VERIZON FLORIDA 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 $27.9, $32.5, $69.1 and $84.3 from affiliates)	$	399.1	$	415.7	$	1,201.5	$	1,284.2

Operations and support expense (exclusive of items shown below) (including $75.1, $62.8, $214.1 and $175.0 to affiliates)		255.9		228.8		700.1		693.1
Depreciation and amortization		80.4		85.4		246.9		250.2

		336.3		314.2		947.0		943.3

OPERATING INCOME		62.8		101.5		254.5		340.9
OTHER INCOME, NET (including $13.6, $12.0, $33.0 and $38.8 from affiliates)		13.6		12.0		33.4		38.8
INTEREST EXPENSE (including $14.3, $12.7, $32.7 and $56.1 to affiliates)		31.2		31.5		84.0		99.9

INCOME BEFORE PROVISION FOR INCOME TAXES		45.2		82.0		203.9		279.8
PROVISION FOR INCOME TAXES		16.2		32.9		77.5		112.3

NET INCOME	$	29.0	$	49.1	$	126.4	$	167.5

(Dollars in Millions)	September 30, 2002		December 31, 2001
	(Unaudited)
ASSETS
CURRENT ASSETS
Cash	$	69.0	$	89.6
Short-term investments		1.7		65.8
Notes receivable from affiliates		1,268.8		1,628.3
Accounts receivable:
Trade and other, net of allowances for uncollectibles of $53.4 and $27.0		207.4		272.0
Affiliates		51.1		41.5
Material and supplies		24.1		22.4
Prepaid expenses		20.5		18.4
Deferred income taxes		9.5		—
Other		49.7		48.1

		1,701.8		2,186.1

PLANT, PROPERTY AND EQUIPMENT		5,340.1		5,271.7
Less accumulated depreciation		3,327.4		3,241.8

		2,012.7		2,029.9

PREPAID PENSION ASSET		440.2		431.8

OTHER ASSETS		109.2		100.9

TOTAL ASSETS	$	4,263.9	$	4,748.7

(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	$	1,390.2	$	1,778.5
Other		200.0		200.0
Accounts payable and accrued liabilities:
Affiliates		89.1		136.5
Other		135.2		202.7
Other liabilities		175.3		166.6

		1,989.8		2,484.3

LONG-TERM DEBT		690.3		690.1

EMPLOYEE BENEFIT OBLIGATIONS		281.9		276.4

DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes		312.3		279.3
Other		99.9		94.3

		412.2		373.6

SHAREOWNER’S INVESTMENT
Common stock (one share, without par value, at September 30, 2002; $25 par value, authorized 50,000,000 shares, outstanding 23,400,000 shares at December 31, 2001)		585.0		585.0
Contributed capital		191.2		191.2
Reinvested earnings		113.5		148.1

		889.7		924.3

TOTAL LIABILITIES AND SHAREOWNER’S INVESTMENT	$	4,263.9	$	4,748.7

	Nine Months Ended September 30,
(Dollars in Millions) (Unaudited)	2002			2001
NET CASH PROVIDED BY OPERATING ACTIVITIES	$	319.0		$	500.0

CASH FLOWS FROM INVESTING ACTIVITIES
Net change in short-term investments		64.1			42.7
Capital expenditures		(214.0	)		(260.8	)
Change in notes receivable from affiliates		359.5			(387.2	)
Other, net		.1			.5

Net cash (used in)/provided by investing activities		209.7			(604.8	)

CASH FLOWS FROM FINANCING ACTIVITIES
Change in notes payable to affiliates		(388.3	)		246.2
Principal repayments of capital lease obligations		—			(1.2	)
Dividends paid		(161.0	)		(130.0	)

Net cash (used in)/provided by financing activities		(549.3	)		115.0

NET CHANGE IN CASH		(20.6	)		10.2
CASH, BEGINNING OF PERIOD		89.6			71.9

CASH, END OF PERIOD	$	69.0		$	82.1

Verizon Florida 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 consolidated 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 other intangible assets at December 31, 2001 and 2000.

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.

GTE Funding Incorporated (GTE Funding), a wholly owned subsidiary of Verizon Florida, provides short-term financing, investment vehicles and cash management services for us and six other of Verizon Communications’ domestic operating telephone companies. From time to time, depending on the operating needs of each of those affiliates, GTE Funding may have a note receivable or note payable balance with an affiliate. The Financial Services Agreements between GTE Funding and the affiliates specify that the affiliates are permitted to borrow or advance short-term funds on a day-to day (demand note) basis to finance their ordinary business and capital requirements. Since these borrowings and advances are based on a variable interest rate and demand note basis the carrying value of the notes approximates its fair market value.

In addition, GTE Funding has a contractual agreement with an affiliated company, Verizon Network Funding Corporation (VNFC), for the provision of short-term financing and cash management services. VNFC issues commercial paper and obtains bank loans to fund the working capital requirements of some Verizon Communications’ network services subsidiaries, including us, and invests funds in temporary investments on their behalf.

	Notes Receivable from Affiliates				Notes Payable to Affiliates
	September 30, 2002		December 31, 2001		September 30, 2002		December 31, 2001
	(Dollars in Millions)
Verizon California Inc.	$	708.8	$	720.1	$	—	$	—
Verizon North Inc.		197.0		244.8		—		—
Verizon Northwest Inc.		197.1		286.7		—		—
Verizon South Inc.		—		—		855.0		274.6
GTE Southwest Incorporated		165.9		105.3		—		—
GTE Midwest Incorporated		—		271.4		306.4		—
VNFC		—		—		228.8		1,503.9

Total	$	1,268.8	$	1,628.3	$	1,390.2	$	1,778.5

	Common Stock		Contributed Capital		Reinvested Earnings
	(Dollars in Millions)
Balance at December 31, 2001	$	585.0	$	191.2	$	148.1
Net income						126.4
Dividends declared to GTE						(161.0	)

Balance at September 30, 2002	$	585.0	$	191.2