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, 1996
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)
Three Months Nine Months
For the Period Ended September 30, 1996 1995 1996 1995
- ---------------------------------------------------------------------------
OPERATING REVENUES
Local service $ 525.8 $ 494.1 $1,546.4 $1,460.9
Long distance 172.1 176.3 514.2 521.8
Network access 349.9 330.3 1,031.7 973.0
Other 130.6 91.9 333.3 265.0
-------- -------- -------- --------
Total operating revenues 1,178.4 1,092.6 3,425.6 3,220.7
-------- -------- -------- --------
OPERATING EXPENSES
Maintenance and support 292.7 272.1 871.0 827.4
Depreciation and amortization 225.0 223.5 701.9 674.4
Marketing and customer services 144.7 156.8 461.9 430.6
Taxes other than income 35.4 33.1 104.9 96.7
Provision for uncollectible revenues 15.3 12.0 40.5 39.0
Other 92.2 122.9 364.9 403.6
-------- -------- -------- --------
Total operating expenses 805.3 820.4 2,545.1 2,471.7
-------- -------- -------- --------
Operating income 373.1 272.2 880.5 749.0
Other income (expense) - net (3.8) 2.7 (5.6) 9.3
Interest expense 35.5 37.0 106.5 116.3
-------- -------- -------- --------
Earnings before income taxes,
extraordinary item and cumulative effect
of change in accounting principle 333.8 237.9 768.4 642.0
-------- -------- -------- --------
Income taxes
Federal 109.1 76.6 248.1 205.2
State and local 18.7 15.7 47.2 43.5
-------- -------- -------- --------
Total income taxes 127.8 92.3 295.3 248.7
-------- -------- -------- --------
Earnings before extraordinary item
and cumulative effect of change in
accounting principle 206.0 145.6 473.1 393.3
Extraordinary item for the discontinuance
of regulatory accounting principles,
net of taxes - - - (627.8)
Cumulative effect of change in
accounting for directory publishing
income, net of taxes (Note B) - - 55.2 -
-------- -------- -------- -----
NET INCOME (LOSS) $ 206.0 $ 145.6 $ 528.3 $ (234.5)
======== ======== ======== ========
RETAINED EARNINGS
Beginning of period $ 503.9 $ 378.5 $ 414.9 $ 979.9
Net income (loss) 206.0 145.6 528.3 (234.5)
Dividends declared (116.7) (110.7) (350.0) (332.0)
-------- -------- -------- --------
End of period $ 593.2 $ 413.4 $ 593.2 $ 413.4
======== ======== ======== ========
See accompanying notes to financial statements.
2
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
BALANCE SHEETS
(In millions) (Unaudited)
September 30, December 31,
1996 1995
- ---------------------------------------------------------------------------
ASSETS
Current assets:
Cash $ 12.8 $ 8.4
Receivables
Trade and other (net of allowance of
$48.0 and $49.7, respectively) 898.4 890.0
Affiliates 147.3 27.1
Deferred charges 82.0 95.9
Deferred income taxes 56.5 106.2
Inventory 88.8 53.7
Prepaid expenses and other 92.2 36.1
--------- ---------
Total current assets 1,378.0 1,217.4
--------- ---------
Telephone plant - at cost 12,783.8 12,543.4
Less: accumulated depreciation 6,978.2 6,681.9
--------- ---------
5,805.6 5,861.5
--------- ---------
Long-term investment, deferred charges and other 141.2 139.9
--------- ---------
TOTAL ASSETS $ 7,324.8 $ 7,218.8
========= =========
LIABILITIES AND SHARE OWNER'S EQUITY
Current liabilities:
Accounts payable
Affiliates $ 411.4 $ 473.7
Other 449.1 608.0
Short-term debt 426.3 387.6
Dividends payable 116.7 110.7
Taxes accrued 95.0 27.7
Advance billing and customers' deposits 20.0 19.5
Interest accrued 44.6 38.1
--------- ---------
Total current liabilities 1,563.1 1,665.3
--------- ---------
Long-term debt 1,822.4 1,822.0
Deferred income taxes 286.0 345.5
Unamortized investment tax credits 62.2 67.9
Other long-term liabilities
and deferred credits 908.8 814.1
--------- ---------
Total liabilities 4,642.5 4,714.8
--------- ---------
Commitments and contingencies (Notes C and D)
Share owner's equity:
Common stock - one share, without par value 1.0 1.0
Additional paid-in capital 2,088.1 2,088.1
Retained earnings 593.2 414.9
--------- ---------
Total share owner's equity 2,682.3 2,504.0
--------- ---------
TOTAL LIABILITIES AND SHARE OWNER'S EQUITY $ 7,324.8 $ 7,218.8
========= =========
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)
For the Nine Months Ended September 30, 1996 1995
- -------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ 528.3 $ (234.5)
-------- --------
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Extraordinary item, net of taxes - 627.8
Depreciation and amortization 701.9 674.4
Deferred income taxes - net (45.7) (56.2)
Deferred credits - net (5.6) (8.8)
Changes in operating assets and liabilities:
Receivables (128.6) (58.9)
Deferred charges 13.9 (3.3)
Deferred income taxes 49.7 1.7
Inventory (35.1) (1.3)
Prepaid expenses and other (56.1) (43.8)
Accounts payable (221.2) (31.1)
Taxes accrued 67.3 55.3
Advance billing and customers' deposits .5 1.3
Interest accrued 6.5 7.6
Other - net 59.7 43.9
-------- -------
Total adjustments 407.2 1,208.6
-------- --------
Net cash provided by operating activities 935.5 974.1
-------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (625.2) (599.2)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from NYNEX 38.5 (52.1)
Dividends paid to NYNEX (344.1) (327.5)
Repayment of long-term debt and capital leases (0.3) (0.4)
-------- -------
Net cash used in financing activities (305.9) (380.0)
-------- -------
Net increase (decrease) in Cash 4.4 (5.1)
Cash at beginning of period 8.4 9.1
-------- -------
Cash at end of period $ 12.8 $ 4.0
========= =======
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 1995 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 1995 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 as disclosed in the Company's 1995 Annual
Report on Form 10-K. The discontinued application of regulatory accounting
principles does not change the Company's accounting and reporting for regulatory
purposes.
B Change in Accounting Principle
Effective January 1, 1996, NYNEX Information Resources Company ("Information
Resources"), a wholly owned subsidiary of NYNEX, changed the recognition of its
directory publishing revenue and production expenses from the "amortized" method
to the "point of publication" method. Under the point of publication method,
revenues and product expenses will be recognized when the directories are
published rather than over the lives of the directories (generally one year) as
was the case under the amortized method. NYNEX and the Company believe the
change to the point of publication method is preferable because it is the method
that is generally followed by publishing companies and reflects more precisely
the operations of the business. Pursuant to the directory licensing agreement
between Information Resources and the Company, the Company's portion of the
initial effect of the change to the point of publication method is reported as a
cumulative effect of a change in accounting principle which resulted in a
one-time, non-cash gain of $91.7 million ($55.2 million after-tax) in the first
quarter of 1996. The impact of applying the point of publication method during
the first nine months of 1996 resulted in a $15.0 million increase in net
income.
5
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
Pro forma results, assuming the point of publication method had been applied
during the first nine months of 1995, are as follows:
Nine Months Ended
September 30, 1995
(In millions)
Pro forma As Reported
Net Loss $(218.6) $(234.5)
C Revenues Subject to Possible Refund
Several state and federal regulatory matters, may possibly require the Company
to refund a portion of the revenues collected in the current and prior periods.
As of September 30, 1996, the aggregate amount of such revenues that was
estimated to be subject to possible refund was approximately $35.0 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.
D Litigation and Other Contingencies
Various legal actions and regulatory proceedings are pending that may affect the
Company. 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 operating results.
E Supplemental Cash Flow 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,
(In millions) 1996 1995
---------------
Income tax payments $319.5 $257.1
Interest payments $114.5 $105.4
F NYNEX and Bell Atlantic Corporation Merger
On July 2, 1996, NYNEX and Bell Atlantic Corporation ("Bell Atlantic") executed
an amendment to their definitive merger agreement (the "Merger"), effecting a
technical change in the transaction structure of the Merger of equals announced
on April 22, 1996. As amended, the agreement provides that a
6
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
newly formed subsidiary of Bell Atlantic will merge with and into NYNEX, thereby
making NYNEX a wholly owned subsidiary of Bell Atlantic. There is no change in
the fundamental elements of the proposed merger. The exchange ratio for shares
is restated to reflect the difference in the transaction. Each NYNEX shareholder
will receive 0.768 shares of Bell Atlantic common stock in exchange for one
share of NYNEX common stock. The purpose of the amendment to the merger
agreement is to expedite the regulatory approval process by eliminating the need
to obtain congressional approval of the merger under a 1913 District of Columbia
"anti-merger" law. The Merger, which is expected to qualify as a pooling of
interests for accounting purposes, is subject to a number of conditions,
including regulatory approvals, the approval of the shareholders of both NYNEX
and Bell Atlantic and receipt of opinions that the merger will be tax free,
except, in the case of NYNEX shareholders, for tax payable because of cash
received for a fractional share and the payment by NYNEX of certain transfer
taxes on behalf of its shareholders. The transaction is expected to close by
April 1997. A Special Meeting of Share Owners of NYNEX was held on November 6,
1996. At the meeting NYNEX announced preliminary voting results, indicating that
proxies representing approximately 76 percent of the outstanding shares had been
returned, of which 96.4 percent voted to approve the Merger.
7
<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.
Results of Operations
Net income for the nine months ended September 30, 1996 was $528.3 million. Net
loss for the same period of 1995 was $(234.5) million.
Net income for the first nine months of 1996 includes an after-tax gain of $55.2
million for the cumulative effect of a change in accounting for directory
publishing income (see Note B). Net income for the first nine months of 1996
also includes after-tax charges of $60.0 million for pension enhancements and
after-tax charges of $4.3 million for accruals related to various self-insurance
programs. Net income for the first nine months of 1995 included an after-tax
extraordinary charge of $627.8 million for the discontinuance of regulatory
accounting principles, after-tax charges of $60.0 million for pension
enhancements, and after-tax charges of $9.9 million for accruals related to
various self-insurance programs, regulatory obligations and revised benefit
charges.
Excluding the above items, net income for the first nine months of 1996 would
have been $537.4 million, an improvement of $74.2 million, or 16.0%, over
adjusted net income for the same period of 1995.
Operating Revenues
Operating revenues for the nine months ended September 30, 1996 were $3.4
billion, an improvement of $204.9 million, or 6.4%, over the same period of
1995.
The $204.9 million improvement in operating revenues includes the following
categories:
Local service revenues are earned from the provision of local exchange, local
private line and local public network services. The $85.5 million, or 5.9%,
improvement over the first nine months of 1995 results from the net of (i) a $97
million increase, resulting primarily from increased demand, driven by growth in
access lines and sales of calling features, and a $4 million increase in
revenues pursuant to a Vermont Public Service Board order, and (ii) $15 million
in rate reductions primarily in Massachusetts pursuant to the price regulation
plan.
8
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
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. The $7.6 million, or 1.5%,
decrease from the first nine months of 1995 results from the net of (i) an
increase of $10 million primarily in demand, which consists of a $19 million
increase in message toll services partially offset by an $8 million decrease in
operator, public and WATS services, and (ii) $18 million in rate reductions in
Maine, Massachusetts and New Hampshire. Certain decreases, primarily due to
intraLATA presubscription ("ILP"), are being partially offset by increases in
network access revenues.
Network access revenues are earned from the provision of exchange access service
primarily to interexchange carriers. The $58.7 million, or 6.0%, improvement
over the first nine months of 1995 results from (i) a net $40 million
improvement in switched access revenues due to a $68 million increase primarily
due to increased demand, including the previously mentioned shift from long
distance revenues, partially offset by a $21 million reduction in interstate
rates and a $7 million reduction in intrastate rates primarily in Massachusetts,
and (ii) a $19 million increase in special access revenues 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. The $68.3 million, or 25.8%,
improvement over the first nine months of 1995 resulting primarily from (i) a
$53 million increase in directory revenues from the directory licensing
agreement with Information Resources due primarily to a change in accounting
principle (see Cumulative effect of change in accounting principle) and pension
enhancement costs recorded in the first nine months of 1995, and (ii) a $12
million increase in revenues from increased demand for voice messaging and other
miscellaneous customer services.
Operating Expenses
Operating expenses for the nine months ended September 30, 1996 were $2.5
billion, an increase of $73.4 million, or 3.0%, over the same period of 1995.
Included in the operating expenses for the first nine months of 1996 were
pension enhancement charges of $98.6 million (see components below) and a charge
of $7.0 million for various self-insurance programs. Included in operating
expenses for the same period of 1995 were pension enhancements of $94.5 million,
charges of $9.0 million related to various self-insurance programs and revised
benefit charges, and $7.4 million resulting from a court decision on
overearnings complaints.
Excluding the items discussed above, operating expenses would have increased
$78.7 million, or 3.3%, over adjusted operating expenses for the first nine
months of 1995.
9
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
The $78.7 million increase in adjusted operating expenses includes the following
categories:
Depreciation and amortization increased $27.5 million, or 4.1%, over the first
nine months of 1995, resulting from the net of (i) a $23 million increase due to
growth in depreciable plant investment and an $11 million increase attributable
to the discontinuance of regulatory accounting principles in 1995, and (ii) a
decrease of $5 million due to revised estimates of remaining useful lives.
Taxes other than income, which include gross receipts taxes, property taxes and
other non-income based taxes, increased $8.2 million, or 8.5%, over the first
nine months of 1995, resulting from increases of $5 million in municipal tax
rates for real estate in Massachusetts and $1 million in the gross receipts tax
in Rhode Island.
Employee related costs, which consist primarily of wages, payroll taxes, and
employee benefits, decreased $12.9 million from the first nine months of 1995,
resulting from (i) a $10 million decrease in benefit expenses primarily due to a
decrease in pension expense attributable to changes in actuarial assumptions,
and (ii) a $2 million decrease in wages primarily as a result of reductions in
the Company's workforce due to the transfer of employees to Telesector Resources
associated with re-engineering service delivery to customers and the Company's
force reduction program.
Other operating expenses, which consist primarily of contracted and centralized
services, rent and other general and administrative costs, increased $55.9
million over the first nine months of 1995. The increase resulted primarily from
the net of (i) a $37 million increase in charges from affiliated companies,
primarily attributable to increases in Telesector Resources' contracted and
centralized services due to process re-engineering costs not accrued for in 1993
business restructuring reserves and costs to implement the competitive checklist
provisions of the Telecommunications Act of 1996 (the "Act")(see Regulatory
Environment - Federal),and the transfer of employees from the Company to
Telesector Resources, partially offset by decreases due to Telesector Resources'
force reduction program, and a $20 million increase in miscellaneous expenses
primarily related to contracted services needed to satisfy increased volume and
service improvement, and (ii) a $2 million decrease in billing and collection
fixed rate uncollectible losses pursuant to the contract with AT&T Corp.
("AT&T").
10
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
The components of the pension enhancement charges for the first nine months of
1996 and 1995 are as follows:
For the Nine Months Ended
September 30,
(In millions) 1996* 1995*
---- ----
Pretax After-Tax Pretax After-Tax
Pension enhancement charges $82.6 $50.2 $94.1 $59.1
Postretirement medical costs 16.0 9.8 .4 .9
----- ----- ----- -----
$98.6 $60.0 $94.5 $60.0
===== ===== ===== =====
* 1996 - 210 management and 700 nonmanagement employees
1995 - 250 management and 710 nonmanagement employees
For the nine months ended September 1996 and 1995, $12.4 million and $16.8
million, respectively ($7.5 million and $10.2 million, respectively,
after-tax) were allocated to the Company from Telesector Resources for its
pension enhancements and $(.9) million and $(.2) million, respectively
($(.6) million and $(.1) million, respectively, after-tax) for its
associated postretirement medical benefits.
Much of the cost of the enhancements is funded by NYNEX's pension plans.
Other income (expense) - net
Other income (expense) - net decreased $14.9 million from the first nine months
of 1995 primarily due to a change in the recording of capitalized interest
expense associated with the discontinuance of regulatory accounting principles
(in 1996, capitalized interest expense is recorded as a reduction to Interest
expense).
Interest expense
Interest expense decreased $9.8 million, or 8.4%, from the first nine months of
1995 primarily due to a change in the recording of capitalized interest expense
associated with the discontinuance of regulatory accounting principles (see
Other income (expense) - net).
Income taxes
Income taxes increased $46.6 million, or 18.7%, over the same period last year,
principally due to an increase in pretax income in addition to a decrease in the
amortization of investment tax credits.
11
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
Extraordinary Item
In the second quarter of 1995, the discontinuance of regulatory accounting
principles 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
extraordinary 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.
Cumulative effect of change in accounting principles
Effective January 1, 1996, Information Resources changed the recognition of its
directory publishing revenue and production expenses from the "amortized" method
to the "point of publication" method. Under the point of publication method,
revenues and product expenses will be recognized when the directories are
published rather than over the lives of the directories (generally one year) as
was the case under the amortized method. NYNEX and the Company believe the
change to the point of publication method is preferable because it is the method
that is generally followed by publishing companies and reflects more precisely
the operations of the business. Pursuant to the directory licensing agreement
between Information Resources and the Company, the Company's portion of the
initial effect of the change to the point of publication method is reported as a
cumulative effect of a change in accounting principle which resulted in a
one-time, non-cash gain of $91.7 million ($55.2 million after-tax) in the first
quarter of 1996. The impact of applying the point of publication method during
the first nine months of 1996 resulted in a $15.0 million increase to net
income.
Pro forma results, assuming the point of publication method had been applied
during the first nine months of 1995, are as follows:
Nine Months Ended
September 30, 1995
(In millions)
Pro forma As Reported
Net Loss $(218.6) $(234.5)
While the application of the point of publication method is not expected to have
a material impact on total 1996 and pro forma 1995 results, the impact of the
change is likely to materially effect the results of certain quarters due to the
nature of the change.
Current Status of Retirement Incentives
In July 1996, the Company extended the period for offering retirement incentives
to management employees to mid-1997 to better coordinate force sizing with
process re-engineering implementation and service improvement initiatives. At
the present time, the Company expects the total number of employees who will
elect to take the retirement incentives to be in the range of 5,800 to 6,200
consisting of approximately 2,200 management and 3,600 to
12
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
4,000 nonmanagement employees depending on work volumes, needs of the business
and timing of the incentive offers. The increase of an estimated 300 additional
management employees expected to leave the Company under the retirement
incentives results from higher than anticipated acceptances of the retirement
incentives.
Current Status of Business Restructuring
As a result of the Company's most recent experience and projections of remaining
costs and work effort for process re-engineering initiatives, systems
development costs are expected to exceed earlier projections by $6 million,
while work center consolidation and training costs are expected to be lower than
originally planned by approximately $5 million and $1 million, respectively.
Reserve Utilization in 1996
The restructuring reserve balance at September 30, 1996, which does not include
the liability for postretirement medical benefits associated with employees'
leaving the Company under the business restructuring, was approximately $55
million. Summarized below are the components of $44 million of reserves utilized
during the nine months ended September 30, 1996:
(In millions)
Severance $32
Process Re-engineering:
Systems redesign:
Customer contact $4
Customer operations 5
--
Total systems redesign $9
Work center consolidation -
Branding -
Relocation -
Training 3
Re-engineering implementation -
--
Subtotal 12
Telesector Resources' allocated reserves:
Systems re-engineering -
Re-engineering implementation -
Work center consolidation -
--
Total allocated -
--
Total process re-engineering 12
---
Total $44
===
The severance reduction amount is primarily 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.
$8 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.
13
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
Cost Savings
Since the inception of process re-engineering and the special pension
enhancement program in 1994, approximately 3,900 employees have accepted the
retirement incentives. On an annualized basis, this will equate to an average
reduction in wages and benefits of approximately $198 million. In addition, the
Company's share of the annualized average reduction in wages and benefits
attributable to employees of Telesector Resources leaving under retirement
incentives will be approximately $80 million. A portion of these cost savings
will be offset by the effects of wage and price inflation, growth in volume of
business and higher costs attributable to service improvements.
Financing
At September 30, 1996, the Company had $500 million of unissued, unsecured debt
securities registered with the SEC.
$350 million of the Company's Debentures are repayable on November 15, 1996, in
whole or in part, at the option of the holder, and as such are classified as
Short-term debt at September 30, 1996 and December 31, 1995. No options to elect
repayment were received and, therefore, the Debentures will be classified as
Long-term debt at December 31, 1996.
Regulatory Environment
In response to regulatory filings made by NYNEX in July, state regulatory
commissions in Maine and Vermont have indicated that they have the authority to
approve the Merger and have initiated proceedings. The New Hampshire Public
Utilities Commission ("NHPUC") has also initiated proceedings to review the
Merger. The Massachusetts Department of Public Utilities has issued an order
stating that it will review the Merger within the context of its general
supervisory authority over telephone operations within the Commonwealth and has
scheduled public hearings. The Rhode Island Public Utilities Commission
("RIPUC") may also seek to review the Merger. Evidentiary hearings are scheduled
in November in Maine, and in December in New Hampshire and Vermont.
The governing legal standard varies from state to state, but generally requires
a showing that the Merger is consistent with the public interest. As part of
that standard, these state regulatory commissions may look at the impact of the
Merger on competition, rates, and service quality as well as the impact on the
customers and employees of the Company.
In addition, NYNEX and Bell Atlantic have filed applications with the Federal
Communications Commission ("FCC") seeking approval of the transfer of control of
certain FCC licenses and authorizations held by the Company and New York
Telephone Company (collectively, the "Telephone Companies").
NYNEX expects that all necessary regulatory action will be completed by early
1997.
14
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
State
Massachusetts
The Company's annual price cap filing became effective October 15, 1996, and
will produce an overall decrease in the Company's annual intrastate revenues of
approximately $29.6 million. The revenue reduction includes a $16.3 million
decrease in revenues from residential customers, a $15.4 million decrease in
revenues from business customers, a $7.4 million decrease in revenues from
access services, and a $9.3 million increase in certain miscellaneous revenues.
New Hampshire
In August, the NHPUC issued an order approving ILP and the method of
implementation. The Company has elected, and the NHPUC has approved, an ILP
implementation date of June 2, 1997. Implementation shall include all switches
serving customers in the state. The costs of implementing ILP are to be
recovered over a two year period from all intraLATA toll carriers, including the
Company, on a minutes of use basis.
Rhode Island
The RIPUC postponed further hearings in its proceeding on local exchange
competition, inviting comments from the parties regarding the impact of the Act
and related FCC orders. Discussions are underway among the RIPUC and parties as
to the future course of action.
Vermont
The Company has reached stipulations with the parties on several issues
addressed in the Vermont Public Service Board's ("VPSB") Order in Phase I of its
proceeding on competition, including unbundling of network elements, directory
assistance and listings, and a cost study methodology. As a result of the FCC's
Interconnection Order, however, VPSB consideration of the stipulations has been
delayed. The parties continue to meet to determine which issues remain for
decision in the Vermont proceeding and which issues are resolved by the FCC's
Order.
Federal
Telecommunications Act of 1996: The Telephone Companies are actively engaged in
the negotiation of interconnection agreements with various competitive local
exchange carriers ("CLECs") under the terms of the Act. Agreements are
state-specific and have been reached with nine individual CLECs. Each agreement
must be reviewed by the appropriate state regulatory commission and approved or
disapproved within 90 days of filing.
Arbitration proceedings have been commenced in every state to resolve the terms
of interconnection where the Telephone Companies and the affected CLEC have been
unable to reach an agreement for interconnection. The principal issues involve
the wholesale pricing of services offered by the Telephone Companies for resale,
as well as the prices for unbundled network elements and for the transport and
termination of local traffic.
15
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
In August, the FCC issued its First Report and Order setting forth the terms and
conditions under which local exchange companies such as the Telephone Companies
are required to provide their services and facilities for use by competitors in
the provision of telecommunications services as required by the Act. The Order
establishes comprehensive technical rules, and sets national cost and pricing
standards for interconnection, the transport and termination of local traffic,
the provision of unbundled network elements and resale services. The Order also
sets "default" or proxy rates for these functions, which state regulatory
commissions may use until the FCC-mandated cost studies have been completed. The
proposed default rates and resale discount result in rates that are
significantly less than the negotiated rates contained in the Telephone
Companies' various interconnection agreements pending before the state
regulatory commissions and the Telephone Companies' costs. The Order provides
further that, in negotiating an interconnection agreement with a local exchange
company, a CLEC may select individual provisions from any other interconnection
agreement the local exchange company has negotiated. The Order requires that
state regulatory commissions reconsider any approved or arbitrated
interconnection agreements in light of the requirements of the Order.
In September, state regulatory commissions, local exchange carriers such as
NYNEX, and other parties filed appeals with U. S. Courts of Appeals to overturn
portions of the FCC's Order. The U. S. Court of Appeals for the 8th Circuit
issued a temporary stay of the Order, and all appeals have now been consolidated
with the Court. In October, the Court ordered that, pending completion of the
appeal, the stay will be continued with respect to the pricing rules and the
selective contract provision. The Court is expected to hear oral arguments on
the appeals in January. In the meantime, the FCC and several other parties,
including AT&T and MCI Corp. ("MCI"), have petitioned the U. S. Supreme Court to
vacate the stay. In its petition the FCC stated the "the stay draws into
question not just the timing of competition in the local markets, but also the
timing of full entry by the Bell operating companies into the long distance
market." In late October the petitions were denied by Justice Thomas. The FCC
and other petitioners have resubmitted their petitions to other Justices of the
Supreme Court.
NYNEX expects that the interconnection negotiation and arbitration process will
continue before the various state regulatory commissions, utilizing the FCC
interconnection rules that remain in effect, but with each commission
determining the appropriate pricing rules for its jurisdiction, as provided by
the Act. Arbitrated issues must be completed within nine months of the CLEC's
initial request to negotiate interconnection, with state approval of the
arbitrated agreement one month thereafter. In each of the states in which the
Company operates, interconnection agreements with AT&T and MCI must be
arbitrated and approved by January 1997, and with Sprint Corp. by February 1997.
16
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
The Order is the first of three FCC rulemakings that, taken together, will
determine the regulatory framework for competitive local exchange markets as
required by the Act. The FCC has previously indicated that the remaining
rulemakings, which will address universal service reform and access charge
reform, are scheduled to be completed by May 1997. While the outcome of these
proceedings cannot be predicted, they are likely to have a significant impact on
the Company's future rate structures, rate levels and revenues.
17
<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
(12) Computation of Ratio of Earnings to Fixed Charges
(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.
18
<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
J.W. Diercksen
-------------------------------------------
J.W. Diercksen
Acting Vice President-Finance and Treasurer
(Principal Financial and Accounting Officer)
November 8, 1996
19
<PAGE>
Exhibit (12)
NEW ENGLAND TELEPHONE AND TELEGRAPH COMPANY
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In millions) (Unaudited)
<TABLE>
<CAPTION>
For the
Nine Months
Ended
September 30, For The Year Ended December 31,
1996 1995 1994 1993 1992 1991
---- --------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earnings
Earnings before Interest Expense,
Extraordinary Item and Cumulative
Effect of Change in Accounting Principle $579.6 $659.4 $637.3 $281.3 $676.3 $507.7
Federal, State and Local Income Taxes 295.3 312.5 268.2 (39.1) 240.9 135.9
Estimated Int rest Portion of Rental Expense 20.3 28.0 28.3 27.8 30.2 30.7
------ ------ ------ ------ ------ ------
Total Earnings $895.2 $999.9 $933.8 $270.0 $947.4 $674.3
====== ====== ====== ====== ====== ======
Fixed Charges
Total Interest Deductions $106.5 $153.9 $163.0 $175.0 $189.7 $191.2
Estimated Interest Portion of Rental Expense 20.3 28.0 28.3 27.8 30.2 30.7
------ ------ ------ ------ ------ ------
Total Fixed Charges $126.8 $181.9 $191.3 $202.8 $219.9 $221.9
====== ====== ====== ====== ====== ======
Ratio of Earnings to Fixed Charges 7.06 5.50 4.88 1.33 4.31 3.04
====== ====== ====== ====== ====== ======
</TABLE>
20
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1995
<PERIOD-END> Sep-30-1996
<CASH> 13
<SECURITIES> 0
<RECEIVABLES> 1,094
<ALLOWANCES> 48
<INVENTORY> 89
<CURRENT-ASSETS> 1,378
<PP&E> 12,784
<DEPRECIATION> 6,978
<TOTAL-ASSETS> 7,325
<CURRENT-LIABILITIES> 1,563
<BONDS> 1,822
0
0
<COMMON> 1
<OTHER-SE> 2,681
<TOTAL-LIABILITY-AND-EQUITY> 7,325
<SALES> 0
<TOTAL-REVENUES> 3,426
<CGS> 0
<TOTAL-COSTS> 2,545
<OTHER-EXPENSES> (6)
<LOSS-PROVISION> 41
<INTEREST-EXPENSE> 107
<INCOME-PRETAX> 768
<INCOME-TAX> 295
<INCOME-CONTINUING> 473
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 55
<NET-INCOME> 528
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
