UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
----------------
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 OPERATIONS AND REINVESTED EARNINGS (ACCUMULATED DEFICIT)
(Unaudited)
(Dollars in Thousands)
Three months ended Nine months ended
September 30, September 30,
-------------------- --------------------
1994 1993 1994 1993
--------- --------- --------- ---------
OPERATING REVENUES
Local service.................... $ 76,342 $ 72,971 $225,096 $213,999
Network access................... 29,604 31,642 86,436 94,963
Toll service..................... 1,037 1,065 3,318 2,978
Directory advertising, billing
services and other (including
$12,997, $13,526, $40,078 and
$42,239 from affiliates)........ 34,146 35,413 97,163 102,263
Provision for uncollectibles..... (583) (1,169) (3,043) (3,138)
-------- -------- -------- --------
140,546 139,922 408,970 411,065
-------- -------- -------- --------
OPERATING EXPENSES
Employee costs, including
benefits and taxes.............. 44,055 40,283 121,267 120,608
Depreciation and amortization.... 27,265 26,820 79,353 81,551
Taxes other than income.......... 11,332 10,394 33,232 30,967
Other (including $30,470,
$28,363, $86,294 and $80,977 to
affiliates) 39,385 41,797 117,041 119,971
-------- -------- -------- --------
122,037 119,294 350,893 353,097
-------- -------- -------- --------
NET OPERATING REVENUES............. 18,509 20,628 58,077 57,968
-------- -------- -------- --------
OPERATING INCOME TAXES
Federal.......................... 3,645 3,761 11,197 9,901
State............................ 2,562 1,824 5,809 5,125
-------- -------- -------- --------
6,207 5,585 17,006 15,026
-------- -------- -------- --------
OPERATING INCOME................... 12,302 15,043 41,071 42,942
-------- -------- -------- --------
OTHER INCOME (EXPENSE)
Allowance for funds used
during construction............. 54 197 295 540
Miscellaneous - net (including
$153, $14, $279 and $166 from
affiliate)...................... (242) (164) (818) (646)
-------- -------- -------- --------
(188) 33 (523) (106)
-------- -------- -------- --------
INTEREST EXPENSE (including $0,
$28, $73 and $119 to affiliate)... 4,381 5,028 13,731 14,948
-------- -------- -------- --------
INCOME BEFORE EXTRAORDINARY ITEMS
AND CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE........... 7,733 10,048 26,817 27,888
EXTRAORDINARY ITEMS
Discontinuation of Regulatory
Accounting Principles, Net of
Tax (74,647) --- (74,647) ---
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 (LOSS).................. $(66,914) $ 10,048 $(47,830) $ 19,173
======== ======== ======== ========
(Continued)
See Notes to Financial Statements.
-1-
Bell Atlantic - Washington, D.C., Inc.
STATEMENTS OF OPERATIONS AND REINVESTED EARNINGS (ACCUMULATED DEFICIT)
(Continued)
(Unaudited)
(Dollars in Thousands)
Three months ended Nine months ended
September 30, September 30,
------------------- -------------------
1994 1993 1994 1993
--------- -------- --------- --------
REINVESTED EARNINGS (ACCUMULATED
DEFICIT)
At beginning of period.............. $ 36,574 $40,153 $ 33,739 $41,340
Add: net income (loss).............. (66,914) 10,048 (47,830) 19,173
-------- ------- -------- -------
(30,340) 50,201 (14,091) 60,513
Deduct: dividends................... 10,168 8,500 26,317 18,789
other changes............... (30) 63 70 86
-------- ------- -------- -------
At end of period.................... $(40,478) $41,638 $(40,478) $41,638
======== ======= ======== =======
See Notes to Financial Statements.
-2-
Bell Atlantic - Washington, D.C., Inc.
BALANCE SHEETS
(Unaudited)
(Dollars in Thousands)
ASSETS
------
September 30, December 31,
1994 1993
------------ ------------
CURRENT ASSETS
Cash........................................... $ --- $ 36
Note Receivable from affiliate................. 5,235 6,728
Accounts receivable:
Customers and agents, net of allowances for
uncollectibles of $6,289 and $5,705......... 111,844 111,122
Affiliates................................... 23,317 16,639
Other........................................ 19,988 24,376
Material and supplies.......................... 2,539 1,979
Prepaid expenses............................... 17,118 11,476
Deferred income taxes.......................... 3,506 2,818
Other.......................................... 682 4,845
---------- ----------
184,229 180,019
---------- ----------
PLANT, PROPERTY AND EQUIPMENT.................... 1,325,555 1,305,203
Less accumulated depreciation.................. 700,280 518,432
---------- ----------
625,275 786,771
---------- ----------
OTHER ASSETS..................................... 26,945 31,163
---------- ----------
TOTAL ASSETS..................................... $ 836,449 $ 997,953
========== ==========
See Notes to Financial Statements.
-3-
Bell Atlantic - Washington, D.C., Inc.
BALANCE SHEETS
(Unaudited)
(Dollars in Thousands)
LIABILITIES AND SHAREOWNER'S INVESTMENT
---------------------------------------
September 30, December 31,
1994 1993
------------ ------------
CURRENT LIABILITIES
Debt maturing within one year................ $ 1,027 $ 1,006
Accounts payable:
Parent and affiliates....................... 88,492 82,570
Other....................................... 39,360 45,221
Accrued expenses:
Taxes....................................... 3,415 3,601
Other....................................... 24,395 27,941
Advance billings and customer deposits....... 12,050 8,277
-------- --------
168,739 168,616
-------- --------
LONG-TERM DEBT................................. 249,111 243,367
-------- --------
EMPLOYEE BENEFIT OBLIGATIONS................... 149,450 137,120
-------- --------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes........................ 16,595 76,360
Unamortized investment tax credits........... 6,039 16,350
Other........................................ 37,025 72,433
-------- --------
59,659 165,143
-------- --------
SHAREOWNER'S INVESTMENT
Common stock, one share, without par value,
owned by parent............................. 249,968 249,968
Reinvested earnings (accumulated deficit).... (40,478) 33,739
-------- --------
209,490 283,707
-------- --------
TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT.. $836,449 $997,953
======== ========
See Notes to Financial Statements.
-4-
Bell Atlantic - Washington, D.C., Inc.
STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
Nine Months Ended
September 30,
----------------------
1994 1993
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES ........ $ 78,800 $116,679
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to plant, property and equipment...... (58,535) (67,388)
Net change in note receivable from affiliate.... 1,493 (24,838)
Other, net...................................... 2,846 (2,188)
------- -------
Net cash used in investing activities............. (54,196) (94,414)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings........................ 118 89,648
Principal repayments of borrowings and capital
lease obligations.............................. (844) (1,733)
Early extinguishment of debt and related
call premium................................... --- (96,714)
Dividends paid.................................. (26,317) (18,789)
Net change in outstanding checks drawn
on controlled disbursement accounts............ 2,403 5,309
------- -------
Net cash used in financing activities............. (24,640) (22,279)
------- -------
NET CHANGE IN CASH ............................... (36) (14)
CASH, BEGINNING OF PERIOD ........................ 36 47
------- -------
CASH, END OF PERIOD .............................. $ --- $ 33
======= =======
See Notes to Financial Statements.
-5-
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.
Effective August 1, 1994, the Company no longer reports using generally accepted
accounting principles applicable to regulated entities (see Note 3).
(2) Dividend
On November 1, 1994, the Company declared and paid a dividend in the amount of
$12,229,000 to Bell Atlantic Corporation.
(3) Discontinuation of Regulatory Accounting Principles
In the third quarter of 1994, the Company determined that it was 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). In connection with the decision to
discontinue regulatory accounting principles under Statement No. 71, the Company
recorded a non-cash, after-tax extraordinary charge of $74,647,000, which is net
of an income tax benefit of $74,423,000.
The Company's determination that it was no longer eligible for continued
application of the accounting required by Statement No. 71 was based on the
belief 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 are creating 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 components of the charge recognized as a result of the discontinued
application of Statement No. 71 follow:
(Dollars in Thousands)
-----------------------
Pre-tax After-tax
---------- -----------
Increase in plant and equipment depreciation reserve.. $137,896 $81,105
Accelerated investment tax credit amortization........ --- (5,018)
Tax-related regulatory asset and liability elimination --- (8,011)
Other regulatory asset and liability elimination...... 11,174 6,571
-------- -------
Total................................................. $149,070 $74,647
======== =======
The accumulated depreciation reserve was increased by $137,896,000. This
increase was supported by both an impairment analysis which identified estimated
amounts not recoverable from future discounted cash flows, and a depreciation
study which identified inadequate depreciation reserve levels which the Company
believes resulted principally from the cumulative underdepreciation of plant as
a result of the regulatory process. Investment tax credits
-6-
Bell Atlantic - Washington, D.C., Inc.
(ITCs) are deferred and amortized over the estimated service lives of the
related telephone plant and equipment. ITC amortization was accelerated as a
result of the reduction in asset lives of the associated telephone plant and
equipment.
Upon adoption of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," the effects of required adjustments to deferred
tax balances were deferred on the balance sheet as regulatory assets and
liabilities and amortized at the time the related deferred taxes were recognized
in the ratemaking process. As of August 1, 1994, tax-related regulatory assets
of $14,206,000 and tax-related regulatory liabilities of $22,217,000 were
eliminated. The elimination of other regulatory assets and liabilities relate
principally to deferred debt refinancing and vacation pay costs which were being
amortized as they were recognized in the ratemaking process.
On August 1, 1994, for financial reporting purposes, the Company began using
estimated asset lives for certain categories of plant and equipment that are
shorter than those approved by regulators prior to the discontinued application
of Statement No. 71. The shorter asset lives result from the Company's
expectations as to the revenue-producing lives of the assets. A comparison of
the regulator-approved asset lives to the shorter new asset lives for the most
significantly impacted categories of plant and equipment follows:
Average Lives (in years)
-------------------------------
Regulator-Approved New
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
As a result of the discontinued application of Statement No. 71, regulatory
accounting principles no longer apply to the Company for financial accounting
and reporting purposes. The Company no longer recognizes regulatory assets and
liabilities and the related amortization. Additionally, the Company reports
depreciation expense based on economic asset lives and reports capitalized
interest costs as a cost of telephone plant and equipment and a reduction in
interest expense, in accordance with the provisions of Statement of Financial
Accounting Standards No. 34, "Capitalization of Interest Cost." Prior to the
discontinued application of Statement No. 71, the Company recorded an allowance
for funds used during construction which included both interest and equity
return components and was recorded as a cost of plant and an item of other
income. The Company's accounting and reporting for regulatory purposes are not
affected by the discontinued application of Statement No. 71.
(4) Postemployment Benefits
In the third quarter of 1994, the Company recorded a pretax charge of
$7,959,000, in accordance with Statement of Financial Accounting Standards No.
112, "Employers' Accounting for Postemployment Benefits" (Statement No. 112), to
recognize the Company's proportionate share of benefit costs for the separation
of employees who are entitled to benefits under preexisting Bell Atlantic
separation pay plans. The charge, which was actuarially determined, represents
benefits earned through July 1, 1994 for employees who are expected to receive
separation payments in the future, including those employees who will be
separated through 1997 as a result of a recently announced workforce reduction
initiative.
(5) 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 the upper limit, and
-7-
Bell Atlantic - Washington, D.C., Inc.
may file a rate case if the Company's earnings are under the lower limit. Rates
for basic residential services remain frozen at the levels 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 DS1 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
allowed the Company to increase rates for public telephone service, increase the
message unit rate for business customers and increase 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.
(6) Restatement
Results of operations for the nine months ended September 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.
(7) 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 nine
months ended September 30, 1993 have been reclassified to conform to the current
year's classifications.
-8-
Bell Atlantic - Washington, D.C., Inc.
SELECTED OPERATING DATA
(Unaudited)
(In Thousands)
At September 30,
----------------------
1994 1993
--------- -------
Network Access Lines in Service:
Residence..................... 286 280
Business...................... 560 555
Public........................ 10 11
---- ----
856 846
==== ====
Nine Months Ended
September 30,
----------------------
1994 1993
-------- ---------
Carrier Access Minutes of Use:
Interstate .................. 2,027,803 1,988,601
========= =========
Nine Months Ended
September 30,
----------------------
1994 1993
--------- ---------
Toll Messages:
Message Telecommunication
Services ................... 3,139 2,882
===== =====
-9-
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
The Company reported a loss of $47,830,000 for the nine months ended September
30, 1994, compared to net income of $19,173,000 for the corresponding period
last year.
Results for the nine months ended September 30, 1994 included a non-cash,
after-tax extraordinary charge of $74,647,000 in connection with the Company's
decision to discontinue application of regulatory accounting principles 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 required the Company, for
financial reporting purposes, to eliminate its regulatory assets and
liabilities, resulting in an after-tax credit of $1,440,000. In addition, the
Company recorded an after-tax charge of $76,087,000, net of related investment
tax credits of $5,018,000, to adjust the carrying amount of its telephone plant
and equipment.
As a result of the discontinued application of Statement No. 71, the Company
utilizes shorter asset lives for certain categories of plant and equipment than
those approved by regulators prior to the discontinued application of Statement
No. 71. It is expected that the use of the shorter asset lives will not
significantly change depreciation expense in the fourth quarter of 1994, for
financial reporting purposes, from the amount that would have been recorded
using asset lives prescribed by regulators prior to the discontinued application
of Statement No. 71. The elimination of the amortization of net regulatory
liabilities and the effect of changes in certain accounting policies are not
expected to have a significant impact on financial results in future periods.
The Company's accounting and reporting for regulatory purposes are not affected
by the discontinued application of Statement No. 71. See Note 3 to the Financial
Statements for additional information on the discontinuation of regulatory
accounting principles.
In the third quarter of 1994, the Company recorded a pretax charge of
$7,959,000, in accordance with Statement of Financial Accounting Standards No.
112, "Employers' Accounting for Postemployment Benefits" (Statement No. 112), to
recognize the Company's proportionate share of benefit costs for the separation
of employees who are entitled to benefits under preexisting Bell Atlantic
separation pay plans. The charge, which was actuarially determined, represents
benefits earned through July 1, 1994 for employees who are expected to receive
separation payments in the future, including those who will be separated
through 1997 as a result of a 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 (see Note 4
to the Financial Statements). Management currently expects the wage and salary
savings associated with the workforce reduction to significantly offset the
ongoing expense impact for separation benefits accrued under these separation
pay plans for 1995 through 1997. Management also expects to recognize
additional costs to enhance systems and consolidate work activities, which will
be charged to operating expense as incurred.
-10-
Bell Atlantic - Washington, D.C., Inc.
OPERATING REVENUES
Operating revenues for the nine months ended September 30, 1994 decreased
$2,095,000 or .5% from the corresponding period last year. The decrease in
total operating revenues was comprised of the following:
Increase/(Decrease)
(Dollars in Thousands)
----------------------
Local service ............................. $11,097
Network access ............................ (8,527)
Toll service .............................. 340
Directory advertising, billing services
and other ................................. (5,100)
Less: Provision for uncollectibles ....... (95)
-------
$(2,095)
=======
Local service revenues are earned from the provision of local exchange, local
private line, and public telephone services. Local service revenues increased
$11,097,000 or 5.2%, 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 5 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 September 30, 1994 increased 1.2% from September 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 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 $8,527,000 or 9.0%, 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 repricing in
response 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 2.0% during the first nine months 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. The 1994 revised 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 generated from interexchange usage services such as
Message Telecommunication Services (MTS). Toll service revenues increased
$340,000 or 11.4%, compared to the same period in 1993. MTS message volumes
were 8.9% higher compared to the first nine 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
increased 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 amounts
earned from directory advertising, billing and collection services provided to
IXCs and others, premises services such as inside wire installation and
maintenance, rent of Company facilities by affiliates and non-affiliates, and
certain nonregulated enhanced network services.
Directory advertising, billing services and other revenues decreased
$5,100,000 or 5.0%, 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
-11-
Bell Atlantic - Washington, D.C., Inc.
recorded in 1993 and lower facilities rental revenue from affiliates. This
decrease was partially offset by higher demand for premises services and voice
messaging services, including Answer Call.
The provision for uncollectibles, expressed as a percentage of total operating
revenues, was .7% for the first nine months of 1994 and .8% for the same period
last year.
OPERATING EXPENSES
Operating expenses for the nine months ended September 30, 1994 decreased
$2,204,000 or .6% from the corresponding period last year. The decrease in
total operating expenses was comprised of the following:
Increase/(Decrease)
(Dollars in Thousands)
----------------------
Employee costs ............................ $ 659
Depreciation and amortization ............. (2,198)
Taxes other than income ................... 2,265
Other ..................................... (2,930)
-------
$(2,204)
=======
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 increased $659,000 or .5% over the corresponding period in
1993. The increase was principally due to a charge of $6,010,000 to recognize,
in accordance with Statement No. 112, the Company's proportionate share of
benefit costs for the separation of employees who are entitled to benefits under
preexisting Bell Atlantic separation pay plans. Third quarter 1994 employee
costs also included approximately $163,000 for the ongoing accrual of separation
benefit costs under these separation pay plans. Benefit costs associated with
the separation of employees of NSI were allocated to the Company and are
included in other operating expenses. Additionally, the employee costs were
higher due to a combination of salary and wage increases and increased overtime.
Higher repair and maintenance activity caused by unusually severe weather
conditions experienced in 1994 contributed to the overall increase in employee
costs. These increases were substantially offset by the effects of a reduced
workforce and lower benefit expense during 1994.
Depreciation and amortization expense decreased $2,198,000 or 2.7% compared
with the same period in 1993. The decrease was principally due to lower
depreciation expense resulting from a reduction in the level of depreciable
plant. The Company's discontinued application of Statement No. 71 has resulted
in the use of shorter asset lives for certain categories of plant and equipment
than those approved by regulators prior to August 1, 1994. The shorter estimated
asset lives reflect the Company's expectations as to the revenue-producing lives
of the assets (see Note 3 to the Financial Statements). The use of the shorter
asset lives did not significantly impact depreciation expense in the third
quarter of 1994, for financial reporting purposes. It is expected that the use
of the shorter asset lives will not significantly change depreciation expense in
the fourth quarter of 1994, for financial reporting purposes, from the amount
that would have been recorded using asset lives prescribed by regulators prior
to the discontinued application of Statement No. 71. Future depreciation
represcriptions by regulators will not affect depreciation expense for financial
reporting purposes.
Taxes other than income increased $2,265,000 or 7.3%, 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 local service
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 $2,930,000 or
-12-
Bell Atlantic - Washington, D.C., Inc.
2.4%, compared to the same period in 1993, primarily reflecting the effect of
one-time accruals recorded in 1993, lower directory costs and the effect of
adjustments made to billing agreements with certain affiliated companies in
1994. These decreases were substantially offset by higher costs allocated from
NSI primarily as a result of higher employee costs, affiliate rent expense, and
employee-related expenses incurred in that organization, including $1,949,000
for the Company's allocated share of a charge for separation benefit costs
recognized under Statement No. 112. In addition, higher material costs also
offset these decreases.
OPERATING INCOME TAXES
The provision for income taxes increased $1,980,000 or 13.2%, compared to the
same period in 1993. The Company's effective income tax rate was 38.6% for the
first nine months of 1994, compared to 33.2% in the same period in 1993. The
increase in the effective tax rate was principally the result of the reduction
in amortization of investment tax credits as a result of the discontinued
application of Statement No. 71, an increase in the state income tax rate, and
the effect of a one-time net benefit recorded in the third quarter of 1993 to
adjust deferred tax assets for the increase in the federal corporate income tax
rate from 34% to 35%.
OTHER INCOME AND EXPENSE
Other expense was $523,000 for the nine months ended September 30, 1994 and
$106,000 for the same period in 1993. The increase is principally due to a
reduction in income related to the allowance for funds used during construction
and higher non-operating tax expense.
Prior to the discontinued application of Statement No. 71, the Company
recorded an allowance for funds used during construction as a cost of plant and
an item of other income. As prescribed by regulators, the allowance for funds
used during construction included both interest and equity return components.
Effective August 1, 1994, interest costs on telephone plant under construction
are capitalized in accordance with the provisions of Statement of Financial
Accounting Standards No. 34, "Capitalization of Interest Cost," and reported as
a cost of telephone plant and a reduction to interest expense. The amount of
allowance for funds used during construction that was recorded as other income
prior to August 1, 1994 was $295,000 in 1994 and $699,000 for the twelve month
period ended December 31, 1993.
INTEREST EXPENSE
Interest expense decreased $1,217,000 or 8.1%, compared to the same period in
1993, principally due to the effect of long-term debt refinancings in 1993.
Interest expense was further reduced by the recognition of $389,000 in
capitalized interest costs, effective with the discontinued application of
Statement No. 71.
EXTRAORDINARY ITEM
As discussed in Note 3 to the Financial Statements, in connection with the
Company's decision to discontinue application of regulatory accounting
principles under Statement No. 71, the Company recorded a non-cash, after-tax
extraordinary charge of $74,647,000, net of an income tax benefit of $74,423,000
in the third quarter of 1994.
COMPETITIVE ENVIRONMENT
The communications industry continues to undergo 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
-13-
Bell Atlantic - Washington, D.C., Inc.
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 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,
network access, and toll 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 being 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 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 of the growth
opportunities created by technological advances and the convergence of the
communications, information services and entertainment industries.
REGULATORY ENVIRONMENT
Federal Regulation
------------------
Recent FCC regulatory rulings have sought to expand competition for special
and switched access services. The FCC had ordered local exchange carriers
(LECs), including the Company, to provide physical collocation in the Company's
central offices to competitors for the purpose of providing special and switched
access transport 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. However, 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 were 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. The Company does not
expect the net revenue impact of virtual collocation to be material.
As reported in the Company's 1993 Form 10-K (Part I, Item 1 - Business), the
FCC initiated Computer Inquiry III in 1985 to re-examine its regulations
requiring that "enhanced services" (e.g., voice messaging services, electronic
mail, videotext gateway, protocol conversion) be offered only through a
structurally separated subsidiary. In 1986, the FCC eliminated this requirement,
permitting the Company to offer enhanced services, subject to compliance with a
series of nonstructural safeguards. These safeguards include detailed cost
accounting, protection of customer information, public disclosure of technical
interfaces and certain reporting requirements.
In June 1990, the U.S. Court of Appeals for the Ninth Circuit (Court of
Appeals) vacated and remanded the Computer Inquiry III decisions to the FCC. In
December 1991, the FCC adopted an order which reinstated relief from the
separate subsidiary requirement upon a company's compliance with the FCC's
Computer III Open Network Architecture (ONA) requirements and strengthened some
of the nonstructural safeguards. In March 1992, the Company certified to the
FCC that it had complied with all initial ONA obligations, and the FCC granted
the Company structural relief in June 1992.
-14-
Bell Atlantic - Washington, D.C., Inc.
In October 1994, the Court of Appeals vacated the 1991 order and remanded the
matter to the FCC for further proceedings. As the Court of Appeals has not yet
issued a mandate giving formal effect to its decision, the Company continues to
offer enhanced services pending further action by the Court of Appeals or the
FCC.
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 5 to the
Financial Statements.
OTHER MATTERS
Environmental Issues
--------------------
The Company is subject to a number of environmental proceedings 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 54.4% at September 30, 1994, compared to 46.3% at
December 31, 1993. The debt ratio was significantly impacted by the equity
reduction associated with the discontinued application of Statement No. 71.
As of September 30, 1994, the Company had $60,000,000 remaining under a shelf
registration statement filed with the Securities and Exchange Commission.
As a result of the discontinued application of Statement No. 71, the Balance
Sheet at September 30, 1994 reflects significant changes due to the elimination
of regulatory assets and liabilities, the revaluation of plant and equipment and
the accelerated amortization of investment tax credits (see Note 3 to the
Financial Statements).
-15-
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 Corp.
(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
(a) Exhibits:
Exhibit Number
27 Financial Data Schedule.
(b) There were no Current Reports on Form 8-K filed during the quarter
ended September 30, 1994.
-16-
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: November 10, 1994 By /s/ Sheila D. Shears
-------------------------------------
Sheila D. Shears
Controller
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF NOVEMBER 7, 1994.
-17-