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 September 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, Rochester, NY 14646-0700
(Address of principal executive offices) (Zip Code)
(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: 772 shares outstanding as of
October 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 unaudited 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.
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 September 30, 9 Months Ended September 30,
- - ------------------------------------------------------------------------------------------------
In thousands of dollars 1995 1994 1995 1994
- - ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Revenues $78,661 $77,295 $235,159 $231,869
- - ------------------------------------------------------------------------------------------------
Costs and Expenses
Operating expenses 39,254 35,608 110,285 114,746
Depreciation and amortization 13,483 14,053 41,098 42,098
Taxes other than income taxes 5,898 6,854 19,163 21,079
- - ------------------------------------------------------------------------------------------------
Total Costs and Expenses 58,635 56,515 170,546 177,923
- - ------------------------------------------------------------------------------------------------
Operating Income 20,026 20,780 64,613 53,946
Interest expense 1,818 3,160 6,004 9,317
Allowance for funds used during
construction 225 260 748 796
Other income (expense), net 1,254 (1,341) (9) (4,199)
- - ------------------------------------------------------------------------------------------------
Income Before Taxes, Extraordinary
Item, and Cumulative Effect of
Changes in Accounting Principles 19,687 16,539 59,348 41,226
Income taxes 7,173 5,224 22,329 12,225
- - ------------------------------------------------------------------------------------------------
Income Before Extraordinary Item
and Cumulative Effect of Changes
in Accounting Principles 12,514 11,315 37,019 29,001
Extraordinary Item
Discontinuation of regulatory
accounting principles, net of
tax (60,441) 0 (60,441) 0
Cumulative effect of Changes in
Accounting Principles
Accounting for contributions,
net of tax ( 1,020) 0 ( 1,020) 0
Postemployment benefits,
net of tax 0 0 0 ( 6,729)
- - ------------------------------------------------------------------------------------------------
Net Income ($48,947) $11,315 ($24,442) $22,272
================================================================================================
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Average common shares outstanding 772 1 772 1
Earnings Per Common Share
Primary and Fully Diluted:
Income before Extraordinary Item
and Cumulative Effect of Changes
in Accounting Principles $16,210 $11,315,000 ($47,952) $29,001,000
Extraordinary Item (78,292) 0 (78,292) 0
Cumulative effect of Changes
in Accounting Principles (1,321) 0 (1,321) (6,729,000)
- - ------------------------------------------------------------------------------------------------
Earnings Per Common Share (63,403) $11,315,000 ($31,661) $22,272,000
================================================================================================
See accompanying Notes to Financial Statements
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ROCHESTER TELEPHONE CORP.
BALANCE SHEET
(Unaudited)
September 30, December 31,
- - -------------------------------------------------------------------------------
In thousands of dollars 1995 1994
- - -------------------------------------------------------------------------------
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ASSETS
Current Assets
Cash and cash equivalents $ 8,085 $0
Accounts receivable 58,570 53,608
Material and supplies 3,838 3,623
Prepaid Directory 3,135 10,767
Other Prepayments 2,578 1,805
- - --------------------------------------------------------------------------------
Total Current Assets 76,206 69,803
- - --------------------------------------------------------------------------------
Property, Plant and Equipment
Telephone plant in service 846,082 844,654
Telephone plant under construction 20,277 21,228
- - --------------------------------------------------------------------------------
866,359 865,882
Less Accumulated depreciation 527,906 400,135
- - --------------------------------------------------------------------------------
Net Telephone Plant 338,453 465,747
- - --------------------------------------------------------------------------------
Deferred and Other Assets 33,142 33,331
- - --------------------------------------------------------------------------------
Total Assets $447,801 $568,881
================================================================================
LIABILITIES AND SHAREOWNER'S EQUITY
Current Liabilities
Accounts payable $ 41,122 $ 29,995
Advance from affiliate 1,692 0
Advance billings 5,465 7,597
Taxes accrued 7,099 4,970
Interest accrued 33 2,748
- - -------------------------------------------------------------------------------
Total Current Liabilities 55,411 45,310
- - -------------------------------------------------------------------------------
Long-Term Debt 84,000 120,000
- - -------------------------------------------------------------------------------
Deferred Income Taxes 33,883 75,384
- - -------------------------------------------------------------------------------
Postretirement Benefits Obligation 20,965 15,597
- - -------------------------------------------------------------------------------
Other Long-Term Liabilities 10,488 20,492
- - -------------------------------------------------------------------------------
Shareowner's Equity 243,054 292,098
- - -------------------------------------------------------------------------------
Total Liabilities and Shareowner's Equity $447,801 $568,881
===============================================================================
See accompanying Notes to Financial Statements
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ROCHESTER TELEPHONE CORP.
STATEMENT OF SHAREOWNER'S EQUITY
(Unaudited)
September 30, December 31,
- - ------------------------------------------------------------------------------------------
In thousands of dollars 1995 1994
- - ------------------------------------------------------------------------------------------
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COMMON STOCK
1,000 shares authorized, no par value
(772 shares 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 (Loss) (24,442) 28,317
Common Stock Dividends in Cash (51,801)
- - ------------------------------------------------------------------------------------------
TOTAL SHAREOWNER'S EQUITY $243,054 $292,098
==========================================================================================
See accompanying Notes to Financial Statements
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ROCHESTER TELEPHONE CORP.
STATEMENT OF CASH FLOWS
(Unaudited)
9 Months Ended September 30,
- - --------------------------------------------------------------------------------------------
thousands of dollars 1995 1994
- - --------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net Income ($24,442) $22,272
- - --------------------------------------------------------------------------------------------
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Extraordinary Item - Discontinuation of
Regulatory Accounting 95,317 0
Depreciation and amortization 42,262 42,098
Gain on pension curtailment (3,716) 0
Loss on disposition of assets 1,779 0
Cumulative effect of change in accounting principles:
Postemployment Benefits 0 10,352
Accounting For Contributions 1,569 0
Changes in operating assets and liabilities:
(Increase) in accounts receivable (4,962) (3,640)
(Increase) in material and supplies (215) (1,230)
Decrease in prepaid directory 7,632 6,547
(Increase) in other prepayments (773) (1,336)
(Increase) decrease in deferred and other assets (5,287) 1,468
Increase (decrease) in accounts payable 11,127 (1,046)
(Decrease) in advance billings (2,132) (1,658)
(Decrease) in accrued interest & taxes (586) (3,215)
Increase in postretirement benefits obligation 7,008 5,415
(Decrease) in deferred income taxes (33,618) (6,369)
(Decrease) in other long term liabilities (1,038) (3,631)
- - --------------------------------------------------------------------------------------------
Total Adjustments 114,367 43,755
- - --------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 89,925 66,027
- - --------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Expenditures for property, plant and equipment (22,498) (21,393)
- - --------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (22,498) (21,393)
- - --------------------------------------------------------------------------------------------
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Cash Flows from Financing Activities
Repayments of long-term debt (76,000) (5,000)
Proceeds of long-term debt 39,568 0
Advances from affiliate 1,692 0
Dividends paid 0 (39,634)
Equity adjustment on assets transferred 1/1/95 (24,602) 0
- - --------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities (59,342) (44,634)
- - --------------------------------------------------------------------------------------------
Net Increase in Cash & Cash Equivalents 8,085 0
Cash and cash equivalents at beginning of period 0 0
- - --------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $8,085 $0
============================================================================================
See accompanying Notes to Financial Statements
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ROCHESTER TELEPHONE CORP.
Notes to Financial Statements
(Unaudited)
Note 1: Significant Accounting Policies
-------------------------------
Basis of Accounting
The financial statements of Rochester Telephone Corp. (the
"Company") have been prepared in accordance with generally accepted
accounting principles (GAAP). During the third quarter of 1995 the
Company discontinued accounting for its operations under Statement of
Financial Accounting Standards No. 71 (FAS 71), "Accounting for the
effects of Certain Types of Regulation" (see Note 2).
Comparative Financial Statements
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.
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 communica-
tions, and corporate accounting functions. They are allocated to the Company
based on a weighted average of four 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 ("NYSPSC")
pprior to the split-up of the companies under the Open Market Plan agreement.
Cash Management/Dividend Policy
As a subsidiary of Frontier Corporation, the Company utilizes
Frontier's centralized cash management system. This centralized cash manage-
ment 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.
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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 declara-
tion 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 $267.5 million.
Note 2: Discontinuation of Regulatory Accounting - FAS 71
-------------------------------------------------
On a regular basis management has evaluated the continued applica-
bility of FAS 71. In the third quarter of 1995, the Company concluded that
GAAP prescribed by FAS 71 was no longer applicable. This change was based
in part on having achieved price regulation on all of its regulated telephone
operations and recognition of the fact that competition has increased to the
point where the Company believes traditional rate-base, rate of return
regulation for setting prices is no longer feasible.
As a result of the discontinuance of FAS 71, the Company recorded an
extraordinary noncash after-tax charge of $60.4 million as of September 30,
1995. The following table summarizes the extraordinary charge.
Millions of Dollars
Pre-Tax After-Tax
------- ---------
Increase to the accumulated depreciation balance $ 105.4 $ 68.5
Elimination of other net regulatory liabilities (10.1) (6.6)
Tax-related net regulatory assets - 5.7
Accelerated amortization of tax credits - (7.2)
-------- -------
$ 95.3 $ 60.4
The adjustment of $105.4 million to net telephone plant was
necessary because estimated useful lives and depreciation methods
historically prescribed by regulators did not keep up with the rapid pace
of technological changes in the Company and differed significantly from
those used by unregulated enterprises. Plant balances were adjusted by
increasing the accumulated depreciation balance. The increase to the
accumulated depreciation balance was determined by a depreciation reserve
study that identified inadequate accumulated depreciation levels by
individual asset categories. The Company believes these levels developed
over the years as a result of the systematic underdepreciation of assets
resulting from the regulatory process.
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When adjusting its net telephone plant, the Company gave effect to
shorter, more economically realistic lives. The following is a summary of
average lives before and after the discontinuation of FAS 71.
Asset Category Before After
- - -----------------------------------------------------
Central Office Equipment
Digital Switching 20.0 13.5
Analog Switching 12.0 8.0
Circuit Equipment 12.0 8.0
Cable & Wire Facilities
Aerial Metallic 27.0 19.0
Underground Metallic 35.0 12.0
Buried Metallic 24.0 18.0
Fiber Optic 35.0 25.0
The discontinuance of FAS 71 also required the Company to eliminate
for financial reporting the effects of any actions of regulators that had
been recognized as regulatory assets and liabilities pursuant to FAS 71.
These net regulatory liabilities primarily consist of pension credits,
interest on unfunded OPEB liability, deferred software costs and other
assets being recognized over time for regulatory reporting.
The tax-related adjustments were required to adjust excess deferred
tax levels to the currently enacted statutory rates and to eliminate
tax-related regulatory assets and liabilities. Prior to the discontinuance
of FAS 71, the Company had recorded deferred income taxes on the cumulative
amount of tax benefits previously flowed through to ratepayers and recorded
a regulatory asset for the same amount. Also, the Company had recorded a
regulatory liability for the difference between deferred taxes at higher
historical tax rates than with those currently enacted. At the
time the Company discontinued the application of FAS 71, the above
tax-related regulatory assets and liabilities were eliminated and deferred
tax balances adjusted to reflect the application of FAS 109 consistent with
unregulated enterprises. In addition to these tax impacts, the Company,
prior to the discontinuance of FAS 71, used the deferral method of accounting
for investment tax credits. This method provided for the amortization of
the credits as a reduction to tax expense over the life of the asset that
gave rise to the tax credit. As the asset lives were shortened, the
unamortized investment tax credits deemed already earned were credited
against current period tax expense.
Note 3: Accounting For Contributions
----------------------------
In September 1995, the Company adopted the provisions of Financial
Accounting Standards Board Statement No. 116, "Accounting For Contributions
received and Contributions Made" (FAS 116). FAS 116 requires accrual
accounting for unconditional multi-year contribution commitments or pledges.
The Company recognized this obligation by recording a one-time cumulative
effect charge to net income of $1.2 million, net of income taxes of $0.55
million. The adoption of FAS 116 is not expected to significantly impact
future operating expense or the Company's cash flow.
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Note 4: 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.
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 $8.7 million and $9.3 million for the nine
month periods ended June 30, 1995 and June 30, 1994, respectively. In
addition, actual income taxes paid were $29.6 million for the nine months
ended June 30, 1995 and $17.8 million for the nine months ended
June 30, 1994.
Note 6: Regulatory Matters
------------------
Open Market Plan
At its public meeting on October 13, 1994, the NYSPSC 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 Plan, 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. The Company is obligated to certify annually
to the NYSPSC the percentage of stock ownership in Frontier Corporation by
its officers and senior employees.
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In addition, affiliate transactions between Frontier Corporation
and the Company 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.
For the seven-year period of the Open Market Plan, 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 has been opened to full competition. Over
the course of the next seven years, rate reductions of $21 million are
being implemented for Rochester area consumers. In addition, a total of
$17 million will be credited to the depreciation reserve. To date,
approximately $11.0 million in rate reductions have been implemented.
The Open Market Plan temporarily resolves certain financial
questions that are linked to the royalty proceeding, in which the New York
Court of Appeals, on October 31, 1995, confirmed the general authority of
the Commission to utilize a royalty as a ratemaking adjustment. In
particular, the NYSPSC has agreed that a royalty will not be imposed by
the NYPSC against Frontier Corporation or the Company during the seven year
period of the Open Market Plan, subject to limited exceptions. However,
the NYPSC is not precluded from seeking any royalties pursuant to the Royalty
Order subsequent to the expiration of the Open Market Plan.
The Open Market Plan 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 NYPSC, that the payment of dividends to Frontier Corporation
will neither impair the service quality provided to customers of the Company
nor 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". The
Company's current debt rating from S&P is AA.
Incentive Regulation
Prior to the Open Market Plan, an incentive regulation agreement
between the Company and the NYPSC 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 requirement 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 518,000 access
lines in the greater Rochester, New York metropolitan area. The Company
was incorporated in December 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
- - ---------------------
The net loss reported for the first nine months of 1995 amounted to
$24.4 million. The reported net loss reflects an extraordinary charge to
earnings resulting from the company's decision in September 1995 to
discontinue the provisions of Financial Accounting Standards Board
Statement No. 71 ("FAS 71"), "Accounting for the Effects of Certain Types
of Regulation". This decision was based in part, on the continued increase
in competition experienced in the local exchange market coupled with
regulatory changes which have resulted in price cap regulation for the
Company's regulated products and services. As a result the Company
recorded a one-time, non-cash extraordinary charge to earnings of
$60.4 million, net of tax in the third quarter. The Company also adopted,
in the third quarter of 1995, FAS 116, "Accounting for Contributions
Received and Contributions Made". This resulted in a cumulative effect
charge to earnings of $1.0 million, net of tax. Net income for the
comparable nine month period ended September 30, 1994 also reflects 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.
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Excluding these one-time charges, net operating income was
$37.0 million for the nine months ended September 30, 1995, as compared to
$29.0 million for the nine months ended September 30, 1994. Details of
specific line item changes are discussed below.
Revenues. Total revenues for the nine months ended September 30,
1995 were $235.2 million, an increase of $3.3 million, or 1.4 percent over
1994. Revenue growth was primarily driven by an increase in access lines
of 3.4% over the first nine months of 1995, an increase in telephone feature
revenues ($2.6M), new service offerings ($1.8M), and increased demand for
private line services ($1.2M). These revenue increases were partially
offset by price reductions for local measured service, the elimination of
the residential touchtone charge, and a reduction in operator services
revenues.
Operating Income. Operating income for the nine month period ended
September 30, 1995 was $64.6 million compared to $53.9 million in 1994.
This increase of $10.7 million, or 19.9%, was primarily attributable to a
reduction in operating expenses as described below.
Operating Expenses. Total operating expenses for the nine months
ended September 30, 1995 decreased by $7.4 million, or 4.2% over the nine
month period ended September 30, 1994. The primary reasons for the reduction
to operating expense included lower workforce 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, reductions in expenses associated with customer contracts, and
reductions in space occupancy costs. Depreciation and amortization expense
for the first nine months of 1995 was also down 2.4% or $1.0 million from
the comparable period last year. Finally, operating taxes for the nine
months ended September 30, 1995 were $1.9 million lower than the comparable
period for 1994, representing a 9.0% decrease. Reductions in 1995 revenue
taxes were the primary drivers behind the decrease.
Other Income Statement Items
- - ----------------------------
Interest Expense. Interest expense for the period ended
September 30, 1995 was down 35.5% from $9.3 million in the first nine
months of 1994 to $6.0 million in the first nine 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 nine
months of 1995 the average outstanding long-term debt of the Company was
$103.0 million as compared to $125 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 nine months of 1995 consisted of $83 million under the Company's
revolving credit agreement established in December 1994 and $20.0 million
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 nine months of 1995 was
7.8% as compared to 9.9% for the comparable period in 1994.
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Other Expense, Net. Other expense for the first nine months of
1995 decreased by $4.2 million or 100% over the comparable period for
1994. The primary reasons for this reduction to other expense in 1995
was the recognition of a pension curtailment gain of $3.7 million in
September and the elimination in 1995 of the legal and administrative
costs of filing the Open Market Plan.
Income Taxes. Income taxes for the first nine months of 1995
increased $10.1 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 nine months of 1995 was
37.6%. This compares to an effective income tax rate of 29.7% for the
comparable period in 1994.
Extraordinary and Nonrecurring items. As discussed in more
detail in Note 2 under the "Notes to the Financial Statements" the
Company discontinued the provisions of Financial Accounting Standards
Board Statement No. ("FAS") 71, "Accounting for the Effects of Certain
Types of Regulation" effective September 30, 1995. This resulted in a
one-time, non-cash extraordinary charge to earnings of $60.4 million,
net of tax in the third quarter. Also in September, the Company
recorded the cumulative effect impact of adopting FAS No. 116,
"Accounting For Contributions Received and Contributions Made" resulting
in a one-time charge to earnings of $1.0 million, net of tax (See Note 3
to the Financial Statements). In the first quarter of 1994, the
Company adopted FAS No. 112, "Employers' Accounting for Postemployment
Benefits" resulting in a one-time charge to earnings of $6.7 million,
net of taxes (See Note 4 to the Financial Statements).
FINANCIAL CONDITION
- - -------------------
Cash and Cash Equivalents
- - -------------------------
At September 30, 1995, the Company had $8.1 million in cash and
cash equivalents. Cash generated from operations amounted to $89.9
million for the nine months ended September 30, 1995 as compared to
$66.0 million for the comparable period in 1994. Capital expenditures
for the nine months ended September 30, 1995 were $22.5 million, up
$1.1 million from the comparable period in 1994. No dividends were
declared during the first nine months of 1995. This compares to
dividends paid of $39.6 million through the first nine months of 1994.
Total debt repayments amounted to a net $36.0 million through the first
nine months of 1995 as compared to $5.0 million of long term debt
repayment for the comparable period in 1994.
<PAGE>
<PAGE>
Debt
- - ----
At September 30, 1995, the Company's total outstanding long-term
debt amounted to $84.0 million. This debt consisted of $44.0 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 $16.0 million
under the Revolving Credit Agreement during the third quarter of 1995.
The Company's Revolving 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.
Debt Ratio and Interest Coverage
- - --------------------------------
The Company's debt ratio (total debt as a percent of total
capitalization) was 25.7 percent at September 30, 1995 as compared with
29.1 percent at December 31, 1994. This change is primarily due to the
reduction throughout 1995 of outstanding debt under the Revolving Credit
Agreement. Pre-tax interest coverage was 10.9 times through the first
nine months of 1995, as compared with 5.4 times for the calendar year
1994.
Capital Spending
- - ----------------
For the nine months ended September 30, 1995, gross capital
expenditures amounted to $22.5 million. The Company had planned to
spend a total of approximately $37.0 million on its capital program
during the full year 1995. Using that estimate, the full year plan
for the 1995 capital program would represent an increase of $2.1
million over 1994 levels.
Cash Flows
- - ----------
Cash Flow from Operating Activities. Cash flow from operations
amounted to $89.9 million for the nine months ended September 30, 1995
as compared to $66.0 million for the same period in 1994. The primary
drivers of the cash flow increase were an increase in net income
(before extraordinary items and cumulative effects of changes in
accounting principles), decreases in prepaid directory costs, increases
in accounts payable, and increases in the postretirement benefit
obligation.
Cash Flow from Investing Activities. Expenditures on property,
plant and equipment for the nine months ended September 30, 1995 amounted
to $22.5 million, an increase of $1.1 million from the $21.4 million
spent during the first nine months of 1994.
<PAGE>
<PAGE>
Cash Flow from Financing Activities. Cash flow from financing
activities amounted to an outflow of $59.3 million for the nine months
ended September 30, 1995, compared with outflows of $44.6 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. Through September 30,
1995, the Company has paid off an additional $36.0 million dollars of
outstanding debt under the Revolving Credit Agreement. No dividends have
been declared through September 30, 1995. Through the first nine months
of 1994 the Company had paid $39.6 million in dividends and $5.0 million
against outstanding debt.
OTHER ITEMS
- - -----------
Regulatory Matters
- - ------------------
During the seven year period of the Open Market Plan which became
effective on January 1, 1995, the Company 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. The Company 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. The $17 million depreciation
reserve adjustment required under the Open Market Plan is less than the
one-time depreciation reserve adjustment made by the Company in
September, 1995 as part of the adjustments to reflect the discontinuance
of FAS 71 for external reporting purposes.
Certain Considerations 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:
<PAGE>
<PAGE>
(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, and
Time Warner Communications 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 will 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 the Company
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 provides for a
total of $21 million in rate reductions for the Company over
the life of the Plan. During this time, the rates charged
by the Company for basic residential and business telephone
service may not be increased for any reason. However, since
the Company 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.
<PAGE>
<PAGE>
(c) Restraints on Frontier Corporation's Control of the Company.
The Open Market Plan prohibits payment of dividends by the
Company to Frontier Corporation if (i) the Company'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. Dividends paid to the parent, Frontier Corporation,
also are prohibited unless the Company's directors certify
that such dividends will impair the Company'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 the Company will have the financial strength
to provide quality service.
(d) Other Considerations. Because the Company 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. The Company estimates
that its potential impact is in the range of $2 million per year.
The royalty, if implemented, would be an imputation against the
Company revenue requirement from regulated intrastate operations.
The NYSPSC ordered the the Company 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, the Company 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. The Court of Appeals, on October 31, 1995, unanimously
confirmed the Commission's authority, as a generic matter, to utilize
the royalty as a ratemaking tool subject to review of its application
on individual cases, including any application to the Company in the
future. The Company as agreed within the context of 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>
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: November 13, 1995 By: /s/Martin Mucci
______________________
Martin Mucci
Vice President and Treasurer
(and principal financial
officer)
<PAGE>
<PAGE>
INDEX TO EXHIBITS
-----------------
Exhibit No. Description Reference
___________ ___________ _________
27 Financial Data Schedule Filed herewith
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The Schedule contains summary financial information extracted from
financial statements for the nine month period ended September 30,
1995 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<CIK> 0000936105
<NAME> ROCHESTER TELEPHONE CORP.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 8,085
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<RECEIVABLES> 58,570
<ALLOWANCES> 0
<INVENTORY> 3,838
<CURRENT-ASSETS> 76,206
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<DEPRECIATION> 527,906
<TOTAL-ASSETS> 447,801
<CURRENT-LIABILITIES> 55,411
<BONDS> 40,000
<COMMON> 267,496
0
0
<OTHER-SE> (24,442)
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<SALES> 235,159
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</TABLE>
