Form 10-K
Securities and Exchange Commission
Washington, D.C. 20549
(Mark One)
X Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 (Fee Required)
For fiscal year ended December 31, 1993
or
Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 (Fee Required)
For the transition period from to
Commission File Number: 1-2346
SOUTHWESTERN BELL TELEPHONE COMPANY
Incorporated under the laws of the State of Missouri
I.R.S. Employer Identification Number 43-0529710
One Bell Center, St. Louis, Missouri 63101-3099
Telephone Number 314-235-9800
Securities registered pursuant to Section 12(b) of the Act: (See
attached Schedule A)
Securities registered pursuant to Section 12(g) of the Act:
None.
THE REGISTRANT, A WHOLLY-OWNED SUBSIDIARY OF SOUTHWESTERN BELL
CORPORATION, MEETS THE CONDITIONS SET FORTH IN GENERAL
INSTRUCTION J(1)(a) AND (b) OF FORM 10-K AND IS THEREFORE FILING
THIS FORM WITH REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL
INSTRUCTION J(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
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( X ) <PAGE>
Schedule A
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each Class Name of each exchange
on which registered
Three Year 7.70% Notes, New York Stock Exchange
due June 1, 1994
Five Year 8.30% Notes, New York Stock Exchange
due June 1, 1996
Seven Year 6-1/8% Notes, New York Stock Exchange
due March 1, 2000
Eight Year 6-3/8% Notes, New York Stock Exchange
due April 1, 2001
Twelve Year 6-5/8% Notes, New York Stock Exchange
due April 1, 2005
Thirty-Eight Year 7-3/4% American Stock Exchange
Debentures, due September 1, 2009
Forty Year 6-7/8% Debentures, American Stock Exchange
due February 1, 2011
Forty Year 7-3/8% Debentures, American Stock Exchange
due May 1, 2012
Forty Year 7-5/8% Debentures, American Stock Exchange
due October 1, 2013
Forty Year 8-1/4% Debentures, American Stock Exchange
due March 1, 2014
Twenty-two Year 7% Debentures, New York Stock Exchange
due July 1, 2015
Forty Year 8-1/4% Debentures, American Stock Exchange
due April 1, 2017
Thirty Year 7-5/8% Notes, New York Stock Exchange
due March 1, 2023
Thirty-two Year 7-1/4% New York Stock Exchange
Debentures, due July 15, 2025 <PAGE>
TABLE OF CONTENTS
PART I
Item Page
1. Business . . . . . . . . . . . . . . . . . . 4
2. Properties . . . . . . . . . . . . . . . . . 12
3. Legal Proceedings . . . . . . . . . . . . . 12
4. Submission of Matters to a Vote of Security
Holders . . . . . . . . . . . . . . . . . . *
PART II
5. Market for Registrant's Common Equity and
Related Stockholder Matters (Inapplicable) . -
6. Selected Financial and Operating Data . . . 13
7. Management's Discussion and Analysis of
Results of Operations (Abbreviated pursuant
to General Instruction J(2)) . . . . . . . . 14
8. Financial Statements and Supplementary Data 22
9. Changes in and disagreements with Accountants
on Accounting and Financial Disclosure . . . 39
PART III
10. Directors and Executive Officers of the
Registrant . . . . . . . . . . . . . . . . . *
11. Executive Compensation . . . . . . . . . . . *
12. Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . *
13. Certain Relationships and Related
Transactions . . . . . . . . . . . . . . . . *
PART IV
14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K . . . . . . . . . . 39
__________
* Omitted pursuant to General Instruction J(2).
<PAGE>
PART I
Item 1. Business.
The Company
Southwestern Bell Telephone Company (Telephone Company) was
incorporated in 1882 under the laws of the State of Missouri.
The Telephone Company is a wholly-owned subsidiary of
Southwestern Bell Corporation (Corporation) which was
incorporated in 1983 under the laws of the State of Delaware.
The Telephone Company was a wholly-owned subsidiary of AT&T until
January 1, 1984, when it was divested by AT&T pursuant to a
court-ordered reorganization of the Bell System (divestiture).
AT&T accomplished the divestiture by contributing its 100 percent
interest in the Telephone Company to the Corporation and then
distributing its ownership in the Corporation to its shareowners
effective January 1, 1984.
Operations Under the Modification of Final Judgment (MFJ)
The MFJ, as originally approved by the United States District
Court for the District of Columbia (Court) in 1982, placed
restrictions on the types of businesses in which the Corporation
could engage. The principal restriction prohibits the
Corporation from providing interexchange telecommunications
services. An exchange in this context refers to a Local Access
and Transport Area (LATA), which is generally centered on a
standard metropolitan service area or other identifiable
community of interest. Interexchange service refers to the
provision of telecommunications services between exchanges. The
MFJ initially restricted the Corporation from providing
information services and from manufacturing or providing
telecommunications products, other than the provision of customer
premises equipment (CPE) manufactured by others. CPE, as defined
in the MFJ, represents equipment used on customers' premises to
originate, route or terminate telecommunications. The MFJ also
initially restricted the Corporation from engaging in
nontelecommunications lines of business. These services and
products are collectively known as "restricted lines of
business". The MFJ permits the Corporation to obtain relief from
these restrictions upon a showing that there is no substantial
possibility that it could use its monopoly power to impede
competition in the specific market it seeks to enter (waiver
standard).
The Department of Justice (DOJ) initiated a review of the MFJ's
line of business restrictions in 1987. After that review, the
Court removed the restriction against entry into
nontelecommunications lines of business, as well as that portion
of the information services restriction which prohibited voice
messaging services (VMS), electronic mail, electronic White Pages
services and certain gateway functions (i.e., a
telecommunications arrangement, either by video or audio, in
which customers can communicate with many different information
service providers).
In April 1990, the U.S. Court of Appeals for the District of
Columbia Circuit (D.C. Circuit Court) affirmed the Court's
decision not to remove the interexchange and manufacturing
restrictions, but clarified the waiver standard in a manner
beneficial to future waiver requests by the Corporation. The
D.C. Circuit Court also reversed the decision not to lift the
information services restriction in its entirety, and remanded
the issue to the Court for reconsideration under a more lenient
public interest standard which is to apply when AT&T and the DOJ,
the original parties to the MFJ, do not oppose relief. In
July 1991, the Court applied this public interest standard and
issued an order which removed the information services
restriction in its entirety, but stayed the effectiveness of the
relief it granted the regional holding companies (RHCs), pending
appeals. The D.C. Circuit Court has affirmed the order and the
United States Supreme Court (Supreme Court) has refused to review
the matter. Thus, the removal of the information services
restriction on an intraexchange basis (within the LATA) has
become final.
Also as a result of proceedings before the Court since
divestiture, the Corporation has been authorized to engage in the
restricted lines of business outside the United States, subject
to certain conditions designed to prevent an impact on United
States markets. The Corporation has also obtained relief from
the Court to provide interexchange cellular services in various
markets throughout the United States, as well as intersystem
handoff and automatic call delivery capabilities.
Recent Waivers Denied
The Corporation, jointly with the other RHCs, had appealed a
July 1990 order of the Court holding that the RHCs were not
permitted to transport common channel signaling 7 (CCS7)
information across LATA boundaries for handoff to interexchange
carriers at centralized signal transport points (STPs). CCS7 is
the AT&T version of the internationally standardized signaling
system which transmits signaling and service definition
information between components of the telephone network. The STP
is a type of switch which routes the signaling messages within
the signaling network. The Court held that the MFJ requires that
signaling information be given to the interexchange carriers in
the LATA where the call originated, and also denied the RHCs'
requests for waivers to establish the centralized STP service
arrangement. The order was affirmed by the D.C. Circuit Court,
and in February 1993 the Supreme Court refused to review the
decision.
Pending Waiver Requests and Appeals
The Corporation has initiated other requests with the Court which
seek the removal of some of the remaining restrictions. This
includes a generic request, filed jointly by all the RHCs,
seeking relief from the interexchange prohibition to provide
wireless services without regard to geographic boundaries. In
addition, the Corporation has also requested relief to provide
interexchange cellular services in certain of its own regional
markets. The Corporation has also filed waiver requests seeking
relief from the manufacturing restriction, to permit the design
and development of CPE, and the provision of telecommunications
equipment to third parties. All of these requests are pending.
In June 1993, the Corporation, along with the other RHCs, filed a
joint request for a waiver to provide information services on an
interLATA basis. A condition of the request is that the RHCs
lease the interLATA transport from independent interexchange
carriers. Opposition briefs were filed in October 1993.
In January 1992, the Court denied a waiver to allow Ameritech
Corporation (Ameritech), an RHC, to receive royalties from the
sale to third parties of telecommunication equipment designed,
developed and/or manufactured by the unaffiliated party with the
financial assistance of Ameritech. The Court also denied the
DOJ's request for a declaratory ruling that a funding/royalty
agreement with a firm in which an RHC has neither a significant
equity interest nor influence over operations does not constitute
manufacturing. The ruling was appealed to determine the issue of
whether an otherwise independent company over which an RHC has no
operating control and only a minimal ownership interest, may be
labelled an "affiliated enterprise" of the RHC under the MFJ, and
whether a funding/royalty relationship such as that proposed by
Ameritech is permissible under the MFJ. In December 1993, the
D.C. Circuit Court ruled that the MFJ bans all arrangements in
which RHCs have a direct and continuing share in the revenues of
entities engaged in restricted activities. However, Ameritech's
waiver request was remanded to the Court for further
consideration and is pending.
The Corporation has requested relief with regard to certain
paging services, as described below. Although the Corporation
recently sold its paging services subsidiary, these requests are
being pursued as they may have relevance to other aspects of the
Corporation's business. In February 1989, the Court granted a
waiver permitting the RHCs to provide multi-LATA one-way paging
services regardless of geographic scope, but included a condition
requiring the interexchange links for multi-LATA paging services
to be obtained from unaffiliated interexchange carriers. The
Corporation appealed that portion of the order which prohibited
it from owning the interexchange links outside the service
territory of the Telephone Company. In October 1990, the D.C.
Circuit Court reversed the Court's decision and remanded the
matter to the Court for reconsideration. This matter is still
pending.
In January 1993, the Corporation filed a request for a waiver to
provide interLATA paging origination and access to voice storage
and retrieval services. This waiver would permit the origination
of pages from outside of LATA boundaries and permit paging
subscribers to access their voice-mail messages from outside of a
LATA. This request is pending with the Court.
Principal Services
The Telephone Company's principal services include local
services, network access and long-distance (i.e., toll) services,
which are provided in the states of Arkansas, Kansas, Missouri,
Oklahoma and Texas (five-state area).
Local services involve the transport of telecommunications
traffic between telephones and other CPE located within the same
local service calling area. Local services include: basic local
exchange service, extended area service, dedicated private line
services for voice and special services, directory assistance and
various vertical services. Vertical services represent
discretionary, generally nonregulated, services which a customer
may choose to supplement his/her basic line, such as: call
waiting, call forwarding, call blocking, etc.
Toll services involve the transport of traffic between local
calling areas within the same LATA, and include such services as
Wide Area Telecommunications Service (WATS or 800 services) and
other special services.
Network access services link a subscriber's telephone or other
equipment to the transmission facilities of other non-Telephone
Company carriers which, in turn, provide long-distance and other
communications services. Network access is either switched,
which uses a switched communications path between the carrier and
the customer, or special, which uses a direct nonswitched path.
The following table sets forth for the Telephone Company the
percentage of total operating revenues by any class of service
which accounted for 10 percent or more of total operating
revenues in any of the last three fiscal years.
Percentage of Total
Operating Revenues
1993 1992 1991
Charges for local
service 48% 48% 48%
Charges to
interexchange carriers
for network access 26% 26% 25%
Charges for long-
distance (i.e., toll
service) 12% 13% 14%
Major Customer
See Note 10, "Segment and Major Customer Information", on page 38
of this report.
Government Regulation
In the five-state area, the Telephone Company is subject to
regulation by state commissions which have the power to regulate
intrastate rates and services, including local, toll, private
line and network access (both intraLATA and interLATA access
within the state) services. The Telephone Company is also
subject to the jurisdiction of the Federal Communications
Commission (FCC) with respect to foreign and interstate rates and
services, including interstate access charges. Access charges
are designed to compensate the Telephone Company for the use of
its facilities for the origination or termination of long-
distance and other communications by non-Telephone Company
carriers.
Additional information relating to federal and state regulation
of the Telephone Company is contained in Item 7, Management's
Discussion and Analysis of Results of Operations of this report
under the heading "Regulatory Environment" beginning on page 17
of this report.
Principal Markets
The Telephone Company provides its services along approximately 9
million residential and 4 million business access lines in the
five-state area. During 1993, more than half of the Telephone
Company's access line growth occurred in Texas. In 1993, 1992
and 1991, approximately 73 percent of the Telephone Company's
total operating revenues were attributable to intrastate
operations.
Status of New Services
During 1993, the Telephone Company continued to expand its
offering of optional services, known as Easy Options. These
options include, among others: Caller ID, a feature which
displays the telephone number of the person calling and, by next
year, will also display the caller's name in certain markets;
Call Return, a feature that redials the number of the last
incoming call; and Call Blocker, a feature which allows customers
to automatically reject calls from a designated list of telephone
numbers.
Recent changes in Texas law will allow the Telephone Company to
introduce Caller ID in its largest markets during 1994 and 1995.
Caller ID is now being offered in certain markets in all of the
states in the Telephone Company's five-state area.
The FCC has promulgated certain rules that impact the manner in
which the Telephone Company may offer enhanced services, which
generally include services which are more than basic transmission
services. Under FCC decisions known as Computer Inquiry III, the
Telephone Company is permitted to offer enhanced services either
on its own or jointly with its affiliates, subject to
nonstructural safeguards, designed to permit the Telephone
Company's competitors to acquire needed network services on an
efficient, non-discriminatory basis and to reduce the risk of
cross-subsidization. These safeguards include accounting and
reporting procedures, and Open Network Architecture (ONA)
requirements, which represent the Telephone Company's plan
essentially to provide equal access to its network to all
enhanced service providers. Enhanced services are deregulated at
the federal level, and none of the Telephone Company's state
commissions have, as yet, asserted jurisdiction over intrastate
enhanced services.
In December 1991, after various court proceedings, the FCC
slightly modified the original Computer Inquiry III nonstructural
competitive safeguards. The Telephone Company received FCC
acknowledgement of its initial ONA implementation in November
1992. However, the current modified Computer Inquiry III
nonstructural safeguards are subject to an appeal now pending at
the U.S. Court of Appeals for the Ninth Circuit.
Competition
Competition is growing in the telecommunications industry.
Regulatory and court decisions have expanded the number of
alternative service providers offering telecommunications
services. Technological advances have expanded the types and
uses of services and products available. Accordingly, the
Corporation faces increasing competition in significant portions
of its business.
The Telephone Company currently faces competition from, but not
limited to, competitive access providers (CAPs), private
networks, residential multi-tenant services, interexchange
carriers, cellular providers, resellers and providers of
telecommunications equipment. CAPs typically build fiber optic
"rings" throughout large metropolitan areas to provide transport
services (generally high-speed data) for large business customers
and interexchange carriers. Also, an increasing number of
individual firms, particularly large business customers, have
established their own private network systems to transmit voice
and data, bypassing Telephone Company facilities. The extent of
the economic incentive to bypass the local exchange network
depends upon local exchange prices, access charges, regulatory
policy and other factors. End user charges ordered by the FCC
are designed to mitigate the effect of system bypass.
Recent regulatory rulings have sought to expand competition for
special and switched access services. Special access refers to a
dedicated transmission path, used primarily by large business
customers and long-distance carriers, which does not involve
switching at the local exchange carrier central office. Switched
access refers to the link between local exchange carriers'
switching facilities and long-distance carriers' networks;
switched access transport is one component of this process. In
October 1992, the FCC released an order requiring large local
exchange carriers, including the Telephone Company, to file
tariffs permitting independent parties to physically collocate
(i.e., locate) their equipment within local exchange carrier
central offices for purposes of providing certain special access
services. Local exchange carriers were also required to work out
virtual collocation agreements for central offices where there is
insufficient space for physical collocation. Virtual collocation
involves a set of technical and pricing rules intended to
position the interconnector as if its equipment were located in
the central office. Tariffs were filed in February 1993, and
became effective in June 1993. In November 1992, the Telephone
Company joined with 11 local exchange carriers in a petition
filed with the FCC to stay the physical collocation requirement,
and also filed a separate petition to stay the virtual
collocation requirement. After denial of the petitions, the
Telephone Company and several other local exchange carriers filed
an appeal with the D.C. Circuit Court. Oral arguments were
presented in February 1994.
In September 1993, the FCC released an order essentially imposing
the same collocation requirements for switched access transport
services as for special access services. In November 1993, the
Telephone Company and other local exchange carriers filed an
appeal of that order as well. Switched access transport
collocation tariffs were filed in November 1993, and became
effective in February 1994.
State regulatory commissions are also addressing issues
pertaining to CAPs. In Texas, the Texas Public Utility
Commission (TPUC) was asked to determine whether CAPs must first
obtain a certificate of convenience and necessity before
providing certain intrastate services. In response, the TPUC
adopted a change to the definition of local exchange service that
would allow CAPs to provide certain intrastate services without
specific TPUC approval. The Telephone Company is appealing this
decision. In February 1993, the TPUC denied a petition filed by
a CAP seeking intrastate collocation, rate unbundling and the
elimination of resale restrictions in Telephone Company tariffs,
and indicated it would address these issues in separate
proceedings. In Missouri, CAPs are permitted to provide certain
services, including special access and interexchange and
intraexchange private line services, upon a showing of financial
viability and authorization from the Missouri Public Service
Commission (MPSC). In Missouri, a number of CAPs are presently
certified to offer services.
The MPSC, in December 1992, granted the Telephone Company
transitionally competitive status for toll, WATS, 800, operator
and private line services, which has been appealed by several
parties. This decision permits the Telephone Company to file
minimum and maximum rates for those services, within which it can
change rates without prior MPSC approval once enabling tariffs
are approved. The Telephone Company plans to file for these
rates in early 1994.
In February 1993, the Arkansas Public Service Commission issued
an order granting Tier 1 local exchange carriers, including the
Telephone Company, the choice between physical and virtual
collocation. The Telephone Company has appealed that decision to
the Arkansas Court of Appeals. The Oklahoma Corporation
Commission (OCC) issued an order in February 1993, adopting a
policy of local exchange carriers discretion to choose between
physical and virtual collocation. In Texas, the TPUC adopted a
rule in January 1994, requiring expanded interconnection for
special access services on terms similar to the interstate
tariffs. The rule also requires the Telephone Company to provide
expanded interconnection for private line services, and to
unbundle special access and private line services. In Missouri,
the MPSC has initiated preliminary discussions on expanded
interconnection. The Kansas Corporation Commission (KCC)
presently does not authorize intrastate collocation.
The Telephone Company faces increasing competition in its
intraLATA toll markets, primarily from interexchange carriers and
resellers. IntraLATA toll competition currently exists in
various forms in Arkansas, Missouri and Texas. In Kansas,
certain types of intraLATA toll competition went into effect in
November 1993. And in Oklahoma, the OCC is currently considering
an Administrative Law Judge's recommendation to allow certain
types of intraLATA toll competition.
In the future, it is likely that additional competitors will
emerge in the telecommunications industry. Cable television
companies and electric utilities have expressed an interest in
providing telecommunications services. Interexchange carriers
have also expressed interest in providing local service, either
directly or through alternative wireless networks, and one
carrier has publicly announced its intent to provide local
service in certain markets, some of which may be in the Telephone
Company's five-state area. During 1993, several RHCs announced
mergers, acquisitions, or investments in domestic cable
companies, subject to court and regulatory approval. As a result
of these mergers and acquisitions, the Corporation may face
competition from entities offering both cable and telephone
services over their transport mediums in the Telephone Company's
operating territory.
In September 1993, the FCC adopted an order allocating radio
spectrum and outlining development of licenses for new personal
communications services (PCS). PCS utilizes wireless
telecommunications technology, using different radio spectrum
than cellular, and, like cellular, is designed to permit access
to a variety of communications services regardless of subscriber
location. Under an auction process scheduled to begin in May
1994, up to seven new licenses could be awarded in each of 51
geographic areas. Licenses may be combined by spectrum amounts
and geographically, including creation of a nationwide service.
The Telephone Company will monitor the auction of PCS licenses
within its operating area to assess competitive impacts.
Competitive opportunities may arise as a result of pending
legislative and legal proceedings. Legislation has recently been
introduced in the United States Congress which, if adopted, could
allow the Corporation to enter previously restricted lines of
business. Specifically, provisions of certain of these bills
seek to eliminate or modify restrictions imposed at divestiture
by the MFJ related to electronic publishing, telecommunications
equipment manufacturing and interLATA telecommunications
services, and would allow local exchange carriers to compete in
the cable television business in their own areas. In addition,
pricing flexibility could be granted for services subject to
competition. In February 1994, the Corporation filed a lawsuit
in the U.S. District Court in Dallas, seeking to overturn
provisions of the Cable Communications Policy Act of 1984, in
order to provide cable television service in the Telephone
Company's five-state area. The outcome of these proceedings
cannot be predicted at this time.
The Corporation is aggressively representing its interests
regarding competition before federal and state regulatory bodies
and courts, and before Congress and state legislatures, and will
continue to evaluate the increasingly competitive nature of its
business and the appropriate regulatory, legislative and industry
solutions needed to respond effectively to competition.
The Telephone Company currently accounts for the economic effects
of regulation in accordance with Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of
Certain Types of Regulation" (Statement No. 71). Continued
application of Statement No. 71 is appropriate only if it is
reasonable to assume that rates designed to recover costs can be
charged to and collected from customers. This assumption
requires, among other things, consideration of anticipated
changes in levels of demand or competition during the recovery
period for any capitalized costs. It is management's opinion
that application of Statement No. 71 to the Telephone Company is
appropriate at this time. If, as a result of actual and
anticipated increases in competition and other changes in the
telecommunications industry, including the manner of determining
rates, the Telephone Company determines that it no longer
qualifies for the provisions of Statement No. 71, management
expects that the resulting non-cash extraordinary charge would be
material.
Research and Development
The majority of company-sponsored basic and applied research
activities are conducted at Bell Communications Research, Inc.
(Bellcore). The Telephone Company owns a one-seventh interest in
Bellcore along with the other six RHCs. Bellcore is also the
coordinator for the Federal government's telecommunications
requirements on national security and emergency preparedness.
Basic and applied research is also conducted at Southwestern Bell
Technology Resources, Inc. (TRI), a subsidiary of the
Corporation. TRI provides technology planning and assessment
services to the Telephone Company.
Employees
As of January 31, 1994, the Telephone Company employed 49,370
persons. Approximately 76 percent of the employees are
represented by the Communications Workers of America (CWA).
Effective in August 1992, a three-year contract was negotiated
between the CWA and the Telephone Company. This contract will be
subject to renegotiation in mid-1995.
Item 2. Properties.
The properties of the Telephone Company do not lend themselves to
description by character and location of principal units. At
December 31, 1993, network access lines represented
45 percent of the Telephone Company's investment in telephone
plant; central office equipment represented 36 percent; land and
buildings represented 10 percent; other miscellaneous property,
comprised principally of furniture and office equipment and
vehicles and other work equipment, represented 7 percent; and
information origination/termination equipment represented
2 percent.
Item 3. Legal Proceedings.
Not applicable
<PAGE>
PART II
Item 6.
SOUTHWESTERN BELL TELEPHONE COMPANY
SELECTED FINANCIAL AND OPERATING DATA
At December 31, or for the year ended
1993 1992
Return on Weighted Average 12.48%* 10.71%
Total Capital
Debt Ratio (debt, including 48.58%** 41.31%
current maturities, as a
percentage of total
capital)
Network access lines in 13,238 12,803
service (000)
Access minutes of use 43,767 41,235
(000,000)
Long-distance messages 1,093 1,057
(000,000)
Number of employees 49,320 49,960
* Calculated using income before extraordinary loss and
cumulative effect of changes in accounting principles.
These impacts are included in shareowner's equity.
** Shareowner's equity used in debt ratio calculation
includes extraordinary loss and cumulative effect of
changes in accounting principles.
<PAGE>
Item 7. Management's Discussion and Analysis of Results of
Operations.
Dollars in Millions
Southwestern Bell Telephone Company (Telephone Company) provides
telecommunications services through approximately 13.2 million
access lines in Arkansas, Kansas, Missouri, Oklahoma and Texas
(five-state area). The Telephone Company is a public utility
subject to regulation by each of the state jurisdictions in which
it operates and by the Federal Communications Commission (FCC).
The Telephone Company is a wholly-owned subsidiary of
Southwestern Bell Corporation (Corporation).
This discussion should be read in conjunction with the financial
statements and the accompanying notes.
Results of Operations
Summary
Financial results, including changes from the prior year, are
summarized as follows:
Percent
change
1992 vs.
1993 1992 1993
Operating revenues $ 8,072.9 $7,744.0 4.2%
Operating expenses $ 6,240.9 $6,040.0 3.3%
Income before extraordinary loss and
accounting changes $ 1,015.0 $ 964.1 5.3%
Extraordinary loss $ (153.2) - -
Accounting changes $(1,849.4) - -
Net income (loss) $ (987.6) $ 964.1 (202.4)%
The Telephone Company reported income before extraordinary loss
and cumulative effect of changes in accounting principles of
$1,015.0. Extraordinary loss associated with early
extinguishment of debt was $153.2. The adoption of financial
accounting standards relating to postretirement benefits,
postemployment benefits and income taxes resulted in one-time
charges of $1,849.4 in the first quarter of 1993. As a result,
net loss for the year was $987.6.
The primary factors contributing to the increase in income before
extraordinary loss and cumulative effect of changes in accounting
principles in 1993 were the growth in demand for services and
products and the decrease in license fees for switching system
software. These factors were partially offset by increased
postretirement benefit and depreciation expenses, accruals for
potential rate reductions, and a one-time charge for
restructuring.
Items affecting the comparison of the operating results between
1993 and 1992 are discussed in the following sections.
Operating Revenues
Total operating revenues increased $328.9, or 4.2 percent, in
1993. Revenue components of total operating revenues, including
changes from the prior year, are as follows:
Percent
change
1993 vs.
1993 1992 1992
Local service $ 3,898.3 $ 3,727.3 4.6%
Network access
Interstate 1,804.7 1,710.3 5.5
Intrastate 880.7 837.5 5.2
Long-distance service 965.7 1,003.4 (3.8)
Other 523.5 465.5 12.5
$ 8,072.9 $ 7,744.0 4.2%
Local Service revenues increased in 1993 due primarily to
increases in demand, including growth in the number of access
lines of 3.4 percent. Nearly two-thirds of the access line
growth occurred in Texas. Local service revenues for the
period also increased as a result of extended area service
plans which expand the area defined as local service.
Network Access Interstate network access revenues increased
in 1993 due primarily to increases in demand for access
services and growth in revenues from end user charges
attributable to an increasing access line base. These
increases were partially offset by decreases in recognized
interstate rates.
Intrastate network access revenues increased in 1993 due
primarily to increases in demand. These increases were
partially offset by previously ordered rate reductions,
primarily in Texas.
Long-Distance Service revenues decreased in 1993 due mainly
to accruals for potential rate reductions in Oklahoma and the
impact of extended area service plans. These decreases were
partially offset by increases in demand for long-distance
services. Although extended area service plans have had a
negative effect on long-distance service revenues, this
effect is partially offset by related increases in local
service revenues, as noted in the discussion of local service
revenues.
Other revenues increased in 1993 due primarily to increases
in demand for the Telephone Company's nonregulated services
and products.
Operating Expenses
Total operating expenses increased $200.9, or 3.3 percent, in
1993. Expense components of total operating expenses, including
changes from the prior year, are as follows:
Percent
change
1993 vs.
1993 1992 1992
Cost of services and products $ 2,519.1 $ 2,594.3 (2.9)%
Selling, general and
administrative 2,022.2 1,830.7 10.5
Depreciation and amortization 1,699.6 1,615.0 5.2
$ 6,240.9 $ 6,040.0 3.3%
Cost of Services and Products decreased in 1993 due primarily
to a decrease in license fees for switching system software.
Increased switching system software expenses in 1992 were
associated with advanced calling features and an accelerated
implementation of a single national database of 800 numbers
as mandated by the FCC. This decrease was partially offset
by costs related to increased demand for services and
products, and annual compensation increases.
Selling, General and Administrative expenses increased in
1993 due primarily to the increase of approximately $110 in
postretirement benefits expense required by the adoption of
Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Postretirement Benefits Other Than
Pensions" (Statement No. 106) as discussed in Note 2 to the
financial statements. The increased expenses also reflect a
one-time charge for restructuring, as further discussed in
"Other Business Matters," as well as increases in property
and other taxes and annual compensation increases.
Depreciation and Amortization increased in 1993 mainly due to
changes in plant level and composition. This increase was
partially offset by a decrease in reserve deficiency
amortization.
Interest Expense decreased $23.5, or 5.7 percent, in 1993. The
decrease was due primarily to lower interest rates on long-term
debt refinanced during 1993.
Other Income - Net decreased $52.0 in 1993. The decrease was due
primarily to the absence of interest income associated with the
settlement of federal income tax audit issues in 1992 and to
increases in legislative advocacy expenses in Texas.
Federal Income Tax expense increased $47.7, or 15.1 percent, in
1993, primarily due to higher income before income taxes. Based
on comparable results, management estimates that the change in
tax rates and other provisions of the Omnibus Budget
Reconciliation Act will decrease net income in 1994 by
approximately $25-$30.
Extraordinary Item The Telephone Company recorded an
extraordinary charge of $153.2 in 1993 as a result of
refinancing $2,100 of long-term debt. See Note 7 to the
financial statements for additional information.
Operating Environment and Trends of the Business
Regulatory Environment
The Telephone Company operates in a five-state area comprised of
Arkansas, Kansas, Missouri, Oklahoma and Texas. The intrastate
telecommunications operations of Arkansas, Missouri and Oklahoma
are currently regulated under traditional rate-of-return
methodology. Since 1990, Kansas and Texas intrastate
telecommunications operations have been governed by alternative
forms of regulation. The Telephone Company's interstate
telecommunications operations in the five states are regulated by
the FCC, using, since 1991, a price-cap methodology.
The Texas Public Utility Commission (TPUC) requires that certain
ratemaking adjustments be made to the Telephone Company's
reported earnings in order to compute earnings subject to sharing
according to its regulatory plan. These adjustments, however,
are not used in preparing the published financial statements.
Similarly, other jurisdictions may require that adjustments be
made to reported earnings in order to compute regulatory returns.
As a result, differences may exist between the returns reported
to these regulatory bodies and those computed from Telephone
Company financial information included in the financial
statements.
Following is a summary of significant regulatory proceedings.
Missouri Missouri has completed its fourth and final year under
an incentive regulation plan (Missouri Plan), formed as part of a
September 1989 agreement among the Missouri Public Service
Commission (MPSC), Office of Public Counsel (OPC) and the
Telephone Company. Under its terms, the Telephone Company was
required to reduce annual revenues, effective October 1989, by
approximately $82, and upgrade its network in Missouri between
1990 and 1997 at an estimated cost of $180. The Missouri Plan
also provided for a sharing of earnings between the Telephone
Company and its customers at certain rate-of-return thresholds.
Revenue sharing amounts for 1990 and 1991 were refunded to
customers in June 1991 and June 1992, respectively, with no
material impact on financial results. The Telephone Company was
not required to share revenues for 1992, and expects that sharing
for 1993, if any, will be minimal.
In October 1992, the Telephone Company, the MPSC staff and OPC
filed separate recommendations to the MPSC concerning the success
of the Missouri Plan and proposing changes in procedures and
parameters. The Missouri Plan, originally scheduled to expire on
December 31, 1992, was ordered extended until December 31, 1993,
to allow for consideration of the various proposals.
The MPSC staff filed a complaint with the MPSC in January 1993
alleging that, under traditional rate-of-return methods, the
Telephone Company's intrastate rates should be reduced by $150
annually. In December 1993, the MPSC issued an order requiring
rate reductions of $84.6 annually, beginning January 1, 1994.
The order also offered the Telephone Company the option of
participating in a five-year Accelerated Modernization Plan
(AMP). The AMP would have required annual revenue reductions of
$84.6, a five-year rate freeze, as well as continued revenue
sharing and accelerated network modernization.
In December 1993, the Telephone Company declined the AMP offer on
the basis that it would be detrimental to the Telephone Company,
and obtained a temporary restraining order from the Cole County
Circuit Court (Circuit Court), temporarily preventing enforcement
of the ordered rate reductions. In February 1994, the Circuit
Court granted a stay of the ordered rate reductions, pending
disposition on appeal. All revenues in excess of the MPSC
proposed reduced rates are being paid to the Circuit Court at
this time and will not be reflected in 1994 operating revenues.
The MPSC order did not impact 1993 financial results. The final
impact of the order on future financial results cannot be
determined until all issues are resolved.
Oklahoma In January 1989, the Oklahoma Corporation Commission
(OCC) ordered an investigation into the reasonableness of the
Telephone Company's intrastate rates. A final order was issued
in August 1992, requiring the Telephone Company to refund
revenues in excess of 11.41 percent return on equity, effective
April 1991 through the date of the final order. The ordered
refund obligation is $148.4.
The OCC order also would reduce annual revenues by $100.6
effective September 1992 (of which $24.5 relates to wide-area
calling plans which had already been implemented when the order
was issued, and $7.4 relates to expanded wide-area calling plans
implemented during 1993 through March 1994), partially offset by
a positive annual revenue adjustment of $7.8 to compensate the
Telephone Company for its investment of $84 over five years for
network modernization. The order would also lower the allowed
return on equity from 14.25 percent to 12.20 percent. In
addition, the order denies recovery of depreciation expense
associated with certain network assets and changes the regulatory
method of accounting for pension expense. These actions could
result in a maximum one-time reduction in net income of
approximately $36.
In September 1992, the Telephone Company appealed to the Oklahoma
Supreme Court which suspended the effectiveness of the entire
order pending final disposition. This appeal is still pending.
The Telephone Company is contesting all aspects of the OCC's
actions. Although it is unable to predict the outcome of the
proceeding at this time, management believes that the OCC-ordered
refund of revenues collected before the date of the OCC's August
1992 order is illegal under Oklahoma law, and will be overturned
by the Court. The Court may require the Telephone Company to
implement some portion of the annual rate reductions indicated in
the OCC order. Management is unable to determine the outcome of
the remaining portions of the OCC order. Ultimate resolution of
the entire OCC order is not expected to have a material impact on
financial results.
In 1986, the OCC made an inquiry into the effects of the Tax
Reform Act of 1986 on the Telephone Company. As a result, in
October 1989, the OCC concluded that the Telephone Company had a
revenue surplus of $27.5, and required the Telephone Company to
invest this surplus, together with interest, to upgrade its
network in Oklahoma rather than refund it to customers. In
addition, prospective annual rate reductions totaling $7.8 were
ordered, effective October 1989.
In October 1989, the OCC order was appealed to the Oklahoma
Supreme Court by various parties, including the Telephone
Company. In December 1991, the Court upheld the portion of the
OCC's decision that required the Telephone Company to invest the
revenue surplus in network upgrades. The Court also determined
that the OCC's finding of a depreciation reserve deficiency was
not supported by substantial evidence and that the OCC's
treatment of employee severance payments and cash working capital
analysis was inappropriate. The OCC has not reconsidered the
remand issues. A prehearing conference has been scheduled for
April 1994. Although the final outcome of the OCC's
reconsideration is uncertain at this time, management does not
expect the decision to have a material future impact on financial
results.
Texas The Telephone Company has completed the third year of its
four-year incentive regulation agreement (the Agreement), which
was approved by the TPUC in November 1990. Under the terms of
the Agreement the Telephone Company has agreed, over a four-year
period ending November 29, 1994, to cap certain local rates,
provide annual rate reductions and other benefits to customers in
Texas, and upgrade the network at a cost of approximately $329.
Rate reductions and customer benefits for 1991 were approximately
$246. Additional rate reductions of $34 and $21 were implemented
in 1992 and 1993, respectively, and additional rate reductions of
approximately $146 will be implemented in 1994.
The Agreement also provides an earnings-sharing mechanism
designed to encourage efficiency and innovation by the Telephone
Company. Revenue sharing amounts for 1991 and 1992 were refunded
to customers in 1993, with no material impact on financial
results. Management expects that sharing for 1993, if any, will
be minimal.
In 1991, the Agreement was appealed through the courts, and, in
February 1993, the Texas Court of Appeals (Appeals Court) upheld
the Agreement, but found that the TPUC incorrectly applied laws
on the treatment of federal income tax benefits related to
disallowed expenses and directed the matter back to the TPUC for
resolution. In August 1993, the Telephone Company and opposing
intervenors filed appeals in the Texas Supreme Court, and the
matter is pending.
In October 1992, the Office of Public Utility Counsel (OPUC)
filed a petition for inquiry into the rates of the Telephone
Company, alleging that the Telephone Company had realized excess
annual earnings of approximately $234, which the sharing
mechanism failed to capture. The Telephone Company filed a
motion to dismiss in November 1992. In July 1993, TPUC granted
the Telephone Company's motion to dismiss.
Postretirement Benefits Other Than Pensions The adoption of
Statement No. 106 for ratemaking purposes has been addressed by
regulatory authorities in most of the Telephone Company's state
jurisdictions. See Note 2 to the financial statements for
additional information on Statement No. 106. Texas and Arkansas,
through commission order, and Kansas, through stipulation and
commission order, have agreed to accrual accounting for
postretirement benefit expenses, with some funding requirements.
In Missouri, the MPSC has ordered continued pay-as-you-go
treatment for postretirement benefit expenses. The Telephone
Company intends to appeal this order. In Oklahoma, the OCC has
not ruled on the issue, although OCC staff has recommended
accrual accounting for postretirement benefit expenses, with some
funding requirements.
An FCC order issued in December 1991 required all local exchange
carriers to use the amortization method for recognition of the
transition benefit obligation. In June 1992, the Telephone
Company asked the FCC for the ability to increase its price caps
to take into account the incremental interstate costs resulting
from the accrual accounting required by Statement No. 106
(referred to as exogenous treatment). In January 1993, the FCC
issued an order denying exogenous treatment for these incremental
costs, but did not preclude the seeking of exogenous treatment of
the transition benefit obligation in a separate filing in 1993.
In February 1993, the Telephone Company joined with other local
exchange carriers in an appeal of the January 1993 FCC order. In
April 1993, the Telephone Company filed tariffs with the FCC
requesting exogenous treatment of the transition benefit
obligation. In June 1993, the FCC allowed the proposed rates to
go into effect on July 1, 1993, subject to further investigation
which could result in future refunds for all or part of the
amount attributable to the transition benfit obligation.
Potential refunds are currently being accrued by the Telephone
Company; however, any future refunds are not expected to have a
material impact on financial results.
Competition
Information relating to actual and potential competition
impacting the Telephone Company's local exchange, vertical
services, access and intraLATA toll revenues is included under
the heading "Competition" in Item 1 on page 8 of this report.
Other Business Matters
Operational Restructuring During the third quarter of 1993, the
Telephone Company announced a restructuring of its operations.
The restructuring realigns the Telephone Company into two
operating divisions, Customer Services, comprised of nine
geographic market areas, and Network Services, which focuses on
technology planning and deployment. As part of the
restructuring, approximately 800 management positions were
eliminated during 1993. Costs for severance, relocation and
benefits associated with the positions currently eliminated were
accrued during 1993, reducing net income by approximately $35.
Over the next 18 to 24 months, approximately 700 additional
management positions will be eliminated.
Pending Litigation The Telephone Company is presently engaged in
litigation with four Texas cities arising from the Telephone
Company's alleged breach of certain ordinances relating to the
Telephone Company's use of, and work activities in, streets and
other public ways. The cases are entitled City of Mesquite v.
Southwestern Bell Telephone Company, et al., and City of
Harlingen and City of Brownsville v. Southwestern Bell Telephone
Company, et al., in the U.S. District Court for the Northern
District of Texas, and City of Port Arthur, et al., v.
Southwestern Bell Telephone Company, et al., in the 136th
Judicial District Court of Jefferson County, Texas. The City of
Port Arthur action was certified as a class action on November
20, 1992. The certification order has been appealed by the
Telephone Company. If the class certification is affirmed, the
class could include approximately 110 Texas cities.
The ordinances provide for the payment of a percentage of the
gross receipts received by the Telephone Company from the
provision of certain services within the cities. While the
particular claims of the cities vary, they all allege that the
Telephone Company should have included revenues received from
other services in calculating the compensation described in the
ordinances. The cities have demanded general unspecified actual
and exemplary damages or have not specifically alleged the amount
of damages resulting from the gross receipts claims. The
Telephone Company believes it has several meritorious defenses to
the claims and intends to vigorously pursue these defenses.
Although the outcomes of these cases are uncertain, the Telephone
Company believes that it will either be successful on the merits
of the cases or that any unfavorable result will not have a
material impact on the financial results.
<PAGE>
Item 8. Financial Statements and Supplementary Data.
Report of Independent Auditors
The Board of Directors
Southwestern Bell Telephone Company
We have audited the accompanying balance sheets of Southwestern
Bell Telephone Company as of December 31, 1993 and 1992, and the
related statements of income, shareowner's equity and cash flows
for each of the three years in the period ended December 31,
1993. Our audits also included the financial statement schedules
listed in the Index at Item 14 (a). These financial statements
and schedules are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Southwestern Bell Telephone Company at December 31, 1993 and
1992, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1993, in
conformity with generally accepted accounting principles. Also,
in our opinion, the related financial statement schedules, when
considered in relation to the basic financial statements taken as
a whole, present fairly in all material respects the information
set forth therein.
As discussed in Notes 2 and 3 to the financial statements, in
1993 the Company changed its method of accounting for
postretirement benefits other than pensions, postemployment
benefits and income taxes.
/s/ Ernst & Young
San Antonio, Texas
February 11, 1994
Southwestern Bell Telephone Company
Statements of Income
(Dollars in millions)
1993 1992 1991
Operating Revenues
Local service $ 3,898.3 $ 3,727.3 $ 3,527.9
Network access 2,685.4 2,547.8 2,440.8
Long-distance service 965.7 1,003.4 1,020.4
Other 523.5 465.5 435.0
Total operating revenues 8,072.9 7,744.0 7,424.1
Operating Expenses
Cost of services and products 2,519.1 2,594.3 2,433.5
Selling, general and administrative 2,022.2 1,830.7 1,719.4
Depreciation and amortization 1,699.6 1,615.0 1,555.5
Total operating expenses 6,240.9 6,040.0 5,708.4
Operating Income 1,832.0 1,704.0 1,715.7
Other Income (Expense)
Interest expense (385.2) (408.7) (456.3)
Other income (expense) - net (22.6) 29.4 26.9
Total other income (expense) (407.8) (379.3) (429.4)
Income Before Income Taxes, Extraordinary
Loss and Cumulative Effect of Changes in
Accounting Principles 1,424.2 1,324.7 1,286.3
Income Taxes
Federal 364.4 316.7 316.6
State and local 44.8 43.9 33.7
Total income taxes 409.2 360.6 350.3
Income Before Extraordinary Loss and
Cumulative Effect of Changes in
Accounting Principles 1,015.0 964.1 936.0
Extraordinary Loss on Early Extinguishment
of Debt, net of tax (153.2) - (80.7)
Cumulative Effect of Changes in Accounting
Principles, net of tax (1,849.4) - -
Net Income (Loss) $ (987.6) $ 964.1 $ 855.3
The accompanying notes are an integral part of the financial statements.
Southwestern Bell Telephone Company
Balance Sheets
(Dollars in millions)
December 31,
1993 1992
Assets
Current Assets
Cash and cash equivalents $ 37.8 $ 44.9
Accounts receivable - net of allowances
for uncollectibles of $14.2 and $11.3 1,375.0 1,259.6
Material and supplies 129.0 121.5
Deferred charges 46.8 53.4
Deferred income taxes 152.4 79.5
Prepaid expenses and other current assets 56.6 63.0
Total current assets 1,797.6 1,621.9
Property, Plant and Equipment - Net 15,699.1 15,666.1
Other Assets 401.7 570.6
Total Assets $17,898.4 $17,858.6
Liabilities and Shareowner's Equity
Current Liabilities
Debt maturing within one year $ 663.0 $ 466.5
Accounts payable and accrued liabilities 2,160.0 2,002.8
Total current liabilities 2,823.0 2,469.3
Long-Term Debt 4,383.0 4,524.5
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes 1,746.7 3,162.2
Postemployment benefit obligation 2,817.7 -
Unamortized investment tax credits 429.8 495.3
Other noncurrent liabilities 356.7 116.2
Total deferred credits and other
noncurrent liabilities 5,350.9 3,773.7
Commitments (Note 5)
Shareowner's Equity
Common stock - one share, without par value,
owned by parent 1.0 6,469.9
Paid-in surplus 5,706.9 -
Retained earnings (deficit) (366.4) 621.2
Total shareowner's equity 5,341.5 7,091.1
Total Liabilities and Shareowner's Equity $17,898.4 $17,858.6
The accompanying notes are an integral part of the financial statements.
Southwestern Bell Telephone Company
Statements of Cash Flows
(Dollars in millions, increase (decrease) in cash and cash equivalents)
1993 1992 1991
Operating Activities
Net income (loss) $ (987.6) $ 964.1 $ 855.3
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 1,699.6 1,615.0 1,555.5
Provision for uncollectible accounts 66.0 62.6 67.3
Amortization of investment tax credits (65.5) (72.0) (86.7)
Pensions and other postemployment
expenses 262.2 66.3 (55.2)
Deferred income tax expense (163.8) (99.0) (70.0)
Extraordinary loss, net of tax 153.2 - 80.7
Cumulative effect of accounting
changes, net of tax 1,849.4 - -
Changes in operating assets and
liabilities:
Accounts receivable (176.7) (145.5) (72.0)
Other current assets (36.9) (37.2) (7.4)
Accounts payable and accrued
liabilities 245.3 104.4 126.3
Other - net (220.5) 256.1 43.4
Total adjustments 3,612.3 1,750.7 1,581.9
Net Cash Provided by Operating Activities 2,624.7 2,714.8 2,437.2
Investing Activities
Construction and capital expenditures (1,667.8) (1,617.4) (1,475.3)
Net Cash Used in Investing Activities (1,667.8) (1,617.4) (1,475.3)
Financing Activities
Net change in short-term borrowings
with original maturities of three
months or less 38.1 (189.9) 318.8
Issuance of other short-term
borrowings 16.0 521.4 -
Repayment of other short-term
borrowings (137.6) (394.8) -
Issuance of long-term debt 2,086.1 284.3 397.4
Repayment of long-term debt (10.7) (11.1) (7.8)
Early extinguishment of debt and
related call premiums (2,190.3) (355.6) (799.5)
Dividends paid (865.6) (960.6) (855.4)
Equity from parent 100.0 - -
Net Cash Used in Financing Activities (964.0) (1,106.3) (946.5)
Net increase (decrease) in cash and cash
equivalents (7.1) (8.9) 15.4
Cash and cash equivalents beginning of
year 44.9 53.8 38.4
Cash and Cash Equivalents End of Year $ 37.8 $ 44.9 $ 53.8
The accompanying notes are an integral part of the financial statements.
Southwestern Bell Telephone Company
Statements of Shareowner's Equity
(Dollars in Millions)
Retained
Common Paid-in Earnings
Stock Surplus (Deficit)
Balance, December 31, 1991 $ 6,469.9 $ - $ 621.2
Net income - - 964.1
Dividend to shareowner - - (964.1)
Balance, December 31, 1992 6,469.9 - 621.2
Net income (loss) - - (987.6)
Dividend to shareowner - (862.0) -
Equity from parent - 100.0 -
Transfer of equity (6,468.9) 6,468.9 -
Balance, December 31, 1993 $ 1.0 $ 5,706.9 $ (366.4)
The accompanying notes are an integral part of the financial statements. <PAGE>
1. Summary of Significant Accounting Policies
Southwestern Bell Telephone Company (Telephone Company) is a
regulated utility which provides telecommunications services
to customers in Arkansas, Kansas, Missouri, Oklahoma and
Texas. The Telephone Company is a wholly-owned subsidiary
of Southwestern Bell Corporation (Corporation).
Regulatory Accounting The Telephone Company prepares its
financial statements in accordance with the provisions of
Statement of Financial Accounting Standards No. 71,
"Accounting for the Effects of Certain Types of Regulation"
(Statement No. 71). The provisions of Statement No. 71
require, among other things, that regulated enterprises
reflect rate actions of regulators in their financial
statements, when appropriate. These rate actions can
provide reasonable assurance of the existence of an asset,
reduce or eliminate the value of an asset, or impose a
liability on a regulated enterprise.
Allowance for Funds Used During Construction Where capital
invested by the Telephone Company in construction projects
is not allowed in the rate base upon which revenue
requirements are determined, it is the practice of
regulatory authorities to allow, in lieu thereof, a
capitalization of interest and equity costs during periods
of construction. These capitalized costs are reflected as
income during the construction period and as an addition to
the cost of plant constructed, and are included in other
income (expense)-net on the Telephone Company's Statements
of Income.
Income Taxes The Telephone Company is included in the
Corporation's consolidated federal income tax return.
Federal income taxes are provided for in accordance with the
provisions of the Tax Allocation Agreement (Agreement)
between the Telephone Company and the Corporation. In
general, the Telephone Company's income tax provision under
the Agreement reflects the financial consequences of income,
deductions and credits which can be utilized on a separate
return basis or in consolidation with the Corporation and
which are assured of realization.
Deferred income taxes are provided for certain temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for tax purposes.
Investment tax credits resulted from federal tax law
provisions that allowed for a reduction in income tax
liability based on certain construction and capital
expenditures. Corresponding income tax expense reductions
were deferred and are being amortized as reductions in
income tax expense over the life of the property, plant and
equipment that gave rise to the credits.
Effective January 1, 1993, the Telephone Company adopted a
new accounting standard for accounting for income taxes.
See Note 3.
Cash Equivalents Cash equivalents include all highly liquid
investments with an original maturity of three months or
less. The carrying amount of cash equivalents approximates
fair value.
Material and Supplies New and reusable materials are
carried principally at average original cost. Specific
costs are used for large individual items. Nonreusable
material is carried at estimated salvage value.
Property, Plant and Equipment The cost of additions and
substantial betterments of property, plant and equipment is
capitalized. Cost includes salaries and wages, material,
applicable taxes, pensions and other benefits, allowance for
funds used during construction and certain other items.
The Telephone Company computes depreciation using certain
straight-line methods as prescribed by the FCC and the
applicable state regulatory authorities. The Telephone
Company's provision for depreciation includes the
amortization of interstate and certain intrastate
accumulated depreciation deficiencies (reserve deficiency
amortization). Reserve deficiency amortization allows
additional depreciation to be recognized currently in an
attempt to reflect more accurately prior years' actual
consumption of telephone plant.
When a portion of the Telephone Company's depreciable
property, plant and equipment is retired, the gross book
value is charged to accumulated depreciation.
The cost of maintenance and repairs of property, plant and
equipment,including the cost of replacing minor items not
constituting substantial betterments, is charged to
operating expenses.
2. Employee Retirement Benefits
Pensions Substantially all employees of the Telephone
Company are covered by noncontributory pension and death
benefit plans sponsored by the Corporation. The pension
benefit formula used in the determination of pension cost is
based on a flat dollar amount per year of service according
to job classification for nonmanagement employees, and a
stated percentage of adjusted career income for management
employees.
The Corporation's objective in funding the plans, in
combination with the standards of the Employee Retirement
Income Security Act of 1974 (as amended), is to accumulate
funds sufficient to meet its benefit obligations to
employees upon their retirement. Contributions to the plans
are made to a trust for the benefit of plan participants.
Plan assets consist primarily of stocks, U.S. government and
domestic corporate bonds and real estate.
The following data relate to plan costs:
1993 1992 1991
Pension cost (credit) $ 21.6 $ 61.5 $ (57.5)
Amount capitalized in property,
plant and equipment $ 1.5 $ 11.5 $ (5.5)
Assumed discount rate for
determining projected
benefit obligation 7.25% 7.5% 7.5%
Assumed long-term rate of return
on plan assets 8.0% 8.0% 7.75%
Assumed composite rate of
compensation increase 4.6% 4.6% 4.6%
Statement of Financial Accounting Standards No. 87, "Employers'
Accounting for Pensions", requires certain disclosures to be made
of components of net periodic pension cost for the period and a
reconciliation of the funded status of the plans with amounts
reported in the balance sheets. Since the funded status of plan
assets and obligations relates to the plans as a whole, which are
sponsored by the Corporation, this information is not presented for
the Telephone Company. As of December 31, 1993 and 1992, the
amount of the Telephone Company's cumulative contributions made to
the pension trust in excess of its cumulative amount of pension
cost recognized was $251.8 and $396.6, respectively. Based on the
actuarial valuations of each plan, the fair value of each plan's
assets exceeded the estimated actuarial projected benefit
obligation at December 31, 1993 and 1992.
Savings Plans Substantially all employees are eligible to
participate in contributory savings plans sponsored by the
Corporation. Under the savings plans, the Telephone Company
matches a stated percentage of eligible employee contributions,
subject to a specified ceiling.
Since 1990, the Telephone Company's match of employee contributions
to the savings plans has been fulfilled with the Corporation's
common stock allocated from two leveraged Employee Stock Ownership
Plans and with purchases of the Corporation's stock in the open
market. The costs relating to these savings plans were $43.5,
$48.6 and $53.5 in 1993, 1992 and 1991, respectively.
Voluntary Retirement Programs As a result of a March 1992
agreement with the Communications Workers of America (CWA), the
Telephone Company offered a limited early retirement plan to
designated nonmanagement employees which included incentives
affecting service pension eligibility and amounts. Approximately
1,200 nonmanagement employees participated in this offer. The plan
resulted in a charge to 1992 net income of approximately $24.
In 1991, the Corporation amended the pension plan for management
employees and offered incentives for managers of selected
subsidiaries, including the Telephone Company, to retire or resign
effective December 30, 1991. Approximately 3,500 managers
participated in the program in 1991. The voluntary management
retirement program resulted in a charge to 1991 net income of
approximately $28 for the Telephone Company.
Postretirement Benefits The Telephone Company provides certain
medical, dental and life insurance benefits to substantially all
retired employees. Effective January 1, 1993, the Telephone
Company adopted Statement of Financial Accounting Standards No.
106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions" (Statement No. 106), which requires accrual of
actuarially determined postretirement benefit costs as active
employees earn these benefits. Prior to the adoption of Statement
No. 106, the Telephone Company expensed retiree medical benefits
when claims were incurred.
In implementing Statement No. 106, the Telephone Company
immediately recognized an accumulated obligation for postretirement
benefits (transition obligation) in the amount of $2,756.9 and a
related deferred income tax benefit of $976.2. The resulting 1993
charge to net income of $1,780.7 is included in the cumulative
effect of changes in accounting principles in the Statement of
Income.
In accordance with Statement No. 71, a regulatory asset associated
with the transition obligation was not recorded by the Telephone
Company.
In connection with the 1992 collective bargaining agreements
negotiated between subsidiaries of the Corporation and the CWA, the
Corporation established collectively bargained Voluntary Employee
Beneficiary Association (CBVEBA) trusts to fund postretirement
benefits. In March 1993, the Telephone Company contributed $132.3
into the CBVEBA trusts to be ultimately used for the payment of
postretirement benefits. The Telephone Company also funds
postretirement life insurance benefits at an actuarially determined
rate. Assets consist principally of stocks and U.S. government and
corporate bonds.
Statement No. 106 requires certain disclosures to be made of
components of net periodic postretirement benefit cost and a
reconciliation of the funded status of the plans to amounts
reported in the balance sheets. Since the funded status of assets
and obligations relates to the plans as a whole, this information
is not presented for the Telephone Company. The Telephone Company
recognized postretirement benefit cost for 1993 of $238.8. Under
the claims incurred method, expense would have been approximately
$126.6. In 1992 and 1991, the cost of providing these
postretirement benefits was $102.6 and $95.1, respectively. At
December 31, 1993, the amount included in postemployment benefit
obligation for postretirement benefits was $2,722.6.
Certain actuarial assumptions were used by the Corporation to
calculate postretirement costs under Statement No. 106. The
accumulated postretirement benefit obligation (APBO) was determined
using an assumed discount rate of 7.25 percent, a rate of future
compensation increases of 4.6 percent, and an expected long-term
rate of return on assets of 8.0 percent. The assumed medical cost
trend rate in 1994 is approximately 10.5 percent, decreasing
gradually to 5.5 percent in 2004, prior to adjustment of cost-
sharing provisions of the plan for active and certain recently
retired employees. The assumed dental cost rate in 1994 is 7.0
percent reducing to 5.0 percent in 2002. The discount rate used in
determining the postretirement benefit cost is 7.5 percent.
Raising the annual medical and dental cost trend rates by one
percentage point increases the net periodic postretirement benefit
cost for the year ended December 31, 1993 by approximately 7.5
percent.
Postemployment Benefits Effective January 1, 1993, the Telephone
Company adopted Statement of Financial Accounting Standards No.
112, "Employers' Accounting for Postemployment Benefits" (Statement
No. 112). Statement No. 112 requires accrual of disability pay,
workers' compensation and medical benefits at the occurrence of an
event that renders an employee inactive or, if the benefits ratably
vest, over the vesting period. These expenses were previously
recognized as the claims were incurred. A charge to net income of
$60.1, after a deferred tax benefit of $32.9, is included in the
cumulative effect of changes in accounting principles in the 1993
Statement of Income. Management does not anticipate that Statement
No. 112 will materially affect ongoing postemployment benefit
expense.
3. Income Taxes
The Telephone Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (Statement No.
109) effective January 1, 1993. In adopting Statement No. 109, the
Telephone Company adjusted its net deferred income tax liability
for all temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes, computed based on provisions
of the enacted tax law on a separate company basis. Financial
statements prior to January 1, 1993, have not been restated to
apply the provisions of Statement No. 109. The cumulative effect
of adopting Statement No. 109 as of January 1, 1993 was to decrease
net income for 1993 by $8.6. The adoption of Statement No. 109 had
no material effect on pre-tax income.
As a result of implementing Statement No. 109, the Telephone
Company recorded a $431.4 net reduction in its deferred tax
liability. The reduction in the deferred tax liability was caused
primarily by deferred tax benefits provided for excess deferred
taxes (arising from reduced tax rates, which are returned to
customers through rates), and unamortized investment tax credits,
partially offset by deferred taxes provided for temporary
differences previously flowed through the ratepayers. This
reduction was substantially offset by the establishment of a net
regulatory liability in accordance with Statement No. 71, with
minimal effect on net income. The net regulatory liability
recognizes the differences between the recording of income taxes
for financial reporting purposes and recovery of those taxes
through telephone service rates. Amounts comprising the net
liability will be amortized over the regulatory lives of the
associated assets. Future regulatory proceedings may affect the
period in which these amounts are recognized in net income.
Significant components of deferred tax liabilities and assets as of
December 31, 1993 are as follows:
Depreciation $ 2,893.5
Employee benefits 116.3
Other 105.0
Gross deferred tax liabilities 3,114.8
Employee benefits 1,091.9
Unamortized investment tax credits 156.9
Other 271.7
Gross deferred tax assets 1,520.5
Net deferred tax liabilities $ 1,594.3
The components of income tax expense are as follows:
1993 1992 1991
Federal:
Current $ 568.9 $ 489.4 $ 472.8
Deferred - net (139.0) (100.7) (69.5)
Amortization of investment tax (65.5) (72.0) (86.7)
credits
364.4 316.7 316.6
State and local:
Current 69.6 42.2 34.2
Deferred - net (24.8) 1.7 (.5)
44.8 43.9 33.7
Total $ 409.2 $ 360.6 $ 350.3 <PAGE>
The components of deferred federal income tax expense for
1992 and 1991 as reported prior to the adoption of Statement
No. 109 are as follows:
1992 1991
Depreciation $ (23.7) $ (62.5)
Employee benefits (70.0) 3.8
Other - net (7.0) (10.8)
Total $ (100.7) $ (69.5)
A reconciliation of income tax expense and the amount
computed by applying the statutory federal income tax rate
(35 percent for 1993, 34 percent for 1992 and 1991) to
income before income taxes and extraordinary loss and
cumulative effect of changes in accounting principals is as
follows:
1993 1992 1991
Taxes computed at federal $ 498.5 $ 450.4 $ 437.4
statutory rate
Increases (decreases) in taxes
resulting from:
Amortization of investment tax
credits over the life of the
plant that gave rise to
the credits (65.5) (72.0) (86.7)
Excess deferred taxes due to rate (43.2) (74.3) (55.8)
change
Depreciation of telephone plant
construction costs previously
deducted for tax purposes - net 22.5 21.7 23.2
State and local income taxes -
net of federal tax benefit 29.1 29.0 22.3
Other - net (32.2) 5.8 9.9
Total $ 409.2 $ 360.6 $ 350.3
On August 10, 1993, the Omnibus Budget Reconciliation Act
was signed into law. Among other provisions, the top
corporate tax rate was raised to 35 percent, effective
January 1, 1993. The effect on net income was not material,
as the increase in taxes on operating income was offset by
an increase in deferred tax assets associated with the
postemployment benefit obligation. Increases in previously
recorded deferred tax liabilities were offset by decreases
in the net regulatory liability.
4. Property, Plant and Equipment
Property, plant and equipment, which is stated at cost, is
summarized as follows at December 31:
1993 1992
Telephone plant:
In service $ 25,970.0 $ 25,005.4
Under construction 261.3 265.5
26,231.3 25,270.9
Accumulated depreciation and
amortization (10,532.2) (9,604.8)
Property, plant and equipment - net $ 15,699.1 $ 15,666.1
5. Leases
Certain facilities and equipment used in operations are
under capital or operating leases. Rental expenses under
operating leases were $68.3, $82.8 and $68.2 for 1993, 1992
and 1991, respectively. At December 31, 1993, the aggregate
minimum rental commitments under noncancelable leases were
as follows:
Operating Capital
Year Leases Leases
1994 $ 30.9 $ 5.3
1995 23.2 2.4
1996 11.2 1.6
1997 6.8 1.0
1998 4.3 1.3
Thereafter 26.7 3.4
Total minimum lease payments $ 103.1 15.0
Amount representing executory costs (0.9)
Amount representing interest (4.1)
Present value of minimum lease payments $ 10.0
6. Debt Maturing Within One Year
Debt maturing within one year consists of the following
at December 31:
1993 1992 1991
Commercial paper $ 375.0 $ 458.6 $ 521.9
Current maturities of long-term
debt 288.0 7.9 107.4
Total $ 663.0 $ 466.5 $ 629.3
Commercial paper:
Average amount outstanding
during the year * $ 671.1 $ 676.3 $ 496.6
Maximum amount at any month end
during the year $ 808.7 $ 808.1 $ 813.7
Weighted average interest rate
at December 31, 3.3% 3.5% 4.8%
Weighted average interest rate
on average commercial paper ** 3.2% 3.8% 5.9%
* Amounts represent average daily face amount.
** Computed by dividing the average daily face amount of
commercial paper into the aggregate related interest
expense.
At December 31, 1993 and 1992, the carrying amount of
commercial paper approximates fair value.
The Telephone Company has entered into agreements with
several banks for lines of credit totaling $270.0, all
of which may be used to support commercial paper
borrowings. All of these lines are on an informal
basis, with interest rates determined at time of
borrowing. There were no borrowings outstanding under
these lines of credit at December 31, 1993. <PAGE>
7. Long-Term Debt
Long-term debt, including interest rates and maturities,
is summarized as follows at December 31:
Maturities 1993 1992
Debentures
4.50%-5.88% 1995-2006 $ 700.0 $ 500.0
6.12%-6.88% 2000-2024 1,050.0 350.0
7.00%-7.75% 1994-2025 1,400.0 800.0
8.25%-9.63% 1996-2024 650.0 2,750.0
3,800.0 4,400.0
Unamortized discount-net of premium (34.2) (168.9)
Total debentures
(Fair value of $3,830.8 and $4,427.0) 3,765.8 4,231.1
Notes
5.04%-7.35% 1994-2010 900.0 285.0
Unamortized discount (4.8) (1.3)
Total notes
(Fair value of $915.1 and $288.3) 895.2 283.7
Capitalized leases 10.0 17.6
Total long-term debt, including current
maturities 4,671.0 4,532.4
Current maturities (288.0) (7.9)
Total long-term debt $ 4,383.0 $4,524.5
The fair value of the debentures was based on quoted
market prices. The fair values of the notes were
estimated using a discounted cash flow analysis based on
the yield to maturity of each issue.
The Telephone Company recorded extraordinary losses on
the refinancing of long-term bonds of $153.2 and $80.7
in 1993 and 1991 respectively, net of related income tax
benefits of $92.2 and $48.6, respectively.
The aggregate principal amounts of long-term debt
scheduled for repayment for the years 1994 through 1998
are $288.0, $117.5, $201.1, $120.7 and $172.9,
respectively. As of December 31, 1993, the Telephone
Company was in compliance with all covenants and
conditions of the indenture relating to its debt.
8. Reallocation of Shareowner's Equity
On March 25, 1993, the Board of Directors of the
Telephone Company approved the reduction of Common Stock
to $1.0 and the reallocation of all amounts in excess of
$1.0 to Paid-in Surplus. Any dividends to the
Corporation declared subsequent to January 1, 1993,
which are in excess of Retained Earnings will be
considered a return of equity and be paid as liquidating
dividends out of Paid-in Surplus. All future equity
contributions made by the Corporation will be allocated
to Paid-in Surplus.
9. Additional Financial Information
December 31,
Balance Sheets 1993 1992
Accounts payable and accrued liabilities:
Accounts payable $ 748.7 $ 826.0
Accrued taxes 379.9 296.9
Advance billing and customer deposits 222.2 208.7
Compensated future absences 182.8 179.6
Accrued interest 86.8 91.3
Accrued payroll 91.0 90.4
Other 448.6 309.9
Total $ 2,160.0 $ 2,002.8
Statements of Income 1993 1992 1991
Interest expense:
Long-term debt $ 354.8 $ 381.0 $ 414.4
Notes payable 21.3 25.9 29.3
Other 9.1 1.8 12.6
Total $ 385.2 $ 408.7 $ 456.3
Allowance for funds used
during construction $ 20.7 $ 30.1 $ 33.8
Statements of Cash Flows 1993 1992 1991
Cash paid during the year
for:
Interest $ 389.6 $ 416.3 $ 471.5
Income taxes $ 477.8 $ 563.5 $ 383.9
10. Segment and Major Customer Information
The Telephone Company operates predominantly in the
communications service industry.
Approximately 15 percent in 1993, 16 percent in 1992 and 17
percent in 1991 of the Telephone Company's revenues were from
services provided to AT&T. No other customer accounted for
more than 10 percent of total revenues.
11. Quarterly Financial Information (Unaudited)
Calendar Total Operating
Quarter Revenues Operating Income Net Income (Loss)
1993 1992 1993 1992 1993 1992
First $ 1,960.5 $ 1,863.9 $ 470.3 $ 393.4 $(1,682.7)#$ 225.6
Second 1,999.2 1,923.9 487.9 451.9 222.2 # 256.7
Third 2,060.6 1,974.7 428.9 463.4 232.1 # 264.3
Fourth 2,052.6 1,981.5 444.9 395.3 240.8 217.5
Total $ 8,072.9 $ 7,744.0 $ 1,832.0 $ 1,704.0 $ (987.6) $ 964.1
# Includes extraordinary losses of $89.4, $43.6 and $20.2 for the
first, second and third quarter of 1993, respectively. The first
quarter also includes a charge of $1,849.4 for cumulative effect of
changes in accounting principles. <PAGE>
Item 9. Changes in and disagreements With Accountants on
Accounting and Financial Disclosure.
No changes in accountants or disagreements with accountants on any
accounting or financial disclosure matters occurred during the
period covered by this report.
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.
(a) Documents filed as a part of the report: Page
(1) Report of Independent Auditors . . . . . 22
Financial Statements Covered by
Report of Independent Auditors:
Statements of Income . . . . . . . 23
Balance Sheets . . . . . . . . . . . 24
Statements of Cash Flows . . . . . . 25
Statements of Shareowner's Equity . 26
Notes to Financial Statements . . . 27
(2) Financial Statement Schedules Covered by
Report of Independent Auditors:
V-Property, Plant and Equipment . . . . . 41
VI-Accumulated Depreciation, Depletion,
and Amortization of Property, Plant
and Equipment . . . . . . . . . . . . 45
VIII-Valuation and Qualifying Accounts 46
X-Supplementary Income Statement Information 47
Financial statement schedules other than those listed above have
been omitted because the required information is contained in the
financial statements and notes thereto, or because such schedules
are not required or applicable.
(3) Exhibits:
Exhibits identified in parentheses below, on file with the SEC,
are incorporated by reference as exhibits hereto.
4 Pursuant to Regulation S-K, Item 601(b)(4)(iii)(A), no
instrument which defines the rights of holders of long
and intermediate term debt of the registrant is filed
herewith. Pursuant to this regulation, the registrant
hereby agrees to furnish a copy of any such instrument to
the SEC upon request.
12 Computation of Ratios of Earnings to Fixed Charges.
23 Consent of Ernst & Young.
24 Powers of Attorney.
(b) Reports on Form 8-K:
No report on Form 8-K was filed by the Registrant during the
last quarter of the year covered by this report. <PAGE>
<TABLE>
SOUTHWESTERN BELL TELEPHONE COMPANY Schedule V - Sheet 1
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT
Dollars in Millions
<CAPTION>
COL. A COL. B COL. C COL. D COL. E COL. F
Balance
at Additions Other Balance at
Beginning at cost Retirements Changes End of
Classification of Period -Note (a) -Note (b) -Note (c) Period
Year 1993
<S> <C> <C> <C> <C> <C>
Aerial Cable . . . . . . . . . $ 1,325.3 $ 52.1 $ 22.2 $ (.7) $ 1,354.5
Aerial Wire . . . . . . . . . . 34.8 .8 1.1 - 34.5
Buildings . . . . . . . . . . . 2,439.7 76.8 34.6 (20.9) 2,461.0
Buried Cable . . . . . . . . . 6,165.5 365.6 57.7 (4.5) 6,468.9
Central Office Assets . . . . . 9,146.8 840.8 446.9 3.9 9,544.6
Conduit Systems . . . . . . . . 1,294.8 46.9 2.4 .3 1,339.6
Furniture and Office Equipment 1,270.0 128.8 77.4 32.6 1,354.0
Held for Future Use . . . . . . .5 - - (.1) .4
Information Equipment . . . . . 508.0 47.5 67.9 29.1 516.7
Intrabuilding Network Cable . . 143.5 1.1 1.8 - 142.8
Land . . . . . . . . . . . . . 168.6 1.4 1.7 (.3) 168.0
Poles . . . . . . . . . . . . . 312.6 9.3 4.1 - 317.8
Submarine Cable . . . . . . . . 4.7 .1 .1 .1 4.8
Underground Cable . . . . . . . 2,028.7 85.1 15.2 7.1 2,105.7
Vehicles and Work Equipment . . 427.4 35.5 19.5 (25.4) 418.0
Total Property,Plant and Equipment $ 25,270.9 $ 1,691.8 $ 752.6 21.2 26,231.3
<FN>
Depreciation as a percentage of average depreciable plant 6.7%
and equipment
The Notes on Sheet 4 are an integral part of this Schedule. <PAGE>
</TABLE>
<TABLE>
SOUTHWESTERN BELL TELEPHONE COMPANY Schedule V - Sheet 2
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT
Dollars in Millions
<CAPTION>
COL. A COL. B COL. C COL. D COL. E COL. F
Balance at Additions Retirements Other Balance at
Beginning at cost -Note (b) Changes End of
Classification of Period -Note (a) -Note (c) Period
Year 1992
<S> <C> <C> <C> <C> <C>
Aerial Cable . . . . . . . . . $ 1,299.7 $ 47.9 $ 22.3 $ - $ 1,325.3
Aerial Wire . . . . . . . . . . 34.8 .6 .6 - 34.8
Buildings . . . . . . . . . . . 2,364.0 88.0 12.3 - 2,439.7
Buried Cable . . . . . . . . . 5,918.5 302.5 55.3 (.2) 6,165.5
Central Office Assets . . . . . 8,747.8 910.6 528.4 16.8 9,146.8
Conduit Systems . . . . . . . . 1,267.9 28.7 1.8 - 1,294.8
Furniture and Office Equipment 1,199.4 124.4 62.2 8.4 1,270.0
Held for Future Use . . . . . . .4 - - .1 .5
Information Equipment . . . . . 568.0 45.0 130.2 25.2 508.0
Intrabuilding Network Cable . 144.2 1.5 2.4 .2 143.5
Land . . . . . . . . . . . . . 167.9 .7 .3 .3 168.6
Poles . . . . . . . . . . . . . 307.1 9.5 4.0 - 312.6
Submarine Cable . . . . . . . . 4.7 - - - 4.7
Underground Cable . . . . . . . 1,981.2 62.4 15.0 .1 2,028.7
Vehicles and Work Equipment . . 414.5 29.7 17.0 .2 427.4
Total Property,Plant and Equipment $ 24,420.1 $ 1,651.5 $ 851.8 $ 51.1 $ 25,270.9
<FN>
Depreciation as a percentage of average depreciable plant 6.6%
and equipment
The Notes on Sheet 4 are an integral part of this Schedule <PAGE>
</TABLE>
<TABLE>
SOUTHWESTERN BELL TELEPHONE COMPANY Schedule V - Sheet 3
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT
Dollars in Millions
<CAPTION>
COL. A COL. B COL. C COL. D COL. E COL. F
Balance at Additions Retirements Other Balance at
Beginning at cost -Note (c) Changes End of
Classification of Period -Note (b) -Note (c) Period
Year 1991
<S> <C> <C> <C> <C> <C>
Aerial Cable . . . . . . . . . $ 1,281.8 $ 46.5 $ 27.2 $ (1.4) $ 1,299.7
Aerial Wire . . . . . . . . . . 35.1 .6 .9 - 34.8
Buildings . . . . . . . . . . . 2,245.1 131.3 11.9 (.5) 2,364.0
Buried Cable . . . . . . . . . 5,686.0 299.0 65.0 (1.5) 5,918.5
Central Office Assets . . . . . 8,505.5 732.3 515.1 25.1 8,747.8
Conduit Systems . . . . . . . . 1,238.8 31.7 2.4 (.2) 1,267.9
Furniture and Office Equipment 1,144.1 117.9 70.1 7.5 1,199.4
Held for Future Use . . . . . . 8.5 - - (8.1) .4
Information Equipment . . . . . 531.6 49.6 27.4 14.2 568.0
Intrabuilding Network Cable . . 141.1 2.1 2.5 3.5 144.2
Land . . . . . . . . . . . . . 165.3 2.7 .2 .1 167.9
Poles . . . . . . . . . . . . . 302.2 9.9 5.0 - 307.1
Submarine Cable . . . . . . . . 4.8 - .1 - 4.7
Underground Cable . . . . . . . 1,931.2 73.0 23.0 - 1,981.2
Vehicles and Work Equipment . . 413.3 20.5 19.3 - 414.5
Total Property,Plant and Equipment $ 23,634.4 $ 1,517.1 $ 770.1 $ 38.7 $24,420.1
<FN>
Depreciation as a percentage of average depreciable plant 6.6%
and equipment
The Notes on Sheet 4 are an integral part of this Schedule. <PAGE>
</TABLE>
Schedule V - Sheet 4
(a) Includes allowance for funds used during construction and additions
to capitalized leases.
(b) Items of telephone plant, when retired or sold are deducted from the
property accounts at the amount of cost originally recorded.
Amounts are estimated if original historical cost is not known.
(c) Primarily includes transfers to and from Material and Supplies for
reused material. The 1993 amounts include certain reclassifications.
<TABLE>
SOUTHWESTERN BELL TELEPHONE COMPANY
SCHEDULE VI - ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION
OF PROPERTY, PLANT AND EQUIPMENT
Dollars in Millions
<CAPTION>
COL. A COL. B COL. C COL. D COL. E COL. F
Balance at Additions Other Balance
Beginning Charged Changes at End of
Description of Period to Expense Retirements -Note (a) Period
<S> <C> <C> <C> <C> <C>
Year 1993 . . . . . . . . . . $ 9,604.8 1,699.6 752.6 (19.6) $ 10,532.2
Year 1992 . . . . . . . . . . $ 8,856.5 1,615.0 851.9 (14.8) $ 9,604.8
Year 1991 . . . . . . . . . . . $ 8,063.0 1,555.5 770.1 8.1 $ 8,856.5
<FN>
_________
(a) Comprised principally of the following items:
(1) Amounts received for property, plant and equipment sold.
(2) Provisions for the cost of removing plant and equipment retired.
(3) The 1991 amount also includes the Telephone Company's deferral of
certain interstate amortization expenses to 1992, as required by
the FCC beginning in July 1991.
</TABLE>
<TABLE>
SOUTHWESTERN BELL TELEPHONE COMPANY
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
Allowance for Uncollectibles
Dollars in Millions
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
Additions
(1) (2)
Charged
Balance at to Other Balance
Beginning Charged Accounts Deductions at End of
Description of Period to Revenue -Note (a) Note (b) Period
<S> <C> <C> <C> <C> <C>
Year 1993 . . . . . . . . . . $ 11.3 66.0 35.1 98.2 $ 14.2
Year 1992 . . . . . . . . . . $ 12.3 62.6 34.8 98.4 $ 11.3
Year 1991 . . . . . . . . . . $ 18.1 67.3 24.5 97.6 $ 12.3
<FN>
(a)Amounts previously written off which were credited directly to this account when recovered.
(b)Amounts written off as uncollectible. <PAGE>
</TABLE>
SOUTHWESTERN BELL TELEPHONE COMPANY
SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION
Dollars in Millions
Column B -
Charged to
Column A - Item Expense
Year 1993
1. Maintenance and repairs . . . . . $1,506.3
2. Taxes, other than payroll and
income taxes
Property . . . . . . . $ 292.8
Gross receipts . . . $ 179.0
Year 1992
1. Maintenance and repairs . . . . . $1,655.8
2. Taxes, other than payroll and
income taxes
Property . . . . . . $ 272.2
Gross receipts . . . . $ 147.9
Year 1991
1. Maintenance and repairs . . . . . $1,515.2
2. Taxes, other than payroll and
income taxes
Property . . . . . . . $ 265.1
Gross receipts . . . . $ 130.6
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the 18th day of March, 1994.
SOUTHWESTERN BELL TELEPHONE COMPANY
By /s/ Charles J. Roesslein
(Charles. J. Roesslein
Vice President-Chief Financial
Officer and Treasurer)
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the date
indicated.
Principal Executive Officer:
Robert G. Pope*
President and Chief
Executive Officer
Principal Financial and
Accounting Officer:
Charles J. Roesslein
Vice President-Chief Financial
Officer and Treasurer
/s/Charles J. Roesslein
(Charles J. Roesslein, as
attorney-in-fact and on
his own behalf as
Principal Financial
Officer and Principal
Accounting Officer)
Directors:
Robert G. Pope*
Royce S. Caldwell*
William E. Dreyer*
J. Cliff Eason*
James D. Ellis* March 18, 1994
Richard A. Harris*
Donald E. Kiernan*
_________
* by power of attorney
EXHIBIT INDEX
Exhibits identified in parentheses below, on file with the SEC, are
incorporated by reference as exhibits hereto.
4 Pursuant to Regulation S-K, Item 601(b)(4)(iii)(A), no instrument
which defines the reghts of holders of long and intermediate term debt
of the registrant is filed herewith. Pursuant to this regulation, the
registrant hereby agrees to furnish a copy of any such instrument to the
SEC upon request.
12 Computation of Ratios of Earnings to Fixed Charges.
23 Consent of Ernst & Young.
24 Powers of Attorney.
<TABLE>
EXHIBIT 12
SOUTHWESTERN BELL TELEPHONE COMPANY
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
DOLLARS IN MILLIONS
<CAPTION>
YEAR ENDED DECEMBER 31,
1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C>
Income Before Income Taxes,
Extraordinary Loss and Cumulative
Effect of Changes in Accounting
Principles . . . . . . . . . $ 1,424.2 $1,324.7 $ 1,286.3 $ 1,319.4 $1,268.9
Add: . . . Interest Expense 385.2 408.7 456.3 439.3 476.6
1/3 Rental Expense . . 22.8 27.6 22.7 29.6 28.2
Adjusted Earnings . . . . . $ 1,832.2 $1,761.0 $ 1,765.3 $ 1,788.3 $1,773.7
Total Interest Charges . . . . $ 385.2 $ 408.7 $ 456.3 $ 439.3 $ 476.6
1/3 Rental Expense . . . . . . 22.8 27.6 22.7 29.6 28.2
Adjusted Fixed Charges $ 408.0 $ 436.3 $ 479.0 $ 468.9 $ 504.8
Ratio of Earnings to Fixed Charges 4.49 4.04 3.69 3.81 3.51 <PAGE>
</TABLE>
EXHIBIT 23
Consent of Independent Auditors
We consent to the incorporation by reference in the
Registration Statement (Form S-3 No. 33-49967) of
Southwestern Bell Telephone Company and in the related
Prospectus of our report dated February 11, 1994, with
respect to the financial statements and schedules of
Southwestern Bell Telephone Company included in this
Annual Report (Form 10-K) for the year ended
December 31, 1993.
/s/ Ernst & Young
San Antonio, Texas
March 15, 1994 <PAGE>
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
THAT, WHEREAS, SOUTHWESTERN BELL TELEPHONE COMPANY, a Missouri
corporation, hereinafter referred to as the "Company," proposes to file
with the Securities and Exchange Commission, under the provisions of the
Securities Exchange Act of 1934, as amended, an annual report on Form
10-K, and
WHEREAS, each of the undersigned is an officer or a director, or
both, of the Company, as set forth beneath his signature;
NOW, THEREFORE, each of the undersigned hereby constitutes and
appoints James E. Taylor and Charles J. Roesslein, or either of them,
his attorneys for him and in his name, place and stead, and in his
office and capacity in the Company as an officer or a director, or, if
he holds both such offices, then as both an officer and as a director,
to execute and file such annual report, and thereafter to execute and
file any amendment or amendments thereto, hereby giving and granting to
said attorneys full power and authority to do and perform each and every
act and thing whatsoever requisite or necessary to be done in and
concerning the premises, as fully to all intents and purposes as he
might or could do if personally present at the doing thereof, hereby
ratifying and confirming all that said attorneys may or shall lawfully
do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has hereunto set his
hand on the date set forth opposite his signature.
/s/ Robert G. Pope 2/21/94
Robert G. Pope Date
Chairman of the Board,
President and Chief Executive Officer
/s/ Royce S. Caldwell 2/21/94
Royce S. Caldwell Date
Director and President-
Customer Services
/s/ William E. Dreyer 2/21/94
William E. Dreyer Date
Director
/s/ J. Cliff Eason 2/21/94
J. Cliff Eason Date
Director and President-
Network Services
/s/ James D. Ellis 2/21/94
James D. Ellis Date
Director
/s/ Richard A. Harris 2/21/94
Richard A. Harris Date
Director
/s/ Donald E. Kiernan 2/21/94
Donald E. Kiernan Date
Director <PAGE>
