Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark one)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1994
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 1-3435
NEW YORK TELEPHONE COMPANY
Incorporated under the laws of the State of New York
I.R.S. Employer Identification Number 13-5275510
1095 Avenue of the Americas, New York, New York 10036
Telephone Number (212) 395-2121
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 York Telephone Company
PART I - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(In millions) (Unaudited)
Three Months Nine Months
For the Period Ended September 30, 1994 1993 1994 1993
OPERATING REVENUES
Local service $1,188.0 $1,178.5 $3,545.5 3,502.3
Long distance 90.1 95.2 263.4 283.1
Network access 557.3 548.4 1,677.0 1,663.6
Other 93.3 127.9 277.6 409.1
Total operating revenues 1,928.7 1,950.0 5,763.5 5,858.1
OPERATING EXPENSES
Maintenance and support 633.3 580.3 1,863.3 1,735.8
Depreciation and amortization 374.3 359.9 1,113.0 1,076.8
Marketing and customer services 247.7 265.1 743.5 743.4
Taxes other than income taxes 187.6 193.6 587.3 616.7
Provision for uncollectibles 16.5 17.6 60.2 46.3
Other 175.8 182.5 913.0 548.6
Total operating expenses 1,635.2 1,599.0 5,280.3 4,767.6
Operating income 293.5 351.0 483.2 1,090.5
Other income - net 9.7 16.8 17.8 56.1
Interest expense 82.7 88.8 234.0 266.7
Earnings before income taxes
and cumulative effect of change
in accounting principle 220.5 279.0 267.0 879.9
Income taxes 66.9 92.8 63.1 264.0
Earnings before cumulative effect
of change in accounting principle 153.6 186.2 203.9 615.9
Cumulative effect of change in
accounting for postemployment
benefits, net of taxes - 1.5* - (89.3)*
NET INCOME $ 153.6 $ 187.7* $ 203.9 $ 526.6 *
RETAINED EARNINGS
Beginning of period $ 831.8 $1,790.6* $1,082.0 $ 1,813.6
Prior period adjustment (Note (f)) (61.9) - - -
Beginning retained earnings-adjusted 769.9 1,790.6 1,082.0 1,813.6
Net income 153.6 187.7* 203.9 526.6 *
Dividends (181.2) (181.0) (543.6) (542.9)
End of period $ 742.3 $1,797.3*$ 742.3 $1,797.3 *
* Restated to reflect the adoption of Statement of Financial Accounting
Standards No. 112 in the fourth quarter of 1993 retroactive to January 1, 1993.
See accompanying notes to consolidated financial statements.
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Form 10-Q Part I New York Telephone Company
CONSOLIDATED BALANCE SHEETS
(In millions)
September 30, December 31,
1994 1993
(Unaudited)
ASSETS
Current assets:
Cash and temporary cash investments $ 26.7 $ 7.5
Receivables (net of allowance of $136.7
and $134.8, respectively) 1,473.5 1,427.5
Deferred charges 75.0 55.5
Deferred income taxes 4.3 99.4
Inventory 72.8 72.4
Prepaid expenses and other 124.0 102.9
Total current assets 1,776.3 1,765.2
Telephone plant - at cost 20,178.9 19,696.5
Less: accumulated depreciation 8,206.6 7,580.5
11,972.3 12,116.0
Deferred charges and other 1,525.6 1,554.2
Total Assets $15,274.2 $15,435.4
LIABILITIES AND SHARE OWNER'S EQUITY
Current liabilities:
Accounts payable $ 1,522.9 $ 1,744.7
Short-term debt 471.0 255.7
Dividends payable 181.2 181.0
Taxes accrued 46.6 48.3
Advance billing and customers' deposits 180.9 187.2
Interest accrued 66.9 58.2
Total current liabilities 2,469.5 2,475.1
Long-term debt 3,973.9 3,972.1
Deferred income taxes 1,509.6 1,826.9
Unamortized investment tax credits 220.8 244.9
Other long-term liabilities and deferred
credits 2,254.9 1,731.2
Total liabilities 10,428.7 10,250.2
Commitments and contingencies (Notes (d) and (e))
Share owner's equity:
Common stock - one share,
without par value 4,103.2 4,103.2
Retained earnings 742.3 1,082.0
Total share owner's equity 4,845.5 5,185.2
Total Liabilities and
Share Owner's Equity $15,274.2 $15,435.4
See accompanying notes to consolidated financial statements.
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Form 10-Q Part I New York Telephone Company
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions) (Unaudited)
For the Nine Months Ended
September 30,
1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 203.9 $ 526.6 *
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,113.0 1,076.8
Allowance for funds used during
construction - equity component (14.2) (17.6)
Change in operating assets and liabilities:
Receivables (46.0) 14.3
Current Deferred charges, Inventory,
Deferred income taxes and Prepaid
expenses and other 54.1 (133.5)
Accounts payable, Deferred income taxes,
Taxes accrued, Advance billing and
customers' deposits and Interest accrued (221.1) (147.4)*
Deferred income taxes and Unamortized
investment tax credits (341.4) 203.9 *
Other long-term liabilities and
deferred credits 523.7 (86.0)*
Other - net (9.3) 84.0
Total adjustments 1,058.8 994.5
Net cash provided by operating
activities 1,262.7 1,521.1
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (915.7) (842.1)
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from NYNEX (373.6) (175.8)
Dividends paid to NYNEX (543.4) (536.9)
Issuance of long-term debt 593.5 1,035.3
Repayment of long-term debt and capital
leases ( 4.3) ( 3.9)
Debt refinancings and call premiums - (983.4)
Net cash used in financing activities (327.8) (664.7)
Net increase in Cash and
temporary cash investments 19.2 14.3
Cash and temporary cash investments at
beginning of period 7.5 24.7
Cash and temporary cash investments at
end of period $ 26.7 $ 39.0
* Restated to reflect the adoption of Statement of Financial
Accounting Standards No. 112 in the fourth quarter of 1993 retroactive to
January 1, 1993.
See accompanying notes to consolidated financial statements.
-4-
Form 10-Q Part I New York Telephone Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(a) BASIS OF PRESENTATION - The consolidated financial statements
have been prepared by New York Telephone 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 (consisting only of normal recurring adjustments)
necessary for a fair presentation of the financial information for
each period shown. Certain information and footnote disclosures
normally included in consolidated 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
consolidated financial statements for 1993 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 consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes
thereto included in the Company's 1993 Annual Report on Form 10-K and
the current year's previously issued Quarterly Reports on Form 10-Q.
(b) CASH AND TEMPORARY CASH INVESTMENTS - The Company's cash
management policy is to make funds available in banks when checks are
presented. At September 30, 1994, the Company had recorded in
Accounts payable checks outstanding but not yet presented for payment
of $87.0 million.
(c) SUPPLEMENTAL INFORMATION - The following information is provided
in accordance with Statement of Financial Accounting Standards
No. 95, "Statement of Cash Flows":
For the
Nine Months Ended
September 30,
1994 1993
(In millions)
Income tax payments $270.0 $425.5
Interest payments $208.1 $228.2
(d) REVENUES SUBJECT TO POSSIBLE REFUND - Several state and federal
regulatory matters including affiliate transactions issues in the
Company's 1990 intrastate rate case and service issues in the
Company's incentive regulation proceeding and other matters, may
possibly require the refund of a portion of the revenues collected in
the current and prior periods. As of September 30, 1994, the
aggregate amount of such revenues that was estimated to be subject to
possible refund was approximately $239 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.
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Form 10-Q Part I New York Telephone Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(e) LITIGATION AND OTHER CONTINGENCIES - It is probable that local
tax claims aggregating approximately $215 million in tax and
$144 million in associated interest will be asserted against the
Company for the period 1983 through the third quarter of 1994. The
claims relate to the taxability of the Company's interstate and
intrastate network access revenues. The current status is that these
matters have been identified as possible audit adjustments by the
taxing authority, and the Company is presenting its arguments against
those adjustments. While the Company's counsel cannot give assurance
as to the outcome, counsel believes that the Company has strong legal
positions in these matters.
Various other legal actions and regulatory proceedings are pending
that may affect the Company, including matters involving Racketeer
Influenced and Corrupt Organizations Act, antitrust, tort, contract
and tax deficiency claims.
While counsel cannot give assurance as to the outcome of any of these
matters, in the opinion of management based on 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 but could have a material effect on annual operating
results.
(f) SHAREOWNER'S EQUITY - Retained earnings at June 30, 1994 has
been adjusted to correct an error by the outside actuary of the
registrant in calculating the cost of pension enhancements in the
second quarter of 1994. The effect of the correction on net income
for the second quarter was a decrease of $61.9 million, net of income
tax of $33.3 million, and the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1994 has been amended. This adjustment
has no effect on net income for the nine months ended September 30,
1994.
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Form 10-Q Part I New York Telephone 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.
STATE REGULATORY MATTERS
As previously reported (see New York Telephone Company's ("the
Company") Annual Report on Form 10-K for the year ended December 31,
1993), on February 4, 1993, the New York State Public Service
Commission ("NYSPSC") issued an order with respect to the Second and
Third Stages, permitting the Company to retain 1993 earnings above a
return on equity of 11.7% and up to 12.7%, depending on its
attainment of specified service quality criteria, with earnings above
12.7% return on equity to be held for the ratepayers' benefit. The
Company has submitted a report to the NYSPSC showing 1993 earnings
below 11.7%. The NYSPSC is currently reviewing the Company's
submission.
On September 26, 1994, the Company, the New York State Department of
Public Service staff and 15 other parties filed a proposed Regulatory
Plan (the "Plan") for approval by the NYSPSC. The Plan would modify
the manner in which the Company is regulated by the NYSPSC over the
next seven years. The Plan was developed by the parties in the third
phase of the incentive regulation proceeding that the NYSPSC
instituted in 1992. As previously reported (see the Company's Annual
Report on Form 10-K for the year ended December 31, 1993 and
Quarterly Report on Form 10-Q for the period ended June 30, 1994), in
the first phase of the proceeding, the NYSPSC ordered the Company's
rates to be reduced by $170 million annually, effective January 1,
1994. The NYSPSC also ordered that an additional $153 million in
revenues be "set aside" for short-term service incentive plans and a
longer term plan for performance-based earnings incentives and
network improvements to be determined in the second phase.
The Plan is a performance-based plan that, if approved by the NYSPSC,
will operate as follows:
(1)The new framework will replace the traditional way the Company's
operations have been regulated in New York - a method based on
limited earnings - with incentives to invest in new technologies
and improve service. Rate of return will no longer be the focus
of regulation. The Plan will cap, at current rates, the prices
for such "basic" services as residence and business exchange
access, residence and business local calling and LifeLine
service. In addition, by the end of the seven-year term of the
Plan, the Company's prices will have been decreased by an amount
that would produce a $425 million reduction in annual revenue
based on current volumes of business. This reduction will be
accomplished primarily by reducing the average prices of toll and
carrier access services. The first price reduction, estimated at
$100 million in annual revenue, will be effective January 1,
1995. During its term, the Plan allows certain prices to be
adjusted to take into account inflation in excess of 4 percent
annually or costs associated with government mandates and other
"exogenous" events.
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Form 10-Q PartI New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
STATE REGULATORY MATTERS (Continued)
(2) The Company will commit to maintain and improve its service
quality over the term of the Plan, with rebates to customers if
it fails to meet the specified service quality standards. If the
Company does not meet specified service quality criteria, the
Plan will terminate at the end of five years.
(3) The Plan will encourage the Company to achieve substantial
productivity gains over the term of the Plan. The NYSPSC may
terminate the Plan at the end of five years unless the Company's
prices, as measured by an index, are at least 4.5 percentage
points lower than a price index of national telecommunications
companies.
(4) The Plan includes competitive enhancements, including a specific
schedule to provide IntraLATA Presubscription ("ILP") by 1996.
ILP will give a customer the option of designating, in advance, a
carrier that would carry the customer's intraLATA toll calls
without the necessity of dialing extra digits. The Plan will
require the Company to pay ILP implementation costs.
(5)Approximately $122 million of the $153 million "set aside"
ordered by the NYSPSC in the first phase of the incentive
regulation proceeding will be released to the Company in exchange
for the various commitments the Company has made under the Plan.
$31 million of the $153 million has already been dedicated to a
service improvement plan that is being implemented in 1994.
It is expected that the Plan will be reviewed by the NYSPSC by the
end of 1994.
The NYSPSC will also review the Company's performance under a service
quality plan for 1994, which was agreed to in the first phase of the
incentive regulation proceeding.
FEDERAL REGULATORY MATTERS
On July 1, 1994, the Company implemented the fourth annual update to
the price cap rates. These tariffs will result in a net reduction in
the Company's annual interstate access rates of approximately $9.1
million during the tariff period from July 1, 1994 to June 30, 1995.
BUSINESS RESTRUCTURING
Approximately $418 million of pretax charges ($272 million after-tax)
were recorded in the second and third quarters of 1994 for pension
enhancements for approximately 700 management and 2,000 nonmanagement
employees who elected during the second and third quarters to leave
the Company under retirement incentives and for the Company's
allocation from Telesector Resources Group, Inc. ("TRG") for its
pension enhancements. A portion of the year-end 1993 accrual for
severance was utilized on a per employee basis, and the incremental
costs of both the Company's pension
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Form 10-Q Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
BUSINESS RESTRUCTURING (Continued)
enhancements and the Company's allocation of TRG's pension
enhancements were recorded. The retirement incentives are intended
to provide a voluntary means to implement a portion of the planned
work force reductions of approximately 9,000 employees by the end of
1996. The components of the $418 million pretax charges are as
follows: $245 million ($160 million after-tax) for pension
enhancements, $119 million ($77 million after-tax) for associated
postretirement medical benefits, $29 million ($19 million after-tax)
for charges allocated to the Company from TRG for its pension
enhancements and $25 million ($16 million after-tax) for charges
allocated to the Company from TRG for its associated postretirement
medical benefits.
The retirement incentives credit employees with an additional six
years toward both their age and their length of service for the
purpose of determining pension eligibility and benefits. Much of the
cost of the incentives will be funded by NYNEX's pension plans.
These incentives also resulted in more individuals qualifying for
lifetime medical coverage than under the severance plan. The pension
enhancement to the NYNEX management pension plan was announced in
February 1994 and will be offered at different times through 1996
according to local force requirements. The Company's agreements with
the Communications Workers of America ("CWA") and with the
International Brotherhood of Electrical Workers ("IBEW") in New York,
which extend the existing labor agreements to August 1998, provide a
retirement incentive (see COLLECTIVE BARGAINING AGREEMENTS below).
The restructuring reserve balance for the 1993 business restructuring
charges at September 30, 1994 was approximately $497 million,
excluding the liability recorded at year-end for postretirement
medical benefits associated with employees leaving the Company under
the business restructuring. In the first nine months of 1994, the
Company reduced 1993 restructuring reserves by approximately
$225 million as follows: $75 million of reserves established for
severance was transferred to the pension liability on a per employee
basis as a result of employees' leaving under the pension
enhancements as opposed to severance provisions as previously accrued
for; $14 million of the Company's severance reserve was transferred
from the Company to TRG to cover severance costs associated with
employees who transferred from the Company to TRG and subsequently
left under the pension enhancements; $8 million was utilized for
other retiree costs; $14 million was utilized for developing a single
"NYNEX" brand identity; $43 million was utilized for the Company's
allocation of TRG's pension enhancements; $31 million was utilized
for the Company's allocation of TRG's postretirement medical
benefits; and $40 million was utilized for the Company's allocation
of TRG's process re-engineering. Additionally, $26 million of
reserves accrued in 1991 for severance costs related to TRG was
utilized for the Company's allocation of TRG's pension enhancements.
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Form 10-Q Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
BUSINESS RESTRUCTURING (Continued)
During the third quarter of 1994, the Company began to realize
significant expense savings associated with force reductions. For
the first nine months of 1994, the Company experienced a $32 million
reduction in wages as well as a $15 million reduction in costs
allocated from TRG as a result of expense savings associated with its
force reductions.
FIRST NINE MONTHS OF 1994 AS COMPARED TO FIRST NINE MONTHS OF 1993
OPERATING REVENUES
Operating revenues for the nine months ended September 30, 1994
decreased $94.6 million, or 1.6%, from the same period last year.
This decrease in total operating revenues is comprised of the
following:
Increase (Decrease)
(In millions)
Local service $ 43.2
Long distance (19.7)
Network access 13.4
Other (131.5)
$(94.6)
Local service revenues are earned from the provision of local
exchange, local private line and local public network services. The
increase in Local service revenues was primarily due to a net
$139 million increase attributable to increased demand as evidenced
by growth in access lines, growth in sales of calling features, such
as call waiting, remote call forwarding and touch-tone services, and
higher usage associated with the severe winter storms. In addition,
there was a $5 million increase due to a 1993 reduction in revenues
associated with the reversal of a 1990 deferral of private line
revenues. These increases were partially offset by a $101 million
revenue reduction pursuant to an NYSPSC order (see STATE REGULATORY
MATTERS above).
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 decrease in Long distance revenues was primarily
attributable to a $10 million revenue reduction pursuant to an NYSPSC
order (see STATE REGULATORY MATTERS above) and a decrease in demand
for private line and wide area telecommunications services as a
result of increased competition and customer shifts to lower priced
services offered by the Company, partially offset by increased demand
for message toll service.
Network access revenues are earned from the provision of exchange
access services primarily to interexchange carriers. Switched access
revenues are charges to
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Form 10-Q Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
FIRST NINE MONTHS OF 1994 AS COMPARED TO FIRST NINE MONTHS OF 1993
(Continued)
OPERATING REVENUES (Continued)
telecommunications carriers for access to the Company's local
exchange facilities. Switched access revenues increased a net
$25 million principally due to increased usage, partially offset by a
reduction in interstate rates, which included the phase-out of the
equal access cost recovery charge, and by a $9 million revenue
reduction pursuant to an NYSPSC order (see STATE REGULATORY MATTERS
above). Special access revenues are charges for dedicated lines that
connect terminal locations of interexchange carriers and end users.
Special access revenues decreased $12 million primarily due to a
reduction in interstate rates, increased competition and customer
shifts to lower priced Company services.
Other revenues are earned from the provision of products and services
other than Local service, Long distance and Network access. The
decrease in Other revenues was due principally to a $115 million
reduction in revenues as ordered by the NYSPSC representing the
first, second and third quarter deferrals of the $153 million
designated by the Company as an incentive to improve service quality
(see STATE REGULATORY MATTERS above), a $24 million decrease in
revenues attributable to the 1993 reversal of previously recorded
reductions in revenues in connection with the phase-out of ad valorem
taxes on central office equipment, and a $12 million decrease due to
the cessation of imputed revenues for procurement costs. Partially
offsetting these decreases was a $10 million increase due to the 1993
reversal of a 1992 deferral of revenues for concession service, and a
$6 million increase in revenues related to the directory licensing
agreement with NYNEX Information Resources Company resulting from
higher estimated pretax earnings from the directories published
pursuant to the agreement.
OPERATING EXPENSES
Operating expenses for the nine months ended September 30, 1994
increased $512.7 million, or 10.8%, over the same period last year.
This increase in total operating expenses is comprised of the
following:
Increase (Decrease)
(In millions)
Depreciation and amortization $ 36.2
Taxes other than income taxes (29.4)
All other:
Business restructuring charges 418.2
Employee related 48.4
Other 39.3
$512.7
Depreciation and amortization increased principally due to a $36
million increase associated with increased plant investment.
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Form 10-Q Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
FIRST NINE MONTHS OF 1994 AS COMPARED TO FIRST NINE MONTHS OF 1993
(Continued)
OPERATING EXPENSES (Continued)
Taxes other than income taxes decreased principally due to a
$23 million decrease in property taxes resulting from lower
assessments of property value and an $11 million decrease
primarily attributable to a decrease in the surcharge rate from 15%
to 12.5%. These decreases were partially offset by a $3 million
increase in New York State capital stock tax.
Business restructuring charges recorded in the second and third
quarter of 1994 consisted of incremental costs related to pension
enhancements (see BUSINESS RESTRUCTURING above).
Employee related costs consist primarily of wages, payroll taxes, and
employee benefits. Wages and payroll taxes increased a net
$48 million principally due to increases in salary and wage rates and
additional labor costs due to initiatives to improve service quality,
partially offset by reductions in the Company's work force
attributable to the Company's force reduction program and the
transfer of employees to TRG associated with re-engineering the way
service is delivered to customers, including operating the Company
and New England Telephone and Telegraph Company ("New England
Telephone") as a single enterprise under the "NYNEX" brand (see Other
operating expenses below). Benefit expenses increased $2 million
primarily due to higher costs of providing medical coverage for
active and retired employees.
Other operating expenses consist primarily of contracted and
centralized services, rent and other general and administrative
costs. The increase in other operating expenses was due principally
to a $51 million net increase in contracted and centralized services,
including an increase from affiliated companies resulting primarily
from the transfer of employees from the Company to TRG (see Employee
related costs above) and an increase in sales agent commissions, an
$18 million increase in bad debt expense recognized pursuant to
provisions of the billing and collection contract with AT&T Corp. and
a $14 million increase in the Provision for uncollectibles.
Partially offsetting these increases were a $22 million decrease due
to the completion of equal access amortization in 1993, a $9 million
decrease attributable to the reversal in 1993 of deferred inside wire
expense recorded in 1991 and 1992 and a $6 million decrease in right-
to-use fees due to lower purchases of software.
OTHER INCOME - NET
Other income - net for the nine months ended September 30, 1994
decreased $38.3 million from the same period last year, due
principally to a $41 million decrease resulting from the completion
in 1993 of the transition plan with New England Telephone to phase in
the earnings impact of the unified tariff access rate structure.
This decrease was partially offset by an increase due to higher
expenses in the first nine months of 1993 for the interstate portion
of call premiums and other charges associated with the refinancing of
long-term debt.
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Form 10-Q Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
FIRST NINE MONTHS OF 1994 AS COMPARED TO FIRST NINE MONTHS OF 1993
(Continued)
INTEREST EXPENSE
Interest expense for the nine months ended September 30, 1994
decreased $32.7 million from the same period last year, primarily due
to lower average interest rates resulting from long-term debt
refinancings during 1993 and higher expenses in the first nine months
of 1993 for interest on customer overbillings.
INCOME TAXES
Income taxes for the nine months ended September 30, 1994 decreased
$200.9 million from the same period last year, principally due to a
decrease in taxable income.
FINANCING
At September 30, 1994, the Company had $250 million of unissued,
unsecured debt securities registered with the SEC.
Pursuant to the indentures for certain of its debentures, the Company
has covenanted that it will not issue additional funded debt
securities ranking equally with or prior to such debentures unless it
has maintained an earnings coverage of 1.75 for interest charges for
a period of any 12 consecutive months out of the 15 month period
prior to the date of the proposed issuance. As a result of the 1993
business restructuring charges and the 1994 pension enhancements, the
Company does not currently meet the earnings coverage requirement.
COLLECTIVE BARGAINING AGREEMENTS
On March 24, 1994, an agreement was reached with the CWA and Local
2213 of the IBEW in New York to extend through August 8, 1998 the
collective bargaining agreements that were to expire on August 5,
1995. The agreements were ratified in May 1994. Under the terms of
the new agreements, there will be basic wage increases of 10.5%
during the life of the agreements. Wages will increase 4.0% on
August 6, 1995, 3.5% on August 4, 1996 and 3.0% on August 3, 1997.
In 1997 there may also be a cost-of-living adjustment. The
agreements also provide for retirement incentives, a commitment to no
layoffs or loss of wages as a result of Company-initiated "process
change", an enhanced educational program and incentives to improve
service quality.
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Form 10-Q New York Telephone Company
PART II - OTHER INFORMATION
ITEM 5. Other Information
STATE REGULATORY MATTERS
The New York State Public Service Commission ("NYSPSC") has
instituted a proceeding to consider the terms that should
govern local exchange competition in New York State.
(Competition for local exchange services has been authorized
on an interim basis pending the development of final
regulations.) Among the matters being considered in this
proceeding are interconnection between competing local
exchange providers, regulation of new entrants, and the
possibility of creating a "universal service fund."
Decisions in this proceeding could have a significant impact
on New York Telephone Company's (the "Company") revenues.
In the first phase of the incentive regulation proceeding,
the Company and the NYSPSC agreed to a service quality plan
for 1994. In this plan, the Company committed to achieve
certain measurable levels of customer service, or, failing
to achieve those levels, to accept a penalty, the amount of
which would be determined by the achieved service
performance levels. Based on the effects of the third
quarter, the Company's level of performance (measured by the
service quality indicators) does not currently meet plan
levels. The Company and the NYSPSC are discussing the
effect of unusually severe weather on the achieved year-to-
date results.
See, also, discussion of STATE REGULATORY MATTERS in Part I,
Management's Discussion and Analysis of Results of
Operations, which is incorporated herein by reference.
FEDERAL REGULATORY MATTERS
In accordance with the Federal Communications Commission's
("FCC") July 14, 1994 order on virtual collocation, the
Company and New England Telephone and Telegraph Company
(collectively, "the telephone companies") advised the FCC on
September 1, 1994 that, because the telephone companies'
physical collocation tariff complies with the requirements
in the FCC's order, the telephone companies did not intend
to file a virtual collocation tariff.
-14-
Form 10-Q New York Telephone Company
Part II- Other Information (Continued)
FEDERAL REGULATORY MATTERS (Continued)
On September 1, 1994, the telephone companies filed tariff
revisions with the FCC to amend price cap indices to reflect
additional exogenous costs resulting from the implementation
of Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Postretirement Benefits Other
Than Pensions" ("OPEB"). The filing reflects $37.6 million
of costs already accrued and increased annual costs of $21
million. The filing follows a July 12, 1994 decision of the
U.S. Court of Appeals for the District of Columbia Circuit
overturning the FCC's prior order denying exogenous
treatment of additional OPEB costs. On September 26, 1994,
the telephone companies filed a reply opposing MCI
Communications Corp.'s petition to suspend and investigate
the tariff filing.
On October 20, 1994, the FCC announced that it had adopted a
decision responding to petitions for reconsideration of its
1992 order establishing the rules and regulatory framework
governing telephone company provision of video dialtone.
The FCC generally affirmed its rules for video dialtone,
with some clarifications and modifications. The FCC
affirmed the common carrier nature of the video dialtone
platform, indicated that the video dialtone platform will be
subject to dual federal/state regulation, stated that cost
allocation issues will be resolved in the tariff process and
relaxed in certain respects its telephone company/cable non-
ownership affiliation rules.
OPERATIONS UNDER THE MODIFICATION OF FINAL JUDGMENT ("MFJ")
On August 18, 1994, the United States District Court for the
District of Columbia (the "MFJ Court") ordered that the July
6, 1994 motion of NYNEX Corporation ("NYNEX"), Bell Atlantic
Corporation ("Bell Atlantic"), BellSouth Corporation
("BellSouth") and Southwestern Bell Corporation ("SBC") to
vacate the MFJ be referred to the Department of Justice
("DOJ") for investigation. The MFJ Court's order provides
that interested parties are to file their comments on the
motion with the DOJ by mid-November. Following completion
of its investigation, the DOJ is expected to file its
response to the motion with the MFJ Court in late 1995 or
early 1996, following which there shall be an opportunity
for additional public comment and responses by NYNEX, Bell
Atlantic, BellSouth and SBC.
On August 25, 1994, NYNEX filed a request with the DOJ for a
waiver from the MFJ to provide interexchange services for
calls originating in New York State. Public comments on the
waiver request are expected to be filed with the DOJ by mid-
November.
-15-
Form 10-Q New York Telephone Company
Part II- Other Information (Continued)
ITEM 6.Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number
(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.
-16-
Form 10-Q New York Telephone 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 York Telephone Company
Mel Meskin
Mel Meskin
Vice President - Finance and Treasurer
(Principal Financial and Chief Accounting
Officer)
November 8, 1994
-17-
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