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, 2000
<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, 2000
--------------
|_| 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 28, 2000 were 263,679,242.
<PAGE>
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
Index to Consolidated Financial Statements
Page No.
--------
Part I. Financial Information
Consolidated Balance Sheets at March 31, 2000 and December 31, 1999 2
Consolidated Statements of Income and Comprehensive Income (Loss)
for the Three Months Ended March 31, 2000 and 1999 3
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2000 and 1999 4
Notes to Consolidated Financial Statements 5
Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
Quantitative and Qualitative Disclosures about Market Risk 13
Part II. Other Information
Legal Proceedings 14
Exhibits and Reports on Form 8-K 15
Signatures 16
1
<PAGE>
PART I. FINANCIAL INFORMATION
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, December 31,
2000 1999
---------- ----------
ASSETS
- ------
Current assets:
Cash $ 43,992 $ 37,141
Accounts receivable, net 217,785 241,519
Other 30,038 29,964
---------- ----------
Total current assets 291,815 308,624
---------- ----------
Property, plant and equipment 4,567,876 4,458,654
Less accumulated depreciation 1,620,900 1,569,936
---------- ----------
Net property, plant and equipment 2,946,976 2,888,718
---------- ----------
Investments 546,652 591,386
Regulatory assets 183,895 184,942
Deferred debits and other assets 136,817 141,274
Assets of discontinued operations 1,652,310 1,656,414
---------- ----------
Total assets $ 5,758,465 $5,771,358
========== ==========
LIABILITIES AND EQUITY
- ----------------------
Current liabilities:
Long-term debt due within one year $ 33,005 $ 31,156
Accounts payable and other current liabilities 333,375 435,856
---------- ----------
Total current liabilities 366,380 467,012
Deferred income taxes 448,160 460,208
Customer advances for construction and contributions
in aid of construction 180,652 179,831
Deferred credits and other liabilities 70,827 87,668
Regulatory liabilities 26,419 27,000
Long-term debt 2,193,494 2,107,460
Liabilities of discontinued operations 394,861 310,269
---------- ----------
Total liabilities 3,680,793 3,639,448
---------- ----------
Company Obligated Mandatorily Redeemable Convertible
Preferred Securities * 201,250 201,250
Minority interest in subsidiary 6,930 11,112
Shareholders' equity:
Common stock issued, $.25 par value 65,811 65,519
Additional paid-in capital 1,589,621 1,577,903
Retained earnings 268,915 261,590
Accumulated other comprehensive income (13,122) 14,923
Treasury stock (41,733) (387)
---------- ----------
Total shareholders' equity 1,869,492 1,919,548
---------- ----------
Total liabilities and
shareholders' equity $ 5,758,465 $ 5,771,358
========== ==========
* 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 Consolidated Financial
Statements.
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, 2000 AND 1999
(In thousands, except per-share amounts)
2000 1999
--------- ---------
Revenue $ 282,455 $ 264,750
--------- ---------
Operating Expenses:
Network access 27,003 34,395
Depreciation and amortization 82,705 61,885
Other operating expenses 155,981 161,338
Acquisition assimilation expenses 3,974 -
--------- ---------
Total operating expenses 269,663 257,618
--------- ---------
Income from operations 12,792 7,132
Investment and other income, net 5,265 75,521
Minority interest 6,285 5,993
Interest expense 29,164 19,098
--------- ---------
Income (loss) before income taxes, dividends
on convertible preferred securities
and discontinued operations (4,822) 69,548
Income tax expense (benefit) (1,253) 26,606
--------- ---------
Income (loss) before dividends on convertible
preferred securities and discontinued operations (3,569) 42,942
Dividends on convertible preferred securities, net of
income tax benefit 1,552 1,552
--------- ---------
Income (loss) before discontinued operations (5,121) 41,390
Income from discontinued operations, net of tax 12,447 13,235
--------- ---------
Net income 7,326 54,625
Other comprehensive income (loss), net of tax and
reclassification adjustments (28,045) (14,118)
--------- ---------
Total comprehensive income (loss) $ (20,719) $ 40,507
========= =========
Income (loss) before discontinued operations per common share:
Basic $ (.02) $ .16
Diluted $ (.02) $ .16
Income from discontinued operations per common share:
Basic $ .05 $ .05
Diluted $ .05 $ .05
Net income per common share:
Basic $ .03 $ .21
Diluted $ .03 $ .21
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
3
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(In thousands)
2000 1999
----------- -----------
Net cash provided by continuing operating activities $ 77,329 $ 217,671
----------- -----------
Cash flows used for investing activities:
Construction expenditures (138,466) (145,581)
Securities purchased (23,886) (394,037)
Securities sold 17,054 398,414
Securities matured 6,400 -
Other (6,901) (297)
----------- -----------
(145,799) (141,501)
Cash flows from financing activities:
Short-term debt repayments - (110,000)
Long-term debt borrowings 88,543 68,686
Long-term debt principal payments (10,814) (1,998)
Issuance of common stock 12,009 8
Common stock buybacks (41,346) (131)
Other 822 (12,522)
----------- ----------
49,214 (55,957)
Cash from (used for) discontinued operations 26,107 (30,485)
Increase (decrease) in cash 6,851 (10,272)
Cash at January 1, 37,141 31,922
----------- ----------
Cash at March 31, $ 43,992 $ 21,650
=========== ==========
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
4
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
(1) Summary of Significant Accounting Policies:
------------------------------------------
(a)Basis of Presentation:
Citizen Utilities Company and its subsidiaries are referred to as "we",
"us" or "our" in this report. The unaudited consolidated financial
statements include our accounts and have been prepared in conformity with
generally accepted accounting principles and should be read in conjunction
with the consolidated financial statements and notes included in our 1999
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:
Our 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 (see Note 5).
(2) Acquisitions:
------------
On May 27, September 21, and December 16, 1999, we announced that we had
entered into definitive agreements to purchase from GTE approximately
366,000 telephone access lines (as of December 31, 1999) in Arizona,
California, Illinois, Minnesota and Nebraska for approximately
$1,171,000,000 in cash. We expect 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 third quarter 2000.
On June 16, 1999, we announced that we had entered into a series of
definitive agreements to purchase from US West approximately 545,000
telephone access lines (as of December 31, 1999) in Arizona, Colorado,
Idaho, Iowa, Minnesota, Montana, Nebraska, North Dakota and Wyoming for
approximately $1,650,000,000 in cash. We expect 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 third quarter
2000.
(3) Discontinued Operations:
-----------------------------
On August 24, 1999, our Board of Directors approved a plan of divestiture by
sale of our public services properties, which include gas, electric and
water and wastewater businesses. The proceeds from the sales of public
services businesses will be used to fund the telephone access line
purchases.
On October 18, 1999, we announced that we had agreed to sell our water and
wastewater operations to American Water Works, Inc. for $835,000,000 plus
the assumption of certain liabilities. The transaction is expected to close
in 2000 following regulatory approvals.
On February 15, 2000, we announced that we had agreed to sell our electric
utility operations for $535,000,000 plus the assumption of certain
liabilities. The Arizona and Vermont electric divisions will be sold to Cap
Rock Energy Corp. and the Kauai (Hawaii) electric division will be sold to
Kauai Island Electric Co-op. The transactions are expected to close in 2000
following regulatory approvals.
On April 13, 2000, we announced that we had agreed to sell our Louisiana Gas
operations to Atmos Energy Corporation for $375,000,000 plus the assumption
of certain liabilities. The transaction is expected to close in 2001
following regulatory approvals.
5
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
We have accounted for the planned divestiture of the public services
properties as a discontinued operation. Discontinued operations in the
consolidated statements of income and comprehensive income reflect the
results of operations of the public services properties including allocated
interest expense for the periods presented. Interest expense was allocated
to discontinued operations based on debt issued for these businesses. The
debt presented in liabilities of discontinued operations represents only
debt to be transferred pursuant to the asset sale agreements described
above.
Summarized financial information for the discontinued operations is set
forth below:
<TABLE>
<CAPTION>
<S> <C> <C>
March 31, December 31,
2000 1999
-------------------------
($ in thousands)
Current assets $ 107,177 $ 109,250
Net property, plant and equipment 1,465,689 1,459,958
Other assets 79,444 87,206
--------- ---------
Total assets $ 1,652,310 $ 1,656,414
========= =========
Current liabilities $ 97,629 $ 18,040
Long-term debt 134,542 133,817
Other liabilities 162,690 158,412
--------- ---------
Total liabilities $ 394,861 $ 310,269
========= =========
For the three months ended
March 31,
--------------------------
2000 1999
--------------------------
($ in thousands)
Revenue $ 190,312 $ 172,764
Operating income $ 28,961 $ 29,191
Income taxes $ 5,942 $ 4,912
Net income $ 12,447 $ 13,235
</TABLE>
The March 31, 2000 balance sheet has been adjusted for changes in assets and
liabilities of discontinued operations as well as for new agreements that
have been signed since the December 31, 1999 balance sheet was published.
(4) 1999 Restructuring Charges:
---------------------------
In the fourth quarter of 1999, we approved a plan to restructure our
corporate office activities. In connection with this plan, we recorded a
pre-tax charge of $5,760,000 in other operating expenses in the fourth
quarter of 1999. The restructuring results in the reduction of 49 corporate
employees. All affected employees were communicated with in the early part
of November 1999.
As of March 31, 2000, approximately $2,677,000 of the costs had been paid
and 22 employees were terminated. The remaining employees will be terminated
during 2000. The remaining accrual of approximately $3,083,000 is included
in other current liabilities. These costs are expected to be paid during
2000.
6
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
(5) Net Income Per Common Share:
-----------------------------
The reconciliation of the net income per common share calculation for the
three months ended March 31, 2000, and 1999 is as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
2000 1999
----------------------------- -------------------------
($ in thousands, except for per share amounts)
Income Shares Per Share Income Shares Per Share
------ ------ --------- ------ ------ ---------
Net income per common share:
Basic $ 7,326 262,718 $ .03 $ 54,625 259,701 $.21
Effect of dilutive shares - 4,548 - - 651 -
Diluted $ 7,326 267,266 $ .03 $ 54,625 260,352 $.21
</TABLE>
All share amounts represent weighted average shares outstanding for each
respective period. The diluted net income per common share calculation
excludes the effect of potentially dilutive shares when their effect is
antidilutive. At March 31, 2000, we have 4,025,000 shares of potentially
dilutive Mandatorily Redeemable Convertible Preferred Securities (Convertible
Preferred) which are convertible into common stock at a 3.76 to 1 ratio at an
exercise price of $13.30 per share that are not included in the calculation
as their effect is antidilutive. At March 31, 1999, these Convertible
Preferred shares and certain potentially dilutive stock options were not
included in the calculation as their effect was antidilutive at that time.
(6) Segment Information:
-------------------
We operate in two segments, telecommunications and ELI. The
telecommunications segment provides both regulated and competitive
communications services to residential, business and wholesale customers.
ELI is a facilities based integrated communications provider providing a
broad range of communications services throughout the United States.
EBITDA is earnings before interest, income taxes, depreciation and
amortization. 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.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
For the three months ended March 31, 2000
-----------------------------------------
Consolidated
Telecommunications ELI Eliminations Total
------------------ --- ------------ -----
Revenue $ 226,312 $ 56,778 $ (635)(1) $ 282,455
Depreciation 69,950 12,755 82,705
Operating Income 32,020 (19,420) 192(2) 12,792
EBITDA 101,970 (6,665) 192(2) 95,497
For the three months ended March 31, 1999
-----------------------------------------
Consolidated
Telecommunications ELI Eliminations Total
------------------ --- ------------ -----
Revenue $ 227,232 $ 38,216 $ (698)(1) $ 264,750
Depreciation 54,891 6,994 61,885
Operating Income 36,610 (29,803) 325(2) 7,132
EBITDA 91,501 (22,809) 325(2) 69,017
(1)Represents revenue received by ELI from our telecommunications operations.
(2)Represents administrative fees charged to ELI by the Company.
</TABLE>
7
<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 we review continuously. All
forward-looking statements may differ from actual future results due to, but not
limited to, any of the following possibilities:
o changes in the economy of our markets,
o the nature and pace of technological changes,
o the number and effectiveness of competitors in our markets,
o changes in legal and regulatory policy,
o success in overall strategy,
o our ability to identify future markets and successfully expand existing
ones,
o the mix of products and services offered in our target markets, and
o the effects of acquisitions and dispositions and the ability to
effectively integrate businesses acquired.
You should consider these important factors in evaluating any statement in this
Form 10-Q or otherwise made by us or on our 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 our 1999 Annual Report on Form 10-K previously
filed. We have no obligation to update or revise these forward-looking
statements.
(a) Liquidity and Capital Resources
-------------------------------
We consider our operating cash flows and our ability to raise debt and equity
capital as the principal indicators of our liquidity. For the three months ended
March 31, 2000, we 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 certain
public services plant.
We have $3,200,000,000 of committed revolving bank credit facilities in addition
to a credit commitment under which we may borrow up to $200,000,000. There were
no amounts outstanding under these commitments at March 31, 2000. ELI has
committed revolving lines of credit with commercial banks under which it may
borrow up to $400,000,000. As of March 31, 2000, $300,000,000 was outstanding
under ELI's revolving lines of credit. We have guaranteed all of ELI's
obligations under these revolving lines of credit.
Acquisitions
- ------------
On May 27, September 21, and December 16, 1999, we announced that we had entered
into definitive agreements to purchase from GTE approximately 366,000 telephone
access lines (as of December 31, 1999) in Arizona, California, Illinois,
Minnesota and Nebraska for approximately $1,171,000,000 in cash. We expect 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
third quarter 2000.
On June 16, 1999, we announced that we had entered into a series of definitive
agreements to purchase from US West approximately 545,000 telephone access lines
(as of December 31, 1999) in Arizona, Colorado, Idaho, Iowa, Minnesota, Montana,
Nebraska, North Dakota and Wyoming for approximately $1,650,000,000 in cash. We
expect 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 third quarter 2000.
We expect to temporarily fund these telephone access line purchases with cash
and investment balances and proceeds from commercial paper issuances, backed by
the credit commitments described above. Permanent funding is expected to be from
cash and investment balances and the proceeds from the divestiture of our public
services businesses.
8
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
Divestiture
- -----------
On August 24, 1999, our Board of Directors approved a plan of divestiture for
our public services properties, which include gas, electric and water and
wastewater businesses. The proceeds from the sales of public services businesses
will be used to fund the telephone access line purchases.
On October 18, 1999, we announced that we had agreed to sell our water and
wastewater operations to American Water Works, Inc. for $835,000,000 plus the
assumption of certain liabilities. The transaction is expected to close in 2000
following regulatory approvals.
On February 15, 2000, we announced that we had agreed to sell our electric
utility operations for $535,000,000 plus the assumption of certain liabilities.
The Arizona and Vermont electric divisions will be sold to Cap Rock Energy Corp.
and the Kauai (Hawaii) Electric Division will be sold to Kauai Island Electric
Co-op. The transactions are expected to close in 2000 following regulatory
approvals.
On April 13, 2000, we announced that we had agreed to sell our Louisiana Gas
operations to Atmos Energy Corporation for $375,000,000 plus the assumption of
certain liabilities. The transaction is expected to close in 2001 following
regulatory approvals.
We have accounted for the planned divestiture of the public services properties
as a discontinued operation. Discontinued operations in the consolidated
statements of income and comprehensive income reflect the results of operations
of the public services properties including allocated interest expense for the
periods presented. Interest expense was allocated to the discontinued operations
based on the outstanding debt specifically identified with these businesses.
(b) Results of Operations
---------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
REVENUE
-------
For the three months ended March 31,
-----------------------------------------
($ in thousands)
%
Increase/
Telecommunications revenue 2000 1999 (Decrease)
- -------------------------- ---- ---- ----------
Network access services $ 121,656 $ 128,680 (5%)
Local network services 73,555 69,913 5%
Long distance and data services 20,066 21,101 (5%)
Directory services 8,819 8,397 5%
Other 12,649 9,794 29%
Eliminations (10,433) (10,653) N/A
--------- ----------
$ 226,312 $ 227,232 -
========= ==========
</TABLE>
Network access services revenue decreased $7 million, or 5%, as compared with
the first quarter of 1999 primarily due to a non-recurring $10 million
interstate universal service fund settlement received in the first quarter of
1999. The decrease was partially offset by access line and switched access
minutes of use growth and increased special access revenue in the first quarter
of 2000.
Local network services revenue increased $3.6 million, or 5%, as compared with
the first quarter of 1999 primarily due to access line growth, increased custom
calling features and higher private line sales.
Long distance and data services revenue decreased $1 million, or 5%, as compared
with the first quarter of 1999 primarily due to a decrease in long distance
minutes of use by out-of-territory customers, partially offset by an increase in
long distance minutes of use by in-territory customers.
Directory services revenue increased $.4 million, or 5%, as compared with the
first quarter of 1999 primarily due to increased directory advertising and
listing sales.
Other revenue increased $2.9 million, or 29%, as compared with the first quarter
of 1999 primarily due to increased equipment sales.
Eliminations represent network access revenue received by our local exchange
operations from our long distance operations.
9
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
<S> <C> <C> <C>
For the three months ended March 31,
-----------------------------------------
($ in thousands)
%
Increase/
ELI revenue 2000 1999 (Decrease)
- ----------- ---- ---- ----------
Network services $ 16,004 $ 10,424 54%
Local telephone services 24,274 14,308 70%
Long distance services 4,596 8,530 (46%)
Data services 11,904 4,954 140%
---------- ----------
56,778 38,216 49%
Intersegment revenue (635) (698) N/A
---------- ----------
$ 56,143 $ 37,518 50%
========== ==========
</TABLE>
Network services revenue increased $5.6 million, or 54%, as compared with the
first quarter 1999 primarily due to network expansion and sales of additional
circuits to new and existing customers.
Local telephone services revenue increased $10 million, or 70%, as compared with
the first quarter of 1999 primarily due to increased dial tone and integrated
service digital network (ISDN) revenue as a result of an increase in access line
equivalents installed. Carrier access billings and reciprocal compensation
revenue also increased.
Long distance services revenue decreased $3.9 million, or 46%, as compared with
the first quarter of 1999 primarily due to our decision to exit the prepaid
services market in the third quarter of 1999, partially offset by increased
minutes of use as a result of new customers and expanded services to existing
customers.
Data services revenue increased $7 million, or 140%, as compared with the first
quarter of 1999 primarily due to increased sales from Internet services and an
18 month take-or-pay contract that commenced in September 1999. The take-or-pay
contract provides $20 million in revenue for 2000. There is no assurance this
take-or-pay contract will be renewed in 2001.
Intersegment revenue reflects revenue received by ELI from our
telecommunications operations.
NETWORK ACCESS EXPENSE
----------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
For the three months ended March 31,
-----------------------------------------
($ in thousands)
%
Increase/
2000 1999 (Decrease)
---- ---- ---------
Network access $ 38,071 $ 45,746 (17%)
Eliminations (11,068) (11,351) N/A
---------- ----------
$ 27,003 $ 34,395 (21%)
========== ==========
</TABLE>
Network access expenses decreased $7.7 million, or 17%, as compared with the
first quarter of 1999 primarily due to a decrease in long distance minutes of
use by out-of-territory customers of our telecommunications long distance
operations and ELI's decision to exit the prepaid services market in the third
quarter of 1999.
Eliminations represent expenses incurred by our long distance operations
related to network access services provided by our local exchange operations and
expenses incurred by our telecommunications operations related to network
services provided by ELI.
10
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
DEPRECIATION AND AMORTIZATION EXPENSE
-------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
For the three months ended March 31,
-----------------------------------------
($ in thousands)
%
Increase/
2000 1999 (Decrease)
---- ---- ----------
Depreciation and amortization $ 82,705 $ 61,885 34%
</TABLE>
Depreciation and amortization expense increased $20.8 million, or 34%, as
compared with the first quarter of 1999 primarily due to $15.1 million of
accelerated depreciation related to the change in useful life of an operating
system in the telecommunications sector and increased property, plant and
equipment.
OTHER OPERATING EXPENSES
------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
For the three months ended March 31,
------------------------------------------
($ in thousands)
%
Increase/
2000 1999 (Decrease)
---- ---- ----------
Operating expenses $ 122,594 $ 128,678 (5%)
Taxes other than income 16,573 16,422 1%
Sales and marketing 17,006 16,563 3%
Eliminations (192) (325) N/A
---------- ---------
$ 155,981 $ 161,338 (3%)
========== =========
</TABLE>
Operating expenses decreased $6.1 million, or 5%, as compared with the first
quarter of 1999 primarily due to decreased Y2K, separation and rent expense,
partially offset by an increase in operating expenses to support the expanded
delivery of services.
Taxes other than income remained consistent with the first quarter of 1999.
Sales and marketing expenses increased $.4 million, or 3%, as compared with the
first quarter of 1999 primarily due to an increase in personnel and related
expenses to support the expanded delivery of services in existing and new
markets.
Eliminations represent the elimination of administrative fees charged to ELI.
ACQUISITION ASSIMILATION EXPENSES
---------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
For the three months ended March 31,
------------------------------------------
($ in thousands)
%
Increase/
2000 1999 (Decrease)
---- ---- ----------
Acquisition assimilation expenses $ 3,974 $ - 100%
</TABLE>
Acquisition assimilation expenses were incurred by us related to the pending
acquisition of approximately 1 million access lines. We anticipate that we will
continue to incur such assimilation costs through the remainder of the fiscal
year as we prepare to integrate the pending acquisitions.
INCOME FROM OPERATIONS
----------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
For the three months ended March 31,
-----------------------------------------
($ in thousands)
%
Increase/
2000 1999 (Decrease)
---- ---- ----------
Income from operations $ 12,792 $ 7,132 79%
</TABLE>
11
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
Income from operations increased $5.7 million or 79%, as compared with the first
quarter of 1999 primarily due to decreased ELI operating losses and decreased
Y2K and separation expenses, partially offset by increased depreciation expense
related to the change in useful life of an operating system in the
telecommunications sector and the 1999 non-recurring universal service fund
revenue.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
INVESTMENT AND OTHER INCOME, NET / MINORITY INTEREST / INTEREST EXPENSE / INCOME TAXES
--------------------------------------------------------------------------------------
For the three months ended March 31,
-----------------------------------------
($ in thousands)
%
Increase/
2000 1999 (Decrease)
---- ---- ----------
Investment and other income, net $ 5,265 $ 75,521 (93%)
</TABLE>
Investment and other income, net decreased $70.3 million, or 93%, as compared
with the first quarter of 1999 primarily due to the $69.5 million gain on the
sale of our investment in Centennial Cellular Corp. in January 1999.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
For the three months ended March 31,
-----------------------------------------
($ in thousands)
%
Increase/
2000 1999 (Decrease)
---- ---- ----------
Minority interest $ 6,285 $ 5,993 5%
</TABLE>
Minority interest represents the minority's share of ELI's loss before income
tax.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
For the three months ended March 31,
-----------------------------------------
($ in thousands)
%
Increase/
2000 1999 (Decrease)
---- ---- ---------
Interest expense $ 29,164 $ 19,098 53%
</TABLE>
Interest expense increased $10.1 million, or 53%, as compared with the first
quarter of 1999 primarily due to increased ELI borrowings and the amortization
of costs associated with our committed bank credit facilities.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
For the three months ended March 31,
-----------------------------------------
($ in thousands)
%
Increase/
2000 1999 (Decrease)
---- ---- ---------
Income taxes $ (1,253) $ 26,606 (105%)
</TABLE>
Income taxes decreased $27.9 million, or 105%, as compared with the first
quarter of 1999 primarily due to the $26.6 million of income taxes on the sale
of our investment in Centennial Cellular Corp. in January 1999.
DISCONTINUED OPERATIONS
-----------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
For the three months ended March 31,
-----------------------------------------
($ in thousands)
%
Increase/
2000 1999 (Decrease)
---- ---- ---------
Revenue $ 190,312 $ 172,764 10%
Operating income 28,961 29,191 (1%)
Net income 12,447 13,235 (6%)
</TABLE>
12
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
Revenue from discontinued operations increased $17.5 million, or 10%, as
compared with the first quarter of 1999 primarily due to customer growth in the
public services sector, increased consumption in the electric and water and
wastewater sectors, increased purchased fuel costs and purchased power costs
passed on to customers, offset by decreased consumption in the gas sector.
Operating income from discontinued operations decreased $.2 million, or 1%, and
net income from discontinued operations decreased $.8 million, or 6%, as
compared with the first quarter of 1999 primarily due to increased depreciation
expense, maintenance expense and payroll related costs, partially offset by
increased consumption in the electric and water and wastewater sectors.
Increased income taxes also contributed to the decrease in net income.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
NET INCOME / NET INCOME PER COMMON SHARE/
----------------------------------------
COMPREHENSIVE INCOME (LOSS), NET OF TAX AND RECLASSIFICATION ADJUSTMENTS
------------------------------------------------------------------------
For the three months ended March 31,
-------------------------------------------
($ in thousands)
%
Increase/
2000 1999 (Decrease)
---- ---- ----------
Net income $ 7,326 $ 54,625 (87%)
Net income per common share $ .03 $ .21 (86%)
Other comprehensive income (loss),
net of tax and reclassification
adjustments $ (28,045) $ (14,118) N/A
</TABLE>
Net income and net income per share decreased $47.3 million, or 87% and
18(cent), or 86%, respectively, due to accelerated depreciation related to the
change in useful life of an operating system in the telecommunications sector,
increased ELI interest expense, $42.9 million, or 16(cent) per share, after tax
gain on the sale of our investment in Centennial Cellular Corp. in January 1999
and the 1999 non-recurring universal service fund revenue, partially offset by
decreased Y2K and separation expenses.
Other comprehensive income (loss), net of tax and reclassification adjustments
decreased $28 million during the three months ended March 31, 2000 primarily due
to increased unrealized losses on our investment portfolio. Other comprehensive
income (loss), net of tax and reclassification adjustments decreased $14.1
million during the three months ended March 31, 1999 primarily due to the
realization of the gain on the sale of our investment in Centennial Cellular
Corp. in January 1999, partially offset by increased unrealized gains on our
investment portfolio.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
----------------------------------------------------------
We are exposed to the impact of interest rate and market risks. In the normal
course of business, we employ established policies, procedures and internal
processes to manage our exposure to interest rate and market risks. Our
objective in managing our interest rate risk is to limit the impact of interest
rate changes on earnings and cash flows and to lower our overall borrowing
costs. To achieve these objectives, we maintain fixed rate debt on a majority of
our borrowings and refinance debt when advantageous. We maintain a portfolio of
investments consisting of both equity and debt financial instruments. Our equity
portfolio is comprised of investments in communications companies. Our bond
portfolio consists of government, corporate and municipal fixed-income
securities. We do not hold or issue derivative or other financial instruments
for trading purposes. We purchase monthly gas futures contracts to manage
well-defined commodity price fluctuations, caused by weather and other
unpredictable factors, associated with our commitments to deliver natural gas to
certain industrial customers at fixed prices. This derivative financial
instrument activity relates to the discontinued operations and is not material
to our consolidated financial position, results of operations or cash flows.
13
<PAGE>
PART II. OTHER INFORMATION
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
Item 1. Legal Proceedings
-----------------
In November 1995, our 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 us 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 our Demand Side Management program. In addition, the DPS
believed that we should have sought and received regulatory approvals prior to
construction of certain facilities in prior years. On June 16, 1997, the VPSB
ordered us to reduce our 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 then authorized by the
VPSB. In addition, the VPSB assessed statutory penalties totaling $60,000 and
placed us on regulatory probation for a period of at least five years. During
this probationary period, we could lose our franchise to operate in Vermont if
we violate 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, we filed an appeal in the Vermont Supreme Court challenging
certain of the penalties imposed by the VPSB. The appeal has been fully briefed
and argued and we are awaiting the Court's decision.
In August 1997, a lawsuit was filed in the United States District Court for the
District of Connecticut (Leventhal vs. Tow, et al.) against us and five of our
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 our Common Stock between
September 5, 1996 and July 11, 1997, inclusive. On February 9, 1998, the
plaintiffs filed an amended complaint. The complaint alleged that we 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
us, 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. We and the individual defendants believe the allegations are unfounded
and filed a motion to dismiss on March 27, 1998 and 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. The parties have entered into
a settlement stipulation which is subject to the District Court's approval.
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
us and three of our officers, one of whom is also a director, on behalf of all
purchasers of our Common Stock between May 6, 1996 and August 7, 1997,
inclusive. The complaint alleges that we 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 our
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. We 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 us on
July 24, 1998. Our motion to dismiss the amended complaint was filed on October
13, 1998 and 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, briefing has been completed and oral argument took place April 10,
2000.
In November 1998, a class action lawsuit was filed in state District Court for
Jefferson Parish, Louisiana, against us and our subsidiary LGS Natural Gas
Company. The lawsuit alleges that we 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. We believe that the allegations made in the
lawsuit are unfounded and we will vigorously defend our interests in both the
lawsuits and the related Commission investigation.
In addition, we are party to 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 our financial position, results of operations, or our
cash flows.
14
<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) Exhibits:
27 Financial data schedule for the periods ended March 31, 2000 and restated March 31, 1999.
b) Reports on Form 8-K:
We filed on Form 8-K dated February 15, 2000 under Item 5 "Other
Events" and Item 7 "Exhibits," a press release announcing that we
will sell all of our electric utility operations.
We filed on Form 8-K dated March 22, 2000 under Item 7 "Exhibits,"
a press release announcing financial results for the year ended
December 31, 1999 and certain operating data.
</TABLE>
15
<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: May 12, 2000
16
<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, 2000 AND 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
IN ADDITION, CITIZENS UTILITIES COMPANY AND SUBSIDIARIES' CONSOLIDATED
FINANCIAL INFORMATION HAS BEEN RESTATED FOR MARCH 31, 1999 AS A RESULT
OF THE DECISION TO DIVEST ITS PUBLIC UTILITY OPERATIONS.
</LEGEND>
<CIK> 0000020520
<NAME> CITIZENS UTILITIES COMPANY
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-2000 DEC-31-1999
<PERIOD-END> MAR-31-2000 MAR-31-1999
<BOOK-VALUE> PER-BOOK PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 2,946,976 2,731,971
<OTHER-PROPERTY-AND-INVEST> 546,652<F1> 430,354<F1>
<TOTAL-CURRENT-ASSETS> 291,815 248,030
<TOTAL-DEFERRED-CHARGES> 183,895<F2> 188,819<F2>
<OTHER-ASSETS> 136,817<F3> 179,955<F3>
<TOTAL-ASSETS> 5,758,465<F4> 5,313,453<F4>
<COMMON> 65,811 64,872
<CAPITAL-SURPLUS-PAID-IN> 1,589,621 1,557,278
<RETAINED-EARNINGS> 268,915 171,728
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,869,492 1,836,452
201,250<F5> 201,250<F5>
0 0
<LONG-TERM-DEBT-NET> 2,193,494 1,846,442
<SHORT-TERM-NOTES> 0 0
<LONG-TERM-NOTES-PAYABLE> 0 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0 0
<LONG-TERM-DEBT-CURRENT-PORT> 33,005 8,352
0 0
<CAPITAL-LEASE-OBLIGATIONS> 0 0
<LEASES-CURRENT> 0 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,461,224<F6> 1,420,957<F6>
<TOT-CAPITALIZATION-AND-LIAB> 5,758,465<F6> 5,313,453<F6>
<GROSS-OPERATING-REVENUE> 282,455 264,750
<INCOME-TAX-EXPENSE> (1,253) 26,606
<OTHER-OPERATING-EXPENSES> 27,003<F7> 34,395<F7>
<TOTAL-OPERATING-EXPENSES> 269,663 257,618
<OPERATING-INCOME-LOSS> 12,792 7,132
<OTHER-INCOME-NET> 5,265 75,521
<INCOME-BEFORE-INTEREST-EXPEN> 24,342 88,646
<TOTAL-INTEREST-EXPENSE> 29,164 19,098
<NET-INCOME> 7,326<F8> 54,625<F8>
1,552<F5> 1,552<F5>
<EARNINGS-AVAILABLE-FOR-COMM> 7,326<F8> 54,625<F8>
<COMMON-STOCK-DIVIDENDS> 0 0
<TOTAL-INTEREST-ON-BONDS> 0 0
<CASH-FLOW-OPERATIONS> 86,283 225,235
<EPS-BASIC> .03<F9> .21<F9>
<EPS-DILUTED> .03<F9> .21<F9>
<FN>
<F1>REPRESENTS INVESTMENT FUNDS.
<F2>REPRESENTS REGULATORY ASSETS.
<F3>DEFERRED DEBITS AND OTHER ASSETS.
<F4>TOTAL ASSETS INCLUDE $1,652,310 AND $1,534,324 FOR MARCH 31, 2000 AND 1999,
RESPECTIVELY, OF ASSETS OF 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 $394,861 AND $266,930 FOR MARCH 31, 2000 AND 1999, RESPECTIVELY, OF
LIABILITIES OF DISCONTINUED OPERATIONS.
<F7>REPRESENTS NETWORK ACCESS EXPENSES.
<F8>NET INCOME INCLUDES $12,447 AND $13,235 FOR MARCH 31, 2000 AND 1999,
RESPECTIVELY, OF INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX.
<F9>EPS BASIC AND DILUTED INCLUDES $.05 AND $.05, RESPECTIVELY, OF INCOME FROM
DISCONTINUED OPERATIONS PER COMMON SHARE.
</FN>
</TABLE>
