-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LMg2s9Rccm/wDx/bzpQeOqy8MhSkc6fATQnlfIodDMDNkIRyQwlxb+nVBkBqJAmp pMv8wRjf7c2C0VdDvJaXXw== 0000068622-96-000006.txt : 19961115 0000068622-96-000006.hdr.sgml : 19961115 ACCESSION NUMBER: 0000068622-96-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961113 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: U S WEST COMMUNICATIONS INC CENTRAL INDEX KEY: 0000068622 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 840273800 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03040 FILM NUMBER: 96661313 BUSINESS ADDRESS: STREET 1: 7800 EAST ORCHARD ROAD STREET 2: SUITE 480 CITY: ENGLEWOOD STATE: CO ZIP: 80111 BUSINESS PHONE: 3037936631 MAIL ADDRESS: STREET 1: 7800 EAST ORCHARD ROAD STREET 2: SUITE 480 CITY: ENGLEWOOD STATE: CO ZIP: 80111 FORMER COMPANY: FORMER CONFORMED NAME: MOUNTAIN STATES TELEPHONE & TELEGRAPH CO DATE OF NAME CHANGE: 19910109 10-Q 1 FORM 10-Q 3RD QTR 1996 ===================================================================== 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.
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. FORM 10-Q TABLE OF CONTENTS
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 PART II - OTHER INFORMATION 1. Legal Proceedings 18 6. Exhibits and Reports on Form 8-K 18
Form 10-Q - Part I U S WEST Communications, Inc. CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
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 =============== ================ =============== ================
See Notes to Consolidated Financial Statements. Form 10-Q - Part I U S WEST Communications, Inc. CONSOLIDATED BALANCE SHEETS (Unaudited)
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 ==================== ===================
Contingencies (See Note B to the Consolidated Financial Statements) See Notes to Consolidated Financial Statements. Form 10-Q - Part I U S WEST Communications, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
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 =================== ==================
See Notes to Consolidated Financial Statements. 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 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. 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:
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
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. 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:
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 ====== ====== ======== ========= ======== ======= =========== ==========
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. 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
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)
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. 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
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% -
The increase in the effective tax rate resulted primarily from higher income before income taxes and lower amortization of the investment tax credit. 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:
Restructuring Plan Costs Actual 1994 Actual 1995 Estimate 1996 Estimate 1997 Total - -------------------------------------- ------------ ------------ -------------- -------------- ------ Cash expenditures: Employee separation (1) $ 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 ============ ============ ============== ============== ====== (1) Employee separation costs, including the balance of the 1991 restructuring reserve at December 31, 1993, aggregate $339.
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. 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:
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 =========== =========== ============= ============= ====== Employee Separation Costs Actual 1994(1) 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 ==================== ============ ============== ============== ====== (1) Includes the remaining employees and the separation amounts associated with the balance of a 1991 restructuring reserve at December 31, 1993.
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:
Reserve Balance First Nine Months Change in Relocation/ Reserve Balance ------------------ ------------------- ----------------------- ------------------- December 31, 1995 1996 Activity Employee Separation September 30, 1996 ------------------ ------------------- ----------------------- ------------------- Amounts (1) ----------------------- 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 ================== =================== ======================= =================== (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.
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 =========== =========== ================= ==============
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. 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. 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. 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
Exhibit No. - ----------- 12 Statement regarding computation of earnings to fixed charges ratio of U S WEST Communications, Inc. 27 Financial Data Schedule
(b) Reports on Form 8-K Filed During the Third Quarter of 1996:
(i) No reports on Form 8-K were filed.
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 EX-12 2 EXHIBIT 12 EFC USWC EXHIBIT 12 U S WEST Communications, Inc. RATIO OF EARNINGS TO FIXED CHARGES (Dollars in Millions)
Quarter Ended 9/30/96 9/30/95 - ------------------------------------------------ --------- --------- 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 - ------------------------------------------------ --------- --------- Year-to-Date 9/30/96 9/30/95 - ------------------------------------------------ --------- --------- 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 - ------------------------------------------------ --------- ---------
EX-27 3 FDS 3RD QTR. 1996
5 0000068622 U S WEST COMMUNICATIONS, INC. 1,000,000 3-MOS 9-MOS DEC-31-1996 DEC-31-1996 SEP-30-1996 SEP-30-1996 94 94 0 0 1,533 1,533 0 0 124 124 2,024 2,024 31,936 31,936 18,204 18,204 16,515 16,515 3,510 3,510 5,375 5,375 0 0 0 0 7,603 7,603 (3,617) (3,617) 16,515 16,515 2,456 7,304 2,456 7,304 0 0 0 0 1,867 5,522 0 0 104 308 477 1,500 183 574 294 926 0 0 0 0 0 34 294 960 0 0 0 0
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