0000075641-95-000011.txt : 19950815
0000075641-95-000011.hdr.sgml : 19950815
ACCESSION NUMBER: 0000075641-95-000011
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 3
CONFORMED PERIOD OF REPORT: 19950630
FILED AS OF DATE: 19950814
SROS: NYSE
SROS: PSE
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: PACIFIC BELL
CENTRAL INDEX KEY: 0000075641
STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813]
IRS NUMBER: 940745535
STATE OF INCORPORATION: CA
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-01414
FILM NUMBER: 95563212
BUSINESS ADDRESS:
STREET 1: 140 NEW MONTGOMERY ST
CITY: SAN FRANCISCO
STATE: CA
ZIP: 94105
BUSINESS PHONE: 4155429000
FORMER COMPANY:
FORMER CONFORMED NAME: PACIFIC TELEPHONE & TELEGRAPH CO
DATE OF NAME CHANGE: 19840115
10-Q
1
PACIFIC BELL'S 2ND QTR 1995 FORM 10-Q
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-1414
PACIFIC BELL
I.R.S. Employer No. 94-0745535
A California Corporation
140 New Montgomery Street, San Francisco, California 94105
Telephone - Area Code (415) 542-9000
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 .
--- ---
At July 31, 1995, 224,504,982 common shares were outstanding.
THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF PACIFIC TELESIS GROUP, 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).
PACIFIC BELL AND SUBSIDIARIES
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION Number
------------------------------ ------
Item 1. Financial Statements
Review Report of Independent Accountants .............. 1
Condensed Consolidated Statements of Income ........... 2
Condensed Consolidated Balance Sheets ................. 3
Condensed Consolidated Statements of Shareowner's
Equity.............................................. 4
Condensed Consolidated Statements of Cash Flows ....... 5
Notes to Condensed Consolidated Financial Statements .. 7
Item 2. Management's Discussion and Analysis of Results of
Operations ............................................ 13
PART II. OTHER INFORMATION
---------------------------
Item 6. Exhibits and Reports on Form 8-K ........................ 29
SIGNATURE ........................................................ 30
---------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
REVIEW REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareowners of Pacific Bell:
We have reviewed the accompanying condensed consolidated balance sheet of
Pacific Bell and Subsidiaries as of June 30, 1995, and the related condensed
consolidated statements of income for the three- and six-month periods ended
June 30, 1995 and 1994, and the condensed consolidated statements of
shareowner's equity and cash flows for the six-month periods ended June 30,
1995 and 1994. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data, and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial statements
for them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Pacific Bell and Subsidiaries as
of December 31, 1994, and the related consolidated statements of income,
shareowner's equity, and cash flows for the year then ended (not presented
herein); and in our report dated February 23, 1995, we expressed an
unqualified opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying condensed consolidated
balance sheet as of December 31, 1994, is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has been
derived.
/s/Coopers & Lybrand L.L.P.
San Francisco, California
August 11, 1995
1
PACIFIC BELL AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the 3 Months Ended For the 6 Months Ended
June 30, June 30,
---------------------- ----------------------
(Dollars in millions) 1995 1994 1995 1994
----------------------------------------------------------------------------
OPERATING REVENUES:
Local service................. $ 928 $ 827 $1,859 $1,667
Network access
Interstate.................. 413 387 844 784
Intrastate.................. 177 167 343 340
Toll service.................. 290 501 604 994
Other service revenues........ 378 327 748 671
------ ------ ------ ------
Total Operating Revenues...... 2,186 2,209 4,398 4,456
------ ------ ------ ------
OPERATING EXPENSES:
Cost of products and services. 425 471 924 947
Customer operations and
selling expense............. 439 461 875 884
General, administrative, and
other expense............... 317 268 619 611
Property and miscellaneous taxes 51 45 96 90
Depreciation and amortization. 460 435 920 869
------ ------ ------ ------
Total Operating Expenses...... 1,692 1,680 3,434 3,401
------ ------ ------ ------
OPERATING INCOME ............. 494 529 964 1,055
Interest expense.............. 109 117 217 220
Miscellaneous income.......... 8 (4) 28 (3)
------ ------ ------ ------
INCOME BEFORE INCOME TAXES.... 393 408 775 832
Income taxes 150 152 286 300
------ ------ ------ ------
NET INCOME.................... $ 243 $ 256 $ 489 $ 532
====== ====== ====== ======
The accompanying Notes are an integral part of the Condensed Consolidated
Financial Statements.
2
PACIFIC BELL AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
(Dollars in millions) 1995 1994
---------------------------------------------------------------------------
ASSETS: (Unaudited)
Cash and cash equivalents ..................... $ 66 $ 62
Accounts receivable - (net of allowances for
uncollectibles of $133 and $132 in 1995 and
1994, respectively) ......................... 1,360 1,531
Prepaid expenses and other current assets ..... 964 950
------- -------
Total current assets .......................... 2,390 2,543
------- -------
Property, plant, and equipment - at cost....... 26,394 26,107
Less: accumulated depreciation ............. 10,675 10,243
------- -------
Property, plant, and equipment - net .......... 15,719 15,864
------- -------
Deferred charges and other noncurrent assets .. 816 963
------- -------
TOTAL ASSETS .................................. $18,925 $19,370
======= =======
LIABILITIES AND SHAREOWNER'S EQUITY:
Accounts payable .............................. $ 1,108 $ 1,580
Debt maturing within one year ................. 256 255
Other current liabilities ..................... 1,600 1,366
------- -------
Total current liabilities ..................... 2,964 3,201
------- -------
Long-term obligations ......................... 4,758 4,752
------- -------
Deferred income taxes ......................... 2,329 2,315
------- -------
Other noncurrent liabilities and
deferred credits ............................ 2,638 2,878
------- -------
Commitments and Contingencies (Note B)
Total shareowner's equity ..................... 6,236 6,224
------- -------
TOTAL LIABILITIES AND SHAREOWNER'S EQUITY ..... $18,925 $19,370
======= =======
The accompanying Notes are an integral part of the Condensed Consolidated
Financial Statements.
3
PACIFIC BELL AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREOWNER'S EQUITY
(Unaudited)
For the 6 Months
Ended June 30,
----------------------
(Dollars in millions) 1995 1994
-------------------------------------------------------------------------
COMMON STOCK
Balance at beginning of period ................. $ 225 $ 225
------ ------
Balance at end of period ....................... 225 225
------ ------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period ................. 5,169 5,168
------ ------
Balance at end of period ....................... 5,169 5,168
------ ------
REINVESTED EARNINGS
Balance at beginning of period ................. 830 761
Net income ..................................... 489 532
Common dividends declared ...................... (477) (452)
Other changes................................... - (4)
------ ------
Balance at end of period ....................... 842 837
------ ------
TOTAL SHAREOWNER'S EQUITY ...................... $6,236 $6,230
====== ======
The accompanying Notes are an integral part of the Condensed Consolidated
Financial Statements.
4
PACIFIC BELL AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the 6 Months
Ended June 30,
----------------------
(Dollars in millions) 1995 1994
---------------------------------------------------------------------------
CASH FROM (USED FOR) OPERATING ACTIVITIES
Net Income .......................................... $ 489 $ 532
Adjustments to reconcile net income for items
currently not affecting operating cash flows:
Depreciation and amortization ................... 920 869
Deferred income taxes ........................... 7 (49)
Unamortized investment tax credits .............. (25) (35)
Allowance for funds used during construction .... (19) (15)
Changes in operating assets and liabilities:
Accounts receivable ............................. 175 39
Prepaid expenses and other current assets........ (6) (4)
Deferred charges and other noncurrent assets..... 151 2
Accounts payable and accrued liabilities......... (156) 88
Other current liabilities ....................... (11) (20)
Noncurrent liabilities and deferred credits...... (235) 64
Other adjustments, net .......................... 7 2
------ ------
Cash from operating activities ...................... 1,297 1,473
------ ------
CASH FROM (USED FOR) INVESTING ACTIVITIES
Additions to property, plant, and equipment.......... (817) (700)
Other investing activities, net ..................... 2 1
------ ------
Cash used for investing activities .................. (815) (699)
------ ------
CASH FROM (USED FOR) FINANCING ACTIVITIES
Dividends paid ...................................... (477) (452)
Increase (decrease) in short-term borrowings, net ... 1 (345)
Principal payments under capital lease obligations .. (2) 8
------ ------
Cash used for financing activities .................. (478) (789)
------ ------
Increase(decrease) in cash and cash equivalents ..... 4 (15)
Cash and cash equivalents at January 1 .............. 62 57
------ ------
Cash and cash equivalents at June 30................. $ 66 $ 42
====== ======
(Continued on next page)
5
PACIFIC BELL AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Continued)
For the 6 Months
Ended June 30,
----------------------
(Dollars in millions) 1995 1994
---------------------------------------------------------------------------
Cash payments for:
Interest ........................................ $ 191 $ 190
Income taxes .................................... $ 156 $ 238
---------------------------------------------------------------------------
The accompanying Notes are an integral part of the Condensed Consolidated
Financial Statements.
6
PACIFIC BELL AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A. BASIS OF PRESENTATION
The Condensed Consolidated Financial Statements include the accounts of
Pacific Bell, and its wholly owned subsidiaries, Pacific Bell Directory
("Directory") Pacific Bell Information Services ("PBIS"), and
Pacific Bell Mobile Services ("PBMS"), hereinafter referred to as the
"Company." All significant intercompany balances and transactions have
been eliminated. The Condensed Consolidated Income Statement and
Statement of Cash Flows for 1994 reflect certain reclassifications made
to conform with the current presentation.
The Condensed Consolidated Financial Statements have been prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission ("SEC") applicable to interim financial information. Certain
information and footnote disclosures included in financial statements
prepared in accordance with generally accepted accounting principles have
been condensed or omitted in these interim statements pursuant to such
SEC rules and regulations. Management recommends that these interim
financial statements be read in conjunction with the audited consolidated
financial statements and notes thereto included in the Company's 1994
annual report on Form 10-K.
In management's opinion, the Condensed Consolidated Financial Statements
include all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly the financial position and results of
operations for each interim period shown. The Condensed Consolidated
Financial Statements have been reviewed by Coopers & Lybrand L.L.P.,
independent accountants. Their report is on page 1.
7
PACIFIC BELL AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A. BASIS OF PRESENTATION (CONTINUED)
Accounting Under Regulation
The Company accounts for the economic effects of regulation under
Statement of Financial Accounting Standards No. 71 ("SFAS 71"),
"Accounting for the Effects of Certain Types of Regulation." SFAS 71
requires the Company to reflect the rate actions of regulators in its
financial statements when appropriate. Regulators sometimes include
costs in allowable costs for ratemaking in a period other than the period
in which those costs would be charged to expense by an unregulated
enterprise. These timing differences can create "regulatory assets" or
"regulatory liabilities." The regulatory assets and liabilities included
in the Company's consolidated balance sheets are listed and discussed
below:
June 30, December 31,
(Dollars in millions) 1995 1994
---------------------------------------------------------------------
Regulatory assets (liabilities) due to:
Deferred pension costs*.................... $ 442 $ 407
Unamortized debt redemption costs**........ 340 346
Deferred compensated absence costs*........ 208 212
Unamortized purchases of property, plant,
and equipment under $500................. 90 106
Deferred income taxes***................... (167) (185)
Other...................................... 41 48
----- -----
Total ....................................... $ 954 $ 934
=====================================================================
* Included primarily in "deferred charges and other noncurrent assets"
in the Company's balance sheets.
** Reflected as a reduction of "long-term obligations."
*** Included in "other current liabilities" and "other noncurrent
liabilities and deferred credits."
8
PACIFIC BELL AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A. BASIS OF PRESENTATION (Continued)
Deferred pension costs above reflect an order by the California Public
Utilities Commission ("CPUC") requiring the Company to use the "aggregate
cost method" for its intrastate operations. These deferred costs
represent differences between the Company's intrastate pension costs
calculated using this actuarial method, subject to Internal Revenue
Service ("IRS") and other limitations, and costs determined under the
provisions of Statement of Financial Accounting Standards No. 87
("SFAS 87"), "Employers' Accounting for Pensions," and No. 88
("SFAS 88"), "Employers' Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits."
When debt is refinanced before maturity, the Company amortizes to expense
any difference between net book value and redemption price evenly over
the term of the replacing issue for its intrastate operations, in
accordance with the ratemaking treatment of such costs by the CPUC.
These costs are expensed as incurred for interstate operations.
In prior years, the CPUC and the Federal Communications Commission
("FCC") changed the required accounting for the costs of compensated
absences, such as vacation days, from a cash basis to an accrual basis. A
transition liability for earned, but unused, compensated absence days is
being amortized to expense over periods prescribed by each regulator.
However, the CPUC continues to require the Company to recognize certain
compensated absence costs on a cash basis for ratemaking. The above
regulatory asset for compensated absences reflects those costs which have
been deferred in accordance with ratemaking treatment.
In 1989 and 1990, respectively, the FCC and the CPUC increased the
threshold for directly expensing purchases of property, plant, and
equipment from $200 to $500. Purchases of less than $500 which were
previously capitalized are being amortized to expense over periods
prescribed by regulators.
Specific provisions of Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes," require regulated companies to
record a regulatory asset or a regulatory liability when recognizing
deferred income taxes if it is probable that these deferred taxes will be
reflected in future rates.
9
PACIFIC BELL AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A. BASIS OF PRESENTATION (CONTINUED)
In addition to the regulatory assets and liabilities described above, the
carrying amount of property, plant, and equipment is also affected by the
actions of regulators. Property, plant, and equipment is carried at
cost. The cost of self-constructed plant includes employee wages and
benefits, materials, and other costs. Regulators allow the Company to
accrue an allowance for funds used during construction, which includes
both debt and equity components, as a cost of constructing certain plant
and as an item of miscellaneous income. This income is not realized in
cash currently, but is expected to be realized over the service lives of
the related plant. When retired, the original cost of depreciable
telephone plant is charged to accumulated depreciation.
Expenditures in excess of $500 that increase the capacity, operating
efficiency, or useful life of an individual asset are capitalized.
Expenditures for maintenance and repairs are charged to expense. The
costs of computer software purchased or developed for internal use
generally are expensed as incurred. However, initial operating system
software costs are capitalized and amortized over the lives of the
associated hardware. Costs for subsequent additions or modifications to
operating system software are expensed as incurred.
Depreciation of telephone plant is computed essentially by straight-line
depreciation using depreciable lives prescribed periodically by state and
federal regulators. Regulators currently have prescribed the following
depreciable lives for the Company's property, plant, and equipment:
Depreciable Lives
-----------------------------------------------------------------------
(in years)
Buildings.............................................. 30 to 57
Cable.................................................. 10 to 30
Central office equipment............................... 9 to 16.5
Furniture, equipment, and other........................ 5.5 to 20
=======================================================================
An unregulated enterprise may have selected shorter depreciable lives for
similar assets.
10
PACIFIC BELL AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A. BASIS OF PRESENTATION (CONTINUED)
The CPUC recently issued initial rules opening the Company's local
services market to competition beginning January 1, 1996, further
increasing competition in the Company's markets. In connection with this
action, the CPUC is scheduling hearings to determine what changes, if
any, should be made to the Company's regulatory framework. Management is
evaluating the effects of recent and pending regulatory actions to
determine whether the application of SFAS 71 regulatory accounting
continues to be appropriate. If it becomes no longer reasonable to
assume the Company will recover its costs of providing regulated services
through rates charged to customers, whether resulting from the effects of
increased competition or specific regulatory actions, SFAS 71 will no
longer apply.
Discontinuing the application of SFAS 71 would require the Company to
eliminate its regulatory assets and liabilities and may require a
reduction of the carrying amount of its telephone plant. Five telephone
regional holding companies ("RHCs") have discontinued the application of
SFAS 71 regulatory accounting and have adopted shorter depreciable lives
and reduced their telephone plant balances. If the Company were to
discontinue the application of SFAS 71 and compute the effect on its
telephone plant in a manner similar to these five RHCs, the reduction in
the carrying amount of the Company's property, plant, and equipment would
be between $3 and $5 billion. In addition, the Company would write off
its regulatory assets and liabilities at the time of discontinuance. At
June 30, 1995, the Company had net regulatory assets of $954 million.
11
PACIFIC BELL AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
B. COMMITMENTS AND CONTINGENCIES
Broadband Network
In December 1994, the Company contracted for the purchase of up to
$2 billion of broadband network facilities which will incorporate
emerging technologies. The Company is committed to purchase these
facilities in 1998 if they meet certain quality and performance criteria.
Revenues Subject to Refund
In 1992, the CPUC issued a decision adopting, with modification,
Statement of Financial Accounting Standards No. 106 ("SFAS 106"),
"Employers' Accounting for Postretirement Benefits Other than Pensions,"
for regulatory accounting purposes. Annual price cap decisions by the
CPUC granted the Company $100 million in each of the years 1995 and 1994
for partial recovery of higher costs under SFAS 106. However, the CPUC
in October 1994 reopened the proceeding to determine the criteria for
exogenous cost treatment and whether the Company should continue to
recover these costs. The CPUC's order held that related revenues
collected after October 12, 1994 are subject to refund. Beginning
August 1, 1995 through June 30, 1996, approximately $25 million of
1993-94 postretirement benefits costs are being recovered subject to
potential refund in the interstate jurisdiction. The FCC is examining
the appropriateness of this cost recovery in a new proceeding.
Management believes these costs are appropriately included in the
Company's price cap filings, but is unable to predict the outcome of the
CPUC's or FCC's proceedings.
12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
----------------------------------------------------------------------
RESULTS OF OPERATIONS
The following discussions and data compare the results of operations of
Pacific Bell and subsidiaries (the "Company") for the six-month period ended
June 30, 1995 to the same period in 1994. Results for the first six months of
1995 may not be indicative of results for the full year.
A summary of selected operating data is shown below:
For the 6 Months Ended
June 30, Change
---------------------- ------------------
Selected Operating Data 1995 1994 Amount Percent
---------------------------------------------------------------------------
Operating ratio (%).............. 78.1 *76.3 1.8 -
Return on shareowner's equity (%) 15.7 17.1 -1.4 -
Total employees ................. 49,419 52,207 -2,788 -5.3
Revenues per employee
($ thousands) ................. 89.0 *85.4 3.6 4.2
Employees per ten thousand
access lines** ................ 30.8 33.4 -2.6 -7.8
===========================================================================
* Restated
** Excludes Pacific Bell Directory and Pacific Bell Mobile Services
employees
Earnings
--------
For the 6 Months Ended
June 30, Change
---------------------- -----------------
($ millions) 1995 1994 Amount Percent
---------------------------------------------------------------------------
Net income $489 $532 -$ 43 -8.1
---------------------------------------------------------------------------
The decline in 1995 net income was primarily due to continuing revenue
shortfalls resulting from a California Public Utilities Commission ("CPUC")-
ordered price rebalancing that accompanied the official introduction of toll
services competition on January 1, 1995. Additional pressure on earnings
resulted from incremental labor expense associated with the severe storms in
early 1995. These earnings decreases in 1995 were partially offset by the
Company's ongoing cost-reduction efforts.
13
The revenue shortfalls occurred because the average 40 percent reduction in
toll prices did not stimulate demand growth to the extent anticipated by the
CPUC. Stimulation of demand fell far short of the amount necessary to achieve
revenue neutrality as intended by the price rebalancing order. The CPUC price
rebalancing order assumed that volume growth would be a key source of new
revenues to offset the price reductions. Results to date strongly suggest
that the CPUC's forecasted growth in demand will not be realized in 1995.
Management believes 1995 earnings could be about 10 percent less than 1994
primarily due to this revenue rebalancing shortfall.
In 1994, net income was reduced about $29 million because of a CPUC refund
order which resulted from past problems with the Company's payment processing
system.
Volume Indicators
------------------
For the 6 Months Ended
June 30, Change
---------------------- ------------------
Volume Indicators 1995 1994 Amount Change
---------------------------------------------------------------------------
Customer switched access lines
in service at June 30 (thousands) 15,209 14,790 419 2.8
Interexchange Carrier access
minutes-of-use (millions) ..... 28,476 *25,887 2,589 10.0
Interstate .................... 15,736 *15,218 518 3.4
Intrastate .................... 12,740 *10,669 2,071 19.4
Toll messages (millions) ........ 2,363 2,195 168 7.7
============================================================================
* Restated
The total number of access lines in service grew to 15,209 thousand, an
increase of 2.8 percent for the twelve months ended June 30, 1995. This is an
improvement over the 2.4 percent increase for the same period last year. The
residential access line growth rate increased to 2.1 percent for the twelve
months ended June 30, 1995, from 1.4 percent last year. The growth rate in
business access lines was 4.0 percent this year, unchanged from last year.
Business Centrex lines grew 10.9 percent during the same period as businesses
continued to link multiple locations and improve disaster preparedness. The
number of ISDN lines in service grew to 33,607, an increase of 108 percent for
the twelve months ended June 30, 1995, as customers demanded faster data
transmission and Internet access.
14
Access minutes-of-use represent the volume of traffic carried by interexchange
carriers over the Company's local network. Total access minutes-of-use for
the six months ended June 30, 1995 increased by 10.0 percent over the same
period last year. The increase in access minutes-of-use was primarily
attributable to economic growth. The official introduction of toll services
competition in January 1995 also had the effect of increasing intrastate
access minutes-of-use. The Company provides access service to other carriers
who complete intra-service area toll calls over the Company's local network.
Toll messages are comprised of Message Telecommunications Service, Optional
Calling Plans, WATS and terminating 800 messages. For the six months ended
June 30, 1995, toll messages increased by 7.7 percent compared to an increase
of 4.7 percent for the corresponding period in 1994. The increase was driven
primarily by economic growth as well as lower prices. On January 1, 1995, the
Company lowered the price of its toll services by an average of 40 percent.
The Company also began offering new discount calling plans. Residential
customers receive an automatic 15 percent off toll charges above five dollars
per month while businesses receive an automatic 20 percent off toll charges
over $15 per month. High volume customers can receive even larger discounts.
Price decreases have stimulated demand slightly but the increase falls far
short of levels included in the CPUC's order. Since the official introduction
of competition in January 1995, management estimates the Company has lost
approximately six percent of the local toll services market to other providers
by the end of second quarter 1995. Based upon prior studies, the Company
previously estimated that it retains less than 75 percent of its former share
of the business toll market. Those studies have now been updated and
broadened to include all segments of the expanding business toll market.
Management now estimates that, as a result of official competition and
unofficial competitive losses in prior years, the Company currently serves
less than 60 percent of that total market. Changes contemplated by the CPUC
and the effects of pending legislation make it too early to predict when, or
at what level, market share loss will stabilize.
Operating Revenues
------------------
For the 6 Months Ended
June 30, Change
------------------------ -----------------
($ millions) 1995 1994 Dollar Percent
---------------------------------------------------------------------------
Total operating revenues $4,398 $4,456 -$ 58 -1.3
---------------------------------------------------------------------------
Revenues for the first six months of 1995 were reduced from the same period
last year primarily because demand growth as a result of lower prices was
slower than assumed in the CPUC-ordered price rebalancing. Revenues were also
reduced because of price cap revenue reductions ordered by the CPUC under
incentive-based regulation and the effects of toll services competition.
15
Effective January 1, 1995 the CPUC allowed long-distance companies and others
to officially compete with the Company in providing intra-service area toll
call services in California. The decision rebalanced prices for most of the
Company's regulated services so that the Company could remain competitive in
the new environment. The CPUC intended this decision to be initially revenue
neutral. Revenue reductions due to lower prices were intended to be offset by
other price increases and by increased network usage because of lower prices.
Although the Company observed some increased usage during the first six months
of 1995, calling volumes were far below levels envisioned by the CPUC as
necessary to achieve revenue neutrality.
Overall, revenue decreases from price rebalancing and price cap orders were
partially offset by $143 million in revenues from increased customer demand.
The increase in customer demand resulted both from general economic growth and
the effect of price rebalancing. The revenue decreases were also partially
offset by a CPUC-ordered refund last year related to past problems with the
Company's payment processing system. Due to the 1994 refund, miscellaneous
other service revenues increased $27 million compared to last year. Factors
affecting revenue changes are summarized in the following table.
Price
Price Re- Cap Customer Total
($ million) balancing Order Misc. Demand Change
----------------------------------------------------------------------------
Local service................. $202 -$ 62 $ 37 $ 15 $192
Network access
Interstate................... 13 - 12 35 60
Intrastate................... -123 -9 28 107 3
Toll service................... -300 -25 -14 -51 -390
Other service revenues......... 8 - 32 37 77
----- ----- ----- ----- -----
Total operating revenues...... -$200 -$ 96 $ 95 $143 -$ 58
============================================================================
The increase in revenues due to customer demand in the above table is the
result of growth in key volume indicators. The $15 million increase in local
service revenues due to customer demand reflects access line growth resulting
from economic recovery.
The $35 million increase in interstate network access revenues due to customer
demand reflects increased interexchange carrier access minutes-of-use, as well
as increased access lines. The $107 million demand-related increase in
intrastate network access revenues also reflects growth in interexchange
carrier access minutes-of-use. The official introduction of competition in
the intra-service area toll market in January 1995 had the effect of
increasing access usage revenues.
16
The $51 million decrease in customer demand-related toll service revenues
primarily results from competition. Since the official introduction of
competition in January 1995, management estimates the Company has lost
approximately six percent of the local toll services market to other providers
by the end of second quarter. In addition, the Company has lost and continues
to lose WATS and 800 service business to interexchange carriers who have the
competitive advantage of being able to offer these services both within and
between service areas. Partially offsetting these reductions were increased
usage revenues resulting from general economic growth. Based upon prior
studies, the Company previously estimated that it retains less than 75 percent
of its former share of the business toll market. Those studies have now been
updated and broadened to include all segments of the expanding business toll
market. Management now estimates that, as a result of official competition
and unofficial competitive losses in prior years, the Company currently serves
less than 60 percent of that total market.
The $37 million demand-related increase in other service revenues reflects the
continuing success of the Company's voice mail products as well as its
directory operations.
Operating Expenses
------------------
For the 6 Months Ended
June 30, Change
------------------------ -------------------
($ millions) 1995 1994 Dollar Percent
-----------------------------------------------------------------------------
Total operating expenses $3,434 $3,401 $33 1.0
-----------------------------------------------------------------------------
17
Total operating expenses for the first half of 1995 increased when compared
with 1994 reflecting this year's increased depreciation expense and the costs
resulting from severe storm damage in early 1995. These expense were
partially offset by the Company's continuing cost reduction efforts as
displayed in the table below.
Salaries Settle- Miscel- Subsid- Total
($ millions) & Wages Benefits ments laneous iaries Change
----------------------------------------------------------------------------
Costs of services
& products........ $18 -$ 7 -$35 -$ 5 $ 6 -$23
Customer operations
& selling expense. -1 -13 - -5 10 -9
General, admin. &
other expense..... -16 3 - 5 16 8
Property & misc. taxes - - - 5 1 6
Depreciation
& amortization...... - - - 49 2 51
---- ---- ---- ---- ---- ----
Total operating
expenses............ $ 1 -$17 -$35 $49 $35 $33
============================================================================
Salaries and wages for the first six months of 1995 were flat. Higher overtime
costs were offset by force reduction savings. The Company achieved a $62
million decrease in salary and wage expense related to force reduction.
However, higher overtime expense for storm and flood repairs offset this
decrease. Lower employee benefits expense is primarily due to the Company's
ongoing health care cost-reduction efforts.
Settlements expense decreased primarily due to the CPUC-ordered price
rebalancing which lowered reimbursements to other local exchange carriers for
calls terminating in their territories.
Miscellaneous general and administrative expense increased primarily due to
increased contract services for programmers.
Depreciation expense increased primarily due to higher depreciation rates
ordered by the CPUC effective January 1, 1995 and higher telephone plant
balances.
18
Interest Expense
----------------
($ millions) 1995 1994 Change Percent
------------------------------------------------------------------------------
Interest expense $217 $220 -$3 -1.4
------------------------------------------------------------------------------
Interest expense for the first six months of 1995 decreased slightly compared
to 1994 primarily due to last year's interest expense associated with the
CPUC's late payment charges decision. These decreases were partially offset by
higher interest expense for short term borrowings.
Miscellaneous Income
--------------------
($ millions) 1995 1994 Change Percent
------------------------------------------------------------------------------
Miscellaneous income (expense) $28 -$3 $31 -
------------------------------------------------------------------------------
Miscellaneous income for the first six months of 1995 increased primarily due
to interest income of $18 million from a tax refund received in 1995 related
to prior years. In addition, the late payment charges penalty recorded in
1994 increased comparative miscellaneous income by $10 million.
Income Taxes
------------
($ millions) 1995 1994 Change Percent
------------------------------------------------------------------------------
Income taxes $286 $300 -$14 -4.7
------------------------------------------------------------------------------
Income taxes expense decreased compared to the first half of 1994. Lower pre-
tax income reduced income taxes by $40 million. Last year's accelerated
recognition of prior period investment tax credits due to shorter plant lives
increased comparative tax expense by $10 million.
19
Status of Restructuring Reserve
-------------------------------
As previously reported, the Company established a restructuring reserve at the
end of 1993 to provide for the incremental cost of force reductions and other
related costs to restructure its internal business processes through 1997. A
total of 2,100 employees left the Company (excluding subsidiaries) during the
first six months of 1995. After new hires, the net force loss for the Company
(excluding subsidiaries) was approximately 700. A total of $107 million was
charged to the reserve in the first half of 1995 primarily for reengineering
projects. The majority of this year's projected costs is expected to be
incurred during the second half of the year. As of June 30, 1995, a balance
of $727 million remained in the restructuring reserve.
During second quarter, the Company announced that it will further consolidate
its network operations centers to two by first quarter 1996, rather than four
centers as previously announced. This move is expected to result in
investment savings of $20 million during 1995 without affecting customer
service.
Capital Expenditures
--------------------
The Company invested about $766 million during the first half of 1995
primarily to modernize and expand the network. The Company expects to invest
about $2.0 billion in 1995 excluding broadband costs.
BOND RATING
In May 1995, Duff and Phelps, Inc. lowered the rating of Pacific Bell's bonds
from Double-A ("AA") to Double-A-Minus ("AA-"). At June 30, 1995, the Company
had approximately $5 billion of long- and intermediate-term debt outstanding.
The rating action reflected price cap revenue reductions, toll services
competition, and proposed interim rules on local services competition. The
rating action also reflected the expected financing requirements of the
broadband and Personal Communications Services networks. Standard & Poor's
Corporation has placed the Company's bond and commercial paper ratings on
"CreditWatch," with negative implications, following the release by the CPUC
of its proposed interim rules on local services competition. In addition,
Moody's Investor Services, Inc. has changed its outlook on the long-term debt
of the Company to "negative" from "stable," citing concerns about risks
associated with deployment of the broadband network and potential pressure on
the financial profile and performance of the Company.
20
LABOR NEGOTIATIONS
On August 8, 1995, the Company reached a tentative three-year agreement with
the Communications Workers of America which represents about 33,000 employees
in California. The previous union contract expired on August 5, 1995. The
new tentative agreement features a 10.5 percent wage increases over three
years, a 14 percent pension increase, a $16 million training and retraining
program, a new voluntary early retirement option, continued employment
security and improved health benefits. Agreements were also reached with two
other unions. Management estimates that the tentative agreements would result
in increased costs of approximately $550 million over three years. This
estimate does not include savings which may result from future force
reductions. The tentative agreements must be ratified by employees before they
become effective. The ratification results are expected by the end of
September 1995.
PENDING REGULATORY ISSUES
Telecommunications Legislation
------------------------------
In June 1995, the U.S. Senate approved a telecommunications bill which would
ease certain restrictions imposed by the Communications Act of 1934, the
1982 Consent Decree and the 1984 Cable Act. Among the provisions, the bill
would allow telephone companies and cable television companies to compete in
each others' markets. In August 1995, similar legislation was passed by the
House of Representatives. The bills now go to conference to reconcile the
differences. Management believes that the telecommunications reform
legislation passed by Congress, after reconciliation and if enacted, will be a
balanced plan that would begin to offer consumers the benefits of real
competition.
Calling Party Identification
----------------------------
In May 1995, the Federal Communications Commission ("FCC") established
national rules affecting how telephone companies, including Pacific Bell, may
offer calling party identification services ("Caller ID"). Caller ID displays
the telephone number of the calling party on a device that attaches to a
customer's telephone unless it is blocked by the calling party. Caller ID is
already available in most other states but has not been offered in California
due to CPUC blocking requirements that make the service uneconomic to provide.
The FCC ruling preempts the CPUC's restrictions which made providing Caller ID
uneconomic. In June 1995, the CPUC appealed the FCC's ruling to the
U.S. Court of Appeals for the Ninth Circuit. Subject to CPUC approval,
management believes that Caller ID could be an important new revenue source.
21
FCC Regulatory Framework Review
--------------------------------
In March 1995, the FCC adopted new interim price cap rules that govern the
prices that the larger local exchange carriers ("LECs"), including the
Company, charge interexchange carriers ("IECs") for access to local telephone
networks.
The interim rules require the LECs to adjust their maximum prices for changes
in inflation, productivity and certain costs beyond the control of the LEC.
Under the interim plan, LECs may choose from three productivity factors: 4.0,
4.7, or 5.3 percent. Election of the 5.3 percent productivity factor permits
the LEC to retain all of its earnings whereas the other lower productivity
factors require earnings to be shared with customers. In adopting the interim
plan, the FCC required LECs to prospectively reduce their price caps by
0.7 percent for each year the LEC elected the lower 3.3 percent productivity
factor during 1991-94. For the Company, this resulted in a 2.1 percent
reduction. The Company has formally contested this reduction as well as other
adjustments associated with the interim plan in the U.S. Court of Appeals for
the District of Columbia (the "Court"). In August 1995, the Court agreed to
expedite review of these adjustments.
The FCC plans to adopt permanent rules in 1996 following a rulemaking
proceeding. Management continues to believe that the FCC should adopt pure
price cap regulation and eliminate the productivity factor, sharing, and
earnings caps.
The Company's 1995 annual access filing implementing the interim rules took
effect August 1, 1995. As a result, the Company's revenues will be reduced
approximately $123 million through June 30, 1996. Of this amount, $69 million
is reflected in the Company's 1994 financials. The Company chose the
5.3 percent productivity factor that will enable it to retain all of its
earnings after July 1, 1995. The higher productivity factor was chosen
because management believes that it will be more than offset by elimination of
the sharing mechanism.
Video Dialtone Applications Approval
------------------------------------
In July 1995, the FCC approved the Company's applications for authority to
offer video dialtone services in specific locations in four of its service
areas. The approval allows the Company to begin installing the video-specific
components of its advanced communications network in the San Francisco Bay
Area, Los Angeles, Orange County and San Diego. Construction of the video-
specific elements of the network will give customers access to such
interactive services as movies and television shows on demand, interactive
news, tele-education, home shopping, video games, community information
listings, high-speed Internet access and broadcast programming. Construction
of the telephone portion of the network began in May 1994.
22
The Company's approved video dialtone applications, filed in late
December 1993, cover approximately 1.3 million homes throughout California.
With this approval, the Company is on track to be the first company in the
United States to offer a single full service network supporting telephony,
data, and video. Technology trials will be conducted during the second half of
1995 in the South San Francisco Bay Area, with paying customers connected
early next year. Interactive services will be offered to consumers beginning
mid-1996.
The Company has selected the state-of-the-art hybrid fiber/coaxial cable
architecture. The technology is cost effective to deploy and operate, and
allows Pacific Bell to achieve significant operational savings. Furthermore,
the architecture is flexible enough to meet customer needs today while network
capacity can be expanded easily as demand grows.
There are still critical regulatory issues to resolve before the Company can
deliver the full benefits of the "communications superhighway". The FCC must
still resolve the issue of whether video dialtone providers will be regulated
under cable television rules or common carrier rules. While a closed cable
television system allows the owner sole discretion to determine programming, a
video dialtone provider is a common carrier open to all. Management believes
that telephone companies providing video dialtone should be regulated solely
as common carriers.
CPUC Regulatory Framework Review
--------------------------------
In June 1995, the Company filed an emergency petition with the CPUC requesting
an expeditious review of its current regulatory framework. In July 1995, the
CPUC granted the Company's request and announced the first phase of the review
which will address three issues.
1. Should the price cap formula be modified or eliminated?
2. Should the price cap formula be applied to non-competitive and partially
competitive services or only to non-competitive services?
3. Should any modifications to the regulatory framework be ordered in stages?
Management believes that the productivity factor of the price cap formula is
excessive. As the Company operates under an increasingly competitive
environment, competition itself replaces the need for formula based
adjustments to rates.
Depreciation Filing
-------------------
The CPUC evaluates and prescribes depreciation rates each year. In June 1995,
the Company filed an application for changes to its depreciation rates to be
effective January 1, 1996. The Company requested technical changes which
would result in a $34 million decrease in annual depreciation expense.
23
Local Services Competition
--------------------------
In July 1995, the CPUC issued initial rules opening the local exchange market
to competition. Facilities-based competitive local carriers ("CLCs") are
authorized to begin providing local phone service beginning January 1, 1996.
Those companies leasing lines for resale will be able to offer phone service
by March 1, 1996. No CLC may begin operating until all certification
requirements are satisfied and the CPUC grants a certificate of public
convenience and necessity. The CPUC expects to resolve remaining issues and
issue final rules for implementing full competition in all California
telecommunications markets by January 1, 1997.
The CPUC will take additional comments and hold evidentiary hearings beginning
later this year on specific unresolved issues related to local competition.
These issues include the application of customer number rating areas used by
the Company for billing the CLCs, the removal of resale restrictions, the
economic effects of permitting resale competition, and the appropriate
wholesale rates for local phone services.
Although management commends the CPUC decision expanding local telephone
competition, it is concerned that under the initial rules competitors will be
able to package and resell local phone service together with long-distance
service, while the Company will still not be able to offer customers the same
array of services. Management believes that the CPUC should accelerate its
efforts to resolve universal service issues in a competitive environment.
Management intends to file an Application for Rehearing of the decision on
certain limited grounds, including the need for evidentiary hearings on resale
and interconnection issues. (See "Universal Service" discussion below.)
Universal Service
-----------------
In July 1995, in connection with its local services competition decision, the
CPUC affirmed its commitment to universal service, and proposed rules to
assure the continuation of affordable, high quality service in the coming
competitive local phone services market. Universal service issues are
fundamental to the ongoing CPUC proceeding to allow local and long-distance
companies to compete in providing basic local phone services, just as they
already compete in providing local toll services.
24
The CPUC has stated that companies that want to compete in the local phone
service market will have the opportunities as well as the obligations
associated with universal service. Hearings will be held to seek public
comment on the proposed universal service rules. The CPUC intends to
implement a universal service funding mechanism for high-cost areas only after
local competition, unbundling, and presubscription are in place. Management
believes that universal service issues should be resolved before local
competition is authorized. Local competition is currently scheduled to begin
January 1, 1996.
Property Taxes
--------------
In 1992, a settlement agreement was reached between the State Board of
Equalization, all California counties, the State Attorney General, and
28 utilities, including the Company, on a specific methodology for valuing
utility property for property tax purposes. The CPUC opened an investigation
to determine if any resulting property tax savings should be returned to
customers. Intervenors have asserted that as much as $20 million of annual
property tax savings should be treated as an exogenous cost reduction in the
Company's annual price cap filings. These intervenors have also asserted that
past property tax savings totaling as much as $60 million plus interest as of
June 30, 1995 should be returned to customers. Management believes that under
the CPUC's regulatory framework, any property tax savings should only be
treated as a component of the calculation of shareable earnings. In an
Interim Opinion issued in June 1995, the CPUC decided to defer a final
decision on this matter pending resolution of the criteria for exogenous cost
treatment under its regulatory framework. The criteria are being considered
in a separate proceeding initiated for rehearing of the CPUC's postretirement
benefits decision. (See "Revenues Subject to Refund" under Note B on
page 12.)
25
DISPOSITION OF BELLCORE
In April 1995, Bellcore announced a decision by its owners to pursue the
disposition of their interests in Bellcore. Bellcore is a leading provider of
communications software and consulting services. It is owned by Pacific Bell
and six other affiliates of the telephone regional holding companies formed at
the divestiture of AT&T Corp. in 1984. A final decision regarding the
disposition of interests and the structure of such a transaction has yet to be
determined. Any transaction will be subject to necessary approvals.
COMPETITIVE RISK
Regulatory, legislative and judicial actions, as well as advances in
technology, have expanded the types of available communications products and
services and the number of companies offering such services. Various forms of
competition are growing steadily and are already having an effect on the
Company's earnings. An increasing amount of this competition is from large
companies with substantial capital, technological, and marketing resources.
Currently, competitors primarily consist of interexchange carriers,
competitive access providers and wireless companies. Soon the Company will
also face competition from cable television companies and others.
Effective January 1, 1995, the CPUC authorized toll services competition.
Toll service revenues represented approximately 14 percent of the Company's
total operating revenues for the first six months of 1995. Since the official
introduction of competition in January 1995, management estimates the Company
has lost approximately six percent of the local toll services market to other
providers by the end of second quarter. Based upon prior studies, the Company
previously estimated that it retains less than 75 percent of its former share
of the business toll market. Those studies have now been updated and
broadened to include all segments of the expanding business toll market.
Management now estimates that, as a result of official competition and
unofficial competitive losses in prior years, the Company currently serves
less than 60 percent of that total market. Changes contemplated by the CPUC
and the effects of pending legislation make it too early to predict when, or
at what level, market share loss will stabilize. In May 1995, the CPUC issued
a decision that requires the Company to permit Centrex customers who purchase
certain optional routing features to route intra-service area calls to the
toll carrier of their choice. In addition, the CPUC has issued initial rules
to open the local exchange market to competition beginning January 1, 1996.
(See "Local Services Competition" on page 24.) Local service revenues
represented approximately 42 percent of the Company's total operating revenues
for the first six months of 1995.
26
Because of the unique characteristics of the California market, the Company is
vulnerable to competition. Pacific Bell's business and residence revenues and
profitability are highly concentrated among a portion of its customer base and
geographic areas. Competitors need only serve portions of our service area to
compete for the majority of the Company's business and residence usage
revenues. High-margin customers are clustered in high density areas such as
Los Angeles and Orange County, the San Francisco Bay Area, San Diego and
Sacramento.
Competitors can be expected to target the high-usage, high-profit customers
and can do this by targeting only a small part of our geographic area and a
small part of our customer base. Large and well-capitalized long-distance
carriers, wireless companies, competitive access providers and cable
television companies are preparing to compete in major local exchange markets.
In some cases they are already deploying switches and other facilities. In
California, cable television companies currently pass more than 90 percent of
the Company's residential customers. Cable television companies have already
announced plans for major build-outs to compete in the local exchange market.
All of the Company's customers have already chosen a long-distance company,
and there is more advertising from long-distance companies than from
traditional local exchange companies including Pacific Bell.
Market research has shown that a substantial majority of residence customers
prefer using one company for all telecommunications services. This is a
significant competitive disadvantage to the Company since it is prohibited by
the 1982 Consent Decree from providing long-distance service between service
areas. Similar market research shows that a substantial majority of business
customers would select one of the major long-distance companies over a
combination of Pacific Bell and a long-distance company because using one
carrier would permit them to apply all of their traffic toward volume discount
plans offered by the long-distance companies.
For these reasons, management believes that implementation of local exchange
competition prior to the Company being allowed to enter the long-distance
market would provide already strong competitors an unfair advantage.
Management also believes that a truly open competitive market would allow for
the simultaneous entry of all telecommunications competitors into each others'
markets on an equal footing. Although the Company is facing increasing
competition for all of its services, management believes that a truly open
competitive market, in which the Company can compete without restrictions,
offers long-term opportunity to grow the business.
27
APPLICABILITY OF REGULATORY ACCOUNTING
The Company currently accounts for the economic effects of regulation under
Statement of Financial Accounting Standards No. 71, ("SFAS 71") "Accounting
for the Effects of Certain Types of Regulation." The CPUC recently issued
initial rules opening the Company's local services market to competition
beginning January 1, 1996, further increasing competition in the Company's
markets. In connection with this action, the CPUC is scheduling hearings to
determine what changes, if any, should be made to the Company's regulatory
framework. Management is evaluating the effects of recent and pending
regulatory actions to determine whether the application of SFAS 71 regulatory
accounting continues to be appropriate. If it becomes no longer reasonable to
assume the Company will recover its costs of providing regulated services
through rates charged to customers, whether resulting from the effects of
increased competition or specific regulatory actions, SFAS 71 will no longer
apply. (See "Pending Regulatory Issues" and "Competitive Risk" beginning on
page 21.)
Discontinuing the application of SFAS 71 would require the Company to
eliminate its regulatory assets and liabilities and may require a reduction of
the carrying amount of its telephone plant. (See "Accounting Under
Regulation" in Note A on page 8.) Five telephone regional holding companies
("RHCs") have discontinued the application of SFAS 71 regulatory accounting
and have adopted shorter depreciable lives and reduced their telephone plant
balances. If the Company were to discontinue the application of SFAS 71 and
compute the effect on its telephone plant in a manner similar to these five
RHCs, the reduction in carrying amount of the Company's property, plant, and
equipment would be between $3 and $5 billion. In addition, the Company would
write off its regulatory assets and liabilities at the time of discontinuance.
At June 30, 1995, the Company had net regulatory assets of $954 million.
28
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibits identified as on file with the SEC are incorporated herein
by reference as exhibits hereto.
Exhibit
Number Description
------- -----------
4 No instrument which defines the rights of holders of long- and
intermediate-term debt of Pacific Bell is filed herewith pursuant to
Regulation S-K, Item 601(b)(4)(iii)(A). Pursuant to this regulation,
Pacific Bell hereby agrees to furnish a copy of any such instrument
to the SEC upon request.
15 Letter re unaudited interim financial information.
27 Article 5 FDS for 2nd Quarter 1995 Form 10-Q.
The Company will furnish to a security holder upon request a copy of any
exhibit at cost.
(b) Reports on Form 8-K.
Form 8-K, Date of Report April 19, 1995, was filed with the SEC,
under Item 5 in connection with a Pacific Bell competitive
vulnerability filing with the CPUC.
29
FORM 10-Q
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Pacific Bell
By /s/Peter A. Darbee
---------------------------------------
Peter A. Darbee
Vice President, Chief Financial Officer
and Controller
August 11, 1995
30
EXHIBIT INDEX
Exhibits identified as on file with the SEC are incorporated herein by
reference as exhibits hereto. All other exhibits are provided as part of the
electronic transmission.
Exhibit
Number Description
------- -----------
4 No instrument which defines the rights of holders of long- and
intermediate-term debt of Pacific Bell is filed herewith pursuant to
Regulation S-K, Item 601(b)(4)(iii)(A). Pursuant to this regulation,
Pacific Bell hereby agrees to furnish a copy of any such instrument
to the SEC upon request.
15 Letter re unaudited interim financial information.
27 Article 5 FDS for 2nd Quarter 1995 Form 10-Q.
31
EX-15
2
LTR RE: UNAUDITED INTERIM FIN. INFO.
Exhibit 15
----------
COOPERS & LYBRAND L.L.P.
August 11, 1995
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Ladies and Gentlemen:
Re: Pacific Bell
Registration Statement on Form S-3
------------------------------------
We are aware that our report dated August 11, 1995 on our review of the
interim financial information of Pacific Bell and Subsidiaries for the three-
and six-month periods ended June 30, 1995 included in this Form 10-Q is
incorporated by reference in the Company's registration statement as follows:
Form S-3: Pacific Bell $1.575 Billion Debt Securities
Pursuant to Rule 436(c) under the Securities Act of 1933, this report should
not be considered a part of the registration statement prepared or certified
by us within the meaning of Sections 7 and 11 of that Act.
Very truly yours,
/s/Coopers & Lybrand L.L.P.
EX-27
3
ARTICLE 5 FDS FOR PACIFIC BELL'S 2ND QTR 1995 FORM 10-Q
5
1,000,000
DEC-31-1995
JAN-01-1995
JUN-30-1995
6-MOS
66
0
1,493
133
0
2,390
26,394
10,675
18,925
2,964
0
225
0
0
0
18,925
0
4,398
0
3,434
0
0
217
775
286
0
0
0
0
489
0.00
0.00