<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
----------------
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994
OR
[ ] 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 1-6393
BELL ATLANTIC - PENNSYLVANIA, INC.
A Pennsylvania Corporation I.R.S. Employer Identification No. 23-0397860
One Parkway, Philadelphia, Pennsylvania 19102
Telephone Number (215) 466-9900
---------------
THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF BELL ATLANTIC CORPORATION, MEETS
THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND
IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL
INSTRUCTION H(2).
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 12 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 90 days. Yes X No
----- -----
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Financial Statements
STATEMENTS OF INCOME AND REINVESTED EARNINGS
(Unaudited)
(Dollars in Millions)
Three months ended Six months ended
June 30, June 30,
------------------ ---------------------
1994 1993 1994 1993
------ ------ ------ ---------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Local service.................... $358.3 $347.4 $ 712.0 $ 688.3
Network access................... 216.4 206.1 440.7 410.0
Toll service..................... 120.7 116.8 245.9 236.3
Directory advertising, billing
services and other (including
$11.8, $11.1, $22.4 and $22.0
from affiliates)................ 137.9 133.5 271.6 263.6
Provision for uncollectibles..... (12.0) (12.7) (25.1) (25.3)
------ ------ -------- --------
821.3 791.1 1,645.1 1,572.9
------ ------ -------- --------
OPERATING EXPENSES
Employee costs, including
benefits and taxes.............. 181.8 180.6 370.0 358.8
Depreciation and amortization.... 169.7 153.9 337.5 308.7
Taxes other than income.......... 38.1 36.3 73.7 71.1
Other (including $145.2, $134.6,
$282.3 and $269.2 to affiliates). 235.3 222.8 461.0 463.7
------ ------ -------- --------
624.9 593.6 1,242.2 1,202.3
------ ------ -------- --------
NET OPERATING REVENUES............. 196.4 197.5 402.9 370.6
------ ------ -------- --------
OPERATING INCOME TAXES
Federal.......................... 45.7 43.0 94.8 79.9
State............................ 22.7 21.8 46.8 39.2
------ ------ -------- --------
68.4 64.8 141.6 119.1
------ ------ -------- --------
OPERATING INCOME................... 128.0 132.7 261.3 251.5
------ ------ -------- --------
OTHER INCOME (EXPENSE)
Allowance for funds used
during construction............. .7 .5 1.5 1.0
Miscellaneous - net.............. (1.7) (2.3) (2.6) (3.9)
------ ------ -------- --------
(1.0) (1.8) (1.1) (2.9)
------ ------ -------- --------
INTEREST EXPENSE (including $1.4,
$1.6, $2.1 and $2.4 to affiliate). 32.3 32.9 64.0 68.0
------ ------ -------- --------
INCOME BEFORE EXTRAORDINARY ITEM
AND CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE........... 94.7 98.0 196.2 180.6
EXTRAORDINARY ITEM
Early Extinguishment of Debt,
Net of Tax...................... --- --- --- (14.9)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE
Postemployment Benefits, Net of
Tax --- --- --- (15.9)
------ ------ -------- --------
NET INCOME......................... $ 94.7 $ 98.0 $ 196.2 $ 149.8
====== ====== ======== ========
</TABLE>
(Continued)
See Notes to Financial Statements.
-1-
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
STATEMENTS OF INCOME AND REINVESTED EARNINGS (Continued)
(Unaudited)
(Dollars in Millions)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
1994 1993 1994 1993
------- --------- ------- -------
<S> <C> <C> <C> <C>
REINVESTED EARNINGS
At beginning of period.. $546.4 $495.4 $521.2 $522.3
Add: net income......... 94.7 98.0 196.2 149.8
------ ------ ------ ------
641.1 593.4 717.4 672.1
Deduct: dividends....... 100.0 67.7 176.3 146.3
other changes... --- --- --- .1
------ ------ ------ ------
At end of period........ $541.1 $525.7 $541.1 $525.7
====== ====== ====== ======
</TABLE>
See Notes to Financial Statements.
-2-
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
BALANCE SHEETS
(Unaudited)
(Dollars in Millions)
ASSETS
------
<TABLE>
<CAPTION>
June 30, December 31,
1994 1993
-------- ------------
<S> <C> <C>
CURRENT ASSETS
Accounts receivable:
Customers and agents, net of allowances for
uncollectibles of $50.5 and $50.3........... $ 493.4 $ 467.3
Parent and affiliates........................ 32.6 30.0
Other........................................ 18.6 12.1
Material and supplies.......................... 26.4 27.2
Prepaid expenses............................... 164.0 89.6
Deferred income taxes.......................... 35.5 37.1
Other.......................................... 10.5 8.8
-------- --------
781.0 672.1
-------- --------
PLANT, PROPERTY AND EQUIPMENT.................... 8,790.9 8,636.3
Less accumulated depreciation.................. 3,420.2 3,147.4
-------- --------
5,370.7 5,488.9
-------- --------
OTHER ASSETS..................................... 539.4 558.3
-------- --------
TOTAL ASSETS..................................... $6,691.1 $6,719.3
======== ========
</TABLE>
See Notes to Financial Statements.
-3-
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
BALANCE SHEETS
(Unaudited)
(Dollars in Millions)
LIABILITIES AND SHAREOWNER'S INVESTMENT
---------------------------------------
<TABLE>
<CAPTION>
June 30, December 31,
1994 1993
-------- ------------
<S> <C> <C>
CURRENT LIABILITIES
Debt maturing within one year:
Affiliate................................... $ 136.3 $ 98.8
Other....................................... .7 1.0
Accounts payable:
Parent and affiliates....................... 220.0 194.7
Other....................................... 244.4 290.3
Accrued expenses:
Taxes....................................... 22.4 52.5
Other....................................... 152.9 149.7
Advance billings and customer deposits....... 102.1 104.6
----------- --------
878.8 891.6
----------- --------
LONG-TERM DEBT................................. 1,646.2 1,646.1
----------- --------
EMPLOYEE BENEFIT OBLIGATIONS................... 740.3 721.4
----------- --------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes........................ 744.1 774.4
Unamortized investment tax credits........... 120.2 127.5
Other........................................ 425.0 441.7
----------- --------
1,289.3 1,343.6
----------- --------
SHAREOWNER'S INVESTMENT
Common stock, $20 par value per share........ 1,594.7 1,594.7
Authorized shares: 80,210,000
Outstanding shares: 79,732,681
Contributed capital.......................... .7 .7
Reinvested earnings.......................... 541.1 521.2
----------- --------
2,136.5 2,116.6
----------- --------
TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT.. $ 6,691.1 $6,719.3
=========== ========
</TABLE>
See Notes to Financial Statements.
-4-
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Millions)
<TABLE>
<CAPTION>
Six months ended
June 30,
----------------------
1994 1993
------- --------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES ...... $ 360.6 $ 419.1
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to plant, property and equipment.... (209.3) (231.0)
Other, net.................................... (8.5) (6.3)
------- -------
Net cash used in investing activities........... (217.8) (237.3)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings...................... --- 470.0
Principal repayments of capital lease
obligations.................................. (.4) (.4)
Early extinguishment of debt and related
call premium................................. --- (555.7)
Net change in note payable to affiliate....... 37.5 88.3
Dividends paid................................ (176.3) (146.3)
Net change in outstanding checks drawn
on controlled disbursement accounts.......... (3.6) (34.3)
------ ------
Net cash used in financing activities........... (142.8) (178.4)
------ ------
NET CHANGE IN CASH ............................. --- 3.4
CASH, BEGINNING OF PERIOD ...................... --- ---
------- -------
CASH, END OF PERIOD ............................ $ --- $ 3.4
======= =======
</TABLE>
See Notes to Financial Statements.
-5-
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
The accompanying financial statements are unaudited and have been prepared by
Bell Atlantic - Pennsylvania, Inc. (formerly The Bell Telephone Company of
Pennsylvania) (the Company) pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC). The December 31, 1993 balance sheet
was derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles. In the
opinion of management, these financial statements include all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
the results of operations, financial position and cash flows. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such SEC rules and regulations. The Company
believes that the disclosures made are adequate to make the information
presented not misleading. It is suggested that these financial statements be
read in conjunction with the financial statements and notes thereto included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1993.
(2) Dividend
On August 1, 1994, the Company declared and paid a dividend in the amount of
$92.9 million to Bell Atlantic Corporation.
(3) Subsequent Events
Discontinued Application of Statement No. 71
--------------------------------------------
The Company has historically accounted for the economic effects of regulation
in accordance with the provisions of Statement of Financial Accounting Standards
No. 71, "Accounting for the Effects of Certain Types of Regulation" (Statement
No. 71). Under Statement No. 71, as a result of actions of regulators, the
Company has depreciated telephone plant using lives prescribed by regulators and
deferred certain costs or recognized certain liabilities (regulatory assets and
liabilities).
On August 15, 1994, the Company's parent, Bell Atlantic Corporation (Bell
Atlantic), announced that it has determined that it is no longer eligible for
continued application of the accounting required by Statement No. 71. The
Company believes that the convergence of competition, technological change
(including the Company's recent technology deployment plans), recent and
potential regulatory, legislative and judicial actions and other factors will
create fully open and competitive markets. In such markets, the Company
believes it can no longer be assured that prices can be maintained at levels
that will recover the net carrying amount of existing telephone plant and
equipment, which has been depreciated over relatively long regulator-prescribed
lives. In addition, changes from cost-based regulation to a form of incentive
regulation contributed to the determination that the continued application of
Statement No. 71 is inappropriate.
The discontinued application of Statement No. 71 requires the Company, for
financial reporting purposes, to eliminate its regulatory assets and liabilities
and adjust the carrying amount of its telephone plant to the extent that it
determines that such amounts either are overstated as a result of the regulatory
process, or are not recoverable. Accordingly, as of August 1, 1994, the Company
will recognize a non-cash, after-tax extraordinary charge of approximately $626
million to adjust the net carrying amount of telephone plant and equipment and
an after-tax extraordinary charge of approximately $102 million to eliminate net
regulatory assets. The adjustment to the net carrying amount of telephone plant
and equipment will increase the reserve for accumulated depreciation by
approximately $1.1 billion. The Company's accounting and reporting for
regulatory purposes are not affected by the discontinued application of
Statement No. 71.
As of August 1, 1994, for financial reporting purposes, the Company will
utilize estimated asset lives for certain categories of plant and equipment that
are shorter
-6-
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
than those currently approved by regulators. The shorter estimated asset lives
result from the Company's current expectations as to the revenue-producing lives
of the assets. A comparison of the current regulator-approved asset lives and
the associated shorter estimated asset lives for the most significantly impacted
categories of plant and equipment follows:
<TABLE>
<CAPTION>
Average Lives (in years)
------------------------------------
Regulator-Approved Estimated
Asset Lives Asset Lives
------------------------ -----------
<S> <C> <C>
Digital Switch 17.5 12
Digital Circuit 11.5 10
Conduit 60 50
Copper Cable 20 - 26 15.5 - 16
Fiber Cable 30 20 - 25
</TABLE>
Employee Benefits
-----------------
On August 15, 1994, Bell Atlantic also announced that it will record a charge
in the third quarter of 1994, as required by Statement of Financial Accounting
Standards No. 112, "Employers' Accounting for Postemployment Benefits"
(Statement No. 112), to recognize the benefit costs for the separation of
employees who are entitled to benefits under its preexisting separation pay
plans. The charge, which was actuarially determined, represents benefits earned
to date by employees who are expected to receive separation payments in the
future, including those who will be separated through 1997 as a result of the
recently announced workforce reduction initiative. These workforce reductions
will be made possible by improved provisioning systems and customer service
processes, increased spans of control, and consolidation and centralization of
administrative and staff groups. The Company will record a pretax charge of
between $40 million and $50 million to recognize its share of the benefit costs
under the separation pay plans.
(4) Restatement of 1993 Financial Statements
Results of operations for the six months ended June 30, 1993 were restated in
the fourth quarter of 1993 to reflect the cumulative effect of the adoption of
Statement No. 112, effective January 1, 1993.
(5) Reclassifications - Statements of Cash Flows
Certain amounts included in Net Cash Provided by Operating Activities and Cash
Flows from Investing Activities in the Statement of Cash Flows for the six
months ended June 30, 1993 have been reclassified to conform to the current
year's classifications.
-7-
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
SELECTED OPERATING DATA
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
At June 30,
--------------------
1994 1993
--------- ---------
<S> <C> <C>
Network Access Lines in Service:
Residence..................... 3,725 3,666
Business...................... 1,799 1,724
Public........................ 78 78
------ -----
5,602 5,468
====== =====
</TABLE>
<TABLE>
<CAPTION>
Six months ended
June 30,
--------------------
1994 1993
--------- ---------
<S> <C> <C>
Carrier Access Minutes of Use:
Interstate.................... 6,726,065 6,185,128
Intrastate.................... 2,155,383 1,878,667
--------- ---------
8,881,448 8,063,795
========= =========
</TABLE>
<TABLE>
<CAPTION>
Six months ended
June 30,
----------------
1994 1993
------- -------
<S> <C> <C>
Toll Messages:
Message Telecommunication Services..... 382,667 355,308
Optional Calling Plans................. 2,994 3,728
Unidirectional Long-Distance Services.. 42,035 67,786
Corridor............................... 6,177 6,287
------- -------
433,873 433,109
======= =======
</TABLE>
-8-
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
Item 2. Management's Discussion and Analysis of Results of Operations
(Abbreviated pursuant to General Instruction H(2).)
This discussion should be read in conjunction with the Financial Statements
and Notes to Financial Statements.
RESULTS OF OPERATIONS
Net income for the six months ended June 30, 1994 increased $46.4 million from
the corresponding period last year. Results for the first six months of 1993
reflect an after-tax charge of $15.9 million for the adoption of Statement of
Financial Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits" and a $14.9 million extraordinary charge, net of tax,
for the early extinguishment of debt.
OPERATING REVENUES
Operating revenues for the six months ended June 30, 1994 increased $72.2
million or 4.6% from the corresponding period last year. The increase in total
operating revenues was comprised of the following:
<TABLE>
<CAPTION>
Increase/(Decrease)
(Dollars in Millions)
----------------------
<S> <C>
Local service....................... $23.7
Network access...................... 30.7
Toll service........................ 9.6
Directory advertising, billing
services and other................ 8.0
Less: Provision for uncollectibles.. (.2)
-----
$72.2
=====
</TABLE>
Local service revenues are earned from the provision of local exchange, local
private line, and public telephone services. Local service revenues increased
$23.7 million or 3.4%, compared to the same period in 1993. The increase
resulted primarily from growth in network access lines and higher demand for
value-added central office services such as Custom Calling. Access lines in
service at June 30, 1994 increased 2.5% from June 30, 1993 (see Selected
Operating Data on page 8).
Network access revenues are received from interexchange carriers (IXCs) for
their use of the Company's local exchange facilities in providing long-distance
services to IXCs' customers and from end-user subscribers. Switched access
revenues are derived from usage-based charges paid by IXCs for access to the
Company's network. Special access revenues arise from access charges paid by
customers who have private lines, and end-user access revenues are earned from
local exchange carrier customers who pay for access to the network.
Network access revenues increased $30.7 million or 7.5%, compared to the same
period in 1993. Access minutes of use were 10.1% higher than the first six
months of 1993 (see Selected Operating Data on page 8), due to the effects of a
recovering economy and inclement weather conditions in the region during the
first quarter of 1994. The increase in network access revenues is due to
customer demand as reflected by growth in access minutes of use, as well as
increased access lines in service. In addition to volume growth, network access
revenues increased due to lower support payments to the National Exchange
Carrier Association (NECA) interstate common line pool and increased revenues
recognized through an interstate revenue sharing arrangement with affiliated
companies. These revenue increases were partially offset by the effect of an
interstate rate reduction filed by the Company with the Federal Communications
Commission (FCC), which became effective on July 2, 1993. In its April 1, 1994
tariff filing, the Company filed revised rates, which became effective July 1,
1994. These revised rates, net of lower support obligations to the NECA
interstate common line pool, are not expected to significantly change current
levels of interstate access revenues.
Toll service revenues are earned from interexchange usage services such as
Message Telecommunication Services (MTS), including optional calling plans,
Unidirectional Services (Wide Area Toll Service (WATS) and 800 services),
Corridor Services between southeastern Pennsylvania and southern New Jersey, and
private line services. Toll
-9-
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
service revenues increased $9.6 million or 4.1%, compared to the same period in
1993. MTS message volumes (including messages from optional calling plans) were
7.4% higher, while unidirectional long-distance messages decreased 38.0%,
compared to the first six months of 1993 (see Selected Operating Data on page
8). The growth in MTS message volumes was due to the effects of a recovering
economy and harsh weather conditions during the first quarter of 1994. This
increase was partially offset by a reduction in private line revenues and lower
unidirectional message revenues, principally due to competitive pressures.
Directory advertising, billing services and other revenues include amounts
earned from directory advertising, billing and collection services provided to
IXCs, premises services such as inside wire installation and maintenance, rent
of Company facilities by affiliates and non-affiliates, and certain nonregulated
enhanced network services.
Directory advertising, billing services and other revenues increased $8.0
million or 3.0%, compared to the same period in 1993. The increase is primarily
due to increased revenues from directory advertising, customer premises services
and enhanced network services. The increase in directory advertising resulted
primarily from higher rates for yellow pages advertising. Higher volumes for
premises services and voice messaging services, primarily Answer Call, also
increased revenues. These revenue increases were partially offset by lower
facilities rental revenues.
The provision for uncollectibles, expressed as a percentage of total operating
revenues, was 1.5% in the first six months of 1994 and 1.6% for the same period
last year.
OPERATING EXPENSES
Operating expenses for the six months ended June 30, 1994 increased $39.9
million or 3.3% from the corresponding period last year. The increase in total
operating expenses was comprised of the following:
<TABLE>
<CAPTION>
Increase/(Decrease)
(Dollars In Millions)
---------------------
<S> <C>
Employee costs ............................. $11.2
Depreciation and amortization .............. 28.8
Other ...................................... (.1)
-----
$39.9
=====
</TABLE>
Employee costs consist of salaries, wages and other employee compensation,
employee benefits and payroll taxes paid directly by the Company. Similar costs
incurred by employees of Bell Atlantic Network Services, Inc. (NSI), who provide
centralized services on a contract basis, are allocated to the Company and are
included in other operating expenses. Employee costs increased $11.2 million or
3.1%, compared to the same period in 1993, due to a combination of salary and
wage increases and higher healthcare costs for active and retired employees.
Higher repair and maintenance activity experienced in the first quarter of 1994
caused by unusually severe winter storm conditions throughout the region
contributed to the increase in employee costs.
On August 15, 1994, the Company's parent, Bell Atlantic Corporation, announced
that it will record a charge in the third quarter of 1994, as required by
Statement of Financial Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits," to recognize the benefit costs for the separation of
employees who are entitled to benefits under its preexisting separation pay
plans. The charge, which was actuarially determined, represents benefits earned
to date by employees who are expected to receive separation payments in the
future, including those who will be separated through 1997 as a result of the
recently announced workforce reduction initiative. These workforce reductions
will be made possible by improved provisioning systems and customer service
processes, increased spans of control, and consolidation and centralization of
administrative and staff groups. The Company will record a pretax charge of
between $40 million and $50 million to recognize its share of the benefit costs
under the separation pay plans. Costs of enhancing systems and consolidating
work activities will be charged to expense as incurred.
-10-
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
Depreciation and amortization expense increased $28.8 million or 9.3%,
compared to the same period in 1993. The increase was due primarily to
additional expense resulting from a change in the depreciable lives of certain
classes of plant, as approved by the Pennsylvania Public Utility Commission
(PUC), effective July 1, 1993. Also contributing to the increase was growth in
the level of depreciable plant.
Other operating expenses consist primarily of contracted services including
centralized service expenses allocated from NSI, rent, network software costs,
operating taxes other than income, and other general and administrative
expenses. Other operating expenses decreased $.1 million, compared to the same
period in 1993. Other operating expenses decreased principally due to decreased
software development costs associated with the enhancement of the Company's
network. Also contributing to the decrease were a reduction in write-offs during
the first half of 1994 associated with uncollectible accounts with the Company's
billing and collection services, and the effect of one-time accruals for certain
liabilities recorded in the first six months of 1993. These decreases were
substantially offset by increased intercompany rental expense and contract labor
costs. In addition, the first six months of 1994 included added expense for
gross receipts taxes due to higher operating revenues and additional property
taxes due to higher assessments.
OPERATING INCOME TAXES
The provision for income taxes increased $22.5 million or 18.9%, compared to
the same period in 1993. The Company's effective income tax rate was 41.8% in
the first six months of 1994, compared to 39.2% for same period in 1993. The
increase in the effective tax rate was principally the result of federal tax
legislation enacted in the third quarter of 1993, which increased the federal
corporate tax rate from 34% to 35%, and a reduction in investment tax credit
amortization.
INTEREST EXPENSE
Interest expense decreased $4.0 million or 5.9%, compared to the same period
in 1993, principally due to the effect of long-term debt refinancings in 1993.
COMPETITIVE ENVIRONMENT
The communications industry is currently undergoing fundamental changes which
may have a significant impact on future financial performance of
telecommunications companies. These changes are driven by a number of factors,
including the accelerated pace of technological innovation, the convergence of
telecommunications, cable television, information services and entertainment
businesses, and a regulatory environment in which many traditional regulatory
barriers are being lowered and competition permitted or encouraged.
Communications services and equipment and the number of competitors offering
such services are continuing to expand. The Company's telecommunications
business is currently subject to competition from numerous sources, including
competitive access providers for network access services and competing cellular
telephone companies. An increasing amount of this competition is from large
companies which have substantial capital, technological and marketing resources,
many of which do not face the same regulatory constraints as the Company. Other
potential sources of competition are cable television systems, shared tenant
services and other non-carrier systems which are capable of partially or
completely bypassing the Company's local network.
The entry of well-financed competitors, such as large long-distance carriers
and other local exchange service competitors, has the potential to adversely
affect multiple revenue streams of the Company, including local exchange, local
access, and long-distance services in the market segments and geographical areas
in which the competitors operate. The amount of revenue reductions will depend
on the competitors' success in marketing these services, and the conditions of
interconnection established by regulators. The potential impact is expected to
be offset, to some extent, by revenues from interconnection charges to be paid
to the Company by these competitors.
The Company continues to focus its efforts on becoming more competitive and
seeking growth opportunities. The Company's responses to competitive challenges
include an increased emphasis on meeting customer requirements through the rapid
introduction of
-11-
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
new products and services, the delivery of increased customer value, and the
development of customer loyalty programs. In addition, the Company continues to
strive for increased pricing flexibility through efforts to reprice and
repackage existing competitive services, to reduce its cost structure and
workforce through consolidation, re-engineering and streamlining initiatives,
and to achieve an improved regulatory and legislative environment. Other
important competitive responses, including the development of broadband
networks, will improve the Company's ability to take advantage of the growth
opportunities created by technological advances and the convergence of the
communications, information services and entertainment industries.
On May 19, 1994, Bell Atlantic Corporation announced the specifics underlying
its full service network deployment program to make broadband, interactive,
multimedia services available to up to 8.5 million homes throughout the Bell
Atlantic region by the end of the year 2000. The Company will use a variety of
technologies, on a market by market basis, depending on customer demand and cost
considerations.
REGULATORY ENVIRONMENT
Federal Regulation
------------------
Recent FCC regulatory rulings have sought to expand competition for special
and switched access services. Effective February 1994, the FCC ordered local
exchange carriers (LECs), including the Company, to allow competing carriers to
interconnect to the local exchange network for the purpose of providing switched
access transport services. The terms and conditions of this ruling are similar
to those for special access collocation ordered during 1992. The principal goal
of the FCC's collocation rulings is to encourage competition for these services.
The FCC also granted additional, but limited, pricing flexibility for these
services so that the LECs can better respond to the competition that will
result. The Company does not expect the net revenue impact of special access
collocation to be material. Revenue losses from switched access collocation,
however, are expected to be larger than from special access collocation. Bell
Atlantic and certain other parties appealed both the special and switched access
collocation orders. In June 1994, the U.S. Court of Appeals for the District of
Columbia Circuit vacated the FCC's special access collocation order insofar as
it required physical collocation and remanded for further proceedings in which
the FCC could consider whether, and to what extent, virtual collocation should
be imposed. In July 1994, the FCC voted to require LECs to offer competitors
virtual collocation, with the LECs having the option to offer physical
collocation. Tariffs for virtual collocation for special access are required to
be filed on September 1, 1994 and will become effective on December 15, 1994.
The appeal of the switched access collocation order is being held in abeyance.
The FCC has informed the U.S. Court of Appeals that it will not further litigate
the June 1994 special access decision.
In February 1994, the FCC initiated a rulemaking proceeding to determine the
effectiveness of the price cap rules and decide what changes, if any, should be
made to those rules. Under proposed rulemaking, the FCC identified for
examination three broad sets of issues including those related to the basic
goals of price regulation, the operation of price caps and the transition of
local exchange services to a fully competitive market. This rulemaking is
expected to be concluded by the end of 1994. Any changes to the current price
cap plan are expected to be effective January 1, 1995 or shortly thereafter. At
this time, the Company cannot estimate the financial impact, if any, that would
result if the FCC revised its current price cap rules.
State Regulation
----------------
The non-competitive communications services of the Company are subject to
regulation by the PUC with respect to intrastate rates and services and other
matters.
On July 8, 1993, legislation was enacted in Pennsylvania which enabled the
Company to petition the PUC to regulate the Company under a form of regulation
other than rate base rate of return regulation. On October 1, 1993, the Company
filed its petition and plan with the PUC. Hearings on this petition and plan
were held in February 1994.
On June 28, 1994, the PUC approved, with modifications, the Company's
Alternative Regulation Plan, which was accepted by the Company on July 15, 1994.
The major provisions of the modified plan provide for a pure price cap plan with
no sharing that
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Bell Atlantic - Pennsylvania, Inc.
replaces rate base rate of return regulation. The Commission's order confirmed
that current rates are just and reasonable, and therefore, required no change to
current rates.
The plan removed from price and earnings regulation six competitive services,
including directory advertising, billing service, Centrex service, paging, speed
calling and repeat calling. All remaining noncompetitive services will be price
regulated.
Under price regulation, annual price increases up to, but not exceeding, the
inflation rate (GDP-PI) minus 2.93 percent will be permitted. Rates for
protected services in the noncompetitive category, which include residential and
business basic exchange services, special access and switched access, are capped
through December 31, 1999. However, revenue neutral rate restructures for both
protected and other services are permitted.
The plan requires the Company to establish a lifeline service for residential
customers on a revenue neutral basis. It also requires deployment of a
universal broadband network, which must be completed in phases (i) 20% by 1998,
(ii) 50% by 2004, and (iii) 100% by 2015. Deployment must be reasonably
balanced among urban, suburban and rural areas.
Management believes the modified plan provides the Company with improved
opportunities for product/market development and revenue/earnings growth.
In June 1994, the PUC approved tariff rates for Caller ID Service in
Pennsylvania. The service is scheduled to be available in September 1994. The
Caller ID service is expected to generate revenues of approximately $2 million
in the first year, growing to more than $10 million in later years.
The PUC commenced an investigation to determine whether presubscription for
intraLATA toll services should be authorized. A decision on this proceeding is
expected by the third quarter of 1995.
OTHER MATTERS
Subsequent Event - Discontinued Application of Statement No. 71
---------------------------------------------------------------
On August 15, 1994, the Company's parent, Bell Atlantic Corporation, announced
that it has determined that it is no longer eligible for continued application
of the accounting required by Statement of Financial Accounting Standards No.
71, "Accounting for the Effects of Certain Types of Regulation" (Statement No.
71). The discontinued application of Statement No. 71 requires the Company, for
financial reporting purposes, to eliminate its regulatory assets and liabilities
and adjust the carrying amount of its telephone plant to the extent that it
determines that such amounts either are overstated as a result of the regulatory
process, or are not recoverable. Accordingly, as of August 1, 1994, the Company
will recognize a non-cash, after-tax extraordinary charge of approximately $626
million to adjust the net carrying amount of telephone plant and equipment and
an after-tax extraordinary charge of approximately $102 million to eliminate net
regulatory assets. The adjustment to the net carrying amount of telephone plant
and equipment will increase the reserve for accumulated depreciation by
approximately $1.1 billion. The Company expects to report a loss for the third
quarter and year as a result of the extraordinary charge for the discontinued
application of Statement No. 71.
As of August 1, 1994, for financial reporting purposes, the Company will
utilize estimated asset lives for certain categories of plant and equipment that
are shorter than those currently approved by regulators (see Note 3 to the
Financial Statements). It is expected that the use of the shorter asset lives
when applied to the reduced net asset base will not significantly impact
depreciation expense for financial reporting purposes for the remainder of 1994.
The ongoing impact on operating expense resulting from the elimination of the
amortization of net regulatory assets is not expected to be significant in
future periods. The Company's accounting and reporting for regulatory purposes
are not affected by the discontinued application of Statement No. 71.
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Bell Atlantic - Pennsylvania, Inc.
Environmental Issues
- - --------------------
The Company is subject to a number of environmental matters as a result of its
operations and shared liability provisions in the Plan of Reorganization,
related to the Modification of Final Judgment. Certain of these environmental
matters relate to Superfund sites for which the Company has been designated a
potentially responsible party by the U.S. Environmental Protection Agency. The
Company is a third party defendant in litigation involving five Superfund sites.
The Company is also responsible for the remediation of sites with underground
fuel storage tanks and other expenses associated with environmental compliance.
The Company continually monitors its operations with respect to potential
environmental issues, including changes in legally mandated standards and
remediation technologies. The Company's recorded liability reflects those
specific issues where remediation activities are currently deemed to be probable
and where the cost of remediation is estimable. Management believes that the
aggregate amount of any potential liability would not have a material effect on
the Company's financial condition or results of operations.
FINANCIAL CONDITION
Management believes that the Company has adequate internal and external
resources available to meet ongoing operating requirements, including network
expansion and modernization, and payment of dividends. Management expects that
presently foreseeable capital requirements will be financed primarily through
internally generated funds, although additional long-term debt may be needed to
fund development activities and to maintain the Company's capital structure
within management's guidelines.
The Company's debt ratio was 45.5% at June 30, 1994, compared to 45.2% at
December 31, 1993.
As of June 30, 1994, the Company had $300.0 million remaining under a shelf
registration statement filed with the Securities and Exchange Commission.
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Bell Atlantic - Pennsylvania, Inc.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
For background concerning the Company's contingent liabilities under
the Plan of Reorganization governing the divestiture by AT&T
Corporation (formerly American Telephone and Telegraph Company) of
certain assets of the former Bell System Operating Companies with
respect to private actions relating to pre-divestiture events,
including pending antitrust cases, see Item 3 of the Company's Annual
Report on Form 10-K for the year ended December 31, 1993.
Item 6. Exhibits and Reports on Form 8-K
(b) There were no Current Reports on Form 8-K filed during the quarter
ended June 30, 1994.
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Bell Atlantic - Pennsylvania, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BELL ATLANTIC - PENNSYLVANIA, INC.
Date: August 15, 1994 By /s/ William Harral
------------------------------------------
William Harral
Vice President - External Affairs
and Chief Financial Officer
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