=====================================================================
UNITED STATES
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, 1996
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.
<TABLE>
<CAPTION>
<S> <C>
A Colorado Corporation IRS Employer No. 84-0273800
</TABLE>
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 __
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<PAGE>
Form 10-Q - Part I U S WEST Communications, Inc.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
Item Page
- ---- ----
PART I - FINANCIAL INFORMATION
1. Financial Statements
Consolidated Statements of Income -
Three and Nine Months Ended September 30, 1996 and 1995 3
Consolidated Balance Sheets -
September 30, 1996 and December 31, 1995 4
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1996 and 1995 5
Notes to Consolidated Financial Statements 6
2. Management's Analysis - (Reduced disclosure format pursuant to
General Instruction H(2)) 8
<CAPTION>
<C> <S> <C>
PART II - OTHER INFORMATION
1. Legal Proceedings 18
6. Exhibits and Reports on Form 8-K 18
</TABLE>
<PAGE>
Form 10-Q - Part I U S WEST Communications, Inc.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Dollars in millions Three Months Three Months Nine Months Nine Months
- ------------------------------------ --------------- ---------------- --------------- ----------------
Ended Ended Ended Ended
--------------- ---------------- --------------- ----------------
Sept. 30, 1996 Sept. 30, 1995 Sept. 30, 1996 Sept. 30, 1995
--------------- ---------------- --------------- ----------------
Operating revenues:
Local service $ 1,208 $ 1,105 $ 3,532 $ 3,231
Interstate access service 606 594 1,854 1,774
Intrastate access service 192 186 571 558
Long-distance network services 272 298 840 891
Other services 178 151 507 455
--------------- ---------------- --------------- ----------------
Total operating revenues 2,456 2,334 7,304 6,909
Operating expenses:
Employee-related expenses 848 780 2,525 2,277
Other operating expenses 386 403 1,148 1,159
Taxes other than income taxes 92 92 284 299
Depreciation and amortization 541 507 1,565 1,499
--------------- ---------------- --------------- ----------------
Total operating expenses 1,867 1,782 5,522 5,234
--------------- ---------------- --------------- ----------------
Income from operations 589 552 1,782 1,675
Interest expense 104 98 308 284
Gains on sales of rural telephone
exchanges 2 34 51 112
Other expense - net 10 10 25 43
--------------- ---------------- --------------- ----------------
Income before income taxes,
extraordinary item and
cumulative effect of change
in accounting principle 477 478 1,500 1,460
Provision for income taxes 183 173 574 543
--------------- ---------------- --------------- ----------------
Income before extraordinary item
and cumulative effect of change
in accounting principle 294 305 926 917
Extraordinary item:
Early extinguishment of debt
- net of tax - (5) - (5)
--------------- ---------------- --------------- ----------------
Income before cumulative effect of
change in accounting principle 294 300 926 912
Cumulative effect of change in
accounting principle - net of tax - - 34 -
--------------- ---------------- --------------- ----------------
NET INCOME $ 294 $ 300 $ 960 $ 912
=============== ================ =============== ================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
Form 10-Q - Part I U S WEST Communications, Inc.
CONSOLIDATED BALANCE SHEETS (Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
Dollars in millions September 30, 1996 December 31, 1995
- ----------------------------------------------- -------------------- -------------------
ASSETS
Current assets:
Cash and cash equivalents $ 94 $ 191
Accounts and notes receivable - net 1,533 1,546
Inventories and supplies 124 142
Deferred tax asset 213 240
Prepaid and other 60 43
-------------------- -------------------
Total current assets 2,024 2,162
-------------------- -------------------
Gross property, plant and equipment 31,936 30,988
Accumulated depreciation 18,204 17,540
-------------------- -------------------
Property, plant and equipment - net 13,732 13,448
Other assets 759 740
-------------------- -------------------
Total assets $ 16,515 $ 16,350
==================== ===================
LIABILITIES AND SHAREOWNER'S EQUITY
Current liabilities:
Short-term debt $ 1,107 $ 995
Accounts payable 664 864
Employee compensation 255 281
Current portion of restructuring charge 202 270
Other 1,282 1,081
-------------------- -------------------
Total current liabilities 3,510 3,491
-------------------- -------------------
Long-term debt 5,375 5,411
Postretirement and other postemployment benefit
obligations 2,293 2,316
Deferred taxes, credits and other 1,351 1,386
Shareowner's equity:
Common shares - one share without par value 7,603 7,348
Cumulative deficit (3,617) (3,602)
-------------------- -------------------
Total shareowner's equity 3,986 3,746
-------------------- -------------------
Total liabilities and shareowner's equity $ 16,515 $ 16,350
==================== ===================
</TABLE>
Contingencies (See Note B to the Consolidated Financial Statements)
See Notes to Consolidated Financial Statements.
<PAGE>
Form 10-Q - Part I U S WEST Communications, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
Dollars in millions Nine Months Ended Nine Months Ended
- --------------------------------------------------- ------------------- ------------------
Sept. 30, 1996 Sept. 30, 1995
------------------- ------------------
OPERATING ACTIVITIES
Net income $ 960 $ 912
Adjustments to net income:
Depreciation and amortization 1,565 1,499
Gains on sales of rural telephone exchanges (51) (112)
Cumulative effect of change in accounting
principle - net of tax (34) -
Deferred income taxes and amortization
of investment tax credits (8) 120
Changes in operating assets and liabilities:
Restructuring payments (114) (253)
Postretirement medical and life costs
- net of cash fundings (28) (159)
Accounts and notes receivable 5 (188)
Inventories, supplies and other
current assets (2) (49)
Accounts payable and accrued liabilities 83 (48)
Other - net 9 17
------------------- ------------------
Cash provided by operating activities 2,385 1,739
------------------- ------------------
INVESTING ACTIVITIES
Expenditures for property, plant
and equipment (1,883) (1,696)
Proceeds from sales of rural telephone exchanges 130 162
Payments on disposals of property, plant and
equipment (1) (2)
------------------- ------------------
Cash (used for) investing activities (1,754) (1,536)
------------------- ------------------
FINANCING ACTIVITIES
Net proceeds from issuance of short-term debt 257 406
Proceeds from issuance of long-term debt 16 495
Repayments of long-term debt (271) (248)
Dividends paid on common stock (965) (905)
Equity infusions from
U S WEST Communications Group 235 -
------------------- ------------------
Cash (used for) financing activities (728) (252)
------------------- ------------------
CASH AND CASH EQUIVALENTS
Decrease (97) (49)
Beginning balance 191 114
------------------- ------------------
Ending balance $ 94 $ 65
=================== ==================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
Form 10-Q - Part I U S WEST Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 1996 and 1995
(Dollars in millions)
(Unaudited)
A. Summary of Significant Accounting Policies
Basis of Presentation
U S WEST Communications, Inc. (the "Company") is incorporated under the laws
of the State of Colorado and is an indirect wholly owned subsidiary of U S
WEST, Inc. ("U S WEST").
The Consolidated Financial Statements have been prepared by the Company,
pursuant to the interim reporting 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 ("GAAP") have been condensed or
omitted pursuant to the interim 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, 1995.
New Accounting Standard
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121
requires that long-lived assets and associated intangibles be written down to
fair value whenever an impairment review indicates that the carrying value
cannot be recovered on an undiscounted cash flow basis. SFAS No. 121 also
requires that a company no longer record depreciation expense on assets held
for sale.
Adoption of SFAS No. 121 resulted in income of $34 (net of tax of $22) from
the cumulative effect of reversing depreciation expense recorded in prior
years related to rural telephone exchanges held for sale. Depreciation
expense was reversed from the date the Company formally committed to a plan to
dispose of the rural exchange assets through January 1, 1996. The income has
been recorded as a cumulative effect of change in accounting principle in
accordance with SFAS No. 121. The carrying value of the rural exchange assets
was approximately $338 at
<PAGE>
Form 10-Q - Part I U S WEST Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
New Accounting Standard (Continued)
December 31, 1995. As a result of adopting SFAS No. 121, depreciation expense
for the nine months ended September 30, 1996 was reduced by $21 ($13 after
tax). In 1996, depreciation expense will decrease approximately $25 as a
result of adopting SFAS No. 121. The combined effects of lower depreciation
expense and the cumulative effect of adoption of the new standard will be
directly offset by lower recognized gains on future rural exchange sales.
B. 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 $155.
On April 11, 1996, the Washington State Utilities and Transportation
Commission ("WUTC" or the "Commission") acted on the Company's 1995 rate
request. In February 1995, the Company sought to increase revenues by raising
rates for basic residential services over a four-year period. The two major
issues in this proceeding involve the Company's requests for improved capital
recovery and elimination of the imputation of Yellow Pages revenue. Instead of
granting the Company's request, the Commission ordered approximately $91.5 in
annual revenue reductions, effective May 1, 1996. Based on the above ruling,
the Company filed a lawsuit with the King County Superior Court (the "Court")
for an appeal of the order, a temporary stay of the ordered rate reduction and
an authorization to implement a revenue increase.
On April 29, 1996, the Court stayed the rate decreases ordered by the WUTC.
The Court granted the stay pending a decision on the Company's appeal.
Effective May 1, 1996, the Company began collecting revenues subject to refund
with interest. The Company expects its appeal to be successful and plans not
to accrue any of the amounts subject to refund. However, an adverse judgment
on the appeal would have a significant impact on the Company's future results
of operations. The Company expects the Court to rule on the appeal in
November 1996.
<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 income before extraordinary item and cumulative effect
of change in accounting principle for the nine months ended September 30
follow:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Nine Months Ended Nine Months Ended Percent
------------------ ------------------ -------
Sept. 30, 1996 Sept. 30, 1995 Change
------------------ ------------------ -------
Income before extraordinary item and cumulative
effect of change in accounting principle $ 926 $ 917 1.0
</TABLE>
Income before extraordinary item and cumulative effect of change in accounting
principle for the nine-month period ended September 30, 1996, adjusted to
exclude certain nonoperating items, was $882, an increase of $35, or 4.1
percent, compared with the same period in 1995. The adjustments include the
1996 current year-to-date impact of $13 from adopting SFAS No. 121 and gains
of $31 and $70 on the sales of rural telephone exchanges during 1996 and 1995,
respectively.
Effective January 1, 1996, the Company adopted SFAS No. 121 (See Note A)
which, among other things, requires that companies no longer record
depreciation expense on assets held for sale. Adoption of SFAS No. 121
resulted in a one-time gain of $34 (net of tax of $22), related to the
cumulative effect of change in accounting principle.
Increased income at the Company is primarily attributable to higher demand for
services. Partially offsetting the effects of higher demand was an increase
in costs incurred to address the requirements associated with increased
business growth and continuing service-improvement initiatives. Further
offsetting the effects of higher demand were third quarter 1996 costs
associated with the discontinuance of the Omaha broadband video service trial.
Increased demand for the Company's services resulted in growth in earnings
before interest, taxes, depreciation, amortization and other ("EBITDA") of
5.5 percent for the nine-month period ended September 30, 1996. EBITDA also
excludes gains on sales of certain rural telephone exchanges in 1996 and 1995.
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.
<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 (Continued)
Operating Revenues
An analysis of changes in the Company's operating revenues follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Higher Increase Increase
-------- ----------- ----------
Nine Months Ended (Lower) Higher (Decrease) (Decrease)
- --------------------- -------- --------- ----------- ----------
September 30, 1996 1995 Prices Refunds Demand Other Dollars Percent
- --------------------- ------ ------ -------- --------- -------- ------- ----------- ----------
Local service $3,532 $3,231 $ 19 $ (4) $ 301 $ (15) $ 301 9.3
Interstate access 1,854 1,774 (43) (46) 174 (5) 80 4.5
Intrastate access 571 558 (17) - 32 (2) 13 2.3
Long-distance network 840 891 (6) (1) (28) (16) (51) (5.7)
Other services 507 455 - - - 52 52 11.4
------ ------ -------- --------- -------- ------- ----------- ----------
Total $7,304 $6,909 $ (47) $ (51) $ 479 $ 14 $ 395 5.7
====== ====== ======== ========= ======== ======= =========== ==========
</TABLE>
Local service revenues increased principally as a result of higher demand for
services. Total reported access lines increased 633,000, or 4.3 percent
during the last 12 months, of which 234,000 is attributed to second lines.
Second line installations increased 31.4 percent during the past year. Access
line growth was 5.1 percent when adjusted for sales of approximately 116,000
rural telephone access lines during the last 12 months. Also contributing to
the increase in local service revenues was expanded growth in new central
office features such as caller identification, last call return and continuous
redial. Local service revenues from these features were approximately $130,
an increase of over 100 percent as compared to 1995.
Higher revenues from interstate access services resulted from access line
growth and an increase of 8.9 percent in interstate billed access minutes of
use for the nine-month period ended September 30, 1996. The increased volume
of business was partially offset by the effects of price reductions and
sharing related accruals for refunds to interexchange carriers. Intrastate
access revenues increased slightly primarily due to higher demand partially
offset by the effects of price reductions.
Long-distance network service revenues decreased by 5.7 percent, compared with
the same period in 1995, primarily due to the effects of competition and the
implementation of a multiple toll carrier plan ("MTCP") in Iowa in May 1996.
The MTCP allows independent telephone companies to act as toll carriers. The
impact of the MTCP for the nine-month period ended September 30, 1996 was
long-distance revenue losses of $16, offset by an increase in intrastate
access revenues of $2 and a decrease in other operating expenses (i.e., access
expense) of $13.
<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 (Continued)
Operating Revenues (Continued)
Excluding the effects of the MTCP, long-distance network service revenues
decreased 3.9 percent for the nine-month period ended September 30, 1996.
Erosion of long-distance revenue will continue due to the loss of exclusivity
of 1+ dialing in Minnesota, effective in February 1996, and in Arizona,
effective in April 1996.
Revenues from other services increased primarily as a result of continued
market penetration in voice messaging service and increases in inside wire
service.
Future revenues at the Company may be affected by pending regulatory actions
in local regulatory jurisdictions.
Costs and Expenses
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Nine Months Ended Nine Months Ended Percent
------------------- ------------------- --------
September 30, 1996 September 30, 1995 Change
------------------- ------------------- --------
Employee-related expenses $ 2,525 $ 2,277 10.9
Other operating expenses 1,148 1,159 (0.9)
Taxes other than income taxes 284 299 (5.0)
Depreciation and amortization 1,565 1,499 4.4
Interest expense 308 284 8.5
Other expense - net 25 43 (41.9)
</TABLE>
Employee-related expenses increased $248 compared to the prior year. The
increase is primarily attributable to continued efforts to meet the
requirements associated with increased business growth and service-improvement
initiatives.
Salaries and wages increased employee-related expenses by approximately $119
over the prior year primarily due to inflation-driven wage increases. The
increase is also attributable to absorbing certain employee transfers from
affiliate companies during 1995. Salaries and wages were reduced through
employee reductions associated with the Company's restructuring program;
however, costs associated with employee transfers, along with other workforce
additions needed to meet increased business growth and service-improvement
initiatives, have offset these benefits.
<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 (Continued)
Costs and Expenses (Continued)
Contract labor increased approximately $115 for the nine-month period ended
September 30, 1996. The increase was primarily due to increased network
operations costs incurred to meet increased business growth and marketing
organization costs associated with the implementation of new products and
services. Also contributing to the increase was $6 of third-quarter 1996
costs related to the discontinuance of the Omaha broadband video service
trial.
Approximately $15 of the increase in employee-related expenses (i.e., contract
labor and overtime) was attributed to severe flooding in Washington and Oregon
in the first quarter of 1996. Partially offsetting the increase in
employee-related expenses was a reduction in the postretirement benefits
accrual and lower travel and conference expenses.
The slight decrease in other operating expenses is primarily attributable to
lower affiliate costs and reduced access expense of which a portion related to
the implementation of the MTCP in Iowa in May 1996. Increased uncollectible
expense, higher advertising costs and greater materials and supplies expense
partially offset these decreases. Also partially offsetting was an $11
third-quarter 1996 charge related to the discontinuance of the Omaha broadband
video service trial.
Increased depreciation and amortization expense was attributable to the
effects of a higher depreciable asset base, partially offset by the effects of
1995 sales of rural telephone exchanges, and the effects of adopting SFAS No.
121. Interest expense increased primarily due to higher average debt levels.
Provision for Income Taxes
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Nine Months Ended Nine Months Ended Percent
------------------- ------------------- -------
September 30 1996 September 30 1995 Change
------------------- ------------------- -------
Provision for income taxes $ 574 $ 543 5.7
Effective tax rate 38.3% 37.2% -
</TABLE>
The increase in the effective tax rate resulted primarily from higher income
before income taxes and lower amortization of the investment tax credit.
<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 (Continued)
Restructuring Charge
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.
Following is a schedule of the costs included in the Restructuring Plan:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Restructuring Plan Costs Actual 1994 Actual 1995 Estimate 1996 Estimate 1997 Total
- -------------------------------------- ------------ ------------ -------------- -------------- ------
Cash expenditures:
Employee separation (1) <F1> $ 19 $ 76 $ 82 $ 106 $ 283
Systems development 118 129 113 - 360
Real estate 50 66 14 - 130
Relocation 21 21 5 - 47
Retraining and other 8 23 22 7 60
------------ ------------ -------------- -------------- ------
Total cash expenditures 216 315 236 113 880
Remaining 1991 plan employee costs (1) 56 - - - 56
------------ ------------ -------------- -------------- ------
Total $ 272 $ 315 $ 236 $ 113 $ 936
============ ============ ============== ============== ======
<FN>
<F1>
(1) Employee separation costs, including the balance of the 1991 restructuring reserve at December 31,
1993, aggregate $339.
</FN>
</TABLE>
Employee separation costs include severance payments, health-care coverage and
postemployment education benefits associated with the planned reduction of
10,000 employees. 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. Real estate costs
include preparation costs for the new service centers. The Company has
consolidated its 560 customer service centers into 26 centers in 10 cities.
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.
<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 (Continued)
Restructuring Charge (Continued)
The timing and mix of employee separations has been changed. Managerial and
occupational employee separations under the Restructuring Plan are estimated
to be 3,670 and 6,330, respectively, as compared with previous estimates of
2,738 and 7,262. As a result of this change, the currently estimated cost for
employee separations is $339, compared with $311 as previously estimated. The
cost increase will be funded through a transfer from the reserve for employee
relocations.
Additionally, 1,000 employee separations previously scheduled for 1997 will
occur in 1996. Accordingly, estimated employee separation costs increased by
$49 in 1996, of which $21 was transferred from 1997 and $28 was reallocated
from the reserve for employee relocations. Following are current estimates of
employee separations and separation costs:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Employee Separations Actual 1994 Actual 1995 Estimate 1996 Estimate 1997 Total
- -------------------- ----------- ----------- ------------- ------------- ------
Managerial 497 682 1,435 1,056 3,670
Occupational 1,683 1,643 565 2,439 6,330
----------- ----------- ------------- ------------- ------
Total 2,180 2,325 2,000 3,495 10,000
=========== =========== ============= ============= ======
<CAPTION>
<S> <C> <C> <C> <C> <C>
Employee Separation Costs Actual 1994(1) <F1> Actual 1995 Estimate 1996 Estimate 1997 Total
- ------------------------- -------------------- ------------ -------------- -------------- ------
Managerial $ 5 $ 30 $ 69 $ 49 $ 153
Occupational 14 46 13 57 130
-------------------- ------------ -------------- -------------- ------
Total 19 76 82 106 283
Remaining 1991 reserve 56 - - - 56
-------------------- ------------ -------------- -------------- ------
Total $ 75 $ 76 $ 82 $ 106 $ 339
==================== ============ ============== ============== ======
<FN>
<F1>
(1) Includes the remaining employees and the separation amounts associated with the balance of a
1991 restructuring reserve at December 31, 1993.
</FN>
</TABLE>
<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 (Continued)
Restructuring Charge (Continued)
Progress Under the Restructuring Plan:
Following is a reconciliation of restructuring reserve activity during the
first nine months of 1996:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Reserve Balance First Nine Months Change in Relocation/ Reserve Balance
------------------ ------------------- ----------------------- -------------------
December 31, 1995 1996 Activity Employee Separation September 30, 1996
------------------ ------------------- ----------------------- -------------------
Amounts (1)<F1>
-----------------------
Employee separations
Managerial $ 63 $ (28) $ 55 $ 90
Occupational 97 (11) (27) 59
------------------ ------------------- ----------------------- -------------------
Total separations 160 (39) 28 149
Systems development
Service delivery 44 (26) - 18
Service assurance 26 (7) - 19
Capacity provisioning 42 (22) - 20
All other 1 - - 1
------------------ ------------------- ----------------------- -------------------
Total systems 113 (55) - 58
Real estate 14 (4) - 10
Relocation 33 (2) (28) 3
Retraining and other 29 (14) - 15
------------------ ------------------- ----------------------- -------------------
Total $ 349 $ (114) $ - $ 235
================== =================== ======================= ===================
<FN>
<F1>
(1) As a result of the change in the estimated mix of total employee separations, $27 was transferred from
the occupational to the managerial employee separation reserve. Additionally, $28 was reallocated from the
relocation reserve to the managerial employee separation reserve.
</FN>
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1994 1995 First Nine Months Cumulative
----------- ----------- ----------------- --------------
Separations Separations 1996 Separations Separations At
----------- ----------- ----------------- --------------
Sept. 30, 1996
--------------
Employee separations
Managerial 497 682 549 1,728
Occupational 1,683 1,643 444 3,770
----------- ----------- ----------------- --------------
Total 2,180 2,325 993 5,498
=========== =========== ================= ==============
</TABLE>
<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 (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 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 $155.
On April 11, 1996, the WUTC acted on the Company's 1995 rate request. In
February 1995, the Company sought to increase revenues by raising rates for
basic residential services over a four-year period. The two major issues in
this proceeding involve the Company's requests for improved capital recovery
and elimination of the imputation of Yellow Pages revenue. Instead of granting
the Company's request, the Commission ordered approximately $91.5 in annual
revenue reductions, effective May 1, 1996. Based on the above ruling, the
Company filed a lawsuit with the King County Superior Court (the "Court") for
an appeal of the order, a temporary stay of the ordered rate reduction and an
authorization to implement a revenue increase.
On April 29, 1996, the Court stayed the rate decreases ordered by the WUTC.
The Court granted the stay pending a decision made on the Company's appeal.
Effective May 1, 1996, the Company began collecting revenues subject to refund
with interest. The Company expects its appeal to be successful and plans not
to accrue any of the amounts subject to refund. However, an adverse judgment
on the appeal would have a significant impact on the Company's future results
of operations. The Company expects the Court to rule on the appeal in
November 1996.
<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 (Continued)
Regulatory Environment
On August 8, 1996, the Federal Communications Commission ("FCC") established a
framework of detailed national rules that will enable the states and the FCC
to begin implementing the local competition provisions of the
Telecommunications Act of 1996. Included in the order are requirements that
local exchange carriers ("LECs"): a) provide interconnection to any
requesting telecommunications carrier at any technically feasible point, equal
in quality to that provided by the incumbent LEC; b) provide unrestricted
access to network services on an unbundled basis; c) provide physical
collocation of equipment necessary for interconnection at the incumbent LEC's
premises, unless physical collocation is not practical for technical reasons
or because of space limitations; and d) offer for resale any
telecommunications services that the LEC provides at retail to subscribers who
are not telecommunications carriers. The order also stipulates that
commercial mobile radio service operators ("CMRS") are entitled to reciprocal
compensation arrangements and that a LEC may not charge a CMRS provider for
terminating LEC-originated traffic. The FCC's order continues to provide for
access charge recovery by LECs from interexchange carriers until it further
evaluates the issues of access charge reform and universal service.
The FCC order also established rigid costing and pricing rules which, from the
Company's perspective, significantly impede negotiations with new entrants,
State Public Utility Commission ("PUC") interconnection rulemakings, and
interconnection arbitrations. U S WEST appealed the FCC order and sought a
stay of portions of the order, including certain pricing provisions, pending
appellate review. On October 15, 1996, the Eighth Circuit Court of Appeals
("Eighth Circuit") issued its order granting a stay of all the pricing
provisions of the FCC order. The stay does not postpone implementation of the
Telecommunications Act of 1996. Rather the effect of the stay is to have
interconnection and network unbundled element pricing be resolved through
negotiations or state PUC arbitrations without the PUCs being limited in their
consideration of relevant costs.
Subsequently, the FCC and certain interexchange carriers requested the United
States Supreme Court ("Supreme Court") to review and vacate the Eighth Circuit
stay. On October 31, 1996, the Supreme Court denied these requests.
Thereafter, the FCC and certain interexchange carriers petitioned the Supreme
Court for further consideration of vacating the stay. On November 12, 1996,
the Supreme Court rejected these further petitions. Thus, the Eighth Circuit
stay will remain in effect until modified by that court or until the appeal is
resolved. A decision on the appeal is expected by May 1997. The order's
impact on the Company's future results is unknown.
<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 (Continued)
Other Items
During October 1996, the Company's credit ratings were lowered in connection
with the regulatory uncertainty surrounding the WUTC's $91.5 rate reduction
order (See "Contingencies") and U S WEST's planned merger with Continental
Cablevision, Inc. Duff & Phelps lowered the senior unsecured debt rating to
AA-minus and reaffirmed the D-1-plus commercial paper rating. Fitch lowered
the senior unsecured debt rating to A-plus and the commercial paper rating to
F-1.
The Company and the other regional Bell operating companies ("RBOCs") continue
to explore the disposal of their interests in Bell Communications Research
Inc. ("Bellcore"), one-seventh of which is owned by the Company. The majority
of the Company's research and development activities are currently conducted
at Bellcore. Following such disposal, Bellcore and other third parties will
provide research and development and other services to the Company on a
contract basis.
Some of the information presented in or in connection with this report
constitutes "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Although the Company believes that
its expectations are based on reasonable assumptions within the bounds of its
knowledge of its business and operations, there can be no assurance that
actual results will not differ materially from its expectations. Factors that
could cause actual results to differ from expectations include: (i) greater
than anticipated competition from new entrants into the local exchange and
intralata toll markets, (ii) changes in demand for products and services,
including optional custom calling features, (iii) higher than anticipated
employee levels, capital expenditures, and operating expenses as a result of
unusually rapid in-region growth, (iv) the gain or loss of significant
customers, (v) pending regulatory actions in state jurisdictions and (vi)
regulatory changes affecting the telecommunications industry, including
changes that could have an impact on the competitive environment in the local
exchange market.
<PAGE>
Form 10-Q - Part I U S WEST Communications, Inc.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On April 11, 1996, the Washington State Utilities and Transportation
Commission ("WUTC" or the "Commission") acted on the Company's 1995 rate
request. In February 1995, the Company sought to increase revenues by raising
rates for basic residential services over a four-year period. The two major
issues in this proceeding involve the Company's requests for improved capital
recovery and elimination of the imputation of Yellow Pages revenue. Instead of
granting the Company's request, the Commission ordered approximately $91.5 in
annual revenue reductions, effective May 1, 1996. Based on the above ruling,
the Company filed a lawsuit with the King County Superior Court (the "Court")
for an appeal of the order, a temporary stay of the ordered rate reduction and
an authorization to implement a revenue increase.
On April 29, 1996, the Court stayed the rate decreases ordered by the WUTC.
The Court granted the stay pending a decision on the Company's appeal.
Effective May 1, 1996, the Company began collecting revenues subject to refund
with interest. The Company expects its appeal to be successful and plans not
to accrue any of the amounts subject to refund. However, an adverse judgment
on the appeal would have a significant impact on the Company's future results
of operations. The Company expects the Court to rule on the appeal in
November 1996.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
<S> <C>
Exhibit No.
- -----------
12 Statement regarding computation of earnings to fixed charges ratio of
U S WEST Communications, Inc.
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K Filed During the Third Quarter of 1996:
<TABLE>
<CAPTION>
<C> <S>
(i) No reports on Form 8-K were filed.
</TABLE>
<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/ ALLAN R. SPIES
U S WEST Communications, Inc.
Allan R. Spies
Vice President and Controller
November 13, 1996
<PAGE>
EXHIBIT 12
U S WEST Communications, Inc.
RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Millions)
<TABLE>
<CAPTION>
Quarter Ended
9/30/96 9/30/95
- ------------------------------------------------ --------- ---------
<S> <C> <C>
Income before income taxes, extraordinary
item and cumulative effect of change in
accounting principle $477 $478
Interest expense (net of amounts capitalized) 104 98
Interest factor on rentals (1/3) 12 13
--------- ---------
Earnings $593 $589
Interest expense 105 109
Interest factor on rentals (1/3) 12 13
--------- ---------
Fixed charges $117 $122
Ratio of earnings to fixed charges 5.07 4.83
- ------------------------------------------------ --------- ---------
<CAPTION>
Year-to-Date
9/30/96 9/30/95
- ------------------------------------------------ --------- ---------
<S> <C> <C>
Income before income taxes, extraordinary
item and cumulative effect of change in
accounting principle $1,500 $1,460
Interest expense (net of amounts capitalized) 308 284
Interest factor on rentals (1/3) 41 44
--------- ---------
Earnings $1,849 $1,788
Interest expense 337 314
Interest factor on rentals (1/3) 41 44
--------- ---------
Fixed charges $378 $358
Ratio of earnings to fixed charges 4.89 4.99
- ------------------------------------------------ --------- ---------
</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 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-END> SEP-30-1996 SEP-30-1996
<CASH> 94 94
<SECURITIES> 0 0
<RECEIVABLES> 1,533 1,533
<ALLOWANCES> 0 0
<INVENTORY> 124 124
<CURRENT-ASSETS> 2,024 2,024
<PP&E> 31,936 31,936
<DEPRECIATION> 18,204 18,204
<TOTAL-ASSETS> 16,515 16,515
<CURRENT-LIABILITIES> 3,510 3,510
<BONDS> 5,375 5,375
0 0
0 0
<COMMON> 7,603 7,603
<OTHER-SE> (3,617) (3,617)
<TOTAL-LIABILITY-AND-EQUITY> 16,515 16,515
<SALES> 2,456 7,304
<TOTAL-REVENUES> 2,456 7,304
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 1,867 5,522
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 104 308
<INCOME-PRETAX> 477 1,500
<INCOME-TAX> 183 574
<INCOME-CONTINUING> 294 926
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 34
<NET-INCOME> 294 960
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
