SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 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 1-6654
THE SOUTHERN NEW ENGLAND TELEPHONE COMPANY
(Exact name of registrant as specified in its charter)
Connecticut 06-0542646
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification
organization) Number)
227 Church Street, New Haven, CT 06510
(Address of principal executive (Zip Code)
offices)
(203) 771-5200
(Registrant's telephone number,
including area code)
Not applicable
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X. No .
THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF SOUTHERN NEW ENGLAND
TELECOMMUNICATIONS CORPORATION, MEETS THE CONDITIONS SET FORTH IN
GENERAL INSTRUCTION H(1) (a) AND (b) OF FORM 10-Q AND IS THEREFORE
FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT PURSUANT TO
GENERAL INSTRUCTION H(2).
Form 10-Q - Part I The Southern New England Telephone Company
PART I - FINANCIAL INFORMATION
The Southern New England Telephone Company ("Telephone Company")
is a wholly owned telephone operating subsidiary of the Southern
New England Telecommunications Corporation ("Corporation") and
has its principal executive office at 227 Church Street, New
Haven, Connecticut 06510 (telephone number (203) 771-5200).
The condensed financial statements on the following pages have
been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC") and, in the opinion of
management, include all adjustments of a normal recurring nature
necessary for fair presentation for each period shown. The 1994
financial statements have been reclassified to conform to the
current year presentation. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have
been condensed or omitted pursuant to such SEC rules and
regulations. Management believes that the disclosures made are
adequate to make the information presented not misleading.
Operating results for any interim periods, or comparisons between
interim periods, are not necessarily indicative of the results
that may be expected for full fiscal years. It is suggested that
these financial statements be read in conjunction with the
financial statements and notes thereto included in the Telephone
Company's 1994 Annual Report on Form 10-K.
Form 10-Q - Part I The Southern New England Telephone Company
Condensed Statement of Income and Retained Earnings
(Unaudited)
For the 3 Months Ended For the 6 Months Ended
June 30, June 30,
Dollars in Millions 1995 1994 1995 1994
Revenues
Local service $160.0 $154.3 $317.4 $306.3
Network access 93.0 88.4 184.5 175.2
Intrastate toll 66.5 75.9 135.6 154.9
Publishing and other 54.5 52.5 110.5 104.1
Total Revenues 374.0 371.1 748.0 740.5
Costs and Expenses
Operating and maintenance 195.7 189.9 380.4 385.8
Depreciation and amortization 75.2 74.0 150.0 147.7
Taxes other than income 13.6 13.6 26.6 27.2
Total Costs and Expenses 284.5 277.5 557.0 560.7
Operating Income 89.5 93.6 191.0 179.8
Interest 13.2 13.4 26.4 27.5
Income Before Income Taxes 76.3 80.2 164.6 152.3
Income taxes 29.5 32.4 64.3 61.4
Net Income $ 46.8 $ 47.8 $ 100.3 $ 90.9
Retained Earnings, Beginning $669.5 $592.3 $648.0 $572.2
of Period
Net income 46.8 47.8 100.3 90.9
Dividends declared to parent (29.5) (27.0) (61.5) (50.0)
Retained Earnings, End $686.8 $613.1 $686.8 $613.1
of Period
The accompanying notes are an integral part of these financial statements.
Form 10-Q - Part I The Southern New England Telephone Company
Condensed Balance Sheet
Dollars in Millions, Except Per Share Amounts June 30, 1995 Dec. 31, 1994
(Unaudited)
Assets
Cash and temporary cash investments $ 55.1 $ 44.2
Accounts receivable, net of allowance
for uncollectibles of $24.9 and $25.0,
respectively 267.6 267.4
Materials and supplies 8.7 6.2
Prepaid publishing 38.6 39.0
Deferred income taxes 99.9 92.6
Prepaid taxes and other assets 25.4 11.2
Total Current Assets 495.3 460.6
Telephone plant, at cost 4,155.2 4,080.1
Less: Accumulated depreciation 1,637.5 1,539.2
Telephone Plant, net 2,517.7 2,540.9
Deferred charges and other assets 234.6 247.3
Total Assets $3,247.6 $3,248.8
Liabilities and Shareholder's Equity
Accounts payable and accrued expenses $ 165.2 $ 181.6
Restructuring charge - current 162.0 145.5
Advance billings and customer deposits 44.0 42.3
Accrued compensated absences 34.1 34.1
Other current liabilities 81.4 72.7
Total Current Liabilities 486.7 476.2
Long-term debt 746.5 746.3
Deferred income taxes 453.0 458.6
Restructuring charge - long-term 59.5 114.4
Unamortized investment tax credits 39.4 42.9
Other liabilities and deferred credits 244.6 231.3
Total Liabilities 2,029.7 2,069.7
Common stock; $12.50 par value;
30,428,596 shares issued and
30,385,900 outstanding at each period end 380.4 380.4
Proceeds in excess of par value 152.1 152.1
Retained earnings 686.8 648.0
Less: Treasury stock 42,696 shares at (1.4) (1.4)
each period end
Total Shareholder's Equity 1,217.9 1,179.1
Total Liabilities and Shareholder's $3,247.6 $3,248.8
Equity
The accompanying notes are an integral part of these financial statements.
Form 10-Q - Part I The Southern New England Telephone Company
Condensed Statement of Cash Flows
(Unaudited)
For the Six Months Ended
June 30,
Dollars in Millions 1995 1994
Operating Activities
Net income $ 100.3 $ 90.9
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 150.0 147.7
Effect of business restructuring (38.4) (29.6)
Change in operating assets and liabilities, net (10.6) (50.4)
Other, net 12.8 31.6
Net Cash Provided by Operating Activities 214.1 190.2
Investing Activities
Cash expended for capital additions (142.5) (111.6)
Other, net 1.3 (.5)
Net Cash Used by Investing Activities (141.2) (112.1)
Financing Activities
Cash dividends (62.0) (45.0)
Repayment of long-term debt - (240.0)
Net Cash Used by Financing Activities (62.0) (285.0)
Increase (decrease) in cash and temporary 10.9 (206.9)
cash investments
Cash and temporary cash investments at 44.2 214.5
beginning of period
Cash and Temporary Cash Investments at $ 55.1 $ 7.6
End of Period
Income Taxes Paid $ 58.0 $ 62.0
Interest Paid $ 26.5 $ 35.0
The accompanying notes are an integral part of these financial statements.
Form 10-Q - Part I The Southern New England Telephone Company
Notes To Financial Statements
(Unaudited)
Note 1: Income Taxes
In the second quarter of 1995, new state income tax rates were
signed into law to accelerate the reduction of rates originally
enacted in 1993. The current state income tax rate of 11.25%
will gradually decrease to 7.5% in 2000. In accordance with
regulatory and tax accounting, the Telephone Company's regulatory
and deferred tax assets and liabilities were appropriately
adjusted for this change with no resulting impact to income tax
expense.
Note 2: Restructuring Charge
In December 1993, the Telephone Company recorded a restructuring
charge of $335.0 million before-tax, or $192.7 million after-tax,
to provide for a comprehensive restructuring program. The
program included costs to be incurred to facilitate employee
separations involving approximately 2,400 employees. The charge
also included: incremental costs of implementing appropriate
reengineering solutions; designing and developing new processes
and tools to continue the Telephone Company's provision of
excellent service; and retraining of the remaining employees to
help them meet the changing demands of customers.
The original 1993 restructuring charge and costs incurred during
1994 are summarized as follows:
Balance at Costs incurred Balance at
Dollars in Millions Dec. 31, 1993 during 1994 Dec. 31, 1994
Employee separation costs $160.0 $38.6 $121.4
Process and systems reengineering 145.0 35.0 110.0
Exit and other costs 30.0 1.5 28.5
Total $335.0 $75.1 $259.9
The Telephone Company incurred restructuring costs in 1995 as follows:
For the Three Months For the Six Months
Dollars in Millions Ended June 30, 1995 Ended June 30, 1995
Employee separation costs $ 2.1 $ 4.0
Process and systems reengineering 20.2 33.9
Exit and other costs .2 .5
Total Costs Incurred $22.5 $38.4
Costs incurred for employee separations included payments for
severance, unused compensated absences, health care continuation
and employee retraining. Process and systems reengineering costs
included incremental costs incurred in connection with the
execution of numerous reengineering programs involving network
operations, customer service, repair and support processes. Exit
and other costs included expenses related to the initial phase of
redesigning work space requirements due to downsizing.
To date, the Telephone Company has implemented network
operations, customer service, repair and support programs and
developed new processes to substantially reduce the costs of
business while significantly improving quality and customer
service. The remaining employee separations will not be possible
without the development and installation of these new processes
which, among other things, will reduce or eliminate the current
labor-intensive interfaces between the existing systems.
Form 10-Q - Part I The Southern New England Telephone Company
Notes To Financial Statements
(Unaudited)
Note 2: Restructuring Charge (continued)
As of June 30, 1995, approximately 920 employees (570 management
and 350 bargaining-unit employees, or 18.2% and 5.4% of the
respective total workforce at the inception of the restructuring
program) had left the Telephone Company under severance plans and
retirement incentives. On April 21, 1995, the Connecticut Union
of Telephone Workers ("CUTW") ratified a new contract which
includes a voluntary "early-out offer" available to bargaining-
unit employees [see Employee Relations]. The early-out offer
provides enhanced pension benefits by adding six years to the age
and the length of service of employees for purposes of
determining pension and postretirement health care benefits
eligibility. The employees will also have the option to select a
pension distribution method (e.g., lump sum, monthly pension or a
combination of both) at the time of separation. Approximately
2,600 bargaining-unit employees, or 41.4% of the total bargaining-
unit workforce, accepted the early-out offer available during
July 1995. The majority of the employee separations are expected
to occur in the latter half of 1995. In certain cases, the
Telephone Company may stagger separation dates through June 1996
to ensure that service to customers will not be adversely
affected.
Expected accumulated savings are dependent on the timing and mix
of total employee separations and, based on original projections,
are estimated to be $60 million, $90 million, and $110 million
for 1995, 1996, and 1997, respectively. As a result of higher
than expected response to the early-out offer, these estimated
savings are currently being reassessed. Management continues to
expect that savings will be substantially offset by costs related
to the growth in business, the construction of I-SNET, a
statewide information superhighway, and the cost of adding other
employees with different skills.
Cash expenditures for the restructuring program are estimated to
be $120 million, $75 million, and $35 million in 1995, 1996, and
1997, respectively. The early-out offer will be funded primarily
by the pension and postretirement plans. Incremental capital
expenditures related to the restructuring program approximated
$12 million for the first six months of 1995. These items have
been recorded in property, plant and equipment and will result in
increased depreciation expense in future years. The Telephone
Company currently anticipates total incremental capital
expenditures of approximately $60 million over the remaining
life of the program.
In order to maintain quality customer service while at the same
time reengineer the business, the 1993 restructuring program
is expected to extend into 1997, rather than be completed by 1996
as originally intended. It is also possible that shifts within
reserve categories may occur. In addition, as a result of higher
than expected response to the early-out offer, total employee
separations under the restructuring program are expected to
increase to approximately 3,700 employees from the original
estimate of 2,400 employees. Management is in the process of
evaluating whether an additional provision for employee
separations is required. A final determination is expected to be
made in the fourth quarter of 1995 when the majority of the
affected employees are actually separated.
Form 10-Q - Part I The Southern New England Telephone Company
Notes To Financial Statements
(Unaudited)
Note 3: Litigation
On June 14, 1995, a U.S. District Court decision was issued in
favor of the Department of Labor against the Corporation and the
Telephone Company. The decision held that the Corporation and
the Telephone Company violated certain sections of the Fair Labor
Standards Act and were liable for back wages and liquidated
damages. A decision assessing the exact amount to be paid to
employees is pending. The Corporation and the Telephone Company
are appealing this decision. The Telephone Company has recorded
a liability of $11.0 million as its anticipated cost of total
damages for this and other litigation matters, which was charged
to operating and maintenance expenses in the second quarter of
1995.
Form 10-Q - Part I The Southern New England Telephone Company
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Comparison of six months ended June 30, 1995 vs. six months ended
June 30, 1994
Revenues and Sales
Local service revenues increased $11.1 million, or 3.6%, due
primarily to growth experienced in access lines in service.
Access lines in service grew 2.9% to approximately 2,041,000 at
June 30, 1995 from approximately 1,984,000 at June 30, 1994.
Also contributing to the increase in local service revenues was
an increase in subscriptions to premium services, such as
SmartLink[R]. In addition, revenues from maintenance of inside
wiring for residence customers increased due to increased rates
effective January 1995.
Network access revenues, generated primarily from interstate and
intrastate services, increased $9.3 million, or 5.3%. Interstate
access revenues increased $4.4 million due primarily to an
increase in interstate minutes of use of approximately 4%.
Partially offsetting the impact of the increase in minutes of use
was a decrease in interstate access tariff rates implemented on
July 1, 1994, in accordance with the Telephone Company's 1994
annual Federal Communications Commission ("FCC") filing under
price cap regulation. In addition, intrastate access revenues
increased $4.9 million due mainly to an increase in intrastate
minutes of use as a result of growth in competition for
intrastate long-distance services.
Intrastate toll revenues, which include revenues primarily from
toll and WATS services, decreased $19.3 million, or 12.5%. Toll
message revenues decreased $14.3 million due primarily to reduced
intrastate toll rates and decreased volume. The decline in rates
was attributable to the introduction of several discount calling
plans in 1994 that provide competitive options to business and
residence customers. Toll message volume decreased 3.8%
primarily as a result of increased competition offset partially
by the migration of customers from WATS services. WATS revenues
decreased $3.6 million due primarily to lower message volume
resulting from the shift to lower priced services and the impact
of competition.
Publishing and other revenues increased $6.4 million, or 6.1%.
Publishing and other revenues include: directory advertising;
billing and collections and other non-access services rendered on
behalf of interexchange carriers; provision for the Telephone
Company's uncollectible accounts receivable; and miscellaneous
revenues. Other non-access services rendered on behalf of
interexchange carriers and lower provision for uncollectible
accounts receivable for the Telephone Company's residence,
business and directory customers contributed to the increase in
other revenues.
Operating and Maintenance
Operating and maintenance expenses are comprised primarily of
employee-related costs, including wages and employee-benefit
costs. Cost of services and general and administrative expenses
represent the remaining portion of these expenses. Operating and
maintenance expenses decreased $5.4 million, or 1.4%. Excluding
an $11.0 million before-tax charge resulting primarily from a court
ruling on the Telephone Company's labor practices, operating and
maintenance expenses decreased $16.4 million, or 4.3%.
Form 10-Q - Part I The Southern New England Telephone Company
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Comparison of six months ended June 30, 1995 vs. six months ended
June 30, 1994
Employee-related costs increased approximately $3 million due
primarily to a 5.0% wage rate increase for bargaining-unit
employees effective October 1994 in accordance with the 1992 CUTW
contract, and to a lesser extent, an average 4.0% salary increase
for management employees effective April 1994. Also contributing
to the increase in employee-related costs was an increase in
overtime payments. The impact of a 1.7% decrease in the average
work force partially offset these increases. Cost savings
associated with the restructuring program are anticipated to
continue as additional employee separations are expected to occur
in the latter half of 1995 [see Note 2].
Operating and maintenance expenses, excluding employee-related
costs and the litigation charge, decreased approximately $19
million. The decrease was due primarily to cost-containment
efforts in areas such as contract services and publishing.
Depreciation and Amortization
Depreciation and amortization expense increased $2.3 million, or
1.5%. This increase was due primarily to revised depreciation
rate schedules for the Telephone Company's intrastate plant, as
approved by the Connecticut Department of Public Utility Control
("DPUC"), effective January 1, 1995. Higher levels of property,
plant and equipment also contributed to the increase.
Interest Expense
Interest expense decreased $1.1 million, or 4.0% due primarily to
a decrease in average debt outstanding of approximately $63
million.
Income Taxes
The combined federal and state effective tax rate for 1995 was
39.1% compared with 40.3% for 1994. The effective tax rate
decreased due primarily to the recognition of an enacted state
income tax credit related to personal property taxes paid on
certain data processing equipment.
Form 10-Q - Part I The Southern New England Telephone Company
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Comparison of balances as of June 30, 1995 vs. December 31, 1994
Deferred Charges, Leases and Other Assets
Deferred charges, leases and other assets decreased $12.7 million
due primarily to a decrease in the regulatory asset. This
decrease was primarily the result of the change in state income
tax rates.
Accounts Payable and Accrued Expenses
Accounts payable decreased $16.4 million due primarily to the
timing of payments of accounts payable.
Other Liabilities and Deferred Credits
Other liabilities and deferred credits increased $13.3 million
due primarily to an increase in the regulatory liability. This
increase was primarily the result of the change in state income
tax rates.
Liquidity and Capital Resources
The Telephone Company generated cash flows from operations of
$214.1 million during the six months ended June 30, 1995 as
compared with $190.2 million during the six months ended June 30,
1994. The primary use of corporate funds continued to be capital
expenditures.
For the six months ended June 30, 1995, cash outlays related to
the Telephone Company's restructuring charge recorded in December
1993 amounted to $33.5 million. Substantially all of the
expenditures related to incremental costs incurred for executing
numerous reengineering programs during the first half of 1995.
These expenditures were funded from cash flows from operations.
Management anticipates that cash expenditures for the restructuring
program will approximate $120 million, $75 million, and $35
million in 1995, 1996 and 1997, respectively, and will be funded
from operations. The early-out offer will be funded primarily by
the pension and postretirement plans.
Competition
On May 26, 1994, Public Act 94-83 ("Act") was enacted providing a
new regulatory framework for the Connecticut telecommunications
industry. The Act, which took effect on July 1, 1994, represents
a broad strategic response to the changes facing the
telecommunications industry in Connecticut based on the premise
that broader participation in the Connecticut telecommunications
market will be more beneficial to the public than will broader
regulation. The Act opens Connecticut telecommunications
services to full competition, including local phone service
currently provided primarily by the Telephone Company, and
encourages the DPUC to adopt alternative forms of regulation for
telephone companies, including the Telephone Company's
noncompetitive and emerging competitive services.
Form 10-Q - Part I The Southern New England Telephone Company
Management's Discussion and Analysis of Financial
Condition and Results of Operations
The DPUC has conducted, and is conducting, a number of
proceedings, in two phases, to implement the Act. In the
competitive phase, the DPUC is addressing competition in the
areas of: local exchange service; alternative operator services
and customer owned coin operated telephone service; universal
service and lifeline program policy issues; unbundling of local
exchange carriers' ("LECs") local networks; and reclassification
of LECs' products and services into competitive, emerging
competitive and noncompetitive categories. During the
alternative regulation phase, also underway, the Telephone
Company submitted to the DPUC on June 19, 1995 an alternative
regulation plan that will replace rate of return regulation with
price regulation for non-competitive and emerging competitive
services. The plan also indicates that the Telephone Company
will not increase the price of local service before 1998. In
addition, the alternative regulation phase will involve a
complete financial review of the Telephone Company and will
address cost of service, capital recovery and service standards.
At this time, two telecommunication providers have been granted
certificate of public convenience and necessity for local
service. Two additional applications are pending before the
DPUC. Local service competition is expected to begin by the end
of 1995 under the framework resulting from the state regulation
initiatives discussed below.
Since the July 1, 1993 effective date of "10XXX" competition,
over 65 telecommunications providers have received approval from
the DPUC to offer "10XXX" or other competitive intrastate long-
distance services. In addition, over 35 companies have filed
for initial certificates of public convenience and necessity and
are awaiting DPUC approval. Increasing competition in intrastate
long-distance service and the Telephone Company's reduction in
intrastate toll rates will continue to place significant downward
pressure on the Telephone Company's intrastate toll revenues as
will the implementation of intrastate equal access, which is
required to be implemented for all dual preferred interexchange
carrier capable switches no later than December 1, 1996.
Since the introduction of "10XXX" competition, major carriers
have increased their marketing efforts in Connecticut to sell
intrastate long-distance services primarily to residential
customers. In response to major carriers and other competitors'
efforts, the Telephone Company has undertaken a number of
initiatives. The Telephone Company remains focused on providing
excellent customer service and quality products and has made
several changes to its product lines. During the latter part of
1994 and the beginning of 1995, the Telephone Company added
several new discount calling plans to its existing High Volume
Discount Toll service offering. Additionally, the Telephone
Company, working with its affiliate SNET America, realigned its
discount and rate structures to provide the Connecticut customer
with a seamless toll service product line which includes a
discount structure that can be applied to intrastate, interstate
and international calling each month.
Management expects to see continued movement toward a fully
competitive telecommunications marketplace, both on an
interexchange and intraexchange basis. The Telephone Company's
ability to compete is dependent upon regulatory reform that will
allow pricing flexibility to meet competition and provide a level
playing field with similar regulation for similar services and
with reduced regulation to reflect an emerging competitive
marketplace. The Act and regulatory proceedings that flow from
it should produce a telecommunications marketplace in Connecticut
that, by providing equal opportunity to all competitors, will
work to benefit Connecticut consumers.
Form 10-Q - Part I The Southern New England Telephone Company
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Regulatory Matters
State Regulation Initiatives
On June 15, 1995, the Telephone Company filed a tariff with the
DPUC to offer unbundled loops and ports and interconnection
arrangements of loops and ports to certified local exchange
providers ("CLECs"). These services provide CLECs with an
opportunity to purchase individual local service functions to
meet their local exchange certification requirements. A final
DPUC decision and offering is expected by the latter part of
1995.
On July 5, 1995, the Telephone Company filed a tariff with the
DPUC to offer wholesale local service and certain related
features. The service provides CLECs with an alternative to
building facilities or constructing a ubiquitous network to meet
their coverage obligations. A final DPUC decision and offering
is expected by the latter part of 1995.
Federal Regulation Initiatives
The FCC adopted an interim plan in 1995 for interstate access
rates requiring the LECs to adopt higher productivity targets
into their rates. The interim plan requires LECs to chose from
among three productivity factors (4.0%, 4.7% or 5.3%). These
factors are subtracted from inflation-based price increases
allowed each year to account for increasing productivity. If
either the 4.0% or 4.7% factor is chosen, LECs must share 50% of
earnings above a 12.25% rate of return. In addition, all
earnings above 13.25% and 16.25%, respectively, will be returned.
If the 5.3% factor is chosen, all earnings can be retained
without sharing. In addition, companies are required to
reinitialize their price cap index ("PCI") on a one-time downward
basis of 0.7% for each year they elected the 3.3% factor up to a
2.8% maximum. The Telephone Company has maintained its selection
of the 3.3% productivity factor each year since entering price
cap regulation in 1991. Accordingly, the Telephone Company is
required to reinitialize its PCI downward by 2.8%. A further
notice will be issued to address price cap changes to respond to
competition.
On May 9, 1995, the Telephone Company filed its 1995 annual
interstate access tariff filing under price cap regulation to
become effective August 1, 1995. The Telephone Company elected a
4.0% productivity factor and will be allowed to earn up to a
12.25% interstate rate of return annually before any sharing
mechanism is invoked. The filing, if approved by the FCC, is
anticipated to decrease interstate network access revenues by
approximately $10 million for the period August 1, 1995 to June
30, 1996. Management expects this decrease to be at least
partially offset by increased demand.
Form 10-Q - Part I The Southern New England Telephone Company
Management's Discussion and Analysis of Financial
Condition and Results of Operations
On March 9, 1995, the Telephone Company filed proposed tariffs
with both the FCC and DPUC to establish rates for its market test
of Video Dialtone ("VDT") trial service. Approval of these
tariffs by the respective regulatory agencies will allow the
Telephone Company to charge its customers for services in the
West Hartford area and expanded trial area within Connecticut.
The FCC recently limited its jurisdiction over VDT to the
provision of transport of video communications that have been
transmitted over radio waves or across state lines.
Consequently, the Telephone Company filed a state tariff for
video-on-demand, enhanced pay-per-view and broadcast services
originating within the state. The Telephone Company's tariffs
initially cover analog services based upon currently available
technology. The Telephone Company intends to deploy digital
equipment when technically feasible and economically reasonable.
On June 28, 1995, the DPUC approved the Telephone Company's
tariff for the VDT trial service. FCC approval is expected in
the latter part of 1995.
On April 28, 1995, the Telephone Company filed with the FCC an
application to construct, operate, own, and maintain facilities
used to provide commercial VDT service in the State of
Connecticut. The proposed system, if approved, would be
constructed over the next 15 years and would eventually reach all
customers throughout the Telephone Company's service area.
On January 19, 1994, the Telephone Company filed suit in the U.S.
District Court ("Court") in New Haven requesting the Court find
that the Cable Communications Policy Act of 1984 violates the
Telephone Company's First and Fifth Amendment rights. On April
28, 1995, the Court ruled in favor of the Telephone Company,
pending further court actions, by allowing the Telephone Company
to provide in-territory cable programming and to own more than 5%
of any company that provides cable programming in its local
service area.
Effects of Regulatory Accounting
The Telephone Company gives accounting recognition to the actions
of regulatory authorities where appropriate, as prescribed by
Statement of Financial Accounting Standards ("SFAS") No. 71
"Accounting for the Effects of Certain Types of Regulation."
Under SFAS No. 71, the Telephone Company records certain assets
and liabilities because of actions of regulatory authorities.
More significantly, amounts charged to operations for
depreciation expense reflect estimated lives and methods
prescribed by regulatory authorities rather than those consisting
of useful and economic lives that might otherwise apply to
unregulated enterprises. In the event that the Telephone Company
no longer meets the criteria for following SFAS No. 71, the
accounting impact to the Telephone Company would be an
extraordinary non-cash charge to operations of a material amount.
The Telephone Company continues to review the criteria set forth
in SFAS No. 71 and has determined that the continuing application
of the regulatory accounting standard is appropriate at this
time.
Form 10-Q - Part I The Southern New England Telephone Company
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Employee Relations
On April 21, 1995, a new labor contract was ratified by members
of the CUTW. As part of the new contract, a voluntary "early-out
offer" was available to bargaining-unit employees during July
1995 and subsequent dates, when considered necessary, during the
life of the contract. The early-out offer provides additional
incentives in the form of enhanced pension benefits. Bargaining-
unit employees leaving under the offer will receive increased
pensions of between 35% and 45%. CUTW members who remain with the
Telephone Company will receive a 4.0% wage rate increase in
January 1996 and a 3.0% wage rate increase in both January 1997
and January 1998. In addition, the contract also provides a sign-
on bonus and health benefit and pension enhancements. The new
agreement replaced the existing contract which was scheduled to
expire on August 5, 1995 and will be in effect until August 8,
1998. The contract is intended to keep layoffs to a minimum
while enabling the Telephone Company to position itself to meet
increasing competition through downsizing efforts.
Form 10-Q - Part II The Southern New England Telephone Company
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There were no material developments in the second
quarter of 1995.
Item 6. Exhibit and Reports on Form 8-K
(a) Exhibit
(27) Financial Data Schedule
(b) Reports on Form 8-K
On April 21, 1995, the Telephone Company filed a report
on Form 8-K, dated April 20, 1995 announcing the
Corporation's financial results for the first quarter of
1995.
On May 19, 1995, the Telephone Company filed a report on
Form 8-K, dated May 18, 1995, announcing that the
Telephone Company gave notice of intent to file with the
DPUC an application for approval of a plan for
alternative regulation. The filing will also include
financial data to enable the DPUC to conduct a financial
review of the Telephone Company. The Telephone Company
stated that it is not seeking to increase the price of
local service.
On July 25, 1995, the Telephone Company filed a report on
Form 8-K, dated July 24, 1995 announcing the
Corporation's financial results for the second quarter
of 1995.
Form 10-Q - Part II The Southern New England Telephone Company
Signatures
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
The Southern New England Telephone Company
August 10, 1995
/s/ J. A. Sadek
J. A. Sadek
Vice President and Comptroller