<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, 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 Six months ended
June 30, June 30,
------------------- -------------------
1995 1994 1995 1994
------- ------ -------- --------
<S> <C> <C> <C> <C>
OPERATING REVENUES (including $19.8, $19.5,
$39.9 and $37.3 from affiliates)............... $ 861.1 $833.3 $1,703.3 $1,670.2
------- ------ -------- --------
OPERATING EXPENSES
Employee costs, including benefits and taxes... 182.5 181.8 365.9 370.0
Depreciation and amortization.................. 167.2 169.7 332.4 337.5
Other (including $165.9, $160.0, $324.5
and $311.1 to affiliates)..................... 292.0 285.4 568.3 559.8
------- ------ -------- --------
641.7 636.9 1,266.6 1,267.3
------- ------ -------- --------
OPERATING INCOME................................ 219.4 196.4 436.7 402.9
OTHER INCOME (EXPENSE), NET
Allowance for funds used during construction... --- .7 --- 1.5
Other, net..................................... 1.5 (2.5) .9 (3.6)
------- ------ -------- --------
1.5 (1.8) .9 (2.1)
INTEREST EXPENSE (including $2.0, $1.4, $2.6,
and $2.1 to affiliate)......................... 32.2 32.3 61.2 64.0
------- ------ -------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES........ 188.7 162.3 376.4 336.8
PROVISION FOR INCOME TAXES...................... 80.6 67.6 159.1 140.6
------- ------ -------- --------
NET INCOME...................................... $ 108.1 $ 94.7 $ 217.3 $ 196.2
======= ====== ======== ========
REINVESTED EARNINGS (ACCUMULATED DEFICIT)
At beginning of period......................... $(194.5) $546.4 $ (210.6) $ 521.2
Add: net income............................... 108.1 94.7 217.3 196.2
------- ------ -------- --------
(86.4) 641.1 6.7 717.4
Deduct: dividends............................. 110.0 100.0 203.1 176.3
------- ------ -------- --------
At end of period............................... $(196.4) $541.1 $ (196.4) $ 541.1
======= ====== ======== ========
</TABLE>
See Notes to Financial Statements.
1
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
BALANCE SHEETS
(Unaudited)
(Dollars in Millions)
ASSETS
------
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
-------- ------------
<S> <C> <C>
CURRENT ASSETS
Short-term investments........................ $ 25.2 $ ---
Accounts receivable:
Customers and agents, net of allowances for
uncollectibles of $51.9 and $51.9.......... 489.3 505.8
Affiliates................................... 23.3 22.1
Other........................................ 19.2 21.7
Material and supplies......................... 19.3 19.9
Prepaid expenses.............................. 167.9 121.3
Deferred income taxes......................... 68.6 54.1
Other......................................... 1.9 3.6
-------- --------
814.7 748.5
-------- --------
PLANT, PROPERTY AND EQUIPMENT.................. 9,230.2 8,979.3
Less accumulated depreciation................. 4,990.0 4,744.6
-------- --------
4,240.2 4,234.7
-------- --------
OTHER ASSETS................................... 43.6 81.5
-------- --------
TOTAL ASSETS................................... $5,098.5 $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>
June 30, December 31,
1995 1994
---------- ------------
<S> <C> <C>
CURRENT LIABILITIES
Debt maturing within one year:
Note payable to affiliate................... $ 153.8 $ 12.1
Other....................................... 36.1 1.1
Accounts payable:
Affiliates.................................. 244.9 248.6
Other....................................... 226.3 319.8
Accrued expenses:
Taxes....................................... 11.0 46.4
Other....................................... 166.4 156.7
Advance billings and customer deposits....... 86.9 102.2
-------- --------
925.4 886.9
-------- --------
LONG-TERM DEBT................................ 1,631.8 1,667.4
-------- --------
EMPLOYEE BENEFIT OBLIGATIONS.................. 828.0 808.3
-------- --------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes........................ 130.2 132.7
Unamortized investment tax credits........... 47.7 51.9
Other........................................ 136.4 132.7
-------- --------
314.3 317.3
-------- --------
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.......................... (196.4) (210.6)
-------- --------
1,399.0 1,384.8
-------- --------
TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT.. $5,098.5 $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>
Six months ended
June 30,
------------------
1995 1994
------ ------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES........... $ 441.8 $ 360.6
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in short-term investments............... (25.2) ---
Additions to plant, property and equipment......... (344.5) (209.3)
Other, net......................................... 3.4 (8.5)
------- ------
Net cash used in investing activities............... (366.3) (217.8)
------- ------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal repayments of capital lease obligations.. (.5) (.4)
Net change in note payable to affiliate............ 141.7 37.5
Dividends paid..................................... (203.1) (176.3)
Net change in outstanding checks drawn
on controlled disbursement accounts............... (13.6) (3.6)
------- ------
Net cash used in financing activities............... (75.5) (142.8)
------- ------
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 August 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 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 six months of 1995 of $217.3
million, compared to net income of $196.2 million for the same period in 1994.
Major items affecting the comparison of results for the six month period
ended June 30, 1995, versus the six month period ended June 30, 1994, are
discussed in the following sections.
OPERATING REVENUES
- ------------------
<TABLE>
<CAPTION>
For the Six Months Ended June 30 1995 1994
- --------------------------------------------------------------------------------
(Dollars in Millions)
<S> <C> <C>
Transport Services
Local service.......................... $ 609.3 $ 602.5
Network access......................... 467.6 440.7
Toll service........................... 223.4 245.9
Ancillary Services
Directory advertising.................. 162.4 158.5
Other.................................. 77.8 73.8
Value-added Services..................... 162.8 148.8
-------- --------
Total.................................... $1,703.3 $1,670.2
======== ========
</TABLE>
TRANSPORT SERVICES OPERATING STATISTICS
- -----------------------------------------
<TABLE>
<CAPTION>
Percentage
Increase
1995 1994 (Decrease)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
At June 30
- ----------
Access Lines in Service (In thousands)
Residence............................. 3,771 3,725 1.2%
Business.............................. 1,884 1,799 4.7
Public................................ 77 78 (1.3)
----- -----
5,732 5,602 2.3
===== =====
For the Six Month Period Ended June 30
- --------------------------------------
Access Minutes of Use (In millions)
Interstate............................ 7,279 6,726 8.2
Intrastate............................ 2,403 2,155 11.5
----- -----
9,682 8,881 9.0
===== =====
Toll Messages (In millions)
Intrastate............................ 398 416 (4.3)
Interstate............................ 18 18 -
----- -----
416 434 (4.1)
===== =====
</TABLE>
6
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
LOCAL SERVICE REVENUES
(Dollars in Millions) Increase
- -------------------------------------------------------------------------------
Six Months $ 6.8 1.1%
- -------------------------------------------------------------------------------
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 a 2.3% 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 exchange services by
approximately $1.7 million in the first half of 1995. (See Competitive and
Regulatory Environment - State Regulation section.)
NETWORK ACCESS REVENUES
(Dollars in Millions) Increase
- -------------------------------------------------------------------------------
Six Months $ 26.9 6.1%
- -------------------------------------------------------------------------------
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 a 9.0% growth in access minutes of use, as
well as growth in revenues from end-user charges attributable to increasing
access lines in service. Increased demand for digital data transport services
also contributed to growth in access revenues. Revenues in the first half of
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 was partially offset by price reductions in effect from
July 1, 1994 to July 31, 1995 and lower revenues recognized through an
interstate revenue sharing agreement with affiliated companies. Further,
reported growth in access minutes of use and revenues in the first half of 1995
was negatively impacted by higher storm-related calling volumes experienced in
the first quarter of 1994.
Effective August 1, 1995, the Company implemented price decreases of
approximately $83.1 million on an annual basis, principally for interstate
access services, in connection with the Federal Communications Commission's
(FCC) Interim Price Cap Order. 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. As a result of
the selection of a 5.3% Productivity Factor under the Interim Plan, the Company
is no longer required to share a portion of its interstate earnings. See
"Competitive and Regulatory Environment - Federal Regulation" for a further
discussion of FCC interstate access revenue issues.
7
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
TOLL SERVICE REVENUES
(Dollars in Millions) (Decrease)
- -------------------------------------------------------------------------------
Six Months $ (22.5) (9.2)%
- -------------------------------------------------------------------------------
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).
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 six month period ended June 30, 1995 decreased 4.1% over the
comparable period last year. The decrease in toll messages was due primarily to
increased competition for intraLATA toll, WATS and corridor services. The effect
of storm-related usage experienced in the first quarter of 1994 further impacted
volume growth. The Company's annual price adjustment filing under the
Alternative Regulation Plan, effective January 1, 1995, reduced toll service
revenues by approximately $1.2 million in the first half of 1995. The Company
expects the effect of competition will have less of a negative impact on toll
service revenues for the remainder of 1995, relative to 1994 levels. (See
Competitive and Regulatory Environment--State Regulation section.)
DIRECTORY ADVERTISING REVENUES
(Dollars in Millions) Increase
- -------------------------------------------------------------------------------
Six Months $ 3.9 2.5%
- -------------------------------------------------------------------------------
Directory advertising revenues are earned primarily from local advertising
and marketing services provided to businesses in White and Yellow Pages
directories. Other directory advertising services include database and foreign
directory marketing.
Growth in directory advertising revenues was due primarily to higher rates
charged for these services. Changes in billing procedures and lower customer
claims and disconnects further boosted directory services revenues in the first
half of 1995. Volume growth continues to be impacted by competition from other
directory companies, as well as other advertising media.
OTHER ANCILLARY SERVICES REVENUES
(Dollars in Millions) Increase
- -------------------------------------------------------------------------------
Six Months $ 4.0 5.4%
- -------------------------------------------------------------------------------
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. This increase was offset, in part, by a reduction in billing and
collection revenues as a result of a revised contract with an IXC, which no
longer includes certain billing and collection services.
VALUE-ADDED SERVICES REVENUES
(Dollars in Millions) Increase
- -------------------------------------------------------------------------------
Six Months $ 14.0 9.4%
- -------------------------------------------------------------------------------
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 the
first half of 1995.
8
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
OPERATING EXPENSES
- ------------------
<TABLE>
<CAPTION>
For the Six Months Ended June 30 1995 1994
- -----------------------------------------------------------------------------
(Dollars in Millions)
<S> <C> <C>
Employee costs, including benefits and taxes.. $ 365.9 $ 370.0
Depreciation and amortization................. 332.4 337.5
Other operating expenses...................... 568.3 559.8
-------- --------
Total......................................... $1,266.6 $1,267.3
======== ========
</TABLE>
EMPLOYEE COSTS
(Dollars in Millions) (Decrease)
- -------------------------------------------------------------------------------
Six Months $ (4.1) (1.1)%
- -------------------------------------------------------------------------------
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 reduced overtime pay
and repair and maintenance activity, both of which were higher in the first
quarter of 1994 as a result of unusually severe weather conditions. The effect
of lower workforce levels also contributed to the overall decrease in employee
costs. These reductions were partially offset by annual salary and wage
increases for management and associate employees, effective April 1995 and
August 1994, respectively, and the recognition of certain contract costs
associated with the ratification of a new five-year labor contract with one of
the Company's two unions.
In June 1995, the Company ratified a new labor contract with the
International Brotherhood of Electrical Workers (IBEW), representing
approximately 1,700 associate employees. The IBEW labor contract, which was
effective May 21, 1995, provides 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 contract with the Company's other union, the Communications Workers of
America (CWA), expired on August 5, 1995. As of August 7, 1995, the CWA has not
called a strike and the Company continues to make work available to associate
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)
- -------------------------------------------------------------------------------
Six Months $ (5.1) (1.5)%
- -------------------------------------------------------------------------------
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 half 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
- -------------------------------------------------------------------------------
Six Months $ 8.5 1.5%
- -------------------------------------------------------------------------------
Other operating expenses consist primarily of contracted services including
centralized service expenses allocated from NSI, rent, network software costs,
operating taxes other than income, provision for uncollectible accounts
receivable, and other costs.
The increase in other operating expenses was largely attributable to
higher centralized services costs allocated from NSI, primarily as a result of
increased advertising and employee costs, as well as additional costs incurred
in that organization to
9
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
enhance systems and consolidate work activities at Bell Atlantic's network
services subsidiaries. An increase in the provision for uncollectible accounts
receivable also contributed to higher other operating expenses in the first half
of 1995. These increases were partially offset by lower network software costs
due to the timing of purchases, lower directory production costs, and decreased
capital stock taxes.
OTHER INCOME (EXPENSE), NET
(Dollars in Millions) Increase
- -------------------------------------------------------------------------------
Six Months $ 3.0
- -------------------------------------------------------------------------------
The change in other income (expense), net, was attributable to an increase
in interest income related to short-term investments and related to a favorable
settlement of federal income tax matters associated with prior years. Lower non-
operating costs in the first half of 1995 also contributed to the change in
other income (expense), net. These increases were partially offset by a
reduction in 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)
- -------------------------------------------------------------------------------
Six Months $ (2.8) (4.4)%
- -------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------
Six Months $ 18.5 13.2%
- -------------------------------------------------------------------------------
EFFECTIVE INCOME TAX RATES
For the Six Months Ended June 30
- -------------------------------------------------------------------------------
1995 42.3%
- -------------------------------------------------------------------------------
1994 41.8%
- -------------------------------------------------------------------------------
The Company's effective income tax rate was higher for the first half of
1995 due to the restatement of the deferred tax liability as a result of a
change in the state income tax rate. 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, also contributed
to the higher effective income tax rate.
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 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 are currently pending from MFS - Intelenet,
MCI Metro ATS, TCG Pittsburgh, and Eastern TeleLogic Corporation. Evidentiary
hearings on the MFS - Intelenet application were held in February 1995. The
Initial Decision of the Administrative Law Judge was issued June 6, 1995.
Exceptions and Reply Exceptions to this decision were filed by the parties in
July. The Final PUC Order is expected in the third quarter of 1995. Decisions
on the other applications are also expected in the third quarter of 1995.
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 by reducing its cost structure
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 interLATA
services and engage in manufacturing upon meeting certain conditions. The
Senate passed a similar bill in June of 1995. A conference committee is
expected to work through the differences between the two bills in September and
October of 1995. 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. Resolution of this matter is expected later in
1995.
FCC Interim Price Cap Orders
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. 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 March 30, 1995, the FCC also adopted an Order relating to the Price Cap
Plan requiring local exchange carriers to include in their calculation of
interstate earnings an adjustment to add back to revenues the amounts that were
required to be shared with ratepayers in the prior year. This adjustment, which
is effective for determination of sharing relating to earnings for 1994 and
subsequent years, increased 1994 calculated interstate returns for the purpose
of determining sharing amounts that were reflected in rate reductions that
became effective August 1, 1995.
11
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
On May 9, 1995, Bell Atlantic filed its Transmittal of Interstate Rates as
required by the March 30, 1995 Orders. 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 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 Orders to the Court of Appeals for the D.C.
Circuit and petitioned the Court for a stay of certain aspects of the Orders
pending the results of the appeals. On July 31, 1995, the Court of Appeals
denied the Company's request for a stay.
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.
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 default
to 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. The PUC final Order is expected by year end.
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 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 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 additional potential liability would not have a material
effect on the Company's results of operations or financial condition.
12
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
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 June 30, 1995, the Company had $244.8 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 56.6% at June 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 June 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: August 10, 1995 By /s/ Robert J. McGonagle
------------------------------
Robert J. McGonagle
Chief Financial Officer,
Controller and Treasurer
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF AUGUST 7, 1995.
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Statement of Operations for the six months ended June 30, 1995 and the Balance
Sheet as of June 30, 1995 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
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<COMMON> 1,595
0
0
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