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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 1994.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to .
Commission File Number 1-6654
THE SOUTHERN NEW ENGLAND TELEPHONE COMPANY
(Exact name of registrant as specified in its charter)
Connecticut 06-0542646
(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 .
THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF SOUTHERN NEW ENGLAND
TELECOMMUNICATIONS 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).
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Form 10-Q - Part I The Southern New England Telephone Company
PART I - FINANCIAL INFORMATION
The Southern New England Telephone Company ("Telephone Company")
is a wholly owned telephone operating subsidiary of the Southern
New England Telecommunications Corporation ("Corporation") and
has its principal executive office at 227 Church Street, New
Haven, Connecticut 06510 (telephone number (203) 771-5200).
The condensed 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 of a normal recurring nature
necessary for fair presentation for each period shown.
Certain information and footnote disclosures normally included
in 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 financial statements
be read in conjunction with the financial statements and notes
thereto included in the Telephone Company's 1993 Annual Report
on Form 10-K.
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Form 10-Q - Part I The Southern New England Telephone Company
CONDENSED STATEMENT OF INCOME AND RETAINED EARNINGS
(Dollars in millions)
(Unaudited)
For the 3 Months Ended For the 6 Months Ended
June 30, June 30,
1994 1993 1994 1993
Revenues
Local service $ 154.3 $ 134.3 $ 306.3 $ 265.7
Intrastate toll 75.9 90.8 154.9 180.2
Network access 88.4 86.4 175.2 172.2
Publishing and other 52.4 48.9 103.6 95.7
Total Revenues 371.0 360.4 740.0 713.8
Costs and Expenses
Operating and maintenance 189.6 195.7 385.0 394.9
Depreciation and amortization 74.0 64.2 147.7 122.3
Taxes other than income 13.6 14.0 27.2 29.6
Total Costs and Expenses 277.2 273.9 559.9 546.8
Operating Income 93.8 86.5 180.1 167.0
Other (expense) income, net (.2) .4 (.3) .2
Income Before Interest, Income
Taxes and Accounting Change 93.6 86.9 179.8 167.2
Interest 13.4 16.7 27.5 34.6
Income Before Income Taxes
and Accounting Change 80.2 70.2 152.3 132.6
Income Taxes 32.4 26.1 61.4 49.8
Income Before Accounting Change 47.8 44.1 90.9 82.8
Accounting change - - - (6.5)
Net Income $ 47.8 $ 44.1 $ 90.9 $ 76.3
Retained Earnings -
Beginning of period $ 592.3 $ 770.1 $ 572.2 $ 763.7
Net income 47.8 44.1 90.9 76.3
Dividends declared to parent (27.0) (35.2) (50.0) (61.0)
End of Period $ 613.1 $ 779.0 $ 613.1 $ 779.0
The accompanying notes are an integral part of these financial statements.
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Form 10-Q - Part I The Southern New England Telephone Company
CONDENSED BALANCE SHEET
(Dollars in millions)
(Unaudited)
June 30, 1994 Dec. 31, 1993
ASSETS
Current Assets
Cash and temporary cash investments $ 7.6 $ 214.5
Accounts receivable, net of allowance
for uncollectibles of $21.8 and $20.4,
respectively 248.9 251.0
Prepaid publishing 39.5 40.5
Materials and supplies 5.7 8.0
Deferred income taxes, prepaid taxes and other 121.6 80.2
Total Current Assets 423.3 594.2
Telephone plant, at cost 4,075.4 4,039.8
Less: Accumulated depreciation and
amortization 1,530.8 1,429.2
Net Telephone Plant 2,544.6 2,610.6
Deferred charges and other assets 254.0 265.7
Total Assets $3,221.9 $3,470.5
The accompanying notes are an integral part of these financial statements.
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Form 10-Q - Part I The Southern New England Telephone Company
CONDENSED BALANCE SHEET (continued)
(Dollars in millions)
(Unaudited)
LIABILITIES AND STOCKHOLDERS EQUITY June 30, 1994 Dec. 31, 1993
Current Liabilities
Accounts payable and accrued expenses $ 139.9 $ 192.7
Obligations maturing within one year - 240.0
Restructuring charge - current 146.0 103.0
Advance billings and customer deposits 41.2 41.0
Accrued compensated absences 30.4 33.9
Other current liabilities 82.3 70.4
Total Current Liabilities 439.8 681.0
Long-term obligations 746.2 746.1
Deferred income taxes 454.0 424.2
Restructuring charge - long-term 159.3 232.0
Unamortized investment tax credits 46.9 50.8
Other liabilities and deferred credits 231.5 233.1
Total Liabilities 2,077.7 2,367.2
Stockholder's Equity
Common stock; $12.50 par value;
30,428,596 shares issued and
30,385,900 outstanding at each
period end 380.4 380.4
Proceeds in excess of par value 152.1 152.1
Retained earnings 613.1 572.2
Less: Treasury stock (42,696 shares
at each period end) (1.4) (1.4)
Total Stockholder's Equity 1,144.2 1,103.3
Total Liabilities and Stockholder's Equity $3,221.9 $3,470.5
The accompanying notes are an integral part of these financial statements.
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Form 10-Q - Part I The Southern New England Telephone Company
CONDENSED STATEMENT OF CASH FLOWS
(Dollars in millions)
(Unaudited)
For the 6
Months Ended
June 30,
1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $90.9 $76.3
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 147.7 122.3
Cumulative effect of accounting change - 6.5
Effect of business restructuring (29.6) -
Change in operating assets and liabilities, net (50.4) (55.3)
Other, net 31.6 38.8
Net cash provided by operating activities 190.2 188.6
CASH FLOWS FROM INVESTING ACTIVITIES
Cash expended for capital additions (111.6) (121.2)
Other, net (.5) .1
Net cash used by investing activities (112.1) (121.1)
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends (45.0) (43.0)
Net proceeds (payments) of short-term
borrowings from affiliate .1 (23.8)
Repayment of long-term borrowings (240.0) -
Other, net (.1) (.3)
Net cash used by financing activities (285.0) (67.1)
(Decrease) increase in cash and temporary cash
investments (206.9) .4
Cash and temporary cash investments at beginning
of period 214.5 6.4
Cash and temporary cash investments at end
of period $ 7.6 $ 6.8
Income taxes paid $62.0 $70.5
Interest paid $35.0 $34.6
The accompanying notes are an integral part of these financial statements.
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Form 10-Q-Part I The Southern New England Telephone Company
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(a) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Changes - The Telephone Company
implemented Statement of Financial Accounting Standards
("SFAS") No. 106 "Employers' Accounting for Postretirement
Benefits Other Than Pensions", SFAS No. 112
"Employers' Accounting for Postemployment Benefits" and
SFAS No. 109 "Accounting for Income Taxes" effective
January 1, 1993. The cumulative effect of the
accounting change for SFAS No. 112 as of January 1, 1993
resulted in a one-time, non-cash charge which reduced net
income reported in the condensed statement of income by
$6.5 million. For SFAS No. 106, the Telephone Company
elected to amortize the transition obligation over the
average remaining service period, therefore a cumulative
effect was not recorded. In addition, a cumulative
effect was not recorded for the adoption of SFAS No. 109
in compliance with the methods of adoption for regulated
entities.
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Form 10-Q-Part I The Southern New England Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Comparison of six months ended June 30, 1994 vs. six months
ended June 30, 1993
Revenues and Sales:
Local service revenues increased $40.6 million, or 15.3%,
due primarily to new rates implemented beginning on July 9,
1993 in accordance with the Telephone Company's 1993
general rate award. The primary services affected by the
increase in rates were directory assistance, coin
telephone and basic local service. Also contributing to
the increase in local service revenues was an increase in
access lines in service and an expansion of the local-
calling service area in several exchanges during
September of 1993, which resulted in a shift in revenue
from intrastate toll to local service. Access lines in
service grew 1.9% from approximately 1,947,000 at June 30,
1993 to approximately 1,984,000 at June 30, 1994. In
addition, growth experienced in subscriptions to
premium services, such as Totalphone [sm] and
SmartLink [sm] also contributed to the increase in local
service revenues, as well as increased Totalphone [sm]
rates resulting from the 1993 general rate award.
Intrastate toll revenues, which includes revenues from
toll and WATS services, decreased $25.3 million, or
14.0%. A portion of this decrease was due to the shift of
revenues to local service caused by the extension of the
local-calling service area in several exchanges as
discussed above. Also contributing to the decrease was a
reduction in intrastate toll rates, including several toll
discount plans, which were implemented in accordance with
the 1993 general rate award, as well as the increasingly
competitive toll and WATS market. Toll message volumes
decreased 3.2% reflecting the impact of the extension of
the local-calling service areas. In addition, WATS
revenues decreased $7.3 million, or 31.7%, due primarily
to lower WATS message volumes resulting from customers
migrating to lower priced services offered by the
Telephone Company and the impact competitive providers
have had on this market.
Network access revenues increased $3.0 million, or 1.7%,
due primarily to an increase in interstate minutes of
use of approximately 8.0%. Partially offsetting the
increase in interstate minutes of use was a decrease,
effective July 2, 1993, in interstate access tariff rates
in accordance with the Telephone Company's 1993 annual
Federal Communications Commission ("FCC") filing under
price cap regulation.
Publishing and other revenues increased $7.9 million, or
8.3%. Publishing and other revenues include revenues from
publishing operations; billing and collection, and other
non-access services rendered on behalf of interexchange
carriers; and provision for uncollectible accounts
receivable. Miscellaneous revenues associated with the 1993
general rate award and a decrease in the provision
for uncollectible accounts receivable for residence,
business and directory customers account for the majority
of the variance.
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Form 10-Q-Part I The Southern New England Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Comparison of six months ended June 30, 1994 vs. six months
ended June 30, 1993
Costs and Expenses:
Operating and maintenance expenses decreased $9.9 million,
or 2.5%. Employee related costs decreased approximately
$9.0 million primarily as a result of a decrease in the
average work force of 6.7% over the comparable 1993
period. This decrease is primarily the result of the
initial implementation of the work force reduction
portion of the restructuring program announced in
December 1993. As of June 30, 1994, approximately 850
employees, representing 16.6% of the total number of
management employees and 5.3% of the total number of
bargaining-unit employees, had left the Telephone Company as
a result of the work force reduction plan. Partially
offsetting the decrease in average work force was a 3.0%
wage increase for bargaining-unit employees effective
October 1993 and, to a lesser extent, an average
wage increase of approximately 4.0% for management
employees effective April 1994.
Depreciation and amortization expense increased $25.4
million, or 20.8%. The increase in depreciation and
amortization was attributable primarily to revised
depreciation rate schedules for intrastate plant, as
approved by the Connecticut Department of Public Utility
Control ("DPUC"). The increase in depreciation expense
relating to intrastate plant was approximately $20
million. An increase in the average depreciable
telephone plant, property and equipment also
contributed to the increase in depreciation and
amortization expense.
Interest Expense:
Interest expense decreased $7.1 million, or 20.5%
due primarily to interest savings from previous debt
refinancings and a decrease in average debt outstanding.
Income Taxes:
The effective tax rate in 1994 was 40.3% as compared
with 37.6% in 1993. For 1993, income taxes include an
adjustment reflecting the settlement of certain tax matters.
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Form 10-Q-Part I The Southern New England Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Comparison of balances at June 30, 1994 vs. December 31, 1993
Cash and temporary cash investments:
Cash and temporary cash investments decreased $206.9 million
due primarily to the repayment of debt [see Liquidity and
Capital Resources].
Obligations maturing within one year:
Obligations maturing within one year decreased $240.0
million due primarily to the repayment of debt [see
Liquidity and Capital Resources].
Liquidity and Capital Resources
The Telephone Company generated cash flows from operations
of $190.2 million during the six months ended June 30,
1994 as compared with $188.6 million during the six months
ended June 30, 1993. The primary use of cash flows from
operations continued to be capital expenditures. The
Telephone Company believes that cash flows from operations
will be sufficient to fund all of its anticipated capital
expenditures.
In January 1994, the proceeds of $200.0 million of
Telephone Company 6.125% unsecured notes issued in December
1993 were used to redeem $200.0 million of 8.625% debentures
called irrevocably on December 14, 1993. In addition, $40.0
million of Telephone Company notes, effectively tendered
in December 1993, were liquidated in January 1994.
As of June 30, 1994, total charges, pre-tax, relating to the
Telephone Company's restructuring plan announced in December
1993 amounted to approximately $30 million. Substantially all
of the expenditures related to severance and other employee
related payments associated with work force reductions and to a
lesser extent systems reengineering. Implementation of the
restructuring program began during the first half of 1994. All
cash expenditures associated with the year to date charges were
funded from cash flows from operations. The Telephone Company
expects total 1994 cash expenditures related to the restructuring
program to range between $70 and $90 million, pre-tax.
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Form 10-Q-Part I The Southern New England Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Competition
On June 10, 1994, the U.S. Court of Appeals ("Court")
overturned a 1992 FCC decision requiring local exchange
carriers (LECs), including the Telephone Company, to
provide expanded special access (private line)
interconnection to permit carriers and others to terminate
their own transmission facilities and physically colocate in
LEC central offices. In response to the Court's action, the
FCC, on July 14, 1994, directed the LECs to provide expanded
interconnection in central offices in which the LECs chose to
provide physical colocation. Prior to the Court's decision,
the Telephone Company had begun to allow physical
colocation for applications received from competitive
access providers for special access interconnection in selected
central offices of the Telephone Company. The Telephone
Company will continue to review and evaluate each
application and determine the most effective method of
colocation.
Regulatory Matters
State Regulatory Matters
On June 30, 1994, the DPUC issued a final decision on
the Telephone Company's request to develop and provide
electronic information services ("EIS"), including
electronic publishing services. The DPUC's decision will
allow the Telephone Company to offer several new services,
such as SNET Access, Consumer Tips, and Electronic Yellow
Pages through its SNET Publishing division, as well as other
information and multi-media services through a non-telephone
business of the Corporation.
On May 26, 1994 the Governor of the State of Connecticut
signed into law (Public Act 94-83) legislation which
provides a new regulatory model framework for Connecticut
telecommunications. The law, which resulted from
recommendations submitted by a telecommunications task
force in February 1994 and which took effect July 1, opens
Connecticut telecommunication services to full competition,
including local phone service currently provided
primarily by the Telephone Company and encourages the DPUC
to adopt alternative forms of regulation for telephone
companies' "noncompetitive" and "emerging competitive"
services. As a result of the new legislation, the DPUC has
opened a number of dockets to address the implementation of
Public Act 94-83, including an initial docket to determine the
appropriate vision for the Connecticut telecommunications
infrastructure. In addition, subject to federal restraints,
the law permits any entity, including a telecommunications
company, to apply to the DPUC to offer competing cable TV service
within existing franchise areas and permits cable TV companies to
seek certification to compete with LECs within their franchise areas.
The Corporation is not currently able to quantify the effect that
this legislation will have on its operations.
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Form 10-Q-Part I The Southern New England Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Regulatory Matters (continued)
State Regulatory Matters (continued)
On April 13, 1994, the DPUC approved a marketing
arrangement between the Telephone Company and SNET America,
Inc. ("SNET America"), a wholly owned subsidiary of the
Corporation offering long distance services. The marketing
arrangement enables the Telephone Company to sell SNET
America's interstate and international products and SNET
America to sell the Telephone Company's intrastate
products and services. This arrangement will enable the
Telephone Company to satisfy its customer's complete long
distance calling needs with a single point of contact.
As of June 30, 1994, the Telephone Company's intrastate rate
of return on common equity was below the 11.65% authorized by
the DPUC in the 1993 general rate award.
Federal Regulatory Matters
On July 12, 1994, the Court reversed and remanded to the FCC
a ruling affecting the exogenous treatment of certain
incremental postretirement costs incurred by price cap
carriers. The Telephone Company's tariffs which took effect on
July 2, 1993 and were subject to FCC further investigation
could be affected by the Court's decision. The Telephone
Company does not expect this decision to have a material effect
on its revenues.
On April 1, 1994, the Telephone Company filed with the FCC
its 1994 annual interstate access tariff under price cap
regulation for effect on July 1, 1994. The Telephone Company
maintained its selection of the 3.3% 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, which was approved by the FCC effective July 1,
1994, incorporated rate reductions which will result in
decreased annual interstate network access revenues of
approximately $7.0 million for the period July 1, 1994 to
June 30, 1995.
As of June 30, 1994, the Telephone Company's interstate rate
of return was below the 12.25% authorized under price
cap regulation.
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Form 10-Q-Part I The Southern New England Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Regulatory Matters (continued)
Effects of Regulatory Accounting
The Telephone Company currently gives accounting recognition
to the actions of regulators where appropriate, as
prescribed by SFAS No. 71, "Accounting for the Effects of
Certain Types of Regulation". Under SFAS No. 71, the
Telephone Company records certain assets and liabilities
because of actions of regulators. More significantly,
amounts charged to operations for depreciation expense
reflect estimated lives and methods prescribed by
regulators rather than those consisting of useful and
economic lives that might otherwise apply to unregulated
enterprises. In the event the Telephone Company no longer
meets the criteria for following SFAS No. 71, the accounting
impact to the Company would be an extraordinary non-cash
charge to operations of a material amount. In light of the
new regulatory model framework for Connecticut
telecommunications (see "State Regulatory Matters"), the
Telephone Company reviewed the criteria set forth in SFAS
No. 71 and determined that the continuing application of the
regulatory accounting standard is appropriate.
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Form 10-Q-Part II The Southern New England Telephone Company
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There were no material developments in the second
quarter of 1994.
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K
On April 21, 1994, the Telephone Company filed a
report on Form 8-K, dated April 21, 1994 announcingthe
Corporation's financial results for the first quarter
of 1994.
On July 21, 1994, the Telephone Company filed
a report on Form 8-K, dated July 21, 1994
announcing the Corporation's financial results
for the second quarter of 1994.
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Form 10-Q-Part II The Southern New England Telephone Company
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
The Southern New England Telephone Company
August 11, 1994
/s/ J. A. Sadek
J. A. Sadek
Vice President and Comptroller
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