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 June 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
<TABLE>
PART I - FINANCIAL INFORMATION
STATEMENTS OF INCOME AND RETAINED EARNINGS
(In millions) (Unaudited)
<CAPTION>
Three Months Six Months
For the Period Ended June 30, 1995 1994 1995 1994
<S> <C> <C> <C> <C>
OPERATING REVENUES
Local service $ 487.5 $ 479.7 $ 966.8 $ 949.9
Long distance 173.3 185.6 345.5 379.0
Network access 324.8 295.4 642.7 594.3
Other 88.9 90.8 173.1 181.0
Total operating revenues 1,074.5 1,051.5 2,128.1 2,104.2
OPERATING EXPENSES
Maintenance and support 273.3 288.4 555.3 593.4
Depreciation and amortization 223.1 222.9 450.9 442.7
Marketing and customer
services 148.1 139.2 273.8 285.5
Taxes other than income taxes 31.9 29.8 63.6 53.3
Provision for uncollectible
revenues 12.3 10.8 27.0 23.0
Other 148.7 158.7 280.7 240.9
Total operating expenses 837.4 849.8 1,651.3 1,638.8
Operating income 237.1 201.7 476.8 465.4
Other income (expense) - net 3.4 3.5 6.6 6.2
Interest expense 39.0 41.2 79.3 81.4
Earnings before income taxes and
extraordinary item 201.5 164.0 404.1 390.2
Income taxes
Federal 64.1 46.9 128.6 113.0
State and local 13.7 11.7 27.8 27.1
Total income taxes 77.8 58.6 156.4 140.1
Earnings before extraordinary
item 123.7 105.4 247.7 250.1
Extraordinary item for the
discontinuance of regulatory
accounting principles,
net of taxes (Note (b)) (627.8) - (627.8) -
NET INCOME (LOSS) $ (504.1)$ 105.4 $ (380.1)$ 250.1
RETAINED EARNINGS
Beginning of period $ 993.3 $ 968.6 $ 979.9 $ 929.9
Net income (loss) (504.1) 105.4 (380.1) 250.1
Dividends declared (110.7) (106.2) (221.3) (212.2)
End of period $ 378.5 $ 967.8 $ 378.5 $ 967.8
See accompanying notes to financial statements.
</TABLE>
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
<TABLE>
BALANCE SHEETS
(In millions)
<CAPTION>
June 30, December 31,
1995 1994
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 7.9 $ 9.1
Receivables (net of allowance of $53.0
and $50.9, respectively) 820.0 804.2
Deferred income taxes 112.5 109.9
Deferred charges 80.1 82.6
Inventory 52.4 49.4
Prepaid expenses and other 44.5 18.2
Total current assets 1,117.4 1,073.4
Telephone plant - at cost 12,276.1 12,084.7
Less: accumulated depreciation 6,456.4 5,451.8
5,819.7 6,632.9
Deferred charges and other 136.8 574.8
TOTAL ASSETS $ 7,073.9 $ 8,281.1
LIABILITIES AND SHARE OWNER'S EQUITY
Current liabilities:
Accounts payable
Affiliates $ 453.8 $ 407.0
Trade and other 572.1 648.3
Short-term debt 20.8 53.8
Dividends payable 110.7 106.1
Taxes accrued 63.9 46.0
Advance billing and customers' deposits 20.3 20.1
Interest accrued 39.2 38.0
Total current liabilities 1,280.8 1,319.3
Long-term debt 2,171.7 2,165.4
Deferred income taxes 353.8 773.2
Unamortized investment tax credits 73.2 91.9
Other long-term liabilities
and deferred credits 726.8 862.3
Total liabilities 4,606.3 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 378.5 979.9
Total share owner's equity 2,467.6 3,069.0
TOTAL LIABILITIES AND SHARE OWNER'S
EQUITY $ 7,073.9 $ 8,281.1
See accompanying notes to financial statements.
</TABLE>
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
<TABLE>
STATEMENTS OF CASH FLOWS
(In millions) (Unaudited)
<CAPTION>
For the Six Months Ended June 30, 1995 1994
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (380.1) $ 250.1
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Extraordinary item, net of taxes 627.8 -
Depreciation and amortization 450.9 442.7
Changes in operating assets and liabilities:
Receivables (15.8) (35.4)
Deferred income taxes 6.9 32.1
Deferred charges (22.4) 11.5
Inventory (3.0) 15.1
Prepaid expenses and other (26.3) 23.9
Accounts payable 5.6 (32.6)
Taxes accrued 17.9 (11.2)
Advance billing and customers' deposits 0.2 2.4
Interest accrued 1.2 (0.4)
Deferred income taxes and Unamortized
investment tax credits (49.0) (52.8)
Other long-term liabilities and
deferred credits 65.0 38.0
Other - net (20.4) (3.4)
Total adjustments 1,038.6 429.9
Net cash provided by operating activities 658.5 680.0
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (407.9) (478.4)
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from NYNEX (34.8) 5.7
Dividends paid to NYNEX (216.7) (209.4)
Repayment of long-term debt and
capital leases (0.3) (0.5)
Net cash used in financing activities (251.8) (204.2)
Net (decrease) increase in Cash (1.2) (2.6)
Cash at beginning of period 9.1 11.2
Cash at end of period $ 7.9 $ 8.6
See accompanying notes to financial statements.
</TABLE>
<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 Report 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.
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
NOTES TO FINANCIAL STATEMENTS
(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.
<TABLE>
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:
<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.
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
NOTES TO FINANCIAL STATEMENTS
(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 June 30, 1995,
the Company had recorded in Accounts payable checks outstanding
but not yet presented for payment of $38.2 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 June 30, 1995, the aggregate amount of
such revenues that was estimated to be subject to possible refund
was approximately $27.4 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.
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
NOTES TO FINANCIAL STATEMENTS
(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.
<TABLE>
(g) SUPPLEMENTAL INFORMATION - The following information is
provided in accordance with Statement of Financial Accounting
Standards No. 95, "Statement of Cash Flows":
<CAPTION>
For the
Six Months Ended
June 30,
(In millions) 1995 1994
<S> <C> <C>
Income tax payments $171.9 $121.5
Interest payments $ 75.6 $ 73.8
</TABLE>
(h) REALLOCATION OF 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.
(i) SUBSEQUENT EVENT - On August 1, 1995, the U.S. Court of Appeals
for the District of Columbia Circuit found that decisions of the Federal
Communications Commission had understated the amount of damages to be paid
by the Company in connection with overearnings complaints for the period
1987-1988. The Company intends to petition the Court for rehearing.
It is probable, however, that, as a result of the Court's decision, the
Company will be required to refund revenues plus interest of approximately
$7.4 million. Taking into account prior accruals related to this matter,
the net effect of the Court's decision will be an additional reduction of
approximately $3.7 million in revenues.
<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 SIX MONTHS OF 1995 AS COMPARED TO FIRST SIX MONTHS OF 1994
RESULTS OF OPERATIONS
For the six months ended June 30, 1995 and 1994, net income
(loss) was $(380.1) million and $250.1 million, respectively.
Results for the first six 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
$46.0 million for pension enhancements for approximately 160
management and 410 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 charges of $5.4 million for accruals related to various self-
insurance programs and revised benefit charges. Results for the
first six months of 1994 included an after-tax charge of
$34.7 million for pension enhancements for approximately 400
management 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 $23.9 million, or 1.1%, over the
first six months of 1994 principally due to the net effect of
growth in access lines and switched access usage, and intrastate
and interstate rate reductions.
Operating expenses increased $12.5 million, or 0.8%, over the
first six months of 1994. Excluding pretax pension enhancement
charges of $71.5 million and $54.3 million in 1995 and 1994,
respectively, and non-recurring charges of $9.0 million in 1995,
operating expenses decreased $13.7 million, or 0.9%, from the
first six months of 1994, as force reductions and process
re-engineering continued.
<TABLE>
OPERATING REVENUES
Operating revenues for the six months ended June 30, 1995
increased $23.9 million, or 1.1%, over the same period last year.
This increase is comprised of the following:
<CAPTION>
Increase (Decrease)
(In millions)
<S> <C>
Local service $16.9
Long distance (33.5)
Network access 48.4
Other (7.9)
$23.9
</TABLE>
<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 $26 million, driven by growth in access lines and sales
of calling features, (2) a net increase of $8 million in rates
primarily attributable to a restructuring of Massachusetts rates
effective April 14, 1994, (3) an $8 million decrease resulting
from the deferral of revenues in 1995 for a subsequent refund to
Vermont customers (see STATE REGULATORY MATTERS), (4) 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 (5) a
$4 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: (1) a net $19 million
decrease in demand for message toll, private line and wide area
telecommunications services as a result of increased competition
and customer shifts to lower priced services offered by the
Company, and (2) a $15 million decrease in rates primarily
attributable to the Massachusetts rates restructuring.
Network access revenues are earned from the provision of exchange
access services primarily to interexchange carriers. There was a
net $44 million increase in switched access revenues and a net
$4 million increase in special access revenues primarily due to
increased demand. Certain competitive losses in long distance
revenues are being mostly offset by increases in network access
revenues.
Other revenues are earned from the provision of products and
services other than Local service, Long distance and Network
access. There was a $9 million decrease in billing and
collection revenues primarily pursuant to the contract with AT&T
Corp. and a $6 million decrease in revenues related to the
directory licensing agreement with NYNEX Information Resources
Company ("Information Resources"), as a result of Information
Resources' pension enhancement costs recorded during the first
six months of 1995 lowering their pretax earnings.
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
<TABLE>
OPERATING EXPENSES
Operating expenses for the six months ended June 30, 1995
increased $12.5 million, or 0.8%, over the same period last year.
This increase is comprised of the following:
<CAPTION>
Increase (Decrease)
(In millions)
<S> <C>
Depreciation and amortization $ 8.2
Taxes other than income taxes 10.3
All other:
Business restructuring charges 17.2
Employee related (29.0)
Other 5.8
$ 12.5
</TABLE>
Depreciation and amortization increased principally due to:
(1) a $10 million net increase due to growth in depreciable plant
investment, (2) a $6 million increase due to revised intrastate
depreciation rates in Vermont, effective February 1995
retroactive to January 1, 1994 and (3) a $7 million decrease
primarily attributable to revised interstate and intrastate
depreciation rates. The discontinuance of regulatory accounting
principles (see Note (b)) did not significantly impact depreciation
and amortization in the second quarter of 1995.
Taxes other than income taxes include gross receipts taxes,
property taxes and other non-income based taxes. There was an
$8 million increase in property taxes primarily attributable to a
1994 reversal of accrued taxes as a result of unasserted
municipal assessments.
Business restructuring charges consist of incremental costs
related to pension enhancements. Pretax restructuring charges
for the six months ended June 30, 1995 increased $17.2 million
over the same period last year. During the first six months of
1995, $71.5 million of pretax charges ($46.0 million after-tax)
was recorded for approximately 160 management and 410
nonmanagement employees who elected during the first six 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: $44.5 million
($28.9 million after-tax) for pension enhancements, $10.9 million
($7.3 million after-tax) for associated postretirement medical
benefits, $10.7 million ($6.5 million after-tax) for charges
allocated to the Company from Telesector Resources for its
pension enhancements and $5.4 million ($3.3 million after-tax)
for its associated postretirement medical benefits. During the
first six months of 1994, $54.3 million of pretax charges
($34.7 million after-tax) was recorded for approximately 400
management employees who elected during the first six months of
1994 to leave under retirement incentives and for the Company's
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
allocation from Telesector Resources. The components of the
pretax charges are as follows: $14.4 million ($9.8 million after-
tax) for pension enhancements, $10.2 million ($6.8 million after-
tax) for associated postretirement medical
benefits, $15.3 million ($9.3 million after-tax) for charges
allocated to the Company from Telesector Resources for its
pension enhancements and $14.4 million ($8.8 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. There was a $22 million net decrease in
wages and payroll taxes as a result of 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 (see Other operating expenses) and to the
Company's force reduction program, partially offset by salary and
wage rate increases. Benefit expenses decreased $7 million due
principally to an $8 million decrease in pension expense
attributable to changes in actuarial assumptions and a $4 million
decrease associated with revised charges for postemployment benefits,
partially offset by a $3 million increase resulting from the amortization
of deferred pension costs pursuant to an intrastate regulatory
plan and a $1 million revised benefit charge for non-qualified
pension plans.
Other operating expenses consist primarily of contracted and
centralized services, rent and other general and administrative
costs. The net increase was principally due to: (1) a
$42 million net increase in charges from affiliated companies,
primarily attributable to 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 increase due to non-recurring charges resulting
from accruals related to various self-insurance programs; these
charges reflect events that occurred this quarter and additional
information made available through revised estimates and analyses
completed during the second quarter, (3) a $37 million decrease in
expenses primarily due to the transfer of functions to Telesector
Resources (see Employee related costs), and (4) an $11 million
decrease in right to use fees resulting from decreased software deployment.
INTEREST EXPENSE
Interest expense decreased $2.1 million, or 2.6%, from the same
period last year due principally to the elimination of the
amortization of the intrastate portion of previously deferred
refinancing costs in the second quarter of 1995 as a result of
the discontinuance of regulatory accounting principles (see Note
(b)).
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
INCOME TAXES
Income taxes increased $16.3 million, or 11.6%, 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
$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
<TABLE>
Reserve Utilization in 1995
The restructuring reserve balance at June 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 $167 million.
During the first six months of 1995, the Company utilized 1993
restructuring reserves of approximately $77 million in the
following categories:
<CAPTION>
<S> <C> <C> <C>
Severance
Management $13
Nonmanagement 3
Total Severance $16
Severance transferred to Telesector Resources 15
Process Re-engineering:
Systems redesign -
Work center consolidation 1
Branding -
Relocation -
Training 1
Re-engineering implementation -
Subtotal $ 2
Telesector Resources' allocated reserves:
Systems re-engineering 36
Re-engineering implementation 8
Work center consolidation -
Total allocated 44
Total process re-engineering 46
Total $77
</TABLE>
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
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 for.
$15 million was 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.
Cost Savings
During the first six months of 1995, the Company experienced a
reduction in wages of approximately $39 million as well as a
$22 million reduction in costs allocated from Telesector
Resources as a result of employees' leaving under retirement
incentives.
FINANCING
At June 30, 1995, the Company had $500 million of unissued,
unsecured debt securities registered with the SEC.
STATE REGULATORY MATTERS
Maine
On May 15, 1995, the MPUC issued Orders in its investigation of
alternatives to traditional rate of return regulation for the
Company and in a related earnings investigation. The MPUC
adopted a price cap plan for a five-year term, with the provision
for a five-year extension after review by the MPUC. There will
be no restriction on the Company's earnings. Overall average
prices and specific rate elements for most services will be
limited by a price cap formula of inflation minus a productivity
factor plus or minus certain exogenous cost changes. The
productivity factor adopted by the MPUC is more stringent than
that recommended by the Company. The Company is to make its
first annual price cap filing on December 1, 1996. The MPUC also
established a service quality index with penalties to apply if
service quality categories are missed. Penalties would take the
form of customer rebates and are subject to annual limits of
$1 million per service quality category and $10 million overall.
In the related earnings investigation, the MPUC ordered that the
Company's revenues be reduced by $14.4 million annually. The
MPUC stated that the Company may use up to $4 million of the
reduction "to reduce rates and/or provide additional services or
equipment to libraries and schools." The MPUC also ordered a one-
time customer credit of $2.8 million. The Company filed tariffs
on June 1, 1995 to implement the customer credit and
$10.4 million of the overall reduction. On July 31, 1995, the
Company filed its proposal with respect to providing up to
$4 million to Maine libraries and schools.
<PAGE>
Form 10-Q Part II New England Telephone and Telegraph Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
Massachusetts
On May 12, 1995, the Massachusetts Department of Public Utilities
("MDPU") issued an order approving with some modifications the
Alternative Regulatory Plan proposed by the Company
to govern its Massachusetts intrastate operations. The principal
components are as follows:
(1)The Company will be regulated under a price framework through
August 2001.
(2)Pricing rules will limit the Company's ability to increase
both overall average prices and specific rate elements for
most services, 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 that affect the Company's annual revenues by at least
$3 million. The productivity factor adopted by the MDPU is
more stringent than that recommended by the Company.
The MPDU also established a quality of service index and tied
the Company's inability to achieve service quality standards
to the level of the productivity factor. The Company's
inability to meet the performance levels in any given month
will result in an increase in the productivity offset by one-
twelfth of one percent for purposes of the annual price cap
filing.
(3)There will be no restriction on the Company's earnings.
(4)Certain residence exchange rates will be capped through
August 2001.
(5)There will be an increase of $2.50 monthly in the credit on
exchange services for Lifeline customers.
(6)There will be rate reductions for switched access services.
The MDPU found, without judging the reasonableness of the
investments, that the Company could proceed with its investment
commitments for the public telecommunications network, including
commencing the deployment of a broadband network in
Massachusetts.
On July 3, 1995, the Company submitted its initial price cap
filing in compliance with the MDPU's Order. Rates proposed in
that filing, which result in an annual reduction of approximately
$32.8 million, will become effective on September 15, 1995,
pending MDPU approval. Rate changes in the compliance filing
relate to switched access services, residence optional calling
plans, business local usage, and conduit attachment fees. An
additional reduction of $5.3 million is associated with the Company's
monthly increase of $2.50 in the Lifeline Service credit that took
effect on June 11, 1995, as directed by the MDPU's Order.
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
The MDPU's decision has been appealed to the Supreme Judicial
Court of Massachusetts by AT&T Communications of New England, MCI
Telecommunications Corporation and New England Cable Television
Association. The Court has granted the Company's motion to
intervene in each of the proceedings.
On July 6, 1995, hearings commenced in the MDPU's investigation
concerning intraLATA and local exchange competition in
Massachusetts.
New Hampshire
On June 30, 1995, the New Hampshire Public Utilities Commission
approved the Company's proposed toll rate reduction targeted at
small and medium volume usage customers, effective July 31, 1995.
The annual revenue effect of the toll rate reduction is estimated
to be approximately $6.8 million.
Vermont
On May 17, 1995, the Vermont Public Service Board ("VPSB")
approved, with minor modifications, the Company's rate design
proposal and refund methodology for the VPSB's previously ordered
$15 million reduction in rates, which is retroactive to
December 29, 1993. The new rates took effect on July 15, 1995.
The Company began issuing refunds to customers in July 1995.
Total refunds will equal approximately $23 million, including
interest (see OPERATING REVENUES).
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 VPSB's order on the rate reduction and
in the companion price regulation case to the Vermont Supreme
Court. On June 9, 1995, the Court, on the Company's motion,
remanded two issues to the VPSB for further consideration. The
schedule for briefing and argument before the Court has been
suspended pending the VPSB's ruling on those issues.
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
PART II - OTHER INFORMATION
Item 5. Other Information
STATE REGULATORY MATTERS
Rhode Island
On June 27, 1995, the Rhode Island Public Utilities
Commission 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. A schedule for further proceedings has not yet
been finalized.
Vermont
On July 21, 1995, the Vermont Public Service Board began
hearings in its proceeding on competition. Hearings in
Phase I of the estimated three-year proceeding will
address 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.
See, also, discussion of STATE REGULATORY MATTERS in Part
I, MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS.
FEDERAL REGULATORY MATTERS
Price Caps
New England Telephone and Telegraph Company (the
"Company") and New York Telephone Company (collectively,
the "Telephone Companies") filed tariffs in May 1995 to
implement the fifth annual update to the price cap rates,
including the adjustments ordered by the Federal
Communications Commission ("FCC") on March 30, 1995, in
its interim changes to the price cap rules for local
exchange carriers. The tariffs, which became effective
on August 1, 1995, will reduce the Telephone Companies'
interstate access rates by approximately $75.1 million
for the tariff period ending June 30, 1996.
Other Federal Regulatory Matters
The fifth annual update to the price cap rates included
tariff revisions to recover approximately $21 million of
exogenous costs resulting from the implementation of
Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Postretirement Benefits Other
Than Pensions". Collection of these revenues is subject
to possible refund pending resolution of the FCC's Common
Carrier Bureau investigation (see the Company's Annual
Report on Form 10-K for the year ended December 31,
1994).
<PAGE>
Form 10-Q Part II New England Telephone and Telegraph Company
PART II - OTHER INFORMATION
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 May 12, 1995 and filed May 24, 1995,
reporting on Item 5.
<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
John Diercksen
John Diercksen
Controller
August 8, 1995
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