CITIZENS UTILITIES COMPANY FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2000 -------------- |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________to__________ Commission file number 001-11001 --------- CITIZENS UTILITIES COMPANY ________________________________________________________________________________ (Exact name of registrant as specified in its charter) Delaware 06-0619596 ________________________________ ____________________________________ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 3 High Ridge Park P.O. Box 3801 Stamford, Connecticut 06905 ________________________________________ ____________________________________ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (203) 614-5600 ______________________________ NONE ________________________________________________________________________________ (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days. Yes X No The number of shares outstanding of the registrant's class of common stock as of April 28, 2000 were 263,679,242.
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES Index to Consolidated Financial Statements Page No. -------- Part I. Financial Information Consolidated Balance Sheets at March 31, 2000 and December 31, 1999 2 Consolidated Statements of Income and Comprehensive Income (Loss) for the Three Months Ended March 31, 2000 and 1999 3 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2000 and 1999 4 Notes to Consolidated Financial Statements 5 Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Quantitative and Qualitative Disclosures about Market Risk 13 Part II. Other Information Legal Proceedings 14 Exhibits and Reports on Form 8-K 15 Signatures 16 1
PART I. FINANCIAL INFORMATION CITIZENS UTILITIES COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands) March 31, December 31, 2000 1999 ---------- ---------- ASSETS - ------ Current assets: Cash $ 43,992 $ 37,141 Accounts receivable, net 217,785 241,519 Other 30,038 29,964 ---------- ---------- Total current assets 291,815 308,624 ---------- ---------- Property, plant and equipment 4,567,876 4,458,654 Less accumulated depreciation 1,620,900 1,569,936 ---------- ---------- Net property, plant and equipment 2,946,976 2,888,718 ---------- ---------- Investments 546,652 591,386 Regulatory assets 183,895 184,942 Deferred debits and other assets 136,817 141,274 Assets of discontinued operations 1,652,310 1,656,414 ---------- ---------- Total assets $ 5,758,465 $5,771,358 ========== ========== LIABILITIES AND EQUITY - ---------------------- Current liabilities: Long-term debt due within one year $ 33,005 $ 31,156 Accounts payable and other current liabilities 333,375 435,856 ---------- ---------- Total current liabilities 366,380 467,012 Deferred income taxes 448,160 460,208 Customer advances for construction and contributions in aid of construction 180,652 179,831 Deferred credits and other liabilities 70,827 87,668 Regulatory liabilities 26,419 27,000 Long-term debt 2,193,494 2,107,460 Liabilities of discontinued operations 394,861 310,269 ---------- ---------- Total liabilities 3,680,793 3,639,448 ---------- ---------- Company Obligated Mandatorily Redeemable Convertible Preferred Securities * 201,250 201,250 Minority interest in subsidiary 6,930 11,112 Shareholders' equity: Common stock issued, $.25 par value 65,811 65,519 Additional paid-in capital 1,589,621 1,577,903 Retained earnings 268,915 261,590 Accumulated other comprehensive income (13,122) 14,923 Treasury stock (41,733) (387) ---------- ---------- Total shareholders' equity 1,869,492 1,919,548 ---------- ---------- Total liabilities and shareholders' equity $ 5,758,465 $ 5,771,358 ========== ========== * Represents securities of a subsidiary trust, the sole assets of which are securities of a subsidiary partnership, substantially all the assets of which are convertible debentures of the Company. The accompanying Notes are an integral part of these Consolidated Financial Statements. 2
PART I. FINANCIAL INFORMATION (Continued) CITIZENS UTILITIES COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS) FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (In thousands, except per-share amounts) 2000 1999 --------- --------- Revenue $ 282,455 $ 264,750 --------- --------- Operating Expenses: Network access 27,003 34,395 Depreciation and amortization 82,705 61,885 Other operating expenses 155,981 161,338 Acquisition assimilation expenses 3,974 - --------- --------- Total operating expenses 269,663 257,618 --------- --------- Income from operations 12,792 7,132 Investment and other income, net 5,265 75,521 Minority interest 6,285 5,993 Interest expense 29,164 19,098 --------- --------- Income (loss) before income taxes, dividends on convertible preferred securities and discontinued operations (4,822) 69,548 Income tax expense (benefit) (1,253) 26,606 --------- --------- Income (loss) before dividends on convertible preferred securities and discontinued operations (3,569) 42,942 Dividends on convertible preferred securities, net of income tax benefit 1,552 1,552 --------- --------- Income (loss) before discontinued operations (5,121) 41,390 Income from discontinued operations, net of tax 12,447 13,235 --------- --------- Net income 7,326 54,625 Other comprehensive income (loss), net of tax and reclassification adjustments (28,045) (14,118) --------- --------- Total comprehensive income (loss) $ (20,719) $ 40,507 ========= ========= Income (loss) before discontinued operations per common share: Basic $ (.02) $ .16 Diluted $ (.02) $ .16 Income from discontinued operations per common share: Basic $ .05 $ .05 Diluted $ .05 $ .05 Net income per common share: Basic $ .03 $ .21 Diluted $ .03 $ .21 The accompanying Notes are an integral part of these Consolidated Financial Statements. 3
PART I. FINANCIAL INFORMATION (Continued) CITIZENS UTILITIES COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (In thousands) 2000 1999 ----------- ----------- Net cash provided by continuing operating activities $ 77,329 $ 217,671 ----------- ----------- Cash flows used for investing activities: Construction expenditures (138,466) (145,581) Securities purchased (23,886) (394,037) Securities sold 17,054 398,414 Securities matured 6,400 - Other (6,901) (297) ----------- ----------- (145,799) (141,501) Cash flows from financing activities: Short-term debt repayments - (110,000) Long-term debt borrowings 88,543 68,686 Long-term debt principal payments (10,814) (1,998) Issuance of common stock 12,009 8 Common stock buybacks (41,346) (131) Other 822 (12,522) ----------- ---------- 49,214 (55,957) Cash from (used for) discontinued operations 26,107 (30,485) Increase (decrease) in cash 6,851 (10,272) Cash at January 1, 37,141 31,922 ----------- ---------- Cash at March 31, $ 43,992 $ 21,650 =========== ========== The accompanying Notes are an integral part of these Consolidated Financial Statements. 4
PART I. FINANCIAL INFORMATION (Continued) CITIZENS UTILITIES COMPANY AND SUBSIDIARIES (1) Summary of Significant Accounting Policies: ------------------------------------------ (a)Basis of Presentation: Citizen Utilities Company and its subsidiaries are referred to as "we", "us" or "our" in this report. The unaudited consolidated financial statements include our accounts and have been prepared in conformity with generally accepted accounting principles and should be read in conjunction with the consolidated financial statements and notes included in our 1999 Annual Report on Form 10-K. These unaudited consolidated financial statements include all adjustments, which consist of normal recurring accruals necessary to present fairly the results for the interim periods shown. Certain information and footnote disclosures have been condensed pursuant to Securities and Exchange Commission rules and regulations. The results of the interim periods are not necessarily indicative of the results for the full year. Certain reclassifications of balances previously reported have been made to conform to current presentation. (b)Regulatory Assets and Liabilities: Our regulated operations are subject to the provisions of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation." SFAS 71 requires regulated entities to record regulatory assets and liabilities as a result of actions of regulators. (c)Net Income Per Common Share: Basic net income per common share is computed using the weighted average number of common shares outstanding during the period being reported on. Diluted net income per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock at the beginning of the period being reported on (see Note 5). (2) Acquisitions: ------------ On May 27, September 21, and December 16, 1999, we announced that we had entered into definitive agreements to purchase from GTE approximately 366,000 telephone access lines (as of December 31, 1999) in Arizona, California, Illinois, Minnesota and Nebraska for approximately $1,171,000,000 in cash. We expect that these acquisitions, which are subject to various state and federal regulatory approvals, will occur on a state-by-state basis and will begin closing in the third quarter 2000. On June 16, 1999, we announced that we had entered into a series of definitive agreements to purchase from US West approximately 545,000 telephone access lines (as of December 31, 1999) in Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, North Dakota and Wyoming for approximately $1,650,000,000 in cash. We expect that these acquisitions, which are subject to various state and federal regulatory approvals, will occur on a state-by-state basis and will begin closing in the third quarter 2000. (3) Discontinued Operations: ----------------------------- On August 24, 1999, our Board of Directors approved a plan of divestiture by sale of our public services properties, which include gas, electric and water and wastewater businesses. The proceeds from the sales of public services businesses will be used to fund the telephone access line purchases. On October 18, 1999, we announced that we had agreed to sell our water and wastewater operations to American Water Works, Inc. for $835,000,000 plus the assumption of certain liabilities. The transaction is expected to close in 2000 following regulatory approvals. On February 15, 2000, we announced that we had agreed to sell our electric utility operations for $535,000,000 plus the assumption of certain liabilities. The Arizona and Vermont electric divisions will be sold to Cap Rock Energy Corp. and the Kauai (Hawaii) electric division will be sold to Kauai Island Electric Co-op. The transactions are expected to close in 2000 following regulatory approvals. On April 13, 2000, we announced that we had agreed to sell our Louisiana Gas operations to Atmos Energy Corporation for $375,000,000 plus the assumption of certain liabilities. The transaction is expected to close in 2001 following regulatory approvals. 5
PART I. FINANCIAL INFORMATION (Continued) CITIZENS UTILITIES COMPANY AND SUBSIDIARIES We have accounted for the planned divestiture of the public services properties as a discontinued operation. Discontinued operations in the consolidated statements of income and comprehensive income reflect the results of operations of the public services properties including allocated interest expense for the periods presented. Interest expense was allocated to discontinued operations based on debt issued for these businesses. The debt presented in liabilities of discontinued operations represents only debt to be transferred pursuant to the asset sale agreements described above. Summarized financial information for the discontinued operations is set forth below: <TABLE> <CAPTION> <S> <C> <C> March 31, December 31, 2000 1999 ------------------------- ($ in thousands) Current assets $ 107,177 $ 109,250 Net property, plant and equipment 1,465,689 1,459,958 Other assets 79,444 87,206 --------- --------- Total assets $ 1,652,310 $ 1,656,414 ========= ========= Current liabilities $ 97,629 $ 18,040 Long-term debt 134,542 133,817 Other liabilities 162,690 158,412 --------- --------- Total liabilities $ 394,861 $ 310,269 ========= ========= For the three months ended March 31, -------------------------- 2000 1999 -------------------------- ($ in thousands) Revenue $ 190,312 $ 172,764 Operating income $ 28,961 $ 29,191 Income taxes $ 5,942 $ 4,912 Net income $ 12,447 $ 13,235 </TABLE> The March 31, 2000 balance sheet has been adjusted for changes in assets and liabilities of discontinued operations as well as for new agreements that have been signed since the December 31, 1999 balance sheet was published. (4) 1999 Restructuring Charges: --------------------------- In the fourth quarter of 1999, we approved a plan to restructure our corporate office activities. In connection with this plan, we recorded a pre-tax charge of $5,760,000 in other operating expenses in the fourth quarter of 1999. The restructuring results in the reduction of 49 corporate employees. All affected employees were communicated with in the early part of November 1999. As of March 31, 2000, approximately $2,677,000 of the costs had been paid and 22 employees were terminated. The remaining employees will be terminated during 2000. The remaining accrual of approximately $3,083,000 is included in other current liabilities. These costs are expected to be paid during 2000. 6
PART I. FINANCIAL INFORMATION (Continued) CITIZENS UTILITIES COMPANY AND SUBSIDIARIES (5) Net Income Per Common Share: ----------------------------- The reconciliation of the net income per common share calculation for the three months ended March 31, 2000, and 1999 is as follows: <TABLE> <CAPTION> <S> <C> <C> <C> <C> <C> <C> 2000 1999 ----------------------------- ------------------------- ($ in thousands, except for per share amounts) Income Shares Per Share Income Shares Per Share ------ ------ --------- ------ ------ --------- Net income per common share: Basic $ 7,326 262,718 $ .03 $ 54,625 259,701 $.21 Effect of dilutive shares - 4,548 - - 651 - Diluted $ 7,326 267,266 $ .03 $ 54,625 260,352 $.21 </TABLE> All share amounts represent weighted average shares outstanding for each respective period. The diluted net income per common share calculation excludes the effect of potentially dilutive shares when their effect is antidilutive. At March 31, 2000, we have 4,025,000 shares of potentially dilutive Mandatorily Redeemable Convertible Preferred Securities (Convertible Preferred) which are convertible into common stock at a 3.76 to 1 ratio at an exercise price of $13.30 per share that are not included in the calculation as their effect is antidilutive. At March 31, 1999, these Convertible Preferred shares and certain potentially dilutive stock options were not included in the calculation as their effect was antidilutive at that time. (6) Segment Information: ------------------- We operate in two segments, telecommunications and ELI. The telecommunications segment provides both regulated and competitive communications services to residential, business and wholesale customers. ELI is a facilities based integrated communications provider providing a broad range of communications services throughout the United States. EBITDA is earnings before interest, income taxes, depreciation and amortization. EBITDA is a measure commonly used to analyze companies on the basis of operating performance. It is not a measure of financial performance under generally accepted accounting principles and should not be considered as an alternative to net income as a measure of performance nor as an alternative to cash flow as a measure of liquidity and may not be comparable to similarly titled measures of other companies. <TABLE> <CAPTION> <S> <C> <C> <C> <C> For the three months ended March 31, 2000 ----------------------------------------- Consolidated Telecommunications ELI Eliminations Total ------------------ --- ------------ ----- Revenue $ 226,312 $ 56,778 $ (635)(1) $ 282,455 Depreciation 69,950 12,755 82,705 Operating Income 32,020 (19,420) 192(2) 12,792 EBITDA 101,970 (6,665) 192(2) 95,497 For the three months ended March 31, 1999 ----------------------------------------- Consolidated Telecommunications ELI Eliminations Total ------------------ --- ------------ ----- Revenue $ 227,232 $ 38,216 $ (698)(1) $ 264,750 Depreciation 54,891 6,994 61,885 Operating Income 36,610 (29,803) 325(2) 7,132 EBITDA 91,501 (22,809) 325(2) 69,017 (1)Represents revenue received by ELI from our telecommunications operations. (2)Represents administrative fees charged to ELI by the Company. </TABLE> 7
PART I. FINANCIAL INFORMATION (Continued) CITIZENS UTILITIES COMPANY AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results ------------------------------------------------------------------------ of Operations ------------- This quarterly report on Form 10-Q contains forward-looking statements that are subject to risks and uncertainties which could cause actual results to differ materially from those expressed or implied in the statements. All forward-looking statements (including oral representations) are only predictions or statements of current plans, which we review continuously. All forward-looking statements may differ from actual future results due to, but not limited to, any of the following possibilities: o changes in the economy of our markets, o the nature and pace of technological changes, o the number and effectiveness of competitors in our markets, o changes in legal and regulatory policy, o success in overall strategy, o our ability to identify future markets and successfully expand existing ones, o the mix of products and services offered in our target markets, and o the effects of acquisitions and dispositions and the ability to effectively integrate businesses acquired. You should consider these important factors in evaluating any statement in this Form 10-Q or otherwise made by us or on our behalf. The following information is unaudited and should be read in conjunction with the consolidated financial statements and related notes to consolidated financial statements included in this report and as presented in our 1999 Annual Report on Form 10-K previously filed. We have no obligation to update or revise these forward-looking statements. (a) Liquidity and Capital Resources ------------------------------- We consider our operating cash flows and our ability to raise debt and equity capital as the principal indicators of our liquidity. For the three months ended March 31, 2000, we used cash flow from operations and proceeds from net financings and parties desiring utility services to fund capital expenditures. Funds requisitioned from the Industrial Development Revenue Bond construction fund trust accounts were used to partially fund the construction of certain public services plant. We have $3,200,000,000 of committed revolving bank credit facilities in addition to a credit commitment under which we may borrow up to $200,000,000. There were no amounts outstanding under these commitments at March 31, 2000. ELI has committed revolving lines of credit with commercial banks under which it may borrow up to $400,000,000. As of March 31, 2000, $300,000,000 was outstanding under ELI's revolving lines of credit. We have guaranteed all of ELI's obligations under these revolving lines of credit. Acquisitions - ------------ On May 27, September 21, and December 16, 1999, we announced that we had entered into definitive agreements to purchase from GTE approximately 366,000 telephone access lines (as of December 31, 1999) in Arizona, California, Illinois, Minnesota and Nebraska for approximately $1,171,000,000 in cash. We expect that these acquisitions, which are subject to various state and federal regulatory approvals, will occur on a state-by-state basis and will begin closing in the third quarter 2000. On June 16, 1999, we announced that we had entered into a series of definitive agreements to purchase from US West approximately 545,000 telephone access lines (as of December 31, 1999) in Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, North Dakota and Wyoming for approximately $1,650,000,000 in cash. We expect that these acquisitions, which are subject to various state and federal regulatory approvals, will occur on a state-by-state basis and will begin closing in the third quarter 2000. We expect to temporarily fund these telephone access line purchases with cash and investment balances and proceeds from commercial paper issuances, backed by the credit commitments described above. Permanent funding is expected to be from cash and investment balances and the proceeds from the divestiture of our public services businesses. 8
PART I. FINANCIAL INFORMATION (Continued) CITIZENS UTILITIES COMPANY AND SUBSIDIARIES Divestiture - ----------- On August 24, 1999, our Board of Directors approved a plan of divestiture for our public services properties, which include gas, electric and water and wastewater businesses. The proceeds from the sales of public services businesses will be used to fund the telephone access line purchases. On October 18, 1999, we announced that we had agreed to sell our water and wastewater operations to American Water Works, Inc. for $835,000,000 plus the assumption of certain liabilities. The transaction is expected to close in 2000 following regulatory approvals. On February 15, 2000, we announced that we had agreed to sell our electric utility operations for $535,000,000 plus the assumption of certain liabilities. The Arizona and Vermont electric divisions will be sold to Cap Rock Energy Corp. and the Kauai (Hawaii) Electric Division will be sold to Kauai Island Electric Co-op. The transactions are expected to close in 2000 following regulatory approvals. On April 13, 2000, we announced that we had agreed to sell our Louisiana Gas operations to Atmos Energy Corporation for $375,000,000 plus the assumption of certain liabilities. The transaction is expected to close in 2001 following regulatory approvals. We have accounted for the planned divestiture of the public services properties as a discontinued operation. Discontinued operations in the consolidated statements of income and comprehensive income reflect the results of operations of the public services properties including allocated interest expense for the periods presented. Interest expense was allocated to the discontinued operations based on the outstanding debt specifically identified with these businesses. (b) Results of Operations --------------------- <TABLE> <CAPTION> <S> <C> <C> <C> REVENUE ------- For the three months ended March 31, ----------------------------------------- ($ in thousands) % Increase/ Telecommunications revenue 2000 1999 (Decrease) - -------------------------- ---- ---- ---------- Network access services $ 121,656 $ 128,680 (5%) Local network services 73,555 69,913 5% Long distance and data services 20,066 21,101 (5%) Directory services 8,819 8,397 5% Other 12,649 9,794 29% Eliminations (10,433) (10,653) N/A --------- ---------- $ 226,312 $ 227,232 - ========= ========== </TABLE> Network access services revenue decreased $7 million, or 5%, as compared with the first quarter of 1999 primarily due to a non-recurring $10 million interstate universal service fund settlement received in the first quarter of 1999. The decrease was partially offset by access line and switched access minutes of use growth and increased special access revenue in the first quarter of 2000. Local network services revenue increased $3.6 million, or 5%, as compared with the first quarter of 1999 primarily due to access line growth, increased custom calling features and higher private line sales. Long distance and data services revenue decreased $1 million, or 5%, as compared with the first quarter of 1999 primarily due to a decrease in long distance minutes of use by out-of-territory customers, partially offset by an increase in long distance minutes of use by in-territory customers. Directory services revenue increased $.4 million, or 5%, as compared with the first quarter of 1999 primarily due to increased directory advertising and listing sales. Other revenue increased $2.9 million, or 29%, as compared with the first quarter of 1999 primarily due to increased equipment sales. Eliminations represent network access revenue received by our local exchange operations from our long distance operations. 9
PART I. FINANCIAL INFORMATION (Continued) CITIZENS UTILITIES COMPANY AND SUBSIDIARIES <TABLE> <CAPTION> <S> <C> <C> <C> For the three months ended March 31, ----------------------------------------- ($ in thousands) % Increase/ ELI revenue 2000 1999 (Decrease) - ----------- ---- ---- ---------- Network services $ 16,004 $ 10,424 54% Local telephone services 24,274 14,308 70% Long distance services 4,596 8,530 (46%) Data services 11,904 4,954 140% ---------- ---------- 56,778 38,216 49% Intersegment revenue (635) (698) N/A ---------- ---------- $ 56,143 $ 37,518 50% ========== ========== </TABLE> Network services revenue increased $5.6 million, or 54%, as compared with the first quarter 1999 primarily due to network expansion and sales of additional circuits to new and existing customers. Local telephone services revenue increased $10 million, or 70%, as compared with the first quarter of 1999 primarily due to increased dial tone and integrated service digital network (ISDN) revenue as a result of an increase in access line equivalents installed. Carrier access billings and reciprocal compensation revenue also increased. Long distance services revenue decreased $3.9 million, or 46%, as compared with the first quarter of 1999 primarily due to our decision to exit the prepaid services market in the third quarter of 1999, partially offset by increased minutes of use as a result of new customers and expanded services to existing customers. Data services revenue increased $7 million, or 140%, as compared with the first quarter of 1999 primarily due to increased sales from Internet services and an 18 month take-or-pay contract that commenced in September 1999. The take-or-pay contract provides $20 million in revenue for 2000. There is no assurance this take-or-pay contract will be renewed in 2001. Intersegment revenue reflects revenue received by ELI from our telecommunications operations. NETWORK ACCESS EXPENSE ---------------------- <TABLE> <CAPTION> <S> <C> <C> <C> For the three months ended March 31, ----------------------------------------- ($ in thousands) % Increase/ 2000 1999 (Decrease) ---- ---- --------- Network access $ 38,071 $ 45,746 (17%) Eliminations (11,068) (11,351) N/A ---------- ---------- $ 27,003 $ 34,395 (21%) ========== ========== </TABLE> Network access expenses decreased $7.7 million, or 17%, as compared with the first quarter of 1999 primarily due to a decrease in long distance minutes of use by out-of-territory customers of our telecommunications long distance operations and ELI's decision to exit the prepaid services market in the third quarter of 1999. Eliminations represent expenses incurred by our long distance operations related to network access services provided by our local exchange operations and expenses incurred by our telecommunications operations related to network services provided by ELI. 10
PART I. FINANCIAL INFORMATION (Continued) CITIZENS UTILITIES COMPANY AND SUBSIDIARIES DEPRECIATION AND AMORTIZATION EXPENSE ------------------------------------- <TABLE> <CAPTION> <S> <C> <C> <C> For the three months ended March 31, ----------------------------------------- ($ in thousands) % Increase/ 2000 1999 (Decrease) ---- ---- ---------- Depreciation and amortization $ 82,705 $ 61,885 34% </TABLE> Depreciation and amortization expense increased $20.8 million, or 34%, as compared with the first quarter of 1999 primarily due to $15.1 million of accelerated depreciation related to the change in useful life of an operating system in the telecommunications sector and increased property, plant and equipment. OTHER OPERATING EXPENSES ------------------------ <TABLE> <CAPTION> <S> <C> <C> <C> For the three months ended March 31, ------------------------------------------ ($ in thousands) % Increase/ 2000 1999 (Decrease) ---- ---- ---------- Operating expenses $ 122,594 $ 128,678 (5%) Taxes other than income 16,573 16,422 1% Sales and marketing 17,006 16,563 3% Eliminations (192) (325) N/A ---------- --------- $ 155,981 $ 161,338 (3%) ========== ========= </TABLE> Operating expenses decreased $6.1 million, or 5%, as compared with the first quarter of 1999 primarily due to decreased Y2K, separation and rent expense, partially offset by an increase in operating expenses to support the expanded delivery of services. Taxes other than income remained consistent with the first quarter of 1999. Sales and marketing expenses increased $.4 million, or 3%, as compared with the first quarter of 1999 primarily due to an increase in personnel and related expenses to support the expanded delivery of services in existing and new markets. Eliminations represent the elimination of administrative fees charged to ELI. ACQUISITION ASSIMILATION EXPENSES --------------------------------- <TABLE> <CAPTION> <S> <C> <C> <C> For the three months ended March 31, ------------------------------------------ ($ in thousands) % Increase/ 2000 1999 (Decrease) ---- ---- ---------- Acquisition assimilation expenses $ 3,974 $ - 100% </TABLE> Acquisition assimilation expenses were incurred by us related to the pending acquisition of approximately 1 million access lines. We anticipate that we will continue to incur such assimilation costs through the remainder of the fiscal year as we prepare to integrate the pending acquisitions. INCOME FROM OPERATIONS ---------------------- <TABLE> <CAPTION> <S> <C> <C> <C> For the three months ended March 31, ----------------------------------------- ($ in thousands) % Increase/ 2000 1999 (Decrease) ---- ---- ---------- Income from operations $ 12,792 $ 7,132 79% </TABLE> 11
PART I. FINANCIAL INFORMATION (Continued) CITIZENS UTILITIES COMPANY AND SUBSIDIARIES Income from operations increased $5.7 million or 79%, as compared with the first quarter of 1999 primarily due to decreased ELI operating losses and decreased Y2K and separation expenses, partially offset by increased depreciation expense related to the change in useful life of an operating system in the telecommunications sector and the 1999 non-recurring universal service fund revenue. <TABLE> <CAPTION> <S> <C> <C> <C> INVESTMENT AND OTHER INCOME, NET / MINORITY INTEREST / INTEREST EXPENSE / INCOME TAXES -------------------------------------------------------------------------------------- For the three months ended March 31, ----------------------------------------- ($ in thousands) % Increase/ 2000 1999 (Decrease) ---- ---- ---------- Investment and other income, net $ 5,265 $ 75,521 (93%) </TABLE> Investment and other income, net decreased $70.3 million, or 93%, as compared with the first quarter of 1999 primarily due to the $69.5 million gain on the sale of our investment in Centennial Cellular Corp. in January 1999. <TABLE> <CAPTION> <S> <C> <C> <C> For the three months ended March 31, ----------------------------------------- ($ in thousands) % Increase/ 2000 1999 (Decrease) ---- ---- ---------- Minority interest $ 6,285 $ 5,993 5% </TABLE> Minority interest represents the minority's share of ELI's loss before income tax. <TABLE> <CAPTION> <S> <C> <C> <C> For the three months ended March 31, ----------------------------------------- ($ in thousands) % Increase/ 2000 1999 (Decrease) ---- ---- --------- Interest expense $ 29,164 $ 19,098 53% </TABLE> Interest expense increased $10.1 million, or 53%, as compared with the first quarter of 1999 primarily due to increased ELI borrowings and the amortization of costs associated with our committed bank credit facilities. <TABLE> <CAPTION> <S> <C> <C> <C> For the three months ended March 31, ----------------------------------------- ($ in thousands) % Increase/ 2000 1999 (Decrease) ---- ---- --------- Income taxes $ (1,253) $ 26,606 (105%) </TABLE> Income taxes decreased $27.9 million, or 105%, as compared with the first quarter of 1999 primarily due to the $26.6 million of income taxes on the sale of our investment in Centennial Cellular Corp. in January 1999. DISCONTINUED OPERATIONS ----------------------- <TABLE> <CAPTION> <S> <C> <C> <C> For the three months ended March 31, ----------------------------------------- ($ in thousands) % Increase/ 2000 1999 (Decrease) ---- ---- --------- Revenue $ 190,312 $ 172,764 10% Operating income 28,961 29,191 (1%) Net income 12,447 13,235 (6%) </TABLE> 12
PART I. FINANCIAL INFORMATION (Continued) CITIZENS UTILITIES COMPANY AND SUBSIDIARIES Revenue from discontinued operations increased $17.5 million, or 10%, as compared with the first quarter of 1999 primarily due to customer growth in the public services sector, increased consumption in the electric and water and wastewater sectors, increased purchased fuel costs and purchased power costs passed on to customers, offset by decreased consumption in the gas sector. Operating income from discontinued operations decreased $.2 million, or 1%, and net income from discontinued operations decreased $.8 million, or 6%, as compared with the first quarter of 1999 primarily due to increased depreciation expense, maintenance expense and payroll related costs, partially offset by increased consumption in the electric and water and wastewater sectors. Increased income taxes also contributed to the decrease in net income. <TABLE> <CAPTION> <S> <C> <C> <C> NET INCOME / NET INCOME PER COMMON SHARE/ ---------------------------------------- COMPREHENSIVE INCOME (LOSS), NET OF TAX AND RECLASSIFICATION ADJUSTMENTS ------------------------------------------------------------------------ For the three months ended March 31, ------------------------------------------- ($ in thousands) % Increase/ 2000 1999 (Decrease) ---- ---- ---------- Net income $ 7,326 $ 54,625 (87%) Net income per common share $ .03 $ .21 (86%) Other comprehensive income (loss), net of tax and reclassification adjustments $ (28,045) $ (14,118) N/A </TABLE> Net income and net income per share decreased $47.3 million, or 87% and 18(cent), or 86%, respectively, due to accelerated depreciation related to the change in useful life of an operating system in the telecommunications sector, increased ELI interest expense, $42.9 million, or 16(cent) per share, after tax gain on the sale of our investment in Centennial Cellular Corp. in January 1999 and the 1999 non-recurring universal service fund revenue, partially offset by decreased Y2K and separation expenses. Other comprehensive income (loss), net of tax and reclassification adjustments decreased $28 million during the three months ended March 31, 2000 primarily due to increased unrealized losses on our investment portfolio. Other comprehensive income (loss), net of tax and reclassification adjustments decreased $14.1 million during the three months ended March 31, 1999 primarily due to the realization of the gain on the sale of our investment in Centennial Cellular Corp. in January 1999, partially offset by increased unrealized gains on our investment portfolio. Item 3. Quantitative and Qualitative Disclosures about Market Risk ---------------------------------------------------------- We are exposed to the impact of interest rate and market risks. In the normal course of business, we employ established policies, procedures and internal processes to manage our exposure to interest rate and market risks. Our objective in managing our interest rate risk is to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, we maintain fixed rate debt on a majority of our borrowings and refinance debt when advantageous. We maintain a portfolio of investments consisting of both equity and debt financial instruments. Our equity portfolio is comprised of investments in communications companies. Our bond portfolio consists of government, corporate and municipal fixed-income securities. We do not hold or issue derivative or other financial instruments for trading purposes. We purchase monthly gas futures contracts to manage well-defined commodity price fluctuations, caused by weather and other unpredictable factors, associated with our commitments to deliver natural gas to certain industrial customers at fixed prices. This derivative financial instrument activity relates to the discontinued operations and is not material to our consolidated financial position, results of operations or cash flows. 13
PART II. OTHER INFORMATION CITIZENS UTILITIES COMPANY AND SUBSIDIARIES Item 1. Legal Proceedings ----------------- In November 1995, our Vermont electric division was permitted an 8.5% rate increase. Subsequently, the Vermont Public Service Board (VPSB) called into question the level of rates awarded us in connection with its formal review of allegations made by the Department of Public Service (the DPS), the consumer advocate in Vermont and a former Citizens employee. The major issues in this proceeding involved classification of certain costs to property, plant and equipment accounts and our Demand Side Management program. In addition, the DPS believed that we should have sought and received regulatory approvals prior to construction of certain facilities in prior years. On June 16, 1997, the VPSB ordered us to reduce our rates for Vermont electric service by 14.65% retroactive to November 1, 1995 and to refund to customers, with interest, all amounts collected since that time in excess of the rates then authorized by the VPSB. In addition, the VPSB assessed statutory penalties totaling $60,000 and placed us on regulatory probation for a period of at least five years. During this probationary period, we could lose our franchise to operate in Vermont if we violate the terms of probation prescribed by the VPSB. The VPSB prescribed final terms of probation in its final order issued September 15, 1998. In October 1998, we filed an appeal in the Vermont Supreme Court challenging certain of the penalties imposed by the VPSB. The appeal has been fully briefed and argued and we are awaiting the Court's decision. In August 1997, a lawsuit was filed in the United States District Court for the District of Connecticut (Leventhal vs. Tow, et al.) against us and five of our officers, one of whom is also a director, on behalf of all persons who purchased or otherwise acquired Series A and Series B shares of our Common Stock between September 5, 1996 and July 11, 1997, inclusive. On February 9, 1998, the plaintiffs filed an amended complaint. The complaint alleged that we and the individual defendants, during such period, violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 based upon certain public statements made by us, which are alleged to be materially false or misleading, or are alleged to have failed to disclose information necessary to make the statements made not false or misleading. The plaintiffs sought to recover unspecified compensatory damages. We and the individual defendants believe the allegations are unfounded and filed a motion to dismiss on March 27, 1998 and on March 30, 1999 the Court dismissed the action. On April 29, 1999 the plaintiffs filed a notice of appeal with the Court of Appeals for the Second Circuit. The parties have entered into a settlement stipulation which is subject to the District Court's approval. In March 1998, a lawsuit was filed in the United States District Court for the District of Connecticut (Ganino vs. Citizens Utilities Company, et al.), against us and three of our officers, one of whom is also a director, on behalf of all purchasers of our Common Stock between May 6, 1996 and August 7, 1997, inclusive. The complaint alleges that we and the individual defendants, during such period, violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by making materially false and misleading public statements concerning our relationship with a purported affiliate, Hungarian Telephone and Cable Corp. (HTCC), and by failing to disclose material information necessary to render prior statements not misleading. The plaintiff seeks to recover unspecified compensatory damages. We and the individual defendants believe that the allegations are unfounded and filed a motion to dismiss. The plaintiff requested leave to file an amended complaint and an amended complaint was served on us on July 24, 1998. Our motion to dismiss the amended complaint was filed on October 13, 1998 and the Court dismissed the action with prejudice on June 28, 1999. The Plaintiffs filed a notice of appeal with the Court of Appeals for the Second Circuit, briefing has been completed and oral argument took place April 10, 2000. In November 1998, a class action lawsuit was filed in state District Court for Jefferson Parish, Louisiana, against us and our subsidiary LGS Natural Gas Company. The lawsuit alleges that we and the other named defendants passed through in rates charged to Louisiana customers certain costs that plaintiffs contend were unlawful. The lawsuit seeks compensatory damages in the amount of the alleged overcharges and punitive damages equal to three times the amount of any compensatory damages, as allowed under Louisiana law. In addition, the Louisiana Public Service Commission has opened an investigation into the allegations raised in the lawsuit. We believe that the allegations made in the lawsuit are unfounded and we will vigorously defend our interests in both the lawsuits and the related Commission investigation. In addition, we are party to proceedings arising in the normal course of business. The outcome of individual matters is not predictable. However, management believes that the ultimate resolution of all such matters, including those discussed above, after considering insurance coverages, will not have a material adverse effect on our financial position, results of operations, or our cash flows. 14
PART II. OTHER INFORMATION (Continued) CITIZENS UTILITIES COMPANY AND SUBSIDIARIES <TABLE> <CAPTION> <S> <C> Item 6. Exhibits and Reports on Form 8-K -------------------------------- a) Exhibits: 27 Financial data schedule for the periods ended March 31, 2000 and restated March 31, 1999. b) Reports on Form 8-K: We filed on Form 8-K dated February 15, 2000 under Item 5 "Other Events" and Item 7 "Exhibits," a press release announcing that we will sell all of our electric utility operations. We filed on Form 8-K dated March 22, 2000 under Item 7 "Exhibits," a press release announcing financial results for the year ended December 31, 1999 and certain operating data. </TABLE> 15
PART II. OTHER INFORMATION (Continued) CITIZENS UTILITIES COMPANY AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CITIZENS UTILITIES COMPANY -------------------------- (Registrant) By: /s/ Robert J. DeSantis -------------------------------------------- Robert J. DeSantis Vice President and Chief Financial Officer By: /s/ Livingston E. Ross -------------------------------------------- Livingston E. Ross Vice President and Chief Accounting Officer Date: May 12, 2000 16