28
<PAGE>
_____________________________________________________________________________
__________________________________________________________________
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 June 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 __
____________________________________________________________________________
___________________________________________________________________
<PAGE>
Form 10-Q - Part I U S WEST Communications, Inc.
<TABLE>
TABLE OF CONTENTS
<CAPTION>
<S> <C>
Item Page
------------------------------------------------------------------- ----
PART I - FINANCIAL INFORMATION
1. Financial Statements
Consolidated Statements of Operations -
Three and six months ended June 30, 1995 and 1994 3
Condensed Consolidated Balance Sheets -
June 30, 1995 and December 31, 1994 4
Consolidated Statements of Cash Flows -
Six months ended June 30, 1995 and 1994 6
Consolidated Statements of Shareowner's Equity -
Six months ended June 30, 1995 and 1994 7
Notes to Consolidated Financial Statements 8
2. Management's Analysis - (Reduced disclosure format pursuant to
General Instruction H(2)) 10
<CAPTION>
PART II - OTHER INFORMATION
<S> <C>
6. Exhibits and Reports on Form 8-K 19
</TABLE>
Form 10-Q - Part I U S WEST Communications, Inc.
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Dollars in millions
<CAPTION>
<S> <C> <C> <C> <C>
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1995 1994 1995 1994
--------- --------- --------- ---------
OPERATING REVENUES
Local service $ 1,076 $ 1,016 $ 2,126 $ 2,001
Interstate access service 591 556 1,180 1,118
Intrastate access service 184 179 372 353
Long-distance network service 294 345 593 696
Other services 153 147 304 293
--------- --------- --------- ---------
Total operating revenues 2,298 2,243 4,575 4,461
OPERATING EXPENSES
Employee-related expenses 767 738 1,497 1,455
Other operating expenses 365 401 756 799
Taxes other than income taxes 104 98 207 195
Depreciation and amortization 498 470 992 935
--------- --------- --------- ---------
Total operating expenses 1,734 1,707 3,452 3,384
Income from operations 564 536 1,123 1,077
Interest expense 95 81 186 161
Gains on sales of rural telephone
exchanges 15 24 78 48
Other expense - net 20 7 33 17
--------- --------- --------- ---------
Income before income taxes 464 472 982 947
Provision for income taxes 175 177 370 355
--------- --------- --------- ---------
NET INCOME $ 289 $ 295 $ 612 $ 592
========= ========= ========= =========
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
Form 10-Q - Part I U S WEST Communications, Inc.
<TABLE>
CONSOLIDATED BALANCE SHEETS (Unaudited)
Dollars in millions
<CAPTION>
<S> <C> <C>
June 30, December 31,
1995 1994
--------- -------------
ASSETS
Current assets
Cash and cash equivalents $ 45 $ 114
Accounts receivable 1,552 1,450
Materials and supplies 135 120
Deferred tax asset 284 280
Other 62 48
--------- -------------
Total current assets 2,078 2,012
--------- -------------
Gross property, plant and equipment 29,972 29,406
Accumulated depreciation 16,983 16,444
--------- -------------
Property, plant and equipment - net 12,989 12,962
Other assets 761 726
--------- -------------
Total assets $ 15,828 $ 15,700
========= =============
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
Form 10-Q - Part I U S WEST Communications, Inc.
<TABLE>
CONSOLIDATED BALANCE SHEETS (Unaudited)
Dollars in millions
<CAPTION>
<S> <C> <C>
June 30, December 31,
1995 1994
---------- --------------
LIABILITIES AND SHAREOWNER'S EQUITY
Current liabilities
Short-term debt $ 2,262 $ 1,485
Accounts payable 700 883
Employee compensation 275 283
Current portion of restructuring charges 342 317
Other 1,029 883
---------- --------------
Total current liabilities 4,608 3,851
---------- --------------
Long-term debt 3,977 4,242
Postretirement and other postemployment benefit
obligations 2,196 2,393
Deferred taxes, credits and other 1,363 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 $ 15,828 $ 15,700
========== ==============
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
Form 10-Q - Part I U S WEST Communications, Inc.
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Dollars in millions
<CAPTION>
<S> <C> <C>
Six Months Ended June 30, 1995 1994
---------------------------------------------------- -------- --------
OPERATING ACTIVITIES
Net income $ 612 $ 592
Adjustments
Depreciation and amortization 991 935
Gains on sales of rural telephone exchanges (78) (48)
Deferred income taxes and amortization
of investment tax credits 56 50
Changes in operating assets and liabilities:
Restructuring payments (172) (63)
Postretirement medical and life costs, net of
cash fundings (211) (235)
Accounts receivable (102) (29)
Materials, supplies and other (41) (37)
Accounts payable and accrued liabilities 41 -
Other - net 5 37
-------- --------
Cash provided by operating activities 1,101 1,202
-------- --------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment (1,090) (1,165)
Proceeds from disposals of property, plant
and equipment 112 47
-------- --------
Cash (used) for investing activities (978) (1,118)
-------- --------
FINANCING ACTIVITIES
Net proceeds from repayment of short-term debt 569 149
Proceeds from Issuance of long-term debt - 251
Repayments of long-term debt (132) (243)
Dividends paid (629) (612)
Equity infusions from parent - 360
-------- --------
Cash (used for) financing activities (192) (95)
-------- --------
CASH AND CASH EQUIVALENTS
Decrease (69) (11)
Beginning balance 114 67
-------- --------
Ending balance $ 45 $ 56
======== ========
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
Form 10-Q - Part I U S WEST Communications, Inc.
<TABLE>
CONSOLIDATED STATEMENTS OF
SHAREOWNER'S EQUITY (Unaudited)
Dollars in millions
<CAPTION>
<S> <C> <C>
Six Months Ended June 30, 1995 1994
----------------------------------------------- -------- --------
COMMON SHARES
Balance at beginning of period $ 7,286 $ 6,742
Equity infusions from parent - 360
Other - 2
-------- --------
Balance at end of period 7,286 7,104
CUMULATIVE DEFICIT
Balance at beginning of period (3,602) (3,602)
Net income 612 592
Dividends declared (612) (592)
-------- --------
Balance at end of period (3,602) (3,602)
TOTAL SHAREOWNER'S EQUITY $ 3,684 $ 3,502
======== ========
See Notes to Consolidated Financial Statements.
</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"), 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 Proposal
The Board of Directors of U S WEST, Inc. ("U S WEST"), a Colorado corporation,
has adopted a proposal (the "Recapitalization Proposal") that would change the
state of incorporation of U S WEST from Colorado to Delaware and create two
classes of common stock that are intended to reflect separately the
performance of U S WEST's communications and multimedia businesses. Under the
Recapitalization Proposal, shareholders of U S WEST will be asked to approve
an Agreement and Plan of Merger between U S WEST and U S WEST, Inc., a
Delaware corporation and wholly owned subsidiary of U S WEST ("U S WEST
Delaware"), pursuant to which U S WEST would be merged (the "Merger") with and
into U S WEST Delaware with U S WEST Delaware continuing as the surviving
corporation. In connection with the Merger, the Certificate of Incorporation
of U S WEST Delaware would be amended and restated (as so amended and
restated, the "Restated Certificate") to, among other things, designate two
classes of common stock of U S WEST Delaware, one class of which would be
authorized as U S WEST Communications Group Common Stock ("Communications
Stock"), and the other class of which would be authorized as U S WEST Media
Group Common Stock ("Media Stock"). Upon consummation of the Merger, each
share of existing common stock of U S WEST would be automatically 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 Proposal (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 U S WEST Communications and certain other
subsidiaries of U S WEST (the "Communications Group") and 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 Federal Services, Inc., U S WEST
Advanced Technologies, Inc. and U S WEST Business Resources, Inc.
Under the Recapitalization Proposal, dividends to be paid to the holders of
Communications Stock will initially be at a quarterly rate of $0.535 per
share. Dividends on the Communications Stock will be paid at the discretion
of the Board of Directors of U S WEST, Inc., based primarily upon the
financial condition, results of operations and business requirements of the
Communications Group and U S WEST as a whole.
A preliminary proxy statement on the Recapitalization Proposal was filed with
the Securities and Exchange Commission on May 12, 1995, and amendment one was
filed on June 30, 1995.
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 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 an
interexchange carrier and other parties that relates 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 I U S WEST Communications, Inc.
Item 2. Management's Analysis (Dollars in millions)
<TABLE>
Results of Operations
Comparative details of operations for the six months ended June 30 follow:
<CAPTION>
<S> <C> <C>
Six Months Ended June 30, 1995 1994
------------------------------------------- ------ ------
Operating revenues $4,575 $4,461
Operating expenses
Employee-related expenses 1,497 1,455
Other operating expenses 756 799
Taxes other than income taxes 207 195
Depreciation and amortization 992 935
Interest expense 186 161
Gains on sales of rural telephone exchanges 78 48
Other expense - net 33 17
------ ------
Income before income taxes 982 947
Provision for income taxes 370 355
------ ------
Net income $ 612 $ 592
====== ======
</TABLE>
For the six months ended June 30, 1995, the Company's net income was $612, a
$20, or 3.4 percent, increase compared with the same period in 1994.
Excluding gains on the sales of certain rural telephone exchanges, of $49 and
$31 year-to-date 1995 and year-to-date 1994, respectively, net income
increased $2, or .4 percent, as compared to the same period of 1994.
Increased income at U S WEST Communications 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 offset by an
increase in operating costs incurred to address current customer service
issues.
Volume growth resulted in a 5.1 percent increase in earnings before interest,
taxes, depreciation, amortization and other ("EBITDA") for the six months
ended June 30, 1995, as compared with the same period of 1994. EBITDA also
excludes the sales of certain rural telephone exchanges. The Company
considers EBITDA an important indicator of the operational strength and
performance 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.
<PAGE>
Form 10-Q - Part I U S WEST Communications, Inc.
Item 2. Management's Analysis (Dollars in millions)
<TABLE>
Sales & Other Revenues
<CAPTION>
Six Six
Months Months
Ended Ended Lower Increase Increase
June 30, June 30, Price (Higher) (Decrease) (Decrease)
1995 1994 Changes Refunds Growth Other Dollars Percent
--------- --------- --------- --------- -------- ------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Local service $ 2,126 $ 2,001 $ 4 $ - $ 121 $ - $ 125 6.2
Interstate access 1,180 1,118 (18) (10) 90 - 62 5.5
Intrastate access 372 353 (12) 5 19 7 19 5.4
Long-distance network 593 696 (15) - (28) (60) (103) (14.8)
Other services 304 293 - - - 11 11 3.8
--------- --------- --------- --------- -------- ------- ----------- ----------
Total revenues $ 4,575 $ 4,461 $ (41) $ (5) $ 202 $ (42) $ 114 2.6
--------- --------- --------- --------- -------- ------- ----------- ----------
</TABLE>
Total operating revenues were $4,575, a $114, or 2.6 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 509,000 access
lines, or 3.6 percent, during the last 12 months. Excluding the effects of
the sales of certain rural telephone exchanges, access lines increased by
591,000 lines, or 4.2 percent, during the last 12 months.
Higher revenue from interstate access services resulted from an increase of
9.1 percent in interstate billed access minutes of use in the first six months
of 1995 as compared with the same period of 1994, which more than offset the
effects of price reductions. Intrastate access charges increased as a result
of higher demand and the effects of multiple toll carrier plans implemented in
Oregon and Washington in May and June 1994, respectively, partially offset by
the impacts of price changes. These regulatory arrangements decreased
long-distance network revenues by $62, increased intrastate access revenues by
$12 and decreased access fees (otherwise paid to independent companies) by
$42.
The increase in other services revenues is largely due to continued market
penetration of new service offerings and higher revenues from customer premise
equipment installations.
<PAGE>
Form 10-Q - Part I U S WEST Communications, Inc.
Item 2. Management's Analysis (Dollars in millions)
<TABLE>
Costs and Expenses
<CAPTION>
Six Six
Months Months
Ended Ended Increase Increase
June 30, June 30, (Decrease) (Decrease)
1995 1994 Dollars Percent
--------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Employee-related expenses $ 1,497 $ 1,455 $ 42 2.9
eEmplo
yee-related expenses
Other operating expenses 756 799 (43) (5.4)
Taxes other than income taxes 207 195 12 6.2
Depreciation and amortization 992 935 57 6.1
Interest expense 186 161 25 15.5
Other expense-net 33 17 16 94.1
Provision for income taxes 370 355 15 4.2
--------- --------- ----------- ----------
</TABLE>
Higher employee-related expenses are a result of business growth and related
customer service issues, which have been impacted by a temporary decline in
productivity caused by a major rearrangement of resources due to
restructuring. Growth in employee-related expenses is expected to continue
throughout the remainder of the year. Overtime payments and contract labor
increased employee-related expenses by approximately $95 from the first six
months of 1994 to the first six months of 1995. Partially offsetting these
increases were lower health-care benefit costs, including a reduction in the
accrual for postretirement benefits, and certain benefit cost true-ups.
Since December 1993, the Company has separated 3,560 employees under the
Restructuring Plan. (See "Restructuring Charges.") These separations have
been partially offset by the addition of approximately 2,100 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 and data transmission services.
<PAGE>
Form 10-Q - Part I U S WEST Communications, Inc.
Item 2. Management's Analysis (Dollars in millions)
Costs and Expenses (continued)
The decrease in other operating expenses was mainly attributable to a $42
reduction in access expense related to the effects of multiple toll carrier
plans. The increase in depreciation and amortization expense was primarily a
result of a higher depreciable asset base. Interest expense increased as a
result of higher amounts of short-term debt combined with the effects of
higher interest rates.
Restructuring Charges
The Company's 1993 results reflect an $880 restructuring charge (pretax). The
related 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, the Company is developing new systems and
enhanced system functionality 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 560 customer service centers
into 26 centers in 10 cities and reducing its 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.
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)<F1> $ 19 $ 67 $ 104 $ 65 $255
Systems development 118 145 97 - 360
Real estate 50 77 3 - 130
Relocation 21 52 2 - 75
Retraining and other 8 30 12 10 60
------- --------- --------- --------- ------
Total cash expenditures 216 371 218 75 880
Remaining 1991 plan employee costs(1)<F1> 56 - - - 56
------- --------- --------- --------- ------
Total $ 272 $ 371 $ 218 $ 75 $ 936
======= ========= ========= ========= ======
<FN>
<F1>
(1) Employee separation costs, including the balance of the 1991 restructuring reserve at
December 31, 1993, aggregate $311.
</FN>
</TABLE>
<PAGE>
Form 10-Q - Part I U S WEST Communications, Inc.
Item 2. Management's Analysis (Dollars in millions)
Restructuring Charges (continued)
Employee separation costs include severance payments, health-care coverage and
postemployment education benefits. Systems 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.
The following estimates of employee separations and related amounts reflect
the extension of employee reductions into 1997:
<TABLE>
<CAPTION>
Estimate Actual Estimate Estimate Estimate
1994 1994(1)<F1> 1995 1996 1997 Total
--------- ------------- --------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Employee separations
Managerial 1,061 497 862 840 521 2,720
Occupational 1,887 1,683 1,288 2,660 1,649 7,280
--------- ------------- --------- --------- --------- -------
Total 2,948 2,180 2,150 3,500 2,170 10,000
========= ============= ========= ========= ========= =======
Estimate Actual Estimate Estimate Estimate
1994 1994 (1)<F1> 1995 1996 1997 Total
--------- ------------- --------- --------- --------- -------
Employee separation amounts
Managerial $ 22 $ 5 $ 31 $ 30 $ 19 $ 85
Occupational 15 14 36 74 46 170
--------- ------------- --------- --------- --------- -------
Total 37 19 67 104 65 255
Remaining 1991 reserve 56 56 - - - 56
--------- ------------- --------- --------- --------- -------
Total $ 93 $ 75 $ 67 $ 104 $ 65 $ 311
========= ============= ========= ========= ========= =======
<FN>
<F1>
(1) Includes the remaining employees and the separation amounts associated with the balance
of the 1991 restructuring reserve at December 31, 1993.
</FN>
</TABLE>
<PAGE>
Form 10-Q - Part I U S WEST Communications, Inc.
Item 2. Management's Analysis (Dollars in millions)
Restructuring Charges (continued)
Employee Separation (continued)
Compared with the original estimates, employee reduction and separation
amounts shown above have been reduced by 1,319 employees and $35,
respectively, in 1995, and increased by 900 employees and $18 in 1996 and
2,170 employees and $65 in 1997, respectively.
Systems Development. The Company's 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 Company's
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.
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 and enhanced
system functionality follow:
<TABLE>
<CAPTION>
Estimate Actual Estimate Estimate
1994 1994 1995 1996 Total
--------- ------- --------- ----- ---------
<S> <C> <C> <C> <C> <C>
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>
<PAGE>
Form 10-Q - Part I U S WEST Communications, Inc.
Item 2. Management's Analysis (Dollars in millions)
Restructuring Charges (continued)
Systems Development (continued)
The Company continues to review its estimates of systems expenditures under
the Restructuring Plan. Management does not anticipate any material revisions
in total estimated expenditures. 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.
The key related administrative (i.e. general purpose) systems 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.
Progress Under the Restructuring Plan. Following is a reconciliation of
restructuring activity since December 1993:
<TABLE>
<CAPTION>
Change in
Relocation/
Reserve Reserve First Half Employee Reserve
Balance 1994 Balance 1995 Separation Balance
12/31/93 Activity 12/31/94 Activity Estimates 6/30/95
--------- --------- --------- ----------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Employee Separations
Managerial $ 75 $ 5 $ 70 $ 11 $ 7 $ 66
Occupational 150 14 136 28 23 131
--------- --------- --------- ----------- ------------- --------
Total 225 19 206 39 30 197
System Development
Service delivery 73 21 52 7 45
Service assurance 64 12 52 11 41
Capacity provisioning 179 57 122 47 75
All other 44 28 16 0 16
--------- --------- --------- ----------- --------
Total 360 118 242 65 177
Real Estate 130 50 80 50 30
Relocation 105 21 84 10 (30) 44
Retraining & other 60 8 52 9 43
--------- --------- --------- ----------- --------
Total 880 216 664 173 - 491
Remaining 1991 plan costs 56 56 - - - -
--------- --------- --------- ----------- ------------- --------
Total $ 936 $ 272 $ 664 $ 173 - $ 491
========= ========= ========= =========== ============= ========
</TABLE>
<PAGE>
Form 10-Q - Part I U S WEST Communications, Inc.
Item 2. Management's Analysis (Dollars in millions)
<TABLE>
Restructuring Charges (continued)
Progress Under the Restructuring Plan: (continued)
<CAPTION>
<S> <C> <C> <C>
Cumulative
First Half Separations
1994 Separations 1995 Separations At June 30, 1995
---------------- ---------------- ----------------
Employee separations
Managerial 497 324 821
Occupational 1,683 1,056 2,739
---------------- ---------------- ----------------
Total 2,180 1,380 3,560
================ ================ ================
</TABLE>
Recapitalization Proposal
The Board has adopted a proposal that would change the state of incorporation
of U S WEST 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 Proposal see Footnote B
in the Notes to the Consolidated Financial Statements.
A preliminary proxy statement on the Recapitalization Proposal was filed with
the Securities and Exchange Commission on May 12, 1995, and amendment one was
filed on June 30, 1995.
Other Items
U S WEST from time to time engages in discussions regarding acquisitions. U S
WEST may fund such acquisitions with internally generated funds, debt or
equity. The incurrence of indebtedness to fund such acquisitions and/or the
assumption of indebtedness in connection with acquisitions, if significant,
could result in a downgrading of the credit rating of U S WEST and/or the
Company.
Broadband
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, however, in order to fully assess the results of
the Omaha trials and examine alternative technologies, including wireless
cable and direct broadcast satellite services, U S WEST Communications
withdrew the Broadband Applications. The Communications Group plans to
incorporate the results of the Omaha trials , as well as applicable new
technologies, into its Broadband Network architecture in order to develop an
advanced Broadband Network that is responsive to the needs of customers.
<PAGE>
Form 10-Q - Part I U S WEST Communications, Inc.
Item 2. Management's Analysis (Dollars in millions)
OTHER ITEMS (continued)
Regulatory
Though Congress failed to pass telecommunications reform legislation in 1994,
new telecommunications legislation has been introduced in both houses in 1995.
The Senate passed a bill on June 16, 1995, and the House of Representatives
passed a bill on August 4, 1995. The thrust of this legislation is to open up
the network of local exchange carriers to further competition and to eliminate
certain prohibitions upon local exchange carriers entering into other lines of
business. The proposed legislation would (i) open local exchange service to
competition and preempt states from imposing barriers preventing such
competition, (ii) impose new unbundling and interconnection requirements on
local exchange carrier networks, (iii) remove the MFJ prohibitions on
interLATA services and manufacturing if certain competitive conditions are
met, (iv) transfer any remaining MFJ requirements (including the MFJ's
nondiscrimination provisions) to the FCC's jurisdiction, (v) impose
requirements to conduct certain competitive activities only through
structurally separate affiliates, and (vi) eliminate many of the remaining
cable and telephone company cross-ownership restrictions. There is, however,
uncertainty concerning the outcome of such legislation and whether key
differences between the House and Senate bills could be resolved in Conference
Committee. The passing of such legislation would significantly change the
competitive landscape of the telecommunications industry as a whole.
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 Commission's initial order denied a refund request
from an interexchange carrier and other parties that relates 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 second quarter
(i) report dated June 20, 1995, concerning U S WEST, Inc.'s
announcement with respect to key executive changes.
<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.
/s/ John W. Putnam
U S WEST Communications, Inc.
John W. Putnam
Vice President and Controller
August 9, 1995
<TABLE>
U S WEST Communications, Inc.
RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Millions)
,CAPTION.
Quarter Ended
6/30/95 6/30/94
--------------------------------------------------- --------- ---------
<S> <C> <C>
Income before income taxes $465 $472
Interest expense (net of amounts capitalized) 95 81
Interest factor on rentals (1/3) 16 18
--------- ---------
Earnings $576 $571
Interest expense 105 88
Interest factor on rentals (1/3) 16 18
--------- ---------
Fixed charges $121 $106
Ratio of earnings to fixed charges 4.76 FALSE
--------------------------------------------------- --------- ---------
<CAPTION>
Year-to-Date
6/30/95 6/30/94
--------------------------------------------------- --------- ---------
<S> <C> <C>
Income before income taxes $983 $947
Interest expense (net of amounts capitalized) 186 161
Interest factor on rentals (1/3) 31 36
--------- ---------
Earnings $1,200 $1,144
Interest expense 205 174
Interest factor on rentals (1/3) 31 36
--------- ---------
Fixed charges $236 $210
Ratio of earnings to fixed charges 5.08 5.45
--------------------------------------------------- --------- ---------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000068622
<NAME> U S WEST COMMUNICATIONS, INC.
<MULTIPLIER> 1,000,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1995
<PERIOD-END> JUN-30-1995 JUN-30-1995
<CASH> 45 45
<SECURITIES> 0 0
<RECEIVABLES> 1,552 1,552
<ALLOWANCES> 0 0
<INVENTORY> 135 135
<CURRENT-ASSETS> 2,078 2,078
<PP&E> 29,972 29,972
<DEPRECIATION> 16,983 16,983
<TOTAL-ASSETS> 15,828 15,828
<CURRENT-LIABILITIES> 4,608 4,608
<BONDS> 3,977 3,977
<COMMON> 7,286 7,286
0 0
0 0
<OTHER-SE> (3,602) (3,602)
<TOTAL-LIABILITY-AND-EQUITY> 15,828 15,828
<SALES> 2,298 4,575
<TOTAL-REVENUES> 2,298 4,575
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 1,734 3,452
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 95 186
<INCOME-PRETAX> 464 982
<INCOME-TAX> 175 370
<INCOME-CONTINUING> 289 612
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 289 612
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
