<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
----------------
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-7150
BELL ATLANTIC - WEST VIRGINIA, INC.
A West Virginia Corporation I.R.S. Employer Identification No. 54-0142020
1500 MacCorkle Avenue, S.E., Charleston, West Virginia 25314
Telephone Number (304) 343-9911
----------------
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 - West Virginia, Inc.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STATEMENTS OF INCOME AND REINVESTED EARNINGS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1994 1993 1994 1993
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Local service........................ $ 72,301 $ 70,710 $144,253 $139,650
Network access....................... 39,049 40,846 83,015 82,199
Toll service......................... 18,711 19,576 38,145 39,254
Directory advertising, billing
services and other (including
($1,419, $1,209, $2,677 and
$2,386 from affiliates)............ 14,369 12,762 27,800 25,003
Provision for uncollectibles......... (940) (945) (2,273) (1,890)
-------- -------- -------- --------
143,490 142,949 290,940 284,216
-------- -------- -------- --------
OPERATING EXPENSES
Employee costs, including benefits
and taxes........................... 32,049 32,456 65,466 63,542
Depreciation and amortization........ 26,336 28,806 52,597 57,645
Taxes other than income.............. 7,660 6,984 15,072 14,034
Other (including $24,875, $22,452,
$49,266 and $44,512 to affiliates).. 40,885 35,993 79,204 74,149
-------- -------- -------- --------
106,930 104,239 212,339 209,370
-------- -------- -------- --------
NET OPERATING REVENUES................. 36,560 38,710 78,601 74,846
-------- -------- -------- --------
OPERATING INCOME TAXES
Federal.............................. 9,648 9,430 20,674 18,019
State................................ 3,501 4,122 7,518 8,047
-------- -------- -------- --------
13,149 13,552 28,192 26,066
-------- -------- -------- --------
OPERATING INCOME....................... 23,411 25,158 50,409 48,780
-------- -------- -------- --------
OTHER INCOME (EXPENSE)
Allowance for funds used
during construction................. 222 144 427 306
Miscellaneous - net.................. (198) 45 (537) (536)
-------- -------- -------- --------
24 189 (110) (230)
-------- -------- -------- --------
INTEREST EXPENSE (including $56,
$186, $174 and $427 to affiliate)..... 4,731 5,371 9,527 10,674
-------- -------- -------- --------
INCOME BEFORE EXTRAORDINARY ITEM
AND CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE............... 18,704 19,976 40,772 37,876
EXTRAORDINARY ITEM
Early Extinguishment of Debt,
Net of Tax.......................... --- (1,456) --- (1,456)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE
Postemployment Benefits, Net of Tax.. --- --- --- (7,397)
-------- -------- -------- --------
NET INCOME............................. $ 18,704 $ 18,520 $ 40,772 $ 29,023
======== ======== ======== ========
</TABLE>
(Continued)
See Notes to Financial Statements.
-1-
<PAGE>
Bell Atlantic - West Virginia, Inc.
STATEMENTS OF INCOME AND REINVESTED EARNINGS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
1994 1993 1994 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REINVESTED EARNINGS
At beginning of period.. $46,761 $43,113 $41,833 $47,769
Add: net income......... 18,704 18,520 40,772 29,023
------- ------- ------- -------
65,465 61,633 82,605 76,792
Deduct: dividends....... 21,150 17,600 38,290 32,750
other changes... 1 214 1 223
------- ------- ------- -------
At end of period........ $44,314 $43,819 $44,314 $43,819
======= ======= ======= =======
</TABLE>
See Notes to Financial Statements.
-2-
<PAGE>
Bell Atlantic - West Virginia, Inc.
BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
ASSETS
------
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1993
---------- ------------
CURRENT ASSETS
<S> <C> <C>
Cash........................................... $ --- $ 6,730
Accounts receivable:
Customers and agents, net of allowances for
uncollectibles of $3,239 and $3,077......... 68,275 63,925
Affiliates................................... 12,474 15,166
Other........................................ 5,226 2,848
Material and supplies.......................... 3,601 2,836
Prepaid expenses............................... 12,331 11,605
Deferred income taxes.......................... 701 680
Other.......................................... 1,101 1,101
---------- ----------
103,709 104,891
---------- ----------
PLANT, PROPERTY AND EQUIPMENT.................... 1,539,814 1,518,354
Less accumulated depreciation.................. 616,918 577,344
---------- ----------
922,896 941,010
---------- ----------
OTHER ASSETS..................................... 43,164 50,789
---------- ----------
TOTAL ASSETS..................................... $1,069,769 $1,096,690
========== ==========
</TABLE>
See Notes to Financial Statements.
-3-
<PAGE>
Bell Atlantic - West Virginia, Inc.
BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
LIABILITIES AND SHAREOWNER'S INVESTMENT
---------------------------------------
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1993
---------- ------------
CURRENT LIABILITIES
<S> <C> <C>
Debt maturing within one year:
Affiliate................................... $ 939 $ 20,387
Other....................................... 52 55
Accounts payable:
Parent and affiliates....................... 32,991 35,466
Other....................................... 26,442 30,379
Accrued expenses:
Taxes....................................... 9,109 9,687
Other....................................... 28,803 26,943
Advance billings and customer deposits....... 14,875 13,956
---------- ----------
113,211 136,873
---------- ----------
LONG-TERM DEBT................................. 263,697 263,679
---------- ----------
EMPLOYEE BENEFIT OBLIGATIONS................... 132,278 128,866
---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes........................ 86,290 88,064
Unamortized investment tax credits........... 22,821 24,100
Other........................................ 61,019 67,136
---------- ----------
170,130 179,300
---------- ----------
SHAREOWNER'S INVESTMENT
Common stock, one share, without par value,
owned by parent............................. 340,482 340,482
Contributed capital.......................... 5,657 5,657
Reinvested earnings.......................... 44,314 41,833
---------- ----------
390,453 387,972
---------- ----------
TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT.. $1,069,769 $1,096,690
========== ==========
</TABLE>
See Notes to Financial Statements.
-4-
<PAGE>
Bell Atlantic - West Virginia, Inc.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------
1994 1993
-------- -------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES .... $ 84,892 $ 79,130
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to plant, property and equipment.. (32,978) (47,350)
Other, net.................................. (878) (203)
------- -------
Net cash used in investing activities......... (33,856) (47,553)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings.................... --- 49,250
Principal repayments of capital lease
obligations................................ (29) (140)
Early extinguishment of debt and related
call premium............................... --- (52,185)
Net change in note payable to affiliate..... (19,447) 8,704
Dividends paid.............................. (38,290) (32,750)
Net change in outstanding checks drawn
on controlled disbursement accounts........ --- (4,456)
------- -------
Net cash used in financing activities......... (57,766) (31,577)
------- -------
NET CHANGE IN CASH ........................... (6,730) ---
CASH, BEGINNING OF PERIOD .................... 6,730 ---
------- -------
CASH, END OF PERIOD .......................... $ --- $ ---
======= =======
</TABLE>
See Notes to Financial Statements.
-5-
<PAGE>
Bell Atlantic - West Virginia, Inc.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying financial statements are unaudited and have been prepared by
Bell Atlantic - West Virginia, Inc. (formerly The Chesapeake and Potomac
Telephone Company of West Virginia) (the Company) pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC). The December 31,
1993 balance sheet was derived from audited financial statements, but does not
include all disclosures required by generally accepted accounting principles.
In the opinion of management, these financial statements include all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
the results of operations, financial position and cash flows. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such SEC rules and regulations. The Company
believes that the disclosures made are adequate to make the information
presented not misleading. It is suggested that these financial statements be
read in conjunction with the financial statements and notes thereto included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1993.
(2) DIVIDEND
On August 1, 1994, the Company declared and paid a dividend in the amount of
$17,770,000 to Bell Atlantic Corporation.
(3) SUBSEQUENT EVENTS
Discontinued Application of Statement No. 71
--------------------------------------------
The Company has historically accounted for the economic effects of regulation
in accordance with the provisions of Statement of Financial Accounting Standards
No. 71, "Accounting for the Effects of Certain Types of Regulation" (Statement
No. 71). Under Statement No. 71, as a result of actions of regulators, the
Company has depreciated telephone plant using lives prescribed by regulators and
deferred certain costs or recognized certain liabilities (regulatory assets and
liabilities).
On August 15, 1994, the Company's parent, Bell Atlantic Corporation (Bell
Atlantic), announced that it has determined that it is no longer eligible for
continued application of the accounting required by Statement No. 71. The
Company believes that the convergence of competition, technological change
(including the Company's recent technology deployment plans), recent and
potential regulatory, legislative and judicial actions and other factors will
create fully open and competitive markets. In such markets, the Company
believes it can no longer be assured that prices can be maintained at levels
that will recover the net carrying amount of existing telephone plant and
equipment, which has been depreciated over relatively long regulator-prescribed
lives. In addition, changes from cost-based regulation to a form of incentive
regulation contributed to the determination that the continued application of
Statement No. 71 is inappropriate.
The discontinued application of Statement No. 71 requires the Company, for
financial reporting purposes, to eliminate its regulatory assets and liabilities
and adjust the carrying amount of its telephone plant to the extent that it
determines that such amounts either are overstated as a result of the regulatory
process, or are not recoverable. Accordingly, as of August 1, 1994, the Company
will recognize a non-cash, after-tax extraordinary charge of approximately $64
million to adjust the net carrying amount of telephone plant and equipment and
an after-tax extraordinary charge of approximately $1 million to eliminate net
regulatory assets. The adjustment to the net carrying amount of telephone plant
and equipment will increase the reserve for accumulated depreciation by
approximately $116 million. The Company's accounting and reporting for
regulatory purposes are not affected by the discontinued application of
Statement No. 71.
As of August 1, 1994, for financial reporting purposes, the Company will
utilize estimated asset lives for certain categories of plant and equipment that
are shorter
-6-
<PAGE>
Bell Atlantic - West Virginia, Inc.
than those currently approved by regulators. The shorter estimated asset lives
result from the Company's current expectations as to the revenue-producing lives
of the assets. A comparison of the current regulator-approved asset lives and
the associated shorter estimated asset lives for the most significantly impacted
categories of plant and equipment follows:
<TABLE>
<CAPTION>
Average Lives (in years)
-------------------------------
Regulator-Approved Estimated
Asset Lives Asset Lives
------------------ -----------
<S> <C> <C>
Digital Switch 17.5 12
Copper Cable 20 - 25 15.5 - 19
Fiber Cable 20 - 30 20 - 25
</TABLE>
Employee Benefits
-----------------
On August 15, 1994, Bell Atlantic also announced that it will record a charge
in the third quarter of 1994, as required by Statement of Financial Accounting
Standards No. 112, "Employers' Accounting for Postemployment Benefits"
(Statement No. 112), to recognize the benefit costs for the separation of
employees who are entitled to benefits under its preexisting separation pay
plans. The charge, which was actuarially determined, represents benefits earned
to date by employees who are expected to receive separation payments in the
future, including those who will be separated through 1997 as a result of the
recently announced workforce reduction initiative. These workforce reductions
will be made possible by improved provisioning systems and customer service
processes, increased spans of control, and consolidation and centralization of
administrative and staff groups. The Company will record a pretax charge of
between $7 million and $10 million to recognize its share of the benefit costs
under the separation pay plans.
(4) RESTATEMENT OF 1993 FINANCIAL STATEMENTS
Results of operations for the six months ended June 30, 1993 were restated in
the fourth quarter of 1993 to reflect the cumulative effect of the adoption of
Statement No. 112, effective January 1, 1993.
(5) RECLASSIFICATIONS - STATEMENTS OF CASH FLOWS
Certain amounts included in Net Cash Provided by Operating Activities and Cash
Flows from Investing Activities in the Statement of Cash Flows for the six
months ended June 30, 1993 have been reclassified to conform to the current
year's classifications.
-7-
<PAGE>
Bell Atlantic - West Virginia, Inc.
SELECTED OPERATING DATA
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
AT JUNE 30,
-----------
1994 1993
----- ----
<S> <C> <C>
Network Access Lines in Service:
Residence.............................. 553 546
Business............................... 168 160
Public................................. 10 11
---- ----
731 717
==== ====
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1994 1993
--------- ---------
<S> <C> <C>
Carrier Access Minutes of Use:
Interstate............................. 1,002,837 921,303
Intrastate............................. 201,965 172,753
--------- ---------
1,204,802 1,094,056
========= =========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------
1994 1993
------- -------
<S> <C> <C>
Toll Messages:
Message Telecommunication Services..... 17,858 18,521
Optional Calling Plans................. 2,467 954
Unidirectional Long-Distance Services.. 2,062 2,676
------ ------
22,387 22,151
====== ======
</TABLE>
-8-
<PAGE>
Bell Atlantic - West Virginia, Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
(ABBREVIATED PURSUANT TO GENERAL INSTRUCTION H(2).)
This discussion should be read in conjunction with the Financial Statements
and Notes to Financial Statements.
RESULTS OF OPERATIONS
Net income for the six months ended June 30, 1994 increased $11,749,000 from
the corresponding period last year. Results for 1993 reflect an after-tax
charge of $7,397,000 for the adoption of Statement of Financial Accounting
Standards No. 112, "Employers' Accounting for Postemployment Benefits" and an
extraordinary charge, net of tax, of $1,456,000 for the early extinguishment of
debt.
OPERATING REVENUES
Operating revenues for the six months ended June 30, 1994 increased $6,724,000
or 2.4% from the corresponding period last year. The increase in total
operating revenues was comprised of the following:
<TABLE>
<CAPTION>
Increase/(Decrease)
(Dollars in Thousands)
----------------------
<S> <C>
Local service........................ $ 4,603
Network access....................... 816
Toll service......................... (1,109)
Directory advertising, billing
services and other.................. 2,797
Less: Provision for uncollectibles.. 383
-------
$ 6,724
=======
</TABLE>
Local service revenues are earned from the provision of local exchange, local
private line, and public telephone services. Local service revenues increased
$4,603,000 or 3.3% compared to the same period in 1993. The increase resulted
primarily from growth in network access lines and higher demand for value-added
central office services such as Custom Calling and Caller ID. Access lines in
service at June 30, 1994 increased 2.0% from June 30, 1993 (see Selected
Operating Data on page 8).
Network access revenues are received from interexchange carriers (IXCs) for
their use of the Company's local exchange facilities in providing long-distance
services to IXCs' customers and from end-user subscribers. Switched access
revenues are derived from usage-based charges paid by IXCs for access to the
Company's network. Special access revenues arise from access charges paid by
customers who have private lines, and end-user access revenues are earned from
local exchange carrier customers who pay for access to the network.
Network access revenues increased $816,000 or 1.0% compared to the same period
in 1993. Access minutes of use were 10.1% higher than the first six months of
1993 (see Selected Operating Data on page 8), due to the effects of a recovering
economy and inclement weather conditions in the region during the first quarter
of 1994. The increase in network access revenues is due to customer demand as
reflected by growth in access minutes of use, as well as increased access lines
in service. In addition to volume growth, network access revenues increased due
to additional revenues recognized through an interstate revenue sharing
arrangement with affiliated companies. These revenue increases were
substantially offset by the effect of an interstate rate reduction filed by the
Company with the Federal Communications Commission (FCC), which became effective
on July 2, 1993. In addition, switched access revenues were reduced due to
lower rates ordered by the Public Service Commission on August 26, 1993. In its
April 1, 1994 tariff filing, the Company filed revised rates with the FCC, which
became effective July 1, 1994. These revised rates are not expected to
significantly change current levels of interstate access revenues.
Toll service revenues are earned from interexchange usage services such as
Message Telecommunication Services (MTS), including optional calling plans,
Unidirectional Services (Wide Area Toll Service (WATS) and 800 services), and
private line services.
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<PAGE>
Bell Atlantic - West Virginia, Inc.
Toll service revenues decreased $1,109,000 or 2.8% compared to the same period
in 1993. MTS message volumes decreased 3.6% and optional calling plans volumes
more than doubled, reflecting the impact of customers switching to lower priced
optional calling plans offered by the Company (see Selected Operating Data on
page 8). Unidirectional services revenues decreased primarily due to
competitive pressures.
Directory advertising, billing services and other revenues include amounts
earned from directory advertising, billing and collection services provided to
IXCs, premises services such as inside wire installation and maintenance, rent
of Company facilities by affiliates and non-affiliates, and certain nonregulated
enhanced network services.
Directory advertising, billing services and other revenues increased
$2,797,000 or 11.2% compared to the same period in 1993, principally due to
higher revenues from directory advertising and customer premises services. The
increase in directory advertising resulted primarily from higher rates for
yellow pages advertising. The increase in customer premises revenues is
attributed to higher contract billing. Also contributing to these revenue
increases were higher revenues from voice messaging services, primarily Answer
Call.
The provision for uncollectibles, expressed as a percentage of total operating
revenues, was .8% for the first six months of 1994 and .7% for the same period
last year.
OPERATING EXPENSES
Operating expenses for the six months ended June 30, 1994 increased $2,969,000
or 1.4% from the corresponding period last year. The increase in total
operating expenses was comprised of the following:
Increase/(Decrease)
(Dollars in Thousands)
----------------------
[S] [C]
Employee costs ........................ $ 1,924
Depreciation and amortization ......... (5,048)
Other ................................. 6,093
-------
$ 2,969
=======
Employee costs consist of salaries, wages and other employee compensation,
employee benefits and payroll taxes paid directly by the Company. Similar costs
incurred by employees of Bell Atlantic Network Services, Inc. (NSI), who provide
centralized services on a contract basis, are allocated to the Company and are
included in other operating expenses. Employee costs increased $1,924,000 or
3.0% compared to the same period in 1993 due primarily to salary and wage
increases and higher healthcare costs. Higher repair and maintenance activity
experienced in the first quarter of 1994 caused by unusually severe winter storm
conditions throughout the region contributed to the increase in employee costs.
On August 15, 1994, the Company's parent, Bell Atlantic Corporation, announced
that it will record a charge in the third quarter of 1994, as required by
Statement of Financial Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits," to recognize the benefit costs for the separation of
employees who are entitled to benefits under its preexisting separation pay
plans. The charge, which was actuarially determined, represents benefits earned
to date by employees who are expected to receive separation payments in the
future, including those who will be separated through 1997 as a result of the
recently announced workforce reduction initiative. These workforce reductions
will be made possible by improved provisioning systems and customer service
processes, increased spans of control, and consolidation and centralization of
administrative and staff groups. The Company will record a pretax charge of
between $7 million and $10 million to recognize its share of the benefit costs
under the separation pay plans. Costs of enhancing systems and consolidating
work activities will be charged to expense as incurred.
Depreciation and amortization expense decreased $5,048,000 or 8.8% compared to
the same period in 1993 due primarily to lower depreciation expense resulting
from the completion, in December 1993, of accelerated depreciation for analog
switching
-10-
<PAGE>
Bell Atlantic - West Virginia, Inc.
equipment. This decrease was partially offset by an increase in the level of
depreciable plant.
Other operating expenses consist primarily of contracted services including
centralized service expenses allocated from NSI, rent, network software costs,
operating taxes other than income, and other general and administrative
expenses. Other operating expenses increased $6,093,000 or 6.9% compared to the
same period in 1993. The increase was principally due to higher costs allocated
from NSI primarily as a result of higher employee costs, contracted services,
and employee related expenses incurred in that organization. Also contributing
to the increase in other operating expenses were increased software development
costs associated with enhancing the Company's network and additional property
taxes resulting from higher assessments.
OPERATING INCOME TAXES
The provision for income taxes increased $2,126,000 or 8.2% compared to the
same period in 1993. The Company's effective income tax rate was 40.9% in the
first six months of 1994, compared to 40.6% for the same period in 1993. The
increase in the effective tax rate was principally the result of federal tax
legislation enacted in the third quarter of 1993, which increased the federal
corporate tax rate from 34% to 35%, partially offset by the reversal of certain
state deferred tax balances in the first half of 1994.
INTEREST EXPENSE
Interest expense decreased $1,147,000 or 10.7% compared to the same period in
1993, principally due to the effect of a long-term debt refinancing in 1993 and
lower average levels of short-term debt.
COMPETITIVE ENVIRONMENT
The communications industry is currently undergoing fundamental changes which
may have a significant impact on future financial performance of
telecommunications companies. These changes are driven by a number of factors,
including the accelerated pace of technological innovation, the convergence of
telecommunications, cable television, information services and entertainment
businesses, and a regulatory environment in which many traditional regulatory
barriers are being lowered and competition permitted or encouraged.
Communications services and equipment and the number of competitors offering
such services are continuing to expand. The Company's telecommunications
business is currently subject to competition from numerous sources, including
competitive access providers for network access services and competing cellular
telephone companies. An increasing amount of this competition is from large
companies which have substantial capital, technological and marketing resources,
many of which do not face the same regulatory constraints as the Company. Other
potential sources of competition are cable television systems, shared tenant
services and other non-carrier systems which are capable of partially or
completely bypassing the Company's local network.
The entry of well-financed competitors, such as large long-distance carriers
and other local exchange service competitors, has the potential to adversely
affect multiple revenue streams of the Company, including local exchange, local
access, and long-distance services in the market segments and geographical areas
in which the competitors operate. The amount of revenue reductions will depend
on the competitors' success in marketing these services, and the conditions of
interconnection established by regulators. The potential impact is expected to
be offset, to some extent, by revenues from interconnection charges to be paid
to the Company by these competitors.
The Company continues to focus its efforts on becoming more competitive and
seeking growth opportunities. The Company's responses to competitive challenges
include an increased emphasis on meeting customer requirements through the rapid
introduction of new products and services, the delivery of increased customer
value, and the development of customer loyalty programs. In addition, the
Company continues to strive for increased pricing flexibility through efforts to
reprice and repackage existing competitive services, to reduce its cost
structure and workforce through consolidation, re-engineering and streamlining
initiatives, and to achieve an improved regulatory and
-11-
<PAGE>
Bell Atlantic - West Virginia, Inc.
legislative environment. Other important competitive responses, including the
development of broadband networks, will improve the Company's ability to take
advantage of the growth opportunities created by technological advances and the
convergence of communications, information services and entertainment
industries.
On May 19, 1994, Bell Atlantic Corporation announced the specifics underlying
its full service network deployment program to make broadband, interactive,
multimedia services available to up to 8.5 million homes throughout the Bell
Atlantic region by the end of the year 2000. The Company will use a variety of
technologies, on a market by market basis, depending on customer demand and cost
considerations.
REGULATORY ENVIRONMENT
Federal Regulation
------------------
Recent FCC regulatory rulings have sought to expand competition for special
and switched access services. Effective February 1994, the FCC ordered local
exchange carriers (LECs), including the Company, to allow competing carriers to
interconnect to the local exchange network for the purpose of providing switched
access transport services. The terms and conditions of this ruling are similar
to those for special access collocation ordered during 1992. The principal goal
of the FCC's collocation rulings is to encourage competition for these services.
The FCC also granted additional, but limited, pricing flexibility for these
services so that the LECs can better respond to the competition that will
result. The Company does not expect the net revenue impact of special access
collocation to be material. Revenue losses from switched access collocation,
however, are expected to be larger than from special access collocation. Bell
Atlantic and certain other parties appealed both the special and switched access
collocation orders. In June 1994, the U.S. Court of Appeals for the District of
Columbia Circuit vacated the FCC's special access collocation order insofar as
it required physical collocation and remanded for further proceedings in which
the FCC could consider whether, and to what extent, virtual collocation should
be imposed. In July 1994, the FCC voted to require LECs to offer competitors
virtual collocation, with the LECs having the option to offer physical
collocation. Tariffs for virtual collocation for special access are required to
be filed on September 1, 1994 and will become effective on December 15, 1994.
The appeal of the switched access collocation order is being held in abeyance.
The FCC has informed the U.S. Court of Appeals that it will not further litigate
the June 1994 special access decision.
In February 1994, the FCC initiated a rulemaking proceeding to determine the
effectiveness of the price cap rules and decide what changes, if any, should be
made to those rules. Under proposed rulemaking, the FCC identified for
examination three broad sets of issues including those related to the basic
goals of price regulation, the operation of price caps and the transition of
local exchange services to a fully competitive market. This rulemaking is
expected to be concluded by the end of 1994. Any changes to the current price
cap plan are expected to be effective January 1, 1995 or shortly thereafter. At
this time, the Company cannot estimate the financial impact, if any, that would
result if the FCC revised its current price cap rules.
State Regulation
----------------
The communications services of the Company are subject to regulation by the
Public Service Commission of West Virginia (PSC) with respect to intrastate
rates and services and other matters.
The Company continues to operate under the provisions of the Incentive
Regulation Plan which was approved by the PSC, with some modifications, in
December 1991. The Incentive Regulation Plan gives the Company pricing
flexibility for competitive services and freezes the rates for basic local
exchange service. It also committed the Company to invest an additional $450
million from 1991 through 1995 in West Virginia's telecommunications
infrastructure, provides the Company some flexibility in setting depreciation
rates, and allows the Company to petition for a surcharge to reflect changes in
federally mandated separations procedures and accounting rules. The Incentive
Regulation Plan also provides for the phased elimination of Locality Rate Area
charges, which are basic service charges paid by customers who are located
farthest from the central office. Under the PSC's December 1991 order, the
freeze on rates for basic service and the phase out of Locality Rate Area
charges will end on December 31, 1994.
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Bell Atlantic - West Virginia, Inc.
The Company is currently working with the PSC staff and Consumer Advocate
Division on a new Incentive Regulation Plan that would begin in 1995.
OTHER MATTERS
Subsequent Event - Discontinued Application of Statement No. 71
---------------------------------------------------------------
On August 15, 1994, the Company's parent, Bell Atlantic Corporation, announced
that it has determined that it is no longer eligible for continued application
of the accounting required by Statement of Financial Accounting Standards No.
71, "Accounting for the Effects of Certain Types of Regulation" (Statement No.
71). The discontinued application of Statement No. 71 requires the Company, for
financial reporting purposes, to eliminate its regulatory assets and liabilities
and adjust the carrying amount of its telephone plant to the extent that it
determines that such amounts either are overstated as a result of the regulatory
process, or are not recoverable. Accordingly, as of August 1, 1994, the Company
will recognize a non-cash, after-tax extraordinary charge of approximately $64
million to adjust the net carrying amount of telephone plant and equipment and
an after-tax extraordinary charge of approximately $1 million to eliminate net
regulatory assets. The adjustment to the net carrying amount of telephone plant
and equipment will increase the reserve for accumulated depreciation by
approximately $116 million. The Company expects to report a loss for the third
quarter as a result of the extraordinary charge for the discontinued application
of Statement No. 71.
As of August 1, 1994, for financial reporting purposes, the Company will
utilize estimated asset lives for certain categories of plant and equipment that
are shorter than those currently approved by regulators (see Note 3 to the
Financial Statements). It is expected that the use of the shorter asset lives
when applied to the reduced net asset base will result in increased depreciation
expense for financial reporting purposes of approximately $2 million for the
remainder of 1994. The ongoing impact on operating expense resulting from the
elimination of the amortization of net regulatory assets is not expected to be
significant in future periods. The Company's accounting and reporting for
regulatory purposes are not affected by the discontinued application of
Statement No. 71.
Environmental Issues
--------------------
The Company is subject to a number of environmental matters as a result of its
operations and shared liability provisions in the Plan of Reorganization,
related to the Modification of Final Judgment. The Company continually monitors
its operations with respect to potential environmental issues, including changes
in legally mandated standards and remediation technologies. The Company's
recorded liability reflects those specific issues where remediation activities
are currently deemed to be probable and where the cost of remediation is
estimable. Management believes that the aggregate amount of any potential
liability would not have a material effect on the Company's financial condition
or results of operations.
FINANCIAL CONDITION
Management believes that the Company has adequate internal and external
resources available to meet ongoing operating requirements, including network
expansion and modernization, and payment of dividends. Management expects that
presently foreseeable capital requirements will be financed primarily through
internally generated funds, although additional long-term debt may be needed to
fund development activities and to maintain the Company's capital structure
within management's guidelines.
The Company's debt ratio was 40.4% at June 30, 1994, compared to 42.3% at
December 31, 1993.
As of June 30, 1994, the Company had $50,000,000 remaining under a shelf
registration statement filed with the Securities and Exchange Commission.
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Bell Atlantic - West Virginia, Inc.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For background concerning the Company's contingent liabilities under the
Plan of Reorganization governing the divestiture by AT&T Corporation
(formerly American Telephone and Telegraph Company) of certain assets of the
former Bell System Operating Companies with respect to private actions
relating to pre-divestiture events, including pending antitrust cases, see
Item 3 of the Company's Annual Report on Form 10-K for the year ended
December 31, 1993.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) There were no Current Reports on Form 8-K filed during the quarter ended
June 30, 1994.
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Bell Atlantic - West Virginia, 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 - WEST VIRGINIA, INC.
Date: August 15, 1994 By /s/ Ritchie A. Ireland, II
--------------------------------------
Ritchie A. Ireland, II
Vice President - External Affairs
and Finance
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