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, 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)
<TABLE>
<CAPTION>
Three Months Six Months
For the Period Ended June 30, 1996 1995 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Local service $ 517.2 $ 487.5 $ 1,020.6 $ 966.8
Long distance 170.4 173.3 342.1 345.5
Network access 342.6 324.8 681.8 642.7
Other 83.6 88.9 202.7 173.1
-------- -------- -------- --------
Total operating revenues 1,113.8 1,074.5 2,247.2 2,128.1
-------- -------- -------- --------
OPERATING EXPENSES
Maintenance and support 291.8 273.3 578.3 555.3
Depreciation and amortization 241.4 223.1 476.9 450.9
Marketing and customer services 155.2 148.1 317.2 273.8
Taxes other than income 34.5 31.9 69.5 63.6
Provision for uncollectible revenues 11.7 12.3 25.2 27.0
Other 105.2 148.7 272.7 280.7
-------- -------- -------- --------
Total operating expenses 839.8 837.4 1,739.8 1,651.3
-------- -------- -------- --------
Operating income 274.0 237.1 507.4 476.8
Other income (expense) - net (1.2) 3.4 (1.8) 6.6
Interest expense 35.2 39.0 71.0 79.3
-------- -------- -------- --------
Earnings before income taxes,
extraordinary item and cumulative effect
of change in accounting principle 237.6 201.5 434.6 404.1
Income taxes
Federal 76.3 64.1 139.0 128.6
State and local 15.5 13.7 28.5 27.8
-------- -------- -------- --------
Total income taxes 91.8 77.8 167.5 156.4
-------- -------- -------- --------
Earnings before extraordinary item
and cumulative effect of change in
accounting principle 145.8 123.7 267.1 247.7
Extraordinary item for the discontinuance
of regulatory accounting principles,
net of taxes - (627.8) - (627.8)
Cumulative effect of change in
accounting for directory publishing
income, net of taxes (Note B) - - 55.2 -
-------- -------- -------- --------
NET INCOME (LOSS) $ 145.8 $ (504.1) $ 322.3 $ (380.1)
======== ======== ======== ========
RETAINED EARNINGS
Beginning of period $ 474.8 $ 993.3 $ 414.9 $ 979.9
Net income (loss) 145.8 (504.1) 322.3 (380.1)
Dividends declared (116.7) (110.7) (233.3) (221.3)
-------- -------- -------- --------
End of period $ 503.9 $ 378.5 $ 503.9 $ 378.5
======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
BALANCE SHEETS
(In millions) (Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 6.5 $ 8.4
Receivables
Trade and other (net of allowance of
$51.0 and $49.7, respectively) 910.5 890.0
Affiliates 111.4 27.1
Deferred charges 77.5 95.9
Deferred income taxes 59.0 106.2
Inventory 76.5 53.7
Prepaid expenses and other 94.2 36.1
--------- ---------
Total current assets 1,335.6 1,217.4
--------- ---------
Telephone plant - at cost 12,848.5 12,543.4
Less: accumulated depreciation 7,040.3 6,681.9
--------- ---------
5,808.2 5,861.5
--------- ---------
Deferred charges and other 138.9 139.9
--------- ---------
TOTAL ASSETS $ 7,282.7 $ 7,218.8
========= =========
LIABILITIES AND SHARE OWNER'S EQUITY
Current liabilities:
Accounts payable
Affiliates $ 421.5 $ 473.7
Other 450.4 608.0
Short-term debt 516.1 387.6
Dividends payable 116.7 110.7
Taxes accrued 56.0 27.7
Advance billing and customers' deposits 18.9 19.5
Interest accrued 37.9 38.1
--------- ---------
Total current liabilities 1,617.5 1,665.3
--------- ---------
Long-term debt 1,822.3 1,822.0
Deferred income taxes 280.0 345.5
Unamortized investment tax credits 64.1 67.9
Other long-term liabilities
and deferred credits 905.8 814.1
--------- ---------
Total liabilities 4,689.7 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 503.9 414.9
--------- ---------
Total share owner's equity 2,593.0 2,504.0
--------- ---------
TOTAL LIABILITIES AND SHARE OWNER'S EQUITY $ 7,282.7 $ 7,218.8
========= =========
</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 Six Months Ended June 30, 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ 322.3 $(380.1)
------- -------
Adjustments to reconcile net income to
net cash provided by operating activities:
Extraordinary item, net of taxes - 627.8
Depreciation and amortization 476.9 450.9
Deferred income taxes - net (54.1) (35.9)
Deferred credits - net (3.8) (6.3)
Change in operating assets and liabilities:
Receivables (104.8) (15.8)
Deferred charges 18.4 (22.4)
Deferred income taxes 47.2 6.9
Inventory (22.8) (3.0)
Prepaid expenses and other (58.1) (26.3)
Accounts payable (209.8) 5.6
Taxes accrued 28.3 17.9
Advance billing and customers' deposits (.6) 0.2
Interest accrued (.2) 1.2
Other - net 68.9 37.8
------- -------
Total adjustments 185.5 1,038.6
------- -------
Net cash provided by operating activities 507.8 658.5
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (410.5) (407.9)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from NYNEX 128.4 (34.8)
Dividends paid to NYNEX (227.4) (216.7)
Repayment of long-term debt and capital leases (0.2) (0.3)
------- -------
Net cash used in financing activities (99.2) (251.8)
------- -------
Net decrease in Cash (1.9) (1.2)
Cash at beginning of period 8.4 9.1
------- -------
Cash at end of period $ 6.5 $ 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 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 Report 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
with 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 six months of 1996 resulted in a $9.1 million increase in net income.
5
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Pro forma results, assuming the point of publication method had been applied
during the first six months of 1995, are as follows:
Six Months Ended
June 30, 1995
(In millions)
Pro forma As Reported
--------- -----------
Net Loss $(372.7) $(380.1)
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 June 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
Six Months Ended
June 30,
(In millions) 1996 1995
----------------
Income tax payments $191.1 $171.9
Interest payments $ 76.2 $ 75.6
F Subsequent Events
On July 2, 1996, NYNEX and Bell Atlantic Corporation ("Bell Atlantic") executed
an amendment to their definitive merger agreement, 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 newly formed subsidiary of Bell
Atlantic will merge with and into NYNEX, thereby
6
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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.
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 six months ended June 30, 1996 was $322.3 million. Net loss
for the same period of 1995 was $(380.1) million.
Net income for the first six 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 six months of 1996 also
includes certain after-tax charges of $56.1 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 six months of 1995 included an after-tax
extraordinary charge of $627.8 million for the discontinuance of regulatory
accounting principles, after-tax charges of $46.0 million for pension
enhancements and after-tax charges of $5.4 million for accruals related to
various self-insurance programs and revised benefit charges.
Excluding the above items, net income for the first six months of 1996 would
have been $327.5 million, an improvement of $28.4 million, or 9.5%, over
adjusted net income for the same period of 1995.
Operating Revenues
Operating revenues for the six months ended June 30, 1996 were $2.2 billion, an
improvement of $119.1 million, or 5.6%, over the same period of 1995.
Local service revenues are earned from the provision of local exchange, local
private line and local public network services. The $53.8 million, or 5.6%,
improvement over the first six months of 1995 results from the net of (i) an
increase of $62 million, primarily in demand, driven by growth in access lines
and sales of calling features, and (ii) an $8 million decrease in rates
primarily in Massachusetts pursuant to the price regulation plan.
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 $3.4 million, or 1.0%,
decrease from the first six months of 1995 results from the net of (i) an
increase of $11 million primarily in demand, and (ii) a $13 million decrease in
rates principally due to a $4 million rate reduction in Maine required by the
Maine Public Utilities Commission, a $6 million required rate reduction in
Massachusetts pursuant to the price regulation plan, and a $3 million rate
reduction in New Hampshire. Certain decreases in long distance revenues,
resulting from competition, are being partially offset by increases in network
access revenues.
8
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
Network access revenues are earned from the provision of exchange access service
primarily to interexchange carriers. The $39.1 million, or 6.1%, improvement
over the first six months of 1995 results from (i) a net $28 million increase in
switched access revenues due to a $47 million increase resulting primarily from
increased demand including the previously mentioned shift from long distance
revenues, partially offset by a $14 million reduction in interstate rates and a
$5 million reduction in intrastate rates primarily in Massachusetts pursuant to
the price regulation plan, and (ii) an $11 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 $29.6 million, or 17.1%,
improvement over the first six months of 1995 results from (i) a $26 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 six months of 1995, and (ii) a $5 million increase
primarily in voice messaging services revenue.
Operating Expenses
Operating expenses for the six months ended June 30, 1996 were $1.7 billion, an
increase of $88.5 million, or 5.4%, over the same period of 1995.
Included in the operating expenses for the first six months of 1996 were pension
enhancement charges of $92.3 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 $71.5 million and charges
of $9.0 million related to various self-insurance programs and revised benefit
charges.
Excluding the items discussed above, operating expenses would have increased
$69.7 million, or 4.4%, over adjusted operating expenses for the first six
months of 1995.
The $69.7 million increase in adjusted operating expenses includes the following
categories:
Depreciation and amortization increased $26.0 million, or 5.8%, over the first
six months of 1995, resulting from increases of $15 million due to growth in
depreciable plant investment and $11 million attributable to the discontinuance
of regulatory accounting principles in 1995.
Taxes other than income, which include gross receipts taxes, property taxes and
other non-income based taxes, increased $5.9 million, or 9.3%, over the first
six months of 1995, resulting from increases of $3 million in municipal tax
rates for real estate in Massachusetts and $1 million in the gross receipts tax
in Rhode Island.
9
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
Employee related costs, which consist primarily of wages, payroll taxes, and
employee benefits, decreased $6.0 million from the first six months of 1995,
resulting from a $5 million decrease in benefit expenses primarily due to a
decrease in pension expense attributable to changes in actuarial assumptions.
Other operating expenses, which consist primarily of contracted and centralized
services, rent and other general and administrative costs, increased $43.8
million over the first six months of 1995. The increase resulted primarily from
a $42 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 to implement the competitive checklist provisions
of the Telecommunications Act of 1996 (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.
The components of the pension enhancement charges for the first six months of
1996 and 1995 are as follows:
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
(In millions) 1996* 1995*
---- ----
Pretax After-Tax Pretax After-Tax
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Pension enhancement charges $76.5 $46.5 $55.2 $35.4
Postretirement medical costs 15.8 9.6 16.3 10.6
----- ---- ----- -----
$92.3 $56.1 $71.5 $46.0
===== ===== ===== =====
</TABLE>
* 1996 - 180 management and 630 nonmanagement employees
1995 - 160 management and 410 nonmanagement employees
For the six months ended June 1996 and 1995, $10.7 million and $10.7
million, respectively ($6.5 million and $6.5 million, respectively,
after-tax) were allocated to the Company from Telesector Resources for
its pension enhancements and $(.6) million and $5.4 million,
respectively ($(.3) million and $3.3 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 $8.4 million from the first six 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).
10
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
Interest expense
Interest expense decreased $8.3 million, or 10.5%, from the first six 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 $11.1 million, or 7.1%, 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.
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
with 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 six months of 1996 resulted in a $9.1 million increase to net income.
Pro forma results, assuming the point of publication method had been applied
during the first six months of 1995, are as follows:
Six Months Ended
June 30, 1995
(In millions)
Pro forma As Reported
--------- -----------
Net Loss $(372.7) $(380.1)
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 quarterly results due to the nature of
the change.
11
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
Current Status of Retirement Incentives
In July 1996, NYNEX extended the offering period for retirement incentives to
management employees to mid-1997 and to 1998 for nonmanagement employees in
order 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 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 the
remaining costs and work effort involved in the process re-engineering
initiatives, systems development costs are expected to exceed original
projections by $6 million for the remainder of 1996, while work center
consolidation and training costs are expected to be lower than originally
projected by $5 million and $1 million, respectively.
Reserve Utilization in 1996
The restructuring reserve balance at June 30, 1996, which does not include the
liability for postretirement medical benefits associated with employees' leaving
the Company under the business restructuring, was approximately $64 million.
Summarized below are the components of $34 million of reserves utilized during
the six months ended June 30, 1996.
Severance $27
Process Re-engineering:
Systems redesign:
Customer contact $2
Customer operations 3
--
Total systems redesign $5
Work center consolidation -
Branding -
Relocation -
Training 2
Re-engineering implementation -
--
Subtotal 7
Telesector Resources' allocated reserves:
Systems re-engineering -
Re-engineering implementation -
Work center consolidation -
--
Total allocated -
--
Total process re-engineering 7
---
Total $34
===
12
<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 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.
$4 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.
Cost Savings
Since the inception of process re-engineering and the special pension
enhancement program in 1994, approximately 3,800 employees have accepted the
retirement incentives. On an annualized basis, this will equate to an average
reduction in wages and benefits of approximately $194 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 $79 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 June 30, 1996, the Company had $500 million of unissued, unsecured debt
securities registered with the SEC.
Regulatory Environment
State
On July 3, 1996, NYNEX and Bell Atlantic filed information on their proposed
merger with regulators in the District of Columbia and the thirteen states in
which their respective local telephone companies provide service. The filings
seek the level of review mandated by the applicable provisions of the states'
public service laws and seek formal regulatory approval where required. In
addition, a joint filing was made with the Federal Communications Commission
("FCC") on the same date.
Massachusetts
In June, New England Telephone filed its second annual price cap filing with the
Massachusetts Department of Public Utilities. The filing proposes rate changes
effective August 15, 1996, which would 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 April, the New Hampshire Public Utilities Commission ("NHPUC") issued an
Order directing local exchange carriers, including the Company, to implement
13
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
intraLATA presubscription in New Hampshire on or before October 1, 1996. In late
May, following the Company's request for clarification or reconsideration, the
NHPUC clarified its Order, stating that it would "entertain evidence regarding
the implementation date for each particular company." The Company has filed its
plan, proposing to implement presubscription in June 1997. NHPUC hearings on
implementation issues were held in June and July.
In June, the NHPUC filed with the New Hampshire Legislature proposed rules to
govern the authorization of competitive local exchange service. A public hearing
was held in July, and comments are due in August. By statute, the rulemaking
process must be completed by year-end.
In June, the NHPUC issued a proposed rule to adopt standards under which it may
regulate utilities using a form of regulation other than traditional rate of
return regulation. A public hearing was held and comments filed in June.
Rhode Island
In June, the Rhode Island Public Utilities Commission ("RIPUC") approved an
incentive regulation plan that had been proposed by the Company and the Rhode
Island Division of Public Utilities and Carriers. The Plan has no set term or
expiration, although there are opportunities for annual review by the RIPUC.
There is no earnings cap or sharing mechanism, which was a component of the
expired Trial. The Company will thus be able to operate in Rhode Island with
increased earnings, pricing, operational, and depreciation flexibility.
Other features of the Plan include: more stringent service quality requirements,
including a financial penalty, with a maximum annual rebate of $1.25 million;
and no increase in residence or business basic exchange rates through 1999.
Further hearings in the RIPUC's competition proceeding are scheduled to be
completed in August, and a decision is expected in November.
Vermont
In late May, the Vermont Public Service Board ("VPSB") issued its final Order in
Phase I of its proceeding on competition. The Order directs the Company to
"unbundle" certain elements of its network, sets pricing rules for wholesale and
retail services and adopts a mandatory "bill-and-keep" compensation arrangement
for local exchange carrier interconnection. Under a bill-and-keep arrangement
the carrier originating a call does not pay the terminating carrier for access
to its network. The Order also stated that the Company's cost of provisioning
services or facilities to itself will be presumed to equal the cost of providing
the same services or facilities on a wholesale basis to competitors for resale.
In mid-June, the Company filed a request for reconsideration of two aspects of
the VPSB's Order. The Company argues that a mandatory "bill-and-keep"
14
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
compensation arrangement for interconnection violates the Telecommunications Act
of 1996 (the "1996 Act") by negating the Company's right to mutual and
reciprocal compensation for use of its network. The Company also argues that the
VPSB should not have prejudged the issue of the Company's cost of
self-provisioning, which will be definitively determined once cost studies are
concluded later this year in Phase II of the proceeding.
Phase II of the proceeding will begin in September and will address specific
pricing and technical questions with respect to local and intraLATA toll
competition, including intraLATA presubscription. The VPSB will open a separate
docket to investigate service quality, privacy and other consumer protection
issues, which will create benchmark standards for all competitors in dealings
with retail customers.
Federal
Telecommunications Act of 1996: On August 1, 1996, the FCC announced that it had
adopted rules to begin implementing the local competition provisions of the 1996
Act. The rules address among other matters, local exchange carrier
interconnection, unbundling of network elements and provision of local exchange
services for resale. These rules may impact the competitive checklist
requirements for NYNEX's entry into the in-region long distance business. The
effect of the rules on NYNEX's business plans cannot be assessed until the text
of the rules is released by the FCC.
In July, the FCC issued interim rules that grant "nondominant carrier" status
for a Regional Holding Company's ("RHC") affiliate when it offers long distance
services outside of its home region. The rules impose certain minimum
safeguards: the affiliate may not own network facilities jointly with the
parent, must maintain separate books, and must pay tariffed rates for services
from the parent. The FCC rejected the proposals of long distance competitors
that sought to bar the RHC's and their affiliates from certain operating
efficiencies, such as the common use of employees and premises, and that sought
to impose regulatory accounting requirements on the affiliate. In view of the
proposed mergers between NYNEX and Bell Atlantic and between SBC Communications
and Pacific Telesis Group, the FCC decided that nondominant status will not
automatically apply to an RHC's affiliate providing long distance service in a
state where the RHC's prospective merger partner provides local exchange
service. The RHC may seek such status by a waiver request. The FCC has commenced
a separate rulemaking proceeding to determine whether the minimum safeguards
imposed on nondominant carriers should be continued or may be eliminated.
In July, the FCC granted NYNEX authority to provide international long distance
service outside of its home region. NYNEX was afforded nondominant carrier
status, subject to the FCC's interim rules.
Nondominant carriers enjoy substantial regulatory freedom, including freedom
from detailed price cap regulation and flexibility to make tariff changes on one
day's notice (compared with two weeks for dominant carriers) without cost
15
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
support and with a presumption of lawfulness. The FCC's Order will greatly
facilitate NYNEX's timely provision of out-of-region interstate and
international long distance services.
In July, the FCC also commenced separate rulemaking proceedings to determine the
safeguards to be applied to the affiliate of an RHC or other local exchange
carrier when it offers certain services, including long distance services within
its home region, manufacturing and information services, electronic publishing,
alarm monitoring and telemessaging services.
In June, the FCC issued an Order adopting regulations to implement the open
video systems ("OVS") provisions of the 1996 Act to provide opportunities for
the distribution of video programming other than through cable systems. In its
Order, the FCC adopted a streamlined process for entry, including reasonable
presumptions for determining whether rates are just and reasonable. In addition,
the FCC adopted capacity allocation rules that provide flexibility for OVS
operators, such as NYNEX, while guaranteeing unrelated programmers access to
customers. The FCC also adopted rules implementing Congressional intent to limit
the role of local franchise authorities in the oversight of OVS. Many parties,
including NYNEX, have sought reconsideration of aspects of the Order.
Reconsideration petitions must be decided and final rules in place by early
August.
In June, the FCC adopted rules that will contribute towards the development of
competition in the local exchange market by allowing customers to retain their
telephone numbers when switching local service providers. The FCC's rules
implement the number portability obligations imposed on local exchange carriers
by the 1996 Act. Local exchange carriers are to begin implementing number
portability in the 100 largest metropolitan areas by October 1997, with
completion by the end of 1998. Number portability outside of those areas must be
provided within six months after receiving a specific request from a
telecommunications carrier. The FCC has proposed a further inquiry into cost
recovery for meeting these requirements.
Price Caps: In June, the FCC approved the Company and New York Telephone
Company's (collectively, the "Telephone Companies") Annual Access Tariff Filing
for the tariff period July 1996 to June 1997. In that filing the Telephone
Companies elected to use the highest productivity factor in their price cap
formula, allowing them to retain all interstate earnings without sharing. (The
price cap formula adjusts the limits on access price levels upward for
inflation, downward for productivity, and up or down for certain "exogenous"
costs beyond the carrier's control.) The FCC also approved the Telephone
Companies' petition to elect the same "no-sharing" productivity factor
retroactively to January 1, 1996, which will require them to make an additional
$20 million permanent reduction in access price levels.
Other Federal Regulatory Matters: In July, the U.S. Court of Appeals for the
District of Columbia Circuit granted petitions for review of the 1992-94 FCC
orders that changed the rate structure for interstate Local Transport access
16
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
services (transport between local telephone company central offices and
interexchange carrier premises). The FCC orders established a mix of flat
monthly rates and per-minute rates for Local Transport services and, to ease the
impact of this restructure on small interexchange carriers, placed some of the
costs for per-minute transport in a "residual interconnection charge," ("RIC")
imposed on all interexchange carriers. The FCC described this as an interim rate
structure to allow a transition to cost-based rates. However, the Court found
that the FCC had made no apparent progress since 1992 in developing cost-based
rates. While the Court did not reverse the FCC orders, it remanded the case with
the instruction that the FCC must implement cost-based rates for transport
services and a cost-based alternative to the RIC, or give a reasoned explanation
why a departure from cost-based pricing is necessary. The FCC may deal with this
case as part of the access reform proceeding that it intends to initiate in the
near future. The RIC accounts for approximately $600 million of NYNEX's annual
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)
August 7, 1996
19
Exhibit (12)
NEW ENGLAND TELEPHONE AND TELEGRAPH COMPANY
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In millions)
<TABLE>
<CAPTION>
For the
Six Months
Ended
June 30, For The Year Ended December 31,
1996 1995 1994 1993 1992 1991
---- ----------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Earnings
Earnings before Interest Expense,
Extraordinary Item and Cumulative
Effect of Change in Accounting Principle $338.1 $659.4 $637.3 $281.3 $676.3 $507.7
Federal, State and Local Income Taxes 167.5 312.5 268.2 (39.1) 240.9 135.9
Estimated Interest Portion of Rental Expense 13.8 28.0 28.3 27.8 30.2 30.7
------ ------ ------ ------ ------ ------
Total Earnings $519.4 $999.9 $933.8 $270.0 $947.4 $674.3
====== ====== ====== ====== ====== ======
Fixed Charges
Total Interest Deductions $ 71.0 $153.9 $163.0 $175.0 $189.7 $191.2
Estimated Interest Portion of Rental Expense 13.8 28.0 28.3 27.8 30.2 30.7
------ ------ ------ ------ ------ ------
Total Fixed Charges $ 84.8 $181.9 $191.3 $202.8 $219.9 $221.9
====== ====== ====== ====== ====== ======
Ratio of Earnings to Fixed Charges 6.12 5.50 4.88 1.33 4.31 3.04
====== ====== ====== ====== ====== ======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Dec-31-1995
<PERIOD-END> Jun-30-1996
<CASH> 7
<SECURITIES> 0
<RECEIVABLES> 1,073
<ALLOWANCES> 51
<INVENTORY> 77
<CURRENT-ASSETS> 1,336
<PP&E> 12,849
<DEPRECIATION> 7,040
<TOTAL-ASSETS> 7,283
<CURRENT-LIABILITIES> 1,618
<BONDS> 1,822
0
0
<COMMON> 1
<OTHER-SE> 2,593
<TOTAL-LIABILITY-AND-EQUITY> 7,283
<SALES> 0
<TOTAL-REVENUES> 2,247
<CGS> 0
<TOTAL-COSTS> 1,740
<OTHER-EXPENSES> (2)
<LOSS-PROVISION> 25
<INTEREST-EXPENSE> 71
<INCOME-PRETAX> 435
<INCOME-TAX> 168
<INCOME-CONTINUING> 267
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 55
<NET-INCOME> 322
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
