UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 1997.
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 of (I.R.S. Employer
incorporation or organization) Identification Number)
227 Church Street, New Haven, CT 06510
(Address of principal executive offices) (Zip Code)
(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 Southern New
England Telecommunications Corporation ("Corporation") and has
its principal executive offices 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, which are normal and
recurring in nature, necessary for fair presentation for each
period shown. The 1996 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 1996 Annual
Report on Form 10-K.
- 2 -
Form 10-Q -Part I The Southern New England Telephone Company
CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS
(Unaudited)
For the Three Months Ended
March 31,
Dollars in Millions 1997 1996
Revenues
Local service $ 169.4 $ 164.7
Network access 102.6 97.0
Intrastate toll 53.4 66.4
Publishing and other 58.1 60.3
Total Revenues 383.5 388.4
Costs and Expenses
Operating and maintenance 203.1 192.7
Depreciation and amortization 77.4 74.4
Taxes other than income 11.5 12.8
Total Costs and Expenses 292.0 279.9
Operating Income 91.5 108.5
Interest expense 11.2 11.6
Other (expense) income, net (.2) 1.0
Income Before Income Taxes 80.1 97.9
Income taxes 31.3 38.2
Income Before Extraordinary Charge 48.8 59.7
Extraordinary charge, net of tax (3.7) -
Net Income $ 45.1 $ 59.7
Retained Earnings, Beginning of Period $ 92.6 $ 31.8
Net income 45.1 59.7
Dividends declared to parent (40.0) (35.6)
Retained Earnings, End of Period $ 97.7 $ 55.9
- 3 -
Form 10-Q - Part I The Southern New England Telephone Company
CONDENSED BALANCE SHEETS
Dollars in Millions March 31, 1997 December 31, 1996
(Unaudited)
Assets
Cash and temporary cash investments $ - $ 56.8
Accounts receivable, net of allowance for
uncollectibles of $17.8 and $18.0,
respectively 267.8 270.8
Accounts receivable from affiliates 9.8 11.1
Materials and supplies 16.8 14.3
Prepaid publishing 34.6 35.2
Deferred income taxes and other current assets 63.1 47.1
Total Current Assets 392.1 435.3
Total telephone plant, at cost 4,369.1 4,309.1
Accumulated depreciation (3,015.0) (2,964.5)
Net Telephone Plant 1,354.1 1,344.6
Deferred income taxes and other assets 94.9 77.3
Total Assets $ 1,841.1 $1,857.2
Liabilities and Shareholder's Equity
Accounts payable and accrued expenses $ 186.8 $ 180.2
Advance billings and customer deposits 44.8 42.6
Accounts and notes payable to affiliates 36.7 19.5
Other current liabilities 137.4 116.8
Total Current Liabilities 405.7 359.1
Long-term debt 666.9 746.9
Other liabilities and deferred credits 139.7 127.5
Total Liabilities 1,212.3 1,233.5
Common Stock; $12.50 par value; 30,428,596
shares issued and 30,385,900 outstanding 380.4 380.4
Proceeds in excess of par value 152.1 152.1
Retained earnings 97.7 92.6
Treasury stock; 42,696 shares, at cost (1.4) (1.4)
Total Shareholder's Equity 628.8 623.7
Total Liabilities and Shareholder's Equity $1,841.1 $1,857.2
- 4 -
Form 10-Q - Part I The Southern New England Telephone Company
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months Ended
March 31,
Dollars in Millions 1997 1996
Operating Activities
Net income $ 45.1 $ 59.7
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 77.4 74.4
Extraordinary charge, net of tax 3.7 -
Restructuring payments (2.2) (18.2)
Change in operating assets and liabilities, net (1.0) 13.8
Other, net 5.5 3.2
Net Cash Provided by Operating Activities 128.5 132.9
Investing Activities
Cash expended for capital additions (82.6) (57.3)
Other, net (1.8) 1.1
Net Cash Used by Investing Activities (84.4) (56.2)
Financing Activities
Repayment of long-term debt (80.0) -
Cash dividends paid (33.0) (23.0)
Net proceeds of short-term debt from affiliate 17.9 -
Other, net (5.8) -
Net Cash Used by Financing Activities (100.9) (23.0)
(Decrease) increase in Cash and Temporary
Cash Investments (56.8) 53.7
Cash and temporary cash investments at
beginning of period 56.8 70.5
Cash and Temporary Cash Investments at
End of Period $ - $ 124.2
Income Taxes Paid $ 7.6 $ 9.5
Interest Paid, net of amounts capitalized $ 9.1 $ 8.7
- 5 -
Form 10-Q - Part I Southern New England Telephone Company
NOTES TO FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
(Unaudited)
Note 1: Extraordinary Charge
On February 18, 1997, the Telephone Company redeemed $80.0 of
8.70% medium-term notes due 2031, which were satisfied with cash
and short-term borrowings from the Corporation. The early
extinguishment of debt resulted in an extraordinary charge of
$3.7, net of tax benefits of $2.7.
- 6 -
Form 10-Q - Part I The Southern New England Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Millions)
Comparison of three months ended March 31, 1997 vs. three months
ended March 31, 1996
Operating Results
Income before extraordinary charge was $48.8 in 1997 compared
with $59.7 in 1996.
Revenues and Sales
For the Three Months Ended March 31, 1997 1996
Local service $169.4 $164.7
Network access 102.6 97.0
Intrastate toll 53.4 66.4
Publishing and other 58.1 60.3
Total Revenues $383.5 $388.4
Local service revenues, derived from providing local exchange,
advanced calling features and local private line services,
increased $4.7, or 2.9%, in 1997. The increase was due
primarily to continued strong growth of 4.8% in access lines in
service to approximately 2,190,000 lines as of March 31, 1997.
This increase included significant growth in Centrex business
lines and second residential lines. Local service revenues also
increased due to growth in vertical services, primarily
SmartLink[R] advanced calling features, including Caller ID, missed
call dialing, call blocking and call tracing. The increase was
offset partially by a decrease in revenues recognized from
wireless carriers, due to a decrease in the generic wireless
tariff in accordance with the Federal Telecommunications Act of
1996 ("Act"). Management expects competition to impact local
service revenues as other telecommunications providers start to
offer local service during the year [see Competition].
Network access revenues, generated primarily from interstate and
intrastate services, increased $5.6, or 5.8%. Intrastate access
revenues increased $3.3, or 53.3%, due primarily to an increase
in intrastate minutes of use by competitive providers of
intrastate long-distance service. Interstate access revenues
increased $2.3, or 2.5%, due primarily to growth in interstate
minutes of use of approximately 4% and an increase in access
lines in service, discussed previously. Partially offsetting
the impact of the increase in minutes of use were lower rates
due to discount plans and a decrease in tariff rates in
accordance with the Telephone Company's July 1996 Federal
Communications Commission ("FCC") filing under price cap
regulation.
Intrastate toll revenues, which include primarily revenues from
toll and WATS services, decreased $13.0, or 19.6%. The decrease
was due primarily to a 15.9% reduction in toll message volume,
as well as reduced intrastate toll rates. Lower toll volume was
due primarily to the first full quarter impact of intrastate
equal access and the increasingly competitive toll market.
Additionally, unusually high toll volume occurred in the first
quarter of 1996 due to stormy weather experienced in
Connecticut. The decline in rates was attributable to the
introduction of several discount calling plans that provide
competitive options to business and residence customers.
Increasing competition and the Telephone Company's offering of
competitive discount calling plans will continue to place
downward pressure on intrastate toll revenues.
- 7 -
Form 10-Q - Part I The Southern New England Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Millions)
Comparison of three months ended March 31, 1997 vs. three months
ended March 31, 1996
The $2.2 decrease in publishing and other revenues was due
primarily to the discontinuance of the provision of billing
services for a major long-distance carrier. Publishing revenues
remained flat despite an increasingly competitive market.
Costs and Expenses
For the Three Months Ended March 31, 1997 1996
Operating costs $203.1 $192.7
Depreciation and amortization 77.4 74.4
Taxes other than income 11.5 12.8
Total Costs and Expenses $292.0 $279.9
Operating costs - Operating costs consist primarily of employee-
related expenses, including wages and benefits. Cost of
services and general and administrative expenses, including
marketing, represent the remaining portion of these expenses.
Total operating costs increased $10.4, or 5.4%, including
approximately $3 of reprogramming costs associated with the
recognition of the year 2000. The remainder of the increase was
due primarily to higher employee-related expenses and network
contract services, mainly as a result of continuing higher
service demands. Additionally, licensed software fees for
network switching increased due to the timing of projects, and
bad debt expense increased due to higher credit risk in an
increasingly competitive environment.
Depreciation and amortization - Depreciation and amortization
expense increased $3.0, or 4.0%, due primarily to an increase in
the average depreciable telecommunications property, plant and
equipment.
Taxes other than income - The 10.2% decrease in taxes other than
income was due primarily to savings in property taxes as a
result of the continuing reduction of overall corporate space.
Interest Expense and Other (Expense) Income, net
For the Three Months Ended March 31, 1997 1996
Interest expense $11.2 $11.6
Other (expense) income, net $ (.2) $ 1.0
Interest expense decreased $.4, or 3.4%, due primarily to
savings from the February 18, 1997 redemption of $80.0 of medium-
term notes with an interest rate of 8.70%, offset partially by a
decrease in the amount of interest which was capitalized. The
decrease in other (expense) income, net was due primarily to a
decrease in interest income from the Corporation, as the
Telephone Company's cash balance was used to satisfy the
previously mentioned redemption.
- 8 -
Form 10-Q - Part I The Southern New England Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Millions)
Income Taxes
For the Three Months Ended March 31, 1997 1996
Income taxes $31.3 $38.2
The combined federal and state effective tax rate for the three
months ended March 31, 1997 was 39.1% compared with 39.0% for
the same period in 1996. The decrease in income taxes was due
to a corresponding decrease in income before income taxes.
Extraordinary Charge
For the Three Months Ended March 31, 1997 1996
Extraordinary charge, net of tax $(3.7) -
On February 18, 1997, the Telephone Company redeemed $80.0 of
8.70% medium-term notes due 2031. The early extinguishment of
debt resulted in an extraordinary charge of $3.7 after-tax.
Comparison of balances as of March 31, 1997 vs. December 31, 1996
The previously discussed redemption of debt led to a decrease of
$80.0 in long-term debt, and was the primary factor in the $56.8
decrease in cash and temporary cash investments and the $17.2
increase in accounts and notes payable to affiliates.
Other current liabilities increased $20.6 due to the timing of
income tax payments and an increase in dividends payable.
Liquidity and Capital Resources
The Telephone Company generated cash flows from operations of
$128.5 during the three months ended March 31, 1997 as compared
with $132.9 during the three months ended March 31, 1996. The
decrease was due primarily to lower net income, offset partially
by lower restructuring payments made in first quarter 1997.
Capital expenditures were the primary use of corporate funds.
On February 18, 1997, the Telephone Company redeemed $80.0 of
8.70% medium-term notes as discussed previously.
Competition
The Telephone Company continues to experience an increasingly
competitive environment with respect to telecommunications
services in Connecticut. Competitors include interexchange
carriers and competitive access providers, and most recently,
competitive local exchange carriers ("CLEC"). Telecommunications
providers continue to file with the Department of Public Utility
Control ("DPUC") to offer competitive intrastate long-distance
services, and major carriers intensified their marketing efforts
to sell intrastate long-distance services since the full
implementation of intrastate equal access.
- 9 -
Form 10-Q - Part I The Southern New England Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Millions)
Local service competition is expected to grow significantly in
1997; however, the financial impact cannot be predicted at this
time. Based on existing state and federal regulations, the
Telephone Company expects that many competitors will resell the
Telephone Company's network and that increased network access
revenues will offset a significant portion of local service
revenues lost to competition.
Regulatory Matters
Federal Regulatory Initiatives
In accordance with the Act, the Federal-State Joint Board adopted
a Recommended Decision on Universal Service on November 7, 1996.
The recommendation addresses the universal service provisions of
the Act and proposes that one federal fund be established to
provide support for universal service. The proposal calls for
interstate telecommunications service providers to contribute to
the fund based on their telecommunications revenue, net of
payments to other carriers. The revenue to be assessed may
either be total interstate and intrastate revenue, or interstate
revenue only. Management is currently evaluating the impact of
FCC decisions regarding universal service and access charges.
The Telephone Company filed its 1997 annual interstate access
price cap revisions in April 1997 and anticipates filing proposed
rate changes in June 1997 for effect July 1, 1997. These filings
will adjust interstate access rates for an experienced rate of
inflation, the FCC's productivity target and exogenous cost
changes, if any. The Telephone Company again elected a 4.0%
productivity factor.
State Regulatory Initiatives
On January 24, 1997, the Corporation filed a proposal with the
DPUC outlining steps to structure its wireline business,
including the Telephone Company, into separate retail and
wholesale subsidiaries. Under the proposal, the new retail
organization, a CLEC, will compete under the same regulations as
all other retail telecommunications providers in the state and
will bring innovative packages of products and services to the
consumer. The wholesale organization, an incumbent local
exchange carrier, will provide network services and functionality
to retail providers, including the Corporation's new CLEC, on
neutral terms. The Telephone Company's current directory
publishing operations will also be structured as a separate
subsidiary of the Corporation. A decision is expected in late
June 1997.
In compliance with the Act, the Telephone Company has filed with
the DPUC numerous cost studies supporting its proposed wholesale
(i.e., resale) and unbundled rates for interconnection services.
On March 24, 1997, the DPUC issued a final decision setting a
uniform 17.8% discount rate off the Telephone Company's retail
prices for telecommunications services resold to CLEC's. On April
23, 1997, the DPUC issued a final decision addressing the
proposal for allocation of HFC costs to video and telephony and
the Telephone Company's costs and rates associated with unbundled
loops, ports, multiplexing, and inter-wire center transport. In
this decision, the DPUC agreed to the Telephone Company's
proposed 50/50 allocation for video and telephony. It also
approved the proposal to include 100% of the cost of the loop in
its intrastate cost studies, rather than only 75% of the cost of
- 10 -
Form 10-Q - Parts I & II The Southern New England Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Millions)
the loop (25% of the cost of the loop was previously allocated
to interstate services). In addition, the DPUC approved the cost
studies based on Total Service Long Run Incremental Cost
(TSLRIC). The Telephone Company submitted a revised tariff for
unbundled loops, ports, multiplexing, and inter-wire center
transport reflecting the findings in the decision.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There were no material developments in the first
quarter of 1997.
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K
On January 21, 1997, the Telephone Company filed a
report on Form 8-K, dated January 21, 1997,
announcing the Corporation's 1996 financial results.
On April 23, 1997, the Telephone Company filed a
report on Form 8-K, dated April 23, 1997, announcing
the Corporation's financial results for the first
quarter of 1997.
- 11 -
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
May 8, 1997
/s/ Donald R. Shassian
Donald R. Shassian
Senior Vice President and Chief
Financial Officer
- 12 -