SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-1049
BellSouth Telecommunications, Inc.
(Exact name of registrant as specified in its charter)
Georgia 58-0436120
(State of Incorporation) (I.R.S. Employer
Identification Number)
675 West Peachtree Street, N. E., Atlanta, Georgia 30375
(Address of principal executive offices) (Zip Code)
Registrant's telephone number 404 529-8611
THE REGISTRANT, A WHOLLY-OWNED SUBSIDIARY OF BELLSOUTH 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 ___
Table of Contents
Item
Page
Part I
1. Financial Statements 3
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Selected Operating Data 10
2. Management's Discussion and Analysis of
Results of Operations 12
Results of Operations 12
Volumes of Business 13
Operating Revenues 13
Operating Expenses 15
Other Income Statement Items 16
Extraordinary Losses 16
Other Financing Activity 17
Work Force Reduction Charges 18
1995 Work Force Reduction Charge 18
Postemployment Benefits Charge 18
1993 Restructuring of Telephone
Operations 19
Regulatory and Competitive Environment 20
Regulation 20
Competition 22
Business Developments 22
CWA Working Agreement 22
Part II
6. Exhibits and Reports on Form 8-K 23
PART I -- FINANCIAL INFORMATION
BELLSOUTH TELECOMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(Unaudited)
(In Millions)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1995 1994 1995 1994
Operating Revenues:
Network and related services
Local service $1,856.8 $1,728.2 $5,418.5 $5,117.6
Interstate access 805.4 770.8 2,406.1 2,338.2
Intrastate access 229.9 226.6 683.0 687.1
Toll 219.8 298.4 766.4 899.0
Other 493.0 486.1 1,486.9 1,435.9
Total Operating Revenues 3,604.9 3,510.1 10,760.9 10,477.8
Operating Expenses:
Cost of services and
products 1,336.4 1,341.5 3,894.1 3,951.1
Depreciation and
amortization 774.7 735.5 2,285.8 2,192.9
Selling, general and
administrative 577.2 581.7 1,693.4 1,682.8
Total Operating Expenses 2,688.3 2,658.7 7,873.3 7,826.8
Operating Income 916.6 851.4 2,887.6 2,651.0
Interest Expense 134.5 146.2 424.8 408.0
Other Income, net 7.7 3.8 19.9 13.1
Income Before Income Taxes
and Extraordinary Losses 789.8 709.0 2,482.7 2,256.1
Provision for Income Taxes 302.9 247.9 944.4 824.1
Income Before Extraordinary
Losses 486.9 461.1 1,538.3 1,432.0
Extraordinary Loss for
Discontinuance of SFAS No.
71, net of tax (Note C) -- -- (2,717.7) --
Extraordinary Loss on Early
Extinguishment of Debt, net
of tax (Note C) -- -- (15.8) --
Net Income (Loss) $ 486.9 $ 461.1 $(1,195.2) $1,432.0
Retained Earnings:
At beginning of period $ 1,009.2 $3,326.1 $ 3,521.5 $3,180.0
Add: Net Income (Loss) 486.9 461.1 (1,195.2) 1,432.0
Deduct: Dividends declared 386.7 365.8 1,216.9 1,190.6
At end of period $ 1,109.4 $3,421.4 $ 1,109.4 $3,421.4
The accompanying notes are an integral part of these financial statements.
BELLSOUTH TELECOMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In Millions)
September 30, December 31,
1995 1994
ASSETS
Current Assets:
Cash and cash equivalents $91.6 $94.4
Accounts receivable, net of allowance for
uncollectibles of $95.9 and $84.6 2,741.2 2,316.5
Material and supplies 339.0 375.2
Other current assets 134.4 380.1
3,306.2 3,166.2
Investments In and Advances to Affiliates 276.3 248.9
Property, Plant and Equipment, net 18,577.6 23,515.2
Deferred Charges and Other Assets 301.1 441.5
Total Assets $22,461.2 $27,371.8
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Debt maturing within one year $840.8 $1,218.2
Accounts payable 1,060.7 1,121.9
Other current liabilities 2,166.6 2,502.4
4,068.1 4,842.5
Long-Term Debt 6,805.3 6,511.8
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 1,211.3 2,992.1
Unamortized investment tax credits 374.4 443.3
Other liabilities and deferred credits 1,479.3 1,657.6
3,065.0 5,093.0
Shareholder's Equity:
Common stock, one share, no par value 7,413.4 7,403.0
Retained earnings 1,109.4 3,521.5
8,522.8 10,924.5
Total Liabilities and Shareholder's Equity $22,461.2 $27,371.8
The accompanying notes are an integral part of these financial statements.
BELLSOUTH TELECOMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Millions)
For the Nine Months
Ended September 30,
1995 1994
Cash Flows from Operating Activities:
Net income (loss) $(1,195.2) $1,432.0
Adjustments to net income:
Extraordinary loss for discontinuance of SFAS No. 71 4,449.0 --
Extraordinary loss on early extinguishment of debt 25.8 --
Payment of call premium (13.8) --
Depreciation 2,285.4 2,190.0
Provision for losses on bad debts 96.3 92.4
Deferred income taxes and unamortized investment tax
credits (1,705.2) (138.4)
Net change in accounts receivable and other current
assets (166.9) (151.2)
Change in accounts payable and other current
liabilities (398.0) (218.2)
Change in deferred charges and other assets 8.1 (4.1)
Net change in other liabilities and deferred credits 124.0 269.4
Other reconciling items, net 11.5 (1.0)
Net cash provided by operating activities 3,521.0 3,470.9
Cash Flows from Investing Activities:
Capital expenditures (2,197.7) (2,320.1)
Other investing activities, net (9.9) 94.0
Net cash used for investing activities (2,207.6) (2,226.1)
Cash Flows from Financing Activities:
Proceeds from short-term borrowings 9,945.0 9,553.3
Repayment of short-term borrowings (10,323.2) (9,477.7)
Proceeds from long-term debt 600.0 --
Repayment of long-term debt (300.2) (.3)
Advances from parent and affiliates 465.7 381.0
Repayment of advances from parent and affiliates (469.1) (388.9)
Dividends paid to parent (1,226.6) (1,216.9)
Other Financing activities, net (7.8) (58.6)
Net cash used for financing activities (1,316.2) (1,208.1)
Net Increase(Decrease) in Cash and Cash Equivalents (2.8) 36.7
Cash and Cash Equivalents at Beginning of Period 94.4 84.3
Cash and Cash Equivalents at End of Period $91.6 $121.0
The accompanying notes are an integral part of these financial statements.
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Millions)
(Unaudited)
Note A -- Preparation of Interim Financial Statements
The consolidated financial statements of BellSouth
Telecommunications, Inc. (BellSouth Telecommunications) have been
prepared in accordance with the rules and regulations of the
Securities and Exchange Commission (SEC). Certain amounts have
been reclassified from previous presentations. In the opinion of
BellSouth Telecommunications, these statements include all
adjustments necessary for a fair presentation of the results of all
interim periods reported herein. All adjustments are of a normal
recurring nature unless otherwise disclosed. Certain information
and footnote disclosures prepared in accordance with generally
accepted accounting principles have been either condensed or
omitted pursuant to SEC rules and regulations. However, BellSouth
Telecommunications believes that the disclosures made are adequate
for a fair presentation of results of operations, financial
position and cash flows. These consolidated financial statements
should be read in conjunction with the consolidated financial
statements and accompanying notes included in BellSouth
Telecommunications's latest annual report on Form 10-K and previous
quarterly reports on Form 10-Q. BellSouth Telecommunications is a
wholly-owned subsidiary of BellSouth Corporation (BellSouth).
Note B -- Supplemental Cash Flow Information
The following supplemental information is presented in accordance
with the provisions of Statement of Financial Accounting Standards
(SFAS) No. 95, "Statement of Cash Flows."
For the Nine Months
Ended September 30,
1995 1994
Cash Paid For:
Income taxes $835.0 $951.3
Interest $472.5 $453.2
Note C -- Extraordinary Losses
Discontinuance of SFAS No. 71. As a result of its continuing
regulatory and marketplace assessments, BellSouth
Telecommunications concluded during the second quarter that it is
no longer appropriate to prepare its external financial results
using the accounting method required for regulated enterprises.
BellSouth Telecommunications believes that, based on recent changes
in the regulatory framework and the increasing level of
competition, it was required to discontinue SFAS No. 71,
"Accounting for the Effects of Certain Types of Regulation," for
financial reporting purposes. Discontinuance was required because
most of BellSouth Telecommunications' revenues are not being
generated under cost-based regulation and because it is doubtful
that regulated rates sufficient to recover the net book value of
telephone plant could be charged to and collected from customers
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Millions)
(Unaudited)
Note C -- Extraordinary Losses (continued)
due to the expected levels of future competition. Accordingly, in
the second quarter, BellSouth Telecommunications discontinued
application of SFAS No. 71 and recorded a non-cash extraordinary
charge of $2,717.7 (net of a deferred tax benefit of $1,731.3).
The components of the charge are as follows:
Pretax After tax
Reduction in recorded value of long lived
telephone plant ($4,896) ($3,002)
Full adoption of issue basis accounting 317 194
Elimination of regulatory assets and liabilities 111 71
Partial adjustment to unamortized investment tax
credits 19 19
Total ($4,449) ($2,718)
The reduction of telephone plant, $4,896 pretax, was recorded as an
increase to the related accumulated depreciation accounts, the
categories and amounts of which are as follows:
Category Amount
Buried metallic cable $1,345
Digital switching 1,305
Circuit-other 1,291
Aerial metallic cable 630
Underground metallic cable 325
Total $4,896
Such reduction of plant was determined by an impairment analysis
that identified estimated amounts not recoverable from future
discounted cash flows. The analysis considered projected effects
of future competition as well as changes in technology and capital
requirements. The plant-related charge, all of which related to
assets within the regulatory framework, was further supported by
depreciation studies that identified inadequate levels of
accumulated depreciation for certain asset categories. These
studies give recognition to the historical underdepreciation of
assets resulting primarily from regulator-prescribed asset lives
that exceeded the estimated economic asset lives.
For financial reporting purposes, the average depreciable lives of
affected categories of long lived telephone plant have been reduced
to more closely reflect the economic and technological lives.
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Millions)
(Unaudited)
Note C -- Extraordinary Losses (continued)
Differences between regulator-approved asset lives and the current
estimated economic asset lives are as follows:
Composite of Estimated
Regulator-Approved Economic Asset
Category Asset Lives (in Years) Lives (in Years)
Buried metallic cable 20.0 14.0
Digital switching 17.0 10.0
Circuit-other 10.5 9.1
Aerial metallic cable 20.0 14.0
Underground metallic cable 25.0 12.0
The remaining components of the extraordinary charge, which
partially offset the plant-related portion of the overall charge,
include $194 (after tax) related to the method by which BellSouth
Telecommunications reports its directory publishing revenues.
BellSouth's unregulated subsidiaries recognize directory publishing
revenues and production expenses using issue basis accounting.
Under issue basis accounting, revenues and product expenses are
recognized when directories are published rather than over the
lives of the directories (generally one year) as under the
prescribed regulatory accounting framework. BellSouth
Telecommunications is now reporting using issue basis accounting
consistent with BellSouth's unregulated subsidiaries and with
publishing companies in general. The overall extraordinary charge
was also reduced by $71 (after tax) to reflect the removal of
regulatory assets and liabilities that were recorded as a result of
previous actions by regulators. Virtually all of these regulatory
assets and liabilities arose in connection with the incorporation
of new accounting standards into the ratemaking process, and were
transitory in nature. The magnitude of the regulatory assets and
liabilities has been decreasing over time due to the ongoing
amortization prescribed as a part of the adoption in 1988 of the
Federal Communications Commission's current Uniform System of
Accounts. In addition, the overall extraordinary charge was reduced
by $19 (after tax) for the partial acceleration of unamortized
investment tax credits associated with the reductions in asset
carrying values and in asset lives.
Early Extinguishment of Debt. In the second quarter of 1995,
BellSouth Telecommunications issued $300 of Ten Year Notes, the
proceeds from which were used to redeem and refinance an
outstanding $300 Debenture issue, due August 1, 2029. In June,
BellSouth Telecommunications called the Debenture issue for
redemption on August 1 and executed an in-substance defeasance by
depositing $326.6 in an irrevocable trust for the purchase of U.S.
government obligations to cover the principal amount called, the
call premium of $13.8 and accrued interest due of $12.8. As a
result, the $300 Debenture issue (and related deferred issuance
costs of approximately $12) was removed from the consolidated
balance sheet at June 30, 1995 and an extraordinary loss on early
extinguishment
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Millions)
(Unaudited)
Note C -- Extraordinary Losses (continued)
of debt of $15.8 (net of taxes of $10.0) was recognized in the
second quarter.
Note D -- Subsequent Events
Debt Refinancing. In October 1995, BellSouth Telecommunications
issued $300 of Thirty Year Debentures, the proceeds from which were
used to redeem and refinance an outstanding $300 Debenture issue
due November 1, 2024. As a result, BellSouth Telecommunications
will record an extraordinary loss of approximately $13 in the
fourth quarter of 1995.
Workforce Reduction Charges. In the fourth quarter of 1995,
BellSouth Telecommunications will recognize an estimated pretax
charge of approximately $1,085 ($665 after tax), comprised of
approximately $945 ($580 after tax) related to planned work force
reductions by the end of 1997, approximately $85 ($50 after tax)
for expected severance benefit payments after 1997 and
approximately $55 ($35 after tax) for additional curtailment losses
related to employee reductions under a restructuring plan initiated
in 1993.
BELLSOUTH TELECOMMUNICATIONS, INC.
SELECTED OPERATING DATA
(Unaudited)
Percent Change
1995 vs. 1994 vs.
1995 1994 1993
Network Access Lines in Service at September 30 (Thousands)(a):
By Type:
Residence 14,551.0 3.5% 3.5%
Business 6,116.7 7.7 7.0
Other 255.9 0.8 (0.1)
Total Access Lines 20,923.6 4.7 4.4
By State:
Florida 5,513.7 4.6 4.7
Georgia 3,508.7 6.0 5.5
Tennessee 2,412.4 4.4 4.5
Louisiana 2,096.3 3.8 3.5
North Carolina 2,083.3 5.7 4.9
Alabama 1,779.5 3.9 3.5
South Carolina 1,285.0 4.0 3.3
Mississippi 1,152.2 3.8 4.0
Kentucky 1,092.5 3.7 3.0
Total Access Lines 20,923.6 4.7 4.4
Percent Change for
the Periods Ended
1995 vs. 1994 vs.
1995 1994 1993
Access Minutes of Use (Millions)(a)(b):
Interstate:
Three months ended March 31 15,131.3 7.7% 7.9%
Three months ended June 30 15,597.1 8.2 7.6
Three months ended September 30 15,713.4 8.5 8.6
Nine months ended September 30 46,441.8 8.1 8.1
Intrastate:
Three months ended March 31 4,529.1 13.1 11.4
Three months ended June 30 4,789.9 14.7 9.9
Three months ended September 30 4,884.8 13.8 10.5
Nine months ended September 30 14,203.8 13.9 10.6
Total Minutes of Use:
Three months ended March 31 19,660.4 8.9 8.7
Three months ended June 30 20,387.0 9.6 8.1
Three months ended September 30 20,598.2 9.7 9.0
Nine months ended September 30 60,645.6 9.4 8.6
Toll Messages (Millions)(a):
Three months ended March 31 370.0 (4.3) 5.3
Three months ended June 30 352.0 (11.4) 2.1
Three months ended September 30 328.7 (15.1) 1.7
Nine months ended September 30 1,050.7 (10.3) 3.0
BELLSOUTH TELECOMMUNICATIONS, INC.
SELECTED OPERATING DATA (Continued)
(Unaudited)
(a) Prior period operating data are often revised at later dates
to reflect updated information. The above information reflects the
latest data available for the periods indicated.
(b) Minutes of Use are classified as either interstate or
intrastate based on the percentage interstate usage factor. This
factor is updated periodically.
For the Nine
Months Ended
September 30,
1995
Ratio of Earnings to Fixed Charges (c) 6.03
(c) For the purpose of this ratio: (i) earnings have been
calculated by adding income before income taxes and extraordinary
losses, gross interest expense and such portion of rental expense
representative of the interest factor on such rentals; (ii) fixed
charges are comprised of gross interest expense and such portion of
rental expense representative of the interest factor on such
rentals.
At September 30,
1995 1994
Debt Ratio (d) 47.2% 41.1%
(d) This ratio is calculated by dividing the sum of debt maturing
within one year and long-term debt, net of unamortized debt
issuance costs, by the sum of shareholder's equity, debt maturing
within one year and long-term debt, net of unamortized debt
issuance costs.
BELLSOUTH TELECOMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS
(Dollars in Millions)
Management's Discussion and Analysis of Results of Operations
(MD&A) should be read in conjunction with MD&A in BellSouth
Telecommunications, Inc.'s (BellSouth Telecommunications)
latest annual report on Form 10-K and previous
quarterly reports on Form 10-Q.
BellSouth Telecommunications is a wholly-owned subsidiary of
BellSouth Corporation (BellSouth) and is headquartered in Atlanta,
Georgia. BellSouth Telecommunications serves, in the aggregate,
approximately two-thirds of the population and one-half of the
territory within Alabama, Florida, Georgia, Kentucky, Louisiana,
Mississippi, North Carolina, South Carolina and Tennessee.
BellSouth Telecommunications primarily provides local exchange and
toll communications services within court-defined geographic areas,
called Local Access and Transport Areas (LATAs), and provides
network access services to enable interLATA communications using
the long-distance facilities of interexchange carriers. Through
subsidiaries, other telecommunications services and products are
provided both inside and outside the nine-state BellSouth
Telecommunications region.
Approximately 86% of BellSouth Telecommunications' Total Operating
Revenues for the nine-month periods ended September 30, 1995 and
1994 were from wireline services. Charges for local, access and
toll services for the nine months ended September 30, 1995
accounted for approximately 59%, 33% and 8%, respectively, of the
wireline revenues discussed above. The remainder of BellSouth
Telecommunications' Total Operating Revenues was derived
principally from directory publishing fees, customer premises
equipment sales and other nonregulated services.
RESULTS OF OPERATIONS
For the Nine
Months
Ended September
30,
1995 1994
Income Before $1,538.3 $1,432.0
Extraordinary Losses
Extraordinary Loss for
Discontinuance of (2,717.7) --
SFAS No. 71, net of
tax
Extraordinary Loss on
Early Extinguishment of (15.8) --
Debt, net of tax
Net Income (Loss) $(1,195.2) $1,432.0
For the nine-month period ended September 30, 1995, Income Before
Extraordinary Losses increased by $106.3 (7.4%). The increase
resulted primarily from continued strong growth in key business
volumes and expense savings attributable to the restructuring plan
begun in 1993.
For a discussion of the second quarter 1995 extraordinary losses,
see "Extraordinary Losses" below and Note C to the Consolidated
Financial Statements.
Volumes of Business
The total number of access lines in service since September 30,
1994 increased by approximately 930,400 (4.7%) to 20,923,600,
compared to a 4.4% rate of increase for the same prior year period.
Business and residence access lines increased by 7.7% and 3.5%,
respectively, compared to growth rates of 7.0% and 3.5% in 1994.
The number of second residence lines, included in total residence
lines, increased by 207,300 (21.0%) to 1,194,200 and accounted for
approximately 42.1% and 22.3% of the overall increase in residence
access lines and total access lines, respectively, since September
30, 1994. Such second residence lines are generally used for home
office purposes, access to on-line computer services and children's
phones. The growth in all categories of access lines was primarily
attributable to continued economic improvement in the Southeast and
successful marketing programs.
Access minutes of use represent the volume of traffic carried by
interexchange carriers between LATAs, both interstate and
intrastate, using BellSouth Telecommunications' local facilities.
Total access minutes of use increased by 5,216.6 million (9.4%) for
the nine-month period ended September 30, 1995 compared to an
increase of 8.6% for the same period last year. The increase in
access minutes of use was primarily attributable to access line
growth, promotions by the interexchange carriers and intraLATA toll
competition, which has the effect of increasing access minutes of
use while reducing toll messages carried over BellSouth
Telecommunications' facilities. The growth rate in total minutes
of use continues to be negatively impacted by competition and the
migration of interexchange carriers to categories of service (e.g.,
special access) that have a fixed charge as opposed to a volume-
driven charge and to high capacity services.
Toll messages are comprised of Message Telecommunications Service
and Wide Area Telecommunications Service. For the nine-month
period ended September 30, 1995, toll messages decreased by 120.3
million (10.3%), compared to an increase of 3.0% for the
corresponding period in 1994. The decrease in 1995 was primarily
attributable to the expansion of local area calling plans in
Georgia, South Carolina, Florida, North Carolina and Mississippi.
These plans and future implementation of other such plans in
BellSouth Telecommunications' service region, coupled with
competition in the intraLATA toll market, will adversely impact
future toll message volumes. Local area calling plans and the
effects of competition result in the transfer of calls from toll to
local service and access categories, respectively, but the
corresponding revenues are not generally shifted at commensurate
rates.
Operating Revenues
Total Operating Revenues increased $283.1 (2.7%) for the nine-month
period ended September 30, 1995 when compared to the corresponding
1994 period. The components of Total Operating Revenues were as
follows:
For the Nine
Months
Ended September
30,
1995 1994
Local Service $5,418.5 $5,117.6
Interstate Access 2,406.1 2,338.2
Intrastate Access 683.0 687.1
Toll 766.4 899.0
Other 1,486.9 1,435.9
Total $10,760.9 $10,477.8
Operating Revenues
Local Service revenues increased $300.9 (5.9%) for the nine-month
period ended September 30, 1995 as compared to the same 1994
period. The increase was due primarily to 4.7% growth in access
lines in service since September 30, 1994, an increase of $79 due
to higher customer demand for Touchstar and Custom Calling services
and the effect of expanded local area calling plans. The increase
was partially offset by net rate reductions since September 30,
1994 of approximately $49. Such rate reductions include refunds of
$31 and $9 in Florida and Georgia, respectively, both of which had
previously been accrued as a reduction in Other Services revenues,
pending determination of the specific revenue category affected.
Interstate Access revenues increased $67.9 (2.9%) for the nine-
month period ended September 30, 1995 as compared to the same prior
year period. The increase was attributable primarily to growth in
minutes of use of 8.1% and increases in end-user charges of $36
attributable to growth in the number of access lines in service.
Also contributing was an increase of $30 due to higher demand for
special access services. The increase was partially offset by net
rate reductions since September 30, 1994 of approximately $74.
Intrastate Access revenues were essentially unchanged for the nine-
month period ended September 30, 1995 when compared to the
corresponding 1994 period, reflecting rate reductions of $72 since
September 30, 1994 and an increase attributable to growth in
minutes of use of 13.9%.
Toll revenues decreased $132.6 (14.7%) for the nine-month period
ended September 30, 1995 when compared to the same prior year
period. The decrease was primarily attributable to a decline in
toll messages of 10.3% and net rate reductions since September 30,
1994 of approximately $59. Such factors reflect the expansion of
local area calling plans and increased competition. The decrease
was also due in part to a retroactive independent company
settlement during third quarter 1995, which reduced revenues by
$31.
Other revenues are principally comprised of revenues from
publishing rights fees, customer premises equipment (CPE) sales and
maintenance services, billing and collection services and other
nonregulated services (primarily inside wire services). Other
revenues increased $51.0 (3.6%) for the nine-month period ended
September 30, 1995 when compared to the corresponding 1994 period.
The increase was attributable to reduced levels of revenue
reduction accruals related to potential sharing under certain state
regulatory plans coupled with the reclassification of certain such
accruals to Local Service revenues, the combined effect of which
increased Other revenues by approximately $88. The increase was
also due in part to approximately $32 resulting from higher demand
for voice messaging and inside wire services and an overall
increase of $21 in directory publishing fees. The increase was
partially offset by a reduction of $39 in revenues from billing and
collection services and by approximately $33 related to the sale in
April 1994 of BellSouth Telecommunications' out-of-region CPE sales
and service operations.
Operating Expenses
Total Operating Expenses increased $46.5 (0.6%) for the nine-month
period ended September 30, 1995 compared to the same period in
1994. The components of Total Operating Expenses were as follows:
For the Nine
Months
Ended September
30,
1995 1994
Depreciation and $2,285.8 $2,192.9
Amortization
Other Operating
Expenses:
Cost of Services 3,894.1 3,951.1
and Products
Selling, General
and Administrative 1,693.4 1,682.8
5,587.5 5,633.9
Total $7,873.3 $7,826.8
Operating Expenses
Depreciation and Amortization increased $92.9 (4.2%) for the nine-
month period ended September 30, 1995 compared to the same period
in 1994. The increase was due primarily to higher levels of
property, plant and equipment since September 30, 1994 resulting
from continued growth in the customer base and continued
modernization of the network.
For a discussion of the impact of discontinuance of SFAS No. 71 on
depreciation expense in 1995 and 1996, see "Extraordinary Losses -
Discontinuance of SFAS No. 71" below.
Other Operating Expenses are comprised of Cost of Services and
Products and Selling, General and Administrative. Cost of Services
and Products includes employee and employee-related expenses
associated with network repair and maintenance, material and
supplies expense, cost of tangible goods sold and other expenses
associated with providing services. Selling, General and
Administrative includes expenses related to sales activities such
as salaries, commissions, benefits, travel, marketing and
advertising expenses and administrative expenses.
Other Operating Expenses decreased $46.4 (0.8%) for the nine-month
period ended September 30, 1995 when compared to the corresponding
1994 period. The decrease for the period was due primarily to a
decrease of $152 in labor costs, including expenses for employee
benefits, in the core wireline business. Such decrease reflects
employee reductions since September 30, 1994 attributable to the
restructuring plan begun in 1993, partially offset by annual
compensation increases for management and represented employees.
Also contributing was a decrease of approximately $54 in the CPE
business, primarily attributable to the sale in April 1994 of the
out-of-region CPE sale and service operations. The overall
decrease for the period was partially offset by expenses for
network services and related activities, necessitated primarily by
volume growth.
Other Income Statement Items
The other income statement components were as follows:
For the Nine Months
Ended September 30,
1995 1994
Interest Expense $424.8 $408.0
Other Income, net 19.9 13.1
Provision for
Income Taxes 944.4 824.1
Interest Expense increased $16.8 (4.1%) for the nine-month period
ended September 30, 1995 compared to the same period last year. The
increase was primarily attributable to higher average interest
rates on short-term borrowings and higher average debt levels for
both short- and long-term borrowings.
Provision for Income Taxes increased $120.3 (14.6%) for the nine-
month period ended September 30, 1995 over the comparable 1994
period. BellSouth Telecommunications' effective tax rates were
38.0% and 36.5% for the nine months ended September 30, 1995 and
1994, respectively. The higher effective tax rate in 1995 was due
to an increase in deferred tax expense resulting from the 1995
discontinuance of SFAS No. 71.
Extraordinary Losses
Discontinuance of SFAS No. 71. As a result of its continuing
regulatory and marketplace assessments, BellSouth
Telecommunications has concluded that it is no longer appropriate
to prepare its external financial results using the accounting
method required for regulated enterprises. BellSouth
Telecommunications believes that based on recent changes in the
regulatory framework and the increasing level of competition, it
was required to discontinue SFAS No. 71 for financial reporting
purposes. Discontinuance was required because most of BellSouth
Telecommunications' revenues are not being generated under cost-
based regulation and because it is doubtful that regulated rates
sufficient to recover the net book value of telephone plant could
be charged to and collected from customers due to the expected
levels of future competition. Accordingly, in the second quarter,
BellSouth Telecommunications discontinued application of SFAS No.
71 and recorded a non-cash extraordinary charge of $2,717.7 (net of
a deferred tax benefit of $1,731.3). The extraordinary charge
reflects $3,002 (after tax) to reduce the recorded value of long
lived telephone plant, all of which was within the regulatory
framework, and equipment to the level appropriate for non-regulated
enterprises. The overall charge was partially offset by $194
related to the method by which BellSouth Telecommunications reports
its directory publishing revenues, $71 related to the elimination
of regulatory assets and liabilities and $19 for the partial
acceleration of unamortized investment tax credits associated with
the reductions in asset carrying values and in asset lives.
Recent changes in its regulatory framework and the simultaneous
elimination of legal and regulatory barriers for its competitors
both support discontinuance of SFAS No. 71. In the regulatory
arena, implementation of price regulation has been and continues to
be a cornerstone in BellSouth Telecommunications' corporate
strategy. Due in part to this strategy, changes in the regulatory
framework are now being implemented (see "Regulatory and
Competitive Environment - State Regulation"). As a result of such
changes, a significant portion of BellSouth Telecommunications'
revenue will no longer be regulated based on the recovery of
specific costs. Furthermore, BellSouth Telecommunications expects
that competition in its local exchange markets will accelerate.
The removal of legal and regulatory barriers is expected to
encourage potential competitors to accelerate deployment of
competing networks to either compete directly for local service or
to bypass the BellSouth Telecommunications network for long
distance access. Potential competitors have continued to make
investments in wireless licenses, cable properties and enhanced
interexchange networks, which serves as further evidence of
increased competition.
In connection with the discontinuance of SFAS No. 71, the average
depreciable lives of significant categories of long lived telephone
plant were reduced to more closely reflect the economic and
technological lives. As a result of such shorter lives applicable
to both existing and newly acquired assets, BellSouth
Telecommunications expects that depreciation expense will increase
about $22 in 1995 and about $70 in 1996. However, the impact on
net income in these time periods is not expected to be significant
because of elimination of the amortization of regulatory assets and
the acceleration of unamortized investment tax credits due to the
shorter lives of telephone plant.
See Note C to the Consolidated Financial Statements.
Early Extinguishment of Debt. During the second quarter, BellSouth
Telecommunications recognized an extraordinary loss of $15.8 (net
of taxes of $10.0) related to the early extinguishment of an
outstanding debt issue. See Note C to the Consolidated Financial
Statements.
OTHER FINANCING ACTIVITY
During second quarter 1995, BellSouth Telecommunications issued
$300 of long-term debt and, with the net proceeds, refinanced
outstanding short-term debt. During the same period, BellSouth
Telecommunications issued an additional $300 of long-term debt and
refinanced an outstanding long-term debenture issue. In October,
BellSouth Telecommunications issued $300 of long-term debt and
refinanced another outstanding long-term debenture issue. See
Notes C and D to the Consolidated Financial Statements.
Additional refinancings of both short- and long-term debt are
possible during the remainder of the year depending on prevailing
market interest rates. As of November 1, 1995, a shelf
registration statement was on file with the Securities and Exchange
Commission under which $1,400 of long-term debt securities could be
publicly offered.
WORK FORCE REDUCTION CHARGES
In the fourth quarter of 1995, BellSouth Telecommunications will
recognize an estimated pretax charge of approximately $1,085 ($665
after tax), comprised of approximately $945 ($580 after tax)
related to planned work force reductions by the end of 1997,
approximately $85 ($50 after tax) for expected severance benefit
payments after 1997 and approximately $55 ($35 after tax) for
additional curtailment losses related to employee reductions under
a restructuring plan initiated in 1993. Each component of the
overall charge is discussed below.
1995 Work Force Reduction Charge
In connection with a previously-disclosed plan to significantly
reduce its work force by the end of 1997, BellSouth
Telecommunications will record a pretax charge of $945 in the
fourth quarter of 1995. Under this plan, BellSouth
Telecommunications expects to reduce the work force of the core
wireline business by approximately 11,300 employees, consisting of
approximately 7,000 employees in 1996 and approximately 4,300
employees in 1997.
The work force reduction will be accomplished through the
separation of approximately 13,200 employees, partially offset by
the planned hiring of new employees primarily to replace those not
expected to relocate in connection with the consolidation of work
locations.
The $945 pretax charge is comprised of approximately $565 under the
provisions of Statement of Financial Accounting Standards (SFAS)
No. 112, "Employers' Accounting for Postemployment Benefits,"
related to those employees who are expected to receive severance
benefits under preexisting separation plans, and approximately $380
for curtailment losses under the provisions of SFAS No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits" and SFAS No.
106, "Employers' Accounting for Postretirement Benfits Other Than
Pensions."
Once the plan to reduce 11,300 employees is completed, annual
employee cost savings are estimated to be approximately $560. Such
annual savings will be partially offset by increased costs of
approximately $60 for outsourced services.
Postemployment Benefits Charge
The pretax charge of $85 represents estimated future postemployment
severance benefits to be paid after 1997, also in accordance with
the provisions of SFAS No. 112. This component is based on
BellSouth's belief that work force reductions will continue under
existing separation plans, although at reduced separation benefit
levels.
1993 Restructuring Of Telephone Operations
In the fourth quarter of 1993, BellSouth Telecommunications
recognized a $1,136.4 restructuring charge in connection with a
plan to redesign, consolidate and streamline the fundamental
processes and work activities in its telephone operations. A total
of 10,200 employee reductions were included in the plan. Upon
completion, restructuring of the telephone operations is expected
to improve overall responsiveness to customer needs and reduce
costs.
At September 30, 1995, the remaining liability associated with the
1993 restructuring plan was $175.4, all of which was classified as
current. Since inception of the restructuring plan, total employee
reductions were approximately 7,700, including 4,600 since
September 30, 1994. As a result of this reduction of 4,600
employees, operating expenses for the three- and nine- month
periods ended September 30, 1995 were reduced by approximately $50
and $150, respectively. The cumulative reduction of 7,700
employees since inception of the plan has reduced operating
expenses in 1995 by approximately $250. For the years 1995 and
1996, cumulative employee reductions under the plan are projected
to reduce operating expenses by approximately $375 and $600,
respectively.
A summary of employee reductions and expenditures through September
30, 1995 under the 1993 restructuring plan is as follows:
Third Year-
Quarter to- Year Year
1995 Date 1994 1993 Total
1995
Employee Reductions 1,100 2,500 3,900 1,300 7,700
Expenditures By Component:
Consolidation and
Elimination $40.3 $149.4 $164.6 $14.7 $328.7
of Operations
Systems 65.6 164.6 170.3 --- 334.9
Employee Separation 48.6 125.3 133.8 38.3 297.4
Total $154.5 $439.3 $468.7 $53.0 $961.0
Expenditures By Type:
Cash $137.8 $391.5 $390.2 $53.0 $834.7
Non-Cash 16.7 47.8 78.5 --- 126.3
Total $154.5 $439.3 $468.7 $53.0 $961.0
Capital Expenditures (not
included in above $66.8 $150.9 $203.6 $--- $354.5
expenditures)
BellSouth Telecommunications expects to substantially complete the
1993 restructuring plan activities in 1995. During fourth quarter
1995, a pretax charge of $55 will be recognized for additional
curtailment losses related to employee reductions under the plan.
The additional curtailment losses resulted from a greater number of
retirement-eligible employees separating than originally expected.
In connection with the 1993 plan, total employee reductions in 1995
are projected to be approximately 5,000, including the reductions
of 2,500 which occurred in the first nine months of 1995.
REGULATORY AND COMPETITIVE ENVIRONMENT
Regulation
Alabama. In June, a law was enacted which permits the Alabama
Public Service Commission to authorize alternative methods of
regulation for local exchange carriers, including BellSouth
Telecommunications. In September, the Alabama Commission approved
a price regulation plan, which was effective September 20, 1995 for
BellSouth Telecommunications, and a local competition plan. Under
the provisions of the price regulation plan, prices for basic
services, including local exchange services for residence and
business customers, are capped for five years, after which an
inflation-based formula will be used to change prices; prices for
non-basic services are capped for one year, after which increases
are limited to 10% annually; and intrastate access charges are
reduced first by $5 to achieve parity with the August 1, 1995
interstate switched access rates, and are then further reduced by
$8. The order also provides for specific access reductions in
later years through July 1, 1999. Additional terms of the price
regulation plan require annual price reductions for certain defined
basic services. Such reductions, which are effective July 1 of each
year, will be $10, $15, $10, $11 and $11 for 1995, 1996, 1997, 1998
and 1999, respectively.
Under the terms of the local competition plan, service providers,
among other things, must be approved by the Alabama Commission and
must make their respective networks available for interconnection
with all other local networks.
Florida. In June, a law was enacted which, effective January 1,
1996, permits local exchange competition in BellSouth
Telecommunications' service areas. The law also allows qualified
service providers to elect price regulation, effective at the later
of January 1, 1996 or such time that an alternative local exchange
carrier is approved to provide services in BellSouth
Telecommunications' territory. In November, BellSouth
Telecommunications filed with the Florida Public Service Commission
an election for price regulation.
In connection with its price regulation election, BellSouth
Telecommunications is required to comply with the provisions of a
previously-disclosed settlement reached with Florida's Office of
Public Counsel in January 1994. Such settlement provides for
scheduled rate reductions of $80 in October 1995 and $84 in October
1996 as well as the continuation of current earnings sharing
provisions through 1996 or 1997, subject to defined terms in the
settlement.
Georgia. In April, a law was enacted which, effective July 1, 1995,
authorizes the Georgia Public Service Commission to permit
qualified service providers to compete with BellSouth
Telecommunications in the local exchange telecommunications market
and allows BellSouth Telecommunications to elect alternative
regulation. In July, BellSouth Telecommunications filed an
election for alternative regulation with the Georgia Commission;
such election became effective on August 5, 1995. In October, the
Georgia Commission denied an interexchange carrier's request to
stay BellSouth Telecommunications' election of alternative
regulation.
In June, the Georgia Public Service Commission, after a review of
BellSouth Telecommunications' rates and charges, ordered BellSouth
Telecommunications to refund $9 to existing customers and reduce
rates prospectively by $33. Of such $33, approximately $12 had
been previously implemented or scheduled; the remaining $21 will be
applied to intrastate switched access rates. In August, the
Georgia Commission denied the motion of the Consumers' Utility
Council to reconsider this order.
Kentucky. In July, the Kentucky Public Service Commission approved
BellSouth Telecommunications' previously-filed price regulation
plan, with certain modifications. In connection with approval of
the plan, which was effective in July, the Kentucky Commission
ordered reductions in rates for access, toll and residential touch-
tone services and other defined charges, which together aggregate
$29.
The Kentucky Commission has opened a docket to consider local
exchange competition.
Mississippi. In November, the Mississippi Public Service Commission
approved a price regulation plan which will be effective January 1,
1996 and remain in effect until the end of 2001. Reviews of such
plan will be conducted by the Mississippi Commission after three
and five years. Under the provisions of the plan, rates for basic
services, which include the provision of local telephone service,
are capped for three years after which such basic service revenues
will be reduced annually by one percent for the duration of the
plan. In addition, intrastate switched access rates are capped at
the same level as interstate rates over the life of the plan. The
terms of the plan provide for increasing amounts of rate
reductions, which by the sixth year of the plan amount to
approximately $34 annually.
North Carolina. In April, a law was enacted which, effective July
1, 1996, authorizes the North Carolina Utilities Commission to
permit local exchange and exchange access competition in BellSouth
Telecommunications' service areas; however, such competition may be
permitted prior to July 1, 1996 in the territory of a local
exchange carrier for which the North Carolina Commission approves a
price regulation plan. The law, among other provisions, allows
BellSouth Telecommunications to elect to operate under a price
regulation plan, which must be approved by the North Carolina
Commission. In October, BellSouth Telecommunications filed with
the North Carolina Utilities Commission a proposed price regulation
plan. The North Carolina Commission has scheduled hearings in
January 1996 on the proposed plan.
South Carolina. In March, BellSouth Telecommunications filed a
proposed price regulation plan with the South Carolina Public
Service Commission. In September, the South Carolina Commission
concluded hearings with respect to the proposed price regulation
plan and its investigation of BellSouth Telecommunications' 1994
earnings. A decision by the South Carolina Commission is pending.
Tennessee. In June, a law was enacted which authorizes local
exchange competition in BellSouth Telecommunications' service areas
and allows qualified service providers to elect price regulation.
As permitted under the provisions of the law, BellSouth
Telecommunications filed an application for a price regulation plan
to be effective October 1, 1995.
In November, the Tennessee Public Service Commission held a hearing
to determine the initial rates for purposes of implementing the
price regulation plan. The Tennessee Commission subsequently voted
to reduce BellSouth Telecommunications' rates by approximately $57
in setting the initial rates under the price regulation plan. To
date, no written order has been issued and BellSouth
Telecommunications has not determined what action it may take with
regard to an appeal of this order.
Federal Legislation. The U. S. Senate and House of Representatives
have each passed bills, S.652 and H.R. 1555, respectively, which
could, if enacted into law, significantly affect BellSouth's
business operations and opportunities. Among other things, such
bills include, subject to defined terms and limitations, provisions
that open local exchange markets to competition while allowing Bell
Holding Companies, including BellSouth, to provide interLATA (long
distance) service. The ultimate disposition of this matter is
uncertain, pending reconciliation of differences in the bills'
provisions by a joint committee of the House and Senate; approval
of a revised bill by both the House and Senate; and signature by
the President.
Competition
The Florida, Georgia and Tennessee Commissions have authorized
several companies to provide various services, including local
exchange and exchange access, in competition with BellSouth
Telecommunications. In certain states, such competing companies
include AT&T, MCI and U S West or affiliates thereof.
Several companies have also filed applications with the North
Carolina, Alabama and Kentucky Commissions to provide certain
services in competition with BellSouth Telecommunications.
BUSINESS DEVELOPMENTS
CWA Working Agreement
In October, members of the Communications Workers of America (CWA)
ratified new three-year contracts with BellSouth Telecommunications
covering approximately 54,000 employees.
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit
Number
4 No instrument which defines the rights of holders of long and
intermediate term debt of BellSouth Telecommunications, Inc.
is filed herewith pursuant to Regulation S-K, Item
601(b)(4)(iii)(A). Pursuant to this regulation, BellSouth
Telecommunications, Inc. hereby agrees to furnish a copy of
any such instrument to the SEC upon request.
12 Computation of Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule.
(b) Reports on Form 8-K:
Date of Event Subject
October 1, 1995 Indenture between BellSouth
Telecommunications, Inc. and Compass Bank
November 2, 1995 Form of Indenture, Standard Indenture
Provisions and Form of Supplemental
Indenture
SIGNATURE
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.
BELLSOUTH TELECOMMUNICATIONS, INC.
By /s/ Patrick H. Casey
PATRICK H. CASEY
Vice President and Comptroller
(Principal Accounting Officer)
November 10, 1995
EXHIBIT INDEX
Exhibit
Number
12 Computation of Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule.
EXHIBIT 12
BellSouth Telecommunications Inc.
Computation Of Earnings To Fixed Charges
(Dollars In Millions)
For the Nine
Months Ended
September 30,
1995
1. Earnings
(a) Income from continuing operations
before deductions for taxes and interest $2,907.5
(b) Portion of rental expense
representative of interest factor 53.0
TOTAL $2,960.5
2. Fixed Charges
(a) Interest $438.3
(b) Portion of rental expense
representative of interest factor 53.0
TOTAL $491.3
Ratio (1 divided by 2) 6.03
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