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, 1996.
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: 65,353,360 shares
outstanding as of April 30, 1996
- 1 -
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
offices 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 1995 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 1995 Annual Report on Form 10-K.
- 2 -
Form 10-Q - Part I Southern New England Telecommunications Corporation
CONDENSED, CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the Three Months Ended
March 31,
Dollars in Millions, Except Per Share Amounts 1996 1995
Revenues and Sales $ 474.0 $ 440.4
Costs and Expenses
Operating 180.8 165.2
Maintenance 87.9 84.6
Depreciation and amortization 89.2 83.4
Taxes other than income 14.0 13.5
Total Costs and Expenses 371.9 346.7
Operating Income 102.1 93.7
Interest expense 22.6 18.0
Other income, net 3.7 .9
Income from Continuing Operations Before Income Taxes 83.2 76.6
Income taxes 31.0 29.9
Net Income $ 52.2 $ 46.7
Weighted Average Common Shares Outstanding (thousands) 65,384 64,641
Earnings Per Share $ .80 $ .72
Dividends Declared Per Share * $ .44 $ .44
The accompanying notes are an integral part of these financial statements.
* The first quarter 1996 dividends were declared out of proceeds in excess
of par value.
- 3 -
Form 10-Q - Part I Southern New England Telecommunications Corporation
CONDENSED, CONSOLIDATED BALANCE SHEETS
Dollars in Millions, Except Per Share Amounts March 31, December 31,
1996 1995
(Unaudited)
Assets
Cash and temporary cash investments $ 16.7 $ 11.1
Accounts receivable, net of allowance
for uncollectibles of $34.2 at each
period end 341.0 347.3
Materials, supplies and inventories 23.9 26.1
Prepaid publishing 36.4 37.3
Deferred income taxes 60.0 66.8
Other current assets 56.9 46.3
Total Current Assets 534.9 534.9
Property, plant and equipment, at cost 4,564.3 4,532.1
Less: Accumulated depreciation 3,027.8 2,966.9
Property, plant and equipment, net 1,536.5 1,565.2
Intangible assets, net 411.0 414.9
Deferred income taxes 96.6 92.0
Deferred charges, leases and other assets 116.5 117.2
Total Assets $2,695.5 $2,724.2
Liabilities and Shareholders' Equity
Short-term debt $ 201.0 $ 232.2
Accounts payable and accrued expenses 257.4 261.9
Restructuring charge - current 42.3 59.0
Advance billings and customer deposits 59.0 58.0
Accrued compensated absences 36.6 36.6
Other current liabilities 88.4 87.9
Total Current Liabilities 684.7 735.6
Long-term debt 1,174.3 1,182.4
Accrued postretirement benefit obligation 311.8 310.8
Restructuring charge - long-term 16.0 18.0
Unamortized investment tax credits 17.0 17.6
Other liabilities and deferred credits 106.4 106.9
Total Liabilities 2,310.2 2,371.3
Common Stock; $1.00 par value; 300,000,000
shares authorized; 68,022,396 and
67,881,159 issued, respectively 68.0 67.9
Proceeds in excess of par value * 674.3 697.9
Retained deficit (197.0) (249.5)
Less: Treasury stock; 2,758,512 shares, at cost (104.7) (104.7)
Unearned compensation related to ESOP (55.3) (58.7)
Total Shareholders' Equity 385.3 352.9
Total Liabilities and Shareholders' Equity $2,695.5 $2,724.2
The accompanying notes are an integral part of these financial statements.
* The first quarter 1996 dividends were declared out of proceeds in excess
of par value.
- 4 -
Form 10-Q - Part I Southern New England Telecommunications Corporation
CONDENSED, CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY
(Unaudited)
For the Three Months Ended
March 31,
Dollars in Millions 1996 1995
Common Stock, Par Value
Balance at Beginning of Period $ 67.9 $ 67.3
Common shares issued, at market:
Dividend reinvestment plan .1 .1
Balance at End of Period $ 68.0 $ 67.4
Proceeds in Excess of Par Value
Balance at Beginning of Period $ 697.9 $ 677.8
Dividends declared * (28.7) -
Common shares issued, at market:
Dividend reinvestment plan 3.5 3.8
Savings and incentive plans 1.6 1.2
Balance at End of Period $ 674.3 $ 682.8
Retained (Deficit) Earnings
Balance at Beginning of Period $(249.5) $ 381.8
Net income 52.2 46.7
Dividends declared * - (28.4)
Tax benefit of dividends declared on
unallocated shares held in ESOP .3 .3
Balance at End of Period $(197.0) $ 400.4
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 $ (58.7) $ (69.3)
Reduction of ESOP debt 7.6 7.1
ESOP earned compensation accrual (4.2) (4.7)
Balance at End of Period $ (55.3) $ (66.9)
Total Shareholders' Equity $ 385.3 $ 979.0
The accompanying notes are an integral part of these financial statements.
* The first quarter 1996 dividends were declared out of proceeds in excess
of par value.
- 5 -
Form 10-Q - Part I Southern New England Telecommunications Corporation
CONDENSED, CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months Ended
March 31,
Dollars in Millions 1996 1995
Operating Activities
Net income $ 52.2 $ 46.7
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 89.2 83.4
Restructuring payments (18.7) (16.8)
Change in operating assets and
liabilities, net (.6) 30.9
Other, net 1.6 2.1
Net Cash Provided by Operating Activities 123.7 146.3
Investing Activities
Cash expended for capital additions (68.1) (93.1)
Repayment of loan made to ESOP .5 .5
Other, net 10.7 8.3
Net Cash Used by Investing Activities (56.9) (84.3)
Financing Activities
Net payments of short-term debt (31.7) (7.1)
Repayments of long-term debt (4.5) (3.1)
Cash dividends paid (25.0) (24.5)
Net Cash Used by Financing Activities (61.2) (34.7)
Increase in Cash and Temporary Cash Investments 5.6 27.3
Cash and temporary cash investments at 11.1 6.7
beginning of period
Cash and Temporary Cash Investments at $ 16.7 $ 34.0
End of Period
Income Taxes Paid (Refunded) $ 8.0 $ (3.5)
Interest Paid $ 26.2 $ 15.9
The accompanying notes are an integral part of these financial statements.
- 6 -
Form 10-Q - Part I Southern New England Telecommunications Corporation
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
(Unaudited)
Note 1: Significant Accounting Policies
Accounting Pronouncements - Effective January 1, 1996, the
Corporation implemented Statement of Financial Accounting
Standard ("SFAS") No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of." The
implementation did not have a material impact on the consolidated
financial statements.
The Corporation also implemented SFAS No. 123, "Accounting for
Stock-Based Compensation," effective January 1, 1996. In
compliance with SFAS No. 123, the pro forma net income and
earnings per share, as affected by the valuation of stock-based
compensation, will be disclosed in the Annual Report. The
implementation had no effect on the consolidated financial
statements.
Note 2: Restructuring Charge
In December 1993, the Corporation recorded a restructuring charge
of $355.0 to provide for a comprehensive restructuring program.
Specifically, the program included costs to be incurred to
facilitate employee separations. 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 and 1995 are summarized as follows:
Balance Costs Costs Balance
at incurred incurred at
Dec. 31, during during Dec. 31,
1993 1994 1995 1995
Employee separation costs $170.0 $41.8 $111.2 $17.0
Process and systems reengineering 145.0 35.0 74.2 35.8
Exit and other costs 40.0 13.3 2.5 24.2
Total $355.0 $90.1 $187.9 $77.0
The Corporation incurred restructuring costs in 1996 as follows:
For the Three Months Ended March 31, 1996
Employee separation costs $ 4.3
Process and systems reengineering 13.4
Exit and other costs 1.0
Total Costs Incurred $18.7
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 to reduce overall corporate
space requirements.
- 7 -
Form 10-Q - Part I Southern New England Telecommunications Corporation
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
(Unaudited)
In July 1995, the early-out offer ("EOO") was available to the
bargaining-unit work force and approximately 2,700 employees, or
40.7% of the total bargaining-unit work force, accepted the
offer. As of March 31, 1996, approximately 2,140 employees had
left the Corporation, with the remaining 560 employees to leave
no later than June 1996. Future adjustments to the restructuring
charge are expected to include pension settlement gains of
approximately $24 in the second quarter of 1996.
Total employee separations under the restructuring program are
expected to approximate up to 4,000 employees. As of March 31,
1996, approximately 3,430 employees had left the Corporation
under the restructuring program: 970 employees left under
severance plans through the end of 1994, 2,195 employees left
primarily under the EOO in 1995 and 265 employees left under the
EOO and severance plans in the first quarter of 1996. The
remaining employee separations are expected to occur primarily in
1996. Total employee separations to date were offset partially
by an increase in provisional employees and growth in the
business.
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
initial installation and ongoing development of these new
integrated processes have enabled the Telephone Company to
increase its responsiveness to customer specific needs and to
eliminate certain current labor-intensive interfaces between the
existing systems.
As a result of employee separations since March 31, 1995,
employee-related expenses for the first quarter of 1996 were
reduced by approximately $16 compared with the first quarter
1995, net of costs for provisional employees. Most of the
reduction in employee-related expenses, due to the EOO, will be
realized in 1996 since the majority of the employee separations
occurred in the fourth quarter of 1995, with the remainder to
occur no later than June 1996. After full implementation of the
restructuring program, the Corporation anticipates annual savings
of approximately $120 from reduced employee-related expenses, net
of costs for provisional employees. These anticipated savings
will also be substantially offset by growth in the business.
Cash expenditures for the restructuring program are estimated to
be $80 in 1996. The EOO was funded primarily by the pension and
postretirement plans. Incremental capital expenditures related
to the restructuring program approximated $5 in the first quarter
of 1996. These items were recorded in property, plant and
equipment and will result in increased depreciation expense in
future years. The Corporation currently anticipates total
incremental capital expenditures of approximately $30 in 1996
under the restructuring program.
Specific process and systems reengineering projects under the
restructuring program are expected to be completed in 1996. In
addition, shifts within reserve categories are expected to occur
in 1996. Management believes that the total restructuring
reserve balance of $58.3 as of March 31, 1996 plus the expected
net adjustments of approximately $24, discussed previously, are
adequate for future estimated costs under the restructuring
program.
- 8 -
Form 10-Q - Part I Southern New England Telecommunications Corporation
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
(Unaudited)
Note 3: Supplemental Financial Information
Operating Earnings(1) - The following unaudited financial data on
the Corporation's product groups is voluntary and provided for
informational purposes only:
For the Three Months Ended March 31, 1996 1995
Wireline $154.3 $144.5
Wireless 2.0 (2.5)
Information and Entertainment 26.7 26.8
Other(2) 8.3 8.3
Total $191.3 $177.1
(1) Represents earnings before interest, taxes, depreciation and
amortization. Operating earnings is not a generally accepted
accounting principle measurement.
(2) Includes real estate and holding company operations and
eliminations.
- 9 -
Form 10-Q - Part I Southern New England Telecommunications Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Millions, Except Per Share Amounts)
Southern New England Telecommunications Corporation has business
units in the following telecommunications product groups:
wireline; wireless; and information and entertainment. Wireline
includes The Southern New England Telephone Company's ("Telephone
Company's") telecommunications services, premium services and
equipment sales. Wireless consists of cellular and paging
services; and information and entertainment includes publishing,
internet and multimedia services. Services, such as real estate
and holding company operations, and eliminations are included in
other.
Comparison of three months ended March 31, 1996 vs. three months
ended March 31,1995
Operating Results
Net income was $52.2 in 1996 compared with $46.7 in 1995. The
corresponding net income per share was $.80 in 1996 and $.72 in
1995. Strong wireline operating earnings were partially offset
by an $.11 per share dilutive impact related to cellular
acquisitions that were completed in July 1995.
Revenues and Sales
For the Three Months Ended March 31, 1996 1995
Wireline
Local service $ 164.7 $ 157.4
Network access 97.0 91.5
Intrastate toll 66.4 69.1
Interstate and international toll 18.0 6.8
Premium services and equipment sales 25.6 26.6
Other revenues 14.4 14.1
Wireless
Cellular 46.0 30.1
Paging 1.4 4.3
Information and Entertainment 46.0 44.6
Other (5.5) (4.1)
Total Revenues and Sales $ 474.0 $ 440.4
Wireline - Local service revenues, derived from providing local
exchange, public telephone and local private line services,
increased $7.3, or 4.6%, in 1996. The increase was due
primarily to strong growth of 3.3% in access lines in service to
approximately 2,090,000 lines as of March 31, 1996. This
increase included significant growth in second residential
access lines. Local service revenues also increased due to
growth in subscriptions to SmartLink[R] advanced calling features,
including Caller ID, missed call dialing, call blocking and call
tracing. Management expects competition to impact local service
revenues beginning in 1996 as other telecommunications providers
start to offer local service during the year [see Competition].
- 10 -
Form 10-Q - Part I Southern New England Telecommunications Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Millions, Except Per Share Amounts)
Comparison of three months ended March 31, 1996 vs. three months
ended March 31,1995
Network access revenues, generated primarily from interstate and
intrastate services, increased $5.5, or 6.0%. Interstate access
revenues increased $3.6, or 4.1%, due primarily to growth in
interstate minutes of use of approximately 9% and an increase in
access lines in service, discussed previously. Partially
offsetting the impact of the increase in minutes of use was a
decrease in tariff rates implemented on August 1, 1995, in
accordance with the Telephone Company's annual Federal
Communications Commission ("FCC") filing under price cap
regulation. In addition, intrastate access revenues increased
$1.9 due primarily to an increase in intrastate minutes of use
by competitive providers of intrastate long-distance service.
Intrastate toll revenues, which include primarily revenues from
toll and WATS services, decreased $2.7, or 3.9%. Toll message
revenues decreased $2.1 due primarily to reduced intrastate toll
rates, offset partially by a 6.2% increase in toll message
volume. The decline in rates was attributable to the
introduction of several discount calling plans that provide
competitive options to business and residence customers. Higher
toll volume was due mainly to stormy weather experienced in
Connecticut during the first three months of 1996. The offering
of competitive discount calling plans and the implementation of
intrastate equal access through December 1996 will continue to
place downward pressure on intrastate toll revenues.
Interstate and international toll services provided to
Connecticut based customers increased $11.2 as a result of
strong growth in the customer base. Customers continue to
migrate to the SNET All Distance[SM] product line which allows
Connecticut customers to package their entire long-distance
calling into one competitively priced calling plan.
Wireless - Cellular wholesale and retail sales increased $15.9,
or 52.8%, due mainly to strong growth of 47.9% in the
preacquisition subscriber base in response to competitive
marketing and pricing strategies. Also contributing to the
increase in cellular sales was the impact of the cellular
acquisitions completed in July 1995. Including the new
subscribers from the expanded cellular coverage area, the
subscriber base increased 90.5%. Average usage per subscriber
continued to decline in 1996, in line with a nationwide trend,
as lower volume users made up a larger portion of the subscriber
base.
Paging sales decreased $2.9 as a result of the sale of
substantially all of the paging network assets and certain
accounts in June 1995. Wireless retained certain paging retail
accounts and will continue as a reseller to market paging
services under its Page 2000[R] brand name.
Information and Entertainment - Growth in Yellow Pages
advertising was the primary contributor to the $1.4 increase in
information and entertainment sales.
- 11 -
Form 10-Q - Part I Southern New England Telecommunications Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Millions, Except Per Share Amounts)
Comparison of three months ended March 31, 1996 vs. three months
ended March 31,1995
Costs and Expenses
For the Three Months Ended March 31, 1996 1995
Operating $180.8 $165.2
Maintenance 87.9 84.6
Total operating costs 268.7 249.8
Depreciation and amortization 89.2 83.4
Taxes other than income 14.0 13.5
Total Costs and Expenses $371.9 $346.7
Operating costs - Operating costs consist primarily of employee-
related expenses, including wages and benefits. Cost of goods
sold and general and administrative expenses, including
marketing, represent the remaining portion of these expenses.
Total operating costs increased $18.9, or 7.6%.
Wireline - Wireline operating costs increased $10.9, or 5.2%, due
primarily to an increase in contracted services for systems
operations (i.e., outsourcing of data center operations) and an
increase in costs of providing interstate and international toll
services. Partially offsetting these increases was a reduction
in employee-related expenses as a result of a smaller work
force. The Telephone Company's wireline work force decreased to
7,796 employees at March 31, 1996, compared with 8,620 employees
at March 31, 1995, due primarily to the EOO and severance
programs under the restructuring program. The decrease in
employee-related expenses was partially offset by overtime for
storm-related repairs and a compensation increase for bargaining-
unit employees. Employee-related expense savings are
anticipated to continue from employee separations.
Wireless - Wireless operating costs increased $8.1, or 22.2%, due
primarily to an expanding preacquisition subscriber base,
including additional marketing and distributing expenses. In
addition, the integration and operation of the cellular
acquisitions contributed to higher costs. Partially offsetting
these increases was a reduction in roaming fraud as a result of
preventive control programs. Operating costs also decreased due
to the impact from the sale of substantially all the paging
network assets in June 1995.
Information and Entertainment - Costs of providing internet
services contributed to the $1.5 increase in information and
entertainment operating costs.
Depreciation and Amortization - Depreciation and amortization
expense increased $5.8, or 7.0%, due primarily to amortization
expense of approximately $4 on intangible assets acquired in the
cellular acquisitions, primarily cellular licenses. An increase
in the average depreciable telecommunications property, plant
and equipment, mainly cell sites, also contributed to the
increase in depreciation and amortization expense.
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Form 10-Q - Part I Southern New England Telecommunications Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Millions, Except Per Share Amounts)
Comparison of three months ended March 31, 1996 vs. three months
ended March 31,1995
Interest Expense
For the Three Months Ended March 31, 1996 1995
Interest expense $22.6 $18.0
Interest expense increased $4.6, or 25.6%, due primarily to the
issuance of commercial paper and medium-term notes in connection
with the cellular acquisitions. Interest on the financing of
the cellular acquisitions approximated $7. This increase was
partially offset by interest savings realized from repayment of
debt in June 1995 related to paging and real estate operations
and by reporting capitalized interest as a cost of
telecommunications plant and a reduction to interest expense.
Prior to the discontinuance of SFAS No. 71, capitalized interest
was reported as a component of other income, net.
Other Income, net
For the Three Months Ended March 31, 1996 1995
Other income, net $3.7 $.9
The increase in other income, net was due primarily to a gain on
the sale of cellular equipment and higher interest income.
Income Taxes
For the Three Months Ended March 31, 1996 1995
Income taxes $31.0 $29.9
The combined federal and state effective tax rate for the three
months ended March 31, 1996 was 37.3% compared with 39.0% for
the same period in 1995. The decrease in the effective tax rate
was due primarily to the combined effect of lower Connecticut
state tax rates and a higher level of tax credits in 1996.
Comparison of balances as of March 31, 1996 vs. December 31, 1995
Other Current Assets
Other current assets increased $10.6 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 1996. The prepaid property
taxes will be amortized over the remainder of 1996. The
decrease in income taxes receivable was due to the timing of
income tax payments.
Short-term Debt
Short-term debt decreased $31.2 due to the pay-down on
commercial paper outstanding as a result of an improved cash
position.
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Form 10-Q - Part I Southern New England Telecommunications Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Millions, Except Per Share Amounts)
Liquidity and Capital Resources
The Corporation generated cash flows from operations of $123.7
during the three months ended March 31, 1996 as compared with
$146.3 during the three months ended March 31, 1995. The
decrease was due primarily to higher income tax and interest
payments as well as the timing of accounts receivable
collections. The primary use of corporate funds continued to be
capital expenditures.
For the three months ended March 31, 1996, cash outlays relating
to the Corporation's restructuring charge totaled $18.7.
Primarily all of the expenditures related to incremental costs
incurred for executing numerous reengineering programs during
the first three months of 1996. All cash expenditures were
funded with cash flows from operations. Management anticipates
that cash expenditures in connection with the restructuring
program will approximate $80 in 1996 and will be funded from
operations.
The Corporation's ratio of debt to total capitalization
decreased to 78.1% at March 31, 1996 compared with 80.0% at year-
end 1995. For the first quarter of 1996, the Corporation's
Board of Directors declared a dividend of $.44 per share from
proceeds in excess of par value.
Management believes that the Corporation has sufficient 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 1996. The
Corporation also has access to external resources including
lines of credit and long-term shelf registration commitments.
WIRELINE
Competition
Wireline (the Telephone Company) is experiencing increased
competition from companies and carriers, including competitive
access providers, that construct and operate their own
communications systems and networks, as well as from companies
that resell the telecommunications systems and networks of
underlying carriers. Over 105 telecommunications providers have
received approval from the Department of Public Utility Control
("DPUC") to offer competitive intrastate long-distance services.
In addition, over 45 companies have filed for initial
certificates of public convenience and necessity and are awaiting
DPUC approval. The implementation of intrastate equal access for
all dual preferred interexchange carrier capable switches will be
completed by December 1996.
To provide competitive products, Wireline has realigned its
discount and rate structures to provide Connecticut customers
with SNET All Distance, a seamless toll service product line
which includes discount calling plans that combine intrastate,
interstate and international calling. The migration of customers
to these bundled calling plans will continue to place downward
pressure on intrastate toll rates and revenues, while at the same
time, promote growth for interstate and international toll
services.
- 14 -
Form 10-Q - Part I Southern New England Telecommunications Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Millions, Except Per Share Amounts)
Concerning competition for local exchange service, eight
telecommunications providers have been granted a certificate of
public convenience and necessity for local service and four
additional applications are pending before the DPUC. The effect
of increased competition on local service revenues cannot be
predicted at this time. While some customers may purchase
services from competitors, the Telephone Company expects that
most competitors will utilize its network and that increased
network access revenues will offset a portion of local service
revenues lost to competition. Local service competition began in
1996.
Regulatory Matters
State Regulatory Initiatives
In March 1996, the DPUC issued a decision that replaces
traditional rate of return regulation with alternative (price
based) regulation to be employed during the transition to full
competition. The decision contains the following major items:
price cap regulation for non-competitive services; a five year
monitoring period on financial results; and a price cap formula
on services categorized as non-competitive (utilizing an
inflation factor, a 5% productivity offset, a narrowly defined
exogenous factor, a potential service quality adjustment and
various pricing bands). In addition, basic local service rates
for residence, business and coin may not be raised above current
levels until January 1, 1998, at which time the price cap formula
becomes effective for these services, unless they have been
reclassified into the emerging competitive or competitive
categories. The decision also authorized a rate of return on the
Telephone Company's common equity of 11.90% during the monitoring
period. The impact of these changes on the Telephone Company's
operating results will depend on the timing of classifying the
various products and services into categories (non-competitive,
emerging competitive and competitive) for pricing (banding)
changes. As of March 31, 1996, the Telephone Company's rate of
return was below the 11.90% threshold.
Federal Regulatory Initiatives
On January 17, 1996, the Telephone Company filed with the FCC a
petition requesting authorization to provide interstate and
international telecommunications services under non-dominant
regulation. If approved, the Telephone Company would provide the
service rather than SNET America, Inc., a separate subsidiary of
the Corporation.
On February 1, 1996, the U.S. Congress passed legislation that
created broad changes in telecommunications law and regulation
nationwide. The majority of the federal legislation is
consistent with legislation enacted by the State of Connecticut
in 1994. Certain provisions of the federal legislation relating
to the prices the Telephone Company charges competitors for
certain services (those that are below cost today based on their
end use prices) could, however, have the effect of producing
below cost prices, therefore necessitating the development of a
significantly larger state universal service fund than previously
anticipated. The legislation allows local exchange carriers
("LECs") with less than 2% of the nation's access lines,
including the Telephone Company, to petition the DPUC for a
suspension or modification of certain requirements under the
federal law that apply specifically to LECs. The DPUC may grant
a suspension or modification of the requirements if such action
is consistent with the public interest and avoids a significant
adverse economic impact on users or a requirement that is unduly
economically burdensome or technically infeasible. The Telephone
Company filed such a petition with the DPUC on March 15, 1996.
- 15 -
Form 10-Q - Part I & II Southern New England Telecommunications Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Millions, Except Per Share Amounts)
On April 2, 1996, the Telephone Company filed its 1996 annual
interstate access tariff under price cap regulation to become
effective July 1, 1996. The Telephone Company again 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 $.6
for the period July 1, 1996 to June 30, 1997. Management expects
this decrease to be offset by increased demand. The price cap
interstate rate of return of 11.58% for calendar year 1995 was
also reported to the FCC.
WIRELESS
In April 1996, the U.S. Court of Appeals upheld the FCC's
determination that the Corporation's cellular business should be
deregulated. This decision is consistent with the recent federal
legislation encouraging competition.
INFORMATION AND ENTERTAINMENT
On January 25, 1996, SNET Personal Vision, Inc., a newly formed
subsidiary, filed an application seeking approval from the DPUC
for a certificate of public convenience and necessity to operate
a community antenna television system that would serve the entire
state of Connecticut. The Corporation decided to withdraw from
video dial tone coincident with filing its cable franchise
application. A decision is anticipated by the end of the third
quarter of 1996 with service beginning in January 1997.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There were no material developments in the first
quarter of 1996.
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K
On January 22, 1996, the Corporation and the
Telephone Company filed, separately, reports on
Form 8-K, dated January 22, 1996, announcing the
Corporation's 1995 financial results.
On April 23, 1996, the Corporation and the
Telephone Company filed, separately, reports on
Form 8-K, dated April 23, 1996 announcing the
Corporation's financial results for the first
quarter of 1996.
- 16 -
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 7, 1996
/s/ Donald R. Shassian
Donald R. Shassian
Senior Vice President and Chief Financial Officer
- 17 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
1ST QUARTER 1996 FORM 10-Q OF SOUTHERN NEW ENGLAND TELECOMMUNICATIONS
CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 16,700
<SECURITIES> 0
<RECEIVABLES> 375,200
<ALLOWANCES> 34,200
<INVENTORY> 23,900
<CURRENT-ASSETS> 534,900
<PP&E> 4,564,300
<DEPRECIATION> 3,027,800
<TOTAL-ASSETS> 2,695,500
<CURRENT-LIABILITIES> 684,700
<BONDS> 1,174,300
0
0
<COMMON> 68,000
<OTHER-SE> 317,300
<TOTAL-LIABILITY-AND-EQUITY> 2,695,500
<SALES> 0
<TOTAL-REVENUES> 474,000
<CGS> 0
<TOTAL-COSTS> 371,900
<OTHER-EXPENSES> (3,700)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,600
<INCOME-PRETAX> 83,200
<INCOME-TAX> 31,000
<INCOME-CONTINUING> 52,200
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 52,200
<EPS-PRIMARY> .80
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