CITIZENS COMMUNICATIONS COMPANY
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31,JUNE 30, 2001
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,June 30, 2001
--------------
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________to__________
Commission file number 001-11001
---------
CITIZENS COMMUNICATIONS COMPANY
----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-0619596
- -------------------------------- -------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer(I.R.S.Employer Identification No.)
incorporation or organization)
3 High Ridge Park
P.O. Box 3801
Stamford, Connecticut 06905
-----------------------------------------------------------
(Address, zip code of principal executive offices)
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 30,July 31, 2001 was 263,460,555.292,251,861.
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
Index to Consolidated Financial Statements
Page No.
--------
Part I. Financial Information (Unaudited)
Consolidated Balance Sheets at March 31,June 30, 2001 and December 31, 2000 2
Consolidated Statements of Income and Comprehensive Income (Loss) for the three months ended March 31,June 30, 2001 and 2000 3
Consolidated Statements of Income for the six months ended June 30, 2001 and 2000 4
Consolidated Statements Comprehensive Loss for the three and six months ended
June 30, 2001 and 2000 5
Consolidated Statements of Shareholders' Equity for the year ended December 31, 2000 and the
threesix months ended March 31,June 30, 2001 46
Consolidated Statements of Cash Flows for the threesix months ended March 31,June 30, 2001 and 2000 57
Notes to Consolidated Financial Statements 68
Management's Discussion and Analysis of Financial Condition and Results of Operations 1417
Quantitative and Qualitative Disclosures about Market Risk 2228
Part II. Other Information
Legal Proceedings 2430
Submission of Matters to a Vote of Security Holders 30
Other Information 2431
Exhibits and Reports on Form 8-K 2532
Signature 2633
1
PART I. FINANCIAL INFORMATION
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)Unaudited
March 31,June 30, 2001 December 31, 2000
-------------- -----------------
ASSETS
- ------
Current assets:
Cash $ 28,44831,115 $ 31,223
Accounts receivable, net 229,605336,490 243,304
Short-term investments 5,63018,463 38,863
Other current assets 16,11540,424 52,545
Assets held for sale 1,222,7731,240,998 1,212,307
Assets of discontinued operations 673,994687,275 673,515
------------ ------------------------------ --------------------
Total current assets 2,176,5652,354,765 2,251,757
Property, plant and equipment, net 3,508,2574,662,361 3,520,712
Investments 181,851 214,359
Goodwill and customer base, net 621,5473,014,751 633,268
Investments 173,318 214,359
Regulatory assets 174,902173,611 175,949
Other assets 148,581466,882 158,961
------------ ------------------------------ --------------------
Total assets $ 6,811,70310,845,688 $ 6,955,006
============ ============================== ====================
LIABILITIES AND EQUITY
- ----------------------
Current liabilities:
Long-term debt due within one year $ 181,215222,522 $ 181,014
Accounts payable and other current liabilities 299,481416,207 330,383
Liabilities related to assets held for sale 260,810255,774 290,575
Liabilities of discontinued operations 185,197189,856 190,496
------------ ------------------------------ --------------------
Total current liabilities 926,7031,084,359 992,468
Deferred income taxes 490,007688,562 490,487
Customer advances for construction and contributions
in aid of construction 203,012200,688 205,604
Other liabilities 104,913245,888 108,321
Regulatory liabilities 24,00123,415 24,573
Equity units 460,000 -
Long-term debt 2,981,4965,818,312 3,062,289
------------ ------------------------------ --------------------
Total liabilities 4,730,1328,521,224 4,883,742
Equity forward contracts 150,013107,018 150,013
Company Obligated Mandatorily Redeemable Convertible
Preferred Securities* 201,250 201,250
Shareholders' equity 1,730,3082,016,196 1,720,001
------------ ------------------------------ --------------------
Total liabilities and equity $ 6,811,70310,845,688 $ 6,955,006
============ ============================== ====================
* 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 COMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME (LOSS)
FOR THE THREE MONTHS ENDED MARCH 31,JUNE 30, 2001 AND 2000
(In thousands, except per-share amounts)
(Unaudited)Unaudited
2001 2000
--------- ------------------------ --------------
Revenue $624,281 $ 448,702505,741 $ 418,607
Operating Expenses:expenses:
Cost of services 226,121 121,166128,528 103,434
Depreciation and amortization 105,706 95,981114,366 86,643
Other operating expenses 199,087 188,849195,236 186,947
Acquisition assimilation expense 5,484 3,974
--------- ----------7,062 7,617
-------------- --------------
Total operating expenses 536,398 409,970
--------- ----------445,192 384,641
-------------- --------------
Operating income 87,883 38,73260,549 33,966
Investment and other income, net 2,784 5,59810,641 4,219
Minority interest - 6,2855,937
Interest expense 61,452 37,590
--------- ----------73,129 41,750
-------------- --------------
Income (loss) from continuing operations before income taxes and
dividends on convertible preferred securities 29,215 13,025(1,939) 2,372
Income tax expense 9,047 4,827
--------- ----------525 471
-------------- --------------
Income (loss) from continuing operations before dividends
on convertible preferred securities 20,168 8,198(2,464) 1,901
Dividends on convertible preferred securities, net of income tax benefit 1,553 1,553
--------- ----------1,552 1,552
-------------- --------------
Income (loss) from continuing operations 18,615 6,645(4,016) 349
Income from discontinued operations, net of tax 1,108 681
--------- ----------3,367 2,663
-------------- --------------
Net income $ 19,723 $ 7,326
========= ==========
Other comprehensive loss, net of tax (19,623) (28,045)
--------- ----------
Total comprehensive income (loss) $ 100(649) $ (20,719)
========= ==========3,012
============== ==============
Carrying cost of equity forward contracts 12,647 -
-------------- --------------
Net income (loss) available to common shareholders $ (13,296) $ 3,012
============== ==============
Income (loss) from continuing operations per common share:
Basic $ 0.07(0.01) $ 0.030.00
Diluted $ 0.07(0.01) $ 0.020.00
Income from discontinued operations per common share:
Basic $ -0.01 $ -0.01
Diluted $ -0.01 $ -0.01
Net income (loss) available to common shareholders per common share:
Basic $ 0.07(0.05) $ 0.030.01
Diluted $ 0.07(0.05) $ 0.030.01
The accompanying Notes are an integral part of these
Consolidated Financial Statements.
3
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(In thousands, except per-share amounts)
Unaudited
2001 2000
-------------- --------------
Revenue $ 1,130,023 $ 867,309
Operating Expenses:
Cost of services 353,893 224,342
Depreciation and amortization 220,072 182,624
Other operating expenses 395,080 376,054
Acquisition assimilation expense 12,546 11,591
-------------- --------------
Total operating expenses 981,591 794,611
-------------- --------------
Operating income 148,432 72,698
Investment and other income, net 13,425 9,817
Minority interest - 12,222
Interest expense 134,581 79,340
-------------- --------------
Income from continuing operations before income taxes and dividends
on convertible preferred securities 27,276 15,397
Income tax expense 9,573 5,298
-------------- --------------
Income from continuing operations before dividends
on convertible preferred securities 17,703 10,099
Dividends on convertible preferred securities, net of income tax benefit 3,105 3,105
-------------- --------------
Income from continuing operations 14,598 6,994
Income from discontinued operations, net of tax 4,476 3,344
-------------- --------------
Net income $ 19,074 $ 10,338
============== ==============
Carrying cost of equity forward contracts 12,647 -
-------------- --------------
Net income available to common shareholders $ 6,427 $ 10,338
============== ==============
Income from continuing operations per common share:
Basic $ 0.05 $ 0.03
Diluted $ 0.05 $ 0.03
Income from discontinued operations per common share:
Basic $ 0.02 $ 0.01
Diluted $ 0.02 $ 0.01
Net income available to common shareholders per common share:
Basic $ 0.02 $ 0.04
Diluted $ 0.02 $ 0.04
The accompanying Notes are an integral part of these
Consolidated Financial Statements.
4
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(In thousands)
Unaudited
For the three months ended June 30, For the six months ended June 30,
-------------------------------------- ---------------------------------------
2001 2000 2001 2000
------------------ ------------------ ------------------ -------------------
Net income (loss) $ (649) $ 3,012 $ 19,074 $ 10,338
Other comprehensive loss, net of tax (5,246) (12,348) (24,869) (40,393)
------------------ ------------------ ------------------ -------------------
Total comprehensive loss $ (5,895) $ (9,336) $ (5,795) $ (30,055)
================== ================== ================== ===================
The accompanying Notes are an integral part of these
Consolidated Financial Statements.
5
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2000 AND THE THREESIX MONTHS ENDED MARCH 31,JUNE 30, 2001
(In thousands, except per-share amounts)
(Unaudited)
Accumulated
Common Additional Other Total
Stock Paid-In Retained Comprehensive Treasury Shareholders'
($0.25 par) Capital Earnings Income (Loss) Stock Equity
----------- -------------- ------------- ----------------------------- -------------- --------------- ---------------------------- -----------------
Balances January 1, 2000 $ 65,519 $ 1,577,903$1,577,903 $ 261,590 $ 14,923 $ - $ 1,919,935
Acquisitions 28 1,770 - - 1,861 3,659
Treasury stock acquisitions - - - - (49,209) (49,209)
Stock plans 895 42,156 - - (4,523) 38,528
Equity forward contracts - (150,013) - - - (150,013)
Net loss - - (28,394) - - (28,394)
Other comprehensive loss, net of tax - - - (14,505) - (14,505)
----------- -------------- ------------- -------------- -------------- --------------- ------------- ------------- -------------------------------
Balances December 31, 2000 66,442 1,471,816 233,196 418 (51,871) 1,720,001
Stock plans 180 10,159312 19,887 - - (132) 10,207(317) 19,882
Common stock offering 6,289 283,498 - - - 289,787
Equity units offering - 4,968 - - - 4,968
Carrying cost of equity forward contracts - - (12,647) - - (12,647)
Net income - - 19,72319,074 - - 19,72319,074
Other comprehensive loss, net of tax - - - (19,623)(24,869) - (19,623)(24,869)
----------- -------------- ------------- -------------- -------------- --------------- ------------- ------------- -------------------------------
Balances March 31,June 30, 2001 $ 66,62273,043 $1,780,169 $ 1,481,975239,623 $ 252,919(24,451) $ (19,205)(52,188) $ (52,003) $ 1,730,3082,016,196
=========== ============== ============= ============== ============== =============== ============= ============= ===============================
4The accompanying Notes are an integral part of these
Consolidated Financial Statements.
6
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREESIX MONTHS ENDED MARCH 31,JUNE 30, 2001 AND 2000
(In thousands)
2001 2000
------------ --------------------------- ----------------
Net cash provided by continuing operating activities $ 152,766162,929 $ 113,272172,431
Cash flows from investing activities:
Capital expenditures (113,969) (150,221)(217,801) (292,060)
Securities purchased (522) (23,886)(484) (27,044)
Securities sold 34,477 16,60321,641 49,684
Securities matured - 6,85110,400
Acquisitions (3,367,987) (205,404)
ELI share purchases - (17,493)
Other 531 (6,927)
------------ ----------187 (212)
---------------- ----------------
Net cash used by investing activities (79,483) (157,580)(3,564,444) (482,129)
Cash flows from financing activities:
Long-term debt borrowings 39,871 84,9382,781,318 350,953
Issuance of equity units 446,200 -
Common stock offering 289,787 -
Long-term debt principal payments (118,853) (7,748)(120,008) (9,163)
Issuance of common stock 9,119 6,395for employee plans 17,279 19,632
Common stock buybacks - (41,732)(40,960)
Other (1,524) 1,472
------------ ----------(3,244) 4,514
---------------- ----------------
Net cash (used by) provided by financing activities (71,387) 43,3253,411,332 324,976
Cash (used by) providedused by discontinued operations (4,671) 7,834
------------ ----------(9,925) (3,269)
---------------- ----------------
(Decrease) increase in cash (2,775) 6,851(108) 12,009
Cash at January 1, 31,223 37,141
------------ -------------------------- ----------------
Cash at March 31,June 30 $ 28,44831,115 $ 43,992
============ ==========49,150
================ ================
Non-cash investing and financing activities:
Increase in capital lease asset $ -(33,985) $ 23,412
Equity forward contracts $ - $ 49,55696,510
The accompanying Notes are an integral part of these
Consolidated Financial Statements.
57
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies:
------------------------------------------
(a) Basis of Presentation:
Citizens Communications Company and its subsidiaries are referred to
as "we," "us" or "our" in this report. The unaudited consolidated
financial statements include our accounts and have been prepared in
conformity with generally accepted accounting principles and should be
read in conjunction with the consolidated financial statements and
notes included in our 2000 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:
Certain of our local exchange telephone operations and all of our
public utilities services operations are subject to the provisions of
Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting
for the Effects of Certain Types of Regulation". For these entities,
regulators can establish regulatory assets and liabilities that are
required to be reflected on the balance sheet in anticipation of
future recovery through the ratemaking process.
Our consolidated balance sheet as of March 31,June 30, 2001 included regulatory
assets of approximately $62.2 million$61,600,000 and regulatory liabilities of
approximately $4.1 million$4,000,000 associated with our local exchange telephone
operations. The remainder of the regulatory assets and regulatory
liabilities on the balance sheet are associated with our public
utilities services operations and have not been classified as
assets/liabilities held for sale or discontinued operations. In
addition, property, plant and equipment for the properties subject to
SFAS 71 have been depreciated using the straight-line method over
plant lives approved by regulators. Such depreciable lives may exceed
the lives that would have been used if we did not operate in a
regulated environment.
SFAS No. 101 "Regulated Enterprises Accounting for the Discontinuance
of Application of SFAS No. 71" specifies the accounting required when
the regulated operations of an enterprise are no longer expected to
meet the provisions of SFAS 71 in the future due to changes in
regulations, competition and the operations of regulated entities.
SFAS 101 would require the write-off of a portion of our regulatory
assets and liabilities, as a net non-cash charge or credit to income,
if it were determined in the future that the conditions requiring the
use of SFAS 71 no longer apply. SFAS 101 further provides that the
carrying amount of property, plant and equipment would be adjusted to
reflect the use of shorter depreciation lives only to the extent that
the net book value of these assets are impaired.
The ongoing applicability of SFAS 71 to our regulated telephone
operations is continually monitored due to the changing regulatory,
competitive and legislative environment and the changes that may occur
in our future operations as we acquire and consolidate our local
exchange telephone operations. It is possible that future changes in
our business environment or changes in the demand for our products and
services could result in our telephone operations no longer being
subject to the provisions of SFAS 71. If discontinuation of SFAS 71
becomes appropriate, the accounting may result in a material non-cash
effect on our results of operations and financial position that can
not be estimated at this time.
(c) Revenue Recognition:
ILEC
----
Network access services - Monthly recurring network access service
chargesservices
are billed in advance with any portion that is billed but unearned
recorded as deferred revenue on the balance sheet as part of accrued
expenses which are then recognized as revenue over the period that
services are provided. Non-recurring network access services are
billed in arrears and recognized as revenue in the period services are
provided. Earned but unbilled network access service revenue is
accrued for and included in accounts receivable and revenue in the
period services are provided. Network access revenue primarily
consists of switched access revenue billed to other carriers. Switched
access revenue is billed in arrears and recognized as revenue in the
period services are provided based on originating and terminating
minutes of use. Network access revenue also contains special access
revenue. Special access revenue is billed in arrears and recognized in
revenue in the period services are provided.
68
Local services - Monthly recurring local line charges are billed to
end users in advance and recognized as revenue in the period of
billing with any portion that is billed but unearned recorded as
deferred revenue on the balance sheet as part of accrued expenses.
Non-recurring local services are billed in arrears and recognized as
revenue in the period services are provided. Earned but unbilled local
service revenue is accrued for and included in accounts receivable and
revenue in the period services are provided.
Long distance services - Long distance services are billed in arrears
and recognized as revenue in the period services are provided. Earned
but unbilled long distance revenue is accrued for and included in
accounts receivable and revenue in the period services are provided.
Directory services and Other - Revenue is recognized when services are
provided or when products are delivered to customers. Installation
fees and their related direct and incremental costs are initially
deferred and recognized as revenue and expense over the average term
of a customer relationship. We recognize as current period expense the
portion of installation costs that exceed installation fee revenue.
ELI ---- Revenue is recognized when the services are provided. Long-termRevenue
from long-term prepaid network services revenue agreements are deferred and
recognized on a straight-line basis over the terms of the related
agreements. Installation fees and related costs (up to the amount of
installation revenue) are deferred and recognized over the average
contractcustomer life. Installation related costs in excess of installation
fees are expensed when incurred.
Public Utilities Services ---------------------------- Revenue is recognized when services are
provided for public utilities services. Certain revenue is based upon
consumption while other revenue is based upon a flat fee. Earned but
unbilled public utilities services revenue is accrued for and included
in accounts receivable and revenue.
(d) Minority Interest and Minority Interest in Subsidiary:
Minority interest on the income statement represents the minority's
share of Electric Lightwave Inc.'s (ELI) net loss (minority interest
in subsidiary, as presented on the balance sheet in prior periods,
represents the minority's share of ELI's equity capital). Since ELI's
initial public offering, we recorded minority interest on our income
statement and reduced minority interest on our balance sheet by the
amount of the minority interests' share of ELI's losses. As of June
30, 2000, the minority interest on the balance sheet had been reduced
to zero. From that point going forward, we discontinued recording
minority interest income on our income statement as there is no
obligation for the minority interests to provide additional funding
for ELI. Therefore, we are recording ELI's entire loss in our
consolidated results.
(e) 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 6)7).
(2) Property, Plant and Equipment, Net:
-----------------------------------
Property, plant and equipment, net at March 31,June 30, 2001 and December 31, 2000
is as follows:
($ in thousands) March 31,June 30, 2001 December 31, 2000
------------------------------------ --------------------
Property, plant and equipment $ 5,357,0386,591,189 $ 5,307,427
Less accumulated depreciation (1,848,781)(1,928,828) (1,786,715)
-------------------------------------- --------------------
Property, plant and equipment, net $ 3,508,2574,662,361 $ 3,520,712
====================================== ====================
At June 30, 2001, approximately $1,127,314,000 of net property, plant and
equipment was related to our acquisition of Frontier Corp. which closed on
June 29, 2001 (see Note 3).
Depreciation expense, calculated using the straight-line method, is based
upon the estimated service lives of various classifications of property,
plant and equipment. Depreciation expense was $92,383,000$101,290,000 and $95,134,000$85,849,000
for the three months ended March 31,June 30, 2001 and 2000, respectively, and
$193,743,000 and $181,195,000 for the six months ended June 30, 2001 and
2000, respectively. We ceased to record depreciation expense on the gas
assets effective October 1, 2000 and on the electric assets effective
January 1, 2001 (see Note 4).
79
(3) Acquisitions:
-------------
From May 27, 1999 through July 12, 2000, we entered into several agreements
to acquire approximately 2,034,700 telephone access lines
(as of December 31, 2000) for approximately $6,471,000,000 in cash
which was subsequently reduced to $6,321,000,000.lines. These transactions have been and will be
accounted for using the purchase method of accounting. The results of
operations of the acquired properties have been and will be included in our
financial statements from the dates of acquisition of each property. These
agreements and the status of each transaction are described as follows:
Verizon Acquisition
-------------------
On May 27, September 21, and December 16, 1999, we announced
definitive agreements to purchase from Verizon Communications Inc.,
formerly GTE Corp. (Verizon), approximately 381,200 telephone access
lines (as of December 31, 2000) in Arizona, California,
Illinois/Wisconsin, Minnesota and Nebraska for approximately
$1,171,000,000 in cash. On June 30, 2000, we closed on the Nebraska
purchase of approximately 62,200 access lines for approximately
$205,400,000 in cash. On August 31, 2000, we closed on the Minnesota
purchase of approximately 142,400 access lines for approximately
$438,900,000 in cash. On November 30, 2000, we closed on the
Illinois/Wisconsin purchase of approximately 112,900 access lines for
approximately $303,900,000 in cash. We expect that the remainder of
the VerizonArizona and
California transactions, which are subject to various state and
federal regulatory approvals, will close on a state-by-state basis induring 2001. Our expected
cash requirement to complete the Verizon acquisitions is $222,800,000 in 2001.$222,800,000.
Qwest Acquisition
-----------------
On June 16, 1999, we announced a series of definitive agreements to
purchase from Qwest Communications, formerly US WestU S WEST (Qwest),
approximately 556,800 telephone access lines (as of December 31, 2000)
in Arizona, Colorado, Idaho/Washington, Iowa, Minnesota, Montana,
Nebraska, North Dakota and Wyoming for approximately $1,650,000,000 in
cash and the assumption of certain liabilities. On October 31, 2000,
we closed on the North Dakota purchase of approximately 17,000 access
lines for approximately $38,000,000 in cash. On July 20, 2001, we
delivered a notice of termination for the remaining acquisition
agreements with Qwest. On July 23, 2001, Qwest advised us that it
intends to pursue a claim of $64 million (available under letters of
credit issued by us) for liquidated damages in an arbitration
proceeding. We expect thatwill also pursue our substantial claims for breach of
contract against Qwest in the remainder of the Qwest acquisitions, which are subject to various
state and federal regulatory approvals, will occur on a state-by-state
basis by the end of the first quarter of 2002 upon satisfaction of
certain closing conditions. Our expected cash requirements to complete
the Qwest acquisitions are $989,300,000 and $622,700,000 in 2001 and
2002, respectively.
Global Crossingsame arbitration.
Frontier Acquisition
-----------------------------------------------
On July 12, 2000, we announced a definitive agreement to purchase from
Global Crossing Ltd. (Global) 100% of the stock of Frontier Corp.,
which ownsowned approximately 1,096,700 telephone access lines (as of
December 31, 2000) in Alabama/Florida, Georgia, Illinois, Indiana,
Iowa, Michigan, Minnesota, Mississippi, New York, Pennsylvania and
Wisconsin, for approximately $3,650,000,000 in cash which price was
later reduced to $3,500,000,000. On June 29, 2001, we closed on the
Frontier acquisition for approximately $3,368,000,000 in cash, subject
to adjustment. The operations of Frontier are included in our
financial statements from the date of acquisition.
In conjunction with the Frontier acquisition, we are evaluating our
facilities to take advantage of operational and functional synergies
between the two companies with the objective of concentrating our
resources in the areas where we have the most customers, to better
serve those customers. Accordingly, we intend to close our operations
support center in Plano, Texas by April 2002. We have received approvalcommunicated with all
affected employees during July 2001. Certain employees will be
relocated; others will be offered severance, job training and/or
outplacement counseling. We intend to sublease our office space after
April 30, 2002. In connection with this plan, we will record a
restructuring charge to operating expenses in the third quarter of
2001.
The following pro forma financial information for the proposed purchase fromthree and six months
ended June 30, 2001 and 2000 present the Federal Communications Commissioncombined results of our operations
and all
other state Public Service Commissions with the exception of
Minnesota. Subject toFrontier acquisition acquired on June 30, 2001. The pro forma
information presents the timely receiptcombined results as if the acquisition had
occurred at the beginning of the Minnesota regulatory
approval,year prior to its acquisition. The pro
forma financial information does not necessarily reflect the results of
operations that would have occurred had we expect that this transaction will be completed and paid
for in full by the end of June 2001.constituted a single entity
during such periods.
10
($ in thousands, except per share amounts)
For the three months ended June 30, For the six months ended June 30,
------------------------------------- -------------------------------------
2001 2000 2001 2000
----------------- ----------------- ----------------- -----------------
Revenue $ 701,269 $ 608,532 $ 1,517,819 $ 1,245,356
Net loss $ (44,872) $ (25,174) $ (62,829) $ (51,487)
Net loss available to common
shareholders per share $ (0.19) $ (0.09) $ (0.26) $ (0.18)
(4) Discontinued Operations and Net Assets Held for Sale:
-----------------------------------------------------
On August 24, 1999, our Board of Directors approved a plan of divestiture
for our public utilities services businesses, which include gas, electric
and water and wastewater businesses. The proceeds from the sales of these
public utilities services businesses have been and will be used to
partially fund the telephone access line purchases (see Note 3).
Currently, we have agreements to sell all our water and wastewater
operations, one of our electric operations and one of our natural gas
operations. The proceeds from these agreements will include approximately
$1,380,000,000$1,391,000,000 in cash plus the assumption of certain liabilities. These
agreements and the status of each transaction are described as follows:
8
Water and Wastewater
-----------------------------------------
On October 18, 1999, we announced the agreement to sell our water and
wastewater operations to American Water Works, Inc. for $745,000,000
in cash and $90,000,000 of assumed debt. These transactions are
currently expected to close in the second half of 2001 following
regulatory approval. The contract may be terminated if the required
approvals are not received by September 30, 2001.
Electric
--------
On February 15, 2000, we announced that we had agreed to sell our
electric utility operations. The Arizona and Vermont electric
divisions were under contract to be sold to Cap Rock Energy Corp. (Cap
Rock). The agreement with Cap Rock was terminated on March 7, 2001. It
is our intention to pursue the disposition of the Vermont and Arizona
electric divisions with alternative buyers. In August 2000, the Hawaii
Public Utilities Commission denied the initial application requesting
approval of the purchase of our Kauai electric division by the Kauai
Island Electric Co-op for $270,000,000 in cash including the
assumption of certain liabilities. We are considering a variety of
options, including filing a request for reconsideration of the
decision, which may include filing a new application. Our agreement
for the sale of this division may be terminated if regulatory approval
is not received before February 2002.
Gas
---
On April 13, 2000, we announced the agreement to sell our Louisiana
Gas operations to Atmos Energy Corporation for $365,000,000 in cash
plus the assumption of certain liabilities. Regulatory approval was
received in April 2001. On July 2, 2001, we closed on the sale for
$363,400,000 in cash. The estimated pre-tax gain on the sale is
approximately $150,000,000 that will be recognized in the third
quarter.
In July 2001, an agreement was signed to sell the Colorado Gas
division to Kinder Morgan for $11,000,000. This transaction is
expected to close on June
30, 2001.in the fourth quarter of 2001 following regulatory
approval.
Discontinued operations in the consolidated statements of income and
comprehensive income (loss) reflect
the results of operations of the water/wastewater properties including
allocated interest expense for the periods presented. Interest expense was
allocated to the discontinued operations based on the outstanding debt
specifically identified with these businesses. The long-term debt presented
in liabilities of discontinued operations represents the only liability to
be assumed by the buyer pursuant to the water and wastewater asset sale
agreements.
We initially accounted for the planned divestiture of all the public
utilities services properties as discontinued operations. Currently, we do
not have agreements to sell our entire gas and electric segments.
Consequently, we reclassified all of our gas (on September 30, 2000) and
electric assets (on December 31, 2000) and their related liabilities to
"assets held for sale" and "liabilities related to assets held for sale,"
respectively. We also reclassified the results of these operations from
discontinued operations to their original income statement captions as part
of continuing operations. Additionally, because both our gas and electric
operations are expected to be sold at a profit, we ceased to record
depreciation expense on the gas assets effective October 1, 2000 and on the
electric assets effective January 1, 2001. Such depreciation expense would
have been $13.9 millionan additional $14,200,000 and $28,100,000 for the three and six
months ended March 31, 2001.June 30, 2001, respectively. We continue to actively pursue
buyers for our remaining gas and electric businesses.
911
Summarized financial information for the water/wastewater operations
(discontinued operations) is set forth below:
($ in thousands) March 31, 2001 December 31, 2000
----------------- -----------------
Current assets $ 16,931 $ 18,578
Net property, plant and equipment 646,274 639,994
Other assets 10,789 14,943
----------------- -----------------
Total assets $ 673,994 $ 673,515
================= =================
Current liabilities $ 15,450 $ 21,062
Long-term debt 90,448 90,546
Other liabilities 79,299 78,888
----------------- -----------------
Total liabilities $ 185,197 $ 190,496
================= =================
($ in thousands) For the three months ended March 31,
-----------------------------------------
2001 2000
------------------- ---------------
Revenue $ 24,094 $ 24,065
Operating income $ 3,762 $ 3,021
Income tax expense (benefit) $ 70 $ (138)
Net income $ 1,108 $ 681
($ in thousands) June 30, 2001 December 31, 2000
------------------ ------------------
Current assets $ 20,041 $ 18,578
Net property, plant and equipment 655,422 639,994
Other assets 11,812 14,943
------------------ ------------------
Total assets $ 687,275 $ 673,515
================== ==================
Current liabilities $ 19,167 $ 21,062
Long-term debt 90,448 90,546
Other liabilities 80,241 78,888
------------------ ------------------
Total liabilities $ 189,856 $ 190,496
================== ==================
($ in thousands) For the three months ended June 30,
---------------------------------------
2001 2000
------------------ ------------------
Revenue $ 29,335 $ 26,576
Operating income $ 8,183 $ 7,009
Income tax expense $ 2,089 $ 1,648
Net income $ 3,367 $ 2,663
($ in thousands) For the six months ended June 30,
---------------------------------------
2001 2000
------------------ ------------------
Revenue $ 53,429 $ 50,641
Operating income $ 11,945 $ 10,030
Income tax expense $ 2,159 $ 1,510
Net income $ 4,476 $ 3,344
Summarized financial information for the gas and electric operations (assets held(held
for sale) is set forth below:
($ in thousands) March 31,June 30, 2001 December 31, 2000
----------------- -------------------------------------- --------------------
Current assets $ 122,862108,133 $ 127,495
Net property, plant and equipment 970,774984,367 953,328
Other assets 129,137148,498 131,484
-------------- ---------------------------------- --------------------
Total assets held for sale $ 1,222,7731,240,998 $ 1,212,307
============== ================================== ====================
Current liabilities $ 138,945128,553 $ 169,066
Long-term debt 43,95743,945 43,980
Other liabilities 77,90883,276 77,529
-------------- ---------------------------------- --------------------
Total liabilities related to assets
held for sale $ 260,810255,774 $ 290,575
============== ================================== ====================
12
(5) Security Issuances:
-------------------
We issued the following securities during the three months ended June 30,
2001 under our $3,800,000,000 shelf registration statement. The net
proceeds from these issuances were used to repay bank borrowings, for the
Frontier Acquisition (see note 3) and for general corporate purposes. We
have a remaining shelf registration of $825,600,000 after these issuances.
Long-Term Debt
--------------
On May 18, 2001, we issued an aggregate of $1.75 billion of notes
consisting of $700 million principal amount of 8.50% notes, due May 15,
2006 and $1.05 billion principal amount of 9.25% notes due May 15, 2011.
The net proceeds of this issuance was $1,726,000,000 (after underwriting
discounts and commissions and before offering expenses).
Equity Units
------------
On June 13, 2001, we issued 18,400,000 equity units at $25 per unit for net
proceeds of $446,200,000 (after underwriting discounts and commissions and
before offering expenses). Each equity unit will initially consist of a 6
3/4 % senior note due 2006 and a purchase contract for our common stock.
The purchase contract (warrant) obligates the holder to purchase from us,
no later than August 17, 2004 for a purchase price of $25, the following
number of shares of our common stock:
o If the average closing price of our common stock over the 20-day
trading period ending on the third trading day prior to August 17,
2004 equals or exceeds $14.52, 1.7218 shares;
o If the average closing price of our common stock over the same period
is less than $14.52, but greater than $12.10, a number of shares
having a value, based on the average closing price over that period,
equal to $25; and
o If the average closing price of our common stock over the same period
is less than or equal to $12.10, 2.0661 shares.
The equity units have been approved for listing on The New York Stock
Exchange under the symbol "CZB."
Common Stock
------------
On June 13, 2001, we issued 25,156,250 shares of our common stock at
$12.10, for net proceeds of $289,787,000 (after underwriting discounts and
commissions).
(6) 1999 Restructuring Charges:
---------------------------
In the fourth quarter of 1999, we approved a plan to restructure our
corporate office activities. In connection with this plan, we recorded a
pre-tax charge of $5,760,000 in other operating expenses in the fourth
quarter of 1999. The restructuring resulted in the reduction of 49
corporate employees. All affected employees were communicated with inwithin the
early part of November 1999.
As of March 31,June 30, 2001, approximately $4,613,000$4,413,000 has been paid, 42 employees
were terminated and 6 employees who were expected to be terminated took
other positions within the company. The remaining employee will be
terminated during 2001. At December 31, 2000, we adjusted our original
accrual down by $1,008,000 and the remaining accrual of $139,000$339,000 is
included in other current liabilities at March 31,June 30, 2001. These costs are
expected to be paid in the secondthird quarter of 2001.
1013
(6)(7) Net Income Per Common Share:
---------------------------------------------------------
The reconciliation of the net income per common share calculation for the
three and six months ended March 31,June 30, 2001 and 2000, respectively, is as
follows:
(In thousands, except per-share amounts) For the three months ended March 31,
---------------------------------------------------------------------------June 30,
-----------------------------------------------------------------------------
2001 2000
----------------------------------- -------------------------------------------------------------------------- -------------------------------------
Income Shares Per Share Income Shares Per Share
--------- --------- ---------- --------- --------------------- ------------ ----------- ------------ ----------- ----------
Net income per common share:
Basic $ 19,723 263,036(649) 269,879 $ 0.073,012 261,215
Carrying cost of equity forward contracts 12,647 - - -
------------ ------------ ------------ -----------
Net income available for common shareholders $(13,296) 269,879 $ 7,326 261,427(0.05) $ 0.033,012 261,215 $ 0.01
Effect of dilutive options - 7,2472,924 - - 4,5486,259 -
------------ ------------ ----------- ------------ ----------- ----------
Diluted $(13,296) 272,803 $ (0.05) $ 3,012 267,474 $ 0.01
============ ============ =========== ============ =========== ==========
(In thousands, except per-share amounts) For the six months ended June 30,
-----------------------------------------------------------------------------
2001 2000
-------------------------------------- -------------------------------------
Income Shares Per Share Income Shares Per Share
------------ ------------ ----------- ------------ ----------- ----------
Net income per common share:
Basic $ 19,074 266,898 $10,338 261,426
Carrying cost of equity forward contracts 12,647 - - -
------------ ------------ ------------ -----------
Net income available for common shareholders $ 6,427 266,898 $ 0.02 $10,338 261,426 $ 0.04
Effect of dilutive options - 3,339 - - 4,315 -
------------ ------------ ----------- ------------ ----------- ----------
Diluted $ 19,723 270,2836,427 270,237 $ 0.070.02 $10,338 265,741 $ 7,326 265,975 $ 0.030.04
============ ============ =========== ============ =========== ==========
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,June 30, 2001, we have 4,025,000 shares of potentially
dilutive Mandatorily Redeemable Convertible Preferred Securities which are
convertible into common stock at a 3.76 to 1 ratio at an exercise price of
$13.30 per share and 2,887,0006,714,000 potentially dilutive stock options at a
range of $13.97$13.38 to $21.47 per share that are not included in the
calculation as they are antidilutive. (7)See Note 10 regarding carrying costs
of equity forward contracts.
(8) Segment Information:
-------------------
We operate in four segments, Incumbent Local Exchange Carrier (ILEC), ELI,
gas and electric. The ILEC segment provides both regulated and competitive
communications services to residential, business and wholesale customers.
ELI is a facilities based integrated communications provider offering a
broad range of communications services in the western United States. We own
85% of ELI and guarantee all of ELI's long-term debt, one of its capital
leases and one of its operating leases. Our gas and electric segments which are
intended to be sold and are classified as "assets held for sale" and
"liabilities related to assets held for sale,sale." were previously reported
as discontinued operations (see Note 4).
Adjusted EBITDA is operating income (loss) plus depreciation and
amortization. EBITDA is a measure commonly used to analyze companies on the
basis of operating performance. It is not a measure of financial
performance under generally accepted accounting principles and should not
be considered as an alternative to net income as a measure of performance
nor as an alternative to cash flow as a measure of liquidity and may not be
comparable to similarly titled measures of other companies.
($ in thousands) For the three months ended March 31, 2001
---------------------------------------------------------------------------------------
Total
ILEC ELI Gas Electric Eliminations Segments
--------- --------- ----------- ----------- ------------- ----------
Revenue $ 287,344 $ 62,562 $ 220,515 $ 54,697 $ (837) (1) $ 624,281
Depreciation and Amortization 86,377 18,894 150 - 285 (2) 105,706
Operating Income (Loss) 62,671 (15,601) 28,614 11,699 500 (2,3) 87,883
Adjusted EBITDA 149,048 3,293 28,764 11,699 785 (3) 193,589
1114
($ in thousands) For the three months ended March 31, 2000
---------------------------------------------------------------------------------------June 30, 2001
-------------------------------------------------------------------------------------------
Total
ILEC ELI Gas Electric Eliminations Segments
----------- ---------- ----------- ------------------------ -------------- --------------- ------------- ----------------------- ------------
Revenue $ 226,312288,788 $ 56,77860,429 $ 113,055102,155 $ 53,19255,464 $ (635) (1)(1,095)1 $ 448,702505,741
Depreciation and Amortization 70,006 12,755 6,446 6,830 (56) (2) 95,98188,312 19,834 155 5,800 265 2 114,366
Operating Income (Loss) 31,972 (19,420) 18,074 7,866 240 (3) 38,73260,685 (15,770) 9,882 5,260 492 2,3 60,549
Adjusted EBITDA 101,978 (6,665) 24,520 14,696 184 (3) 134,713148,997 4,064 10,037 11,060 757 3 174,915
($ in thousands) For the three months ended June 30, 2000
-------------------------------------------------------------------------------------------
Total
ILEC ELI Gas Electric Eliminations Segments
-------------- -------------- --------------- ------------- ------------- ------------
Revenue $ 227,396 $ 60,620 $ 77,366 $ 53,917 $ (692)1 $ 418,607
Depreciation and Amortization 59,765 14,721 5,922 6,247 (12)2 86,643
Operating Income (Loss) 39,384 (16,156) 4,876 5,522 340 2,3 33,966
Adjusted EBITDA 99,149 (1,435) 10,798 11,769 328 3 120,609
($ in thousands) For the six months ended June 30, 2001
-------------------------------------------------------------------------------------------
Total
ILEC ELI Gas Electric Eliminations Segments
-------------- -------------- --------------- ------------- ------------- ------------
Revenue $ 576,133 $ 122,991 $ 322,670 $ 110,161 $ (1,932)1 $ 1,130,023
Depreciation and Amortization 174,689 38,728 305 5,800 550 2 220,072
Operating Income (Loss) 123,355 (31,371) 38,496 16,959 993 2,3 148,432
Adjusted EBITDA 298,044 7,357 38,801 22,759 1,543 3 368,504
($ in thousands) For the six months ended June 30, 2000
-------------------------------------------------------------------------------------------
Total
ILEC ELI Gas Electric Eliminations Segments
-------------- -------------- --------------- ------------- ------------- ------------
Revenue $ 453,708 $ 117,398 $ 190,421 $ 107,109 $ (1,327)1 $ 867,309
Depreciation and Amortization 129,771 27,476 12,368 13,077 (68)2 182,624
Operating Income (Loss) 71,356 (35,576) 22,950 13,388 580 2,3 72,698
Adjusted EBITDA 201,127 (8,100) 35,318 26,465 512 3 255,322
1 Represents revenue received by ELI from our ILEC operations.
2 Represents amortization of the capitalized portion of intercompany
interest related to our guarantees of ELI debt and leases and
amortization of goodwill related to our purchase of ELI stock.
3 Represents the administrative services fee charged to ELI pursuant to
our management services agreement with ELI.
(8)15
(9) Supplemental Segment Information:
--------------------------------
Supplemental segment income statement information for the threesix months ended
March 31,June 30, 2001 is as follows:
($( $ in thousands) Discontinued Consolidated
ILEC ELI Gas Electric Operations Eliminations Total
------------ ---------- -------- -------- -------- ----------------------- ---------- ----------- ------------ -----------
Revenue $287,344 $ 62,562 $220,515 $54,697576,133 $ -122,991 $322,670 $110,161 $ (837)(1,932) $ 624,2811,130,023
Operating expenses:
Cost of services 17,297 16,731 163,163 29,68635,148 33,782 227,077 59,655 - (756) 226,121(1,769) 353,893
Depreciation and amortization 86,377 18,894 150174,689 38,728 305 5,800 - - 285 105,706550 220,072
Other operating expenses 115,515 42,538 28,588 13,312230,395 81,852 56,792 27,747 - (866) 199,087(1,706) 395,080
Acquisition assimilation expense 5,48412,546 - - - - - 5,48412,546
------------ ---------- -------- -------- ------------------- ---------- ------- --------------------- -------------------------
Total operating expenses 224,673 78,163 191,901 42,998452,778 154,362 284,174 93,202 - (1,337) 536,398(2,925) 981,591
------------ ---------- -------- -------- ------------------- ---------- ------- --------------------- -------------------------
Operating income (loss) 62,671 (15,601) 28,614 11,699123,355 (31,371) 38,496 16,959 - 500 87,883993 148,432
Investment and other income, net 2,372 120 850 (558)12,166 194 1,489 (424) - - 2,78413,425
Interest expense 39,305 22,050 4,803 4,25089,057 46,365 9,807 8,847 - (8,956) 61,452(19,495) 134,581
------------ ---------- -------- -------- -------- --------- ------------------ ---------- ----------- -------------------------
Income (loss) from continuing operations
before income taxes and dividends on
convertible preferred securities 25,738 (37,531) 24,661 6,89146,464 (77,542) 30,178 7,688 - 9,456 29,21520,488 27,276
Income tax expense (benefit) (575) 163 7,393 2,066(3,312) 427 9,929 2,529 - - 9,0479,573
------------ ---------- -------- -------- ------------------- ---------- ------- --------------------- -------------------------
Income (loss) from continuing operations
before dividends on convertible
preferred securities 26,313 (37,694) 17,268 4,82549,776 (77,969) 20,249 5,159 - 9,456 20,16820,488 17,703
Dividends on convertible preferred
securities, net of income tax benefit 1,5533,105 - - - - - 1,5533,105
------------ ---------- -------- -------- -------- --------- ------------------ ---------- ----------- -------------------------
Income (loss) from continuing
operations 24,760 (37,694) 17,268 4,82546,671 (77,969) 20,249 5,159 - 9,456 18,61520,488 14,598
Income from discontinued operations,
net of tax - - - - 1,1084,476 - 1,1084,476
------------ ---------- --------- -------- -------- --------- ------------------ ---------- ----------- -------------------------
Net income (loss) $ 24,760 $(37,694)46,671 $ 17,268(77,969) $ 4,82520,249 $ 1,108 $9,4565,159 $ 19,7234,476 $ 20,488 $ 19,074
============ ========== ========= ======== ======== ========= ================== ========== =========== =========================
12
(9)(10) Equity Forward Contracts:
-------------------------
During 2000, we entered into equity forward contracts for the acquisition
of 9,140,000 shares as part of our share purchaserepurchase programs. ThesePursuant to
transition accounting rules, commencing December 31, 2000 through June 30,
2001 we were required to report our equity forward contracts do not meet the requirements for presentation within the
stockholders' equity section at December 31, 2000 and March 31, 2001. As a
result, they have been reflected as a reduction
of stockholders'to shareholders' equity and a component of temporary equity for the gross
settlement amount of the contracts ($150,013,000). On June 28, 2001, we
entered into a master confirmation agreement that amends the equity forward
contracts to no longer permit share settlement of the contracts. Current accounting rules permit a transition period until June
30, 2001From time
to amendtime, we will settle the equity forward contracts based on fluctuations
in the closing price of our stock. We may "net cash settle" the contracts
to comply withby paying the requirements for
permanent equity presentation. If an agreement withdifference between our current stock price times the counter party tonumber
of shares purchased minus the redemption amount of the contracts. We may
also "full physical settle" the contracts can be reached by paying the redemption amount
and taking possession of our shares. On June 29, 2001, we accrued
$42,995,000 to net cash settle a portion of the contracts, plus $12,647,000
in associated carrying costs. At June 30, 2001, the current impactcontracts are reported
at their redemption amount of the
classification to temporary equity will be reversed and the gross
settlement amount will again be presented in permanent equity with no
adjustment until final settlement. If an agreement with the counter party
cannot be reached by June 30, 2001, not only will the current impact be
reversed as noted above, but we would record the change in fair value of
the equity forward contracts from inception to that date as an asset or a
liability with the offset recorded as a cumulative effect of change in
accounting principle with future changes to the fair value recorded in
earnings.
If we were required to apply the guidance required at June 30, 2001, in the
accompanying financial statements based on the fair value of the contracts
as of March 31, 2001, we would have reflected a charge as a cumulative
effect of a change in accounting principle and an offsetting liability of
approximately $34.4 million.
(10)$107,018,000.
(11) Derivative Instruments and Hedging Activities:
----------------------------------------------
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities."
This statement establishes accounting and reporting standards for
derivative instruments and hedging activities and, as amended, is effective
for all fiscal quarters of fiscal years beginning after June 15, 2000. The
statement requires balance sheet recognition of derivatives as assets or
liabilities measured at fair value. Accounting for gains and losses
resulting from changes in the values of derivatives is dependent on the use
of the derivative and whether it qualifies for hedge accounting. The
adoption of SFAS 133 could increase the volatility of reported earnings and
other comprehensive income in the future. In general, the amount of
volatility will vary with the level of derivative activities during any
period. We adopted SFAS 133 on January 1, 2001. As of March 31,June 30, 2001 we have
not identified any derivative instruments subject to the provisions of SFAS
133. Therefore, SFAS 133 did not have any impact on our first and second
quarter 2001 financial statements.
1316
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results
------------------------------------------------------------------------ of Operations
-------------
This---------------------
Statements contained in this quarterly report on Form 10-Q containsthat are not
historical facts are forward-looking statements thatmade pursuant to the safe harbor
provisions of the Private Securities Reform Act of 1995. In addition, words such
as "believes," "anticipates," "expects" and similar expressions are intended to
identify forward-looking statements. These forward-looking statements are
subject to risks and uncertainties which could cause actual results to differ
materially from those expressed or implied in the statements. Forward-looking
statements (including oral representations) are only predictions or statements
of current plans, which we review continuously. Forward-looking statements may
differ from actual future results due to, but not limited to, any of the
following possibilities:to:
o Our ability to obtain new financing on favorable terms;
o Our ability to timely consummate our pending acquisitions and
effectively manage our growth, including the integration of newly
acquired operations into our operations, and otherwise monitor our
operations, costs, regulatory compliance and service quality;
o Our ability to divest our public utilities services businesses;
o Our ability to successfully introduce new product offerings on a
timely and cost effective basis, including our ability to offer
bundled service packages on terms attractive to our customers, and our
ability to offer second lines and enhanced services to markets
currently under-penetrated;
o Our ability to expand through attractively priced acquisitions;
o Our ability to identify future markets and successfully expand
existing ones;
o The effects of greater than anticipated competition requiring new
pricing, marketing strategies or new product offerings and the risk
that we will not respond on a timely or profitable basis;
o ELI's ability to complete a public or private financing that would
provide the funds necessary to finance its cash requirements;
o The effects of rapid technological changes, including the lack of
assurance that our ongoing network improvements will be sufficient to
meet or exceed the capabilities and quality of competing networks;
o The effects of changes in regulation in the telecommunications
industry as a result of the Telecommunications Act of 1996 and other
similar federal and state legislation and regulation;
o The future applicability of Statement of Financial Accounting Standard
No. 71, "Accounting for Certain Types of Regulation" to certain of our
ILEC subsidiaries;
o The effects of more general factors, including changes in economic
conditions; changes in the capital markets; changes in industry
conditions; changes in our credit ratings; and changes in accounting
policies or practices adopted voluntarily or as required by generally
accepted accounting principles.
You should consider these important factors in evaluating any statement in this
Form 10-Q or otherwise made by us or on our behalf. These forward-looking
statements are made as of the date of this report based upon current
expectations, and we undertake no obligation to update this information. The
following information is unaudited and should be read in conjunction with the
consolidated financial statements and related notes included in this report and
as presented in our 2000 Annual Report on Form 10-K.
We have no obligation to update or revise these
forward-looking statements.
(a) Liquidity and Capital Resources
-------------------------------
For the three and six months ended March 31,June 30, 2001, we used cash flow from
operations, marketable securities and cash on hand and proceeds from the sale of securities to fund
capital expenditures and pay down
outstanding indebtedness.
14acquisitions of additional telephone access lines.
In May 2001, we filed a $3.8 billion shelf registration statement with the
Securities and Exchange Commission on Form S-3 that permits us to offer from
time to time common stock, preferred stock, depositary shares, debt securities,
warrants to purchase these types of securities and units of the foregoing. The
net proceeds from the sale of these securities have been and are expected to be
used to refinance our bank borrowings and other extensions of credit, to expand
our networks, services and related infrastructure and fund working capital and
pending and future acquisitions, and make further investments in the related
telecommunications business as well as general corporate purposes. After the
offerings discussed below, we have a remaining shelf registration of $825.6
million.
17
In May 2001, we issued an aggregate of $1.75 billion of notes consisting of $700
million principal amount of 8.50% notes, due May 15, 2006 and $1.05 billion
principal amount of 9.25% notes due May 15, 2011. This offering was made under
the $3.8 billion shelf registration statement. The net proceeds of $1,726.0
million (after underwriting discounts and commissions and before offering
expenses) were used to repay bank borrowings and the remainder was used for
general corporate purposes and to finance acquisitions.
In June 2001, we issued equity securities in two concurrent public offerings.
The first offering consists of 25,156,250 shares of our common stock. The net
proceeds of $289.9 million (after underwriting discounts and commissions and
before offering expenses) were used to fund the acquisition of Frontier Corp.
The second offering consisted of $460 million of equity units. The net proceeds
of $446.2 million (after underwriting discounts and commissions and before
offering expenses) were used to fund the acquisition of Frontier Corp. Each
equity unit will initially consist of a senior note and a purchase contract for
our common stock. The price for the common stock under the purchase contract
will be based upon the average trading price of the stock at the time the
contract is exercised. These offerings were made under the $3.8 billion shelf
registration statement.
We have available lines of credit with financial institutions in the amounts of
$5.7$2.87 billion with associated facility fees of 0.125% per annum and $450 million
with no associated facility fees. Our ability to draw on our $5.7$2.87 billion
credit facility will end on October 26, 2001 and the debt outstanding under this
facility will mature onno later than October 25, 2002. These credit facilities are
in addition to credit commitments under which we may borrow up to $200 million,
with associated facility fees of 0.15% per annum, that expire on December 16,
2003. As of March 31,June 30, 2001, $650 million$1.78 billion was outstanding under the $5.7$2.87 billion
credit facility, as well as $146 million in commercial paper backed by this
credit facility. We intend to raise capital through public or private debt or
equity financings, or other financing arrangements to replace a portion of this
indebtedness.
Electric Lightwave Inc. (ELI) has $400 million of committed revolving lines of
credit with commercial banks, which expire November 21, 2002. It has borrowed
$400 million under these lines at March 31,June 30, 2001. The ELI credit facility has an
associated facility fee of 0.08% per annum. We have guaranteed all of ELI's
obligations under these revolving lines of credit.
We have committed to continue to finance ELI's cash requirements until the
completion of a public or private financing or June 30,
2002, that would provide
the funds necessary to support their cash requirements.2002. We extended a revolving credit facility to ELI for $450 million with an
interest rate of 15% and a final maturity of October 30, 2005. Funds of $260 million for general
corporate purposes of $260 million are available to be drawn until June 30,
2002. The remaining balance may be drawn by ELI to pay interest expense due
under the facility. As of March
31,June 30, 2001, we have advanced $58$112 million to ELI.
In January 2001, one of our subsidiaries, Citizens Utilities Rural Company, was
advanced $1.0 million, under its Rural Utilities Services Loan Contract. The
initial interest rate on the advance was 5.4125% with an ultimate maturity date
of November 1, 2016.
In March 2001, we filed a $3.8 billion shelf registration statement with the
Securities and Exchange Commission on Form S-3 that permits us to offer from
time to time common stock, preferred stock, depositary shares, debt securities,
and warrants to purchase these types of securities. The net proceeds from the
sale of these securities will be used to refinance our bank borrowings and other
extensions of credit, to expand our networks, services and related
infrastructure and fund working capital and pending and future acquisitions, and
make further investments in the related telecommunications business as well as
general corporate purposes.
At March 31, 2001, we classified $150 million of debentures as "long-term debt
due within one year" on our balance sheet. Of this amount, $50 million will
mature on September 1, 2001 and $100 million is redeemable at par at the option
of the holders on October 1, 2001.
In April 2001, we converted and remarketed $14.4 million of 1991 Series
industrial development revenue bonds as money market bonds with an initial
interest rate of 5.25% and a maturity date of April 1, 2026.
In May 2001, we converted and remarketed $23.325 million of the Illinois 1997
series of environmental facilities revenue bonds due May 1, 2032 at an initial
interest rate of 5.85%. We also converted and remarketed $18.250 million of the
Northampton (Pennsylvania) 1998 series of industrial development revenue bonds
due September 1, 2018 at an initial interest rate of 5.75%.
On June 29, 2001, we completed the acquisition of Frontier Corp. from Global
Crossing for $3,368.0 million in cash (see Acquisitions below). The acquisition
was financed on an interim basis by the drawdown of our bank credit facility of
$1,780.0 million with the remainder derived from the proceeds of our registered
securities offerings.
We have budgeted approximately $750$150 million of debentures as "long-term debt due within one year" on
our balance sheet. Of this amount, $50 million will mature on September 1, 2001
and $100 million is redeemable at par at the option of the holders on October 1,
2001.
18
On July 2, 2001, we completed the sales of our Louisiana Gas operations to Atmos
Energy Corp for $363.4 million in cash. The proceeds were used to repay a
portion of the borrowings under our bank credit facility.
As of June 30, 2001, our actual capital projects,
including approximately $513expenditures are $148.8 million for the
ILEC segment, $141$35.3 million for the ELI segment and $96$46.6 million for the public
utilities services segments which includes $39.3 million for the water and wastewater segment. As of March 31,
2001, our actual capital expenditures are $76.6 million for the ILEC segment,
$20.3 million for the ELI segment and $27.1 million for the public utilities
services segments which includes $10$12.9 million for the water and
wastewater segment. We anticipate that the funds necessary for our 2001 capital
expenditures will be provided from operations and from advances of Rural
Utilities Service loan contracts. If required, we may use funding from
additional sources, including commercial paper notes
payable, debt, equity and other financing at appropriate times and borrowings
under bank credit facilities.
Capital expenditures for discontinued operations and assets held for sale will
also be funded through requisitions of Industrial Development Revenue Bond
construction fund trust accounts and from parties desiring utility service. Upon
disposition, we will receive reimbursement of certain 1999, 2000 and 2001
capital expenditures pursuant to the terms of each respective sales agreement.
15
Acquisitions
- ------------
From May 27, 1999 through July 12, 2000, we entered into several agreements to
acquire approximately 2.0 million telephone access lines (as of December 31,
2000) for approximately $6,471.0 million in cash which was subsequently reduced
to $6,321.0 million.lines. These transactions have been and will be
accounted for using the purchase method of accounting. The results of operations
of the acquired properties have been and will be included in our financial
statements from the dates of acquisition of each property. These agreements and
the status of each transaction are described as follows:
Verizon Acquisition
-------------------
On May 27, September 21, and December 16, 1999, we announced definitive
agreements to purchase from Verizon Communications, formerly GTE Corp.
(Verizon), approximately 381,200 telephone access lines (as of December 31,
2000) in Arizona, California, Illinois/Wisconsin, Minnesota and Nebraska
for approximately $1,171.0 million in cash. On June 30, 2000, we closed on
the Nebraska purchase of approximately 62,200 access lines for
approximately $205.4 million in cash. On August 31, 2000, we closed on the
Minnesota purchase of approximately 142,400 access lines for approximately
$438.9 million in cash. On November 30, 2000, we closed on the
Illinois/Wisconsin purchase of approximately 112,900 access lines for
approximately $303.9 million in cash. We expect that the remainder of the
VerizonArizona and
California transactions, which are subject to various state and federal
regulatory approvals, will close on a state-by-state basis induring 2001. Our expected cash requirement
to complete the Verizon acquisitions is $222.8 million in 2001.million.
Qwest Acquisition
-----------------
On June 16, 1999, we announced a series of definitive agreements to
purchase from Qwest Communications, formerly US WestU S WEST (Qwest),
approximately 556,800 telephone access lines (as of December 31, 2000) in
Arizona, Colorado, Idaho/Washington, Iowa, Minnesota, Montana, Nebraska,
North Dakota and Wyoming for approximately $1,650.0 million in cash and the
assumption of certain liabilities. On October 31, 2000, we closed on the
North Dakota purchase of approximately 17,000 access lines for
approximately $38.0 million in cash. On July 20, 2001, we delivered a
notice of termination for the remaining acquisition agreements with Qwest.
On July 23, 2001, Qwest advised us that it intends to pursue a claim of $64
million (available under letters of credit issued by us) for liquidated
damages in an arbitration proceeding. We expect thatwill also pursue our substantial
claims for breach of contract against Qwest in the remainder of the
Qwest acquisitions, which are subject to various state and federal
regulatory approvals, will occur on a state-by-state basis by the end of
the first quarter of 2002 upon satisfaction of certain closing conditions.
Our expected cash requirements to complete the Qwest acquisitions are
$989.3 million and $622.7 million in 2001 and 2002, respectively.
Global Crossingsame arbitration.
Frontier Acquisition
-----------------------------------------------
On July 12, 2000, we announced a definitive agreement to purchase from
Global Crossing Ltd. (Global) 100% of the stock of Frontier Corp., which
ownsowned approximately 1,096,700 telephone access lines (as of December 31,
2000) in Alabama/Florida, Georgia, Illinois, Indiana, Iowa, Michigan,
Minnesota, Mississippi, New York, Pennsylvania and Wisconsin, for
approximately $3,650.0 million in cash which price was later reduced to
$3,500.0 million. We have received approvalOn June 29, 2001, we closed on the Frontier acquisition
for the proposed purchaseapproximately $3,368.0 million in cash, subject to adjustment. The
operations of Frontier are included in our financial statements from the
Federal Communications Commission and all other state Public Service
Commissionsdate of acquisition.
In conjunction with the exceptionFrontier acquisition, we are evaluating our
facilities to take advantage of Minnesota. Subjectoperational and functional synergies
between the two companies with the objective of concentrating our resources
in the areas where we have the most customers, to the timely receipt
of the Minnesota regulatory approval,better serve those
customers. Accordingly, we expect that this transactionintend to close our operations support center in
Plano, Texas by March 2002. We communicated with all affected employees
during July 2001. Certain employees will be completed and paid forrelocated; others will be
offered severance, job training and/or outplacement counseling. We intend
to sublease our office space after March 31, 2002. In connection with this
plan, we will record a restructuring charge to operating expenses in full by the
endthird quarter of June 2001.
19
We have and/or expect to temporarily fund these telephone access line purchases
with cash and investment balances, proceeds from commercial paper issuances,
backed by the credit commitments, and borrowings under lines of credit, as
described above. Permanent funding is expected to include cash and investment
balances, the proceeds from the divestiture of our public utilities services
businesses, direct drawdowns from certain of the credit facilities and issuances
of debt and equity securities, or other financing arrangements.
Divestitures
- ------------
On August 24, 1999, our Board of Directors approved a plan of divestiture for
our public utilities services businesses, which include gas, electric and water
and wastewater businesses. The proceeds from the sales of these public utilities
services businesses will be used to partially fund the telephone access line
purchases described above.
Currently, we have agreements to sell all our water and wastewater operations,
one of our electric operations and one of our natural gas operations. The
proceeds from these agreements will include approximately $1,380.0$1,391.0 million in
cash plus the assumption of certain liabilities. These agreements and the status
of each transaction are described as follows:
Water and Wastewater
-----------------------------------------
On October 18, 1999, we announced the agreement to sell our water and
wastewater operations to American Water Works, Inc. for $745.0 million in
cash and $90.0 million of assumed debt. These transactions are currently
expected to close in the second half of 2001 following regulatory approval.
The contract may be terminated if the required approvals are not received
by September 30, 2001.
16
Electric
--------
On February 15, 2000, we announced that we had agreed to sell our electric
utility operations. The Arizona and Vermont electric divisions were under
contract to be sold to Cap Rock Energy Corp. (Cap Rock). The agreement with
Cap Rock was terminated on March 7, 2001. It is our intention to pursue the
disposition of the Vermont and Arizona electric divisions with alternative
buyers. In August 2000, the Hawaii Public Utilities Commission denied the
initial application requesting approval of the purchase of our Kauai
electric division by the Kauai Island Electric Co-op for $270.0 million in
cash including the assumption of certain liabilities. We are considering a
variety of options, including filing a request for reconsideration of the
decision, which may include filing a new application. Our agreement for the
sale of this division may be terminated if regulatory approval is not
received before February 2002.
Gas
---
On April 13, 2000, we announced the agreement to sell our Louisiana Gas
operations to Atmos Energy Corporation for $365.0 million in cash plus the
assumption of certain liabilities. Regulatory approval was received in
April 2001. On July 2, 2001, we closed on the sale for $363.4 million in
cash. The estimated pre-tax gain on the sale is approximately $152 million
and will be recognized in the third quarter.
In July 2001, an agreement was signed to sell the Colorado Gas division to
Kinder Morgan for $11 million. This transaction is expected to close on June 30, 2001.in the
fourth quarter of 2001 following regulatory approval.
Discontinued operations in the consolidated statements of income and
comprehensive income (loss) reflect the
results of operations of the water/wastewater properties including allocated
interest expense for the periods presented. Interest expense was allocated to
the discontinued operations based on the outstanding debt specifically
identified with these businesses. The long-term debt presented in liabilities of
discontinued operations represents the only liability to be assumed by the buyer
pursuant to the water and wastewater asset sale agreements.
We initially accounted for the planned divestiture of all the public utilities
services properties as discontinued operations. Currently, we do not have
agreements to sell our entire gas and electric segments. Consequently, we
reclassified all of our gas and electric assets and their related liabilities to
"assets held for sale" and "liabilities related to assets held for sale,"
respectively. We also reclassified the results of these operations from
discontinued operations to their original income statement captions as part of
continuing operations. Additionally, because both our gas and electric
operations are expected to be sold at a profit, we ceased to record depreciation
expense on the gas assets effective October 1, 2000 and on the electric assets
effective January 1, 2001. Such depreciation expense would have been $13.9an
additional $14.2 million and $28.1 million for the three and six months ended
March 31, 2001.June 30, 2001, respectively. We continue to actively pursue buyers for our
remaining gas and electric businesses.
20
New Accounting Pronouncements
- -----------------------------
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 141, "Business Combinations." This
statement requires that all business combinations be accounted for under the
purchase method of accounting. SFAS No. 141 requires that the purchase method of
accounting be used for business combinations initiated after June 30, 2001 and
prohibits the use of the pooling-of-interests method of accounting. The Frontier
acquisition which closed on June 30, 2001 is accounted for using the purchase
method.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." This statement requires that goodwill no longer be amortized to
earnings, but instead be reviewed for impairment. Impairment tests are required
to be performed at least annually. The amortization of goodwill ceases upon
adoption of the statement. The statement is effective for fiscal years beginning
after December 15, 2001 for companies whose annual reporting period ends on
December 31, 2001 and applies to all goodwill and other intangible assets
recognized in the statement of financial position at that date, regardless of
when the assets were initially recognized. We will cease to recognize
amortization of goodwill starting January 1, 2002. We will be required to test
for impairment of goodwill annually starting in 2002. The amount of any future
impairment, if any, cannot be estimated at this time.
(b) Results of Operations
---------------------
REVENUE
Consolidated revenue for the three and six months ended March 31,June 30, 2001 increased
$175.6$87.1 million, or 39%21%, and $262.7 million, or 30%, respectively, as compared
with the prior year period.periods. The increase is primarily due to a $61.0$61.4 million
and $122.4 million increase in telecommunications revenue and a $5.6$24.8 million
increase
in ELI revenue, a $107.5and $132.2 million increase in gas revenue and a $1.5 million
increase in electric revenue.
ILEC REVENUE
($ in thousands) Forfor the three and six months ended
March 31,
-----------------------------------------June 30, 2001, 2000 % Change
------------ ------------ -----------
Network access services $ 132,399 $ 106,870 24%
Local network services 100,691 73,053 38%
Long distance and data services 30,607 25,010 22%
Directory services 10,690 8,895 20%
Other 12,957 12,484 4%
------------ ------------
$ 287,344 $ 226,312 27%
============ ============respectively, as compared with the prior year periods.
ILEC REVENUE
($ in thousands) For the three months ended June 30, For the six months ended June 30,
----------------------------------------- ---------------------------------------
2001 2000 % Change 2001 2000 % Change
------------- ------------- ----------- ------------- ------------- -----------
Network access services $ 139,403 $ 108,423 29% $ 271,800 $ 215,293 26%
Local network services 95,713 74,871 28% 196,405 147,924 33%
Long distance and data services 32,675 24,480 33% 63,284 49,462 28%
Directory services 10,999 9,000 22% 21,689 17,922 21%
Other 9,998 10,622 -6% 22,955 23,107 -1%
------------- ------------- ------------- -------------
$ 288,788 $ 227,396 27% $ 576,133 $ 453,708 27%
============= ============= ============= =============
We acquired the Verizon Nebraska access lines on June 30, 2000, the Verizon
Minnesota access lines on August 31, 2000, the Qwest North Dakota access lines
on October 31, 2000 and the Verizon Illinois/Wisconsin access lines on November
30, 2000 (collectively referred to as the Acquisitions). These Acquisitions
contributed $48.1$52.5 million and $100.6 million of revenue for the three and six
months ended March 31,June 30, 2001, respectively. Access lines excluding these
Acquisitions increased 45,596 from 1,017,188 to 1,062,784 as compared with the
prior year period. Access lines from these Acquisitions totaled 340,736 at June
30, 2001. 17
Minutes of use excluding these Acquisitions increased 129 million from
1,380 million to 1,509 million for the three months ended June 30, 2001 as
compared with the prior year period. Minutes of use from these Acquisitions
totaled 433 million for the three months ended June 30, 2001. Minutes of use
excluding these Acquisitions increased 296 million from 2,703 million to 2,999
million for the six months ended June 30, 2001 as compared with the prior year
period. Minutes of use from these Acquisitions totaled 753.8 million for the six
months ended June 30, 2001. We acquired Frontier on June 29, 2001. Frontier
contributed $4.2 million in revenue for the three and six months ended June 30,
2001. Revenue data includes Frontier; access lines and minutes of use data do
not include Frontier.
Network access services revenue for the three months ended March 31,June 30, 2001
increased $25.5$31.0 million, or 24%29%, as compared with the prior year period
primarily due to the impact of the Acquisitions and Frontier of $20.0$24.5 million.
Growth in minutes of use of 86.9 million contributed $3.0$.7 million and growth in special
access and subsidies
contributed $3.4 million and $3.6 million, respectively.$3.7 million. These increases were partially offset by $4.5$4.3 million
from the effect of the Federal Communications Commission's (FCC) Coalition for
Affordable Local and Long Distance Services (CALLS) mandate which reduced access
charges paid by long distance companies. LocalNetwork access also includes a
reclassification of $6.3 million in revenue reported as local network services
revenue in the prior year.
21
Network access services revenue for the threesix months ended March 31,June 30, 2001 increased
$27.6$56.5 million, or 38%26%, as compared with the prior year period primarily due to
the impact of the Acquisitions and Frontier of $24.7 million, access line
and second line growth$44.5 million. Growth in minutes
of 26,000use contributed $1.6$3.7 million and growth in enhancedspecial access and subsidies
contributed $3.4 million and $7.4 million, respectively. These increases were
partially offset by $8.8 million from the effect of the FCC's CALLS mandate
which reduced access charges paid by long distance companies. Network access
also includes a reclassification of $6.3 million in revenue reported as local
network services contributed $1.3 million.
Long distance and datarevenue in the prior year.
Local network services revenue for the three months ended March 31,June 30, 2001
increased $5.6$20.8 million, or 22%, as compared with the prior year period
primarily due to $2.9 million of growth related to data and dedicated circuits
and growth in long distance services of $2.0 million. The acquired properties
also contributed $0.7 million in data revenue.
Directory services revenue for the three months ended March 31, 2001 increased
$1.8 million, or 20%28%, as compared with the prior year period
primarily due to the impact of the Acquisitions and Frontier of $1.5$26.6 million
and growth in enhanced services of $.3$1.0 million. OtherLocal network services revenue
also reflects a reclassification of $6.3 million in revenue reported as network
access revenue in the prior year.
Local network services revenue for the threesix months ended March 31,June 30, 2001 increased
$0.5$48.5 million, or 4%33%, as compared with the prior year period primarily due to
the impact of the Acquisitions.
ELI REVENUE
($Acquisitions and Frontier of $51.3 million, growth in thousands) Forenhanced
services of $2.3 million and access line and second line growth of $1.6 million.
Local network services revenue also reflects a reclassification of $6.3 million
in revenue reported as network access revenue in the prior year.
Long distance and data services revenue for the three months ended March 31,
------------------------------------------June 30, 2001
2000 % Change
------------ ----------- -----------
Networkincreased $8.2 million, or 33%, as compared with the prior year period primarily
due to $1.4 million of growth in Digital Subscriber Line (DSL) and Internet
services, $ 25,768 $ 16,004 61%
Local telephone services 21,797 24,274 -10%$1.0 million of growth related to data and dedicated circuits and $3.4
million of growth in long distance services. The acquired properties and
Frontier also contributed $2.4 million in long distance and data revenue.
Long distance and data services 3,084 4,596 -33%
Datarevenue for the six months ended June 30, 2001
increased $13.8 million, or 28%, as compared with the prior year period
primarily due to $2.8 million of growth in DSL and Internet services, 11,913 11,904 0%
----------- -----------
62,562 56,778 10%
Intersegment$2.5
million of growth related to data and dedicated circuits and $5.4 million of
growth in long distance services. The acquired properties and Frontier also
contributed $3.1 million in long distance and data revenue.
Directory services revenue * (837) (635) N/A
----------- -----------
$ 61,725 $ 56,143 10%
=========== ===========for the three months ended June 30, 2001 increased
$2.0 million, or 22%, as compared with the prior year period primarily due to
the impact of the Acquisitions and Frontier of $1.8 million and growth of $.2
million.
Directory services revenue for the six months ended June 30, 2001 increased $3.8
million, or 21%, as compared with the prior year period primarily due to the
impact of the Acquisitions and Frontier of $3.3 million and growth of $.5
million.
Other revenue for the three months ended June 30, 2001 decreased $.6 million, or
6%, as compared with the prior year period. The Acquisitions and Frontier
contributed $1.4 million, which was partially offset by a decrease of $2.0
million in miscellaneous revenue categories.
Other revenue for the six months ended June 30, 2001 decreased $.2 million, or
1%, as compared with the prior year period. The Acquisitions and Frontier
contributed $2.6 million, which was partially offset by a decrease of $2.8
million in miscellaneous revenue categories.
ELI REVENUE
($ in thousands) For the three months ended June 30, For the six months ended June 30,
----------------------------------------- ---------------------------------------
2001 2000 % Change 2001 2000 % Change
------------- ------------- ----------- ------------- ------------- -----------
Network services $ 26,121 $ 17,173 52% $ 51,889 $ 33,177 56%
Local telephone services 21,868 25,951 -16% 43,664 50,225 -13%
Long distance services 3,098 4,265 -27% 6,183 8,862 -30%
Data services 9,342 13,231 -29% 21,255 25,134 -15%
------------- ------------- ------------- -------------
60,429 60,620 0% 122,991 117,398 5%
Intersegment revenue * (1,095) (692) N/A (1,932) (1,327) N/A
------------- ------------- ------------- -------------
$ 59,334 $ 59,928 -1% $ 121,059 $ 116,071 4%
============= ============= ============= =============
*Intersegment revenue reflects revenue received by ELI from our ILEC operations.
22
Included in revenue for the three months ended June 30, 2001 is approximately
$3.8 million of revenue representing a "net settlement" of past billing disputes
between ELI and Qwest. Additionally, we are currently providing service to
customers that have filed for protection under Chapter 11 of the bankruptcy
code. Of our largest twenty-five customers, two are under Chapter 11
protection. These two customers contribute approximately $1.1 million of
revenue monthly; amounts due from such customers are current.
Network services revenue for the three and six months ended June 30, 2001
increased $9.8$8.9 million, or 61%52%, and $18.7 million, or 56%, respectively, as
compared with the prior year period.periods. The increase is due to continued growth in
our network and sales of additional circuits to new and existing customers.
Local telephone services revenue for the three and six months ended June 30,
2001 decreased $2.5$4.1 million, or 10%16%, and $6.6 million, or 13%, respectively, as
compared with the prior year period.periods. Local telephone services include ISDN PRI,
dial tone, Carrier Access Billings and reciprocal compensation.
For the three months ended June 30, For the six months ended June 30,
----------------------------------------- ---------------------------------------
($ In thousands) 2001 2000 % Change 2001 2000 % Change
------------- ------------- ----------- ------------- ------------- -----------
ISDN PRI $ 6,755 $ 8,402 -20% $ 14,785 $ 16,231 -9%
Dial tone 4,528 4,201 8% 9,231 8,749 6%
Carrier access billings 2,574 2,948 -13% 3,923 5,219 -25%
Reciprocal compensation 8,011 10,400 -23% 15,725 20,026 -21%
------------- ------------- ------------- -------------
$ 21,868 $ 25,951 -16% $ 43,664 $ 50,225 -13%
============= ============= ============= =============
ISDN PRI revenue increased $0.2for the three and six months ended June 30, 2001
decreased $1.6 million, or 3%20%, and $1.4 million, or 9%, respectively,
as compared with the prior year period.periods primarily due to the decline
in the consumer dial-up market.
Dial tone revenue increased $0.2$0.3 million, or 3%8%, and $0.5 million, or
6%, respectively, as compared with the prior year period.periods. Increases
in revenue for both ISDN PRI and dial tone isare the result of an increase in the average
access line equivalents of 14,280,14,747, or 8%16%, and 5,379, or 5%, for the
three and six months ended June 30, 2001, respectively.
Carrier Access Billings revenue for the three and six months ended
June 30, 2001 decreased $0.4 million, or 13%, and $1.3 million, or
25%, respectively, as compared with the prior year period.
Carrier Access Billings revenue decreased $0.9 million, or 41%, as compared
with the prior year period.periods. The
decrease is the result of lower average rates per minute due to
competitive pressures in the markets in which we operate, offset by an
increase in average monthly minutes processed of 12.71.7 million, or 49%5%,
as compared with the prior period.
18
Reciprocal compensation revenue decreased $1.9and 8.7 million, or 20%31%, for the three and six months ended June 30,
2001, respectively, as compared with the prior year period.periods.
Reciprocal compensation revenue for the three and six months ended
June 30, 2001 decreased $2.4 million, or 23%, and $4.3 million, or
21%, respectively, as compared with the prior year periods. The
decrease is due to a decrease in average monthly minutes processed of
31.1110 million, or 9%, and 35 million, or 3%, for the three and six
months ended June 30, 2001, respectively, as compared with the prior
year period,periods and lower average rates per minute due to competitive
pressures in the markets in which we operate.
Long distance services revenue for the three and six months ended June 30, 2001
decreased $1.5$1.2 million, or 33%27%, and $2.7 million, or 30%, respectively, as
compared with the prior year period.periods. Long distance services include retail and
wholesale long distance.
Retail long distance revenue for the three and six months ended June
30, 2001 decreased $0.3$0.2 million, or 11%9%, and $0.5 million, or 10%,
respectively, as compared with the prior year period.periods. The decrease is
due to a decrease in average monthly minutes processed of 0.3 million,
or 3%, and 0.2 million, or 2%, for the three and six months ended March 31,June
30, 2001 and lower average rates per minute.
Wholesale long distance revenue for the three and six months ended
June 30, 2001 decreased $1.1$0.5 million, or 49%34%, and $1.5 million, or
43%, respectively, as compared with the prior year period.periods. The
decrease is due to a decrease in average monthly minutes processed of
5.84.3 million, or 30%25%, and 5 million, or 28%, for the three and six
months ended March 31,June 30, 2001 and lower average rates per minute.
23
Data services revenue increased marginally overfor the first quarter 2000.three and six months ended June 30, 2001 decreased
$3.9 million, or 29%, and $3.9 million, or 15%, respectively, as compared with
the prior year periods. Data services include Internet, RSVP, Frame Relay and
other services.
Revenue for the three and six months ended June 30, 2001 from our
Internet services product increased $0.6decreased $0.4 million, or 18%9%, and increased
$0.2 million, or 2.9%, respectively, as compared with the prior year
period.periods.
Revenue for the three and six months ended June 30, 2001 from our RSVP
products increased $0.7$0.4 million, or 106%52%, and $1.1 million, or 76%,
respectively, as compared with the prior year period.periods.
Revenue for the three and six months ended June 30, 2001 from our
Frame Relay product increased $0.3decreased $0.1 million, or 14%7%, and increased $0.1
million, or 3%, respectively, as compared with the prior year period.
These increases were offset by a decrease of $1.6periods.
Revenue for the three and six months ended June 30, 2001 from other
services revenue decreased $3.8 million, or 33%70%, and $5.4 million, or
51%, respectively, as compared with the prior year period as the result ofperiods, primarily
due to the expiration on February 28, 2001 of an 18-month take-or-pay
contract with a significant customer. This take-or-pay contract haswas
not been renewed.
GAS REVENUE
($ in thousands) For the three months ended March 31,
-----------------------------------------
2001 2000 % Change
------------ ----------- ----------
Gas revenue $ 220,515 $ 113,055 95%
GAS REVENUE
($ in thousands) For the three months ended June 30, For the six months ended June 30,
----------------------------------------- ---------------------------------------
2001 2000 % Change 2001 2000 % Change
------------- ------------- ----------- ------------- ------------- -----------
Gas revenue $ 102,155 $ 77,366 32% $ 322,670 190,421 69%
Gas revenue for the three and six months ended March 31,June 30, 2001 increased $107.5$24.8
million, or 95%32%, and $132.2 million, or 69%, as compared with the prior year
periodperiods, primarily due to higher purchased gas costs passed on to customers.and customer growth. Under
tariff provisions, increases in our costs of gas purchased are largely passed on
to customers. ELECTRIC REVENUE
($Included in thousands) Forgas revenue is approximately $52.7 million and $203.5
million for the three and six months ended March 31,
---------------------------------------June 30, 2001, 2000 % Change
---------- ----------- -----------
Electricrespectively, of
revenue $ 54,697 $ 53,192from our Louisiana gas operations. This revenue will not continue since
the sale of our Louisiana gas operations closed on July 2, 2001.
ELECTRIC REVENUE
($ in thousands) For the three months ended June 30, For the six months ended June 30,
----------------------------------------- ---------------------------------------
2001 2000 % Change 2001 2000 % Change
------------- ------------- ----------- ------------- ------------- -----------
Electric revenue $ 55,464 $ 53,917 3% $ 110,161 $ 107,109 3%
Electric revenue for the three and six months ended March 31,June 30, 2001 increased $1.5
million, or 3%, and $3.1 million, or 3%, respectively, as compared with the
prior year periodperiods, primarily due to higher purchasepurchased power prices.
19costs, customer
growth and increased consumption due to warmer weather conditions. Under tariff
provisions, increases in our costs of electric energy and fuel oil purchased are
largely passed on to customers.
24
COST OF SERVICES
($ in thousands) For the three months ended March 31,
-------------------------------------June 30, For the six months ended June 30,
----------------------------------------- ---------------------------------------
2001 2000 % Change ----------2001 2000 % Change
------------- ------------- ----------- ----------------------- ------------- -----------
Gas purchased $ 163,16363,914 $ 57,271 185%42,785 49% $ 227,077 $ 100,056 127%
Electric energy and fuel oil purchased 29,686 24,173 23%29,969 27,801 8% 59,655 51,974 15%
Network access 34,028 40,357 -16%35,658 33,540 6% 68,930 73,639 -6%
Eliminations * (756) (635)(1,013) (692) N/A ---------- -----------(1,769) (1,327) N/A
------------- ------------- ------------- -------------
$128,528 $103,434 24% $ 226,121 $121,166 87%
========== ===========353,893 $ 224,342 58%
============= ============= ============= =============
*Eliminations represent expenses incurred by our ILEC operations related to
network services provided by ELI.
Gas purchased for the three and six months ended March 31,June 30, 2001 increased $105.9$21.1
million, or 185%49%, and $127.0 million, or 127%, respectively, as compared with the
prior year periodperiods, primarily due to an increase in the cost of gas. Under
tariff provisions, increases in our costs of gas purchased are largely passed on
to customers. Included in gas purchased is approximately $37.0 million and
$161.3 million for the three and six months ended June 30, 2001, respectively,
of gas purchase by our Louisiana gas operations. This cost will not continue
since the sale of our Louisiana gas operations closed on July 2, 2001.
Electric energy and fuel oil purchased for the three and six months ended March 31,June
30, 2001 increased $5.5$2.2 million, or 23%8%, and $7.7 million, or 15%, respectively,
as compared with the prior year periods, primarily due to higher purchased power
prices.
During the past two years the decrease in the availability of power in certain
areas of the country has caused power supply costs to increase substantially,
forcing companies to pay higher operating costs to operate their electric
businesses. As a result, companies have attempted to offset these increased
costs by either renegotiating prices with their power suppliers or passing these
additional costs on to their customers through a rate proceeding. In Arizona,
excessive power costs charged by our power supplier in the amount of
approximately $88 million through June 30, 2001 has been incurred. We are
allowed to recover these charges from ratepayers through the Purchase Power Fuel
Adjustment clause. In an attempt to limit "rate shock" to our customers, we will
request that this deferred amount, plus interest, be recovered over a extended
time period. As a result, we have deferred these costs on the balance sheet in
anticipation of recovering through the regulatory process.
On July 16, 2001, Citizens terminated its existing contract with Arizona Public
Service and entered into a new seven year purchase power agreement. This
agreement allows us to purchase all power required for operations at a fixed
rate per kilowatt hour. This agreement is retroactive to June 1, 2001 and will
minimize any further increase in the deferred power cost account.
Network access expenses for the three months ended June 30, 2001 increased $2.1
million, or 6%, as compared with the prior year period primarily due to higher purchase power prices.the
impact of the Acquisitions and an Internet remote call forwarding adjustment
partially offset by a reduction in long distance access expense related to rate
changes in the ILEC sector and $1.2 million of reduced variable costs at ELI.
Network access expenses for the threesix months ended March 31,June 30, 2001 decreased $6.3$4.7
million, or 16%6%, as compared with the prior year period primarily due to $5.2
million of reduced variable costs at ELI and a reduction in long distance access
expense of $5.4 million related to lower
minutes of use and rate changes in the ILEC sector, and $4.0 million of reduced
variable costs at ELI, partially offset by the
impact of the Acquisitions of
$3.0 million.
DEPRECIATION AND AMORTIZATION EXPENSE
($ in thousands) For the three months ended March 31,
-------------------------------------------
2001 2000 % Change
----------- ------------- -----------
Depreciation expense $ 92,383 $ 95,134 -3%
Amortization expense 13,323 847 1473%
----------- -------------
$105,706 $ 95,981 10%
===========and an Internet remote call forwarding adjustment.
DEPRECIATION AND AMORTIZATION EXPENSE
($ in thousands) For the three months ended June 30, For the six months ended June 30,
----------------------------------------- ---------------------------------------
2001 2000 % Change 2001 2000 % Change
------------- ------------- ----------- ------------- ------------- -----------
Depreciation expense $ 101,290 $ 85,849 18% $ 193,743 $ 181,195 7%
Amortization expense 13,076 794 1547% 26,329 1,429 1742%
------------- ------------- ---------------------------
$ 114,366 $ 86,643 32% $ 220,072 $ 182,624 21%
============= ============= ===========================
25
Depreciation expense for the three and six months ended March 31,June 30, 2001 decreased $2.8increased
$15.4 million, or 3%18%, and $12.5 million, or 7%, respectively, as compared with
the prior year periodperiods, primarily due to $13.9the impact of decreasedthe Acquisitions of $14.0
million and $32.1 million, respectively, and higher property, plant and
equipment balances in the telecommunications sector. The increases were
partially offset by a decrease of $6.2 million and $19.3 million, respectively,
of depreciation expense resulting from the classification ofrelated to our gas and electric sectors classified as
"assets held for sale" which requires us to cease depreciating these assets, and
$15.1$3.6 million and $17.4 million, respectively, in the prior year periodperiods of
accelerated depreciation related to the change in useful life of an operating
system in the telecommunications sector.
The decreases were partially
offset by the impact of the Acquisitions of $15.8 million and $7.5 million
related to higher property, plant and equipment balances in the
telecommunications sector.
Amortization expense for the three and six months ended March 31,June 30, 2001 increased
$12.5$12.3 million, or 1473%1547%, and $24.9 million, or 1742%, respectively, as compared
with the prior year periodperiods, primarily due to amortization of goodwill of $11.7
million and $23.4 million, respectively, related to the Acquisitions of $11.6 million.
OTHER OPERATING EXPENSES
($ in thousands) For the three months ended March 31,
---------------------------------------
2001 2000 % Change
----------- ------------- ----------
Operating expenses $ 155,483 $ 145,065 7%
Taxes other than income taxes 25,836 26,778 -4%
Sales and marketing 17,768 17,006 4%
----------- -------------
$ 199,087 $ 188,849 5%
===========Acquisitions.
OTHER OPERATING EXPENSES
($ in thousands) For the three months ended June 30, For the six months ended June 30,
----------------------------------------- ---------------------------------------
2001 2000 % Change 2001 2000 % Change
------------- ------------- ----------- ------------- ------------- -----------
Operating expenses $ 149,839 $ 139,633 7% $ 303,236 $ 283,472 7%
Taxes other than income taxes 24,437 28,311 -14% 50,273 55,089 -9%
Sales and marketing 20,960 19,003 10% 41,571 37,493 11%
------------- ------------- ------------- -------------
$ 195,236 $ 186,947 4% $ 395,080 $ 376,054 5%
============= ============= ============= =============
20
Operating expenses for the three months ended March 31,June 30, 2001 increased $10.4$10.2
million, or 7%, as compared with the prior year periodperiods, primarily due to
increased operating expenses related to the Acquisitions and increased operating
costs of $7.5 million in the gas and electric sectors, partially offset by
decreased operating expenses of $4.8 million at ELI due to a reduction in
personnel.
Operating expenses for the six months ended June 30, 2001 increased operating efficiencies.
Sales and marketing expenses increased $0.8$19.7
million, or 4%7%, as compared with the prior year periodperiods, primarily due to
the impact ofincreased operating expenses related to the Acquisitions and increased operating
costs of $1.0
million.
ACQUISITION ASSIMILATION EXPENSE
($$4.7 million in thousands) For the three months ended March 31,
-------------------------------------
2001 2000 % Change
---------- ---------- ------------
Acquisition assimilation expense $ 5,484 $ 3,974 38%gas and electric sectors partially offset by
decreased operating expenses of $6.4 million at ELI due to a reduction in
personnel.
Taxes other than income taxes decreased $3.9 million, or 14%, and $4.8 million,
or 9%, respectively, as compared with the prior year periods, primarily due to
franchise tax refunds received by the gas sector.
Sales and marketing expenses increased $2.0 million, or 10%, and $4.1 million,
or 11%, respectively, as compared with the prior year periods, primarily due to
increased telemarketing costs in the telecommunications sector.
ACQUISITION ASSIMILATION EXPENSE
($ in thousands) For the three months ended June 30, For the six months ended June 30,
----------------------------------------- ---------------------------------------
2001 2000 % Change 2001 2000 % Change
------------- ------------- ----------- ------------- ------------- -----------
Acquisition assimilation expense $ 7,062 $ 7,617 -7% $ 12,546 $ 11,591 8%
Acquisition assimilation expense of $5.5$7.1 million and $4.0$7.6 million for the three
months ended March 31,June 30, 2001 and 2000, respectively, and $12.6 million and $11.6
million for the six months ended June 30, 2001 and 2000, respectively, is
related to the completed and pending acquisitions of approximately 21.5 million
telephone access lines. As we complete the acquisitions currently under
contracts, we will continue to incur additional assimilation costs.
OPERATING INCOME
($ in thousands) For the three months ended March 31,
-------------------------------------
2001 2000 % Change
-------------------------------------
Operating Income $ 87,883 $ 38,732 127%26
OPERATING INCOME
($ in thousands) For the three months ended June 30, For the six months ended June 30,
----------------------------------------- ---------------------------------------
2001 2000 % Change 2001 2000 % Change
------------- ------------- ----------- ------------- ------------- -----------
Operating Income $ 60,549 $ 33,966 78% $ 148,432 $ 72,698 104%
Operating income for the three and six months ended March 31,June 30, 2001 increased
$49.2$26.6 million, or 127%78%, and $75.7 million, or 104%, respectively, as compared
with prior year periodperiods, primarily due to ILEC growth, increased operating
income from the impact
of the Acquisitionsgas and electric sectors and decreased ELI operating losses.
INVESTMENT AND OTHER INCOME, NET/MINORITY INTEREST/
INTEREST EXPENSE/INCOME TAXES
($Included in thousands) Foroperating income is approximately $158,000 and $12.7 million for the
three and six months ended March 31,
-------------------------------------June 30, 2001, 2000 % Change
---------- ---------- ----------
Investment and otherrespectively, of operating income net $ 2,784 $ 5,598 -50%
Minority interest $ - $ 6,285 -100%
Interest expense $ 61,452 $ 37,590 63%
Income taxes $ 9,047 $ 4,827 87%from
our Louisiana gas operations. This operating income will not continue since the
sale of our Louisiana gas operations closed on July 2, 2001.
INVESTMENT AND OTHER INCOME, NET / MINORITY INTEREST
INTEREST EXPENSE/INCOME TAXES
($ in thousands) For the three months ended June 30, For the six months ended June 30,
----------------------------------------- ---------------------------------------
2001 2000 % Change 2001 2000 % Change
------------- ------------- ----------- ------------- ------------- -----------
Investment and other income, net $ 10,641 $ 4,219 152% $ 13,425 $ 9,817 37%
Minority interest $ - $ 5,937 -100% $ - $ 12,222 -100%
Interest expense $ 73,129 $41,750 75% $134,581 $ 79,340 70%
Income taxes $ 525 $ 471 11% $ 9,573 $ 5,298 81%
Investment and other income, net for the three and six months ended March 31,June 30,
2001 decreased $2.8increased $6.4 million, or 50%152%, and $3.6 million, or 37%, respectively, as
compared with the prior year periodperiods, primarily due to lower average investment balances.increased income from
higher money market balances, an increase in the equity component of the
allowance for funds used during construction (AFUDC) and increases in
miscellaneous income items.
Minority interest, as presented on the income statement, represents the
minority's share of ELI's net loss which we were able to recognize in prior
periods to the extent of minority interest on our balance sheet. As of June 30,
2000, the minority interest on the balance sheet had been reduced to zero,
therefore,zero.
Therefore, from that point going forward, we discontinued recording minority
interest income on our income statement as there is no obligation for the
minority interests to provide additional funding for ELI.
See Note 1(d) of Notes
to Consolidated Financial Statements.
Interest expense for the three months ended March 31,June 30, 2001 increased $23.9$31.4
million, or 63%75%, as compared with the prior year periodperiods, primarily due to $12.2$16.9
million of interest expense on our $1.75 billion of notes issued in May 2001,
$7.8 million of interest expense on our lines of credit, a $3.1$1.9 million increase
in ELI's interest expense related to increased borrowings, a $4.2$0.9 million increase
due to an increaseof
interest expense on our equity units issued in our commercial paper outstandingJune 2001 and $3.1$0.8 million for
amortization of costs associated with our committed bank credit facilities.
During the three months ended March 31,June 30, 2001, we had average long-term debt
outstanding of $3.0$3.7 billion compared to $2.2$2.4 billion during the three months
ended March 31,June 30, 2000. Our composite average borrowing rate paid for the three
months ended March 31,June 30, 2001 as compared with the prior year period was 7446 basis
points higher due to the impact of higher interest rates on our variable debt.
21
Income taxesnew borrowings.
Interest expense for the threesix months ended March 31,June 30, 2001 increased $4.2$55.2 million,
or 87%70%, as compared with the prior year periods, primarily due to $16.9 million
of interest expense on our $1.75 billion of notes issued in May 2001, $20.0
million of interest expense on our lines of credit, a $5.1 million increase in
ELI's interest expense related to increased borrowings, a $4.0 million increase
due to an increase in our commercial paper outstanding, $3.9 million for
amortization of costs associated with our committed bank credit facilities and
$0.9 million of interest expense on our equity units issued in June. During the
six months ended June 30, 2001, we had average long-term debt outstanding of
$3.7 billion compared to $2.3 billion during the six months ended June 30, 2000.
Our composite average borrowing rate paid for the six months ended June 30, 2001
as compared with the prior year period was 82 basis points higher due to the
impact of higher interest rates on our new borrowings.
27
Income taxes for the three and six months ended June 30, 2001 increased $0.05
million, or 11%, and $4.3 million, or 81%, respectively, as compared with the
prior year periods, primarily due to changes in taxable income. The estimated
annual effective tax rate for 2001 is 31% as compared with 37% for 2000. DISCONTINUED OPERATIONS
($ in thousands) ForIncome
tax expense for the three and six months ended June 30, 2000 include true-ups to
arrive at this rate.
DISCONTINUED OPERATIONS
($ in thousands) For the three months ended June 30, For the six months ended June 30,
----------------------------------------- ---------------------------------------
2001 2000 % Change 2001 2000 % Change
------------- ------------- ----------- ------------- ------------- -----------
Revenue $ 29,335 $ 26,576 10% $ 53,429 $ 50,641 6%
Operating income $ 8,183 $ 7,009 17% $ 11,945 $ 10,030 19%
Net income $ 3,367 $ 2,663 26% $ 4,476 $ 3,344 34%
Revenue from discontinued operations for the three and six months ended June 30,
2001 increased $2.8 million, or 10%, and $2.8 million, or 6%, respectively, as
compared with the prior year periods, primarily due to customer growth and new
water sales related to the completion of a multi-year $50 million water pipeline
project in Illinois in March 31,
-----------------------------------------
2001 2000 % Change
----------- ------------ ------------
Revenue $ 24,094 $ 24,065 0%
Operating income $ 3,762 $ 3,021 25%
Net income $ 1,108 $ 681 63%2001.
Operating income from discontinued operations for the three and six months ended
March
31,June 30, 2001 increased $0.7$1.2 million, or 25%17%, and $1.9 million, or 19%,
respectively, as compared with the prior year periodperiods, primarily due to $0.4 millioncustomer
growth and new water sales related to the completion of Year 2000 costsa water pipeline project
in the prior year period and
decreased allocated expenses.Illinois in March 2001.
Net income from discontinued operations for the three and six months ended March 31,June
30, 2001 increased $0.4$0.7 million, or 63%26%, and $1.2 million, or 34%, respectively,
as compared with prior year periodperiods, primarily due to the respective changes in
operating income net of income taxes.
NET INCOME/NET INCOME PER COMMON SHARE/
OTHER COMPREHENSIVE LOSS, NET OF TAX
($ in thousands) For the three months ended March 31,
---------------------------------------
2001 2000 % Change
------------ ----------- ----------
NET INCOME (LOSS)
($ in thousands) For the three months ended June 30, For the six months ended June 30,
----------------------------------------- ---------------------------------------
2001 2000 % Change 2001 2000 % Change
------------- ------------- ----------- ------------- ------------- -----------
Net income (loss) $ (649) $ 3,012 -122% $ 19,074 $ 10,338 85%
Net income $ 19,723 $ 7,326 169%
Net income per common share $ 0.07 $ 0.03 133%
Other comprehensive loss, net of tax $ (19,623) $ (28,045) N/A
Net income and net income per share(loss) for the three months ended March 31,June 30, 2001 decreased $3.7
million, or 122%, as compared with the prior year period, primarily due to
increased interest expense which partially offset increased operating income.
Net income for the six months ended June 30, 2001 increased $12.4$8.7 million, or
169%, and 4(cent), or 133%85%, respectively, as compared with the prior year period primarily due to
the impact of the
Acquisitionsincreased operating income partially offset by increased interest expense.
Other comprehensive loss, netDuring 2000, we entered into equity forward contracts for the acquisition of
tax during the three months ended March 31,
2001 and the three months ended March9,140,000 shares as part of our share repurchase programs. Pursuant to
transition accounting rules, commencing December 31, 2000 through June 30,2001
we were required to report our equity forward contracts as a reduction to
shareholders' equity and a component of temporary equity for the gross
settlement amount of the contracts ($150,013,000). On June 28, 2001, we entered
into a master confirmation agreement that amends the equity forward contracts to
no longer permit share settlement of the contracts. We are primarilyrequired to report
the resultaccrued carrying costs as a reduction of unrealized lossesnet income available to common
shareholders. Accordingly, we accrued $12,647,000 in associated cumulative
carrying costs at June 30, 2001. Future quarters will reflect the carrying costs
for the period being reported on our investment portfolio.computed at LIBOR plus the carrying spread
times the redemption amount as a reduction of net income available to common
shareholders. At June 30, 2001, the contracts are reported on the balance sheet
at their redemption amount of $107,018,000.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
----------------------------------------------------------
Disclosure of primary market risks and how they are managed
We are exposed to market risk in the normal course of our business operations
due to ongoing investing and funding activities. Market risk refers to the
potential change in fair value of a financial instrument as a result of
fluctuations in interest rates and equity and commodity prices. We do not hold
or issue derivative instruments, derivative commodity instruments or other
financial instruments for trading purposes. As a result, we do not undertake any
specific actions to cover our exposure to market risks and we are not party to
any market risk management agreements. Our primary market risk exposures are
interest rate risk and equity and commodity price risk as follows:
Interest Rate Exposure
Our exposure to market risk for changes in interest rates relates primarily to
the interest bearing portion of our investment portfolio and long term debt and
capital lease obligations. The long term debt and capital lease obligations
include various instruments with various maturities and weighted average
interest rates.
2228
Our objectives in managing our interest rate risk isare to limit the impact of
interest rate changes on earnings and cash flows and to lower our overall
borrowing costs. To achieve these objectives, a majority of our borrowings have
fixed interest rates and variable rate debt is refinanced when advantageous.
Consequently, we have no material future earnings or cash flow exposures from
changes in interest rates on our long-term debt and capital lease obligations. A
hypothetical 10% adverse change in interest rates would increase the amount that
we pay on our variable obligations and could result in fluctuations in the fair
value of our fixed rate obligations. Based upon our overall interest rate
exposure at March 31,June 30, 2001, a near-term change in interest rates would not
materially affect our consolidated financial position, results of operations or
cash flows.
Sensitivity analysis of interest rate exposure
At March 31,June 30, 2001, the fair value of our long-term debt and capital lease
obligations was estimated to be approximately $2,680.0$6,098.6 million, based on our
overall weighted average rate of 6.4%7.0% and our overall weighted maturity of
12approximately 9 years. There has been no material change in the overall weighted
average maturityinterest rate applicable to our obligations since December 31, 2000.
However, the overall weighted average interest ratematurity has declined by approximately 55 basis points,
consistent withdecreased due to the general declineissuance
of interest rates during$1.75 billion of notes in May 2001 and the first quarter
2001.increase in our credit facility
since December 31, 2000. A hypothetical increase of 6470 basis points (10% of our
overall weighted average borrowing rate) would result in an approximate $55.4$154.4
million decrease in the fair value of our fixed rate obligations.
Equity Price Exposure
Our exposure to market risk for changes in equity prices relate primarily to the
equity portion of our investment portfolio and our common stock buyback program.
The equity portion of our investment portfolio includes marketable equity
securities of media and telecommunications companies. The common stock buyback
program includes equity forward contracts indexed to our common stock. Based
upon our overall equity price exposure at March 31,June 30, 2001, a material near-term
change in the quoted market price of our common stock could affect our
consolidated financial position, results of operations or cash flows.
Sensitivity analysis of equity price exposure
At March 31,June 30, 2001, the fair value of the equity portion of our investment
portfolio and of the equity forward contracts were estimated to be $179.0$170.5
million and $116.0$110.1 million, respectively. A hypothetical 10% decrease in quoted
market prices would result in an approximate $18.0$17.1 million decrease in the fair
value of the equity portion of our investment portfolio and an approximate $12.0$11.0
million decrease in the fair value of the equity forward contracts.
Commodity Price Exposure
We purchase monthly gas future contracts to manage well-defined commodity price
fluctuations, caused by weather and other unpredictable factors, associated with
our commitments to deliver natural gas to customers at fixed prices. Customers
pay for gas service based upon prices that are defined by a tariff. A tariff is
an agreement between the public utility commission and us, which determines the
price that will be charged to the customer. Fluctuations in gas prices are
routinely handled through a pricing mechanism called the purchase gas adjustor
(PGA). The PGA allows for a process whereby any price change from the agreed
upon tariff will be settled as a pass through to the customer. As a result, if
gas prices increase, the PGA will increase and pass more costs on to the
customer. If gas prices decrease, the PGA will decrease and refunds will be
provided to the customer. This commodity activity relates to our gas businesses
and is not material to our consolidated financial position or results of
operations. In all instances we take physical delivery of the gas supply
purchased or contracted for. These gas future contracts and gas supply contracts
are considered derivative instruments as defined by SFAS 133. However, such
contracts are excluded from the provisions of SFAS 133 since they are purchases
made in the normal course of business and not for speculative purposes. Based
upon our overall commodity price exposure at March 31,June 30, 2001 a material near-term
change in the quoted market price of gas would not materially affect our
consolidated financial position or results of operations.
Disclosure of limitations of sensitivity analysis
Certain shortcomings are inherent in the method of analysis presented in the
computation of fair value of financial instruments. Actual values may differ
from those presented should market conditions vary from assumptions used in the
calculation of the fair value. This analysis incorporates only those exposures
that exist as of March 31,June 30, 2001. It does not consider those exposures or
positions which could arise after that date. As a result, our ultimate exposure
with respect to our market risks will depend on the exposures that arise during
the period and the fluctuation of interest rates and quoted market prices.
2329
PART II. OTHER INFORMATION
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
Item 1. Legal Proceedings
-----------------
In November 1995, our Vermont electric division was permitted an 8.5% rate
increase. Subsequently, the Vermont Public Service Board (VPSB) called into
question the level of rates awarded to 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
believedOn July 20, 2001, we notified Qwest Corporation that we should have soughtwere terminating eight
acquisition agreements with Qwest relating to telephone exchanges in Arizona,
Colorado, Idaho/ Washington, Iowa, Minnesota, Montana, Nebraska and received regulatory approvals priorWyoming. On
July 23, 2001, Qwest informed us that it intends 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. On December 15, 2000, the Vermont
Supreme Court denied our appeal and affirmed all penalties imposed by the VPSB.
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 then existing 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 appealclaim for
arbitration in Denver, Colorado under the rules of the American Arbitration
Association with respect to the Court of Appeals for the
Second Circuit. Briefing has been completedterminated acquisition agreements. Qwest asserts
that we wrongfully terminated these agreements and oral argument took place April
10, 2000. The parties have entered into a settlement stipulation,is seeking approximately $64
million, which is subjectthe aggregate of liquidated damages under letters of credit
established in the terminated acquisition agreements. We intend to file a notice
of claim in the District Court's approval. Undersame arbitration proceeding, contesting Qwest's asserted claims
and asserting substantial claims against Qwest for material breaches of
representations, warranties and covenants in the terms ofterminated acquisition
agreements and in the proposed
settlement,acquisition agreement relating to North Dakota assets that
we have agreed, without any admission of guilt or responsibility, to
pay $2.5 million to injured class members in full and final settlement of all
claims. The entire amount of the proposed settlement is covered by one or more
of our insurance policies.
In addition, wepurchased from Qwest.
We are party to other proceedings arising in the normal course of our business. The
outcome of individual matters is not predictable. However, we believe that the
ultimate resolution of all such matters, including those
discussed above, after considering insurance coverage,
will not have a material adverse effect on our financial position, results of
operations, or our cash flows.
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
None.
Item 3. Defaults upon Senior Securities
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a) The Registrant held its 2001 Annual Meeting of the Stockholders on May 17,
2001.
(b) Proxies for the Annual Meeting were solicited pursuant to Regulation 14A;
there was no solicitation in opposition to management's nominees for
directors as listed in the Proxy Statement. All such nominees were elected
pursuant to the following votes:
Number of Votes
---------------
Directors For Abstain
--------- --- -------
N.I. Botwinik 222,874,582 10,190,709
A.I. Fleischman 223,882,433 9,182,858
R.J. Graf 224,071,770 8,993,522
S. Harfenist 224,035,721 9,029,570
A.N. Heine 223,786,197 9,279,094
S.N. Schneider 224,105,767 8,959,525
J.L. Schroeder 223,844,904 9,220,387
R.D. Siff 223,584,472 9,480,820
R.A. Stanger 224,042,297 9,022,994
E. Tornberg 223,597,675 9,467,616
C. Tow 220,505,895 12,559,397
L. Tow 221,639,802 11,425,489
(c) At the 2001 Annual Meeting of the Stockholders, the shareholders approved
the 2000 Equity Incentive Plan. The following sets forth the number of
votes on this proposal.
For Against Abstain
--- ------- -------
182,286,407 46,547,822 4,230,564
30
Item 5. Other Information
-----------------
As disclosed in our proxy statement for the 2001 Annual Meeting, under our
bylaws, if any stockholder intends to propose any matter at the 2002 annual
meeting, the proponent must give written notice to us not earlier than January
1, 2002 nor later than February 15, 2002. Furthermore, in accordance with the
proxy rules and regulations of the Securities and Exchange Commission, if a
stockholder does not notify us by February 14, 2002 of a proposal, then our
proxies would be able to use their discretionary voting authority when the
stockholder's proposal is raised at the meeting.
On April 2, 2001, ELI received a letternotice from The Nasdaq Stock Market, Inc., dated April 2, 2001,
informing it that
ELI's Class A Common Stockcommon stock would be subject to delisting after July 2, 2001 from
The Nasdaq National Market because it has failed to maintain a $5 minimum bid
price. Nasdaq suggested that ELI may consider filing an application to have its
Class A common stock listed on The Nasdaq SmallCap Market. On July 5, 2001, ELI
filed an application to have its Class A common stock listed on The Nasdaq
SmallCap Market. ELI is currently in discussions with Nasdaq as to the
application and their ability to meet the applicable listing requirements. In
order to meet a separate requirement concerning market capitalization of ELI's
common stock, we may convert sufficient shares of ELI Class B common stock that
we hold to Class A common stock to provide a market capitalization of the Class
A common stock of $35 million. It is uncertain whether ELI will be able to meet
the applicable listing requirements including the requirement that a minimum bid
price of $5.00 over the prior 30 consecutive trading days which does not meet
the minimum listing criteria of Nasdaq for shares listed on the National Market
System.$1.00 per share be maintained. If the bid price forrequirements are not met, ELI's
Class A Common Stock iscommon stock may not at least $5.00be eligible for 10 consecutive days priortrading on Nasdaq and ELI expects
that it would trade in the over-the-counter market. ELI continues to July 2, 2001, subjecthave
discussions with Nasdaq and does have the ability to the filingappeal any determination of
an
application and its approval, ELI's listing will be transferred to the Nasdaq
Small Cap Market.Nasdaq. In addition, ELI hascontinues to review alternative resolutions to this
matter. There can be no assurance of the opportunityoutcome of these discussions or of any
appeal if ELI determines to appeal any change in
status to a Nasdaq Listing Qualifications Panel. ELI intends to explore its
options, including an appeal and a transfer to the Nasdaq Small Cap Market,
unless the price ofseek one. If ELI's Class A Common Stock has achievedcommon stock fails to
remain included on Nasdaq, the minimum level.
Atdelisting may have a material adverse impact on
the closemarket value of business on May 8, 2001, the bid price for a share of ELI'sits Class A Common Stock was $2.70.
24common stock.
31
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a) Exhibits:
None.10.37 Citizens 401(K) Savings Plan effective as of January 1,
1997 reflecting amendments made through April,2001.
b) Reports on Form 8-K:
We filed on Form 8-K on February 13,April 4, 2001 under Item 5 "Other Events"
and Item 7 "Financial Statements and Exhibits," a press release
announcing that we plan to offer $3 billion worth of debt and
equity securities under a shelf registration statement.
We filed on Form 8-K on April 25, 2001 under Item 5 "Other
Events" and Item 7 "Financial Statements and Exhibits," a press
release announcing that we received approval of sale of our
Louisiana Gas assets.
We filed on Form 8-K on April 27, 2001 under Item 5 "Other
Events" and Item 7 "Financial Statements and Exhibits," a press
release announcing that we received approval from the New York
Public Service Commission for the purchase of Global Crossing's
Local Exchange Carrier Business.
We filed on Form 8-K on May 7, 2001 under Item 5 "Other Events"
and Item 7 "Financial Statements, Pro Forma Financial Information
and Exhibits," financial statements of businesses acquired and
pro forma financial information.
We filed on Form 8-K on March 8,May 10, 2001 under Item 7 "Exhibits,"Financial
Statements and Exhibits," a press release announcing earnings for
the year and quarter ended DecemberMarch 31, 20002001 and certain financial and
operating data.
We filed on Form 8-K on March 29,May 16, 2001 under Item 5 "Other Events"
and Item 7 "Financial Statements, Exhibits," financial statementsa press release
announcing that we intend to sell up to $1 billion in Senior
Unsecured Debt.
We filed on Form 8-K on May 24, 2001 under Item 5 "Other Events"
and Item 7 "Financial Statements, Exhibits," a press release
announcing that we issued $1.75 billion of businesses acquirednotes, consisting of
$700,000,00 principal amount of 8.50% notes due 2006 and
pro forma financial information.
25$1,050,000,000 principal amount of 9.25% notes due 2011.
We filed on Form 8-K on June 4, 2001 under Item 5 "Other Events"
and Item 7 "Financial Statements, Exhibits," a press release
announcing that we plan two concurrent public offerings of equity
securities.
We filed on Form 8-K on June 12, 2001 under Item 7 "Financial
Statements and Exhibits" certain agreements related to our equity
units offering.
We filed on Form 8-K on June 14, 2001 under Item 5 "Other Events"
and Item 7 "Financial Statements, Exhibits," a press release
announcing pricing of equity units and common stock offerings.
We filed on Form 8-K on June 21, 2001 under Item 5 "Other Events"
and Item 7 "Financial Statements, Exhibits," certain agreements
related to our equity units and common stock offerings.
32
CITIZENS COMMUNICATIONS 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 COMMUNICATIONS COMPANY
-------------------------------
(Registrant)
By: /s/ Robert J. Larson
---------------------------------------
Robert J. Larson
Vice President and Chief Accounting Officer
Date: MayAugust 10, 2001
26