<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
___ SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1994
_____________________________
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
___ SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
_____________ ____________
Commission file number 0-873
_____________________________________
PACIFIC TELECOM, INC.
(Exact name of registrant as specified in its charter)
Washington 91-0644974
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
805 Broadway, P.O. Box 9901,
Vancouver, Washington 98668 - 8701
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (206)696-0983
____________________
No Change
________________________________________________________________
(Former name, former address and former fiscal year, if changed
since last report)
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
___ ____
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
Common Stock, no par value 39,619,623 shares
_____________________________________________________________________
(Title of Class) (Outstanding at November 4, 1994)
<PAGE>
PACIFIC TELECOM, INC.
INDEX
_____
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION: PAGE NO.
_____________________ ________
<C> <S> <C>
Item 1 - Financial Statements:
Consolidated Balance Sheets -
September 30, 1994 and December 31, 1993 3
Consolidated Statements of Income -
Three and nine months ended September 30, 1994
and 1993 4
Consolidated Statements of Cash Flows -
Nine months ended September 30, 1994 and 1993 5
Condensed Notes to Consolidated Financial Statements 6 - 8
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 13
PART II OTHER INFORMATION:
_________________
Item 1 - Legal Proceedings 14
Item 5 - Other Events 14
Item 6 - Exhibits and Reports on Form 8-K 14
Signatures 15
</TABLE>
- 2 -
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. - Financial Statements
PACIFIC TELECOM, INC.
Consolidated Balance Sheets
(Unaudited)
ASSETS
______
<TABLE>
<CAPTION>
September 30, December 31,
1994 1993
_____________ ____________
(In thousands)
<S> <C> <C>
Current assets:
Cash and temporary cash investments $ 7,049 $ 4,861
Accounts receivable 112,805 99,055
Accounts and notes receivable - affiliates 1,295 2,039
Material and supplies 17,036 15,967
Inventory - North Pacific Cable 63,049 65,753
Other 17,788 32,493
__________ _________
Total current assets 219,022 220,168
Investments 166,267 129,897
Plant in service:
Telecommunications 1,517,085 1,562,021
Other 22,016 17,695
Less accumulated depreciation 792,986 741,061
_________ _________
746,115 838,655
Construction work in progress 26,583 14,523
_________ _________
Net plant 772,698 853,178
Intangible assets 254,388 256,226
Deferred charges 23,770 22,755
_________ _________
Total assets $1,436,145 $1,482,224
_________ _________
_________ _________
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND CAPITALIZATION
______________________________
<S> <C> <C>
Current liabilities:
Currently maturing long-term debt $ 6,706 $ 16,429
Notes payable 15,903 24,903
Accounts payable 63,527 50,330
Income taxes payable 26,812 -
Accrued liabilities 45,920 49,928
Accrued toll settlements 19,565 17,756
_________ _________
Total current liabilities 178,433 159,346
Long-term debt 404,190 426,669
Deferred income taxes 90,133 153,455
Unamortized investment tax credits 14,944 18,326
Other long-term liabilities 70,032 68,947
Minority interest 16,210 16,770
Shareholders' equity:
Common stock 19,806 19,805
Additional paid-in capital 205,607 205,842
Retained earnings 436,790 413,064
_________ _________
Total shareholders' equity 662,203 638,711
_________ _________
Total liabilities and capitalization $1,436,145 $1,482,224
_________ _________
_________ _________
</TABLE>
See accompanying notes to consolidated financial statements.
- 3 -
<PAGE>
PACIFIC TELECOM, INC.
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
__________________ _________________
1994 1993 1994 1993
________ _______ ______ _______
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Operating revenues:
Local network service $ 24,722 $ 21,240 $ 70,917 $ 60,516
Network access service 42,088 45,545 125,485 134,803
Long distance network service 82,747 67,470 208,276 199,620
Private line service 14,499 16,476 43,733 50,141
Sales of cable capacity 1,665 867 4,252 3,347
Other 28,727 29,719 78,113 76,668
_______ _______ _______ _______
Total operating revenues 194,448 181,317 530,776 525,095
_______ _______ _______ _______
Operating expenses:
Plant support 30,552 34,423 85,937 92,205
Depreciation and amortization 25,966 27,951 79,584 80,340
Leased circuits 6,764 6,682 19,980 22,838
Access expense 23,869 24,463 69,462 73,501
Other operating expense 9,268 9,014 26,751 25,305
Cost of cable sales 1,050 423 2,704 1,717
Customer operations 17,900 18,008 54,506 52,638
Administrative support 20,040 19,840 55,996 61,554
Taxes other than income taxes 4,087 3,923 11,461 11,306
_______ _______ _______ _______
Total operating expenses 139,496 144,727 406,381 421,404
_______ _______ _______ _______
Operating income 54,952 36,590 124,395 103,691
_______ _______ _______ _______
Other income (expense):
Interest expense (8,712) (11,244) (26,629) (34,135)
Interest income 594 166 806 460
Gain (Loss) on sale of investment (338) 1,340 2,828 1,340
Other (2,241) (3,917) (6,486) (8,891)
_______ _______ _______ _______
Total other income (expense) (10,697) (13,655) (29,481) (41,226)
_______ _______ _______ _______
Income before income taxes 44,255 22,935 94,914 62,465
Income taxes 14,574 8,901 31,799 20,243
_______ _______ _______ _______
Income from continuing
operations 29,681 14,034 63,115 42,222
Income from discontinued operations,
net of income taxes - 60,444 - 60,444
_______ _______ _______ _______
Net income $ 29,681 $ 74,478 $ 63,115 $102,666
_______ _______ _______ _______
_______ _______ _______ _______
Average number of common shares
outstanding 39,612 39,588 39,610 39,580
_______ _______ _______ _______
_______ _______ _______ _______
Income from continuing operations
per common share $ .75 $ .35 $ 1.59 $ 1.07
_______ _______ ______ _______
_______ _______ ______ _______
Net income per common share $ .75 $ 1.88 $ 1.59 $ 2.59
_______ _______ ______ _______
_______ _______ ______ _______
Cash dividends per
common share $ .33 $ .33 $ .99 $ .99
_______ _______ ______ _______
_______ _______ ______ _______
</TABLE>
See accompanying notes to consolidated financial statements.
- 4 -
<PAGE>
PACIFIC TELECOM, INC.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
____________________
1994 1993
_____ _____
(In thousands)
<S> <C> <C>
Cash Flows from Operating Activities:
Income from continuing operations $ 63,115 $ 42,222
Adjustments to reconcile income from continuing operations
to net cash provided by operating activities:
Depreciation and amortization 84,868 85,241
Deferred income taxes and investment tax credits, net (70,893) 1,722
Gain on sale of investment (2,725) (1,340)
(Gains) Losses from unconsolidated entities, net (922) 85
Accounts receivable and other current assets (10,009) 6,034
Inventory - North Pacific Cable 2,704 8,113
Accounts payable and accrued liabilities 35,806 13,355
Other 2,752 4,319
________ ________
Net cash provided by operating activities 104,696 159,751
________ ________
Cash Flows from Investing Activities:
Construction expenditures (77,139) (70,170)
Cost of businesses acquired - (8,331)
Investments in and advances to affiliates, net (21,008) (1,257)
Proceeds from Alaska restructuring 75,000 -
Proceeds from sales of assets 1,288 3,217
________ ________
Net cash used by investing activities (21,859) (76,541)
________ ________
Cash Flows from Financing Activities:
Net payments on short-term debt (9,000) (17,064)
Proceeds from issuance of long-term debt 8,006 3,220
Dividends paid (39,214) (39,157)
Purchase of common stock (234) -
Payment of long-term debt (40,207) (22,048)
________ ________
Net cash used by financing activities (80,649) (75,049)
________ ________
Increase in Cash and Temporary Cash Investments 2,188 8,161
Cash and Temporary Cash Investments at Beginning of Period 4,861 9,735
________ _______
Cash and Temporary Cash Investments at End of Period $ 7,049 $ 17,896
________ _______
________ _______
Supplemental Disclosures of Cash Flow Information:
Cash paid during the nine months ended September 30 for:
Interest $ 31,398 $ 38,586
Income Taxes $ 73,712 $ 29,439
Noncash Investing and Financing Activities:
Common stock issued for employee benefits $ - $ 971
Common stock received as consideration
in sale of subsidiaries $ 16,564 $201,000
Unrealized loss on securities available for sale $ 174 $ -
See accompanying notes to consolidated financial statements.
</TABLE>
- 5 -
<PAGE>
Notes to Consolidated Financial Statements
(Unaudited)
1. The consolidated financial statements include all normal adjustments
which, in the opinion of management, are necessary to present fairly the
consolidated financial position at September 30, 1994, and the
consolidated results of operations for the three and nine months ended
September 30, 1994 and 1993 and cash flows for the nine months ended
September 30, 1994 and 1993. These consolidated financial statements
should be read in conjunction with the financial statements and related
notes incorporated in the latest annual report filed on Form 10-K of
Pacific Telecom, Inc. (Company). The consolidated results of operations
presented herein are not necessarily indicative of the results to be
expected for the year. The 1993 consolidated financial statements
reflect certain reclassifications to conform to the current year
presentations.
2. At September 30, 1994, approximately 87 percent of the Company's
outstanding common stock was owned by PacifiCorp Holdings, Inc.
(Holdings), a wholly-owned subsidiary of PacifiCorp. (See Part II, Item
5. "Other Events" on page 14 of this Form 10-Q for information regarding
a proposal by Holdings to acquire the remaining 13 percent minority
interest in the Company.)
3. Certain loan agreements contain provisions restricting the payment of
cash dividends. Retained earnings of approximately $226.6 million were
available for dividends and other distributions at September 30, 1994.
The Company's ratio of earnings to fixed charges for the nine months
ended September 30, 1994, calculated in accordance with Item 503 of
Regulation S-K under the Securities Exchange Act of 1934, was 3.6 to
1.0.
4. The Company's effective combined state and federal income tax rates were
33.5 percent and 32.4 percent for the nine months ended September 30,
1994 and 1993, respectively. The difference between taxes calculated
at the statutory federal tax rates and the effective combined rates for
1994 and 1993 is reconciled as follows:
<TABLE>
<CAPTION>
1994 1993
____ ____
<S> <C> <C>
Federal statutory rate 35.0 % 35.0%
State income taxes, net of federal benefit 1.0 4.6
Amortization of investment tax credits (3.4) (5.8)
Amortization of excess deferred income taxes (1.0) (3.6)
Amortization of excess cost 1.9 1.7
Other - .5
____ ____
Effective tax rate 33.5% 32.4%
____ ____
____ ____
</TABLE>
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
________________ ________________
1994 1993 1994 1993
_______ ______ _______ ______
(In thousands)
<S> <C> <C> <C> <C>
Federal income taxes $15,622 $ 7,278 $ 30,314 $15,872
State income taxes (1,048) 1,623 1,485 4,371
______ ______ _______ ______
$14,574 $ 8,901 $ 31,799 $20,243
______ ______ _______ ______
______ ______ _______ ______
Income taxes currently payable
(Note 8) $78,938 $10,309 $102,697 $26,398
Deferred income taxes (63,236) (162) (67,515) (2,419)
Amortization of deferred
investment tax credits (1,128) (1,246) (3,383) (3,736)
______ ______ _______ ______
$14,574 $ 8,901 $ 31,799 $20,243
______ ______ _______ ______
______ ______ _______ ______
</TABLE>
- 6 -
<PAGE>
Notes to Consolidated Financial Statements
(Unaudited)
5. Investments include $22.4 million of construction costs, $16.7
million of which was added during the first nine months of 1994,
relating to upgrading facilities of telephone exchanges in Colorado
that the Company has agreed to purchase from US WEST Communications,
Inc. (USWC). (See Part I, Item 1, "Business - Telecommunications
operations - Local Exchange Companies" on page 5 of the Annual Report
on Form 10-K for the year ended December 31, 1993 for additional
information concerning the transaction and construction contract.)
If the transaction with USWC does not close, USWC is required to
reimburse the Company for all of the Company's expenditures under the
construction contract plus interest.
6. On April 29, 1994, the Company completed the sale of PTI Harbor Bay,
Inc. and Upsouth Corporation to IntelCom Group, Inc. (IntelCom)
(AMEX:ITR) for 1,183,147 shares of IntelCom common stock and $.2
million in cash. The net assets of PTI Harbor Bay, Inc. and Upsouth
Corporation prior to the sale were classified in other current
assets. Based on the trading value for IntelCom stock at April 29,
1994, the Company recognized proceeds on the sale of the subsidiaries
of $16.8 million (including $.2 million in cash) and an after-tax
gain of $1.6 million, net of anticipated selling commissions and
other expenses. At September 30, 1994, the closing price of Intelcom
stock was slightly lower than the original recorded value and an
unrealized net loss of $.2 million was recorded directly to retained
earnings in accordance with Statement of Financial Accounting
Standards No. 115. The IntelCom share value was included in
investments at September 30, 1994. On October 17, 1994, the Company
sold its IntelCom stock. Cash proceeds of $15.7 million and a loss
of $.5 million, net of tax and selling expenses, will be recognized
in October.
7. In October 1994, the Company signed an agreement to sell the stock of
Alascom, Inc. (Alascom) to AT&T Corp. (AT&T) in a transaction
providing $365 million in proceeds. Under terms of the agreement,
AT&T will pay $290 million in cash for the Alascom stock and for
settlement of all past cost study issues. AT&T has also agreed to
allow PTI to retain the $75 million transition payment made by AT&T
to Alascom in July 1994 pursuant to a Federal Communications
Commission (FCC) order. AT&T made a down payment of $30 million to
the Company upon signing the stock purchase agreement, which would be
applied to the final $75 million transition payment required in the
FCC order if the transaction failed to close. The remaining $260
million is to be paid when the transaction closes. Closing of the
sale of Alascom is subject to certain conditions, including receipt
of state and federal regulatory approvals that are expected to be
received during the first half of 1995.
In September 1994, settlement revenues of $16.0 million were
recognized in long distance network service relating to the
settlement of past cost study issues.
Summarized income statement data for Alascom are as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
__________________ __________________
1994 1993 1994 1993
________ ________ ________ ________
(In thousands)
<S> <C> <C> <C> <C>
Operating revenues $101,352 $88,843 $261,092 $254,408
Operating income 32,850 15,531 63,638 42,816
</TABLE>
- 7 -
<PAGE>
Notes to Consolidated Financial Statements
(Unaudited)
8. Net cash provided by operating activities was reduced by $43.2
million for taxes paid on the transition payments received and to be
received from AT&T totalling $150 million. The Company believes the
cash used to make this tax payment directly relates to the $75
million in cash received in July 1994 for the first transition
payment included in cash flow from investing activities. However,
generally accepted accounting principles require that income tax
expenses be offset against cash from operating activities. This tax
payment had little effect on net income as the increase in current
income tax expense was mostly offset by a reduction in deferred
income tax expense.
- 8 -
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Three Months Ended September 30
_______________________________
Results of Operations
_____________________
The Company's net income applicable to common stock for the third quarter
of 1994 was $29.7 million or $.75 per share compared to net income of
$74.5 million or $1.88 per share for the third quarter of 1993. Net
income decreased $60.4 million as a result of a gain recognized on the
sale of the Company's international subsidiary, TRT Communications, Inc.
(TRT), and a smaller subsidiary of the Company to IDB Communications
Group, Inc. (IDB) in the third quarter of 1993. This 1993 gain was
reported in discontinued operations. The decrease in net income in 1994
was partially offset by long lines interstate revenues of $9.5 million,
net of tax, recognized in September 1994 in connection with the
settlement of disputes over revenue requirements, lower interest expense,
resulting mainly from lower borrowing levels, and the 1993 valuation
adjustments on noncore investments.
Operating income increased 50 percent or $18.4 million in the third
quarter of 1994. Excluding the effects of other revenue adjustments and
settlement revenues, the Company experienced growth in operating income
of $6.2 million, or 18 percent, over the prior year third quarter. This
increase was attributable mainly to higher long lines interstate rate of
return, growth in the cellular business, LEC access line growth and lower
benefit costs. These items were partially offset by the decline in the
long lines rate base resulting from the $75 million transition payment
received from AT&T in July 1994 (Note 7).
Operating revenues for the third quarter of 1994 were $194.4 million, an
increase of seven percent from $181.3 million for the third quarter of
1993. LEC extended calling area service revenues of $2.0 million and the
$.9 million revenue effect of access line growth combined to contribute
most of the $3.5 million increase in local network service revenue. The
implementation of extended calling area service routes shifts revenues
from network access, long distance and other revenue to local service
revenue. Network access service revenue declined $3.5 million, with $1.6
million resulting from the effect of LEC extended calling area services
and $1.9 million due to lower revenue adjustments than in the prior year.
Long distance network service revenue was up $15.3 million. This
increase was mainly due to the settlement of all open revenue studies
under the Joint Services Agreement (JSA) (Note 7), which increased long
lines revenues by $18.7 million. Partially offsetting this increase was
a $2.4 million decrease relating to the decline in the long lines rate
base and a $1.6 million decline in interstate access revenue. The
Anchorage Telephone Utility (ATU) exited the National Exchange Carrier
Association (NECA) traffic sensitive pools, which in part resulted in
this reduction in access charge expenses that are recovered in interstate
access revenue. Private line service revenue decreased $2.0 million as a
result of the Company exiting certain noncore business activities.
Higher revenues from cable sales of $.8 million reflected increased sales
of cable capacity. In other revenue for 1993, the long lines subsidiary
recognized one-time other revenue and plant support expense of $3.2
million relating to providing service in Saudi Arabia in support of
Desert Storm. Increased cellular revenues of $2.6 million in 1994
relating to customer growth and acquisitions partially offset the decline
in other revenue.
On May 24, 1994, the Federal Communications Commission (FCC) adopted a
final order relating to the restructuring of the
Alaska interstate long distance marketplace. The Company's wholly-owned
subsidiary, Alascom, Inc., filed a petition for review of the order with
the United States Court of Appeals for the District of Columbia, but the
Company has initiated implementation of its requirements under the order,
which became effective on June 27, 1994. In addition, on July 8, 1994
Alascom received the first of two $75 million transition payments from
AT&T. Pursuant to the FCC order, this amount was used to reduce
Alascom's ratebase, which will result in lower revenues and depreciation
expense in future periods. (See Part I, Item 1, "Business -
- 9 -
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Telecommunications Operations - Alaska Market Restructuring" on page 7 of
the Annual Report on Form 10-K for the year ended December 31, 1993 for
additional information.) In October 1994, AT&T agreed to purchase the
common stock of Alascom from the Company (Note 7).
Operating expenses for the third quarter of 1994 were $139.5 million, a
decrease of $5.2 million compared to the third quarter of 1993. A one-
time charge relating to service provided in Saudi Arabia in 1993 caused
plant support and other revenue to decrease by $3.2 million.
Depreciation expense was $2.0 million lower in part as a result of a $.9
million decrease caused by lower long lines plant balances resulting from
the $75 million transition payment. The sale of noncore subsidiaries
also lowered depreciation by $.9 million. Access expense decreased $.6
million due to the $1.7 million effect of ATU exiting the NECA traffic
sensitive pools. Partially offsetting this decrease in access expense
was an increase of $1.3 million relating to increased facility costs
associated with long lines intrastate and special access services.
Other expense (net) for the third quarter of 1994 was $10.7 million, a
decrease of $3.0 million from the third quarter of 1993. This decrease
was mainly due to the $2.5 million decrease in interest expense resulting
from lower debt levels and the valuation adjustments of $3.8 million for
certain noncore investments in 1993. The lower debt levels resulted from
the payment of debt with proceeds from the sale of IDB stock in 1993.
(See Part I, Item 1,"Business - International Communications" on page 10
of the Annual Report on Form 10-K for the year ended December 31, 1993
for more information concerning the payment of debt.) Gain on sale of
investment was lower by $1.7 million due mainly to 1993 sales of cellular
properties. Income tax expense increased due to higher taxable income.
Nine Months Ended September 30
______________________________
Results of Operations
_____________________
The Company's net income applicable to common stock for the nine months
ended September 30, 1994 was $63.1 million or $1.59 per share, a decrease
of 39 percent compared to net income of $102.7 million or $2.59 per share
for the same period in 1993. This decrease resulted from the after-tax
gain of $60.4 million recognized in discontinued operations, partially
offset by after-tax valuation adjustments of $2.5 million for noncore
business investments recognized in 1993. The net increase in long lines
interstate settlement revenues and other revenue adjustments of $5.5
million, after-tax, also helped partially offset the decrease. In
addition, a decline in interest expense caused mainly by lower borrowing
levels, gains on the sale of two wholly-owned subsidiaries, and a
positive valuation adjustment to a lease liability helped to mitigate the
decrease in net income in the 1994 period.
Operating income increased 20 percent or $20.7 million for the first nine
months of 1994. Excluding the effects of settlement revenues and other
revenue adjustments, the Company experienced growth in operating income
of $12.3 million, or 13 percent, over the first nine months of 1994.
This increase was attributable mainly to growth in the cellular business,
higher long lines return on rate base, LEC access line growth, lower
leased circuits expense and reduced corporate and benefit costs.
Partially offsetting these items were the effects of long lines rate base
reductions and increased customer support expenses.
Operating revenues for the first nine months of 1994 were $530.8 million,
an increase of one percent from $525.1 million for the same period of
- 10 -
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
1993. LEC extended calling area service revenues of $6.0 million, access
line growth with a revenue effect of $2.8 million and the revenue effect
of certain rate increases of $.7 million combined to contribute most of
the $10.4 million increase in local network service revenue. Network
access service revenue declined $9.3 million, with $4.8 million resulting
from the effect of LEC extended calling area services and $4.8 million
due to lower revenue adjustments. Long distance network service revenue
was up $8.7 million primarily due to the settlement of all open revenue
studies relating to the JSA (Note 7), which resulted in long lines
interstate revenue increases of $18.3 million. In addition, a $2.2
million improvement in intrastate revenue relating to increased
intrastate billed minutes added to the improvement in long distance
network service revenues. Reducing long distance network service revenue
were the $6.2 million decline in interstate access revenue due to ATU
exiting the NECA traffic sensitive pools, the revenue effects of long
lines reduced expenses of $4.7 million and reduced rate base of $3.2
million. Private line service revenue decreased $6.4 million mainly as
a result of the Company exiting certain noncore business activities.
Sales of cable capacity were higher as 330 prime cable and 660 backhaul
circuits were sold through the first nine months of 1994 compared to 180
prime cable and 765 backhaul circuits through the first nine months of
1993. These sales bring the total percentage of cable sold to
approximately 53 percent. Other revenue increased $1.4 million,
including increased cellular revenues of $7.2 million relating to
customer growth and acquisitions which were partially offset by a decline
of $3.2 million relating to 1993 revenues from providing service in Saudi
Arabia, decreased cable maintenance and restoration of $.8 million
relating to a 1993 cable outage and lower revenue of $1.4 million
relating to the effect of LEC extended calling service revenue.
Operating expenses for the first nine months of 1994 were $406.4 million,
a decrease of $15.0 million compared to the first nine months of 1993.
Plant support decreased $6.3 million as the decision to exit certain
noncore business activities reduced plant support by $2.3 million and
long lines contract service expenses declined by $1.0 million mainly due
to various nonrecurring charges in 1993. A one-time charge relating to
service provided in Saudi Arabia in 1993 caused plant support and other
revenue to decrease by $3.2 million in 1994. Depreciation expense was
lower by $.8 million due to lower depreciation of $2.6 million resulting
from the sale of noncore subsidiaries and $.9 million due to the
decrease in plant balances resulting from the $75 million transition
payment. These items were offset in part by LEC depreciation rate
increases of $2.2 million. Leased circuits expense declined $2.9
million, $1.6 million of which related to noncore business activities
that were sold and $1.1 million of which related to the cable
outage in 1993. Access expense decreased $4.0 million due to the $6.2
million effect of ATU exiting the NECA traffic sensitive pools.
Partially offsetting this decrease was an increase of $2.2 million
relating to increased facility costs associated with access services.
Growth in cellular roaming expense caused most of the $1.4 million
increase in other operating expense. Cellular customer growth and an
increase in the incremental cost to acquire new cellular customer
subscriptions increased customer operations expense. Administrative
support expense decreased $5.6 million, with $4.2 million relating mainly
to lower corporate support and employee benefit costs and $1.4 million
due to the sale of other noncore subsidiaries.
Other expense (net) for the first nine months of 1994 was $29.5 million,
a decrease of $11.7 million from the first nine months of 1993. This
decrease was mainly due to a $3.2 million pre-tax gain on the sale of two
wholly-owned subsidiaries, a $7.5 million decrease in interest expense
reflecting lower debt levels as a result of the payment of debt with
proceeds from the sale of IDB stock in 1993, 1993 valuation adjustments
of noncore subsidiaries of $3.8 million and a $.8 million favorable
adjustment to a lease liability. Partially offsetting the decreases in
other expense were the 1993 gains on sales of cellular properties and
amortization of excess cost relating to cellular properties. Income tax
expense increased due mainly to higher taxable income.
- 11 -
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Acquisitions
____________
In August 1993, the Company signed a definitive agreement with US WEST
Communications, Inc. (USWC) under which the Company would acquire certain
rural telephone exchange properties in Colorado. (See Part I, Item 1,
"Business - Telecommunications Operations - Local Exchange Companies" on
page 5 of the Annual Report on Form 10-K for the year ended December 31,
1993, for additional information concerning the purchase of the Colorado
properties.) The Colorado Public Utilities Commission order approving
the transaction with conditions became final in June 1994. The comment
period has expired in the Federal Communications Commission (FCC) docket
considering the Company's application for study area and price cap
waivers associated with the transaction. No opposing comments were
received, but issuance of the FCC written order is still pending.
On May 4, 1994, the Company signed definitive purchase agreements to
acquire certain rural telephone exchange properties in Oregon and
Washington from USWC. (See Part I, Item 2, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on page 11 of
the Form 10-Q for the quarter ended June 30, 1994, for additional
information concerning the purchase of Oregon and Washington properties.)
Applications seeking Washington Utilities and Transportation
Commission and Oregon Public Utilities Commission approvals and FCC
study area and price cap waivers were filed in the second quarter of
1994. Hearings before the Oregon Commission are expected to occur in
December 1994 or January 1995. It is unclear whether a formal hearing
will be required with respect to the Washington application. No opposing
comments to the FCC applications were received, but written orders will
not be issued until decisions by the state commissions are issued. The
Company expects that all regulatory approvals will be received by the end
of 1995.
See Part I, Item 1, "Business - Acquisition Program" on page 18 of the
Annual Report on Form 10-K for the year ended December 31, 1993 for
information on the Company's acquisition strategy.
Liquidity and Capital Resources
_______________________________
During the nine months ended September 30, 1994, construction
expenditures amounted to $77.1 million. These expenditures related
mainly to network upgrades and growth in the Company's operations. The
construction expenditures were funded using cash from operations. In
1994, total construction expenditures estimated at $123.8 million and
expenditures for the construction contract with USWC estimated at $28
million are expected to be funded primarily through cash from operations.
In October, the Company sold 1,183,147 shares of common stock of IntelCom
Group, Inc. (IntelCom) (Note 6). Cash proceeds of $15.7 million from the
sale, net of selling commissions and other expenses, will be used to help
finance the Company's continuing local exchange acquisition program.
- 12 -
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The Company has access to funds through its $300 million revolving credit
agreement. At September 30, 1994, the Company had nothing outstanding
under the revolving credit agreement. In addition to providing available
funds, the revolving credit agreement also serves as backup for a $100
million commercial paper program, under which nothing was outstanding at
September 30, 1994. The Company had $12 million outstanding under other
banking arrangements and $3.9 million due to the minority owner of a
Company subsidiary at September 30, 1994. The Company also has a $150
million Series B Medium-Term Note program, with $74.5 million outstanding
at September 30, 1994, and has received approval from the Rural Telephone
Bank authorizing it to borrow up to $20.9 million in additional REA debt
for certain construction projects. In July 1994, Moody's Investors
Service, Inc. (Moody's) lowered the rating on the Company's Medium-Term
Notes from A3 to Baa1. This reduction is not expected to result in a
material increase in the interest rate on new issuances of the Company's
Medium-Term Notes since this downgrade by Moody's put its rating on a
comparable level with Standard and Poors.
On July 8, 1994, Alascom received the first of two $75 million transition
payments from AT&T. The Company made an estimated tax payment in the
third quarter of 1994 which included taxes of $43.2 million relating to
transition payments totalling $150 million (Note 8). In October 1994,
the Company signed an agreement to sell Alascom to AT&T, which provides
for the retention by the Company of the transition payment received in
July from AT&T. (See Note 7 relating to the sale of Alascom and the
receipt of transition payments.)
The Company has an agreement that allows temporary cash advances to or
from its majority shareholder, PacifiCorp Holdings, Inc. (Holdings).
Interest rates on advances from Holdings are based on Holdings' cost of
short-term funds plus 3/8 percent. Interest rates on advances to
Holdings are based on the 30-day LIBOR. At September 30, 1994, there
were no advances to or from Holdings.
The Company has definitive agreements with USWC to purchase local
telephone properties in Colorado for approximately $200 million and in
Oregon and Washington for approximately $180 million. The Company
expects to fund these acquisitions through proceeds received on the sale
of Alascom (Note 7), the issuance of external debt and internally
generated funds.
Any temporary cash or liquidity requirements during 1994 are expected to
be met through utilization of funds available under the revolving credit
agreement or temporary advances from Holdings. Long-term liquidity
requirements are expected to be met through utilization of funds
available under the revolving credit agreement, the term of which ends in
November 1995 and is renewable on an annual basis with the consent of the
banks, temporary advances from Holdings or the issuance of additional
Series B Medium-Term Notes.
- 13 -
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
In Loewen, et al. v. Galligan, et al., Circuit Court for the
__________________________________ State of Oregon, County
of Multnomah; United States District Court, District of Oregon
(see Part I, Item 3, "Legal Proceedings" on page 20 of the
Company's Annual Report on Form 10-K for the year ended December
31, 1993) on September 14, 1994, the Court of Appeals affirmed
the trial court's judgment in all respects. On October 19,
1994, plaintiffs filed a petition for review of the Court of
Appeals' decision with the Oregon Supreme Court.
Item 5. Other Events
The Company has received a proposal from its parent company,
PacifiCorp Holdings, Inc. (Holdings), under which Holdings would
acquire the 13 percent minority interest of the Company for $28
per share in cash. Holdings currently owns the remaining 87
percent of the outstanding common stock of the Company.
Under terms of the proposal, a newly formed, wholly-owned
subsidiary of Holdings would merge into the Company and the
holders of the approximately 5.3 million shares of common stock
of the Company not held by Holdings would receive cash in the
amount of $28 in exchange for each share of the Company common
stock. As a result of the merger, the Company would become a
wholly-owned subsidiary of Holdings. The Company is currently
reviewing Holding's proposal.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
12 Statements re Computation of Ratios
27 Financial Data Schedule (Filed electronically only)
(b) Reports on Form 8-K
On Form 8-K dated October 17, 1994, under Item 5. "Other
Events," the Company reported the signing of an agreement to
sell the stock of Alascom, Inc. to AT&T Corp.
On Form 8-K dated November 2, 1994, under Item 5. "Other
Events," the Company reported that a proposal had been
received from PacifiCorp Holdings, Inc. to acquire the 13
percent minority interest of the Company for $28 per share
in cash.
- 14 -
<PAGE>
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.
Pacific Telecom, Inc.
___________________________________________
(Registrant)
Date: November 9, 1994 /s/James H. Huesgen
__________________________________________
James H. Huesgen
Executive Vice President and
Chief Financial Officer
- 15 -
<PAGE>
<TABLE>
EXHIBIT 12
Pacific Telecom, Inc.
Computation of Ratio of Earnings to Fixed Charges
(Dollar amounts in millions)
<CAPTION>
Nine Months
Ended
September 30, Year Ended December 31,
___________________________________________
1994 1993 1992 1991 1990 1989
_____________ ______ ______ ______ ______ ______
<S> <C> <C> <C> <C> <C> <C>
Earnings, as defined*:
Income from continuing operations
before income taxes $94.9 $ 82.9 $ 99.8 $120.4 $137.5 $104.6
Add:
Fixed charges 37.4 59.5 63.2 67.7 49.2 40.0
Equity losses of less than 50%
owned persons - - 0.9 0.5 0.7 0.1
Minority interest 0.8 0.6 0.1 2.0 4.0 -
_____ _____ _____ _____ _____ _____
Total earnings $133.1 $143.0 $164.0 $190.6 $191.4 $144.7
_____ _____ _____ _____ _____ _____
_____ _____ _____ _____ _____ _____
Fixed charges:
Interest $26.6 $44.3 $52.1 $55.0 $40.1 $30.0
Interest portion of rental expense 10.8 15.2 11.1 12.7 9.1 10.0
____ ____ ____ ____ ____ ____
Total fixed charges $37.4 $59.5 $63.2 $67.7 $49.2 $40.0
____ ____ ____ ____ ____ ____
____ ____ ____ ____ ____ ____
Ratio of earnings to fixed charges 3.6 2.4 2.6 2.8 3.9 3.6
____ ____ ____ ____ ____ ____
____ ____ ____ ____ ____ ____
<FN>
* For the purpose of computing these ratios, "earnings" represents the aggregate of (a) income
from continuing operations before income taxes, (b) fixed charges, (c) equity losses of less
than 50% owned persons and (d) minority interest. Equity losses of less than 50% owned
persons are added to income from continuing operations before income taxes since the Company
does not guarantee the debt of such persons. "Fixed Charges" consist of interest charges and
an estimated amount representing the interest portion of rental expense.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1994 AND THE CONSOLIDATED RESULTS OF
OPERATIONS AND CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1994
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 752901
<OTHER-PROPERTY-AND-INVEST> 186064
<TOTAL-CURRENT-ASSETS> 219022
<TOTAL-DEFERRED-CHARGES> 23770
<OTHER-ASSETS> 254388
<TOTAL-ASSETS> 1436145
<COMMON> 19806
<CAPITAL-SURPLUS-PAID-IN> 205607
<RETAINED-EARNINGS> 436790
<TOTAL-COMMON-STOCKHOLDERS-EQ> 662203
0
0
<LONG-TERM-DEBT-NET> 404190
<SHORT-TERM-NOTES> 15903
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 6706
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 347143
<TOT-CAPITALIZATION-AND-LIAB> 1436145
<GROSS-OPERATING-REVENUE> 530776
<INCOME-TAX-EXPENSE> 31799
<OTHER-OPERATING-EXPENSES> 406381
<TOTAL-OPERATING-EXPENSES> 438180
<OPERATING-INCOME-LOSS> 92596
<OTHER-INCOME-NET> (2852)
<INCOME-BEFORE-INTEREST-EXPEN> 89744
<TOTAL-INTEREST-EXPENSE> (26629)
<NET-INCOME> 63115
0
<EARNINGS-AVAILABLE-FOR-COMM> 63115
<COMMON-STOCK-DIVIDENDS> 39214
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 104696
<EPS-PRIMARY> 1.59
<EPS-DILUTED> 1.59
</TABLE>
