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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended March 31, 1995.
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 1-9157
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
Connecticut 06-1157778
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
227 Church Street, New Haven, CT 06510
(Address of principal executive offices) (Zip Code)
(203) 771-5200
(Registrant's telephone number,
including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
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 .
Common stock, par value $1.00 per share: 64,780,108 shares
outstanding as of April 28, 1995
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Form 10-Q - Part I Southern New England Telecommunications Corporation
PART I - FINANCIAL INFORMATION
Southern New England Telecommunications Corporation
("Corporation") was incorporated under the laws of the State of
Connecticut on January 7, 1986 and has its principal executive
office at 227 Church Street, New Haven, Connecticut 06510
(telephone number (203) 771-5200).
The condensed, consolidated financial statements on the following
pages have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission ("SEC") and, in the
opinion of management, include all adjustments, consisting of
a normal recurring nature necessary for fair presentation for
each period shown. The 1994 financial statements have been
reclassified to conform to the current-year presentation. 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. Operating results for any
interim periods, or comparisons between interim periods, are not
necessarily indicative of the results that may be expected for
full fiscal years. It is suggested that these condensed,
consolidated financial statements be read in conjunction with the
consolidated financial statements and notes thereto included
in the Corporation's 1994 Annual Report on Form 10-K.
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Form 10-Q - Part I Southern New England Telecommunications Corporation
CONDENSED, CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
For the Three Months Ended
March 31,
Dollars in Millions, Except Per Share Amounts 1995 1994
Revenues and Sales
Local service $ 157.4 $ 152.0
Network access 91.5 86.8
Intrastate toll 69.1 79.0
Publishing 44.6 44.7
Sales and other 80.5 60.7
Total Revenues and Sales 443.1 423.2
Costs and expenses
Operating and maintenance 251.6 235.4
Depreciation and amortization 83.4 80.7
Taxes other than income 13.5 14.2
Total Costs and Expenses 348.5 330.3
Operating Income 94.6 92.9
Interest 18.0 19.8
Income Before Income Taxes 76.6 73.1
Income taxes 29.9 29.6
Net Income $ 46.7 $ 43.5
Weighted Average Common Shares Oustanding
(in thousands) 64,641 63,982
Earnings Per Share $ .72 $ .68
Dividends Declared Per Share $ .44 $ .44
The accompanying notes are an integral part of these financial statements.
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Form 10-Q - Part I Southern New England Telecommunications Corporation
CONDENSED, CONSOLIDATED BALANCE SHEET
Dollars in Millions, Except Per Share Amounts March 31, 1995 Dec. 31, 1994
(Unaudited)
Assets
Cash and temporary cash investments $ 34.0 $ 6.7
Accounts receivable, net of allowance
for uncollectibles of $29.4 and
$29.8, respectively 282.7 294.4
Materials, supplies and inventories 22.9 26.4
Prepaid publishing 39.0 39.0
Deferred income taxes 109.5 101.8
Prepaid taxes and other assets 39.6 29.4
Total Current Assets 527.7 497.7
Property, plant and equipment, at cost 4,417.6 4,372.6
Less: Accumulated depreciation 1,717.7 1,660.4
Property, Plant and Equipment, net 2,699.9 2,712.2
Deferred charges, leases and other assets 286.8 294.7
Total Assets $3,514.4 $3,504.6
Liabilities and Shareholders' Equity
Debt maturing within one year $ 33.0 $ 39.6
Accounts payable and accrued expenses 186.1 205.1
Restructuring charge - current 167.8 145.5
Advance billings and customer deposits 59.5 56.7
Accrued compensated absences 36.6 36.8
Other current liabilities 106.3 84.6
Total Current Liabilities 589.3 568.3
Long-term debt 944.3 952.1
Deferred income taxes 396.3 375.0
Postretirement benefits other than pension 308.1 308.2
Restructuring charge - long-term 80.3 119.4
Unamortized investment tax credits 41.2 42.9
Other liabilities and deferred credits 176.0 185.8
Total Liabilities 2,535.5 2,551.7
Common stock; $1.00 par value;
300,000,000 shares authorized;
67,420,245 and 67,264,435 issued,
respectively 67.4 67.3
Proceeds in excess of par value 682.8 677.8
Retained earnings 400.4 381.8
Less: Treasury stock; 2,758,512 shares, at cost (104.7) (104.7)
Unearned compensation related to ESOP (66.9) (69.3)
Total Shareholders' Equity 979.0 952.9
Total Liabilities and Shareholders' Equity $3,514.4 $3,504.6
The accompanying notes are an integral part of these financial
statements.
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Form 10-Q - Part I Southern New England Telecommunications Corporation
CONDENSED, CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY
(Unaudited)
For the Three Months Ended
March 31,
Dollars in Millions 1995 1994
Common Stock, Par Value
Balance at Beginning of Period $ 67.3 $ 66.6
Common shares issued:
Dividend reinvestment plan .1 .1
Savings and incentive plans - .1
Balance at End of Period $ 67.4 $ 66.8
Proceeds in Excess of Par Value
Balance at Beginning of Period $ 677.8 $ 656.7
Common shares issued, at market:
Dividend reinvestment plan 3.8 3.7
Savings and incentive plans 1.2 1.5
Balance at End of Period $ 682.8 $ 661.9
Retained Earnings
Balance at Beginning of Period $ 381.8 $ 315.7
Net income 46.7 43.5
Dividends declared (28.4) (28.2)
Tax benefit of dividends declared
on unallocated shares held
in ESOP .3 .4
Balance at End of Period $ 400.4 $ 331.4
Treasury Stock
Balance at Beginning and End
of Period $(104.7) $(104.7)
Unearned Compensation Related
To Employee Stock Ownership Plan
Balance at Beginning of Period $ (69.3) $ (79.7)
Reduction of ESOP debt 7.1 6.6
ESOP earned compensation accrual (4.7) (4.7)
Balance at End of Period $ (66.9) $ (77.8)
Total Shareholders' Equity $ 979.0 $ 877.6
The accompanying notes are an integral part of these financial statements.
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Form 10-Q - Part I Southern New England Telecommunications Corporation
CONDENSED, CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
For the Three Months Ended
March 31,
Dollars in Millions 1995 1994
Operating Activities
Net income $ 46.7 $ 43.5
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 83.4 80.7
Effect of business restructuring (16.8) (18.4)
Change in operating assets and
liabilities, net 30.9 6.9
Other, net 2.1 1.1
Net Cash Provided by Operating Activities 146.3 113.8
Investing Activities
Cash expended for capital additions (93.1) (77.5)
Repayment of loan made to ESOP .5 .4
Other, net 8.3 4.7
Net Cash Used by Investing Activities (84.3) (72.4)
Financing Activities
Net (payments) proceeds of short-term debt (7.1) 58.7
Repayments of long-term debt (3.1) (251.7)
Cash dividends (24.5) (24.3)
Net Cash Used by Financing Activities (34.7) (217.3)
Increase (Decrease) in Cash and Temporary
Cash Investments 27.3 (175.9)
Cash and temporary cash investments at
beginning of period 6.7 224.8
Cash and Temporary Cash Investments at
End of Period $ 34.0 $ 48.9
Income Taxes (Refunded) Paid $ (3.5) $ 8.5
Interest Paid $ 15.9 $ 23.6
The accompanying notes are an integral part of the financial statements.
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Form 10-Q - Part I Southern New England Telecommunications Corporation
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1: Financial Data on Subsidiaries
Selected financial data on the Corporation's subsidiaries is summarized as
follows:
For the Three Months Ended
March 31,
Dollars in Millions 1995 1994
Revenues and Sales
The Southern New England Telephone Company $374.0 $369.4
Cellular operations(1) 29.6 21.3
SNET Diversified Group, Inc.(2) 26.6 24.6
All others(3) 13.8 8.6
Intercompany sales (.9) (.7)
Total $443.1 $423.2
Operating Earnings (Loss)(4)
The Southern New England Telephone Company $176.3 $159.9
Cellular operations(1) (1.5) 4.4
SNET Diversified Group, Inc.(2) .9 2.6
All others(3) 2.3 6.7
Total $178.0 $173.6
(1) Cellular operations consist of the Corporation's wholesale
and retail cellular businesses, SNET Cellular, Inc. ("Cellular") and
SNET Mobility, Inc. ("Mobility"), net of cellular intercompany amounts.
(2) SNET Diversified Group, Inc. includes results of Business Communications,
SNET Premium Services and Multi-Media Services.
(3) All others include SNET Real Estate, Inc., SNET Paging, Inc. ("Paging"),
SNET America, Inc. ("SNET America") and Parent Company operations.
(4) Represents earnings (loss) before interest, taxes, depreciation and
amortization. Operating earnings (loss) is not a generally accepted
accounting principal measurement. Management provides this measurement
for informational purposes only.
Note 2: Pending Acquisitions and Sales of Certain Assets
On November 22, 1994, Cellular entered into multiple definitive agreements
with Bell Atlantic Corporation ("Bell Atlantic") and NYNEX Corporation
("NYNEX") to purchase, for $450 million in aggregate, certain cellular
properties in Rhode Island and New Bedford and Pittsfield, Massachusetts,
and an increased interest in Springwich Cellular Limited Partnership
("Springwich"). Currently, Cellular and SNET Springwich, Inc., a
wholly-owned subsidiary of Cellular, hold an 82.5% partnership interest
in Springwich.
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Form 10-Q - Part I Southern New England Telecommunications Corporation
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 2: Pending Acquisitions and Sale of Certain Assets (continued)
These transactions are subject to the consummation by Bell
Atlantic and NYNEX of their cellular joint venture, the formation
of which requires them to sell these properties. These
transactions will be accounted for under the purchase method.
On December 13, 1994, Paging and TNI Associates, Inc. ("TNIA"), a
wholly-owned subsidiary of Paging, entered into a definitive
agreement with Paging Network of New York, Inc. to sell
substantially all of the network assets of Paging and TNIA,
including wireless messaging network transmitters, switches, and
operating frequencies, as well as all reseller accounts and
TNIA's retail accounts. Paging will retain its retail accounts
and will continue as a reseller to market paging services under
its Page 2000[R] brand name. The transaction, which is subject to
regulatory approval and certain other conditions, is expected to
be completed in the second quarter of 1995.
Note 3: Restructuring Charge
In December 1993, the Corporation recorded a restructuring charge
of $355.0 million before-tax, $204.2 million after-tax, or $3.21
per share, to provide for a comprehensive restructuring program.
The program included costs to be incurred to facilitate employee
separations involving approximately 2,500 employees. The charge
also included: incremental costs of implementing appropriate
reengineering solutions; designing and developing new processes
and tools to continue the Corporation's provision of excellent
service; and retraining of the remaining employees to help them
meet the changing demands of customers.
The original 1993 restructuring charge and costs incurred during
1994 are summarized as follows:
Balance at Costs incurred Balance at
Dollars in Millions Dec. 31, 1993 during 1994 Dec. 31, 1994
Employee separation costs $170.0 $41.8 $128.2
Process and systems
reengineering 145.0 35.0 110.0
Exit and other costs 40.0 13.3 26.7
Total $355.0 $90.1 $264.9
In order to maintain quality customer service while at the same
time reengineering the business, the 1993 restructuring program
is expected to extend into 1997, rather than be completed by 1996
as originally intended. It is also possible that shifts within
reserve categories may occur. However, no significant changes in
the total cost of the 1993 restructuring program are likely to
occur nor are any adjustments anticipated to the original
estimate.
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Form 10-Q - Part I Southern New England Telecommunications Corporation
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3: Restructuring Charge (continued)
The Corporation incurred restructuring costs in 1995 as follows:
For the Three Months
Dollars in Millions Ended March 31, 1995
Employee separation costs $ 2.8
Process and systems reengineering 13.7
Exit and other costs .3
Total Costs Incurred $16.8
Costs incurred for employee separations included payments for
severance, unused compensated absences, health care continuation
and employee retraining. Process and systems reengineering costs
included incremental costs incurred in connection with the
execution of numerous reengineering programs involving network
operations, customer service, repair and support processes. Exit
and other costs included expenses related to the initial phase of
redesigning work space requirements due to downsizing.
To date, the Corporation has implemented network operations,
customer service, repair and support programs and developed new
processes to substantially reduce the costs of business while
significantly improving quality and customer service. The
remaining employee separations will not be possible without the
development and installation of these new processes which, among
other things, will reduce or eliminate the current labor-
intensive interfaces between the existing systems.
As of March 31, 1995, approximately 1,000 employees (620
management and 380 bargaining-unit employees, or 17.3% and 5.5%
of the respective total workforce at the inception of the
restructuring program) had left the Corporation under severance
plans and retirement incentives. On April 21, 1995, the
Connecticut Union of Telephone Workers ("CUTW") ratified a new
contract which includes a voluntary "early-out option" available
to bargaining-unit employees [see Employee Relations]. The early-
out option provides enhanced pension benefits by adding six years
to the age and the length of service of employees for purposes of
determining pension and postretirement health care benefits
eligibility. Depending on the number and mix of employees who
volunteer for the early-out option, separation dates may be
staggered up to one year to ensure that service to customers will
not be adversely affected.
Expected accumulated savings are dependent on the timing and mix
of approximately 1,500 additional employee separations and are
currently estimated to be $60 million, $90 million, and $110
million for 1995, 1996, and 1997, respectively. These anticipated
savings will be substantially offset by costs related to the
growth in business, the construction of I-SNET, a statewide
information superhighway, and the cost of adding other employees
with different skills.
Cash expenditures are estimated at $120 million, $80 million, and
$35 million in 1995, 1996, and 1997, respectively. Incremental
capital expenditures related to the restructuring program
approximated $5 million for the first quarter 1995. These items
have been recorded in property, plant and equipment and will
result in increased depreciation expense in future years. The
Corporation anticipates total incremental capital expenditures of
approximately $60 million over the remaining life of the program.
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Form 10-Q - Part I Southern New England Telecommunications Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Comparison of quarter ended March 31, 1995 vs. quarter ended March 31, 1994
Revenues and Sales
Local service revenues increased $5.4 million, or 3.6%, due
primarily to growth experienced in access lines in service.
Access lines in service grew 2.3% to approximately 2,025,000 at
March 31, 1995 from approximately 1,979,000 at March 31, 1994.
Also contributing to the increase in local service revenues was
an increase in subscriptions to premium services, such as
SmartLink[R]. In addition, revenues from maintenance of inside
wiring for residence customers increased due mainly to increased
rates effective January 1995.
Network access revenues generated primarily from interstate and
intrastate services increased $4.7 million, or 5.4%. Interstate
access revenues increased $2.5 million due primarily to an
increase in interstate minutes of use of approximately 5%.
Partially offsetting the impact of the increase in minutes of use
was a decrease in interstate access tariff rates implemented on
July 1, 1994, in accordance with The Southern New England
Telephone Company's ("Telephone Company") 1994 annual Federal
Communications Commission ("FCC") filing under price cap
regulation. In addition, intrastate access revenues increased
$2.2 million due mainly to an increase in intrastate minutes of
use.
Intrastate toll revenues, which include revenues primarily from
toll and WATS services, decreased $9.9 million, or 12.5%. Toll
message revenues decreased $7.1 million due primarily to reduced
intrastate toll rates and decreased volume. The decline in rates
was attributable to the introduction of several discount calling
plans in 1994 that provide competitive options to business and
residence customers. Toll message volume decreased 4.5%
primarily as a result of increased competition offset partially
by the migration of customers from WATS services. WATS revenues
decreased $2.2 million due primarily to lower message volumes
resulting from the shift to lower priced services and the impact
of competition.
Sales and other revenues increased $19.8 million, or 32.6%.
Sales and other revenues include: revenues from the Corporation's
non-telephone businesses; billing and collections, and other non-
access services rendered on behalf of interexchange carriers;
provision for the Telephone Company's uncollectible accounts
receivable; and miscellaneous revenues. Sales of cellular
operations increased $8.3 million, or 39.0%, net of cellular
intercompany amounts. This increase was due mainly to
significant growth in the number of customers from approximately
97,000 as of March 31, 1994 to 181,000 as of March 31, 1995 as a
result of competitive marketing and pricing strategies. In
addition, sales of SNET America, a reseller of interstate and
international long-distance service to Connecticut customers,
increased as a result of continued growth in the customer base.
Other non-access services rendered on behalf of interexchange
carriers and lower provision for uncollectible accounts
receivable for the Telephone Company's residence, business and
directory customers also contributed to the increase in other
revenues.
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Form 10-Q - Part I Southern New England Telecommunications Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Comparison of quarter ended March 31, 1995 vs. quarter ended March 31, 1994
Operating and Maintenance
Operating and maintenance expenses increased $16.2 million, or
6.9%. Employee-related costs, including wages and employee-
benefit costs, represent a significant portion of these expenses.
The remainder of these costs is comprised primarily of cost of
goods sold and general and administrative expenses, specifically
marketing.
The Corporation's employee-related costs increased approximately
$6 million due primarily to a 5.0% wage rate increase for
bargaining-unit employees effective October 1994 in accordance
with the 1992 CUTW contract, and to a lesser extent, an average
4.0% salary increase for management employees effective April
1994. Also contributing to the increase in employee-related
costs was an increase in overtime payments and higher incentive-
based accruals. The impact of a 1.6% decrease in the average
work force partially offset these increases. Cost savings
associated with the restructuring program are anticipated to
continue in 1995 as additional employee separations are expected
to occur as a result of the early-out option available to
bargaining-unit employees during July 1995.
The Corporation's operating and maintenance expenses, excluding
employee-related costs, increased approximately $10 million.
Specifically, cellular operations experienced increased expenses
of approximately $12 million due to costs associated with an
expanding customer base. Also contributing to the higher
expenses was the Corporation's increased marketing and operating
efforts associated with SNET America and multimedia technology.
Partially offsetting these increases was a decrease in Telephone
Company expenses due primarily to cost-containment efforts in
areas such as contract services and publishing.
Depreciation and Amortization
Depreciation and amortization expense increased $2.7 million, or
3.4%. This increase was due primarily to revised depreciation
rate schedules for the Telephone Company's intrastate plant, as
approved by the Connecticut Department of Public Utility Control
("DPUC"), effective January 1, 1995. Investments in
telecommunications property, plant and equipment, including
wireless cell sites, also contributed to the increase.
Interest Expense
Interest expense decreased $1.8 million, or 9.1% due primarily to
a decrease in average debt outstanding of approximately $134
million.
Income Taxes
The combined federal and state effective tax rate for the three
months ended March 31, 1995 was 39.0% compared with 40.5% for the
comparable period in 1994. The effective tax rate decreased due
primarily to the recognition of an enacted state income tax
credit based on personal property taxes paid on certain data
processing equipment.
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Form 10-Q - Part I Southern New England Telecommunications Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Comparison of balances as of March 31, 1995 vs. December 31, 1994
Accounts Receivable
Accounts receivable decreased $11.7 million due primarily to
timing of cash collections of the Telephone Company's accounts
receivable.
Prepaid taxes and other assets
Prepaid taxes and other assets increased $10.2 million due
primarily to an increase in prepaid property taxes partially
offset by a decrease in income taxes receivable. The increase in
prepaid property taxes is a result of the Telephone Company's
annual payment of property taxes in March 1995. The prepaid
property taxes will be amortized over the remainder of 1995. The
receipt of an income tax refund resulted in a decrease in income
taxes receivable.
Other current liabilities
Other current liabilities increased $21.7 million due primarily
to an increase in accrued income taxes. The increase in accrued
income taxes was a result of the timing of 1995 income tax
payments coupled with no income tax accrual as of December 31,
1994 as an income tax refund was expected in the first quarter
1995.
Liquidity and Capital Resources
The Corporation generated cash flows from operations of $146.3
million during the three months ended March 31, 1995 as compared
with $113.8 million during the three months ended March 31, 1994.
The primary use of capital resources continued to be capital
expenditures.
For the three months ended March 31, 1995, cash outlays relating
to the Corporation's restructuring charge recorded in December
1993 amounted to $13.6 million. Substantially all of the
expenditures related to incremental costs incurred for
executing numerous reengineering programs during the first
quarter 1995. These expenditures were funded from cash flows
from operations. Management currently anticipates that cash
expenditures in connection with the restructuring program will
approximate $120 million, $80 million, and $35 million in 1995,
1996 and 1997, respectively, and will be funded from operations.
The Corporation's ratio of debt to total capitalization decreased
to 50.0% at March 31, 1995 compared with 51.0% at December 31,
1994. For the first quarter 1995, the Corporation's Board of
Directors declared a dividend of $.44 per share.
Management believes that the Corporation has adequate internal
and external resources to finance the anticipated requirements of
business development. Capital additions, restructuring costs,
dividends and maturing debt are expected to be funded primarily
with cash from operations during 1995. The Corporation also has
access to external resources including lines of credit and long-
term shelf registration commitments. The issuance of short- and
long-term debt is expected during 1995 in order to fund the
pending acquisitions of certain cellular properties [see Note 2].
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Form 10-Q - Part I Southern New England Telecommunications Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Competition
On May 26, 1994, Public Act 94-83 ("Act") was enacted providing a
new regulatory framework for the Connecticut telecommunications
industry. The Act, which took effect on July 1, 1994, represents
a broad strategic response to the changes facing the
telecommunications industry in Connecticut based on the premise
that broader participation in the Connecticut telecommunications
market will be more beneficial to the public than will broader
regulation. The Act opens Connecticut telecommunications
services to full competition, including local phone service
currently provided primarily by the Telephone Company, and
encourages the DPUC to adopt alternative forms of regulation for
telephone companies, including the Telephone Company's
noncompetitive and emerging competitive services.
The DPUC has conducted, and is conducting, a number of
proceedings in two phases to implement the Act. In the
competitive phase the Department is addressing: local exchange
service competition; universal service and lifeline program
policy issues; unbundling of local exchange carriers' ("LECs")
local networks; and reclassification of LECs' products and
services into competitive, emerging competitive and
noncompetitive categories. During the alternative regulation
phase, also underway, the Telephone Company intends to submit to
the DPUC an alternative regulation plan that will replace rate of
return regulation with price regulation for non-competitive and
emerging competitive services. The alternative regulation phase
will also involve a complete financial review of the Telephone
Company and will address cost of service, capital recovery and
service standards.
Since the July 1, 1993 effective date of "10XXX" competition,
over 50 telecommunications providers have received approval from
the DPUC to offer "10XXX" or other competitive intrastate long-
distance services. In addition, over 25 companies have filed for
initial certificates of public convenience and necessity and are
awaiting DPUC approval. Increasing competition in intrastate
long-distance service and the Telephone Company's reduction in
intrastate toll rates will continue to place significant downward
pressure on the Telephone Company's intrastate toll revenues as
will the implementation of intrastate equal access, which is
required to be implemented for all dual preferred interexchange
carrier ("PIC") capable switches no later than December 1, 1996.
No balloting of customers is required. Although the DPUC ordered
the Company to bear its proportionate share of the costs to
deploy the dual PIC technology, the DPUC added the estimated
1996 average net toll revenue loss to the cost recovery formula.
These costs will be recovered through an intrastate equal access
rate element on the presubscribed lines of all carriers unless
the Office of Consumer Counsel's December 7, 1994 Petition for
Administrative Appeal to the Superior Court results in a change.
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Form 10-Q - Part I Southern New England Telecommunications Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Since the introduction of "10XXX" competition, major carriers
have increased their marketing efforts in Connecticut to sell
intrastate long-distance services primarily to residential
customers. In response to major carriers and other competitors'
efforts, the Telephone Company has undertaken a number of
initiatives. The Telephone Company remains focused on providing
excellent customer service and quality products and has made
several changes to its product lines to provide creative options
and flexible packages that meet and exceed customers'
expectations. During the latter part of 1994 and the first
quarter of 1995, the Telephone Company added several new
discount calling plans to its existing High Volume Discount Toll
service offering. These plans target specific customer segments
and extend to them a discount and rate structure which addresses
key business needs. Additionally, the Telephone Company, working
with its affiliate SNET America, realigned its discount and rate
structures to provide the Connecticut customer with a seamless
toll service product line which includes a discount structure
that can be applied to intrastate, interstate and international
calling each and every month.
The Telephone Company expects to see continued movement toward a
fully competitive telecommunications marketplace, both on an
interexchange and intraexchange basis. The Telephone Company's
ability to compete is dependent upon regulatory reform that will
allow pricing flexibility to meet competition and provide a level
playing field with similar regulation for similar services and
with reduced regulation to reflect an emerging competitive
marketplace. The legislation and regulatory proceedings that
flow from it should produce a telecommunications marketplace in
Connecticut that, by providing equal opportunity to all
competitors, will work to benefit Connecticut consumers.
Regulatory Matters
State Regulation Initiatives
On February 6, 1995, the DPUC established the criteria,
information requirements and procedures to permit the
reclassification of telecommunications products and services from
noncompetitive to either emerging competitive or competitive
based on the degree of competition.
On February 28, 1995, the DPUC defined the capabilities and
qualities that, at a minimum, must be included in the basic
telecommunications service offered by all providers of local
service.
On March 15, 1995, the DPUC established regulations for market
entry by both new entrants and existing firms who wish to add
additional services to their certification.
On March 16, 1995, the DPUC ruled that local competition is
consistent with the goals of the Act and that effective local
competition requires the resolution of technical and operational
issues, such as, unbundling and number portability, which will be
addressed in other dockets.
On March 31, 1995, the DPUC concluded that the current
provisioning responsibilities associated with universal service
incurred by incumbent telephone companies must be extended to all
local service providers. In addition, the DPUC required the
mandatory establishment of a Lifeline Program and the
establishment of a Universal Service Program, if needed, for high
cost or geographically remote areas pending the completion of
cost studies.
- 14 -
<PAGE>
Form 10-Q - Part I Southern New England Telecommunications Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Federal Regulation Initiatives
The FCC adopted an interim plan for interstate access rates
requiring the LECs to pass through to long-distance companies a
greater share of cost savings. The interim plan allows LECs to
chose from among three productivity factors (4.0%, 4.7% or 5.3%).
These factors are an offset to inflation based on price increases
allowed each year. If the 5.3% factor is chosen, no earnings are
shared. If either the 4.7% or 4.0% factor is chosen, sharing
begins at 12.25%. In addition, companies are required to
reinitialize their price cap index on a 0.7% one-time downward
basis for each year they elected the 3.3% factor up to a 2.8%
maximum. The Telephone Company has maintained its selection of
the 3.3% productivity factor each year since entering price caps
in 1991. A further notice will be issued to address price cap
changes to respond to competition.
On May 9, 1995, the Telephone Company filed its 1995 annual
interstate access tariff filing under price cap regulation to
become effective August 1, 1995. The Telephone Company elected a
4.0% productivity factor and will be allowed to earn up to a
12.25% interstate rate of return annually before any sharing
mechanism is invoked. The filing, if approved by the FCC, is
anticipated to decrease interstate network access revenues by
approximately $10 million for the period August 1, 1995 to June
30, 1996. Management expects this decrease to be at least
partially offset by increased demand.
On March 9, 1995, the Telephone Company made tariff filings with
both the FCC and DPUC to establish rates for its market test of
Video Dialtone ("VDT") trial service. Approval of these tariffs
by the respective regulatory agencies will allow the Telephone
Company to charge its customers for services in the West Hartford
area and expanded trial area within Connecticut. The FCC recently
limited its jurisdiction over VDT to the provision of transport
video communications that have been transmitted over radio waves
or across state lines. Consequently, the Telephone Company filed
a state tariff for video-on-demand, enhanced pay-per-view and
broadcast services. The Telephone Company's tariffs initially
cover analog services based upon currently available technology.
The Telephone Company intends to deploy digital equipment as soon
as technically feasible and economically reasonable. The
Telephone Company anticipates that its federal tariff will become
effective on June 7, 1995 and its state tariff will take effect
subsequent to hearings at the DPUC that begin in May 1995.
On April 28, 1995, the Telephone Company filed with the FCC an
application to construct, operate, own, and maintain facilities
used to provide commercial VDT service in the State of
Connecticut. The proposed system, if approved, will be
constructed over the next 15 years and will eventually reach all
customers throughout the Telephone Company's service area.
On January 19, 1994, the Telephone Company filed suit in the U.S.
District Court ("Court") in New Haven requesting the Court find
that the Cable Communications Policy Act of 1984 violates the
Telephone Company's First and Fifth Amendment rights. On April
28, 1995, the Court ruled in favor of the Telephone Company by
allowing the Telephone Company to provide in-territory cable
programming and to own more than 5% of any company that provides
cable programming in its local service area.
- 15 -
<PAGE>
Form 10-Q - Part I & II Southern New England Telecommunications Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Employee Relations
On April 21, 1995, a new labor contract was ratified by members
of the CUTW. As a part of the new contract, a voluntary "early-
out option" will be available to bargaining-unit employees during
July 1995 and subsequent dates, when considered necessary, during
the life of the contract. The early-out option offers additional
incentives in the form of enhanced pension benefits. Bargaining-
unit employees leaving under the offer will receive increased
pensions of between 35% to 45%. CUTW members who remain with the
Corporation will receive a 4.0% wage rate increase in January
1996 and a 3.0% wage rate increase in both January 1997 and
January 1998. In addition, the contract also provides a sign-on
bonus and health benefit and pension enhancements. The new
agreement will be in effect until August 8, 1998 and will replace
the existing contract which was scheduled to expire on August 5,
1995. The contract is intended to keep layoffs to a minimum
while enabling the Corporation to position itself to meet
increasing competition through downsizing efforts.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There were no material developments in the first
quarter of 1995.
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K
On January 25, 1995, the Corporation and the
Telephone Company filed, separately, reports on
Form 8-K, dated January 24, 1995, announcing the
Corporation's 1994 financial results and the change
in credit ratings by Standard and Poor's on the
Corporation's senior unsecured debt to A+ from AA
and commercial paper rating to A-1 from A-1+.
On April 21, 1995, the Corporation and the
Telephone Company filed, separately, reports on
Form 8-K, dated April 20, 1995 announcing the
Corporation's financial results for the first
quarter of 1995.
- 16 -
<PAGE>
Form 10-Q - Part II Southern New England Telecommunications Corporation
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.
Southern New England Telecommunications Corporation
May 9, 1995
/s/ J.A. Sadek
J.A. Sadek
Vice President and Comptroller
- 17 -
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
1ST QUARTER 1995 FORM 10-Q OF SOUTHERN NEW ENGLAND TELECOMMUNICATIONS
CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
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