Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark one)
---
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
---
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 .
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Form 10-Q Part I New England Telephone and Telegraph Company
PART I - FINANCIAL INFORMATION
STATEMENTS OF INCOME AND RETAINED EARNINGS
(In millions) (Unaudited)
For the For the
Three Months Ended Nine Months Ended
September 30, September 30,
1994 1993 1994 1993
OPERATING REVENUES
Local service $ 470.9 $ 458.2 $1,420.8 $1,355.4
Long distance 183.3 193.1 562.3 567.8
Network access 302.5 289.4 896.8 873.4
Other 90.7 86.3 271.7 257.0
Total operating revenues 1,047.4 1,027.0 3,151.6 3,053.6
OPERATING EXPENSES
Maintenance and support 291.2 281.4 884.6 824.8
Depreciation and amortization 205.2 216.4 647.9 613.1
Marketing and customer services 137.2 149.9 422.7 429.0
Taxes other than income taxes 30.4 29.1 83.7 87.2
Provision for uncollectible
revenues 13.0 12.4 36.0 35.5
Other 96.2 97.3 337.1 296.8
Total operating expenses 773.2 786.5 2,412.0 2,286.4
Operating income 274.2 240.5 739.6 767.2
Other income (expense) - net 5.1 (11.6) 11.3 (35.6)
Interest expense 40.0 42.6 121.4 131.4
Earnings before income taxes
and cumulative effect of
change in accounting principle 239.3 186.3 629.5 600.2
Income taxes
Federal 70.2 58.5 183.2 171.6
State and local 16.4 13.1 43.5 41.8
Total income taxes 86.6 71.6 226.7 213.4
Earnings before cumulative effect
of change in accounting
principle 152.7 114.7 402.8 386.8
Cumulative effect of change in
accounting for postemployment
benefits, net of taxes - 0.3* - (25.0)*
NET INCOME $ 152.7 $ 115.0* $ 402.8 $ 361.8 *
RETAINED EARNINGS
Beginning of period $ 979.5 $1,302.1* $ 929.9 $1,262.0
Prior period adjustment
(Note (f)) (11.7) - - -
Beginning retained
earnings-adjusted 967.8 1,302.1 929.9 1,262.0
Net income 152.7 115.0* 402.8 361.8 *
Dividends declared (106.0) (103.4) (318.2) (310.1)
End of period $1,014.5 $1,313.7* $1,014.5 $1,313.7 *
* Restated to reflect the adoption of Statement of Financial
Accounting Standards No. 112 in the fourth quarter of
1993 retroactive to January 1, 1993.
See accompanying notes to financial statements.
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Form 10-Q Part I New England Telephone and Telegraph Company
BALANCE SHEETS
(In millions)
September 30, December 31,
1994 1993
(Unaudited)
ASSETS
Current assets:
Cash $ 7.9 $ 11.2
Receivables (net of allowance of $46.7
and $51.7, respectively) 801.9 732.5
Deferred income taxes 82.1 120.6
Deferred charges 91.6 99.5
Inventories 43.0 57.6
Prepaid expenses and other 32.6 69.6
Total current assets 1,059.1 1,091.0
Telephone plant - at cost 12,050.4 11,591.1
Less: accumulated depreciation 5,411.3 5,013.9
6,639.1 6,577.2
Deferred charges and other 576.8 602.8
TOTAL ASSETS $ 8,275.0 $ 8,271.0
LIABILITIES AND SHARE OWNER'S EQUITY
Current liabilities:
Accounts payable
Affiliates $ 393.9 $ 404.3
Trade and other 526.0 587.7
Short-term debt 133.6 158.5
Dividends payable 106.1 103.4
Taxes accrued 53.7 26.5
Advance billing and customers' deposits 20.2 18.2
Interest accrued 45.2 37.8
Total current liabilities 1,278.7 1,336.4
Long-term debt 2,165.0 2,164.0
Deferred income taxes 791.9 841.7
Unamortized investment tax credits 98.6 115.4
Other long-term liabilities
and deferred credits 837.2 794.5
Total liabilities 5,171.4 5,252.0
Commitments and contingencies (Notes (d) and (e))
Share owner's equity:
Common stock - one share,
without par value 2,089.1 2,089.1
Retained earnings 1,014.5 929.9
Total share owner's equity 3,103.6 3,019.0
TOTAL LIABILITIES AND
SHARE OWNER'S EQUITY $ 8,275.0 $ 8,271.0
See accompanying notes to financial statements.
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Form 10-Q Part I New England Telephone and Telegraph Company
STATEMENTS OF CASH FLOWS
(In millions) (Unaudited)
For The
Nine Months Ended
September 30,
1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 402.8 $ 361.8 *
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 647.9 613.1
Allowance for funds used during
construction - equity component (7.0) (5.8)
Change in operating assets and liabilities:
Receivables (69.4) (8.9)
Deferred income taxes 38.5 3.8 *
Deferred charges 7.9 1.9
Inventories 14.6 6.5
Prepaid expenses and other 37.0 (7.3)
Accounts payable (72.1) (39.0)*
Taxes accrued 27.2 11.1
Advance billing and customers' deposits 2.0 0.2
Interest accrued 7.4 (8.9)
Deferred income taxes and Unamortized
investment tax credits (66.6) (6.2)*
Other long-term liabilities and
deferred credits 42.7 (25.0)*
Other - net 5.1 4.5
Total adjustments 615.2 540.0
Net cash provided by operating activities 1,018.0 901.8
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (680.5) (593.4)
Advances to NYNEX - 82.0
Net cash used in investing activities (680.5) (511.4)
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from NYNEX (24.6) 145.1
Dividends paid to NYNEX (315.5) (305.8)
Issuance of long-term debt - 323.2
Repayment of long-term debt and capital leases (0.7) (0.8)
Debt refinancings and call premiums - (551.0)
Net cash used in financing activities (340.8) (389.3)
Net (decrease) increase in Cash (3.3) 1.1
Cash at beginning of period 11.2 12.7
Cash at end of period $7.9 $13.8
* Restated to reflect the adoption of Statement of
Financial Accounting Standards No. 112 in the fourth
quarter of 1993 retroactive to January 1, 1993.
See accompanying notes to financial statements.
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Form 10-Q Part I New England Telephone and Telegraph Company
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(a) BASIS OF PRESENTATION - The financial statements have been
prepared by New England Telephone and Telegraph Company (the
"Company"), a wholly owned subsidiary of NYNEX Corporation
("NYNEX"), pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC") and, in the
opinion of management, include all adjustments (consisting only
of normal recurring adjustments) necessary for a fair
presentation of the financial information for each period shown.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted
pursuant to such SEC rules and regulations. Management believes
that the disclosures made are adequate to make the information
presented not misleading. Certain information in the financial
statements for 1993 has been reclassified to conform to the
current year's presentation. The results for interim periods are
not necessarily indicative of results for the full year. These
financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's
1993 Annual Report on Form 10-K and the current year's previously
issued Quarterly Reports on Form 10-Q.
(b) CASH - The Company's cash management policy is to make funds
available in banks when checks are presented. At September 30,
1994, the Company had recorded in Accounts payable checks
outstanding but not yet presented for payment of $52.4 million.
(c) SUPPLEMENTAL INFORMATION - The following information is
provided in accordance with Statement of Financial Accounting
Standards No. 95, "Statement of Cash Flows":
For the
Nine Months Ended
September 30,
1994 1993
(In millions)
Income tax payments $243.1 $249.7
Interest payments $117.2 $137.5
(d) REVENUES SUBJECT TO POSSIBLE REFUND - Several regulatory
matters, primarily involving the rates and charges for the
provision of certain interstate access and other related
services, may possibly require the refund of a portion of the
revenues collected for such services in the current and prior
periods. As of September 30, 1994, the aggregate amount of such
revenues that was estimated to be subject to possible refund was
approximately
$17 million, plus related interest. The outcome of each pending
matter, as well as the time frame within which each will be
resolved, is not presently determinable.
(e) LITIGATION AND OTHER CONTINGENCIES - Various legal actions
and regulatory proceedings are pending that may affect the
Company, including matters involving Racketeer Influenced and
Corrupt Organizations Act, antitrust, tort, contract and tax
deficiency claims. While counsel cannot give assurance as to
the outcome of any of these matters, in the opinion of management
based upon the advice of counsel, the ultimate resolution of
these matters in future periods is not expected to have a
material effect on the Company's financial
position or annual operating results but could have a material
effect on quarterly operating results.
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Form 10-Q Part I New England Telephone and Telegraph Company
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(f) SHARE OWNER'S EQUITY - Retained earnings at June 30, 1994
has been adjusted to correct an error by the outside actuary of
the registrant in calculating the cost of pension enhancements in
the second quarter of 1994. The effect of the correction on net
income for the second quarter was a decrease of $11.7 million,
net of income tax of $7.2 million, and the Company's Quarterly
Report on Form 10-Q for the period ended June 30, 1994 has been
amended. This adjustment has no effect on net income for the
nine months ended September 30, 1994.
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Form 10-Q 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 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 period 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 reduction 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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Form 10-Q 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
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.
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. Much of
the cost of the incentives will be funded by NYNEX's pension
plans. These incentives also resulted in more individuals
qualifying for lifetime medical coverage than under the severance
plan. 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 restructuring reserve balance for the 1993 business
restructuring charges at September 30, 1994 was approximately
$286 million, excluding the liability recorded at year-end for
postretirement medical benefits associated with
employees leaving the Company under the business restructuring.
In the first nine months of 1994, the Company reduced 1993
restructuring reserves by approximately $140 million as follows:
$37 million of reserves established for severance was 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 of reserves established for severance was
utilized for severance and other retiree costs; $8 million of the
Company's severance reserve was transferred 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; $6 million was
utilized for developing a single "NYNEX" brand identity and $6
million was reversed to reflect a revised estimate of costs
related to a "NYNEX" brand identity; $29 million was utilized for
the Company's allocation of Telesector Resources' pension
enhancements; $19 million was utilized for the Company's
allocation of Telesector Resources' postretirement medical
benefits; and $29 million was utilized for the Company's
allocation of Telesector Resources' process re-engineering.
Additionally, $14 million of reserves established 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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Form 10-Q 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
$ 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 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
$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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Form 10-Q 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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<PAGE>
Form 10-Q 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.
- 13 -
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
PART II - OTHER INFORMATION
Item 5. Other Information
State Regulatory Matters
Maine
In an order dated August 18, 1994, the Maine Public
Utilities Commission ("MPUC") decided to address a rate
payer complaint challenging the level of earnings of New
England Telephone and Telegraph Company (the "Company) in
Maine by including the matter in the pending alternative
regulation proceeding. The MPUC has scheduled hearings in
the alternative regulation proceeding for January 1995.
Rhode Island
On October 13, 1994, the Company made its third annual
filing with the Rhode Island Public Utilities Commission
("RIPUC") under the Price Regulation Trial, for effect on
January 15, 1995. This filing calls for an overall
revenue reduction of approximately $445,000, with numerous
minor price adjustments.
In a separate proceeding, the RIPUC is considering
proposals from the Rhode Island Division of Public
Utilities and Carriers and various interexchange carriers
with respect to the Company's intrastate access charges,
including a proposal to freeze the Company's annual
carrier common line revenues based on the most recent
available annual amount. A decision by the RIPUC is
expected by mid-November.
On October 25, 1994, the RIPUC initiated a proceeding with
respect to competition. The scope of the proceeding is
yet to be defined but may include intraLATA
presubscription and local exchange competition.
See, also, discussion of STATE REGULATORY MATTERS in Part
I, Management's Discussion and Analysis of Results of
Operations, which is incorporated herein by reference.
Federal Regulatory Matters
In accordance with the Federal Communications Commission's
("FCC") July 14, 1994 order on virtual collocation, the
Company and New York Telephone Company (collectively, "the
telephone companies") advised the FCC on September 1, 1994
that, because the telephone companies' physical
collocation tariff complies with the requirements in the
FCC's order, the telephone companies did not intend to
file a virtual collocation tariff.
On September 1, 1994, the telephone companies filed tariff
revisions with the FCC to amend price cap indices to
reflect additional exogenous costs resulting from the
implementation of Statement of Financial Accounting
Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" ("OPEB").
The filing reflects $37.6 million of costs already accrued
and increased annual
- 14 -
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph
Company
Item 5. Other Information (Continued)
Federal Regulatory Matters (Continued)
costs of $21 million. The filing follows a July 12, 1994
decision of the U.S. Court of Appeals for the District of
Columbia Circuit overturning the FCC's prior order denying
exogenous treatment of additional OPEB costs. On
September 26, 1994, the telephone companies
filed a reply opposing MCI Communications Corp.'s petition
to suspend and investigate the tariff filing.
On September 9, 1994, the New England Cable Television
Association, National Cable Television Association and Cox
Enterprises
filed petitions with the FCC to deny the Company's July 8,
1994 request to construct facilities and provide video
dialtone service in portions of Massachusetts and Rhode
Island. On September 22, 1994, the Company filed its
opposition to the petitions to deny.
On October 20, 1994, the FCC announced that it had adopted
a decision responding to petitions for reconsideration of
its 1992 order establishing the rules and regulatory
framework governing telephone company provision of video
dialtone. The FCC generally affirmed its rules for video
dialtone, with some clarifications and modifications. The
FCC affirmed the common carrier nature of the video
dialtone platform, indicated that the video dialtone
platform will be subject to dual federal/state regulation,
stated that cost allocation issues will be resolved in the
tariff process and relaxed in certain respects its
telephone company/cable non-ownership affiliation rules.
Operations under the Modification of Final Judgment
("MFJ")
On August 18, 1994, the United States District Court for
the District of Columbia (the "MFJ Court") ordered that
the July 6, 1994 motion of NYNEX Corporation ("NYNEX"),
Bell Atlantic Corporation ("Bell Atlantic"), BellSouth
Corporation ("BellSouth") and Southwestern Bell
Corporation ("SBC") to vacate the MFJ be referred to the
Department of Justice ("DOJ") for investigation. The MFJ
Court's order provides that interested parties are to file
their comments on the motion with the DOJ by mid-November.
Following completion of its investigation, the DOJ is
expected to file its response to the motion with the MFJ
Court in late 1995 or early 1996, following which there
shall be an opportunity for additional public comment and
responses by NYNEX, Bell Atlantic, BellSouth and SBC.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit
Number
(27) Financial Data Schedule
(b) Reports on Form 8-K
No report on Form 8-K was filed by the registrant
during the quarter for which this report is filed.
- 15 -
<PAGE>
Form 10-Q Part I 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)
November 8, 1994
- 16 -
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