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, 1996
UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 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, 1996 ------------------ Commission file number 001-11001 CITIZENS UTILITIES COMPANY (Exact name of registrant as specified in its charter) Delaware 06-0619596 (State or other jurisdiction (I.R.S. Employer Identification No.) incorporation or organization) 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)329-8800 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 Indicate the number of shares outstanding of each of the registrant's classes of common stock as of November 1, 1996. Common Stock Series A 155,098,414 Common Stock Series B 80,807,275
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES INDEX Page No. Part I. Financial Information Consolidated Condensed Balance Sheets September 30, 1996 and December 31, 1995 2 Consolidated Condensed Statements of Income for the Three Months Ended September 30, 1996 and 1995 3 Consolidated Condensed Statements of Income for the Nine Months Ended September 30, 1996 and 1995 4 Consolidated Condensed Statements of Cash Flows for the Nine Months Ended September 30, 1996 and 1995 5 Notes to Financial Statements 6 Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Part II. Other Information 10 Signature 11 ~ 1 ~
PART I. FINANCIAL INFORMATION CITIZENS UTILITIES COMPANY AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (In thousands) September 30, 1996 December 31, 1995 ASSETS Current assets: Cash $ 16,432 $ 17,922 Accounts receivable 246,097 199,813 Other 62,941 34,967 ------------- -------------- Total current assets 325,470 252,702 ------------- -------------- Property, plant and equipment 4,463,831 4,187,354 Less accumulated depreciation 1,428,694 1,279,324 ------------- -------------- Net property, plant and equipment 3,035,137 2,908,030 ------------- -------------- Investments 432,232 329,090 Regulatory assets 180,768 180,572 Deferred debits and other assets 271,054 247,793 ------------- -------------- Total assets $ 4,244,661 $ 3,918,187 ============= ============== LIABILITIES AND EQUITY Current liabilities: Long-term debt due within one year $ 3,179 $ 3,865 Short-term debt - 140,650 Accounts payable and current liabilities 299,663 359,163 ------------- --------------- Total current liabilities 302,842 503,678 -------------- --------------- Customer advances for construction and contributions in aid of construction 228,391 223,923 Deferred income taxes 348,279 314,094 Regulatory liabilities 26,682 28,279 Deferred credits and other liabilities 105,666 101,300 Long-term debt 1,388,338 1,187,000 ------------- ------------- Total liabilities 2,400,198 2,358,274 ------------- ------------- Company Obligated Mandatorily Redeemable Convertible Preferred Securities * 201,250 - ------------- ------------- Shareholders' Equity: Common stock issued, $.25 par value Series A 38,900 38,839 Series B 20,018 18,057 Additional paid-in capital 1,345,355 1,263,694 Retained earnings 238,285 235,236 Unrealized gain on securities classified as available for sale 655 4,087 ------------- ------------- Total shareholders' equity 1,643,213 1,559,913 ============= ============= Total liabilities and equity $ 4,244,661 $ 3,918,187 ============= ============= * 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 CONDENSED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (In thousands, except per-share amounts) 1996 1995 -------------- --------------- Revenue $ 319,959 $ 259,732 -------------- --------------- Expenses: Operating expenses 199,491 147,155 Depreciation 46,246 39,637 --------------- -------------- 245,737 186,792 -------------- --------------- Income from operations 74,222 72,940 Other income, net 17,420 14,320 Interest expense 22,366 21,037 -------------- --------------- Income before income taxes and dividends on Convertible preferred securities 69,276 66,223 Income taxes 21,680 21,162 -------------- --------------- Income before dividends on Convertible preferred securities 47,596 45,061 Dividend on Convertible preferred securities, net of income tax benefit 1,564 - -------------- --------------- Net Income $ 46,032 $ 45,061 ============== =============== Earnings per share of common stock Series A and Series B $ .20 $ .19* ============== =============== Average number of common shares outstanding for the period Series A Common Stock 155,303 165,709* Series B Common Stock 78,883 72,433* Dividend rate declared on common stock: Paid in Series A shares on Series A Common Stock and in Series B shares on Series B Common Stock 1.6% 1.6% ============== =============== *Adjusted for subsequent stock dividends The accompanying Notes are an integral part of these Financial Statements. ~ 3 ~
PART I. FINANCIAL INFORMATION (Continued) CITIZENS UTILITIES COMPANY AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (In thousands, except per-share amounts) 1996 1995 -------------- ---------------- Revenues $ 967,224 $ 778,444 -------------- ---------------- Expenses: Operating expenses 607,454 467,337 Depreciation 140,475 117,134 -------------- -------------- 747,929 584,471 -------------- ---------------- Income from operations 219,295 193,973 Other income, net 46,243 42,099 Interest expense 67,012 64,741 -------------- ---------------- Income before income taxes and dividends on Convertible preferred securities 198,526 171,331 Income taxes 63,191 50,428 -------------- ---------------- Income before dividends on Convertible preferred securities 135,335 120,903 Dividend on Convertible preferred securities, net of income tax benefit 4,196 - -------------- ---------------- Net Income $ 131,139 $ 120,903 ============== ================ Earnings per share of common stock Series A and Series B $ .57 $ .52* ============== ================ Average number of common shares outstanding for the period Series A Common Stock 155,476 162,446* Series B Common Stock 76,150 68,972* Dividend rate declared on common stock compounded: Paid in Series A shares on Series A Common Stock and in Series B shares on Series B Common Stock 4.88% 4.67% ============== ================ *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 CONDENSED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (In thousands) 1996 1995 ---------- ----------- Net cash provided by operating activities $ 210,967 $ 193,571 ----------- ----------- Cash flows from investing activities: Construction expenditures (225,215) (150,461) Securities purchased (195,430) (31,689) Securities sold 72,700 88,341 Securities matured 29,446 68,869 Business acquisitions (89,564) (112,394) Other (27,800) (2,809) ----------- ----------- (435,863) (140,143) ----------- ----------- Cash flows from financing activities: Long-term debt borrowings 209,508 171,793 Long-term debt principal payments (3,538) (128,438) Short-term debt repayments (140,650) (361,550) Issuance of convertible preferred securities 201,250 - Issuance of common stock 9,761 269,233 Common stock buybacks (50,535) - Other (2,390) (817) ----------- ----------- 223,406 (49,779) ----------- ----------- Increase (decrease) in cash (1,490) 3,649 Cash at January 1, 17,922 14,224 ----------- ----------- Cash at September 30, $ 16,432 $ 17,873 =========== =========== The accompanying Notes are an integral part of these Financial Statements. ~ 5 ~
PART I. FINANCIAL INFORMATION (Continued) CITIZENS UTILITIES COMPANY AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (1) The consolidated financial statements include the accounts of Citizens Utilities Company and all subsidiaries after elimination of intercompany balances and transactions. All adjustments, which consist of only normal recurring accruals, necessary for a fair statement of the results for the interim periods have been made. (2) Earnings per share is based on the average number of outstanding shares, adjusted for subsequent stock dividends. The effect on earnings per share of outstanding stock options is immaterial. (3) In accordance with applicable regulatory systems of account, an allowance for funds used during construction is included in the cost of additions to property, plant and equipment and is allowed in rate base for rate making purposes. The allowance is not a cash item. The amount relating to equity is included in Other income, net and the amount relating to borrowings is offset against Interest expense. (4) During the first quarter of 1996 a consolidated wholly-owned subsidiary of the Company, Citizens Utilities Trust (the "Trust"), issued, in an underwritten public offering, 4,025,000 shares of 5% Company Obligated Mandatorily Redeemable Convertible Preferred Securities due 2036 ("Trust Convertible Preferred Securities"), representing preferred undivided interests in the assets of the Trust, with a liquidation preference of $50 per security (for a total liquidation amount of $201,250,000). The proceeds from the issuance of the Trust Convertible Preferred Securities and a Company capital contribution were used to purchase $207,475,000 aggregate liquidation amount of 5% Partnership Convertible Preferred Securities due 2036 from another wholly owned consolidated subsidiary, Citizens Utilities Capital L.P. (the "Partnership"). The proceeds from the issuance of the Partnership Convertible Preferred Securities and a Company capital contribution were used to purchase from the Company $211,756,050 aggregate principal amount of 5% Convertible Subordinated Debentures Due 2036. The sole assets of the Trust are the Partnership Convertible Preferred Securities, and the Company's Convertible Subordinated Debentures are substantially all the assets of the Partnership. The Company's obligations under the agreements related to the issuances of such securities, taken together, constitute a full and unconditional guarantee by the Company of the Trust's obligations relating to the Trust Convertible Preferred Securities and the Partnership's obligations relating to the Partnership Convertible Preferred Securities. ~ 6 ~
PART I. FINANCIAL INFORMATION (Continued) CITIZENS UTILITIES COMPANY AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (a) Liquidity and Capital Resources For the nine months ended September 30, 1996, the Company used proceeds from operations and net financings to fund acquisitions and construction. Funds requisitioned from the 1996, 1995, 1994 and 1993 Series Industrial Development Revenue Bond construction fund trust accounts were used to partially pay for construction of utility plant. On January 22, 1996, a subsidiary of the Company issued 4,025,000 shares of 5% Company Obligated Mandatorily Redeemable Convertible Preferred Securities (also known as Equity Providing Preferred Income Convertible Securities or "EPPICS") having a liquidation preference of $50 per security and a maturity date of January 15, 2036. Each security is currently convertible into 3.411 shares of the Company's Common Stock Series A at a conversion price of $14.660 per share (as adjusted for subsequent stock dividends paid on Series A Common Stock). The $196,722,000 of net proceeds from the sale of these securities was used to repay short-term debt, permanently fund a portion of the acquisition of 23,000 telephone access lines in Nevada from ALLTEL Corporation on March 31, 1996 and for other general corporate purposes. On January 22, 1996 and September 25, 1996, Citizens Utilities Rural Company, Inc., a subsidiary of the Company, under its Rural Telephone Bank Loan Contract, was advanced $4,464,000 and $4,515,000, respectively. Such funds bear the respective initial interest rates of 5.83% and 6.08% and have an ultimate maturity date of December 31, 2027. On June 11, 1996, the Company issued $100,000,000 of debentures at a price of 99.818% with an interest rate of 6.8% and a maturity date of August 15, 2026. The debentures are redeemable at par at the option of the holders on August 15, 2003. The proceeds from the sale of the debentures were used to repay outstanding commercial paper and to fund capital expenditures for the construction, extension and improvement of the Company's facilities and services. On August 1, 1996, the Company arranged for the issuance of $16,700,000 of Industrial Development Revenue Bonds. The Bonds were issued as money market bonds with an initial interest rate of 3.67% and an ultimate maturity date of July 1, 2031. Proceeds from the issuance of the Bonds will be used to fund the construction of the Company's water utility facilities in the State of Pennsylvania. On September 3, 1996, $18,250,000 of the Company's 1988 Series Industrial Development Revenue Bonds, outstanding as 7% demand purchase bonds, were converted and remarketed as weekly rate bonds, initially bearing interest at a rate of 3.35% and maturing on September 1, 2018. On October 1, 1996, $24,000,000 of the Company's 1988 Series A and 1988 Series C Industrial Development Revenue Bonds originally issued as 7.9% and 7.375%, respectively, demand purchase bonds, were converted and remarketed as money market bonds, initially bearing interest at a rate of 3.63% and maturing on September 1, 2018. On October 10, 1996, the Company entered into a definitive agreement to acquire all the stock of Conference-Call USA, Inc. Conference-Call USA, Inc. provides nationwide conference calling services and its subsidiary, Dial, Inc., provides international dial-back services. The transaction, valued at approximately $15.5 million, is expected to close in the fourth quarter of 1996, pending receipt of FCC approval. On October 18, 1996, holders of $9,400,000 of the Company's 1985 Series Industrial Development Revenue Bonds, outstanding as 7.375% Demand Purchase Bonds were given notice of the conversion and remarketing of the Bonds to money market bonds. The conversion and remarketing of the bonds is expected to occur on November 19, 1996. The Company considers its operating cash flows and its ability to raise debt and equity capital as the principal indicators of its liquidity. Although working capital is not considered to be an indicator of the Company's liquidity, the Company experienced an increase in its working capital at September 30, 1996 as compared to December 31, 1995. The increase is primarily due to the repayment of outstanding commercial paper with the proceeds from the issuances of the EPPICS and debentures. The Company has lines of credit with commercial banks under which it may borrow up to $600,000,000. There were no amounts outstanding under these lines at September 30, 1996. ~ 7 ~
PART I. FINANCIAL INFORMATION (Continued) CITIZENS UTILITIES COMPANY AND SUBSIDIARIES During 1996 to date, the Company was authorized increases in annual revenues for properties in Arizona, Pennsylvania, and Louisiana totaling $9,017,000. In August, 1996, the Hawaii Public Utilities Commission finalized the Company's rate application granting the Company a $12.8 million rate increase without providing for the proposed statewide surcharge for partial recovery of Hurricane Iniki restoration and repair costs; $5,983,000 of this rate increase was received in an interim order dated June, 1995. The Company has requests for increases in annual revenues pending before regulatory commissions in Arizona and California. (b) Results of Operations Operating revenues increased for the three and nine months ended September 30, 1996 in comparison to the like 1995 periods primarily due to revenues from long distance service and acquisitions. Telecommunications revenues for the 1996 third quarter totaled $208,824,000, a 34% increase over the $156,160,000 for the third quarter of 1995. Telecommunications revenues for the nine months ended September 30, 1996 totaled $591,825,000, a 32% increase over the 1995 amount of $447,698,000. For both the quarter and the nine months ended September 30, 1996, the increase in revenues was primarily due to increased customers, revenues from long distance service and acquisitions. Natural gas revenues for the 1996 third quarter totaled $34,426,000, a 10% increase over the $31,351,000 for the third quarter of 1995. Natural gas revenues for the nine months ended September 30, 1996 totaled $166,484,000, an 18% increase over the 1995 amount of $141,129,000. For both the quarter and the nine months ended September 30, 1996, the increase in revenues was primarily the result of a rate increase in Louisiana which took effect on May 1, 1996. In addition to the rate increase, there was also increased consumption by residential customers in Louisiana due to colder than normal weather conditions which was partially offset by decreased usage in Arizona due to milder than expected weather conditions and a decrease in industrial customers in Louisiana. Water and Wastewater revenues for the 1996 third quarter totaled $24,059,000, a 10 % increase over the $21,927,000 for the third quarter of 1995. Water and Wastewater revenues for the nine months ended September 30, 1996 totaled $65,447,000, a 13% increase over the 1995 amount of $57,687,000. For both the quarter and nine months ended September 30, 1996, the increase in revenues was primarily the result of rate increases in Illinois, Pennsylvania and Ohio as well as increased consumption at the Company's California and Arizona water properties. Operating expenses for the three months ended September 30, 1996 increased 36% to $199,491,000 from $147,155,000 for the like 1995 period and for the nine months ended September 30, 1996 increased 30% to $607,454,000 from $467,337,000 for the like 1995 period primarily due to increased telecommunications operating expenses, increases in the cost of natural gas purchased, and a noncash charge of $12.5 million for electric sector net regulatory assets which, as a result of recently finalized rate proceedings in Hawaii, are no longer deemed recoverable in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". Depreciation expense for the three and nine month periods ended September 30, 1996 increased by 17% and 20%, respectively, over the corresponding 1995 periods. These increases were due to increased depreciable telecommunications plant due to acquisitions. ~ 8 ~
PART I. FINANCIAL INFORMATION (Continued) CITIZENS UTILITIES COMPANY AND SUBSIDIARIES Other income, net for the three and nine month periods ended September 30, 1996 increased by 22% and 10%, respectively, over the corresponding 1995 periods primarily due to an increase in the allowance for funds used during construction associated with increases in construction expenditures. Interest expense for the three month period ending September 30, 1996 increased by 6% over the corresponding 1995 period due the issuance of additional debt during 1996. Income taxes for the nine month period ending September 30, 1996 increased 25% compared to the like 1995 period due to an increase in taxable income. ~ 9 ~
PART II. OTHER INFORMATION CITIZENS UTILITIES COMPANY AND SUBSIDIARIES Item 1. Legal Proceedings In September 1992, the EPA filed a complaint with the United States District Court for the Northern District of Illinois relating to alleged violations by the Company's Illinois subsidiary with respect to National Pollutant Discharge Elimination System permit requirements. The Company settled this action on March 21, 1995, and paid a $490,000 fine. Under the settlement, the Company also agreed to construct plant improvements, with an estimated cost of $2,200,000, which would be required in order to comply with new discharge limits provided for by the settlement. Shortly after the action was settled, the Company entered into a tentative agreement with the Village of Bolingbrook to transfer flow from the Company's to the Village's nearby facilities for treatment and to convert the Company's plant to a flow transfer station. The agreement with the Village of Bolingbrook required both EPA and Court approval. Those approvals were obtained and are contained in a Court Order dated May 22, 1996. The Company's financial obligations to convert its systems to transfer flow to the Village of Bolingbrook's plant will be equal to the estimated costs of upgrading the plant as stated above. As a regulated entity, the Company is entitled to earn a fair rate of return on improvements that are placed in service for the benefit of its customers. The Company believes that the cost of the above discussed improvements will be recovered through customer rates. Item 6. Exhibits and Reports on Form 8-K (a) The following exhibit is filed as part of this report: Exhibit 10.16.1 Employment Agreement between Citizens Utilities Company and Leonard Tow. (b) No Form 8-K was required during the three months ended September 30, 1996. ~ 10 ~
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES SIGNATURE 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) Date November 12, 1996 By:/s/Livingston E. Ross ----------------- --------------------- Livingston E. Ross Vice President and Controller ~ 11 ~