SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 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 March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-1049
BELLSOUTH TELECOMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Georgia 58-0436120
(State of Incorporation) (I.R.S. Employer
Identification Number)
675 West Peachtree Street, N. E., Atlanta, Georgia 30375
(Address of principal executive offices) (Zip Code)
Registrant's telephone number 404 529-8611
THE REGISTRANT, A WHOLLY-OWNED SUBSIDIARY OF BELLSOUTH CORPORATION,
MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND
(b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH REDUCED
DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTION H(2).
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No ___
Table of Contents
Item
Page
Part I
1. Financial Statements 3
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Selected Operating Data 8
2. Management's Discussion and Analysis of
Results of Operations 10
Results of Operations 10
Volumes of Business 10
Operating Revenues 12
Operating Expenses 13
Other Income Statement Items 14
Regulatory Developments and Competition 14
Federal Developments 14
State Developments 15
Part II
6. Exhibits and Reports on Form 8-K 16
PART I -- FINANCIAL INFORMATION
BELLSOUTH TELECOMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(Unaudited)
(In Millions)
For the Three Months
Ended March 31,
1997 1996
Operating Revenues:
Local service $ 2,104 $ 1,930
Interstate access 917 909
Intrastate access 218 218
Toll 174 207
Other 392 391
Total Operating Revenues 3,805 3,655
Operating Expenses:
Cost of services and
products 1,205 1,260
Depreciation and
amortization 819 798
Selling, general and
administrative 630 604
Total Operating Expenses 2,654 2,662
Operating Income 1,151 993
Interest Expense 134 139
Other Income, net 2 11
Income Before Income Taxes 1,019 865
Provision for Income Taxes 386 326
Net Income $ 633 $ 539
Retained Earnings:
At beginning of period $ 870 $ 555
Add: Net Income 633 539
Deduct: Dividends declared (491) (382)
At end of period $ 1,012 $ 712
The accompanying notes are an integral part of these consolidated
financial statements.
BELLSOUTH TELECOMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(In Millions)
March 31, December 31,
1997 1996
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents $ 108 $ 100
Accounts receivable, net of allowance for
uncollectibles of $78 and $67 2,753 2,807
Material and supplies 299 327
Other current assets 391 355
Total Current Assets 3,551 3,589
Investments and Advances 306 297
Property, Plant and Equipment:
Property, Plant and Equipment 46,268 45,762
Accumulated Depreciation 27,613 27,023
Property, Plant and Equipment, net 18,655 18,739
Deferred Charges and Other Assets 490 413
Total Assets $ 23,002 $ 23,038
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Debt maturing within one year $ 1,039 $ 1,435
Accounts payable 1,316 1,126
Other current liabilities 2,247 2,194
Total Current Liabilities 4,602 4,755
Long-Term Debt 6,663 6,671
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 1,057 1,079
Unamortized investment tax credits 262 278
Other liabilities and deferred credits 2,023 2,004
Total Deferred Credits and Other
Liabilities 3,342 3,361
Shareholder's Equity:
Common stock, one share, no par value 7,383 7,381
Retained earnings 1,012 870
Total Shareholder's Equity 8,395 8,251
Total Liabilities and Shareholder's Equity $ 23,002 $ 23,038
The accompanying notes are an integral part of these consolidated
financial statements.
BELLSOUTH TELECOMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Millions)
For the Three Months
Ended March 31,
1997 1996
Cash Flows from Operating Activities:
Net income $ 633 $ 539
Adjustments to net income:
Depreciation 819 798
Provision for uncollectibles 42 32
Deferred income taxes and unamortized investment tax
credits (12) (14)
Net change in:
Accounts receivable and other current assets (34) 112
Accounts payable and other current liabilities 186 (238)
Deferred charges and other assets (78) (105)
Other liabilities and deferred credits 19 17
Other reconciling items, net (10) (61)
Net cash provided by operating activities 1,565 1,080
Cash Flows from Investing Activities:
Capital expenditures (699) (713)
Other investing activities, net (3) 5
Net cash used for investing activities (702) (708)
Cash Flows from Financing Activities:
Proceeds from short-term borrowings 2,809 3,917
Repayment of short-term borrowings (3,216) (4,524)
Repayment of long-term debt - (485)
Advances from parent and affiliates 67 172
Repayment of advances from parent and affiliates (71) (166)
Dividends paid to parent (444) (319)
Other financing activities, net - (20)
Net cash used for financing activities (855) (1,425)
Net Increase (Decrease) in Cash and Cash Equivalents 8 (1,053)
Cash and Cash Equivalents at Beginning of Period 100 1,084
Cash and Cash Equivalents at End of Period $ 108 $ 31
The accompanying notes are an integral part of these consolidated
financial statements.
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Millions)
(Unaudited)
Note A -- Preparation of Interim Financial Statements
The consolidated financial statements of BellSouth
Telecommunications, Inc. (BellSouth Telecommunications) have been
prepared in accordance with the rules and regulations of the
Securities and Exchange Commission (SEC). Certain amounts have
been reclassified from previous presentations. These consolidated
financial statements include estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities and the amounts of revenues and
expenses. Actual results could differ from those estimates. In
the opinion of BellSouth Telecommunications, these statements
include all adjustments necessary for a fair presentation of the
results of all interim periods reported herein. All adjustments
are of a normal recurring nature unless otherwise disclosed.
Certain information and footnote disclosures prepared in accordance
with generally accepted accounting principles have been either
condensed or omitted pursuant to SEC rules and regulations.
However, BellSouth Telecommunications believes that the disclosures
made are adequate for a fair presentation of results of operations,
financial position and cash flows. These consolidated financial
statements should be read in conjunction with the consolidated
financial statements and accompanying notes included in BellSouth
Telecommunications' latest annual report on Form 10-K. BellSouth
Telecommunications is a wholly-owned subsidiary of BellSouth
Corporation (BellSouth).
Note B -- Supplemental Cash Flow Information
For the Three Months
Ended March 31,
1997 1996
Cash Paid For:
Income taxes $ 30 $ 23
Interest $ 87 $ 116
BELLSOUTH TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Millions)
(Unaudited)
Note C -- Subsequent Event
In 1994, the South Carolina Public Service Commission ordered
BellSouth Telecommunications to refund approximately $29, plus
interest, based on an investigation of 1992 earnings. The
Commission postponed review of earnings in 1993 and 1994 pending
final resolution of the 1992 period. The order with respect to
the 1992 period was substantially affirmed by the South Carolina
Court of Common Pleas in October 1996 and BellSouth
Telecommunications began to pursue further review of the decision.
On April 29, 1997, BellSouth Telecommunications, the Commission and
other parties to the proceeding agreed on a settlement to claims of
alleged overearnings for the years 1992 through 1994. Under the
terms of the settlement, BellSouth Telecommunications will pay
approximately $72 to its customers. Accordingly, BellSouth
Telecommunications will record an after-tax charge of approximately
$47 in the second quarter of 1997 associated with the settlement.
BELLSOUTH TELECOMMUNICATIONS, INC.
SELECTED OPERATING DATA
(Unaudited)
Network Access Lines in Service at March 31 (Thousands)(a):
Percent Change
1997 vs. 1996 vs.
1997 1996 1995
By Type:
Residence 15,394 3.6% 3.5%
Business 6,854 7.6 7.9
Other 266 3.5 0.8
Total Access Lines 22,514 4.8 4.8
By State:
Florida 6,008 5.4 5.1
Georgia 3,840 6.0 6.2
Tennessee 2,583 4.4 4.6
North Carolina 2,256 5.7 5.2
Louisiana 2,211 3.5 3.6
Alabama 1,884 3.6 4.0
South Carolina 1,366 4.0 4.0
Mississippi 1,214 3.2 3.6
Kentucky 1,152 3.3 3.7
Total Access Lines 22,514 4.8 4.8
For the Three Percent Change for
Months Ended the Periods Ended
March 31, 1997 vs. 1996 vs.
1997 1996 1995
Access Minutes of Use
(Millions)(a)(b):
Interstate 17,721 6.4% 10.1%
Intrastate 5,552 8.4 13.0
Total Access Minutes of Use 23,273 6.9 10.8
Toll Messages (Millions)(a) 230 (18.1) (24.1)
(a) Prior period operating data are often revised at later dates
to reflect updated information. The above information reflects the
latest data available for the periods indicated.
(b) Minutes of Use are classified as either interstate or
intrastate based on the percentage interstate usage factor. This
factor is updated periodically.
BELLSOUTH TELECOMMUNICATIONS, INC.
SELECTED OPERATING DATA (Continued)
(Unaudited)
For the Three
Months Ended
March 31,
1997
Ratio of Earnings to Fixed Charges (c) 7.8
(c) For the purpose of this ratio: (i) earnings have been
calculated by adding income before income taxes, gross interest
expense and such portion of rental expense representative of the
interest factor on such rentals; (ii) fixed charges are comprised
of gross interest expense and such portion of rental expense
representative of the interest factor on such rentals.
At At
March 31, December 31,
1997 1996
Debt Ratio (d) 47.7% 49.4%
(d) This ratio is calculated by dividing the sum of debt maturing
within one year and long-term debt, net of unamortized debt
issuance costs, by the sum of shareholder's equity, debt maturing
within one year and long-term debt, net of unamortized debt
issuance costs.
BELLSOUTH TELECOMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS
(Dollars in Millions)
Management's Discussion and Analysis of Results of Operations
(MD&A) should be read in conjunction with MD&A in BellSouth
Telecommunications, Inc.'s (BellSouth Telecommunications)
latest annual report on Form 10-K.
BellSouth Telecommunications is a wholly-owned subsidiary of
BellSouth Corporation (BellSouth). BellSouth Telecommunications
serves, in the aggregate, approximately two-thirds of the
population and one-half of the territory within Alabama, Florida,
Georgia, Kentucky, Louisiana, Mississippi, North Carolina, South
Carolina and Tennessee. BellSouth Telecommunications primarily
provides local exchange and toll communications services within
geographic areas, called Local Access and Transport Areas (LATAs),
and provides network access services to enable interLATA and
intraLATA communications using the long-distance facilities of
interexchange carriers. Through subsidiaries, other
telecommunications services and products are provided primarily
within the nine-state BellSouth Telecommunications region.
Approximately 90% and 89% of BellSouth Telecommunications' Total
Operating Revenues for the three-month period ended March 31, 1997
and 1996, respectively, were from wireline services. Charges for
local, access and toll services for the three month period ended
March 31, 1997 accounted for approximately 62%, 33% and 5%,
respectively, of the wireline revenues discussed above. The
remainder of BellSouth Telecommunications' Total Operating Revenues
was derived principally from sales and maintenance of customer
premises equipment and other nonregulated services.
RESULTS OF OPERATIONS
For the Three
Months Ended
March 31,
1997 1996
Net Income $633 $539
For the three-month period ended March 31, 1997, Net Income
increased by $94 (17.4%) when compared to the same 1996 period. The
increase for the three-month period resulted primarily from
continued strong growth in key business volumes and expense savings
primarily attributable to employee reductions under BellSouth
Telecommunications' work force reduction plan initiated in 1995.
Volumes of Business
The total number of access lines in service as of March 31, 1997
increased by approximately 1,022,000 (4.8%) since March 31, 1996 to
22,514,000, consistent with a 4.8% rate of increase for the same
period a year ago. Business and residence access lines increased
by 7.6% and 3.6%, respectively, compared to growth rates of 7.9%
and 3.5% in the same 1996 period. The increase in residence lines
includes additional lines used by customers for home office
purposes, access to on-line computer services, children's phones
and other uses. The number of additional residence lines increased
by 309,000 (22.8%) to 1,662,000 and accounted for approximately
58.4% and 30.2% of the overall increase in residence access lines
and total access lines, respectively, since March 31, 1996. The
growth in all categories of access lines was primarily attributable
to continued economic improvement in the Southeast and successful
marketing programs.
Access minutes of use represent the volume of traffic carried by
interexchange carriers, both interstate and intrastate, using
BellSouth Telecommunications' local facilities. Total access
minutes of use increased by 1,494 million (6.9%)for the three-month
period ended March 31, 1997, compared to an increase of 10.8% for
the same 1996 period. The increase in access minutes of use was
primarily attributable to access line growth; promotions by the
interexchange carriers; and intraLATA toll competition, which has
the effect of increasing access minutes of use while reducing toll
messages carried over BellSouth Telecommunications' facilities.
The growth rate in total minutes of use continues to be negatively
impacted by competition and the migration of interexchange carriers
to categories of service (e.g., special access) that have a fixed
charge as opposed to a volume-driven charge and to high capacity
services.
Toll messages are comprised of Message Telecommunications Service
and Wide Area Telecommunications Service. For the three-month
period ended March 31, 1997, toll messages decreased by 51 million
(18.1%), compared to a decrease of 24.1% for the same 1996 period.
The decrease in 1997 is primarily attributable to the continuing
expansion of local area calling plans (LACPs) in Florida, Georgia
and North Carolina and also to increasing competition from
interexchange carriers in the intraLATA toll market. Historically,
the primary factor impacting toll message decline has been the
expansion of LACPs. However, as the planned expansion of
significant LACPs has neared completion, the impact of competition
has become and is expected to continue to be a more significant
factor in the toll message decline.
The expanded LACPs discussed above and future implementation of
other such plans in BellSouth Telecommunications' service region,
coupled with competition in the intraLATA toll market, will
adversely impact future toll message volumes. Expanded LACPs and
the effects of competition result in the transfer of calls from
toll to local service and access categories, respectively, but the
corresponding revenues are not generally shifted at commensurate
rates.
Operating Revenues
Total Operating Revenues increased $150 (4.1%) for the three-month
period ended March 31, 1997 when compared to the same 1996 period.
The components of Total Operating Revenues were as follows:
For the Three
Months Ended
March 31,
1997 1996
Local Service $2,104 $1,930
Interstate Access 917 909
Intrastate Access 218 218
Toll 174 207
Other Services 392 391
Total Operating Revenues $3,805 $3,655
Local Service revenues increased $174 (9.0%)for the three-month
period ended March 31, 1997 when compared to the same 1996 period.
The increase was due primarily to a 4.8% growth in access lines in
service since March 31, 1996. Also contributing was an increase of
$66 due to higher customer demand for optional services.
Interstate Access revenues increased $8 (0.9%) for the three-month
period ended March 31, 1997 when compared to the same 1996 period.
The increase was primarily attributable to growth in minutes of use
of 6.4%, an increase of $19 due to higher demand for special access
services and an increase in end user charges of $14 attributable to
growth in the number of access lines. The increase was
substantially offset by rate reductions which decreased revenues by
$51.
Intrastate Access revenues were unchanged for the three-month
period ended March 31, 1997 when compared to the same 1996 period.
For the 1997 period, growth in minutes of use of 8.4% was
substantially offset by rate reductions.
Toll revenues decreased $33 (15.9%) for the three-month period
ended March 31, 1997 when compared to the same 1996 period. The
decrease was primarily attributable to a decline in toll messages
of 18.1% which reflects the expansion of LACPs and increased
competition.
Other Services revenues are principally comprised of revenues from
customer premises equipment (CPE) sales and maintenance services,
cellular interconnect services and other nonregulated services
(primarily inside wire, billing and collection and voice messaging
services). Other Services revenues increased $1 (0.3%) for the
three-month period ended March 31, 1997 when compared to the same
1996 period.
The increase primarily reflected increased demand and prices for
non-regulated services and product sales, higher billing-related
fees and higher revenues associated with fees for services
rendered to affiliates. The increase was substantially offset by
the effects in 1996 of positive rate impacts, as well as the sale
of a subsidiary which performed computer maintenance.
Operating Expenses
Total Operating Expenses decreased $8 (0.3%) for the three-month
period ended March 31, 1997 when compared to the same 1996 period.
The components of Total Operating Expenses were as follows:
For the Three
Months Ended
March 31,
1997 1996
Depreciation and Amortization $ 819 $ 798
Other Operating Expenses:
Cost of Services and
Products 1,205 1,260
Selling, General and
Administrative 630 604
1,835 1,864
Total Operating Expenses $ 2,654 $ 2,662
Depreciation and Amortization increased $21 (2.6%) for the three-
month period ended March 31, 1997 compared to the same 1996 period.
The increase was due primarily to higher levels of property, plant
and equipment since March 31, 1996 resulting from continued growth
in the customer base and continued modernization of the network.
Other Operating Expenses are comprised of Cost of Services and
Products and Selling, General and Administrative. Cost of Services
and Products includes employee and employee-related expenses
associated with network repair and maintenance, material and
supplies expense, cost of tangible goods sold and other expenses
associated with providing services. Selling, General and
Administrative includes expenses related to sales activities such
as salaries, commissions, benefits, travel, marketing and
advertising expenses and administrative expenses.
Other Operating Expenses decreased $29 for the three-month period
ended March 31, 1997 when compared to the same 1996 period. The
increase for the period was primarily attributable to a reduction
of approximately $29 in employee-related costs in the core wireline
business, including expenses for employee benefits. The decrease
in such employee-related costs reflected net employee reductions in
BellSouth Telecommunications' telephone operations of approximately
6,100 since March 31, 1996, partially offset by annual compensation
increases for management and represented employees. The employee
reductions were primarily attributable to a previously-disclosed
work force reduction plan. The decrease in other operating
expenses was also attributable to the April 1996 sale of a
subsidiary which performed computer maintenance. These decreases
were partially offset by increased costs in the company's telephone
operations associated with higher business volumes and costs
related to initiatives to compete effectively, including new
service offerings and intensified marketing and advertising. The
overall decline in other operating expenses at BellSouth
Telecommunications is not expected to continue during the remainder
of 1997 as BellSouth Telecommunications intensifies initiatives
related to competition as well as marketing and advertising
efforts.
Other Income Statement Items
For the Three
Months Ended
March 31,
1997 1996
Interest Expense $134 $139
Other Income, net 2 11
Provision for Income Taxes 386 326
Provision for Income Taxes increased $60 (18.4%) for the three-
month period ended March 31, 1997 when compared to the same 1996
period. BellSouth Telecommunications' effective tax rates were
37.9% and 37.7% for the three months ended March 31, 1997 and 1996,
respectively.
REGULATORY DEVELOPMENTS AND COMPETITION
Federal Developments
On May 7, 1997, the Federal Communications Commission (FCC) adopted
orders regarding revisions to the Local Exchange Carrier (LEC)
price cap plan, access charge reform and the establishment of a
universal service fund. The orders on the LEC price cap plan and
access charge reform result in access rate reductions and affect
both per-line and per-minute-of-use charges. The access charge
reductions result primarily from a FCC-mandated increase in the
price cap productivity factor from 5.3% to 6.5% with no sharing.
The new rates go into effect beginning July 1, 1997 and are to be
computed as if the 6.5% productivity factor had been in effect when
current rates were set on July 1, 1996. The FCC estimates that the
rate reductions called for in the order will reduce access charges
industry-wide by $1.7 billion in the first year.
The order also includes increases in subscriber line charges (SLCs)
and the establishment of a presubscribed interexchange carrier
charge (PICC). SLCs remain unchanged for primary residential and
single-line business access lines. SLCs for additional residential
access lines will be permitted to increase to the lower of cost or
$6.00 per line. Multi-line business SLCs will be permitted to
increase to the lower of cost or $9.00 per line. The SLC increases
are to be phased in beginning in July 1997 through 1999. PICCs are
per-line rates charged to interexchange carriers for recovery of
non-traffic-sensitive costs not covered by SLCs and are scheduled
to begin in 1998.
The universal service order deferred implementation of any changes
to the support mechanisms currently in place to subsidize the
provision of services to high-cost areas until January 1, 1999.
The new support mechanism, when implemented in 1999, will be based
on forward looking economic costs; however, proposed cost models
have yet to be developed. A new proceeding will be initiated in
June 1997 to select a model by the end of 1997 with final FCC
action expected in 1998.
The order also established significant discounts to be provided to
eligible schools, libraries and rural health care providers for all
telecommunications services, internal connections and internet
services. Industry-wide annual costs of the program are to be
capped at $2.65 billion and are to be funded out of the universal
service fund. Local and interexchange carriers' contributions to
the education and health care fund would be assessed by the
administrator of the fund on the basis of their intrastate and
interstate end-user revenues.
BellSouth is currently analyzing the universal service order. The
price cap order and the access charge reform order are not yet
available. Until these orders can be reviewed and analyzed, and
until any challenges to these orders have been concluded, it will
not be possible to determine the impact that these orders will have
on BellSouth's financial position or annual operating results or
cash flows.
State Developments
See Note C to the Consolidated Financial Statements.
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit
Number
4 No instrument which defines the rights of holders of long and
intermediate term debt of BellSouth Telecommunications, Inc.
is filed herewith pursuant to Regulation S-K, Item
601(b)(4)(iii)(A). Pursuant to this regulation, BellSouth
Telecommunications, Inc. hereby agrees to furnish a copy of
any such instrument to the SEC upon request.
12 Computation of Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule.
(b) Reports on Form 8-K:
None.
SIGNATURE
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.
BELLSOUTH TELECOMMUNICATIONS, INC.
By /s/ Isaiah Harris
ISAIAH HARRIS
Vice President,
Chief Financial Officer
& Comptroller
(Principal Financial and
Accounting Officer)
May 13, 1997
EXHIBIT INDEX
Exhibit
Number
12 Computation of Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule.
EXHIBIT 12
BellSouth Telecommunications Inc.
Computation Of Earnings To Fixed Charges
(Dollars In Millions)
For the Three
Months Ended
March 31,
1997
1. Earnings
(a) Income from continuing operations $ 1,152
before deductions for taxes and interest
(b) Portion of rental expense
representative of interest factor 14
TOTAL $ 1,166
2. Fixed Charges
(a) Interest $ 136
(b) Portion of rental expense
representative of interest factor 14
TOTAL $ 150
Ratio (1 divided by 2) 7.8
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