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Citizens Communications Company is a Stamford, Connecticut-based company that in the early 2000s made the switch from utilities to telecommunications. Under the Frontier brand, the company serves rural and small town customers with some 2.4 million access lines in 24 states, offering local and long distance telephone service, calling features, and high-speed Internet connections, as well as bundled satellite television through Dish Network. Frontier also offers voice, data, and Internet services, and telephone equipment to business customers. Citizens is a public company listed on the New York Stock Exchange.
Origins Dating to 1935
Citizens was incorporated in 1935 to reorganize Public Utilities Consolidated Corp., a subsidiary of W.B. Foshay Co. which had been forced into receivership. The man behind the company was Wilbur Burton Foshay, a prominent Minneapolis figure of the day. He parlayed a $6,000 loan received in 1916 into a business empire, which included finance and real estate interests. However it was with utility companies that he made his mark, snapping up one after another during the Roaring Twenties, financing his deals by selling more and more stock in Public Utilities. By 1927 he was rich enough to build a new $3.7 million headquarters and a testament to himself: The 32-story Foshay Tower, as he named it, would become the tallest skyscraper west of the Mississippi River. The structure, made out of Indiana limestone, emulated the Washington Monument, with which Foshay had been fascinated since childhood. In August 1929 he was ready to dedicate the Tower, which featured "Foshay" etched in ten-foot-high letters on all four sides to be illuminated every night, and spent close to $120,000 on a three-day celebration, attended by a number of dignitaries. Foshay even commissioned legendary composer John Philip Sousa to write the "Foshay Tower Washington Memorial March," which the legendary composer then performed at the building's opening with his 75-piece band.
The dedication of the tower would be the highlight of Foshay's life, and the high-water mark for his business career. When the stock market crashed two months later, ushering in the Great Depression of the 1930s, Foshay's empire was revealed to be ethereal, nothing more than paper profits, a kiting scheme in which continuous sales of Public Utilities stock kept the enterprise afloat. Sousa's $20,000 check bounced, prompting the composer to refuse permission for the march to be played until he was paid. It was not revived until 1997, when Twin Cities residents chipped in to buy the rights and the "Foshay Tower Washington Memorial March" was performed once again. Foshay was convicted of three counts of mail fraud and sent to federal prison, serving three years before his sentence was commuted by President Roosevelt. President Truman fully pardoned Foshay in 1947, and ten years later, all but forgotten, the one-time utility mogul died in a Minneapolis nursing home.
Citizens Utilities maintained its headquarters in the Foshay Tower, which despite its builder's tarnished reputation became the civic symbol of Minneapolis. While Citizens Utilities managed to survive the 1930s, it was hardly a prosperous concern. After World War II came to a close it had revenues of $2.4 million and earnings of less than $180,000. At its height Public Utilities owned properties throughout the United States as well as in Central America, but many of these assets were shed during the reorganization, so that by 1946 Citizens owned a collection of electric, gas, and water utilities located in five states. Nevertheless, it attracted the attention of a young Wall Street Financier named Richard Laurence Rosenthal.
Young Financier Acquires Citizens: 1946
Rosenthal was born in Canada in 1915 and came to the United States six years later. He earned an undergraduate degree at New York University (NYU), graduating summa cum laude in 1936. He then spent two years in postgraduate studies at NYU before taking a job with a Wall Street investment firm, Wertheim & Company. Unusual at the time, Rosenthal did not rely on company-provided information, preferring to personally visit acquisition candidates to conduct his own research. He impressed some Wall Street friends who formed an investment group and recruited Rosenthal, just 29 years old, to take charge of acquiring control of promising companies. He agreed and then decided to focus on an industry in which solid management could make a significant impact. In a 1980 Barron's interview he explained that his research experience had taught him, "if you wanted to find poor management, the utility industry was then a good place to look for it." Citizens would become Rosenthal's first acquisition, completed in 1946, and other purchases would follow: Michigan Gas and Electric in 1947 and the New York Water Service Corporation in 1948.
Rosenthal took over as president, chief executive officer, and chairman of Citizens, and soon moved the corporate headquarters from Minneapolis to Stamford, Connecticut, where he lived. He now faced the task of nurturing the business. "I had to decide either to liquidate much of what was there and have Citizens be a one-category, one-area utility company," he told Barron's, "or to extend what was in place and have it become more multi-state and more variegated. I chose the latter." As a result, Citizens became diversified by region, insulated from local economic cycles and not excessively impacted by the decision of regulators in a particular state.
Under Rosenthal, Citizens acquired more than 40 small companies in the electric, water, gas, wastewater, and telephone industries. In order to fund growth he implemented an innovative two-tier stock arrangement in 1955. According to the New York Times, "Instead of paying out most of the earnings in dividends, as most utilities do, he issued a special type of stock in which shareholders got stock as dividends. Investors enjoyed one of the highest annual rates of return in the utility industry during his tenure." During his 1980 Barron's interview, Rosenthal estimated that someone who invested $10,000 in the company in 1946 and then elected to take the stock dividend shares would have holdings worth $1.8 million. Rosenthal was also loathe to build new power plants to meet rising demand for electricity in his markets, electing instead to buy power from other producers. In addition to Citizens, he had a lot of other business interests, including a music publishing company and a Virginia Islands resort. Thus, he delegated a great deal of authority to the local utilities, although he paid regular visits and insisted on weekly reports to keep tabs on Citizen's growing number of assets.
The first acquisitions came in 1948 with the addition of Bangor Gas Co., based in Bangor, Maine. The 1950s saw scores of acquisitions, including Francis Land and Water Co., Ferndale, California, in 1954; Parkway Water Co., serving the Sacramento, California, area, in 1956; an Illinois company, Northwest Utilities Co., in 1956; California's Shasta Telephone Co. in 1956; Bluett Water Supply Co. of Roselle, Illinois, in 1958; and Arrowhead Water Co., serving suburban Chicago, in 1959. Rosenthal did not let up the pace in the 1960s and 1970s. A representative sampling of acquisitions included San Francisco-area Inverness Water Company; Sinking Spring Water Co., a Pennsylvania utility; Washington Water & Light Co., serving West Sacramento, California; Kauai Electric Co., which served the island of Kauai, Hawaii; Ohio Utilities Co., provider of water and wastewater services in the Columbus area; and Blue Mountain Consolidated Water Co., of Nazareth, Pennsylvania. Rosenthal continued to add to Citizens in the 1980s, acquiring such properties as Arizona's Oasis Utility Co. and Sierra Utility Co., and Glen Alsace Water Co., providing water service in Berks County, Pennsylvania.
Rosenthal retired in June 1989 having produced record earnings every year he was in charge of Citizens. All told, the company had more than 460,000 customers in over 500 communities in a dozen states. (Rosenthal would die in 1998 at the age of 82.) A year after Rosenthal's retirement, the company's president and chief executive, Ishier Jacobson, retired as well, after 35 years with the company and serving as president since 1970. Before leaving, he named a new president and chief operating officer, Daryl A. Ferguson, whom Jacobson recruited because of his significant experience in telecommunications, an indication of the direction Citizens was about to take. Within the month, Leonard Tow was named the company's new CEO, and he also assumed the chairmanship, which had been open since Rosenthal's retirement a year earlier.
Focus on Telecommunications
Under the new management regime, Citizens began to aggressively use its utility rights-of-way to expand its telecommunications business. One step taken in the early 1990s was a 1991 investment in Centennial Cellular Corp., a cellular telephone company. Two years later Citizens paid $1.1 billion to GTE Corp. for 500,000 access lines in nine states. More GTE lines were bought in Arizona, Montana, and California in late 1994. In 1995 Citizens acquired Flex Communications, provider of long-distance telephone, voice mail, paging, cellular, and private data services to 5,500 customers in Albany, Syracuse, Johnstown, Norwich, and Middletown, New York. Also in 1995 and 1996 Citizens bought access lines from ALLTEL Corp. in West Virginia, Oregon, Tennessee, Utah, New Mexico, and California.
The transformation of Citizens continued in the second half of the decade, as the Telecommunications Act of 1996 opened markets across the country. Conference-Call USA was acquired for stock in December 1996, and a year later Ogden Telephone Company was bought in a $23.5 million deal. In November 1998 Citizens spent another $80.9 million to acquire Rhinelander Telecommunications Inc., a holding company for a Wisconsin telephone company. By now, the telecommunications assets were branded under the Citizens Communications name, while energy and water operations were packaged under the Citizens Public Services banner. Citizens generated about two-thirds of its revenues from telecommunications and was looking to make an even greater commitment to the industry as the decade came to a close. In 1999 it paid $664 million for 187,000 access lines from GTE Corporation, and later in the year agreed to a $1.65 billion deal to acquire 530,000 rural phone lines in nine states from US West Communications Inc.
In June 2000 Citizens Utilities became Citizens Communications Co., and management began to actively divest its utility assets. Electric utility operations were sold for $535 million in February 2000. Louisiana Gas Service and sister company LGS Natural Gas Company, along with the Colorado Gas division, were sold in 2001. Early in 2002 Citizens sold its water and wastewater treatment operations to American Water Works in a $979 million transaction that was originally brokered in October 1999. Citizens' final utility sale came in April 2004 when it sold the Vermont Electric division for $21.4 million in cash.
Citizens' management had set a goal of owning five million access lines by 2005 and in the early 2000s appeared to be making considerable progress in realizing that vision, despite a setback in 2001. The $1.64 billion deal with US West fell apart after Citizens had second thoughts about the price and US West, since bought by Qwest Communications, refused to renegotiate, resulting in the termination of the acquisition. In the meantime, Citizens enjoyed better success with the $3.65 billion acquisition of Frontier Corp., a deal that added more than one million local access lines and gave Citizens the recognizable Frontier brand to build upon. But no major deals followed and Citizens produced lackluster results, although it still fared better than most in the troubled telecommunications sector.
In December 2003 Citizens announced that it would retain a financial advisor to explore "strategic alternatives," prompting speculation that the company would either be sold to a private equity firm or lopped off into individual pieces. In February 2004, J.P. Morgan Securities and Morgan Stanley were named financial advisors. A pair of suitors emerged, Kohlberg Kravis Roberts & Co. and the Blackstone Group, but by July 2004 both backed off, deeming the price of Citizens' stock to be too high. All speculation about a possible sale came to an end when Tow resigned as CEO and chairman in July 2004.
The Citizens board of directors found a new president and CEO in Maggie Wilderotter, who took over the posts in November 2004. In January 2006 she would also assume the chairmanship of the company. The 49-year-old Wilderotter was a seasoned executive in the telecommunications and cable industry. She learned the business by spending 12 years at U.S. Computer Services, Inc./Cable Data. She then became president-Western Region for McCaw Cellular and executive vice-president-National Operations for AT&T Wireless. Later she served as CEO of Wink Communications before joining Microsoft where she was a senior vice-president of Worldwide Public Sector.
Under Wilderotter's watch, Citizens added satellite video services in an agreement with Dish Network. The move allowed Frontier to bundle telephone, Internet, and video services, a single-bill offering that held great appeal to customers. Increasing product revenues was a key to Citizens' growth, because of the rural nature of its business. With customers spread far apart, the company could not fully take advantage of economies of scale but was required to provide universal telephone service to residents. Although it received a federal subsidiary for universal service, the amount the government paid continued to dwindle. In 2005, for example, the amount paid was $20 million less than in 2004.
Citizens' balance sheet showed marked improvement in 2005 over the prior year. The company generated sales of more than $2.16 billion, a slight increase over 2004, but net income grew 180 percent to $202.4 million. The company continued to adjust its business mix. In 2006 it liquidated its Rural Telephone Bank subsidiary and sold Electric Lightwave, primarily a provider of voice, data, and Internet services to portions of the western United States, for $243 million in cash.
Citizens Cable Company; Citizens Capital Ventures Corp.; Frontier Subsidiary Telco LLC.
AT&T Inc.; Qwest Communications International Inc.; Verizon Communications Inc.