VERIZON NEW ENGLAND INC - 10-Q Quarterly 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 ¨

	Three Months Ended September 30,					Nine Months Ended September 30,
(Dollars in Millions) (Unaudited)	2002			2001		2002			2001
OPERATING REVENUES (including $46.4, $59.5, $156.1 and $187.0 from affiliates)	$	1,068.8		$	1,141.1	$	3,290.1		$	3,519.9


Operations and support expense (exclusive of items shown below) (including $217.2, $174.8, $623.7 and $580.6 to affiliates)		662.4			632.7		1,901.7			1,873.5
Depreciation and amortization		275.7			280.3		869.3			828.6

		938.1			913.0		2,771.0			2,702.1


OPERATING INCOME		130.7			228.1		519.1			817.8

OTHER INCOME, NET (including $3.6, $4.0, $28.7 and $17.6 from affiliates)		4.2			16.5		32.2			35.6

INTEREST EXPENSE (including $1.2, $9.8, $8.3 and $46.1 to affiliates)		42.5			39.1		121.7			128.0


INCOME BEFORE PROVISION FOR INCOME TAXES, EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE		92.4			205.5		429.6			725.4

PROVISION FOR INCOME TAXES		35.4			77.1		159.0			276.2


INCOME BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE		57.0			128.4		270.6			449.2

EXTRAORDINARY ITEM Early extinguishment of debt, net of tax		(18.6	)		—		(22.9	)		—

CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET OF TAX		—			—		—			.3


NET INCOME	$	38.4		$	128.4	$	247.7		$	449.5

(Dollars in Millions)	September 30, 2002		December 31, 2001
	(Unaudited)
ASSETS
CURRENT ASSETS
Short-term investments	$	5.0	$	266.9
Notes receivable from affiliates		118.9		107.2
Accounts receivable:
Trade and other, net of allowances for uncollectibles of $179.7 and $142.2		890.5		1,031.0
Affiliates		274.5		296.5
Material and supplies		35.1		38.3
Prepaid expenses		22.5		30.6
Deferred income taxes		62.2		33.4
Other		131.6		127.7

		1,540.3		1,931.6


PLANT, PROPERTY AND EQUIPMENT		17,139.3		16,953.4
Less accumulated depreciation		10,585.0		10,120.9

		6,554.3		6,832.5

OTHER ASSETS		658.1		506.8


TOTAL ASSETS	$	8,752.7	$	9,270.9

(Dollars in Millions)	September 30, 2002		December 31, 2001
	(Unaudited)
LIABILITIES AND SHAREOWNER’S INVESTMENT
CURRENT LIABILITIES
Debt maturing within one year:
Note payable to affiliate	$	—	$	574.4
Current portion of long-term debt
Affiliate		200.0		—
Other		400.3		176.3
Accounts payable and accrued liabilities:
Affiliates		769.2		807.1
Other		766.3		829.5
Other liabilities		154.0		162.2

		2,289.8		2,549.5

LONG-TERM DEBT
Note payable to affiliate		—		200.0
Other		2,626.1		2,608.2

		2,626.1		2,808.2

EMPLOYEE BENEFIT OBLIGATIONS		1,247.1		1,297.0

DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes		321.7		222.3
Unamortized investment tax credits		23.8		26.0
Other		181.5		199.9

		527.0		448.2

SHAREOWNER’S INVESTMENT
Common stock-one share, without par value		1.0		1.0
Additional paid-in capital		1,516.4		1,497.4
Reinvested earnings		545.3		669.6

		2,062.7		2,168.0

TOTAL LIABILITIES AND SHAREOWNER’S INVESTMENT	$	8,752.7	$	9,270.9

	Nine Months Ended September 30,
(Dollars in Millions) (Unaudited)	2002			2001
NET CASH PROVIDED BY OPERATING ACTIVITIES	$	1,094.1		$	1,241.9

CASH FLOWS FROM INVESTING ACTIVITIES
Net change in short-term investments		261.9			176.5
Capital expenditures		(579.2	)		(1,047.9	)
Change in notes receivable from affiliates		(11.7	)		(94.5	)
Investment in unconsolidated business		(8.7	)		—
Other, net		(7.2	)		(17.0	)

Net cash used in investing activities		(344.9	)		(982.9	)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings		464.9			993.2
Early extinguishment of debt		(300.0	)		—
Principal repayments of borrowings and capital lease obligations		(.1	)		(100.0	)
Change in short-term note payable to affiliate		(574.4	)		(884.1	)
Distributions of additional paid-in capital		—			(145.0	)
Dividends paid		(341.0	)		(95.0	)
Capital contribution from parent		8.7			—
Net change in outstanding checks drawn on controlled disbursement accounts		(7.3	)		(28.1	)

Net cash used in financing activities		(749.2	)		(259.0	)

NET CHANGE IN CASH		—			—
CASH, BEGINNING OF PERIOD		—			—

CASH, END OF PERIOD	$	—		$	—

Verizon New England Inc. is a wholly owned subsidiary of NYNEX Corporation (NYNEX), which is a wholly owned subsidiary of Verizon Communications Inc. (Verizon Communications). The accompanying unaudited condensed financial statements have been prepared based upon Securities and Exchange Commission (SEC) rules that permit reduced disclosure for interim periods. These financial statements reflect all adjustments that are necessary for a fair presentation of results of operations and financial position for the interim periods shown including normal recurring accruals. The results for the interim periods are not necessarily indicative of results for the full year. The balance sheet at December 31, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For a more complete discussion of significant accounting policies and certain other information, you should refer to the financial statements included in our 2001 Annual Report on Form 10-K.

Effective January 1, 2002, we adopted Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 no longer permits the amortization of goodwill and indefinite-lived intangible assets. Instead, these assets must be reviewed annually (or more frequently under prescribed conditions) for impairment in accordance with this statement. This impairment test uses a fair value approach rather than the undiscounted cash flows approach previously required by SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.” The goodwill impairment test under SFAS No. 142 requires a two-step approach, which is performed at the reporting unit level, as defined in SFAS No. 142. Step one identifies potential impairments by comparing the fair value of the reporting unit to its carrying amount. Step two, which is only performed if there is a potential impairment, compares the carrying amount of the reporting unit’s goodwill to its implied value, as defined in SFAS No. 142. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized for an amount equal to that excess. Intangible assets that do not have indefinite lives are amortized over their useful lives and reviewed for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” The adoption of SFAS No. 142 did not impact our results of operations or financial position because we had no goodwill or indefinite-lived intangible assets at December 31, 2001 and 2000.

Intangible assets amortization expense was $8.0 million for the three months ended September 30, 2002 and $23.4 million for the nine months ended September 30, 2002. Amortization expense is estimated to be $7.9 million for the remainder of 2002, $31.6 million in 2003, $29.5 million in 2004, $20.4 million in 2005 and $17.0 million in 2006, related to our non-network software.

Effective January 1, 2002, we adopted SFAS No. 144. This standard supersedes SFAS No. 121 and the provisions of Accounting Principles Board (APB) Opinion No. 30, “Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” with regard to reporting the effects of a disposal of a segment of a business. SFAS No. 144 establishes a single accounting model for assets to be disposed of by sale and addresses several SFAS No. 121 implementation issues. The adoption of SFAS No. 144 did not have a material effect on our results of operations or financial position.

In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” This standard provides the accounting for the cost of legal obligations associated with the retirement of long-lived assets. SFAS No. 143 requires that companies recognize the fair value of a liability for asset retirement obligations in the period in which the obligations are incurred and capitalize that amount as a part of the book value of the long-lived asset. That cost is then depreciated over the remaining life of the underlying long-lived asset. We are required to adopt SFAS No. 143 effective January 1, 2003. We are currently evaluating the impact this new standard will have on our future results of operations or financial position.

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS No. 145, among other things, eliminates the requirement that all gains and losses on the extinguishment of debt must be classified as extraordinary items on the income statement, thereby permitting the classification of such gains and losses as extraordinary items only if the criteria of APB No. 30 are met. We are required to adopt this provision of SFAS No. 145 effective January 1, 2003 and, upon adoption, we will reclassify in our statements of income previously reported extraordinary charges for the early extinguishment of debt to income from continuing operations.

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This standard addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” EITF Issue No. 94-3 required accrual of liabilities related to exit and disposal activities at a plan (commitment) date. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. The provisions of this standard are effective for exit or disposal activities that are initiated after December 31, 2002.

Effective January 1, 2001, we adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” and SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities.” The initial impact of adoption on our financial statements was recorded as a cumulative effect of an accounting change resulting in income of $0.3 million in current earnings. The recognition of assets and liabilities was not material to our financial position.

The ongoing effect of SFAS No. 133 on our financial statements is determined each quarter by several factors, including the specific hedging instruments in place and their relationships to hedged items, as well as market conditions at the end of each period. We recorded a pre-tax gain of $0.1 million for the nine months ended September 30, 2002. This gain is related to the mark-to-market adjustment on our interest rate swaps and the amortization of an ineffective interest rate swap. We recorded pre-tax charges of $0.2 million, $1.0 million and $1.4 million for the three months ended September 30, 2002, the three and nine months ended September 30, 2001, respectively. These charges are related to the mark-to-market adjustment on our interest rate swaps and the amortization of an ineffective interest rate swap.

Our $175.0 million 6.3% notes due in 2012 are subject to a mandatory redemption at 100% of the principal amount plus accrued interest on December 16, 2002. During September 2002, we recorded an extraordinary charge associated with the buyout of the option to remarket these securities, which reduced net income by $18.6 million (net of income tax benefits of $12.1 million.)

	As of September 30, 2002				As of December 31, 2001
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
	(Dollars in Millions)
Non-network software (3 to 7 years)	$	195.0	$	71.8	$	187.7	$	48.4