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, 1995
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 .
--- ---
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
PART I - FINANCIAL INFORMATION
STATEMENTS OF INCOME AND RETAINED EARNINGS
(In millions) (Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
For the Period Ended September 30, 1995 1994 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Local service $ 494.1 $ 470.9 $1,460.9 $1,420.8
Long distance 176.3 183.3 521.8 562.3
Network access 326.0 302.5 968.7 896.8
Other 91.9 90.7 265.0 271.7
-------- -------- -------- --------
Total operating revenues 1,088.3 1,047.4 3,216.4 3,151.6
-------- -------- -------- --------
OPERATING EXPENSES
Maintenance and support 272.1 291.2 827.4 884.6
Depreciation and amortization 223.5 205.2 674.4 647.9
Marketing and customer services 156.8 137.2 430.6 422.7
Taxes other than income taxes 33.1 30.4 96.7 83.7
Provision for uncollectible revenues 12.0 13.0 39.0 36.0
Other 115.5 96.2 396.2 337.1
-------- -------- -------- --------
Total operating expenses 813.0 773.2 2,464.3 2,412.0
-------- -------- -------- --------
Operating income 275.3 274.2 752.1 739.6
Other income (expense) - net 2.7 5.1 9.3 11.3
Interest expense 40.1 40.0 119.4 121.4
-------- -------- -------- --------
Earnings before income taxes and
extraordinary item 237.9 239.3 642.0 629.5
-------- -------- -------- --------
Income taxes
Federal 76.6 70.2 205.2 183.2
State and local 15.7 16.4 43.5 43.5
-------- -------- -------- --------
Total income taxes 92.3 86.6 248.7 226.7
-------- -------- -------- --------
Earnings before extraordinary item 145.6 152.7 393.3 402.8
Extraordinary item for the
discontinuance of regulatory
accounting principles,
net of taxes (Note (b)) -- -- (627.8) --
--------- -------- -------- --------
NET INCOME (LOSS) $ 145.6 $ 152.7 $ (234.5) $ 402.8
======== ======== ======== ========
RETAINED EARNINGS
Beginning of period $ 378.5 $ 967.8 $ 979.9 $ 929.9
Net income (loss) 145.6 152.7 (234.5) 402.8
Dividends declared (110.7) (106.0) (332.0) (318.2)
-------- -------- -------- --------
End of period $ 413.4 $1,014.5 $ 413.4 $1,014.5
======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
BALANCE SHEETS
--------------
(in millions)
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
- --------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash $ 4.0 $ 9.1
Receivables (net of allowance of $53.6
and $50.9, respectively) 863.1 804.2
Deferred income taxes 108.7 109.9
Deferred charges 85.9 82.6
Inventory 50.7 49.4
Prepaid expenses and other 36.5 18.2
--------- ---------
Total current assets 1,148.9 1,073.4
--------- ---------
Telephone plant - at cost 12,355.7 12,084.7
Less: accumulated depreciation 6,558.4 5,451.8
--------- ---------
5,797.3 6,632.9
--------- ---------
Deferred charges and other 136.4 574.8
--------- ---------
TOTAL ASSETS $ 7,082.6 $ 8,281.1
========= =========
LIABILITIES AND SHARE OWNER'S EQUITY
- ------------------------------------
Current liabilities:
Accounts payable
Affiliates $ 458.9 $ 407.0
Trade and other 512.6 648.3
Short-term debt 3.4 53.8
Dividends payable 110.7 106.1
Taxes accrued 101.3 46.0
Advance billing and customers' deposits 21.4 20.1
Interest accrued 45.6 38.0
--------- ---------
Total current liabilities 1,253.9 1,319.3
--------- ---------
Long-term debt 2,171.9 2,165.4
Deferred income taxes 329.7 773.2
Unamortized investment tax credits 70.7 91.9
Other long-term liabilities
and deferred credits 753.9 862.3
--------- ---------
Total liabilities 4,580.1 5,212.1
--------- ---------
Commitments and contingencies (Notes (e) and (f))
Share owner's equity:
Common stock - one share, without par
value (Note (h)) 1.0 2,089.1
Additional paid-in capital (Note (h)) 2,088.1 --
Retained earnings 413.4 979.9
--------- ---------
Total share owner's equity 2,502.5 3,069.0
--------- ---------
TOTAL LIABILITIES AND SHARE OWNER'S EQUITY $ 7,082.6 $ 8,281.1
========= =========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
STATEMENTS OF CASH FLOWS
------------------------
(In millions) (Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended September 30, 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (234.5) $ 402.8
-------- -------
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Extraordinary item, net of taxes 627.8 --
Depreciation and amortization 674.4 647.9
Changes in operating assets and liabilities:
Receivables (58.9) (69.4)
Current deferred charges (3.3) 7.9
Current deferred income taxes 1.7 38.5
Inventory (1.3) 14.6
Prepaid expenses and other (43.8) 37.0
Accounts payable (31.1) (72.1)
Taxes accrued 55.3 27.2
Advance billing and customers' deposits 1.3 2.0
Interest accrued 7.6 7.4
Deferred income taxes and Unamortized
investment tax credits (63.4) (66.6)
Other long-term liabilities and
deferred credits 55.7 42.7
Other - net (13.4) (1.9)
-------- -------
Total adjustments 1,208.6 615.2
-------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 974.1 1,018.0
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (599.2) (680.5)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from NYNEX (52.1) (24.6)
Dividends paid to NYNEX (327.5) (315.5)
Repayment of long-term debt and capital leases (0.4) (0.7)
-------- -------
NET CASH USED IN FINANCING ACTIVITIES (380.0) (340.8)
-------- -------
Net (decrease) increase in Cash (5.1) (3.3)
Cash at beginning of period 9.1 11.2
-------- -------
CASH AT END OF PERIOD $ 4.0 $ 7.9
======== =======
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
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 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 1994 has been reclassified
to conform to the current year's presentation. The results for interim periods
are not necessarily indicative of the 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 1994 Annual Report on Form 10-K and the
current year's previously issued Quarterly Reports on Form 10-Q. In the second
quarter of 1995, the Company discontinued using generally accepted accounting
principles applicable to regulated entities (see Note (b)).
(b) DISCONTINUANCE OF REGULATORY ACCOUNTING PRINCIPLES - In the second
quarter of 1995, the Company discontinued accounting for its operations in
accordance with the provisions of Statement of Financial Accounting Standards
No. 71, "Accounting for the Effects of Certain Types of Regulation" ("Statement
No. 71"). As a result, the Company recorded an extraordinary non-cash charge of
$627.8 million, net of income taxes of $414.2 million.
The operations of the Company no longer met the criteria for application of
Statement No. 71 due to a number of factors including: significant changes in
regulation, including the achievement of price regulation rather than
rate-of-return regulation in Massachusetts, its largest operating jurisdiction,
and Maine, and the ongoing efforts to achieve price regulation in its remaining
jurisdictions, an intensifying level of competition, and the increasingly rapid
pace of technological change. Under Statement No. 71, the Company had accounted
for the effects of rate actions by federal and state regulatory commissions by
establishing certain regulatory assets and liabilities, including the
depreciation of its telephone plant and equipment using asset lives approved by
regulators and the deferral of certain costs and obligations based on approvals
received from regulators. The Company had continually assessed its position and
the recoverability of its telecommunications assets with respect to Statement
No. 71.
5
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
NOTES TO FINANCIAL STATEMENTS (Continued)
-----------------------------
(Unaudited)
As a result of the discontinuance of Statement No. 71, the Company has
implemented Statement of Financial Accounting Standards No. 101, "Regulated
Enterprises - Accounting for the Discontinuation of Application of FASB
Statement No. 71" ("Statement No. 101"). The Company has adjusted its telephone
plant and equipment through an increase in accumulated depreciation, to reflect
the difference between recorded depreciation and the amount of depreciation that
would have been recorded had the Company not been subject to rate regulation. As
a result of the increase in accumulated depreciation, gross plant was written
off where fully depreciated. Non-plant regulatory assets and liabilities were
eliminated from the balance sheet.
The after-tax extraordinary charge recorded consists of $472.6 million for the
adjustment to telephone plant and equipment and $155.2 million for the write-off
of non-plant regulatory assets and liabilities.
The net adjustment to telephone plant and equipment was a decrease of $790.1
million ($472.6 million after-tax). This decrease was supported by a
depreciation analysis, which identified inadequate depreciation reserve levels
which the Company believes resulted principally from the cumulative
under-depreciation of telephone plant and equipment as a result of the
regulatory process. An impairment analysis was performed and did not identify
any additional amounts not recoverable from future operations. Investment tax
credits ("ITCs") are deferred and amortized over the estimated service lives of
the related telephone plant and equipment. ITC amortization was accelerated as a
result of the reduction in asset lives of the associated telephone plant and
equipment.
The major components of non-plant regulatory net assets which were written off
as a result of the discontinued application of Statement No. 71 are as follows:
<TABLE>
<CAPTION>
(In millions) Pretax After-tax
<S> <C> <C>
Compensated absences $ 53.0 $ 31.3
Deferred pension costs 116.7 67.6
Refinancing costs 70.9 46.4
Deferred taxes - 2.0
Other 11.3 7.9
------ ------
Total $251.9 $155.2
====== ======
</TABLE>
Upon the adoption of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," the effects of required adjustments to deferred
tax balances were deferred on the balance sheet as regulatory assets and
liabilities. These deferrals were amortized during the period in which the
related deferred taxes were recognized in the ratemaking process. During the
second quarter of 1995, tax-related regulatory net assets of $2.0 million were
eliminated.
6
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
NOTES TO FINANCIAL STATEMENTS (Continued)
-----------------------------
(Unaudited)
Upon adoption of Statement No. 101, the Company began using estimated asset
lives for certain categories of telephone plant and equipment that are shorter
than those approved by regulators. The shorter asset lives result from the
Company's expectations as to the revenue-producing lives of the assets. A
comparison of average asset lives before and after the discontinuance of
Statement No. 71, for the most significantly affected categories of telephone
plant and equipment, is as follows:
<TABLE>
<CAPTION>
Average lives (in years)
------------------------
Composite
Regulator-Approved Economic
Asset Lives Asset Lives
<S> <C> <C>
Digital Switching 17 12
Circuit-Other 11 8
Aerial Metallic Cable 21 17
Underground Metallic Cable 25 15
Buried Metallic Cable 22 17
Fiber 30 20
</TABLE>
As a result of the discontinued application of Statement No. 71, regulatory
accounting principles no longer apply to the operations of the Company for
financial accounting and reporting purposes. The Company no longer recognizes
regulatory assets and liabilities and the related amortization. The application
of Statement No. 101 does not change the Company's accounting and reporting for
regulatory purposes.
(c) CASH - The Company's cash management policy is to make funds available in
banks when checks are presented. At September 30, 1995, the Company had recorded
in Accounts payable checks outstanding but not yet presented for payment of
$35.5 million.
(d) ADOPTION OF FINANCIAL ACCOUNTING STANDARDS - Effective January 1, 1995, the
Company adopted Statement of Financial Accounting Standards No. 116, "Accounting
for Contributions Received and Contributions Made" ("Statement No. 116"). The
effect of implementing Statement No. 116 on the Company's results of operations
and financial position was insignificant.
(e) 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, 1995, the aggregate amount of such revenues that was estimated to
be subject to possible refund was approximately $28.0 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.
7
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
NOTES TO FINANCIAL STATEMENTS (Continued)
-----------------------------
(Unaudited)
(f) 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.
(g) SUPPLEMENTAL INFORMATION - The following information is provided in
accordance with Statement of Financial Accounting Standards No. 95, "Statement
of Cash Flows":
<TABLE>
<CAPTION>
For the
Nine Months Ended
September 30,
(In millions) 1995 1994
---------------
<S> <C> <C>
Income tax payments $257.1 $243.1
Interest payments $105.4 $117.2
</TABLE>
(h) SHARE OWNER'S EQUITY - Pursuant to the resolutions of the Board of Directors
of the Company, adopted on June 21, 1995, the Common stock of the Company was
reduced by approximately $2.1 billion and such amount was reallocated to
Additional paid-in capital.
8
<PAGE>
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.
FIRST NINE MONTHS OF 1995 AS COMPARED TO FIRST NINE MONTHS OF 1994
- ---------------------------------------------------------------------------
RESULTS OF OPERATIONS
- ----------------------
For the nine months ended September 30, 1995 and 1994, net (loss) income was
($234.5) million and $402.8 million, respectively. Results for the first nine
months of 1995 include an after-tax extraordinary charge of $627.8 million for
the discontinuance of Statement No. 71. Results also include an after-tax charge
of $60.0 million for pension enhancements for approximately 250 management and
710 nonmanagement employees who elected to leave the Company under retirement
incentives and for the Company's allocation from Telesector Resources Group,
Inc. ("Telesector Resources") for its pension enhancements, and non-recurring
after-tax items of $9.9 million for accruals related to various self-insurance
programs, a court decision on overearnings complaints and revised benefit
charges. Results for the first nine months of 1994 included an after-tax charge
of $39.3 million for pension enhancements for approximately 480 management and
40 nonmanagement employees who elected to leave the Company under retirement
incentives and for the Company's allocation from Telesector Resources for its
pension enhancements.
Operating revenues increased $64.8 million, or 2.1%, over the first nine
months of 1994. Excluding a non-recurring item of $4.3 million in the third
quarter of 1995 resulting from a court decision on overearnings complaints,
operating revenues increased $69.1 million, or 2.2%, principally due to the net
effect of growth in access lines and switched access usage, and intrastate and
interstate rate reductions.
Operating expenses increased $52.3 million, or 2.2%, over the first nine
months of 1994. Excluding pretax pension enhancement charges in 1995 and 1994 of
$94.5 million and $60.9 million, respectively, and non-recurring charges of $9.0
million in 1995, operating expenses increased $9.7 million, or 0.4%, over the
first nine months of 1994, due primarily to a $27 million increase in
depreciation expense attributable to an increase in rates and plant investment
offset by a net $17 million decrease in expenses as force reductions and process
re-engineering continued.
OPERATING REVENUES
- ------------------
Operating revenues for the nine months ended September 30, 1995 increased $64.8
million, or 2.1%, over the same period last year. This increase is comprised of
the following:
<TABLE>
<CAPTION>
Increase (Decrease)
(In millions)
-------------
<S> <C>
Local service $40.1
Long distance (40.5)
Network access 71.9
Other (6.7)
-----
$64.8
=====
</TABLE>
9
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
-------------------------------------------------------------
Local service revenues are earned from the provision of local exchange, local
private line and local public network services. The net increase was due
principally to: (1) increased customer demand of approximately $43 million,
driven by growth in access lines and sales of calling features, (2) a net
increase of $6 million in rates attributable to a 1994 restructuring of
Massachusetts rates, (3) a $5 million decrease due to the 1994 reversal of
deferred revenues that were in excess of the required credit to customers
pursuant to the 1993 Rhode Island price regulation trial, and (4) a $6 million
decrease as required by an order of the Maine Public Utilities Commission
("MPUC") (see STATE REGULATORY MATTERS).
Long distance revenues are earned from the provision of services beyond the
local service area, but within the local access and transport area, and include
public and private network switching. The decrease was due principally to a $21
million decrease in rates, and a net $18 million decrease in demand for message
toll, private line and wide area telecommunications services as a result of
customer shifts to lower priced services offered by the Company and increased
competition. However, certain competitive losses in long distance revenues were
mostly offset by increases in network access revenues.
Network access revenues are earned from the provision of exchange access
services primarily to interexchange carriers. Excluding a decrease in the third
quarter of 1995 of $4 million resulting from a court decision on overearnings
complaints for the period 1987-1988 (see FEDERAL REGULATORY MATTERS), network
access revenues increased $76.2 million, or 8.5%. There was a net $68 million
increase in switched access revenues primarily due to increased demand partially
offset by interstate rate reductions. Special access revenues increased a net $8
million primarily due to increased demand.
Other revenues are earned from the provision of products and services other than
Local service, Long distance and Network access. There was a $13 million
decrease in billing and collection revenues under the contract with AT&T Corp.
("AT&T"), partially offset by a $5 million increase in voice messaging services
revenues.
OPERATING EXPENSES
- ------------------
Operating expenses for the nine months ended September 30, 1995 increased $52.3
million, or 2.2%, over the same period last year. This increase is comprised of
the following:
<TABLE>
<CAPTION>
Increase (Decrease)
(In millions)
<S> <C>
Depreciation and amortization $ 26.5
Taxes other than income taxes 13.0
All other:
Business restructuring charges 33.6
Employee related (40.4)
Other 19.6
------
$ 52.3
======
</TABLE>
10
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
- -------------------------------------------------------------
Excluding pretax pension enhancement charges of $94.5 million and $60.9 million
in 1995 and 1994, respectively, and non-recurring charges of $9.0 million in
1995, operating expenses increased $9.7 million, or 0.4%, over the first nine
months of 1994.
Depreciation and amortization increased principally due to: (1) a $14 million
net increase due to growth in depreciable plant investment, (2) a $13 million
increase due to revised intrastate depreciation rates in Vermont, (3) a $6
million increase in the amortization of central office equipment, (4) a $3
million increase due to the discontinuance of regulatory accounting principles
(see Note (b)) and (5) a $9 million decrease primarily attributable to revised
non-regulated depreciation rates.
Taxes other than income taxes include gross receipts taxes, property taxes and
other non-income based taxes. The increase is primarily attributable to a 1994
reversal of accrued taxes as a result of unasserted municipal property tax
assessments.
Business restructuring charges consist of incremental costs related to pension
enhancements. Pretax restructuring charges for the nine months ended September
30, 1995 increased $33.6 million over the same period last year. During the
first nine months of 1995, $94.5 million of pretax charges ($60.0 million
after-tax) was recorded for approximately 250 management and 710 nonmanagement
employees who elected during the first nine months of 1995 to leave under
retirement incentives and for the Company's allocation from Telesector
Resources. The components of the pretax charges are as follows: $77.3 million
($48.9 million after-tax) for pension enhancements, $.6 million ($1 million
after-tax) for associated postretirement medical benefits, $16.8 million ($10.2
million after-tax) for charges allocated to the Company from Telesector
Resources for its pension enhancements and $(.2) million ($(.1) million
after-tax) for its associated postretirement medical benefits. During the first
nine months of 1994, $60.9 million of pretax charges ($39.3 million after-tax)
was recorded for approximately 480 management and 40 nonmanagement employees who
elected during the first nine months of 1994 to leave under retirement
incentives and for the Company's allocation from Telesector Resources. The
components of the pretax charges are as follows: $17.2 million ($11.9 million
after-tax) for pension enhancements, $10.6 million ($7.2 million after-tax) for
associated postretirement medical benefits, $17.9 million ($10.9 million
after-tax) for charges allocated to the Company from Telesector Resources for
its pension enhancements and $15.2 million ($9.3 million after-tax) for its
associated postretirement medical benefits. Much of the cost of the enhancements
will be funded by NYNEX's pension plans.
Employee related costs consist primarily of wages, payroll taxes, and employee
benefits. Wages and payroll taxes decreased a net $33 million as a result of
reductions in the Company's work force due to transfers of employees to
Telesector Resources associated with re-engineering service delivery to
customers (see Other operating expenses) and to the Company's force reduction
11
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
- -------------------------------------------------------------
program, partially offset by salary and wage rate increases. Benefit expenses
decreased $7 million. Included in this decrease are non-recurring items
associated with revised charges for postemployment benefits (a $4 million
decrease) and for non-qualified pension plans (a $1 million increase). There was
also a $9 million decrease in pension expense attributable to changes in
actuarial assumptions, partially offset by a $3 million increase resulting from
the amortization of deferred pension costs pursuant to an intrastate regulatory
plan.
Other operating expenses consist primarily of contracted and centralized
services, rent and other general and administrative costs. The increase was
principally due to: (1) an $80 million increase in charges from affiliated
companies, primarily attributable to the transfer of functions to Telesector
Resources which includes charges for advertising, telemarketing and sales agent
commissions, increases in Telesector Resources' contracted and centralized
services and salary and wage rates, and the transfer of employees from the
Company to Telesector Resources (see Employee related costs), partially offset
by decreases due to Telesector Resources' force reduction program, (2) a $12
million non-recurring charges resulting from accruals related to various
self-insurance programs; these charge reflect events that occurred during the
second quarter and additional information made available through revised
estimates and analyses completed during the second quarter, (3) a $4 million
increase in bad debt expense recognized pursuant to provisions of billing and
collection contracts, (4) a $3 million increase in the provision for
uncollectibles, and (5) a $79 million decrease in expenses primarily due to the
transfer of functions to Telesector Resources (see Employee related costs) and
to the Company's force reduction program.
INTEREST EXPENSE
- ----------------
Interest expense decreased $2.0 million, or 1.6%, from the same period last
year due to lower levels of advances from NYNEX, partially offset by a $3
million non-recurring charge for interest incurred in connection with a court
decision on overearnings complaints for the period 1987-1988 (see Federal
Regulatory Matters).
INCOME TAXES
- ------------
Income taxes increased $22.0 million, or 9.7%, over the same period last year
principally due to an increase in taxable income and a decrease in amortization
of investment tax credits.
EXTRAORDINARY ITEM
- ------------------
The discontinued application of Statement No. 71 required the Company, for
financial accounting purposes, to adjust telephone plant and equipment and to
eliminate non-plant regulatory assets and liabilities from the balance sheet.
This change resulted in an after-tax charge of $627.8 million, consisting of
12
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
-------------------------------------------------------------
$472.6 million to adjust the carrying amount of telephone plant and equipment
and $155.2 million to write-off non-plant regulatory assets and liabilities. As
a result of the discontinuance of regulatory accounting principles, the Company
utilized shorter asset lives for certain categories of telephone plant and
equipment than those approved by regulators. (See Note (b) for additional
information on the discontinuance of regulatory accounting principles.)
CURRENT STATUS OF BUSINESS RESTRUCTURING
- ----------------------------------------
Reserve Utilization in 1995
- ---------------------------
The restructuring reserve balance at September 30, 1995, which does not include
the liability recorded at year-end for postretirement medical benefits
associated with employees' leaving the Company under the business restructuring,
was approximately $141 million. During the first nine months of 1995, the
Company utilized 1993 restructuring reserves of approximately $103 million in
the following categories:
<TABLE>
<S> <C> <C> <C>
Severance:
Management $15
Nonmanagement 6
Transferred to Telesector Resources 15
---
Total Severance $36
Process Re-engineering:
Systems redesign:
Customer contact 4
Customer provisioning 1
Customer operations 4
Customer support 1
--
Total systems redesign $10
Work center consolidation 3
Branding 1
Relocation -
Training 1
Re-engineering implementation -
--
Subtotal 15
Telesector Resources' allocated reserves:
Systems re-engineering 41
Re-engineering implementation 10
Work center consolidation 1
--
Total allocated 52
--
Total process re-engineering 67
----
Total $103
====
</TABLE>
The severance reduction amount is comprised 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. $15 million was transferred from the Company to Telesector Resources
associated with employees who transferred from the Company to Telesector
Resources and subsequently left under the pension enhancements. $10 million was
transferred from the Company to Telesector Resources for costs incurred by
Telesector
13
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
-------------------------------------------------------------
Resources on behalf of the Company for the following business
processes: (1) $4 million for customer contact, (2) $1 million for customer
provisioning, (3) $4 million for customer operations, and (4) $1 million for
customer support.
Cost Savings
- ------------
Since the inception of process re-engineering and the special pension
enhancement program in 1994, approximately 2,500 employees have accepted the
retirement incentives. On an annualized basis, this will equate to an average
reduction in wages and benefits attributable to employees' leaving under
retirement incentives of approximately $130 million. In addition, the Company's
share of the annualized average reduction in wages and benefits attributable to
Telesector Resources' employees' leaving under retirement incentives will be
approximately $60 million. Partially offsetting these cost savings will be the
effects of wage and price inflation, growth in volume of business and higher
costs attributable to service improvements.
FINANCING
- ---------
At September 30, 1995, the Company had $500 million of unissued, unsecured debt
securities registered with the SEC.
STATE REGULATORY MATTERS
- ------------------------
Maine
- ----
The May 15, 1995 orders of the MPUC, which adopted an alternative form of
regulation for the Company and concluded a related earnings investigation, have
been appealed to the Maine Supreme Judicial Court. The appellants contend that
the MPUC should have ordered greater rate reductions by the Company and
challenge the MPUC's authority to apply $4 million of the ordered $14.4 million
reduction to the provision of new services and/or equipment to schools and
libraries. The Court has scheduled oral argument on the case for January 1996.
Massachusetts
- -------------
Rates proposed in the Company's initial price cap filing, in compliance with the
Massachusetts Department of Public Utilities' ("MDPU") May 12, 1995 Order,
became effective on September 15, 1995. Rate changes in the filing, which result
in an annual reduction of approximately $32.8 million, relate to switched access
services, residence optional calling plans, business local usage, and conduit
attachment fees. An additional reduction of $5.3 million, associated with the
Company's monthly increase of $2.50 in the Lifeline Service credit, took effect
on June 11, 1995, as directed by the MDPU's Order.
14
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
-------------------------------------------------------------
Vermont
- -------
As previously reported (see the Company's Quarterly Report on Form 10-Q for the
period ended March 31, 1995), the Company has appealed portions of the Vermont
Public Service Board's ("VPSB") order on the rate reduction and in the companion
price regulation case to the Vermont Supreme Court. On October 5, 1995, the VPSB
issued an order on issues remanded to it by the Court. The VPSB accepted the
Company's proposal for extended time frames to eliminate multiparty service and
to replace one of the two remaining analog switches in the state. The Company
intends to withdraw its appeal on those issues.
On September 8, 1995, the Company filed a rate case seeking an annual increase
in rates of $12.2 million. The Vermont Department of Public Service ("VDPS") has
recommended that the VPSB suspend and investigate the proposed tariff filing. On
October 31, 1995, the Company and the VDPS entered into a stipulation that, if
approved by the VPSB, will result in an annual increase in rates of $7.5
million. The VPSB is expected to hold hearings on the stipulation by January
1996.
FEDERAL REGULATORY MATTERS
- --------------------------
On August 1, 1995, the U.S. Court of Appeals for the District of Columbia
Circuit found that a decision of the Federal Communications Commission ("FCC")
had understated the amount of damages to be paid by the Company and New York
Telephone Company (collectively, the "Telephone Companies") in connection with
overearnings complaints for the period 1987-1988. On October 4, 1995, the Court
denied the Telephone Companies' petition for rehearing. It is probable that, as
a result of the Court's decision, the Company will be required to pay damages
plus interest in the amount of approximately $7.4 million (see Network access
revenues).
15
<PAGE>
Form 10-Q Part II New England Telephone and Telegraph Company
PART II - OTHER INFORMATION
---------------------------
Item 5. Other Information
- ------ -----------------
STATE REGULATORY MATTERS
------------------------
Vermont
-------
Hearings in Phase I of the Vermont Public Service Board's ("VPSB")
proceeding on competition have ended. Phase I of the proceeding
addresses public policy issues and rules involving unbundling,
cost study methodologies and the definition of universal service.
A decision in Phase I is expected by the end of 1995. Phase II of
the proceeding will address specific pricing and technical
questions with respect to local service and intraLATA toll
competition, including intraLATA presubscription, pricing
(including imputation rules) and interconnection. A decision in
Phase II is not expected until late 1996.
Rhode Island
------------
On June 27, 1995, the Rhode Island Public Utilities Commission
("RIPUC") issued an initial order in the competition proceeding,
expressing an overall policy favoring local competition, asserting
jurisdiction over potential local competitors and requiring
seamless interconnection of networks. Pursuant to a prehearing
conference on September 21, 1995, the RIPUC issued a schedule for
the next phase of the proceeding. The parties are to file
testimony on the issues raised in the initial phase of the docket
by November 17, 1995, with discovery and hearings to follow. The
RIPUC proposes to issue a decision in the proceeding by June 30,
1996.
FEDERAL REGULATORY MATTERS
--------------------------
Price Caps
----------
On September 27, 1995, the Federal Communications Commission
("FCC") issued a Notice of Proposed Rulemaking in the Price Cap
proceeding, regarding the productivity factor used by local
exchange carriers ("LECs"), including New England Telephone and
Telegraph Company (the "Company"), in the FCC price cap formula.
The FCC price cap formula adjusts the limits on access price
levels ("price cap index") upward for inflation, downward for
productivity improvement and up or down for exogenous costs.
Depending on the productivity factor selected by the LEC, earnings
above certain levels are shared with ratepayers. The Proposed
Rulemaking will consider changes in the determination of the
productivity factor, the recognition of exogenous costs, the
extent of carrier sharing, and the formula for calculating the
price cap index for certain services. The FCC has requested
comments by November 27, 1995 and replies by December 27, 1995.
The FCC has
16
<PAGE>
Form 10-Q Part II New England Telephone and Telegraph Company
PART II - OTHER INFORMATION
---------------------------
Price Caps (Cont'd)
----------
indicated that it intends to issue an order in time for the final
changes to be reflected in LECs' rates as of July 1, 1996.
On September 20, 1995, the FCC issued a Notice of Proposed
Rulemaking to determine how the price cap rules should be modified
to accommodate increasing levels of competition. The FCC intends
to consider whether to allow greater flexibility to lower prices,
adopting procedures to allow a more rapid introduction of new
services, and establishing criteria that can be used in assessing
whether LECs warrant streamlined or non-dominant treatment for
certain services when they face substantial competition in a
geographic area. The FCC asked for comments on a proposal by the
Company and New York Telephone Company (collectively, the
"Telephone Companies") that earnings sharing be reduced or
eliminated as an LEC implements measures to promote competition
for local exchange services.
Other Federal Regulatory Matters
--------------------------------
On September 11, 1995, the Telephone Companies filed a further
response to the FCC's March 3, 1995 Order to Show Cause in
connection with an audit of costs reported by the LECs to the
National Exchange Carrier Association (see the Company's Annual
Report on Form 10-K for the year ended December 31, 1994). In that
response, the Telephone Companies argued that no forfeitures or
price cap reductions should be imposed and that their internal
processes are in compliance with the FCC's rules.
Item 6. Exhibits and Reports on Form 8-K
- ------ --------------------------------
(a) Exhibits.
--------
Exhibit
-------
Number
------
(27) Financial Data Schedule
(b) Reports on Form 8-K.
--------------------
The Company's Current Report on Form 8-K, date of report August 2,
1995 and filed August 2, 1995, reporting on Item 5.
17
<PAGE>
Form 10-Q 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
Mel Meskin
--------------------------------------------
Mel Meskin
Vice President - Finance and Treasurer
(Principal Financial and Chief Accounting
Officer)
November 9, 1995
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