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 March 31, 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)
For the Three Months Ended
March 31,
1997 1996
------------------------
OPERATING REVENUES
- ------------------
Local service $ 526.2 $ 503.4
Long distance 169.4 171.7
Network access 354.5 339.2
Other 109.1 119.1
-------- --------
Total operating revenues 1,159.2 1,133.4
-------- --------
OPERATING EXPENSES
- ------------------
Maintenance and support 279.5 286.5
Depreciation and amortization 220.7 235.5
Marketing and customer services 141.5 162.0
Taxes other than income 36.4 35.0
Provision for uncollectible revenues 15.4 13.5
Other 257.9 167.5
-------- --------
Total operating expenses 951.4 900.0
-------- --------
Operating income 207.8 233.4
Other income (expense) - net (2.6) (0.6)
Interest expense 34.9 35.8
-------- --------
Earnings before income taxes and cumulative
effect of change in accounting principle 170.3 197.0
-------- --------
Income taxes
Federal 54.6 62.7
State and local 11.3 13.0
-------- --------
Total income taxes 65.9 75.7
-------- --------
Earnings before cumulative effect of
change in accounting principle 104.4 121.3
Cumulative effect of change in accounting for
directory publishing income, net of taxes (Note B) -- 55.2
-------- --------
NET INCOME $ 104.4 $ 176.5
======== ========
RETAINED EARNINGS
- -----------------
Beginning of year $ 657.8 $ 414.9
Net income 104.4 176.5
Dividends declared (187.4) (116.6)
-------- --------
End of period $ 574.8 $ 474.8
======== ========
See accompanying notes to financial statements.
2
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
BALANCE SHEETS
(In Millions) (Unaudited)
March 31, December 31,
1997 1996
-------- --------
ASSETS
- ------
Current assets:
Cash $ 17.0 $ 14.2
Receivables
Trade and other (net of allowance of
$48.1 and $47.4, respectively) 890.8 918.8
Affiliates 248.7 153.6
Deferred charges 104.2 83.3
Deferred income taxes 41.4 52.6
Inventory 94.3 99.5
Prepaid expenses and other 65.2 55.8
-------- --------
Total current assets 1,461.6 1,377.8
-------- --------
Telephone plant - at cost 12,939.3 12,780.5
Less: accumulated depreciation 7,071.3 6,906.6
-------- --------
5,868.0 5,873.9
-------- --------
Long-term investment, deferred charges and other 136.9 137.4
-------- --------
TOTAL ASSETS $7,466.5 $7,389.1
======== ========
LIABILITIES AND SHARE OWNER'S EQUITY
- ------------------------------------
Current liabilities:
Accounts Payable
Affiliates $ 505.1 $ 432.3
Other 409.1 544.3
Short-term debt 175.8 175.7
Dividends payable 187.4 116.7
Taxes accrued 123.6 73.2
Advance billing and customers' deposits 20.2 18.2
Interest accrued 45.7 38.1
-------- --------
Total current liabilities 1,466.9 1,398.5
-------- --------
Long-term debt 1,996.4 1,996.4
Deferred income taxes 216.5 271.0
Unamortized investment tax credits 57.2 59.0
Other long-term liabilities and deferred credits 1,065.6 917.3
-------- --------
Total liabilities 4,802.6 4,642.2
-------- --------
Commitments and contingencies (Notes D and E)
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 574.8 657.8
-------- --------
Total share owner's equity 2,663.9 2,746.9
-------- --------
TOTAL LIABILITIES AND SHARE OWNER'S EQUITY $7,466.5 $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 Three Months Ended
March 31,
1997 1996
--------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 104.4 $ 176.5
-------- --------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 220.7 235.5
Deferred income taxes - net (43.4) (40.4)
Deferred credits - net (1.8) (1.9)
Change in operating assets and liabilities:
Receivables 26.4 (121.6)
Deferred charges (20.9) 24.3
Deferred income taxes 11.2 40.4
Inventory 5.2 (15.2)
Prepaid expenses and other (9.4) (11.5)
Accounts payable (62.4) (137.2)
Taxes Accrued 50.3 98.5
Advance billing and customers' deposits 2.0 1.3
Interest accrued 7.6 14.3
Other - net 121.0 181.2
-------- --------
Total adjustments 306.5 267.7
-------- --------
Net cash provided by operating activities 410.9 444.2
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (197.9) (294.2)
Advances to NYNEX (93.4) --
-------- --------
Net cash used in investing activities (291.3) (294.2)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from NYNEX -- (35.3)
Dividends paid to NYNEX (116.7) (110.7)
Repayment of long-term debt and capital leases (0.1) (0.1)
-------- --------
Net cash used in financing activities (116.8) (146.1)
-------- --------
Net increase in Cash 2.8 3.9
Cash at beginning of period 14.2 8.4
-------- --------
Cash at end of period $ 17.0 $ 12.3
======== ========
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 have 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.
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 March 31, 1997, the Company had advances
to NYNEX of $133.4 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 March 31, 1997, the aggregate amount of revenues estimated to be subject to
possible refund was approximately $35.0 million for the Company, and
approximately $7 million for the Company and New York Telephone Company
(collectively, the "Telephone Companies") together in connection with one other
proceeding, 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.
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
Three Months Ended
March 31,
1997 1996
------------------
(In millions)
Income tax payments $67.7 $33.3
Interest payments * $29.6 $30.2
* Amounts shown are net of capitalized interest of $2.8 million in both
1997 and 1996.
G Proposed Merger
---------------
On April 22, 1996, NYNEX and Bell Atlantic Corporation ("Bell Atlantic")
announced a proposed merger of equals pursuant to a definitive merger agreement
(the "Merger"), dated April 21, 1996 that provided for the formation of a new
company to be named Bell Atlantic Corporation. On July 2, 1996, NYNEX and Bell
Atlantic executed an amendment to the agreement effecting a technical change in
the transaction structure of the Merger. As amended, the agreement provides that
a 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. Each NYNEX
shareholder will receive 0.768 shares of Bell Atlantic
6
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
NOTES TO FINANCIAL STATEMENTS (Continued)
-----------------------------
(Unaudited)
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. At special meetings held in
November 1996, the shareholders of both companies voted to approve the Merger.
The state regulatory commissions in NYNEX's region have approved or have not
sought jurisdiction over the Merger. Effective March 21, 1997, the New York
State Public Service Commission issued an order approving the Merger, subject to
certain conditions, which were accepted by NYNEX and Bell Atlantic on March 31,
1997. On April 24, 1997, the United States Department of Justice announced that
its Antitrust Division had closed its investigation of the proposed Merger,
having concluded that the Merger does not violate the antitrust laws. 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 their telephone subsidiaries. The completion of the
Merger is subject to a number of conditions, including certain regulatory
approvals 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 Merger is expected to qualify as a pooling of interests
for accounting purposes. NYNEX expects to be able to complete the Merger in the
second quarter of 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 first quarter of 1997 was $104.4 million. Net income for the
first quarter of 1996 was $176.5 million.
Net income for the first quarter of 1997 includes after-tax charges of
$105.3 million for retirement incentives (see Retirement Incentives). Net income
for the first quarter of 1996 included a 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 quarter of 1996 also included charges of
$51.5 million for items related to retirement incentives and various
self-insurance programs.
Excluding the above items, net income for the first quarter of 1997 would have
been $209.7 million, an improvement of $36.9 million, or 21.4%, over adjusted
net income for the first quarter of 1996.
Operating Revenues
- ------------------
Operating revenues for the first quarter of 1997 were $1.2 billion, an
improvement of $25.8 million, or 2.3%, over the first quarter of 1996.
Local service revenues are earned from the provision of local exchange, local
private line and local public network services. The $22.8 million, or 4.5%,
improvement results from the net of (i) an increase of $30 million, primarily in
demand, driven by growth in access lines and sales of calling features, and (ii)
$7 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 $2.3 million, or 1.3%,
decrease results from a decrease in demand and minimal rate reductions.
Network access revenues are earned from the provision of exchange access service
primarily to interexchange carriers. The $15.3 million, or 4.5%, improvement
results from a net $4 million improvement in switched access revenues primarily
due to a $13 million increase in demand, offset by a $6 million reduction in
interstate rates and a $2 million reduction in intrastate rates, and 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 $10.0 million, or 8.4%
decrease results primarily from the net of (i) a $7 million increase in revenues
from increased demand for voice messaging and other enhanced calling features,
and (ii) an $18 million decrease in directory revenues from the
8
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
-------------------------------------------------------------
directory licensing agreement with Information Resources primarily consisting of
$6 million in retirement incentive costs and $13 million attributable to
differences in accrual levels of publishing income.
Operating Expenses
- ------------------
Operating expenses for the first quarter of 1997 were $951.4 million, an
increase of $51.4 million, or 5.7%, over the first quarter of 1996.
Included in operating expenses for the first quarter of 1997 were charges of
$172.9 million for retirement incentives (see Retirement incentives). Included
in operating expenses for the first quarter of 1996 were charges of
$77.5 million for retirement incentives and a charge of $7.0 million related to
various self-insurance programs.
Excluding the items discussed above, operating expenses would have decreased
$37.0 million, or 4.5%, from adjusted operating expenses for the first quarter
of 1996.
The $37.0 million decrease in adjusted operating expenses include the following
categories:
Depreciation and amortization decreased $14.8 million, or 6.3%, from the first
quarter of 1996, resulting primarily from the net of (i) a $4 million increase
due to growth in depreciable plant investment, and (ii) a $19 million decrease
attributable to revised estimates of future net salvage value and remaining
useful lives in the third and fourth quarters of 1996, and technical updates to
depreciation rates in 1997.
Employee related costs, which consist primarily of wages, payroll taxes, and
employee benefits, decreased $13.8 million from 1996, resulting from an
$11 million decrease in wages as a result of decreased overtime due to favorable
weather conditions and re-engineering service delivery to customers, and a
$3 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, decreased
$9.8 million from 1996 primarily due to the net of (i) a $1 million increase in
right to use fees resulting from increased software upgrades, a $2 million
increase in the provision for uncollectibles and a $1 million increase in rent
expense, and (ii) a $14 million decrease in charges from affiliated companies,
attributable to a $12 million decrease in sales agent commissions billed from
Telesector Resources Group, Inc. ("Telesector Resources") to the Company and a
net $2 million decrease related to advertising and promotion.
9
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
Income taxes
- ------------
Income taxes decreased $9.8 million, or 12.9%, from the same period last year,
principally due to a decrease in pretax income.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
-------------------------------------------------------------
Retirement incentives
- ---------------------
The number of employees who elected to leave under retirement incentives in the
first quarter of 1997 and 1996 are as follows:
1997 1996
----- -----
Management 200 70
Associates 860 530
----- -----
Total 1,060 600
===== =====
The components of the charges for retirement incentives for the first quarter of
1997 and 1996 are as follows:
(In Millions) 1997 1996
---- ----
Pretax After-Tax Pretax After-Tax
------ --------- ------ ---------
Pension enhancement charges $137.6 $ 83.7 $ 60.6 $ 36.9
Postretirement medical costs 35.3 21.6 16.9 10.3
------ ------ ------ ------
$172.9 $105.3 $ 77.5 $ 47.2
====== ====== ====== ======
Included in the charges above for the first three 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;
$33.9 million and $5.2 million, respectively ($20.6 million and $3.2 million,
respectively, after-tax) for pension enhancements and $12.4 million and
$0.4 million, respectively ($7.6 million and $0.2 million, respectively,
after-tax) for postretirement medical costs. The total number of employees who
left Telesector Resources under the retirement incentives in the first quarter
of 1997 and 1996 were 845 and 180, respectively, of which 325 and 70,
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 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 quarter of 1997, severance reserves of $24 million were
transferred to the pension liability and $31 million of postretirement medical
liability was applied on a per employee basis as a result of associates
10
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
-------------------------------------------------------------
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 quarter of 1997 for the allocated
number of Telesector Resources associates who left under the retirement
incentives. At March 31, 1997, $15 million of severance reserves and $19 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 March 31, 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"). NYNEX is unable
to assess fully the potential impact of these new rules until the FCC releases
the full text of its access reform and price cap orders later in May. Based on
the information currently available, however, NYNEX does not believe that these
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 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 recovered
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 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.
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.
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
11
<PAGE>
Form 10-Q Part I New England Telephone and Telegraph Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
-------------------------------------------------------------
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
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
intraLATA presubscription ("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.
Maine
- -----
In its rulemaking on intrastate access charges, the MPUC is considering an
interim rate reduction, pending the completion of the FCC's access reform
proceeding. The Company has commented that any such reduction should be achieved
in a revenue-neutral manner.
The MPUC has opened a proceeding to examine the manner in which the Company
proposes to offer ILP. The MPUC has indicated that it expects ILP to be
implemented in the third quarter of 1997.
In April 1997, the MPUC awarded the Company approximately $3 million in
additional annual revenues from basic exchange rates to compensate for the loss
of toll revenues occasioned by the MPUC's 1995 implementation of expanded,
toll-free local calling areas. The MPUC also permitted the Company to impose a
temporary surcharge on basic exchange rates to recover approximately $6 million
in lost toll revenues retroactively to March 1995. The Maine Office of Public
Advocate has filed for reconsideration of the surcharge, claiming that
retroactive recovery constitutes impermissible retroactive ratemaking. A
decision by the MPUC on this issue is expected in May.
Massachusetts
- -------------
The MDPU is conducting a proceeding to examine the manner in which the Company
proposes to offer ILP and is expected to issue its decision in May.
12
<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.
13
<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.
14
<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)
May 12, 1997
15
Exhibit (12)
NEW ENGLAND TELEPHONE AND TELEGRAPH COMPANY
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In millions) (Unaudited)
<TABLE>
<CAPTION>
For the
Three Months
Ended
March 31, 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 $139.3 $ 796.6 $659.4 $637.3 $281.3 $676.3
Federal, State and Local Income Taxes 65.9 403.2 312.5 268.2 (39.1) 240.9
Estimated Interest Portion of Rental Expense 6.4 27.4 28.0 28.3 27.8 30.2
------ -------- ------ ------ ------ ------
Total Earnings $211.6 $1,227.2 $999.9 $933.8 $270.0 $947.4
====== ======== ====== ====== ====== ======
Fixed Charges
Total Interest Deductions $ 34.9 $ 142.1 $153.9 $163.0 $175.0 $189.7
Estimated Interest Portion of Rental Expense 6.4 27.4 28.0 28.3 27.8 30.2
------ -------- ------ ------ ------ ------
Total Fixed Charges $ 41.3 $ 169.5 $181.9 $191.3 $202.8 $219.9
====== ======== ====== ====== ====== ======
Ratio of Earnings to Fixed Charges 5.12 7.24 5.50 4.88 1.33 4.31
====== ======== ====== ====== ====== ======
</TABLE>
16
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-END> Mar-31-1997
<CASH> 17
<SECURITIES> 0
<RECEIVABLES> 1,188
<ALLOWANCES> 48
<INVENTORY> 94
<CURRENT-ASSETS> 1,462
<PP&E> 12,939
<DEPRECIATION> 7,071
<TOTAL-ASSETS> 7,467
<CURRENT-LIABILITIES> 1,467
<BONDS> 1,996
0
0
<COMMON> 1
<OTHER-SE> 2,663
<TOTAL-LIABILITY-AND-EQUITY> 7,467
<SALES> 0
<TOTAL-REVENUES> 1,159
<CGS> 0
<TOTAL-COSTS> 951
<OTHER-EXPENSES> (3)
<LOSS-PROVISION> 15
<INTEREST-EXPENSE> 35
<INCOME-PRETAX> 170
<INCOME-TAX> 66
<INCOME-CONTINUING> 104
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 104
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
