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, 1997
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, 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
- ------------------
Local service $ 545.2 $ 517.2 $ 1,071.4 $ 1,020.6
Long distance 167.9 170.4 337.3 342.1
Network access 356.1 342.6 710.6 681.8
Other 98.4 83.6 207.5 202.7
-------- -------- -------- --------
Total operating revenues 1,167.6 1,113.8 2,326.8 2,247.2
======== ======== ======== ========
OPERATING EXPENSES
- ------------------
Maintenance and support 316.9 291.8 596.4 578.3
Depreciation and amortization 224.1 241.4 444.8 476.9
Marketing and customer services 160.5 155.2 302.0 317.2
Taxes other than income 35.9 34.5 72.3 69.5
Provision for uncollectible revenues 13.7 11.7 29.1 25.2
Other 87.5 105.2 345.4 272.7
-------- -------- -------- --------
Total operating expenses 838.6 839.8 1,790.0 1,739.8
======== ======== ======== ========
Operating income 329.0 274.0 536.8 507.4
Other income (expense) - net 7.9 (1.2) 5.3 (1.8)
Interest expense 34.7 35.2 69.6 71.0
-------- -------- -------- --------
Earnings before income taxes and
cumulative effect of change in
accounting principle 302.2 237.6 472.5 434.6
Income taxes
Federal 97.5 76.3 152.1 139.0
State and local 19.6 15.5 30.9 28.5
-------- -------- -------- --------
Total income taxes 117.1 91.8 183.0 167.5
-------- -------- -------- --------
Earnings before cumulative effect
of change in accounting principle 185.1 145.8 289.5 267.1
Cumulative effect of change in
accounting for directory publishing
income, net of taxes (Note B) -- -- -- 55.2
-------- -------- -------- --------
NET INCOME (LOSS) $ 185.1 $ 145.8 $ 289.5 $ 322.3
======== ======== ======== ========
RETAINED EARNINGS
Beginning of period $ 574.8 $ 474.8 $ 657.8 $ 414.9
Net income 185.1 145.8 289.5 322.3
Dividends declared (187.4) (116.7) (374.8) (233.3)
-------- -------- -------- --------
End of period $ 572.5 $ 503.9 $ 572.5 $ 503.9
======== ======== ======== ========
</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)
June 30, December 31,
1997 1996
- --------------------------------------------------------------------------------
ASSETS
- ------
Current assets:
Cash $ 15.6 $ 14.2
Receivables
Trade and other (net of allowance of
$50.8 and $47.4, respectively) 900.9 918.8
Affiliates 153.7 153.6
Deferred charges 108.8 83.3
Deferred income taxes 34.0 52.6
Inventory 113.6 99.5
Prepaid expenses and other 80.0 55.8
--------- ---------
Total current assets 1,406.6 1,377.8
--------- ---------
Telephone plant - at cost 13,098.1 12,780.5
Less: accumulated depreciation 7,214.4 6,906.6
--------- ---------
5,883.7 5,873.9
--------- ---------
Long-term investment, deferred charges and other 136.7 137.4
--------- ---------
TOTAL ASSETS $ 7,427.0 $ 7,389.1
========= =========
LIABILITIES AND SHARE OWNER'S EQUITY
- ------------------------------------
Current liabilities:
Accounts payable
Affiliates $ 512.5 $ 432.3
Other 441.7 544.3
Short-term debt 175.9 175.7
Dividends payable 187.4 116.7
Taxes accrued 51.7 73.2
Advance billing and customers' deposits 18.5 18.2
Interest accrued 38.0 38.1
--------- ---------
Total current liabilities 1,425.7 1,398.5
--------- ---------
Long-term debt 1,996.5 1,996.4
Deferred income taxes 218.7 271.0
Unamortized investment tax credits 55.4 59.0
Other long-term liabilities
and deferred credits 1,069.1 917.3
--------- ---------
Total liabilities 4,765.4 4,642.2
--------- ---------
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 572.5 657.8
--------- ---------
Total share owner's equity 2,661.6 2,746.9
--------- ---------
TOTAL LIABILITIES AND SHARE OWNER'S EQUITY $ 7,427.0 $ 7,389.1
========= =========
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 Six Months Ended June 30, 1997 1996
- --------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $289.5 $322.3
------ ------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 444.8 476.9
Deferred income taxes - net (33.7) (54.1)
Deferred credits - net (3.6) (3.8)
Change in operating assets and liabilities:
Receivables 4.6 (104.8)
Deferred charges (25.5) 18.4
Deferred income taxes 18.6 47.2
Inventory (14.1) (22.8)
Prepaid expenses and other (24.2) (58.1)
Accounts payable (22.4) (209.8)
Taxes accrued (21.5) 28.3
Advance billing and customers' deposits 0.3 (0.6)
Interest accrued (0.1) (0.2)
Other - net 121.1 68.9
------ ------
Total adjustments 444.3 185.5
------ ------
Net cash provided by operating activities 733.8 507.8
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (441.3) (410.5)
Advances to NYNEX 13.2 --
------ ------
Net cash used in investing activities (428.1) (410.5)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from NYNEX -- 128.4
Dividends paid to NYNEX (304.1) (227.4)
Repayment of long-term debt and capital leases (0.2) (0.2)
------ ------
Net cash used in financing activities (304.3) (99.2)
------ ------
Net increase (decrease) in Cash 1.4 (1.9)
Cash at beginning of period 14.2 8.4
------ ------
Cash at end of period $ 15.6 $ 6.5
====== ======
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 ("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 ("GAAP") have been condensed or omitted pursuant to such
SEC rules and regulations. GAAP requires Management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Due to the uncertainty inherent in making estimates, actual
results could differ from those estimates. Certain information in the financial
statements for 1996 has been reclassified to conform to the current period's
presentation. The results for interim periods are not necessarily indicative of
the results for the entire year. These financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's 1996 Annual Report on Form 10-K and the current year's previously
issued Quarterly Report on Form 10-Q.
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 income from the "amortized" method to the "point of
publication" method. Under the point of publication method, revenues and
production expenses are 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 was 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 application of the point of publication method did not have
a material effect on operating results for the year ended December 31, 1996.
C Receivables - Affiliates
------------------------
At December 31, 1996, the Company had advances to NYNEX of $39.9 million
included in Receivables-Affiliates. At June 30, 1997, the Company had advances
to NYNEX of $26.7 million included in Receivables-Affiliates.
5
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
NOTES TO FINANCIAL STATEMENTS (Continued)
-----------------------------------------
(Unaudited)
D 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, 1997, the aggregate amount of revenues estimated to be subject to
possible refund was approximately $38 million for the Company. The outcome of
each pending matter, as well as the time frame within which each will be
resolved, is not presently determinable.
E Litigation and Other Contingencies
----------------------------------
Various legal actions and regulatory proceedings are pending that may affect the
Company. While counsel cannot give assurance as to the outcome of any of these
matters, in the opinion of Management based upon the opinion 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 but could have a material
effect on operating results.
F 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,
1997 1996
------------------
(In millions)
Income tax payments $235.3 $210.1
Interest payments* $74.8 $76.2
* Amounts shown are net of capitalized interest of $6.0 million in 1997 and
$6.2 million in 1996.
G Proposed Merger
---------------
NYNEX and Bell Atlantic Corporation ("Bell Atlantic") announced a proposed
Merger of equals under a definitive merger agreement (the "Merger"), entered
into on April 21, 1996 and amended on July 2, 1996. Under the terms of the
amended agreement, NYNEX will become a subsidiary of Bell Atlantic. NYNEX
stockholders will receive 0.768 of a share of Bell Atlantic common stock for
each share of NYNEX common stock that they own. Bell Atlantic stockholders will
continue to own their existing shares after the Merger.
The Merger is expected to qualify as a "pooling of interests," which means that,
for accounting and financial reporting purposes, the companies will be treated
as if they had always been combined. At special meetings held in November 1996,
stockholders of both companies approved the Merger. The
6
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
NOTES TO FINANCIAL STATEMENTS (Continued)
-----------------------------
(Unaudited)
completion of the Merger is subject to the Federal Communications Commission's
("FCC") approval, which is expected to be received shortly.
After the closing of the Merger, Bell Atlantic will file, as part of a Current
Report on Form 8-K, unaudited pro forma combined condensed financial statements
which give effect to the Merger using the pooling-of-interests method of
accounting.
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, 1997 was $289.5 million. Net income
for the same period of 1996 was $322.3 million.
Net income for the first six months of 1997 includes after-tax charges of $110.8
million for retirement incentives (see Retirement Incentives). 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 retirement incentives and after-tax
charges of $4.3 million for accruals related to various self-insurance programs.
Excluding the above items, net income for the first six months of 1997 would
have been $400.3 million, an improvement of $72.8 million, or 22.2%, over
adjusted net income for the same period of 1996.
Operating Revenues
- ------------------
Operating revenues for the first six months of 1997 were $2.3 billion, an
improvement of $79.6 million, or 3.5%, over the same period of 1996.
Local service revenues are earned from the provision of local exchange, local
private line and local public network services. The $50.8 million, or 5.0%,
improvement results from the net of (i) an increase of $66 million, primarily in
demand, driven by growth in access lines and sales of calling features, and (ii)
$15 million in rate reductions 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 $4.8 million, or 1.4%,
decrease results primarily from a decrease in demand for calling plans due to
the effects of competition.
Network access revenues are earned from the provision of exchange access service
primarily to interexchange carriers. The $28.8 million, or 4.2%, improvement
results from a net $8 million improvement in switched access revenues primarily
due to a $30 million increase in demand, offset by a $16 million reduction in
interstate rates and a $6 million reduction in intrastate rates, and a $20
million increase in special access revenues primarily due to increased demand.
8
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
-------------------------------------------------------------
Other revenues are earned from the provision of products and services other than
Local service, Long distance and Network access. The $4.8 million, or 2.4%
improvement results primarily from the net of (i) a $14 million increase in
revenues from increased demand for voice messaging services, rent revenues and
incidental revenues such as late payment charges, and (ii) a $7 million decrease
in directory revenues from the directory licensing agreement with Information
Resources, and a $3 million reduction in billing and collection revenues.
Operating Expenses
- ------------------
Operating expenses for the first six months of 1997 were $1.8 billion, an
increase of $50.2 million, or 2.9%, over the same period of 1996.
Included in operating expenses for the first six months of 1997 were charges of
$181.9 million for retirement incentives (see Retirement incentives). Included
in operating expenses for the first six months of 1996 were retirement
incentives of $92.3 million (see components below) and a charge of $7.0 million
for various self-insurance programs.
Excluding the items discussed above, operating expenses would have decreased
$32.4 million, or 2.0%, from adjusted operating expenses for the first six
months of 1996.
The $32.4 million decrease in adjusted operating expenses include the following
categories:
Depreciation and amortization decreased $32.1 million, or 6.7%, from the first
six months of 1996, resulting primarily from the net of (i) a $12 million
increase due to growth in depreciable plant investment, and (ii) a $45 million
decrease attributable to revised estimates of future net salvage value and
remaining useful lives in the third and fourth quarters of 1996, and decreases
due to technical updates to depreciation rates in 1997.
Employee related costs, which consist primarily of wages, payroll taxes, and
employee benefits, decreased $12.5 million from 1996, resulting from an $8
million decrease in wages and payroll taxes as a result of decreased overtime
due to favorable weather conditions and re-engineering service delivery to
customers, and a $5 million decrease in benefit expenses primarily attributable
to decreases in medical expenses.
Other operating expenses, which consist primarily of contracted and centralized
services, rent and other general and administrative costs, increased $9.5
million from 1996 primarily due to the net of (i) an $8 million increase in
right to use fees resulting from software upgrades, a $2 million increase in
leases for equipment, a $4 million increase in the provision for uncollectible
revenues and a $4 million increase in other expenses such as contracted and
centralized services, and (ii) an $8 million decrease in charges from affiliated
companies, attributable to decreases in billing for various research
9
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
-------------------------------------------------------------
related projects and a reduction in expenses related to process re-engineering
costs at Telesector Resources Group, Inc. ("Telesector Resources").
Other income (expense) - net
- ----------------------------
Other income (expense) - net increased $7.1 million primarily due to a gain of
$11 million on the sale of property in Boston partially offset by certain
merger-related costs of $3 million.
Income taxes
- ------------
Income taxes increased $15.5 million, or 9.3%, from the same period last year,
principally due to an increase in pretax income.
Retirement incentives
- ---------------------
The number of employees who elected to leave under retirement incentives during
the first six months of 1997 and 1996 are as follows:
1997 1996
----- ----
Management 255 180
Associates 855 630
----- ----
Total 1,110 810
===== ====
The components of the charges for retirement incentives for the first six months
of 1997 and 1996 are as follows:
(In Millions) 1997 1996
---- ----
Pretax After-Tax Pretax After-Tax
------ --------- ------ ---------
Pension enhancement charges $145.6 $ 88.6 $ 76.5 $ 46.5
Postretirement medical costs 36.3 22.2 15.8 9.6
------ ------ ------ ------
$181.9 $110.8 $ 92.3 $ 56.1
====== ====== ====== ======
Included in the charges above for the first six months of 1997 and 1996, are
amounts charged to the Company by Telesector Resources for an allocated portion
of the employees who left Telesector Resources under the retirement incentives;
$35.4 million and $10.7 million, respectively ($21.5 million and $6.5 million,
respectively, after-tax) for pension enhancements and $12.1 million and $(0.6)
million, respectively ($7.4 million and $(0.3) million, respectively, after-tax)
for postretirement medical costs. The total number of employees who left
Telesector Resources under the retirement incentives during the first six months
of 1997 and 1996 were 860 and 405, respectively, of which 330 and 155,
respectively, were allocated to the Company for determining the Company's
portion of Telesector Resources charges for retirement incentives. Most of the
cost of the retirement incentives is funded by NYNEX's pension plans.
The severance reserves established in 1993 have been and will continue to be
transferred to the pension liability on a per employee basis as employees
10
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
-------------------------------------------------------------
accept the retirement incentives. The postretirement medical liability
established in 1993 has been and will continue to be applied to retired
employees on a per employee basis as employees accept the retirement incentives.
The reserves for management employees were completely utilized during 1996.
During the first six months of 1997, severance reserves of $25 million were
transferred to the pension liability and $33 million of postretirement medical
liability was applied on a per employee basis as a result of associates leaving
under the retirement incentives. $2 million of severance reserves and $3 million
of postretirement medical liability were transferred from the Company to
Telesector Resources during the first six months of 1997 for the allocated
number of Telesector Resources associates who left under the retirement
incentives. At June 30, 1997, $13 million of severance reserves and $16 million
of unapplied postretirement medical liability remained.
Cumulative effect of change in accounting principles
- ----------------------------------------------------
Effective January 1, 1996, Information Resources, a wholly owned subsidiary of
NYNEX, changed the recognition of its directory publishing income from the
"amortized" method to the "point of publication" method. Under the point of
publication method, revenues and production expenses are 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 was 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 application of the point of
publication method did not have a material effect on operating results for the
year ended December 31, 1996.
Financing
- ---------
At June 30, 1997, the Company had $500 million of unissued, unsecured debt
securities registered with the SEC.
Regulatory Environment
- ----------------------
Telecommunications Act of 1996
On May 7, 1997, the FCC adopted orders to reform the interstate access charge
system, to modify its price cap system and to implement the "universal service"
requirements of the Telecommunications Act of 1996 (the "Act"). While there are
additional decisions pending on Universal Service and Access Reform, based on
the decisions to date, NYNEX does not believe that these
11
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
-------------------------------------------------------------
proceedings will result in a material adverse impact on results of operations or
financial condition.
Access Charges
Access charges are the rates long distance carriers pay for use and availability
of the Company and New York Telephone Company's (together, the "Telephone
Companies") facilities for the origination and termination of interstate
interLATA service. On May 7, 1997, the FCC adopted changes to the tariff
structures it has prescribed for such charges in order to permit the Telephone
Companies to recover their costs through rates which reflect the manner in which
those costs are incurred. As of January 1, 1998, the FCC will require, in
general, that interstate costs of the Telephone Companies which do not vary
based on usage be recovered from long distance carriers through flat rate
charges, and those interstate costs that do vary based on usage be recovered
from interexchange carriers through usage based rates. In addition, the FCC will
require establishment of separate usage based charges for originating and for
terminating interstate interLATA traffic.
A portion of the Telephone Companies' interstate costs are also recorded through
flat monthly charges to subscribers ("subscriber line charges"). Under the FCC's
order, subscriber line charges for primary residential and single line
businesses will remain unchanged, but such charges for additional residential
lines and multi-line businesses will rise.
The restructuring of access charges in January 1998 is expected to be revenue
neutral to the Telephone Companies.
The FCC is expected to adopt an order later this year that would address the
conditions under which the FCC would relax or remove existing access rate
structure requirements and price cap restrictions as increased local market
competition develops. NYNEX is unable to predict the results of this further
proceeding.
Price Caps
The FCC also adopted modifications to its price cap rules that will affect
access rate levels. Under the current price cap rules effective through June 30,
1997, NYNEX's price cap index is adjusted by an inflation index (GDP-PI) less a
fixed percentage, either 4.0%, 4.7% or 5.3% as NYNEX may elect, which is
intended to reflect increases in productivity ("Productivity Factor"). For the
current period ending June 30, 1997, NYNEX has chosen the 5.3% Productivity
Factor.
The FCC has adopted new rules, effective July 1, 1997, that will create a single
Productivity Factor for all price cap companies of 6.5%, with no requirements to
share a portion of future interstate earnings, and will set rates as if the
higher factor had been in effect since July 1996. Any local exchange company
that earns a rate of return on its interstate services of less than 10.25% in
any calendar year will be permitted to increase its
12
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
-------------------------------------------------------------
interstate rates in the following year. The FCC also ordered elimination of
recovery for amortized costs associated with reconfiguration of the Telephone
Companies' networks to provide equal access to facilities for all long distance
carriers.
On June 30, 1997, NYNEX made its Annual Access Tariff Filing of Interstate
Rates, which became effective on July 1, 1997. The rates included in the filing
resulted in annual price decreases totaling approximately $198.7 million, of
which $4.4 million is a result of one-time adjustments which will only be in
effect until July 1998. The FCC is conducting an investigation that could result
in further rate reductions.
The FCC is expected to adopt an order later this year to address the conditions
under which the FCC would relax or remove existing access rate structure
requirements and price cap restrictions as increased local market competition
develops. NYNEX is unable to predict the results of this further proceeding.
Universal Service
The FCC also adopted rules designed to preserve "universal service" by ensuring
that local exchange service remains reasonably available to all residential
customers, including low-income customers and customers in areas that are
expensive to serve. The FCC will maintain existing levels of universal service
support for such high cost areas pending completion of further FCC proceedings.
By the end of 1997, the FCC, in conjunction with the Federal-State Joint Board
on Universal Service, will determine whether to increase the size of this
federal universal service fund for high cost areas, and how to assess the
appropriate level of federal financial support required to continue to ensure
affordable local telephone service. Any new high cost universal service support
mechanism will become effective January 1, 1999.
The FCC also adopted rules to implement the Act's requirements to provide
discounted telecommunications services to schools and libraries, beginning
January 1, 1998, and to ensure that not-for-profit rural health care providers
have access to such services at rates comparable to those charged their urban
counterparts.
All telecommunications carriers will be required to contribute funding for these
universal service programs. The federal universal service funding needs as of
January 1, 1998 will require each carrier to contribute approximately 1% to 2%
of its revenues. NYNEX, however, will be permitted to recover its universal
service contributions through higher interstate charges to long distance
carriers and end users.
13
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
-------------------------------------------------------------
Other
The Massachusetts Department of Public Utilities ("MDPU") and the New Hampshire
Public Utilities Commission ("NHPUC") have opened investigations into NYNEX's
plans for obtaining FCC approval under Section 271 to provide in-region long
distance services in Massachusetts and New Hampshire, respectively.
In May 1997, NYNEX submitted to the Maine Public Utilities Commission ("MPUC")
for its approval a proposed Statement of Terms and Conditions for
interconnection pursuant to Section 271. Also, pending is the MPUC's
investigation of NYNEX's ability to satisfy the competitive checklist
requirements under Section 271 in order to obtain FCC approval to provide
in-region long distance services in Maine.
State Regulatory
Maine
- -----
The MPUC has commenced a rulemaking to reduce intrastate access charges to the
rate levels prevailing in the interstate jurisdiction. In June the MPUC ordered
a 20% reduction in the carrier common line charge (approximately $5.3 million in
access revenues on an annual basis), as an initial step in the rate re-balancing
process, but declined to award the Company any offsetting revenue increases. The
MPUC held that increases in rates for other services were barred under the Price
Regulation Plan, which governs the Company's operations.
The Company has appealed the Order to the Maine Supreme Judicial Court as an
unconstitutional taking of property inasmuch as the ordered reduction in access
charges, with no offsetting revenue increase, violates the Price Regulation
Plan. The Company applied to the court for a stay of the effective date of the
ordered access tariff reductions pending final resolution of the appeal. A
decision by the Court on that motion is expected shortly.
Massachusetts
- -------------
In May, the MDPU issued its decision establishing the procedures for the
Company's implementation of intraLATA presubscription ("ILP") in Massachusetts.
Generally, the MDPU adopted the Company's proposals regarding the presubscribed
carrier ("PIC") method, timing, eligibility of calls, cost recovery mechanism,
and customer education plan. Finally, the MDPU required the Company to develop a
cost-based ILP PIC change charge and carrier selection procedures to ensure
competitive neutrality prior to ILP PIC selection, particularly during the
90-day implementation period.
14
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
-------------------------------------------------------------
Rhode Island
- ------------
In March 1997, the Rhode Island Public Utilities Commission ("RIPUC") approved a
stipulation signed by the Company, AT&T Corp. and the RIPUC staff to implement
ILP on August 1, 1997. The stipulation was based on an ILP plan submitted by the
Company in New Hampshire and subsequently modified by the NHPUC in orders issued
in 1996 and 1997.
Vermont
- -------
On July 31, the Company filed with the Vermont Public Service Board ("VPSB") a
proposed three-year Price Regulation Plan. The Plan is similar in structure to
plans in effect in Massachusetts, Maine, and Rhode Island. It includes a 2.5 %
productivity factor, pricing and operations flexibility, and a service quality
incentive plan that provides for both penalties and rewards for various levels
of service quality.
Also on July 31, NYNEX submitted to the VPSB for its approval a proposed
Statement of Terms and Conditions for interconnection pursuant to Section 271,
and accompanying cost studies. The Statement was filed as part of NYNEX's
compliance with the requirement in the VPSB's order approving the merger that
NYNEX satisfy the Section 271 "checklist" by September 30, 1997. The VPSB has
issued an order suggesting that it will consider deferring that compliance date
if it finds that progress is being made in determining NYNEX's costs and in
opening the Vermont local market to competition.
15
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
PART II - OTHER INFORMATION
---------------------------
Item 5. Other Information
- ------- -----------------
STATE REGULATORY MATTERS
------------------------
New Hampshire
-------------
In April 1997, the New Hampshire Public Utilities Commission ("NHPUC")
granted New England Telephone and Telegraph Company's (the "Company")
request to increase the initial-period payphone coin rate from 10
cents to 25 cents. The NHPUC required that, in order to satisfy
certain Federal Communication Commission ("FCC") requirements as to
the elimination of payphone subsidies, the Company must implement a
corresponding decrease in local exchange and exchange access service
rates. The Company had proposed to meet the FCC requirements through a
decrease in toll rates. The estimated annual revenue effect of the
filing is a reduction of approximately $3.6 million in exchange and
exchange access revenues, offset by the estimated annual revenue
effect of the local coin increase.
Vermont
-------
In April 1997, the Vermont Public Service Board ("VPSB") conducted
hearings on the Company's request to increase the initial-period
payphone coin rate from 10 cents to 25 cents, and to make additional
adjustments to the overtime period and applicable rate. The VPSB
conducted hearings and will be issuing an order on the Company's
proposed rate request and proposal to apply an offset for the increase
in payphone revenues against forgone rate increases to basic service
resulting from the implementation of expanded local calling areas in a
separate docket. The estimated annual revenue effect of the offset is
a reduction of approximately $1.9 million in exchange and exchange
access revenues, offset by the estimated annual revenue effect of the
local coin increase.
16
<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.
17
<PAGE>
Form 10-Q New England Telephone and Telegraph Company
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NEW ENGLAND TELEPHONE AND TELEGRAPH COMPANY
John W. Diercksen
---------------------------------------------
John W. Diercksen
Acting Vice President - Finance and Treasurer
(Principal Financial and Accounting Officer)
August 6, 1997
18
Exhibit (12)
NEW ENGLAND TELEPHONE AND TELEGRAPH COMPANY
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In millions) (Unaudited)
<TABLE>
<CAPTION>
For the
Six Months
Ended
June 30, For The Year Ended December 31,
1997 1996 1995 1994 1993 1992
---- ---------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earnings
Earnings before Interest Expense,
Extraordinary Item and Cumulative
Effect of Change in Accounting Principle $359.1 $ 796.6 $659.4 $637.3 $281.3 $676.3
Federal, State and Local Income Taxes 183.0 403.2 312.5 268.2 (39.1) 240.9
Estimated Interest Portion of Rental Expense 13.6 27.4 28.0 28.3 27.8 30.2
------ -------- ------ ------ ------ ------
Total Earnings $555.7 $1,227.2 $999.9 $933.8 $270.0 $947.4
====== ======== ====== ====== ====== ======
Fixed Charges
Total Interest Deductions $ 69.6 $ 142.1 $153.9 $163.0 $175.0 $189.7
Estimated Interest Portion of Rental Expense 13.6 27.4 28.0 28.3 27.8 30.2
------ -------- ------ ------ ------ ------
Total Fixed Charges $ 83.2 $ 169.5 $181.9 $191.3 $202.8 $219.9
====== ======== ====== ====== ====== ======
Ratio of Earnings to Fixed Charges 6.68 7.24 5.50 4.88 1.33 4.31
====== ======== ====== ====== ====== ======
</TABLE>
19
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1997
<CASH> 16
<SECURITIES> 0
<RECEIVABLES> 1,105
<ALLOWANCES> 51
<INVENTORY> 114
<CURRENT-ASSETS> 1,407
<PP&E> 13,098
<DEPRECIATION> 7,214
<TOTAL-ASSETS> 7,427
<CURRENT-LIABILITIES> 1,426
<BONDS> 1,997
0
0
<COMMON> 1
<OTHER-SE> 2,661
<TOTAL-LIABILITY-AND-EQUITY> 7,427
<SALES> 0
<TOTAL-REVENUES> 2,327
<CGS> 0
<TOTAL-COSTS> 1,790
<OTHER-EXPENSES> 5
<LOSS-PROVISION> 29
<INTEREST-EXPENSE> 70
<INCOME-PRETAX> 473
<INCOME-TAX> 183
<INCOME-CONTINUING> 290
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 290
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
