26
_____________________________________________________________________________
__________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------
FORM 10-Q
---------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1995
OR
[ ] 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 1-3040
U S WEST Communications, Inc.
A Colorado Corporation IRS Employer No. 84-0273800
1801 California Street, Denver, Colorado 80202
Telephone Number (303) 896-3099
THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF U S WEST, INC., MEETS THE
CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1) OF FORM 10-Q AND IS
THEREFORE
FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL
INSTRUCTION H(2).
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 __
____________________________________________________________________________
___________________________________________________________________
Form 10-Q - Part I U S WEST Communications, Inc.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
<S> <C>
Item Page
1. Financial Statements
Consolidated Statements of Operations -
Three and nine months ended September 30, 1995 and 1994 3
Condensed Consolidated Balance Sheets -
September 30, 1995 and December 31, 1994 4
Consolidated Statements of Cash Flows -
Nine months ended September 30, 1995 and 1994 6
Consolidated Statements of Shareowner's Equity -
Nine months ended September 30, 1995 and 1994 7
Notes to Consolidated Financial Statements 8
2. Management's Analysis - (Reduced disclosure format pursuant to
General Instruction H(2)) 11
</TABLE>
PART II - OTHER INFORMATION
<TABLE>
<CAPTION>
<S> <C>
6. Exhibits and Reports on Form 8-K 21
</TABLE>
Form 10-Q - Part I U S WEST Communications, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Dollars in millions
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Mos. Three Mos. Nine Mos. Nine Mos.
Ended Ended Ended Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
Dollars in millions 1995 1994 1995 1994
OPERATING REVENUES
Local service $ 1,105 $ 1,034 $ 3,231 $ 3,035
Interstate access service 594 573 1,774 1,691
Intrastate access service 186 188 558 541
Long-distance network service 298 323 891 1,019
Other services 151 149 455 442
Total operating revenues 2,334 2,267 6,909 6,728
OPERATING EXPENSES
Employee-related expenses 780 752 2,277 2,207
Other operating expenses 403 400 1,159 1,199
Taxes other than income taxes 92 99 299 294
Depreciation and amortization 507 471 1,499 1,406
Total operating expenses 1,782 1,722 5,234 5,106
Income from operations 552 545 1,675 1,622
Interest expense 98 82 284 243
Gains on sales of rural telephone exchanges 34 - 112 48
Other expense - net 10 6 43 23
Income before income taxes and
extraordinary item 478 457 1,460 1,404
Provision for income taxes 173 172 543 527
Income before extraordinary item 305 285 917 877
Extraordinary item:
Early extinguishment of debt, net of tax (5) - (5) -
NET INCOME $ 300 $ 285 $ 912 $ 877
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
Form 10-Q - Part I U S WEST Communications, Inc.
CONSOLIDATED BALANCE SHEETS (Unaudited)
Dollars in millions
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, December 31,
Dollars in millions 1995 1994
ASSETS
Current assets
Cash and cash equivalents $ 65 $ 114
Accounts receivable 1,638 1,450
Materials and supplies 160 120
Deferred tax asset 274 280
Other 38 48
Total current assets 2,175 2,012
Gross property, plant and equipment 30,498 29,406
Accumulated depreciation 17,289 16,444
Property, plant and equipment - net 13,209 12,962
Other assets 752 726
Total assets $ 16,136 $ 15,700
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
Form 10-Q - Part I U S WEST Communications, Inc.
CONSOLIDATED BALANCE SHEETS (Unaudited)
Dollars in millions
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, December 31,
Dollars in millions 1995 1994
LIABILITIES AND SHAREOWNER'S EQUITY
Current liabilities
Short-term debt $ 2,011 $ 1,485
Accounts payable 784 883
Employee compensation 321 283
Current portion of restructuring charges 342 317
Other 934 883
Total current liabilities 4,392 3,851
Long-term debt 4,465 4,242
Postretirement and other postemployment benefit
obligations 2,249 2,393
Deferred taxes, credits and other 1,346 1,530
Shareowner's equity
Common shares - one share without par value 7,286 7,286
Cumulative deficit (3,602) (3,602)
Total shareowner's equity 3,684 3,684
Total liabilities and shareowner's equity $ 16,136 $ 15,700
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
Form 10-Q - Part I U S WEST Communications, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Dollars in millions
<TABLE>
<CAPTION>
<S> <C> <C>
Nine Months Ended September 30, 1995 1994
OPERATING ACTIVITIES
Net income $ 912 $ 877
Adjustments
Depreciation and amortization 1,499 1,406
Gains on sales of rural telephone exchanges (112) (48)
Deferred income taxes and amortization
of investment tax credits 120 135
Changes in operating assets and liabilities:
Restructuring payments (253) (156)
Postretirement medical and life costs, net of
cash fundings (159) ( 213)
Accounts receivable (188) (123)
Materials, supplies and other (49) (31)
Accounts payable and accrued liabilities (48) 15
Other - net 17 (23)
Cash provided by operating activities 1,739 1,839
INVESTING ACTIVITIES
Expenditures for property, plant and equipment (1,696) (1,732)
Proceeds from disposals of property, plant
and equipment 160 48
Cash (used for) investing activities (1,536) (1,684)
FINANCING ACTIVITIES
Net proceeds from issuance of short-term debt 406 286
Proceeds from issuance of long-term debt 495 251
Repayments of long-term debt (248) (263)
Dividends paid (905) (894)
Equity infusions from parent - 451
Cash (used for) financing activities (252) (169)
CASH AND CASH EQUIVALENTS
Decrease (49) (14)
Beginning balance 114 67
Ending balance $ 65 $ 53
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
Form 10-Q - Part I U S WEST Communications, Inc.
CONSOLIDATED STATEMENTS OF
SHAREOWNER'S EQUITY (Unaudited)
Dollars in millions
<TABLE>
<CAPTION>
<S> <C> <C>
Nine Months Ended September 30, 1995 1994
COMMON SHARES
Balance at beginning of period $ 7,286 $ 6,742
Equity infusions from parent - 451
Other - -
Balance at end of period 7,286 7,193
CUMULATIVE DEFICIT
Balance at beginning of period (3,602) (3,602)
Net income 912 877
Dividends declared (912) (877)
Balance at end of period (3,602) (3,602)
TOTAL SHAREOWNER'S EQUITY $ 3,684 $ 3,591
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
Form 10-Q - Part I U S WEST Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
A. Summary of Significant Accounting Policies
Consolidated Financial Statements
The Consolidated Financial Statements have been prepared by U S WEST
Communications, Inc. (the "Company"), a wholly owned subsidiary of U S WEST
Inc., pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). Certain information and footnote disclosures normally
accompanying financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
SEC rules and regulations. In the opinion of the Company's management, the
Consolidated Financial Statements include all adjustments, consisting of only
normal recurring adjustments, necessary to present fairly the financial
information set forth therein. It is suggested that these Consolidated
Financial Statements be read in conjunction with the financial statements and
notes thereto included in the Company's Form 10-K for the year ended December
31, 1994.
Certain reclassifications within the Consolidated Financial Statements have
been made to conform to the current year presentation.
B. Recapitalization Plan
On October 31, 1995, the shareholders of U S WEST, Inc., a Colorado
corporation ("U S WEST Colorado") voted to approve a proposal (the
"Recapitalization Plan") adopted by the Board of Directors to reincorporate
from Colorado to Delaware and create two classes of common stock that are
intended to reflect separately the performance of the communications and
multimedia businesses. Under the Recapitalization Plan, shareholders approved
an Agreement and Plan of Merger between U S WEST Colorado and U S WEST, Inc.,
a Delaware corporation ("U S WEST"), pursuant to which U S WEST continues as
the surviving corporation. In connection with the merger, the Certificate of
Incorporation of U S WEST has been amended and restated to, among other
things, designate two classes of common stock of U S WEST, one class of which
is authorized as U S WEST Communications Group Common Stock ("Communications
Stock"), and the other class is authorized as U S WEST Media Group Common
Stock ("Media Stock"). Effective November 1, 1995, each share of common stock
of U S WEST Colorado was converted into one share of Communications Stock and
one share of Media Stock.
<PAGE>
Form 10-Q - Part I U S WEST Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
B. Recapitalization Plan (continued)
The Communications Stock and Media Stock are designed to provide shareholders
with separate securities that are intended to reflect separately the
communications businesses of the Company and certain other subsidiaries of U S
WEST (the "Communications Group") and the U S WEST's multimedia businesses
(the "Media Group" and, together with the Communications Group, the "Groups").
The Communications Group is comprised of U S WEST Communications, U S WEST
Communications Services, Inc., U S WEST Communications Federal Services, Inc.,
U S WEST Advanced Technologies, Inc. and U S WEST Business Resources, Inc. U
S WEST Communications comprised approximately 98 percent of the revenues and
assets of the Communications Group in 1994.
The Media Group is comprised of U S WEST Marketing Resources Group, Inc., a
publisher of White and Yellow Pages telephone directories, and provider of
multimedia content and services, U S WEST NewVector Group, Inc., which
provides communications and information products and services over wireless
networks, U S WEST Multimedia Communications, Inc., which owns domestic cable
television operations and investments, and U S WEST International Holdings,
Inc., which primarily owns investments in international cable and
telecommunications, wireless communications and directory publishing
operations.
Dividends to be paid to the holders of Communications Stock will initially be
$0.535 per share per quarter. Dividends on the Communications Stock will be
paid at the discretion of the Board of Directors of U S WEST, based primarily
upon the financial condition, results of operations and business requirements
of the Communications Group and U S WEST as a whole. With regard to the Media
Stock, the Board of Directors of U S WEST currently intends to retain future
earnings, if any, for the development of the Media Group's businesses and does
not anticipate paying dividends on the Media Stock in the foreseeable future.
<PAGE>
Form 10-Q - Part I U S WEST Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
C. Contingencies
There are pending regulatory actions in local regulatory jurisdictions that
call for price decreases, refunds or both. In one such instance, the Utah
Supreme Court has remanded a Utah Public Service Commission ("PSC") order to
the PSC for reconsideration, thereby establishing two exceptions to the rule
against retroactive ratemaking: 1) unforeseen and extraordinary events, and
2) misconduct. The PSC's initial order denied a refund request from
interexchange carriers and other parties related to the Tax Reform Act of
1986. This action is still in the discovery process. If a formal filing -
made in accordance with the remand from the Supreme Court - alleges that the
exceptions apply, the range of possible risk is $0 to $140.
D. Debt
During third quarter 1995, the Company refinanced $410 of commercial paper to
take advantage of favorable long-term interest rates. In addition to the
commercial paper, the Company refinanced $90 of long term debt. Expenses
associated with the refinancing of long-term debt resulted in an extraordinary
charge to income of $5, net of an income tax benefit of $3.
Subsequent to third quarter 1995, the Company refinanced $750 of commercial
paper.
<PAGE>
Form 10-Q - Part I U S WEST Communications, Inc.
Item 2. Management's' Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions)
Results of Operations
Comparative details of operations for the nine months ended September 30
follow:
<TABLE>
<CAPTION>
<S> <C> <C>
Nine Months Ended September 30, 1995 1994
Operating revenues $6,909 $6,728
Operating expenses
Employee-related expenses 2,277 2,207
Other operating expenses 1,159 1,199
Taxes other than income taxes 299 294
Depreciation and amortization 1,499 1,406
Interest expense 284 243
Gains on sales of rural telephone exchanges 112 48
Other expense - net 43 23
Income before income taxes and extraordinary item 1,460 1,404
Provision for income taxes 543 527
Income before extraordinary item 917 877
Extraordinary item (5) -
Net income $ 912 $ 877
</TABLE>
For the nine months ended September 30, 1995, the Company's net income was
$912, a $35, or 4.0 percent, increase compared with the same period in 1994.
Excluding gains on the sales of certain rural telephone exchanges of $70 and
$31 year-to-date 1995 and 1994, respectively, and the extraordinary item in
1995 of $5, net income increased $1, or .1 percent, as compared with the same
period in 1994.
Increased income is attributable to higher demand for services and access line
growth, and lower employee benefit costs, including the effects of certain
benefit cost true-ups. Largely offsetting these items were an increase in
operating costs incurred to address current customer service issues, increased
depreciation expense and higher interest expense.
<PAGE>
Form 10-Q - Part I U S WEST Communications, Inc.
Item 2. Management's' Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Results of Operations (continued)
Increased demand for the Company's services resulted in growth in earnings
before interest, taxes, depreciation, amortization and other ("EBITDA") of 4.8
percent for the nine months ended September 30, 1995, as compared with the
same period in 1994. The Company believes EBITDA is an important indicator of
the operational strength of the business. EBITDA, however, should not be
considered as an alternative to operating or net income as an indicator of the
performance of the Company's business or as an alternative to cash flows from
operating activities as a measure of liquidity, in each case determined in
accordance with GAAP.
Sales & Other Revenues
An analysis of changes in the Company's revenues follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Nine Nine
Mos. Mos.
Ended Ended Lower Increase Increase
Sept. 30 Sept. 30 Price (Higher) (Decrease) (Decrease)
1995 1994 Changes Refunds Growth Other Dollars Percentage
Local service $ 3,231 $ 3,035 $ 9 $ (7) $ 194 $ - $ 196 6.5
Interstate access 1,774 1,691 (27) (15) 126 (1) 83 4.9
Intrastate access 558 541 (24) 7 26 8 17 3.1
Long-distance network 891 1,019 (20) - (42) (66) (128) (12.6)
Other services 455 442 - - - 13 13 2.9
Total revenues $ 6,909 $ 6,728 $ (62) $ (15) $ 304 $ (46) 181 2.7
</TABLE>
Total operating revenues were $6,909, a $181 or 2.7 percent increase over the
prior year. Local service revenues increased principally as a result of higher
demand for services, as evidenced by an increase of 495,000 access lines, or
3.5 percent, during the last 12 months. Access line growth was 4.2 percent as
adjusted for sales of approximately 103,000 rural telephone access lines
during the last 12 months.
Higher revenues from interstate access services resulted from an increase of
9.4 percent in interstate billed access minutes of use in the first nine
months of 1995 as compared with the same period of 1994. The increased volume
of business more than offset the effects of price reductions and refunds.
Intrastate access revenues increased primarily due to the impacts of multiple
toll carrier plans.
Multiple toll carrier plans ("MTCP") implemented in Oregon and Washington in
May and July 1994, respectively, allow independent telephone companies to act
as toll carriers. The impact on the Company for the nine months ended
September 30, 1995 was long-distance revenue losses of $62, partially offset
by increases in intrastate access revenue of $12, and decreases in other
operating expenses (i.e. access expense) of $42. These regulatory arrangements
did not impact third quarter results.
<PAGE>
Form 10-Q - Part I U S WEST Communications, Inc.
Item 2. Management's' Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Sales & Other Revenues (continued)
Adjusted for the effects of MTCP, long-distance network revenues decreased by
6.5 percent for the nine months ended September 30, 1995, compared with the
same period last year. The decrease was primarily due to the effects of
competition and rate reductions.
Revenues from other services increased primarily as a result of continued
market penetration in voice messaging services and increases in inside wire
services, partially offset by decreases in billing and collection revenues.
Costs and Expenses
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Nine Mos. Nine Mos.
Ended Ended Increase Increase
September 30, September 30, (Decrease) (Decrease)
1995 1994 Dollars Percentage
Employee-related expenses $ 2,277 $ 2,207 $ 70 3.2
Other operating expenses 1,159 1,199 (40) (3.3)
Taxes other than income taxes 299 294 5 1.7
Depreciation and amortization 1,499 1,406 93 6.6
Interest expense 284 243 41 16.9
Other expense-net 43 23 20 87.0
Provision for income taxes 543 527 16 3.0
</TABLE>
Higher employee-related expenses are primarily the result of initiatives to
improve customer service and address business growth. Customer service has
been impacted by temporary declines in productivity partly caused by
restructuring efforts. Higher levels of employee-related expenses are expected
to continue throughout the remainder of the year. Overtime payments and
contract labor increased employee-related expenses by approximately $149 for
the first nine months of 1995 as compared to the first nine months of 1994.
Partially offsetting these increases was a reduction in the accrual for
postretirement benefits, certain benefit cost true-ups and lower travel and
conference expenses.
<PAGE>
Form 10-Q - Part I U S WEST Communications, Inc.
Item 2. Management's' Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Costs and Expenses (continued)
Since December 1993, the Company has separated 4,299 employees under the
Restructuring Plan. (See "Restructuring Charges.") These separations have
been partially offset by the addition of approximately 2,600 employees (a
significant portion of which are temporary) primarily dedicated to improving
customer service and also developing new business opportunities. Benefits from
the net work-force reductions have offset wage and salary increases.
The Company estimates that it will achieve employee reductions of 9,000 in
connection with the Restructuring Plan by the end of 1997. (See
"Restructuring Charges.") These employee reductions will be partially offset
by the planned addition of some employees by the end of 1997 to accommodate
business growth, including wireless cable and data transmission services.
Other operating expenses decreased primarily due to the effect of the multiple
toll carrier plans. Increased depreciation and amortization expense was
attributable to the effects of a higher depreciable asset base. Interest
expense increased primarily as a result of an increased use of debt financing.
Restructuring
The Company's 1993 results reflected an $880 restructuring charge (pretax).
The related restructuring plan (the "Restructuring Plan") is designed to
provide faster, more responsive customer services while reducing the costs of
providing these services. As part of the Restructuring Plan new systems and
enhanced system functionality are being developed that will enable it to
monitor networks to reduce the risk of service interruptions, activate
telephone service on demand, rapidly design and engineer new services for
customers and centralize its service centers. The Company is consolidating its
560 customer service centers into 26 centers in 10 cities and reducing its
total work force by approximately 9,000 employees.
The Restructuring Plan is scheduled to be completed by the end of 1997.
Implementation to date has been driven by growth in the business and related
service issues, revisions to system delivery schedules and productivity issues
caused by the major rearrangement of resources due to restructuring. These
issues may continue to affect the timing of the implementation of the
Restructuring Plan.
<PAGE>
Form 10-Q - Part I U S WEST Communications, Inc.
Item 2. Management's' Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
<PAGE>
Following is a schedule of the costs included in the Restructuring Plan:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Actual Estimate Estimate Estimate
1994 1995 1996 1997 Total
Cash expenditures:
Employee separation (1) $ 19 $ 75 $ 96 $ 65 $ 255
Systems development 118 145 97 - 360
Real estate 50 71 9 - 130
Relocation 21 23 31 - 75
Retraining and other 8 27 15 10 60
Total cash expenditures 216 341 248 75 880
Remaining 1991 plan employee 56 - - - 56
costs (1)
Total $ 272 $ 341 $ 248 $ 75 $ 936
<FN>
(1) Employee separation costs, including the balance of the 1991 restructuring
reserve at December 31, 1993, aggregate $311.
</FN>
</TABLE>
Employee separation costs include severance payments, health-care coverage and
postemployment education benefits. System development costs include new
systems and the application of enhanced system functionality to existing
single purpose systems to provide integrated, end-to-end customer service. A
substantial portion of the work-force reductions will be enabled by developing
new systems and enhanced system functionality, which will simplify the
current, labor-intensive interfaces between existing processes. Real estate
costs include preparation costs for the new service centers. The relocation
and retraining costs are related to moving employees to the new service
centers and retraining employees on the methods and systems required in the
new, restructured mode of operation.
The Company estimates that full implementation of the Restructuring Plan will
reduce employee-related expenses by approximately $400 per year. These
savings are expected to be offset by the effects of inflation. Future
operating costs also will be impacted by business growth.
Employee Separation. Net employee reductions will total 9,000 under the
Restructuring Plan. While the Company will separate 10,000 employees,
approximately 1,000 employees that were originally expected to relocate have
chosen separation or other job assignments and will be replaced. The
estimated total cost for employee separations is $311, compared with $281 in
the original estimate. The $30 cost associated with these additional employee
separations has been reclassified from relocation to the reserve for employee
separations.
<PAGE>
Form 10-Q - Part I U S WEST Communications, Inc.
Item 2. Management's' Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
The following estimates of employee separations and related amounts reflect
the extension of employee reductions into 1997:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Estimate Actual Estimate Estimate Estimate
1994 1994 (1) 1995 1996 1997 Total
Employee separations
Managerial 1,061 497 612 1,090 521 2,720
Occupational 1,887 1,683 1,638 2,310 1,649 7,280
Total 2,948 2,180 2,250 3,400 2,170 10,000
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Estiimate Actual Estimate Estimate Estimate
1994 1994 (1) 1995 1996 1997 Total
Employee separation amounts
Managerial $ 22 $ 5 $ 21 $ 40 $ 19 $ 85
Occupational 15 14 54 56 46 170
Total 37 19 75 96 65 255
Remaining 1991 reserve 56 56 - - - 56
Total $ 93 $ 75 $ 75 $ 96 $ 65 $ 311
<FN>
(1) Includes the remaining employees and the separation amounts associated with the
balance of the 1991 restructuring reserve at
December 31, 1993
</FN>
</TABLE>
Compared with the original estimates, employee reductions and separation
amounts shown above have been reduced by 1,219 and $27 in 1995, and increased
by 800 and $10 in 1996, and 2,170 and $65 in 1997.
Systems Development. The existing information management systems were largely
developed to support a monopoly environment. These systems have become
increasingly inadequate due to the effects of increased competition, new forms
of regulation and changing technology that have driven consumer demand for new
services that can be delivered quickly, reliably and economically. The Company
believes that improved customer service, delivered at lower cost, can be
achieved by a combination of new systems and introducing new functionality to
existing systems. This is a change from the initial strategy which placed
more emphasis on the development of new systems. The Restructuring Plan is
now less dependent on development of entirely new, untested systems and
related technology.
<PAGE>
Form 10-Q - Part I U S WEST Communications, Inc.
Item 2. Management's' Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
The systems development program involves new systems and enhanced system
functionality for systems that support the following core processes:
Service Delivery - to support service on demand for all products and services.
These new systems and enhanced system functionality will permit one
customer service representative to handle all facets of a customer's
requirements as contrasted to the numerous points of customer
interface required today.
Service Assurance - for performance monitoring from one location and remote
testing in the new environment, including identification and
resolution of faults prior to customer impact.
Capacity Provisioning - for integrated planning of future network capacity,
including the installation of software controllable service
components.
The direct, incremental and nonrecurring costs of providing new systems and
enhanced system functionality follow:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Estimate Actual Estimate Estimate
1994 1994 1995 1996 Total
Service delivery $ 35 $ 21 $ 21 $ 31 $ 73
Service assurance 45 12 24 28 64
Capacity provisioning 17 57 92 30 179
All other 8 28 8 8 44
Total $ 105 $ 118 $ 145 $ 97 $ 360
</TABLE>
The Company continues to review its estimates of systems expenditures under
the Restructuring Plan. Material revisions in total estimated expenditures are
not anticipated. However, should expenditures exceed the remaining reserve,
additional amounts would be expensed as incurred.
Systems expenses charged to current operations consist of costs associated
with the information management function, including planning, developing,
testing and maintaining data bases for general purpose computers, in addition
to systems costs related to maintenance of telephone network applications.
Other systems expenses are for administrative (i.e. general purpose) systems
which include customer service, order entry, billing and collection, accounts
payable, payroll, human resources and property records. Ongoing systems costs
comprised approximately six percent of total operating expenses in 1994, 1993
and 1992. The Company expects systems costs charged to current operations as a
percent of total operating expenses to approximate the current level
throughout the life of the Restructuring Plan. However, systems costs could
increase relative to other operating costs as the business becomes more
technology dependent.
Form 10-Q - Part I U S WEST Communications, Inc.
Item 2. Management's' Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Progress Under the Restructuring Plan:
Following is a reconciliation of restructuring reserve activity since December
1993.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
First Change in
Nine Relocation/
Reserve Reserve Months Employee Reserve Balance
Balance 1994 Balance 1995 Separation 9/30/95
12/31/93 Activity 12/31/94 Activity Estimates
Employee separations
Managerial $ 75 $ 5 $ 70 $ 19 $ 7 $ 58
Occupational 150 14 136 48 23 111
Total separations 225 19 206 67 30 169
Systems Development
Service delivery 73 21 52 13 39
Service assurance 64 12 52 16 36
Capacity provisioning 179 57 122 65 57
All other 44 28 16 3 13
Total systems 360 118 242 97 145
Real estate 130 50 80 58 22
Relocation 105 21 84 13 (30) 41
Retraining and other 60 8 52 18 34
Total 880 216 664 253 411
Remaining 1991 Plan
expenditures 56 56 0 - - -
Total $ 936 $ 272 $ 664 $ 253 $ - $ 411
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Cumulative
First Nine Months Separations
1994 Separations 1995 Separations At September 30,1995
Employee separations
Managerial 497 581 1,078
Occupational 1,683 1,538 3,221
Total 2,180 2,119 4,299
</TABLE>
Recapitalization Plan
On October 31, 1995, the shareholders of U S WEST, Inc., a Colorado
corporation and parent of the Company, voted to approve a proposal by the
Board of Directors to reincorporate from Colorado to Delaware and create two
classes of common stock, the Communications Stock and the Media Stock, which
are intended to reflect separately the performance of the communications and
multimedia businesses. For a more complete discussion on the Recapitalization
Plan see Footnote B in the Notes to the Consolidated Financial Statements.
<PAGE>
Form 10-Q - Part I U S WEST Communications, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions) , continued
Broadband
In 1993, the Company announced its intention to build an interactive
multimedia telecommunications network (the "Broadband Network") capable of
providing voice, data and video services to customers within the region.
Limited testing of the Broadband Network began in Omaha, Nebraska in December
1994. A market trial in the Omaha area that will cover up to 50,000 homes
commenced in August 1995.
In early 1994, U S WEST Communications filed applications with the FCC to
install Broadband Network architecture in Denver; Minneapolis-St. Paul; Salt
Lake City; Boise; and Portland, Oregon (collectively, the "Broadband
Applications"). In May 1995, U S WEST Communications withdrew the Broadband
Applications. The Company is evaluating the relative costs of alternative
video technologies, as well as the near-term feasibility of interactive
services. In order to satisfy anticipated demand for combined video and
telephony services on a cost-effective basis, the Company's strategy may
include selective investments in wireless cable technologies.
Regulatory
On October 11, 1995, the U.S. Justice Department recommended that U S WEST be
allowed to offer long-distance telephone service outside its 14-state region.
The agreement, among U S WEST, the Justice Department and AT&T, must be
approved by U. S. District Court Judge Harold Greene, who oversees the consent
decree that broke up AT&T in 1984, and barred the Regional Holding Companies
from a number of businesses, including interLATA long distance.
If approved by Judge Greene, U S WEST will be able to offer long-distance
service outside U S WEST's local service territory. Such an approval would
mean that U S WEST would be the first Regional Holding Company allowed to
offer interLATA long-distance service outside its region.
Union Contract
On October 2, 1995, U S WEST union members approved a new three-year contract
with the Company. The contract provides for salary increases of 10.6 percent
over three years effective January 1 of each year. The contract also provides
employees with a lump sum payment of $1,500 in lieu of wage increases becoming
effective in August each year. This lump sum payment will be recognized over
the life of the contract. The agreement covers 33,000 Communications Workers
of America members who work for U S WEST Communications and U S WEST Business
Resources.
<PAGE>
Form 10-Q - Part I U S WEST Communications, Inc.
Item 2. Management's' Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Contingencies
There are pending regulatory actions in local regulatory jurisdictions that
call for price decreases, refunds or both. In one such instance, the Utah
Supreme Court has remanded a Utah Public Service Commission ("PSC") order to
the PSC for reconsideration, thereby establishing certain exceptions to the
rule against retroactive ratemaking: 1) unforeseen and extraordinary events,
and 2) misconduct. The PSC's initial order denied a refund request from
interexchange carriers and other parties related to the Tax Reform Act of
1986. This action is still in the discovery process. If a formal filing -
made in accordance with the remand from the Supreme Court - alleges that the
exceptions apply, the range of possible risk is $0 to $140.
<PAGE>
Form 10-Q - Part II U S WEST Communications, Inc.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number
12 Statement regarding computation of earnings to fixed charges ratio of U S
WEST Communications, Inc.
(b) Reports on Form 8-K filed during the third quarter
(i) report dated September 14, 1995, concerning U S WEST Communications,
Inc.'s form of 6-5/8% Notes due 2005 and form of 7-1/4% Debentures due 2025.
<PAGE>
Form 10-Q - Part II U S WEST Communications, Inc.
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.
U S WEST Communications, Inc.
/s/ John W. Putnam
By: __________________________________
John W. Putnam
Vice President-Controller
November 13, 1995
EXHIBIT 12
U S WEST Communications, Inc.
RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Millions)
<TABLE>
<CAPTION>
<S> <C> <C>
Quarter Quarter
Ended Ended
9/30/95 9/30/94
- ------------------------------------------- ------- -------
Income before income taxes $ 478 $ 457
Interest expense (net of amounts capitalized) 98 82
Interest factor on rentals (1/3) 13 16
-------- --------
Earnings $ 589 $ 555
Interest expense 109 89
Interest factor on rentals (1/3) 13 16
-------- --------
Fixed charges $ 122 $ 105
Ratio of earnings to fixed charges 4.83 5.29
- ------------------------------------------- -------- --------
<CAPTION>
<S> <C> <C>
Year-to- Year-to-
date date
9/30/95 9/30/94
- -------------------------------------------- ------- -------
Income before income taxes $ 1,461 $ 1,404
Interest expense (net of amounts capitalized) 284 243
Interest factor on rentals (1/3) 44 52
-------- --------
Earnings $ 1,789 $ 1,699
Interest expense 314 263
Interest factor on rentals (1/3) 44 52
-------- --------
Fixed charges $ 358 $ 315
Ratio of earnings to fixed charges 5.00 5.39
------------------------------------------- -------- --------
</TABLE>
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<NAME> U S WEST COMMUNICATIONS, INC.
<MULTIPLIER> 1,000,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1995
<PERIOD-END> SEP-30-1995 SEP-30-1995
<CASH> 65 65
<SECURITIES> 0 0
<RECEIVABLES> 1,638 1,638
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<BONDS> 4,465 4,465
<COMMON> 7,286 7,286
0 0
0 0
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<TOTAL-LIABILITY-AND-EQUITY> 16,136 16,136
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<INCOME-PRETAX> 478 1,460
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<EXTRAORDINARY> (5) (5)
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