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 September 30, 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 1-9157
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
Connecticut 06-1157778
(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 .
Common stock, par value $1.00 per share: 66,540,036 shares
outstanding as of October 31, 1997
- 1 -
Form 10-Q - Part I Southern New England Telecommunications Corporation
PART I - FINANCIAL INFORMATION
Southern New England Telecommunications Corporation
("Corporation") was incorporated under the laws of the State of
Connecticut on January 7, 1986 and has its principal executive
offices at 227 Church Street, New Haven, Connecticut 06510
(telephone number (203) 771-5200).
The condensed, consolidated 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
consolidated 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 condensed,
consolidated financial statements be read in conjunction with the
consolidated financial statements and notes thereto included in
the Corporation's 1996 Annual Report on Form 10-K.
- 2 -
Form 10-Q - Part I Southern New England Telecommunications Corporation
CONDENSED, CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
Dollars in Millions, Except 1997 1996 1997 1996
Per Share Amounts
Revenues and Sales $ 509.7 $ 488.2 $1,494.0 $1,450.0
Costs and Expenses
Operating and maintenance 301.3 295.3 878.2 849.9
Depreciation and amortization 95.0 88.5 281.0 265.9
Taxes other than income 14.2 13.9 40.7 41.4
Total Costs and Expenses 410.5 397.7 1,199.9 1,157.2
Operating Income 99.2 90.5 294.1 292.8
Interest expense 22.4 21.9 67.5 67.2
Other income, net 1.7 .4 5.7 6.2
Income Before Income Taxes 78.5 69.0 232.3 231.8
Income taxes 29.4 23.2 87.1 83.3
Income Before Extraordinary Charge 49.1 45.8 145.2 148.5
Extraordinary charge, net of tax - - (3.7) -
Net Income $ 49.1 $ 45.8 $141.5 $ 148.5
Weighted Average Common Shares
Outstanding (in thousands) 66,481 65,606 66,110 65,539
Earnings Per Share
Income before extraordinary charge $ .74 $ .70 $ 2.20 $ 2.27
Extraordinary charge, net of tax - - (.06) -
Earnings Per Share $ .74 $ .70 $ 2.14 $ 2.27
Dividends Declared Per Share $ .44 $ .44 $ 1.32 $ 1.32
The accompanying notes are an integral part of these financial statements.
- 3 -
Form 10-Q - Part I Southern New England Telecommunications Corporation
CONDENSED, CONSOLIDATED BALANCE SHEETS
Dollars in Millions, Except Per Share September 30, 1997 December 31, 1996
Amounts (Unaudited)
Assets
Cash and temporary cash investments $ 12.0 $ 9.0
Accounts receivable, net of allowance
for uncollectibles of $25.7 and
$27.4, respectively 335.7 323.3
Materials, supplies and inventories 26.4 27.4
Prepaid publishing 33.3 35.2
Deferred income taxes and other 83.5 73.1
current assets
Total Current Assets 490.9 468.0
Property, plant and equipment, at cost 4,905.4 4,707.3
Accumulated depreciation (3,223.4) (3,110.3)
Property, plant and equipment, net 1,682.0 1,597.0
Intangible assets, net 399.4 400.3
Deferred income taxes, leases and other 202.0 205.7
assets
Total Assets $ 2,774.3 $ 2,671.0
Liabilities and Shareholders' Equity
Accounts payable and accrued expenses $ 237.1 $ 252.0
Short-term debt 191.6 215.2
Advance billings and customer deposits 67.0 60.9
Other current liabilities 146.6 138.9
Total Current Liabilities 642.3 667.0
Long-term debt 1,184.1 1,169.7
Accrued postretirement benefit obligation 281.0 288.9
Other liabilities and deferred credits 101.2 82.4
Total Liabilities 2,208.6 2,208.0
Common Stock; $1.00 par value; 300,000,000
shares authorized; 68,749,657 and
68,407,669 issued, respectively 68.7 68.4
Proceeds in excess of par value 615.8 602.8
Retained earnings (deficit) 3.6 (55.7)
Treasury stock; at cost, 2,230,586 and
2,758,512 shares, respectively (84.7) (104.7)
Unearned compensation related to ESOP (37.7) (47.8)
Total Shareholders' Equity 565.7 463.0
Total Liabilities and Shareholders' Equity $ 2,774.3 $ 2,671.0
The accompanying notes are an integral part of these financial statements.
- 4 -
Form 10-Q - Part I Southern New England Telecommunications Corporation
CONDENSED, CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY
(Unaudited)
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
Dollars in Millions 1997 1996 1997 1996
Common Stock, Par Value
Balance at Beginning of Period $ 68.7 $ 68.2 $ 68.4 $ 67.9
Common shares issued, at market:
Dividend reinvestment plan .1 .1 .3 .3
Savings and incentive plans - - .1 .1
Common shares repurchased (.1) - (.1) -
Balance at End of Period $ 68.7 $ 68.3 $ 68.7 $ 68.3
Proceeds in Excess of Par Value
Balance at Beginning of Period $ 613.1 $ 650.7 $ 602.8 $ 697.9
Dividends declared - (28.8) - (86.3)
Common shares issued, at market:
Dividend reinvestment plan 3.2 3.6 10.0 10.8
Savings and incentive plans 1.7 1.2 5.2 4.3
Common shares repurchased (3.2) - (3.2) -
Acquisition of Woodbury Telephone 1.0 - 1.0 -
Balance at End of Period $ 615.8 $ 626.7 $ 615.8 $ 626.7
Retained Earnings (Deficit)
Balance at Beginning of Period $ (20.9) $(146.3) $ (55.7) $(249.5)
Net income 49.1 45.8 141.5 148.5
Dividends declared (29.2) - (87.2) -
Acquisition of Woodbury Telephone 4.5 - 4.5 -
Tax benefit of dividends declared
on unallocated shares held in ESOP .1 .2 .5 .7
Balance at End of Period $ 3.6 $(100.3) $ 3.6 $(100.3)
Treasury Stock
Balance at Beginning of Period $(104.7) $(104.7) $ (104.7) $(104.7)
Acquisition of Woodbury Telephone 20.0 - 20.0 -
Balance at End of Period $ (84.7) $(104.7) $ (84.7) $(104.7)
Unearned Compensation Related
To Employee Stock Ownership Plan
Balance at Beginning of Period $ (41.6) $ (51.7) $ (47.8) $ (58.7)
Reduction of ESOP debt 5.2 4.5 13.3 12.1
ESOP earned compensation accrual (1.3) (2.0) (3.2) (2.6)
Balance at End of Period $ (37.7) $ (49.2) $ (37.7) $ (49.2)
Total Shareholders' Equity $ 565.7 $ 440.8 $ 565.7 $ 440.8
The accompanying notes are an integral part of these financial statements.
- 5 -
Form 10-Q - Part I Southern New England Telecommunications Corporation
CONDENSED, CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months Ended
September 30,
Dollars in Millions 1997 1996
Operating Activities
Net income $ 141.5 $ 148.5
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 281.0 265.9
Extraordinary charge, net of tax 3.7 -
Restructuring payments (12.4) (57.9)
Change in operating assets and liabilities, net (22.7) (36.9)
Other, net 29.0 30.4
Net Cash Provided by Operating Activities 420.1 350.0
Investing Activities
Cash expended for capital additions (327.6) (234.6)
Other, net 9.1 17.9
Net Cash Used by Investing Activities (318.5) (216.7)
Financing Activities
Proceeds from long-term debt 100.0 -
Repayments of long-term debt (87.4) (30.4)
Net payments of short-term debt (24.8) (25.9)
Cash dividends paid (76.5) (75.0)
Other, net (9.9) -
Net Cash Used by Financing Activities (98.6) (131.3)
Increase in Cash and Temporary Cash Investments 3.0 2.0
Cash and temporary cash investments at
beginning of period 9.0 11.1
Cash and Temporary Cash Investments at
End of Period $ 12.0 $ 13.1
Income Taxes Paid $ 64.8 $ 61.5
Interest Paid, net of amounts capitalized $ 68.0 $ 69.6
The accompanying notes are an integral part of these financial statements.
- 6 -
Form 10-Q - Part I Southern New England Telecommunications Corporation
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
(Unaudited)
Note 1: Significant Accounting Policies
Accounting Pronouncements - The Corporation will adopt Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share," at year-end 1997. SFAS No. 128 establishes standards for
computing and presenting earnings per share. Management does not
expect the adoption of the standard to have a material impact on
the earnings per share calculation.
Note 2: Supplemental Financial Information
Operating Cash Flow(1) - The following unaudited financial data on
the Corporation's product groups is not required by generally
accepted accounting principles and is provided for informational
purposes only:
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
1997 1996 1997 1996
Wireline $150.0 $135.7 $443.8 $436.6
Wireless 19.4 11.2 47.9 23.4
Information and Entertainment 21.3 30.0 70.1 85.0
Other(2) 3.5 2.1 13.3 13.7
Total $194.2 $179.0 $575.1 $558.7
(1) Represents operating income before depreciation and amortization.
Operating cash flow is not a generally accepted accounting principle
measurement.
(2) Includes SNET Real Estate, Inc. and holding company operations.
Note 3: Long-term Debt
On February 18, 1997, the Corporation redeemed $80.0 of 8.70%
medium-term notes due 2031, which were satisfied with the
issuance of short-term debt. The early extinguishment of debt
resulted in an extraordinary charge of $3.7, net of tax benefits
of $2.7.
On February 4, 1997, the Corporation issued $100.0 of 6.50%
medium-term notes due 2002. The issuance replaced a portion of
short-term debt related to the cellular acquisitions of July
1995.
Note 4: Woodbury Telephone Company Acquisition
On July 30, 1997, the Corporation completed its acquisition of the
Woodbury Telephone Company ("Woodbury"). The Corporation held an
investment in Woodbury at cost prior to the acquisition, and
issued approximately 528,000 shares of SNET stock to Woodbury's
common shareholders for the remaining 63.5% of Woodbury. The
acquisition was accounted for as a purchase, and the results of
Woodbury have been included in the accompanying consolidated
financial statements since the date of acquisition. The cost of
the acquisition, $21.1, was allocated on the basis of the
estimated fair market value of the assets acquired and the
liabilities assumed. This allocation resulted in goodwill of
$11.5, which is being amortized over 15 years. The Corporation
assumed $9.0 of Woodbury's long-term debt in the acquisition.
- 7 -
Form 10-Q - Part I Southern New England Telecommunications Corporation
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
(Unaudited)
Note 5: Litigation
On July 31, 1997, the Second Circuit Court of Appeals issued a
decision upholding an August 28, 1995 judgment from the U.S.
District Court finding that the Corporation and the Telephone
Company had violated certain sections of the Fair Labor Standards
Act and were liable for $9.7 in back pay and liquidated damages
plus interest of approximately 5.9% from the date of the District
Court judgment. In the second quarter of 1995, the Telephone
Company recorded a liability of $11.0, which is adequate to cover
the anticipated cost of total damages for this matter.
- 8 -
Form 10-Q - Part I Southern New England Telecommunications Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Millions, Except Per Share Amounts)
Southern New England Telecommunications Corporation has business
units in the following telecommunications product groups:
wireline; wireless; and information and entertainment. Wireline
includes telephone related services, premium services and
equipment sales; wireless consists of cellular and paging
services and cellular equipment sales; and information and
entertainment includes publishing, internet and cable television
services. Other activities, such as real estate and holding
company operations, are included with eliminations and other
sales.
Comparison of the periods ended September 30, 1997 vs. the
periods ended September 30, 1996
Operating Results
Income before extraordinary charge was $49.1, or $.74 per share,
and $145.2, or $2.20 per share, for the three and nine months
ended September 30, 1997, respectively. The corresponding
periods in 1996 generated net income of $45.8, or $.70 per
share, and $148.5, or $2.27 per share. The quarterly increase
was primarily due to wireline revenues increasing, despite
decreases in intrastate toll as a result of competition. The
increase was partially offset by higher depreciation expense due
to increased investment in physical plant, and expenses relating
to the new cable offering. Revenues for the nine month period
have been more than offset by those factors, causing the
decrease in income before extraordinary charge.
Revenues and Sales
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
1997 1996 1997 1996
Wireline:
Local service $179.5 $170.5 $ 524.3 $ 503.7
Network access 104.5 94.4 314.5 288.5
Intrastate toll 54.2 62.1 159.8 193.1
Interstate and international toll 36.7 28.9 101.6 71.3
Premium services and equipment sales 35.6 26.9 91.0 77.1
Other revenues 12.7 11.1 36.0 37.9
Total Wireline 423.2 393.9 1,227.2 1,171.6
Wireless:
Cellular service 56.1 52.7 157.9 149.0
Cellular equipment sales .6 2.5 5.0 7.0
Paging 1.6 1.5 4.9 4.5
Total Wireless 58.3 56.7 167.8 160.5
Information and Entertainment 47.3 46.0 141.0 138.1
Eliminations and Other Sales (19.1) (8.4) (42.0) (20.2)
Revenues and Sales $509.7 $488.2 $1,494.0 $1,450.0
Wireline - Local service revenues, derived from providing local
exchange, advanced calling features and local private line
services, increased $9.0, or 5.3%, and $20.6, or 4.1%, for the
three and nine month periods, respectively. The increase was
due primarily to continued strong growth of 5.2% in access lines
in service to approximately 2,257,000 lines as of September 30,
1997, including approximately 21,000 lines acquired in the
Woodbury purchase. The increase excluding the Woodbury
- 9 -
Form 10-Q - Part I Southern New England Telecommunications Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Millions, Except Per Share Amounts)
Comparison of the periods ended September 30, 1997 vs. the
periods ended September 30, 1996
purchase was 4.2%. 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. Additionally, payphone revenues increased due to
compensation received as part of the pay telephone
reclassification and compensation provisions of the Federal
Telecommunications Act of 1996 ("Act") [see Regulatory Matters].
The increase in local service revenues was tempered by a
decrease in revenues recognized from wireless carriers, due to a
decrease in the generic wireless tariff in accordance with the
Act. Management expects increased competition to negatively
impact local service revenues as other telecommunications
providers offer local service and as the Department of Public
Utility Control ("DPUC") mandated balloting process commences
[see Competition].
Network access revenues, generated primarily from interstate and
intrastate services, increased $10.1, or 10.7%, and $26.0, or
9.0%, for the three and nine month periods, respectively.
Intrastate access revenues increased $4.8, or 65.5%, for the
quarter, and $13.1, or 65.8% for the nine month period, due
primarily to an increase in intrastate minutes of use by
competitive providers of intrastate long-distance service.
Interstate access revenues increased $5.3, or 6.0%, for the
quarter, and $12.9, or 4.8% for the nine month period. The
increases were due to growth in interstate minutes of use,
including the impact from the Woodbury acquisition, of
approximately 5.6% and 5.2%, respectively, and the effects of
the reversal of proposed tariff changes. Partially offsetting
the impact of these items was a decrease in tariff rates in
accordance with the Telephone Company's July 1997 Federal
Communications Commission ("FCC") filing under price cap
regulation.
Intrastate toll revenues, which include primarily revenues from
toll and WATS services, decreased $7.9, or 12.7%, and $33.3, or
17.2%, for the three and nine month periods, respectively. The
decreases were due primarily to 10.6% and 13.3% reductions in
toll message volume, respectively, as well as reduced intrastate
toll rates. Lower toll volume was due primarily to the highly
competitive toll market as a result of full intrastate equal
access. The decline in rates was attributable to customer
migration to several discount calling plans that provide
competitive options to business and residence customers.
Increasing competition and the offering of competitive discount
calling plans will continue to place downward pressure on
intrastate toll revenues.
Interstate and international toll revenues increased $7.8 for
the quarter and $30.3 for the nine month period due to strong
growth in the customer base. The growth is primarily a result
of customer migration to the SNET All Distance[R] product line
which allows Connecticut customers to package and discount their
entire long-distance calling in one plan.
Premium services and equipment sales increased $8.7 for the
quarter and $13.9 for the nine month period due primarily to a
one-time cost-plus contract providing backroom operations for a
communications company.
Wireless - Cellular service revenues increased $3.4, or 6.5%, and
$8.9, or 6.0%, for the three and nine month periods,
respectively, due mainly to growth of 16.3% in the subscriber
base. This growth was offset partially by lower roaming rates
and lower revenues per subscriber.
- 10 -
Form 10-Q - Part I Southern New England Telecommunications Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Millions, Except Per Share Amounts)
Comparison of the periods ended September 30, 1997 vs. the
periods ended September 30, 1996
Information and Entertainment - Growth in internet sales was the
primary contributor to the increase in information and
entertainment sales. Additionally, SNET americast revenues have
increased with the deployment of the cable television offering,
while publishing revenues have remained steady.
Costs and Expenses
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
1997 1996 1997 1996
Operating costs $301.3 $295.3 $ 878.2 $ 849.9
Depreciation and amortization 95.0 88.5 281.0 265.9
Taxes other than income 14.2 13.9 40.7 41.4
Total Costs and Expenses $410.5 $397.7 $1,199.9 $1,157.2
Operating costs - Operating costs consist primarily of employee-
related expenses, including wages and benefits. Cost of goods
sold and general and administrative expenses, including
marketing, represent the remaining portion of these expenses.
Total operating costs increased $6.0, or 2.0%, for the quarter,
and $28.3, or 3.3%, for the nine month period, including
approximately $3 and $9, respectively, of reprogramming costs
associated with computer recognition of the year 2000.
Wireline - For the three and nine month periods, wireline
operating costs increased $15.0, or 6.1%, and $49.6, or 7.1%,
respectively, due primarily to an increase in the direct costs
of providing interstate and international toll services. Also
contributing to the increase were higher employee-related
expenses, mainly as a result of continuing higher service
demands, and higher costs for growing Premium service product
lines. Costs associated with a one-time cost-plus contract
providing backroom operations for a communications company also
added to the increase.
Wireless - For the three and nine month periods, wireless
operating costs decreased $6.9, or 15.5%, and $17.7, or 13.2%,
respectively. The decrease was due primarily to lower expenses
related to bad debt and fraud, as well as a decrease in the cost
to complete calls to landline telephones, as a result of the
reduced generic wireless tariff discussed previously. For the
nine month period, customer acquisition costs, including
distribution and marketing costs, also declined.
Information and Entertainment - Operating costs for information
and entertainment increased $10.0, or 62.5% for the quarter, and
$17.7, or 33.3% for the nine month period. The increase was
primarily driven by costs associated with the cable offering.
Additionally, providing internet services to a larger customer
base contributed to the increase. Management expects information
and entertainment operating costs to continue to increase as the
new cable television service is deployed.
Depreciation and amortization - Depreciation and amortization
expense increased $6.5, or 7.3%, and $15.1, or 5.7%, for the
three and nine month periods, respectively, due primarily to an
increase in the average depreciable telecommunications property,
plant and equipment.
- 11 -
Form 10-Q - Part I Southern New England Telecommunications Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Millions, Except Per Share Amounts)
Comparison of the periods ended September 30, 1997 vs. the
periods ended September 30, 1996
Interest Expense
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
1997 1996 1997 1996
Interest expense $22.4 $21.9 $67.5 $67.2
Interest expense was relatively flat, as savings from the
redemption of $80.0 of medium-term notes with an interest rate
of 8.70% on February 18, 1997 was substantially offset by
interest on $100.0 of 6.50% medium-term notes issued February 4,
1997.
Other Income, net
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
1997 1996 1997 1996
Other income, net $1.7 $.4 $5.7 $6.2
The quarterly increase in other income, net was due primarily to
an increase in interest income, due to interest received with a
tax refund. The decrease for the nine month period was due
primarily to greater minority interest losses, offset partially
by the increase in interest income.
Income Taxes
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
1997 1996 1997 1996
Income taxes $29.4 $23.2 $87.1 $83.3
The combined federal and state effective tax rate for the
quarter was 37.5% compared with 33.6% for the same period in
1996. The tax rate for the nine month period increased to 37.5%
from 35.9% for the respective 1996 period. The lower 1996
effective rate was due primarily to the settlement of tax
matters.
Extraordinary Charge
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
1997 1996 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, or
$.06 per share.
- 12 -
Form 10-Q - Part I Southern New England Telecommunications Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Millions, Except Per Share Amounts)
Liquidity and Capital Resources
The Corporation generated cash flows from operations of $420.1
during the nine months ended September 30, 1997 as compared with
$350.0 during the nine months ended September 30, 1996. The
increase was primarily the result of lower restructuring
payments. Capital expenditures were the primary use of corporate
funds.
On February 4, 1997, the Corporation issued $100.0 of 6.50%
medium-term notes due 2002. The issuance replaced a portion of
short-term debt related to the cellular acquisitions of July
1995. With this issuance, the Corporation's unissued, unsecured
debt securities registered with the SEC decreased to $125.0.
On February 18, 1997, the Telephone Company redeemed $80.0 of
8.70% medium-term notes as discussed previously.
The Corporation's ratio of debt to total capitalization
decreased to 70.9% at September 30, 1997 compared with 74.9% at
year-end 1996. For the third quarter of 1997, the Corporation's
Board of Directors declared a dividend of $.44 per share.
The Corporation sponsors a Dividend Reinvestment and Stock
Purchase Plan ("DRISPP"). Effective July 1, 1997, the
Corporation began purchasing shares on the open market to meet
most of the needs of the DRISPP, as opposed to the prior policy
of issuing new shares.
Management believes that the Corporation has sufficient internal
and external resources to finance the anticipated requirements
of business development. Capital additions and dividends are
expected to be funded primarily with cash from operations during
the remainder of 1997. The Corporation also has access to
external resources including lines of credit and long-term shelf
registration commitments.
WIRELINE
Competition
The Telephone Company faces a fully competitive environment with
respect to telecommunications services in Connecticut. Wireline
competitors include interexchange carriers, competitive access
providers and competitive local exchange carriers ("CLECs"). In
the long distance market, competition has intensified since the
full implementation of intrastate equal access.
Local service competition is expected to grow significantly,
particularly upon commencement of the DPUC mandated balloting
process [see State Regulatory Initiatives]. Although 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.
- 13 -
Form 10-Q - Part I Southern New England Telecommunications Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Millions, Except Per Share Amounts)
Regulatory Matters
Federal Regulatory Initiatives
On October 14, 1997 the Eighth Circuit Court of Appeals vacated a
portion of the FCC's rules which prohibited Incumbent Local
Exchange Carriers ("ILECs") from separating the network elements
it provides to itself unless requested by a CLEC. The Court
indicated that the Act requires ILECs to provide access to
unbundled network elements, not access to platforms used by ILECs
in which network elements are combined.
On August 18, 1997, the FCC released its Third Report and Order
on Reconsideration. This Order requires that ILECs must provide
shared transport to new entrants as an unbundled network element
at cost-based prices. This Order could have a material financial
impact on the Corporation, but management is currently unable to
quantify the impact. Several companies have filed Petitions for
Review, which will be heard by the Eighth Circuit Court of
Appeals. A decision in this matter is not expected until 1998.
On July 18, 1997, the Eighth Circuit Court of Appeals issued a
decision on the appeal of the FCC's First Report and Order. The
decision was consistent with the stay issued in October 1996,
which delayed the effectiveness of the pricing provisions and the
rule allowing competitors to "pick and choose" isolated terms out
of negotiated interconnection agreements. The decision struck
down key provisions of the Order by vacating the Order's pricing
and "pick and choose" rules and certain terms under which
potential competitors can lease portions of the Telephone
Company's network. Other provisions, such as the requirement to
unbundle operating support systems, operator services and
vertical switching features, were upheld by the Court. The
Court's decision overall reflects Congress' intention that the
states, not the FCC, play a primary role in implementing local
telecommunications competition. The decision should allow the
Corporation to implement local competition on the course mapped
by the DPUC and the state legislature.
In May 1997, the FCC issued three major orders. The FCC released
its Report and Order on Universal Service on May 8, 1997. The
Order revised the current universal service programs which ensure
availability of local exchange service to low income customers
and high cost areas. It also establishes new federal support for
telecommunications services provided to schools, libraries, and
rural healthcare facilities. The federal universal service
mechanisms are to be funded, beginning January 1, 1998, by an
assessment on the end user revenues of all telecommunications
service providers. Funding for the revised programs supporting
high cost and low income areas will be from interstate end user
revenues, while funding for the new federal support services
provided to schools, libraries, and rural healthcare facilities
will come from both interstate and intrastate end user revenues.
The Order is currently on appeal in the Fifth Circuit Court of
Appeals. The Telephone Company has intervened in the appeal.
On May 16, 1997, the FCC released its First Report and Order
regarding access charge reform. This Order mandates changes to
the way the Telephone Company recovers interstate access charges
from interstate toll providers, including SNET America, Inc.
Specifically, the Order establishes flat-rated per line access
charges and reduces usage based charges. This Order establishes
a prescriptive mechanism to ensure that interstate access charges
will be driven toward the levels that competition would be
expected to produce. Management expects this order to pressure
earnings but is currently unable to quantify the impact. The
Order is currently on appeal in the Eighth Circuit Court of
Appeals. The Telephone Company has intervened in the appeal.
The FCC is also expected to release a Pricing Flexibility Order
early in 1998, establishing a market-based approach to pricing.
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Form 10-Q - Part I Southern New England Telecommunications Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Millions, Except Per Share Amounts)
On May 21, 1997, the FCC released its Price Cap Order revising
its price cap plan for regulating ILECs. This Order establishes
a single productivity factor of 6.5% and eliminates the sharing
requirements of the prior rules. The Telephone Company filed its
1997 annual interstate access price cap revisions in April 1997
and filed its proposed rate changes on June 16, 1997 for effect
July 1, 1997. These filings adjusted interstate access rates for
an experienced rate of inflation, the FCC's new productivity
target and exogenous cost changes. The FCC also required all
price cap ILECs, including the Telephone Company, to adjust their
Price Cap Indices, effective July 1, 1997, to reflect the 6.5%
productivity factor retroactively for the 1996-1997 tariff year.
The filings are anticipated to decrease interstate network access
revenues by approximately $28 for the period July 1, 1997 to June
30, 1998. The Corporation expects that this decrease will be
partially offset by increased demand. The Order is currently on
appeal in the District of Columbia Circuit Court of Appeals.
Additionally, on August 13, 1997, the Telephone Company filed a
Petition for Waiver from the 6.5% productivity factor, requesting
that the FCC establish a productivity factor of 5.3% for the
Telephone Company.
In accordance with the Act, the FCC requires ILECs, including the
Telephone Company, to implement a long term solution for
portability of local telephone numbers. The Telephone Company is
required to construct and operate a system that will permit end
user customers to retain their telephone numbers when they elect
a different carrier for local service. The system is to be
operational in mid-1998 for a large percentage of the Telephone
Company's access lines. The FCC, however, has not yet decided on
a method to recover the investment and operating costs relating
to the number portability system. Until such decision on
recovery is made, management is not able to estimate the
financial impact on the Corporation.
The FCC has released Reports and Orders on the Implementation of
the Pay Telephone Reclassification and Compensation Provisions of
the Telecommunication Act of 1996. The orders, among other
things, have eliminated existing regulatory constraints which
inhibited payphone competition, eliminated all subsidies in
interstate access rates and removed pay telephone investment from
the ILECs' interstate ratebase. Additionally, the orders have
established mechanisms for the full and fair compensation to
payphone providers, including per call compensation for
subscriber 800 and access code calls from payphones. Under the
orders, all ILECs, including the Telephone Company, were required
to unbundle payphone instruments, file tariffs on payphone
service lines and make them available on a non-discriminatory
basis to Payphone Service Providers. The Telephone Company
has filed with the FCC the necessary revisions to its interstate
access charges and has filed with the DPUC new retail and
wholesale Pay Telephone Access Line Service offerings in accordance
with the FCC's order.
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Form 10-Q - Part I Southern New England Telecommunications Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Millions, Except Per Share Amounts)
State Regulatory Initiatives
On June 25, 1997, the DPUC issued a final decision allowing the
Corporation to establish separate wholesale and retail
affiliates. Under the decision, the new retail organization, a
CLEC, will compete under the same regulations as all other retail
telecommunications providers in the state. The wholesale
organization, an ILEC, will provide network services and
functionality to retail providers, including the Corporation's
new CLEC, on neutral terms. The ILEC will be treated as a public
service company, and will continue to be subject to regulation.
The directory publishing operations will also be structured as a
separate subsidiary of the Corporation. As part of the decision,
however, the DPUC mandated that Connecticut customers must choose
their local exchange provider via a balloting process. Customers
who do not choose a carrier will be assigned a CLEC based on the
proportion of votes in a local service area. The specific details
of the balloting process will be addressed in further technical
discussions among the participants and the DPUC. The balloting
process, as well as the changes associated with the restructure,
were originally scheduled to occur between March and July of
1998. On October 24, 1997, however, the DPUC reopened the docket
for the purpose of rescheduling the process. The revised
schedule is not known at this time.
In order for the balloting process to commence, the Telephone
Company must demonstrate that the systems offered to CLECs
provide full technical and operational support as required by the
Act. The DPUC will examine and critically evaluate the
respective Operations Support System ("OSS") platforms offered to
the CLECs by the Telephone Company. The first phase of the
DPUC's evaluation will establish a set of tests and standards
that can be used to determine the suitability of the Telephone
Company's OSS to support a competitive local exchange market. A
decision regarding this phase is due on January 28, 1998. The
second phase will determine if the interfaces proposed by the
Telephone Company offer the comparability required under the
provisions of the Act. A final decision is due on June 24, 1998.
On March 18, 1997, SNET America, Inc. ("SAI"), the Corporation's
interstate carrier, filed an application with the DPUC to provide
local and intrastate toll services throughout Connecticut. The
DPUC issued a final decision granting approval on June 25, 1997.
This grants SAI the authority to operate as a CLEC in the state
of Connecticut and to provide competitive retail services to end
user customers with the same regulatory and pricing flexibility
as all other CLECs in the state.
In compliance with the Federal Telecommunications Act of 1996,
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 sold to CLECs. 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. In addition, the DPUC
approved the cost studies based on Total Service Long Run
Incremental Cost ("TSLRIC"). Subsequently, the DPUC opened a new
docket to determine appropriate TSLRIC based rates for the
remaining unbundled elements (non-loop) defined by the FCC's
First Report and Order. A final decision is expected in February
1998.
On July 23, 1997, the DPUC approved the acquisition of Woodbury
Telephone Company by the Corporation. The Corporation completed
its purchase on July 30, 1997.
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Form 10-Q - Part II Southern New England Telecommunications Corporation
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There were no material developments in the third quarter
of 1997.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit
(27) Financial Data Schedule
(b) Reports on Form 8-K
On July 24, 1997, the Corporation and the Telephone
Company filed, separately, reports on Form 8-K, dated
July 24, 1997 announcing the Corporation's financial
results for the second quarter of 1997.
On October 23, 1997, the Corporation and the Telephone
Company filed, separately, reports on Form 8-K, dated
October 23, 1997 announcing the Corporation's financial
results for the third quarter of 1997.
- 17 -
Form 10-Q - Part II Southern New England Telecommunications Corporation
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.
Southern New England Telecommunications Corporation
November 6, 1997
/s/ Donald R. Shassian
Donald R. Shassian
Senior Vice President and Chief Financial Officer
- 18 -