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, 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, 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 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, 2001 was 263,460,555.
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
Index to Consolidated Financial Statements
Page No.
--------
Part I. Financial Information (Unaudited)
Consolidated Balance Sheets at March 31, 2001 and December 31, 2000 2
Consolidated Statements of Income and Comprehensive Income (Loss) for the three months ended
March 31, 2001 and 2000 3
Consolidated Statements of Shareholders' Equity for the year ended December 31, 2000 and the
three months ended March 31, 2001 4
Consolidated Statements of Cash Flows for the three months ended March 31, 2001 and 2000 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial Condition and Results of Operations 14
Quantitative and Qualitative Disclosures about Market Risk 22
Part II. Other Information
Legal Proceedings 24
Other Information 24
Exhibits and Reports on Form 8-K 25
Signature 26
PART I. FINANCIAL INFORMATION
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
March 31, 2001 December 31, 2000
-------------- -----------------
ASSETS
- ------
Current assets:
Cash $ 28,448 $ 31,223
Accounts receivable, net 229,605 243,304
Short-term investments 5,630 38,863
Other current assets 16,115 52,545
Assets held for sale 1,222,773 1,212,307
Assets of discontinued operations 673,994 673,515
------------ ------------
Total current assets 2,176,565 2,251,757
Property, plant and equipment, net 3,508,257 3,520,712
Investments 181,851 214,359
Goodwill and customer base, net 621,547 633,268
Regulatory assets 174,902 175,949
Other assets 148,581 158,961
------------ ------------
Total assets $ 6,811,703 $ 6,955,006
============ ============
LIABILITIES AND EQUITY
- ----------------------
Current liabilities:
Long-term debt due within one year $ 181,215 $ 181,014
Accounts payable and other current liabilities 299,481 330,383
Liabilities related to assets held for sale 260,810 290,575
Liabilities of discontinued operations 185,197 190,496
------------ ------------
Total current liabilities 926,703 992,468
Deferred income taxes 490,007 490,487
Customer advances for construction and contributions in aid of construction 203,012 205,604
Other liabilities 104,913 108,321
Regulatory liabilities 24,001 24,573
Long-term debt 2,981,496 3,062,289
------------ ------------
Total liabilities 4,730,132 4,883,742
Equity forward contracts 150,013 150,013
Company Obligated Mandatorily Redeemable Convertible Preferred Securities* 201,250 201,250
Shareholders' equity 1,730,308 1,720,001
------------ ------------
Total liabilities and equity $ 6,811,703 $ 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, 2001 AND 2000
(In thousands, except per-share amounts)
(Unaudited)
2001 2000
--------- ----------
Revenue $624,281 $ 448,702
Operating Expenses:
Cost of services 226,121 121,166
Depreciation and amortization 105,706 95,981
Other operating expenses 199,087 188,849
Acquisition assimilation expense 5,484 3,974
--------- ----------
Total operating expenses 536,398 409,970
--------- ----------
Operating income 87,883 38,732
Investment and other income, net 2,784 5,598
Minority interest - 6,285
Interest expense 61,452 37,590
--------- ----------
Income from continuing operations before income taxes and dividends
on convertible preferred securities 29,215 13,025
Income tax expense 9,047 4,827
--------- ----------
Income from continuing operations before dividends
on convertible preferred securities 20,168 8,198
Dividends on convertible preferred securities, net of income tax benefit 1,553 1,553
--------- ----------
Income from continuing operations 18,615 6,645
Income from discontinued operations, net of tax 1,108 681
--------- ----------
Net income $ 19,723 $ 7,326
========= ==========
Other comprehensive loss, net of tax (19,623) (28,045)
--------- ----------
Total comprehensive income (loss) $ 100 $ (20,719)
========= ==========
Income from continuing operations per common share:
Basic $ 0.07 $ 0.03
Diluted $ 0.07 $ 0.02
Income from discontinued operations per common share:
Basic $ - $ -
Diluted $ - $ -
Net income per common share:
Basic $ 0.07 $ 0.03
Diluted $ 0.07 $ 0.03
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 SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2000 AND THE THREE MONTHS ENDED MARCH 31, 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 $ 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 10,159 - - (132) 10,207
Net income - - 19,723 - - 19,723
Other comprehensive loss,
net of tax - - - (19,623) - (19,623)
-------------- -------------- --------------- ------------- ------------- -----------------
Balances March 31, 2001 $ 66,622 $ 1,481,975 $ 252,919 $ (19,205) $ (52,003) $ 1,730,308
============== ============== =============== ============= ============= =================
4
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(In thousands)
2001 2000
------------ -----------
Net cash provided by continuing operating activities $ 152,766 $ 113,272
Cash flows from investing activities:
Capital expenditures (113,969) (150,221)
Securities purchased (522) (23,886)
Securities sold 34,477 16,603
Securities matured - 6,851
Other 531 (6,927)
------------ ----------
Net cash used by investing activities (79,483) (157,580)
Cash flows from financing activities:
Long-term debt borrowings 39,871 84,938
Long-term debt principal payments (118,853) (7,748)
Issuance of common stock 9,119 6,395
Common stock buybacks - (41,732)
Other (1,524) 1,472
------------ ----------
Net cash (used by) provided by financing activities (71,387) 43,325
Cash (used by) provided by discontinued operations (4,671) 7,834
------------ ----------
(Decrease) increase in cash (2,775) 6,851
Cash at January 1, 31,223 37,141
------------ ----------
Cash at March 31, $ 28,448 $ 43,992
============ ==========
Non-cash investing and financing activities:
Increase in capital lease asset $ - $ 23,412
Equity forward contracts $ - $ 49,556
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
5
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, 2001 included
regulatory assets of approximately $62.2 million and regulatory
liabilities of approximately $4.1 million 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
charges 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.
6
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-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
contract 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).
(2) Property, Plant and Equipment, Net:
-----------------------------------
Property, plant and equipment, net at March 31, 2001 and December 31, 2000
is as follows:
($ in thousands) March 31, 2001 December 31, 2000
------------------- --------------------
Property, plant and equipment $ 5,357,038 $ 5,307,427
Less accumulated depreciation (1,848,781) (1,786,715)
-------------------- --------------------
Property, plant and equipment, net $ 3,508,257 $ 3,520,712
==================== ====================
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
and $95,134,000 for the three months ended March 31, 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).
7
(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. 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 Verizon transactions which are subject to various state and
federal regulatory approvals will close on a state-by-state basis in
2001. Our expected cash requirement to complete the Verizon
acquisitions is $222,800,000 in 2001.
Qwest Acquisition
-----------------
On June 16, 1999, we announced a series of definitive agreements to
purchase from Qwest Communications, formerly US 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. We expect that 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 Crossing 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 owns 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. We have received approval for the
proposed purchase from the Federal Communications Commission and all
other state Public Service Commissions with the exception of
Minnesota. Subject to the timely receipt of the Minnesota regulatory
approval, we expect that this transaction will be completed and paid
for in full by the end of June 2001.
(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 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 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. This transaction is expected to close on June
30, 2001.
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 $13.9 million for the three months
ended March 31, 2001. We continue to actively pursue buyers for our
remaining gas and electric businesses.
9
Summarized financial information for the water/wastewater operations
(discontinued operations) is set forth below:
($ 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
Summarized financial information for the gas and electric operations
(assets held for sale) is set forth below:
($ in thousands) March 31, 2001 December 31, 2000
----------------- ------------------
Current assets $ 122,862 $ 127,495
Net property, plant and equipment 970,774 953,328
Other assets 129,137 131,484
-------------- --------------
Total assets held for sale $ 1,222,773 $ 1,212,307
============== ==============
Current liabilities $ 138,945 $ 169,066
Long-term debt 43,957 43,980
Other liabilities 77,908 77,529
-------------- --------------
Total liabilities related to assets held
for sale $ 260,810 $ 290,575
============== ==============
(5) 1999 Restructuring Charges:
---------------------------
In the fourth quarter of 1999, we approved a plan to restructure our
corporate office activities. In connection with this plan, we recorded a
pre-tax charge of $5,760,000 in other operating expenses in the fourth
quarter of 1999. The restructuring resulted in the reduction of 49
corporate employees. All affected employees were communicated with in the
early part of November 1999.
As of March 31, 2001, approximately $4,613,000 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 is
included in other current liabilities at March 31, 2001. These costs are
expected to be paid in the second quarter of 2001.
10
(6) Net Income Per Common Share:
----------------------------
The reconciliation of the net income per common share calculation for the
three months ended March 31, 2001 and 2000, respectively, is as follows:
(In thousands, except per-share amounts) For the three months ended March 31,
---------------------------------------------------------------------------
2001 2000
----------------------------------- ------------------------------------
Income Shares Per Share Income Shares Per Share
--------- --------- ---------- --------- --------- ----------
Net income per common share:
Basic $ 19,723 263,036 $ 0.07 $ 7,326 261,427 $ 0.03
Effect of dilutive options - 7,247 - - 4,548 -
Diluted $ 19,723 270,283 $ 0.07 $ 7,326 265,975 $ 0.03
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, 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 2,887,000 potentially dilutive stock options at a
range of $13.97 to $21.47 per share that are not included in the
calculation as they are antidilutive.
(7) Segment Information:
-------------------
We operate in four segments, Incumbent Local Exchange Carrier (ILEC), ELI,
gas and electric. The ILEC segment provides both regulated and competitive
communications services to residential, business and wholesale customers.
ELI is a facilities based integrated communications provider offering a
broad range of communications services in the western United States. We own
85% of ELI and guarantee all of ELI's long-term debt, one of its capital
leases and one of its operating leases. Our gas and electric segments,
which are intended to be sold and are classified as "assets held for sale"
and "liabilities related to assets held for sale," were previously reported
as discontinued operations (see Note 4).
Adjusted EBITDA is operating income (loss) plus depreciation and
amortization. EBITDA is a measure commonly used to analyze companies on the
basis of operating performance. It is not a measure of financial
performance under generally accepted accounting principles and should not
be considered as an alternative to net income as a measure of performance
nor as an alternative to cash flow as a measure of liquidity and may not be
comparable to similarly titled measures of other companies.
($ 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
11
($ in thousands) For the three months ended March 31, 2000
---------------------------------------------------------------------------------------
Total
ILEC ELI Gas Electric Eliminations Segments
----------- ---------- ----------- ---------- ------------- ----------
Revenue $ 226,312 $ 56,778 $ 113,055 $ 53,192 $ (635) (1) $ 448,702
Depreciation and Amortization 70,006 12,755 6,446 6,830 (56) (2) 95,981
Operating Income (Loss) 31,972 (19,420) 18,074 7,866 240 (3) 38,732
Adjusted EBITDA 101,978 (6,665) 24,520 14,696 184 (3) 134,713
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) Supplemental Segment Information:
--------------------------------
Supplemental segment income statement information for the three months
ended March 31, 2001 is as follows:
($ in thousands) Discontinued Consolidated
ILEC ELI Gas Electric Operations Eliminations Total
---------- -------- -------- -------- ------------ ------------ -----------
Revenue $287,344 $ 62,562 $220,515 $54,697 $ - $ (837) $ 624,281
Operating expenses:
Cost of services 17,297 16,731 163,163 29,686 - (756) 226,121
Depreciation and amortization 86,377 18,894 150 - - 285 105,706
Other operating expenses 115,515 42,538 28,588 13,312 - (866) 199,087
Acquisition assimilation expense 5,484 - - - - - 5,484
---------- -------- -------- -------- ---------- ------- ----------
Total operating expenses 224,673 78,163 191,901 42,998 - (1,337) 536,398
---------- -------- -------- -------- ---------- ------- ----------
Operating income (loss) 62,671 (15,601) 28,614 11,699 - 500 87,883
Investment and other income, net 2,372 120 850 (558) - - 2,784
Interest expense 39,305 22,050 4,803 4,250 - (8,956) 61,452
---------- -------- -------- -------- --------- ------- ----------
Income (loss) from continuing operations
before income taxes and dividends on
convertible preferred securities 25,738 (37,531) 24,661 6,891 - 9,456 29,215
Income tax expense (benefit) (575) 163 7,393 2,066 - - 9,047
---------- -------- -------- -------- ---------- ------- ----------
Income (loss) from continuing operations before
dividends on convertible preferred securities 26,313 (37,694) 17,268 4,825 - 9,456 20,168
Dividends on convertible preferred securities,
net of income tax benefit 1,553 - - - - - 1,553
---------- -------- -------- -------- --------- ------- ----------
Income (loss) from continuing operations 24,760 (37,694) 17,268 4,825 - 9,456 18,615
Income from discontinued operations, net of tax - - - - 1,108 - 1,108
---------- --------- -------- -------- --------- ------- ----------
Net income (loss) $ 24,760 $(37,694) $ 17,268 $ 4,825 $ 1,108 $9,456 $ 19,723
========== ========= ======== ======== ========= ======= ==========
12
(9) Equity Forward Contracts:
-------------------------
During 2000, we entered into equity forward contracts for the acquisition
of 9,140,000 shares as part of our share purchase programs. These 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' equity and
a component of temporary equity for the gross settlement amount of the
contracts. Current accounting rules permit a transition period until June
30, 2001 to amend the contracts to comply with the requirements for
permanent equity presentation. If an agreement with the counter party to
the contracts can be reached by June 30, 2001, the current impact 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) 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, 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 quarter
2001 financial statements.
13
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 quarterly report on Form 10-Q contains forward-looking statements that are
subject to risks and uncertainties which could cause actual results to differ
materially from those expressed or implied in the statements. Forward-looking
statements (including oral representations) are only predictions or statements
of current plans, which we review continuously. Forward-looking statements may
differ from actual future results due to, but not limited to, any of the
following possibilities:
o 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. 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 months ended March 31, 2001, we used cash flow from operations,
marketable securities and cash on hand to fund capital expenditures and pay down
outstanding indebtedness.
14
We have available lines of credit with financial institutions in the amounts of
$5.7 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 billion credit
facility will end on October 26, 2001 and the debt outstanding under this
facility will mature on 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, 2001, $650 million was outstanding under the $5.7 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, 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. 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 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, 2001, we have advanced $58 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%.
We have budgeted approximately $750 million for our 2001 capital projects,
including approximately $513 million for the ILEC segment, $141 million for the
ELI segment and $96 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 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. 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
Verizon transactions, which are subject to various state and federal
regulatory approvals will close on a state-by-state basis in 2001. Our
expected cash requirement to complete the Verizon acquisitions is $222.8
million in 2001.
Qwest Acquisition
-----------------
On June 16, 1999, we announced a series of definitive agreements to
purchase from Qwest Communications, formerly US 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. We expect that 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 Crossing 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
owns 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 approval for the proposed purchase from
the Federal Communications Commission and all other state Public Service
Commissions with the exception of Minnesota. Subject to the timely receipt
of the Minnesota regulatory approval, we expect that this transaction will
be completed and paid for in full by the end of June 2001.
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 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. This transaction is expected to close on June 30, 2001.
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 $13.9
million for the three months ended March 31, 2001. We continue to actively
pursue buyers for our remaining gas and electric businesses.
(b) Results of Operations
---------------------
REVENUE
Consolidated revenue for the three months ended March 31, 2001 increased $175.6
million, or 39%, as compared with the prior year period. The increase is due to
a $61.0 million increase in telecommunications revenue, a $5.6 million increase
in ELI revenue, a $107.5 million increase in gas revenue and a $1.5 million
increase in electric revenue.
ILEC REVENUE
($ in thousands) For the three months ended March 31,
-----------------------------------------
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%
============ ============
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 million of revenue for the three months ended March 31, 2001.
17
Network access services revenue for the three months ended March 31, 2001
increased $25.5 million, or 24%, as compared with the prior year period
primarily due to the impact of the Acquisitions of $20.0 million. Growth in
minutes of use of 86.9 million contributed $3.0 million and growth in special
access and subsidies contributed $3.4 million and $3.6 million, respectively.
These increases were partially offset by $4.5 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.
Local network services revenue for the three months ended March 31, 2001
increased $27.6 million, or 38%, as compared with the prior year period
primarily due to the impact of the Acquisitions of $24.7 million, access line
and second line growth of 26,000 contributed $1.6 million and growth in enhanced
services contributed $1.3 million.
Long distance and data services revenue for the three months ended March 31,
2001 increased $5.6 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%, as compared with the prior year period primarily due to
the impact of the Acquisitions of $1.5 million and growth of $.3 million.
Other revenue for the three months ended March 31, 2001 increased $0.5 million,
or 4%, as compared with the prior year period primarily due to the impact of the
Acquisitions.
ELI REVENUE
($ in thousands) For the three months ended March 31,
------------------------------------------
2001 2000 % Change
------------ ----------- -----------
Network services $ 25,768 $ 16,004 61%
Local telephone services 21,797 24,274 -10%
Long distance services 3,084 4,596 -33%
Data services 11,913 11,904 0%
----------- -----------
62,562 56,778 10%
Intersegment revenue * (837) (635) N/A
----------- -----------
$ 61,725 $ 56,143 10%
=========== ===========
*Intersegment revenue reflects revenue received by ELI from our ILEC operations.
Network services revenue increased $9.8 million, or 61%, as compared with the
prior year period. The increase is due to continued growth in our network and
sales of additional circuits to new and existing customers.
Local telephone services revenue decreased $2.5 million, or 10%, as compared
with the prior year period. Local telephone services include ISDN PRI, dial
tone, Carrier Access Billings and reciprocal compensation.
ISDN PRI revenue increased $0.2 million, or 3%, as compared with the prior
year period. Dial tone revenue increased $0.2 million or 3% as compared
with the prior year period. Increases in revenue for both ISDN PRI and dial
tone is the result of an increase in the average access line equivalents of
14,280, or 8%, as compared with the prior year period.
Carrier Access Billings revenue decreased $0.9 million, or 41%, as compared
with the prior year period. 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 12.7
million, or 49%, as compared with the prior period.
18
Reciprocal compensation revenue decreased $1.9 million, or 20%, as compared
with the prior year period. The decrease is due to a decrease in average
monthly minutes processed of 31.1 million, or 3%, as compared with the
prior year period, and lower average rates per minute due to competitive
pressures in the markets in which we operate.
Long distance services revenue decreased $1.5 million, or 33%, as compared with
the prior year period. Long distance services include retail and wholesale long
distance.
Retail long distance revenue decreased $0.3 million, or 11%, as compared
with the prior year period. The decrease is due to a decrease in average
monthly minutes processed of 0.3 million, or 3%, for the three months ended
March 31, 2001 and lower average rates per minute.
Wholesale long distance revenue decreased $1.1 million, or 49%, as compared
with the prior year period. The decrease is due to a decrease in average
monthly minutes processed of 5.8 million, or 30%, for the three months
ended March 31, 2001 and lower average rates per minute.
Data services revenue increased marginally over the first quarter 2000. Data
services include Internet, RSVP, Frame Relay and other services.
Revenue from our Internet services product increased $0.6 million, or 18%,
as compared with the prior year period.
Revenue from our RSVP products increased $0.7 million, or 106%, as compared
with the prior year period.
Revenue from our Frame Relay product increased $0.3 million, or 14%, as
compared with the prior year period.
These increases were offset by a decrease of $1.6 million, or 33%, as
compared with the prior year period as the result of the expiration on
February 28, 2001 of an 18-month take-or-pay contract with a significant
customer. This take-or-pay contract has not been renewed.
GAS REVENUE
($ in thousands) For the three months ended March 31,
-----------------------------------------
2001 2000 % Change
------------ ----------- ----------
Gas revenue $ 220,515 $ 113,055 95%
Gas revenue for the three months ended March 31, 2001 increased $107.5 million,
or 95%, as compared with the prior year period primarily due to higher purchased
gas costs passed on to customers. Under tariff provisions, increases in our
costs of gas purchased are largely passed on to customers.
ELECTRIC REVENUE
($ in thousands) For the three months ended March 31,
---------------------------------------
2001 2000 % Change
---------- ----------- -----------
Electric revenue $ 54,697 $ 53,192 3%
Electric revenue for the three months ended March 31, 2001 increased $1.5
million, or 3%, as compared with the prior year period primarily due to higher
purchase power prices.
19
COST OF SERVICES
($ in thousands) For the three months ended March 31,
-------------------------------------
2001 2000 % Change
---------- ----------- ----------
Gas purchased $ 163,163 $ 57,271 185%
Electric energy and fuel oil purchased 29,686 24,173 23%
Network access 34,028 40,357 -16%
Eliminations * (756) (635) N/A
---------- -----------
$ 226,121 $121,166 87%
========== ===========
*Eliminations represent expenses incurred by our ILEC operations related to
network services provided by ELI.
Gas purchased for the three months ended March 31, 2001 increased $105.9
million, or 185%, as compared with the prior year period 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.
Electric energy and fuel oil purchased for the three months ended March 31, 2001
increased $5.5 million, or 23%, as compared with the prior year period primarily
due to higher purchase power prices.
Network access expenses for the three months ended March 31, 2001 decreased $6.3
million, or 16%, as compared with the prior year period primarily due to 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%
=========== =============
Depreciation expense for the three months ended March 31, 2001 decreased $2.8
million, or 3%, as compared with the prior year period primarily due to $13.9 of
decreased depreciation expense resulting from the classification of our gas and
electric sectors as "assets held for sale" and $15.1 million in the prior year
period 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 months ended March 31, 2001 increased $12.5
million, or 1473%, as compared with the prior year period primarily due to
amortization of goodwill 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%
=========== =============
20
Operating expenses for the three months ended March 31, 2001 increased $10.4
million, or 7%, as compared with the prior year period primarily due to
increased operating expenses related to the Acquisitions, partially offset by
increased operating efficiencies.
Sales and marketing expenses increased $0.8 million, or 4%, as compared with the
prior year period primarily due to the impact of the Acquisitions of $1.0
million.
ACQUISITION ASSIMILATION EXPENSE
($ in thousands) For the three months ended March 31,
-------------------------------------
2001 2000 % Change
---------- ---------- ------------
Acquisition assimilation expense $ 5,484 $ 3,974 38%
Acquisition assimilation expense of $5.5 million and $4.0 million for the three
months ended March 31, 2001 and 2000, respectively, is related to the completed
and pending acquisitions of approximately 2 million telephone access lines. As
we complete the acquisitions currently under contracts, we will continue to
incur additional assimilation costs.
OPERATING INCOME
($ in thousands) For the three months ended March 31,
-------------------------------------
2001 2000 % Change
-------------------------------------
Operating Income $ 87,883 $ 38,732 127%
Operating income for the three months ended March 31, 2001 increased $49.2
million, or 127%, as compared with prior year period primarily due to the impact
of the Acquisitions and decreased ELI operating losses.
INVESTMENT AND OTHER INCOME, NET/MINORITY INTEREST/
INTEREST EXPENSE/INCOME TAXES
($ in thousands) For the three months ended March 31,
-------------------------------------
2001 2000 % Change
---------- ---------- ----------
Investment and other 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%
Investment and other income, net for the three months ended March 31, 2001
decreased $2.8 million, or 50%, as compared with the prior year period primarily
due to lower average investment balances.
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, 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, 2001 increased $23.9
million, or 63%, as compared with the prior year period primarily due to $12.2
million of interest expense on our lines of credit, a $3.1 million increase in
ELI's interest expense related to increased borrowings, a $4.2 million increase
due to an increase in our commercial paper outstanding and $3.1 million for
amortization of costs associated with our committed bank credit facilities.
During the three months ended March 31, 2001, we had average long-term debt
outstanding of $3.0 billion compared to $2.2 billion during the three months
ended March 31, 2000. Our composite average borrowing rate for the three months
ended March 31, 2001 as compared with the prior year period was 74 basis points
higher due to the impact of higher interest rates on our variable debt.
21
Income taxes for the three months ended March 31, 2001 increased $4.2 million,
or 87%, as compared with the prior year period primarily due to changes in
taxable income. The estimated annual effective tax rate for 2001 is 31% as
compared with 37% for 2000.
DISCONTINUED OPERATIONS
($ in thousands) For the three months ended March 31,
-----------------------------------------
2001 2000 % Change
----------- ------------ ------------
Revenue $ 24,094 $ 24,065 0%
Operating income $ 3,762 $ 3,021 25%
Net income $ 1,108 $ 681 63%
Operating income from discontinued operations for the three months ended March
31, 2001 increased $0.7 million, or 25%, as compared with the prior year period
primarily due to $0.4 million of Year 2000 costs in the prior year period and
decreased allocated expenses.
Net income from discontinued operations for the three months ended March 31,
2001 increased $0.4 million, or 63%, as compared with prior year period
primarily due to the respective changes in operating income net of income taxes.
NET INCOME/NET INCOME PER COMMON SHARE/
OTHER COMPREHENSIVE LOSS, NET OF TAX
($ in thousands) For the three months ended March 31,
---------------------------------------
2001 2000 % Change
------------ ----------- ----------
Net income $ 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 for the three months ended March 31, 2001
increased $12.4 million, or 169%, and 4(cent), or 133%, respectively, as
compared with the prior year period primarily due to the impact of the
Acquisitions partially offset by increased interest expense.
Other comprehensive loss, net of tax during the three months ended March 31,
2001 and the three months ended March 31, 2000 are primarily the result of
unrealized losses on our investment portfolio.
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.
22
Our objectives in managing our interest rate risk is to limit the impact of
interest rate changes on earnings and cash flows and to lower our overall
borrowing costs. To achieve these objectives, 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, 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, 2001, the fair value of our long-term debt and capital lease
obligations was estimated to be approximately $2,680.0 million, based on our
overall weighted average rate of 6.4% and our overall weighted maturity of 12
years. There has been no material change in the weighted average maturity
applicable to our obligations since December 31, 2000. However, the overall
weighted average interest rate has declined by approximately 55 basis points,
consistent with the general decline of interest rates during the first quarter
2001. A hypothetical increase of 64 basis points (10% of our overall weighted
average borrowing rate) would result in an approximate $55.4 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, 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, 2001, the fair value of the equity portion of our investment
portfolio and of the equity forward contracts were estimated to be $179.0
million and $116.0 million, respectively. A hypothetical 10% decrease in quoted
market prices would result in an approximate $18.0 million decrease in the fair
value of the equity portion of our investment portfolio and an approximate $12.0
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, 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, 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.
23
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
believed that we should have sought and received regulatory approvals prior to
construction of certain facilities in prior years. On June 16, 1997, the VPSB
ordered us to reduce our rates for Vermont electric service by 14.65%
retroactive to November 1, 1995 and to refund to customers, with interest, all
amounts collected since that time in excess of the rates then authorized by the
VPSB. In addition, the VPSB assessed statutory penalties totaling $60,000 and
placed us on regulatory probation for a period of at least five years. During
this probationary period, we could lose our franchise to operate in Vermont if
we violate the terms of probation prescribed by the VPSB. The VPSB prescribed
final terms of probation in its final order issued September 15, 1998. In
October 1998, we filed an appeal in the Vermont Supreme Court challenging
certain of the penalties imposed by the VPSB. 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 appeal with the Court of Appeals for the
Second Circuit. Briefing has been completed and oral argument took place April
10, 2000. The parties have entered into a settlement stipulation, which is
subject to the District Court's approval. Under the terms of the proposed
settlement, 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, we are party to other proceedings arising in the normal course of
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 5. Other Information
-----------------
ELI received a letter from The Nasdaq Stock Market, Inc., dated April 2, 2001,
informing it that ELI's Class A Common Stock failed to maintain 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. If the bid price for ELI's Class A Common Stock is not at least $5.00
for 10 consecutive days prior to July 2, 2001, subject to the filing of an
application and its approval, ELI's listing will be transferred to the Nasdaq
Small Cap Market. In addition, ELI has the opportunity 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 of ELI's Class A Common Stock has achieved the minimum level.
At the close of business on May 8, 2001, the bid price for a share of ELI's
Class A Common Stock was $2.70.
24
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a) Exhibits:
None.
b) Reports on Form 8-K:
We filed on Form 8-K on February 13, 2001 under Item 7 "Financial
Statements, Exhibits," financial statements of businesses acquired
and pro forma financial information.
We filed on Form 8-K on March 8, 2001 under Item 7 "Exhibits," a
press release announcing earnings for the year and quarter ended
December 31, 2000 and certain operating data.
We filed on Form 8-K on March 29, 2001 under Item 5 "Other Events"
and Item 7 "Financial Statements, Exhibits," financial statements
of businesses acquired and pro forma financial information.
25
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: May 10, 2001
26