<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, 1999
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
1717 Arch Street, 32nd Fl., Philadelphia, Pennsylvania 19103
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
CONDENSED STATEMENTS OF INCOME
(Unaudited)
(Dollars in Millions)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------
1999 1998 1999 1998
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING REVENUES (including $20.6,
$22.7, $60.3 and $54.8 from affiliates) $890.4 $869.7 $2,639.8 $2,568.2
----------------------------------------
OPERATING EXPENSES
Employee costs, including benefits and taxes 163.0 145.6 466.8 457.3
Depreciation and amortization 187.8 179.7 553.9 525.7
Other (including $145.8, $192.4,
$473.1 and $549.2 to affiliates) 295.9 333.7 902.7 958.0
----------------------------------------
646.7 659.0 1,923.4 1,941.0
----------------------------------------
OPERATING INCOME 243.7 210.7 716.4 627.2
OTHER INCOME, NET (including $.1, $0,
$.2 and $0 from affiliates) .3 .9 2.0 3.5
INTEREST EXPENSE (including $6.6,
$7.6, $17.5 and $19.5 to affiliate) 31.2 31.4 91.6 92.1
----------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 212.8 180.2 626.8 538.6
PROVISION FOR INCOME TAXES 88.1 74.9 257.9 224.2
----------------------------------------
NET INCOME $124.7 $105.3 $ 368.9 $ 314.4
========================================
</TABLE>
See Notes to Condensed Financial Statements.
1
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
CONDENSED BALANCE SHEETS
(Unaudited)
(Dollars in Millions)
ASSETS
------
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Short-term investments $ --- $ 56.1
Accounts receivable:
Trade and other, net of allowances for
uncollectibles of $72.3 and $63.0 653.9 637.7
Affiliates 22.9 14.5
Material and supplies 21.5 21.7
Prepaid expenses 37.5 22.6
Deferred income taxes 78.9 61.5
Other 7.3 5.2
-------------------------------
822.0 819.3
-------------------------------
PLANT, PROPERTY AND EQUIPMENT 10,948.7 10,447.7
Less accumulated depreciation 6,554.8 6,222.8
-------------------------------
4,393.9 4,224.9
-------------------------------
OTHER ASSETS 96.8 52.0
-------------------------------
TOTAL ASSETS $ 5,312.7 $ 5,096.2
===============================
</TABLE>
See Notes to Condensed Financial Statements.
2
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
CONDENSED BALANCE SHEETS
(Unaudited)
(Dollars in Millions, Except Per Share Amount)
LIABILITIES AND SHAREOWNER'S INVESTMENT
---------------------------------------
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Debt maturing within one year:
Note payable to affiliate $ 485.1 $ 493.6
Other 1.6 1.2
Accounts payable and accrued liabilities:
Affiliates 253.3 320.7
Other 567.9 507.3
Advance billings and customer deposits 95.6 86.6
------------------------------
1,403.5 1,409.4
------------------------------
LONG-TERM DEBT 1,428.9 1,429.9
------------------------------
EMPLOYEE BENEFIT OBLIGATIONS 604.0 685.3
------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 174.9 88.7
Unamortized investment tax credits 26.8 28.8
Other 109.2 112.1
------------------------------
310.9 229.6
------------------------------
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
Accumulated deficit (29.5) (252.9)
Accumulated other comprehensive loss (.5) (.5)
------------------------------
1,565.4 1,342.0
------------------------------
TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT $5,312.7 $5,096.2
===============================
</TABLE>
See Notes to Condensed Financial Statements.
3
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Millions)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------------------
1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 806.3 $ 672.2
--------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in short-term investments 56.1 49.1
Additions to plant, property and equipment (714.6) (750.8)
Other, net 11.8 7.1
--------------------------------------
Net cash used in investing activities (646.7) (694.6)
--------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal repayments of capital lease obligations (1.0) (1.0)
Net change in note payable to affiliate (8.5) 260.3
Dividends paid (145.8) (228.1)
Net change in outstanding checks drawn
on controlled disbursement accounts (4.3) (8.8)
--------------------------------------
Net cash (used in)/provided by financing activities (159.6) 22.4
--------------------------------------
NET CHANGE IN CASH --- ---
CASH, BEGINNING OF PERIOD --- ---
--------------------------------------
CASH, END OF PERIOD $ --- $ ---
======================================
</TABLE>
See Notes to Condensed Financial Statements.
4
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
Bell Atlantic - Pennsylvania, Inc. is a wholly owned subsidiary of Bell
Atlantic Corporation (Bell Atlantic). The accompanying unaudited condensed
financial statements have been prepared based upon Securities and Exchange
Commission rules that permit reduced disclosure for interim periods. These
financial statements reflect all adjustments that are necessary for a fair
presentation of results of operations and financial position for the interim
periods shown including normal recurring accruals. The results for the interim
periods are not necessarily indicative of results for the full year. For a more
complete discussion of significant accounting policies and certain other
information, you should refer to the financial statements included in our Annual
Report on Form 10-K for the year ended December 31, 1998.
We have reclassified certain amounts from the prior year's data to conform
to the 1999 presentation.
2. Dividend
On November 1, 1999, we declared and paid a dividend in the amount of $72.9
million to Bell Atlantic.
3. New Accounting Standards
Costs of Computer Software
Effective January 1, 1999, we adopted Statement of Position (SOP) No. 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." Under SOP No. 98-1, we capitalize the cost of internal-use
software which has a useful life in excess of one year. Subsequent additions,
modifications or upgrades to internal-use software are capitalized only to the
extent that they allow the software to perform a task it previously did not
perform. Software maintenance and training costs are expensed in the period in
which they are incurred. Also, we capitalize interest associated with the
development of internal-use software. The effect of adopting SOP No. 98-1 for
Bell Atlantic was an increase in net income of approximately $175 million for
the nine months ended September 30, 1999.
Costs of Start-Up Activities
Effective January 1, 1999, we adopted SOP No. 98-5, "Reporting on the Costs
of Start-up Activities." Under this accounting standard, we expense costs of
start-up activities as incurred, including pre-operating, pre-opening and other
organizational costs. The adoption of SOP No. 98-5 did not have a material
effect on our results of operations or financial condition because we have not
historically capitalized start-up activities.
Derivatives and Hedging Activities
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement requires that all
derivatives be measured at fair value and recognized as either assets or
liabilities on our balance sheet. Changes in the fair values of derivative
instruments will be recognized in either earnings or comprehensive income,
depending on the designated use and effectiveness of the instruments. The FASB
amended this pronouncement in June 1999 to defer the effective date of SFAS No.
133 for one year.
Under the amended pronouncement, we must adopt SFAS No. 133 no later than
January 1, 2001. We are currently evaluating the provisions of SFAS No. 133. The
impact of adoption will be determined by several factors, including the specific
hedging instruments in place and their relationships to hedged items, as well as
market conditions at the date of adoption. We have not estimated the effect of
adoption as we believe that such a determination will not be meaningful until
closer to the adoption date.
5
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
4. Shareowner's Investment
<TABLE>
<CAPTION>
Accumulated
Other
Common Contributed Accumulated Comprehensive
(Dollars in Millions) Stock Capital Deficit Loss
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1998 $1,594.7 $.7 $(252.9) $(.5)
Net income 368.9
Dividends paid to Bell Atlantic (145.8)
Other .3
----------------------------------------------------
Balance at September 30, 1999 $1,594.7 $.7 $ (29.5) $(.5)
====================================================
</TABLE>
Net income and comprehensive income were the same for the nine months ended
September 30, 1999 and 1998.
5. Litigation and Other Contingencies
Various legal actions and regulatory proceedings are pending to which we
are a party. We have established reserves for specific liabilities in connection
with regulatory and legal matters that we currently deem to be probable and
estimable. We do not expect that the ultimate resolution of pending regulatory
and legal matters in future periods will have a material effect on our financial
condition, but it could have a material effect on our results of operations.
6. Proposed Bell Atlantic - GTE Merger
Bell Atlantic and GTE Corporation (GTE) have announced a proposed merger of
equals under a definitive merger agreement dated as of July 27, 1998. Under the
terms of the agreement, GTE shareholders will receive 1.22 shares of Bell
Atlantic common stock for each share of GTE common stock that they own. Bell
Atlantic shareholders will continue to own their existing shares after the
merger.
It is expected that the merger will qualify as a pooling of interests,
which means that for accounting and financial reporting purposes the companies
will be treated as if they had always been combined. At annual meetings held in
May 1999, the shareholders of each company approved the merger. The completion
of the merger is subject to a number of conditions, including certain regulatory
approvals and receipt of opinions that the merger will be tax-free.
Bell Atlantic and GTE are working diligently to complete the merger and are
targeting completion of the merger around the end of the first quarter of 2000.
However, the companies must obtain the approval of a variety of state and
federal regulatory agencies and, given the inherent uncertainties of the
regulatory process, the closing of the merger may be delayed.
7. State Regulatory Matter
On September 30, 1999, the Pennsylvania Public Utility Commission (PUC)
issued a final decision in its "Global" proceeding on telecommunications
competition matters. The decision proposes to require us to split into separate
retail and wholesale corporations. It proposes reductions in access charges
applicable to services provided to interexchange carriers and in both unbundled
network element rates and wholesale rates applicable to services and facilities
provided to competitive local exchange carriers. It requires us to provide
combinations of unbundled network elements beyond those required by the FCC. It
reclassifies certain business services as "competitive," but restricts the
pricing freedom that that classification is supposed to give us. It sets a
schedule of prerequisites for state endorsement of an application by us to the
Federal Communications Commission for permission to offer in-region long
distance service under Section 271 of the Telecommunications Act of 1996 that
are likely to delay that endorsement. We have challenged the lawfulness of this
order in the Pennsylvania Supreme Court, the Commonwealth Court of Pennsylvania
and the Federal District Court.
6
<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
- ---------------------
We reported net income of $368.9 million for the nine months ended
September 30, 1999, compared to net income of $314.4 million for the same period
in 1998.
Our results for 1999 and 1998 were affected by special items. The special
items in both periods include our allocated share of charges from Bell Atlantic
Network Services, Inc. (NSI).
The following table shows how special items are reflected in our condensed
statements of income for each period:
<TABLE>
<CAPTION>
(Dollars in Millions)
Nine Months Ended September 30 1999 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Employee Costs
Merger transition costs $ 1.6 $ .1
Other Operating Expenses
Merger transition costs --- 2.6
Allocated merger transition costs 10.2 6.2
------------------------------------
$11.8 $ 8.9
====================================
</TABLE>
Merger-related Costs
In connection with the Bell Atlantic-NYNEX merger, which was completed in
August 1997, we recorded pre-tax transition and integration costs of $11.8
million in the first nine months of 1999 and $8.9 million in the first nine
months of 1998.
Transition and integration costs consist of our proportionate share of
costs associated with integrating the operations of Bell Atlantic and NYNEX,
such as systems modifications costs and advertising and branding costs.
Transition and integration costs are expensed as incurred.
OPERATING REVENUE STATISTICS
- ----------------------------
<TABLE>
<CAPTION>
1999 1998 % Change
- ----------------------------------------------------------------------------------------------------------------
At September 30
- ---------------
<S> <C> <C> <C>
Access Lines in Service (in thousands)
Residence 4,246 4,132 2.8%
Business 2,313 2,250 2.8
Public 71 73 (2.7)
--------------------------------------
6,630 6,455 2.7
======================================
Nine Months Ended September 30
- ------------------------------
Access Minutes of Use (in millions) 19,770 18,800 5.2
======================================
</TABLE>
7
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
OPERATING REVENUES
- ------------------
(Dollars in Millions)
<TABLE>
<CAPTION>
Nine Months Ended September 30 1999 1998
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Local services $1,357.1 $1,303.9
Network access services 847.3 811.5
Long distance services 219.3 242.8
Ancillary services 216.1 210.0
-------------------------------
Total $2,639.8 $2,568.2
===============================
</TABLE>
LOCAL SERVICES REVENUES
1999 - 1998 Increase
- --------------------------------------------------------------------------------
Nine Months $53.2 4.1%
- --------------------------------------------------------------------------------
Local services revenues are earned from the provision of local exchange,
local private line, public telephone (pay phone) and value-added services.
Value-added services are a family of services that expand the utilization of the
network. These services include products such as Caller ID, Call Waiting and
Return Call.
Local services revenues increased in 1999 primarily due to higher usage of
our network facilities. Revenue growth was generated, in part, by an increase in
access lines in service of 2.7% from September 30, 1998 and higher residence
message volumes. Access line growth primarily reflects higher demand for Centrex
services and an increase in additional residential lines.
Local services revenue growth in 1999 also reflects strong customer demand
and usage of our data transport and digital services. Revenues from our value-
added services were boosted in 1999 by marketing and promotional campaigns
offering new service packages.
These increases in local services revenues were partially offset by price
reductions on local exchange services and a reduction in revenues from the
resale of access lines and the provision of unbundled network elements to
competitive local exchange carriers. Lower revenues from our pay phone services
due to the increasing popularity of wireless communications further offset local
services revenue growth.
NETWORK ACCESS SERVICES REVENUES
1999 - 1998 Increase
- --------------------------------------------------------------------------------
Nine Months $35.8 4.4%
- --------------------------------------------------------------------------------
Network access services revenues are earned from end-user subscribers and
long distance and other competing carriers who use our local exchange facilities
to provide services to their customers. Switched access revenues are derived
from fixed and usage-based charges paid by carriers for access to our local
network. Special access revenues originate from carriers and end-users that buy
dedicated local exchange capacity to support their private networks. End-user
access revenues are earned from our customers and from resellers who purchase
dial-tone services.
Network access services revenue growth in 1999 was mainly attributable to
higher customer demand, as reflected by growth in access minutes of use of 5.2%
from the same period in 1998. Volume growth also reflects a continuing expansion
of the business market, particularly for high-capacity services. In 1999, demand
for special access services increased, reflecting a greater utilization of our
network. Higher network usage by alternative providers of intraLATA toll
services and higher end-user revenues attributable to an increase in access
lines in service further contributed to revenue growth this year.
In addition, revenues for 1999 include amounts received from customers for
the recovery of local number portability (LNP) costs. LNP allows customers to
change local exchange carriers while maintaining their existing telephone
numbers. In December 1998, the Federal Communications Commission (FCC) issued
an order permitting us to recover costs
8
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
incurred for LNP in the form of monthly end-user charges for a five-year period
beginning in February 1999. LNP charges contributed approximately $8 million to
network access services revenues for the nine-month period ended September 30,
1999.
Volume-related growth was partially offset by net price reductions mandated
by federal and state price cap plans. The FCC regulates the rates that we charge
long distance carriers and end-user subscribers for interstate access services.
We are required to file new access rates with the FCC each year. In July 1999,
we implemented interstate price decreases of approximately $4 million on an
annual basis in connection with the FCC's Price Cap Plan. The rates will be in
effect through June 2000. Interstate price decreases were $12 million on an
annual basis for the period July 1998 through June 1999. These rates also
include amounts necessary to recover our contribution to the FCC's universal
service fund and are subject to change every quarter due to potential increases
or decreases in our contribution to the universal service fund. Our contribution
to the universal service fund is included in Other Operating Expenses. See
"Other Matters - FCC Regulation and Interstate Rates - Universal Service" for
additional information on universal service.
LONG DISTANCE SERVICES REVENUES
1999 - 1998 (Decrease)
- --------------------------------------------------------------------------------
Nine Months $(23.5) (9.7)%
- --------------------------------------------------------------------------------
Long distance services revenues are earned primarily from calls made to
points outside a customer's local calling area, but within our service area
(intraLATA toll). Other long distance services that we provide include 800
services, Wide Area Telephone Service (WATS), and corridor services (between
LATAs in Philadelphia and southern New Jersey).
The decline in long distance services revenues was principally caused by
the competitive effects of presubscription for intraLATA toll services.
Presubscription permits customers to use an alternative provider of their choice
for intraLATA toll calls without dialing a special access code when placing a
call. In response to presubscription, we have implemented customer win-back and
retention initiatives that include toll calling discount packages and product
bundling offers. Price reductions implemented on certain toll services have also
contributed to the decline in long distance services revenues. These revenue
reductions were partially offset by additional revenues generated from higher
calling volumes.
ANCILLARY SERVICES REVENUES
1999 - 1998 Increase
- --------------------------------------------------------------------------------
Nine Months $6.1 2.9%
- --------------------------------------------------------------------------------
Our ancillary services include such services as billing and collections for
long distance carriers and affiliates, facilities rentals to affiliates and
nonaffiliates, collocation by competitive local exchange carriers, usage of
separately priced (unbundled) components of our network by competitive local
exchange carriers, voice messaging, customer premises equipment (CPE) and wiring
and maintenance services, and sales of materials and supplies to affiliates.
Ancillary services revenues also include fees paid by customers for
nonpublication of telephone numbers and multiple white page listings and fees
paid by an affiliate for usage of our directory listings.
Ancillary services revenues increased in 1999 due to higher payments from
competitive local exchange carriers for the purchase of unbundled network
elements and interconnection of their networks with our network. Growth in CPE
services revenues also contributed to the increase in ancillary services
revenues. These revenue increases were partially offset by the recognition in
1998 of revenues associated with a marketing program.
9
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
OPERATING EXPENSES
- ------------------
(Dollars in Millions)
<TABLE>
<CAPTION>
Nine Months Ended September 30 1999 1998
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Employee costs, including benefits and taxes $ 466.8 $ 457.3
Depreciation and amortization 553.9 525.7
Other operating expenses 902.7 958.0
-----------------------------
Total $1,923.4 $1,941.0
=============================
</TABLE>
EMPLOYEE COSTS
1999 - 1998 Increase
- --------------------------------------------------------------------------------
Nine Months $9.5 2.1%
- --------------------------------------------------------------------------------
Employee costs consist of salaries, wages and other employee compensation,
employee benefits and payroll taxes paid directly by us. Similar costs incurred
by employees of NSI, who provide centralized services on a contract basis, are
allocated to us and are included in Other Operating Expenses.
Employee costs increased in the first nine months of 1999 primarily as a
result of annual salary and wage increases for management and associate
employees. Lower pension and benefit costs and the effect of lower work force
levels partially offset the increase in employee costs.
The decline in pension and benefit costs was due to a number of factors,
principally, lower pension costs as a result of favorable pension plan
investment returns and changes in plan provisions and actuarial assumptions.
These factors were partially offset by increased health care costs caused by
inflation and benefit plan improvements provided for under new contracts with
associate employees.
DEPRECIATION AND AMORTIZATION
1999 - 1998 Increase
- --------------------------------------------------------------------------------
Nine Months $28.2 5.4%
- --------------------------------------------------------------------------------
Depreciation and amortization expense increased in the first nine months of
1999 over the same period in 1998 principally as a result of growth in
depreciable telephone plant and changes in the mix of plant assets. The adoption
of Statement of Position (SOP) No. 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" also contributed to the
increase in depreciation and amortization expense in the first nine months of
1999, but to a lesser extent. Under this new accounting standard, computer
software developed or obtained for internal use is capitalized and amortized.
Previously, we expensed most of these software purchases as incurred. For
additional information on SOP No. 98-1, see Note 3 to the condensed financial
statements. These expense increases were partially offset by the effect of lower
rates of depreciation.
OTHER OPERATING EXPENSES
1999 - 1998 (Decrease)
- --------------------------------------------------------------------------------
Nine Months $(55.3) (5.8)%
- --------------------------------------------------------------------------------
Other operating expenses consist of contract services including centralized
services expenses allocated from NSI, rent, network software costs, operating
taxes other than income, the provision for uncollectible accounts receivable,
and other costs.
The decrease in other operating expenses in the first nine months of 1999
was largely attributable to the effect of adopting SOP No. 98-1 and a reduction
in centralized services expenses allocated from NSI, partially as a result of
lower employee costs incurred by NSI.
10
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
These decreases were partially offset by higher interconnection payments to
competitive local exchange and other carriers to terminate calls on their
networks (reciprocal compensation). For additional information on reciprocal
compensation refer to "Other Matters - Telecommunications Act of 1996 -
Reciprocal Compensation."
OTHER INCOME, NET
1999 - 1998 (Decrease)
- --------------------------------------------------------------------------------
Nine Months $(1.5) (42.9)%
- --------------------------------------------------------------------------------
The change in other income, net, was attributable to the recognition of
additional interest income in 1998 in connection with the settlement of tax-
related matters and lower interest income in 1999 from our short-term
investments.
INTEREST EXPENSE
1999 - 1998 (Decrease)
- --------------------------------------------------------------------------------
Nine Months $(.5) (.5)%
- --------------------------------------------------------------------------------
Interest expense includes costs associated with borrowings and capital
leases, net of interest capitalized as a cost of acquiring or constructing plant
assets.
Interest expense decreased in the first nine months of 1999 over the same
period in 1998 principally due to the effects of refinancing long-term debt at a
more favorable interest rate and lower interest rates on average short-term
debt. These decreases were substantially offset by a reduction in capitalized
interest costs primarily resulting from lower levels of average telephone plant
under construction and by the recognition of additional interest costs
associated with a regulatory matter.
EFFECTIVE INCOME TAX RATES
Nine Months Ended September 30
- --------------------------------------------------------------------------------
1999 41.1%
- --------------------------------------------------------------------------------
1998 41.6%
- --------------------------------------------------------------------------------
The effective income tax rate is the provision for income taxes as a
percentage of income before the provision for income taxes. Our effective income
tax rate was lower in the first nine months of 1999 principally due to
adjustments to federal and state income taxes recorded in 1999 and adjustments
to state deferred income taxes recorded in 1998.
FINANCIAL CONDITION
- -------------------
We use the net cash generated from operations and from external financing
to fund capital expenditures for network expansion and modernization, and pay
dividends. While current liabilities exceeded current assets at both September
30, 1999 and 1998 and December 31, 1998, our sources of funds, primarily from
operations and, to the extent necessary, from readily available financing
arrangements with an affiliate, are sufficient to meet ongoing operating
requirements. Management expects that presently foreseeable capital requirements
will continue to be financed primarily through internally generated funds.
Additional long-term debt may be needed to fund development activities or to
maintain our capital structure to ensure financial flexibility.
As of September 30, 1999, we had $164.9 million of an unused line of credit
with an affiliate, Bell Atlantic Network Funding Corporation. In addition, we
had $175.0 million remaining under a shelf registration statement filed with the
Securities and Exchange Commission for the issuance of unsecured debt
securities. Our debt securities continue to be accorded high ratings by primary
rating agencies. Subsequent to the announcement of the Bell Atlantic - GTE
merger, rating agencies have maintained current credit ratings, but have placed
our ratings under review for potential downgrade.
11
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
Our debt ratio was 55.0% at September 30, 1999, compared to 60.5% at
September 30, 1998 and 58.9% at December 31, 1998.
On November 1, 1999, we declared and paid a dividend in the amount of $72.9
million to Bell Atlantic.
OTHER MATTERS
- -------------
FCC Regulation and Interstate Rates
Price Caps
In May 1999, the U.S. Court of Appeals reversed the FCC's establishment of
a 6.5% productivity factor in calculating the annual price cap index applied to
our interstate access rates. The court directed the FCC to reconsider and
explain the methods used in selecting the productivity factor. The court granted
the FCC a stay of its order, however, until April 1, 2000. As a result, our
annual price cap filing effective July 1, 1999 includes the effects of the FCC's
6.5% productivity factor (see Operating Revenues - Network Access Services).
The FCC has adopted rules for special access services that provide for
added pricing flexibility and ultimately the removal of services from price
regulation when certain competitive thresholds are met. The order also allows
certain services, including those included in the interexchange basket of
services, to be removed from price regulation immediately. In response, we have
filed to remove services in the interexchange basket from regulation, effective
October 22, 1999. This will remove services with approximately $16 million in
annual revenues from price regulation and from the operation of the productivity
offset which otherwise would require annual price reductions.
Universal Service
On July 30, 1999, the U.S. Court of Appeals reversed certain aspects of the
FCC's universal service order. The universal service fund includes a multi-
billion dollar interstate fund to link schools and libraries to the Internet and
to subsidize low income consumers and rural healthcare providers. Previously,
under the FCC's rules, all providers of interstate telecommunications services
had to contribute to the schools and libraries fund based on their total
interstate and intrastate retail revenues. The court reversed the decision to
include intrastate revenues as part of the basis for assessing contributions to
that fund. As a result of this decision, our contributions to the universal
service fund will be reduced by approximately $12 million annually beginning on
November 1, 1999, and our interstate access rates will be reduced accordingly.
State Regulation
On September 30, 1999, the Pennsylvania Public Utility Commission (PUC)
adopted an Order in its multi-party global telecommunications settlement
proceeding which purported to resolve issues in a number of contentious
telecommunications regulatory dockets. Certain aspects of the Order are
discussed below.
. The Order requires a structural separation of the wholesale and retail
operations of Bell Atlantic - Pennsylvania. Within 60 days of the Order we
must file a "plan that creates a separate affiliate to supply retail
telecommunications services." Until structural separation is completed, we
are to implement a "functional separation" of our wholesale and retail
business operations.
. The Order requires us to reduce annual intrastate access charges by $32
million 30 days from entry of the Order and an additional $32 million upon
FCC approval of Bell Atlantic's application for entry into the in-region
long distance market in Pennsylvania or one year after the Order, whichever
is sooner. The first $32 million reduction is covered by inflation-based
and productivity-based reductions already due under the PUC's Alternative
Regulation Plan, which is a price cap regulatory plan.
. As a condition to PUC support of Bell Atlantic's entry into the in-region
long distance market in Pennsylvania, the Order sets additional
requirements for testing of our operations support systems. We must also
show that we have fully implemented the terms of the Order.
. The Order requires reductions in rates for unbundled network elements we
offer to competitors. We must offer an unbundled network element platform
(UNE- P) for local and ISDN service to all residential customers and to
business customers generating annual revenues to us of $80,000 or less.
Beginning in 2004, we may petition for exemption from the UNE-P requirement
on a central-office-by-central-office basis.
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Bell Atlantic - Pennsylvania, Inc.
. The Order declares business services competitive, and therefore largely
deregulated under the Alternative Regulation Plan, for customers generating
annual revenues to us of $80,000 or more where local number portability
(LNP) has been implemented. The Order permits us to reduce the $80,000
threshold at specified periods following LNP availability to other business
customers. IntraLATA toll service will be declared competitive upon FCC
approval of Bell Atlantic's application for entry into the in-region long
distance market in Pennsylvania.
. The Order sets up a universal service fund for the benefit of local
exchange carriers other than us and GTE Corporation. The fund size is based
upon our projected annual contributions of approximately $12 million, but
with no cap on our contribution.
. The Order provides that, as a matter of state law and policy,
Internet-bound traffic will continue to be treated as local traffic for
purposes of reciprocal compensation we must pay to other carriers.
On October 21, 1999, we filed an application with the Pennsylvania Supreme
Court requesting the Court to review the Order under its "extraordinary"
jurisdiction and to stay the Order pending appeal. That request is still
pending. On October 29, 1999, we filed a Petition for Review of the Order with
the Pennsylvania Commonwealth Court and a Complaint with the United States
District Court of the Eastern District of Pennsylvania, both of which seek
review of the Order.
Telecommunications Act of 1996
Unbundling of Network Elements
The FCC recently announced its decision setting forth new unbundling
requirements. The FCC had previously identified seven elements that had to be
provided to competitors on an unbundled basis. With respect to those seven
elements, the FCC concluded that incumbent local exchange carriers, such as us,
do not have to provide unbundled switching (or combinations of elements that
include switching, such as the so-called unbundled element "platform")
under certain circumstances to business customers with four or more lines in
certain offices in the top 50 Metropolitan Statistical Areas (MSAs). It also
held that incumbents do not have to provide unbundled access to their directory
assistance or operator services. The remaining elements on the FCC's original
list still must be provided.
With respect to new elements, the FCC concluded that new equipment to
provide advanced services such as ADSL does not have to be unbundled. On the
other hand, the FCC concluded that incumbents must provide dark fiber as an
unbundled element, and that sub-loop unbundling should be provided. Finally, the
FCC ruled that combinations of loops and transport, known as enhanced extended
loops or "EELs," must be made available under certain circumstances, but left to
a further rulemaking certain issues relating to the use of EELs to substitute
for special access services.
Reciprocal Compensation
We have been required by our state regulators to pay "reciprocal
compensation" to competitive local exchange and other carriers to terminate
calls on their networks, including an increasing volume of one-way traffic from
our customers to Internet service providers that are their customers. In
February 1999, the FCC confirmed that such traffic is largely interstate but
concluded that it would not interfere with state regulatory decisions requiring
payment of reciprocal compensation for such traffic and that carriers are bound
by their existing interconnection agreements. The FCC tentatively concluded that
future compensation arrangements for calls to Internet service providers should
be negotiated by carriers and arbitrated, if necessary, before the state
commissions under the terms of the Telecommunications Act of 1996 (1996 Act).
The FCC has initiated a proceeding to consider, alternatively, the adoption of
federal rules to govern future inter-carrier compensation arrangements for this
traffic. We have asked the U.S. Court of Appeals to review the FCC's decision
that state commissions may require payment of reciprocal compensation for this
traffic. The PUC has issued a decision requiring us to continue to pay
reciprocal compensation on Internet-bound traffic.
Recent Accounting Pronouncement - Derivatives and Hedging Activities
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement requires that all
derivatives be measured at fair value and recognized as either assets or
liabilities on our balance sheet. Changes in the fair values of the derivative
instruments will be recognized in either earnings or comprehensive income,
depending on the designated use and
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Bell Atlantic - Pennsylvania, Inc.
effectiveness of the instruments. The FASB amended this pronouncement in June
1999 to defer the effective date of SFAS No. 133 for one year.
Under the amended pronouncement, we must adopt SFAS No. 133 no later than
January 1, 2001. We are currently evaluating the provisions of SFAS No. 133. The
impact of adoption will be determined by several factors, including the specific
hedging instruments in place and their relationships to hedged items, as well as
market conditions at the date of adoption. We have not estimated the effect of
adoption as we believe that such a determination will not be meaningful until
closer to the adoption date.
Year "2000" Update
Bell Atlantic is now in the final stages of its program to evaluate and
address the impact of the Year 2000 date transition on its subsidiaries'
operations, including our operations. This program has included steps to:
. inventory and assess for Year 2000 compliance our equipment, software
and systems;
. determine whether to remediate, replace or retire noncompliant items,
and establish a plan to accomplish these steps;
. remediate, replace or retire the items;
. test the items, where required; and
. provide management with reporting and issues management to support a
seamless transition to the Year 2000.
State of Readiness
For Bell Atlantic's operating telephone subsidiaries, centralized services
entities and general corporate operations, the program has focused on the
following project groups: Network Elements, Applications and Support
Systems, and Information Technology Infrastructure. Bell Atlantic's goal
for these operations was to have its network and other mission critical
systems Year 2000 compliant (including testing) by June 30, 1999 and it
substantially met this goal. What follows is a more detailed breakdown of
Bell Atlantic's efforts to date.
. Network Elements
Approximately 350 different types of network elements (such as central
office switches) appear in over one hundred thousand instances. When
combined in various ways and using network application systems, these
elements are the building blocks of customer services and networked
information transmission of all kinds. Bell Atlantic originally assessed
approximately 70% of these element types, representing over 90% of all
deployed network elements, as Year 2000 compliant. As of November 1, 1999,
Bell Atlantic has completed the required repair/replacement for virtually
all network elements requiring remediation.
. Application and Support Systems
Bell Atlantic has approximately 1,200 application and systems that support:
(i) the administration and maintenance of its network and customer service
functions (network information systems); (ii) customer care and billing
functions; and (iii) human resources, finance and general corporate
functions. Bell Atlantic originally assessed approximately 48% of these
application and support systems as either compliant or to be retired. As of
November 1, 1999, Bell Atlantic has successfully completed the required
repair/replacement of virtually all mission critical application and
support systems.
. Information Technology Infrastructure
Approximately 40 mainframe, 1,000 mid-range, and 90,000 personal computers,
related network components, and software products comprise Bell Atlantic's
information technology (IT) infrastructure. Of the approximately 1,350
unique types of elements in the inventory for the IT infrastructure, Bell
Atlantic originally assessed approximately 73% as compliant or to be
retired. As previously reported, Bell Atlantic has successfully completed
remediation/replacement of all mission critical elements earlier this year.
Bell Atlantic's project to remediate/replace or retire mission critical
systems supporting buildings and other facilities used by its operating
telephone subsidiaries, such as HVAC, access control and alarm systems, is now
complete and its efforts to remediate/replace or retire any other Bell Atlantic
mission critical system used by those subsidiaries is virtually complete.
Remediation/replacement or retirement of non-mission critical systems, where
applicable, and supplemental testing and verification/correction activities, for
both mission critical and non-mission critical systems, are likely to continue
throughout the balance of 1999.
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Bell Atlantic - Pennsylvania, Inc.
Third Party Issues
. Vendors
In general, Bell Atlantic's product vendors have made available either Year
2000-compliant versions of their offerings or new compliant products as
replacements of discontinued offerings. The compliance status of a given
product is typically determined using multiple sources of information,
including Bell Atlantic's own internal testing and analysis. However, in
some instances certification is based on detailed test results or similar
information provided by the product vendor and analysis by Bell Atlantic or
contractors specializing in this type of review. Bell Atlantic is also
continuing Year 2000-related discussions with utilities and similar
services providers. Although Bell Atlantic has received assurances and
other information suggesting that substantially all of its primary services
providers have completed or are well along in their respective Year 2000
projects, Bell Atlantic does not usually have sufficient access to or
control over the providers' systems and equipment to undertake verification
efforts as to such systems and equipment, and as a general matter, it would
be impractical to do so. Bell Atlantic has also participated in
interoperability testing of various mission critical network elements,
purchased from a number of vendors, through the Telco Year 2000 Forum, an
industry group comprised of leading local telecommunications services
companies. Bell Atlantic intends to monitor critical service provider
activities, as appropriate, through the remainder of 1999.
. Customers
Bell Atlantic's customers remain keenly interested in the progress of its
Year 2000 efforts, and it anticipates increased demand for information,
including detailed testing data and company-specific responses. Bell
Atlantic is providing limited warranties of Year 2000 compliance for
certain new telecommunications services and other offerings, but it does
not expect any resulting warranty costs to be material.
. Interconnecting Carriers
Bell Atlantic's network operations interconnect with domestic and
international networks of other carriers. If one of these interconnecting
carrier networks should fail or suffer adverse impact from a Year 2000
problem, Bell Atlantic's customers could experience impairment of service.
Bell Atlantic has participated in various internetworking testing efforts,
as a member of the Association for Telecommunications Industry Solutions
(ATIS), the Cellular Telecommunications Industry Association (CTIA) and the
International Telecommunications Union (ITU). Bell Atlantic intends to
monitor the activities of the primary interconnecting carriers through the
remainder of 1999.
Costs
From the inception of Bell Atlantic's Year 2000 project through September
30, 1999, and based on the cost tracking methods it has historically applied to
this project, Bell Atlantic has incurred total pre-tax expenses of approximately
$211 million, and it has made capital expenditures of approximately $153
million. For 1999, Bell Atlantic expects total pre-tax expenses for its Year
2000 project not to exceed $125 million (approximately $89 million has been
incurred through September 30, 1999) and total capital expenditures not to
exceed $100 million (approximately $73 million has been made through September
30, 1999). Bell Atlantic anticipates that the balance of the costs incurred for
1999 will be primarily attributable to additional testing and
verification/correction, rollover transition management, contingency planning
and repair/replacement of non-mission critical systems. These cost estimates
should not be used as the sole gauge of progress on its Year 2000 project or as
an indication of its Year 2000 readiness.
Risks
The failure to correct a material Year 2000 problem could cause an
interruption or failure of certain of Bell Atlantic's normal business functions
or operations, which could have a material adverse effect on its results of
operations, liquidity or financial condition; however, it considers such a
development remote. Due to the uncertainty inherent in other Year 2000 issues
that are ultimately beyond Bell Atlantic's control, including, for example, the
final Year 2000 readiness of its suppliers, customers, interconnecting carriers,
and joint venture and investment interests, it is unable to determine at this
time the likelihood of a material impact on its results of operations, liquidity
or financial condition due to such Year 2000 issues. However, Bell Atlantic is
taking appropriate prudent measures to mitigate that risk. Bell Atlantic
anticipates that, in the event of material interruption or failure of its
service resulting from an actual or perceived Year 2000 problem within or beyond
its control, it could be subject to third party claims.
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Bell Atlantic - Pennsylvania, Inc.
Contingency Plans
As a public telecommunications carrier, Bell Atlantic has had considerable
experience successfully dealing with natural disasters and other events
requiring contingency planning and execution. Bell Atlantic's Year 2000
contingency plans are built upon its existing Emergency Preparedness and
Disaster Recovery plans.
Bell Atlantic will continue to fine-tune and test its corporate Year 2000
contingency plans to help ensure that core business functions and key support
processes will continue to function without material disruption, in the event of
external (e.g. power, public transportation, water), internal or supply chain
failures (i.e. critical dependencies on another entity for information, data or
services). Bell Atlantic's individual business unit contingency plans for Year
2000 are being integrated and coordinated under an enterprise wide command and
control structure.
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Bell Atlantic - Pennsylvania, Inc.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Number
27 Financial Data Schedule
(b) Reports on Form 8-K filed during the quarter ended September 30,
1999:
We filed a Current Report on Form 8-K, dated August 26, 1999,
reporting on Item 5 (Other Events) in connection with the
Pennsylvania Public Utility Commission's motion on
telecommunication regulatory dockets.
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Bell Atlantic - Pennsylvania, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BELL ATLANTIC - PENNSYLVANIA, INC.
Date: November 10, 1999 By /s/ Edwin F. Hall
-----------------------------------------
Edwin F. Hall
Chief Financial Officer
and Controller
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF NOVEMBER 5, 1999.
18
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