<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, 1995
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
STATEMENTS OF OPERATIONS AND REINVESTED EARNINGS (ACCUMULATED DEFICIT)
(Unaudited)
(Dollars in Millions)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------ -------------------
1995 1994 1995 1994
------- ------- -------- --------
<S> <C> <C> <C> <C>
OPERATING REVENUES (including $18.3, $22.2,
$58.2 and $59.5 from affiliates)........................... $ 857.8 $ 843.1 $2,561.1 $2,513.3
------- ------- -------- --------
OPERATING EXPENSES
Employee costs, including benefits and taxes............... 189.3 234.4 555.2 604.4
Depreciation and amortization.............................. 167.9 169.5 500.3 507.0
Other (including $170.2, $169.7, $494.7
and $480.8 to affiliates)................................. 282.9 282.8 851.2 842.6
------- ------- -------- --------
640.1 686.7 1,906.7 1,954.0
------- ------- -------- --------
OPERATING INCOME............................................ 217.7 156.4 654.4 559.3
OTHER INCOME (EXPENSE), NET
Allowance for funds used during construction............... --- .2 --- 1.7
Other, net................................................. (2.9) (1.8) (2.0) (5.4)
------- ------- -------- --------
(2.9) (1.6) (2.0) (3.7)
INTEREST EXPENSE (including $1.6, $1.1, $4.2,
and $3.2 to affiliate)..................................... 29.1 31.0 90.3 95.0
------- ------- -------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES
AND EXTRAORDINARY ITEM..................................... 185.7 123.8 562.1 460.6
PROVISION FOR INCOME TAXES.................................. 76.2 52.8 235.3 193.4
------- ------- -------- --------
INCOME BEFORE EXTRAORDINARY ITEM............................ 109.5 71.0 326.8 267.2
EXTRAORDINARY ITEM
Discontinuation of Regulatory Accounting Principles,
Net of Tax................................................ --- (728.5) --- (728.5)
------- ------- -------- --------
NET INCOME (LOSS)........................................... $ 109.5 $(657.5) $ 326.8 $ (461.3)
======= ======= ======== ========
REINVESTED EARNINGS (ACCUMULATED DEFICIT)
At beginning of period..................................... $(196.4) $ 541.1 $ (210.6) $ 521.2
Add: net income (loss).................................... 109.5 (657.5) 326.8 (461.3)
------- ------- -------- --------
(86.9) (116.4) 116.2 59.9
Deduct: dividends........................................ 110.0 92.9 313.1 269.2
other changes.................................... 0.1 --- 0.1 ---
------- ------- -------- --------
At end of period.......................................... $(197.0) $(209.3) $ (197.0) $ (209.3)
======= ======= ======== ========
</TABLE>
See Notes to Financial Statements.
1
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
BALANCE SHEETS
(Unaudited)
(Dollars in Millions)
ASSETS
------
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------- ------------
<S> <C> <C>
CURRENT ASSETS
Short-term investments........................ $ 10.5 $ ---
Accounts receivable:
Customers and agents, net of allowances for
uncollectibles of $49.6 and $51.9........... 537.1 505.8
Affiliates................................... 25.4 22.1
Other........................................ 17.7 21.7
Material and supplies......................... 16.4 19.9
Prepaid expenses.............................. 162.0 121.3
Deferred income taxes......................... 70.1 54.1
Other......................................... 3.5 3.6
-------- --------
842.7 748.5
-------- --------
PLANT, PROPERTY AND EQUIPMENT.................. 9,261.7 8,979.3
Less accumulated depreciation................. 5,072.0 4,744.6
-------- --------
4,189.7 4,234.7
-------- --------
OTHER ASSETS................................... 47.8 81.5
-------- --------
TOTAL ASSETS................................... $5,080.2 $5,064.7
======== ========
</TABLE>
See Notes to Financial Statements.
2
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
BALANCE SHEETS
(Unaudited)
(Dollars in Millions)
LIABILITIES AND SHAREOWNER'S INVESTMENT
---------------------------------------
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
-------------- -------------
<S> <C> <C>
CURRENT LIABILITIES
Debt maturing within one year:
Note payable to affiliate.................... $ 107.4 $ 12.1
Other........................................ 36.1 1.1
Accounts payable and accrued liabilities:
Affiliates................................... 244.9 248.6
Taxes........................................ 27.9 46.4
Other........................................ 401.3 476.5
Advance billings and customer deposits........ 89.2 102.2
----------- ------------
906.8 886.9
----------- ------------
LONG-TERM DEBT................................. 1,631.5 1,667.4
----------- ------------
EMPLOYEE BENEFIT OBLIGATIONS................... 839.1 808.3
----------- ------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes......................... 120.3 132.7
Unamortized investment tax credits............ 45.6 51.9
Other......................................... 138.5 132.7
----------- ------------
304.4 317.3
----------- ------------
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
Accumulated deficit........................... (197.0) (210.6)
----------- ------------
1,398.4 1,384.8
----------- ------------
TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT.. $ 5,080.2 $5,064.7
=========== ============
</TABLE>
See Notes to Financial Statements.
3
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Millions)
<TABLE>
<CAPTION>
Nine months ended
September 30,
-------------------
1995 1994
------- -------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES........... $ 699.2 $ 639.4
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in short-term investments............... (10.5) ---
Additions to plant, property and equipment......... (470.4) (348.1)
Other, net......................................... 15.9 (3.4)
------- -------
Net cash used in investing activities............... (465.0) (351.5)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal repayments of capital lease obligations.. (.8) (.8)
Net change in note payable to affiliate............ 95.3 (2.7)
Dividends paid..................................... (313.1) (269.2)
Net change in outstanding checks drawn
on controlled disbursement accounts............... (15.6) (15.2)
------- -------
Net cash used in financing activities............... (234.2) (287.9)
------- -------
NET CHANGE IN CASH.................................. --- ---
CASH, BEGINNING OF PERIOD........................... --- ---
------- -------
CASH, END OF PERIOD................................ $ --- $ ---
======= =======
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying financial statements are unaudited and have been prepared
by Bell Atlantic - Pennsylvania, Inc. (the Company) pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC). The December 31,
1994 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, 1994.
Effective August 1, 1994, the Company discontinued accounting for its operations
in accordance with Statement of Financial Accounting Standards No. 71,
"Accounting for the Effects of Certain Types of Regulation."
2. Dividend
On November 1, 1995, the Company declared and paid a dividend in the amount
of $110.0 million to Bell Atlantic Corporation.
3. Reclassifications
Certain reclassifications of the prior year's data have been made to conform
to 1995 classifications.
5
<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 net income for the first nine months of 1995 of $326.8
million, compared to a loss of $461.3 million for the same period in 1994.
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."
Major items affecting the comparison of results for the nine month period
ended September 30, 1995, versus the nine month period ended September 30, 1994,
are discussed in the following sections.
OPERATING REVENUES
- ------------------
<TABLE>
<CAPTION>
For the Nine Months Ended September 30 1995 1994
- -------------------------------------------------------------------------------
(Dollars in Millions)
<S> <C> <C>
Transport Services
Local service............................... $ 917.7 $ 905.0
Network access.............................. 702.0 673.2
Toll service................................ 332.8 358.2
Ancillary Services
Directory publishing........................ 243.8 237.8
Other....................................... 115.9 114.7
Value-added Services......................... 248.9 224.4
-------- --------
Total........................................ $2,561.1 $2,513.3
======== ========
</TABLE>
TRANSPORT SERVICES OPERATING STATISTICS
- ---------------------------------------
<TABLE>
<CAPTION>
Percentage
Increase
1995 1994 (Decrease)
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
At September 30
- ---------------
Access Lines in Service (In thousands)
Residence................................... 3,797 3,740 1.5%
Business.................................... 1,924 1,823 5.5
Public...................................... 77 78 (1.3)
----- -----
5,798 5,641 2.8
===== =====
For the Nine Month Period Ended September 30
- --------------------------------------------
Access Minutes of Use (In millions)
Interstate.................................. 10,984 10,275 6.9
Intrastate.................................. 3,659 3,285 11.4
------ ------
14,643 13,560 8.0
====== ======
Toll Messages (In millions)
Intrastate................................. 600 617 (2.8)
Interstate................................. 27 27 -
------ ------
627 644 (2.6)
====== ======
</TABLE>
6
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
LOCAL SERVICE REVENUES
(Dollars in Millions) Increase
================================================================================
Nine Months $ 12.7 1.4%
================================================================================
Local service revenues are earned by the Company from the provision of local
exchange, local private line and public telephone services.
Local service revenues increased primarily due to 2.8% growth in the number of
access lines in service, and increased usage and data transport by business
customers. This growth was partially offset by the effect of the Company's
annual price adjustment filing under the Alternative Regulation Plan, effective
January 1, 1995, which reduced revenues for basic local exchange services by
approximately $2.6 million in 1995 (see Competitive and Regulatory
Environment - State Regulation).
NETWORK ACCESS REVENUES
(Dollars in Millions) Increase
================================================================================
Nine Months $ 28.8 4.3%
================================================================================
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
service 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 IXCs and end-users who have private networks, and end-user access revenues
are earned from local exchange carrier customers who pay for access to the
network.
Network access revenues increased principally due to higher customer demand
for access services as reflected by growth in access minutes of use and in
private networks, as well as growth in revenues from end-user charges
attributable to increasing access lines in service. Access minutes of use for
the nine months ended September 30, 1995 were higher than the corresponding
period of 1994 by 8.0%. Revenues in 1995 were also positively impacted by a
temporary rate increase that was in effect from March 17, 1995 through July 31,
1995 to recover prior years "exogenous" postemployment benefit costs.
Revenue growth from volume increases was partially offset by lower revenues
recognized through an interstate revenue sharing agreement with affiliated
companies and the effect of price reductions. Under the Federal Communications
Commission's (FCC) Price Cap Plan, price reductions on interstate access
services were in effect from July 1, 1994 through July 31, 1995.
In March 1995, the FCC adopted an order approving an Interim Price Cap Plan
for interstate access charges, which replaces the prior Price Cap Plan. As
required by the FCC's order, Bell Atlantic filed its Transmittal of Interstate
Rates, which resulted in price decreases for the Company totaling approximately
$83.1 million on an annual basis, effective August 1, 1995. These price
decreases include the scheduled expiration of a temporary rate increase of
approximately $26.7 million on an annualized basis that was in effect from March
17, 1995 through July 31, 1995 to recover prior years "exogenous" postemployment
benefit costs. Approximately 80% of the remaining $56.4 million reduction
results from compliance with the Interim Plan. The remaining 20% represents
reductions that the Company was required to make under the prior Price Cap Plan.
It is expected that these price decreases will be partially offset by volume
increases. Also as part of the filing, Bell Atlantic selected a 5.3%
Productivity Factor, which eliminates the requirement to share a portion of
interstate earnings related to the August 1995 to June 1996 tariff period. See
"Competitive and Regulatory Environment - Federal Regulation" for a further
discussion of FCC interstate access revenue issues.
TOLL SERVICE REVENUES
(Dollars in Millions) (Decrease)
================================================================================
Nine Months $(25.4) (7.1)%
================================================================================
Toll service revenues are earned from calls made outside a customer's local
calling area, but within the same service area boundaries of the Company,
commonly referred to as "LATAs." Other toll services include 800 services, Wide
Area Telephone Service (WATS) and corridor services (between southern New Jersey
and Philadelphia).
7
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
The decrease in toll service revenues was caused by a decline in toll message
volumes and price reductions on certain toll services. Toll message volumes for
the nine month period ended September 30, 1995 decreased 2.6% over the
comparable period last year. The decrease in toll messages was primarily due to
increased competition for intraLATA toll, WATS and corridor services. The
Company's annual price adjustment filing under the Alternative Regulation Plan,
effective January 1, 1995, reduced toll service revenues by approximately $1.8
million in the first nine months of 1995. See "Competitive and Regulatory
Environment - State Regulation" for a further discussion of toll service revenue
issues.
DIRECTORY PUBLISHING REVENUES
(Dollars in Millions) Increase
================================================================================
Nine Months $ 6.0 2.5%
================================================================================
Directory publishing revenues are earned primarily from local advertising and
marketing services provided to businesses in White and Yellow Pages directories.
Other directory publishing services include database and foreign directory
marketing.
Growth in directory publishing revenues was primarily due to higher rates
charged for these services. Changes in billing procedures and lower customer
claims and disconnects further boosted directory publishing revenues in 1995.
Advertising volumes decreased slightly due to the impact of competition from
other directory companies, as well as other advertising media.
OTHER ANCILLARY SERVICES REVENUES
(Dollars in Millions) Increase
================================================================================
Nine Months $ 1.2 1.0%
================================================================================
Other ancillary services include billing and collection services provided to
IXCs and facilities rental services provided to affiliates and non-affiliates.
Other ancillary services revenues increased due to higher facilities rental
revenues in 1995. This increase was substantially offset by a reduction in
billing and collection revenues as a result of revisions made in early 1995 to
the terms of a contract with an IXC. The revised contract no longer includes
certain billing and collection services.
VALUE-ADDED SERVICES REVENUES
(Dollars in Millions) Increase
================================================================================
Nine Months $ 24.5 10.9%
================================================================================
Value-added services represent a family of enhanced services including Call
Waiting, Return Call, Caller ID, Answer Call, and Voice Mail. These services
also include customer premises services such as inside wire installation and
maintenance and other central office services and features.
Continued growth in the network customer base (access lines) and higher demand
by residence customers for certain value-added central office and voice
messaging services offered by the Company, including the introduction of Caller
ID in the third quarter of 1994, increased value-added services revenues in
1995. These increases were partially offset by a reduction in contract billing
for certain advanced premises services for large business customers. Such
premises services, which were primarily performed by the Company until May 1994,
are now being contracted with another affiliate of Bell Atlantic.
8
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
<TABLE>
<CAPTION>
OPERATING EXPENSES
- ------------------
For the Nine Months Ended September 30 1995 1994
- --------------------------------------------------------------------------------
(Dollars in Millions)
<S> <C> <C>
Employee costs, including benefits and taxes...... $ 555.2 $ 604.4
Depreciation and amortization..................... 500.3 507.0
Other operating expenses.......................... 851.2 842.6
-------- --------
Total............................................. $1,906.7 $1,954.0
======== ========
</TABLE>
EMPLOYEE COSTS
(Dollars in Millions) (Decrease)
================================================================================
Nine Months $ (49.2) (8.1)%
================================================================================
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.
The decrease in employee costs was principally due to the effect of a third
quarter 1994 charge of $37.1 million to recognize benefit costs for the
separation of employees who are entitled to benefits under preexisting Bell
Atlantic separation pay plans. Reduced overtime pay and the effect of lower
workforce levels in 1995 also contributed to the decrease in employee costs.
These cost reductions were partially offset by annual salary and wage increases
and the recognition of certain contract labor and separation pay costs
associated with a new five-year labor contract with the International
Brotherhood of Electrical Workers (IBEW).
In June 1995, the Company ratified a contract with the IBEW, representing
approximately 1,700 employees. The IBEW contract, which was effective May 21,
1995, provided for a 14.5% wage increase over the five-year contract period; a
ratification bonus; improved benefits and pensions; and certain employment
security provisions.
The Company's contract with the Communications Workers of America (CWA)
expired on August 5, 1995. As of November 6, 1995, the Company and the CWA have
not reached a settlement on a new contract and the Company continues to make
work available to employees represented by the CWA at the same wages and
benefits as under the expired contract until further notice.
DEPRECIATION AND AMORTIZATION
(Dollars in Millions) (Decrease)
================================================================================
Nine Months $ (6.7) (1.3)%
================================================================================
Depreciation and amortization decreased due to lower depreciation rates. This
decrease was partially offset by growth in depreciable telephone plant. The
composite depreciation rate was 7.4% for the first nine months of 1995. The
Company expects this composite depreciation rate to remain substantially
unchanged for the remainder of 1995.
OTHER OPERATING EXPENSES
(Dollars in Millions) Increase
================================================================================
Nine Months $ 8.6 1.0%
================================================================================
Other operating expenses consist primarily of contracted services including
centralized services expenses allocated from NSI, rent, network software costs,
operating taxes other than income, provision for uncollectible accounts
receivable, and other costs.
9
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
The increase in other operating expenses was largely attributable to
higher centralized services costs allocated from NSI, primarily as a result of
increased advertising costs, as well as additional costs incurred in that
organization to enhance systems and consolidate work activities at Bell
Atlantic's network services subsidiaries. This increase was partially offset by
lower costs for contracted services and directory production.
OTHER INCOME (EXPENSE), NET
(Dollars in Millions) Increase
================================================================================
Nine Months $ 1.7
================================================================================
The change in other income (expense), net, was attributable to an increase in
interest income related to short-term investments and to a favorable settlement
of federal income tax matters associated with prior years. Lower non-operating
costs in 1995 also contributed to the change in other income (expense), net.
These increases were partially offset by the termination of income related to
the allowance for funds used during construction.
Upon the discontinued application of regulatory accounting principles,
effective August 1, 1994, the Company began recognizing capitalized interest
costs as a reduction of interest expense. Previously, the Company recorded an
allowance for funds used during construction as an item of other income.
INTEREST EXPENSE
(Dollars in Millions) (Decrease)
================================================================================
Nine Months $ (4.7) (4.9)%
================================================================================
Interest expense decreased principally due to the recognition of capitalized
interest costs, subsequent to the discontinued application of regulatory
accounting principles, effective August 1, 1994.
PROVISION FOR INCOME TAXES
(Dollars in Millions) Increase
================================================================================
Nine Months $ 41.9 21.7%
================================================================================
EFFECTIVE INCOME TAX RATES
For the Nine Months Ended September 30
================================================================================
1995 41.9%
================================================================================
1994 42.0%
================================================================================
The Company's effective income tax rate was lower in 1995 due to the effect of
a reduction in the state income tax rate. This effect was substantially offset
by the reduction in amortization of investment tax credits and the elimination
of the benefit of the rate differential applied to reversing timing differences,
both as a result of the discontinued application of regulatory accounting
principles in August 1994.
COMPETITIVE AND REGULATORY 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 being driven by a number of factors, including the
accelerated pace of technological innovation, the convergence of the
telecommunications, cable television, information services and entertainment
businesses, and a regulatory environment in which traditional barriers to entry
are being lowered or eliminated and competition permitted or encouraged.
10
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
The Company's telecommunications business is subject to competition from
numerous sources. An increasing amount of this competition is from companies
that have substantial capital, technological and marketing resources, many of
which do not face the same regulatory constraints as the Company.
Several large competitors have requested authority from the Pennsylvania
Public Utility Commission (PUC) to provide local exchange service in areas
served by the Company. Applications from MFS - Intelenet, MCI Metro ATS, TCG
Pittsburgh, and Eastern TeleLogic Corporation were approved on September 27,
1995. In its Final Order, the Commission established interim terms and
conditions for interconnection and ordered the Company to negotiate an interim
local interconnection rate with each of the four authorized co-carriers.
Permanent unbundling and technical interconnection issues will be established in
a newly instituted Phase II Proceeding, and permanent interconnection rates are
to be established as part of the ongoing Universal Service Investigation. Both
of these proceedings are scheduled to be completed in the second quarter of
1996.
The entry of well-financed competitors has the potential to adversely affect
multiple revenue streams of the Company, including toll, local exchange and
network access services in the markets and geographical areas in which the
competitors operate. The amount of revenue reductions will depend, in part, on
the competitors' success in marketing these services and the conditions
established by regulatory authorities. 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 respond to competitive challenges by intensely
focusing on meeting customer requirements and cost controls through efficiency
and productivity initiatives.
Federal Regulation
On August 4, 1995, the U.S. House of Representatives passed a bill which
includes provisions that would open local exchange markets to competitors and
would permit local exchange carriers, such as the Company, to provide video
programming, as well as to provide interLATA services and engage in
manufacturing, upon meeting certain conditions. The Senate passed a similar
bill in June of 1995. The Company is cautiously optimistic that a conference
committee will reconcile the two bills, and Congress will pass comprehensive
telecommunications legislation by the end of 1995. However, no definitive
prediction can be made as to whether or when such legislation will be enacted,
the provisions thereof, or the impact on the business or financial condition of
the Company.
In February 1995, the FCC issued an Order to Show Cause with respect to
certain findings contained in an independent audit of Bell Atlantic's network
services subsidiaries' 1988 and first quarter 1989 reported adjustments to the
National Exchange Carrier Association (NECA) interstate common line pool. On May
2, 1995, Bell Atlantic filed its response to the Show Cause Order, asserting
that there is no legal basis for the FCC to institute enforcement proceedings
with respect to these findings. The FCC solicited comments on Bell Atlantic's
filing, and only one party filed comments challenging Bell Atlantic's response.
On September 11, 1995, Bell Atlantic filed a reply to these comments,
reasserting its position that no proceedings are warranted. Resolution of this
matter is expected late in 1995.
FCC Interim Price Cap Order
On March 30, 1995, the FCC adopted its Report and Order approving an Interim
Price Cap Plan for interstate access charges. The Interim Plan, which was
effective August 1, 1995, replaces the Price Cap Plan that the FCC adopted in
1990.
Under the Interim Plan, the Company's Price Cap Index must be adjusted by an
inflation index (GDP-PI), less a fixed percentage, either 4.0%, 4.7%, or 5.3%,
which is intended to reflect increases in productivity (Productivity Factor).
Companies selecting the 4.0% or 4.7% Productivity Factor are required to reduce
future prices and share a portion of their interstate return in excess of
12.25%. Companies selecting the 5.3% Productivity Factor are also required to
reduce prices but are not required to share a portion of their future interstate
earnings. The Interim Plan also provides for a reduction in the Price Cap Index
of 2.8% to adjust for what the FCC believes was an underestimate in its
calculation of the Productivity Factor in prior years. The Interim Plan also
eliminates the recovery of certain "exogenous" cost changes, including changes
in accounting costs that the FCC believes have no economic consequences.
On May 9, 1995, Bell Atlantic filed its Transmittal of Interstate Rates as
required by the March 30, 1995 Order. In the filing, Bell Atlantic selected
the 5.3% Productivity Factor for the August 1995 to June 1996 tariff period.
The rates included in the May 9, 1995 filing resulted in price decreases for the
Company totaling approximately $83.1 million on an annual basis. These price
decreases include the scheduled expiration of a temporary rate increase of
approximately $26.7 million on an
11
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
annualized basis that was in effect from March 17, 1995 through July 31, 1995 to
recover prior years "exogenous" postemployment benefit costs. Approximately 80%
of the remaining $56.4 million reduction results from compliance with the
Interim Plan. The remaining 20% represents reductions that the Company was
required to make under the prior Price Cap Plan. It is expected that these price
decreases will be partially offset by volume increases.
Bell Atlantic appealed the Interim Price Cap Plan Order to the U.S. Court of
Appeals for the D.C. Circuit, and that case is currently pending.
State Regulation
The communications services of the Company are subject to regulation by the
PUC with respect to intrastate rates and other matters.
The Company received approval in June of 1994 to implement an Alternative
Regulation Plan, which replaces rate base rate of return regulation and allows
the Company to operate under a pure price cap plan with no sharing provisions.
In July 1994, several parties filed appeals in the Pennsylvania Commonwealth
Court regarding the PUC's June 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.
On November 1, 1994, the Company made the first annual price adjustment filing
based on the prescribed formula. Revenues for intrastate non-competitive
services were decreased by $5.9 million annually, beginning January 1, 1995.
Residential and business basic exchange services received a prorated share of
this reduction equal to $3.5 million and intrastate toll service received a
share equal to $2.4 million. On November 1, 1995, the Company made its second
annual price adjustment filing. Based on the prescribed formula, revenues will
decrease $1.0 million annually. The Company proposed decreases in intrastate
residence and business touch-tone rates and residential toll rates, beginning
January 1, 1996.
On September 29, 1995, the PUC approved, subject to the outcome of a Formal
Complaint Investigation, a revenue neutral rate change which involved Residence
Toll rate decreases, various Public & Operator Services rate increases, and the
introduction of a residence Automatic Savings toll plan. These tariff rate
changes became effective October 9, 1995, and are expected to reduce residence
toll revenues by approximately $19.5 million annually, primarily due to the
Automatic Savings toll plan offering of a 20% discount for customers who
generate $20.00 per month in qualifying Bell Atlantic toll charges. In addition
to the Automatic Savings toll plan discounts, certain residence toll rates were
also decreased. These residence toll decreases were entirely offset by rate
increases for Public & Operator Services, which include such services as:
residence and business directory assistance calls, busy line verification,
customer requested call interruption, and certain public telephone use charges.
The PUC's Formal Complaint Investigation is expected to be concluded by May
1996.
On September 29, 1995, the PUC approved a settlement between the Company and
other parties that designated High Capacity Services (HICAP) as competitive,
effective October 13, 1995. HICAP services are designed to satisfy customer
requirements for highly reliable, efficient, and flexible data communications
capabilities. As a result, HICAP services have been removed from price and
earnings regulation.
The PUC is currently conducting a proceeding to examine issues regarding
intraLATA toll competition, including whether to authorize presubscription, and
if so, under what terms and conditions. Currently, intraLATA toll calls are
completed by the Company unless the customer dials a five-digit access code to
use an alternate carrier. Presubscription would enable customers to make
intraLATA toll calls using the carrier of their choice without having to dial a
five-digit access code. The Company's ability to offset such competition will
depend, in part, upon the terms and conditions under which presubscription for
intraLATA toll services may be authorized. Implementation of presubscription
for intraLATA toll services without the ability to offer interLATA services
could have a material negative impact on toll service revenues. The PUC's final
order is expected by the end of 1995.
12
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
OTHER MATTERS
- -------------
Environmental Issues
The Company is subject to a number of environmental proceedings as a result of
its operations and the shared liability provisions in the Plan of Reorganization
related to the MFJ. Certain of these environmental matters relate to Superfund
sites for which the Company has been designated as a potentially responsible
party by the U.S. Environmental Protection Agency or joined as a third-party
defendant in pending Superfund litigation. Such designation or joinder subjects
the Company to potential liability for costs relating to cleanup of the affected
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 liabilities reflect 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 additional potential liability would not have a material
effect on the Company's results of operations or financial condition.
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. Additional long-term debt may be needed to fund
development activities and to maintain the Company's capital structure within
management's guidelines.
As of September 30, 1995, the Company had $291.2 million of an unused line of
credit with an affiliate, Bell Atlantic Network Funding Corporation. In
addition, the Company had $300.0 million remaining under a shelf registration
statement filed with the Securities and Exchange Commission.
The Company's debt ratio was 55.9% at September 30, 1995, compared to 54.8% at
December 31, 1994.
13
<PAGE>
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, 1994.
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, 1995.
14
<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 9, 1995 By /s/ Robert J. McGonagle
--------------------------------
Robert J. McGonagle
Chief Financial Officer,
Controller and Treasurer
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF NOVEMBER 6, 1995.
15
<TABLE> <S> <C>
<PAGE>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND THE
BALANCE SHEET AS OF SEPTEMBER 30, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
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