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 SEPTEMBER 30, 1999
<PAGE>
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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 September 30, 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
October 29, 1999 was 261,266,350.
</TABLE>
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CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
Index to Consolidated Financial Statements
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Page No.
--------
Part I. Financial Information
Consolidated Balance Sheets at September 30, 1999 and December 31, 1998 2
Consolidated Statements of Income and Comprehensive Income for the Three Months Ended
September 30, 1999 and 1998 3
Consolidated Statements of Income and Comprehensive Income for the Nine Months Ended
September 30, 1999 and 1998 5
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1999 and 1998 7
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
Quantitative and Qualitative Disclosures about Market Risk 24
Part II. Other Information
Legal Proceedings 25
Exhibit and Reports on Form 8-K 26
Signatures 27
</TABLE>
1
<PAGE>
PART I. FINANCIAL INFORMATION
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
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September 30, 1999 December 31, 1998
ASSETS ------------------ -----------------
- ------
Current assets:
Cash $ 35,870 $ 31,922
Accounts receivable, net 223,517 233,735
Other 31,203 40,467
-------------- --------------
Total current assets 290,590 306,124
-------------- --------------
Property, plant and equipment 4,380,738 4,045,258
Less accumulated depreciation 1,512,130 1,340,665
-------------- --------------
Net property, plant and equipment 2,868,608 2,704,593
-------------- --------------
Investments 541,498 464,145
Regulatory assets 187,838 189,866
Deferred debits and other assets 148,955 126,491
Net assets of discontinued operations 1,562,769 1,501,713
-------------- --------------
Total assets $ 5,600,258 $ 5,292,932
============== ==============
LIABILITIES AND EQUITY
- ----------------------
Current liabilities:
Long-term debt due within one year $ 22,333 $ 7,672
Short-term debt - 110,000
Accounts payable and current liabilities 449,966 388,197
-------------- --------------
Total current liabilities 472,299 505,869
Deferred income taxes 459,583 442,908
Advances for construction 204,373 211,941
Deferred credits and other liabilities 85,083 84,708
Regulatory liabilities 20,780 19,120
Long-term debt 2,080,050 1,808,973
Net liabilities of discontinued operations 191,363 188,200
-------------- --------------
Total liabilities 3,513,531 3,261,719
-------------- --------------
Company Obligated Mandatorily Redeemable
Convertible Preferred Securities * 201,250 201,250
Contributions in aid of construction 7,416 7,407
Minority interest in subsidiary 14,847 29,785
Shareholders' equity:
Common stock issued, $.25 par value 65,099 64,787
Additional paid-in capital 1,564,464 1,554,188
Retained earnings 191,387 117,104
Accumulated other comprehensive income 42,264 56,692
-------------- --------------
Total shareholders' equity 1,863,214 1,792,771
-------------- --------------
Total liabilities and shareholders' equity $ 5,600,258 $ 5,292,932
============== ==============
</TABLE>
* 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 AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(In thousands, except per-share amounts)
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1999 1998
------------ ------------
Revenues $ 271,517 $ 236,324
------------ ------------
Operating expenses:
Network expenses 18,648 24,931
Depreciation and amortization 64,628 50,004
Other operating expenses 167,245 142,403
------------ ------------
Total operating expenses 250,521 217,338
------------ ------------
Income from operations 20,996 18,986
Other income, net 9,482 8,030
Minority interest 5,301 3,788
Interest expense 21,745 17,181
------------ ------------
Income before income taxes, dividends on convertible preferred securities
and discontinued operations 14,034 13,623
Income taxes 3,956 1,504
------------ ------------
Income before dividends on convertible preferred securities and
discontinued operations 10,078 12,119
Dividends on convertible preferred securities, net of income tax benefit 1,553 1,553
------------ ------------
Income before discontinued operations 8,525 10,566
Discontinued operations:
Income from discontinued operations, net of tax 3,383 3,895
------------ ------------
Net income 11,908 14,461
Other comprehensive (loss), net of tax and reclassification adjustment (17) (3,310)
------------ ------------
Total comprehensive income $ 11,891 $ 11,151
============ ============
</TABLE>
3
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (Continued)
(In thousands, except per-share amounts)
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1999 1998
------------ ------------
Income before discontinued operations per common share:
Basic $ .04 $ .04 *
Diluted $ .04 $ .04 *
Income from discontinued operations per common share:
Basic $ .01 $ .02 *
Diluted $ .01 $ .02 *
Net income per common share:
Basic $ .05 $ .06 *
Diluted $ .05 $ .06 *
Dividend rate declared on common stock - .75%
============ ============
*Adjusted for subsequent stock dividends.
The accompanying Notes are an integral part of these Financial Statements.
</TABLE>
4
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(In thousands, except per-share amounts)
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1999 1998
------------ ------------
Revenues $ 810,213 $ 685,375
------------ ------------
Operating expenses:
Network expenses 86,937 73,653
Depreciation and amortization 186,276 148,943
Other operating expenses 493,901 396,484
------------ ------------
Total operating expenses 767,114 619,080
------------ ------------
Income from operations 43,099 66,295
Other income, net 91,946 26,304
Minority interest 16,987 8,924
Interest expense 59,142 48,576
------------ ------------
Income before income taxes, dividends on convertible preferred securities,
discontinued operations and cumulative effect of change in
accounting principle 92,890 52,947
Income taxes 30,812 7,044
------------ ------------
Income before dividends on convertible preferred securities, discontinued
operations and cumulative effect of change in accounting principle 62,078 45,903
Dividends on convertible preferred securities, net of income tax benefit 4,657 4,657
------------ ------------
Income before discontinued operations and cumulative effect of change
in accounting principle 57,421 41,246
Discontinued operations:
Income from discontinued operations, net of tax 16,863 16,790
------------ ------------
Income before cumulative effect of change in accounting principle 74,284 58,036
Cumulative effect of change in accounting principle, net of income tax benefit
and related minority interest - 2,334
------------ ------------
Net income 74,284 55,702
Other comprehensive (loss) income, net of tax and reclassification adjustment (14,428) 19,974
------------ ------------
Total comprehensive income $ 59,856 $ 75,676
============ ============
</TABLE>
5
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (Continued)
(In thousands, except per-share amounts)
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Income before discontinued operations and cumulative effect of change in 1999 1998
------------ ------------
accounting principle per common share:
Basic $ .22 $ .16 *
Diluted $ .22 $ .16 *
Income from discontinued operations per common share:
Basic $ .07 $ .06 *
Diluted $ .06 $ .06 *
Income before cumulative effect of change in accounting principle per common
share:
Basic $ .29 $ .22 *
Diluted $ .28 $ .22 *
Net income per common share:
Basic $ .29 $ .21 *
Diluted $ .28 $ .21 *
Compounded dividend rate declared on common stock - 2.27%
============ ============
*Adjusted for subsequent stock dividends.
The accompanying Notes are an integral part of these Financial Statements.
</TABLE>
6
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(In thousands)
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<S> <C> <C>
1999 1998
------------- -------------
Net cash provided by operating activities $ 371,372 $ 227,196
------------- -------------
Cash flows from investing activities:
Construction expenditures (452,063) (351,777)
Securities purchased (792,706) (686,919)
Securities sold 757,028 679,717
Securities matured 2,035 2,000
Other (2,766) (4,717)
------------- -------------
Net cash (used by) investing activities (488,472) (361,696)
------------- -------------
Cash flows from financing activities:
Long-term debt borrowings 315,053 157,823
Long-term debt principal payments (90,336) (4,936)
Short-term debt repayments (110,000) -
Issuance of common stock 6,742 5,010
Common stock buybacks (411) (861)
------------- -------------
Net cash provided from financing activities 121,048 157,036
------------- -------------
Increase in cash 3,948 22,536
Cash at January 1, 31,922 35,163
============= =============
Cash at September 30, $ 35,870 $ 57,699
============= =============
The accompanying Notes are an integral part of these Financial Statements.
</TABLE>
7
<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 per common share calculations are presented with adjustments
for subsequent stock dividends.
(d) 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." SOP 98-5 requires that the unamortized
portion of deferred start-up costs at the time of adoption be written
off and reported as a change in accounting principle. Future costs of
start-up activities should then be expensed as incurred. The Company
adopted SOP 98-5 effective January 1, 1998. The net book value of the
CLEC's 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 for the first quarter 1998, net of
income tax benefit of $577,000 and related minority interest of
$483,000.
(2) Acquisitions:
------------
On May 27, 1999 and September 21, 1999, the Company announced that it had
entered into definitive agreements to purchase from GTE Corporation 245,723
telephone access lines (as of year-end 1998) in Arizona, California,
Minnesota and Nebraska for approximately $868,000,000 in cash. The
Company expects that these acquisitions, which are subject to various
state and federal regulatory approvals, will begin closing in the second
quarter 2000.
On June 16, 1999 the Company announced that it had entered into a series of
definitive agreements to purchase from US West 530,000 telephone access
lines (as of year-end 1998) in Arizona, Colorado, Idaho, Iowa, Minnesota,
Montana, Nebraska, North Dakota and Wyoming for approximately
$1,650,000,000 in cash. The Company expects that these acquisitions, which
are subject to various state and federal regulatory approvals, will occur
on a state-by-state basis and will begin closing in the second quarter
2000.
The Company expects to temporarily fund these telephone access line
purchases with cash and investment balances and proceeds from commercial
paper issuances, backed by committed bank credit facilities. The Company
expects to permanently fund the purchases with proceeds from the sale of
the Company's public services businesses and cash and investment balances.
8
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) Discontinued Operations:
-----------------------
On August 24, 1999 the Company's Board of Directors approved a plan of
disposition for the public services properties, which include the Company's
gas, electric and water and wastewater businesses. The Company expects to
sell the public services properties, subject to various state and federal
regulatory approvals. The proceeds from the sales will be used to fund the
telephone access line purchases discussed in Note 2. In accordance with
Accounting Principle Board Opinion No. 30 (APBO 30), the Company has
accounted for the planned disposition of the public services properties as
a discontinued operation. Discontinued operations in the consolidated
statements of income reflect the results of operations of the public
services properties including imputed interest expense for the periods
presented.
On October 18, 1999 the Company announced that it had agreed to sell its
water and wastewater operations to American Water Works, Inc. for an
aggregate purchase price of $835,000,000 consisting of $745,000,000 in
cash and $90,000,000 of assumed debt. The transaction is expected to close
in 2000 following regulatory approvals.
Summarized financial information for the discontinued operations is set
forth below:
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For the three months For the nine months
ended September 30, ended September 30,
------------------------------ -----------------------------
($ in thousands) ($ in thousands)
1999 1998 1999 1998
------------- ------------- ------------- ------------
Revenues $ 154,132 $ 141,955 $ 467,797 $ 463,114
Operating income 16,201 21,352 61,842 71,826
Taxes 1,448 5,123 9,710 18,749
Net income 3,383 3,895 16,863 16,790
Sept. 30,1999 Dec. 31, 1998
---------------- ----------------
($ in thousands) ($ in thousands)
Current assets $ 107,833 $ 107,916
Net property, plant and equipment 1,392,879 1,344,030
Other assets 62,057 49,767
-------------- ---------------
Total net assets $ 1,562,769 $ 1,501,713
============== ===============
</TABLE>
9
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) Income From Continuing Operations Per Common Share:
--------------------------------------------------
The reconciliation of the per common share calculations for the three and
nine months ended September 30, 1999 and 1998, respectively, are as
follows:
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For the three months ended September 30,
----------------------------------------------------------------
1999 1998
-------------------------------- -----------------------------
($ in thousands, except for per share amounts)
Per Per
Income Shares Share Income Shares Share
-------------------------------- -----------------------------
Income before discontinued operations
per common share:
Basic $ 8,525 260,610 $ .04 $ $ 10,566 260,139 $ .04
Effect of dilutive options - 3,180 - - 445 -
Diluted $ 8,525 263,790 $ .04 $ $ 10,566 260,584 $ .04
For the nine months ended September 30,
-----------------------------------------------------------------
1999 1998
--------------------------------- ------------------------------
($ in thousands, except for per share amounts)
Per Per
Income Shares Share Income Shares Share
-------------------------------- -------------------------------
Income before discontinued operations
and cumulative effect of change in accounting
principle per common share:
Basic $ 57,421 259,985 $ .22 $ 41,246 259,409 $ .16
Effect of dilutive options - 2,419 - - 307 -
Diluted $ 57,421 262,404 $ .22 $ 41,246 259,716 $ .16
</TABLE>
All share amounts represent weighted average shares outstanding for each
respective period. 1998 per share amounts have been adjusted for subsequent
stock dividends. The diluted 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 2,562,000 potentially dilutive
stock options at a range of $11.73 to $14.24 per share. These items were
adjusted for subsequent stock dividends and were not included in the
diluted per common share calculation for any of the above periods as their
effect was antidilutive.
10
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) 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.
On October 1, 1999, Adelphia Communication Corporation (Adelphia) was
merged with Century Communications Corp. (Century). The Company owned
1,807,095 shares of Century Class A Common Stock. Pursuant to this merger
agreement, Century Class A Common shares were exchanged for
$10,832,000 in cash and 1,206,705 shares of Adelphia Class A Common Stock
(for a total market value of $79,600,000 based on Adelphia's October 1,
1999 closing price of $57.00). The Company realized and will report a pre-
tax gain of approximately $67,600,000 in the fourth quarter of 1999.
A subsidiary of the Company, in a joint venture with a subsidiary of
Century, owned and operated four cable television systems in southern
California serving over 90,000 basic subscribers. In July 1999, the Company
entered into a separate agreement with Adelphia to sell its interest in the
joint venture. Pursuant to this agreement on October 1, 1999, the Company
received approximately $27,700,000 in cash and 1,852,302 shares of Adelphia
Class A Common Stock (for a total market value of $133,300,000 based on
Adelphia's October 1, 1999 closing price of $57.00) and realized and will
report a pre-tax gain of approximately $83,900,000 in the fourth quarter of
1999. In addition, Adelphia will assume the Company's interest in the debt
of the joint venture.
During the third quarter 1999, the Company reclassified $49,400,000 related
to the Company's joint venture with a subsidiary of Century from other
assets to investments. Prior year presentations have been restated to con-
form to the current year presentation.
11
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) Segment Information:
-------------------
The Company is segmented into communications and CLEC. The communications
sector provides both regulated and competitive communications services to
residential, business and wholesale customers. The CLEC sector is a
facilities based integrated communications provider providing a broad range
of communications services throughout the United States through the
Company's subsidiary, Electric Lightwave, Inc.
Sector EBITDA consists of sector operating income plus depreciation. EBITDA
is a measure commonly used to analyze companies on the basis of operating
performance. It is not a measure of financial performance under generally
accepted accounting principles and should not be considered as an
alternative to net income as a measure of performance nor as an alternative
to cash flow as a measure of liquidity and may not be comparable to
similarly titled measures of other companies.
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For the three months For the nine months
ended September 30, ended September 30,
---------------------------------- --------------------------------
($ in thousands) ($ in thousands)
1999 1998 1999 1998
------------- ------------- ------------- -------------
Communications:
- --------------
Revenues $ 233,712 $ 218,970 $ 712,587 $ 643,562
Inter-sector revenues (10,050) (7,660) (33,072) (23,086)
Revenues as reported 223,662 211,310 679,515 620,476
Operating income 40,101 39,491 117,494 117,121
Depreciation 54,821 45,914 161,325 137,189
EBITDA 94,922 85,405 278,819 254,310
CLEC:
- ----
Revenues $ 48,602 $ 25,664 $ 132,913 $ 67,164
Inter-sector revenues (747) (650) (2,215) (2,265)
Revenues as reported 47,855 25,014 130,698 64,899
Operating loss (19,105) (20,505) (74,395) (50,826)
Depreciation 9,807 4,090 24,951 11,754
EBITDA (9,298) (16,415) (49,444) (39,072)
The following table is a reconciliation of sector EBITDA to the total consolidated EBITDA.
For the three months For the nine months
ended September 30, ended September 30,
--------------------------------- -------------------------------
($ in thousands) ($ in thousands)
1999 1998 1999 1998
-------------- -------------- -------------- -------------
Sector EBITDA $ 85,624 $ 68,990 $ 229,375 $ 215,238
Investment and other income 9,482 8,030 22,447 26,304
Gain on sale of Centennial - - 69,499 -
Minority interest 5,301 3,788 16,987 8,924
Discontinued operations 32,593 36,463 108,711 116,360
-------------- ------------- -------------- -------------
Consolidated EBITDA $ 133,000 $ 117,271 $ 447,019 $ 366,826
============== ============== ============== =============
</TABLE>
12
<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 acquisitions and
dispositions. 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.
(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 nine months ended September 30, 1999, the Company used cash flow from
operations and proceeds from net financings and advances from 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.
In October 1999, the Company arranged for a committed $3,000,000,000
revolving bank credit facility. This credit facility is in addition to
credit commitments under which the Company may borrow up to $400,000,000.
There were no amounts outstanding under these commitments at September 30,
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
September 30, 1999, $200,000,000 was outstanding under ELI's revolving
lines of credit. In April 1999, ELI completed an offering of $325,000,000
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 the payment
of principal, any premium and interest on the notes when due.
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.
On October 1, 1999, Adelphia Communication Corporation (Adelphia) was
merged with Century Communications Corp. (Century). The Company owned
1,807,095 shares of Century Class A Common Stock. Pursuant to this merger
agreement, Century Class A Common shares were exchanged for
$10,832,000 in cash and 1,206,705 shares of Adelphia Class A Common Stock
(for a total market value of $79,600,000 based on Adelphia's October 1,
1999 closing price of $57.00). The Company realized and will report a pre-
tax gain of approximately $67,600,000 in the fourth quarter of 1999.
A subsidiary of the Company, in a joint venture with a subsidiary of
Century, owned and operated four cable television systems in southern
California serving over 90,000 basic subscribers. In July 1999, the Company
entered into a separate agreement with Adelphia to sell its interest in the
joint venture. Pursuant to this agreement on October 1, 1999, the Company
received approximately $27,700,000 in cash and 1,852,302 shares of Adelphia
Class A Common Stock (for a total market value of $133,300,000 based on
Adelphia's October 1, 1999 closing price of $57.00) and realized and will
report a pre-tax gain of approximately $83,900,000 in the fourth quarter of
1999.
13
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
Hungarian Telephone and Cable Corp.
-----------------------------------
In May 1999, in connection with Hungarian Telephone and Cable Corp's (HTCC)
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.
Acquisitions
------------
On May 27, 1999 and September 21, 1999, the Company announced that it had
entered into definitive agreements to purchase from GTE Corporation 245,723
telephone access lines (as of year-end 1998) in Arizona, California,
Minnesota and Nebraska, for approximately $868,000,000 in cash. The
Company expects that these acquisitions, which are subject to various
state and federal regulatory approvals, will begin closing in the second
quarter 2000.
On June 16, 1999 the Company announced that it had entered into a series of
definitive agreements to purchase from US West 530,000 telephone access
lines (as of year-end 1998) in Arizona, Colorado, Idaho, Iowa, Minnesota,
Montana, Nebraska, North Dakota and Wyoming for approximately
$1,650,000,000 in cash. The Company expects that these acquisitions, which
are subject to various state and federal regulatory approvals, will occur
on a state-by-state basis and will begin closing in the second quarter
2000.
The Company expects to temporarily fund these telephone access line
purchases with cash and investment balances and proceeds from commercial
paper issuances, backed by committed bank credit facilities. The Company
expects to permanently fund the purchases with proceeds from the sale of
the Company's public services businesses and cash and investment balances.
Dispositions
------------
On August 24, 1999 the Company's Board of Directors approved a plan of
disposition for the public services properties, which include the Company's
gas, electric and water and wastewater businesses. The Company expects to
sell the public services properties, subject to various state and federal
regulatory approvals. The proceeds from the sales will be used to fund the
telephone access line purchases. In accordance with
Accounting Principle Board Opinion No. 30 (APBO 30), the Company has
accounted for the planned disposition of the public services properties as
a discontinued operation. Discontinued operations in the consolidated
statements of income reflect the results of operations of the public
services properties including imputed interest expense for the periods
presented.
On October 18, 1999 the Company announced that it had agreed to sell its
water and wastewater operations to American Water Works Inc. for an ag-
gregate purchase price of $835,000,000 consisting of $745,000,000 in cash
and $90,000,000 of assumed debt. The transaction is expected to close in
2000 following regulatory approvals.
Business Transformation
-----------------------
In conjunction with the Company's transformation from a diversified utility
to a telecommunications company, the Company is reviewing the administra-
tive and supporting offices' processes, and business and customer support
services in order to focus its attention on its core communications
businesses. As a result, the Company expects to incur certain charges to
earnings in the fourth quarter of 1999.
14
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
Impact of the 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 program to
address the Y2K issue. The 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.
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 and products so as to
ensure continued delivery of core business activities.
The Company believes it's Y2K efforts for mission critical systems and
products are essentially complete. For the nine months ended
September 30, 1999, the Company has spent approximately $18,112,000 on its
Y2K efforts and expects to spend an additional $8,880,000 on its remaining
Y2K efforts. For the nine months ended September 30, 1999, the Company has
spent approximately $11,514,000 on its communications (including ELI)
Y2K efforts, which includes approximately $11,209,000 on
communications IT efforts and $305,000 on communications non-IT efforts.
For the nine months ended September 30, 1999, the Company has also spent
approximately $6,598,000 on its public services Y2K efforts, which
includes approximately $2,756,000 on public services IT efforts and
$3,842,000 on public services non-IT efforts. In addition, the Company
expects to incur $4,800,000 on its IT Y2K efforts and $2,080,000 on its
non-IT efforts in the fourth quarter of 1999, and expects to incur
$2,000,000 in the year 2000.
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.
Certain public services state regulatory 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 $2,328,000 related to its discontinued operations 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.
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.
Contingency plans for the Company were completed by June 30, 1999. The
plan is dedicated to ensuring that established and expected levels of
customer service are maintained without interruption, while core business
functionality is preserved during the millennium transition. Additionally,
the plan utilizes existing operating policies and procedures, disaster re-
covery plans, and enterprise prioritization of all systems and applications
by examining potential exposures while documenting clear mitigation
strategies. Contingency planning, risk mitigation, and testing activities
will continue through the year 1999 and into the year 2000 by all Company
organizations. Revisions to the plan will be made when necessary.
15
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
The Company believes its mission critical systems and products are
essentially Y2K ready. 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.
Testing, remediation and monitoring will continue through the remainder of
1999 to verify that there are no outstanding problems that were not
captured during the initial Y2K efforts. Also, review, modifications and
testing of the contingency plans will take place throughout the remainder
of 1999 and into the year 2000.
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.
16
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
(b) Results of Operations
---------------------
REVENUES
--------
Revenues for the three and nine months ended September 30, 1999 increased
$35.2 million, or 15%, and $124.8 million, or 18%, respectively, as
compared with the prior year periods primarily due to an increase in
communication's network access services and CLEC's local telephone and long
distance services.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
For the three months For the nine months
ended September 30, ended September 30,
--------------------------------------------- -------------------------------------------
($ in thousands) ($ in thousands)
% %
Increase/ Increase/
Communications revenues 1999 1998 (Decrease) 1999 1998 (Decrease)
- ----------------------- ----------- ----------- ------------- ----------- ----------- -------------
Network access services $ 124,137 $ 107,325 16% $ 381,341 $ 315,332 21%
Local network services 72,167 66,439 9% 214,159 194,753 10%
Long distance and data services 17,480 26,435 (34%) 58,413 74,622 (22%)
Directory services 8,178 7,949 3% 24,950 23,757 5%
Other 11,750 10,822 9% 33,724 35,098 (4%)
Eliminations (10,050) (7,660) N/A (33,072) (23,086) N/A
----------- ----------- ----------- -----------
$ 223,662 $ 211,310 6% $ 679,515 $ 620,476 10%
=========== =========== =========== ===========
</TABLE>
Network access services revenues for the three and nine months ended
September 30, 1999 increased $16.8 million, or 16%, and $66 million, or
21%, as compared with the prior year periods primarily due to increased
minutes of use, an increase in special access revenues and a universal
service fund settlement.
Local network services revenues for the three and nine months ended
September 30, 1999 increased $5.7 million, or 9%, and $19.4 million, or
10%, respectively, as compared with the prior year periods primarily due to
access line growth and increased enhanced services revenues.
Long distance and data services revenues for the three and nine months
ended September 30, 1999 decreased $9 million, or 34%, and $16.2 million,
or 22%, respectively, as compared with the prior year periods primarily due
to the elimination of long distance product offerings to out-of-territory
customers, partially offset by increased long distance minutes of use by
in-territory customers.
Directory services revenues for the three and nine months ended September
30, 1999 increased $.2 million, or 3%, and $1.2 million, or 5%,
respectively, as compared with the prior year periods primarily due to an
increase in advertising revenue.
Other revenues for the three months ended September 30, 1999 increased $.9
million, or 9%, as compared with the prior year period primarily due to
increased tariff revenues. Other revenues for the nine months ended
September 30, 1999 decreased $1.4 million, or 4%, as compared with the
prior year period primarily due to the phasing out of certain surcharges
resulting from regulatory decisions in California and New York.
Eliminations represent network access revenues received by the Company's
local exchange operations from its long distance operations and CLEC
operations.
17
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
For the three months For the nine months
ended September 30, ended September 30,
--------------------------------------------- -------------------------------------------
($ in thousands) ($ in thousands)
% %
Increase/ Increase/
CLEC revenues 1999 1998 (Decrease) 1999 1998 (Decrease)
- ------------- ----------- ----------- ------------ ----------- ----------- ------------
Network services $ 14,024 $ 9,009 56% $ 37,431 $ 26,487 41%
Local telephone services 22,313 9,987 123% 55,221 23,780 132%
Long distance services 4,812 2,512 92% 22,587 6,233 262%
Data services 7,453 4,156 79% 17,674 10,664 66%
Eliminations (747) (650) N/A (2,215) (2,265) N/A
----------- ----------- ----------- -----------
$ 47,855 $ 25,014 91% $ 130,698 $ 64,899 101%
=========== =========== =========== ===========
</TABLE>
Network services revenues for the three and nine months ended September 30,
1999 increased $5 million, or 56%, and $10.9 million, or 41%, respectively,
as compared with the prior year periods primarily due to sales of
additional circuits to new and existing customers.
Local telephone services revenues for the three and nine months ended
September 30, 1999 increased $12.3 million, or 123%, and $31.4 million, or
132%, respectively, as compared with the prior year periods primarily due
to an increase in reciprocal compensation revenues that are earned under
various interconnection agreements including new agreements that began in
the second and third quarters 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 the
increase.
The CLEC has various interconnection agreements in the states in which it
operates. These agreements govern reciprocal compensation relating to the
transport and termination of traffic between the Incumbent Local Exchange
Carrier's and the CLEC's networks. On February 25, 1999, the Federal
Communications Commission issued a Declaratory Ruling and Notice of
Proposed Rulemaking that categorized calls terminated to Internet Service
Providers as "largely" interstate in nature which may have an effect on the
recognition of reciprocal compensation revenues in the future.
Long distance services revenues for the three and nine months ended
September 30, 1999 increased $2.3 million, or 92%, and $16.4 million, or
262%, respectively, as compared with the prior year periods primarily due
to large increases in minutes processed as a result of adding new customers
and expanded services for existing customers, partially offset by decreased
sales efforts for prepaid service programs due to the CLEC's strategic
decision to eliminate low margin activities.
Data services revenues for the three and nine months ended September 30,
1999 increased $3.3 million, or 79%, and $7 million, or 66%, respectively,
as compared with the prior year periods primarily due to increased sales
and customer demand for Internet and frame relay services.
Eliminations reflect intercompany activity between the Company's CLEC and
communications sectors.
18
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
OPERATING EXPENSES
------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
For the three months For the nine months
ended September 30, ended September 30,
--------------------------------------------- -------------------------------------------
($ in thousands) ($ in thousands)
% %
Increase/ Increase/
1999 1998 (Decrease) 1999 1998 (Decrease)
----------- ----------- ------------ ----------- ----------- -------------
Network expenses $ 29,445 $ 33,981 (13%) $ 122,224 $ 99,004 23%
Eliminations (10,797) (9,050) N/A (35,287) (25,351) N/A
----------- ----------- ----------- -----------
$ 18,648 $ 24,931 (25%) $ 86,937 $ 73,653 18%
=========== =========== =========== ===========
</TABLE>
Network expenses for the three months ended September 30, 1999 decreased
$4.5 million, or 13%, as compared with the prior year period primarily due
to CLEC vendor credits and the Company's decreased long distance minutes of
use associated with out-of-territory long distance customers. Network
expenses for the nine months ended September 30, 1999 increased $23.2
million, or 23%, as compared with the prior year period primarily due to
expenses related to the CLEC national data expansion, partially offset by
CLEC vendor credits and decreased communications sector long distance
minutes of use associated with out-of-territory long distance customers.
Eliminations represent network expenses incurred by the Company's long
distance operation for services provided by its local exchange operations
and intercompany activity between the Company's CLEC and communications
sectors.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
For the three months For the nine months
ended September 30, ended September 30,
--------------------------------------------- -------------------------------------------
($ in thousands) ($ in thousands)
% %
Increase/ Increase/
1999 1998 (Decrease) 1999 1998 (Decrease)
----------- ----------- ------------ ----------- ----------- -------------
Depreciation and
amortization expense $ 64,628 $ 50,004 29% $ 186,276 $ 148,943 25%
</TABLE>
Depreciation and amortization expense for the three and nine months ended
September 30, 1999 increased $14.6 million, or 29%, and $37.3 million, or
25%, respectively, as compared with the prior year periods primarily due to
increased property, plant and equipment.
19
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
For the three months For the nine months
ended September 30, ended September 30,
--------------------------------------------- -------------------------------------------
($ in thousands) ($ in thousands)
% %
Increase/ Increase/
Other Operating Expenses 1999 1998 (Decrease) 1999 1998 (Decrease)
- ------------------------ ----------- ----------- ------------ ----------- ----------- -------------
Operating $ 134,267 $ 112,418 19% $ 394,274 $ 318,955 24%
Taxes other than income 15,830 15,791 - 48,286 43,733 10%
Sales and marketing 17,148 14,194 21% 51,341 33,796 52%
----------- ----------- ----------- -----------
$ 167,245 $ 142,403 17% $ 493,901 $ 396,484 25%
=========== =========== =========== ===========
</TABLE>
Operating expenses for the three and nine months ended September 30, 1999
increased $21.8 million, or 19%, and $75.3 million, or 24%, respectively,
as compared with the prior year periods primarily due to increased CLEC
expenses relating to the expansion of data services and products exit costs
to eliminate the low margin prepaid phone card and videoconference
products, communications sector Y2K expenses and expenses associated with
Rhinelander Telecommunciations, Inc.
Taxes other than income for the nine months ended September 30, 1999
increased $4.6 million, or 10%, as compared with the prior year period
primarily due to increases in payroll and property taxes.
Sales and marketing expenses for the three and nine months ended September
30, 1999 increased $3 million, or 21%, and $17.5 million, or 52%,
respectively, as compared with the prior year periods primarily due to
increased personnel and product advertising to support the delivery of
services in existing and new markets including the expansion of CLEC data
services and products.
OTHER INCOME, NET/MINORITY INTEREST/INTEREST EXPENSE/INCOME TAXES
-----------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
For the three months For the nine months
ended September 30, ended September 30,
--------------------------------------------- -------------------------------------------
($ in thousands) ($ in thousands)
% %
Increase/ Increase/
Other Income, Net 1999 1998 (Decrease) 1999 1998 (Decrease)
- ----------------- ----------- ----------- ------------ ----------- ----------- -------------
Investment income $ 8,205 $ 8,237 - $ 88,784 $ 24,754 259%
Other 1,277 (207) 717% 3,162 1,550 104%
----------- ----------- ---------- -----------
$ 9,482 $ 8,030 18% $ 91,946 $ 26,304 250%
=========== =========== =========== ===========
</TABLE>
Investment income for the nine months ended September 30, 1999 increased
$64 million, or 259%, as compared with the prior year period 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 for the three and nine months ended September 30, 1999
increased $1.5 million, or 717%, and $1.6 million, or 104%, respectively,
as compared with the prior year periods primarily due to a increase in the
equity component of Allowance for Funds Used during Construction.
20
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
For the three months For the nine months
ended September 30, ended September 30,
--------------------------------------------- -------------------------------------------
($ in thousands) ($ in thousands)
% %
Increase/ Increase/
1999 1998 (Decrease) 1999 1998 (Decrease)
----------- ----------- ------------ ----------- ----------- ------------
Minority interest $ 5,301 $ 3,788 40% $ 16,987 $ 8,924 90%
Minority interest represents the 17.55% minority share of the Company's
CLEC subsidiary's loss before the income tax benefit and the cumulative
effect of change in accounting principle in 1998. Minority interest for the
three and nine months ended September 30, 1999 increased $1.5 million, or
40%, and $8.1 million, or 90%, respectively, as compared with the prior
year periods primarily due to increased losses recorded by ELI.
For the three months For the nine months
ended September 30, ended September 30,
--------------------------------------------- -------------------------------------------
($ in thousands) ($ in thousands)
% %
Increase/ Increase/
1999 1998 (Decrease) 1999 1998 (Decrease)
----------- ----------- ------------ ----------- ----------- -------------
Interest expense $ 21,745 $ 17,181 27% $ 59,142 $ 48,576 22%
Interest expense for the three and nine months ended September 30, 1999
increased $4.6 million, or 27%, and $10.6 million, or 22%, respectively, as
compared with the prior year periods primarily due to an increase in the
usage of ELI's outstanding line of credit and the issuance of $325 million
of five-year unsecured notes in April 1999 by ELI.
For the three months For the nine months
ended September 30, ended September 30,
--------------------------------------------- -------------------------------------------
($ in thousands) ($ in thousands)
% %
Increase/ Increase/
1999 1998 (Decrease) 1999 1998 (Decrease)
----------- ----------- ------------ ----------- ----------- -------------
Income taxes $ 3,956 $ 1,504 163% $ 30,812 $ 7,044 337%
Income taxes for the three and nine months ended September 30, 1999
increased $2.5 million, or 163%, and $23.8 million, or 337%, respectively,
as compared with the prior year periods primarily due to changes in taxable
income and an increase in the effective tax rate. The effective tax rates
for 1999 and 1998 both reflect the impact of non-taxable income and other
favorable permanent differences. The impact of the aforementioned items for
the 1999 tax year is being reduced by the increased pre-tax income
resulting from the sale of investments included in other income.
</TABLE>
21
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
DISCONTINUED OPERATIONS
-----------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
For the three months For the nine months
ended September 30, ended September 30,
----------------------------------------- -----------------------------------------
($ in thousands) ($ in thousands)
% %
Increase/ Increase/
1999 1998 (Decrease) 1999 1998 (Decrease)
----------- ------------ -------------- ------------ ------------ --------------
Revenues $ 154,132 $ 141,955 9% $ 467,797 $ 463,114 1%
Operating income 16,201 21,352 (24%) 61,842 71,826 (14%)
Net income 3,383 3,895 (13%) 16,863 16,790 -
</TABLE>
Revenues from discontinued operations for the three and nine months ended
September 30, 1999 increased $12.2 million, or 9%, and $4.7 million, or 1%,
respectively, as compared with the prior year periods primarily due to
higher purchased electric energy and fuel oil costs passed on to customers,
increased consumption and customer growth.
Operating income from discontinued operations for the three and nine months
ended September 30, 1999 decreased $5.2 million, or 24%, and $10 million,
or 14%, respectively, as compared with the prior year periods primarily due
to a commission ordered one time customer refund in one of the Company's
service areas and increased payroll and Y2K costs, partially offset by an
increase in gross margins.
Net income from discontinued operations for the three months ended
September 30, 1999 decreased $.5 million, or 13%, as compared with the
prior year period primarily due to a commission ordered one time customer
refund in one of the Company's service areas and increased payroll and Y2K
costs, partially offset by a decrease in income taxes.
22
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
NET INCOME AND NET INCOME PER COMMON SHARE
------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
For the three months For the nine months
ended September 30, ended September 30,
------------------------------------------ -----------------------------------------
($ in thousands) ($ in thousands)
% %
Increase/ Increase/
1999 1998 (Decrease) 1999 1998 (Decrease)
------------ ------------ -------------- ------------ ------------- --------------
Net income $ 11,908 $ 14,461 (18%) $ 74,284 $ 55,702 33%
Net income per common share:
Basic $ .05 $ .06 (17%) $ .29 $ .21 38%
Diluted $ .05 $ .06 (17%) $ .28 $ .21 33%
Net income and net income per share for the three months ended September 30,
1999 decreased $2.6 million, or 18%, and .01(cent), or 17%, respectively, as
compared with the prior year period primarily due to increased losses from
the Company's CLEC subsidiary, Y2K costs and an increase in the effective income
tax rate. Net income and net income per share for the nine months ended
September 30, 1999 increased $18.6 million, or 33%, and .08(cent), or 38%, re-
spectively, as compared with the prior year period primarily due to the first
quarter $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 costs.
</TABLE>
23
<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 maintains
fixed rate debt on a majority of its borrowings and refinances debt when
advantageous. In an effort to reduce interest rate risk the Company's CLEC
subsidiary issued fixed interest rate $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 CLEC'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 primarily comprised of
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.
24
<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 (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 alleged 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 sought to
recover unspecified compensatory damages. The Company and the individual
defendants believed the allegations are unfounded and filed a motion to dismiss
on March 27, 1998. 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. A briefing schedule was established and argument is to be
held no earlier than November 29, 1999.
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 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 dismissed the action with prejudice on June 28, 1999. The Plaintiffs
filed a notice of appeal with the Court of Appeals for the Second Circuit and
briefing is to be completed by December 20, 1999, with argument to be held not
earlier than January 17, 2000.
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
coverages, will not have a material adverse effect on the Company's financial
position, results of operations, or its cash flows.
25
<PAGE>
PART II. OTHER INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
<S> <C>
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a) Exhibit:
27 Financial data schedule for the period ended September 30, 1999.
b) Reports on Form 8-K:
The Company filed on Form 8-K dated August 5, 1999 under Item 7
"Exhibits," a press release announcing financial results for the
quarter ended June 30, 1999 and certain operating data.
The Company filed on Form 8-K dated September 22, 1999 under Item
5 "Other Events" and Item 7 "Exhibits," a press release announ-
cing definitive agreements to purchase 58,723 telephone access
lines from GTE Corporation.
The Company filed on Form 8-K dated October 18, 1999 under Item 5
"Other Events" and Item 7 "Exhibits," a press release announcing
that it had agreed to sell its water and wastewater operations to
American Water Works, Inc.
</TABLE>
26
<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
Vice President and
Chief Financial Officer
By: /s/ Livingston E. Ross
---------------------------
Livingston E. Ross
Vice President and
Chief Accounting Officer
Date: November 12, 1999
27
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES' CONSOLIDATED FINANCIAL
STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 2,868,608
<OTHER-PROPERTY-AND-INVEST> 541,498<F1>
<TOTAL-CURRENT-ASSETS> 290,590
<TOTAL-DEFERRED-CHARGES> 187,838<F2>
<OTHER-ASSETS> 148,955<F3>
<TOTAL-ASSETS> 5,600,258<F4>
<COMMON> 65,099
<CAPITAL-SURPLUS-PAID-IN> 1,564,464
<RETAINED-EARNINGS> 191,387
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,863,214
201,250<F5>
0
<LONG-TERM-DEBT-NET> 2,080,050
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 22,333
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,634,661<F6>
<TOT-CAPITALIZATION-AND-LIAB> 5,600,258<F6>
<GROSS-OPERATING-REVENUE> 810,213
<INCOME-TAX-EXPENSE> 30,812
<OTHER-OPERATING-EXPENSES> 86,937<F7>
<TOTAL-OPERATING-EXPENSES> 767,114
<OPERATING-INCOME-LOSS> 43,099
<OTHER-INCOME-NET> 91,946
<INCOME-BEFORE-INTEREST-EXPEN> 152,032
<TOTAL-INTEREST-EXPENSE> 59,142
<NET-INCOME> 74,284<F8>
4,657<F5>
<EARNINGS-AVAILABLE-FOR-COMM> 74,284<F8>
<COMMON-STOCK-DIVIDENDS> 0
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 371,372
<EPS-BASIC> .29
<EPS-DILUTED> .28
<FN>
<F1>REPRESENTS INVESTMENT FUNDS.
<F2>REPRESENTS REGULATORY ASSETS.
<F3>DEFERRED DEBITS AND OTHER ASSETS.
<F4>TOTAL ASSETS INCLUDES $1,562,769 OF NET ASSETS FROM DISCONTINUED OPERATIONS.
<F5>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.
<F6>INCLUDES $191,363 OF NET LIABILITIES OF DISCONTINUED OPERATIONS.
<F7>REPRESENTS NETWORK EXPENSES.
<F8>NET INCOME INCLUDES INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX
OF $16,863.
</FN>
</TABLE>
