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, 1996
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 8
2. Management's Discussion and Analysis of
Results of Operations 10
Results of Operations 10
Volumes of Business 11
Operating Revenues 12
Operating Expenses 13
Other Income Statement Items 14
Regulatory Developments and Competition 14
Federal Developments 14
State Developments 15
Business Developments 16
Other Matters 17
Affiliated Transactions 17
Part II
6. Exhibits and Reports on Form 8-K 17
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,
1996 1995 1996 1995
Operating Revenues:
Local service $ 2,061 $ 1,857 $ 6,012 $ 5,419
Interstate access 892 805 2,672 2,406
Intrastate access 207 230 627 683
Toll 195 220 600 767
Other 405 493 1,149 1,486
Total Operating Revenues 3,760 3,605 11,060 10,761
Operating Expenses:
Cost of services and
products 1,310 1,336 3,854 3,894
Depreciation and
amortization 820 775 2,427 2,286
Selling, general and
administrative 699 577 1,921 1,693
Total Operating Expenses 2,829 2,688 8,202 7,873
Operating Income 931 917 2,858 2,888
Interest Expense 136 135 410 425
Other Income, net -- 8 17 20
Income Before Income Taxes
and Extraordinary Losses 795 790 2,465 2,483
Provision for Income Taxes 298 303 919 944
Income Before Extraordinary
Losses 497 487 1,546 1,539
Extraordinary Loss for
Discontinuance of SFAS No.
71, net of tax -- -- -- (2,718)
Extraordinary Loss on Early
Extinguishment of Debt, net
of tax -- -- -- (16)
Net Income (Loss) $ 497 $ 487 $ 1,546 $ (1,195)
Retained Earnings:
At beginning of period $ 773 $ 1,009 $ 555 $ 3,521
Add: Net Income (Loss) 497 487 1,546 (1,195)
Deduct: Dividends declared (436) (387) (1,267) (1,217)
At end of period $ 834 $ 1,109 $ 834 $ 1,109
The accompanying notes are an integral part of these financial statements.
BELLSOUTH TELECOMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(In Millions)
September 30, December 31,
1996 1995
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents $ 87 $ 1,084
Accounts receivable, net of allowance for
uncollectibles of $85 and $94 2,798 2,941
Material and supplies 312 347
Other current assets 174 281
3,371 4,653
Investments and Advances 304 279
Property, Plant and Equipment:
Property, Plant and Equipment 45,279 43,521
Accumulated Depreciation 26,506 24,777
18,773 18,744
Deferred Charges and Other Assets 472 257
Total Assets $ 22,920 $ 23,933
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Debt maturing within one year $ 1,423 $ 2,265
Accounts payable 1,089 1,332
Other current liabilities 2,006 1,934
4,518 5,531
Long-Term Debt 6,754 6,853
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 909 1,000
Unamortized investment tax credits 297 355
Other liabilities and deferred credits 2,230 2,227
3,436 3,582
Shareholder's Equity:
Common stock, one share, no par value 7,378 7,412
Retained earnings 834 555
8,212 7,967
Total Liabilities and Shareholder's Equity $ 22,920 $ 23,933
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,
1996 1995
Cash Flows from Operating Activities:
Net income (loss) $ 1,546 $(1,195)
Adjustments to net income (loss):
Extraordinary loss for discontinuance of SFAS No. 71 -- 4,449
Extraordinary loss on early extinguishment of debt -- 26
Depreciation and amortization 2,427 2,286
Provision for losses on bad debts 101 96
Deferred income taxes and amortation of investment
tax credits (74) (1,705)
Net change in:
Accounts receivable and other current assets 55 (167)
Accounts payable and other current liabilities (309) (398)
Deferred charges and other assets (213) 8
Deferred credits and other liabilities 111 124
Other reconciling items, net (61) (3)
Net cash provided by operating activities 3,583 3,521
Cash Flows from Investing Activities:
Capital expenditures (2,443) (2,198)
Other investing activities, net 3 (10)
Net cash used for investing activities (2,440) (2,208)
Cash Flows from Financing Activities:
Proceeds from short-term borrowings 11,938 9,945
Repayment of short-term borrowings (12,355) (10,323)
Proceeds from long-term debt -- 600
Repayment of long-term debt (485) (300)
Advances from parent and affiliates 355 466
Repayment of advances from parent and affiliates (364) (469)
Dividends paid to parent (1,263) (1,227)
Other financing activities, net 34 (8)
Net cash used for financing activities (2,140) (1,316)
Net Decrease in Cash and Cash Equivalents (997) (3)
Cash and Cash Equivalents at Beginning of Period 1,084 94
Cash and Cash Equivalents at End of Period $ 87 $ 91
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. These consolidated
financial statements include estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities and the amounts of revenues and
expenses. Actual results could differ from those estimates. 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' 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
For the Nine Months
Ended September 30,
1996 1995
Cash Paid For:
Income taxes $ 859 $ 835
Interest $ 402 $ 473
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Millions)
(Unaudited)
Note C -- Transactions with Affiliates
Through 1995, BellSouth Telecommunications had a contractual
agreement with BellSouth Advertising & Publishing Corporation
(BAPCO), an affiliated company, wherein BAPCO published certain
telephone directories and in return paid publication fees to
BellSouth Telecommunications for publishing rights and other
services. Effective January 1, 1996, BellSouth Telecommunications
and BAPCO established a new contract based on fees for services
rendered between the companies. The new contract eliminated
publication fees to BellSouth Telecommunications. Such fees were
$152 and $482 for the three- and nine-month periods ended September
30, 1995, respectively.
Note D -- Extraordinary Losses
Discontinuance of SFAS No. 71. In the second quarter 1995,
BellSouth Telecommunications discontinued application of SFAS No.
71 and recorded a non-cash extraordinary charge of $2,718 (net of a
deferred tax benefit of $1,731). The components of the charge
included a $3,002 (after tax) reduction of telephone plant
partially offset by a $194 (after tax) benefit for a change in the
method by which BellSouth Telecommunications reported its directory
publishing revenues, a $71 (after tax) benefit reflecting the
removal of regulatory assets and liabilities that were recorded as
a result of previous actions by regulators and a $19 (after tax)
benefit 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 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. As a result
of the early extinguishment of this issue, an extraordinary loss of
$16 (net of taxes of $10) was recognized in the second quarter
1995.
BELLSOUTH TELECOMMUNICATIONS, INC.
SELECTED OPERATING DATA
(Unaudited)
Percent Change
1996 vs. 1995 vs.
1996 1995 1994
Network Access Lines in Service at September 30 (Thousands)(a):
By Type:
Residence 15,039 3.4% 3.5%
Business 6,639 8.5 7.7
Other 265 3.5 0.8
Total Access Lines 21,943 4.9 4.7
By State:
Florida 5,815 5.5 4.6
Georgia 3,738 6.5 6.0
Tennessee 2,525 4.7 4.4
North Carolina 2,192 5.2 5.7
Louisiana 2,170 3.5 3.8
Alabama 1,846 3.8 3.9
South Carolina 1,338 4.1 4.0
Mississippi 1,190 3.2 3.8
Kentucky 1,129 3.4 3.7
Total Access Lines 21,943 4.9 4.7
Percent Change for
the Periods Ended
1996 vs. 1995 vs.
1996 1995 1994
Access Minutes of Use (Millions)(a)(b):
Interstate:
Three months ended March 31 16,660 10.1% 7.7%
Three months ended June 30 16,847 8.0 8.2
Three months ended September 30 16,966 8.0 8.5
Nine months ended September 30 50,473 8.7 8.1
Intrastate:
Three months ended March 31 5,118 13.0 13.1
Three months ended June 30 5,235 9.3 14.7
Three months ended September 30 5,348 9.5 13.8
Nine months ended September 30 15,701 10.5 13.9
Total Minutes of Use:
Three months ended March 31 21,778 10.8 8.9
Three months ended June 30 22,082 8.3 9.6
Three months ended September 30 22,314 8.3 9.7
Nine months ended September 30 66,174 9.1 9.4
Toll Messages (Millions)(a):
Three months ended March 31 281 (24.1) (4.3)
Three months ended June 30 258 (26.7) (11.4)
Three months ended September 30 252 (23.6) (14.9)
Nine months ended September 30 791 (24.8) (10.2)
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,
1996
Ratio of Earnings to Fixed Charges (c) 6.2
(c) For the purpose of this ratio: (i) earnings have been
calculated by adding income before income taxes, 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 At
September 30, December 31,
1996 1995
Debt Ratio (d) 49.8% 51.9%
(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. The debt ratio at December 31, 1995 excludes $485
in long-term debentures called in December and redeemed in January,
1996.
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). 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 service and toll communications services
within geographic areas, called Local Access and Transport Areas
(LATAs), and provides network access services to enable interLATA
and intraLATA communications using the long-distance facilities of
interexchange carriers. Through subsidiaries, other
telecommunications services and products are provided primarily
within the nine-state BellSouth Telecommunications region.
Approximately 90% and 86% of BellSouth Telecommunications' Total
Operating Revenues for the nine-month periods ended September 30,
1996 and 1995, respectively, were from wireline services. Charges
for local, access and toll services for the nine months ended
September 30, 1996 accounted for approximately 61%, 33% and 6%,
respectively, of the wireline revenues discussed above. The
remainder of BellSouth Telecommunications' Total Operating Revenues
was derived principally from sales and maintenance of customer
premises equipment and other nonregulated services.
RESULTS OF OPERATIONS
For the Nine
Months Ended
September 30,
1996 1995
Income Before Extraordinary Losses $ 1,546 $ 1,539
Extraordinary Loss for Discontinuance
of SFAS No. 71, net of tax -- (2,718)
Extraordinary Loss on Early
Extinguishment of Debt, net of tax -- (16)
Net Income (Loss) $ 1,546 $(1,195)
For the nine-month period ended September 30, 1996, Income Before
Extraordinary Losses increased by $7 (.5%). The increase for the
nine-month period resulted primarily from the continued strong
growth in key business volumes and expense savings primarily
attributable to employee reductions under BellSouth
Telecommunications' restructuring and work force reduction plans,
substantially offset by the elimination of publication fee revenue
(see "Other Matters - Affiliated Transactions").
For a description of the second quarter 1995 extraordinary losses,
see Note D to the Consolidated Financial Statements.
Volumes of Business
The total number of access lines in service as of September 30,
1996 increased by approximately 1,019,000 (4.9%) since September
30, 1995 to 21,943,000, compared to a 4.7% rate of increase for the
same period a year ago. Business and residence access lines
increased by 8.5% and 3.4%, respectively, compared to growth rates
of 7.7% and 3.5% in 1995. The number of second residence lines,
included in total residence lines, increased by 280,000 (23.5%) to
1,474,000 and accounted for approximately 57.4% and 27.5% of the
overall increases in residence access lines and total access lines,
respectively, since September 30, 1995. 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, both interstate and intrastate, using
BellSouth Telecommunications' local facilities. Total access
minutes of use increased by 5,528 million (9.1%) for the nine-month
period ended September 30, 1996 compared to an increase of 9.4% 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, 1996, toll messages decreased by 261
million (24.8%) compared to a decrease of 10.2% for the
corresponding period in 1995. The decrease in 1996 was primarily
attributable to the expansion of local area calling plans (LACPs)
in Florida, Georgia and North Carolina and also to increased
competition from interexchange carriers in the intraLATA toll
market. While the respective impacts of such factors cannot be
precisely quantified, BellSouth estimates that about 70% of the
decline in toll messages was attributable to expanded LACPs and
about 30% was due to increased competition.
The expanded LACPs discussed above 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. Expanded LACPs 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 $299 (2.8%) for the nine-month
period ended September 30, 1996 when compared to the corresponding
1995 period. The components of Total Operating Revenues were as
follows:
For the Nine
Months Ended
September 30,
1996 1995
Local Service $6,012 $5,419
Interstate Access 2,672 2,406
Intrastate Access 627 683
Toll 600 767
Other Services 1,149 1,486
Total Operating Revenues $11,060 $10,761
Local Service revenues increased $593 (10.9%) for the nine-month
period ended September 30, 1996 as compared to the same 1995
period. The increase for the period was due primarily to 4.9%
growth in access lines in service since September 30, 1995 and the
effect of expanded LACPs. Also contributing was an increase of
approximately $170 due to higher customer demand for Touchstar and
Custom Calling services, including those offered under the Complete
Choicesm plan.
Interstate Access revenues increased $266 (11.1%) for the nine-
month period ended September 30, 1996 as compared to the same prior
year period. The increase for the period was attributable
primarily to growth in minutes of use of 8.7% and net rate activity
which increased revenues by $30.
Intrastate Access revenues decreased $56 (8.2%) for the nine-month
period ended September 30, 1996 when compared to the corresponding
1995 period. The decrease was due primarily to rate reductions of
$110 compared with the same 1995 period, partially offset by
increases attributable to growth in minutes of use of 10.5%.
Toll revenues decreased $167 (21.8%) for the nine-month period
ended September 30, 1996 when compared to the same prior year
period. The decrease was primarily attributable to the expansion
of LACPs and increased competition, the effect of which reduced
toll messages by 24.8%. The decrease was lessened as a result of a
retroactive independent company settlement during 1995 which
reduced revenues by $31 in that period.
Other Services revenues are principally comprised of revenues from
customer premises equipment (CPE) sales and maintenance services,
billing and collection services, cellular interconnect services,
publishing fees (1995 only) and other nonregulated services
(primarily inside wire services). Other Services revenues
decreased $337 (22.7%) for the nine-month period ended September
30, 1996 when compared to the corresponding 1995 period.
The decrease was primarily due to the elimination of directory
publishing fees, which were $482 in the nine-month period ended
September 30, 1995 (see "Other Matters -- Affiliated
Transactions")and the sale of a subsidiary which performed computer
maintenance. The decreases were partially offset by incremental
rate impacts related to potential sharing under certain state
regulatory plans as well as increased sales of CPE, billing and
collection services and other non-regulated services.
Operating Expenses
Total Operating Expenses increased $329 (4.2%) for the nine-month
period ended September 30, 1996 compared to the same period in
1995. The components of Total Operating Expenses were as follows:
For the Nine
Months Ended
September 30,
1996 1995
Depreciation and Amortization $ 2,427 $ 2,286
Other Operating Expenses:
Cost of Services and
Products 3,854 3,894
Selling, General and
Administrative 1,921 1,693
5,775 5,587
Total Operating Expenses $ 8,202 $ 7,873
Depreciation and Amortization increased $141 (6.2%) for the nine-
month period ended September 30, 1996 compared to the same period
in 1995. The increase was due primarily to higher levels of
property, plant and equipment since September 30, 1995 and shorter
depreciable lives subsequent to the discontinuance of SFAS No. 71.
The higher levels of property, plant and equipment resulted from
continued growth in business volumes and continued modernization of
the network.
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 increased $188 (3.4%) for the nine-month period ended
September 30, 1996 when compared to the corresponding 1995 period.
The increase in Other Operating Expenses for the period was due
principally to higher business volumes and costs related to
initiatives to compete effectively, including new service offerings
and intensified marketing and advertising. The increase for the
period was partially offset by a decrease of approximately $97 for
employee-related costs in the core wireline business, including
expenses for employee benefits. The decrease in such labor costs
reflects net employee reductions in BellSouth Telecommunications'
telephone operations of approximately 6,200 since September 30,
1995 primarily attributable to previously-disclosed restructuring
and work force reduction plans, partially offset by annual
compensation increases for management and represented employees.
The increases in other operating expenses were also partially
offset by the sale of a subsidiary which performed computer
maintenance.
Other Income Statement Items
The other income statement components were as follows:
For the Nine
Months Ended
September 30,
1996 1995
Interest Expense $410 $425
Other Income, net 17 20
Provision for Income Taxes 919 944
Interest Expense decreased $15 (3.5%) for the nine-month period
ended September 30, 1996 compared to the same period last year.
The decrease was primarily attributable to lower average interest
rates on borrowings due in part to refinancings during 1995,
partially offset by higher average debt balances.
Provision for Income Taxes decreased $25 (2.6%) for the nine-month
period ended September 30, 1996 over the comparable 1995 period.
BellSouth Telecommunications' effective tax rates were 37.3% and
38.0% for the nine months ended September 30, 1996 and 1995,
respectively.
REGULATORY DEVELOPMENTS AND COMPETITION
Federal Developments
In February 1996, Congress passed the Telecommunications Act of
1996 (the 1996 Act). Among its provisions, the 1996 Act removes
state legislative and regulatory barriers to competition for local
telephone service, subject only to competitively neutral
requirements to preserve and advance universal service, protect the
public safety and welfare, maintain the quality of
telecommunnications services and safeguard the rights of customers.
The 1996 Act also includes requirements that incumbent local
exchange carriers (ILECs) negotiate agreements for the
interconnection and access to network elements on an unbundled
basis, with competing companies. If a negotiated agreement cannot
be reached, either party may seek arbitration with the state
regulatory authority. The arbitrator must set rates for access to
network elements on an unbundled basis, based on cost, and may
include a reasonable profit. ILECs are also required to negotiate
agreements for providing their retail services at wholesale rates
for the purposes of resale by competing companies. If agreement
cannot be reached, the arbitrator shall set the wholesale rates at
the ILEC's retail rates less costs to be avoided.
In connection with the requirements of the 1996 Act, on August 8,
1996, the FCC released an order adopting rules governing
interconnection and open competition in the local telephone service
industry (the Order). Among the issues specifically addressed by
the Order are the network elements that ILECs must make available;
pricing standards to be followed by states in setting rates for
interconnection, access to network elements on an unbundled basis
and resold services. The FCC will address access charges and
universal service matters in subsequent proceedings, although an
interim access charge plan will lower access charges paid by
carriers that purchase unbundled network elements from ILECs. The
decision also reduces rates paid by wireless carriers for
connection to the wireline networks of the ILECs.
BellSouth and several other ILECs joined in an appeal of the Order
to the United States Court of Appeals for the Eighth Circuit (the
Court). Upon request of several state commissions and ILECs, the
Court stayed the Order in part, pending appeal. Such stay relates
to pricing prescriptions and certain other terms contained within
the Order. The Court has scheduled oral arguments for January 17,
1997.
BellSouth Telecommunications is evaluating the impact that the
Order may have on its operations. It will not be possible to assess
fully its implications until all challenges thereto have been
resolved and the state regulatory commissions have addressed the
related matters within their jurisdictions.
State Developments
In order to comply with the requirements of the 1996 Act, all
states in BellSouth Telecommunications' local service area have
proceedings and other activities in progress necessary to implement
open competition for local service. Among the issues being
addressed in these proceedings are the level of wholesale discounts
required to be offered by the ILECs to carriers providing competing
local service and the price of access to network elements on an
unbundled basis.
A number of carriers have been approved or have filed applications
to provide local service in many of the areas in which BellSouth
Telecommunications provides service. BellSouth Telecommunications
has executed 27 interconnection or resale agreements with such
local carriers. BellSouth Telecommunications believes that a
number of these agreements address all of the 14 checklist items
required for interLATA authority contained in the 1996 Act.
BellSouth Telecommunications continues to negotiate with a number
of other telecommunications companies and is also involved in
arbitration proceedings with carriers (including AT&T, MCI and
Sprint) with whom BellSouth Telecommunications has been unable to
reach agreements on pricing and other provisions.
Price regulation plans have been approved or authorized by the
requisite legislative or regulatory bodies in all states in the
BellSouth Telecommunications local service area. Recent
significant developments with respect to discounts to be offered to
competing local carriers, price regulation and other related issues
are discussed below.
Georgia. In second quarter 1996, the Georgia Public Service
Commission ordered a wholesale discount rate to local service
resellers of 20.3% for residential services and 17.3% for business
services. The discount levels are to remain in effect for a twelve-
month period after which the Commission will conduct a review to
determine if any modifications are necessary. BellSouth
Telecommunications appealed these discounts to the Superior Court
of Fulton County, Georgia which affirmed the Order on October 8,
1996. The Commission also set out a time line starting in the
third quarter of 1996 for electronic interface implementation with
carriers providing competing local service.
Kentucky. In September 1996, the Kentucky Public Service
Commission issued an order concerning local competition and
universal service funds. The order set an interim, single discount
rate of 19.2%. The order also provided that Commission-approved
negotiated agreements for interconnection shall be the primary
means for implementing local competition. The universal service
fund rules established by the Commission are preliminary and
interim until the FCC issues its order on this matter.
Louisiana. In October 1996, the Louisiana Public Service
Commission approved the Administrative Law Judge's recommendation
that the wholesale discount based on BellSouth Telecommunications'
avoided cost be 20.72%, subject to adjustment pending further
hearings on resale.
South Carolina. As previously disclosed, in December 1994, the South
Carolina Public Service Commission issued an order which, in addition to a
prospective rate reduction of $26 million, required a refund of
approximately $29 million, plus interest, based on the 1992 adjusted
earnings of BellSouth Telecommunications. The prospective rate reduction
was implemented, but the refund was stayed pending judicial review of the
decision. On October 23, 1996, the South Carolina Court of Common Pleas
entered its order affirming the Commission's order of the refund but
reversing the rate of interest applied by the Commission. BellSouth
Telecommunications intends to appeal the order to the South Carolina
Supreme Court. The Commission has previously postponed review of BellSouth
Telecommunications' earnings in 1993 and 1994 until a resolution of the
1992 period is reached. While complete assurance cannot be given as to the
outcome of these matters, BellSouth Telecommunications believes that any
financial impact would not be material to its financial position, annual
operating results or cash flows.
BUSINESS DEVELOPMENTS
In April 1996, BellSouth Telecommunications received approval from
the Florida Public Service Commission to provide competing local
service in other carriers' service areas. BellSouth
Telecommunications intends to offer local service in the near
future to business customers in parts of the Orlando market not
previously served by BellSouth Telecommunications.
BellSouth plans to begin offering interLATA wireline service within
its nine-state local service territory as soon as possible after
completion of FCC, appellate court and state regulatory proceedings
and satisfaction of requirements arising out of these proceedings.
As a result of the appellate proceedings described in "Federal
Developments," it is uncertain when BellSouth will be authorized to
initiate such service.
In March, BellSouth Telecommunications began joint marketing of
wireless and wireline services in select markets.
OTHER MATTERS
Affiliated Transactions
Through 1995, BellSouth Telecommunications had a contractual
agreement with BellSouth Advertising & Publishing Corporation
(BAPCO), an affiliated company, wherein BAPCO published certain
telephone directories and in return paid publication fees to
BellSouth Telecommunications for publishing rights and other
services. For the nine months ended September 30, 1995 and the
year ended December 31, 1995, these fees, included in Other
Operating Revenue, were $482 and $721, respectively.
In response to changes in the telecommunications environment,
including passage of the 1996 Act, and to enhance competitive
flexibility, BellSouth Telecommunications and BAPCO established a
new contract, based on fees for services rendered between the
companies, effective January 1, 1996. The new contract is expected
to generate fees of about $75 for BellSouth Telecommunications in
1996, resulting in projected BellSouth Telecommunications' 1996
revenues of about $625 less than they would have been under the old
contract.
Because BellSouth Telecommunications and BAPCO are wholly-owned
subsidiaries, BellSouth's consolidated financial results are not
affected by this change.
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:
None.
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 Financial and
Accounting Officer)
November 12, 1996
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,
1996
1. Earnings
(a) Income from continuing operations
before deductions for taxes and interest $2,876
(b) Portion of rental expense
representative of interest factor 44
TOTAL $2,920
2. Fixed Charges
(a) Interest $424
(b) Portion of rental expense
representative of interest factor 44
TOTAL $468
Ratio (1 divided by 2) 6.2
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 87
<SECURITIES> 219
<RECEIVABLES> 2,883
<ALLOWANCES> 85
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<CURRENT-ASSETS> 3,371
<PP&E> 45,279
<DEPRECIATION> 26,506
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0
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<COMMON> 7,378
<OTHER-SE> 834
<TOTAL-LIABILITY-AND-EQUITY> 22,920
<SALES> 185
<TOTAL-REVENUES> 11,060
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<TOTAL-COSTS> 6,281
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<INTEREST-EXPENSE> 410
<INCOME-PRETAX> 2,465
<INCOME-TAX> 919
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