both intraLATA and interLATA interexchange services, thus
6 . Exhibit 3.00 Docket No. OO-
1 providing customers the option of “one-stop shopping” for
2 telecommunications services, both local and interexchange. In response
3 to rapidly changing telecommunications technology, Citizens will continue
4 to stay abreast of these changes to find opportunities to bring advanced
5 services to small/rural communities at affordable prices.
6
7 Q. Please describe Citizens’ commitment to quality customer service.
8 A. Citizens Illinois is dedicated to providing its customers the highest quality
9 service possible at affordable prices. Citizens Illinois is committed to
10 meeting the Commission’s service standards. The resources and
11 investment Citizens has deployed in its existing service areas demonstrate
12 its commitment to quality customer service and satisfaction. Within two
13 years following acquisition, offices in Arizona, Idaho, Utah, Nevada and
14 Montana were upgraded to digital technology and 99% of the multi-line
15 customers were upgraded to single party service. Today, customers in all
16 states have been upgraded to digital technology offering a variety of
17 services. In each of its prior acquisitions, Citizens met or exceeded plans
18 presented to regulatory agencies at the time of the acquisitions. Citizens’
19 commitment to customer service is evidenced by the service quality it
20 currently provides in other states. For example, in the past six years,
21 Citizens Telecommunications Company of New York, Inc. has received
22 letters of commendation from the New York Public Service Commission
23 for providing excellent service to customers. Overall, Citizens’ “ILEC”
7 . Exhibit 3.00 Docket No. OO- 1 subsidiaries experience 1.8 trouble tickets per 100 access lines.
2
3 Q. Does Citizens have any plans to modernize or upgrade service to Illinois
4 customers?
5 A. Citizens is in the process of evaluating the network and switching facilities
6 for each of the purchased exchanges. Citizens currently contemplates
7 that it will invest at least $60 million in the Illinois exchanges over the first
8 four years following the acquisition closing. This amount represents a
9 substantial increase over the current average level of investment in these
10 exchanges.
11
12 Following the transfer of the Illinois assets to Citizens Illinois, Citizens will
13 continue to analyze the facilities and operations, meet with key customers
14 to evaluate the needs of each community and prioritize projects that will
15 most improve service for its customers. Citizens believes that this
16 assessment and prioritization process should be completed before
17 assigning any of the anticipated funds to specific projects.
18
19 Q. Has Citizens’ evaluation of the facilities thus far identified specific areas
20 for improvement?
21 A. Citizens has evaluated the current GTE plant facilities to identify those
22 areas where Citizens can build upon the existing modern infrastructure.
23 After its initial analysis, Citizens has identified the opportunity to install the
8 . Exhibit 3.00 Docket No. OO- 1 next generation of switch upgrades and to reinforce or upgrade interoffice
2 and transmission facilities in many exchanges.
3
4 Q. Why is it prudent to conduct further study before committing investment to
5 particular projects?
6 A. A systematic approach must be utilized to identify projects. Potential
7 projects must be assessed to determine: 1) the number of customers that
8 will benefit, 2) the impact on overall service quality, and 3) the financial
9 impact on the company and customers. Top priority will be given to
10 projects that have the largest impact on service quality, meet customers
11 needs and profitability, and improve operating efficiencies. Before
12 allocating resources to specific projects, Citizens Illinois will further assess
13 plant conditions and capacities, to pinpoint the most critical plant needs.
14 Citizens will continue this assessment so that, upon closing, it can
15 undertake the highest priority projects as soon as possible, while reserving
16 adequate resources to fund future projects.
17
18 Q. How will customers be notified of the change of ownership?
19 A. After the Commission approves the transaction, GTE will notify customers
20 via bill insert or separate mailing of the approval. At the same time, news / 21 releases describing the transaction will be provided to all local media. All
22 customers will receive a notice prior to closing. The content of the notices
23 will be shared with the Commission prior to distribution.
9 Exhibit 3.00 Docket No. OO- 1 Q. Please summarize why Citizens is fit, willing, and able to provide
2 telecommunications service to the Illinois properties.
3 A. Citizens has been offering telephone service for 65 years. Since the early
4 1990s Citizens has been expanding its presence throughout the country
5 through acquisitions, and it now offers telecommunications services in
6 more than 500 communities in 13 states. This acquisition, once
7 completed, will enable Citizens Illinois to concentrate on core markets,
8 achieve operating synergies, maintain or improve service to customers,
9 and create both immediate and long-term value for shareholders. Citizens
IO Illinois’s operating strength draws upon Citizens‘ history and experience in
11 serving small and medium sized communities. Citizens Illinois will provide
12 high quality service to its customers, meeting the service standards of the
13 Commission. The best evidence for this statement are the service and
14 modernization standards customers enjoy in the more than 500
15 communities in 13 states where Citizens currently provides service. In
16 these states, Citizens entities have deployed digital switching technology
17 throughout the network, upgraded customers to single party service and
18 deployed digital switching, fiber and digital radio technology on inter-
19 exchange routes.
20
21 Q. Does this conclude your direct testimony?
22 A. Yes, it does
10