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, 1999
<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, 1999
--------------
|_| 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, 1999 were 259,927,599.
<PAGE>
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
<S> <C>
Page No.
--------
Part I. Financial Information
Consolidated Balance Sheets at March 31, 1999 and December 31, 1998 2
Consolidated Statements of Income and Comprehensive Income (Loss)
for the Three Months Ended March 31, 1999 and 1998 3
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1999 and 1998 4
Notes to Consolidated Financial Statements 5
Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Quantitative and Qualitative Disclosures about Market Risk 21
Part II. Other Information
Legal Proceedings 22
Exhibits and Reports on Form 8-K 23
Signatures 24
</TABLE>
1
<PAGE>
PART I. FINANCIAL INFORMATION
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
<S> <C> <C>
March 31, 1999 December 31, 1998
-------------- -----------------
ASSETS
- ------
Current assets:
Cash $ 21,650 $ 31,922
Accounts receivable, net 287,885 318,378
Other 56,215 63,741
-------------- -------------
Total current assets 365,750 414,041
-------------- -------------
Property, plant and equipment 6,062,069 5,947,353
Less accumulated depreciation 1,978,723 1,898,730
-------------- -------------
Net property, plant and equipment 4,083,346 4,048,623
-------------- -------------
Investments 430,354 414,761
Regulatory assets 206,920 204,703
Deferred debits and other assets 227,083 210,804
-------------- -------------
Total assets $ 5,313,453 $ 5,292,932
============== =============
LIABILITIES AND EQUITY
- ----------------------
Current liabilities:
Long-term debt due within one year $ 9,310 $ 8,930
Short-term debt - 110,000
Accounts payable and current liabilities 437,785 388,801
-------------- -------------
Total current liabilities 447,095 507,731
Deferred income taxes 416,266 442,908
Customer advances for construction and
contributions in aid of construction 289,698 302,294
Deferred credits and other liabilities 107,520 96,827
Regulatory liabilities 18,669 19,120
Long-term debt 1,972,390 1,900,246
-------------- --------------
Total liabilities 3,251,638 3,269,126
-------------- --------------
Company Obligated Mandatorily Redeemable
Convertible Preferred Securities * 201,250 201,250
Minority interest in subsidiary 24,113 29,785
Shareholders' equity:
Common stock issued, $.25 par value 64,872 64,787
Additional paid-in capital 1,557,278 1,554,188
Retained earnings 171,728 117,104
Accumulated other comprehensive income 42,574 56,692
Total shareholders' equity 1,836,452 1,792,771
-------------- --------------
Total liabilities and shareholders' equity $ 5,313,453 $ 5,292,932
============== ==============
* 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.
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(In thousands, except per-share amounts)
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
------------ ------------
Revenues $ 437,514 $ 403,863
------------ ------------
Operating Expenses:
Cost of services 107,682 108,032
Depreciation 75,641 63,597
Other operating expenses 217,868 175,956
------------ ------------
Total operating expenses 401,191 347,585
------------ ------------
Income from operations 36,323 56,278
Other income, net 75,192 10,638
Minority interest 5,993 2,084
Interest expense 29,813 26,806
------------ ------------
Income before income taxes, dividend on convertible preferred securities
and cumulative effect of change in accounting principle 87,695 42,194
Income taxes 31,518 11,529
------------ ------------
Income before dividend on convertible preferred securities and cumulative
effect of change in accounting principle 56,177 30,665
Dividend on convertible preferred securities, net of income tax benefit 1,552 1,552
------------ ------------
Income before cumulative effect of change in accounting principle 54,625 29,113
Cumulative effect of change in accounting principle, net of income tax benefit
and related minority interest - 2,334
------------ ------------
Net Income 54,625 26,779
Other comprehensive income (loss), net of tax and reclassification adjustment (14,118) 5,970
------------ ------------
Total Comprehensive Income $ 40,507 $ 32,749
============ ============
Net income per common share before cumulative effect of change in
accounting principle:
Basic $ .21 $ .11 *
Diluted $ .21 $ .11 *
Net income per common share:
Basic $ .21 $ .10 *
Diluted $ .21 $ .10 *
Dividend rate declared on common stock - .75%
============ ============
*Adjusted for subsequent stock dividends.
The accompanying Notes are an integral part of these Financial Statements.
</TABLE>
3
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(In thousands)
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
---------------- ----------------
Net cash provided by operating activities $ 213,517 $ 81,438
---------------- ----------------
Cash flows from investing activities:
Construction expenditures (184,594) (120,243)
Securities purchased (394,037) (229,497)
Securities sold 398,463 184,234
Other (287) 129
---------------- ---------------
Net cash provided from investing activities (180,455) (165,377)
---------------- ---------------
Cash flows from financing activities:
Short-term debt repayments (110,000) -
Long-term debt borrowings 68,686 94,261
Long-term debt principal payments (2,028) (2,797)
Issuance of common stock 8 2,695
---------------- ---------------
Net cash provided from financing activities (43,334) 94,159
---------------- ---------------
Increase (decrease) in cash (10,272) 10,220
Cash at January 1, 31,922 35,163
---------------- ---------------
Cash at March 31, $ 21,650 $ 45,383
================ ================
</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. These unaudited consolidated financial statements should be
read in conjunction with the consolidated financial statements and
notes thereto included in the Company's 1998 Annual Report on Form
10-K. These unaudited 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) Net Income Per Common Share:
Basic net income per common share is computed using the weighted
average number of common shares outstanding during the period being
reported on. Diluted net income per common share 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. In 1998, both Basic and
Diluted net income per common share calculations are presented with
adjustments for subsequent stock dividends.
(d) Change in Accounting Principles:
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." SOP 98-5 requires that 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 Electric Lightwave, Inc. (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
adopted SOP 98-5 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
and comprehensive income (loss) for the first quarter 1998, net of
income tax benefit of $577,000 and related minority interest of
$483,000.
(2) Separation:
----------
On May 18, 1998, the Company announced its plans to separate its
communications businesses and public services businesses into two
stand-alone publicly-traded companies. The Company intends to transfer to
NewTelecom all of its communications businesses, including its approximate
83% ownership interest in ELI. This Separation is subject to federal and
state regulatory approvals and is expected to be carried out through a
distribution of the stock of NewTelecom to the Company's shareholders. The
public services businesses will continue to operate as Citizens Utilities
Company and provide natural gas transmission and distribution, electric
distribution, water distribution and wastewater treatment services. This
Separation is being made in recognition of the different investment
features, performance criteria, capital structures, dividend policies,
customers' requirements and regulatory designs of each business, and would
allow each business to pursue its own strategy and compete more
effectively in its respective markets.
5
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company filed a request with the Internal Revenue Service for a private
letter ruling that the transaction will not be subject to federal income
tax. The Company has received, to date, the necessary approvals to proceed
with its Separation plans from eleven of the fourteen substantive state
regulatory agencies. An application with the Federal Communications
Commission for the transfer of certain licenses and filings with the
Securities and Exchange Commission will also be made during the Separation
process. The transaction is expected to be completed in the second half of
1999.
Although the Company continues to pursue its Separation plans, the
increased opportunities that have recently become available to acquire
communications properties which fit within the Company's acquisition
criteria and long-term planning require it to consider the possible
advantages of other transactions, besides Separation, to enhance
securityholder value. Therefore the Company is continuing to investigate
and review opportunities for the acquisition of new communications
properties and the sale or other disposition of public services properties.
(3) Net Income Per Common Share:
---------------------------
The reconciliation of the net income per share calculation for the three
months ended March 31, 1999, and 1998 is as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1999 1998
------------------------------ ----------------------------
($ in thousands, except for per share amounts)
Per Per
Income Shares Share Income Shares Share
------ ------ ----- ------ ------ -----
Net income per common share:
Basic $ 54,625 259,517 $ .21 $26,779 258,890 $ .10
Effect of dilutive options - 651 - - 564 -
Diluted $ 54,625 260,168 $ .21 $26,779 259,454 $ .10
</TABLE>
All share amounts represent weighted average shares outstanding for each
respective period. 1998 per share amounts have been adjusted for subsequent
stock dividends. In November 1998, the Board of Directors concluded that
after the payment of the December 1998 stock dividend the Company should
discontinue the payment of stock dividends at least through the separation.
The diluted net income per common share calculation excludes the effect of
potentially dilutive shares when their exercise price exceeds the average
market price over the period. The Company has 4,025,000 shares of
potentially dilutive Mandatorily Redeemable Convertible Preferred
Securities which are convertible into common stock at a 3.76 to 1 ratio at
an exercise price of $13.30 per share and 10,345,930 potentially dilutive
stock options at a range of $8.22 to $14.24 per share. These items were
adjusted for subsequent stock dividends and were not included in the
diluted net income per common share calculation for any of the above
periods as their effect was antidilutive.
(4) Sale of Investments:
-------------------
In January 1999, Centennial Cellular Corp. (Centennial) was merged with CCW
Acquisition Corp., a company organized at the direction of Welsh, Carson,
Anderson & Stowe. The Company was a holder of 1,982,294 shares of
Centennial Class B Common Stock. In addition, as a holder of 102,187 shares
of Mandatorily Redeemable Convertible Preferred Stock of Centennial, the
Company was required to convert the preferred stock into approximately
2,972,000 shares of Class B Common Stock. The Company received
approximately $205,600,000 in cash for all of its Common Stock interests
and approximately $17,500,000 related to accrued dividends on the preferred
stock. The Company recorded a pre-tax gain of approximately $69,500,000 on
this transaction in January 1999 which is included in other income, net.
6
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In March 1999, Adelphia Communication Corporation (Adelphia) and Century
Communications Corp. (Century) announced the signing of a definitive
agreement for the merger of Century with Adelphia. The Company currently
owns 1,807,095 shares of Century Class A Common Stock. Pursuant to the
merger agreement, each Century Class A Common Share will be exchanged for
cash of $9.16 and .6122 of a share of Adelphia Class A Common Stock (for a
total market value of $55.61 per Century Class A Common Share based on
Adelphia's May 10, 1999 closing price of $75 7/8). This transaction is
expected to close during the fourth quarter of 1999.
A subsidiary of the Company, in a joint venture with a subsidiary of
Century, acquired and operates four cable television systems in southern
California serving over 90,000 basic subscribers. The Company accounts for
the joint venture following the equity method of accounting. It is expected
that these properties will become part of a larger partnership with
Tele-Communications, Inc., a cable operator in California, and Century.
Upon formation of the partnership, the Company will own 5.5% of this
partnership, which will serve approximately 772,000 customers in the Los
Angeles basin. Upon consummation of the Adelphia/Century merger, the
Company expects to sell to Adelphia its interest in the joint venture
properties (or its interest in the partnership if the joint venture
properties are transferred to the partnership before the Adelphia/Century
merger).
(5) Segment Information:
-------------------
The company is a diversified communications and public services company
which is segmented into communications, CLEC, gas, electric and water and
wastewater services. The communications sector provides both regulated and
competitive communications services to residential, business and wholesale
customers. The CLEC sector is a facilities based integrated communications
provider providing a broad range of communications services throughout the
United States through the Company's subsidiary, ELI. The gas sector
provides gas transmission and distribution services to primarily
residential customers. The electric sector provides electric transmission
and distribution services to primarily residential customers. The water and
wastewater sector provides water distribution, wholesale water
transmission, wastewater treatment, public works consulting, and marketing
and billing services to primarily residential customers.
Special items charged against operating income represent 1999 and 1998 Y2K
and separation costs (see Note 2). Sector EBITDA consists of sector
operating income plus depreciation. Special items included in sector EBITDA
are Y2K and separation costs. EBITDA is a measure commonly used to analyze
companies on the basis of operating performance. It is not a measure of
financial performance under generally accepted accounting principles and
should not be considered as an alternative to net income as a measure of
performance nor as an alternative to cash flow as a measure of liquidity
and may not be compared to similarly titled measures of other companies.
7
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C> <C>
March 31,
--------
1999 1998
-------------------------------
($ in thousands)
Communications:
- --------------
Revenues $ 237,885 $ 213,161
Inter-sector revenues (10,653) (7,803)
Revenues as reported 227,232 205,358
Operating income excluding special items 41,078 38,322
Operating income as reported 37,308 38,048
Depreciation 54,891 45,155
EBITDA excluding special items 95,969 83,477
EBITDA 92,199 83,203
CLEC:
- ----
Revenues $ 38,216 $ 20,057
Inter-sector revenues (698) (875)
Revenues as reported 37,518 19,182
Operating loss excluding special items (29,545) (14,230)
Operating loss as reported (30,176) (14,230)
Depreciation 6,994 3,884
EBITDA excluding special items (22,551) (10,346)
EBITDA (23,182) (10,346)
Public Services:
- ---------------
Gas:
---
Revenues $ 103,956 $ 111,583
Operating income excluding special items 19,673 21,904
Operating income as reported 18,836 21,842
Depreciation 4,280 5,507
EBITDA excluding special items 23,953 27,411
EBITDA 23,116 27,349
Electric:
--------
Revenues $ 46,074 $ 47,274
Operating income excluding special items 6,257 6,579
Operating income as reported 6,254 6,553
Depreciation 5,981 5,867
EBITDA excluding special items 12,238 12,446
EBITDA 12,235 12,420
Water and Wastewater:
--------------------
Revenues $ 22,734 $ 20,466
Operating income excluding special items 5,279 4,103
Operating income as reported 4,101 4,065
Depreciation 3,495 3,184
EBITDA excluding special items 8,774 7,287
EBITDA 7,596 7,249
</TABLE>
8
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table is a reconciliation of certain sector items to the
total consolidated amount.
<TABLE>
<CAPTION>
<S> <C> <C>
March 31,
---------
1999 1998
------------------------------
($ in thousands)
Operating income
- ----------------
Total sector operating income excluding special items $ 42,742 $ 56,678
Y2K costs and separation costs (6,419) (400)
-------------- --------------
Consolidated reported operating income $ 36,323 $ 56,278
============== ==============
EBITDA
- ------
Total sector EBITDA excluding special items $ 118,383 $ 120,275
Investment and other income 5,693 10,638
Gain on sale of Centennial 69,499 -
Minority interest 5,993 2,084
Y2K costs and separation costs (6,419) (400)
-------------- --------------
Consolidated EBITDA $ 193,149 $ 132,597
============== ==============
</TABLE>
9
<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 contains 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 economy of the Company's markets, the
nature and pace of technological changes, the number and effectiveness of
competitors in the Company's markets, weather conditions, changes in legal and
regulatory policy, success in overall strategy, the Company's ability to
identify future markets and successfully expand existing ones, the mix of
products and services offered in the Company's target markets, Y2K issues and
the effects of the separation. Readers should consider these important factors
in evaluating any statement in this Form 10-Q or otherwise 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 and as presented in
the Company's 1998 Annual Report on Form 10-K previously filed. The Company has
no obligation to update or revise these forward-looking statements to reflect
the occurrence of future events or circumstances.
On May 18, 1998, the Company announced its plans to separate its communications
businesses and public services businesses into two stand-alone publicly-traded
companies. The Company intends to transfer to NewTelecom all of its
communications businesses, including its approximate 83% ownership interest in
ELI. This Separation is subject to federal and state regulatory approvals and is
expected to be carried out through a distribution of the stock of NewTelecom to
the Company's shareholders. The public services businesses will continue to
operate as Citizens Utilities Company and provide natural gas transmission and
distribution, electric distribution, water distribution and wastewater treatment
services. This Separation is being made in recognition of the different
investment features, performance criteria, capital structures, dividend
policies, customers' requirements and regulatory designs of each business, and
would allow each business to pursue its own strategy and compete more
effectively in its respective markets.
The Company filed a request with the Internal Revenue Service for a private
letter ruling that the transaction will not be subject to federal income tax.
The Company has received, to date, the necessary approvals to proceed with its
Separation plans from eleven of the fourteen substantive state regulatory
agencies. An application with the Federal Communications Commission for the
transfer of certain licenses and filings with the Securities and Exchange
Commission will also be made during the Separation process. The transaction is
expected to be completed in the second half of 1999.
Although the Company continues to pursue its Separation plans, the increased
opportunities that have recently become available to acquire communications
properties which fit within the Company's acquisition criteria and long-term
planning require it to consider the possible advantages of other transactions,
besides Separation, to enhance securityholder value. Therefore the Company is
continuing to investigate and review opportunities for the acquisition of new
communications properties and the sale or other disposition of public services
properties.
10
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
(a) Liquidity and Capital Resources
-------------------------------
The Company considers its operating cash flows and its ability to raise debt and
equity capital as the principal indicators of its liquidity. For the three
months ended March 31, 1999, the Company used cash flow from operations and
proceeds from net financings and parties desiring utility services 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 has committed revolving lines of credit with commercial banks under
which it may borrow up to $575,000,000. There were no amounts outstanding under
these lines at March 31, 1999. ELI has committed revolving 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 revolving lines of credit. As of
March 31, 1999, $354,000,000 was outstanding under ELI's revolving lines of
credit. In April 1999, ELI completed an offering of $325 million of five-year
senior unsecured notes. The notes have an interest rate of 6.05% and mature on
May 15, 2004. The Company has guaranteed all of the obligations under these
unsecured notes. The proceeds from this offering were used to repay outstanding
borrowings under ELI's existing revolving lines of credit.
In January 1999, Centennial Cellular Corp. (Centennial) was merged with CCW
Acquisition Corp., a company organized at the direction of Welsh, Carson,
Anderson & Stowe. The Company was a holder of 1,982,294 shares of Centennial
Class B Common Stock. In addition, as a holder of 102,187 shares of Mandatorily
Redeemable Convertible Preferred Stock of Centennial, the Company was required
to convert the Preferred Security into approximately 2,972,000 shares of Class B
Common Stock. The Company received approximately $205,600,000 in cash for all of
its Common Stock interests and approximately $17,500,000 related to accrued
dividends on the preferred stock. The Company recorded a pre-tax gain of
approximately $69,500,000 on this transaction in January 1999.
In March 1999, Adelphia Communication Corporation (Adelphia) and Century
Communications Corp. (Century) announced the signing of a definitive agreement
for the merger of Century with Adelphia. The Company currently owns 1,807,095
shares of Century Class A Common Stock. Pursuant to the merger agreement, each
Century Class A Common Share will be exchanged for cash of $9.16 and .6122 of a
share of Adelphia Class A Common Stock (for a total market value of $55.61 per
Century Class A Common Share based on Adelphia's May 10, 1999 closing price of
$75 7/8). This transaction is expected to close during the fourth quarter of
1999.
A subsidiary of the Company, in a joint venture with a subsidiary of Century,
acquired and operates four cable television systems in southern California
serving over 90,000 basic subscribers. The Company accounts for the joint
venture following the equity method of accounting. It is expected that these
properties will become part of a larger partnership with Tele-Communications,
Inc., a cable operator in California, and Century. Upon formation of the
partnership, the Company will own 5.5% of this partnership, which will serve
approximately 772,000 customers in the Los Angeles basin. Upon consummation of
the Adelphia/Century merger, the Company expects to sell to Adelphia its
interest in the joint venture properties (or its interest in the partnership if
the joint venture properties are transferred to the partnership before the
Adelphia/Century merger).
11
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
In 1997, Hungarian Telephone and Cable Corp. (HTCC) disputed certain provisions
of a management services agreement between the Company and HTCC and the
associated management fee. In September 1998, the Company and HTCC settled this
dispute. The settlement included the issuance of an $8,400,000 promissory note
to the Company payable in 2004. The settlement also included the termination of
the management services agreement and entering into a new seven-year consulting
services agreement between the Company and HTCC with services to begin in 2004.
In May 1999, in connection with HTCC's debt restructuring, the Company cancelled
HTCC's $8,400,000 note obligation and the seven-year consulting services
agreement in exchange for the issuance by HTCC to the Company of 1,300,000
shares of HTCC common stock and 30,000 shares of HTCC's 5% convertible preferred
stock. Each share of HTCC convertible preferred stock has a liquidation value of
$70 and is convertible at the option of the Company into 10 shares of HTCC
common stock. To the extent the 1,300,000 HTCC common shares and the 300,000
HTCC common shares underlying the HTCC convertible preferred stock do not
achieve an average market closing price of at least $7 per share during a
certain period prior to March 31, 2000, HTCC has agreed to issue additional HTCC
convertible preferred shares with a value equal to any such shortfall.
Impact of Year 2000
- -------------------
The Y2K issue results from computer programs using a two-digit format, as
opposed to four, to indicate the year. Such computer systems may be unable to
interpret dates beyond the year 1999, which could cause system failures or other
computer errors. In late 1997, the Company developed a four-phase program to
address the Y2K issue. The four-phase program was designed to protect the safety
and continuity of the Company's service delivery and support capabilities,
computer systems and other critical functions. The Company's Y2K program seeks
to address problems that could arise: (1) in Information Technology (IT) areas
including information systems and technologies; (2) in non-IT areas such as
communications networks and switches, utility control and monitoring systems,
premises, facilities and general business equipment; and (3) due to suppliers of
products and services not being Y2K compliant. Phase I is inventory and
identification of those systems with which the Company has exposure to Y2K
issues. Phase II is the assessment and development of action plans. Phase III is
the implementation of the Y2K remediation plans. Phase IV, which in some
instances will run concurrent with Phase III, is the testing and validation of
each remedial action to ensure compliance. This phase includes, in some cases,
testing in an environment identical to, but separate from, the production
environment. Each of the Company's sectors has a program office that manages the
progress of the Y2K efforts. The Company has determined priorities for taking
corrective actions on mission critical systems or products so as to ensure
continued delivery of core business activities.
The Company is and will continue to use both internal and external resources to
reprogram, replace and test software and address remediation of IT and non-IT
operational assets for Y2K compliance. The Company has contracted with
consulting firms to provide direction, support, methodologies, reporting
standards and templates.
The following table includes information, by Phase, related to the Y2K program
for both the Company's sectors. The timing of expenses may vary and is not
necessarily indicative of readiness efforts or progress to date. Funding of the
Y2K costs is expected to occur from operating cash flows, cash and investments
and proceeds from the issuance of securities and/or other borrowings.
12
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Expenditures
Estimated ---------------------------------------------------
Completion Dates Estimated for Total
for Mission Actual for the nine months Estimated for
Critical Systems quarter ended ended the year ended
and Products % Completed 3/31/99 12/31/99 12/31/99
------------ ----------- ------- -------- --------
Communications
--------------
and Corporate
-------------
IT $ 2,648,000 $ 14,544,000 $ 17,192,000
--
Inventory Completed 100%
Assessment Completed 100%
Remediation 6/30/99 88%
Testing 6/30/99 16%
Non-IT 317,000 1,967,000 2,284,000
------
Inventory Completed 100%
Assessment 5/31/99 96%
Remediation 6/30/99 84%
Testing 6/30/99 16%
Public Services
---------------
IT 1,658,000 1,256,000 2,914,000
--
Inventory Completed 100%
Assessment Completed 100%
Remediation Completed 100%
Testing 5/31/99 70%
Non-IT 764,000 4,500,000 5,264,000
------
Inventory Completed 100%
Assessment Completed 100%
Remediation 5/31/99 96%
Testing 6/30/99 56%
---------------- ---------------- ----------------
Total $ 5,387,000 $ 22,267,000 $ 27,654,000
================ ================ ================
</TABLE>
Certain state regulator commissions, where the Company operates, have issued
orders allowing the deferral of Y2K costs for consideration in future rate
proceedings. In accordance with these orders the Company deferred $935,000 in
1999.
The systems of vendors and suppliers play a major role in the conduct of the
business of the Company. As a result, in accordance with its Y2K program, the
Company has been contacting software suppliers to determine major areas of
exposure to Y2K issues. The Company has also been contacting its major suppliers
and service providers to ascertain their ability to comply. In addition, the
Company contracted with a consulting firm to review the Y2K programs of selected
third party vendors. Thus far, most of these parties have stated that they
intend to be Y2K compliant by the year 2000. However, there can be no guarantee
that the systems of suppliers or service providers on which the Company's
systems rely will be compliant, or that failure to be compliant by another
company, or a conversion that is incompatible with the Company's systems, would
not have a material adverse effect on the Company.
The Company's communications businesses rely, directly and/or indirectly, on a
large number of traffic carriers to carry communications traffic through a
series of interconnected chains of communications. Therefore, despite its
efforts, the Company cannot ensure that each entity involved in the delivery of
communications services will be Y2K compliant. In an effort to address third
party compliance issues, the Company's communications sector has initiated
testing activities with one of its major suppliers.
13
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
The electric power-supply systems of North America are connected into four major
interconnections called grids. Operational component failures of any entity
connected to any of the grids could cause failures in that grid. The Company
continues to assess these risks as the millennium approaches to evaluate the
likelihood of failures and develop approaches for mitigating the risk of
failures. In addition, the Company participates in trade associations such as
the Electric Power Research Institute (EPRI) and the American Gas Association
(AGA), which furthers the industry's efforts toward Y2K readiness. The Company
uses these organizations' Y2K programs' vast resources to accelerate its Y2K
program for embedded systems. They also provide a forum for working within the
industry peer group whereby joint conclusions may be reached on other key
aspects of Y2K readiness. EPRI's Y2K program participants represent more than
70% of the electric power generation capacity in the U.S. AGA represents 181
natural gas utilities that deliver gas to homes and businesses in all fifty
states.
The Company intends to complete its Y2K remediation efforts on mission critical
systems and products so as to ensure continued delivery of core business
activities by June 1999. Testing, remediation and monitoring will continue
through the remainder of 1999 to verify that there are no outstanding problems
that either were not captured during the initial Y2K efforts or arose after June
30, 1999. Also, review, modifications and testing of the contingency plans may
and will occur throughout the remainder of 1999 and into the year 2000.
In the event of non-remediation of the Y2K issues by the Company or certain of
its vendors, the worst case scenario would be disruption of the Company's
operations, possibly impacting the provision of services to customers and the
Company's ability to bill or collect revenues. However, management believes that
the Company's efforts to mitigate its Y2K issues will avoid significant business
interruptions. Contingency planning is an ongoing process. While the Company's
overall Y2K contingency plan is now being devised, existing disaster recovery
documentation and procedures remain the first line of defense. Some Y2K specific
plans have been developed and are being reviewed and tested. All Y2K operational
contingency plans are expected to be completed and tested by June 1999.
The extent and magnitude of the Y2K problem is difficult to predict or quantify.
The above information is based on the Company's best estimates which were made
using numerous assumptions, including the availability and future costs of
certain technological and other resources, third party modification actions and
other factors. Given the complexity of the issue and the possibility of
unidentified risks, actual results may vary materially from those discussed
above. Specific factors that might cause such differences include, among others,
the availability and cost of the personnel trained in this area, the ability to
locate and correct all affected computer codes, the timing and success of
remedial efforts of third party suppliers and similar uncertainties.
A number of financial and information system applications have been identified
as being Y2K compliant due to their recent implementation. The Company's core
financial systems are being replaced pursuant to the information systems
initiative discussed below.
Other Information Systems Initiatives
- -------------------------------------
The Company also has information systems initiatives in process which are not
the result of the Y2K initiative. These include implementation of an
enterprise-wide financial system and the development of technology to bring the
Company into full compliance with the Communications Act of 1996 Interconnection
Order. For these two projects, the Company expects to incur at least $14,600,000
in costs over the next nine months. The Company will be required to expense a
portion of the cost of these projects under generally accepted accounting
principles. For the three months ended March 31, 1999, the Company incurred
approximately $2,900,000 in total costs in connection with these projects, of
which approximately $640,000 has been expensed.
14
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
(b) Results of Operations
---------------------
REVENUES
--------
Total revenues for the three months ended March 31, 1999 increased $33.7
million, or 8%, as compared with the first quarter of 1998 primarily due to an
increase in communications, CLEC and water and wastewater revenues partially
offset by a decrease in gas and electric revenues.
Communications / CLEC Revenues
- ------------------------------
Communications and CLEC revenues for the three months ended March 31, 1999
increased $40.2 million, or 18%, as compared with the first quarter of 1998
primarily due to an increase in communications network access services and CLEC
local telephone services.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
For the three months
ended March 31,
--------------------------------------------
($ in thousands)
%
Increase/
Communications revenues 1999 1998 (Decrease)
- ----------------------- ---- ---- ----------
Network access services $ 128,680 $ 103,886 24%
Local network services 69,913 63,418 10%
Long distance services 21,101 26,778 (21%)
Directory services 8,397 7,783 8%
Other 9,794 11,296 (13%)
Eliminations (10,653) (7,803) N/A
------------- -------------
$ 227,232 $ 205,358 11%
============= =============
</TABLE>
Network access services revenues increased $24.8 million, or 24%, as compared
with the first quarter of 1998 primarily due to an interstate universal service
fund settlement, the acquisition of Rhinelander Telecommunication, Inc. (RTI) in
November 1998, increased local access minutes of use and increased special
access revenues.
Local network services revenues increased $6.5 million, or 10%, as compared with
the first quarter of 1998 primarily due to the acquisition of RTI and increased
custom calling features and private line sales.
Long distance services revenues decreased $5.7 million, or 21%, as compared with
the first quarter of 1998 primarily due to the elimination of long distance
product offerings to out-of-territory customers.
Directory services revenues increased $.6 million, or 8%, as compared with the
first quarter of 1998 primarily due to the acquisition of RTI.
Other revenues decreased $1.5 million, or 13%, as compared with the first
quarter of 1998 primarily due to the phasing out of certain surcharges resulting
from regulatory decisions in California and New York.
Eliminations represent network access revenues received by the Company's local
exchange operations from its long distance operations and CLEC operations.
15
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
<S> <C> <C> <C>
For the three months
ended March 31,
---------------------------------------------
($ in thousands)
%
Increase/
CLEC revenues 1999 1998 (Decrease)
- ------------- ---- ---- ----------
Network services $ 10,424 $ 9,107 14%
Local telephone services 14,308 6,024 138%
Long distance services 8,530 1,822 368%
Data services 4,954 3,104 60%
Eliminations (698) (875) N/A
------------- -------------
$ 37,518 $ 19,182 96%
============= =============
</TABLE>
Network services revenues increased $1.3 million, or 14%, as compared with the
first quarter 1998 primarily due to sales of additional circuits to new and
existing customers partially offset by the expiration of a short-term contract
with a significant customer in 1998.
Local telephone services revenues increased $8.3 million, or 138%, as compared
with the first quarter of 1998 primarily due to an increase in reciprocal
compensation revenues that are earned under contracts which are scheduled to
expire in the second half of 1999. In addition, increased sales of the
integrated service digital network (ISDN) product to Internet Service Providers
and an increase in local dial tone services contributed to this increase.
Long distance services revenues increased $6.7 million, or 368%, as compared
with the first quarter of 1998 primarily due to increases in prepaid services
resulting from new large volume customers.
Data services revenues increased $1.9 million, or 60%, as compared with the
first quarter of 1998 primarily due to increased sales from Internet and frame
relay services.
Eliminations reflect intercompany activity between the Company's CLEC and
communications sectors.
16
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
Public Services Revenues
- ------------------------
Public services revenues decreased $6.6 million, or 4%, as compared with the
first quarter of 1998 primarily due to decreased gas and electric revenues
partially offset by increased water and wastewater revenues.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
For the three months
ended March 31,
---------------------------------------------
($ in thousands)
%
Increase/
Gas revenues 1999 1998 (Decrease)
- ------------ ---- ---- ----------
Residential $ 51,974 $ 62,103 (16%)
Commercial 31,686 35,778 (11%)
Industrial 15,039 7,432 102%
Municipal 1,266 1,845 (31%)
------------- -------------
Total Distribution 99,965 107,158 (7%)
Transportation 1,027 952 8%
Other 2,964 3,473 (15%)
------------- -------------
$ 103,956 $ 111,583 (7%)
============= =============
</TABLE>
Residential, commercial and municipal revenues decreased $10.1 million, or 16%,
$4.1 million, or 11% and $.6 million, or 31%, respectively, as compared with the
first quarter of 1998 primarily due to lower purchased gas costs passed on to
customers and decreased consumption due to warmer weather conditions in certain
of the Company's service territories.
Industrial revenues increased $7.6 million, or 102%, as compared with the first
quarter of 1998 primarily due to customer growth.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
For the three months
ended March 31,
-------------------------------------------
($ in thousands)
%
Increase/
Electric revenues 1999 1998 (Decrease)
- ----------------- ---- ---- ----------
Residential $ 20,326 $ 20,779 (2%)
Commercial 13,593 13,164 3%
Industrial 9,259 10,077 (8%)
Municipal 1,978 1,895 4%
------------- -------------
Total Distribution 45,156 45,915 (2%)
Transportation 905 571 58%
Other 13 788 (98%)
------------- -------------
$ 46,074 $ 47,274 (3%)
============= =============
</TABLE>
Electric revenues decreased $1.2 million, or 3%, as compared with the first
quarter of 1998 primarily due to lower purchased electric energy and fuel oil
costs passed on to customers and decreased consumption.
17
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
<TABLE>
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
<CAPTION>
<S> <C> <C> <C>
For the three months
ended March 31,
--------------------------------------------
($ in thousands)
%
Water and Wastewater revenues Increase/
- ----------------------------- 1999 1998 (Decrease)
---- ---- ----------
Residential distribution $ 17,594 $ 16,413 7%
Commercial distribution 3,142 2,908 8%
Industrial distribution 232 210 10%
Other 1,766 935 89%
------------ ------------
$ 22,734 $ 20,466 11%
============ ============
</TABLE>
Water and wastewater revenues increased $2.3 million, or 11%, as compared with
the first quarter 1998 primarily due to customer growth, increased consumption
and a rate increase in Ohio.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
OPERATING EXPENSES
------------------
For the three months
ended March 31,
------------------------------------------
($ in thousands)
%
Increase/
Cost of Services 1999 $ 1998 (Decrease)
- ---------------- ---- ---- ----------
Gas purchased $ 52,704 59,194 (11%)
Network expenses 45,746 35,772 28%
Electric energy and fuel oil
purchased 20,583 21,744 (5%)
Eliminations (11,351) (8,678) N/A
------------- -------------
$ 107,682 $ 108,032 -
============= =============
</TABLE>
Gas purchased expenses decreased $6.5 million, or 11%, as compared with the
first quarter of 1998 primarily due to a decrease in the cost of gas and lower
consumption as a result of warmer weather conditions in the Company's service
territories.
Network expenses increased $10.0 million, or 28%, as compared with the first
quarter of 1998 primarily due to increases in long distance costs related to the
Company's CLEC subsidiary's prepaid services programs and expenses related to
the CLEC national data expansion. The increase in CLEC's network expenses was
partially offset by decreased communications network expenses primarily due to
decreased long distance minutes of use.
Electric energy and fuel oil purchased expenses decreased $1.2 million, or
5%, as compared with the first quarter of 1998 primarily due to lower supplier
prices and decreased consumption.
Eliminations represent network expenses incurred by the Company's long distance
operation for services provided by its local exchange operations and
intercompany activity between the Company's CLEC and communications sectors.
18
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
<S> <C> <C> <C>
For the three months
ended March 31,
-------------------------------------------
($ in thousands)
%
Increase/
1999 1998 (Decrease)
---- ---- ----------
Depreciation expense $ 75,641 $ 63,597 19%
</TABLE>
Depreciation expense increased $12.0 million, or 19%, as compared with the
first quarter of 1998 primarily due to increased property, plant and equipment.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
For the three months
ended March 31,
-------------------------------------------
($ in thousands)
%
Increase/
Other Operating Expenses 1999 1998 (Decrease)
- ------------------------ ---- ---- ----------
Operating and maintenance $ 172,609 $ 139,933 23%
Taxes other than income 28,696 26,974 6%
Sales and marketing 16,563 9,049 83%
------------- -------------
$ 217,868 $ 175,956 24%
============= =============
</TABLE>
Operating and maintenance expenses increased $32.7 million, or 23%, as compared
with the first quarter of 1998 primarily due to increased CLEC operating
expenses as a result of the CLEC national data expansion, increased Y2K and
separation expenses, the acquisition of RTI and increased payroll related costs.
Taxes other than income increased $1.7 million, or 6%, as compared with the
first quarter of 1998 primarily due to an increase in payroll and property
taxes.
Sales and marketing expenses increased $7.5 million, or 83%, as compared with
the first quarter of 1998 primarily due to increased personnel and product
advertising to support the delivery of services in existing and new markets
including the CLEC national data expansion.
OTHER INCOME, NET / MINORITY INTEREST / INTEREST EXPENSE / INCOME TAXES
-----------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
For the three months
ended March 31,
-------------------------------------------
($ in thousands)
%
Increase/
Other Income, Net 1999 1998 (Decrease)
- ----------------- ---- ---- ----------
Investment income $ 74,611 $ 8,771 751%
Other 581 1,867 (69%)
------------- ------------
$ 75,192 $ 10,638 607%
============= ============
</TABLE>
Investment income increased $65.8 million, or 751%, as compared with the first
quarter of 1998 primarily due to the $69.5 million gain on the sale of the
Company's investment in Centennial in January 1999 partially offset by lower
investment income earned due to lower average investment balances.
Other income decreased $1.3 million, or 69%, as compared with the first quarter
of 1998 primarily due to a decrease in the equity component of Allowance for
Funds Used during Construction.
19
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
For the three months
ended March 31,
------------------------------------------
($ in thousands)
%
Increase/
1999 1998 (Decrease)
---- ---- ----------
Minority interest $ 5,993 $ 2,084 188%
Minority interest is a result of ELI's initial public offering in November 1997
and it represents 17.30% (the minority's share) of ELI's loss before the income
tax benefit and the cumulative effect of change in accounting principle in 1998.
Minority interest increased $3.9 million, or 188%, as compared to the first
quarter of 1998 primarily due to increased losses recorded by ELI.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
For the three months
ended March 31,
------------------------------------------
($ in thousands)
%
Increase/
1999 1998 (Decrease)
---- ---- ----------
Interest expense $ 29,813 $ 26,806 11%
</TABLE>
Interest expense increased $3.0 million, or 11%, as compared with the first
quarter of 1998 primarily due to an increase in ELI's outstanding lines of
credit.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
For the three months
ended March 31
------------------------------------------
($ in thousands)
%
Increase/
1999 1998 (Decrease)
---- ---- ----------
Income taxes $ 31,518 $ 11,529 173%
</TABLE>
Income taxes increased $20.0 million, or 173%, as compared with the first
quarter of 1998 primarily due to increased taxable income.
NET INCOME AND NET INCOME PER COMMON SHARE
------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
For the three months
ended March 31
------------------------------------------
($ in thousands)
%
Increase/
1999 1998 (Decrease)
---- ---- ----------
Net income $ 54,625 $ 26,779 104%
Net income per common share $ .21 $ .10 110%
</TABLE>
Net income and net income per share increased $27.8 million, or 104% and
.11 cent, or 110%, respectively, primarily due to a $69.5 million gain on the
sale of the Company's investment in Centennial partially offset by increased
losses from the Company's CLEC subsidiary and Y2K and separation expenses.
Absent the gain on the sale of the Company's investment in Centennial and the
Y2K and separation expenses, net income and net income per share decreased $10.9
million, or 40%, and .04 cent, or 40%, respectively, primarily due to increased
losses at the Company's CLEC subsidiary.
20
<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 the impact of interest rate and market risks. In the
normal course of business, the Company employs established policies, procedures
and internal processes to manage its exposure to interest rate and market risks.
The Company's objective in managing its interest rate risk is to limit the
impact of interest rate changes on earnings and cash flows and to lower its
overall borrowing costs. To achieve these objectives, the Company refinances
debt when advantageous and maintains fixed rate debt on a majority of its
borrowings. In an effort to reduce interest rate risk the Company's CLEC
subsidiary issued $325 million, five-year senior unsecured notes in April 1999
that are guaranteed by the Company. The notes have a fixed interest rate. The
net proceeds from the issuance were used to repay outstanding borrowings under
the Company's floating rate bank credit facility. The Company maintains a
portfolio of investments consisting of both equity and debt financial
instruments. The Company's equity portfolio is comprised of primarily
investments in communications companies. The Company's bond portfolio consists
of government, corporate and municipal fixed-income securities. 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.
21
<PAGE>
PART II. OTHER INFORMATION
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
Item 1. Legal Proceedings
-----------------
In 1995, the Company's Arizona Electric Division was notified by the United
States Environmental Protection Agency (USEPA) of it being a Potentially
Responsible Party related to poly chlorinated biphenol shipments that the
Company made to PCB Inc., sites located in Kansas City, Kansas and Kansas City,
Missouri in the mid 1980s. These sites have been designated by the USEPA as
Superfund Sites and are in the process of being evaluated for remediation.
The Company is one of over 1,500 parties that sent material to the sites and is
considered a de minimus participant. The Company responded to a number of data
requests from the USEPA related to its shipments. There has not yet been a
determination of the total cost of the remediation of the sites and of
particular parties, including the Company's share of the cost. The Company has
settled all pending claims.
In November 1995, the Company's Vermont electric division was permitted an 8.5%
rate increase. Subsequently, the Vermont Public Service Board (VPSB) 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 VPSB 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 VPSB. In addition, the VPSB assessed statutory penalties
totaling $60,000 and placed the Company on regulatory probation for a period of
at least five years. During this probationary period, the Company could lose its
franchise to operate in Vermont if it violates the terms of probation prescribed
by the VPSB. The VPSB prescribed final terms of probation in its final order
issued September 15, 1998. In October 1998, the Company filed an appeal in the
Vermont Supreme Court challenging certain of the penalties imposed by the VPSB.
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
believe the allegations are unfounded and 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. On March 30, 1999 the Court dismissed the
action. On April 29, 1999 the plaintiffs filed a notice of appeal with the Court
of Appeals for the Second Circuit.
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 the Company 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 have filed
a motion to dismiss. The plaintiff requested leave to file an amended complaint
and an amended complaint was served on the Company on July 24, 1998. The
Company's motion to dismiss the amended complaint was filed on October 13, 1998.
The Court requested the filing of briefs to address the applicability of the
decision in Leventhal (see prior paragraph) to this matter. The Company filed
its brief on May 7, 1999.
22
<PAGE>
PART II. OTHER INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
In November 1998, a class action lawsuit was filed in state District Court for
Jefferson Parish, Louisiana, against the Company and three of its subsidiaries:
LGS Natural Gas Company, LGS Intrastate, Inc. and Louisiana General Service
Company. The lawsuit alleges that the Company and the other named defendants
passed through in rates charged to Louisiana customers certain costs that
plaintiffs contend were unlawful. The lawsuit seeks compensatory damages in the
amount of the alleged overcharges and punitive damages equal to three times the
amount of any compensatory damages, as allowed under Louisiana law. In addition,
the Louisiana Public Service Commission has opened an investigation into the
allegations raised in the lawsuit. The Company and its subsidiaries believe that
the allegations made in the lawsuit are unfounded and the Company will
vigorously defend its interests in both the lawsuit and the related Commission
investigation.
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
coverage, 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, 1999
and March 31, 1998.
b) Reports on Form 8-K:
The Company filed on Form 8-K dated March 11, 1999 under Item 7
"Exhibits", a press release announcing financial results for the
year ended December 31, 1998 and certain operating data.
23
<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 13, 1999
24
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES' CONSOLIDATED FINANCIAL
STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000020520
<NAME> CITIZENS UTILITIES COMPANY
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 4,083,346
<OTHER-PROPERTY-AND-INVEST> 430,354<F1>
<TOTAL-CURRENT-ASSETS> 365,750
<TOTAL-DEFERRED-CHARGES> 206,920<F2>
<OTHER-ASSETS> 227,083<F3>
<TOTAL-ASSETS> 5,313,453
<COMMON> 64,872
<CAPITAL-SURPLUS-PAID-IN> 1,557,278
<RETAINED-EARNINGS> 171,728
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,836,452
201,250<F4>
0
<LONG-TERM-DEBT-NET> 1,972,390
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 9,310
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,294,051
<TOT-CAPITALIZATION-AND-LIAB> 5,313,453
<GROSS-OPERATING-REVENUE> 437,514
<INCOME-TAX-EXPENSE> 31,518
<OTHER-OPERATING-EXPENSES> 73,287<F5>
<TOTAL-OPERATING-EXPENSES> 401,191
<OPERATING-INCOME-LOSS> 36,323
<OTHER-INCOME-NET> 81,185
<INCOME-BEFORE-INTEREST-EXPEN> 117,508
<TOTAL-INTEREST-EXPENSE> 29,813
<NET-INCOME> 54,625
1,552<F4>
<EARNINGS-AVAILABLE-FOR-COMM> 54,625
<COMMON-STOCK-DIVIDENDS> 0
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 213,517
<EPS-PRIMARY> .21
<EPS-DILUTED> .21
<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.
</FN>
</TABLE>
