Annual Report (Form 10-K), fiscal year 1993

Item 1. Business ______
The United Telephone Company of Pennsylvania (Company), a wholly-owned subsidiary of Sprint Corporation (Sprint), was originally incorporated December 28, 1915, as Cumberland Valley Telephone Company of Pennsylvania. On May 4, 1931, the name of the corporation was changed to The United Telephone Company of Pennsylvania. The Company is engaged in the business of furnishing regulated and nonregulated communications services, mainly local, intraLATA long-distance and interexchange carrier access. The Company serves a 5,847 square mile territory which accounts for 12.9 percent of the geographic area of the Commonwealth of Pennsylvania. All or parts of 25 counties are included in the service territory. Local economies are characterized by a variety of manufacturing and commercial businesses, agricultural and educational enterprises. No other company furnishes local telephone service in any of the 92 exchanges served by the Company.
The Company furnishes local and intraLATA long-distance telephone service between points within its own territory almost entirely by means of its own facilities. All of the Company's telephones have direct distance dialing capability. Microwave relay techniques, digital carrier systems and fiber optic cables are used to provide nearly all of its long-distance transmission facilities. To date, 84.4 percent of the Company's central offices are digital switches with installed digital lines exceeding 338,000. In addition to furnishing local service, the Company's central offices and toll facilities are connected with other local exchange carriers (LECs) and with the nationwide long-distance networks of interexchange carriers, primarily American Telephone & Telegraph (AT&T), MCI Communications Corporation and Sprint. Toll calls may thus be made to any telephone connected to the worldwide interexchange network.
The Company is subject to the jurisdiction of the Pennsylvania Public Utility Commission (Commission), pursuant to the Pennsylvania Public Utility Code, as amended, which confers upon the Commission broad powers of supervision and regulation over public utilities with respect to services and facilities, rates and charges, the issuance of securities and various other matters.
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The United Telephone Company of Pennsylvania Form 10-K/Part I
In June 1993, the Pennsylvania General Assembly enacted legislation authorizing the Commission to sanction alternatives to traditional rate base/rate of return regulation in Pennsylvania. LECs may now petition the Commission for approval of price cap regulation, services to be declared competitive and a network modernization schedule. If LECs do not petition the Commission for alternative regulation within five years, the Commission may compel them to justify why they have not filed a petition. The key policy objectives of this legislation are to encourage accelerated deployment of a universally available broadband network by the year 2015 and to strengthen and enhance consumer safeguards in a telecommunications environment which is growing increasingly competitive.
The Company is also subject to the jurisdiction of the Federal Communications Commission (FCC) with respect to the charges and services for interstate communications services which it provides through connection with interexchange carriers. The FCC prescribes a uniform system of accounts for telephone companies which has been adopted by the Commission.
The consolidated financial statements contained herein reflect the combined operations of the Company, United Telephone Long Distance, Inc. (UTLD) and Joint Underground Locating Services, Inc. (JULS). UTLD was created to lease long-distance services and resell those services to customers in equal access areas. JULS was created to provide underground facility locating services to utilities and contractors engaged in excavation activities in areas containing underground utility plant.
In 1991, the Company began site construction on the five Cellular Rural Service Area licenses that it either wholly owns or partially owns through partnerships. All of the sites began operations by the end of 1992. The Company is utilizing the services of an affiliate to operate the sites.
The Company is continuing to convert its central offices to digital technology. Approximately 95 percent of the Company's access lines are digital. During 1993, the expansion of exchanges in which
I-2
The United Telephone Company of Pennsylvania Form 10-K/Part I
Local Measured Service (LMS) is offered as an option to flat rate local service increased to a total of 77 exchanges, up from 70 in 1992. The LMS rate is 60 percent of the individual flat rate access line service plus a nominal rate based on the time duration of each call.
Revenues from telecommunications services constitute 87.8 percent of 1993 total operating revenues of the Company. During 1993, 32.2 percent of total operating revenues were derived from local service, 35.4 percent from network access service, 20.2 percent from long-distance service, and the remaining 12.2 percent from miscellaneous services.
The following is a summary of the Company's business and residential access lines and long-distance messages originated for the five year period from 1989 to 1993.
Years Ended December 31, ________________________ 1993 1992 1991 1990 1989 ____ ____ ____ ____ ____ Access Lines: Business 65,000 61,000 59,000 56,000 52,000 Residential 259,000 254,000 249,000 245,000 240,000 _______ _______ _______ _______ _______ Total 324,000 315,000 308,000 301,000 292,000 ======= ======= ======= ======= ======= Long-distance messages originated (expressed in thousands) 170,611 169,152 148,330 138,985 124,403
At December 31, 1993 the Company had 1548 employees of which 82 were union-affiliated.
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The United Telephone Company of Pennsylvania Form 10-K/Part I
Compliance with federal, state and local laws and regulations relating to the protection of the environment has had no significant effects upon capital expenditures or earnings of the Company, and future effects are not expected to be material.
In a Report and Order adopted March 1, 1985 and released March 19, 1985 in CC-Docket No. 78-72, Phase III, the FCC promulgated the requirements and guidelines for implementation of equal access by independent telephone companies. End offices, equipped with stored program controlled switches, must be converted to offer exchange access services that are equal in type and quality to that offered to AT&T within three years of the receipt of a reasonable request for equal access services from any interexchange carrier. If no reasonable request is made, end offices should be converted as soon as practical, according to a scheduled implementation which reflects the capital constraints of the operating company, the market, and other business conditions in the area served by the end office. The Company is offering equal access to interexchange carriers through its Bedford, Butler, Carlisle, Chambersburg, and Newport access tandems, including the majority of their remote switching units. By the end of 1994, the Company plans to offer equal access to approximately 90 percent of its available single-party access lines through additional central office conversions. The Company began offering public paystation equal access in 1990 and by the end of 1994 plans to offer equal access to 94 percent of public paystations.
The potential for more direct competition with LECs is increasing. Several states, including Pennsylvania (effective January 1, 1987), have authorized competitive entry into the intraLATA toll service market. State regulators are also increasingly confronted with requests to permit resale of local exchange services, with such resale now existing in Pennsylvania. At the interstate level, the FCC has revised its rules to permit connection of customer-owned coin telephones to the local network, exposing LECs to direct coin telephone competition in many states. Additionally, the FCC has assisted Competitive Access Providers (CAPs) in providing access to interexchange carriers and end users by mandating that all Tier 1 LECs (including the Company) allow collocation of CAP equipment in LEC central offices. The FCC's decision regarding collocation is under appeal to the U.S. Court of Appeals for the D.C. circuit. I-4
The United Telephone Company of Pennsylvania Form 10-K/Part I
In October 1992, the FCC adopted a new rate structure and new pricing rules for LEC-provided switched transport. The Company filed new access transport tariffs with the FCC in September 1993. The new local transport structure was designed by the FCC mandate to be a revenue neutral filing for each LEC. The new rates went into effect on December 30, 1993.
While barriers to competition are increasingly being lowered, the ultimate impact of competition will continue to depend, to a considerable degree, on future FCC and state regulatory actions, court decisions and possible federal or state legislation. Legislation designed to stimulate local competition between local exchange service providers and cable programming service providers, in both markets, is presently pending in both houses of the U.S. Congress.
Effective January 1, 1991, the FCC adopted a price caps regulatory format for the Regional Bell Operating Companies and the GTE Corporation LECs. Other LECs could volunteer to become subject to the price caps regulation. Under price caps, prices for access service must be adjusted annually to reflect industry average productivity gains (as specified by the FCC), inflation and certain allowed cost changes. The Company elected to be subject to price caps regulation and under the form of the plan adopted, the Company has an opportunity to earn up to a 15.25 percent rate of return on investment.
Item 2.



Item 2. Properties ______
The properties of the Company consist principally of land, structures, facilities and equipment in good operating condition. Substantially all of the telephone properties are subject to the liens of the indentures securing the Company's first mortgage bonds. All central offices, the Customer Service Center and the Corporate Center are located on premises owned by the Company.
I-5
The United Telephone Company of Pennsylvania Form 10-K/Part I
Of the Company's investment in telephone plant in service as of December 31, 1993, aerial cable and wire supported on poles and underground cable, both buried and in conduit, located on and under public streets, highways and private property represented approximately 48.3 percent; central office equipment, 35.1 percent; land and buildings, 6.2 percent; and other telephone plant, 10.4 percent.
The following table shows gross additions and retirements of properties of the Company during the five-year period ended December 31, 1993 (in thousands):
Gross Year Additions Retirements ____ ________ ___________
1993 $45,081 $21,728 1992 45,803 28,876 1991 41,427 44,957 1990 40,286 12,857 1989 44,811 25,371
Item 3.

Item 3. Legal Proceedings ______ No material legal proceedings are pending to which the Company or any of its subsidiaries is a party or of which any of their property is the subject.
Item 4.

Item 4. Submission of Matters to a Vote of Security Holders ______ No matter was submitted to a vote of security holders during the fourth quarter of 1993.
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The United Telephone Company of Pennsylvania Form 10-K/Part II
Item 5.

Item 5. Market for the Registrant's Common Stock and Related Security ______ Holder Matters
The Company is a wholly-owned subsidiary of Sprint and consequently its common stock is not traded.
Item 6.

Item 6. Selected Financial Data ______ The following selected financial data for the five-year period ended December 31, 1993 has been derived from the Company's consolidated financial statements (in thousands):
1993 1992 1991 1990 1989 ____ ____ ____ ____ ____
Operating revenues $223,408 $205,670 $192,083 $187,138 $179,385 Net income (1) $ 17,976 $ 21,352 $ 22,603 $ 24,421 $ 19,875 Total assets $395,519 $377,045 $358,000 $344,333 $343,495 Long-term debt (2) $106,521 $111,794 $ 85,223 $ 89,447 $ 92,682
(1) During 1993, nonrecurring charges of $6,537,000 were recorded representing the portion of the costs atributable to the Company associated with the merger of Sprint and Centel Corporation. Such charges reduced 1993 net income by $4,135,000. In addition, extraordinary losses on early extinguishments of debt were recorded in 1993 and 1992, which reduced net income by $501,000 and $509,000, respectively.
(2) Excludes current maturities
Earnings and dividends per common share information has been omitted because the Company is a wholly-owned subsidiary of Sprint.
II-1
The United Telephone Company of Pennsylvania Form 10-K/Part II
Item 7.

Item 7. Management's Discussion and Analysis of Financial Condition ______ and Results of Operations
Recent Development - Sprint/Centel Merger _________________________________________
Effective March 9, 1993, Sprint consummated its merger with Centel Corporation, a telecommunications company with local exchange and cellular/wireless communications services operations (see Note 2 of "Notes to Consolidated Financial Statements" for additional information). The transaction costs associated with the merger (consisting primarily of investment banking and legal fees) and the estimated expenses of integrating and restructuring the operations of the two companies (consisting primarily of employee severance and relocation expenses and costs of eliminating duplicative facilities) resulted in a nonrecurring charge to Sprint during 1993. The portion of such charge attributable to the Company was $6,537,000, which reduced 1993 net income by approximately $4,135,000.
Liquidity and Capital Resources _______________________________
The Company requires only limited amounts of working capital due to the nature of its cash flows. Demand for telephone services is relatively stable. Stable revenues, in turn, lead to stable cash flows into the Company. In addition, the Company has some flexibility in determining construction spending. The ability to generate cash from operations is a good measure of liquidity for the Company.
The Company's net cash provided by operating activities increased $3,978,000 during 1993 from 1992 levels. The 1993 increase is largely attributable to improved operating results, excluding the effects of the merger and integration costs and non-cash expenses (depreciation and deferred income taxes), and increased payroll related accrued liabilities. These increases in cash flows were partially offset by payments made related to the integration of Sprint and Centel.
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The United Telephone Company of Pennsylvania Form 10-K/Part II
Net cash used by investing activities increased $369,000 for 1993 in comparison to 1992. The 1993 increase in net cash used by investing activities was attributable to activity in cellular site operations. Actual expenditures for property, plant and equipment were $45,081,000 in 1993, $45,803,000 in 1992 and $41,427,000 in 1991. The Company's planned construction expenditures for 1994 are $42,768,000 for the improvement and upgrading of facilities. It is anticipated that cash required to meet construction expenditures in 1994 will primarily be provided by operating activities as it was in 1993, 1992 and 1991.
Net cash used in financing activities increased $3,124,000 in 1993 in comparison to 1992. The increase in 1993 is largely attributable to increased long-term debt retirements, reduced proceeds from long-term debt borrowings, and the repurchase of preferred stock, and is partially offset by an increase in advances from the parent company.
The primary source of external financing has been through the issuance of debt. In 1993, the Company issued $15,000,000 of 5.76 percent Series Z First Mortgage Bonds maturing on June 1, 1998 and $17,000,000 of 6.89 percent Series AA First Mortgage Bonds maturing on June 1, 2008. The proceeds were used to reduce short-term advances from Sprint which had been used to redeem higher cost long-term debt and for general corporate purposes. During 1993, the Company redeemed its Series N 6.25 percent, Series O 6.625 percent, Series U 7.625 percent, and Series W 8.45 percent First Mortgage Bonds. The amount required for these redemptions totaled approximately $35,946,000, including principal of $34,490,000, accrued interest of approximately $590,000 and redemption premiums of approximately $866,000. The short-term debt outstanding during 1993 consisted of average daily advances outstanding of $9,470,000 from Sprint, while in 1992 the average daily advances outstanding were $25,708,000. The Company meets its short-term financing needs through advances from Sprint. At December 31, 1993, advances from Sprint of $9,823,000 were outstanding compared to $2,200,000 at December 31, 1992. In addition, at December 31, 1993, the Company has an unused line of credit, shared with an affiliate, of $2,000,000.
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The United Telephone Company of Pennsylvania Form 10-K/Part II
At year-end, the Company's ratio of common stockholder's equity to total capital was 56.2 percent in 1993 and 54.9 percent in 1992. The long-term debt to total capital ratio was 40.2 percent in 1993 and 43.1 percent in 1992.
Results of Operations _____________________
Operating revenues are classified as local service, network access, long-distance network and miscellaneous. Local service revenues result primarily from providing local telephone exchange services. Network access revenues are derived from billing other carriers and telephone customers for their use of the local network to complete long-distance calls when this service is not provided directly by the Company. Long-distance network revenues are derived principally from providing long-distance services within designated areas. Miscellaneous revenues include revenues related to providing billing and collection services for interexchange long-distance carriers, network facilities leases, directory revenues and sales of telecommunications equipment.
The increases in 1993 local service revenues are primarily due to access line growth resulting in a residential, business and ABC/Centrex flat rate revenue increase of $1,659,000. Also contributing to the increases were increased revenues associated with extended area service, nonregulated business and E911 emergency services, and increased sales of custom calling features.
The increases in network access revenues are primarily the result of increased minutes-of-use generating increased revenues of $4,152,000, increased revenues from settlements of $2,828,000, increased revenues of $1,547,000 resulting from the interstate common tariff between the Company and an affiliate to allocate common line and switched access revenues, and increased revenues for operator transfer, 800 data base, line identification data base and interexchange leases. The increases are partially offset by decreases in revenues associated with National Exchange Carrier Association long-term support payments.
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The United Telephone Company of Pennsylvania Form 10-K/Part II
Miscellaneous revenues increased in 1993 primarily due to increases in revenues from nonregulated sales of structural wire of $2,486,000, large private branch exchanges of $1,058,000, data communications equipment of $558,000 and key systems of $229,000.
The increase in 1993 customer operations expense is primarily the result of increased sales and advertising expenses of $2,004,000. Increases in business office operations, billing services and directory printing and distribution also contributed to the increase.
Corporate operations expense increases in 1993 resulted primarily from increased costs of $1,216,000 associated with extended area service, corporate advertising of $499,000, administrative costs of $498,000, and increased other departmental costs.
In addition to the increases discussed above, plant expense, customer operations expense and corporate operations expense also increased as a result of higher postretirement benefits costs due to the adoption of Statement of Financial Accounting Standards (SFAS) No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." The incremental cost associated with this change in accounting principle was approximately $4,010,000.
Nonrecurring merger, integration and restructuring costs, recognized in 1993, were $6,537,000. Included in this amount is $1,686,000 for workforce reduction as part of an ongoing plan to reduce the Company's labor costs.
The increase in other operating expenses in 1993 is the result of the increased cost of equipment sales of $3,707,000, due to higher sales volumes.
The increase in interest on long-term debt in 1993 results from timing differences related to the retirement and refinancing of first mortgage bonds. These timing differences in 1992 were maintained by additional short-term debt, resulting in less interest being paid for long-term debt. The decrease in other interest in 1993 is the result of lower average balances in short-term debt.
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The United Telephone Company of Pennsylvania Form 10-K/Part II
Effects of Inflation __________________
The effects of inflation on the operations of the Company were not significant during 1993, 1992 or 1991.
Recent Accounting Developments ______________________________
Effective January 1, 1994, the Company will adopt SFAS No. 112, "Employers' Accounting for Postemployment Benefits" (see Note 1 of "Notes to Consolidated Financial Statements" for additional information).
Consistent with most local exchange carriers, the Company accounts for the economic effects of regulation pursuant to SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation". The application of SFAS No. 71 requires the accounting recognition of the rate actions of regulators where appropriate, including the recognition of depreciation and amortization based on estimated useful lives prescribed by regulatory commissions rather than those which might be utilized by non-regulated enterprises. The Company's management believes that the Company's operations meet the criteria for the continued application of the provisions of SFAS No. 71. With increasing competition and the changing nature of regulation in the telecommunications industry, the ongoing applicability of SFAS No. 71 must, however, be constantly monitored and evaluated. Should the Company no longer qualify for the application of the provisions of SFAS No. 71 at some future date, the accounting impact could result in the recognition of a material, extraordinary, non-cash charge.
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The United Telephone Company of Pennsylvania Form 10-K/Part II
Item 8.


Item 8. Consolidated Financial Statements and Supplementary Data ______ INDEX TO CONSOLIDATED FINANCIAL STATEMENTS __________________________________________
Page Reference ______________
Report of Independent Auditors II-8
Consolidated Balance Sheets at December 31, 1993 II-9 - II-10 and 1992
Consolidated Statements of Income for each of the three years ended December 31, 1993 II-11
Consolidated Statements of Retained Earnings for each II-12 of the three years ended December 31, 1993
Consolidated Statements of Cash Flows for each of the three years ended December 31, 1993 II-13
Notes to Consolidated Financial Statements II-14 - II-28
II-7
THE UNITED TELEPHONE COMPANY OF PENNSYLVANIA 1993 FORM 10-K/PART II REPORT OF INDEPENDENT AUDITORS ______________________________
Board of Directors and Stockholders The United Telephone Company of Pennsylvania
We have audited the accompanying consolidated balance sheets of The United Telephone Company of Pennsylvania, a wholly-owned subsidiary of Sprint Corporation, as of December 31, 1993 and 1992, and the related consolidated statements of income, retained earnings, and cash flows for each of the three years in the period ended December 31, 1993. Our audits also included the financial statement schedules listed in the Index at Item 14(a)2. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of The United Telephone Company of Pennsylvania at December 31, 1993 and 1992, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the United Telephone Company of Pennsylvania changed its method of accounting for postretirement benefits in 1993.
ERNST & YOUNG Kansas City, Missouri January 21, 1994
II-8
THE UNITED TELEPHONE COMPANY OF PENNSYLVANIA CONSOLIDATED BALANCE SHEETS (In Thousands)
ASSETS December 31, 1993 1992 ____ ____ CURRENT ASSETS Cash $ 130 $ 357 Receivables Customer and other, net of allowance for doubtful accounts of $850 ($380 in 1992) 19,772 16,927 Unbilled toll revenue 5,672 5,543 Interexchange carriers 7,346 5,777 Affiliated companies 2,912 2,923 Inventories 5,361 4,077 Prepayments 1,428 1,277 Deferred income taxes 3,699 2,467 ________ ________ 46,320 39,348
PROPERTY, PLANT AND EQUIPMENT Land and buildings 35,785 33,455 Telephone network equipment and outside plant 482,923 463,124 Other 60,179 58,134 Construction in progress 4,077 4,898 ________ ________ 582,964 559,611
Less accumulated depreciation 257,033 237,772 ________ ________ 325,931 321,839
DEFERRED CHARGES AND OTHER ASSETS 23,268 15,858
________ ________ $395,519 $377,045 ======== ========
See Notes to Consolidated Financial Statements.
II-9
THE UNITED TELEPHONE COMPANY OF PENNSYLVANIA CONSOLIDATED BALANCE SHEETS (CONTINUED) (In Thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY December 31, 1993 1992 ____ ____ CURRENT LIABILITIES Outstanding checks in excess of cash balances $ 2,741 $ 1,868 Current maturities of long-term debt 3,281 2,282 Advances from parent company 9,823 2,200 Accounts payable: Interexchange carriers 6,485 6,599 Affiliated companies 2,975 2,975 Other 6,288 6,693 Advance billings 3,475 2,833 Accrued merger, integration and restructuring costs 2,913 - Accrued taxes 3,207 2,267 Accrued vacation pay 4,262 4,146 Other 6,135 5,324 ________ ________ 51,585 37,187
LONG-TERM DEBT 106,521 111,794
DEFERRED CREDITS AND OTHER LIABILITIES Deferred income taxes 54,536 54,133 Deferred investment tax credits 4,617 6,275 Regulatory liability 16,336 16,103 Other 8,389 3,152 ________ ________ 83,878 79,663 COMMITMENTS
COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY Preferred stock, authorized and issued - 30,000 shares, Series A 4 1/2%, par value $100 per share 3,000 3,000 Treasury stock, 30,000 preferred shares, at par value (3,000) - Common stock, authorized, issued and outstanding - 877,990 shares, par value $50 per share 43,899 43,899 Capital in excess of par value 6,658 6,658 Retained earnings 102,978 94,844 ________ ________ 153,535 148,401 ________ ________ $395,519 $377,045 ======== ======== See Notes to Consolidated Financial Statements.
II-10
THE UNITED TELEPHONE COMPANY OF PENNSYLVANIA CONSOLIDATED STATEMENTS OF INCOME (In Thousands)
Years Ended December 31, 1993 1992 1991 OPERATING REVENUES ____ ____ ____ Local service $ 71,874 $ 66,765 $ 62,715 Network access service 79,154 71,205 65,152 Long-distance network service 45,198 45,298 44,385 Miscellaneous 27,182 22,402 19,831 ________ ________ _________ 223,408 205,670 192,083 OPERATING EXPENSES Plant expense 68,578 67,392 66,719 Depreciation 40,627 39,072 34,112 Customer operations 25,298 22,120 18,343 Corporate operations 26,750 23,365 19,405 Merger, integration and restructuring costs 6,537 - - Other operating expenses 9,288 5,271 2,839 Taxes: Federal income: Current 10,590 9,371 10,384 Deferred (405) 1,192 969 Deferred investment tax credits (1,659) (1,803) (1,706) State, local and miscellaneous 10,709 10,320 10,017 ________ ________ ________ 196,313 176,300 161,082
OPERATING INCOME 27,095 29,370 31,001 INTEREST CHARGES Interest on long-term debt 8,225 7,179 7,431 Other interest 626 1,245 1,088 ________ ________ ________ 8,851 8,424 8,519 OTHER INCOME Interest charged to construction 91 44 61 Other, net 142 871 60 ________ ________ ________ 233 915 121 ________ ________ ________ INCOME BEFORE EXTRAORDINARY ITEM 18,477 21,861 22,603 EXTRAORDINARY LOSSES ON EARLY EXTINQUISHMENTS OF DEBT, NET (501) (509) - ________ ________ ________ NET INCOME $ 17,976 $ 21,352 $ 22,603 ======== ======== ======== See Notes to Consolidated Financial Statements.
II-11
THE UNITED TELEPHONE COMPANY OF PENNSYLVANIA CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (In Thousands)
Years Ended December 31, 1993 1992 1991 ____ ____ ____
Balance at beginning of year $ 94,844 $ 84,163 $ 76,972
Net income 17,976 21,352 22,603
Cash dividends: Preferred stock (135) (135) (135) Common stock (9,617) (10,536) (15,277) Preferred stock repurchase premium (90) - - ________ ________ ________ Balance at end of year $102,978 $ 94,844 $ 84,163 ======== ======== ========
See Notes to Consolidated Financial Statements.
II-12
THE UNITED TELEPHONE COMPANY OF PENNSYLVANIA CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands)
Years Ended December 31, 1993 1992 1991 ____ ____ ____ OPERATING ACTIVITIES Net income $ 17,976 $ 21,352 $ 22,603 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 40,627 39,072 34,112 Extraordinary losses on early extinguishments of debt 866 879 - Deferred income taxes and investment tax credits (4,039) (2,323) (2,587) Changes in operating assets and liabilities: Receivables, net (4,532) (1,194) (3,165) Inventories (1,284) 11 490 Other current assets (151) (129) (507) Accounts payable 996 1,642 (111) Accrued expenses and other current liabilities 4,780 (5,078) 2,501 Noncurrent assets and liabilities, net 1,944 (1,571) (1,808) Other, net 221 765 - ________ ________ ________ NET CASH PROVIDED BY OPERATING ACTIVITIES 57,404 53,426 51,528
INVESTING ACTIVITIES Capital expenditures (45,081) (45,803) (41,427) Other, net (2,332) (1,301) (1,393) Net salvage from plant and equipment retired 362 422 (199) ________ ________ ________ NET CASH USED BY INVESTING ACTIVITIES (47,051) (46,682) (43,019) FINANCING ACTIVITIES Proceeds from long-term borrowings 32,000 54,248 - Retirements of long-term debt (37,140) (31,233) (3,516) Increase (decrease) in advances from parent company 7,623 (19,800) 10,500 Preferred stock repurchase (3,090) - - Dividends paid (9,752) (10,671) (15,412) Other (221) - - ________ ________ ________ NET CASH USED BY FINANCING ACTIVITIES (10,580) (7,456) (8,428) ________ ________ ________ INCREASE (DECREASE) IN CASH (227) (712) 81 CASH AT BEGINNING OF YEAR 357 1,069 988 ________ ________ ________ CASH AT END OF YEAR $ 130 $ 357 $ 1,069 ======== ======== ========
See Notes to Consolidated Financial Statements.
II-13
THE UNITED TELEPHONE COMPANY OF PENNSYLVANIA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993
1. ACCOUNTING POLICIES
The United Telephone Company of Pennsylvania is engaged in the business of providing communications services, principally local, network access and long distance services in Pennsylvania. The principal industries in its service area include manufacturing, commercial, agriculture and education.
Basis of Presentation _____________________
The accompanying consolidated financial statements include the accounts of The United Telephone Company of Pennsylvania and its wholly-owned subsidiaries, United Telephone Long Distance, Inc. (UTLD) and Joint Underground Locating Services, Inc. (JULS), collectively referred to as the "Company". All significant intercompany transactions have been eliminated. The Company is a wholly-owned subsidiary of Sprint Corporation (Sprint); accordingly, earnings per share information has been omitted.
The Company accounts for the economic effects of regulation pursuant to Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation," which requires the accounting recognition of the rate actions of regulators where appropriate. Such actions can provide reasonable assurance of the existence of an asset, reduce or eliminate the value of an asset, or impose a liability on a regulated enterprise.
Certain amounts in the accompanying consolidated financial statements for 1992 and 1991 have been reclassified to conform to the presentation of amounts in the 1993 consolidated financial statements. These reclassifications had no effect on net income in either year.
Inventories ___________
Inventories consist of materials and supplies, stated at average cost, and equipment held for resale, stated at the lower of average cost or market. The sales inventory balances were $1,635,000 and $1,629,000 at December 31, 1993 and 1992, respectively.
Property, Plant and Equipment _____________________________
Property, plant and equipment are recorded at cost. Retirements of depreciable property are charged against accumulated depreciation with no gain or loss recognized. Repairs and maintenance costs are expensed as incurred.
II-14
THE UNITED TELEPHONE COMPANY OF PENNSYLVANIA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993
1. ACCOUNTING POLICIES (continued)
Depreciation ____________
Depreciation expense is generally computed on a straight-line basis. Depreciation rate changes granted by Pennsylvania Public Utility Commission (PUC) resulted in additional depreciation expense in 1992 of $3,601,000. Average annual composite depreciation rates were 7.2 percent for 1993 and 1992 and 6.5 percent for 1991.
Income Taxes ____________
Operations of the Company are included in the consolidated federal income tax returns of Sprint. Federal income tax is calculated by the Company on the basis of its filing a separate return.
Effective January 1, 1992, the Company changed its method of accounting for income taxes by adopting SFAS No. 109, "Accounting for Income Taxes," which requires an asset and liability approach to accounting for income taxes. Under the provisions of SFAS No. 109, the Company adjusted existing deferred income tax amounts, using current tax rates, for the estimated future tax effects attributable to temporary differences between the tax bases of the Company's assets and liabilities and their reported amounts in the financial statements. The Company's principal temporary difference results from using different depreciable lives and methods with respect to its property, plant and equipment for tax and financial reporting purposes.
As a result of corporate income tax rate reductions in prior years and the previous income tax accounting standards which did not permit accumulated deferred income tax amounts to be adjusted for subsequent tax rate changes, adoption of SFAS No. 109 resulted in a decrease in the amount of deferred income tax liabilities recorded. However, because this decrease will accrue to the benefit of the Company's customers through future telephone rates established by the Company's regulators, this decrease in deferred income tax liabilities has been reflected as a regulatory liability in the Company's financial statements. Additionally, deferred income taxes were not provided in prior years in those instances where the Company's regulators did not recognize such deferred income taxes for ratemaking purposes. Upon adoption of SFAS No. 109, the Company recognized deferred income tax liabilities for those temporary differences for which deferred income taxes had not previously been provided. Corresponding regulatory assets were also recorded by the Company to reflect the anticipated recovery of
II-15
THE UNITED TELEPHONE COMPANY OF PENNSYLVANIA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993
1. ACCOUNTING POLICIES (continued)
Income Taxes (continued) ________________________
such taxes in future telephone rates based on actions of the Company's regulators.
Accordingly, the adoption of SFAS No. 109 had no significant effect upon the Company's 1992 net income. As allowed by SFAS No. 109, prior years' consolidated financial statements were not restated.
During 1991, in accordance with Accounting Principles Board Opinion (APB) No. 11, deferred income taxes were provided for all differences in timing of reporting income and expenses for financial statement and income tax purposes, except for items that were not allowable by the Federal Communications Commission (FCC) or the PUC as an expense for rate-making purposes.
Investment tax credits (ITC) are deferred and amortized over the useful life of the related property. The Tax Reform Act of 1986 effectively eliminated ITC after December 31, 1985.
Postretirement Benefits _______________________
Effective January 1, 1993, the Company changed its method of accounting for postretirement benefits (principally health care benefits) provided to certain retirees by adopting SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." SFAS No. 106 requires accrual of the expected cost of providing postretirement benefits to employees and their dependents or beneficiaries during the years employees earn the benefits. As permitted by SFAS No. 106, the Company elected to recognize the obligation for postretirement benefits already earned by its current retirees and active work force as of January 1, 1993 by amortizing such obligation on a straight-line basis over a period of twenty years.
During 1992 and 1991, the Company expensed postretirement benefits as such costs were paid.
Postemployment Benefits _______________________
Effective January 1, 1994, the Company will adopt SFAS No. 112, "Employers' Accounting for Postemployment Benefits." Under the new standard, the Company is required to recognize certain previously unrecorded obligations for benefits provided to former or inactive employees and their dependents, after employment but before retirement. Postemployment benefits offered by the Company include severance,
II-16
THE UNITED TELEPHONE COMPANY OF PENNSYLVANIA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993
1. ACCOUNTING POLICIES (continued)
Postemployment Benefits (continued) _______________________
workers' compensation and disability benefits, including the continuation of other benefits such as health care and life insurance coverage. As required by the standard, the Company will recognize its obligations for postemployment benefits through a cumulative adjustment in the consolidated income statement. The resulting nonrecurring, non-cash charge will not significantly impact the Company's 1994 net income. Adoption of this standard is not expected to significantly impact future operating expenses.
Interest Charged to Construction ________________________________
In accordance with the Uniform System of Accounts, as prescribed by the FCC, interest is capitalized only on those telephone plant construction projects for which the estimated construction period exceeds one year.
2. MERGER, INTEGRATION AND RESTRUCTURING COSTS
Effective March 9, 1993, Sprint consummated its merger with Centel Corporation (Centel), a telecommunications company with local exchange and cellular/wireless communications services operations. Centel's local exchange telephone businesses operate in six states: Florida, North Carolina, Virginia, Illinois, Texas and Nevada. Pursuant to the Agreement and Plan of Merger dated May 27, 1992, Sprint issued 1.37 shares of its common stock in exchange for each outstanding share of Centel common stock.
The operations of the merged companies are being integrated and restructured to achieve efficiencies which are expected to yield significant operational synergies and cost savings. The transaction costs associated with the merger and the estimated expenses of integrating and restructuring the operations of the two companies resulted in nonrecurring charges to Sprint during 1993. The portion of such charges attributable to the Company was $6,537,000, which reduced 1993 net income by approximately $4,135,000.
II-17
THE UNITED TELEPHONE COMPANY OF PENNSYLVANIA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993
3. EMPLOYEE BENEFIT PLANS
Defined Benefit Pension Plan ____________________________
Substantially all employees of the Company are covered by a noncontributory defined benefit pension plan. For participants of the plan represented by collective bargaining units, benefits are based upon schedules of defined amounts as negotiated by the respective parties. For participants not covered by collective bargaining agreements, the plan provides pension benefits based upon years of service and participants' compensation.
The Company's policy is to make contributions to the plan each year equal to an actuarially determined amount consistent with applicable federal tax regulations. The funding objective is to accumulate funds at a relatively stable rate over the participants' working lives so that benefits are fully funded at retirement. As of December 31, 1993, the plan's assets consisted principally of investments in corporate equity securities and U.S. government and corporate debt securities.
The components of the net pension credits and related assumptions are as follows (in thousands):
1993 1992 1991 ____ ____ ____ Service cost -- benefits earned during the period $2,083 $ 1,906 $ 2,007 Interest cost on projected benefit obligation 6,025 5,803 5,586 Actual return on plan assets (16,351) (6,162) (26,134) Net amortization and deferral 4,805 (3,483) 17,077 _______ _______ _______ Net pension credit $(3,438) $(1,936) $(1,464) ======= ======= =======
Discount rate 8.00% 8.50% 8.50% Expected long-term rate of return on plan assets 9.50% 8.25% 8.25% Anticipated composite rate of future increases in compensation 5.50% 6.33% 7.02%
II-18
THE UNITED TELEPHONE COMPANY OF PENNSYLVANIA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993
3. EMPLOYEE BENEFIT PLANS (continued)
Defined Benefit Pension Plan (continued) ________________________________________
The funded status and amounts recognized in the consolidated balance sheets for the plan, as of December 31, are as follows (in thousands):
1993 1992 ____ ____
Actuarial present value of pension benefit obligations
Vested benefit obligation $(75,058) $(64,732) ======== ======== Accumulated benefit obligation $(84,195) $(71,209) ======== ======== Projected benefit obligation $(90,770) $(77,673) Plan assets at fair value 134,821 122,548 ________ ________ Plan assets in excess of the projected benefit obligation 44,051 44,875 Unrecognized net gains (27,535) (24,909) Unrecognized prior service cost (882) (6,753) Unamortized portion of transition asset (9,157) (10,174) ________ ________ Prepaid pension cost $ 6,477 $ 3,039 ======== ========
The projected benefit obligations as of December 31, 1993 and 1992 were determined using a discount rate of 7.50% for 1993 and 8.00% for 1992, and anticipated composite rates of future increases in compensation of 4.50% for 1993 and 5.50% for 1992.
Defined Contribution Plans __________________________
Sprint sponsors two defined contribution employee savings plans covering substantially all employees of the Company. Participants may contribute portions of their compensation to the plans. Contributions of participants represented by collective bargaining units are matched by the Company based upon defined amounts as negotiated by the respective parties. Contributions of participants not covered by collective bargaining agreements are also matched by the Company. For these participants, the Company provides matching contributions equal to 50 percent of participants' contributions up to 6 percent of their base compensation and may, at the discretion of Sprint's Board of Directors, provide additional matching contributions based upon the performance of
II-19
THE UNITED TELEPHONE COMPANY OF PENNSYLVANIA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993
3. EMPLOYEE BENEFIT PLANS (continued)
Defined Benefit Pension Plan (continued) ________________________________________
Sprint's common stock price in comparison to other telecommunications companies. The Company's contributions to the plans aggregated $1,670,000, $1,182,000 and $1,215,000 in 1993, 1992 and 1991, respectively.
Postretirement Benefits _______________________
The Company provides other postretirement benefits (principally health care benefits) to certain retirees. Substantially all employees who retired from the Company before January 1, 1991 became eligible for these postretirement benefits at reduced cost to the retirees. Employees retiring after such date, who meet specified age and years of service requirements, are eligible for these benefits on a shared cost basis, with the Company's portion of the cost determined by the retirees' years of credited service at retirement. The Company funds the accrued costs as benefits are paid.
For regulatory purposes, the FCC permits recognition of net postretirement benefits costs, including amortization of the transition obligation, in accordance with SFAS No. 106.
The components of the 1993 net postretirement benefits cost are as follows (in thousands):
Service cost -- benefits earned during the period $ 599 Interest on accumulated postretirement benefits obligation 2,488 Amortization of transition obligation 1,593 ______
Net postretirement benefits cost $4,680 ======
For measurement purposes, an annual health care cost trend rate of 13 percent was assumed for 1993, gradually decreasing to 6 percent by 2001 and remaining constant thereafter. The effect of a one percent annual increase in the assumed trend rate would have increased the 1993 net postretirement benefits cost by approximately $707,000. The weighted average discount rate for 1993 was 8 percent.
II-20
THE UNITED TELEPHONE COMPANY OF PENNSYLVANIA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993
3. EMPLOYEE BENEFIT PLANS (continued)
Postretirement benefits (continued) __________________________________
The amount recognized in the consolidated balance sheet as of December 31, 1993 is as follows (in thousands):
Accumulated postretirement benefits obligation Retirees $ 13,280 Active plan participants -- fully eligible 7,554 Active plan participants -- other 9,014 ________ 29,848 Unrecognized net gains 3,846 Unrecognized transition obligation (30,265) ________ Accrued postretirement benefits cost $ 3,429 ========
The accumulated benefits obligation as of December 31, 1993 was determined using a discount rate of 7.5 percent. An annual health care cost trend rate of 12 percent was assumed for 1994, gradually decreasing to 6 percent by 2001 and remaining constant thereafter. The effect of a one percent annual increase in the assumed health care cost trend rate would have increased the accumulated benefits obligations as of December 31, 1993 by approximately $4,029,000.
The cost of providing health care benefits to retirees was $958,000 and $1,104,000 in 1992 and 1991, respectively.
II-21
THE UNITED TELEPHONE COMPANY OF PENNSYLVANIA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993
4. INCOME TAXES
The components of federal and state income tax expense are as follows (in thousands):
1993 1992 1991 ____ ____ ____ Federal income taxes Current $10,590 $ 9,371 $10,384 Deferred (405) 1,192 969 Amortization of deferred ITC (1,659) (1,803) (1,706) _______ _______ _______ 8,526 8,760 9,647 State income taxes Current 4,285 3,921 4,230 Deferred (1,975) (1,712) (1,850) _______ _______ _______ 2,310 2,209 2,380 _______ _______ _______ Total income tax expense $10,836 $10,969 $12,027 ======= ======= =======
In 1993 and 1992, income tax benefits of $365,000 and $370,000, respectively, associated with the extraordinary losses incurred related to the early extinguishments of debt were reflected as reductions of such losses in the consolidated statements of income.
The differences which cause the effective income tax rate to vary from the statutory federal income tax rate of 35 percent in 1993 and 34 percent in 1992 and 1991 are as follows (in thousands):
1993 1992 1991 ____ ____ ____ Federal income tax at the statutory rate $10,260 $11,162 $11,774 Less amortization of deferred ITC 1,659 1,803 1,706 _______ _______ _______ Expected federal income tax provision after amortization of deferred ITC 8,601 9,359 10,068 Effect of Differences required to be flowed through by regulatory commissions 692 709 623 Reversal of rate differentials (863) (986) (1,036) State income tax, net of federal income tax effect 1,501 1,458 1,571 Other, net 905 429 801 _______ _______ _______ Income tax expense, including ITC $10,836 $10,969 $12,027 ======= ======= ======= Effective income tax rate 37.0% 33.4% 34.7% ======= ======= =======
II-22
THE UNITED TELEPHONE COMPANY OF PENNSYLVANIA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993
4. INCOME TAXES (continued)
During 1993 and 1992, in accordance with SFAS No. 109, deferred income taxes were provided for the temporary differences between the carrying amounts of the Company's assets and liabilities for financial statement purposes and their tax bases. The sources of the differences that give rise to the deferred income tax assets and liabilities as of December 31, along with the income tax effect of each, are as follows (in thousands): 1993 1992 ____________________ ___________________ Deferred Income Tax Deferred Income Tax ____________________ ___________________ Assets Liabilities Assets Liabilities ______ ___________ _______ ___________ Property, plant and equipment $56,412 $54,673 Allowance for doubtful accounts $ 72 $ 101 Expense accruals 3,139 1,883 Deferred revenue 219 206 Other, net 269 (1,876) 277 (540) ______ _______ ______ _______ $3,699 $54,536 $2,467 $54,133 ====== ======= ====== =======
On August 10, 1993, the Revenue Reconciliation Act of 1993 (the Act) was enacted which, among other changes, raised the federal income tax rate for corporations to 35 percent from 34 percent, retroactive to the beginning of the year. Pursuant to SFAS No. 71, the resulting adjustments to the Company's deferred income tax assets and liabilities to reflect the revised rate have generally been reflected as reductions to the related regulatory liabilities.
During 1991, in accordance with APB No. 11, deferred income tax provisions resulted from the differences in the timing of recognizing certain revenues and expenses for financial statement and income tax purposes. The sources of the differences, along with the income tax effect of each, were as follows (in thousands):
Excess of tax depreciation and cost of removal over book depreciation $ 688 Revenue billed but not recognized for accounting purposes (75) Other (1,494) _______ $ (881) =======
II-23
THE UNITED TELEPHONE COMPANY OF PENNSYLVANIA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993
5. LONG-TERM DEBT AND EXTRAORDINARY LOSSES ON EXTINGUISHMENTS
Long-term debt as of December 31, excluding current maturities, is as follows (in thousands):
1993 1992 ____ ____ Weighted Average Amount Interest Rate Amount ______ _____________ ______
First mortgage bonds, maturities 1995 to 2008 $106,119 7.24% $111,270 REA mortgage notes, maturities 1995 to 2009 402 2.00% 457 Other notes - - 67 ________ ________ $106,521 $111,794 ======== ========
Long-term debt to be retired during the next five years is summarized below (in thousands):
Year Amount ____ ______
1994 $ 3,281 1995 3,860 1996 1,373 1997 1,374 1998 16,372
The first mortgage bonds and notes are secured by substantially all of the Company's property, plant and equipment.
Under the most restricted terms of the Company's first mortgage bond indentures, $1,736,000 of retained earnings were restricted from payment of dividends at December 31, 1993.
As of December 31, 1993, the Company had a bank line of credit shared with an affiliate, totaling $2,000,000; this line of credit, which is renewable in June, 1994, is compensated under fee arrangements. The line of credit may be withdrawn by the bank if there is a material adverse change in the financial condition of the Company or the affiliate. At December 31, 1993, there were no borrowings outstanding under the arrangement.
II-24
THE UNITED TELEPHONE COMPANY OF PENNSYLVANIA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993
5. LONG-TERM DEBT AND EXTRAORDINARY LOSSES ON EXTINGUISHMENTS (continued)
During 1993, the Company redeemed prior to scheduled maturities $34,490,000 of first mortgage bonds with interest rates ranging from 6.25 percent to 8.45 percent. During 1992, the Company redeemed, prior to scheduled maturities, $25,633,000 of first mortgage bonds with interest rates ranging from 9.375 percent to 11.25 percent. The prepayment penalties incurred in connection with the early extinguishments of debt and the write-off of related debt issuance costs, net of the related income tax benefits, are reflected as extraordinary losses in the 1993 and 1992 consolidated statements of income.
6. PREFERRED STOCK
On September 1, 1993, all outstanding shares of the Company's Series A, 4 1/2 percent cumulative preferred stock was called for redemption. Pursuant to the terms of such stocks, all shares were repurchased on or after December 1, 1993 at a price of $103 per share. The repurchased shares of preferred stock are held in treasury as of December 31, 1993.
7. COMMITMENTS
Gross rental expense aggregated $3,390,000 in 1993, $3,131,000 in 1992 and $2,741,000 in 1991.
The Company's planned capital expenditures for the year ending December 31, 1994 are approximately $42,768,000. Normal purchase commitments have been or will be made for these planned expenditures.
8. RELATED PARTY TRANSACTIONS
The Company purchases telecommunications equipment, construction and maintenance equipment, and materials and supplies from its affiliate, North Supply Company. Total purchases for 1993, 1992, and 1991 were $14,940,000, $16,844,000 and $13,765,000, respectively.
Under an agreement with Sprint, the Company reimburses Sprint for data processing services, other data related costs and certain management costs which are incurred for the Company's benefit. A credit resulting from deferred income taxes on intercompany profits is also allocated by Sprint to affiliated companies. Total charges to the
II-25
THE UNITED TELEPHONE COMPANY OF PENNSYLVANIA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993
8. RELATED PARTY TRANSACTIONS (continued)
Company aggregated $17,874,000, $16,932,000 and $14,411,000 in 1993, 1992 and 1991, respectively, and the credit relating to deferred income taxes was $150,000, $164,000 and $191,000 in 1993, 1992 and 1991, respectively. Included in these charges are amounts reimbursed by an affiliated company aggregating approximately $2,426,000 in 1993 $2,865,000 in 1992 and $2,967,000 in 1991 for data processing services incurred by the Company for the benefit of the affiliate. The Company enters into cash borrowing transactions with Sprint; generally, interest on such transactions is computed based on the prior month's thirty-day average commercial paper index, as published in the Federal Reserve Statistical Release H.15, plus forty-five basis points. Interest expense on such advances from Sprint was $345,000, $1,094,000 and $849,000 in 1993, 1992 and 1991, respectively.
Sprint Publishing & Advertising, an affiliate, pays the Company a fee for the right to publish telephone directories in the Company's operating territory, a listing fee, and a fee for billing and collection services performed for Sprint Publishing & Advertising by the Company. For 1993, 1992 and 1991, Sprint Publishing & Advertising paid the Company a total of $4,764,000, $4,622,000 and $4,541,000, respectively. The Company paid Sprint Publishing & Advertising $737,000, $615,000 and $607,000 in 1993, 1992 and 1991, respectively, for its costs of publishing the white page portion of the directories.
The Company provides various services to Sprint's long distance communications services division, such as network access, operator and billing and collection services, and the lease of network facilities. The Company received $5,002,000, $4,534,000 and $3,546,000 in 1993, 1992 and 1991, respectively, for these services. The Company paid Sprint's long distance communications services division $1,775,000, $1,559,000 and $1,656,000 in 1993, 1992 and 1991, respectively, for interexchange telecommunications services.
The Company is reimbursed by an affiliated company for certain salaries and other costs which are incurred by the Company for the benefit of the affiliate. Similarly, the Company reimburses the affiliate for certain costs incurred by the affiliate for the Company's benefit. These reimbursements represent the cost of such items as determined by the Company and its affiliates. Such reimbursable charges, net of amounts reimbursed by the Company, totaled $22,309,000, $21,548,000 and $17,809,000 in 1993, 1992 and 1991, respectively.
II-26
THE UNITED TELEPHONE COMPANY OF PENNSYLVANIA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993
8. RELATED PARTY TRANSACTIONS (continued)
The Company and an affiliated company file a common interstate access tariff with the FCC. As a result, the Company participates in a pooling arrangement with its affiliate whereby each company recognizes interstate access revenues based upon a common rate of return. Under this arrangement, the Company recognized total interstate access revenues of $39,872,000, $36,970,000 and $32,454,000 in 1993, 1992 and 1991, respectively.
9. ADDITIONAL FINANCIAL INFORMATION
Financial Instruments Information _________________________________
The Company's financial instruments consist of long-term debt, including current maturities, with carrying amounts as of December 31, 1993 and 1992 of $109,802,000 and $114,076,000, respectively, and estimated fair values of $117,366,000 and $115,701,000, respectively. The fair values are estimated based on quoted market prices for publicly-traded issues, and based on the present value of estimated future cash flows using a discount rate commensurate with the risks involved for all other issues.
The carrying values of the Company's other financial instruments (principally short-term borrowings) approximate fair value as of December 31, 1993 and 1992.
Supplemental Cash Flows Information ___________________________________
The supplemental disclosures required for the consolidated statements of cash flows for the years ended December 31, are as follows (in thousands):
1993 1992 1991 ____ ____ ____ Cash paid for Interest, net of amounts capitalized $ 8,981 $ 8,768 $ 8,216 Income taxes $13,413 $14,633 $14,368
II-27
THE UNITED TELEPHONE COMPANY OF PENNSYLVANIA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993
9. ADDITIONAL FINANCIAL INFORMATION (continued)
Major Customer Information __________________________
Operating revenues from American Telephone & Telegraph resulting primarily from network access, billing and collection services, and the lease of network facilities aggregated approximately $33,122,000, $33,579,000 and $32,715,000 for 1993, 1992 and 1991, respectively.
10. SUPPLEMENTAL QUARTERLY INFORMATION - UNAUDITED (in thousands)
1993 Quarters Ended _______________________________________________ March 31 June 30 September 30 December 31 _______ _______ ____________ ___________
Operating revenues $52,916 $51,875 $55,025 $63,592 Operating income 3,916 7,460 7,552 8,167 Income before extraordinary item 1,640 5,231 5,374 6,232 Net income 1,640 4,730 5,374 6,232
1992 Quarters Ended _______________________________________________ March 31 June 30 September 30 December 31 _______ _______ ____________ ___________
Operating revenues $50,089 $49,867 $51,690 $54,024 Operating income 7,513 8,237 8,448 5,172 Income before extraordinary item 5,288 6,046 6,470 4,057 Net income 5,288 6,046 5,961 4,057
In the first quarter of 1993, the Company recorded estimated merger and integration costs of $6,100,000 as a result of the Sprint/Centel Merger, which reduced net income by approximately $3,651,000. In the fourth quarter of 1992, the Company recorded additional depreciation expense of $4,300,000 as a result of the technical depreciation rate filing.
II-28
The United Telephone Company of Pennsylvania Form 10-K/Part II
Item 9.

Item 9. Changes in and Disagreements with Accountants on Accounting ______ and Financial Disclosure
None
II-29
The United Telephone Company of Pennsylvania Form 10-K/Part Part III
Item 10.



Item 10. Directors and Executive Officers of the Registrant _______
Omitted under the provisions of General Instruction J.
Item 11.

Item 11. Executive Compensation _______ Omitted under the provisions of General Instruction J.
Item 12.

Item 12. Security Ownership of Certain Beneficial Owners and _______ Management
Omitted under the provisions of General Instruction J.
Item 13.

Item 13. Certain Relationships and Related Transactions _______ Omitted under the provisions of General Instruction J.
III-1
The United Telephone Company of Pennsylvania Form 10-K/Part IV
Item 14.

Item 14. Exhibits, Financial Statement Schedules and Reports on Form _______ 8-K.
(a) 1. The consolidated financial statements of the Company filed as a part of this report are listed in the Index to Consolidated Financial Statements on page II-7. 2. The consolidated financial statement schedules of the Company filed as a part of this report are listed in the Index to Consolidated Financial Statement Schedules on page IV-2. (b) The Registrant was not required to file a report on Form 8-K during the last quarter of 1993.
(c) Exhibits required by Item 601 of Regulation S-K: Exhibit No. __________ (3) (a) Restated Articles of Incorporation (filed on Exhibit 3-A to Registration Statement No. 2-45758 and incorporated herein by reference). (b) Bylaws (filed as Exhibit 3-B to 1989 Form 10-K and incorporated herein by reference). (c) Bylaws, as amended February 25, 1993 (filed as Exhibit 3-C to 1993 Form 10-K). (4) (a) Indenture dated January 1, 1951 and Supplemental Indentures First through Eighteenth (filed as Exhibits 4-A through 4-R to Registration Statement No. 2-45758 and Exhibit 4-A to Registration Statement No. 2-52319 and incorporated herein by reference). (b) Nineteenth Supplemental Indenture (filed as Exhibit 4-B to 1981 Form 10-K and incorporated herein by reference). (c) Twentieth Supplemental Indenture (filed as Exhibit 4-B to 1987 Form 10-K and incorporated herein by reference). (d) Twenty-first Supplemental Indenture (filed as Exhibit 4-D to 1992 Form 10K and incorporated herein by reference). (e) Twenty-second Supplemental Indenture dated as of June 1, 1993 (filed as Exhibit 4-E to 1993 Form 10K).
IV-1
The United Telephone Company of Pennsylvania Form 10-K/Part IV
INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULES (Item 14(a) 2.) ________________________________________________________________________ Page Reference ______________ Schedules for each of the three years ended December 31, 1993:
Schedule V - Property, Plant and Equipment-Consolidated IV-3-IV-5
Schedule VI - Accumulated Depreciation-Consolidated IV-6-IV-8
Schedule VIII - Valuation and Qualifying Accounts-Consolidated IV-9
Schedule X - Supplementary Income Information-Consolidated IV-10
All other schedules have been omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements, including the notes thereto.
IV-2
THE UNITED TELEPHONE COMPANY OF PENNSYLVANIA
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT - CONSOLIDATED
Year Ended December 31, 1993 (In Thousands)
Balance at Constructed Beginning Additions Retirements Balance at of Year at Cost or Sales End of Year _________ ___________ ___________ ___________ Land and buildings $ 33,455 $ 2,749 $ 419 $ 35,785 Other general support assets 40,598 5,114 2,355 43,357 Central office assets 196,741 18,957 12,351 203,347 Information origination/ termination assets 11,572 1,915 3,031 10,456 Cable and wire facilities assets 266,383 16,733 3,540 279,576 Amortizable assets 3,576 80 26 3,630 Telephone plant under construction 4,898 (821) - 4,077 Non-operating plant 2,388 354 6 2,736 ________ _______ _______ ________
$559,611 $45,081 $21,728 $582,964 ======== ======= ======= ========
Depreciation expense is computed on a straight-line basis. The average annual composite depreciation rate for the Company in 1993 was 7.2%.
IV-3
THE UNITED TELEPHONE COMPANY OF PENNSYLVANIA
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT - CONSOLIDATED
Year Ended December 31, 1992 (In Thousands)
Balance at Constructed Beginning Additions Retirements Balance at of Year at Cost or Sales End of Year _________ ___________ ___________ ___________ Land and buildings $ 32,583 $ 1,235 $ 363 $ 33,455 Other general support assets 39,210 5,055 3,667 40,598 Central office assets 192,474 20,049 15,782 196,741 Information origination/ termination assets 12,660 2,146 3,234 11,572 Cable and wire facilities assets 252,757 17,969 4,343 266,383 Amortizable assets 3,680 235 339 3,576 Telephone plant under construction 6,046 (1,148) - 4,898 Property held for future use 37 (37) - - Non-operating plant 3,237 299 1,148 2,388 ________ _______ _______ ________
$542,684 $45,803 $28,876 $559,611 ======== ======= ======= ========
Depreciation expense is computed on a straight-line basis. The average annual composite depreciation rate for the Company in 1992 was 7.2%.
IV-4
THE UNITED TELEPHONE COMPANY OF PENNSYLVANIA
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT - CONSOLIDATED
Year Ended December 31, 1991 (In Thousands)
Balance at Constructed Beginning Additions Retirements Balance at of Year at Cost or Sales End of Year _________ ___________ ___________ ___________ Land and buildings $ 31,321 $ 1,421 $ 159 $ 32,583 Other general support assets 36,229 4,853 1,872 39,210 Central office assets 184,989 17,397 9,912 192,474 Information origination/ termination assets 41,170 1,330 29,840 12,660 Cable and wire facilities assets 239,305 16,490 3,038 252,757 Amortizable assets 3,808 8 136 3,680 Telephone plant under construction 6,157 (111) - 6,046 Property held for future use - 37 - 37 Non-operating plant 3,235 2 - 3,237 ________ _______ _______ ________
$546,214 $41,427 $44,957 $542,684 ======== ======= ======= ========
Depreciation expense is computed on a straight-line basis. The average annual composite depreciation rate for the Company in 1991 was 6.5%.
IV-5
THE UNITED TELEPHONE COMPANY OF PENNSYLVANIA
SCHEDULE VI - ACCUMULATED DEPRECIATION ON PROPERTY, PLANT AND EQUIPMENT - CONSOLIDATED
Year Ended December 31, 1993 (In Thousands)
Balance at Charged Beginning to Depr. Net Balance at of Year Expense Retirements Salvage End of Year _________ _______ ___________ _______ ___________ Land and buildings $ 7,474 $ 1,284 $ 419 $(231) $ 8,108 Other general support assets 16,362 4,324 2,355 339 18,670 Central office assets 82,683 18,375 12,351 569 89,276 Information origination/ termination assets 9,722 1,058 3,031 130 7,879 Cable and wire facilities assets 119,889 14,778 3,540 (537) 130,590 Amortizable assets 2,494 793 26 - 3,261 Non-operating plant (852) 15 6 92 (751) ________ _______ _______ ______ ________
$237,772 $40,627 $21,728 $ 362 $257,033 ======== ======= ======= ====== ========
IV-6
THE UNITED TELEPHONE COMPANY OF PENNSYLVANIA
SCHEDULE VI - ACCUMULATED DEPRECIATION ON PROPERTY, PLANT AND EQUIPMENT - CONSOLIDATED
Year Ended December 31, 1992 (In Thousands)
Balance at Charged Beginning to Depr. Net Balance at of Year Expense Retirements Salvage End of Year _________ _______ ___________ _______ __________ Land and buildings $ 6,761 $ 1,218 $ 350 $(155) $ 7,474 Other general support assets 15,624 4,025 3,667 380 16,362 Central office assets 80,024 18,135 15,782 306 82,683 Information origination/ termination assets 11,773 1,007 3,234 176 9,722 Cable and wire facilities assets 110,691 13,990 4,343 (449) 119,889 Amortizable assets 2,142 691 339 - 2,494 Non-operating plant 126 6 1,148 164 (852) ________ _______ _______ _____ ________ $227,141 $39,072 $28,863(1) $ 422 $237,772 ======== ======= ======= ===== ========
(1)Reconciliation of retirements included in Schedule V - Property, Plant and Equipment - Consolidated: Amount charged to reserve $28,863 Retirements of nondepreciable property 13 _______ Total Schedule V retirements $28,876 =======
IV-7
THE UNITED TELEPHONE COMPANY OF PENNSYLVANIA
SCHEDULE VI - ACCUMULATED DEPRECIATION ON PROPERTY, PLANT AND EQUIPMENT - CONSOLIDATED
Year Ended December 31, 1991 (In Thousands)
Balance at Charged Beginning to Depr. Net Balance at of Year Expense Retirements Salvage End of Year _________ _______ ___________ _______ ___________ Land and buildings $ 6,674 $ 395 $ 159 $(149) $ 6,761 Other general support assets 12,692 4,504 1,872 300 15,624 Central office assets 73,556 16,451 9,912 (71) 80,024 Information origination/ termination assets 40,507 947 29,840 159 11,773 Cable and wire facilities assets 103,113 11,055 3,038 (439) 110,691 Amortizable assets 1,568 709 136 1 2,142 Non-operating plant 75 51 - - 126 ________ _______ ______ _____ _______
$238,185 $34,112 $44,957 $(199) $227,141 ======== ======= ======= ===== ========
IV-8
THE UNITED TELEPHONE COMPANY OF PENNSYLVANIA SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS - CONSOLIDATED Years Ended December 31, 1993, 1992 and 1991 (In Thousands)
Additions Deductions _________ __________ Balance at Charged Accounts Beginning to Charged off, Net Balance at Description of Year Expense of Collections End of Year ___________ _________ _______ ________________ ___________ Deducted from assets: Allowance for uncollectible accounts:
Year ended December 31, 1993 $380 $1,451 $ 981 $850 ==== ====== ====== ====
Year ended December 31, 1992 $398 $1,021 $1,039 $380 ==== ====== ====== ====
Year ended December 31, 1991 $372 $1,230 $1,204 $398 ==== ====== ====== ====
IV-9
THE UNITED TELEPHONE COMPANY OF PENNSYLVANIA SCHEDULE X - SUPPLEMENTARY INCOME INFORMATION-CONSOLIDATED Years Ended December 31, 1993, 1992 and 1991 (In Thousands)
Year Ended December 31, _______________________ 1993 1992 1991 Taxes other than payroll and federal and state income taxes: Gross receipts $4,941 $4,764 $4,250 Capital stock 2,064 2,194 2,159 Other state and local 1,392 1,153 1,228 ______ ______ ______ $8,397 $8,111 $7,637 ====== ====== ======
Maintenance expense is the primary component of plant expense which is shown separately on the consolidated statements of income. The Company had no significant advertising expense and paid no royalties during 1993, 1992 and 1991.
IV-10
The United Telephone Company of Pennsylvania 1993 Form 10-K SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
THE UNITED TELEPHONE COMPANY OF PENNSYLVANIA
Date: By: /s/Richard C. Eckhart _____________ ____________________________ Richard C. Eckhart Vice President-Finance/ Administration and Director Chief Financial Officer
The United Telephone Company of Pennsylvania 1993 Form 10-K SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ Dale L. Cross Date: 03/23/94 Dale L. Cross President and Director Chief Executive Officer
/s/ Roy A. Wilson Date: 03/22/94 Roy A. Wilson Vice President-Service and Director
/s/ Richard C. Eckhart Date: 03/23/94 Richard C. Eckhart Vice President-Finance and Administration and Director Chief Financial Officer
/s/ James L. Walker Date: 03/22/94 James L. Walker Controller and Chief Accounting Officer
/s/ William A. Connor Date: 03/11/94 William A. Conner - Director
/s/ Arthur A. Kurtze Date: 03/18/94 Arthur A. Kurtze - Director
/s/ R. Glen Fenstermacher Date: 03/14/94 R. Glen Fenstermacher - Director
/s/ John E. Kosar Date: 03/16/94 John E. Kosar - Director
/s/ Patricia A. McKiernan Date: 03/16/94 Patricia A. McKiernan - Director
/s/ Michael W. Rice Date: 03/10/94 Michael W. Rice - Director