VERIZON NORTH INC - 10-Q Quarterly Report

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 ¨

	Three Months Ended September 30,					Nine Months Ended September 30,
(Dollars in Millions) (Unaudited)	2002		2001			2002		2001
OPERATING REVENUES (including $96.5, $47.6, $259.8 and $137.8 from affiliates)	$	792.4	$	744.5		$	2,326.5	$	2,255.0

Operations and support expense (exclusive of items shown below)
(including $120.6, $104.2, $330.7 and $272.3 to affiliates)		371.1		314.5			1,052.1		946.1
Depreciation and amortization		173.5		142.3			494.9		422.5

		544.6		456.8			1,547.0		1,368.6

OPERATING INCOME		247.8		287.7			779.5		886.4
OTHER INCOME AND (EXPENSE), NET (including $1.2, $(1.5), $(.6) and $(4.1) to affiliates)		1.5		(1.4	)		1.2		(4.0	)
INTEREST EXPENSE (including $.7, $.6, $3.0 and $5.6 to affiliate)		26.0		32.2			78.4		97.1

INCOME BEFORE PROVISION FOR INCOME TAXES		223.3		254.1			702.3		785.3
PROVISION FOR INCOME TAXES		84.4		96.9			280.7		299.5

NET INCOME	$	138.9	$	157.2		$	421.6	$	485.8

(Dollars in Millions)	September 30, 2002		December 31, 2001
	(Unaudited)
ASSETS
CURRENT ASSETS
Cash	$	.2	$	2.0
Short-term investments		2.1		95.0
Accounts receivable:
Trade and other, net of allowances for uncollectibles of $74.0 and $48.5		443.0		511.3
Affiliates		179.0		145.4
Material and supplies		51.6		44.6
Prepaid expenses		30.2		31.1
Deferred income taxes		84.3		46.0
Other		59.7		62.9

		850.1		938.3

PLANT, PROPERTY AND EQUIPMENT		10,757.1		10,588.0
Less accumulated depreciation		7,218.5		7,034.5

		3,538.6		3,553.5

PREPAID PENSION ASSET		1,928.5		1,813.5

OTHER ASSETS		665.3		138.5

TOTAL ASSETS	$	6,982.5	$	6,443.8

(Dollars in Millions, Except Per Share Amount)	September 30, 2002		December 31, 2001
	(Unaudited)
LIABILITIES AND SHAREOWNER’S INVESTMENT
CURRENT LIABILITIES
Debt maturing within one year:
Notes payable to affiliates	$	198.7	$	244.8
Other		—		.2
Accounts payable and accrued liabilities:
Affiliates		193.0		150.6
Other		400.7		417.2
Other liabilities		289.4		261.4

		1,081.8		1,074.2

LONG-TERM DEBT		1,498.6		1,497.5

EMPLOYEE BENEFIT OBLIGATIONS		509.5		510.1

DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes		1,152.7		893.9
Unamortized investment tax credits		.1		.5
Other		142.7		161.8

		1,295.5		1,056.2

SHAREOWNER’S INVESTMENT
Common stock (one share, without par value, at September 30, 2002;		978.3		978.3
$1,000 stated value, authorized 2,200,000 shares, outstanding 978,350 shares at December 31, 2001)
Contributed capital		1,034.5		1,027.8
Reinvested earnings		584.3		299.7

		2,597.1		2,305.8

TOTAL LIABILITIES AND SHAREOWNER’S INVESTMENT	$	6,982.5	$	6,443.8

	Nine Months Ended September 30,
(Dollars in Millions) (Unaudited)	2002			2001
NET CASH PROVIDED BY OPERATING ACTIVITIES	$	1,083.2		$	1,142.9

CASH FLOWS FROM INVESTING ACTIVITIES
Net change in short-term investments		92.9			54.6
Capital expenditures		(394.6	)		(562.0	)
Change in note receivable from affiliate		—			(91.3	)
Investment in unconsolidated business		(6.6	)		—
Purchase of non-network software from affiliate		(594.7	)		(164.1	)
Other, net		(5.1	)		(2.7	)

Net cash used in investing activities		(908.1	)		(765.5	)

CASH FLOWS FROM FINANCING ACTIVITIES
Principal repayments of capital lease obligations		(.4	)		(1.6	)
Change in notes payable to affiliates		(46.1	)		(96.1	)
Dividends paid		(137.0	)		(285.0	)
Capital contribution from parent		6.6			—

Net cash used in financing activities		(176.9	)		(382.7	)

NET CHANGE IN CASH		(1.8	)		(5.3	)
CASH, BEGINNING OF PERIOD		2.0			6.1

CASH, END OF PERIOD	$	.2		$	.8

Verizon North Inc. is a wholly owned subsidiary of GTE Corporation (GTE), which is a wholly owned subsidiary of Verizon Communications Inc. (Verizon Communications). The accompanying unaudited condensed financial statements have been prepared based upon Securities and Exchange Commission rules that permit reduced disclosure for interim periods. These financial statements reflect all adjustments that are necessary for a fair presentation of results of operations and financial position for the interim periods shown including normal recurring accruals. The results for the interim periods are not necessarily indicative of results for the full year. The balance sheet at December 31, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For a more complete discussion of significant accounting policies and certain other information, you should refer to the financial statements included in our 2001 Annual Report on Form 10-K.

Effective January 1, 2002, we adopted Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 no longer permits the amortization of goodwill and indefinite-lived intangible assets. Instead, these assets must be reviewed annually (or more frequently under prescribed conditions) for impairment in accordance with this statement. This impairment test uses a fair value approach rather than the undiscounted cash flows approach previously required by SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.” The goodwill impairment test under SFAS No. 142 requires a two-step approach, which is performed at the reporting unit level, as defined in SFAS No. 142. Step one identifies potential impairments by comparing the fair value of the reporting unit to its carrying amount. Step two, which is only performed if there is a potential impairment, compares the carrying amount of the reporting unit’s goodwill to its implied value, as defined in SFAS No. 142. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized for an amount equal to that excess. Intangible assets that do not have indefinite lives are amortized over their useful lives and reviewed for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” The adoption of SFAS No. 142 did not impact our results of operations or financial position because we had no goodwill or indefinite-lived intangible assets at December 31, 2001 and 2000.

Intangible assets amortization expense was $27.6 million for the three months ended September 30, 2002 and $56.5 million for the nine months ended September 30, 2002. Amortization expense is estimated to be $30.8 million for the remainder of 2002, $111.2 million in 2003, $111.2 million in 2004, $93.7 million in 2005 and $79.7 million in 2006, related to our non-network software. The amounts as of September 30, 2002 include the transfer of assets from an affiliate of $594.7 million of gross carrying amount and $57.5 million of accumulated amortization.

Effective January 1, 2002, we adopted SFAS No. 144. This standard supersedes SFAS No. 121 and the provisions of Accounting Principles Board (APB) Opinion No. 30, “Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” with regard to reporting the effects of a disposal of a segment of a business. SFAS No. 144 establishes a single accounting model for assets to be disposed of by sale and addresses several SFAS No. 121 implementation issues. The adoption of SFAS No. 144 did not have a material effect on our results of operations or financial position.

In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” This standard provides the accounting for the cost of legal obligations associated with the retirement of long-lived assets. SFAS No. 143 requires that companies recognize the fair value of a liability for asset retirement obligations in the period in which the obligations are incurred and capitalize that amount as a part of the book value of the long-lived asset. That cost is then depreciated over the remaining life of the underlying long-lived asset. We are required to adopt SFAS No. 143 effective January 1, 2003. We are currently evaluating the impact this new standard will have on our future results of operations or financial position.

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS No. 145, among other things, eliminates the requirement that all gains and losses on the extinguishment of debt must be classified as extraordinary items on the income statement, thereby permitting the classification of such gains and losses as extraordinary items only if the criteria of APB No. 30 are met. We are required to adopt this provision of SFAS No. 145 effective January 1, 2003 and, upon adoption, we will reclassify in our statements of income previously reported extraordinary charges for the early extinguishment of debt to income from continuing operations.

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This standard addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” EITF Issue No. 94-3 required accrual of liabilities related to exit and disposal activities at a plan (commitment) date. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. The provisions of this standard are effective for exit or disposal activities that are initiated after December 31, 2002.

	Common Stock		Contributed Capital		Reinvested Earnings
	(Dollars in Millions)
Balance at December 31, 2001	$	978.3	$	1,027.8	$	299.7
Net income						421.6
Dividends declared to GTE						(137.0	)
Capital contributions from GTE				6.6
Other				.1

Balance at September 30, 2002	$	978.3	$	1,034.5	$	584.3

Various legal actions and regulatory proceedings are pending to which we are a party and claims which, if asserted, may lead to other legal actions. We have established reserves for specific liabilities in connection with regulatory and legal matters that we currently deem to be probable and estimable. We do not expect that the ultimate resolution of pending regulatory and legal matters in future periods will have a material effect on our financial condition, but it could have a material effect on our results of operations.

Regulatory conditions to the Bell Atlantic – GTE merger include commitments to, among other things, promote competition and the widespread deployment of advanced services, while helping to ensure that consumers continue to receive high-quality, low cost telephone services. In some cases, there are significant penalties associated with not meeting these commitments. The cost of satisfying these commitments could have a significant impact on net income in future periods.

In December 2000, we transferred certain advanced data assets to an affiliated company, Verizon Ventures III Inc. (Ventures III) in exchange for common stock of Ventures III. This transfer was done to satisfy a condition of the Federal Communications Commission’s (FCC) approval of the Bell Atlantic – GTE merger, which required the provision of advanced data services through a separate affiliate. Throughout 2000 and 2001, we continued to invest in Ventures III through the transfer of additional assets. As a result of the transfers, we acquired an ownership interest in Ventures III, which we accounted for under the equity method of accounting.

In September 2001, the FCC issued an order eliminating this merger condition. Following the FCC order, we made necessary filings with our state regulatory commissions for approval of the transfer of these assets back to us. During the fourth quarter of 2001, after required state regulatory approvals were obtained, Ventures III transferred assets to us in the jurisdictions of Michigan, Ohio, and Wisconsin. Ventures III transferred advanced data assets back to us with an aggregate net book value of $9.7 million in Illinois, Indiana and Pennsylvania on January 1, 2002, February 1, 2002, and April 1, 2002, respectively, after required state regulatory approvals were obtained. In consideration of the transfer of these assets, we have surrendered our common stock in Ventures III and re

	As of September 30, 2002				As of December 31, 2001
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
	(Dollars in Millions)
Non-network software (3 to 7 years)	$	613.8	$	114.7	$	10.3	$	.7