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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number _____________
ROCHESTER TELEPHONE CORP.
(Exact name of registrant as specified in its charter)
New York 16-1469713
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
180 South Clinton Avenue, 14646-0700
Rochester, NY (Zip Code)
(Address of principal
executive offices)
(716) 777-1000
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest
practicable date.
No Par, No Stated Value Common Stock: One share outstanding
as of July 1, 1995
The Registrant meets the conditions set forth in general
instruction H(1)(a) and (b) of Form 10-Q and is therefore filing
this form with the reduced disclosure format.
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ROCHESTER TELEPHONE CORP.
Part I - Financial Information
Item 1. - Financial Statements
Presented on the following pages are the
financial statements of Rochester Telephone Corp.
(the "Company"). In the opinion of management, the
enclosed financial statements and accompanying notes
to the financial statements reflect all adjustments
necessary for a fair presentation of the financial
statements for the interim periods included herein.
There have been no adjustments made in the interim
financial statements which are not of a normal
recurring nature.
The Company received its net assets on January 1,
1995 from its parent company, Frontier Corporation.
The Company's comparative financial statements
presented herein represent the carve out of the
Company's results from operations and net assets from
the historical financial statements of Frontier
Corporation. The historical financial statements of
the Company were included in the consolidated
financial statements of Frontier Corporation.
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ROCHESTER TELEPHONE CORP.
STATEMENT OF INCOME
(Unaudited)
3 Months Ended 6 Months Ended June 30,
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In thousands of dollars 1995 1994 1995 1994
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<S> <C> <C> <C> <C>
Total revenues $78,846 $77,271 $156,498 $154,574
--------------------------------------------------------------------------------
Costs and expenses
Operating expenses 35,555 40,198 71,031 79,138
Depreciation and amortization 13,634 14,020 27,615 28,045
Taxes other than income taxes 6,731 7,311 13,265 14,225
--------------------------------------------------------------------------------
Total costs and expenses 55,920 61,529 111,911 121,408
--------------------------------------------------------------------------------
Operating income 22,926 15,742 44,587 33,166
Interest expense 2,126 3,111 4,186 6,157
Other income and expense:
Allowance for funds used
during construction 201 273 523 536
Other income (expense), net (588) (1,700) (1,263) (2,858)
--------------------------------------------------------------------------------
Income before taxes and
cumulative effect of change
in accounting principle 20,413 11,204 39,661 24,687
Income taxes 7,778 1,549 15,156 7,001
--------------------------------------------------------------------------------
Income before cumulative effect
of change in accounting
principle 12,635 9,655 24,505 17,686
Cumulative effect of change in
accounting principle for
postemployment benefits,
net of tax 0 0 0 (6,729)
--------------------------------------------------------------------------------
Net income $12,635 $9,655 $24,505 $10,957
================================================================================
See accompanying Notes to Financial Statements
</TABLE>
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ROCHESTER TELEPHONE CORP.
BALANCE SHEET
(Unaudited)
June 30, December 31,
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In thousands of dollars 1995 1994
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(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $8,679 $0
Accounts receivable 56,474 53,608
Material and supplies 3,016 3,623
Prepaid Directory 5,711 10,767
Other Prepayments 1,499 1,805
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Total Current Assets 75,379 69,803
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Property, Plant and Equipment
Telephone plant in service 840,442 844,654
Telephone plant under construction 17,016 21,228
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857,458 865,882
Less - Accumulated depreciation 405,800 400,135
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Net Telephone Plant 451,658 465,747
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Deferred and Other Assets 35,182 33,331
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Total Assets $562,219 $568,881
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LIABILITIES AND SHAREOWNER'S EQUITY
Current Liabilities
Accounts payable $32,912 $29,995
Advance from affiliate 7,351 0
Advance billings 6,024 7,597
Taxes accrued 8,408 4,970
Interest accrued 784 2,748
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Total Current Liabilities 55,479 45,310
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Long-Term Debt 100,000 120,000
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Deferred Income Taxes 74,336 75,384
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Postretirement Benefits Obligation 20,547 15,597
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Other Long-Term Liabilities 19,856 20,492
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Shareowner's Equity 292,001 292,098
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Total Liabilities and
Shareowner's Equity $562,219 $568,881
==========================================================================
See accompanying Notes to Financial Statements
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ROCHESTER TELEPHONE CORP.
STATEMENT OF SHAREOWNER'S EQUITY
Unaudited)
June 30, December 31,
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In thousands of dollars 1995 1994
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<S> <C> <C>
COMMON STOCK
1,000 shares authorized, no par value
(1 share issued and outstanding)
Balance, January 1 $292,098 $315,582
Equity Adjustment on Assets transferred
1/1/95 (24,602) 0
-------------------------
Adjusted Balance, January 1 $267,496 $315,582
RETAINED EARNINGS
Net Income 24,505 28,317
Common Stock Dividends in Cash 0 (51,801)
-------------------------------------------------------------------------
TOTAL SHAREOWNER'S EQUITY $292,001 $292,098
=========================================================================
See accompanying Notes to Financial Statements
</TABLE>
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<TABLE>
ROCHESTER TELEPHONE CORP.
STATEMENT OF CASH FLOWS
(Unaudited)
6 Months Ended June 30,
------------------------------------------------------------------------
In thousands of dollars 1995 1994
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<S> <C> <C>
Cash Flows from Operating Activities
Net Income $24,505 $10,957
------------------------------------------------------------------------
Adjustments to Reconcile Net Income to
Net Cash
Provided by Operating Activities:
Depreciation and amortization 28,283 28,045
Cumulative effect of change in
accounting principle 0 10,352
Changes in operating assets and
liabilities:
(Increase) in accounts receivable (2,866) (342)
Decrease (increase) in material
and supplies 607 (1,004)
Decrease in prepaid directory 5,056 4,387
Decrease in other prepayments 306 280
(Increase) decrease in deferred
and other assets (3,992) 179
Increase in accounts payable 2,917 2,278
(Decrease) in advance billings (1,573) (1,052)
Increase (decrease) in accrued
interest & taxes 1,474 (52)
Increase in postretirement
benefits obligation 4,950 4,342
Increase (decrease) in deferred
income taxes 915 (5,844)
(Decrease) increase in other
long term liabilities (636) 1,035
------------------------------------------------------------------------
Total Adjustments 35,441 42,604
------------------------------------------------------------------------
Net Cash Provided by Operating
Activities 59,946 53,561
------------------------------------------------------------------------
Cash Flows from Investing Activities
Expenditures for property, plant and
equipment (13,592) (14,363)
------------------------------------------------------------------------
Net Cash Used in Investing Activities (13,592) (14,363)
------------------------------------------------------------------------
Cash Flows from Financing Activities
Repayments of long-term debt (60,000) (5,000)
Proceeds of long-term debt 39,576 0
Advances from affiliate 7,351 0
Dividends paid 0 (34,198)
Equity adjustment on assets
transferred 1/1/95 (24,602) 0
------------------------------------------------------------------------
Net Cash Used in Financing Activities (37,675) (39,198)
------------------------------------------------------------------------
Net Increase (Decrease) in Cash & Cash
Equivalents 8,679 0
------------------------------------------------------------------------
Cash and cash equivalents at beginning of
period 0 0
------------------------------------------------------------------------
Cash and Cash Equivalents at End
of Period $8,679 $0
========================================================================
See accompanying Notes to Financial Statements
</TABLE>
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ROCHESTER TELEPHONE CORP.
Notes to Financial Statements
(Unaudited)
Note 1: Basis of Accounting
The accounting policies of Rochester Telephone Corp.
(the "Company"), a wholly owned subsidiary of Frontier
Corporation, are in conformity with generally accepted
accounting principles. In accordance with the provisions of
Financial Accounting Standards Board Statement No. 71,
Accounting for the Effects of Certain Types of Regulation
("FAS 71"), the Company conforms to the accounting
principles as prescribed by the Federal Communications
Commission and the New York State Public Service Commission,
where applicable. The provisions of FAS 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.
The Company periodically reviews the criteria that
would result in the discontinuance of FAS 71, including
changes in the level of competition or a significant change
in the manner in which rates are set by regulators. At this
time, the Company believes that FAS 71 continues to be
appropriate. However, if in the future the Company
determines that FAS 71 is no longer applicable, the
resulting impact to the Company's Statement of Income could
be a material, extraordinary non-cash charge to operations.
The Company received its net assets on January 1, 1995
from its parent company, Frontier Corporation. The
Company's comparative financial statements for 1994
represent the carve out of the Company's results from
operations and net assets from the historical financial
statements of Frontier Corporation. The historical
financial statements of the Company were included in the
consolidated financial statements of Frontier Corporation.
The Company's management believes that the assumptions used
in preparing the carve out financial statements provide a
reasonable basis for presenting the results of operations
and net assets of the Company. A summary of the significant
assumptions used to prepare the carve out financial
statements follows.
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Allocation of Corporate Overhead
The results of operations of the Company include allocations
of corporate expenses from Frontier Corporation. These
costs include primarily executive, corporate planning,
legal, tax, treasury, corporate communications, and
corporate accounting functions. They are allocated to the
Company based on a weighted average of four mutually
beneficial factors; employees, revenues, capitalization and
common equity. The methodology used to allocate these
corporate mutually beneficial costs is considered reasonable
and has been approved for use by the New York State Public
Service Commission prior to the split-up of the companies
under the Open Market Plan agreement.
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Cash Management/Dividend Policy
As a subsidiary of Frontier Corporation, the Company
utilizes Frontier's centralized cash management system.
This centralized cash management system provides the Company
with a repository for the investment of cash reserves and an
immediate low cost source of funds for borrowing. Under the
Open Market Plan (see Note 6) however, the Company may not
exceed short-term borrowings from Frontier Corporation in
excess of 5 percent of its total capital. The operating
results reflect net interest on short-term cash reserves
invested with Frontier offset by interest expense on
short-term borrowings from Frontier.
The 1994 comparative financial statements assumed that the
net cash flow generated from operating activities, less
those expenditures for property plant and equipment and
repayment of long term debt, was paid to Frontier
Corporation in the form of a cash dividend. The Open Market
Plan (see Note 6) effective January 1, 1995, imposes
limitations on the declaration of dividends from the Company
to Frontier Corporation such that the Company may only pay
dividends on its common stock when the payment of such
dividends will neither impair the Company's service quality
nor its ability to finance its short- and long-term capital
needs at reasonable terms while maintaining specified debt
ratings.
Valuation of Common Stock
The value assigned to common stock of the Company was
determined based on the historical net book value of the
assets transferred from Frontier Corporation to the Company
on January 1, 1995. The net book value of the assets
transferred, as of January 1, 1995, was $267 million.
Note 2: Income Taxes
The taxable income of the Company is included in the
consolidated federal income tax return of Frontier. The
provision for federal income taxes consists of the following
(in thousands):
3 Months Ended 6 Months Ended
June 30, June 30,
1995 1994 1995 1994
-------------- ---------------
Federal
Current $8,163 $2,392 $15,881 $9,463
Deferred (385) (843) (725) (2,462)
----- ----- ------ -----
$7,778 $1,549 $15,156 $7,001
----- ----- ------ -----
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For State tax purposes the Company is taxed under
Article 9 of the New York State Tax Law on the basis of
gross receipts, not net taxable income. Therefore, there is
no provision for state income taxes.
Deferred income taxes are provided in compliance with
the normalization provisions of current tax law and
regulatory orders. The major temporary differences
reflected in the deferred tax liability are depreciation and
investment tax credits. On January 1, 1993, the company
adopted Financial Accounting Standards Board Statement No.
109 (FAS 109) "Accounting For Income Taxes". In accordance
with state and federal regulatory orders which required the
Company to adopt this accounting standard on a revenue
neutral basis, a deferred regulatory asset and liability has
been established. The regulatory asset represents a
receivable from ratepayers for the income taxes the company
will be required to pay in the future resulting from
regulators allowing the prior flow through of tax benefits,
primarily associated with accelerated depreciation, directly
to ratepayers before the Company was required to normalize
all temporary differences. The regulatory liability
primarily relates to the reduction of deferred taxes as a
result of the Tax Reform Act of 1986, which reduced the
corporate federal income tax rate from 46 to 34 percent.
Under the Orders to adopt FAS 109 on a revenue neutral
basis, the Company must flow-back to earnings these excess
deferred taxes as the temporary differences which gave rise
to them, reverse themselves.
Note 3: Postemployment Benefits
In January 1994, the Company adopted the provisions of
Financial Accounting Standards Board Statement No. 112,
"Employers' Accounting for Postemployment Benefits" (FAS
112). FAS 112 requires that projected future costs of
providing postemployment, pre-retirement benefits, such as
disability, pre-pension leave (salary continuation) and
severance pay, be recognized as an expense as employees
render service rather than when the benefits are paid. The
Company recognized the obligation for postemployment
benefits through a cumulative effect charge to net income of
$6.7 million, net of taxes of $3.6 million. The adoption of
FAS 112 is not expected to significantly impact future
operating expense or the Company's cash flow.
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Note 4: Stock Incentive Plans
In January 1995, the Rochester Telephone Corp. Board of
Directors adopted Frontier Corporation's "Management Stock
Incentive Plan" and "Directors Stock Incentive Plan".
Directors, executive officers, and key management employees
of Rochester Telephone Corp. are eligible to receive
Frontier stock options under these plans. Specifically
under the terms of the "Directors Stock Incentive Plan", all
Rochester Telephone Corp. non-employee directors are
entitled to receive annually 3,000 options for Frontier
Corporation common stock. Under this plan, the aggregate
number of shares available for grant is 1,000,000 shares.
Under the "Management Stock Incentive Plan" the aggregate
number of shares available for grant cannot exceed one
percent of the number of Frontier Corporation's issued
shares outstanding, including treasury stock.
Under both plans, the exercise price is the fair market
value of the stock on the date of the grant of the stock
option. One third of the options become exercisable on the
first year anniversary of the grant date. Another third
become exercisable on the second year anniversary and the
final third become exercisable on the third year anniversary
of the grant date. The options expire ten years after the
date of grant.
Information with respect to Frontier stock options
granted to directors and executive officers of Rochester
Telephone Corp. under the above plans are as follows:
Option Price
Shares Per Share Aggregate
----------------------------------------------------------------
Outstanding at December
31, 1994 67,694 $1,365,777
Granted in March 1995 41,200 $21.88 901,250
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Outstanding at March 31,
1995 108,894 $2,267,027
Granted in April 1995 15,000 $19.88 298,125
Cancelled in May 1995 (9,800) $19.06-$21.88 (207,763)
----------------------------------------------------------------
Outstanding at June 30,
1995 114,094 $2,357,390
================================================================
The above table includes options granted to the
Chairman and CEO, President, Treasurer, Secretary and all
five non-employee directors of Rochester Telephone Corp.
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Note 5: Cash Flows
For purposes of the Statement of Cash Flows, the
Company considers all highly-liquid investments with a
maturity of three months or less when purchased to be cash
equivalents.
Actual interest paid was $6.1 million and $6.3 million
for the six month periods ended June 30, 1995 and June 30,
1994, respectively. In addition, actual income taxes paid
were $15.3 million for the six months ended June 30, 1995
and $11.1 million for the six months ended June 30, 1994.
Note 6: Regulatory Matters
Open Market Plan
At its public meeting on October 13, 1994, the New York
State Public Service Commission (PSC) unanimously approved
Frontier Corporation's Open Market Plan and Corporate
Restructuring (Open Market Plan) and subsequently issued a
written order in November 1994. The Open Market Plan was
approved by shareowners in December 1994 and became
operational on January 1, 1995.
Under the terms of the Open Market Agreement, the
majority of the Board of Directors of the Company must be
outside directors. They may not be officers or employees of
Frontier Corporation or any of its affiliates. Only one of
the Company's directors may serve simultaneously as a
director, officer or employee of Frontier Corporation or any
of its affiliates. Also, at no time may the officers and
senior management of the Company, or their immediate
families, own shares or options in Frontier stock such that
the cumulative ownership exceeds ten percent of the
outstanding shares of Frontier Corporation. Rochester
Telephone is obligated to certify annually to the PSC the
percentage of stock ownership in Frontier Corporation by its
officers and senior employees.
In addition, affiliate transactions between Frontier
Corporation and Rochester Telephone are also subject to
limitations under the open market plan. Purchases by the
Company of non-tariffed goods and services from Frontier
Corporation and its affiliates are limited to approximately
$13.8 million annually, with an exception for purchases from
Frontier's information services subsidiary, which are
limited to the Company's 1993 information services expense
levels.
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For the seven year period of the Open Market Plan
Agreement, the Company will no longer be subject to rate of
return regulation. In its place, the Company will be
subject to price regulation. The local market for telephone
service in Rochester will be opened to full competition.
Over the course of the next seven years, rate reductions of
$21 million will be implemented for Rochester area
consumers. In addition, a total of $17 million will be
credited to the depreciation reserve.
The Open Market Plan Agreement temporarily resolves
certain financial questions that are linked to the royalty
proceeding, a contested proceeding that has been in
litigation since 1984. In particular, the PSC has agreed
that a royalty will not be imposed by the PSC against
Frontier Corporation or the Company during the seven year
period of the Open Market Plan, subject to limited
exceptions. However, the PSC is not precluded from seeking
any royalties pursuant to the Royalty Order, on a
prospective basis only, as it may be modified as a result of
judicial appeal, subsequent to the expiration of the Open
Market Plan. Under the Open Market Plan Agreement, the
Company is permitted to continue its litigation challenging
the Royalty Order, and the company intends to pursue it to
conclusion.
The Open Market Plan Agreement also places certain
conditions on the ability of the Board of Directors of the
Company to declare dividends. Specific conditions include a
quarterly certification by the directors of the Company to
the PSC, that the payment of dividends to Frontier
Corporation will neither impair the service quality provided
to customers of the Company or its ability to finance its
short and long term capital needs at reasonable terms while
maintaining a target debt rating of "A" (for S&P). Also
under the terms of the Agreement, the Company will
immediately be required to discontinue the payment of any
dividends to Frontier Corporation if the Company experiences
a downgrading of its senior debt to "BBB" or is placed on
credit watch for a possible downgrading of its debt to
"BBB".
Incentive Regulation
Prior to the Open Market Plan Agreement, an incentive
regulation agreement between the Company and the PSC had
been in effect. As part of that agreement, the Company
agreed to share with ratepayers 50 percent of earnings above
a threshold rate of return. As a result, the Company's
revenue was reduced by $9.4 million in 1994, plus interest.
This revenue reduction was credited to the Company's
depreciation reserve to alleviate a reserve deficiency
rather than refunding cash to ratepayers.
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Note 7: Commitments and Contingencies
It is anticipated that the Company will expend
approximately $37 million for additions to property, plant,
and equipment during 1995. In connection with this capital
program, the Company has made certain commitments for the
purchase of material and equipment.
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Item 2 - Management's Narrative Analysis of the Results of
Operations
Because the Registrant meets the conditions of General
Instruction H, the Registrant has elected to omit the
information called for by Item 2, Management's Discussion
and Analysis of Financial Condition and Results of
Operations. Set forth below is a narrative analysis of the
Registrant's Results of Operations.
DESCRIPTION OF BUSINESS
-----------------------
Rochester Telephone Corp. (the "Company") is a
regulated independent telephone company that serves
approximately 500,000 access lines in the greater Rochester,
New York metropolitan area. The Company was incorporated in
November 1994 as a wholly owned subsidiary of Frontier
Corporation. Frontier Corporation, previously known as
Rochester Telephone Corporation, has been providing local
telephone service in the greater Rochester market since
1920. The Company is the primary provider of basic telephone
services in the Rochester market and offers its customers a
full complement of local telephone network services, access
to long distance network services, directory and other
operator services. The Company also offers all of its
network services for sale on a wholesale basis to other
telecommunication service providers in the Rochester market.
RESULTS OF OPERATIONS
---------------------
Net income for the first six months of 1995 was $24.5
million, a $13.5 million increase over the comparable period
in 1994. The results for the first six months of 1994
reflected a one-time after tax charge of $6.7 million for
the adoption of Financial Accounting Standards Board
Statement No.112 (FAS 112), "Employers' Accounting for
Postemployment Benefits," related to the accounting for
certain employee benefit costs. Excluding this charge, 1995
net income increased by $6.8 million or 38.6% over the
comparable 1994 period. Details of specific line item
changes are discussed below.
Revenues. Total revenues for the first six months
ended June 30, 1995 were $156.5 million, an increase of $1.9
million, or 1.2 percent over 1994. Revenue growth was
primarily driven by an increase in access lines of 2.2% over
the first six months of 1995, an increase in telephone
feature revenue due to increased marketing efforts ($1.5M),
and increased demand for private line services ($0.9M).
These revenue increases were partially offset by price
reductions for local measured service and the elimination of
the residential touchtone charge as agreed to by the Company
under the Open Market Plan.
Operating Income. Operating income for the six month
period ended June 30, 1995 was $44.6 million compared to
$33.2 million in 1994. This increase of $11.4 million, or
34.4%, was primarily attributable to a reduction in
operating expenses as described below.
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Operating Expenses. Total operating expenses for the
first six months of 1995 decreased by $9.5 million, or 7.8%
over the six month period ended June 30, 1994. The primary
reasons for the reduction to operating expense included
lower employee costs due to the transfer of employees from
the Company to Frontier Communications of Rochester and Frontier
Corporation, lower software development costs and
right-to-use fees, a reduction in maintenance overtime, and a
reduction in the allocation of rent expense. Depreciation and
amortization expense for the first six months of 1995 was
also down 1.5% or $0.4 million from the comparable period
last year. Finally, operating taxes for the six months
ended June 30, 1995 were $1.0 million lower than 1994,
representing a 6.7% decrease. Reductions in both revenue
and property taxes contributed to the decrease.
Other Income Statement Items
----------------------------
Interest Expense. Interest expense for the period
ended June 30, 1995 was down 32.0% from $6.2 million in the
first six months of 1994 to $4.2 million in the first six
months of 1995. The primary reasons for the reduction in
interest expense are lower interest rates applicable to the
Company's debt and a decrease in the Company's average
outstanding debt levels over the two periods. For the first
six months of 1995 the average outstanding long-term debt of
the Company was $110.0 million as compared to $127.5 million
in 1994. Also in 1994, the allocation of interest expense to
the Company was based on the effective composite interest
rate paid on the consolidated debt of the Company and
Frontier Corporation. The Company's average outstanding
debt for the first six months of 1995 consisted of $90.0
million under the Company's revolving credit agreement
established in December 1994 and $20.0M of medium term notes
issued on March 27, 1995. The interest rates applicable to
this debt are LIBOR plus .17% for amounts borrowed under the
revolving credit agreement and 7.51% on the medium term
notes. In total, the composite interest rate for the first
six months of 1995 was 7.4% as compared to 9.7% for the
comparable period in 1994.
Other Expense, Net. Other expense for the first
six months of 1995 decreased by $1.6 million or 55.8% over the
comparable period for 1994. The primary reason for this
reduction was the elimination in 1995 of the legal and
administrative costs of filing for the Open Market Plan.
Income Taxes. Income taxes for the first six months of
1995 increased $8.2 million over the comparable period in
1994. This increase was primarily due to higher pre-tax
income in 1995. The effective federal income tax rate for
the first six months of 1995 was 38.2%. This compares to an
effective income tax rate of 28.4% for the comparable period
in 1994.
<PAGE>
<PAGE>
Nonrecurring item. In 1994, the Company adopted
Financial Accounting Standards Board Statement ("FAS") No.
112, "Employers' Accounting for Postemployment Benefits,"
which requires that projected future costs of providing
postemployment benefits be recognized as an expense during
the employment term of employees rather than at the time of
payment. The cumulative effect of the adoption of FAS No.
112 by the Company amounted to a charge of $6.7 million, net
of taxes of $3.6 million. As required by FAS No. 112, the
Company reported this one-time charge as a special line item
on the Statement of Income in the first quarter of 1994.
FINANCIAL CONDITION
-------------------
Cash and Cash Equivalents
-------------------------
At June 30, 1995, the Company had $8.7 million in cash
and cash equivalents. Cash generated from operations
amounted to $59.9 million in the first six months of 1995
compared to $53.6 million for the comparable period in 1994.
Capital expenditures for the first six months of 1995 were
$13.6 million, down $0.8 million from the first six months
of 1994. No dividends were declared during the first six
months of 1995 as compared to $34.2 million in dividends
paid for the comparable period in 1994. Total debt
repayments amounted to a net $20.0 million for the first six
months of 1995. This compares to a net $5.0 million
repayment in the first six months of 1994.
Debt
----
At June 30, 1995, the Company's total outstanding long-
term debt amounted to $100.0 million. This debt consisted of
$60.0 million under the Company's Revolving Credit Agreement
entered into in December of 1994 and $40.0 million of medium
term notes issued on March 27, 1995. The net proceeds from
the medium term notes were used to pay down $40.0 million of
the Company's outstanding balance under the Revolving Credit
Agreement. Operating cash was used to repay an additional
$20.0 million under the Revolving Credit Agreement during
the second quarter of 1995.
The Company's Revolting Credit Agreement, entered into
in December 1994, was amended at the end of the first quarter
to reduce the maximum line of credit under the agreement from
$160 million down to $100 million and release the security
interest in the assets of the Company. All other terms and
conditions remain unchanged.
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Debt Ratio and Interest Coverage
--------------------------------
The Company's debt ratio (total debt as a percent of
total capitalization) was 25.5 percent at June 30, 1995 as
compared with 29.1 percent at December 31, 1994. This change
is primarily due to the retirement of outstanding debt under
the Revolving Credit Agreement. Pre-tax interest coverage
was 10.5 times for the first six months of 1995, as compared
with 5.4 times at the end of 1994.
Capital Spending
----------------
During the first six months of 1995, gross capital
expenditures amounted to $13.6 million. The Company plans
to spend a total of approximately $37.0 million on its capital
program during the full year 1995. The total 1995 capital
program represents an increase of $2.1 million over 1994.
Cash Flows
----------
Cash Flow from Operating Activities. Cash flow from
operations amounted to $59.9 million for the first six
months of 1995 as compared to $53.6 million for the same
period in 1994. The primary drivers of the cash flow
increase were an increase in net income, a decrease in
prepaid directory costs, an increase in accounts payable,
and an increase in the postretirement benefit obligation.
Cash Flow from Investing Activities. Expenditures on
property, plant and equipment for the first six months of
1995 amounted to $13.6 million, a decrease of $0.8 million
from the $14.4 million spent during the first six months of
1994.
Cash Flow from Financing Activities. Cash flow from
financing activities amounted to an outflow of $37.7 million
for the first six months of 1995, compared with outflows of
$39.2 million for the same period last year. In the first
quarter of 1995, the Company issued $40.0 million of new
medium term notes (7 year maturity, 7.51% interest), using
the net proceeds of the debt issuance to pay down $40.0
million of outstanding debt under the Revolving Credit
Agreement. In addition, the Company paid down an additional
$20.0 million dollars of outstanding debt under the
Revolving Credit Agreement in the second quarter of 1995.
No dividends were declared in the either the first or second
quarter of 1995. For the first six months of 1994 the
Company paid $34.2 million in dividends to Frontier
Corporation.
<PAGE>
<PAGE>
OTHER ITEMS
-----------
Regulatory Matters
------------------
During the seven year period of the Open Market Plan
Agreement which became effective on January 1, 1995,
Rochester Telephone Corp. is no longer regulated by the
monopoly standard of rate-of-return regulation, but instead
by pure price cap regulation. The local market for
telephone service in Rochester has been opened up to full
competition. Over the course of the seven year period of
the Open Market Plan, rate reductions of $21 million will be
implemented for Rochester area consumers. In addition, a
total of $17 million will be credited to the depreciation
reserve during this seven year period. Rochester Telephone
Corp. can decide when to increase the depreciation reserve,
provided that by the end of the first year, the amount shall
be at least $5 million and, by the end of the fifth year,
the cumulative amount shall be at least $15 million. During
the first six months of 1995, no credits were taken against
the depreciation reserve.
Certain Consideratons Related to the Open Market Plan
-----------------------------------------------------
Management believes there are significant market and
business opportunities associated with the Company's Open
Market Plan; however, there are also uncertainties
associated with the Plan and the corporate restructuring.
In our opinion, these are the most significant:
(a) Increased Competition in the Rochester, New York
Market. The Open Market Plan is hastening local
telephone competition in the Rochester, New York market
by providing for (1) the full interconnection of
competing local networks including reciprocal
compensation for terminating traffic, (2) equal access
to network databases, (3) access to local telephone
numbers and (4) telephone number portability. Some
competitors, such as AT&T, have already begun providing
basic local exchange services in the Rochester market.
The inherent risk associated with opening the Rochester
market to competition is that some customers will
purchase services from competitors, which would reduce
the number of customers of the Company and potentially
cause a decrease in the Company's revenues and
profitability. The Company believes, however, that
usage of its network following implementation of the
Open Market Plan will increase over the long term, and
that new revenue will offset, to some extent, the loss
of revenues from end-user customers. Increased
competition may also lead to additional price decreases
for services of the Company, adversely impacting the
Company's margins. However, price cap regulation will
not require Rochester Telephone Corp. to rebate any
additional earnings achieved through operating
efficiencies that previously would have been shared
with customers. The Open Market Plan allows the
Company to anticipate the erosion of its market share
in local exchange services on terms that the Company
believes will be in the best interests of its
customers, employees and shareowners.
(b) Risk of Rate Stabilization Plan. The Rate
Stabilization Plan incorporated in the Open Market Plan
Agreement provides for a total of $21 million in rate
reductions for Rochester Telephone Corp. over the life
of the Agreement. During this time, the rates charged
by Rochester Telephone Corp. for basic residential and
business telephone service may not be increased for any
reason. But, since Rochester Telephone Corp. will
operate under a price cap environment with no rate of
return regulation, the Company will be able to retain
the full value of any cost savings it introduces over
the life of the plan. Even though the rates provided
in the Rate Stabilization Plan were designed to permit
the Company to recover its costs and to earn a
reasonable rate of return, there is no assurance that
this will occur.
(c) Restraints on Frontier Corporation's Control of
Rochester Telephone Corp. The Open Market Plan
prohibits payment of dividends by Rochester Telephone
Corp. to Frontier Corporation if (i) Rochester
Telephone Corp.'s senior debt has been downgraded to
"BBB" by Standard & Poor's ("S&P"), or the equivalent
rating by other rating agencies or is placed on credit
watch for such a downgrade, or (ii) a service quality
penalty is imposed under the Open Market Plan
Agreement. Dividends paid to the parent, Frontier
Corporation, also are prohibited unless Rochester
Telephone Corp.'s directors certify that such dividends
will neither impair Rochester Telephone Corp.'s service
quality nor its ability to finance its short and long
term capital needs on reasonable terms while
maintaining an S&P debt rating target of "A". Other
financial covenants exist to ensure that Rochester
Telephone Corp. will have the financial strength to
provide quality service.
(d) Other Considerations. Because Rochester Telephone
Corp. and Frontier Communications of Rochester will
sometimes compete for the same customers, there may be
some duplication of sales and service expenses in the
consolidated company. Over time, this duplication is
expected to reach minimal levels.
<PAGE>
<PAGE>
PART II - OTHER INFORMATION
---------------------------
Item 1 - Legal Proceedings
--------------------------
In its Opinion and Order in Case 87-C-8959, issued
July 6, 1993, the NYSPSC, by a three-to-two vote, imposed a
royalty upon the Company in the amount of two percent of
the total capitalization of the Company's unregulated
operations. The NYSPSC justified the royalty on two
grounds: first, that ratepayers are entitled to protection
from the potential for cost misallocations and increased
risk that accompany diversification of the Company's basic
telephone business; and second, that the Company's
unregulated operations benefit from their use of the
Rochester name and reputation. The NYSPSC rejected the
Company's statutory and constitutional defenses and
concluded that it possessed the authority under the Public
Service Law to impose a royalty and that its imposition is
not unconstitutional. Based upon an initial interpretation
of the Order, the Company estimates that its potential
effect is in the range of $2 million per year. The
royalty, if implemented, would be an imputation against
Rochester Telephone Corp's revenue requirement from
regulated intrastate operations. The NYSPSC ordered the
Rochester Telephone Corp. to file, by August 5, 1993, an
accounting plan to account for the royalty amount, together
with a plan for returning such amount to ratepayers. The
NYSPSC denied a request for waiver and, on August 5, 1993,
the Company filed its plan.
On August 6, 1993, Rochester Telephone Corp. filed
with Supreme Court, Albany County, its petition seeking
judicial review of the NYSPSC's Opinion and Order. By order
dated October 7, 1993, this proceeding was transferred to
the Appellate Division, Third Department. On June 30, 1994,
the Appellate Division unanimously upheld the Commission's
Order. On July 29, 1994, the Company filed a Notice of
Appeal and a Motion for Leave To Appeal with the New York
Court of Appeals. On December 8, 1994, the Court of Appeals
accepted the Company's appeal and denied the Motion for
Leave To Appeal as unnecessary. Briefs were filed between
February and April 1995. On February 27, 1995, the NYSPSC
moved to dismiss the appeal as moot as a result of the Open
Market Plan Settlement. The Company filed its opposition to
that motion on March 13, 1995. On April 4, 1995, the Court
denied the Commission's motion to dismiss without prejudice
to renew at oral argument and set the case for oral argument
on September 21, 1995. The Company is vigorously contesting
this case and is of the opinion that it will ultimately
prevail, but cannot predict the outcome with any certainty
at this time. While this royalty issue continues to be
litigated, the Company has agreed within the context of the
Rate Stabilization Plan, which is part of the Open Market
Plan, that no additional revenue requirement adjustments
will be made during the duration of the Open Market Plan.
<PAGE>
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
ROCHESTER TELEPHONE CORP.
---------------------------
(Registrant)
Dated: August 14, 1995 By/s/Martin Mucci
_________________________
Martin Mucci
Treasurer
(and Principal Financial Officer)
<PAGE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from
financial statements for the six-month period ended June 30, 1995 and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000936105
<NAME> ROCHESTER TELEPHONE CORP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
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0
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