<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, 2000
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 1-1150
VERIZON NEW ENGLAND INC.
(Former Name: New England Telephone and Telegraph Company)
A New York Corporation I.R.S. Employer Identification No. 04-1664340
185 Franklin Street, Boston, Massachusetts 02110
Telephone Number (617) 743-9800
_____________________
THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF VERIZON COMMUNICATIONS INC., 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>
Verizon New England Inc.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------------------------------------------------
(Dollars in Millions) (Unaudited) 2000 1999 2000 1999
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
(including $25.1, $18.5, $70.4 and
$58.7 from affiliates) $1,173.0 $1,155.6 $3,515.3 $3,455.4
--------------------------------------------------------------------------
OPERATING EXPENSES
Operations and support (including $211.3, $186.9,
$619.3 and $538.5 to affiliates) 625.7 650.4 1,916.4 1,824.0
Depreciation and amortization 262.0 249.6 769.1 735.4
--------------------------------------------------------------------------
887.7 900.0 2,685.5 2,559.4
--------------------------------------------------------------------------
OPERATING INCOME 285.3 255.6 829.8 896.0
OTHER INCOME, NET
(including $10.2, $5.6, $18.5 and
$16.9 from affiliates) 11.2 6.0 23.9 20.0
INTEREST EXPENSE
(including $14.9, $4.9, $40.2 and
$9.6 to affiliates) 44.8 35.5 127.6 103.8
--------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES
AND EXTRAORDINARY ITEM 251.7 226.1 726.1 812.2
PROVISION FOR INCOME TAXES 95.0 87.1 281.4 313.0
--------------------------------------------------------------------------
INCOME BEFORE EXTRAORDINARY ITEM 156.7 139.0 444.7 499.2
EXTRAORDINARY ITEM
Early extinguishment of debt, net of tax --- --- --- (3.7)
--------------------------------------------------------------------------
NET INCOME $ 156.7 $ 139.0 $ 444.7 $ 495.5
==========================================================================
</TABLE>
See Notes to Condensed Financial Statements.
1
<PAGE>
Verizon New England Inc.
CONDENSED BALANCE SHEETS
ASSETS
------
(Dollars in Millions) September 30, 2000 December 31, 1999
--------------------------------------------------------------------------------
(Unaudited)
CURRENT ASSETS
Cash $ --- $ 2.5
Short-term investments --- 166.9
Accounts receivable:
Trade and other, net of allowances for
uncollectibles of $66.5 and $68.0 1,031.0 977.9
Affiliates 138.1 145.4
Material and supplies 37.5 70.5
Prepaid expenses 87.0 53.2
Deferred income taxes 24.2 20.0
Other 102.9 50.1
---------------------------------
1,420.7 1,486.5
---------------------------------
PLANT, PROPERTY AND EQUIPMENT 15,666.7 14,964.9
Less accumulated depreciation 9,182.1 8,716.2
---------------------------------
6,484.6 6,248.7
---------------------------------
DEFERRED INCOME TAXES --- 16.2
---------------------------------
OTHER ASSETS 280.9 199.6
---------------------------------
TOTAL ASSETS $8,186.2 $7,951.0
=================================
See Notes to Condensed Financial Statements.
2
<PAGE>
Verizon New England Inc.
CONDENSED BALANCE SHEETS
LIABILITIES AND SHAREOWNER'S INVESTMENT
---------------------------------------
<TABLE>
<CAPTION>
(Dollars in Millions) September 30, 2000 December 31, 1999
------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Debt maturing within one year:
Note payable to affiliates $ 788.4 $ 721.1
Other 100.1 100.3
Accounts payable and accrued liabilities:
Affiliates 723.6 912.2
Other 735.7 696.4
Other liabilities 48.1 40.5
-------------------------------------
2,395.9 2,470.5
-------------------------------------
LONG-TERM DEBT
Note payable to affiliate 200.0 ---
Other 1,829.9 1,805.7
-------------------------------------
2,029.9 1,805.7
-------------------------------------
EMPLOYEE BENEFIT OBLIGATIONS 1,544.1 1,750.1
-------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 97.3 .6
Unamortized investment tax credits 38.7 42.2
Other 47.0 51.9
-------------------------------------
183.0 94.7
-------------------------------------
SHAREOWNER'S INVESTMENT
Common stock-one share, without par value 1.0 1.0
Additional paid-in capital 1,440.8 1,678.7
Reinvested earnings 593.1 151.9
Accumulated other comprehensive loss (1.6) (1.6)
-------------------------------------
2,033.3 1,830.0
-------------------------------------
TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT $8,186.2 $7,951.0
=====================================
</TABLE>
See Notes to Condensed Financial Statements.
3
<PAGE>
Verizon New England Inc.
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------------------
(Dollars in Millions) (Unaudited) 2000 1999
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $1,005.3 $1,292.6
-------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in short-term investments 166.9 159.0
Capital expenditures (973.6) (802.5)
Other, net (103.1) (27.1)
-------------------------------------------
Net cash used in investing activities (909.8) (670.6)
-------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 124.7 198.4
Proceeds from medium-term note payable to affiliate 200.0 ---
Early extinguishment of debt --- (225.0)
Principal repayments of borrowings and capital lease obligations (100.2) (145.3)
Net change in note payable to affiliates 67.3 171.8
Distributions of additional paid-in capital (381.6) (34.3)
Dividends paid --- (576.1)
Net change in outstanding checks drawn on controlled
disbursement accounts (8.2) (22.6)
-------------------------------------------
Net cash used in financing activities (98.0) (633.1)
-------------------------------------------
NET CHANGE IN CASH (2.5) (11.1)
CASH, BEGINNING OF PERIOD 2.5 11.1
-------------------------------------------
CASH, END OF PERIOD $ --- $ ---
==========================================
</TABLE>
See Notes to Condensed Financial Statements.
4
<PAGE>
Verizon New England Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
Verizon New England Inc., formerly New England Telephone and Telegraph
Company, is a wholly owned subsidiary of NYNEX Corporation (NYNEX), which is a
wholly owned subsidiary of Verizon Communications Inc. (Verizon Communications).
The accompanying unaudited condensed financial statements have been prepared
based upon Securities and Exchange Commission (SEC) rules that permit reduced
disclosure for interim periods. These financial statements include certain
reclassifications in presentation as a result of the merger of Bell Atlantic
Corporation (Bell Atlantic) and GTE Corporation (GTE) (see Note 2). 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 and other items (see Note 2).
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 1999 Annual Report on Form 10-K.
2. Bell Atlantic - GTE Merger
On June 30, 2000, Bell Atlantic and GTE completed a merger of equals
under a definitive merger agreement dated as of July 27, 1998. Under the terms
of the agreement, GTE became a wholly owned subsidiary of Bell Atlantic. In
September 2000, Bell Atlantic changed its name to Verizon Communications Inc.
The merger qualified as a tax-free reorganization and has been accounted for as
a pooling of interests. Under this method of accounting, Bell Atlantic and GTE
are treated as if they had always been combined for accounting and financial
reporting purposes.
Merger-Related and Severance Costs
Results of operations for the nine months ended September 30, 2000
included merger-related pre-tax costs totaling approximately $53.5 million,
consisting of $25.7 million for direct incremental costs and $27.8 million for
employee severance costs. These costs include approximately $40.3 million
representing our allocated share of merger-related costs from Verizon Services
Corp. (Verizon Services), an affiliate which provides centralized services on a
contract basis. Costs allocated from Verizon Services are included in Operations
and Support Expenses.
Direct incremental costs consist of our proportionate share of expenses
associated with completing the merger transaction such as professional and
regulatory fees, compensation arrangements and shareowner-related costs.
Employee severance costs, as recorded under Statement of Financial Accounting
Standards (SFAS) No. 112, "Employers' Accounting for Postemployment Benefits,"
represent our proportionate share of benefit costs for the separation of
management employees who are entitled to benefits under pre-existing Verizon
Communications separation pay plans. The separations are expected to occur as a
result of consolidations and process enhancements. Accrued postemployment
benefit liabilities for those employees are included in our balance sheet as a
component of Accounts Payable and Accrued Liabilities -Other.
Transition Costs
In addition to the direct merger-related and severance costs, over the
next several years, we expect to incur transition costs related to the merger.
These costs will be incurred to integrate systems, consolidate real estate and
relocate employees. These costs will include our allocated share of
merger-related costs from Verizon Services. They also include advertising and
other costs to establish the Verizon brand. Transition costs are expensed as
incurred. During the nine month period ended September 30, 2000, we incurred
$5.1 million of transition costs which were allocated to us by Verizon Services.
Other Related Actions
During the second quarter of 2000, we also recorded a $2.0 million charge
for other actions in relation to the merger or other strategic decisions. This
charge included the write-off of duplicate assets.
5
<PAGE>
Verizon New England Inc.
3. Dividend
On September 7, 2000, we declared a dividend in the amount of $79.3
million from Additional Paid-in-Capital. The dividend was paid to NYNEX on
November 1, 2000.
4. Debt
On June 15, 2000, we issued a 7.65% note for $125.0 million which matures
on June 15, 2007. On June 30, 2000, we issued a medium-term note for $200.0
million to an affiliated company, Verizon NSI Holdings Inc. The note carries a
floating interest rate with an initial rate of 6.98%, which will be reset each
quarter. This note matures on June 30, 2003.
In April 1999, we issued $200.0 million of 5.875% notes, due on April 15,
2009. The proceeds from the issuance were used to redeem $200.0 million of
7.375% notes due on October 15, 2007. We recorded an extraordinary loss of $1.5
million (net of an income tax benefit of $.9 million) related to this
redemption. We also repurchased $25.0 million of 9% debentures, due on August 1,
2031, in the second quarter of 1999 and recorded an extraordinary loss on this
transaction of $2.2 million (net of an income tax benefit of $1.4 million).
5. Recent Accounting Pronouncements
FASB Accounting Standard - Derivatives and Hedging Activities
In June 1998, the Financial Accounting Standards Board (FASB) issued 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 other
comprehensive income, depending on the designated use and effectiveness of the
instruments.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," which amended SFAS No.
133. The amendments in SFAS No. 138 address certain implementation issues and
relate to such matters as the normal purchases and normal sales exception, the
definition of interest rate risk, hedging recognized
foreign-currency-denominated assets and liabilities, and intercompany
derivatives.
We are currently evaluating the provisions of SFAS No. 133 and SFAS No.
138, which we will adopt on January 1, 2001. The impact of adoption will be
affected 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.
SEC Staff Accounting Bulletin - Revenue Recognition
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition in Financial Statements," which provides additional
guidance on revenue recognition and, in certain circumstances, requires the
deferral of incremental costs. We will adopt SAB No. 101 in the fourth quarter
of 2000, retroactive to January 1, 2000. We are currently assessing the impact
of adopting SAB No. 101.
6. Shareowner's Investment
<TABLE>
<CAPTION>
Additional Reinvested Accumulated Other
(Dollars in Millions) (Unaudited) Common Stock Paid-in Capital Earnings Comprehensive Loss
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1999 $1.0 $1,678.7 $151.9 $(1.6)
Net income 444.7
Distributions of additional paid-in capital
declared to parent (237.9)
Other (3.5)
---------------------------------------------------------------------
Balance at September 30, 2000 $1.0 $1,440.8 $593.1 $(1.6)
=====================================================================
</TABLE>
Net income and comprehensive income were the same for the nine months
ended September 30, 2000 and 1999.
6
<PAGE>
Verizon New England Inc.
7. Commitments and 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.
Several federal regulatory matters may possibly require us to refund a
portion of the revenues collected in the current and prior periods. The outcome
of each pending matter, as well as the time frame within which each matter will
be resolved, is not presently determinable.
Federal and state regulatory conditions to the Bell Atlantic - GTE merger
include certain commitments to, among other things, promote competition and the
widespread deployment of advanced services, while helping ensure that consumers
continue to receive high-quality, low cost telephone services. In some cases,
there are significant penalties associated with not meeting these commitments.
The cost of satisfying these commitments could have a significant impact on net
income in future periods. As previously disclosed, the cost of satisfying these
commitments is likely to impact the net income of Verizon Communications on a
consolidated basis in 2000 by approximately $275 to $325 million, based on
preliminary estimates. The estimated impact on each operating telephone
subsidiary, including the Company, is currently being assessed.
7
<PAGE>
Verizon New England 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 $444.7 million for the nine months ended
September 30, 2000, compared to net income of $495.5 million for the same period
in 1999.
Our results for 2000 and 1999 were affected by special items. The special
items in both periods included our allocated share of charges from Verizon
Services Corp. (Verizon Services), an affiliate which provides centralized
services on a contract basis.
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, 2000 1999
---------------------------------------------------------------------------------------------------------------------
Operations and Support Expenses
<S> <C> <C>
Bell Atlantic-GTE merger direct incremental costs $ 25.7 $ ---
Bell Atlantic-GTE merger severance costs 27.8 ---
Bell Atlantic-GTE merger transition costs 5.1 ---
Bell Atlantic-GTE merger other related actions 2.0 ---
Bell Atlantic-NYNEX merger transition costs --- 13.7
Other charges and special items 39.9 ---
------------------------------------
Net impact on income before provision for income taxes and extraordinary item $100.5 $ 13.7
====================================
Extraordinary item
Early extinguishment of debt, net of tax $ --- $ (3.7)
====================================
</TABLE>
What follows is a further explanation of the nature of these special
items.
Bell Atlantic - GTE Merger
On June 30, 2000, Bell Atlantic and GTE completed a merger of equals under
a definitive merger agreement dated as of July 27, 1998. Under the terms of the
agreement, GTE became a wholly owned subsidiary of Bell Atlantic. In September
2000, Bell Atlantic changed its name to Verizon Communications Inc. (Verizon
Communications). The merger qualified as a tax-free reorganization and has been
accounted for as a pooling of interests. Under this method of accounting, Bell
Atlantic and GTE are treated as if they had always been combined for accounting
and financial reporting purposes.
Merger-Related and Severance Costs
Results of operations for the nine months ended September 30, 2000
included merger-related pre-tax costs totaling approximately $53.5 million,
consisting of $25.7 million for direct incremental costs and $27.8 million for
employee severance costs. These costs include approximately $40.3 million
representing our allocated share of merger-related costs from Verizon Services.
Costs allocated from Verizon Services are included in Operations and Support
Expenses.
Direct incremental costs consist of our proportionate share of expenses
associated with completing the merger transaction such as professional and
regulatory fees, compensation arrangements and shareowner-related costs.
Employee severance costs, as recorded under Statement of Financial Accounting
Standards (SFAS) No. 112, "Employers' Accounting for Postemployment Benefits,"
represent our proportionate share of benefit costs for the separation of
management employees who are entitled to benefits under pre-existing Verizon
Communications separation pay plans. The separations are expected to occur as a
result of consolidations and process enhancements. Accrued postemployment
benefit liabilities for those employees are included in our balance sheet as a
component of Accounts Payable and Accrued Liabilities -Other.
8
<PAGE>
Verizon New England Inc.
Transition Costs
In addition to the direct merger-related and severance costs, over the
next several years, we expect to incur transition costs related to the merger.
These costs will be incurred to integrate systems, consolidate real estate and
relocate employees. These costs will include our allocated share of
merger-related costs from Verizon Services. They also include advertising and
other costs to establish the Verizon brand. Transition costs are expensed as
incurred. During the nine month period ended September 30, 2000, we incurred
$5.1 million of transition costs which were allocated to us by Verizon Services.
Other Related Actions
During the second quarter of 2000, we also recorded a $2.0 million charge
for other actions in relation to the merger or other strategic decisions. This
charge included the write-off of duplicate assets.
Other Charges and Special Items
In the second quarter of 2000, we recorded other charges and special items
totaling approximately $39.9 million. These charges included costs for inventory
adjustments, write-offs of accounts receivable, legal contingencies and other
miscellaneous items.
Bell Atlantic - NYNEX Merger
Merger-Related Costs
In connection with the Bell Atlantic-NYNEX merger, which was completed in
August 1997, we recorded pre-tax merger-related transition costs of $13.7
million in the first nine months of 1999. These costs included approximately
$13.4 million, representing our allocated share of transition costs from Verizon
Services.
Transition costs consisted of our proportionate share of costs associated
with integrating the operations of Bell Atlantic and NYNEX, such as systems
modification costs and advertising and branding costs. Transition costs were
expensed as incurred.
Extraordinary Item
In the first nine months of 1999, we recorded extraordinary charges
associated with the early extinguishments of long-term debt. These charges
reduced net income by a total of $3.7 million (net of income tax benefits
totaling $2.3 million). You may find additional information about these
extraordinary charges in Note 4 to the condensed financial statements.
Termination of Agreement with Yellow Pages
In 1999, our operating revenues included payments from Verizon Yellow
Pages Company (Yellow Pages) for earnings related to its directory activities in
Maine based on a regulated rate of return. We also earned fees from Yellow Pages
for the use of our name in soliciting directory advertising and in publishing
and distributing directories. As of December 31, 1999, Yellow Pages gave notice
of its intention to terminate the payments relating to the Maine directory
business, such termination to be effective upon receipt of regulatory approval.
On June 13, 2000, Yellow Pages received approval from the Maine Public Utilities
Commission to terminate these payments, effective January 1, 2000. As a result,
past operating results are no longer indicative of future operating results.
These and other items affecting the comparison of our results of operations for
the nine month periods ended September 30, 2000 and 1999 are discussed in the
following sections.
9
<PAGE>
Verizon New England Inc.
OPERATING REVENUE STATISTICS
----------------------------
2000 1999 % Change
--------------------------------------------------------------------------------
At September 30,
Access Lines in Service (in thousands)*
Residence 4,697 4,681 .3%
Business 2,613 2,559 2.1
Public 76 79 (3.8)
----------------------------------
7,386 7,319 .9
==================================
Nine Months Ended September 30,
Access Minutes of Use (in millions) 23,772 22,293 6.6
==================================
* 1999 reflects a restatement of access lines in service
OPERATING REVENUES
------------------
(Dollars in Millions)
Nine Months Ended September 30, 2000 1999
--------------------------------------------------------------------------------
Local services $1,798.4 $1,760.4
Network access services 1,092.2 1,056.3
Long distance services 391.3 440.8
Other services 233.4 197.9
--------------------------------
Total $3,515.3 $3,455.4
================================
LOCAL SERVICES
2000 - 1999 Increase
--------------------------------------------------------------------------------
Nine Months $38.0 2.2%
--------------------------------------------------------------------------------
Local service revenues are earned from the provision of local exchange,
local private line, wire maintenance, voice messaging and value-added services.
Value-added services are a family of services that expand the utilization of the
network, including products such as Caller ID, Call Waiting and Return Call.
Local services also includes wholesale revenues from unbundled network element
(UNE) platforms, certain data transport revenues, and wireless interconnection
revenues.
Local service revenues increased in the first nine months of 2000 due to
higher customer demand and usage of our wire maintenance services, as well as
our national directory assistance and data transport and digital services.
Higher wireless interconnection revenues also contributed to the increase in
local service revenue. Growth in local service revenues was partially offset by
price reductions on certain local exchange services and the effect of lower
calling volumes.
The effect of an 18-day work stoppage, as described below under "Operating
Expenses - Operations and Support - Labor Agreements," adversely affected local
service revenue growth due to the delay in the installation of new services and
as a result of customers not having full access to demand-based services.
NETWORK ACCESS SERVICES
2000 - 1999 Increase
--------------------------------------------------------------------------------
Nine Months $35.9 3.4%
--------------------------------------------------------------------------------
Network access revenues are earned from end-user subscribers and from 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.
10
<PAGE>
Verizon New England Inc.
Network access revenue growth in the first nine months of 2000 was mainly
attributable to higher customer demand, as reflected by growth in access minutes
of use, of 6.6% from the same period in 1999. Volume growth also reflects a
continuing expansion of the business market, particularly for high capacity data
services. In the first nine months of 2000, 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, network access revenues included higher revenues 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 incurred for LNP
in the form of monthly end-user charges for a five-year period beginning in
March 1999.
Volume-related growth was largely offset by price reductions associated
with federal and state price cap filings and other regulatory decisions,
including the implementation of the Coalition for Affordable Local and Long
Distance Service (CALLS) plan, effective July 1, 2000. For more information on
federal access rates see "Other Matters - FCC Regulation and Interstate Rates."
LONG DISTANCE SERVICES
2000 - 1999 (Decrease)
--------------------------------------------------------------------------------
Nine Months $(49.5) (11.2)%
--------------------------------------------------------------------------------
Long distance revenues are earned primarily from calls made to points
outside a customer's local calling area, but within our service area (intraLATA
toll). IntraLATA toll calls originate and terminate within the same LATA, but
generally cover a greater distance than a local call. These services are
regulated by state regulatory commissions, except where they cross state lines.
Other long distance services that we provide include 800 services and Wide Area
Telephone Service (WATS).
The decline in long distance revenues in the first nine months of 2000 was
principally caused by the competitive effects of presubscription, which enables
customers to make intraLATA toll calls using a competing carrier without having
to dial an access code, and price reductions on long distance services as
required by state price cap plans. The negative effect of presubscription on
long distance revenues was partially mitigated by increased network access
services for usage of our network by alternative service providers. In response
to presubscription, we have implemented customer win-back and retention
initiatives that include toll calling discount packages and product bundling
offers. The decline in long distance revenues was partially offset by additional
revenue generated by higher calling volumes.
OTHER SERVICES
2000 - 1999 Increase
--------------------------------------------------------------------------------
Nine Months $35.5 17.9%
--------------------------------------------------------------------------------
Our other services include such services as billing and collections for
long distance carriers and affiliates, facilities rentals to affiliates and
nonaffiliates, collocation for competitive local exchange carriers, usage of
separately priced (unbundled) components of our network by competitive local
exchange carriers, public (coin) telephone and customer premises equipment
(CPE). Other services revenues also include directory services revenues earned
primarily from fees paid by customers for nonpublication of telephone numbers
and multiple white page listings.
As described earlier, Yellow Pages terminated its payments to us for its
directory publishing activities in Maine, effective January 1, 2000. As a
result, we no longer earn revenues associated with Yellow Pages' directory
business in Maine.
Other services revenues increased in the first nine months of 2000
primarily due to higher payments received from competitive local exchange
carriers for interconnection of their networks with our network and higher
facilities rental revenues received from affiliates. These increases were
partially offset by an accrual for state regulatory matters and the effect of
the termination of the agreement with Yellow Pages.
11
<PAGE>
Verizon New England Inc.
OPERATING EXPENSES
------------------
(Dollars in Millions)
OPERATIONS AND SUPPORT
2000 - 1999 Increase
--------------------------------------------------------------------------------
Nine Months $92.4 5.1%
--------------------------------------------------------------------------------
Operations and support expenses consist of employee costs and other
operating expenses. Employee costs consist of salaries, wages and other employee
compensation, employee benefits and payroll taxes. Other operating expenses
consist of contract services including centralized services expenses allocated
from Verizon Services and NYNEX, rent, network software costs, operating taxes
other than income, the provision for uncollectible accounts receivable, and
other costs.
The increase in operations and support expenses was primarily attributable
to merger-related costs and other special items recorded in 2000. These charges
consisted of $60.6 million for merger-related costs and $39.9 million for other
special items. Operations and support expenses were further increased by the
effect of higher work force levels and annual salary and wage increases for
management and associate employees.
These increases were partially offset by a decline in pension and benefit
costs and the effects of the work stoppage. The decline in pension and benefit
costs was due to favorable pension plan investment returns and changes in
actuarial assumptions. These factors were partially offset by changes in certain
plan provisions, including a previously reported amendment to our management
cash balance plan and a special lump sum pension payment to management and
associate retirees.
Labor Agreements
Associate employee wages, and pension and other benefits are determined
under contracts with unions representing our associate employees. On August 5,
2000, collective bargaining agreements with unions representing our associate
employees expired, and the unions initiated a work stoppage.
On August 20, 2000, Verizon Communications reached a tentative agreement
with the Communications Workers of America (CWA) and the International
Brotherhood of Electrical Workers (IBEW) on new 3-year contracts covering our
employees. The contracts provide for annual wage increases of 4 percent, 3
percent and 5 percent, beginning in August 2000. Customer service
representatives will receive an additional 4 percent wage increase effective
immediately. Pension benefits for active employees will increase by 5 percent on
July 1, 2001, 5 percent on July 1, 2002 and 4 percent on July 1, 2003. The
contracts also include team-based incentive awards for meeting higher service,
performance and other standards, increased funding for work and family programs,
improvements to health and other benefits, and certain provisions relating to
overtime, access to work and employment security. In addition, prior to
year-end, all union-represented employees will be granted options to purchase
100 shares of Verizon Communications' common stock.
The labor agreements with the CWA and IBEW have been ratified by the union
membership.
DEPRECIATION AND AMORTIZATION
2000 - 1999 Increase
--------------------------------------------------------------------------------
Nine Months $33.7 4.6%
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Depreciation and amortization expense increased in the first nine months
of 2000 over the same period in 1999 principally as a result of growth in
depreciable telephone plant and changes in the mix of plant assets. The growth
in telephone plant was largely attributable to increased capital expenditures
for software and hardware to support the expansion of our network. These factors
were partially offset by the effect of lower rates of depreciation and
amortization.
12
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Verizon New England Inc.
OTHER INCOME, NET
2000 - 1999 Increase
--------------------------------------------------------------------------------
Nine Months $3.9 19.5%
--------------------------------------------------------------------------------
The change in other income, net, was mainly attributable to an increase in
the income recognized from our investments in SMS/800 and in Verizon Services
under the equity method.
INTEREST EXPENSE
2000 - 1999 Increase
--------------------------------------------------------------------------------
Nine Months $23.8 22.9%
--------------------------------------------------------------------------------
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 increased in the first nine months of 2000 over the same
period in 1999 primarily due to higher levels of average short-term debt with an
affiliate and higher interest rates associated with this debt. These factors
were offset, in part, by higher capitalized interest costs resulting from higher
levels of average telephone plant under construction.
EFFECTIVE INCOME TAX
Nine Months Ended September 30,
--------------------------------------------------------------------------------
2000 38.8%
--------------------------------------------------------------------------------
1999 38.5%
--------------------------------------------------------------------------------
The effective income tax rate is the provision for income taxes as a
percentage of income before the provision for income taxes and extraordinary
items. Our effective income tax rate was higher in the first nine months of 2000
principally due to non-recurring income tax expenses recorded in the first nine
months of 2000.
OTHER MATTERS
-------------
FCC Regulation and Interstate Rates
On May 31, 2000, the FCC approved the industry proposal to restructure
access charges (known as the "CALLS plan"). Under the terms of the plan, direct
end-user access charges are increased while access charges to long distance
carriers are reduced. While the plan continues the 6.5% (less inflation) annual
reductions for most interstate access charges, it provides for a price freeze
when switched access transport prices reach $0.0055 per-minute. In addition, in
conjunction with provisions that will allow carriers to deaverage their
subscriber line charges by geographic zones, the plan establishes a new $650
million universal service fund to support interstate access rates. Of that
amount, Verizon Communications expects approximately $320 million to be used to
support interstate access services in its service territory. The price
restructuring portions of the plan are mandatory for all large local exchange
carriers, including Verizon Communications' telephone operating companies, such
as us. The price level portions of the plan are mandatory only in the initial
year of the plan. By September 14, 2000, carriers were to decide whether to
participate in the remaining four years of the plan, or whether to submit cost
studies as the basis of future price caps.
Consistent with the new access plan, Verizon Communications filed tariff
adjustments to take effect on July 1, 2000 (with modifications effective August
11, 2000). As a result of these tariff adjustments, former GTE carriers in ten
states, and former Bell Atlantic carriers in seven states reached the $0.0055
benchmark and by opting into the full five year CALLS plan, Verizon
Communications would not be subject to further annual interstate switched access
price reductions for the remaining life of the plan.
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Verizon New England Inc.
As of September 14, 2000, Verizon Communications formally opted to
participate in the full five-year term of the FCC-adopted industry plan to
restructure access rates known as the CALLS plan. As a result of this decision,
price caps on Verizon Communications' interstate access charges will be set
according to the terms of the CALLS plan.
Telecommunications Act of 1996
In-Region Long Distance
On September 22, 2000, Verizon Communications filed its application with
the FCC for permission to enter the in-region long distance business in
Massachusetts. This filing followed nearly 16 months of proceedings before the
Massachusetts Department of Telecommunications and Energy (MDTE) demonstrating
that we have satisfied the 14-point "checklist" required under the
Telecommunications Act of 1996 for entry into the in-region long distance
business. The filing also followed an extensive 12 month third-party test of the
operations support systems (OSS) in Massachusetts conducted by KPMG Consulting
under the direction of the MDTE. On October 16, 2000, the MDTE filed an
Evaluation fully supporting our application. On October 27, 2000, the Department
of Justice filed its evaluation of the application. The Department of Justice
stated that "although Verizon Communications has satisfied [the] standard in
most respects, important issues remain inadequately addressed." Verizon
Communications expects the FCC to render a decision on its application before
year-end.
Recent Accounting Pronouncements
FASB Accounting Standard - Derivatives and Hedging Activities
In June 1998, the Financial Accounting Standards Board (FASB) issued 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 other
comprehensive income, depending on the designated use and effectiveness of the
instruments.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," which amended SFAS No.
133. The amendments in SFAS No. 138 address certain implementation issues and
relate to such matters as the normal purchases and normal sales exception, the
definition of interest rate risk, hedging recognized
foreign-currency-denominated assets and liabilities, and intercompany
derivatives.
We are currently evaluating the provisions of SFAS No. 133 and SFAS No.
138, which we will adopt on January 1, 2001. The impact of adoption will be
affected 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.
SEC Staff Accounting Bulletin - Revenue Recognition
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition in Financial Statements," which provides additional
guidance on revenue recognition and, in certain circumstances, requires the
deferral of incremental costs. We will adopt SAB No. 101 in the fourth quarter
of 2000, retroactive to January 1, 2000. We are currently assessing the impact
of adopting SAB No. 101.
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Verizon New England Inc.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There were no proceedings reportable under this Item.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Number
27 Financial Data Schedule.
(b) Current Reports on Form 8-K filed during the quarter ended
September 30, 2000:
A Current Report on Form 8-K, dated August 21, 2000, was
filed regarding a tentative agreement on new three-year
contracts with the International Brotherhood of Electrical
Workers and the Communications Workers of America in New
York and New England.
A Current Report on Form 8-K, dated September 7, 2000, was
filed in connection with a change in our independent
accountants.
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Verizon New England 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.
VERIZON NEW ENGLAND INC.
Date: November 14, 2000 By /s/ Edwin F. Hall
---------------------------
Edwin F. Hall
Chief Financial Officer
and Controller
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF NOVEMBER 8, 2000.
16
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EXHIBIT INDEX
Exhibit Number
27 Financial Data Schedule.
