-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PVD90eMwi8UTH0Se1cJX1G4vX0b3dJLZqNUz+XekuQMCLsLy/35Vh2mjL11uku5X 32wFJzCFE+PsO5vRUISOQg== 0000020520-99-000021.txt : 19991115 0000020520-99-000021.hdr.sgml : 19991115 ACCESSION NUMBER: 0000020520-99-000021 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CITIZENS UTILITIES CO CENTRAL INDEX KEY: 0000020520 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 060619596 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11001 FILM NUMBER: 99748163 BUSINESS ADDRESS: STREET 1: HIGH RIDGE PK BLDG 3 STREET 2: P O BOX 3801 CITY: STAMFORD STATE: CT ZIP: 06905 BUSINESS PHONE: 2033298800 MAIL ADDRESS: STREET 1: HIGH RIDGE PARK BLDG NO 3 CITY: STAMFORD STATE: CT ZIP: 06905 10-Q 1 CITIZENS UTILITIES COMPANY FORM 10-Q CITIZENS UTILITIES COMPANY FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 ------------------ |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________to__________ Commission file number 001-11001 --------- CITIZENS UTILITIES COMPANY ________________________________________________________________________________ (Exact name of registrant as specified in its charter) Delaware 06-0619596 ___________________________________ ____________________________________ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 3 High Ridge Park P.O. Box 3801 Stamford, Connecticut 06905 ________________________________________ _____________________________________ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (203) 614-5600 _____________________________ NONE ________________________________________________________________________________ (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days. Yes X No --- --- The number of shares outstanding of the registrant's class of common stock as of October 29, 1999 was 261,266,350.
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES Index to Consolidated Financial Statements
Page No. -------- Part I. Financial Information Consolidated Balance Sheets at September 30, 1999 and December 31, 1998 2 Consolidated Statements of Income and Comprehensive Income for the Three Months Ended September 30, 1999 and 1998 3 Consolidated Statements of Income and Comprehensive Income for the Nine Months Ended September 30, 1999 and 1998 5 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1999 and 1998 7 Notes to Consolidated Financial Statements 8 Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Quantitative and Qualitative Disclosures about Market Risk 24 Part II. Other Information Legal Proceedings 25 Exhibit and Reports on Form 8-K 26 Signatures 27
1 PART I. FINANCIAL INFORMATION CITIZENS UTILITIES COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands)
September 30, 1999 December 31, 1998 ASSETS ------------------ ----------------- - ------ Current assets: Cash $ 35,870 $ 31,922 Accounts receivable, net 223,517 233,735 Other 31,203 40,467 -------------- -------------- Total current assets 290,590 306,124 -------------- -------------- Property, plant and equipment 4,380,738 4,045,258 Less accumulated depreciation 1,512,130 1,340,665 -------------- -------------- Net property, plant and equipment 2,868,608 2,704,593 -------------- -------------- Investments 541,498 464,145 Regulatory assets 187,838 189,866 Deferred debits and other assets 148,955 126,491 Net assets of discontinued operations 1,562,769 1,501,713 -------------- -------------- Total assets $ 5,600,258 $ 5,292,932 ============== ============== LIABILITIES AND EQUITY - ---------------------- Current liabilities: Long-term debt due within one year $ 22,333 $ 7,672 Short-term debt - 110,000 Accounts payable and current liabilities 449,966 388,197 -------------- -------------- Total current liabilities 472,299 505,869 Deferred income taxes 459,583 442,908 Advances for construction 204,373 211,941 Deferred credits and other liabilities 85,083 84,708 Regulatory liabilities 20,780 19,120 Long-term debt 2,080,050 1,808,973 Net liabilities of discontinued operations 191,363 188,200 -------------- -------------- Total liabilities 3,513,531 3,261,719 -------------- -------------- Company Obligated Mandatorily Redeemable Convertible Preferred Securities * 201,250 201,250 Contributions in aid of construction 7,416 7,407 Minority interest in subsidiary 14,847 29,785 Shareholders' equity: Common stock issued, $.25 par value 65,099 64,787 Additional paid-in capital 1,564,464 1,554,188 Retained earnings 191,387 117,104 Accumulated other comprehensive income 42,264 56,692 -------------- -------------- Total shareholders' equity 1,863,214 1,792,771 -------------- -------------- Total liabilities and shareholders' equity $ 5,600,258 $ 5,292,932 ============== ==============
* Represents securities of a subsidiary trust, the sole assets of which are securities of a subsidiary partnership, substantially all the assets of which are convertible debentures of the Company. The accompanying Notes are an integral part of these Financial Statements. 2 PART I. FINANCIAL INFORMATION (Continued) CITIZENS UTILITIES COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (In thousands, except per-share amounts)
1999 1998 ------------ ------------ Revenues $ 271,517 $ 236,324 ------------ ------------ Operating expenses: Network expenses 18,648 24,931 Depreciation and amortization 64,628 50,004 Other operating expenses 167,245 142,403 ------------ ------------ Total operating expenses 250,521 217,338 ------------ ------------ Income from operations 20,996 18,986 Other income, net 9,482 8,030 Minority interest 5,301 3,788 Interest expense 21,745 17,181 ------------ ------------ Income before income taxes, dividends on convertible preferred securities and discontinued operations 14,034 13,623 Income taxes 3,956 1,504 ------------ ------------ Income before dividends on convertible preferred securities and discontinued operations 10,078 12,119 Dividends on convertible preferred securities, net of income tax benefit 1,553 1,553 ------------ ------------ Income before discontinued operations 8,525 10,566 Discontinued operations: Income from discontinued operations, net of tax 3,383 3,895 ------------ ------------ Net income 11,908 14,461 Other comprehensive (loss), net of tax and reclassification adjustment (17) (3,310) ------------ ------------ Total comprehensive income $ 11,891 $ 11,151 ============ ============
3 PART I. FINANCIAL INFORMATION (Continued) CITIZENS UTILITIES COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (Continued) (In thousands, except per-share amounts)
1999 1998 ------------ ------------ Income before discontinued operations per common share: Basic $ .04 $ .04 * Diluted $ .04 $ .04 * Income from discontinued operations per common share: Basic $ .01 $ .02 * Diluted $ .01 $ .02 * Net income per common share: Basic $ .05 $ .06 * Diluted $ .05 $ .06 * Dividend rate declared on common stock - .75% ============ ============ *Adjusted for subsequent stock dividends. The accompanying Notes are an integral part of these Financial Statements.
4 PART I. FINANCIAL INFORMATION (Continued) CITIZENS UTILITIES COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (In thousands, except per-share amounts)
1999 1998 ------------ ------------ Revenues $ 810,213 $ 685,375 ------------ ------------ Operating expenses: Network expenses 86,937 73,653 Depreciation and amortization 186,276 148,943 Other operating expenses 493,901 396,484 ------------ ------------ Total operating expenses 767,114 619,080 ------------ ------------ Income from operations 43,099 66,295 Other income, net 91,946 26,304 Minority interest 16,987 8,924 Interest expense 59,142 48,576 ------------ ------------ Income before income taxes, dividends on convertible preferred securities, discontinued operations and cumulative effect of change in accounting principle 92,890 52,947 Income taxes 30,812 7,044 ------------ ------------ Income before dividends on convertible preferred securities, discontinued operations and cumulative effect of change in accounting principle 62,078 45,903 Dividends on convertible preferred securities, net of income tax benefit 4,657 4,657 ------------ ------------ Income before discontinued operations and cumulative effect of change in accounting principle 57,421 41,246 Discontinued operations: Income from discontinued operations, net of tax 16,863 16,790 ------------ ------------ Income before cumulative effect of change in accounting principle 74,284 58,036 Cumulative effect of change in accounting principle, net of income tax benefit and related minority interest - 2,334 ------------ ------------ Net income 74,284 55,702 Other comprehensive (loss) income, net of tax and reclassification adjustment (14,428) 19,974 ------------ ------------ Total comprehensive income $ 59,856 $ 75,676 ============ ============
5 PART I. FINANCIAL INFORMATION (Continued) CITIZENS UTILITIES COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (Continued) (In thousands, except per-share amounts)
Income before discontinued operations and cumulative effect of change in 1999 1998 ------------ ------------ accounting principle per common share: Basic $ .22 $ .16 * Diluted $ .22 $ .16 * Income from discontinued operations per common share: Basic $ .07 $ .06 * Diluted $ .06 $ .06 * Income before cumulative effect of change in accounting principle per common share: Basic $ .29 $ .22 * Diluted $ .28 $ .22 * Net income per common share: Basic $ .29 $ .21 * Diluted $ .28 $ .21 * Compounded dividend rate declared on common stock - 2.27% ============ ============ *Adjusted for subsequent stock dividends. The accompanying Notes are an integral part of these Financial Statements.
6 PART I. FINANCIAL INFORMATION (Continued) CITIZENS UTILITIES COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (In thousands)
1999 1998 ------------- ------------- Net cash provided by operating activities $ 371,372 $ 227,196 ------------- ------------- Cash flows from investing activities: Construction expenditures (452,063) (351,777) Securities purchased (792,706) (686,919) Securities sold 757,028 679,717 Securities matured 2,035 2,000 Other (2,766) (4,717) ------------- ------------- Net cash (used by) investing activities (488,472) (361,696) ------------- ------------- Cash flows from financing activities: Long-term debt borrowings 315,053 157,823 Long-term debt principal payments (90,336) (4,936) Short-term debt repayments (110,000) - Issuance of common stock 6,742 5,010 Common stock buybacks (411) (861) ------------- ------------- Net cash provided from financing activities 121,048 157,036 ------------- ------------- Increase in cash 3,948 22,536 Cash at January 1, 31,922 35,163 ============= ============= Cash at September 30, $ 35,870 $ 57,699 ============= ============= The accompanying Notes are an integral part of these Financial Statements.
7 PART I. FINANCIAL INFORMATION (Continued) CITIZENS UTILITIES COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Summary of Significant Accounting Policies: ------------------------------------------ (a) Basis of Presentation: The unaudited consolidated financial statements include the accounts of Citizens Utilities Company and its subsidiaries (the Company) and have been prepared in conformity with generally accepted accounting principles. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 1998 Annual Report on Form 10-K. These unaudited consolidated financial statements include all adjustments, which consist of normal recurring accruals necessary to present fairly the results for the interim periods shown. Certain information and footnote disclosures have been condensed pursuant to Securities and Exchange Commission rules and regulations. The results of the interim periods are not necessarily indicative of the results for the full year. Certain reclassifications of balances previously reported have been made to conform to current presentation. (b) Regulatory Assets and Liabilities: The Company's regulated operations are subject to the provisions of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation." SFAS 71 requires regulated entities to record regulatory assets and liabilities as a result of actions of regulators. (c) Net Income Per Common Share: Basic net income per common share is computed using the weighted average number of common shares outstanding during the period being reported on. Diluted net income per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock at the beginning of the period being reported on. In 1998, both Basic and Diluted per common share calculations are presented with adjustments for subsequent stock dividends. (d) Change in Accounting Principle: In April 1998, the Accounting Standards Executive Committee of the AICPA released Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up Activities." SOP 98-5 requires that the unamortized portion of deferred start-up costs at the time of adoption be written off and reported as a change in accounting principle. Future costs of start-up activities should then be expensed as incurred. The Company adopted SOP 98-5 effective January 1, 1998. The net book value of the CLEC's deferred amounts was $3,394,000 which has been reported as a cumulative effect of a change in accounting principle in the statements of income and comprehensive income for the first quarter 1998, net of income tax benefit of $577,000 and related minority interest of $483,000. (2) Acquisitions: ------------ On May 27, 1999 and September 21, 1999, the Company announced that it had entered into definitive agreements to purchase from GTE Corporation 245,723 telephone access lines (as of year-end 1998) in Arizona, California, Minnesota and Nebraska for approximately $868,000,000 in cash. The Company expects that these acquisitions, which are subject to various state and federal regulatory approvals, will begin closing in the second quarter 2000. On June 16, 1999 the Company announced that it had entered into a series of definitive agreements to purchase from US West 530,000 telephone access lines (as of year-end 1998) in Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, North Dakota and Wyoming for approximately $1,650,000,000 in cash. The Company expects that these acquisitions, which are subject to various state and federal regulatory approvals, will occur on a state-by-state basis and will begin closing in the second quarter 2000. The Company expects to temporarily fund these telephone access line purchases with cash and investment balances and proceeds from commercial paper issuances, backed by committed bank credit facilities. The Company expects to permanently fund the purchases with proceeds from the sale of the Company's public services businesses and cash and investment balances. 8 PART I. FINANCIAL INFORMATION (Continued) CITIZENS UTILITIES COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (3) Discontinued Operations: ----------------------- On August 24, 1999 the Company's Board of Directors approved a plan of disposition for the public services properties, which include the Company's gas, electric and water and wastewater businesses. The Company expects to sell the public services properties, subject to various state and federal regulatory approvals. The proceeds from the sales will be used to fund the telephone access line purchases discussed in Note 2. In accordance with Accounting Principle Board Opinion No. 30 (APBO 30), the Company has accounted for the planned disposition of the public services properties as a discontinued operation. Discontinued operations in the consolidated statements of income reflect the results of operations of the public services properties including imputed interest expense for the periods presented. On October 18, 1999 the Company announced that it had agreed to sell its water and wastewater operations to American Water Works, Inc. for an aggregate purchase price of $835,000,000 consisting of $745,000,000 in cash and $90,000,000 of assumed debt. The transaction is expected to close in 2000 following regulatory approvals. Summarized financial information for the discontinued operations is set forth below:
For the three months For the nine months ended September 30, ended September 30, ------------------------------ ----------------------------- ($ in thousands) ($ in thousands) 1999 1998 1999 1998 ------------- ------------- ------------- ------------ Revenues $ 154,132 $ 141,955 $ 467,797 $ 463,114 Operating income 16,201 21,352 61,842 71,826 Taxes 1,448 5,123 9,710 18,749 Net income 3,383 3,895 16,863 16,790 Sept. 30,1999 Dec. 31, 1998 ---------------- ---------------- ($ in thousands) ($ in thousands) Current assets $ 107,833 $ 107,916 Net property, plant and equipment 1,392,879 1,344,030 Other assets 62,057 49,767 -------------- --------------- Total net assets $ 1,562,769 $ 1,501,713 ============== ===============
9 PART I. FINANCIAL INFORMATION (Continued) CITIZENS UTILITIES COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (4) Income From Continuing Operations Per Common Share: -------------------------------------------------- The reconciliation of the per common share calculations for the three and nine months ended September 30, 1999 and 1998, respectively, are as follows:
For the three months ended September 30, ---------------------------------------------------------------- 1999 1998 -------------------------------- ----------------------------- ($ in thousands, except for per share amounts) Per Per Income Shares Share Income Shares Share -------------------------------- ----------------------------- Income before discontinued operations per common share: Basic $ 8,525 260,610 $ .04 $ $ 10,566 260,139 $ .04 Effect of dilutive options - 3,180 - - 445 - Diluted $ 8,525 263,790 $ .04 $ $ 10,566 260,584 $ .04 For the nine months ended September 30, ----------------------------------------------------------------- 1999 1998 --------------------------------- ------------------------------ ($ in thousands, except for per share amounts) Per Per Income Shares Share Income Shares Share -------------------------------- ------------------------------- Income before discontinued operations and cumulative effect of change in accounting principle per common share: Basic $ 57,421 259,985 $ .22 $ 41,246 259,409 $ .16 Effect of dilutive options - 2,419 - - 307 - Diluted $ 57,421 262,404 $ .22 $ 41,246 259,716 $ .16
All share amounts represent weighted average shares outstanding for each respective period. 1998 per share amounts have been adjusted for subsequent stock dividends. The diluted per common share calculation excludes the effect of potentially dilutive shares when their exercise price exceeds the average market price over the period. The Company has 4,025,000 shares of potentially dilutive Mandatorily Redeemable Convertible Preferred Securities which are convertible into common stock at a 3.76 to 1 ratio at an exercise price of $13.30 per share and 2,562,000 potentially dilutive stock options at a range of $11.73 to $14.24 per share. These items were adjusted for subsequent stock dividends and were not included in the diluted per common share calculation for any of the above periods as their effect was antidilutive. 10 PART I. FINANCIAL INFORMATION (Continued) CITIZENS UTILITIES COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (5) Sale of Investments: ------------------- In January 1999, Centennial Cellular Corp. (Centennial) was merged with CCW Acquisition Corp., a company organized at the direction of Welsh, Carson, Anderson & Stowe. The Company was a holder of 1,982,294 shares of Centennial Class B Common Stock. In addition, as a holder of 102,187 shares of Mandatorily Redeemable Convertible Preferred Stock of Centennial, the Company was required to convert the preferred stock into approximately 2,972,000 shares of Class B Common Stock. The Company received approximately $205,600,000 in cash for all of its Common Stock interests and approximately $17,500,000 related to accrued dividends on the preferred stock. The Company recorded a pre-tax gain of approximately $69,500,000 on this transaction in January 1999 which is included in other income, net. On October 1, 1999, Adelphia Communication Corporation (Adelphia) was merged with Century Communications Corp. (Century). The Company owned 1,807,095 shares of Century Class A Common Stock. Pursuant to this merger agreement, Century Class A Common shares were exchanged for $10,832,000 in cash and 1,206,705 shares of Adelphia Class A Common Stock (for a total market value of $79,600,000 based on Adelphia's October 1, 1999 closing price of $57.00). The Company realized and will report a pre- tax gain of approximately $67,600,000 in the fourth quarter of 1999. A subsidiary of the Company, in a joint venture with a subsidiary of Century, owned and operated four cable television systems in southern California serving over 90,000 basic subscribers. In July 1999, the Company entered into a separate agreement with Adelphia to sell its interest in the joint venture. Pursuant to this agreement on October 1, 1999, the Company received approximately $27,700,000 in cash and 1,852,302 shares of Adelphia Class A Common Stock (for a total market value of $133,300,000 based on Adelphia's October 1, 1999 closing price of $57.00) and realized and will report a pre-tax gain of approximately $83,900,000 in the fourth quarter of 1999. In addition, Adelphia will assume the Company's interest in the debt of the joint venture. During the third quarter 1999, the Company reclassified $49,400,000 related to the Company's joint venture with a subsidiary of Century from other assets to investments. Prior year presentations have been restated to con- form to the current year presentation. 11 PART I. FINANCIAL INFORMATION (Continued) CITIZENS UTILITIES COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (6) Segment Information: ------------------- The Company is segmented into communications and CLEC. The communications sector provides both regulated and competitive communications services to residential, business and wholesale customers. The CLEC sector is a facilities based integrated communications provider providing a broad range of communications services throughout the United States through the Company's subsidiary, Electric Lightwave, Inc. Sector EBITDA consists of sector operating income plus depreciation. EBITDA is a measure commonly used to analyze companies on the basis of operating performance. It is not a measure of financial performance under generally accepted accounting principles and should not be considered as an alternative to net income as a measure of performance nor as an alternative to cash flow as a measure of liquidity and may not be comparable to similarly titled measures of other companies.
For the three months For the nine months ended September 30, ended September 30, ---------------------------------- -------------------------------- ($ in thousands) ($ in thousands) 1999 1998 1999 1998 ------------- ------------- ------------- ------------- Communications: - -------------- Revenues $ 233,712 $ 218,970 $ 712,587 $ 643,562 Inter-sector revenues (10,050) (7,660) (33,072) (23,086) Revenues as reported 223,662 211,310 679,515 620,476 Operating income 40,101 39,491 117,494 117,121 Depreciation 54,821 45,914 161,325 137,189 EBITDA 94,922 85,405 278,819 254,310 CLEC: - ---- Revenues $ 48,602 $ 25,664 $ 132,913 $ 67,164 Inter-sector revenues (747) (650) (2,215) (2,265) Revenues as reported 47,855 25,014 130,698 64,899 Operating loss (19,105) (20,505) (74,395) (50,826) Depreciation 9,807 4,090 24,951 11,754 EBITDA (9,298) (16,415) (49,444) (39,072) The following table is a reconciliation of sector EBITDA to the total consolidated EBITDA. For the three months For the nine months ended September 30, ended September 30, --------------------------------- ------------------------------- ($ in thousands) ($ in thousands) 1999 1998 1999 1998 -------------- -------------- -------------- ------------- Sector EBITDA $ 85,624 $ 68,990 $ 229,375 $ 215,238 Investment and other income 9,482 8,030 22,447 26,304 Gain on sale of Centennial - - 69,499 - Minority interest 5,301 3,788 16,987 8,924 Discontinued operations 32,593 36,463 108,711 116,360 -------------- ------------- -------------- ------------- Consolidated EBITDA $ 133,000 $ 117,271 $ 447,019 $ 366,826 ============== ============== ============== =============
12 PART I. FINANCIAL INFORMATION (Continued) CITIZENS UTILITIES COMPANY AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations --------------------- This quarterly report on Form 10-Q contains forward-looking statements that are subject to risks and uncertainties which could cause actual results to differ materially from those expressed or implied in the statements. All forward-looking statements (including oral representations) are only predictions or statements of current plans, which are constantly under review by the Company. All forward-looking statements may differ from actual future results due to, but not limited to, changes in the economy of the Company's markets, the nature and pace of technological changes, the number and effectiveness of competitors in the Company's markets, weather conditions, changes in legal and regulatory policy, success in overall strategy, the Company's ability to identify future markets and successfully expand existing ones, the mix of products and services offered in the Company's target markets, Y2K issues and the effects of acquisitions and dispositions. Readers should consider these important factors in evaluating any statement in this Form 10-Q or otherwise made by the Company or on its behalf. The following information is unaudited and should be read in conjunction with the consolidated financial statements and related notes to consolidated financial statements included in this report and as presented in the Company's 1998 Annual Report on Form 10-K previously filed. The Company has no obligation to update or revise these forward-looking statements to reflect the occurrence of future events or circumstances. (a) Liquidity and Capital Resources ------------------------------- The Company considers its operating cash flows and its ability to raise debt and equity capital as the principal indicators of its liquidity. For the nine months ended September 30, 1999, the Company used cash flow from operations and proceeds from net financings and advances from parties desiring utility services to fund capital expenditures. Funds requisitioned from the Industrial Development Revenue Bond construction fund trust accounts were used to partially fund the construction of utility plant. In October 1999, the Company arranged for a committed $3,000,000,000 revolving bank credit facility. This credit facility is in addition to credit commitments under which the Company may borrow up to $400,000,000. There were no amounts outstanding under these commitments at September 30, 1999. ELI has committed revolving lines of credit with commercial banks under which it may borrow up to $400,000,000. The Company has guaranteed all of ELI's obligations under these revolving lines of credit. As of September 30, 1999, $200,000,000 was outstanding under ELI's revolving lines of credit. In April 1999, ELI completed an offering of $325,000,000 of five-year senior unsecured notes. The notes have an interest rate of 6.05% and mature on May 15, 2004. The Company has guaranteed the payment of principal, any premium and interest on the notes when due. Sale of Investments ------------------- In January 1999, Centennial Cellular Corp. (Centennial) was merged with CCW Acquisition Corp., a company organized at the direction of Welsh, Carson, Anderson & Stowe. The Company was a holder of 1,982,294 shares of Centennial Class B Common Stock. In addition, as a holder of 102,187 shares of Mandatorily Redeemable Convertible Preferred Stock of Centennial, the Company was required to convert the preferred stock into approximately 2,972,000 shares of Class B Common Stock. The Company received approximately $205,600,000 in cash for all of its Common Stock interests and approximately $17,500,000 related to accrued dividends on the preferred stock. The Company recorded a pre-tax gain of approximately $69,500,000 on this transaction in January 1999 which is included in other income, net. On October 1, 1999, Adelphia Communication Corporation (Adelphia) was merged with Century Communications Corp. (Century). The Company owned 1,807,095 shares of Century Class A Common Stock. Pursuant to this merger agreement, Century Class A Common shares were exchanged for $10,832,000 in cash and 1,206,705 shares of Adelphia Class A Common Stock (for a total market value of $79,600,000 based on Adelphia's October 1, 1999 closing price of $57.00). The Company realized and will report a pre- tax gain of approximately $67,600,000 in the fourth quarter of 1999. A subsidiary of the Company, in a joint venture with a subsidiary of Century, owned and operated four cable television systems in southern California serving over 90,000 basic subscribers. In July 1999, the Company entered into a separate agreement with Adelphia to sell its interest in the joint venture. Pursuant to this agreement on October 1, 1999, the Company received approximately $27,700,000 in cash and 1,852,302 shares of Adelphia Class A Common Stock (for a total market value of $133,300,000 based on Adelphia's October 1, 1999 closing price of $57.00) and realized and will report a pre-tax gain of approximately $83,900,000 in the fourth quarter of 1999. 13 PART I. FINANCIAL INFORMATION (Continued) CITIZENS UTILITIES COMPANY AND SUBSIDIARIES Hungarian Telephone and Cable Corp. ----------------------------------- In May 1999, in connection with Hungarian Telephone and Cable Corp's (HTCC) debt restructuring, the Company cancelled HTCC's $8,400,000 note obligation and the seven-year consulting services agreement in exchange for the issuance by HTCC to the Company of 1,300,000 shares of HTCC Common Stock and 30,000 shares of HTCC's 5% convertible preferred stock. Each share of HTCC convertible preferred stock has a liquidation value of $70 and is convertible at the option of the Company into 10 shares of HTCC Common Stock. To the extent the 1,300,000 HTCC common shares and the 300,000 HTCC common shares underlying the HTCC convertible preferred stock do not achieve an average market closing price of at least $7 per share during a certain period prior to March 31, 2000, HTCC has agreed to issue additional HTCC convertible preferred shares with a value equal to any such shortfall. Acquisitions ------------ On May 27, 1999 and September 21, 1999, the Company announced that it had entered into definitive agreements to purchase from GTE Corporation 245,723 telephone access lines (as of year-end 1998) in Arizona, California, Minnesota and Nebraska, for approximately $868,000,000 in cash. The Company expects that these acquisitions, which are subject to various state and federal regulatory approvals, will begin closing in the second quarter 2000. On June 16, 1999 the Company announced that it had entered into a series of definitive agreements to purchase from US West 530,000 telephone access lines (as of year-end 1998) in Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, North Dakota and Wyoming for approximately $1,650,000,000 in cash. The Company expects that these acquisitions, which are subject to various state and federal regulatory approvals, will occur on a state-by-state basis and will begin closing in the second quarter 2000. The Company expects to temporarily fund these telephone access line purchases with cash and investment balances and proceeds from commercial paper issuances, backed by committed bank credit facilities. The Company expects to permanently fund the purchases with proceeds from the sale of the Company's public services businesses and cash and investment balances. Dispositions ------------ On August 24, 1999 the Company's Board of Directors approved a plan of disposition for the public services properties, which include the Company's gas, electric and water and wastewater businesses. The Company expects to sell the public services properties, subject to various state and federal regulatory approvals. The proceeds from the sales will be used to fund the telephone access line purchases. In accordance with Accounting Principle Board Opinion No. 30 (APBO 30), the Company has accounted for the planned disposition of the public services properties as a discontinued operation. Discontinued operations in the consolidated statements of income reflect the results of operations of the public services properties including imputed interest expense for the periods presented. On October 18, 1999 the Company announced that it had agreed to sell its water and wastewater operations to American Water Works Inc. for an ag- gregate purchase price of $835,000,000 consisting of $745,000,000 in cash and $90,000,000 of assumed debt. The transaction is expected to close in 2000 following regulatory approvals. Business Transformation ----------------------- In conjunction with the Company's transformation from a diversified utility to a telecommunications company, the Company is reviewing the administra- tive and supporting offices' processes, and business and customer support services in order to focus its attention on its core communications businesses. As a result, the Company expects to incur certain charges to earnings in the fourth quarter of 1999. 14 PART I. FINANCIAL INFORMATION (Continued) CITIZENS UTILITIES COMPANY AND SUBSIDIARIES Impact of the Year 2000 ----------------------- The Y2K issue results from computer programs using a two-digit format, as opposed to four, to indicate the year. Such computer systems may be unable to interpret dates beyond the year 1999, which could cause system failures or other computer errors. In late 1997, the Company developed a program to address the Y2K issue. The program was designed to protect the safety and continuity of the Company's service delivery and support capabilities, computer systems and other critical functions. The Company's Y2K program seeks to address problems that could arise: (1) in Information Technology (IT) areas including information systems and technologies; (2) in non-IT areas such as communications networks and switches, utility control and monitoring systems, premises, facilities and general business equipment; and (3) due to suppliers of products and services not being Y2K compliant. Each of the Company's sectors has a program office that manages the progress of the Y2K efforts. The Company has determined priorities for taking corrective actions on mission critical systems and products so as to ensure continued delivery of core business activities. The Company believes it's Y2K efforts for mission critical systems and products are essentially complete. For the nine months ended September 30, 1999, the Company has spent approximately $18,112,000 on its Y2K efforts and expects to spend an additional $8,880,000 on its remaining Y2K efforts. For the nine months ended September 30, 1999, the Company has spent approximately $11,514,000 on its communications (including ELI) Y2K efforts, which includes approximately $11,209,000 on communications IT efforts and $305,000 on communications non-IT efforts. For the nine months ended September 30, 1999, the Company has also spent approximately $6,598,000 on its public services Y2K efforts, which includes approximately $2,756,000 on public services IT efforts and $3,842,000 on public services non-IT efforts. In addition, the Company expects to incur $4,800,000 on its IT Y2K efforts and $2,080,000 on its non-IT efforts in the fourth quarter of 1999, and expects to incur $2,000,000 in the year 2000. The timing of expenses may vary and is not necessarily indicative of readiness efforts or progress to date. Funding of the Y2K costs is expected to occur from operating cash flows, cash and investments and proceeds from the issuance of securities and/or other borrowings. Certain public services state regulatory commissions, where the Company operates, have issued orders allowing the deferral of Y2K costs for consideration in future rate proceedings. In accordance with these orders the Company deferred $2,328,000 related to its discontinued operations in 1999. The systems of vendors and suppliers play a major role in the conduct of the business of the Company. As a result, in accordance with its Y2K program, the Company has been contacting software suppliers to determine major areas of exposure to Y2K issues. The Company has also been contacting its major suppliers and service providers to ascertain their ability to comply. In addition, the Company contracted with a consulting firm to review the Y2K programs of selected third party vendors. Thus far, most of these parties have stated that they intend to be Y2K compliant by the year 2000. However, there can be no guarantee that the systems of suppliers or service providers on which the Company's systems rely will be compliant, or that failure to be compliant by another company, or a conversion that is incompatible with the Company's systems, would not have a material adverse effect on the Company. The Company's communications businesses rely, directly and/or indirectly, on a large number of traffic carriers to carry communications traffic through a series of interconnected chains of communications. Therefore, despite its efforts, the Company cannot ensure that each entity involved in the delivery of communications services will be Y2K compliant. In an effort to address third party compliance issues, the Company's communications sector has initiated testing activities with one of its major suppliers. The electric power-supply systems of North America are connected into four major interconnections called grids. Operational component failures of any entity connected to any of the grids could cause failures in that grid. The Company continues to assess these risks as the millennium approaches to evaluate the likelihood of failures and develop approaches for mitigating the risk of failures. Contingency plans for the Company were completed by June 30, 1999. The plan is dedicated to ensuring that established and expected levels of customer service are maintained without interruption, while core business functionality is preserved during the millennium transition. Additionally, the plan utilizes existing operating policies and procedures, disaster re- covery plans, and enterprise prioritization of all systems and applications by examining potential exposures while documenting clear mitigation strategies. Contingency planning, risk mitigation, and testing activities will continue through the year 1999 and into the year 2000 by all Company organizations. Revisions to the plan will be made when necessary. 15 PART I. FINANCIAL INFORMATION (Continued) CITIZENS UTILITIES COMPANY AND SUBSIDIARIES The Company believes its mission critical systems and products are essentially Y2K ready. The Company is and will continue to use both internal and external resources to reprogram, replace and test software and address remediation of IT and non-IT operational assets for Y2K compliance. Testing, remediation and monitoring will continue through the remainder of 1999 to verify that there are no outstanding problems that were not captured during the initial Y2K efforts. Also, review, modifications and testing of the contingency plans will take place throughout the remainder of 1999 and into the year 2000. The extent and magnitude of the Y2K problem is difficult to predict or quantify. The above information is based on the Company's best estimates which were made using numerous assumptions, including the availability and future costs of certain technological and other resources, third party modification actions and other factors. Given the complexity of the issue and the possibility of unidentified risks, actual results may vary materially from those discussed above. Specific factors that might cause such differences include, among others, the availability and cost of the personnel trained in this area, the ability to locate and correct all affected computer codes, the timing and success of remedial efforts of third party suppliers and similar uncertainties. 16 PART I. FINANCIAL INFORMATION (Continued) CITIZENS UTILITIES COMPANY AND SUBSIDIARIES (b) Results of Operations --------------------- REVENUES -------- Revenues for the three and nine months ended September 30, 1999 increased $35.2 million, or 15%, and $124.8 million, or 18%, respectively, as compared with the prior year periods primarily due to an increase in communication's network access services and CLEC's local telephone and long distance services.
For the three months For the nine months ended September 30, ended September 30, --------------------------------------------- ------------------------------------------- ($ in thousands) ($ in thousands) % % Increase/ Increase/ Communications revenues 1999 1998 (Decrease) 1999 1998 (Decrease) - ----------------------- ----------- ----------- ------------- ----------- ----------- ------------- Network access services $ 124,137 $ 107,325 16% $ 381,341 $ 315,332 21% Local network services 72,167 66,439 9% 214,159 194,753 10% Long distance and data services 17,480 26,435 (34%) 58,413 74,622 (22%) Directory services 8,178 7,949 3% 24,950 23,757 5% Other 11,750 10,822 9% 33,724 35,098 (4%) Eliminations (10,050) (7,660) N/A (33,072) (23,086) N/A ----------- ----------- ----------- ----------- $ 223,662 $ 211,310 6% $ 679,515 $ 620,476 10% =========== =========== =========== ===========
Network access services revenues for the three and nine months ended September 30, 1999 increased $16.8 million, or 16%, and $66 million, or 21%, as compared with the prior year periods primarily due to increased minutes of use, an increase in special access revenues and a universal service fund settlement. Local network services revenues for the three and nine months ended September 30, 1999 increased $5.7 million, or 9%, and $19.4 million, or 10%, respectively, as compared with the prior year periods primarily due to access line growth and increased enhanced services revenues. Long distance and data services revenues for the three and nine months ended September 30, 1999 decreased $9 million, or 34%, and $16.2 million, or 22%, respectively, as compared with the prior year periods primarily due to the elimination of long distance product offerings to out-of-territory customers, partially offset by increased long distance minutes of use by in-territory customers. Directory services revenues for the three and nine months ended September 30, 1999 increased $.2 million, or 3%, and $1.2 million, or 5%, respectively, as compared with the prior year periods primarily due to an increase in advertising revenue. Other revenues for the three months ended September 30, 1999 increased $.9 million, or 9%, as compared with the prior year period primarily due to increased tariff revenues. Other revenues for the nine months ended September 30, 1999 decreased $1.4 million, or 4%, as compared with the prior year period primarily due to the phasing out of certain surcharges resulting from regulatory decisions in California and New York. Eliminations represent network access revenues received by the Company's local exchange operations from its long distance operations and CLEC operations. 17 PART I. FINANCIAL INFORMATION (Continued) CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
For the three months For the nine months ended September 30, ended September 30, --------------------------------------------- ------------------------------------------- ($ in thousands) ($ in thousands) % % Increase/ Increase/ CLEC revenues 1999 1998 (Decrease) 1999 1998 (Decrease) - ------------- ----------- ----------- ------------ ----------- ----------- ------------ Network services $ 14,024 $ 9,009 56% $ 37,431 $ 26,487 41% Local telephone services 22,313 9,987 123% 55,221 23,780 132% Long distance services 4,812 2,512 92% 22,587 6,233 262% Data services 7,453 4,156 79% 17,674 10,664 66% Eliminations (747) (650) N/A (2,215) (2,265) N/A ----------- ----------- ----------- ----------- $ 47,855 $ 25,014 91% $ 130,698 $ 64,899 101% =========== =========== =========== ===========
Network services revenues for the three and nine months ended September 30, 1999 increased $5 million, or 56%, and $10.9 million, or 41%, respectively, as compared with the prior year periods primarily due to sales of additional circuits to new and existing customers. Local telephone services revenues for the three and nine months ended September 30, 1999 increased $12.3 million, or 123%, and $31.4 million, or 132%, respectively, as compared with the prior year periods primarily due to an increase in reciprocal compensation revenues that are earned under various interconnection agreements including new agreements that began in the second and third quarters of 1999. In addition, increased sales of the integrated service digital network (ISDN) product to Internet Service Providers and an increase in local dial tone services contributed to the increase. The CLEC has various interconnection agreements in the states in which it operates. These agreements govern reciprocal compensation relating to the transport and termination of traffic between the Incumbent Local Exchange Carrier's and the CLEC's networks. On February 25, 1999, the Federal Communications Commission issued a Declaratory Ruling and Notice of Proposed Rulemaking that categorized calls terminated to Internet Service Providers as "largely" interstate in nature which may have an effect on the recognition of reciprocal compensation revenues in the future. Long distance services revenues for the three and nine months ended September 30, 1999 increased $2.3 million, or 92%, and $16.4 million, or 262%, respectively, as compared with the prior year periods primarily due to large increases in minutes processed as a result of adding new customers and expanded services for existing customers, partially offset by decreased sales efforts for prepaid service programs due to the CLEC's strategic decision to eliminate low margin activities. Data services revenues for the three and nine months ended September 30, 1999 increased $3.3 million, or 79%, and $7 million, or 66%, respectively, as compared with the prior year periods primarily due to increased sales and customer demand for Internet and frame relay services. Eliminations reflect intercompany activity between the Company's CLEC and communications sectors. 18 PART I. FINANCIAL INFORMATION (Continued) CITIZENS UTILITIES COMPANY AND SUBSIDIARIES OPERATING EXPENSES ------------------
For the three months For the nine months ended September 30, ended September 30, --------------------------------------------- ------------------------------------------- ($ in thousands) ($ in thousands) % % Increase/ Increase/ 1999 1998 (Decrease) 1999 1998 (Decrease) ----------- ----------- ------------ ----------- ----------- ------------- Network expenses $ 29,445 $ 33,981 (13%) $ 122,224 $ 99,004 23% Eliminations (10,797) (9,050) N/A (35,287) (25,351) N/A ----------- ----------- ----------- ----------- $ 18,648 $ 24,931 (25%) $ 86,937 $ 73,653 18% =========== =========== =========== ===========
Network expenses for the three months ended September 30, 1999 decreased $4.5 million, or 13%, as compared with the prior year period primarily due to CLEC vendor credits and the Company's decreased long distance minutes of use associated with out-of-territory long distance customers. Network expenses for the nine months ended September 30, 1999 increased $23.2 million, or 23%, as compared with the prior year period primarily due to expenses related to the CLEC national data expansion, partially offset by CLEC vendor credits and decreased communications sector long distance minutes of use associated with out-of-territory long distance customers. Eliminations represent network expenses incurred by the Company's long distance operation for services provided by its local exchange operations and intercompany activity between the Company's CLEC and communications sectors.
For the three months For the nine months ended September 30, ended September 30, --------------------------------------------- ------------------------------------------- ($ in thousands) ($ in thousands) % % Increase/ Increase/ 1999 1998 (Decrease) 1999 1998 (Decrease) ----------- ----------- ------------ ----------- ----------- ------------- Depreciation and amortization expense $ 64,628 $ 50,004 29% $ 186,276 $ 148,943 25%
Depreciation and amortization expense for the three and nine months ended September 30, 1999 increased $14.6 million, or 29%, and $37.3 million, or 25%, respectively, as compared with the prior year periods primarily due to increased property, plant and equipment. 19 PART I. FINANCIAL INFORMATION (Continued) CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
For the three months For the nine months ended September 30, ended September 30, --------------------------------------------- ------------------------------------------- ($ in thousands) ($ in thousands) % % Increase/ Increase/ Other Operating Expenses 1999 1998 (Decrease) 1999 1998 (Decrease) - ------------------------ ----------- ----------- ------------ ----------- ----------- ------------- Operating $ 134,267 $ 112,418 19% $ 394,274 $ 318,955 24% Taxes other than income 15,830 15,791 - 48,286 43,733 10% Sales and marketing 17,148 14,194 21% 51,341 33,796 52% ----------- ----------- ----------- ----------- $ 167,245 $ 142,403 17% $ 493,901 $ 396,484 25% =========== =========== =========== ===========
Operating expenses for the three and nine months ended September 30, 1999 increased $21.8 million, or 19%, and $75.3 million, or 24%, respectively, as compared with the prior year periods primarily due to increased CLEC expenses relating to the expansion of data services and products exit costs to eliminate the low margin prepaid phone card and videoconference products, communications sector Y2K expenses and expenses associated with Rhinelander Telecommunciations, Inc. Taxes other than income for the nine months ended September 30, 1999 increased $4.6 million, or 10%, as compared with the prior year period primarily due to increases in payroll and property taxes. Sales and marketing expenses for the three and nine months ended September 30, 1999 increased $3 million, or 21%, and $17.5 million, or 52%, respectively, as compared with the prior year periods primarily due to increased personnel and product advertising to support the delivery of services in existing and new markets including the expansion of CLEC data services and products. OTHER INCOME, NET/MINORITY INTEREST/INTEREST EXPENSE/INCOME TAXES -----------------------------------------------------------------
For the three months For the nine months ended September 30, ended September 30, --------------------------------------------- ------------------------------------------- ($ in thousands) ($ in thousands) % % Increase/ Increase/ Other Income, Net 1999 1998 (Decrease) 1999 1998 (Decrease) - ----------------- ----------- ----------- ------------ ----------- ----------- ------------- Investment income $ 8,205 $ 8,237 - $ 88,784 $ 24,754 259% Other 1,277 (207) 717% 3,162 1,550 104% ----------- ----------- ---------- ----------- $ 9,482 $ 8,030 18% $ 91,946 $ 26,304 250% =========== =========== =========== ===========
Investment income for the nine months ended September 30, 1999 increased $64 million, or 259%, as compared with the prior year period primarily due to the $69.5 million gain on the sale of the Company's investment in Centennial in January 1999, partially offset by lower investment income earned due to lower average investment balances. Other income for the three and nine months ended September 30, 1999 increased $1.5 million, or 717%, and $1.6 million, or 104%, respectively, as compared with the prior year periods primarily due to a increase in the equity component of Allowance for Funds Used during Construction. 20 PART I. FINANCIAL INFORMATION (Continued) CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
For the three months For the nine months ended September 30, ended September 30, --------------------------------------------- ------------------------------------------- ($ in thousands) ($ in thousands) % % Increase/ Increase/ 1999 1998 (Decrease) 1999 1998 (Decrease) ----------- ----------- ------------ ----------- ----------- ------------ Minority interest $ 5,301 $ 3,788 40% $ 16,987 $ 8,924 90% Minority interest represents the 17.55% minority share of the Company's CLEC subsidiary's loss before the income tax benefit and the cumulative effect of change in accounting principle in 1998. Minority interest for the three and nine months ended September 30, 1999 increased $1.5 million, or 40%, and $8.1 million, or 90%, respectively, as compared with the prior year periods primarily due to increased losses recorded by ELI. For the three months For the nine months ended September 30, ended September 30, --------------------------------------------- ------------------------------------------- ($ in thousands) ($ in thousands) % % Increase/ Increase/ 1999 1998 (Decrease) 1999 1998 (Decrease) ----------- ----------- ------------ ----------- ----------- ------------- Interest expense $ 21,745 $ 17,181 27% $ 59,142 $ 48,576 22% Interest expense for the three and nine months ended September 30, 1999 increased $4.6 million, or 27%, and $10.6 million, or 22%, respectively, as compared with the prior year periods primarily due to an increase in the usage of ELI's outstanding line of credit and the issuance of $325 million of five-year unsecured notes in April 1999 by ELI. For the three months For the nine months ended September 30, ended September 30, --------------------------------------------- ------------------------------------------- ($ in thousands) ($ in thousands) % % Increase/ Increase/ 1999 1998 (Decrease) 1999 1998 (Decrease) ----------- ----------- ------------ ----------- ----------- ------------- Income taxes $ 3,956 $ 1,504 163% $ 30,812 $ 7,044 337% Income taxes for the three and nine months ended September 30, 1999 increased $2.5 million, or 163%, and $23.8 million, or 337%, respectively, as compared with the prior year periods primarily due to changes in taxable income and an increase in the effective tax rate. The effective tax rates for 1999 and 1998 both reflect the impact of non-taxable income and other favorable permanent differences. The impact of the aforementioned items for the 1999 tax year is being reduced by the increased pre-tax income resulting from the sale of investments included in other income.
21 PART I. FINANCIAL INFORMATION (Continued) CITIZENS UTILITIES COMPANY AND SUBSIDIARIES DISCONTINUED OPERATIONS -----------------------
For the three months For the nine months ended September 30, ended September 30, ----------------------------------------- ----------------------------------------- ($ in thousands) ($ in thousands) % % Increase/ Increase/ 1999 1998 (Decrease) 1999 1998 (Decrease) ----------- ------------ -------------- ------------ ------------ -------------- Revenues $ 154,132 $ 141,955 9% $ 467,797 $ 463,114 1% Operating income 16,201 21,352 (24%) 61,842 71,826 (14%) Net income 3,383 3,895 (13%) 16,863 16,790 -
Revenues from discontinued operations for the three and nine months ended September 30, 1999 increased $12.2 million, or 9%, and $4.7 million, or 1%, respectively, as compared with the prior year periods primarily due to higher purchased electric energy and fuel oil costs passed on to customers, increased consumption and customer growth. Operating income from discontinued operations for the three and nine months ended September 30, 1999 decreased $5.2 million, or 24%, and $10 million, or 14%, respectively, as compared with the prior year periods primarily due to a commission ordered one time customer refund in one of the Company's service areas and increased payroll and Y2K costs, partially offset by an increase in gross margins. Net income from discontinued operations for the three months ended September 30, 1999 decreased $.5 million, or 13%, as compared with the prior year period primarily due to a commission ordered one time customer refund in one of the Company's service areas and increased payroll and Y2K costs, partially offset by a decrease in income taxes. 22 PART I. FINANCIAL INFORMATION (Continued) CITIZENS UTILITIES COMPANY AND SUBSIDIARIES NET INCOME AND NET INCOME PER COMMON SHARE ------------------------------------------
For the three months For the nine months ended September 30, ended September 30, ------------------------------------------ ----------------------------------------- ($ in thousands) ($ in thousands) % % Increase/ Increase/ 1999 1998 (Decrease) 1999 1998 (Decrease) ------------ ------------ -------------- ------------ ------------- -------------- Net income $ 11,908 $ 14,461 (18%) $ 74,284 $ 55,702 33% Net income per common share: Basic $ .05 $ .06 (17%) $ .29 $ .21 38% Diluted $ .05 $ .06 (17%) $ .28 $ .21 33% Net income and net income per share for the three months ended September 30, 1999 decreased $2.6 million, or 18%, and .01(cent), or 17%, respectively, as compared with the prior year period primarily due to increased losses from the Company's CLEC subsidiary, Y2K costs and an increase in the effective income tax rate. Net income and net income per share for the nine months ended September 30, 1999 increased $18.6 million, or 33%, and .08(cent), or 38%, re- spectively, as compared with the prior year period primarily due to the first quarter $69.5 million gain on the sale of the Company's investment in Centennial, partially offset by increased losses from the Company's CLEC subsidiary and Y2K costs.
23 PART I. FINANCIAL INFORMATION (Continued) CITIZENS UTILITIES COMPANY AND SUBSIDIARIES Item 3. Quantitative and Qualitative Disclosures about Market Risk ---------------------------------------------------------- The Company is exposed to the impact of interest rate and market risks. In the normal course of business, the Company employs established policies, procedures and internal processes to manage its exposure to interest rate and market risks. The Company's objective in managing its interest rate risk is to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. To achieve these objectives, the Company maintains fixed rate debt on a majority of its borrowings and refinances debt when advantageous. In an effort to reduce interest rate risk the Company's CLEC subsidiary issued fixed interest rate $325 million, five-year senior unsecured notes in April 1999 that are guaranteed by the Company. The notes have a fixed interest rate. The net proceeds from the issuance were used to repay outstanding borrowings under the CLEC's floating rate bank credit facility. The Company maintains a portfolio of investments consisting of both equity and debt financial instruments. The Company's equity portfolio is primarily comprised of investments in communications companies. The Company's bond portfolio consists of government, corporate and municipal fixed-income securities. The Company does not hold or issue derivative or other financial instruments for trading purposes. The Company purchases monthly gas futures contracts to manage well-defined commodity price fluctuations, caused by weather and other unpredictable factors, associated with the Company's commitments to deliver natural gas to certain industrial customers at fixed prices. This derivative financial instrument activity is not material to the Company's consolidated financial position, results of operations or cash flows. 24 PART II. OTHER INFORMATION CITIZENS UTILITIES COMPANY AND SUBSIDIARIES Item 1. Legal Proceedings ----------------- In November 1995, the Company's Vermont electric division was permitted an 8.5% rate increase. Subsequently, the Vermont Public Service Board (VPSB) called into question the level of rates awarded the Company in connection with its formal review of allegations made by the Department of Public Service (the DPS), the consumer advocate in Vermont and a former Citizens employee. The major issues in this proceeding involved classification of certain costs to property, plant and equipment accounts and the Company's Demand Side Management program. In addition, the DPS believed that the Company should have sought and received regulatory approvals prior to construction of certain facilities in prior years. On June 16, 1997, the VPSB ordered the Company to reduce its rates for Vermont electric service by 14.65% retroactive to November 1, 1995 and to refund to customers, with interest, all amounts collected since that time in excess of the rates authorized by the VPSB. In addition, the VPSB assessed statutory penalties totaling $60,000 and placed the Company on regulatory probation for a period of at least five years. During this probationary period, the Company could lose its franchise to operate in Vermont if it violates the terms of probation prescribed by the VPSB. The VPSB prescribed final terms of probation in its final order issued September 15, 1998. In October 1998, the Company filed an appeal in the Vermont Supreme Court challenging certain of the penalties imposed by the VPSB. In August 1997, a lawsuit was filed in the United States District Court for the District of Connecticut (Leventhal vs. Tow, et al.) against the Company and five of its officers, one of whom is also a director, on behalf of all persons who purchased or otherwise acquired Series A and Series B shares of Common Stock of the Company between September 5, 1996 and July 11, 1997, inclusive. On February 9, 1998, the plaintiffs filed an amended complaint. The complaint alleged that Citizens and the individual defendants, during such period, violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 based upon certain public statements made by the Company, which are alleged to be materially false or misleading, or are alleged to have failed to disclose information necessary to make the statements made not false or misleading. The plaintiffs sought to recover unspecified compensatory damages. The Company and the individual defendants believed the allegations are unfounded and filed a motion to dismiss on March 27, 1998. On March 30, 1999 the Court dismissed the action. On April 29, 1999 the plaintiffs filed a notice of appeal with the Court of Appeals for the Second Circuit. A briefing schedule was established and argument is to be held no earlier than November 29, 1999. In March 1998, a lawsuit was filed in the United States District Court for the District of Connecticut (Ganino vs. Citizens Utilities Company, et al.), against the Company and three of its officers, one of whom is also a director, on behalf of all purchasers of the Company's Common Stock between May 6, 1996 and August 7, 1997, inclusive. The complaint alleges that the Company and the individual defendants, during such period, violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by making materially false and misleading public statements concerning the Company's relationship with a purported affiliate, Hungarian Telephone and Cable Corp. (HTCC), and by failing to disclose material information necessary to render prior statements not misleading. The plaintiff seeks to recover unspecified compensatory damages. The Company and the individual defendants believe that the allegations are unfounded and filed a motion to dismiss. The plaintiff requested leave to file an amended complaint and an amended complaint was served on the Company on July 24, 1998. The Company's motion to dismiss the amended complaint was filed on October 13, 1998. The Court dismissed the action with prejudice on June 28, 1999. The Plaintiffs filed a notice of appeal with the Court of Appeals for the Second Circuit and briefing is to be completed by December 20, 1999, with argument to be held not earlier than January 17, 2000. In November 1998, a class action lawsuit was filed in state District Court for Jefferson Parish, Louisiana, against the Company and three of its subsidiaries: LGS Natural Gas Company, LGS Intrastate, Inc. and Louisiana General Service Company. The lawsuit alleges that the Company and the other named defendants passed through in rates charged to Louisiana customers certain costs that plaintiffs contend were unlawful. The lawsuit seeks compensatory damages in the amount of the alleged overcharges and punitive damages equal to three times the amount of any compensatory damages, as allowed under Louisiana law. In addition, the Louisiana Public Service Commission has opened an investigation into the allegations raised in the lawsuit. The Company and its subsidiaries believe that the allegations made in the lawsuit are unfounded and the Company will vigorously defend its interests in both the lawsuit and the related Commission investigation. In addition, the Company is party to various other legal proceedings arising in the normal course of business. The outcome of individual matters is not predictable. However, management believes that the ultimate resolution of all such matters, including those discussed above, after considering insurance coverages, will not have a material adverse effect on the Company's financial position, results of operations, or its cash flows. 25 PART II. OTHER INFORMATION (Continued) CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
Item 6. Exhibits and Reports on Form 8-K -------------------------------- a) Exhibit: 27 Financial data schedule for the period ended September 30, 1999. b) Reports on Form 8-K: The Company filed on Form 8-K dated August 5, 1999 under Item 7 "Exhibits," a press release announcing financial results for the quarter ended June 30, 1999 and certain operating data. The Company filed on Form 8-K dated September 22, 1999 under Item 5 "Other Events" and Item 7 "Exhibits," a press release announ- cing definitive agreements to purchase 58,723 telephone access lines from GTE Corporation. The Company filed on Form 8-K dated October 18, 1999 under Item 5 "Other Events" and Item 7 "Exhibits," a press release announcing that it had agreed to sell its water and wastewater operations to American Water Works, Inc.
26 PART II. OTHER INFORMATION (Continued) CITIZENS UTILITIES COMPANY AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CITIZENS UTILITIES COMPANY -------------------------- (Registrant) By: /s/ Robert J. DeSantis --------------------------- Robert J. DeSantis Vice President and Chief Financial Officer By: /s/ Livingston E. Ross --------------------------- Livingston E. Ross Vice President and Chief Accounting Officer Date: November 12, 1999 27 EX-27 2 FDS FOR THE PERIOD ENDED 9/30/99
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CITIZENS UTILITIES COMPANY AND SUBSIDIARIES' CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000020520 CITIZENS UTILITIES COMPANY 1,000 9-MOS DEC-31-1998 SEP-30-1999 PER-BOOK 2,868,608 541,498 290,590 187,838 148,955 5,600,258 65,099 1,564,464 191,387 1,863,214 201,250 0 2,080,050 0 0 0 22,333 0 0 0 1,634,661 5,600,258 810,213 30,812 86,937 767,114 43,099 91,946 152,032 59,142 74,284 4,657 74,284 0 0 371,372 .29 .28 REPRESENTS INVESTMENT FUNDS. REPRESENTS REGULATORY ASSETS. DEFERRED DEBITS AND OTHER ASSETS. TOTAL ASSETS INCLUDES $1,562,769 OF NET ASSETS FROM DISCONTINUED OPERATIONS. COMPANY OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SECURITIES OF A SUBSIDIARY TRUST, THE SOLE ASSETS OF WHICH ARE SECURITIES OF A SUBSIDIARY PARTNERSHIP, SUBSTANTIALLY ALL THE ASSETS OF WHICH ARE CONVERTIBLE DEBENTURES OF THE COMPANY. INCLUDES $191,363 OF NET LIABILITIES OF DISCONTINUED OPERATIONS. REPRESENTS NETWORK EXPENSES. NET INCOME INCLUDES INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX OF $16,863.
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