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, 1997
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,
-------------------- -----------------------
1997 1996 1997 1996
--------- --------- ---------- -----------
OPERATING REVENUES (including $27,441, $19,098,
$53,148 and $38,313 from affiliates)................ $159,381 $176,961 $309,027 $314,340
-------- -------- -------- --------
OPERATING EXPENSES
Employee costs, including benefits and taxes........ 24,350 28,912 49,137 57,240
Depreciation and amortization....................... 39,105 33,724 77,554 67,092
Other (including $38,969, $40,692, $77,160 and
$78,945 to affiliates)........................ 63,192 69,926 124,071 126,157
-------- -------- -------- --------
126,647 132,562 250,762 250,489
-------- -------- -------- --------
OPERATING INCOME......................................... 32,734 44,399 58,265 63,851
OTHER EXPENSE, NET....................................... 977 174 1,233 268
INTEREST EXPENSE (including $460, $449, $1,113
and $1,327 to affiliate)............................ 4,643 4,528 9,520 9,448
-------- -------- -------- --------
Income Before Provision for Income Taxes and
Cumulative Effect of Change in Accounting Principle. 27,114 39,697 47,512 54,135
PROVISION FOR INCOME TAXES............................... 10,530 15,648 18,963 21,389
-------- -------- -------- --------
Income Before Cumulative Effect of Change
in Accounting Principle............................. 16,584 24,049 28,549 32,746
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE
Directory Publishing, Net of Tax.................... --- --- --- 286
-------- -------- -------- --------
NET INCOME............................................... $ 16,584 $ 24,049 $ 28,549 $ 33,032
======== ======== ======== ========
REINVESTED EARNINGS
At beginning of period.............................. $ 62,286 $ 12,678 $ 52,691 $ 3,786
Add: net income.................................... 16,584 24,049 28,549 33,032
-------- -------- -------- --------
78,870 36,727 81,240 36,818
Deduct: other changes.............................. 164 148 2,534 239
-------- -------- -------- --------
At end of period.................................... $ 78,706 $ 36,579 $ 78,706 $ 36,579
======== ======== ======== ========
See Notes to Financial Statements.
1
Bell Atlantic - Washington, D.C., Inc.
BALANCE SHEETS
(Unaudited)
(Dollars in Thousands)
ASSETS
------
June 30, December 31,
1997 1996
---------- ------------
CURRENT ASSETS
Short-term investments........................... $ 6,097 $ 8,973
Accounts receivable:
Trade and other, net of allowances for
uncollectibles of $8,317 and $11,495... 147,830 149,777
Affiliates.................................. 18,083 17,779
Material and supplies............................ 2,123 1,707
Prepaid expenses................................. 4,034 10,968
Deferred income taxes............................ 3,807 1,112
---------- ----------
181,974 190,316
---------- ----------
PLANT, PROPERTY AND EQUIPMENT.................... 1,585,241 1,521,071
Less accumulated depreciation.................... 801,680 731,585
---------- ----------
783,561 789,486
---------- ----------
OTHER ASSETS..................................... 8,573 13,940
---------- ----------
TOTAL ASSETS..................................... $ 974,108 $ 993,742
========== ==========
See Notes to Financial Statements.
2
Bell Atlantic - Washington, D.C., Inc.
BALANCE SHEETS
(Unaudited)
(Dollars in Thousands)
LIABILITIES AND SHAREOWNER'S INVESTMENT
---------------------------------------
June 30, December 31,
1997 1996
-------- ------------
CURRENT LIABILITIES
Debt maturing within one year:
Note payable to affiliate...................... $ 26,054 $ 48,210
Other.......................................... 20,096 98
Accounts payable and accrued liabilities:
Affiliates..................................... 104,356 114,626
Other.......................................... 82,821 89,959
Advance billings and customer deposits.............. 11,841 9,328
-------- --------
245,168 262,221
-------- --------
LONG-TERM DEBT...................................... 227,736 247,735
-------- --------
EMPLOYEE BENEFIT OBLIGATIONS........................ 141,749 146,522
-------- --------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes............................... 31,296 28,921
Unamortized investment tax credits.................. 3,898 4,169
Other............................................... 25,038 30,966
-------- --------
60,232 64,056
-------- --------
SHAREOWNER'S INVESTMENT
Common stock - one share, owned by parent, at
stated value................................... 191,968 191,968
Capital surplus..................................... 28,549 28,549
Reinvested earnings................................. 78,706 52,691
-------- --------
299,223 273,208
-------- --------
TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT....... $974,108 $993,742
======== ========
See Notes to Financial Statements.
3
Bell Atlantic - Washington, D.C., Inc.
STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
Six months ended
June 30,
--------------------
1997 1996
--------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES.......... $ 93,013 $108,935
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in short-term investments............... 2,876 (2,827)
Additions to plant, property and equipment......... (78,013) (57,513)
Other, net......................................... 6,335 2,217
--------- --------
Net cash used in investing activities.............. (68,802) (58,123)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal repayments of borrowings and capital
lease obligations............................. (40) (675)
Net change in note payable to affiliate............ (22,156) (45,429)
Net change in outstanding checks drawn
on controlled disbursement accounts........... (2,015) (4,708)
--------- --------
Net cash used in financing activities.............. (24,211) (50,812)
--------- --------
NET CHANGE IN CASH................................. --- ---
CASH, BEGINNING OF PERIOD.......................... --- ---
--------- --------
CASH, END OF PERIOD................................ $ --- $ ---
========= ========
See Notes to Financial Statements.
4
Bell Atlantic - Washington, D.C., Inc.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The Company has prepared the accompanying unaudited financial statements
based upon Securities and Exchange Commission rules that permit reduced
disclosure for interim periods. Management believes that these financial
statements reflect all adjustments which are necessary for a fair presentation
of the Company's results of operations and financial position, which consist of
only normal recurring accruals. For a more complete discussion of significant
accounting policies and certain other information, refer to the financial
statements filed with the Company's 1996 Form 10-K.
2. TRANSFER OF DIRECTORY PUBLISHING ACTIVITIES
On January 1, 1997, the Company transferred, at net book value without gain
or loss, certain assets and liabilities associated with its directory publishing
activities to a newly formed, wholly owned subsidiary. The stock of the
subsidiary was immediately distributed to Bell Atlantic Corporation (Bell
Atlantic). The transfer of such assets and liabilities was completed as part of
Bell Atlantic and the Company's response to the requirements of the
Telecommunications Act of 1996, which prohibits the Company from engaging in
electronic publishing or joint sales and marketing of electronic products.
Net assets transferred by the Company totaled approximately $2,300,000, and
consisted of deferred directory production costs (included in prepaid expenses),
fixed assets, and related deferred tax liabilities.
Revenues and direct expenses related to the Company's directory publishing
activities transferred were approximately $33,400,000 and $13,500,000,
respectively, for the six month period ended June 30, 1996. The Company does
not separately identify indirect expenses attributable to the directory
publishing activities, including expenses related to billing and data management
and processing services, legal, external affairs, depreciation, interest expense
and any corresponding tax expense.
3. PROPOSED BELL ATLANTIC - NYNEX MERGER
Bell Atlantic and NYNEX Corporation announced a proposed merger of equals
under a definitive merger agreement entered into on April 21, 1996 and amended
on July 2, 1996. At special meetings held in November 1996, stockholders of
both companies approved the merger. The completion of the merger is subject to
the Federal Communications Commission's approval, which is expected to be
received shortly.
5
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 net income of $28,549,000, for the six month period
ended June 30, 1997, compared to net income of $33,032,000 for the same period
in 1996.
TRANSFER OF DIRECTORY PUBLISHING ACTIVITIES
- --------------------------------------------------------------------------------
On January 1, 1997, the Company transferred, at net book value without gain
or loss, certain assets and liabilities associated with its directory publishing
activities to a newly formed, wholly owned subsidiary. The stock of the
subsidiary was immediately distributed to Bell Atlantic. The transfer of such
assets and liabilities was completed as part of Bell Atlantic and the Company's
response to the requirements of the Telecommunications Act of 1996, which
prohibits the Company from engaging in electronic publishing or joint sales and
marketing of electronic products.
Net assets transferred by the Company totaled approximately $2,300,000, and
consisted of deferred directory production costs (included in prepaid expenses),
fixed assets, and related deferred tax liabilities.
Revenues and direct expenses related to the Company's directory publishing
activities transferred were approximately $33,400,000 and $13,500,000,
respectively, for the six month period ended June 30, 1996. The Company does
not separately identify indirect expenses attributable to the directory
publishing activities, including expenses related to billing and data management
and processing services, legal, external affairs, depreciation, interest expense
and any corresponding tax expense.
Effective January 1, 1997, revenues from directory publishing activities
transferred are no longer earned, and the related expenses are no longer
incurred, by the Company. Certain other revenues, primarily fees for non-
publication of telephone numbers and multiple white page listings continue to be
earned by the Company. Additionally, contracts between the Company and another
affiliate of Bell Atlantic for billing and collection services related to the
directory activities, use of directory listings, and rental charges have created
new revenue sources for the Company.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING - DIRECTORY PUBLISHING
- --------------------------------------------------------------------------------
The Company changed its method of accounting for directory publishing
revenues and expenses, effective January 1, 1996. The Company adopted the point-
of-publication method, which requires directory revenues and expenses to be
recognized upon publication rather than over the lives of the directories. The
Company recorded an after-tax increase in income of $286,000 in the first
quarter of 1996, representing the cumulative effect of this accounting change.
Results of operations for the first three quarters of 1996 were restated to
reflect the impact of this change.
- --------------------------------------------------------------------------------
Certain other items affecting the comparison of the Company's results of
operations for the six month periods ended June 30, 1997 and 1996 are discussed
in the following sections. This Management's Discussion and Analysis should
also be read in conjunction with the Company's 1996 Annual Report on Form 10-K.
6
Bell Atlantic - Washington, D.C., Inc.
OPERATING REVENUES
- ------------------
(Dollars in Thousands)
Six Month Period Ended June 30 1997 1996
- -------------------------------------------------------------------------------
Transport services
Local service......................... $125,135 $123,752
Network access........................ 72,376 64,979
Toll service.......................... 2,002 1,954
Ancillary services
Directory publishing.................. 1,375 34,532
Other................................. 55,180 40,414
Value-added services...................... 52,959 48,709
-------- --------
Total..................................... $309,027 $314,340
======== ========
TRANSPORT SERVICES OPERATING STATISTICS
- ---------------------------------------
Percentage
1997 1996 Increase
- -------------------------------------------------------------------------------
At June 30
- ----------
Access Lines in Service (in thousands)
Residence............................. 291 282 3.2%
Business.............................. 599 584 2.6
Public................................ 10 10 ---
----- -----
900 876 2.7
===== =====
Six Month Period Ended June 30
- ------------------------------------------
Access Minutes of Use (in millions)
Interstate............................ 1,444 1,431 .9
===== =====
Toll Messages (in thousands)
Interstate............................ 1,952 1,858 5.1
===== =====
LOCAL SERVICE REVENUES
1997-1996 Increase
- --------------------------------------------------------------------------------
Six Months $1,383 1.1%
- --------------------------------------------------------------------------------
Local service revenues are earned by the Company from the provision of
local exchange, local private line and public telephone (pay phone) services.
Higher usage of the Company's network facilities was the primary reason for
the increase in local service revenues in the first six months of 1997. This
growth was generated by an increase in access lines in service of 2.7% from June
30, 1996. This access line growth primarily reflects higher demand for Centrex
services and an increase in second residential lines. This increase in local
service revenues was partially offset by the effects of rate reductions on
certain local services for business customers.
For a discussion of the Telecommunications Act of 1996, which will open the
local exchange market to competition, see "Factors That May Impact Future
Results" beginning on page 11.
7
Bell Atlantic - Washington, D.C., Inc.
NETWORK ACCESS REVENUES
1997-1996 Increase
- --------------------------------------------------------------------------------
Six Months $7,397 11.4%
- --------------------------------------------------------------------------------
Network access revenues are earned from long distance carriers for their
use of the Company's local exchange facilities in providing long distance
services to their customers, and from end-user subscribers. Switched access
revenues are derived from usage-based charges paid by long distance carriers for
access to the Company's network. Special access revenues arise from access
charges paid by long distance carriers and end-users who have private networks.
End-user access revenues are earned from local exchange carrier customers who
pay for access to the network.
Network access revenues increased due to expansion of the business market,
particularly for high capacity services, and the effect of price increases on
certain end-user access services beginning in July 1996. Access minutes of use
increased by .9% in 1997, primarily due to higher customer demand. Reported
growth in access minutes of use and revenues was negatively affected by
increased calling volumes during the first quarter of 1996 caused by severe
winter storms.
Effective July 1, 1997, the Company implemented price decreases of
approximately $10,700,000 on an annual basis for interstate services, in
connection with the Federal Communications Commission's (FCC) price cap plan.
It is expected that these price decreases will be partially offset by volume
increases. For a further discussion of FCC rulemakings concerning price caps,
access charges and universal service, see "Factors That May Impact Future
Results - Recent Developments - FCC Orders" beginning on page 12.
TOLL SERVICE REVENUES
1997-1996 Increase
- --------------------------------------------------------------------------------
Six Months $48 2.5%
- --------------------------------------------------------------------------------
Toll service revenues are earned primarily from calls made outside a
customer's local calling area, but within the same service area of the Company,
referred to as a Local Access and Transport Area (LATA).
The growth in toll service revenues in the first six months of 1997 was
principally due to higher toll message volumes of 5.1% from June 30, 1996.
DIRECTORY PUBLISHING REVENUES
1997-1996 (Decrease)
- --------------------------------------------------------------------------------
Six Months $(33,157) (96.0)%
- --------------------------------------------------------------------------------
As described earlier, the Company transferred certain assets and
liabilities associated with its directory publishing activities to a newly
formed, wholly owned subsidiary, effective January 1, 1997. As a result,
revenues associated with directory publishing activities transferred are no
longer earned by the Company. The Company's directory publishing revenues in
1997 are earned primarily from fees for non-publication of telephone numbers,
multiple white page listings and usage of directory listings.
The decrease in directory publishing revenues in the first six months of
1997 was principally due to the transfer of directory publishing activities.
8
Bell Atlantic - Washington, D.C., Inc.
OTHER ANCILLARY SERVICES REVENUES
1997-1996 Increase
- --------------------------------------------------------------------------------
Six Months $14,766 36.5%
- --------------------------------------------------------------------------------
The Company provides other ancillary services which include billing and
collection services for long distance carriers, facilities rental services for
affiliates and non-affiliates, and sales of materials and supplies to
affiliates.
The increase in other ancillary services revenues in the first six months
of 1997 was primarily due to higher facilities rental revenues from affiliates.
VALUE-ADDED SERVICES REVENUES
1997-1996 Increase
- --------------------------------------------------------------------------------
Six Months $4,250 8.7%
- --------------------------------------------------------------------------------
Value-added services are a family of services which expand the utilization
of the network. These services include products such as voice messaging
services, Caller ID, Call Waiting, and Return Call, as well as more mature
products such as Touch-Tone and customer premises wiring and maintenance
services.
Value-added services revenues increased in the first six months of 1997 due
to higher revenues from customer premises wiring services for the federal
government. This increase was partially offset by a decrease in Touch-Tone
service charges in 1997. Effective in January 1997, business Touch-Tone service
charges were reduced by 50%, relative to 1996 rates, resulting in an annual
decrease of approximately $2,200,000 in value-added services revenues.
OPERATING EXPENSES
- ------------------
(Dollars in Thousands)
Six Month Period Ended June 30 1997 1996
- --------------------------------------------------------------------------------
Employee costs, including benefits and taxes.. $ 49,137 $ 57,240
Depreciation and amortization................. 77,554 67,092
Other operating expenses...................... 124,071 126,157
-------- --------
Total......................................... $250,762 $250,489
======== ========
EMPLOYEE COSTS
1997-1996 (Decrease)
- --------------------------------------------------------------------------------
Six Months $(8,103) (14.2)%
- --------------------------------------------------------------------------------
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.
The decrease in employee costs was primarily due to lower benefit costs.
The reduction in benefit costs was caused by a number of factors, including an
increase in the discount rate used to develop pension and postretirement benefit
costs, favorable pension plan asset returns and lower than expected medical
claims. The Company expects the lower level of benefit costs to continue through
the third quarter of 1997. The effect of lower work force levels in the first
six months of 1997 further reduced employee costs. These cost reductions were
partially offset by annual salary and wage increases and by increased overtime
pay principally as a result of higher business volumes.
9
Bell Atlantic - Washington, D.C., Inc.
DEPRECIATION AND AMORTIZATION
1997-1996 Increase
- --------------------------------------------------------------------------------
Six Months $10,462 15.6%
- --------------------------------------------------------------------------------
The Company uses the composite group remaining life method to depreciate
plant assets. Under this method, the Company periodically revises depreciation
rates based on a number of factors. The composite depreciation rate was 10.2%
for the six month period ended June 30, 1997 compared to 9.6% for the same
period in 1996.
Depreciation and amortization increased in the first six months of 1997
principally due to growth in depreciable telephone plant. The effect of higher
rates of depreciation and amortization also contributed to the expense increase.
OTHER OPERATING EXPENSES
1997-1996 (Decrease)
- --------------------------------------------------------------------------------
Six Months $(2,086) (1.7)%
- --------------------------------------------------------------------------------
Other operating expenses consist of contract services including centralized
services expenses allocated from NSI, rent, network software costs, operating
taxes other than income, the provision for uncollectible accounts receivable,
and other costs.
As a result of the transfer of directory publishing activities, certain
direct and allocated expenses related to the activities transferred are no
longer incurred by the Company.
The decrease in other operating expenses was largely attributable to the
transfer of directory publishing activities, a reduction in write-offs of
uncollectible accounts receivable associated with the Company's billing and
collection services, and lower centralized services expenses allocated from NSI.
The decline in centralized services expenses was primarily due to lower benefit
costs and lower software and systems costs, partially offset by higher rent
expense and higher marketing and advertising costs. These decreases were
substantially offset by higher costs for materials and contract services.
OTHER EXPENSE, NET
1997-1996 Increase
- --------------------------------------------------------------------------------
Six Months $965
- --------------------------------------------------------------------------------
The change in other expense, net, was attributable to higher nonoperating
costs incurred in the first six months of 1997.
INTEREST EXPENSE
1997-1996 Increase
- --------------------------------------------------------------------------------
Six Months $72 .8%
- --------------------------------------------------------------------------------
Interest expense increased principally due to a reduction in capitalized
interest costs resulting from lower levels of telephone plant under
construction. This increase was substantially offset by the effect of lower
levels of average short-term debt.
10
Bell Atlantic - Washington, D.C., Inc.
EFFECTIVE INCOME TAX RATES
Six Months Ended June 30
- --------------------------------------------------------------------------------
1997 39.9%
- --------------------------------------------------------------------------------
1996 39.5%
- --------------------------------------------------------------------------------
The effective income tax rate is the provision for income taxes as a
percentage of income before provision for income taxes and cumulative effect of
change in accounting principle. The Company's effective income tax rate was
higher in the first six months of 1997 principally due to the effect of prior
period adjustments recorded in 1996.
FINANCIAL CONDITION
- -------------------
The Company uses the net cash generated from operations and from external
financing to fund capital expenditures for network expansion and modernization.
While current liabilities exceeded current assets at both June 30, 1997 and
December 31, 1996, the Company's sources of funds, primarily from operations
and, to the extent necessary, from readily available financing arrangements with
an affiliate, are sufficient to meet ongoing operating requirements. Management
expects that presently foreseeable capital requirements will continue to be
financed primarily through internally generated funds. Additional debt may be
needed to fund development activities or to maintain the Company's capital
structure to ensure financial flexibility.
As of June 30, 1997, the Company had $98,946,000 of an unused line of
credit with an affiliate, Bell Atlantic Network Funding Corporation. In
addition, the Company has $60,000,000 remaining under a shelf registration
statement filed with the Securities and Exchange Commission for the issuance of
unsecured debt securities.
The Company's debt ratio was 47.8% as of June 30, 1997, compared to 51.9%
as of June 30, 1996 and 52.0% as of December 31, 1996.
FACTORS THAT MAY IMPACT FUTURE RESULTS
- --------------------------------------
The telecommunications industry is undergoing substantial changes as a
result of the Telecommunications Act of 1996 (the Act), other public policy
changes and technological advances. These changes are likely to bring increased
competitive pressures in the Company's current business, but will also open new
markets to Bell Atlantic.
The Act became law on February 8, 1996 and replaced the Modification of
Final Judgment (MFJ). In general, the Act includes provisions that open local
exchange markets to competition and permit Bell Atlantic to provide interLATA
(long distance) services and to engage in manufacturing. However, the ability of
Bell Atlantic to engage in these new businesses, previously prohibited by the
MFJ, is largely dependent on satisfying certain conditions contained in the Act.
Among the requirements with which the Company must comply is a 14-point
"competitive checklist" which includes steps the Company must take which will
help competitors offer local service, either through resale, through the
purchase of unbundled network elements, or through their own networks. The
Company must also demonstrate to the FCC that its entry into the long distance
market would be in the public interest.
A U.S. Court of Appeals recently found that the FCC unlawfully attempted to
preempt state authority in implementing key provisions of the Act. It also
found that several particularly objectionable provisions of the FCC's rules
were inconsistent with the statutory requirements. In particular, it affirmed
that states have exclusive jurisdiction over the pricing of interconnection
elements and that the FCC could not lawfully allow competitors to "pick and
choose" isolated terms out of negotiated interconnection agreements. This
decision should not delay the advent of local competition, since, under the
previous stay of the FCC's rules, a number of interconnection agreements have
been concluded and the District of Columbia Public Service Commission (PSC) is
currently addressing pricing and other standards for local interconnection.
Pursuant to the Act, the Company filed its "Statement of Generally
Available Terms and Conditions for Interconnection, Unbundled Network Elements,
Ancillary Services and Resale of Telecommunications Services" with the PSC.
Hearings have been completed regarding this filing. On August 4, 1997, the
Company filed briefs that address its Statement of Generally
11
Bell Atlantic - Washington, D.C., Inc.
Available Terms and Conditions, adoption of permanent rates and conditions that
will replace interim rates and conditions adopted in arbitration proceedings,
its collocation proposal and interstate intraLATA toll presubscription plan, and
any other cost, rate, policy or technical issues that must be resolved. An order
is expected before the end of the year.
Bell Atlantic expects to petition the FCC for permission to enter the in-
region long distance market in one or more states in its jurisdiction in 1997.
Bell Atlantic is unable to predict when it will receive such permission.
The Company is unable to predict definitively the impact that the Act will
have on its business, results of operations or financial condition. The
financial impact will depend on several factors, including the timing, extent
and success of competition in the Company's markets, and the timing, extent and
success of Bell Atlantic's pursuit of new business opportunities resulting from
the Act.
The Company anticipates that these industry changes, together with the
rapid growth, enormous size and global scope of these markets, will attract new
entrants and encourage existing competitors to broaden their offerings. Current
and potential competitors in telecommunication services include long distance
companies, other local telephone companies, cable companies, wireless service
providers, and other companies that offer network services. Some of these
companies have a strong market presence, brand recognition and existing customer
relationships, all of which contribute to intensifying competition and may
affect the Company's future revenue growth. See the "Competition" section below
for additional information.
Recent Developments - FCC Orders
On May 7, 1997, the FCC adopted orders to reform the interstate access
charge system, to modify its price cap system and to implement the "universal
service" requirements of the Act. While there are additional decisions pending
on Universal Service and Access Reform, based on the decisions to date the
Company does not believe that these proceedings will result in a material
adverse impact on its results of operations or financial condition.
Access Charges
Access charges are the rates long distance carriers pay for use and
availability of the Company's facilities for the origination and termination of
interstate interLATA service. On May 7, 1997, the FCC adopted changes to the
tariff structures it has prescribed for such charges in order to permit the
Company to recover its costs through rates which reflect the manner in which
those costs are incurred. As of January 1, 1998, the FCC will require, in
general, that interstate costs of the Company which do not vary based on usage
be recovered from long distance carriers through flat rate charges, and those
interstate costs that do vary based on usage be recovered from long distance
carriers through usage-based rates. In addition, the FCC will require
establishment of separate usage-based charges for originating and for
terminating interstate interLATA traffic.
A portion of the Company's interstate costs are also recovered through flat
monthly charges to subscribers (subscriber line charges). Under the FCC's
order, subscriber line charges for primary residential and single line
businesses will remain unchanged, but such charges for additional residential
lines and multi-line businesses will rise.
The restructuring of access charges in January 1998 is expected to be
revenue neutral to the Company.
Price Caps
The FCC also adopted modifications to its price cap rules that affect
access rate levels. Under the FCC's price cap rules, the Company's price cap
index is adjusted annually by an inflation index (GDP-PI) less a fixed
percentage intended to reflect increases in productivity (Productivity Factor).
In the prior year, the Company's Productivity Factor was 5.3%. Effective July 1,
1997, the FCC created a single Productivity Factor for all price cap companies
of 6.5%, and eliminated requirements to share a portion of future interstate
earnings. The FCC required that rates be set as if the higher Productivity
Factor had been in effect since July 1996. Any local exchange company that earns
a rate of return on its interstate services of less than 10.25% in any calendar
year will be permitted to increase its interstate rates in the following year.
The FCC also ordered elimination of recovery for amortized costs associated with
reconfiguration of the Company's network to provide equal access to facilities
for all long distance carriers.
12
Bell Atlantic - Washington, D.C., Inc.
On June 30, 1997, Bell Atlantic made its Annual Access Tariff Filing of
Interstate Rates, which became effective on July 1, 1997. The rates included in
the filing resulted in annual price decreases for the Company totaling
approximately $10,700,000, of which $2,500,000 is a result of one-time
adjustments which will only be in effect until July 1998.
The FCC is expected to adopt an order later this year to address the
conditions under which the FCC would relax or remove existing access rate
structure requirements and price cap restrictions as increased local market
competition develops. The Company is unable to predict the results of this
further proceeding.
Universal Service
The FCC also adopted rules designed to preserve "universal service" by
ensuring that a basket of designated services are widely available and
affordable to all customers, including low-income customers and customers in
areas that are expensive to serve. The FCC's universal service support will
approximate $1.5 billion for high cost areas pending completion of further FCC
proceedings. By the third quarter of 1998, the FCC, in conjunction with the
Federal-State Joint Board on Universal Service, will determine the methodology
for determining high cost areas for non-rural carriers, the proper amount of
federal universal service support for high cost areas, and how to assess the
appropriate level of federal financial support required to continue to ensure
affordable local telephone service. Any new high cost universal service support
mechanism will become effective January 1, 1999.
The FCC also adopted rules to implement the Act's requirements to provide
discounted telecommunications services to schools and libraries, beginning
January 1, 1998, and to ensure that not-for-profit rural health care providers
have access to such services at rates comparable to those charged their urban
counterparts.
All telecommunications carriers will be required to contribute funding for
these universal service programs. The federal universal service funding needs
as of January 1, 1998 will require the Company to contribute approximately 1% to
2% of its revenues for high cost and low income subsidies. The Company will
also be contributing about 5% for schools, libraries and not-for-profit health
care. The Company will, however, be afforded the opportunity to recover its
universal service contributions through higher interstate charges to long
distance carriers and end users.
Competition
Local Exchange Services
Local exchange services have historically been subject to regulation by the
PSC. In September 1996, the D.C. Telecommunications Competition Act of 1996 was
signed into law. The legislation encourages the PSC to facilitate competitors'
entry into the Washington, D.C. telecommunications market and requires the PSC
to interpret the law in a manner consistent with the federal telecommunications
legislation. Since the third quarter of 1996, certificates to provide local
exchange services in competition with the Company have been granted by the PSC.
Other applications for certificates are currently pending.
Both the Telecommunications Act of 1996 and the D.C. Telecommunications
Competition Act of 1996 are expected to significantly increase the level of
competition in the Company's local exchange market.
Other State Regulatory Matters
The communications services of the Company are subject to regulation by the
PSC with respect to intrastate rates and services and certain other matters.
In November 1996, the PSC approved a price cap plan for intra-Washington,
D.C. services provided by the Company. The plan (1) is for four years, through
December 31, 1999; (2) divides services into three categories: basic,
discretionary, and competitive; (3) caps certain basic residential rates for the
term of the plan and allows other basic rates to change with the rate of
inflation (GDP-PI) minus 3%; (4) allows discretionary service rates to increase
by up to 15% annually; (5) eliminates price limits on competitive service rates;
(6) reduces residential rates by $3.2 million in 1996, and business rates by
$2.2 million in 1997 and $3.2 million in 1998; (7) establishes a trust fund to
finance advanced telecommunications services in the District's public schools,
libraries, and community centers; and (8) eliminates the regulation of profits.
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Bell Atlantic - Washington, D.C., Inc.
Effective July 1, 1997, residential and business message unit rates were
decreased by approximately $800,000, on an interim basis, for the negative
change in the rate of inflation adjustment (-.68%). This adjustment was
calculated as directed in the Price Cap Plan. The PSC will issue an order
approving or modifying the Company's proposal after the completion of a 45 day
comment and 15 day reply period.
OTHER MATTERS
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Proposed Bell Atlantic - NYNEX Merger
Bell Atlantic and NYNEX Corporation (NYNEX) announced a proposed merger of
equals under a definitive merger agreement entered into on April 21, 1996 and
amended on July 2, 1996. At special meetings held in November 1996,
stockholders of both companies approved the merger. The completion of the
merger is subject to the FCC's approval, which is expected to be received
shortly. In connection with the FCC's review of the proposed merger, Bell
Atlantic and NYNEX submitted a list of commitments they will follow to assure
competition in their local exchange markets. The Company does not expect these
commitments to have a material impact on its results of operations or financial
condition.
As a result of the merger, Bell Atlantic will incur special transition and
integration costs in connection with completing the transaction and integrating
the operations of Bell Atlantic and NYNEX. It is anticipated that the Company
will bear a portion of the transition and integration costs.
Bell Atlantic also expects to recognize recurring expense savings following
completion of the merger as a result of consolidating operating systems and
other administrative functions and reducing management positions. It is
anticipated that the Company will recognize a portion of these savings.
Cautionary Statement Concerning Forward-Looking Statements
Information contained above with respect to the expected financial impact
of the proposed merger, and other statements in this Management's Discussion and
Analysis regarding expected future events and financial results, are forward-
looking and subject to risks and uncertainties. For those statements, the
Company claims the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995.
The following important factors could affect the future results of the
Company and could cause those results to differ materially from those expressed
in the forward-looking statements: (i) materially adverse changes in economic
conditions in the markets served by the Company; (ii) a significant further
delay in the expected closing of the merger; (iii) the final outcome of FCC
rulemakings with respect to interconnection agreements, access charge reform and
universal service; (iv) future state regulatory actions in the Company's
operating area; and (v) the extent, timing and success of competition from
others in the local telephone and toll service markets.
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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 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, see Item 3 of the
Company's Annual Report on Form 10-K for the year ended December 31,
1996.
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 June 30, 1997.
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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 8, 1997 By /s/ Sheila D. Shears
-----------------------------
Sheila D. Shears
Controller and Treasurer
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF AUGUST 5, 1997.
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