Form 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark one)
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X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1994
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-1150
NEW ENGLAND TELEPHONE AND TELEGRAPH COMPANY
Incorporated under the laws of the State of New York
I.R.S. Employer Identification Number 04-1664340
125 High Street, Boston, Massachusetts 02110
Telephone Number (617) 743-9800
THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF NYNEX CORPORATION, MEETS THE
CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1) (a) AND (b) OF FORM 10-Q AND IS
THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT PURSUANT TO
GENERAL INSTRUCTION H(2).
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_. No__.
Amendment No. 1
The registrant hereby amends the following item of its Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1994, as set forth in the
pages attached hereto:
Part I - Item 2 "Management's Discussion and Analysis of Results of
Operations"
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Form 10-Q/A Part I New England Telephone and Telegraph Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
The following Management's Narrative Analysis of Results of Operations is
provided pursuant to General Instruction H(2) to Form 10-Q.
STATE REGULATORY MATTERS
Massachusetts
On April 14, 1994, the Company filed comprehensive tariff provisions with the
Massachusetts Department of Public Utilities ("MDPU") as part of an Alternative
Regulatory Plan to govern the Company's Massachusetts intrastate operations. The
Company's filing proposes the following: (1) regulation of the Company for a
period of ten years from the date of MDPU approval under a price framework; (2)
pricing rules that limit the Company's ability to increase both overall average
prices and specific rate elements, including a ceiling on the weighted average
price of all tariffed services based on a formula of inflation minus a
productivity factor plus or minus exogenous changes; (3) no earnings
restriction; (4) a cap on the monthly rates for residence services until August
2001; (5) an increase of $2.50 monthly in the credit on exchange services for
Lifeline customers; (6) investment commitments for the public telecommunications
network, including commencing the deployment of a broadband network in
Massachusetts; (7) quality of service commitments; (8) rate reductions for
switched access services; and (9) a new streamlined standard of regulation
governing the review of tariff filings. On May 24, 1994, the MDPU ruled that the
Company's filing would be treated as a petition for alternative regulation and,
consequently, the MDPU's review is not subject to the statutory suspension
period. Hearings concerning the Company's filing are expected to conclude by
late November 1994.
New Hampshire
On June 30, 1994, the New Hampshire Public Utilities Commission ("NHPUC")
approved the Company's proposed toll rate reduction targeted at small and medium
volume usage customers, effective August 5, 1994. The annual revenue effect of
the toll rate reduction is estimated to be approximately $7.1 million. The NHPUC
previously approved, effective January 31, 1994, a New England
Telephone-requested toll rate reduction targeted at high and medium volume usage
customers, with an annual revenue effect of $3.5 million.
Vermont
On October 5, 1994, the Vermont Public Service Board ("VPSB") issued its order
in the Company's Price Regulation Plan proceeding. The VPSB's order proposes
changes to the proposed agreement previously submitted by the Company and the
Vermont Department of Public Service ("VDPS"). The VPSB's proposed changes would
not restrict the Company's earnings during the four-year term of the agreement
but would impose a higher productivity factor and a narrow definition of
exogenous costs in the price regulation formula, additional pricing restrictions
and additional quality of service standards. On October 20, 1994, the Company
notified the VPSB of its rejection of the VPSB's proposed changes and that,
accordingly, the Company would continue under rate of return regulation. The
Company also filed a motion with the VPSB to
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Form 10-Q/A Part I New England Telephone and Telegraph Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
STATE REGULATORY MATTERS (Continued)
Vermont (Continued)
reconsider certain other provisions of the VPSB's order. On the same date, the
VDPS filed a motion with the VPSB to reconsider certain provisions of the VPSB's
order.
In the related proceeding to examine the Company's level of earnings, on October
5, 1994, the VPSB ordered the Company to reduce its annual intrastate revenues
by approximately $15 million. The reduction is retroactive to December 29, 1993,
the date the VPSB opened the proceeding. Among the adjustments ordered was a
reduction, effective September 1994 retroactive to January 1, 1994, in the
Company's Vermont depreciation rate to match the parameters agreed to by the
Federal Communications Commission in the 1993 triennial represcription review.
In September 1994, the Company reduced local operating revenues by approximately
$12 million for subsequent refund to Vermont customers for the period from
December 29, 1993 through September 30, 1994 (see OPERATING REVENUES and
OPERATING EXPENSES below). On October 19, 1994, the VDPS advised the VPSB of its
belief that the VPSB's order understated the Company's level of overearnings by
approximately $5 million. The Company has requested reconsideration of portions
of the VPSB's order. On November 2, 1994, the VPSB granted the Company's request
for a stay of implementation of that order pending a decision on the motion for
reconsideration.
On October 28, 1994, a lawsuit was filed in Vermont state court by a ratepayer
group seeking an additional refund by the Company, with respect to 1993 and 1994
revenues, of up to $54 million.
FEDERAL REGULATORY MATTERS
On July 1, 1994, the Company implemented the fourth annual update to the price
cap rates. These tariffs will result in a net reduction in the Company's annual
interstate access rates of approximately $0.3 million during the tariff period
from July 1, 1994 to June 30, 1995.
BUSINESS RESTRUCTURING
Approximately $61 million of pretax charges ($39 million after-tax) were
recorded in the second and third quarters of 1994 for pension enhancements for
approximately 480 management and 40 nonmanagement employees who elected during
the second and third quarters to leave the Company under retirement incentives
and for the Company's allocation from Telesector Resources Group, Inc.
("Telesector Resources") for its pension enhancements. A portion of the year-end
1993 accrual for severance was utilized on a per employee basis, and the
incremental costs of both the Company's pension enhancements and the Company's
allocation of Telesector Resources' pension enhancements were recorded. The
retirement incentives are intended to provide a voluntary means to implement a
portion of the planned work force reductions of approximately 6,300 employees by
the end of 1996. The components of the $61 million pretax charges are as
follows: $17 million ($12 million after-tax) for pension enhancements,
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<PAGE>
Form 10-Q/A Part I New England Telephone and Telegraph Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
BUSINESS RESTRUCTURING (Continued)
$11 million ($7 million after-tax) for associated postretirement medical
benefits, $18 million ($11 million after-tax) for charges allocated to the
Company from Telesector Resources for its pension enhancements and $15 million
($9 million after-tax) for its associated postretirement medical benefits. Much
of the cost of the incentives will be funded by NYNEX's pension plans.
The pension enhancement to the NYNEX management pension plan was announced in
February 1994 and will be offered at different times through 1996 according to
local force requirements. The Company's agreements with the Communications
Workers of America ("CWA") and with the International Brotherhood of Electrical
Workers ("IBEW"), which extend the existing labor agreements to August 1998,
provide a retirement incentive. (See COLLECTIVE BARGAINING AGREEMENTS below.)
The reserves established for severance will be transferred to the pension
liability on a per employee basis as a result of employees' leaving under the
pension enhancements as opposed to severance provisions, and the incremental
cost of the pension enhancements will be charged to expense as employees leave.
The retirement incentives credit employees with an additional six years toward
both their age and their length of service for the purpose of determining
pension eligibility and benefits. Postretirement medical costs will be increased
on a per employee basis, because these incentives resulted in more individuals
qualifying for lifetime medical coverage than under the severance plan, and will
be charged to expense as employees leave. Under the assumption that
nonmanagement employees will leave under the retirement incentive, the expected
utilization of nonmanagement severance reserves and the application of the
postretirement medical liability per year have been revised from the expected
utilization as previously reported (see the Company's Annual Report on Form
10-K/A, Amendment No. 1, for the year ended December 31, 1993) as follows:
(In millions)
Severance 1994 1995 1996 Total
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Management $80 $11 $ 9 $100
Nonmanagement 14 42 45 101
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Total $94 $53 $54 $201
==============================
Medical 1994 1995 1996 Total
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Management $35 $ 4 $ 4 $ 43
Nonmanagement 24 61 66 151
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Total $59 $65 $70 $194
==============================
The restructuring reserve balance at September 30, 1994, which does not include
the liability recorded at year-end for postretirement medical benefits
associated with employees leaving the Company under the business
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Form 10-Q/A Part I New England Telephone and Telegraph Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
BUSINESS RESTRUCTURING (Continued)
restructuring, was approximately $286 million. In the first nine months of 1994,
the Company reduced 1993 restructuring reserves by approximately $140 million in
the following categories:
Severance:
Management $38
Nonmanagement 5
--
Total Severance $43
Systems redesign:
Customer contact -
Customer provisioning -
Customer operations -
Customer support -
--
Total systems redesign -
Work center consolidation -
Branding 12
Relocation -
Training -
Re-engineering implementation -
Severance transferred to Telesector Resources 8
--
Subtotal 63
Telesector Resources' allocated
reserves:
Severance 29
Postretirement medical benefits 19
Systems re-engineering 21
Re-engineering implementation 8
Work center consolidation -
---
Total allocated reserves 77
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Total $140
====
The severance reduction amount is comprised of $37 million of severance reserves
transferred to the pension liability on a per employee basis as a result of
employees' leaving under the pension enhancements as opposed to severance
provisions as previously accrued for, $6 million utilized for other retiree
costs and $8 million transferred from the Company to Telesector Resources to
cover severance costs associated with employees who transferred from the Company
to Telesector Resources and subsequently left under the pension enhancements.
The reduction in the reserve for branding includes approximately $6 million to
reflect a revised estimate of branding costs.
In addition, $17 million of reserves accrued in 1991 for severance costs related
to Telesector Resources was utilized for the Company's allocation of Telesector
Resources pension enhancements.
During the third quarter of 1994, the Company began to realize significant
expense savings associated with force reductions. For the first nine months of
1994, the Company experienced a $9 million reduction in wages as a result of
approximately 520 employees' leaving under retirement incentives and
approximately 140 nonmanagement employees' leaving under a severance plan. In
addition, there was an $8 million reduction in costs allocated from Telesector
Resources as a result of expense savings associated with its force reductions.
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<PAGE>
Form 10-Q/A Part I New England Telephone and Telegraph Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
FIRST NINE MONTHS OF 1994 AS COMPARED TO FIRST NINE MONTHS OF 1993
OPERATING REVENUES
Operating revenues for the nine months ended September 30, 1994 increased $98.0
million, or 3.2%, over the same period last year. The increase in total
operating revenues is comprised of the following:
Increase (Decrease)
(In millions)
-------------
Local service $ 65.4
Long distance (5.5)
Network access 23.4
Other 14.7
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$ 98.0
======
Local service revenues are earned from the provision of local exchange, local
private line and local public network services. Local service revenues increased
$65.4 million due principally to: (1) increased customer demand of approximately
$51 million, evidenced by growth in access lines and growth in sales of calling
features such as caller identification, call waiting and touch-tone services,
(2) a net increase of approximately $16 million in local service rates primarily
attributable to the implementation of the third transitional filing of a
restructuring of Massachusetts rates effective April 14, 1994, (3) a $3 million
increase in local directory assistance revenues resulting from the reversal of
previously deferred revenues pursuant to a regulatory agreement with the State
of Massachusetts to offset expenses to enhance E911 systems, (4) a $7 million
increase primarily due to the 1994 reversal of revenues deferred in 1993 that
were in excess of the required one-time credit to customers' bills pursuant to
the Rhode Island price regulation trial for 1993 and (5) a $12 million decrease
resulting from a deferral of revenues in September 1994 for subsequent refund to
Vermont customers as required by a VPSB order (see STATE REGULATORY MATTERS
above).
Long distance revenues are earned from the provision of services beyond the
local service area, but within the local access and transport area ("LATA"), and
include public and private network switching. Long distance revenues decreased
$5.5 million due principally to: (1) a $24 million decrease in long distance
rates primarily attributable to the implementation of the third transitional
filing of a restructuring of Massachusetts rates effective April 14, 1994, (2) a
$3 million increase in long distance directory assistance revenues resulting
from the reversal of previously deferred revenues pursuant to a regulatory
agreement with the State of Massachusetts to offset expenses to enhance E911
systems and (3) a net increase of approximately $16 million resulting from
increased message toll service usage partially offset by decreases in private
line revenues and wide area telecommunication revenues primarily due to
increased competition and customer shifts to lower priced services offered by
the Company.
Network access revenues are earned from the provision of exchange access
services primarily to interexchange carriers. Network access revenues increased
$23.4 million due principally to a $29 million increase in switched
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<PAGE>
Form 10-Q/A Part I New England Telephone and Telegraph Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
FIRST NINE MONTHS OF 1994 AS COMPARED TO FIRST NINE MONTHS OF 1993
OPERATING REVENUES (Continued)
access revenues partially offset by a $6 million decrease in special access
revenues. Switched access revenues increased due principally to a $45 million
increase in network demand offset by a net decrease of approximately $12 million
primarily attributable to interstate rate changes. The decline in special access
revenues was due principally to decreased demand of approximately $4 million
resulting from increased competition and customer shifts to lower priced
services offered by the Company and a reduction in interstate rates of
approximately $2 million.
Other revenues are earned from the provision of products and services other than
Local service, Long distance and Network access. Other revenues increased $14.7
million due principally to a $10 million increase in revenues related to the
directory licensing agreement with NYNEX Information Resources Company resulting
from higher estimated pretax earnings from the directories published pursuant to
the agreement and to a $5 million increase in revenues from inside wire related
charges and voice messaging services.
OPERATING EXPENSES
Operating expenses for the nine months ended September 30, 1994 increased $125.6
million, or 5.5%, over the same period last year. This increase in total
operating expenses is comprised of the following:
Increase (Decrease)
(In millions)
-------------
Depreciation and amortization $ 34.8
Taxes other than income taxes (3.5)
All other:
Business restructuring charges
recorded in 1994 61.5
Employee related (5.6)
Other 38.4
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$125.6
======
Depreciation and amortization increased $34.8 million due principally to a $33
million increase due to revised intrastate depreciation rates in Massachusetts
effective July 1993 and a $24 million increase associated with increased plant
investment. These increases were partially offset by the reversal of $14 million
which represents an adjustment of prior year estimates for cost of removal (net
of salvage) for electromechanical switching equipment in Massachusetts, Maine
and Rhode Island and a decrease of $7 million resulting from implementation of
revised intrastate depreciation rates in Vermont in September 1994 retroactive
to January 1, 1994 (see STATE REGULATORY MATTERS above).
Taxes other than income taxes, which include gross receipts taxes, property
taxes and other non-income based taxes, decreased $3.5 million due principally
to a $5 million decrease in property taxes primarily attributable to an
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<PAGE>
Form 10-Q/A Part I New England Telephone and Telegraph Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
FIRST NINE MONTHS OF 1994 AS COMPARED TO FIRST NINE MONTHS OF 1993
OPERATING EXPENSES (Continued)
$8 million reversal of a 1993 accrual as a result of unasserted municipal
assessments partially offset by a $3 million increase in Massachusetts property
taxes due to increased rates. In addition, there was a $1 million increase in
Rhode Island gross receipts tax as a result of an increase in Rhode Island
operating revenues.
Business restructuring charges recorded during the first nine months of 1994
consisted of incremental costs related to pension enhancements (see BUSINESS
RESTRUCTURING above).
Employee related costs, which consist primarily of wages, payroll taxes and
employee benefits, decreased $5.6 million. This decrease was due principally to
a $6 million net decrease in wages and payroll taxes primarily attributable to
reductions in the Company's work force due to transfers of employees to
Telesector Resources associated with re-engineering the way service is delivered
to customers, including operating the Company and New York Telephone Company
("New York Telephone") as a single enterprise (see Other operating expenses
below), and to the Company's force reduction program, partially offset by
increases in salary and wage rates.
Other operating expenses, which consist primarily of contracted and
centralized services, rent and other general and administrative costs, increased
$38.4 million. This increase was principally due to: (1) a $26 million net
increase in charges from affiliated companies primarily attributable to an
increase in Telesector Resources' contracted and centralized services, the
transfer of employees from the Company to Telesector Resources (see Employee
related costs above) and to increases in salary and wage rates, partially offset
by decreases due to Telesector Resources' force reduction program, (2) an
$11 million increase in right to use fees resulting from increased software
purchases, (3) a $7 million increase resulting from capitalization in 1993 of
certain 1992 engineering charges, (4) a $5 million increase in sales commissions
due to an increase in commission rates and increased promotion of new products
and (5) a $4 million increase in contract engineering due to an increase in
generic switch conversions and installation of software enhancements. These
increases were partially offset by: (1) an $8 million decrease in the loss
associated with the bad debt expense realized pursuant to the provisions of the
billing and collection contract primarily with AT&T Corp. and (2) an $8 million
decrease due to the completion of equal access amortization in 1993.
OTHER INCOME (EXPENSE) - NET
Other income (expense) - net increased $46.9 million over the same period last
year due principally to a $41 million increase resulting from completion in 1993
of the transition plan with New York Telephone to phase in the earnings impact
of the unified tariff access rate structure. In addition, there was a $4 million
increase due to higher expenses in the first nine months of 1993 for the
interstate portion of call premiums and other charges associated with the
refinancing of long-term debt.
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Form 10-Q/A Part I New England Telephone and Telegraph Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
FIRST NINE MONTHS OF 1994 AS COMPARED TO FIRST NINE MONTHS OF 1993
INTEREST EXPENSE
Interest expense decreased $10.0 million from the same period last year,
primarily due to a decrease in average interest rates resulting from long-term
debt refinancings in 1993.
INCOME TAXES
Income taxes increased $13.3 million over the same period last year. The
increase was principally due to an increase in pretax income and a reduction in
amortization of the investment tax credit.
FINANCING
At September 30, 1994, the Company had $500 million of unissued, unsecured debt
securities registered with the SEC.
COLLECTIVE BARGAINING AGREEMENTS
On March 24, 1994, an agreement was reached with the CWA to extend through
August 8, 1998 the collective bargaining agreement that was to expire on
August 5, 1995. The agreement was ratified in May 1994. On August 5, 1994,
a similar agreement was reached with the IBEW, which was ratified in
August 1994. Under the terms of the new agreements, there will be basic wage
increases of 10.5% during the life of the agreements. Wages will increase
4.0% on August 6, 1995, 3.5% on August 4, 1996 and 3.0% on August 3, 1997. In
1997 there may also be a cost-of-living adjustment. The agreements also provide
for retirement incentives, a commitment to no layoffs or loss of wages as a
result of Company-initiated "process change", an enhanced educational program
and incentives to improve service quality.
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Form 10-Q/A New England Telephone and Telegraph Company
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NEW ENGLAND TELEPHONE AND TELEGRAPH COMPANY
Gail Deegan
---------------------------------------
Gail Deegan
Vice President, Chief Financial Officer and Treasurer
(Principal Financial and Chief Accounting Officer)
December 14, 1994
