UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
----------------
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-7368
BELL ATLANTIC - WASHINGTON, D.C., INC.
A New York Corporation I.R.S. Employer Identification No. 53-0046277
1710 H Street, N.W., Washington, D.C. 20006
Telephone Number (202) 392-9900
----------------
THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF BELL ATLANTIC CORPORATION, MEETS
THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND
IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL
INSTRUCTION H(2).
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Bell Atlantic - Washington, D.C., Inc.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
STATEMENTS OF INCOME AND REINVESTED EARNINGS
(Unaudited)
(Dollars in Thousands)
Three months ended Six months ended
June 30, June 30,
-------------------- --------------------
1994 1993 1994 1993
--------- --------- --------- ---------
OPERATING REVENUES
Local service.................... $ 75,614 $ 71,200 $148,754 $141,028
Network access................... 28,685 31,564 56,832 63,321
Toll service..................... 1,168 943 2,281 1,913
Directory advertising, billing
services and other (including
$13,994, $13,488, $27,081 and
$28,713 from affiliates)........ 31,285 34,175 63,017 66,850
Provision for uncollectibles..... (1,086) (1,202) (2,460) (1,969)
-------- -------- -------- --------
135,666 136,680 268,424 271,143
-------- -------- -------- --------
OPERATING EXPENSES
Employee costs, including
benefits and taxes.............. 38,475 41,160 77,212 80,325
Depreciation and amortization.... 26,115 27,054 52,088 54,731
Taxes other than income.......... 10,749 10,504 21,900 20,573
Other (including $27,481,
$28,511, $55,824 and $52,614
to affiliates).................. 39,179 40,223 77,656 78,174
-------- -------- -------- --------
114,518 118,941 228,856 233,803
-------- -------- -------- --------
NET OPERATING REVENUES............. 21,148 17,739 39,568 37,340
-------- -------- -------- --------
OPERATING INCOME TAXES
Federal.......................... 4,211 2,806 7,552 6,140
State............................ 1,763 1,614 3,247 3,301
-------- -------- -------- --------
5,974 4,420 10,799 9,441
-------- -------- -------- --------
OPERATING INCOME................... 15,174 13,319 28,769 27,899
-------- -------- -------- --------
OTHER INCOME (EXPENSE)
Allowance for funds used
during construction............. 131 220 241 343
Miscellaneous - net (including
$107, $4, $126 and $152 from
affiliate)...................... (224) (198) (576) (482)
-------- -------- -------- --------
(93) 22 (335) (139)
-------- -------- -------- --------
INTEREST EXPENSE (including $5,
$54, $73 and $91 to affiliate).... 4,657 4,770 9,350 9,920
-------- -------- -------- --------
INCOME BEFORE EXTRAORDINARY ITEM
AND CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE........... 10,424 8,571 19,084 17,840
EXTRAORDINARY ITEM
Early Extinguishment of Debt,
Net of Tax...................... --- --- --- (4,494)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE
Postemployment Benefits, Net of
Tax............................. --- --- --- (4,221)
-------- -------- -------- --------
NET INCOME......................... $ 10,424 $ 8,571 $ 19,084 $ 9,125
======== ======== ======== ========
(Continued)
See Notes to Financial Statements.
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Bell Atlantic - Washington, D.C., Inc.
STATEMENTS OF INCOME AND REINVESTED EARNINGS (Continued)
(Unaudited)
(Dollars in Thousands)
Three months ended Six months ended
June 30, June 30,
------------------ ------------------
1994 1993 1994 1993
-------- -------- -------- --------
REINVESTED EARNINGS
At beginning of period.. $34,657 $35,841 $33,739 $41,340
Add: net income......... 10,424 8,571 19,084 9,125
------- ------- ------- -------
45,081 44,412 52,823 50,465
Deduct: dividends....... 8,477 4,259 16,149 10,289
other changes... 30 --- 100 23
------- ------- ------- -------
At end of period........ $36,574 $40,153 $36,574 $40,153
======= ======= ======= =======
See Notes to Financial Statements.
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Bell Atlantic - Washington, D.C., Inc.
BALANCE SHEETS
(Unaudited)
(Dollars in Thousands)
ASSETS
------
June 30, December 31,
1994 1993
---------- --------------
CURRENT ASSETS
Cash........................................... $ --- $ 36
Note Receivable from affiliate................. 11,128 6,728
Accounts receivable:
Customers and agents, net of allowances for
uncollectibles of $5,800 and $5,705......... 114,849 111,122
Affiliates................................... 22,277 16,639
Other........................................ 21,381 24,376
Material and supplies.......................... 2,715 1,979
Prepaid expenses............................... 15,266 11,476
Deferred income taxes.......................... 3,222 2,818
Other.......................................... 1,187 4,845
---------- ----------
192,025 180,019
---------- ----------
PLANT, PROPERTY AND EQUIPMENT.................... 1,323,796 1,305,203
Less accumulated depreciation.................. 553,772 518,432
---------- ----------
770,024 786,771
---------- ----------
OTHER ASSETS..................................... 30,438 31,163
---------- ----------
TOTAL ASSETS..................................... $ 992,487 $ 997,953
========== ==========
See Notes to Financial Statements.
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Bell Atlantic - Washington, D.C., Inc.
BALANCE SHEETS
(Unaudited)
(Dollars in Thousands)
LIABILITIES AND SHAREOWNER'S INVESTMENT
---------------------------------------
June 30, December 31,
1994 1993
------------ ------------
CURRENT LIABILITIES
Debt maturing within one year................ $ 988 $ 1,006
Accounts payable:
Parent and affiliates....................... 86,199 82,570
Other....................................... 27,999 45,221
Accrued expenses:
Taxes....................................... 10,050 3,601
Other....................................... 26,626 27,941
Advance billings and customer deposits....... 11,602 8,277
------------ ------------
163,464 168,616
------------ ------------
LONG-TERM DEBT................................. 242,933 243,367
------------ ------------
EMPLOYEE BENEFIT OBLIGATIONS................... 140,725 137,120
------------ ------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes........................ 76,022 76,360
Unamortized investment tax credits........... 15,016 16,350
Other........................................ 67,785 72,433
------------ ------------
158,823 165,143
------------ ------------
SHAREOWNER'S INVESTMENT
Common stock, one share, without par value,
owned by parent............................. 249,968 249,968
Reinvested earnings.......................... 36,574 33,739
------------ ------------
286,542 283,707
------------ ------------
TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT.. $ 992,487 $ 997,953
============ ============
See Notes to Financial Statements.
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Bell Atlantic - Washington, D.C., Inc.
STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
Six Months Ended
June 30,
----------------------
1994 1993
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES ........ $ 56,169 $ 59,086
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to plant, property and equipment...... (36,964) (47,612)
Net change in note receivable from affiliate.... (4,400) 4,658
Other, net...................................... 1,869 669
-------- --------
Net cash used in investing activities............. (39,495) (42,285)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings........................ --- 89,648
Principal repayments of borrowings and capital
lease obligations.............................. (561) (1,027)
Early extinguishment of debt and related
call premium................................... --- (96,134)
Net change in note payable to affiliate......... --- 3,834
Dividends paid.................................. (16,149) (10,289)
Net change in outstanding checks drawn
on controlled disbursement accounts............ --- (90)
-------- --------
Net cash used in financing activities............. (16,710) (14,058)
-------- --------
NET CHANGE IN CASH ............................... (36) 2,743
CASH, BEGINNING OF PERIOD ........................ 36 47
-------- --------
CASH, END OF PERIOD .............................. $ --- $ 2,790
======== ========
See Notes to Financial Statements.
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Bell Atlantic - Washington, D.C., Inc.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
The accompanying financial statements are unaudited and have been prepared by
Bell Atlantic - Washington, D.C., Inc. (formerly The Chesapeake and Potomac
Telephone Company) (the Company) pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC). The December 31, 1993 balance sheet
was derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles. In the
opinion of management, these financial statements include all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
the results of operations, financial position and cash flows. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such SEC rules and regulations. The Company
believes that the disclosures made are adequate to make the information
presented not misleading. It is suggested that these financial statements be
read in conjunction with the financial statements and notes thereto included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1993.
(2) Dividend
On August 1, 1994, the Company declared and paid a dividend in the amount of
$10,168,000 to Bell Atlantic Corporation.
(3) Regulatory Matters
The communications services of the Company are subject to regulation by the
District of Columbia Public Service Commission (PSC) with respect to intrastate
rates and services and other matters.
In January 1993, the PSC adopted a regulatory reform plan for a three year
trial period, effective April 1, 1993. Under the plan, the PSC adopted a banded
rate of return of 100 basis points over or under the authorized return on
equity. Under this banded rate of return, the Company shares 50% of the
earnings over, and may file a rate case if the Company's earnings are under.
Rates for basic residential services remain frozen at the level set in 1992.
Under the plan, the Company also applied for and received pricing flexibility
for several competitive services, including Centrex, High Speed Private Line
Services, Digital Data Services, Paging Services, Speed Calling, Repeat Call,
Home Intercom and Home Intercom Extra. The Company can request a change in
rates by filing a 14 day filing application with the PSC. Such applications
have been filed to offer DSI Service Non-Recurring Charge Waiver and Service
Guarantee, and Centrex CustoPAK/SM/.
In December 1993, the PSC issued its Opinion and Order approving a $15,800,000
rate increase, effective January 1, 1994. In this Order, the PSC approved an
authorized return on equity of 11.45% resulting in a banded return of 10.45% to
12.45% for monitoring purposes in the Company's regulatory reform plan. The PSC
increased rates for public telephone service, increased the message unit rate
for business customers and increased certain other business and residential
rates to cover the increased revenue requirement.
On April 22, 1994, the Company filed an appeal with the District of Columbia
Court on two issues related to the Order, (i) the PSC's use of an inappropriate
capital structure for ratemaking and (ii) the PSC's departure from the Federal
Communications Commission's Uniform System of Accounts for accounting purposes.
On May 5, 1994, the PSC issued a Show Cause Order on the overcollection of the
Subscriber Plant Factor surcharge revenues in 1993. The PSC requires the
Company to show cause why it should not refund to its customers $2,300,000, plus
interest, as a result of this overcollection. Initial comments and reply
comments were filed in June 1994. The PSC has directed the parties to file
supplemental comments to address certain issues. Initial supplemental comments
were filed on July 27, 1994 and reply comments were filed on August 5, 1994.
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Bell Atlantic - Washington, D.C., Inc.
(4) Subsequent Events
Discontinued Application of Statement No. 71
--------------------------------------------
The Company has historically accounted for the economic effects of regulation
in accordance with the provisions of Statement of Financial Accounting Standards
No. 71, "Accounting for the Effects of Certain Types of Regulation" (Statement
No. 71). Under Statement No. 71, as a result of actions of regulators, the
Company has depreciated telephone plant using lives prescribed by regulators and
deferred certain costs or recognized certain liabilities (regulatory assets and
liabilities).
On August 15, 1994, the Company's parent, Bell Atlantic Corporation (Bell
Atlantic), announced that it has determined that it is no longer eligible for
continued application of the accounting required by Statement No. 71. The
Company believes that the convergence of competition, technological change
(including the Company's recent technology deployment plans), recent and
potential regulatory, legislative and judicial actions and other factors will
create fully open and competitive markets. In such markets, the Company
believes it can no longer be assured that prices can be maintained at levels
that will recover the net carrying amount of existing telephone plant and
equipment, which has been depreciated over relatively long regulator-prescribed
lives. In addition, changes from cost-based regulation to a form of incentive
regulation contributed to the determination that the continued application of
Statement No. 71 is inappropriate.
The discontinued application of Statement No. 71 requires the Company, for
financial reporting purposes, to eliminate its regulatory assets and liabilities
and adjust the carrying amount of its telephone plant to the extent that it
determines that such amounts either are overstated as a result of the regulatory
process, or are not recoverable. Accordingly, as of August 1, 1994, the Company
will recognize a non-cash, after-tax extraordinary charge of approximately $75
million to adjust the net carrying amount of telephone plant and equipment and
eliminate net regulatory liabilities. The adjustment to the net carrying amount
of telephone plant and equipment will increase the reserve for accumulated
depreciation by approximately $138 million. The Company's accounting and
reporting for regulatory purposes are not affected by the discontinued
application of Statement No. 71.
As of August 1, 1994, for financial reporting purposes, the Company will
utilize estimated asset lives for certain categories of plant and equipment that
are shorter than those currently approved by regulators. The shorter estimated
asset lives result from the Company's current expectations as to the revenue-
producing lives of the assets. A comparison of the current regulator-approved
asset lives and the associated shorter estimated asset lives for the most
significantly impacted categories of plant and equipment follows:
Average Lives (in years)
-------------------------------
Regulator-Approved Estimated
Asset Lives Asset Lives
------------------ -----------
Digital Switch 17 12
Digital Circuit 13 9
Conduit 55 50
Copper Cable 22 - 29 14 - 15
Fiber Cable 27 - 30 20 - 25
Employee Benefits
-----------------
On August 15, 1994, Bell Atlantic also announced that it will record a charge
in the third quarter of 1994, as required by Statement of Financial Accounting
Standards No. 112, "Employers' Accounting for Postemployment Benefits"
(Statement No. 112), to recognize the benefit costs for the separation of
employees who are entitled to benefits under its preexisting separation pay
plans. The charge, which was actuarially determined, represents benefits earned
to date by employees who are expected to receive separation payments in the
future, including those who will be separated through 1997 as a result of the
recently announced workforce reduction initiative. These workforce
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Bell Atlantic - Washington, D.C., Inc.
reductions will be made possible by improved provisioning systems and customer
service processes, increased spans of control, and consolidation and
centralization of administrative and staff groups. The Company will record a
pretax charge of between $7 million and $10 million to recognize its share of
the benefit costs under the separation pay plans.
(5) Restatement of 1993 Financial Statements
Results of operations for the six months ended June 30, 1993 were restated in
the fourth quarter of 1993 to reflect the cumulative effect of the adoption of
Statement No. 112, effective January 1, 1993.
(6) Reclassifications - Statements of Cash Flows
Certain amounts included in Net Cash Provided by Operating Activities and Cash
Flows from Investing Activities in the Statement of Cash Flows for the six
months ended June 30, 1993 have been reclassified to conform to the current
year's classifications.
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Bell Atlantic - Washington, D.C., Inc.
SELECTED OPERATING DATA
(Unaudited)
(In Thousands)
At June 30,
-------------------------
1994 1993
---------- ----------
Network Access Lines in Service:
Residence.................................. 280 279
Business................................... 562 558
Public..................................... 10 10
----- -----
852 847
===== =====
Six Months Ended
June 30,
------------------------
1994 1993
--------- ---------
Carrier Access Minutes of Use:
Interstate .............................. 1,359,161 1,313,957
========= =========
Six Months Ended
June 30,
------------------------
1994 1993
--------- ---------
[S] [C] [C]
Toll Messages:
Message Telecommunication Services ...... 2,059 1,886
===== =====
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Bell Atlantic - Washington, D.C., Inc.
Item 2. Management's Discussion and Analysis of Results of Operations
(Abbreviated pursuant to General Instruction H(2).)
This discussion should be read in conjunction with the Financial Statements
and Notes to Financial Statements.
RESULTS OF OPERATIONS
Net income for the six months ended June 30, 1994 increased $9,959,000 from
the corresponding period last year. Results for the first six months of 1993
reflect an after-tax charge of $4,221,000 for the adoption of Statement of
Financial Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits" and a $4,494,000 extraordinary charge, net of tax, for
the early extinguishment of debt.
OPERATING REVENUES
Operating revenues for the six months ended June 30, 1994 decreased $2,719,000
or 1.0% from the corresponding period last year. The decrease in total
operating revenues was comprised of the following:
Increase/(Decrease)
(Dollars in Thousands)
-----------------------
Local service............................ $ 7,726
Network access........................... (6,489)
Toll service............................. 368
Directory advertising, billing services
and other.............................. (3,833)
Less: Provision for uncollectibles...... 491
-------
$(2,719)
=======
Local service revenues are earned from the provision of local exchange, local
private line, and public telephone services. Local service revenues increased
$7,726,000 or 5.5%, compared to the same period in 1993. This increase was
principally due to an increase in rates, effective January 1, 1994, for basic
business service and Custom Calling features (see Note 3 to the Financial
Statements). Also contributing to this increase was higher demand for value-
added central office services such as Custom Calling and Caller ID. Access
lines in service at June 30, 1994 were substantially unchanged from June 30,
1993 (see Selected Operating Data on page 9).
Network access revenues are received from interexchange carriers (IXCs) for
their use of the Company's local exchange facilities in providing interstate
long-distance services to IXCs' customers and from end-user subscribers.
Switched access revenues are derived from usage-based charges paid by IXCs for
access to the Company's network. Special access revenues arise from access
charges paid by customers who have private lines, and end-user access revenues
are earned from local exchange carrier customers who pay for access to the
network.
Network access revenues decreased $6,489,000 or 10.2%, compared to the same
period in 1993. This decrease was mainly due to the effect of an interstate rate
reduction filed by the Company with the Federal Communications Commission (FCC),
which became effective on July 2, 1993 and lower revenues recognized through an
interstate revenue sharing arrangement with affiliated companies. In addition,
special access revenues decreased principally due to competitive pressures.
These revenue decreases were partially offset by growth in customer demand as
reflected by growth in access minutes of use, which increased 3.4% during the
first six months of 1994 mainly due to the effects of a recovering economy and
inclement weather conditions in the region during the first quarter of 1994 (see
Selected Operating Data on page 9). Lower support payments to the National
Exchange Carrier Association (NECA) interstate common line pool further offset
these decreases. In its April 1, 1994 tariff filing, the Company filed revised
rates with the FCC, which became effective July 1, 1994. These rates, net of
lower support obligations to the NECA interstate common line pool, are expected
to further reduce current levels of interstate access revenues.
Toll service revenues are earned from interexchange usage services such
as Message Telecommunication Services (MTS). Toll service revenues increased
$368,000 or 19.2%,
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Bell Atlantic - Washington, D.C., Inc.
compared to the same period in 1993. Toll message volumes were 9.2% higher
compared to the first six months of 1993 (see Selected Operating Data on page 9)
due to the effects of a recovering economy and harsh weather conditions during
the first quarter of 1994. Revenues were further impacted by the elimination, in
the fourth quarter of 1993, of certain payments to an IXC for the operation of
relay services.
Directory advertising, billing services and other revenues include revenues
earned from directory advertising, billing and collection services provided to
IXCs and others, premises services such as inside wire installation and
maintenance services, rent of Company facilities by affiliates and non-
affiliates, and certain nonregulated enhanced network services.
Directory advertising, billing services and other revenues decreased
$3,833,000 or 5.7%, compared to the same period in 1993. This decrease was
primarily due to lower customer premises revenues resulting from the effect of
favorable billing adjustments recorded in 1993 and lower facilities rental
revenue from affiliates. This decrease was partially offset by increased demand
for voice messaging services, primarily Answer Call.
The provision for uncollectibles, expressed as a percentage of total operating
revenues, was .9% for the first six months of 1994 and .7% for the same period
last year.
OPERATING EXPENSES
Operating expenses for the six months ended June 30, 1994 decreased $4,947,000
or 2.1% from the corresponding period last year. The decrease in total
operating expenses was comprised of the following:
Increase/(Decrease)
(Dollars In Thousands)
----------------------
Employee costs .......................... $(3,113)
Depreciation and amortization ........... (2,643)
Taxes other than income ................. 1,327
Other ................................... (518)
-------
$(4,947)
=======
Employee costs consist of salaries, wages and other employee compensation,
employee benefits, and payroll taxes paid directly by the Company. Similar
costs incurred by employees of Bell Atlantic Network Services, Inc. (NSI), who
provide centralized services on a contract basis, are allocated to the Company
and are included in other operating expenses. Employee costs decreased
$3,113,000 or 3.9% compared to the same period in 1993 primarily due to a
reduction in workforce, the effect of employee cost accruals recorded in 1993,
and lower performance award expense. This decrease was partially offset by
salary and wage increases and increased overtime. Higher repair and maintenance
activity experienced in the first quarter of 1994 caused by unusually severe
winter storm conditions throughout the region contributed to the increase in
employee costs.
On August 15, 1994, the Company's parent, Bell Atlantic Corporation, announced
that it will record a charge in the third quarter of 1994, as required by
Statement of Financial Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits," to recognize the benefit costs for the separation of
employees who are entitled to benefits under its preexisting separation pay
plans. The charge, which was actuarially determined, represents benefits earned
to date by employees who are expected to receive separation payments in the
future, including those who will be separated through 1997 as a result of the
recently announced workforce reduction initiative. These workforce reductions
will be made possible by improved provisioning systems and customer service
processes, increased spans of control, and consolidation and centralization of
administrative and staff groups. The Company will record a pretax charge of
between $7 million and $10 million to recognize its share of the benefit costs
under the separation pay plans. Costs of enhancing systems and consolidating
work activities will be charged to expense as incurred.
Depreciation and amortization expense decreased $2,643,000 or 4.8%, compared
to the same period in 1993. This decrease was principally due to lower
depreciation expense resulting from a reduction in the level of depreciable
plant.
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Bell Atlantic - Washington, D.C., Inc.
Taxes other than income increased $1,327,000 or 6.5%, compared to the same
period in 1993. The increase was due in part to additional property taxes
assessed in 1994, increases in gross receipts tax due to higher operating
revenues, and the effect of a one-time accrual recorded in 1993 for use tax.
Other operating expenses consist primarily of contracted services, including
centralized service expenses allocated from NSI, rent, network software costs,
and other general and administrative expenses. Other operating expenses
decreased $518,000 or .7%, compared to the same period in 1993, primarily
reflecting the effect of one-time accruals recorded in 1993 and lower directory
costs. These decreases were substantially offset by higher costs allocated from
NSI primarily as a result of higher employee costs, contracted services, and
employee-related expenses incurred in that organization.
OPERATING INCOME TAXES
The provision for income taxes increased $1,358,000 or 14.4%, compared to the
same period in 1993. The Company's effective income tax rate was 35.8% for the
first six months of 1994, compared to 32.7% in the same period in 1993. The
increase in the effective tax rate was principally the result of federal tax
legislation enacted in the third quarter of 1993, which increased the federal
corporate tax rate from 34% to 35% and a reduction in investment tax credit
amortization.
INTEREST EXPENSE
Interest expense decreased $570,000 or 5.7%, compared to the same period in
1993, principally due to the effect of long-term debt refinancings in 1993.
COMPETITIVE ENVIRONMENT
The communications industry is currently undergoing fundamental changes which
may have a significant impact on future financial performance of
telecommunications companies. These changes are driven by a number of factors,
including the accelerated pace of technological innovation, the convergence of
telecommunications, cable television, information services and entertainment
businesses, and a regulatory environment in which many traditional regulatory
barriers are being lowered and competition permitted or encouraged.
Communications services and equipment and the number of competitors offering
such services are continuing to expand. The Company's telecommunications
business is currently subject to competition from numerous sources, including
competitive access providers for network access services and competing cellular
telephone companies. An increasing amount of this competition is from large
companies which have substantial capital, technological and marketing resources,
many of which do not face the same regulatory constraints as the Company. Other
potential sources of competition are cable television systems, shared tenant
services and other non-carrier systems which are capable of partially or
completely bypassing the Company's local network.
The entry of well-financed competitors, such as large long-distance carriers
and other local exchange service competitors, has the potential to adversely
affect multiple revenue streams of the Company, including local exchange, local
access, and long-distance services in the market segments and geographical areas
in which the competitors operate. The amount of revenue reductions will depend
on the competitors' success in marketing these services, and the conditions of
interconnection established by regulators. The potential impact is expected to
be offset, to some extent, by revenues from interconnection charges to be paid
to the Company by these competitors.
The Company continues to focus its efforts on becoming more competitive and
seeking growth opportunities. The Company's responses to competitive challenges
include an increased emphasis on meeting customer requirements through the rapid
introduction of new products and services, the delivery of increased customer
value, and the development of customer loyalty programs. In addition, the
Company continues to strive for increased pricing flexibility through efforts to
reprice and repackage existing competitive services, to reduce its cost
structure and workforce through consolidation, re-engineering and streamlining
initiatives, and to achieve an improved regulatory and legislative environment.
Other important competitive responses, including the development of broadband
networks, will improve the Company's ability to take advantage
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Bell Atlantic - Washington, D.C., Inc.
of the growth opportunities created by technological advances and the
convergence of the communications, information services and entertainment
industries.
On May 19, 1994, Bell Atlantic Corporation announced the specifics underlying
its full service network deployment program to make broadband, interactive,
multimedia services available to up to 8.5 million homes throughout the Bell
Atlantic region by the end of the year 2000. The Company will use a variety of
technologies, on a market by market basis, depending on customer demand and cost
considerations.
REGULATORY ENVIRONMENT
Federal Regulation
------------------
Recent FCC regulatory rulings have sought to expand competition for special
and switched access services. Effective February 1994, the FCC ordered local
exchange carriers (LECs), including the Company, to allow competing carriers to
interconnect to the local exchange network for the purpose of providing switched
access transport services. The terms and conditions of this ruling are similar
to those for special access collocation ordered during 1992. The principal goal
of the FCC's collocation rulings is to encourage competition for these services.
The FCC also granted additional, but limited, pricing flexibility for these
services so that the LECs can better respond to the competition that will
result. The Company does not expect the net revenue impact of special access
collocation to be material. Revenue losses from switched access collocation,
however, are expected to be larger than from special access collocation. Bell
Atlantic and certain other parties appealed both the special and switched access
collocation orders. In June 1994, the U.S. Court of Appeals for the District of
Columbia Circuit vacated the FCC's special access collocation order insofar as
it required physical collocation and remanded for further proceedings in which
the FCC could consider whether, and to what extent, virtual collocation should
be imposed. In July 1994, the FCC voted to require LECs to offer competitors
virtual collocation, with the LECs having the option to offer physical
collocation. Tariffs for virtual collocation for special access are required to
be filed on September 1, 1994 and will become effective on December 15, 1994.
The appeal of the switched access collocation order is being held in abeyance.
The FCC has informed the U.S. Court of Appeals that it will not further litigate
the June 1994 special access decision.
In February 1994, the FCC initiated a rulemaking proceeding to determine the
effectiveness of the price cap rules and decide what changes, if any, should be
made to those rules. Under proposed rulemaking, the FCC identified for
examination three broad sets of issues including those related to the basic
goals of price regulation, the operation of price caps and the transition of
local exchange services to a fully competitive market. This rulemaking is
expected to be concluded by the end of 1994. Any changes to the current price
cap plan are expected to be effective January 1, 1995 or shortly thereafter. At
this time, the Company cannot estimate the financial impact, if any, that would
result if the FCC revised its current price cap rules.
State Regulation
----------------
The communications services of the Company are subject to regulation by the
District of Columbia Public Service Commission (PSC) with respect to intrastate
rates and services and other matters.
For a complete discussion of state regulatory matters, see Note 3 to the
Financial Statements.
OTHER MATTERS
Subsequent Event - Discontinued Application of Statement No. 71
---------------------------------------------------------------
On August 15, 1994, the Company's parent, Bell Atlantic Corporation, announced
that it has determined that it is no longer eligible for continued application
of the accounting required by Statement of Financial Accounting Standards No.
71, "Accounting for the Effects of Certain Types of Regulation" (Statement No.
71). The discontinued application of Statement No. 71 requires the Company, for
financial reporting purposes, to eliminate its regulatory assets and liabilities
and adjust the carrying amount of its telephone plant to the extent that it
determines that such amounts either are overstated
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Bell Atlantic - Washington, D.C., Inc.
as a result of the regulatory process, or are not recoverable. Accordingly, as
of August 1, 1994, the Company will recognize a non-cash, after-tax
extraordinary charge of approximately $75 million to adjust the net carrying
amount of telephone plant and equipment and eliminate net regulatory
liabilities. The adjustment to the net carrying amount of telephone plant and
equipment will increase the reserve for accumulated depreciation by
approximately $138 million. The Company expects to report a loss for the third
quarter and year as a result of the extraordinary charge for the discontinued
application of Statement No. 71.
As of August 1, 1994, for financial reporting purposes, the Company will
utilize estimated asset lives for certain categories of plant and equipment that
are shorter than those currently approved by regulators (see Note 4 to the
Financial Statements). It is expected that the use of the shorter asset lives
when applied to the reduced net asset base will not significantly impact
depreciation expense for financial reporting purposes for the remainder of 1994.
The ongoing impact on operating expense resulting from the elimination of the
amortization of net regulatory liabilities is not expected to be significant in
future periods. The Company's accounting and reporting for regulatory purposes
are not affected by the discontinued application of Statement No. 71.
Environmental Issues
--------------------
The Company is subject to a number of environmental matters as a result of its
operations and shared liability provisions in the Plan of Reorganization,
related to the Modification of Final Judgment. The Company is also responsible
for the remediation of sites with underground fuel storage tanks and other
expenses associated with environmental compliance.
The Company continually monitors its operations with respect to potential
environmental issues, including changes in legally mandated standards and
remediation technologies. The Company's recorded liability reflects those
specific issues where remediation activities are currently deemed to be probable
and where the cost of remediation is estimable. Management believes that the
aggregate amount of any potential liability would not have a material effect on
the Company's financial condition or results of operations.
FINANCIAL CONDITION
Management believes that the Company has adequate internal and external
resources available to meet ongoing operating requirements, including network
expansion and modernization, and payment of dividends. Management expects that
presently foreseeable capital requirements will be financed primarily through
internally generated funds, although additional long-term debt may be needed to
fund development activities and to maintain the Company's capital structure
within management's guidelines.
The Company's debt ratio was 46.0% at June 30, 1994, compared to 46.3% at
December 31, 1993.
As of June 30, 1994, the Company had $60,000,000 remaining under a shelf
registration statement filed with the Securities and Exchange Commission.
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Bell Atlantic - Washington, D.C., Inc.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
For background concerning the Company's contingent liabilities under the
Plan of Reorganization governing the divestiture by AT&T Corporation
(formerly American Telephone and Telegraph Company) of certain assets of the
former Bell System Operating Companies with respect to private actions
relating to pre-divestiture events, including pending antitrust cases, see
Item 3 of the Company's Annual Report on Form 10-K for the year ended
December 31, 1993.
Item 6. Exhibits and Reports on Form 8-K
(b) There were no Current Reports on Form 8-K filed during the quarter ended
June 30, 1994.
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Bell Atlantic - Washington, D.C., Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BELL ATLANTIC - WASHINGTON, D.C., INC.
Date: August 15, 1994 By /s/ Sheila D. Shears
-------------------------------------
Sheila D. Shears
Controller
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