Electric Lightwave, Inc. Form 10-Q

Quarterly Report Pursuant To Section 13 or 15(d)
of The Securities Exchange Act of 1934

For The Quarterly Period Ended June 30, 1999

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the quarterly period ended June 30, 1999

|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the transition period from _____ to _____

Commission file number 0-23393

ELECTRIC LIGHTWAVE, INC.
(Exact name of registrant as specified in its charter)

Delaware 93-1035711
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

4400 NE 77th Avenue
Vancouver, Washington 98662
(Address, zip code of principal executive offices)

Registrant's telephone number, including area code (360) 816-3000

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
July 29, 1999 were:

Common Stock Class A 8,751,063
Common Stock Class B 41,165,000

================================================================================
Electric Lightwave, Inc.

Index

Page No.
Part I. Financial Information
Item 1. Financial Statements

Balance Sheets at June 30, 1999 and December 31, 1998 (unaudited).....2
Statements of Operations for the Three Months Ended
June 30, 1999 and 1998 (unaudited)..................................3

Statements of Operations for the Six Months Ended
June 30, 1999 and 1998 (unaudited)..................................4

Condensed Statements of Cash Flows for the Six Months Ended
June 30, 1999 and 1998 (unaudited)..................................5
Notes to Financial Statements.........................................6

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................11

Item 3. Quantitative and Qualitative Disclosures About Market Risk...19

Part II. Other Information
Signature .............................................................23

Electric Lightwave, Inc.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

Balance Sheets

(In thousands)
(Unaudited)

Assets
June 30, 1999 December 31, 1998
--------------- ------------------

Current assets:
Cash .......................................... $ 18,189 $ 13,120
Trade receivables, net ........................ 25,722 20,320
Other receivables ............................. 1,434 2,671
Other current assets .......................... 1,821 1,953
--------- ---------
Total current assets ........................ 47,166 38,064
--------- ---------

Property, plant and equipment .................... 693,449 528,582
Less accumulated depreciation and amortization ... (55,723) (40,912)
--------- ---------
Property, plant and equipment, net ............ 637,726 487,670
--------- ---------

Other assets ..................................... 8,602 6,575
--------- ---------

Total assets ................................ $ 693,494 $ 532,309
========= =========

Liabilities And Equity

Current liabilities:
Accounts payable and accrued liabilities ...... $ 63,307 $ 61,760
Current portion of long-term debt ............. 15,380 351
Due to Citizens Utilities Company ............. 10,138 5,254
Other accrued taxes ........................... 7,793 5,577
Other current liabilities ..................... 7,590 5,024
--------- ---------
Total current liabilities ................... 104,208 77,966

Deferred credits and other ....................... 1,649 1,834
Deferred income taxes payable .................... 2,492 1,760
Long-term debt ................................... 503,250 302,256
--------- ---------
Total liabilities ........................... 611,599 383,816
--------- ---------

Shareholders' equity:
Common stock issued, $.01 par value
Class A ..................................... 87 86
Class B ..................................... 412 412
Additional paid-in-capital .................... 323,484 321,926
Deficit ....................................... (242,088) (173,931)
--------- ---------
Total shareholders' equity .................. 81,895 148,493
--------- ---------

Total liabilities and shareholders' equity .. $ 693,494 $ 532,309
========= =========

See accompanying notes.

Statements of Operations

(In thousands, except per-share amounts)
(Unaudited) For the three months ended June 30,
1999 1998
--------- ---------

Revenues ....................................... $ 46,095 $ 21,443
--------- ---------

Operating expenses:
Network access .............................. 23,702 9,860
Operations .................................. 9,633 6,528
Selling, general and administrative ......... 29,447 17,588
Depreciation and amortization ............... 8,150 3,780
--------- ---------
Total operating expenses .................. 70,932 37,756
--------- ---------

Loss from operations ........................ (24,837) (16,313)

Interest expense and other ..................... 8,068 1,467
--------- ---------

Net loss before income taxes ................ (32,905) (17,780)

Income tax expense (benefit) ................... 300 (3,022)
--------- ---------

Net loss .................................... $ (33,205) $ (14,758)
========= =========

Net loss per common share:
Basic ..................................... $ (.67) $ (.30)
Diluted ................................... $ (.67) $ (.30)

Weighted average shares outstanding ............ 49,822 49,694

See accompanying notes.

Statements of Operations

(In thousands, except per-share amounts)
(Unaudited) For the six months ended June 30,
1999 1998
--------- ---------

Revenues ......................................... $ 84,311 $ 41,500
--------- ---------

Operating expenses:
Network access ................................ 48,926 19,072
Operations .................................... 18,667 11,774
Selling, general and administrative ........... 56,214 32,963
Depreciation and amortization ................. 15,144 7,664
--------- ---------
Total operating expenses .................... 138,951 71,473
--------- ---------

Loss from operations .......................... (54,640) (29,973)

Interest expense and other ....................... 12,847 2,211
--------- ---------

Net loss before income taxes and cumulative
effect of change in accounting principle .... (67,487) (32,184)

Income tax expense (benefit) ..................... 670 (5,471)
--------- ---------

Net loss before cumulative effect of change in
accounting principle ........................ (68,157) (26,713)

Cumulative effect of change in accounting principle
(net of $577 income tax benefit) .............. -- 2,817
--------- ---------

Net loss ...................................... $ (68,157) $ (29,530)
========= =========

Net loss per share before cumulative effect of
change in accounting principle:
Basic ....................................... $ (1.37) $ (.54)
Diluted ..................................... $ (1.37) $ (.54)

Net loss per common share:
Basic ....................................... $ (1.37) $ (.59)
Diluted ..................................... $ (1.37) $ (.59)

Weighted average shares outstanding .............. 49,812 49,690

See accompanying notes.

Condensed Statements of Cash Flows

(In thousands)
(Unaudited) For the six months ended June 30,
1999 1998
--------- ---------

Net cash used for operating activities ........... $ (55,455) $ (13,022)
--------- ---------

Cash flows used for investing activities:
Capital expenditures .......................... (108,458) (74,971)
--------- ---------

Cash flows from financing activities:
Net revolving bank credit facility proceeds
(repayments) ............................. (154,000) 74,000
Note issuance ................................. 325,000 --
Other, net .................................... (2,018) 100
--------- ---------
Net cash provided by financing activities ... 168,982 74,100
--------- ---------

Net increase (decrease) in cash .................. 5,069 (13,893)

Cash at January 1, ............................... 13,120 26,531
--------- ---------
Cash at June 30, ................................. $ 18,189 $ 12,638
========= =========

Supplemental cash flow information:
Cash paid for interest, net of capitalized
portion .................................. $ 11,210 $ 1,836
Non-cash increase in capital lease asset and
obligation ............................... 45,195 2,174

See accompanying notes.
5

Electric Lightwave, Inc.

Notes to Financial Statements

1. Summary of Significant Accounting Policies

a. Basis of Presentation and Use of Estimates

Electric Lightwave, Inc. is referred to as "we", "us" or "our" in
this report. We have prepared these unaudited financial statements in
accordance with generally accepted accounting principles (GAAP) for
interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, we have condensed or
omitted certain information and footnote disclosures. In our opinion,
these financial statements include all adjustments and recurring
accruals necessary to present fairly the results for the interim
periods shown.

Preparing financial statements in conformity with GAAP requires us to
make estimates and assumptions which affect the amounts of assets,
liabilities, revenues and expenses we have reported and our
disclosure of contingent assets and liabilities at the date of the
financial statements. The results of the interim periods are not
necessarily indicative of the results for the full year. We have made
certain reclassifications of balances previously reported to conform
to the current financial statement presentation. You should read
these financial statements in conjunction with the audited financial
statements and the related notes included in our Annual Report on
Form 10-K for the year ended December 31, 1998.

b. Capitalized Interest

Property, plant and equipment includes interest costs capitalized
during the installation and expansion of our communications networks.
Approximately $2,949,000 and $2,050,000 of interest costs were
capitalized in the three months ended June 30, 1999 and 1998,
respectively, with approximately $6,167,000 and $3,838,000
capitalized in the six months ended June 30, 1999 and 1998,
respectively.

c. Reciprocal Compensation

We have various interconnection agreements with U S West
Communications, Inc. (US West) and GTE Corporation (GTE), the
Incumbent Local Exchange Carriers (ILECs) in the states in which we
operate. These agreements govern reciprocal compensation relating to
the transport and termination of traffic between the ILEC's networks
and our network. We recognize reciprocal compensation revenues as
earned, based on the terms of the interconnection agreements. We
recognized total net reciprocal compensation revenues for the three
and six months ended June 30, 1999 of $8.1 million and $14.7 million,
respectively. Net trade accounts receivable relating to reciprocal
compensation at June 30, 1999 totaled $11.0 million, compared to
$10.4 million at December 31, 1998.

We have filed complaints with the Public Utility Commissions (PUCs)
in Washington, Utah, Oregon, Arizona and Idaho requesting that US
West pay us for reciprocal compensation charges relating to the
termination of calls to Internet Service Providers (ISPs), as
required by the interconnection agreements. The Washington and Utah
PUCs ruled in our favor and accordingly, US West is now paying us for
reciprocal compensation charges in these states. The Oregon PUC ruled
in our favor in April 1999. However, US West is disputing the
termination rate included in the Oregon PUC approved interconnection
agreement. The complaints in Arizona and Idaho are pending.

Electric Lightwave, Inc.

Notes to Financial Statements - (Continued)

On February 25, 1999, the FCC issued a Declaratory Ruling and Notice
of Proposed Rulemaking that categorized calls terminated to ISPs as
"largely" interstate in nature, which could have the effect of
precluding these calls from reciprocal compensation charges. However,
the ruling stated that ILECs are bound by the existing
interconnection agreements and the state decisions that have defined
them. The FCC gave the states authority to interpret existing
interconnection agreements. Since the FCC order, thirteen states,
including Oregon and Washington, have ruled that calls terminated to
ISPs should be included in the calculation to determine reciprocal
compensation.

The reciprocal compensation rates defined in our interconnection
agreements are subject to change both by state PUC cost proceedings
and by renegotiation. The Oregon PUC has established a lower rate
than is reflected in our existing interconnection agreements. The new
rate is approximately 70% less than the rate in the existing
agreement. We expect that the new rate will become effective as of
some point in the first half of 1999. Both the Washington and Utah
PUCs have begun proceedings to set new reciprocal compensation rates.
We estimate that the current rates in Washington and Utah may be
reduced by 50% or more in the second half of 1999. These three states
comprise a substantial portion of our reciprocal compensation
revenues. Also, if we cannot renegotiate new interconnection
agreements upon expiration of our current agreements, our reciprocal
compensation revenues could decrease from current levels.

d. Net Loss Per Share

We follow the provisions of Statement of Financial Accounting
Standards (SFAS) 128, "Earnings Per Share" which requires
presentation of both basic and diluted earnings per share (EPS) on
the face of the statement of operations. Basic EPS is computed using
the weighted average number of common shares outstanding during the
period. The diluted EPS calculation assumes that all stock options or
contracts to issue common stock were exercised or converted into
common stock at the beginning of the period. We have excluded certain
common stock equivalents from our diluted EPS calculation during the
quarters ended June 30, 1999 and 1998 because the effect would have
reduced our net loss per share.

2. Change in Accounting Principle

On April 3, 1998, the Accounting Standards Executive Committee of the
AICPA released Statement of Position (SOP) 98-5, "Reporting on the
Costs of Start-Up Activities". The SOP requires that at the beginning
of the fiscal year of adoption, any remaining deferred start-up costs
be expensed and reported as a change in accounting principle. Future
costs of start-up activities should then be expensed as incurred.

We adopted SOP 98-5 effective January 1, 1998. Previous to January 1,
1998, we had capitalized certain third party direct costs incurred in
connection with negotiating and securing initial rights-of-way and
developing network design for new markets or locations. These amounts
were being amortized over five years. We have reported the remaining
net book value of these deferred amounts of $3,394,000 as a
cumulative effect of a change in accounting principle in the
statement of operations for the six months ended June 30, 1998, net
of income tax benefit of $577,000.

Electric Lightwave, Inc.

Notes to Financial Statements - (Continued)

3. Commitments and Contingencies

Our license agreements for the exclusive use of long-haul facilities
connecting our Portland to Seattle, Portland to Spokane and Portland
to Eugene long-haul transport networks and for the exclusive use of
the Phoenix network contain annual minimum usage requirements. If our
traffic on any of these networks falls below the minimums, the
licensor will obtain the right to share usage of a specific number of
fibers with us. We have entered arbitration to resolve a dispute
regarding the exclusive use of our long-haul facilities connecting
Portland to Seattle and Portland to Spokane.

In March 1999, we entered into a 20-year fiber-swap agreement, in
which we will exchange unused fiber on our network for unused fiber
on another carrier's network. This exchange will provide us with
fiber from Salt Lake City to Denver, continuing on to Dallas. We will
provide the other carrier with unused fiber on our long-haul network
that connects Spokane and Seattle, Washington, Portland and the Bay
Area in California. We anticipate incorporating the other carrier's
fiber into our network during 2000. We will pay the other carrier
approximately $101 million over 20 years beginning in 2000. The other
carrier will pay us approximately $77 million over the same time
period.

In June 1999, we entered into a 20-year capital lease for capacity on
a third party's network. The lease calls for total payments of $9
million over the next four years. As of June 30, 1999, we reported a
capital lease asset and related obligation of approximately $7.5
million in our balance sheet, of which $2.5 million is presented in
current portion of long-term debt. We were previously leasing this
capacity through a private-line services agreement with this third
party. The private-line services agreement allows us to utilize the
third party's national fiber optic network through 2007, and had an
initial take-or-pay commitment of $122 million. We amended the
private-line services agreement in June 1999 to reflect that we are
now leasing certain capacity under the new capital lease that had
previously been leased under the private-line services agreement. As
a result of this amendment, our total minimum commitment under the
private-line services agreement was reduced to $90 million for the
remaining period of July 1, 1999 through December 31, 2007.

4. Related Party Transactions

Citizens Utilities Company (Citizens) owns approximately 82% of our
common stock. During 1998, Citizens announced its intent to separate
its telecommunications businesses and its public service businesses
into two stand-alone, publicly traded companies. Through May 1999,
Citizens had been pursuing its separation plans. Subsequently,
Citizens announced that it had entered into two access line purchase
agreements. Entering into these purchase agreements led Citizens to
discontinue its separation plans. Permanent funding for Citizens'
acquisitions will come from the sale of the public service
properties. Citizens is continuing to investigate and review
opportunities for the acquisition of new telecommunications
properties.

Electric Lightwave, Inc.

Notes to Financial Statements - (Continued)

This table summarizes the activity in the liability account Due to
Citizens for the six months ended June 30, 1999:

($ in thousands)

Balance, December 31, 1998............................. $ 5,254
Guarantee fees......................................... 8,087
Administrative services:
Services provided by Citizens..................... 4,555
ELI expenses paid by Citizens..................... 3,742
Payments to Citizens................................... (11,500)
---------
Balance, June 30, 1999................................. $ 10,138
=========

5. Significant Customer

During the three and six months ended June 30, 1999, US West
accounted for 18% of our total revenues.

6. Income Taxes

Citizens includes us in their consolidated federal income tax return
which uses a calendar year reporting period. We record income taxes
as if we were a stand-alone company. We recorded income tax expense
of $300,000 and $670,000 in the three and six months ended June 30,
1999, respectively. This expense represents the deferred tax effect
of the increase in temporary differences between our GAAP financial
statements and our tax return that may not be fully offset with the
use of tax loss carryforwards when the timing differences reverse in
future periods.

The income taxes payable by Citizens' consolidated group have been
reduced as a consequence of our losses for tax purposes in past
years. We would be able to carry-forward our tax losses to future
periods to offset net income for tax purposes in these future periods
had we been stand-alone for tax purposes. Citizens has agreed to
reimburse us, in a tax-sharing agreement, for the taxes we will have
to pay as a result of not being able to use our tax loss
carryforwards in future periods.

7. Long-term Debt

The components of our long-term debt is as follows:

($ in thousands) June 30, 1999 December 31, 1998
---------------- --------------------

Senior unsecured notes............... $ 325,000 $ --
Revolving bank credit facility....... 130,000 284,000
Capital leases....................... 48,250 18,256
---------- ----------
$ 503,250 $ 302,256
========== ==========

We issued $325 million of five-year senior unsecured notes in April
1999. The notes have an interest rate of 6.05% and will mature on May
15, 2004. Citizens has initially guaranteed the notes for an annual
fee of 4.0% of the outstanding balance. See "Item 2, Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources".

Electric Lightwave, Inc.

Notes to Financial Statements - (Continued)

We incurred $2.5 million of costs related to issuing the senior
unsecured notes. We have recorded these amounts in other assets on
our June 30, 1999 balance sheet, and are amortizing them to interest
expense using the effective interest method over the term of the
notes.

We also recorded $30,180,000 of long-term capital lease obligations
during the six months ended June 30, 1999. The obligations primarily
relate to constructed portions of our western long-haul networks.

Electric Lightwave, Inc.

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations

- --------------------------------------------------------------------------------
We caution you that this quarterly report on Form 10-Q contains
forward-looking statements within the meaning of the Securities and
Exchange Act of 1934. Forward-looking statements (including oral
representations) are only predictions or statements of our current
plans, which we review on a continual basis, and are based on our
beliefs, expectations and assumptions and on information currently
available to us. The words "may", "should", "expect", "anticipate",
"intend", "plan", "continue", "believe", "estimate" or similar
expressions used in this report are intended to identify
forward-looking statements.

The forward-looking statements in this quarterly report on Form 10-Q
involve certain risks, uncertainties and assumptions. They are not
guarantees of future performance. Factors that may cause actual
results to differ materially from those expressed or implied in any
forward-looking statements include, but are not limited to, any of
the following possibilities:

* if the local and overall economic conditions of our markets are
less favorable than we expected;

* if there are changes in the nature and pace of technological
advances in our industry;

* if competitive pressure in the telecommunications industry
increases in any of our markets because of the entrance of new
competitors, the combination of existing competitors and/or the
more effective provision of products and services from our
competitors, including ILECs, or other public utilities;

* if our business strategy or its execution, including financial
performance goals, is not as successful as we anticipate;

* if we are not able to maintain exclusive use of fiber on our
performance based leases;

* if state or federal regulatory changes are implemented that
assist our competitors, impair our competitive position,
threaten our costs or impact our rate structures, including the
ability to bill reciprocal compensation for calls terminated to
ISPs;

* if we do not receive the services and support which we require
from the regional ILECs or cannot maintain our current
relationships with ILECs;

* if we are not able to effectively manage rapid growth, including
integrating any businesses acquired;

* if we are not able to correctly identify future markets,
successfully expand existing ones, or successfully expand
through acquisitions;

* if the mix of products and services we are able to offer in our
target markets is not appropriate to the demands of our
customers; or

* if our stock price is volatile.

You should consider these important factors in evaluating any
statement contained in this report and/or made by us or on our
behalf. We have no obligation to update or revise forward-looking
statements.

- --------------------------------------------------------------------------------
11

Electric Lightwave, Inc.

The following information has not been audited. You should read this
information in conjunction with the condensed financial statements
and related notes to financial statements included in this report. In
addition, please see our Management Discussion and Analysis of
Financial Condition and Results of Operations, audited financial
statements and related notes included in our Annual Report on Form
10-K for the year ended December 31, 1998.

Overview

We have built an extensive fiber-optic network in the western United
States, which we use to provide products and services to customers in
seven major cities and their surrounding areas. In addition, we
provide data services in certain strategic markets across the nation.
Our product offerings include:

* Network services - includes dedicated service between two points
for a customer's exclusive use. We offer this in both local and
long-haul applications.

* Local telephone services - consists of the delivery of local
dial tone and related services, including reciprocal
compensation.

* Long distance services - includes retail and wholesale long
distance phone services, including our prepaid phone card
business.

* Data services - includes a wide range of products to deliver
large quantities of data from one location to another through
Asynchronous Transfer Mode (ATM), Frame Relay and Internet
Protocol packet technologies. These technologies group data
(voice, video, images and character-based data) into small
packets of information and transmit the packets over a network.

We are investing in our network in the west and are developing
long-haul networks that will connect all of our seven major cities
and several of our data-only cities with high-capacity fiber-optic
cable and electronics. Certain segments of our long-haul networks are
currently operational, and we expect to complete the remainder of
this network in the second half of 1999. During March 1999, we
entered into a fiber-swap agreement, which exchanges unused fiber on
our network for unused fiber on another carrier's network. This
exchange will provide us with fiber from Salt Lake City, Utah to
Denver, Colorado and continue on to Dallas, Texas. We anticipate
incorporating the other carrier's fiber into our network during 2000.

In addition to our expansion plans in the west, we are expanding our
reach into key cities across the nation by offering high-speed data
and Internet services. We added Atlanta, Dallas, San Diego and
Washington, D.C. during the first quarter of 1999 and Cleveland and
Philadelphia in April 1999. We plan to connect Austin and Houston by
the end of 1999. Our current data cities include Atlanta, Chicago,
Cleveland, Dallas, Las Vegas, Los Angeles, New York, Philadelphia,
San Diego, San Francisco and Washington D.C.

Electric Lightwave, Inc.

a. Liquidity and Capital Resources

We used net debt borrowings of $171 million to fund operating and
capital expenditures in the first half of 1999. The source of these
borrowings was our revolving bank credit facility and $325 million of
notes we issued during April 1999 in a private placement. The notes
are five-year senior unsecured notes, have an interest rate of 6.05%
and will mature on May 15, 2004. We used the majority of the net
proceeds from the issuance to repay outstanding borrowings under our
revolving bank credit facility. As a result, we have $270 million
remaining available through November 2002 under the revolving bank
credit facility to fund future operating and capital expenditures.
Citizens has guaranteed both the revolving bank credit facility and
the notes for a fee of 3.25% and 4.0%, respectively, assessed on the
respective outstanding balances.

We expect that the $270 million remaining on our revolving bank
credit facility will be adequate to fund operating and capital
expenditures through the first quarter 2000. At that point, we will
need to obtain additional debt or equity financing. We cannot provide
assurance that we will be able to obtain such financing, or that we
will be able to obtain it on reasonable terms.

We continue to invest in the installation, development and expansion
of our new and existing communications networks. A significant
portion of these expenditures is incurred before any revenues are
realized. Our capital additions were approximately $165 million in
the first half of 1999, including $45 million in non-cash capital
lease additions. These expenditures, combined with our operating
expenses, have resulted in operating losses and negative cash flows.
We expect to continue incurring operating losses and negative cash
flows until we can establish an adequate customer base and revenue
stream to support our network. We cannot provide assurance that we
will achieve or sustain profitability or generate sufficient positive
cash flow to fund our operating and capital requirements or service
debt.

We continue to evaluate opportunities to generate revenue growth
through making substantial investments in the continued development
of our existing networks, new long-haul routes and entry into new
markets. These opportunities may include acquisitions and/or joint
ventures that are consistent with our business plan of generating
revenue growth through expansion of our network and customer base.
Any such acquisitions, investments and/or strategic arrangements, if
available, could require additional financial resources and/or
reallocation of our financial resources.

We also added short and long-term capital lease obligations to our
June 30, 1999 balance sheet of approximately $12.6 million and $25.1
million, respectively. These obligations were the result of a
constructed portion of our western long-haul networks. Payments for
this capital lease are due over the next two years.

Electric Lightwave, Inc.

Other Matters

Year 2000

The Year 2000 (Y2K) issue stems from the fact that many computer
programs worldwide use two digits, rather than four, to define the
applicable year. For instance, many computers on January 1, 2000 may
assume that 01/01/00 is the first day of the year 1900 rather than
2000. Massive system failures may occur globally if this issue is not
properly addressed. We have developed a Y2K Initiative (the
Initiative) to mitigate the impact of the Y2K issue for our internal
systems and the systems that we rely on indirectly from third
parties.

Under the Initiative, we have formed a cross-functional Y2K project
team that reports to the Chief Information Officer (CIO). The CIO has
authority to establish methodologies, approve expenditures, and
marshal additional resources as necessary. A full-time consultant
project manager, who reports regularly to the CIO, manages the
Initiative and oversees the project team. The CIO is responsible for
researching, planning, executing, implementing and completing the
Initiative.

The three functional categories evaluated in the Initiative include:

* Communications Network - software and electronics that process
voice and data information relating to our communications
operations, including transmission equipment,

* Information Technology (IT) - consists of all internal hardware
and software used to support our financial and administrative
operations, and

* Facilities - consists of all systems necessary to run an office
including security systems, fire suppression, generators,
rectifiers, batteries and components with embedded technology at
our headquarters and leased facilities.

The Initiative is composed of three primary phases that we are
applying to each of the three functional categories.

* Phase I - Inventory and assessment

Inventory and assessment is the process of identifying all
relevant systems and information sources company-wide,
performing a risk-based analysis of each, categorizing each risk
according to its impact on our mission, and making a preliminary
determination of Y2K compliance. Phase I is substantially
complete for all functional categories.

* Phase II - Remediation

Remediation is the process of making changes to the hardware,
software or services in order to become Y2K compliant. Phase II
is substantially complete for all functional categories.

Electric Lightwave, Inc.

* Phase III - Testing, contingency planning and certification

Testing is the process of verifying that systems and processes
will continue to operate properly in the Year 2000 and beyond.
Testing is required for all mission-critical systems and
information sources. We have performed steps to test hardware
and software and reviewed testing documentation prepared by
vendors or service providers. Testing is substantially complete
for all functional categories except Facilities, which we
anticipate to be completed by September 30, 1999.

Contingency planning is required for all mission-critical
systems and information sources. The contingency plan will
include an evaluation of the system or information source
business risk, vulnerabilities, contingency steps and
containment measures. Contingency Planning is underway and is
expected to be complete by September 30, 1999.

Year 2000 certification is achieved when all year 2000
milestones have been successfully completed and approved by the
project manager. We expect certification to be complete by
October 30, 1999.

We anticipate the cost to address the Y2K issue to be approximately
$2 million. This cost estimate is based on current information, and
there are no guarantees that costs will not be higher than we
anticipate. As of June 30, 1999, we had incurred $.9 million of Y2K
costs.

Within the Communications Network, we depend on the ILEC and other
carriers to provide systems that are Y2K compliant to allow us to
connect with some of our customers. Within IT, we depend on
appropriately skilled internal and external experts to develop
software. Within Facilities, we depend on utility suppliers to
provide services to allow our network to continue to operate. If we
do not comply with Y2K, the worst case scenario would be a disruption
of service or the inability to bill or collect revenues from our
customers, which could have a material adverse effect on our
business. However, we believe this is unlikely and that we will
succeed in mitigating Y2K issues. As an added precaution, we have
formed a Y2K Rapid Response Team composed of experts from key
operational departments that will be able to quickly respond in the
event of Y2K failures.

Reciprocal Compensation

We have various interconnection agreements with US West and GTE, the
ILECs in the states in which we operate. These agreements govern
reciprocal compensation relating to the transport and termination of
traffic between the ILEC's networks and our network. We recognize
reciprocal compensation revenues as earned, based on the terms of the
interconnection agreements. We recognized total net reciprocal
compensation revenues for the three and six months ended June 30,
1999 of $8.1 million and $14.7 million, respectively. Net trade
accounts receivable relating to reciprocal compensation at June 30,
1999 totaled $11.0 million, compared to $10.4 million at December 31,
1998.

Electric Lightwave, Inc.

b. Results of Operations

Revenues

Revenues increased in the three and six months ended June 30, 1999
over the respective periods in 1998 due to the expansion of our
network and customer base. Since June 30, 1998, we completed our
fiber network in Spokane, Washington, where we are providing our full
suite of services. Also, since June 30, 1998, we have begun providing
high-speed data and Internet services in various cities across the
nation, including Atlanta, Chicago, Cleveland, Dallas, Las Vegas, Los
Angeles, New York, Philadelphia, San Diego, San Francisco and
Washington, D.C. We also added 631 customers and 113 building
connections, 47% and 17% increases, respectively, since June 30,
1998.

For the three months For the six months
ended June 30, ended June 30,
-------------------------------- ---------------------------------
% %

($ in thousands) 1999 1998 Incr. 1999 1998 Incr.
--------- -------- ------ --------- -------- ------

Network services............ $ 12,983 $ 8,371 55% $ 23,407 $ 17,478 34%
Local telephone services.... 18,600 7,769 139% 32,908 13,793 139%
Long distance services...... 9,245 1,899 387% 17,775 3,721 378%
Data services............... 5,267 3,404 55% 10,221 6,508 57%
---------- --------- ------ ---------- --------- ------
Total $ 46,095 $ 21,443 115% $ 84,311 $ 41,500 103%
========== ========= ========== =========

Electric Lightwave, Inc.

Network Services
Network services revenues increased in both the three and six months
ended June 30, 1999 over the respective periods in 1998 primarily due
to sale of additional circuits to new and existing customers. The
increased revenues in the six months ended June 30, 1999 were
partially offset by a decrease in revenue of $1.2 million from a
significant customer primarily due to the expiration of a short-term
contract in the first quarter 1998.

Local Telephone Services
Local telephone services revenues increased in both the three and six
months ended June 30, 1999 over the respective periods in 1998.
Included in this category were reciprocal compensation revenues,
which increased $4.9 million, or 152%, and $8.8 million, or 148%, in
the three and six months ended June 30, 1999, respectively, over the
same periods in 1998. Our ISDN PRI product revenues increased $3.3
million, or 154%, and $5.7 million, or 162%, in the three and six
months ended June 30, 1999, respectively, over the same periods in
1998. Over the same periods, local dial tone services increased $2.6
million, or 110%, and $4.7 million, or 108%, respectively.

The increases were the result of an increase in access line
equivalents installed of 67,026 or 123%, from June 30, 1998 to June
30, 1999. Also, in the second quarter of 1999, we began recognizing
reciprocal compensation revenues from US West in Idaho and GTE in
Washington. The ISDN PRI growth has largely come from sales to
Internet Service Providers.

Long Distance Services
Long distance services revenues increased in both the three and six
months ended June 30, 1999 over the respective periods in 1998
primarily due to increased revenues from prepaid services, which
increased $5.3 million, or 2,041%, and $11.4 million, or 2,697%,
respectively. The increases were due to large increases in the
minutes processed as a result of adding large volume customers. In
the second quarter 1999, we modified the terms of some of our prepaid
programs, and discontinued others. As a result, we anticipate
significantly less revenue from prepaid services in the remaining
quarters of 1999 compared to current levels. Retail and wholesale
long distance revenues accounted for the remainder of the increase in
each period, driven by increased minutes processed.

Data Services
Data services revenues increased in both the three and six months
ended June 30, 1999 over the respective periods in 1998 primarily due
to strong customer demand for these products. Revenues from our
Internet services product increased $1.6 million, or 151%, and $2.7
million, or 132%, respectively. Additionally, our frame relay product
revenues increased by $.5 million, or 43%, and $1.3 million, or 57%,
respectively.

Electric Lightwave,Inc.

Operating Expenses

Operating expenses increased in both the three and six months ended
June 30, 1999 over the respective periods in 1998. This increase was
due to our growth in network and customer base as reflected in
revenues as well as increased long distance network access costs,
expansion of our sales force and the costs incurred to support our
national data expansion.

For the three months For the six months
ended June 30, ended June 30,
-------------------------------- ---------------------------------
% %

($ in thousands) 1999 1998 Incr. 1999 1998 Incr.
--------- -------- ------ --------- --------- -------
Network access...... $ 23,702 $ 9,860 140% % 48,926 $ 19,072 157%
Operations.......... 9,633 6,528 48% 18,667 11,774 59%
Selling, general and
administrative.... 29,447 17,588 67% 56,214 32,963 71%
Depreciation and
amortization...... 8,150 3,780 116% 15,144 7,664 98%
------- --------- -------- --------
Total.......... $ 70,932 $ 37,756 88% $138,951 $ 71,473 94%
========= ========= ======== ========

Network Access
Network access expenses include resold product expenses. The primary
components are usage-based charges for carrying and terminating
traffic on another carrier's network.

Network access expenses increased in both the three and six months
ended June 30, 1999 over the respective periods in 1998 due to
overall revenue growth and an increase in long distance costs related
to our prepaid services programs. We have also incurred expenses
relating to our national data expansion before we have been able to
realize significant related revenues.

Operations
Operations expenses consist of costs related to providing facilities
based network and enhanced communications services other than network
access costs. The primary components of these expenses are
right-of-way and telecommunications equipment leases as well as
operations and engineering personnel costs.

Operations expenses increased in both the three and six months ended
June 30, 1999 over the respective periods in 1998 due to increases in
payroll and related expenses to support the expanded delivery of
services, and an expanded customer service organization.

Selling, General and Administrative
Selling, general and administrative expenses include all direct and
indirect sales channel expenses and commissions, as well as all
general and administrative expenses.

Selling, general and administrative increased in both the three and
six months ended June 30, 1999 over the respective periods in 1998
due to increases in payroll and related expenses to support the
delivery of services in existing and new markets including the
national data expansion. We increased our sales force to 178
employees, a 58% increase over June 30, 1998.

Depreciation and Amortization
Depreciation and amortization expenses include depreciation of
communications network assets including fiber-optic cable, network
electronics, network switching and network data equipment.

Electric Lightwave, Inc.

Depreciation and amortization expense increased in both the three and
six months ended June 30, 1999 over the respective periods in 1998
due to higher plant in service balances for newly completed
communications network facilities and electronics.

Interest Expense and Other

For the three months For the six months
ended June 30, ended June 30,
----------------------------------- ------------------------------

% %
($ in thousands) 1999 1998 Incr. 1999 1998 Incr.
------- ------- ------- ------- ------ ------
Interest expense and
other................. $ 8,068 $ 1,467 450% $ 12,847 $ 2,211 481%

Interest expense increased in both the three and six months ended
June 30, 1999 over the respective periods in 1998 primarily due to
higher levels of long-term debt outstanding. At June 30, 1999, $503
million of long-term debt was outstanding, compared to $147 million
at June 30, 1998.

Income Tax Expense (Benefit)

For the three months For the six months
ended June 30, ended June 30,
----------------------------------- ------------------------------

% %
($ in thousands) 1999 1998 Incr. 1999 1998 Incr.
------- ------- ------- ------- ------ ------
Income tax expense
(benefit)............. $ 300 $ (3,022) N/A $ 670 $(6,048) N/A

In 1998, we were able to recognize a tax benefit for our tax loss
carryforwards to a limited extent of our deferred tax liabilities. In
1999, the benefit of our tax loss carryforwards is not able to fully
offset the deferred tax expense associated with current year timing
differences.

Cumulative Effect of Change in Accounting Principle

For the three months For the six months
ended June 30, ended June 30,
----------------------------------- ------------------------------

% %
($ in thousands) 1999 1998 Incr. 1999 1998 Incr.
------- ------- ------- ------- ------ ------
Cumulative effect of
change in accounting
principle............. $ -- $ -- N/A $ -- $ 3,394 N/A

Cumulative effect of change in accounting principle represented a
write-off of the unamortized portion of deferred start-up costs due
to our adoption of AICPA Statement of Position 98-5, "Reporting on
the costs of Start-Up Activities" in 1998.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We reduced our interest rate risk by issuing $325 million, five-year
senior unsecured notes in April 1999 that are guaranteed by Citizens.
The notes have a fixed interest rate of 6.05% and a guarantee fee of
4.0%. We used the net proceeds from the issuance to repay outstanding
borrowings under our floating rate bank credit facility.

Electric Lightwave, Inc.

PART II OTHER INFORMATION
Item 1. Legal Proceedings

Subsequent to June 30, 1999, we resolved the legal proceedings and
related arbitration against US West as described in Item 3 of our
1998 Form 10-K. US West has agreed to enter into a purchase of
incremental telecommunications services from us over an 18-month
period.

In accordance with the terms of our contract with Bonneville Power
Administration, we requested arbitration to resolve a dispute
regarding the exclusive use of our long-haul facilities connecting
Portland to Seattle and Seattle to Spokane. We filed our Notice of
Claim or Demand for Arbitration on April 19, 1999. It is pending
before an arbitrator of the American Arbitration Association.

We are party to routine litigation arising in the normal course of
business. We do not expect these matters, individually or in the
aggregate, to have a material adverse effect on our financial
position, results of operations or cash flows. We are also party
to various proceedings before state PUCs. These proceedings
typically relate to authority to operate in a state and regulatory
arbitration proceedings concerning our interconnection agreements.
See "Part I., Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital
Resources - Other Matters - Reciprocal Compensation".

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

We held our 1999 Annual Meeting of the Stockholders on May 20,
1999 to elect directors and consider proposals (i) to approve an
amendment of the 1997 Equity Incentive Plan and (ii) to approve an
amendment of the 1998 Employee Stock Purchase Plan, as discussed
in the Company's proxy statement filed on April 9, 1999.

The following persons were elected directors to hold office until
the next annual meeting and until their successors have been
elected and qualified:

Votes
-----------------------------------------
For (*) Abstained
----------------- ----------------

Daryl A. Ferguson 417,772,742 448,396
Guenther Greiner 417,700,942 520,196
Stanley Harfenist 417,777,242 443,896
David B. Sharkey 417,777,142 443,996
Robert A. Stanger 417,777,142 443,996
Leonard Tow 417,768,743 452,395
Maggie Wilderotter 417,777,142 443,996

Electric Lightwave, Inc.

The stockholders approved the amendment of the 1997 Equity
Incentive Plan by a vote of 413,611,310 (*) votes For to 1,197,077
votes Against; 12,448 votes Abstained and there were 3,400,303
Broker Non-Votes.

The stockholders also approved the amendment of the Employee Stock
Purchase Plan by a vote of 413,880,174 (*) Votes For to 821,157
votes Against; 10,035 votes Abstained and there were 3,509,772
Broker Non-Votes.

(*) Includes votes from the 41,165,000 shares of Class B common
stock. Citizens owns all Class B Common Stock and each share is
entitled to 10 votes on each matter to be voted upon by holders of
the Common Stock.

Item 5. Other Information

None.

Item 6. Exhibits and Reports on Form 8-K

a) The exhibits below are filed as part of this report:

Exhibit No. Description

10.13 1997 Equity Incentive Plan, as amended (incorporated by
reference to Appendix A of our Proxy Statement for our 1999
Annual Meeting of Stockholders).

10.21.1* First Amendment to the Private Line Services Agreement
between Electric Lightwave, Inc. and Qwest dated as of June
29, 1999.

10.22 1998 Employee Stock Purchase Plan, as amended (incorporated
by reference to Appendix B of our Proxy Statement for our
1999 Annual Meeting of Stockholders).

10.24.1 Indenture from Electric Lightwave, Inc. to Citibank, N.A.,
dated April 15, 1999, with respect to the 6.05% Senior
Unsecured Notes due 2004.

10.24.2 First Supplemental Indenture from Electric Lightwave, Inc.,
Citizens Utilities Company and Citizens Newco Company to
Citibank, N.A. dated April 15, 1999, with respect to the
6.05% Senior Unsecured Notes due 2004.

10.24.3 Form of Electric Lightwave, Inc. 6.05% Senior Unsecured
Notes due 2004.

10.24.4 Letter of Representations to the Depository Trust Company
dated April 28,1999, with respect to the 6.05% Senior
Unsecured Notes due 2004.

27.1 Financial Data Schedule for the six months ended June 30,
1999.

27.2 Restated Financial Data Schedule for the six months ended
June 30, 1998.

* Material has been omitted pursuant to a request for
confidential treatment filed with the Securities and Exchange
Commission.

b) Reports on Form 8-K

On May 4, 1999, we filed a Current Report on Form 8-K, under Item
5, "Other Events" containing first quarter 1999 financial
information.

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.

ELECTRIC LIGHTWAVE, INC.
(Registrant)

By: /s/ Kerry D. Rea
Kerry D. Rea
Vice President and Controller

August 2, 1999