CITIZENS COMMUNICATIONS 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, 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 September 30, 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 COMMUNICATIONS 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
------------------------------
No change since last report
--------------------------------------------------------------------------------
(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 31, 2000 was 265,211,459.
<PAGE>
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page No.
Part I. Financial Information
<S> <C>
Consolidated Balance Sheets at September 30, 2000 and December 31, 1999 2
Consolidated Statements of Income and Comprehensive Income (Loss) for the Three Months Ended
September 30, 2000 and 1999 3
Consolidated Statements of Income and Comprehensive Income (Loss) for the Nine Months Ended
September 30, 2000 and 1999 4
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial Condition and Results of Operations 13
Quantitative and Qualitative Disclosures about Market Risk 23
Part II. Other Information
Legal Proceedings 25
Exhibits and Reports on Form 8-K 26
Signatures 27
</TABLE>
1
<PAGE>
PART I. FINANCIAL INFORMATION
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
September 30, 2000 December 31,1999
ASSETS ------------------ ----------------
Current assets:
<S> <C> <C>
Cash $ 45,963 $ 37,141
Accounts receivable, net 220,257 241,519
Short-term investments 224,655 -
Other 37,954 29,964
Net assets held for sale 498,290 552,771
---------- -----------
Total current assets 1,027,119 861,395
---------- -----------
Property, plant and equipment 4,972,531 4,458,654
Less accumulated depreciation 1,717,411 1,569,936
---------- -----------
Net property, plant and equipment 3,255,120 2,888,718
Investments 147,457 591,386
Excess of cost over net assets acquired 466,358 -
Regulatory assets 181,800 184,942
Deferred debits and other assets 172,301 141,274
Assets of discontinued operations 1,169,898 1,065,701
---------- ----------
Total assets $ 6,420,053 $ 5,733,416
========== ==========
LIABILITIES AND EQUITY
Current liabilities:
Long-term debt due within one year $ 84,187 $ 31,156
Accounts payable and other current liabilities 306,803 435,856
---------- ----------
Total current liabilities 390,990 467,012
Deferred income taxes 433,993 460,208
Customer advances for construction and contributions in aid of construction 190,395 179,831
Deferred credits and other liabilities 70,845 87,668
Regulatory liabilities 25,251 27,000
Long-term debt 2,925,680 2,107,460
Liabilities of discontinued operations 332,545 272,327
---------- ---------
Total liabilities 4,369,699 3,601,506
Company Obligated Mandatorily Redeemable Convertible Preferred Securities* 201,250 201,250
Minority interest in subsidiary - 11,112
Shareholders' equity:
Common stock issued, $.25 par value 66,223 65,519
Additional paid-in capital 1,613,693 1,577,903
Retained earnings 273,393 261,590
Accumulated other comprehensive income (loss) (54,174) 14,923
Treasury stock (50,031) (387)
---------- ---------
Total shareholders' equity 1,849,104 1,919,548
---------- ---------
Total liabilities and shareholders' equity $ 6,420,053 $ 5,733,416
========== =========
</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 Consolidated Financial
Statements.
2
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(In thousands, except per-share amounts)
<TABLE>
<CAPTION>
2000 1999
------ ------
<S> <C> <C>
Revenue $ 389,941 $ 337,091
Operating Expenses:
Network access 25,130 20,366
Gas purchased 48,182 31,152
Depreciation and amortization 89,130 69,715
Other operating expenses 180,203 197,315
Acquisition assimilation expense 12,539 -
---------- ----------
Total operating expenses 355,184 318,548
Income from operations 34,757 18,543
Investment and other income, net 5,435 9,703
Minority interest - 5,301
Interest expense 45,025 27,319
---------- ----------
Income (loss) before income taxes, dividends on convertible
preferred securities and discontinued operations (4,833) 6,228
Income tax expense (benefit) (1,170) 1,041
---------- ----------
Income (loss) before dividends on convertible preferred securities
and discontinued operations (3,663) 5,187
Dividends on convertible preferred securities, net of income tax benefit 1,553 1,553
---------- ----------
Income (loss) before discontinued operations (5,216) 3,634
Income from discontinued operations, net of tax 6,683 8,272
---------- ----------
Net income $ 1,467 $ 11,906
========== ==========
Other comprehensive loss, net of tax and reclassification adjustments (28,704) (17)
---------- ----------
Total comprehensive income (loss) $ (27,237) $ 11,889
========== ==========
Income (loss) before discontinued operations per common share:
Basic $ (0.02) $ 0.01
Diluted $ (0.02) $ 0.01
Income from discontinued operations per common share:
Basic $ 0.03 $ 0.03
Diluted $ 0.02 $ 0.03
Net income per common share:
Basic $ 0.01 $ 0.05
Diluted $ 0.01 $ 0.05
</TABLE>
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
3
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(In thousands, except per-share amounts)
<TABLE>
<CAPTION>
2000 1999
------ -------
<S> <C> <C>
Revenue $ 1,150,140 $ 1,048,698
Operating Expenses:
Network access 81,926 84,945
Gas purchased 148,238 116,706
Depreciation and amortization 258,677 202,265
Other operating expenses 543,102 580,006
Acquisition assimilation expense 24,130 -
---------- ----------
Total operating expenses 1,056,073 983,922
Income from operations 94,067 64,776
Investment and other income, net 15,086 91,016
Minority interest 12,222 16,987
Interest expense 116,288 74,560
---------- ----------
Income before income taxes, dividends on convertible
preferred securities and discontinued operations 5,087 98,219
Income tax expense 2,298 32,737
---------- ----------
Income before dividends on convertible preferred securities
and discontinued operations 2,789 65,482
Dividends on convertible preferred securities, net of income tax benefit 4,657 4,657
---------- ----------
Income (loss) before discontinued operations (1,868) 60,825
Income from discontinued operations, net of tax 13,672 13,459
---------- ----------
Net income $ 11,804 $ 74,284
========== ==========
Other comprehensive loss, net of tax and reclassification adjustments (69,097) (14,428)
---------- ----------
Total comprehensive income (loss) $ (57,293) $ 59,856
========== ==========
Income (loss) before discontinued operations per common share:
Basic $ (0.01) $ 0.23
Diluted $ (0.01) $ 0.23
Income from discontinued operations per common share:
Basic $ 0.05 $ 0.05
Diluted $ 0.05 $ 0.05
Net income per common share:
Basic $ 0.04 $ 0.29
Diluted $ 0.04 $ 0.28
</TABLE>
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
4
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(In thousands)
<TABLE>
<CAPTION>
2000 1999
------ -----
<S> <C> <C>
Net cash provided by continuing operating activities $ 269,141 $ 354,784
Cash flows from investing activities:
Capital expenditures (386,893) (412,764)
Securities purchased (52,102) (792,706)
Securities sold 129,396 757,028
Securities matured 10,400 2,035
Acquisitions (644,300) -
ELI share purchases (38,748) -
Other (469) (2,847)
--------- ---------
Net cash used by investing activities (982,716) (449,254)
Cash flows from financing activities:
Short-term debt repayments - (110,000)
Long-term debt borrowings 822,204 315,053
Long-term debt principal payments (34,008) (90,021)
Issuance of common stock 19,504 6,742
Common stock buybacks (49,209) (411)
Other 11,668 3,699
--------- ---------
Net cash provided by financing activities 770,159 125,062
Cash used by discontinued operations (47,762) (26,644)
Increase in cash 8,822 3,948
Cash at January 1, 37,141 31,922
--------- ---------
Cash at September 30, $ 45,963 $ 35,870
========= =========
Supplemental cash flow information:
Non-cash increase in capital lease asset $ 98,555 $ 45,195
</TABLE>
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
5
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies:
------------------------------------------
(a) Basis of Presentation:
Citizens Communications 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" with the exception of our
recent acquisitions from GTE and US West (see Note 2). SFAS No. 71
requires regulated entities to record regulatory assets and
liabilities as a result of actions of regulators. We are evaluating
the applicability of SFAS No. 71 to the newly acquired operations.
(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).
(d) Minority Interest and Minority Interest in Subsidiary:
Minority interest, as presented on the statements of income,
represents the minority's share of Electric Lightwave, Inc.'s (ELI)
net loss for the periods being reported on. Minority interest in
subsidiary, as presented on the balance sheet at December 31, 1999,
represents the minority's share of ELI's equity capital. Since ELI's
public offering, we have been recording minority interest on our
income statement and reducing minority interest on our balance sheet
by the amount of the minority interests' share of ELI's losses. As of
June 30, 2000, the minority interest on the balance sheet had been
reduced to zero, therefore, from that point going forward, we
discontinued recording minority interest income on our income
statement as there is no obligation for the minority interests to
provide additional funding for ELI. Therefore, we are recording ELI's
entire loss in our consolidated results. When ELI becomes profitable,
we will recognize ELI's earnings in full until the cumulative losses
of the minority interests previously absorbed by us are recovered.
After such recovery, we will begin to record minority interest on our
income statement and minority interest in subsidiary on our balance
sheet based on the percentage of ELI owned by third parties.
(2) Acquisitions:
------------
From May 27, 1999 through July 12, 2000 we have entered into several
agreements to acquire approximately 2,011,000 telephone access lines
(as of December 31, 1999) for approximately $6,471,000,000 in cash.
These transactions have been/will be accounted for using the purchase
method of accounting and the results of operations have been/will be
included in the accompanying financial statements from the dates of
acquisition of each property. These agreements are described as
follows:
On May 27, September 21, and December 16, 1999, we announced that we
had entered into definitive agreements to purchase from Verizon
Communications (formerly GTE Corp.) 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. The acquisitions are subject to various state and federal
regulatory approvals. On June 30, 2000, we closed on the Nebraska
purchase of approximately 61,000 access lines for $205,000,000 in
cash. On August 31, 2000, we closed on the Minnesota purchase of
approximately 133,000 access lines for $439,000,000 in cash. We expect
that the remainder of these transactions will close on a
state-by-state basis throughout the next 9 months.
On June 16, 1999, we announced that we had entered into a series of
definitive agreements to purchase from Qwest Communications (formerly
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 and the assumption of certain liabilities. On October 31, 2000,
we closed on the North Dakota purchase of approximately 17,000 access
lines for $38,000,000 in cash. We expect that the remainder of these
acquisitions, which are subject to various state and federal
regulatory approvals, will occur on a state-by-state basis throughout
the next 9 months.
6
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On July 12, 2000, we announced that we had entered into a definitive
agreement to purchase from Global Crossing Ltd. 100% of the stock of
Frontier Corp. which holds approximately 1,100,000 telephone access
lines in Alabama, Georgia, Illinois, Indiana, Iowa, Michigan,
Minnesota, Mississippi, New York, Pennsylvania and Wisconsin for
approximately $3,650,000,000 in cash. We expect that this transaction,
which is subject to various state and federal regulatory approvals,
will be completed in the first half of 2001.
We have recorded acquired assets from our recent acquisitions from
Verizon Communications (formerly GTE Corp.) at their historical
carrying values and have recorded the excess of cost over such amounts
as excess of cost over net assets acquired. We are in the process of
fully evaluating the assets acquired and, as a result, the purchase
price allocation among the tangible and intangible assets acquired,
and their related useful lives may change. The excess of cost over net
assets acquired is being amortized over an estimated life of 15 years.
The following pro forma financial information for the three and nine
months ended September 30, 2000 and 1999, presents the combined
results of our operations and the GTE Nebraska and GTE Minnesota
properties acquired on June 30, 2000 and August 31, 2000,
respectively, as if the acquisitions had occurred at the beginning of
the respective periods. The pro forma information does not necessarily
reflect the results of operations that would have occurred had we
constituted a single entity during such periods.
<TABLE>
<CAPTION>
($ in thousands, except per share amounts)
For the three months ended September 30, For the nine months ended September 30,
------------------------------------------- ---------------------------------------
2000 1999 2000 1999
---------------- --------------- ---------------- -------------
<S> <C> <C> <C> <C>
Revenue $ 402,900 $ 368,022 $ 1,225,917 $ 1,142,308
Income (loss) from continuing
operations (11,535) (6,519) (18,910) 44,404
Net income (loss) (4,527) 1,923 (4,896) 58,033
Income (loss) from continuing
operations per share $ (0.04) $ (0.03) $ (0.07) $ 0.17
Net income (loss) per share $ (0.02) $ 0.01 $ (0.02) $ 0.22
</TABLE>
7
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) Discontinued Operations and Net Assets Held for Sale:
----------------------------------------------------
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 these
public services businesses will be used to partially fund the telephone
access line purchases discussed in Note 2.
We have signed agreements to date for the sale of all our water and
wastewater operations, all our electric operations and one of our natural
gas operations. The proceeds from the agreements signed to date will
include approximately $1,745,000,000 in cash plus the assumption of certain
liabilities. These agreements are described as follows:
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 in cash plus the assumption of certain liabilities. These
transactions are expected to begin closing in the fourth quarter of
2000 following regulatory approvals.
On February 15, 2000, we announced that we had agreed to sell our
electric utility operations for $535,000,000 in cash plus the
assumption of certain liabilities. The Arizona and Vermont electric
divisions are under contract to be sold to Cap Rock Energy Corp. To
date, Cap Rock has failed to raise the required financing and obtain
the required regulatory approval necessary to meet its obligations
under the contract for sale. We are currently evaluating our
alternatives which may include a restructuring of the agreement or
terminating the Cap Rock Energy Corp. contract for sale of the Vermont
and Arizona electric divisions and pursuing the disposition with an
alternative buyer. There is no assurance that the sale to Cap Rock
will be completed or that we will reach definitive terms with an
alternate buyer. In August 2000, the Public Utilities Commission of
the state of Hawaii denied the initial application requesting approval
of the purchase of our Kauai electric division by the Kauai Island
Electric Co-Op. Consideration is being given to a variety of options,
including the filing of a request for reconsideration of the decision,
which may include the filing of a new application.
On April 13, 2000, we announced that we had agreed to sell our
Louisiana Gas operations to Atmos Energy Corporation for $375,000,000
in cash plus the assumption of certain liabilities. This transaction
is expected to close in the first quarter of 2001 following regulatory
approvals.
Discontinued operations in the consolidated statements of income and
comprehensive income (loss) reflect the results of operations of the
electric and water/wastewater 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. The debt presented in liabilities of
discontinued operations represents only debt to be transferred pursuant to
the respective asset sale agreements.
Initially, we accounted for the planned divestiture of all the public
services properties as discontinued operations. Accounting Principles Board
Opinion No. 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions," states a plan of
disposal of a business segment is expected to be carried out within a
period of one year. As of September 30, 2000, we have not yet entered into
agreements to sell our entire gas segment. Consequently, we reclassified
all of our gas assets and related liabilities to "net assets held for sale"
on the balance sheet in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," and reclassified the results of these operations into their original
income statement captions as part of continuing operations. We have
restated our prior periods to conform to the current presentation.
Additionally, as a result of their classification as held for sale, we
ceased to record depreciation expense on these assets effective October 1,
2000. We are continuing to actively pursue a buyer for those gas operations
for which we do not yet have signed agreements.
8
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summarized financial information for the electric and water/wastewater
operations (discontinued operations) is set forth below:
<TABLE>
<CAPTION>
($ in thousands) September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
Current assets $ 50,726 $ 44,654
Net property, plant and equipment 1,022,205 961,739
Other assets 96,967 59,308
----------- -----------
Total assets $ 1,169,898 $ 1,065,701
=========== ===========
Current liabilities $ 69,715 $ 17,976
Long-term debt 133,848 133,226
Other liabilities 128,982 121,125
----------- -----------
Total liabilities $ 332,545 $ 272,327
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
($ in thousands) For the three months ended September 30, For the nine months ended September 30,
---------------------------------------- ---------------------------------------
2000 1999 2000 1999
------- ------- ------ ------
<S> <C> <C> <C> <C>
Revenue $ 92,041 $ 88,557 $ 249,791 $ 229,311
Operating income $ 17,402 $ 18,655 $ 40,819 $ 40,165
Income taxes $ 3,382 $ 4,363 $ 6,722 $ 7,786
Net income $ 6,683 $ 8,272 $ 13,672 $ 13,459
</TABLE>
We have classified certain balance sheet items as discontinued operations
in the September 30, 2000 balance sheet that were previously classified as
continuing operations in the December 31, 1999 balance sheet as a result of
the finalization of certain divestiture agreements and updates to our
estimates.
Summarized financial information for the gas operations (net assets held
for sale) is set forth below:
<TABLE>
<CAPTION>
($ in thousands) September 30, 2000 December 31, 1999
--------------------- ---------------------
<S> <C> <C>
Current assets $ 61,464 $ 64,596
Net property, plant and equipment 514,908 498,219
Other assets 21,676 27,898
------------- ----------
Total assets held for sale 598,048 590,713
Current liabilities 57,909 64
Long-term debt 548 591
Other liabilities 41,301 37,287
------------- ----------
Total liabilities related to assets held for sale 99,758 37,942
------------- ----------
Net assets held for sale $ 498,290 $ 552,771
============= ==========
</TABLE>
9
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 resulted in the reduction of 49
corporate employees. All affected employees were communicated with in the
early part of November 1999.
As of September 30, 2000, approximately $4,049,000 of the costs had been
paid and 39 employees were terminated. The remaining employees will be
terminated in the fourth quarter of 2000. The remaining accrual of
approximately $1,711,000 is included in other current liabilities. These
costs are expected to be paid during the fourth quarter of 2000.
(5) Net Income Per Common Share:
---------------------------
The reconciliation of the net income per common share calculation for the
three and nine months ended September 30, 2000 and 1999, respectively, is
as follows:
<TABLE>
<CAPTION>
(In thousands, except per share amounts) For the three months ended September 30,
-----------------------------------------------------------------------
2000 1999
--------------------------------- ---------------------------------
Income Shares Per Share Income Shares Per Share
-------- ------ --------- ------- ------ ---------
Net income per common share:
<S> <C> <C> <C> <C> <C> <C>
Basic $ 1,467 264,749 $ 0.01 $ 11,906 260,607 $ 0.05
Effect of dilutive options - 6,028 - - 3,180 -
Diluted $ 1,467 270,777 $ 0.01 $ 11,906 263,787 $ 0.05
(In thousands, except per share amounts) For the nine months ended September 30,
-----------------------------------------------------------------------
2000 1999
---------------------------------- -----------------------------------
Income Shares Per Share Income Shares Per Share
-------- ------- ----------- --------- -------- ----------
Net income per common share:
Basic $ 11,804 263,725 $ 0.04 $ 74,284 260,118 $ 0.29
Effect of dilutive options - 4,317 - - 2,419 -
Diluted $ 11,804 268,042 $ 0.04 $ 74,284 262,537 $ 0.28
</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 September 30, 2000, we have 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 160,000 potentially dilutive
stock options at a range of $16.69 to $18.53 per share that are not
included in the calculation as they are antidilutive.
(6) Segment Information:
-------------------
We operate in two segments, telecommunications and ELI. Our gas segment,
which is intended to be sold, was previously reported as discontinued
operations (see Note 3). The telecommunications segment provides both
regulated and competitive communications services to residential, business
and wholesale customers. ELI is a facilities based integrated
communications provider offering a broad range of communications services
throughout the United States. We own 86% of ELI and we guarantee all of
ELI's long-term debt, one of its capital leases and one of its operating
leases.
EBITDA is earnings (operating income (loss)) before interest, income taxes,
depreciation and amortization. EBITDA is a measure commonly used to analyze
companies on the basis of operating performance. It is not a measure of
financial performance under generally accepted accounting principles and
should not be considered as an alternative to net income as a measure of
performance nor as an alternative to cash flow as a measure of liquidity
and may not be comparable to similarly titled measures of other companies.
10
<PAGE>
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands) For the three months ended September 30, 2000
------------------------------------------------------------------------------------
Consolidated
Telecommunications ELI Gas Eliminations Total
------------------ -------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 246,767 $ 63,610 $ 80,333 $ (769) (1) $ 389,941
Depreciation 65,858 16,306 6,708 258 (2) 89,130
Operating Income (Loss) 45,106 (11,530) 1,210 (29) (2,3) 34,757
EBITDA 110,964 4,776 7,918 229 (3) 123,887
($ in thousands) For the three months ended September 30, 1999
-------------------------------------------------------------------------------------
Consolidatied
Telecommunications ELI Gas Eliminations Total
------------------ -------- -------- ------------ -------------
Revenue $ 223,662 $ 48,602 $ 65,574 $ (747) (1) $ 337,091
Depreciation 54,821 9,807 5,087 - 69,715
Operating Income (Loss) 39,354 (18,673) (2,453) 315 (3) 18,543
EBITDA 94,175 (8,866) 2,634 315 (3) 88,258
($ in thousands) For the nine months ended September 30, 2000
-------------------------------------------------------------------------------------
Consolidated
Telecommunications ELI Gas Eliminations Total
------------------ --------- --------- ------------ --------------
Revenue $ 700,475 $ 181,008 $ 270,753 $ (2,096) (1) $ 1,150,140
Depreciation 195,628 43,782 19,076 191 (2) 258,677
Operating Income (Loss) 116,462 (47,106) 24,160 551 (2,3) 94,067
EBITDA 312,090 (3,324) 43,236 742 (3) 352,744
($ in thousands) For the nine months ended September 30, 1999
-------------------------------------------------------------------------------------
Consolidated
Telecommunications ELI Gas Eliminations Total
------------------ --------- --------- ------------ --------------
Revenue $ 679,515 $ 132,913 $ 238,485 $ (2,215) (1) $ 1,048,698
Depreciation 161,325 24,951 15,989 - 202,265
Operating Income (Loss) 115,279 (73,313) 21,677 1,133 (3) 64,776
EBITDA 276,604 (48,362) 37,666 1,133 (3) 267,041
1 Represents revenue received by ELI from our telecommunications operations.
2 Represents amortization of the capitalized portion of intercompany interest related to our guarantees of ELI debt and
leases and amortization of goodwill related to our purchase of ELI stock (see Note 8).
3 Represents the administrative services fee charged to ELI pursuant to the management services agreement between the Company
and ELI.
</TABLE>
11
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) Supplemental Segment Information:
---------------------------------
Supplemental segment income statement information for the nine months ended
September 30, 2000 is as follows:
<TABLE>
<CAPTION>
For the nine months ended September 30, 2000
------------------------------------------------------------------------------------
( $ in thousands) Citizens Communciations
before ELI, Gas, and Discontinued Consolidated
Discontinued Operations ELI Gas Operations Eliminations Total
----------------------- --------- ---------- ------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 700,475 $ 181,008 $ 270,753 $ - $ (2,096) $ 1,150,140
Operating Expenses:
Network access 27,211 56,811 - - (2,096) 81,926
Gas purchased - - 148,238 - - 148,238
Depreciation and amortization 195,628 43,782 19,076 - 191 258,677
Other operating expenses 337,044 127,521 79,279 - (742) 543,102
Acquisition assimilation expense 24,130 - - - - 24,130
------------ -------- --------- --------- ---------- -----------
Total operating expenses 584,013 228,114 246,593 - (2,647) 1,056,073
------------ -------- --------- --------- ---------- -----------
Income (loss) from operations 116,462 (47,106) 24,160 - 551 94,067
Investment and other income, net 16,898 (40) (1,029) - (743) 15,086
Minority interest 12,222 - - - - 12,222
Interest expense 48,281 54,603 13,404 - - 116,288
----------- -------- --------- -------- ----------- -----------
Income (loss) before income taxes, dividends on convertible
preferred securities and discontinued operations 97,301 (101,749) 9,727 - (192) 5,087
Income tax expense (benefit) (2,035) 940 3,393 - - 2,298
----------- -------- -------- -------- ----------- -----------
Income (loss) before dividends on convertible
preferred securities and discontinued operations 99,336 (102,689) 6,334 - (192) 2,789
Dividends on convertible preferred securities,net
of income tax benefit 4,657 - - - - 4,657
----------- -------- -------- -------- ----------- -----------
Income (loss) before discontinued operations 94,679 (102,689) 6,334 - (192) (1,868)
Income from discontinued operations, net of tax - - - 13,672 - 13,672
----------- -------- -------- -------- ----------- -----------
Net income (loss) $ 94,679 $(102,689) $ 6,334 $ 13,672 $ (192) $ 11,804
=========== ======== ======== ======== =========== ===========
</TABLE>
(8) Capital Stock:
-------------
In December 1999, our Board of Directors authorized the purchase, from time
to time, of up to $100,000,000 worth of shares of our common stock. This
share purchase program was completed in April 2000 and resulted in the
acquisition or contract to acquire approximately 6,165,000 shares of our
common stock. Of those shares, 2,500,000 shares were purchased for
approximately $40,959,000 in cash and we entered into an equity forward
contract for the acquisition of the remaining 3,665,000 shares.
In April 2000, our Board of Directors authorized the purchase, from time to
time, of up to an additional $100,000,000 worth of shares of our common
stock. This share purchase program was completed in July 2000 and resulted
in the acquisition or contract to acquire approximately 5,927,000 shares of
our common stock. Of these shares, 452,000 shares were purchased for
approximately $8,250,000 in cash and we entered into an equity forward
contract for the acquisition of the remaining 5,475,000 shares.
In addition to our share purchase programs described above, in April 2000,
our Board of Directors authorized the purchase, from time to time, of up to
$25,000,000 worth of shares of Class A common stock of ELI, our 86% owned
subsidiary, on the open market or in negotiated transactions. This ELI
share purchase program was completed in August 2000 and resulted in the
acquisition of approximately 1,288,000 shares of ELI common stock for
approximately $25,000,000 in cash. In August 2000, our Board of Directors
authorized the purchase, from time to time, of up to an additional
1,000,000 shares of ELI on the open market or in negotiated transactions.
The second ELI share purchase program was completed in September 2000 and
resulted in the acquisition of approximately 1,000,000 shares of ELI common
stock for approximately $13,748,000 in cash.
12
<PAGE>
PART II. OTHER INFORMATION
CITIZENS COMMUNICATIONS 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. Forward-looking
statements (including oral representations) are only predictions or statements
of current plans, which we review continuously. 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 included in this report and as presented in our
1999 Annual Report on Form 10-K. 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 nine months ended
September 30, 2000, we used cash flow from operations and proceeds from net
financings to fund capital expenditures. Funds requisitioned from the Industrial
Development Revenue Bond construction fund trust accounts and advances and
contributions from parties desiring utility services were used to partially fund
the construction of certain public services plant.
In June 2000, we arranged for the issuance of $19.6 million of 2000 Series
special purpose revenue bonds as money market bonds with an initial interest
rate of 4.6% and a maturity date of December 1, 2020. The proceeds were used to
fund and/or prefund expenditures for construction, extension, improvement and
purchase of facilities of the gas division in Hawaii.
In June and August 2000, we completed the purchase of approximately 61,000 and
133,000 access lines in Nebraska and Minnesota, respectively, from Verizon
Communications (formerly GTE Corp.). These transactions totaled approximately
$205 million and $439 million, respectively, and were funded from commercial
paper issuances and proceeds from sales of investments.
In August and October 2000, one of our subsidiaries, Citizens Utilities Rural
Company, was advanced $2.7 million and $.3 million, respectively, under its
Rural Utilities Services Loan Contract. The initial interest rate on the
advances was 5.78% and they have an ultimate maturity date of November 1, 2016.
We have available lines of credit with financial institutions in the amounts of
$5.7 billion with associated facility fees of 0.10% per annum (based our current
long term debt rating) and $450 million with no associated facility fees. These
lines of credit expire on October 26, 2001 and provide us with extension
options. These credit facilities are in addition to credit commitments under
which the Company may borrow up to $200 million, which expire on December 16,
2003. There were no amounts outstanding under these commitments at September 30,
2000. ELI has committed revolving lines of credit with commercial banks under
which it borrowed $400 million and as of September 30, 2000, no further amounts
were available. We have guaranteed all of ELI's obligations under these
revolving lines of credit. In addition we have agreed to fund, on market terms
and conditions, the operating and capital needs of ELI through 2001.
In October 2000, we completed the purchase of approximately 17,000 access lines
in North Dakota from Qwest Communications (formerly US West). This transaction
totaled approximately $38 million and was funded from commercial paper
issuances.
13
<PAGE>
PART II. OTHER INFORMATION
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
Net capital expenditures, by sector, have been and are budgeted as follows:
Actual
($ in thousands) Budget Year-to-Date
2000 September 30, 2000
------------------- --------------------
Communications $ 396,800 $ 249,794
ELI (1) 200,000 192,797
Gas 48,700 35,211
General 3,000 222
------------------- --------------------
648,500 478,024
Discontinued operations (2) 121,200 93,336
------------------- --------------------
$ 769,700 $ 571,360
=================== ====================
(1) Includes approximately $38,000,000 and $98,600,000 in budgeted and actual,
respectively, of non-cash capital lease additions.
(2) The 2000 budget assumes full year ownership of discontinued operations and
includes approximately $41,900,000 for a special water pipeline project.
Acquisitions
------------
From May 27, 1999 through July 12, 2000 we have entered into several agreements
to acquire approximately 2,011,000 telephone access lines (as of December 31,
1999) for approximately $6,471,000,000 in cash. These transactions have
been/will be accounted for using the purchase method of accounting and the
results of operations have been/will be included in the accompanying financial
statements from the dates of acquisition of each property. These agreements are
described as follows:
On May 27, September 21, and December 16, 1999, we announced that we had
entered into definitive agreements to purchase from Verizon Communications
(formerly GTE Corp.) 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. The acquisitions are subject to
various state and federal regulatory approvals. On June 30, 2000, we closed
on the Nebraska purchase of approximately 61,000 access lines for
$205,000,000 in cash. On August 31, 2000, we closed on the Minnesota
purchase of approximately 133,000 access lines for $439,000,000 in cash. We
expect that the remainder of these transactions will close on a
state-by-state basis throughout the next 9 months.
On June 16, 1999, we announced that we had entered into a series of
definitive agreements to purchase from Qwest Communications (formerly 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 and the
assumption of certain liabilities. On October 31, 2000, we closed on the
North Dakota purchase of approximately 17,000 access lines for $38,000,000
in cash. We expect that the remainder of these acquisitions, which are
subject to various state and federal regulatory approvals, will occur on a
state-by-state basis throughout the next 9 months.
On July 12, 2000, we announced that we had entered into a definitive
agreement to purchase from Global Crossing Ltd. 100% of the stock of
Frontier Corp. which holds approximately 1,100,000 telephone access lines
in Alabama, Georgia, Illinois, Indiana, Iowa, Michigan, Minnesota,
Mississippi, New York, Pennsylvania and Wisconsin for approximately
$3,650,000,000 in cash. We expect that this transaction, which is subject
to various state and federal regulatory approvals, will be completed in the
first half of 2001.
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, the proceeds from the divestiture of our public
services businesses, direct drawdowns from certain of the credit facilities and
issuances of debt and equity securities.
14
<PAGE>
PART II. OTHER INFORMATION
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
Divestitures
------------
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 these public services
businesses will be used to partially fund the telephone access line purchases
discussed above.
We have signed agreements to date for the sale of all our water and wastewater
operations, all our electric operations and one of our natural gas operations.
The proceeds from the agreements signed to date will include approximately
$1,745,000,000 in cash plus the assumption of certain liabilities. These
agreements are described as follows:
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 in
cash plus the assumption of certain liabilities. These transactions are
expected to begin closing in the fourth quarter of 2000 following
regulatory approvals.
On February 15, 2000, we announced that we had agreed to sell our electric
utility operations for $535,000,000 in cash plus the assumption of certain
liabilities. The Arizona and Vermont electric divisions are under contract
to be sold to Cap Rock Energy Corp. To date, Cap Rock has failed to raise
the required financing and obtain the required regulatory approval
necessary to meet its obligations under the contract for sale. We are
currently evaluating our alternatives which may include a restructuring of
the agreement or terminating the Cap Rock Energy Corp. contract for sale of
the Vermont and Arizona electric divisions and pursuing the disposition
with an alternative buyer. There is no assurance that the sale to Cap Rock
will be completed or that we will reach definitive terms with an alternate
buyer. In August 2000, the Public Utilities Commission of the state of
Hawaii denied the initial application requesting approval of the purchase
of our Kauai electric division by the Kauai Island Electric Co-Op.
Consideration is being given to a variety of options, including the filing
of a request for reconsideration of the decision, which may include the
filing of a new application.
On April 13, 2000, we announced that we had agreed to sell our Louisiana
Gas operations to Atmos Energy Corporation for $375,000,000 in cash plus
the assumption of certain liabilities. This transaction is expected to
close in the first quarter of 2001 following regulatory approvals.
Discontinued operations in the consolidated statements of income and
comprehensive income (loss) reflect the results of operations of the electric
and water/wastewater 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. The
debt presented in liabilities of discontinued operations represents only debt to
be transferred pursuant to the respective asset sale agreements.
Initially, we accounted for the planned divestiture of all the public services
properties as discontinued operations. Accounting Principles Board Opinion No.
30, "Reporting the Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," states a plan of disposal of a business segment is
expected to be carried out within a period of one year. As of September 30,
2000, we have not yet entered into agreements to sell our entire gas segment.
Consequently, we reclassified all of our gas assets and related liabilities to
"net assets held for sale" on the balance sheet in accordance with SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," and reclassified the results of these operations into their
original income statement captions as part of continuing operations. We have
restated our prior periods to conform to the current presentation. Additionally,
as a result of their classification as held for sale, we ceased to record
depreciation expense on these assets effective October 1, 2000. We are
continuing to actively pursue a buyer for those gas operations for which we do
not yet have signed agreements.
Share Purchase Program
----------------------
In December 1999, our Board of Directors authorized the purchase, from time to
time, of up to $100,000,000 worth of shares of our common stock. This share
purchase program was completed in early April 2000 and resulted in the
acquisition or contract to acquire approximately 6,165,000 shares of our common
stock. Of those shares, 2,500,000 shares were purchased for approximately
$40,959,000 in cash and we entered into an equity forward contract for the
acquisition of the remaining 3,665,000 shares.
15
<PAGE>
PART II. OTHER INFORMATION
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
In April 2000, our Board of Directors authorized the purchase, from time to
time, of up to an additional $100,000,000 worth of shares of our common stock.
This share purchase program was completed in July 2000 and resulted in the
acquisition or contract to acquire approximately 5,927,000 shares of our common
stock. Of these shares, 452,000 shares were purchased for approximately
$8,250,000 in cash and we entered into an equity forward contract for the
acquisition of the remaining 5,475,000 shares.
In addition to our share purchase programs described above, in April 2000, our
Board of Directors authorized the purchase, from time to time, of up to
$25,000,000 worth of shares of Class A common stock of ELI, our 86% owned
subsidiary, on the open market or in negotiated transactions. This ELI share
purchase program was completed in August 2000 and resulted in the acquisition of
approximately 1,288,000 shares of ELI common stock for approximately $25,000,000
in cash. In August 2000, our Board of Directors authorized the purchase, from
time to time, of up to an additional 1,000,000 shares of ELI on the open market
or in negotiated transactions. The second ELI share purchase program was
completed in September 2000 and resulted in the acquisition of approximately
1,000,000 shares of ELI common stock for approximately $13,748,000 in cash.
New Accounting Pronouncement
----------------------------
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". This
statement establishes accounting and reporting standards for derivative
instruments and hedging activities and, as amended, is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. The statement requires
balance sheet recognition of derivatives as assets or liabilities measured at
fair value. Accounting for gains and losses resulting from changes in the values
of derivatives is dependent on the use of the derivative and whether it
qualifies for hedge accounting. Management does not anticipate that the
application of SFAS 133 will have a material impact on our financial statements.
On December 3, 1999, the Securities and Exchange Commission (SEC) staff issued
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." On October 13, 2000, the SEC published "Frequently Asked Questions
and Answers" (Q&A) related to SAB 101 and deferred the effective date to no
later than the fourth quarter of fiscal years beginning after December 15, 1999.
We are currently evaluating the impact of SAB 101 on our financial statements.
(b) Results of Operations
---------------------
REVENUE
Consolidated revenue for the three and nine months ended September 30, 2000
increased $52.9 million, or 16%, and $101.4 million, or 10%, respectively, as
compared with the prior periods. The increase for the three months ended
September 30, 2000 is due to a $23.1 million increase in telecommunications
revenue, a $15.0 million increase in ELI revenue and a $14.8 million increase in
gas revenue. The increase for the nine months ended September 30, 2000 is due to
a $21.0 million increase in telecommunications revenue, a $48.2 million increase
in ELI revenue and a $32.3 million increase in gas revenue.
TELECOMMUNICATIONS REVENUE
<TABLE>
<CAPTION>
($ in thousands) For the three months ended September 30, For the nine months ended September 30,
------------------------------------------- -----------------------------------------
2000 1999 % Change 2000 1999 % Change
----------- ---------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Network access services $ 129,584 $ 123,939 5% $ 375,994 $ 381,014 -1%
Local network services 80,579 69,046 17% 224,284 205,735 9%
Long distance and data services 20,481 17,705 16% 58,534 59,096 -1%
Directory services 8,016 7,058 14% 22,636 21,017 8%
Other 18,003 15,964 13% 51,492 45,725 13%
Eliminations (9,896) (10,050) N/A (32,465) (33,072) N/A
----------- ---------- ---------- ----------
$ 246,767 $ 223,662 10% $ 700,475 $ 679,515 3%
=========== ========== ========== ==========
</TABLE>
We acquired the GTE Nebraska access lines on June 30, 2000 and the GTE Minnesota
access lines on August 31, 2000 (collectively referred to as the Acquisitions).
These Acquisitions contributed $15.6 million of revenue for both the three and
nine months ended September 30, 2000.
16
<PAGE>
PART II. OTHER INFORMATION
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
Network access services revenue for the three months ended September 30, 2000
increased $5.6 million, or 5%, as compared with the prior year period. The
Acquisitions accounted for $7.5 million of the increase while growth in minutes
of use accounted for $1.2 million of the increase. These increases were
partially offset by the effect of the Federal Communications Commission's (FCC)
Coalition for Affordable Local and Long Distance Services (CALLS) mandate which
reduces access charges paid by long distance companies of $5.0 million and the
impact of an intercompany adjustment made in 1999.
Network access services revenue for the nine months ended September 30, 2000
decreased $5.0 million, or 1%, as compared with the prior year period primarily
due to a non-recurring $10.4 million interstate universal service fund (USF)
settlement received in the first quarter of 1999, the effect of CALLS of $5.0
million, a decrease in intralata toll revenue of $3.8 million, settlements with
long distance carriers of $2.3 million in 1999, and the price effect of a July
1999 FCC tariff adjustment of $1.8 million, partially offset by the impact of
the Acquisitions of $7.5 million and growth in minutes of use and special access
revenue of $11.5 million.
Local network services revenue for the three months ended September 30, 2000
increased $11.5 million, or 17%, as compared with the prior year period. The
Acquisitions contributed $6.5 million, enhanced services increased $2.1 million,
access line growth of 39,000 contributed $2.3 million, frame relay increased $.4
million and white pages directory revenue increased $.2 million.
Local network services revenue for the nine months ended September 30, 2000
increased $18.5 million, or 9%, as compared with the prior year period. The
Acquisitions contributed $6.5 million, enhanced services increased $5.4 million
due to increased demand for these services, access line growth of 39,000
contributed $5.1 million and frame relay increased $1.5 million.
Long distance services revenue for the three months ended September 30, 2000
increased $2.8 million, or 16%, as compared with the prior year periods
primarily due to increases in internet revenue and the impact of an intercompany
adjustment made in 1999.
Long distance services revenue for the nine months ended September 30, 2000
decreased $.6 million, or 1%, as compared with the prior year periods primarily
due to a decrease in long distance revenue of $2.9 million, partially offset by
increases in internet revenue of $2.3 million for the nine months ended
September 30, 2000. The long distance decreases were due to decreased minutes of
use of 14.3 million for the nine month period as compared with the prior year
period as we continued to exit the out-of-territory long distance market. In
addition, the average rate per minute for long distance service declined from
$.123 in the nine months ended September 30, 1999 to $.113 in the nine months
ended September 30, 2000, or 8%, as a result of offering discounted calling
plans.
Directory services revenue for the three and nine months ended September 30,
2000 increased $1.0 million, or 14%, and $1.6 million, or 8%, respectively, as
compared with the prior year periods primarily due to increased directory
advertising and listing sales.
Other revenue for the three and nine months ended September 30, 2000 increased
$2.0 million, or 13%, and $5.8 million, or 13%, as compared with the prior year
periods primarily due to an increase in conference call and cable revenue. A
decrease in uncollectible accounts due to improved collection efforts also
contributed to the increase for the nine month period.
Eliminations represent network access revenue received by our local exchange
operations from our long distance operations.
17
<PAGE>
PART II. OTHER INFORMATION
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
ELI REVENUE
($ in thousands) For the three months ended September 30, For the nine months ended September 30,
----------------------------------------- ----------------------------------------
2000 1999 % Change 2000 1999 % Change
----------- --------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Network services $ 21,627 $ 14,024 54% $ 54,804 $ 37,431 46%
Local telephone services 25,187 22,313 13% 75,412 55,221 37%
Long distance services 3,728 4,812 -23% 12,590 22,587 -44%
Data services 13,068 7,453 75% 38,202 17,674 116%
-------- -------- -------- ---------
63,610 48,602 31% 181,008 132,913 36%
Intersegment revenue (769) (747) N/A (2,096) (2,215) N/A
-------- -------- -------- ---------
$ 62,841 $ 47,855 31% $178,912 $130,698 37%
======== ======== ======== =========
</TABLE>
Network Services revenue increased $7.6 million, or 54%, and $17.4 million, or
46% for the three and nine months ended September 30, 2000, respectively, over
the same periods in 1999. The increase is due to continued growth in our network
and sales of additional high bandwidth, D5-3 and OC level circuits to new and
existing customers.
Local telephone services revenue increased $2.9 million, or 13%, and $20.2
million, or 37%, for the three and nine months ended September 30, 2000,
respectively, over the same periods in 1999. Local telephone services include
dial tone, ISDN PRI, Carrier Access Billings and reciprocal compensation.
ISDN PRI revenue increased $3.1 million, or 51%, and $10.2 million, or 66%, for
the three and nine months ended September 30, 2000, respectively, over the same
periods in 1999. Dial tone revenue increased $0.6 million, or 12%, and $1.9
million, or 15%, for the three and nine months ended September 30, 2000,
respectively, over the same periods in 1999. Increases in revenue for both ISDN
PRI and dial tone is the result of an increase in the average access line
equivalents of 61,478, or 43%, and 72,716, or 60%, for the three and nine months
ended September 30, 2000, respectively.
Carrier Access Billings revenue increased $0.1 million, or 7%, and $3.7 million,
or 142%, for the three and nine months ended September 30, 2000, respectively,
over the same periods in 1999. The increase is due to an increase in average
monthly minutes processed of 38.6 million from 21.9 million, or 76%, and 33.2
million from 19.2 million, or 73%, for the three and nine months ended September
30, 2000, respectively, partially offset by lower average rates per minute due
to competitive pressures in the markets in which we operate.
Reciprocal compensation revenue decreased $0.9 million, or 9%, and increased
$4.4 million, or 18%, for the three and nine months ended September 30, 2000,
respectively, over the same periods in 1999. The decrease for the three months
ended September 30, 2000 is primarily due to decreased revenue from Qwest due to
lower rates applicable to new interconnection agreements effective January 1,
2000. The increase for the nine months ended September 30, 2000 is due to
interconnection agreements being in place with Verizon and PacBell during the
three and nine months ended September 30, 2000 to record reciprocal compensation
revenue that were not in place for the same periods in 1999. The increase for
nine months was partially offset by decreased revenue from Qwest due to lower
rates applicable to new interconnection agreements effective January 1, 2000.
Long distance services revenue decreased $1.1 million, or 23%, and $10.0
million, or 44%, for the three and nine months ended September 30, 2000,
respectively, over the same periods in 1999. Long distance services include
retail long distance, wholesale long distance and prepaid services.
Retail long distance revenue increased $0.7 million, or 42%, and $2.3 million,
or 51%, for the three and nine months ended September 30, 2000, respectively,
over the same periods in 1999. The increase is due to an increase in average
monthly minutes processed of 9.8 million from 6.8 million, or 44%, and 9.9
million from 5.9 million, or 68% for the three and nine months ended September
30, 2000, respectively, partially offset by lower average rates per minute.
Wholesale long distance revenue decreased $0.4 million, or 26%, and increased
$0.2 million, or 4%, for the three and nine months ended September 30, 2000,
respectively, over the same periods in 1999.
18
<PAGE>
PART II. OTHER INFORMATION
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
We exited the prepaid services market in the third quarter of 1999. As a result,
prepaid services revenue decreased $1.4 million, or 86%, and $12.5 million, or
93%, for the three and nine months ended September 30, 2000, respectively, over
the same periods in 1999.
Data services revenue increased $5.6 million, or 75%, and $20.5 million, or
116%, for the three and nine months ended September 30, 2000, respectively, over
the same periods in 1999. Data services include Internet, RSVP and other
services.
Data services revenue also increased $3.3 million, or 200%, and $13.2 million,
or 800% for the three and nine months ended September 30, 2000, respectively,
over the same periods in 1999, as the result of an 18-month take-or-pay contract
with a significant customer that expires on February 28, 2001. The take-or-pay
contract will provide $20 million in revenue for 2000. It is not likely that
this take-or-pay contract will be renewed in 2001.
Revenue from our Internet services product increased $1.6 million, or 49%, and
$5.0 million, or 64%, for the three and nine months ended September 30, 2000,
respectively, over the same periods in 1999. Revenue from our RSVP products
increased $0.6 million, or 235% and $1.7 million, or 288%, for the three and
nine months ended September 30, 2000, respectively, over the same periods in
1999.
Intersegment revenue reflects revenue received by ELI from our
telecommunications operations.
<TABLE>
<CAPTION>
GAS REVENUE
($ in thousands) For the three months ended September 30, For the nine months ended September 30,
----------------------------------------- ----------------------------------------
2000 1999 % Change 2000 1999 % Change
----------- ------- ---------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Gas revenue 80,333 65,574 23% 270,753 238,485 14%
</TABLE>
Gas revenue for the three and nine months ended September 30, 2000 increased
$14.8 million, or 23%, and $32.3 million, or 14%, respectively, as compared with
the prior year periods primarily due to higher purchased gas costs passed on to
customers, partially offset by decreased unit sales due to warmer weather
conditions.
<TABLE>
<CAPTION>
COST OF SERVICES
($ in thousands) For the three months ended September 30, For the nine months ended September 30,
------------------------------------------ -----------------------------------------
2000 1999 % Change 2000 1999 % Change
------------- ----------- ---------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Gas purchased $ 48,182 $ 31,152 55% $ 148,238 $ 116,706 27%
Network access 35,795 31,163 15% 116,487 120,232 -3%
Eliminations (10,665) (10,797) N/A (34,561) (35,287) N/A
------------- ----------- ------------ -----------
$ 73,312 $ 51,518 42% $ 230,164 $ 201,651 14%
============= =========== ============ ===========
</TABLE>
Gas purchased for the three and nine months ended September 30, 2000 increased
$17.0 million, or 55%, and $31.5 million, or 27%, respectively, as compared with
the prior year periods primarily due to an increase in the cost of gas and
customer growth.
Gas margin (revenue less purchases) for the three months ended September 30,
2000 decreased $2.3 million, or 7%, as compared with the prior year period
primarily due to a $2.5 million expense of a previously deferred gas cost in
September 2000. Gas margin for the nine months ended September 30, 2000
increased $0.7 million, or 1%, as compared with the prior year period primarily
due to increased customer growth of approximately 2%, partially offset by a $2.5
million expense of a previously deferred gas cost in September 2000.
Network access expenses for the three months ended September 30, 2000 increased
$4.6 million, or 15%, as compared with the prior year period primarily due to
increased costs related to increased revenue growth at ELI, $2.4 million more
vendor disputes resolved in ELI's favor in the prior year period and the impact
of an intercompany adjustment made in 1999, partially offset by a reduction in
costs related to the exit of ELI's prepaid services business.
19
<PAGE>
PART II. OTHER INFORMATION
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
Network access expenses for the nine months ended September 30, 2000 decreased
$3.7 million, or 3%, as compared with the prior year periods primarily due to a
reduction in costs related to the exit of ELI's prepaid services business,
partially offset by increased costs related to increased revenue growth and our
dialed internet product.
Eliminations represent expenses incurred by our long distance operations related
to network access services provided by our local exchange operations and
expenses incurred by our telecommunications operations related to network
services provided by ELI.
<TABLE>
<CAPTION>
DEPRECIATION AND AMORTIZATION EXPENSE
($ in thousands) For the three months ended September 30, For the nine months ended September 30,
---------------------------------------- ----------------------------------------
2000 1999 % Change 2000 1999 % Change
---------- ----------- --------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Depreciation and amortization $ 89,130 $ 69,715 28% $ 258,677 $ 202,265 28%
</TABLE>
Depreciation expense for the three and nine months ended September 30, 2000
increased $19.4 million, or 28%, and $56.4 million, or 28%, respectively, as
compared with the prior year periods primarily due to higher plant in service
balances for newly completed communications network facilities and electronics
at ELI, higher property, plant and equipment balances in the telecommunications
sector and the impact of the Acquisitions of $7.0 million including the
amortization of goodwill of $2.7 million. For the nine months ended September
30, 2000, the increase is also attributable to $19.1 million of accelerated
depreciation taken during the first half of 2000 related to the change in useful
life of an operating system in the telecommunications sector.
<TABLE>
<CAPTION>
OTHER OPERATING EXPENSES
($ in thousands) For the three months ended September 30, For the nine months ended September 30,
----------------------------------------- ----------------------------------------
2000 1999 % Change 2000 1999 % Change
----------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Operating expenses $ 146,494 $ 160,364 -9% $ 433,672 $ 468,131 -7%
Taxes other than income taxes 20,115 21,298 -6% 65,219 64,669 1%
Sales and marketing 13,824 15,968 -13% 44,954 48,339 -7%
Eliminations (230) (315) N/A (743) (1,133) N/A
----------- ---------- ----------- ------------
$ 180,203 $ 197,315 -9% $ 543,102 $ 580,006 -6%
=========== ========== =========== ============
</TABLE>
Operating expenses for the three months ended September 30, 2000 decreased $13.9
million, or 9%, as compared with the prior year period primarily due to
decreased Year 2000 (Y2K) expenses of $3.9 million, decreased corporate office
expense and prior year consulting, severance and benefits payments. The
decreases were partially offset by increased operating expenses related to the
Acquisitions of $3.8 million.
Operating expenses for the nine months ended September 30, 2000 decreased $34.5
million, or 7%, as compared with the prior year period primarily due to
decreased Y2K expenses of $12.4 million, decreased corporate office expense,
prior year consulting, severance and benefits payments and prior year costs
associated with information technology projects that have been completed. The
decreases were partially offset by increased operating expenses related to the
Acquisitions of $3.8 million.
Taxes other than income taxes for the three months ended September 30, 2000
decreased $1.2 million, or 6%, as compared with the prior year periods primarily
due to decreased payroll taxes due to decreased headcount of 67 employees, or
6%, in the gas sector and a payroll tax adjustment in the gas sector in 1999.
Taxes other than income taxes for the nine months ended September 30, 2000
increased $.6 million or 1%, respectively, as compared with the prior year
periods primarily due to increase property taxes at ELI.
Sales and marketing expenses decreased $2.1 million, or 13%, and $3.4 million,
or 7%, as compared with the prior year periods primarily due to decreased sales
personnel related to the exit of ELI's prepaid services business.
Eliminations represent the elimination of intercompany administrative fees
charged to ELI.
20
<PAGE>
PART II. OTHER INFORMATION
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
ACQUISITION ASSIMILATION EXPENSE
($ in thousands) For the three months ended September 30, For the nine months ended September 30,
----------------------------------------- ---------------------------------------
2000 1999 % Change 2000 1999 % Change
----------- --------- ---------- ----------- ------- ---------
<S> <C> <C> <C> <C>
Acquisition assimilation expense $ 12,539 $ - N/A $ 24,130 $ - N/A
</TABLE>
Acquisition assimilation expense of $12.5 million and $24.1 million for the
three and nine months ended September 30, 2000, respectively, is related to the
pending acquisition of approximately 2 million telephone access lines (as of
December 31, 1999). We anticipate that we will continue to incur such
assimilation costs through the remainder of 2000 and into 2001.
<TABLE>
<CAPTION>
INCOME FROM OPERATIONS
($ in thousands) For the three months ended September 30, For the nine months ended September 30,
------------------------------------------ ----------------------------------------
2000 1999 % Change 2000 1999 % Change
---------- ---------- ---------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Income from operations $ 34,757 $ 18,543 87% $ 94,067 $ 64,776 45%
</TABLE>
Income from operations for the three and nine months ended September 30, 2000
increased $16.2 million, or 87%, and $29.3 million, or 45%, respectively, as
compared with prior year periods primarily due to decreased ELI operating losses
and decreased Y2K expenses, partially offset by increased acquisition
assimilation expense. Income from operations for the nine months ended September
30, 2000 also included increased depreciation expense related to the change in
useful life of an operating system in the telecommunications sector. Income from
operations for the nine months ended September 30, 1999 included the $10.4
million universal service fund settlement recorded in the first quarter of 1999.
<TABLE>
<CAPTION>
INVESTMENT AND OTHER INCOME, NET / MINORITY INTEREST / INTEREST EXPENSE / INCOME TAXES
($ in thousands) For the three months ended September 30, For the nine months ended September 30,
----------------------------------------- ----------------------------------------
2000 1999 % Change 2000 1999 % Change
----------- ----------- ----------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Investment and other income, net $ 5,435 $ 9,703 -44% $ 15,086 $ 91,016 -83%
Minority interest $ - $ 5,301 -100% $ 12,222 $ 16,987 -28%
Interest expense $ 45,025 $27,319 65% $ 116,288 $ 74,560 56%
Income taxes (benefit) $ (1,170) $ 1,041 -212% $ 2,298 $ 32,737 -93%
</TABLE>
Investment and other income, net for the three months ended September 30, 2000
decreased $4.3 million, or 44%, as compared with the prior year period primarily
due to lower average investment balances. Investment income for the nine months
ended September 30, 2000 decreased $75.9 million, or 83%, as compared with the
prior year period primarily due to the $69.5 million gain on the sale of our
investment in Centennial Cellular Corp. in January 1999 and lower average
investment balances. As of September 30, 2000, we reclassified certain bond
investments to short-term investments which we plan to sell in the fourth
quarter of 2000. Unrealized losses on these securities were approximately $11.8
million as of September 30, 2000 and are included in comprehensive income.
Minority interest, as presented on the income statement, represents the
minority's share of ELI's net loss. Minority interest in subsidiary, as
presented on the balance sheet at December 31, 1999, represents the minority's
share of ELI's equity capital. Since ELI's public offering, we have been
recording minority interest on our income statement and reducing minority
interest on our balance sheet by the amount of the minority interests' share of
ELI's losses. As of June 30, 2000, the minority interest on the balance sheet
had been reduced to zero, therefore, from that point going forward, we
discontinued recording minority interest income on our income statement as there
is no obligation for the minority interests to provide additional funding for
ELI. Therefore, we are recording ELI's entire loss in our consolidated results.
When ELI becomes profitable, we will recognize ELI's earnings in full until the
cumulative losses of the minority interests previously absorbed by us are
recovered. After such recovery, we will begin to record minority interest on our
income statement and minority interest in subsidiary on our balance sheet based
on the percentage of ELI owned by third parties.
21
<PAGE>
PART II. OTHER INFORMATION
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
Interest expense for the three months ended September 30, 2000 increased $17.7
million, or 65%, as compared with the prior year period primarily due to a $6.5
million increase in ELI's interest expense related to increased borrowings and
higher interest rates, $6.5 million increase due to an increase in our
commercial paper outstanding and $3.2 million for amortization of costs
associated with our committed bank credit facilities. A reduction in capitalized
interest of $1.1 million due to lower average capital work in process balances
at ELI also contributed to the increase. During the three months ended September
30, 2000, we had average long-term debt outstanding of $2.7 billion compared to
$2.1 billion during the three months ended September 30, 1999.
Interest expense for the nine months ended September 30, 2000 increased $41.7
million, or 56%, as compared with the prior year period primarily due to a $19.3
million increase in ELI's interest expense related to increased borrowings and
higher interest rates, $8.0 million increase due to an increase in our
commercial paper outstanding and $9.5 million for amortization of costs
associated with our committed bank credit facilities. A reduction in capitalized
interest of $4.0 million due to lower average capital work in process balances
at ELI also contributed to the increase. During the nine months ended September
30, 2000, we had average long-term debt outstanding of $2.5 billion compared to
$1.9 billion during the nine months ended September 30, 1999.
Income taxes for the three and nine months ended September 30, 2000 decreased
$2.2 million, or 212%, and $30.4 million, or 93%, respectively, as compared with
the prior year periods primarily due to changes in taxable income. The nine
months ended September 30, 2000 decrease is primarily due to taxes on the gain
on the sale of our investment in Centennial Cellular Corp. in January 1999. The
estimated annual effective tax rate for 2000 is 34% as compared with 35% for
1999.
<TABLE>
<CAPTION>
DISCONTINUED OPERATIONS
($ in thousands) For the three months ended September 30, For the nine months ended September 30,
------------------------------------------ ---------------------------------------
2000 1999 % Change 2000 1999 % Change
------------ ------------ ----------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 92,041 $ 88,557 4% $ 249,791 $ 229,311 9%
Operating income $ 17,402 $ 18,655 -7% $ 40,819 $ 40,165 2%
Net income $ 6,683 $ 8,272 -19% $ 13,672 $ 13,459 2%
</TABLE>
Revenue from discontinued operations for the three and nine months ended
September 30, 2000 increased $3.5 million, or 4%, and $20.5 million, or 9%,
respectively, as compared with the prior periods primarily due to customer
growth, increased consumption due to favorable weather conditions and increased
purchased fuel costs and purchased power costs passed on to customers. The
increase for the nine months ended September 30, 2000 as compared with the prior
period was partially offset by $3,750,000 of customer refunds recorded in the
second quarter of 2000 in Arizona in the electric sector.
Operating income from discontinued operations for the three months ended
September 30, 2000 decreased $1.3 million, or 7%, primarily due to increased
purchased fuel costs and purchased power costs and increased depreciation
expense due to increased property, plant and equipment. Operating income from
discontinued operations for the nine months ended September 30, 2000 increased
$.7 million, or 2%, respectively, as compared with prior periods primarily due
to increased revenue, decreased Y2K expenses, decreased sales and marketing
expenses, decreased corporate overhead charges and lower payroll costs due to
reduction in staffing levels of support functions, partially offset by increased
depreciation expense due to increased property, plant and equipment.
Net income from discontinued operations for the three and nine months ended
September 30, 2000 decreased $1.6 million, or 19%, and increased $.2 million, or
2%, respectively, as compared with prior periods primarily due to the respective
changes in operating income.
22
<PAGE>
PART II. OTHER INFORMATION
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
NET INCOME / NET INCOME PER COMMON SHARE /
OTHER COMPREHENSIVE LOSS, NET OF TAX AND RECLASSIFICATION ADJUSTMENTS
($ in thousands) For the three months ended September 30, For the nine months ended September 30,
----------------------------------------- ----------------------------------------
2000 1999 % Change 2000 1999 % Change
------------ ---------- ---------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Net income $ 1,467 $ 11,906 -88% $ 11,804 $ 74,284 -84%
Net income per common share $ 0.01 $ 0.05 -80% $ 0.04 $ 0.29 -86%
Other comprehensive loss, net of tax
and reclassification adjustments $ (28,704) $ (17) N/A $ (69,097) $ (14,428) N/A
</TABLE>
Net income and net income per share for the three months ended September 30,
2000 decreased $10.4 million, or 88%, and 4(cent), or 80%, respectively, as
compared with the prior year period primarily due to increased ELI interest
expense and decreased minority interest income, partially offset by increased
operating income and decreased Y2K expenses. Net income and net income per share
for the nine months ended September 30, 2000 decreased $62.5 million, or 84%,
and 25 (cent), or 86%, respectively, as compared with the prior year period
primarily due to the $42.9 million, or 16 (cent) per share, after tax gain on
the sale of our investment in Centennial Cellular Corporation in January 1999,
the 1999 non-recurring universal service fund settlement, accelerated
depreciation related to the change in useful life of an operating system in the
telecommunications sector and increased ELI interest expense, partially offset
by increased operating income and decreased Y2K expenses.
Other comprehensive loss, net of tax and reclassification adjustments during the
three and nine months ended September 30, 2000 and the three months ended
September 30, 1999 are primarily the result of higher unrealized losses on our
investment portfolio. Other comprehensive loss, net of tax and reclassification
adjustments during the nine months ended September 30, 1999 is primarily the
result of the realization of the gain on the sale of our investment in
Centennial Cellular Corp. in January 1999, partially offset by higher unrealized
gains on our investment portfolio during the first quarter 1999.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
----------------------------------------------------------
We are exposed to market risk in the normal course of our business operations
due to our ongoing investing and funding activities and our purchases of certain
commodities. Market risk refers to the risk of loss that may result from the
potential change in fair value of a financial instrument as a result of
fluctuations in interest rates and equity and commodity prices. We manage our
exposure to these risks by maintaining a conservative investment portfolio,
entering into long term debt obligations with appropriate price and term
characteristics, and utilizing derivative financial instruments when they make
business sense as follows:
Interest Rate Exposure
----------------------
Our objectives 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 a conservative
investment portfolio, consisting of equity and debt financial instruments, a
majority of which includes state and municipal and other fixed income
securities, which is designed to earn current income and is adequately
diversified to offset reasonable interest rate fluctuations. In addition, we
maintain fixed rate debt on a majority of our borrowings and refinance debt when
advantageous by entering into long term debt obligations, including but not
limited to, debenture and industrial development revenue bonds, which usually
possess better than prime interest rates. During the third quarter of 2000, we
arranged for a committed $6.15 billion in credit facilities for the purpose of
funding our pending acquisitions and supporting general corporate activities. As
of September 30, 2000 there are no funds outstanding under these facilities.
Once funds are drawn down on these facilities it is our intention to permanently
fund these amounts through cash and investment balances, proceeds from the
divestiture of our public services businesses and other debt and equity
instruments. Based upon our overall interest rate exposure at September 30, 2000
a near term change in interest rates would not materially affect our
consolidated financial position, results of operations or cash flows.
23
<PAGE>
PART II. OTHER INFORMATION
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
Equity Price Exposure
---------------------
In December 1999, our Board of Directors authorized the purchase, from time to
time, of up to $100 million worth of shares of our common stock. In April 2000,
our Board of Directors authorized the purchase, from time to time, of up to an
additional $100 million worth of shares of our common stock. We purchased
approximately $49 million worth of our shares on the open market in cash and
approximately $151 million worth of our shares using equity forward contracts.
These types of contracts are exposed to equity price risk as these contracts are
indexed to our common stock, which is traded on stock exchanges. Based upon our
overall equity price exposure at September 30, 2000 an adverse change in the
price of our common stock would not materially affect our consolidated financial
position, results of operations or cash flows.
Commodity Price Exposure
------------------------
We purchase monthly gas future contracts to manage well defined commodity price
fluctuations, caused by weather and other unpredictable factors, associated with
our commitments to deliver natural gas to customers at fixed prices. This
commodity activity relates to the net assets held for sale and is not material
to our consolidated financial position, results of operations or cash flows.
The Company does not hold or issue derivative or other financial instruments for
trading purposes.
Finally, the carrying amount of cash, accounts receivable, short-term debt,
accounts payable and other accrued liabilities approximate fair value because of
the short maturity of these instruments.
24
<PAGE>
PART II. OTHER INFORMATION
CITIZENS COMMUNICATIONS 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. The parties have entered into a settlement stipulation which is subject to
the District Court's approval.
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 other 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.
25
<PAGE>
PART II. OTHER INFORMATION (Continued)
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a) Exhibits:
3.200.2 By-laws of Citizens Communications Company with all amendments
to July 18, 2000.
10.32 Stock Purchase Agreement among Citizens Communications
Company, Global Crossing Ltd. and Global Crossing North
America, Inc. dated July 11, 2000.
27 Financial data schedule for the period ended September 30,
2000.
b) Reports on Form 8-K:
We filed on Form 8-K dated August 8, 2000 under Item 7 "Exhibits," a
press release announcing financial results for the quarter ended June
30, 2000 and certain operating data.
We filed on Form 8-K dated August 15, 2000 under Item 5 "Other Events"
and Item 7 "Exhibits," a press release announcing that a Decision and
Order issued by the Public Utilities Commission of the State of Hawaii
denied the initial application requesting approval of the purchase of
our Kauai Electric Division by the Kauai Island Utility Co-Op.
We filed on Form 8-K dated August 31, 2000 under Item 2 "Acquisition
or Disposition of Assets" and Item 7 "Exhibits," announcing the
closing of the Nebraska and Minnesota asset purchases from Verizon
Communications (formerly GTE Corp.) and the corresponding press
releases.
26
<PAGE>
PART II. OTHER INFORMATION (Continued)
CITIZENS COMMUNICATIONS 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 COMMUNICATIONS COMPANY
-------------------------------
(Registrant)
<TABLE>
<CAPTION>
<S> <C>
By: /s/ Robert J. Larson
-------------------------
Robert J. Larson
Vice President and Chief Accounting Officer
</TABLE>
Date: November 14, 2000
