<PAGE>
CITIZENS UTILITIES COMPANY
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1998
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________to__________
Commission file number 001-11001
CITIZENS UTILITIES COMPANY
(Exact name of registrant as specified in its charter)
Delaware 06-0619596
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3 High Ridge Park
P.O. Box 3801
Stamford, Connecticut 06905
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (203)614-5600
NONE
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days.
Yes X No
The number of shares outstanding of the registrant's class of common stock as of
April 30, 1998 were 253,977,654.
<PAGE>
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
Index to Consolidated Financial Statements
Page No.
Part I. Financial Information
Consolidated Balance Sheets at March 31, 1998 and December 31, 1997 2
Consolidated Statements of Income for the Three Months Ended
March 31, 1998 and 1997 3
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1998 and 1997 4
Notes to Consolidated Financial Statements 5
Management's Discussion and Analysis of Financial Condition and
Results of Operations 7
Quantitative and Qualitative Disclosures about Market Risk 15
Part II. Other Information
Legal Proceedings 16
Exhibits and Reports on Form 8-K 16
Signatures 17
1
<PAGE>
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<S> <C> <C>
March 31, 1998 December 31, 1997
ASSETS
Current assets:
Cash $ 45,383 $ 35,163
Accounts receivable, net 266,082 277,405
Other 72,261 64,711
------------- -------------
Total current assets 383,726 377,279
------------- -------------
Property, plant and equipment 5,418,345 5,297,737
Less accumulated depreciation 1,743,056 1,629,944
-------------
-------------
Net property, plant and equipment 3,675,289 3,667,793
------------- -------------
Investments 454,560 398,499
Regulatory assets 212,929 209,921
Deferred debits and other assets 213,327 219,360
------------- -------------
Total assets $ 4,939,831 $ 4,872,852
============= =============
LIABILITIES AND EQUITY
Current liabilities:
Long-term debt due within one year $ 6,069 $ 6,691
Accounts payable and current liabilities 364,732 411,179
------------- -------------
Total current liabilities 370,801 417,870
Deferred income taxes 429,850 420,708
Customer advances for construction and
contributions in aid of construction 260,036 260,790
Deferred credits and other liabilities 115,106 128,984
Regulatory liabilities 20,430 20,881
Long-term debt 1,789,683 1,706,532
------------- -------------
Total liabilities 2,985,906 2,955,765
------------- -------------
Company Obligated Mandatorily Redeemable
Convertible Preferred Securities * 201,250 201,250
Minority interest in subsidiary 34,090 36,626
Shareholders' equity:
Common stock issued, $.25 par value 63,356 62,749
Additional paid-in capital 1,504,348 1,480,425
Retained earnings 141,091 132,217
Accumulated other comprehensive income 9,790 3,820
------------- -------------
Total shareholders' equity 1,718,585 1,679,211
------------- -------------
Total liabilities and shareholders' equity $ 4,939,831 $ 4,872,852
============= =============
* Represents securities of a subsidiary trust, the sole assets of which are
securities of a subsidiary partnership substantially all the assets of which are
convertible debentures of the Company.
The accompanying Notes are an integral part of these Financial Statements.
2
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(In thousands, except per-share amounts)
1998 1997
------------ ------------
Revenues $ 403,863 $ 375,091
------------ ------------
Operating Expenses:
Cost of services 108,032 105,990
Depreciation 63,597 57,015
Other operating expenses 175,956 149,255
------------ ------------
Total operating expenses 347,585 312,260
------------ ------------
Income from operations 56,278 62,831
Other income, net 10,638 12,150
Minority interest 2,053 -
Interest expense 26,806 27,009
------------ ------------
Income before income taxes, dividends on convertible preferred securities
and cumulative effect of change in accounting principle 42,163 47,972
Income taxes 11,498 15,836
------------ ------------
Income before dividends on convertible preferred securities and cumulative
effect of change in accounting principle 30,665 32,136
Dividend on convertible preferred securities, net of income tax benefit 1,552 1,552
------------
------------
Income before cumulative effect of change in accounting principle 29,113 30,584
Cumulative effect of change in accounting principle, net of income tax benefit
and related minority interest 2,334 -
------------ ------------
Net Income $ 26,779 $ 30,584
============ ============
Net income per common share before cumulative effect of change in accounting
principle:
Basic $ .12 $ .12 *
Diluted $ .11 $ .12 *
Net income per common share:
Basic $ .11 $ .12 *
Diluted $ .11 $ .12 *
Dividend rate declared on common stock .75% 1.6%
============ ============
*Adjusted for subsequent stock dividends
The accompanying Notes are an integral part of these Financial Statements.
3
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(In thousands)
1998 1997
--------------- ----------------
Net cash provided by operating activities $ 81,438 $ 64,092
--------------- ----------------
Cash flows from investing activities:
Construction expenditures (120,243) (89,584)
Securities purchased (229,497) (69,005)
Securities sold 184,234 61,774
Securities matured - 8,126
Other 129 (17,350)
--------------- ---------------
Net cash provided from investing activities (165,377) (106,039)
--------------- ---------------
Cash flows from financing activities:
Long-term debt borrowings 94,261 46,669
Long-term debt principal payments (2,797) (1,084)
Issuance of common stock 2,695 971
Common stock buybacks - (13,088)
Other - (27)
--------------- ---------------
Net cash provided from financing activities 94,159 33,441
--------------- ---------------
Increase (decrease) in cash 10,220 (8,506)
Cash at January 1, 35,163 24,230
--------------- ---------------
Cash at March 31, $ 45,383 $ 15,724
=============== ================
</TABLE>
The accompanying Notes are an integral part of these Financial Statements.
4
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies:
(a) Basis of Presentation:
The unaudited consolidated financial statements include the accounts of
Citizens Utilities Company and its subsidiaries (the "Company") and
have been prepared in conformity with generally accepted accounting
principles. The consolidated financial statements include all
adjustments, which consist of normal recurring accruals necessary to
present fairly the results for the interim periods shown. Certain
information and footnote disclosures have been condensed pursuant to
Securities and Exchange Commission rules and regulations. The results
of the interim periods are not necessarily indicative of the results
for the full year. Certain reclassifications of balances previously
reported have been made to conform to current presentation.
(b) Regulatory Assets and Liabilities:
The Company's regulated operations are subject to the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 71,
"Accounting for the Effects of Certain Types of Regulation." SFAS 71
requires regulated entities to record regulatory assets and liabilities
as a result of actions of regulators.
(c) Earnings Per Share:
The Company adopted the provisions of SFAS No. 128, "Earnings Per
Share" on December 31, 1997. SFAS 128 establishes standards for
computing and presenting earnings per share ("EPS") and supersedes APB
Opinion No. 15, "Earnings Per Share". It also requires presentation of
both basic and diluted EPS for net income on the face of the income
statement and a separate reconciliation of both EPS amounts (see Note
2). Basic EPS is computed using the weighted average number of common
shares outstanding during the period being reported on. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common
stock at the beginning of the period being reported on. Both Basic and
Diluted EPS calculations are presented with adjustments for subsequent
stock dividends. 1997 EPS has been restated pursuant to SFAS 128.
(2) Earnings Per Share:
The reconciliation of the earnings per share calculation required by SFAS
128 for the period ended March 31, 1998, and 1997 is as follows:
<TABLE>
1998 1997
--------------------------- --------------------------
($ in thousands, except for per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Per Per
Income Shares Share Income Shares Share
Net income per common share:
Basic $26,779 253,151 $ .11 $30,584 255,677 $ .12
Effect of dilutive options - 553 - - 680 -
Diluted $26,779 253,704 $ .11 $30,584 256,357 $ .12
</TABLE>
All share amounts represent weighted average shares outstanding for each
respective period. All per share amounts have been adjusted for subsequent
stock dividends. Certain instruments were not included in the Diluted EPS
calculation as their effect was antidilutive.
5
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) Comprehensive Income:
Effective January 1, 1998, the Company adopted the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS 130 requires that changes in the amounts of
items such as unrealized gains/losses on certain securities are to be
displayed prominently in the financial statements. The Company's total
comprehensive income is as follows:
<TABLE>
<S> <C> <C> <C>
March 31, March 31,
1998 1997
------------- ---------------
Net income $26,779 $30,584
Unrealized gain (loss) on securities classified
as available for sale, net of income taxes 5,970 (5,521)
------------- ---------------
Total comprehensive income $32,749 $25,063
============= ===============
</TABLE>
(4) Change in Accounting Principle:
In April 1998, the Accounting Standards Executive Committee of the AICPA
released Statement of Position ("SOP") 98-5, "Reporting on the Costs of
Start-Up Activities." The SOP, which is effective for periods beginning
after December 15, 1998, requires that at the beginning of the fiscal year
of adoption, the unamortized portion of deferred start up costs be written
off and reported as a change in accounting principle. Future costs of
start-up activities should then be expensed as incurred.
Certain third party direct costs incurred by ELI in connection with
negotiating and securing initial rights-of-way and developing network
design for new market clusters or locations had been capitalized by ELI in
previous years, and were being amortized over five years. The Company
elected to early adopt SOP 98-5 for ELI effective January 1, 1998. The net
book value of these deferred amounts was $3,394,000 which has been reported
as a cumulative effect of a change in accounting principle in the
statements of income for the first quarter 1998, net of income tax benefit
of $577,000 and related minority interest of $483,000.
(5) Hungarian Telephone and Cable Corporation ("HTCC"):
Pursuant to a definitive agreement with HTCC the Company provides requested
management services to HTCC. Expenses incurred by the Company in providing
such services, including certain allocable overhead items, are required to
to be reimbursed by HTCC. HTCC is currently disputing certain provisions
of this agreement and the associated management fee.
6
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This quarterly report on Form 10-Q may contain forward-looking statements
that are subject to risks and uncertainties which could cause actual
results to differ materially from those expressed or implied in the
statements. All forward-looking statements (including oral representations)
are only predictions or statements of current plans, which are constantly
under review by the Company. All forward-looking statements may differ from
actual future results due to, but not limited to, changes in the local and
overall economy, the nature and pace of technological changes, the number
and effectiveness of competitors in the Company's markets, success in
overall strategy, weather conditions, changes in legal and regulatory
policy, the Company's ability to identify future markets and successfully
expand existing ones and the mix of products and services offered in the
Company's target markets. Readers should consider these important factors
in evaluating any statement contained herein and/or made by the Company or
on its behalf. The following information is unaudited and should be read in
conjunction with the consolidated financial statements and related notes to
consolidated financial statements included in this report.
The Company is a diversified communications and public services company
which provides, either directly or through subsidiaries,
telecommunications, electric transmission and distribution, natural gas
transmission and distribution, water distribution and wastewater treatment
services to customers in areas of 21 states. The Company develops and
expands its businesses through internal investment, acquisitions and joint
ventures in the rapidly evolving telecommunications industry and in
traditional public services and related fields. The Company is currently
reviewing strategic alternatives intended to facilitate an improved market
valuation of the Company's business mix.
(a) Liquidity and Capital Resources
For the three months ended March 31, 1998, the Company used cash flow from
operations and proceeds from net financings to fund capital expenditures.
Funds requisitioned from the Industrial Development Revenue Bond
construction fund trust accounts were used to partially fund the
construction of utility plant.
The Company considers its operating cash flows and its ability to raise
debt and equity capital as the principal indicators of its liquidity. The
Company has committed lines of credit with commercial banks under which it
may borrow up to $600,000,000. There were no amounts outstanding under
these lines at March 31, 1998. In addition, Electric Lightwave, Inc.
("ELI"), the Company's competitive local exchange carrier ("CLEC")
subsidiary, has committed lines of credit with commercial banks under which
it may borrow up to $400,000,000. The Company has guaranteed all of ELI's
obligations under these lines. As of March 31, 1998, $100,000,000 was
outstanding under these lines of credit.
The Company has requests for increases in annual revenues pending before
regulatory commissions in Ohio and California totaling $4,700,000.
7
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
Effects of Newly-Issued Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued a Statement of Position ("SOP") 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." SOP
98-1 requires that certain costs related to the development or purchase of
internal-use software be capitalized and amortized over the estimated
useful life of the software, and costs related to the preliminary project
stage and the post-implementation/operations stage of an internal-use
computer software development project be expensed as incurred. SOP 98-1 is
effective for financial statements issued for fiscal years beginning after
December 15, 1998. The Company does not expect the adoption of SOP 98-1 to
have a material effect on the Company's operations or cash flows.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-up Activities," which requires that costs of start-up activities,
including organizational costs, be expensed as incurred. SOP 98-5 is
effective for financial statements issued for fiscal years beginning after
December 15, 1998. Initial application of SOP 98-5 should be as of the
beginning of the fiscal year in which the SOP is first adopted and should
be reported as the cumulative effect of a change in accounting principle as
described in APB Opinion No. 20 , "Accounting Changes." Restatement of
previously issued financial statements is not permitted. The Company's ELI
subsidiary previously deferred and amortized start-up costs. The Company
has elected to early adopt SOP 98-5 for ELI and has reflected this
cumulative effect of a change in accounting principle in its income
statement, net of income tax benefit and related minority interest.
8
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
(b) Results of Operations
REVENUES
Revenues for the three months ended March 31, 1998 increased $28.8 million,
or 8%, as compared with the first quarter of 1997 primarily due to an
increase in CLEC and natural gas revenues.
<TABLE>
For the three months
ended March 31,
--------------------------------------------
($ in thousands)
<S> <C> <C> <C>
%
Increase/
Communications revenues 1998 1997 (Decrease)
- ----------------------- ---- ---- ----------
Network access services $ 103,886 $ 102,070 2%
Local network services 63,418 60,794 4%
Long distance services 26,778 24,988 7%
Directory services 7,783 7,583 3%
Other 11,296 12,416 (9%)
Eliminations (7,803) (5,439) (43%)
------------ ------------
$ 205,358 $ 202,412 1%
============ ============
</TABLE>
Network access services revenues increased $1.8 million, or 2%, as compared
with the first quarter of 1997 primarily due to increased in-territory toll
minutes of use, partially offset by reductions associated with access
charge/price cap and universal service fund reform.
Local network services revenues increased $2.6 million, or 4%, as compared
with the first quarter of 1997 primarily due to access line growth.
Long distance service revenues increased $1.8 million, or 7%, as compared
with the first quarter of 1997 primarily due to in-territory customer
growth and minutes of use, partially offset by a decrease in
out-of-territory customers and minutes of use.
Other revenues decreased $1.1 million, or 9%, as compared with the first
quarter of 1997 primarily due to a reserve recorded against HTCC management
services fees as a result of a disagreement between the Company and HTCC.
Eliminations represent network access revenues received by the Company's
local exchange operations from its long distance operations.
9
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
<TABLE>
For the three months
ended March 31,
--------------------------------------------
($ in thousands)
<S> <C> <C> <C>
%
Increase/
CLEC revenues 1998 1997 (Decrease)
- ------------- ---- ---- ----------
Dedicated services $ 9,107 $ 6,082 50%
Local dial tone services 6,024 1,245 384%
Long distance services 1,822 1,678 9%
Enhanced services 3,104 1,843 68%
Eliminations (875) (796) (10%)
------------ ------------
$ 19,182 $ 10,052 91%
============ ============
</TABLE>
Dedicated services revenues increased $3.0 million, or 50%, as compared
with the first quarter 1997 primarily due to increased customers and route
miles.
Local dial tone services revenues increased $4.8 million, or 384%, as
compared with the first quarter of 1997 primarily due to increased access
line equivalents, increased sales of the integrated service digital network
(ISDN) product, and increased carrier and local access revenue.
Enhanced services revenues increased $1.3 million, or 68%, as compared with
the first quarter of 1997 primarily due to increased sales of frame relay
and Internet services.
Eliminations reflect intercompany activity between the Company's CLEC and
Communications operations.
Public Services Revenues
- ------------------------
Public services revenues increased $16.7 million, or 10%, as compared with
the first quarter of 1997 primarily due to increased natural gas and water
and wastewater revenues.
<TABLE>
For the three months
ended March 31,
--------------------------------------------
($ in thousands)
<S> <C> <C> <C>
%
Increase/
Natural Gas revenues 1998 1997 (Decrease)
- -------------------- ---- ---- ----------
Residential $ 62,103 $ 60,396 3%
Commercial 35,778 21,063 70%
Industrial 7,432 8,290 (10%)
Municipal 1,845 1,384 33%
------------ ------------
Total Distribution 107,158 91,133 18%
Transportation 952 1,080 (12%)
Other 3,473 2,570 35%
------------ ------------
$ 111,583 $ 94,783 18%
============ ============
</TABLE>
Residential and municipal revenues increased $1.7 million, or 3%, and $.5
million, or 33%, respectively, as compared with the first quarter of 1997
primarily due to increased residential and municipal customers in northern
Arizona, partially offset by a reduction in the purchased gas adjustment
recovery rate allowed by the Louisiana regulatory commission.
Commercial revenues increased $14.7 million, or 70%, as compared with the
first quarter of 1997 primarily due to the acquisition of The Gas Company
("TGC") in October 1997.
Industrial revenues decreased $.9 million, or 10%, as compared with the
first quarter of 1997 primarily due to the loss of customers in Louisiana.
10
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
For the three months
ended March 31,
--------------------------------------------
($ in thousands)
<TABLE>
<S> <C> <C> <C>
%
Increase/
Electric revenues 1998 1997 (Decrease)
- ----------------- ---- ---- ----------
Residential $ 20,779 $ 20,654 1%
Commercial 13,164 13,437 (2%)
Industrial 10,077 10,848 (7%)
Municipal 1,895 1,966 (4%)
------------ ------------
Total Distribution 45,915 46,905 (2%)
Transportation 571 545 5%
Other 788 452 74%
------------ ------------
$ 47,274 $ 47,902 (1%)
============ ============
</TABLE>
Electric revenues decreased $.6 million, or 1% as compared with the first
quarter of 1997 primarily due to a Vermont public utility commission order
requiring a 14.65% rate reduction and lower purchased fuel prices which are
passed on to customers.
<TABLE>
For the three months
ended March 31,
--------------------------------------------
($ in thousands)
<S> <C> <C> <C>
%
Increase/
Water and Wastewater revenues 1998 1997 (Decrease)
- ----------------------------- ---- ---- ---------
Residential distribution $ 16,413 $ 16,238 1%
Commercial distribution 2,908 2,719 7%
Industrial distribution 210 209 -
Other 935 776 20%
------------ ------------
$ 20,466 $ 19,942 3%
============ ============
</TABLE>
Water and wastewater revenues increased $.5 million, or 3%, as compared
with the first quarter 1997 primarily due to increased consumption.
11
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
OPERATING EXPENSES
<TABLE>
For the three months
ended March 31,
--------------------------------------------
($ in thousands)
<S> <C> <C> <C>
%
Increase/
Cost of Services 1998 1997 (Decrease)
- ---------------- ---- ---- ----------
Natural gas purchased $ 59,194 $ 58,569 1%
Network expenses 35,772 31,466 14%
Electric energy and
fuel oil 21,744 22,190 (2%)
purchased
Eliminations (8,678) (6,235) (39%)
------------ ------------
$ 108,032 $ 105,990 2%
============ ============
</TABLE>
Natural gas purchased increased to $.6 million, or 1%, as compared with the
first quarter of 1997 primarily due to the acquisition of TGC in October
1997 and customer growth in northern Arizona offset by a decrease in
supplier prices in Louisiana.
Network expenses increased $4.3 million, or 14%, as compared with the first
quarter of 1997 primarily due to the expansion of CLEC frame relay and
Internet services and customer growth.
Eliminations represent network expenses incurred by the Company's long
distance operation for services provided by its local exchange operations
and intercompany activity between the Company's CLEC and Communications
operations.
<TABLE>
For the three months
ended March 31,
--------------------------------------------
($ in thousands)
<S> <C> <C> <C>
%
Increase/
1998 1997 (Decrease)
---- ---- ----------
Depreciation expense $ 63,597 $ 57,015 12%
</TABLE>
Depreciation expense increased $6.6 million, or 12%, as compared with the
first quarter of 1997 primarily due to the acquisition of TGC in October
1997 and increased property, plant and equipment.
<TABLE>
For the three months
ended March 31,
--------------------------------------------
($ in thousands)
<S> <C> <C> <C>
%
Increase/
Other Operating Expenses 1998 1997 (Decrease)
- ------------------------ ---- ---- ----------
Operating and $ 139,933 $ 109,011 28%
maintenance
Taxes other than income 26,974 24,419 10%
Sales and marketing 9,049 15,825 (43%)
------------ ------------
$ 175,956 $ 149,255 18%
============ ============
</TABLE>
Operating and maintenance expenses increased $30.9 million, or 28%, as
compared with the first quarter of 1997 primarily due to the acquisition of
TGC in October 1997, increased payroll and benefit costs and increased
maintenance and repairs in the Communications and Electric operations.
12
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
Taxes other than income increased $2.6 million, or 10%, as compared with
the first quarter of 1997 primarily due to increased franchise taxes and
the acquisition of TGC in October 1997.
Sales and marketing expenses decreased $6.8 million, or 43%, as compared
with the first quarter of 1997 primarily due to decreased salaries, wages
and commissions resulting from reductions in Communications' sales and
marketing workforce, partially offset by increased CLEC direct retail sales
efforts in new markets.
OTHER INCOME, NET/MINORITY INTEREST/INTEREST EXPENSE/INCOME TAXES
<TABLE>
For the three months
ended March 31,
--------------------------------------------
($ in thousands)
<S> <C> <C> <C>
%
Increase/
Other Income, Net 1998 1997 (Decrease)
- ----------------- ---- ---- ----------
Investment income $ 8,771 $ 9,714 (10%)
Other 1,867 2,436 (23%)
------------ ------------ -------------
$ 10,638 $ 12,150 (12%)
============ ============ =============
</TABLE>
Investment income decreased $.9 million, or 10%, as compared with the first
quarter of 1997 primarily due to lower investment portfolio balances.
Other income decreased $.6 million, or 23%, as compared with the first
quarter of 1997 primarily due to lower income received from the cable joint
venture and the Mohave cellular partnership partially offset by an increase
in the equity component of Allowance for Funds Used During Construction
("AFUDC").
<TABLE>
For the three months
ended March 31,
--------------------------------------------
($ in thousands)
<S> <C> <C> <C>
%
Increase/
1998 1997 (Decrease)
---- ---- ----------
Minority interest $ 2,053 $ - n/a
</TABLE>
The Company's minority interest is a result of the sale in an initial
public offering in November 1997 of 17.17% of the economic interest in the
Company's CLEC subsidiary, Electric Lightwave, Inc. and represents the
minority's share of ELI's loss before the cumulative effect of change in
accounting principle.
<TABLE>
For the three months
ended March 31,
--------------------------------------------
($ in thousands)
<S> <C> <C> <C>
%
Increase/
1998 1997 (Decrease)
---- ---- ----------
Interest expense $ 26,806 $ 27,009 (1%)
</TABLE>
Interest expense decreased $.2 million, or 1%, as compared with the first
quarter of 1997 primarily due to a decrease in the weighted average
interest rate on outstanding debt and an increase in the debt component of
AFUDC partially offset by an increase in long-term debt outstanding.
13
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
<TABLE>
For the three months
ended March 31
--------------------------------------------
($ in thousands)
<S> <C> <C> <C>
%
Increase/
1998 1997 (Decrease)
---- ---- ----------
Income taxes $ 11,498 $ 15,836 (27%)
</TABLE>
Income taxes decreased $4.3 million, or 27%, as compared with the first
quarter of 1997 primarily due to decreased taxable income and a lower
estimated effective income tax rate.
NET INCOME AND EARNINGS PER SHARE
<TABLE>
For the three months
ended March 31
-------------------------------------------
($ in thousands)
<S> <C> <C> <C>
%
Increase/
1998 1997 (Decrease)
------------- ------------ ------------
Income before cumulative effect
of change in accounting principle $ 29,113 $ 30,584 (5%)
Cumulative effect of change in
accounting principle, net of income tax
benefit and related minority interest 2,334 - n/a
------------- ------------
Net Income $ 26,779 $ 30,584 (12%)
============= ============
Net income per common share before cumulative
effect of change in accounting principle:
Basic $ .12 $ .12 -
Diluted $ .11 $ .12 (8%)
Net income per common share:
Basic $ .11 $ .12 (8%)
Diluted $ .11 $ .12 (8%)
</TABLE>
Income before cumulative effect of change in accounting principle decreased
$1.5 million, or 5%, as compared with the first quarter of 1997 primarily
due to an increased net loss from the Company's CLEC subsidiary. In
addition, the Company recorded $3.4 million as a cumulative effect of
change in accounting principle in the statements of income for the first
quarter 1998, net of income tax benefit of $.6 million and related minority
interest of $.5 million related to the Company's CLEC subsidiary. As a
result of this net income decreased $3.8 million, or 12%.
Net income per common share before cumulative effect of change in
accounting principle remained consistent. Net income per common share
decreased $.01, or 8%, as compared with the first quarter of 1997 primarily
due to a decrease in net income, partially offset by a decrease in shares
outstanding resulting from the Company's stock buyback program. Prior year
net income per share amounts have been adjusted for subsequent stock
dividends.
14
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to market risks and has established policies, procedures
and internal processes governing its management of market risks and the use of
financial instruments to manage its exposure to such risks. Sensitivity of
earnings to these risks are managed by maintaining a conservative investment
portfolio, primarily including state and municipal and other fixed income
securities, and entering into long term debt obligations with appropriate price
and term characteristics. The Company does not hold or issue derivative or other
financial instruments for trading purposes. The Company purchases monthly gas
futures contracts to manage well defined commodity price fluctuations, caused by
weather and other unpredictable factors, associated with the Company's
commitments to deliver natural gas to certain industrial customers at fixed
prices. This derivative financial instrument activity is not material to the
Company's consolidated financial position, results of operations or cash flows.
15
<PAGE>
PART II. OTHER INFORMATION
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
Item 1. Legal Proceedings
In November 1995, the Company's Vermont electric division was permitted an 8.5%
rate increase. Subsequently, the Vermont Public Service Board (the "Board")
called into question the level of rates awarded the Company in connection with
its formal review of allegations made by the Department of Public Service (the
"DPS"), the consumer advocate in Vermont and a former Citizens employee. The
major issues in this proceeding involved classification of certain costs to
property, plant and equipment accounts and the Company's Demand Side Management
program. In addition, the DPS believed that the Company should have sought and
received regulatory approvals prior to construction of certain facilities in
prior years. On June 16, 1997, the Board ordered the Company to reduce its rates
for Vermont electric service by 14.65% retroactive to November 1, 1995 and to
refund to customers, with interest, all amounts collected since that time in
excess of the rates authorized by the Board. The Company estimates that the
future annual effect of the rate reduction ordered by the Board is approximately
$3.9 million. The Company made a $6.6 million refund to its customers by issuing
a credit to the utility bills of each customer. In addition, the Board assessed
statutory penalties totaling $60,000 and placed the Company on regulatory
probation for a period of at least five years. The final terms of the probation
have not been finalized. During this probationary period, the Company could lose
its franchise to operate in Vermont if it violates the terms of probation
prescribed by the Board.
In August 1997, a lawsuit was filed in the United States District Court for the
District of Connecticut (Leventhal vs. Tow, et al.) against the Company and five
of its officers, one of whom is also a director, on behalf of all persons who
purchased or otherwise acquired Series A and Series B shares of Common Stock of
the Company between September 5, 1996 and July 11, 1997, inclusive. On February
9, 1998, the plaintiffs filed an amended complaint. The complaint alleges that
Citizens and the individual defendants, during such period, violated Sections 10
(b) and 20 (a) of the Securities Exchange Act of 1934 based upon certain public
statements made by the Company, which are alleged to be materially false or
misleading, or are alleged to have failed to disclose information necessary to
make the statements made not false or misleading. The plaintiffs seek to recover
unspecified compensatory damages. The Company and the individual defendants
filed a motion to dismiss on March 27, 1998. On April 28, 1998 the plaintiffs
served a Memorandum of Law in Opposition to Defendants Motion to Dismiss.
In March 1998, a lawsuit was filed in the United States District Court for the
District of Connecticut (Ganino vs. Citizens Utilities Company, et al.), against
the Company and three of its officers, one of whom is also a director, on behalf
of all purchasers of the Company's common stock between May 6, 1996 and August
7, 1997 inclusive. The complaint alleges that Citizens and the individual
defendants, during such period, violated Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 by making materially false and misleading public
statements concerning the Company's relationship with a purported affiliate,
Hungarian Telephone and Cable Corp. ("HTCC"), and by failing to disclose
material information necessary to render prior statements not misleading. The
plaintiff seeks to recover unspecified compensatory damages. The Company and the
individual defendants believe that the allegations are unfounded and intend to
file a motion to dismiss.
In addition, the Company is party to various other legal proceedings arising in
the normal course of business. The outcome of individual matters is not
predictable. However, management believes that the ultimate resolution of all
such matters, including those discussed above, after considering insurance
coverages, will not have a material adverse effect on the Company's financial
position, results of operations, or its cash flows.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
27. Financial data schedule for the periods ended March 31,
1998 and March 31, 1997.
b) Reports on Form 8-K
The Company filed on Form 8-K dated March 11, 1998 under Item 7
"Exhibits", a press release announcing financial results for the
year ended December 31, 1997 and certain operating data.
16
<PAGE>
PART II. OTHER INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CITIZENS UTILITIES COMPANY
(Registrant)
By: /s/ Robert J. DeSantis
Robert J. DeSantis
Chief Financial Officer,
Vice President and Treasurer
By: /s/ Livingston E. Ross
Livingston E. Ross
Vice President and Controller
Date: May 6, 1998
17
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES' CONSOLIDATED FINANCIAL
STATEMENTS FOR THE PERIODS ENDED MARCH 31,1998 AND MARCH 31, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS. PRIOR YEAR INCOME STATEMENT DATA HAS BEEN RESTATED TO
REFLECT AN ACQUISITION.
</LEGEND>
<CIK> 0000020520
<NAME> CITIZENS UTILITIES COMPANY
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-END> MAR-31-1998 MAR-31-1997
<BOOK-VALUE> PER-BOOK PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 3,675,289 3,161,629
<OTHER-PROPERTY-AND-INVEST> 454,560<F1> 527,973<F1>
<TOTAL-CURRENT-ASSETS> 383,726 347,871
<TOTAL-DEFERRED-CHARGES> 212,929<F2> 174,255<F2>
<OTHER-ASSETS> 213,327<F3> 328,625<F3>
<TOTAL-ASSETS> 4,939,831 4,540,353
<COMMON> 63,356 60,575
<CAPITAL-SURPLUS-PAID-IN> 1,504,348 1,417,159
<RETAINED-EARNINGS> 141,091 230,143
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,718,585 1,695,344
201,250<F4> 201,250<F4>
0 0
<LONG-TERM-DEBT-NET> 1,789,683 1,554,855
<SHORT-TERM-NOTES> 0 0
<LONG-TERM-NOTES-PAYABLE> 0 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0 0
<LONG-TERM-DEBT-CURRENT-PORT> 6,069 8,799
0 0
<CAPITAL-LEASE-OBLIGATIONS> 0 0
<LEASES-CURRENT> 0 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 2,679,837 2,634,960
<TOT-CAPITALIZATION-AND-LIAB> 4,939,831 4,540,353
<GROSS-OPERATING-REVENUE> 403,863 375,091
<INCOME-TAX-EXPENSE> 11,498 15,836
<OTHER-OPERATING-EXPENSES> 80,938<F5> 80,759<F5>
<TOTAL-OPERATING-EXPENSES> 347,585 312,260
<OPERATING-INCOME-LOSS> 56,278 62,831
<OTHER-INCOME-NET> 10,638 12,150
<INCOME-BEFORE-INTEREST-EXPEN> 68,969 74,981
<TOTAL-INTEREST-EXPENSE> 26,806 27,009
<NET-INCOME> 26,779 30,584
1,552<F4> 1,552<F4>
<EARNINGS-AVAILABLE-FOR-COMM> 26,779 30,584
<COMMON-STOCK-DIVIDENDS> 0 0
<TOTAL-INTEREST-ON-BONDS> 0 0
<CASH-FLOW-OPERATIONS> 81,438 64,092
<EPS-PRIMARY> .11 .12<F6>
<EPS-DILUTED> .11 .12<F6>
<FN>
<F1>REPRESENTS INVESTMENT FUNDS.
<F2>REPRESENTS REGULATORY ASSETS.
<F3>DEFERRED DEBITS AND OTHER ASSETS.
<F4>COMPANY OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SECURITIES
OF A SUBSIDIARY TRUST, THE SOLE ASSETS OF WHICH ARE SECURITIES OF A
SUBSIDIARY PARTNERSHIP, SUBSTANTIALLY ALL THE ASSETS OF WHICH ARE
CONVERTIBLE DEBENTURES OF THE COMPANY.
<F5>REPRESENTS COMMODITIES PURCHASED
<F6>HAS BEEN RESTATED PURSUANT TO THE REQUIREMENTS OF STATEMENT OF FINANCIAL
ACCOUNTING STANDARDS NO. 128 ADOPTED BY THE COMPANY ON DECEMBER 31, 1997.
</FN>
</TABLE>
