UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 1997.
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: 65,943,555 shares
outstanding as of July 31, 1997
- 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, which are normal
and recurring in nature, necessary for fair presentation for each
period shown. The 1996 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 1996 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 For the Six
Months Ended Months Ended
June 30, June 30,
Dollars in Millions, Except 1997 1996 1997 1996
Per Share Amounts
Revenues and Sales $ 501.6 $ 487.8 $ 984.3 $ 961.8
Costs and Expenses
Operating and maintenance 295.3 285.9 576.9 554.6
Depreciation and amortization 94.4 88.2 186.0 177.4
Taxes other than income 13.4 13.5 26.5 27.5
Total Costs and Expenses 403.1 387.6 789.4 759.5
Operating Income 98.5 100.2 194.9 202.3
Interest expense 22.4 22.7 45.1 45.3
Other income, net 3.9 2.1 4.0 5.8
Income Before Income Taxes 80.0 79.6 153.8 162.8
Income taxes 30.0 29.1 57.7 60.1
Income Before Extraordinary Charge 50.0 50.5 96.1 102.7
Extraordinary charge, net of tax - - (3.7) -
Net Income $ 50.0 $ 50.5 $ 92.4 $ 102.7
Weighted Average Common Shares
Outstanding (in thousands) 65,999 65,626 65,922 65,505
Earnings Per Share
Income before extraordinary charge $ .76 $ .77 $ 1.46 $ 1.57
Extraordinary charge, net of tax - - (.06) -
Earnings Per Share $ .76 $ .77 $ 1.40 $ 1.57
Dividends Declared Per Share $ .44 $ .44 $ .88 $ .88
The accompanying notes are an integral part of these financial statements.
- 3 -
Form 10-Q - Part I Southern New England Telecommunications Corporation
CONDENSED, CONSOLIDATED BALANCE SHEETS
Dollars in Millions, Except Per Share June 30, 1997 December 31, 1996
Amounts
(Unaudited)
Assets
Cash and temporary cash investments $ 7.7 $ 9.0
Accounts receivable, net of allowance
for uncollectibles of $27.3 and
$27.4, respectively 312.6 323.3
Materials, supplies and inventories 35.8 27.4
Prepaid publishing 33.6 35.2
Deferred income taxes and other current assets 100.2 73.1
Total Current Assets 489.9 468.0
Property, plant and equipment, at cost 4,808.1 4,707.3
Accumulated depreciation (3,183.7) (3,110.3)
Property, plant and equipment, net 1,624.4 1,597.0
Intangible assets, net 392.2 400.3
Deferred income taxes, leases and other assets 210.9 205.7
Total Assets $2,717.4 $2,671.0
Liabilities and Shareholders' Equity
Accounts payable and accrued expenses $ 237.2 $ 252.0
Short-term debt 201.2 215.2
Advance billings and customer deposits 62.9 60.9
Other current liabilities 142.2 138.9
Total Current Liabilities 643.5 667.0
Long-term debt 1,180.3 1,169.7
Accrued postretirement benefit obligation 285.3 288.9
Other liabilities and deferred credits 93.7 82.4
Total Liabilities 2,202.8 2,208.0
Common Stock; $1.00 par value; 300,000,000
shares authorized; 68,700,661 and
68,407,669 issued, respectively 68.7 68.4
Proceeds in excess of par value 613.1 602.8
Retained deficit (20.9) (55.7)
Treasury stock; 2,758,512 shares, at cost (104.7) (104.7)
Unearned compensation related to ESOP (41.6) (47.8)
Total Shareholders' Equity 514.6 463.0
Total Liabilities and Shareholders' Equity $2,717.4 $2,671.0
The accompanying notes are an integral part of these financial statements.
- 4 -
Form 10-Q - Part I Southern New England Telecommunications Corporation
CONDENSED, CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY
(Unaudited)
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
Dollars in Millions 1997 1996 1997 1996
Common Stock, Par Value
Balance at Beginning of Period $ 68.6 $ 68.0 $ 68.4 $ 67.9
Common shares issued, at market:
Dividend reinvestment plan .1 .1 .2 .2
Savings and incentive plans - .1 .1 .1
Balance at End of Period $ 68.7 $ 68.2 $ 68.7 $ 68.2
Proceeds in Excess of Par Value
Balance at Beginning of Period $ 608.2 $ 674.3 $ 602.8 $ 697.9
Dividends declared - (28.8) - (57.5)
Common shares issued, at market:
Dividend reinvestment plan 3.4 3.7 6.8 7.2
Savings and incentive plans 1.5 1.5 3.5 3.1
Balance at End of Period $ 613.1 $ 650.7 $ 613.1 $ 650.7
Retained Deficit
Balance at Beginning of Period $ (42.1) $(197.0) $ (55.7) $ (249.5)
Net income 50.0 50.5 92.4 102.7
Dividends declared (29.0) - (58.0) -
Tax benefit of dividends declared
on unallocated shares held in ESOP .2 .2 .4 .5
Balance at End of Period $ (20.9) $(146.3) $ (20.9) $ (146.3)
Treasury Stock
Balance at Beginning and End
of Period $ (104.7) $(104.7) $ (104.7) $ (104.7)
Unearned Compensation Related
To Employee Stock Ownership Plan
Balance at Beginning of Period $ (44.4) $ (55.3) $ (47.8) $ (58.7)
Reduction of ESOP debt - - 8.1 7.6
ESOP earned compensation accrual 2.8 3.6 (1.9) (.6)
Balance at End of Period $ (41.6) $ (51.7) $ (41.6) $ (51.7)
Total Shareholders' Equity $ 514.6 $ 416.2 $ 514.6 $ 416.2
The accompanying notes are an integral part of these financial statements.
- 5 -
Form 10-Q - Part I Southern New England Telecommunications Corporation
CONDENSED, CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months Ended
June 30,
Dollars in Millions 1997 1996
Operating Activities
Net income $ 92.4 $ 102.7
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 186.0 177.4
Extraordinary charge, net of tax 3.7 -
Restructuring payments (8.5) (43.5)
Change in operating assets and
liabilities, net (43.4) (31.3)
Other, net 15.6 23.1
Net Cash Provided by Operating Activities 245.8 228.4
Investing Activities
Cash expended for capital additions (205.8) (152.5)
Other, net 17.3 17.6
Net Cash Used by Investing Activities (188.5) (134.9)
Financing Activities
Proceeds from long-term debt 100.0 -
Repayments of long-term debt (86.6) (9.1)
Net payments of short-term debt (14.6) (33.7)
Cash dividends paid (50.8) (50.0)
Other, net (6.6) -
Net Cash Used by Financing Activities (58.6) (92.8)
(Decrease) Increase in Cash and
Temporary Cash Investments (1.3) .7
Cash and temporary cash investments at
beginning of period 9.0 11.1
Cash and Temporary Cash Investments at
End of Period $ 7.7 $ 11.8
Income Taxes Paid $ 53.1 $ 42.5
Interest Paid, net of amounts capitalized $ 45.1 $ 45.8
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 - The Corporation will adopt Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings
Per Share," at year-end 1997. SFAS No. 128 establishes
standards for computing and presenting earnings per share.
Management does not expect the adoption of the standard to have
a material impact on the earnings per share calculation.
Note 2: Supplemental Financial Information
Operating Cash Flow(1) - The following unaudited financial data on
the Corporation's product groups is not required by generally
accepted accounting principles and is provided for informational
purposes only:
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
1997 1996 1997 1996
Wireline $149.9 $146.6 $293.8 $300.9
Wireless 15.5 10.2 28.5 12.2
Information and Entertainment 23.5 28.3 48.8 55.0
Other(2) 4.0 3.3 9.8 11.6
Total $192.9 $188.4 $380.9 $379.7
(1) Represents operating income before depreciation and amortization.
Operating cash flow is not a generally accepted accounting
principle measurement.
(2) Includes SNET Real Estate, Inc. and holding company operations.
Note 3: Long-term Debt
On February 18, 1997, the Corporation redeemed $80.0 of 8.70%
medium-term notes due 2031, which were satisfied with the
issuance of short-term debt. The early extinguishment of debt
resulted in an extraordinary charge of $3.7, net of tax benefits
of $2.7.
On February 4, 1997, the Corporation issued $100.0 of 6.50%
medium-term notes due 2002. The issuance replaced a portion of
short-term debt related to the cellular acquisitions of July
1995.
Note 4: Woodbury Telephone Company Acquisition
On July 30, 1997, the Corporation completed its acquisition of
the remaining 63.5% of Woodbury Telephone Company ("Woodbury")
which it did not already own by issuing approximately 528,000
shares of SNET stock to Woodbury's common shareholders. The
acquisition was completed after receiving approval from the
Department of Public Utility Control ("DPUC") on July 23, 1997.
- 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)
Note 5: Subsequent Event
On July 31, 1997, the Second Circuit Court of Appeals issued a decision
upholding an August 28, 1995 judgment from the U.S. District Court
finding that the Corporation and the Telephone Company had violated
certain sections of the Fair Labor Standards Act and were liable for
$9.7 in back pay and liquidating damages plus interest of approximately
5.9% from the date of the District Court judgment. The Corporation
and the Telephone Company are currently evaluating whether to appeal
the Second Circuit decision. In the second quarter of 1995, the
Telephone Company recorded a liability of $11.0 as its anticipated
cost of total damages for this matter, which was charged to operating
and maintenance expense.
- 8 -
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 telephone related services, premium services and
equipment sales; wireless consists of cellular and paging
services and cellular equipment sales; and information and
entertainment includes publishing, internet and cable television
services. Other activities, such as real estate and holding
company operations, are included with eliminations and other
sales.
Comparison of the periods ended June 30, 1997 vs. the periods
ended June 30, 1996
Operating Results
Income before extraordinary charge was $50.0, or $.76 per share,
and $96.1, or $1.46 per share, for the three and six months
ended June 30, 1997, respectively. The corresponding periods in
1996 generated net income of $50.5, or $.77 per share, and
$102.7, or $1.57 per share. The reduced results were primarily
due to increased revenues being more than offset by the
combination of revenue decreases in intrastate toll as a result
of competition, higher depreciation expense due to increased
investment in physical plant, and expenses relating to the new
cable offering.
Revenues and Sales
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
1997 1996 1997 1996
Wireline:
Local service $175.4 $168.5 $344.8 $333.2
Network access 107.4 97.1 210.0 194.1
Intrastate toll 52.2 64.6 105.6 131.0
Interstate and 34.4 24.4 64.9 42.4
Premium services and 27.7 24.6 55.4 50.2
Other revenues 10.9 12.4 23.3 26.8
Total Wireline 408.0 391.6 804.0 777.7
Wireless:
Cellular service 54.8 52.5 101.8 96.3
Cellular equipment sales 2.2 2.3 4.4 4.5
Paging 1.6 1.6 3.3 3.0
Total Wireless 58.6 56.4 109.5 103.8
Information and Entertainment 47.0 46.1 93.7 92.1
Eliminations and Other Sales (12.0) (6.3) (22.9) (11.8)
Revenues and Sales $501.6 $487.8 $984.3 $961.8
Wireline - Local service revenues, derived from providing local
exchange, advanced calling features and local private line
services, increased $6.9, or 4.1%, and $11.6, or 3.5%, for the
three and six month periods, respectively. The increase was due
primarily to continued strong growth of 4.3% in access lines in
service to approximately 2,205,000 lines as of June 30, 1997.
This increase included significant growth in Centrex business
lines and second residential lines. Local service revenues also
increased due to growth in vertical services, primarily
SmartLink[R] advanced calling features, including
- 9 -
Form 10-Q - Part I Southern New England Telecommunications Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Millions, Except Per Share Amounts)
Comparison of the periods ended June 30, 1997 vs. the periods
ended June 30, 1996
Caller ID, missed call dialing, call blocking and call tracing.
Additionally, payphone revenues increased due to compensation
received as part of the pay telephone reclassification and
compensation provisions of the Federal Telecommunications Act of
1996 ("Act") [see Regulatory Matters]. The increase in local
service revenues was tempered by a decrease in revenues
recognized from wireless carriers, due to a decrease in the
generic wireless tariff in accordance with the Act. Management
expects increased competition to negatively impact local service
revenues as other telecommunications providers offer local
service and as the DPUC mandated balloting process commences in
March 1998 [see Competition].
Network access revenues, generated primarily from interstate and
intrastate services, increased $10.3, or 10.6%, and $15.9, or
8.2%, for the three and six month periods, respectively.
Intrastate access revenues increased $5.0, or 78.2%, for the
quarter, and $8.3, or 66.0% for the six month period, due
primarily to an increase in intrastate minutes of use by
competitive providers of intrastate long-distance service.
Interstate access revenues increased $5.3, or 5.9%, for the
quarter, and $7.6, or 4.2% for the six month period, due
primarily to growth in interstate minutes of use of
approximately 6% and 5%, respectively, and an increase in access
lines in service, discussed previously. Partially offsetting
the impact of the increase in minutes of use were lower rates
due to a decrease in tariff rates in accordance with the
Telephone Company's July 1996 Federal Communications Commission
("FCC") filing under price cap regulation.
Intrastate toll revenues, which include primarily revenues from
toll and WATS services, decreased $12.4, or 19.2%, and $25.4, or
19.4%, for the three and six month periods, respectively. The
decreases were due primarily to 13.2% and 14.6% reductions in
toll message volume, respectively, as well as reduced intrastate
toll rates. Lower toll volume was due primarily to the highly
competitive toll market as a result of full intrastate equal
access. The decline in rates was attributable to customer
migration to several discount calling plans that provide
competitive options to business and residence customers.
Increasing competition and the offering of competitive discount
calling plans will continue to place downward pressure on
intrastate toll revenues.
Interstate and international toll revenues increased $10.0 for
the quarter and $22.5 for the six month period due to strong
growth in the customer base. The growth is primarily a result
of customer migration to the SNET All Distance[R] product line
which allows Connecticut customers to package and discount their
entire long-distance calling in one plan.
Wireless - Cellular service revenues increased $2.3, or 4.4%, and
$5.5, or 5.7%, for the three and six month periods,
respectively, due mainly to growth of 15.9% in the subscriber
base. This growth was offset partially by lower roaming
revenues, as lower contracted roaming rates were passed along to
consumers.
Information and Entertainment - Growth in internet sales was the
primary contributor to the increase in information and
entertainment sales. Publishing revenues remained steady
despite an increasingly competitive environment.
- 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 the periods ended June 30, 1997 vs. the periods
ended June 30, 1996
Costs and Expenses
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
1997 1996 1997 1996
Operating costs $295.3 $285.9 $576.9 $554.6
Depreciation and amortization 94.4 88.2 186.0 177.4
Taxes other than income 13.4 13.5 26.5 27.5
Total Costs and Expenses $403.1 $387.6 $789.4 $759.5
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 $9.4, or 3.3%, for the quarter,
and $22.3, or 4.0%, for the six month period, including
approximately $3 and $6, respectively, of reprogramming costs
associated with computer recognition of the year 2000.
Wireline - For the three and six month periods, wireline
operating costs increased $13.1, or 5.6%, and $34.6, or 7.7%,
respectively, due primarily to an increase in the direct costs
of providing interstate and international toll services. Also
contributing to the increase were higher employee-related
expenses, mainly as a result of continuing higher service
demands, and licensed software fees for network switching.
Wireless - For the three and six month periods, wireless
operating costs decreased $3.2, or 7.1%, and $10.8, or 12.0%,
respectively. The decrease for the six month period is due
primarily to lower customer acquisition costs, including
distribution and marketing costs. The cost to complete calls to
landline telephones also decreased, as a result of the reduced
generic wireless tariff discussed previously. Additionally,
wireless experienced lower expenses related to bad debt,
contract services and fraud. The primary contributors to the
decrease for the quarter were lower fraud and bad debt expenses.
Information and Entertainment - Operating costs for information
and entertainment increased $5.7, or 32.0% for the quarter, and
$7.7, or 20.8% for the six month period. The increase was
primarily driven by costs associated with the cable offering.
Additionally, providing internet services to a larger customer
base contributed to the increase. The Corporation launched SNET
americast, its cable television service, in March 1997 and
expects to offer service to approximately one third of
Connecticut's households by the end of 1998. Management expects
information and entertainment operating costs to continually
increase as the service is deployed.
Depreciation and amortization - Depreciation and amortization
expense increased $6.2, or 7.0%, and $8.6, or 4.8%, for the
three and six month periods, respectively, due primarily to an
increase in the average depreciable telecommunications property,
plant and equipment.
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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 the periods ended June 30, 1997 vs. the periods
ended June 30, 1996
Interest Expense
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
1997 1996 1997 1996
Interest expense $22.4 $22.7 $45.1 $45.3
Interest expense was relatively flat, as savings from the
redemption of $80.0 of medium-term notes with an interest rate
of 8.70% on February 18, 1997 was substantially offset by
interest on $100.0 of 6.50% medium-term notes issued February 4,
1997.
Other Income, net
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
1997 1996 1997 1996
Other income, net $3.9 $2.1 $4.0 $5.8
The quarterly increase in other income, net was due primarily to
an increase in gains on the sale of assets, offset partially by
greater minority interest losses. The decrease for the six
month period was due primarily to greater minority interest
losses and lower interest income, offset partially by an
increase in gains on the sale of assets.
Income Taxes
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
1997 1996 1997 1996
Income taxes $30.0 $29.1 $57.7 $60.1
The combined federal and state effective tax rate for the
quarter was 37.5% compared with 36.6% for the same period in
1996. The tax rate for the six month period increased to 37.5%
from 36.9% for the respective 1996 period.
Extraordinary Charge
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
1997 1996 1997 1996
Extraordinary charge, net of tax - - $(3.7) -
On February 18, 1997, the Telephone Company redeemed $80.0 of
8.70% medium-term notes due 2031. The early extinguishment of
debt resulted in an extraordinary charge of $3.7 after-tax, or
$.06 per share.
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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 $245.8
during the six months ended June 30, 1997 as compared with
$228.4 during the six months ended June 30, 1996. The increase
was primarily the result of lower restructuring payments.
Capital expenditures were the primary use of corporate funds.
On February 4, 1997, the Corporation issued $100.0 of 6.50%
medium-term notes due 2002. The issuance replaced a portion of
short-term debt related to the cellular acquisitions of July
1995. With this issuance, the Corporation's unissued, unsecured
debt securities registered with the SEC decreased to $125.0.
On February 18, 1997, the Corporation redeemed $80.0 of 8.70%
medium-term notes as discussed previously.
The Corporation's ratio of debt to total capitalization
decreased to 72.9% at June 30, 1997 compared with 74.9% at year-
end 1996. For the second quarter of 1997, the Corporation's
Board of Directors declared a dividend of $.44 per share.
Management believes that the Corporation has sufficient internal
and external resources to finance the anticipated requirements
of business development. Capital additions and dividends are
expected to be funded primarily with cash from operations during
the remainder of 1997. The Corporation also has access to
external resources including lines of credit and long-term shelf
registration commitments.
WIRELINE
Competition
The Telephone Company faces a fully competitive environment with
respect to telecommunications services in Connecticut. Wireline
competitors include interexchange carriers, competitive access
providers and competitive local exchange carriers ("CLEC"). In
the long distance market, competition has intensified since the
full implementation of intrastate equal access.
Local service competition is expected to grow significantly,
particularly with the DPUC mandated balloting process commencing
in March 1998 (see "State Regulatory Initiatives"). Although the
financial impact cannot be predicted at this time, based on
existing state and federal regulations, the Telephone Company
expects that many competitors will resell the Telephone Company's
network and that increased network access revenues will offset a
significant portion of local service revenues lost to
competition.
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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)
Regulatory Matters
Federal Regulatory Initiatives
On July 18, 1997, the Eighth Circuit Court of Appeals ("Court")
issued a decision on the appeal of the FCC's First Report and
Order. The decision was consistent with the stay issued in
October 1996, which delayed the effectiveness of the pricing
provisions and the rule allowing competitors to "pick and choose"
isolated terms out of negotiated interconnection agreements. The
decision struck down key provisions of the Order by vacating the
Order's pricing and "pick and choose" rules and certain terms
under which potential competitors can lease portions of the
Telephone Company's network. Other provisions, such as the
requirement to unbundle operating support systems, operator
services and vertical switching features, were upheld by the
Court. The Court's decision overall is a strong endorsement of
Congress' intention that the states, not the FCC, play a primary
role in implementing local telecommunications competition. The
decision will allow the Corporation to implement local
competition on the course mapped by the DPUC and the state
legislature.
In May 1997, the FCC issued three major orders. The FCC released
its Report and Order on Universal Service on May 8, 1997. The
Order revised the current universal service programs which ensure
availability of local exchange service to low income customers
and high cost areas. It also establishes new federal support for
telecommunications services provided to schools, libraries, and
rural healthcare facilities. The federal universal service
mechanisms are to be funded, beginning January 1, 1998, by an
assessment on the end user revenues of all telecommunications
service providers. Funding for the revised programs supporting
high cost and low income areas will be from interstate end user
revenues, while funding for the new federal support services
provided to schools, libraries, and rural healthcare facilities
will come from both interstate and intrastate end user revenues.
The Order is currently on appeal in the Fifth Circuit Court of
Appeals. The Telephone Company has filed to intervene in the
appeal.
On May 16, 1997, the FCC released its First Report and Order
regarding access charge reform. This Order mandates changes to
the way the Telephone Company recovers interstate access charges
from interstate toll providers, including SNET America, Inc.
Specifically, the Order establishes flat-rated per line access
charges and reduces usage based charges. This Order establishes
a prescriptive mechanism to ensure that interstate access charges
will be driven toward the levels that competition would be
expected to produce. Management expects this order to pressure
earnings in the second half of 1997 and forward, but is currently
unable to quantify the impact. The Order is currently on
appeal in the 8th Circuit Court of Appeals. The Telephone Company
has intervened in the appeal. The FCC is also expected to
release a Pricing Flexibility Order in the Fall of 1997. This
order will establish a market-based approach to pricing.
On May 21, 1997, the FCC released its Price Cap Order revising its
price cap plan for regulating Incumbent Local Exchange Carriers
("ILECs"). This Order establishes a single productivity factor of
6.5% and eliminates the sharing requirements of the prior rules.
The Telephone Company filed its 1997 annual interstate access
price cap revisions in April 1997 and filed its proposed rate
changes on June 16, 1997 for effect July 1, 1997. These filings
adjusted interstate access rates for an experienced rate of inflation,
the FCC's new productivity target and exogenous cost changes. The
FCC also required all price cap ILECs, including the Telephone
Company, to adjust their Price Cap Indices, effective July 1, 1997,
to reflect the 6.5% productivity factor retroactively for the
1996-1997 tariff year. The filings are anticipated to decrease
interstate network access revenues by approximately $28 for the period
- 14 -
Form 10-Q - Part I Southern New England Telecommunications Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Millions, Except Per Share Amounts)
July 1, 1997 to June 30, 1998. The Company expects that this
decrease will be partially offset by increased demand. The Order
is currently on appeal in the District of Columbia Circuit Court
of Appeals. The Telephone Company has intervened in the appeal.
In accordance with the Act, the FCC requires ILECs, including the
Telephone Company, to implement a long term solution for
portability of telephone numbers. The Telephone Company is
required to construct and operate a system that will permit end
user customers to retain their telephone numbers when they elect
a different carrier for local service. The system is to be
operational in mid-1998 for a large percentage of the Telephone
Company's access lines. The FCC, however, has not yet decided on
a method to recover the investment and operating costs relating
to the number portability system. Until such decision on
recovery is made, management is not able to estimate the
financial impact on the Corporation.
On September 20, 1996, the FCC released its Report and Order on
the Implementation of the Pay Telephone Reclassification and
Compensation Provisions of the Telecommunication Act of 1996.
The order eliminates existing regulatory constraints which
inhibited competition in the payphone marketplace; establishes a
transition period for competitive pricing to further develop in
the marketplace; establishes mechanisms for the full and fair
compensation for all calls to payphone providers; eliminates all
subsidies which currently exist in interstate access rates;
orders that pay telephone investment be removed from the ILECOs
interstate ratebase; and reclassifies pay telephone instruments
as customer premise equipment. Under the order, all ILECs,
including the Telephone Company, were required to unbundle
payphone instruments and file tariffs on payphone service lines
by January 15, 1997 and make them available on a non-discriminatory
basis to Payphone Service Providers by April 15, 1997. The Corporation
has filed with the FCC the necessary revisions to its interstate
access charges and has filed with the DPUC new retail and
wholesale Pay Telephone Access Line Service offerings in
accordance with the FCC's order.
State Regulatory Initiatives
On June 25, 1997, the DPUC issued a final decision allowing the
Corporation to establish separate wholesale and retail
affiliates. Under the decision, the new retail organization, a
CLEC, will compete under the same regulations as all other retail
telecommunications providers in the state and will bring
innovative packages of products and services to the consumer.
The wholesale organization, an ILEC, will provide network
services and functionality to retail providers, including the
Corporation's new CLEC, on neutral terms. The ILEC will be
treated as a public service company, and will continue to be
subject to regulation. The directory publishing operations will
also be structured as a separate subsidiary of the Corporation.
As part of the decision, however, the DPUC mandated that
Connecticut customers must choose their local exchange provider
via a balloting process to commence in March 1998. Customers who
do not choose a carrier will be assigned a CLEC based on the
proportion of votes in a local service area. The balloting
process, as well as the changes associated with the restructure,
are expected to be completed by July 1, 1998. The specific
details of the balloting process will be addressed in further
technical discussions among the participants and the DPUC.
On March 18, 1997, SNET America, Inc. ("SAI"), the Corporate
interstate carrier, filed an application with the DPUC to provide
local and intrastate toll services throughout Connecticut. The
DPUC issued a final decision granting approval on June 25, 1997.
This grants SAI the authority to operate as a CLEC in the state
of Connecticut and to provide competitive retail services to end
user customers with the same regulatory and pricing flexibility
as all other CLECs in the state.
- 15 -
Form 10-Q - Part I Southern New England Telecommunications Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Millions, Except Per Share Amounts)
In compliance with the Federal Telecommunications Act of 1996,
the Telephone Company has filed with the DPUC numerous cost
studies supporting its proposed wholesale (i.e., resale) and
unbundled rates for interconnection services. On March 24, 1997,
the DPUC issued a final decision setting a uniform 17.8%
discount rate off the Telephone Company's retail prices for
telecommunications services sold to CLECs. On April 23, 1997,
the DPUC issued a final decision addressing the proposal for
allocation of HFC costs to video and telephony and the Telephone
Company's costs and rates associated with unbundled loops, ports,
multiplexing, and inter-wire center transport. In this decision,
the DPUC agreed to the Telephone Company's proposed 50/50
allocation for video and telephony. In addition, the DPUC
approved the cost studies based on Total Service Long Run
Incremental Cost (TSLRIC). The Telephone Company submitted a
revised tariff for unbundled loops, ports, multiplexing, and
inter-wire center transport reflecting the findings in the
decision.
On July 23, 1997, the DPUC approved the acquisition of Woodbury
Telephone Company by the Corporation. The Corporation
subsequently completed its acquisition of the remaining 63.5% of
Woodbury which it did not already own by issuing approximately
528,000 shares of SNET stock to Woodbury's common shareholders.
The dilutive effect of the share issuance will be immaterial to
the earnings per share of the Corporation.
- 16 -
Form 10-Q - Part II Southern New England Telecommunications Corporation
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There were no material developments in the second
quarter of 1997.
Item 4. Submission of Matters to a Vote of Security Holders
On May 14, 1997, the Corporation held its Annual Meeting
of Shareholders ("Annual Meeting").
The following persons, having received the FOR votes set
opposite their respective names, constituting in excess
of a majority of the votes cast at the Annual Meeting
for the election of Directors, were duly elected Class
II Directors for a term of three years:
(a) Directors For Withheld
Zoe Baird 48,520,582 2,682,993
Robert L. Bennett 50,162,273 1,044,004
Joyce M. Roche 49,763,726 1,442,551
The terms of office of the following Directors continued
after the Annual Meeting: William F. Andrews, Richard
H. Ayers, Dr. Barry M. Bloom, Frank J. Connor, William
R. Fenoglio, Dr. Claire L. Gaudiani, Ira D. Hall, Dr.
Burton G. Malkiel, Daniel J. Miglio, Frank R. O'Keefe, Jr..
(b) Shareholders ratified the appointment of Coopers &
Lybrand, L.L.P., as independent public accountants, to
examine the consolidated financial statements of the
Corporation for the current year ending December 31,
1997. The vote was 50,160,158 shares FOR and 553,649
shares AGAINST, with 494,804 shares abstaining.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit
(27) Financial Data Schedule
(b) Reports on Form 8-K
On April 23, 1997, the Corporation and the Telephone
Company filed, separately, reports on Form 8-K, dated
April 23, 1997 announcing the Corporation's financial
results for the first quarter of 1997.
On June 25, 1997, the Corporation and the Telephone
Company filed, separately, reports on Form 8-K, dated
June 25, 1997 regarding the DPUC's final decision
allowing the Corporation to structure its wireline
business as separate retail and wholesale subsidiaries.
On July 24, 1997, the Corporation and the Telephone
Company filed, separately, reports on Form 8-K, dated
July 24, 1997 announcing the Corporation's financial
results for the second quarter of 1997.
- 17 -
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
August 7, 1997
/s/ Donald R. Shassian
Donald R. Shassian
Senior Vice President and Chief Financial Officer
- 18 -
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
2ND QUARTER 1997 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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<S> <C>
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
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<SECURITIES> 0
<RECEIVABLES> 339,900
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<INCOME-PRETAX> 153,800
<INCOME-TAX> 57,700
<INCOME-CONTINUING> 96,100
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<EXTRAORDINARY> (3,700)
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