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 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 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).
- 1 -
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.
- 2 -
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 9 Months Ended
September 30, September 30,
Dollars in Millions 1995 1994 1995 1994
Revenues
Local service $161.8 $156.0 $479.2 $462.3
Network access 91.8 88.7 276.3 263.9
Intrastate toll 66.4 72.8 202.0 227.7
Publishing and other 64.0 50.1 174.5 154.2
Total Revenues 384.0 367.6 1,132.0 1,108.1
Costs and Expenses
Operating and maintenance 192.9 190.8 573.3 576.6
Depreciation and amortization 75.6 74.3 225.6 222.0
Taxes other than income 14.0 13.2 40.6 40.4
Total Costs and Expenses 282.5 278.3 839.5 839.0
Operating Income 101.5 89.3 292.5 269.1
Interest 13.1 13.2 39.5 40.7
Income Before Income Taxes 88.4 76.1 253.0 228.4
Income taxes 32.8 30.7 97.1 92.1
Net Income $ 55.6 $ 45.4 $ 155.9 $ 136.3
Retained Earnings, Beginning $686.8 $613.1 $648.0 $572.2
of Period
Net income 55.6 45.4 155.9 136.3
Dividends declared to parent (28.9) (28.0) (90.4) (78.0)
Retained Earnings, End $713.5 $630.5 $713.5 $630.5
of Period
The accompanying notes are an integral part of these financial statements.
- 3 -
Form 10-Q - Part I The Southern New England Telephone Company
Condensed Balance Sheet
Dollars in Millions September 30, 1995 December 31, 1994
(Unaudited)
Assets
Cash and temporary cash investments $ 56.4 $ 44.2
Accounts receivable, net of allowance
for uncollectibles of $25.7 and $25.0,
respectively 292.9 267.4
Materials and supplies 10.2 6.2
Prepaid publishing 37.4 39.0
Deferred income taxes 51.9 92.6
Prepaid taxes and other assets 28.7 11.2
Total Current Assets 477.5 460.6
Telephone plant, at cost 4,205.1 4,080.1
Less: Accumulated depreciation 1,689.6 1,539.2
Telephone Plant, net 2,515.5 2,540.9
Deferred charges and other assets 189.0 247.3
Total Assets $3,182.0 $3,248.8
Liabilities and Shareholder's Equity
Accounts payable and accrued expenses $ 172.6 $ 181.6
Restructuring charge - current 47.8 145.5
Advance billings and customer deposits 46.2 42.3
Accrued compensated absences 34.1 34.1
Other current liabilities 87.2 72.7
Total Current Liabilities 387.9 476.2
Long-term debt 746.5 746.3
Deferred income taxes 410.8 458.6
Restructuring charge - long-term 18.6 114.4
Unamortized investment tax credits 37.7 42.9
Other liabilities and deferred credits 335.9 231.3
Total Liabilities 1,937.4 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 713.5 648.0
Less: Treasury stock 42,696 shares at
each period end (1.4) (1.4)
Total Shareholder's Equity 1,244.6 1,179.1
Total Liabilities and Shareholder's
Equity $3,182.0 $3,248.8
The accompanying notes are an integral part of these financial statements.
- 4 -
Form 10-Q - Part I The Southern New England Telephone Company
Condensed Statement of Cash Flows
(Unaudited)
For the 9 Months Ended
September 30,
Dollars in Millions 1995 1994
Operating Activities
Net income $155.9 $ 136.3
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 225.6 222.0
Restructuring payments (61.7) (41.0)
Change in operating assets and liabilities, net (15.8) (4.3)
Other, net 14.9 7.5
Net Cash Provided by Operating Activities 318.9 320.5
Investing Activities
Cash expended for capital additions (215.8) (161.1)
Other, net .6 (3.3)
Net Cash Used by Investing Activities (215.2) (164.4)
Financing Activities
Cash dividends (91.5) (72.0)
Repayment of long-term debt - (240.0)
Other, net - (.1)
Net Cash Used by Financing Activities (91.5) (312.1)
Increase (decrease) in cash and temporary 12.2 (156.0)
cash investments
Cash and temporary cash investments at 44.2 214.5
beginning of period
Cash and Temporary Cash Investments at $ 56.4 $ 58.5
End of Period
Income Taxes Paid $ 94.4 $ 86.0
Interest Paid $ 36.7 $ 45.1
The accompanying notes are an integral part of these financial statements.
- 5 -
Form 10-Q - Part I The Southern New England Telephone Company
Notes To Financial Statements
(Unaudited)
Note 1: 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
In April 1995, the Telephone Company ratified a contract with the
Connecticut Union of Telephone Workers ("CUTW") which included a
voluntary "early-out offer" [see Employee Relations]. The early-
out offer provided enhanced pension benefits by adding six years
to the age and to the length of service of employees for purposes
of determining pension and postretirement health care benefits
eligibility. The employees also had the option to select a
pension distribution method (e.g., lump-sum, monthly pension or
a combination of both) at the time of separation. The early-out
offer was available to the bargaining-unit work force during July
1995 and approximately 2,600 employees, or 41.4% of the total
bargaining-unit work force, accepted the offer. As a result of
the early-out offer, total employee separations under the
restructuring program are expected to approximate up to 4,000
employees.
The enhanced pension and postretirement benefits under the early-
out offer are expected (from now until June of 1996) to result in
a total non-cash charge of approximately $77 million, net of
settlement gains of approximately $97 million. In the third
quarter of 1995, a non-cash net charge of $132 million was
recorded. The charge included pension enhancements and
curtailment losses of $151 million to reflect the acceptance of
the early-out offer and settlement gains of $19 million to
account for the estimated lump-sum pension payments made for
employee separations during the third quarter. Future
adjustments to the restructuring charge are expected to include a
postretirement curtailment loss of $23 million and a settlement
gain of $57 million in the fourth quarter of 1995 and a
settlement gain of $21 million in the first half of 1996.
A summary of costs incurred in 1995 under the restructuring
program is as follows:
For the 3 Months For the 9 Months
Dollars in Millions Ended September 30, 1995 Ended September 30, 1995
Employee separation
costs $133.8 $137.8
Process and systems
reengineering 19.7 53.6
Exit and other costs 1.6 2.1
Total Costs Incurred $155.1 $193.5
- 6 -
Form 10-Q - Part I The Southern New England Telephone Company
Notes To Financial Statements
(Unaudited)
Note 1: Restructuring Charge (con't)
Costs incurred for employee separations included payments for
severance, unused compensated absences and health care
continuation, as well as the non-cash net charge discussed
previously. 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 initial installation and ongoing development of
these new integrated processes have enabled the Telephone Company
to increase its responsiveness to customer specific needs and to
eliminate certain current labor-intensive interfaces between the
existing systems.
As of September 30, 1995, approximately 1,540 employees (660
management and 880 bargaining-unit employees, or 21.0% and 13.6%
of the respective total work force at the inception of the
restructuring program) left the Telephone Company under severance
plans and retirement incentives. Of the total, approximately 500
bargaining-unit employees left under the early-out offer.
Approximately 2,110 employees will leave under the early-out
offer during the next three quarters (1,530 employees in the
fourth quarter of 1995 and 580 employees in the first half of
1996). The Telephone Company staggered separation dates through
June 1996 to ensure that service to customers would not be
adversely affected.
The Telephone Company anticipates savings of approximately $120
million from total employee separations since the inception of
the restructuring program. These savings are net of costs of
permanent and provisional employees filling core positions and
positions in areas being reengineered. To date, savings of
approximately $40 million have been realized. These anticipated
savings will also 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 $95 million and $85 million in 1995 and 1996, respectively.
The early-out offer will be funded primarily by the pension and
postretirement plans. Incremental capital expenditures related
to the restructuring program approximated $20 million for the
first nine months of 1995. These items were 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 $50 million over the remaining life of the program.
The Telephone Company determined that no additional provision for
employee separations is required as a result of evaluating the
net impact of the early-out offer on the restructuring charge.
The response to the early-out offer also accelerated work force
level objectives, therefore; the utilization of the restructuring
charge is expected to be completed in 1996. It is also expected
that shifts within reserve categories may occur. The Telephone
Company believes that the restructuring charge balance of $66.4
million as of September 30, 1995 plus the expected net
adjustments of approximately $55 million, discussed previously,
are adequate for future estimated costs under the 1993
restructuring program.
- 7 -
Form 10-Q - Part I The Southern New England Telephone Company
Notes To Financial Statements
(Unaudited)
Note 2: Income Taxes
In the second quarter of 1995, new state income tax rates were
enacted to accelerate the reduction of current rates. 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 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.
- 8 -
Form 10-Q - Part 1 The Southern New England Telephone Company
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Comparison of nine months ended September 30, 1995 vs. nine
months ended September 30, 1994
Revenues and Sales
Local service revenues increased $16.9 million, or 3.7%, due
primarily to growth experienced in access lines in service.
Access lines in service grew 2.9% to approximately 2,055,700 at
September 30, 1995 from approximately 1,996,900 at September 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 $12.4 million, or 4.7%.
Interstate access revenues increased $5.5 million due primarily
to an increase in interstate minutes of use of approximately 5%
and growth in access lines in service, discussed above. These
increases were partially offset by decreases in interstate access
tariff rates. These decreases, effective July 1, 1994 and August
1, 1995, were in accordance with the Telephone Company's annual
FCC filings under price cap regulation for 1994 and 1995,
respectively. In addition, intrastate access revenues increased
$6.9 million due primarily 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 $25.7 million, or 11.3%. Toll
message revenues decreased $19.7 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 3.7%
primarily as a result of increased competition offset partially
by the migration of customers from WATS services. WATS revenues
decreased $4.6 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 $20.3 million, or 13.2%.
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, interest income from invested cash
balance 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 benefits. Cost of
services and general and administrative expenses represent the
remaining portion of these expenses. Operating and maintenance
expenses decreased $3.3 million, or 0.6%. Excluding an $11.0
million before-tax charge associated primarily with a court
ruling on the Telephone Company's labor practices, operating and
maintenance expenses decreased $14.3 million, or 2.5%.
- 9 -
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 nine months ended September 30, 1995 vs. nine
months ended September 30, 1994
Operating and Maintenance (cont.)
Operating and maintenance expenses, excluding employee-related
costs and the litigation charge, decreased approximately $17
million. The decrease was due primarily to cost-containment
efforts in areas such as contract services and publishing.
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. The impact of a
2.2% 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 through June 1996 [see Note 1].
Depreciation and Amortization
Depreciation and amortization expense increased $3.6 million, or
1.6%. 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 $1.2 million, or 2.9% due primarily to
a decrease in average debt outstanding of approximately $43
million.
Income Taxes
The combined federal and state effective tax rate for 1995 was
38.4% compared with 40.3% for 1994. Income taxes in 1995 included
an adjustment made to reflect the settlement of tax matters. In
addition, a state income tax credit was recognized related to
personal property taxes paid on certain data processing
equipment.
- 10 -
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 September 30, 1995 vs. December 31, 1994
Accounts receivable
Accounts receivable increased $25.5 million due primarily to
timing of cash collections of the Telephone Company's accounts
receivable.
Deferred income taxes
Deferred income taxes (current asset) decreased $40.7 million due
primarily to costs incurred during 1995 under the restructuring
program [see Note 1].
Prepaid taxes and other assets
Prepaid taxes and other assets increased $17.5 million due
primarily to an increase in prepaid property taxes. The increase
in prepaid property taxes is a result of the Telephone Company's
annual payment of property taxes in March 1995. The prepaid
property taxes will be amortized over the remainder of 1995.
Deferred charges, leases and other assets
Deferred charges, leases and other assets decreased $58.3
million. In connection with the early-out offer, a net pension
curtailment loss was recognized and charged against the
restructuring reserve in the third quarter of 1995 [see Note 1].
This adjustment resulted in the reclassification of the
bargaining-unit prepaid pension asset to an accrued pension
liability. A decrease in the regulatory asset, due mainly as the
result of the change in state tax rates, also contributed to the
decrease.
Other liabilities and deferred credits
Other liabilities and deferred credits increased $104.6 million
due primarily to an increase in the accrued pension liability
caused by the reclassification of the bargaining-unit prepaid
pension asset to an accrued liability discussed previously.
Liquidity and Capital Resources
The Telephone Company generated cash flows from operations of
$318.9 million during the nine months ended September 30, 1995 as
compared with $320.5 million during the nine months ended
September 30, 1994. The primary use of corporate funds continued
to be capital expenditures.
For the nine months ended September 30, 1995, cash outlays
related to the Telephone Company's restructuring charge recorded
in December 1993 amounted to $61.7 million. Substantially all of
the expenditures related to incremental costs incurred for
executing numerous reengineering programs during the first three
quarters of 1995. These expenditures were funded from cash flows
from operations. Management anticipates that cash expenditures
for the restructuring program will approximate $95 million and
$85 million in 1995 and 1996, respectively, and will be funded
from operations. The early-out offer will be funded primarily by
the pension and postretirement plans.
- 11 -
Form 10-Q - Part I The Southern New England Telephone Company
Management's Discussion and Analysis of Financial
Condition and Results of Operations
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 non-
competitive and emerging competitive services.
The DPUC has conducted, and is conducting, a number of
proceedings, in two phases, to implement the Act. In the
competitive phase, the DPUC addressed 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
non-competitive categories. During the alternative regulation
phase, currently 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. A final decision from the DPUC
is expected in early 1996.
At this time, four telecommunication providers have been granted
a certificate of public convenience and necessity for local
service and two additional applications are pending before the
DPUC. In addition, on October 26, 1995, AT&T publicly announced
that it will apply with the DPUC to provide local phone service
throughout most of Connecticut. AT&T is expected to be a
formidable provider of local phone service initially to business
customers. The effect of increased competition on the
Corporation's results of operations cannot be predicted at this
time. While some customers will purchase services from
competitors, the Corporation expects that usage of its network
will increase and that increased network revenues will partially
offset loss of revenues from end-user customers. Local service
competition is expected to begin by the end of 1995 under the
framework resulting from the state regulation initiatives
currently underway.
Since the July 1, 1993 effective date of "10XXX" competition,
over 70 telecommunications providers have received approval from
the DPUC to offer "10XXX" or other competitive intrastate long-
distance services. In addition, over 40 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. Throughout 1995, the
Telephone
- 12 -
Form 10-Q - Part I The Southern New England Telephone Company
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Company has enhanced several discount calling plans in its High
Volume Discount Toll service offering. Additionally, the
Telephone Company, working with its affiliate SNET America,
realigned its discount and rate structures to provide Connecticut
customers with SNET All Distance[R], 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.
Federal Regulation Initiatives
In 1995, the FCC adopted an interim plan for interstate access
rates requiring the LECs to incorporate higher productivity
targets into their rates. The interim plan requires LECs to
choose 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 basis
by reducing the PCI by 0.7% for each prior year in which they
elected the 3.3% factor. The maximum PCI reduction over the four
year price cap period would therefore be 2.8%. The Telephone
Company has elected a 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%.
In September 1995, the FCC released a Further Notice of Proposed
Rulemaking that sought comment on changes to the established
price cap plan including productivity measurements, sharing,
common line formula and exogenous costs. The FCC is expected to
adopt new price cap rules in 1996.
The Telephone Company's 1995 annual interstate access tariff
filing under price cap regulation took effect 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 is required. This filing is expected
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.
On September 1, 1995, the Telephone Company filed a request to
amend its previously approved application to expand its marketing
trial of providing video dialtone service to an additional
150,000 homes in two counties in Connecticut. In the new
application, the Telephone Company focused on key issues related
to providing capacity to video programmers at a time when digital
capacity is not commercially viable or technically available.
- 13 -
Form 10-Q - Part I The Southern New England Telephone Company
Management's Discussion and Analysis of Financial
Condition and Results of Operations
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.
On February 10, 1995, the Telephone Company filed with the DPUC
its depreciation reserve studies indicating its intrastate
deficiency in accumulated depreciation could be as much as $744
million based on telecommunications plant investment as of
January 1, 1995. On November 3, 1995, the DPUC issued a draft
decision on the reasonableness of the intrastate reserve
deficiency. Recognizing that the Telephone Company faces an open
competitive market and its effect on asset lives, the DPUC found
an intrastate reserve deficiency of $587 million to be reasonable
for recovery. The remaining portion of the reserve deficiency of
$157 million should continue to be recovered over the established
remaining life of the related assets. While the draft decision
seeks to quantify the Telephone Company's intrastate reserve
deficiency, the method of recovery will be addressed in
subsequent proceedings on the Telephone Company's financial
condition and alternative, incentive-based regulation. These
proceedings are currently scheduled by the DPUC during the
remainder of 1995 with a decision expected in 1996.
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.
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
labor agreement will expire on 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.
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Form 10-Q - Part II The Southern New England Telephone Company
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There were no material developments in the third
quarter of 1995.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(27) Financial Data Schedule
(b) Reports on Form 8-K
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.
On October 24, 1995, the Telephone Company filed a
report on Form 8-K, dated October 23, 1995 announcing
the Corporation's financial results for the third
quarter of 1995.
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Form 10-Q - Part II The Southern New England Telephone Company
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
The Southern New England Telephone Company
November 8, 1995
/s/ J. A. Sadek
J. A. Sadek
Vice President and Comptroller
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