<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 September 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
Item 1. Financial Statements
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS AND REINVESTED EARNINGS (ACCUMULATED DEFICIT)
(Unaudited)
(Dollars in Millions)
Three months ended Nine months ended
September 30, September 30,
------------------- --------------------
1994 1993 1994 1993
-------- ------ ------- --------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Local service........................... $ 358.6 $350.7 $1,070.6 $1,039.0
Network access.......................... 232.5 216.7 673.2 626.7
Toll service............................ 112.3 117.2 358.2 353.5
Directory advertising, billing
services and other (including
$14.6, $11.6, $37.0 and $33.6
from affiliates)....................... 139.8 134.5 411.4 398.1
Provision for uncollectibles............ (12.2) (12.5) (37.3) (37.8)
------- ------ -------- --------
831.0 806.6 2,476.1 2,379.5
------- ------ -------- --------
OPERATING EXPENSES
Employee costs, including benefits
and taxes.............................. 234.4 191.6 604.4 550.4
Depreciation and amortization........... 169.5 164.0 507.0 472.7
Taxes other than income................. 26.5 36.8 100.2 108.0
Other (including $155.4, $135.9,
$437.7 and $405.0 to affiliates)........ 244.1 229.7 705.1 693.3
------- ------ -------- --------
674.5 622.1 1,916.7 1,824.4
------- ------ -------- --------
NET OPERATING REVENUES.................... 156.5 184.5 559.4 555.1
------- ------ -------- --------
OPERATING INCOME TAXES
Federal................................. 26.2 38.0 121.0 117.9
State................................... 26.9 19.0 73.7 58.2
------- ------ -------- --------
53.1 57.0 194.7 176.1
------- ------ -------- --------
OPERATING INCOME.......................... 103.4 127.5 364.7 379.0
------- ------ -------- --------
OTHER INCOME (EXPENSE)
Allowance for funds used
during construction.................... .2 .5 1.7 1.5
Miscellaneous - net..................... (1.6) (1.5) (4.2) (5.4)
------- ------ -------- --------
(1.4) (1.0) (2.5) (3.9)
------- ------ -------- --------
INTEREST EXPENSE (including $1.1,
$1.2, $3.2 and $3.5 to affiliate)........ 31.0 32.9 95.0 100.9
------- ------ -------- --------
INCOME BEFORE EXTRAORDINARY ITEMS
AND CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE.................. 71.0 93.6 267.2 274.2
EXTRAORDINARY ITEMS
Discontinuation of Regulatory
Accounting Principles, Net of Tax...... (728.5) --- (728.5) ---
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 (LOSS)......................... $(657.5) $ 93.6 $ (461.3) $ 243.4
======= ====== ======== ========
</TABLE>
(Continued)
See Notes to Financial Statements.
-1-
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS AND REINVESTED EARNINGS (ACCUMULATED DEFICIT) (Continued)
(Unaudited)
(Dollars in Millions)
Three months ended Nine months ended
September 30, September 30,
------------------- -------------------
1994 1993 1994 1993
---------- ------- --------- --------
<S> <C> <C> <C> <C>
REINVESTED EARNINGS (ACCUMULATED
DEFICIT)
At beginning of period.............. $ 541.1 $525.7 $ 521.2 $522.3
Add: net income (loss).............. (657.5) 93.6 (461.3) 243.4
------- ------ ------- ------
(116.4) 619.3 59.9 765.7
Deduct: dividends................... 92.9 98.0 269.2 244.3
other changes............... --- .2 --- .3
------- ------ ------- ------
At end of period.................... $(209.3) $521.1 $(209.3) $521.1
======= ====== ======= ======
</TABLE>
See Notes to Financial Statements.
-2-
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
BALANCE SHEETS
(Unaudited)
(Dollars in Millions)
ASSETS
------
<TABLE>
<CAPTION>
September 30, December 31,
1994 1993
------------- ------------
<S> <C> <C>
CURRENT ASSETS
Accounts receivable:
Customers and agents, net of allowances for
uncollectibles of $49.8 and $50.3........... $ 507.8 $ 467.3
Parent and affiliates........................ 32.1 30.0
Other........................................ 23.3 12.1
Material and supplies.......................... 22.1 27.2
Prepaid expenses............................... 127.8 89.6
Deferred income taxes.......................... 38.0 37.1
Other.......................................... 4.0 8.8
-------- --------
755.1 672.1
-------- --------
PLANT, PROPERTY AND EQUIPMENT.................... 8,868.6 8,636.3
Less accumulated depreciation.................. 4,664.7 3,147.4
-------- --------
4,203.9 5,488.9
-------- --------
OTHER ASSETS..................................... 40.9 558.3
-------- --------
TOTAL ASSETS..................................... $4,999.9 $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>
September 30, December 31,
1994 1993
-------------- ------------
<S> <C> <C>
CURRENT LIABILITIES
Debt maturing within one year:
Affiliate................................... $ 96.1 $ 98.8
Other....................................... .8 1.0
Accounts payable:
Parent and affiliates....................... 236.1 194.7
Other....................................... 236.0 290.3
Accrued expenses:
Taxes....................................... 15.3 52.5
Other....................................... 142.0 149.7
Advance billings and customer deposits....... 102.2 104.6
----------- --------
828.5 891.6
----------- --------
LONG-TERM DEBT................................. 1,667.5 1,646.1
----------- --------
EMPLOYEE BENEFIT OBLIGATIONS................... 793.4 721.4
----------- --------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes........................ 144.3 774.4
Unamortized investment tax credits........... 54.6 127.5
Other........................................ 125.5 441.7
----------- --------
324.4 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 (accumulated deficit).... (209.3) 521.2
----------- --------
1,386.1 2,116.6
----------- --------
TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT.. $ 4,999.9 $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>
Nine months ended
September 30,
----------------------
1994 1993
--------- ---------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES .... $ 639.4 $ 663.1
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to plant, property and equipment.. (348.1) (363.6)
Other, net.................................. (3.4) (7.7)
------ ------
Net cash used in investing activities......... (351.5) (371.3)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings.................... --- 470.0
Principal repayments of capital lease
obligations................................ (.8) (.7)
Early extinguishment of debt and related
call premium............................... --- (555.7)
Net change in note payable to affiliate..... (2.7) 76.7
Dividends paid.............................. (269.2) (244.3)
Net change in outstanding checks drawn
on controlled disbursement accounts........ (15.2) (34.3)
------ ------
Net cash used in financing activities......... (287.9) (288.3)
------ ------
NET CHANGE IN CASH ........................... --- 3.5
CASH, BEGINNING OF PERIOD .................... --- ---
------- -------
CASH, END OF PERIOD .......................... $ --- $ 3.5
======= =======
</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.
Effective August 1, 1994, the Company no longer reports using generally accepted
accounting principles applicable to regulated entities (see Note 3).
(2) Dividend
On November 1, 1994, the Company declared and paid a dividend in the amount of
$96.3 million to Bell Atlantic Corporation.
(3) Discontinuation of Regulatory Accounting Principles
In the third quarter of 1994, the Company determined that it was 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). In connection with the decision to
discontinue regulatory accounting principles under Statement No. 71, the Company
recorded a non-cash, after-tax extraordinary charge of $728.5 million, which is
net of an income tax benefit of $456.3 million.
The Company's determination that it was no longer eligible for continued
application of the accounting required by Statement No. 71 was based on the
belief 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 are creating 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 components of the charge recognized as a result of the discontinued
application of Statement No. 71 follow:
<TABLE>
<CAPTION>
(Dollars in Millions)
----------------------
Pre-tax After-tax
--------- -----------
<S> <C> <C>
Increase in plant and equipment depreciation reserve... $1,133.0 $662.6
Accelerated investment tax credit amortization......... --- (36.5)
Tax-related regulatory asset and liability elimination. --- 72.2
Other regulatory asset and liability elimination....... 51.8 30.2
-------- ------
Total.................................................. $1,184.8 $728.5
======== ======
</TABLE>
The accumulated depreciation reserve was increased by $1,133.0 million. This
increase was supported by both an impairment analysis which identified
estimated amounts not recoverable from future discounted cash flows, and a
depreciation study which identified inadequate depreciation reserve levels which
the Company believes resulted principally from the cumulative underdepreciation
of plant as a result of the regulatory process.
-6-
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
Investment tax credits (ITCs) are deferred and amortized over the estimated
service lives of the related telephone plant and equipment. ITC amortization was
accelerated as a result of the reduction in asset lives of the associated
telephone plant and equipment.
Upon adoption of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," the effects of required adjustments to deferred
tax balances were deferred on the balance sheet as regulatory assets and
liabilities and amortized at the time the related deferred taxes were recognized
in the ratemaking process. As of August 1, 1994, tax-related regulatory assets
of $346.4 million and tax-related regulatory liabilities of $274.2 million were
eliminated. The elimination of other regulatory assets and liabilities relate
principally to deferred debt refinancing and vacation pay costs which were being
amortized as they were recognized in the ratemaking process.
On August 1, 1994, for financial reporting purposes, the Company began using
estimated asset lives for certain categories of plant and equipment that are
shorter than those approved by regulators prior to the discontinued application
of Statement No. 71. The shorter asset lives result from the Company's
expectations as to the revenue-producing lives of the assets. A comparison of
the regulator-approved asset lives to the shorter new asset lives for the most
significantly impacted categories of plant and equipment follows:
<TABLE>
<CAPTION>
Average Lives (in years)
-------------------------------------
Regulator-Approved New
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>
As a result of the discontinued application of Statement No. 71, regulatory
accounting principles no longer apply to the Company for financial accounting
and reporting purposes. The Company no longer recognizes regulatory assets and
liabilities and the related amortization. Additionally, the Company reports
depreciation expense based on economic asset lives and reports capitalized
interest costs as a cost of telephone plant and equipment and a reduction in
interest expense, in accordance with the provisions of Statement of Financial
Accounting Standards No. 34, "Capitalization of Interest Cost." Prior to the
discontinued application of Statement No. 71, the Company recorded an allowance
for funds used during construction which included both interest and equity
return components and was recorded as a cost of plant and an item of other
income. The Company's accounting and reporting for regulatory purposes are not
affected by the discontinued application of Statement No. 71.
(4) Postemployment Benefits
In the third quarter of 1994, the Company recorded a pretax charge of $47.0
million, in accordance with Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Postemployment Benefits" (Statement No. 112), to
recognize the Company's proportionate share of benefit costs for the separation
of employees who are entitled to benefits under preexisting Bell Atlantic
separation pay plans. The charge, which was actuarially determined, represents
benefits earned through July 1, 1994 for employees who are expected to receive
separation payments in the future, including those employees who will be
separated through 1997 as a result of a recently announced workforce reduction
initiative.
(5) Restatement
Results of operations for the nine months ended September 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.
-7-
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
(6) 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 nine
months ended September 30, 1993 have been reclassified to conform to the current
year's classifications.
-8-
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
SELECTED OPERATING DATA
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
At September 30,
----------------------
1994 1993
---------- ----------
<S> <C> <C>
Network Access Lines in Service:
Residence..................... 3,740 3,689
Business...................... 1,823 1,759
Public........................ 78 78
----- -----
5,641 5,526
===== =====
<CAPTION>
Nine months ended
September 30,
------------------------
1994 1993
----------- -----------
<S> <C> <C>
Carrier Access Minutes of Use:
Interstate.................... 10,274,763 9,392,160
Intrastate.................... 3,285,528 2,810,976
---------- ----------
13,560,291 12,203,136
========== ==========
<CAPTION>
Nine months ended
September 30,
----------------------
1994 1993
--------- ---------
<S> <C> <C>
Toll Messages:
Message Telecommunication Services..... 568,772 536,147
Optional Calling Plans................. 4,402 5,338
Unidirectional Long-Distance Services.. 61,899 98,233
Corridor............................... 9,299 9,511
------- -------
644,372 649,229
======= =======
</TABLE>
-9-
<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
The Company reported a loss of $461.3 million for the nine months ended
September 30, 1994, compared to net income of $243.4 million for the
corresponding period last year.
Results for the nine months ended September 30, 1994 included a non-cash,
after-tax extraordinary charge of $728.5 million in connection with the
Company's decision to discontinue application of regulatory accounting
principles 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 required the Company, for
financial reporting purposes, to eliminate its regulatory assets and
liabilities, resulting in an after-tax charge of $102.4 million. In addition,
the Company recorded an after-tax charge of $626.1 million, net of related
investment tax credits of $36.5 million, to adjust the carrying amount of its
telephone plant and equipment.
As a result of the discontinued application of Statement No. 71, the Company
utilizes shorter asset lives for certain categories of plant and equipment than
those approved by regulators prior to the discontinued application of Statement
No. 71. It is expected that the use of the shorter asset lives will not
significantly change depreciation expense for the fourth quarter of 1994, for
financial reporting purposes, from the amount that would have been recorded
using asset lives prescribed by regulators prior to the discontinued
application of Statement No. 71. The elimination of the amortization of net
regulatory assets and the effect of changes in certain accounting policies are
not expected to have a significant impact on financial results in future
periods. The Company's accounting and reporting for regulatory purposes are not
affected by the discontinued application of Statement No. 71. See Note 3 to the
Financial Statements for additional information on the discontinuation of
regulatory accounting principles.
In the third quarter of 1994, the Company recorded a pretax charge of $47.0
million, in accordance with Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Postemployment Benefits" (Statement No. 112), to
recognize the Company's proportionate share of benefit costs for the separation
of employees who are entitled to benefits under preexisting Bell Atlantic
separation pay plans. The charge, which was actuarially determined, represents
benefits earned through July 1, 1994 for employees who are expected to receive
separation payments in the future, including those who will be separated through
1997 as a result of a 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 (see Note 4 to the Financial
Statements). Management currently expects the wage and salary savings
associated with the workforce reduction to significantly offset the ongoing
expense impact for separation benefits accrued under these separation pay plans
for 1995 through 1997. Management also expects to recognize additional costs to
enhance systems and consolidate work activities, which will be charged to
operating expense as incurred.
-10-
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
OPERATING REVENUES
Operating revenues for the nine months ended September 30, 1994 increased
$96.6 million or 4.1% 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....................... $31.6
Network access...................... 46.5
Toll service........................ 4.7
Directory advertising, billing
services and other................ 13.3
Less: Provision for uncollectibles.. (.5)
-----
$96.6
=====
</TABLE>
Local service revenues are earned from the provision of local exchange, local
private line, and public telephone services. Local service revenues increased
$31.6 million or 3.0%, 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 Caller ID, which was introduced in
September 1994, and Custom Calling. Access lines in service at September 30,
1994 increased 2.1% from September 30, 1993 (see Selected Operating Data on
page 9).
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 $46.5 million or 7.4%, compared to the same
period in 1993. Access minutes of use were 11.1% higher than the first nine
months of 1993 (see Selected Operating Data on page 9), 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 principally
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. The 1994 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 generated 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 service revenues increased $4.7 million or 1.3%,
compared to the same period in 1993. MTS message volumes (including messages
from optional calling plans) were 5.9% higher, while unidirectional long-
distance messages decreased 37.0%, compared to the first nine months of 1993
(see Selected Operating Data on page 9). 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. Volume-related revenue growth was partially offset
by a reduction in private line revenues and lower unidirectional message
revenues, as competitive pressures continue to impact these services.
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.
-11-
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
Directory advertising, billing services and other revenues increased $13.3
million or 3.3%, compared to the same period in 1993. The increase was
primarily due to increased revenues from directory advertising, customer
premises services and enhanced network services. The increase in directory
advertising resulted primarily from higher prices for yellow pages advertising.
Higher demand for premises services and voice messaging services, including
Answer Call, also increased revenues. These revenue increases were partially
offset by lower billing and collection revenues.
The provision for uncollectibles, expressed as a percentage of total operating
revenues, was 1.5% in the first nine months of 1994 and 1.6% for the same period
last year.
OPERATING EXPENSES
Operating expenses for the nine months ended September 30, 1994 increased
$92.3 million or 5.1% 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................. $54.0
Depreciation and amortization.. 34.3
Taxes other than income........ (7.8)
Other.......................... 11.8
-----
$92.3
=====
</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 $54.0 million or 9.8% over the corresponding period
in 1993. The increase was principally due to a charge of $37.1 million to
recognize, in accordance with Statement No. 112, the Company's proportionate
share of benefit costs for the separation of employees who are entitled to
benefits under preexisting Bell Atlantic separation pay plans. Third quarter
1994 employee costs also included approximately $1 million for the ongoing
accrual of separation benefit costs under these separation pay plans. Benefit
costs associated with the separation of employees of NSI were allocated to the
Company and are included in other operating expenses. Additionally, the employee
costs were higher due to a combination of salary and wage increases and higher
healthcare benefit costs for active and retired employees. Higher repair and
maintenance activity caused by unusually severe weather conditions experienced
in 1994 contributed to the overall increase in employee costs. These expense
increases were offset in part by the effect of lower force levels during 1994.
Depreciation and amortization expense increased $34.3 million or 7.3% compared
with the same period in 1993. The increase was principally due to growth in
telephone plant. The Company's discontinued application of Statement No. 71 has
resulted in the use of shorter asset lives for certain categories of plant and
equipment than those approved by regulators prior to August 1, 1994. The
shorter estimated asset lives reflect the Company's expectations as to the
revenue-producing lives of the assets (see Note 3 to the Financial Statements).
The use of the shorter asset lives did not significantly impact depreciation
expense in the third quarter of 1994, for financial reporting purposes. It is
expected that the use of shorter asset lives will not significantly change
depreciation expense in the fourth quarter of 1994, for financial reporting
purposes, from the amount that would have been recorded using asset lives
prescribed by regulators prior to the discontinued application of Statement
No. 71. Future depreciation represcriptions by regulators will not affect
depreciation expense for financial reporting purposes.
Taxes other than income decreased $7.8 million or 7.2%, compared to the same
period in 1993. This decrease is principally due to reduced capital stock taxes
resulting from the reduction in net income caused by the discontinued
application of Statement No. 71. Partially offsetting the decrease was
additional expense for gross receipts taxes due to higher operating revenues,
and property taxes due to higher assessments.
-12-
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
Other operating expenses consist primarily of contracted services including
centralized service expenses allocated from NSI, rent, network software costs,
and other general and administrative expenses. Other operating expenses
increased $11.8 million or 1.7%, compared to the same period in 1993. Other
operating expenses increased principally due to higher costs allocated from NSI
primarily as a result of higher employee costs, affiliate rent expense and
employee-related expenses incurred in that organization, including $9.9 million
for the Company's allocated share of a charge for separation benefit costs
recognized under Statement No. 112. Also contributing to the increase were
higher contract labor costs and the effect of adjustments made to billing
agreements with certain affiliated companies. These increases were partially
offset by decreased software costs, and the effect of one-time accruals for
certain liabilities recorded in 1993.
OPERATING INCOME TAXES
The provision for income taxes increased $18.6 million or 10.6%, compared to
the same period in 1993. The Company's effective income tax rate was 42.0% in
the first nine months of 1994, compared to 39.4% for same period in 1993. The
increase in the effective tax rate was principally the result of the reduction
in amortization of investment tax credits as a result of the discontinued
application of Statement No. 71, and the effect of a one-time net benefit
recorded in the third quarter of 1993 to adjust deferred tax assets for the
increase in the federal corporate income tax rate from 34% to 35%.
OTHER INCOME AND EXPENSE
Other expense was $2.5 million for the nine months ended September 30, 1994
and $3.9 million for the same period in 1993. The decrease in other expense was
primarily due to lower non-operating costs in 1994, offset in part by higher
income related to the allowance for funds used during construction.
Prior to the discontinued application of Statement No. 71, the Company
recorded an allowance for funds used during construction as a cost of plant and
an item of other income. As prescribed by regulators, the allowance for funds
used during construction included both interest and equity return components.
Effective August 1, 1994, interest costs on telephone plant under construction
are capitalized in accordance with the provisions of Statement of Financial
Accounting Standards No. 34, "Capitalization of Interest Cost," and reported as
a cost of telephone plant and a reduction to interest expense. The amount of
allowance for funds used during construction that was recorded as other income
prior to August 1, 1994 was $1.7 million in 1994 and $2.1 million for the twelve
month period ended December 31, 1993. The impact of this change was more than
offset by increased income recognized for the allowance for funds used during
construction resulting from higher levels of plant under construction prior to
August 1, 1994.
INTEREST EXPENSE
Interest expense decreased $5.9 million or 5.8%, compared to the same period
in 1993, principally due to the effect of long-term debt refinancings in 1993
and lower levels of short-term debt. Interest expense was further reduced by
the recognition of $1.0 million in capitalized interest costs, effective with
the discontinued application of Statement No. 71.
EXTRAORDINARY ITEM
As discussed in Note 3 to the Financial Statements, in connection with the
Company's decision to discontinue application of regulatory accounting
principles under Statement No. 71, the Company recorded a non-cash, after-tax
extraordinary charge of $728.5 million, net of an income tax benefit of $456.3
million, in the third quarter of 1994.
COMPETITIVE ENVIRONMENT
The communications industry continues to undergo 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,
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Bell Atlantic - Pennsylvania, Inc.
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
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,
network access, and toll 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 being 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 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 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.
REGULATORY ENVIRONMENT
Federal Regulation
------------------
Recent FCC regulatory rulings have sought to expand competition for special
and switched access services. The FCC had ordered local exchange carriers
(LECs), including the Company, to provide physical collocation in the Company's
central offices to competitors for the purpose of providing special
and switched access transport 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. However, 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 were 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. The Company does
not expect the net revenue impact of virtual collocation to be material.
As reported in the Company's 1993 Form 10-K (Part I, Item 1 - Business), the
FCC initiated Computer Inquiry III in 1985 to re-examine its regulations
requiring that "enhanced services" (e.g., voice messaging services, electronic
mail, videotext gateway, protocol conversion) be offered only through a
structurally separated subsidiary. In 1986, the FCC eliminated this requirement,
permitting the Company to offer enhanced services, subject to compliance with a
series of nonstructural safeguards. These safeguards include detailed cost
accounting, protection of customer information, public disclosure of technical
interfaces and certain reporting requirements.
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Bell Atlantic - Pennsylvania, Inc.
In June 1990, the U.S. Court of Appeals for the Ninth Circuit (Court of
Appeals) vacated and remanded the Computer Inquiry III decisions to the FCC. In
December 1991, the FCC adopted an order which reinstated relief from the
separate subsidiary requirement upon a company's compliance with the FCC's
Computer III Open Network Architecture (ONA) requirements and strengthened some
of the nonstructural safeguards. In March 1992, the Company certified to the FCC
that it had complied with all initial ONA obligations, and the FCC granted the
Company structural relief in June 1992.
In October 1994, the Court of Appeals vacated the 1991 order and remanded the
matter to the FCC for further proceedings. As the Court of Appeals has not yet
issued a mandate giving formal effect to its decision, the Company continues to
offer enhanced services pending further action by the Court of Appeals or the
FCC.
State Regulation
----------------
The non-competitive intrastate communications services of the Company are
subject to regulation by the PUC with respect to intrastate rates 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.
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 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. Annual price
decreases are required when the GDP-PI falls below 2.93%. 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. On November 1, 1994, the Company
made the first annual price adjustment filing based on the prescribed formula.
Revenues for intrastate noncompetitive services will be decreased by $5.9
million, effective January 1, 1995. Protected services will receive a prorated
share of this reduction equal to $3.5 million.
The plan requires the Company to propose a Lifeline service for residential
customers on a revenue neutral basis. In compliance with the PUC's Order, the
Company filed its revenue neutral Lifeline and Universal Telephone Assistance
Program proposals on September 23, 1994. The Company's proposal would decrease
dial tone line rates to $1 for Lifeline customers and increase rates on other
residence dial tone line customers and Public Coin customers. A decision on the
proposal is expected by the second quarter of 1995. The plan 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 July 1994, several parties filed appeals in the Pennsylvania Commonwealth
Court of the PUC's June 28, 1994 order approving a modified plan. These appeals
have been consolidated by the Court and are expected to be decided by the end of
1995.
In June 1994, the PUC approved tariff rates for Caller ID Service in
Pennsylvania. The service was made available in September 1994. 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.
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Bell Atlantic - Pennsylvania, Inc.
In addition, the PUC's examination of Metropolitan Fiber System's (MFS)
application to become a local carrier is underway. The purpose is to certify
that MFS meets Pennsylvania's statutory requirements. Results are expected by
the third quarter of 1995. On October 3, 1994, MCI also filed to become a local
carrier in Pennsylvania. A schedule for this docket has not yet been
established. Coincident with local service competition, the PUC has initiated
an investigation to formulate general principles and policies of Universal
Service. This issue is expected to be resolved by January, 1996.
OTHER MATTERS
Environmental Issues
--------------------
The Company is subject to a number of environmental proceedings 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 and other sites for which the Company has received a
request for information or is a third-party defendant. 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 56.0% at September 30, 1994, compared to 45.2% at
December 31, 1993. The debt ratio was significantly impacted by the equity
reduction associated with the discontinued application of Statement No. 71.
As of September 30, 1994, the Company had $300.0 million remaining under a
shelf registration statement filed with the Securities and Exchange Commission.
As a result of the discontinued application of Statement No. 71, the Balance
Sheet at September 30, 1994 reflects significant changes due to the elimination
of regulatory assets and liabilities, the revaluation of plant and equipment and
the accelerated amortization of investment tax credits (see Note 3 to the
Financial Statements).
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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 Corp.
(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
(a) Exhibits:
Exhibit Number
27 Financial Data Schedule
(b) There were no Current Reports on Form 8-K filed during the
quarter ended September 30, 1994.
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<PAGE>
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: November 10, 1994 By /s/ Robert J. McGonagle
-------------------------------
Robert J. McGonagle
Chief Financial Officer
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF NOVEMBER 7, 1994.
-18-
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