================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
- -------------------------------------------------------------------------------
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended SeptemberJune 30, 19992000
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
Qwest Corporation
(formerly U S WEST Communications, Inc.
A)
Colorado Corporation 84-0273800
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
incorporation
of organization)
1801 California Street, Denver, Colorado 80202
(Address of principal executive offices and zip code)
Telephone Number (303) 672-2700
-----------992-1400
(Registrant's telephone number, including area code)
___________
THE REGISTRANT, A WHOLLY-OWNED SUBSIDIARY OF U S WEST, INC.Qwest Communications
International Inc., MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION
H(1) (a) AND (b) 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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U S WEST Communications, Inc.===============================================================================
Qwest Corporation
Form 10-Q
TABLE OF CONTENTS
Item Page
PART I - FINANCIAL INFORMATION
1. Financial Statements
Condensed Consolidated Statements of Income -
Three months and ninesix months ended SeptemberJune 30, 19992000 and 1998.................1999..... 3
Condensed Consolidated Balance Sheets -
SeptemberJune 30, 19992000 and December 31, 1998......................................1999.................. 4
Condensed Consolidated Statements of Cash Flows -
NineSix months ended SeptemberJune 30, 19992000 and 1998.................................1999.............. 5
Notes to Condensed Consolidated Financial Statements............................................Statements......... 6
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................................... 11Operations........................... 10
3. Quantitative and Qualitative Disclosures
About Market Risk...................................................................... 18
Risk............................................. 15
PART II - OTHER INFORMATION
1. Legal Proceedings............................................................................. 25
2. Changes in Securities and Use of Proceeds..................................................... 25Proceedings.................................................... 18
6. Exhibits and Reports on Form 8-K.............................................................. 258-K..................................... 18
Signature Page....................................................... 23
U S WEST Communications, Inc.
CONSOLIDATED STATEMENTS OF INCOMEQwest Corporation
Condensed Consolidated Statements of Operations
(dollars in millions)
(unaudited)
Three Months NineEnded Six Months Ended
SeptemberJune 30, Ended SeptemberJune 30,
1999 1998 1999 1998
2000 1999 2000 1999
----- ----- ----- -----
Revenues:
Local services....................................... $2,074 $1,930 $4,119 $3,802
Access services...................................... 735 685 1,445 1,356
Long-distance services............................... 96 150 202 321
Other services....................................... 117 77 207 151
----------- ------------ ------------ -----------
Total revenues.................................... 3,022 2,842 5,973 5,630
----------- ------------ ------------ -----------
Operating revenues:
Local services.......................................... $1,979 $1,805 $5,779 $5,291
Access services......................................... 688 660 2,057 1,996
Long-distance services.................................. 138 199 459 595expenses:
Employee-related expenses............................ 803 892 1,601 1,785
Other services.......................................... 110 75 262 221
-------------operating expenses............................. 736 650 1,513 1,274
Depreciation and amortization........................ 577 557 1,141 1,142
Merger-related expenses.............................. 116 - 120 -
----------- ------------ ------------------------- ------------
Total operating revenues............................. 2,915 2,739 8,557 8,103
-------------expenses.......................... 2,232 2,099 4,375 4,201
----------- ------------ ------------- ------------ ------------- ------------ ------------- -----------------------
Operating expenses:
Employee-related expenses............................... 935 868 2,719 2,550
Other operating expenses................................ 636 625 1,923 1,969
Depreciation and amortization........................... 571 544 1,713 1,580
------------- ------------ ------------- ------------
Total operating expenses............................. 2,142 2,037 6,355 6,099
------------- ------------ ------------- ------------
Operating income.............................................. 773 702 2,202 2,004
------------- ------------ ------------- ------------
------------- ------------ ------------- ------------income........................................... 790 743 1,598 1,429
Other expense:
Interest expense........................................ 102 103 289 288expense..................................... 125 98 244 187
Other expense-net....................................... 9 20 33 76
-------------- ------------- -------------- -------------expense-net.................................... 13 12 19 24
----------- ------------ ------------ -----------
Total other expense-net.............................. 111 123 322 364
-------------- ------------- -------------- -------------
Incomeexpense-net........................... 138 110 263 211
----------- ------------ ------------ -----------
Earnings before income taxes.................................... 662 579 1,880 1,640taxes............................... 652 633 1,335 1,218
Provision for income taxes.................................... 251 219 713 630
-------------- ------------- -------------- -------------taxes................................. 247 246 505 462
----------- ------------ ------------ -----------
Net income.................................................... $411 $360 $1,167 $1,010
============== ============= ============== =============earnings............................................... $ 405 $ 387 $ 830 $ 756
=========== ============ ============ ===========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
U S WEST Communications, Inc.
CONSOLIDATED BALANCE SHEETS3
Qwest Corporation
Condensed Consolidated Balance Sheets
(dollars in millions)
(unaudited)
September
June 30, December 31,
2000 1999
1998
---- ----
(unaudited)--------- ---------
ASSETS
Current assets:
Cash and cash equivalents....................................................... $66 $68equivalents................................................ $ 241 $ 61
Accounts receivable, less allowance for uncollectibles of
$51 and $48, respectively....................................................... 1,703 1,619receivable-net.................................................. 1,902 1,811
Inventories and supplies........................................................ 187 154
Deferred tax assets............................................................. 121 113supplies................................................. 210 211
Prepaid and other............................................................... 98 61
---------------- -------------other........................................................ 308 249
---------- ---------
Total current assets.................................................................. 2,175 2,015assets........................................................... 2,661 2,332
Property, plant and equipment-net..................................................... 15,423 14,681equipment-net.............................................. 17,228 16,049
Other assets-net...................................................................... 1,303 882
---------------- -------------assets-net............................................................... 1,729 1,597
---------- ---------
Total assets.......................................................................... $18,901 $17,578
================ =============assets................................................................... $ 21,618 $ 19,978
========== =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Short-term debt................................................................. $1,767 $789debt.......................................................... $ 2,328 $ 1,684
Accounts payable................................................................ 1,489 1,411payable......................................................... 1,694 1,721
Accrued expenses................................................................ 1,677 1,383expenses and other current liabilities........................... 1,634 1,560
Advance billings and customer deposits.......................................... 341 326
---------------- -------------deposits................................... 384 343
---------- ----------
Total current liabilities............................................................. 5,274 3,909liabilities...................................................... 6,040 5,308
Long-term debt........................................................................ 4,976 5,154debt................................................................. 6,443 5,408
Postretirement and other postemployment benefit obligations........................... 2,426 2,458obligations.................... 2,382 2,462
Deferred income taxes................................................................. 1,045 898
Unamortized investment tax credits.................................................... 158 159taxes.......................................................... 1,474 1,331
Deferred credits and other............................................................ 558 537other..................................................... 772 749
Commitments and Contingenciescontingencies
Stockholder's equity:
Common stock-one share without par value, owned by parent....................... 8,081 8,080parent................ 8,139 8,140
Cumulative deficit..............................................................deficit....................................................... (3,632) (3,617)
(3,617)
---------------- -------------Accumulated other comprehensive income................................... - 197
---------- ----------
Total stockholder's equity............................................................ 4,464 4,463
---------------- -------------equity..................................................... 4,507 4,720
---------- ----------
Total liabilities and stockholder's equity............................................ $18,901 $17,578
================ =============equity..................................... $ 21,618 $ 19,978
========== ==========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
U S WEST Communications, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS4
Qwest Corporation
Condensed Consolidated Statements of Cash Flows
(dollars in millions)
(unaudited)
Nine
Six Months Ended
September 30,
1999 1998
---- ----June 30,
OPERATING ACTIVITIES
Net income................................................................................ $1,167 $1,010
Adjustments to net income:
Depreciation and amortization....................................................... 1,713 1,580
Deferred income taxes and amortization of investment tax credits.................... 134 90
Changes in operating assets and liabilities:
Accounts receivable................................................................. (84) (38)
Inventories, supplies and other current assets...................................... (58) (19)
Accounts payable, accrued expenses and advance billings............................. 294 16
Other............................................................................... (160) 43
-------------- --------------
2000 1999
-------- ---------
Cash provided by operating activities............................................... 3,006 2,682
-------------- --------------activities....................................... $ 2,026 $ 2,048
--------- ---------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment......................................... (2,590) (1,880)equipment............................... (2,588) (1,627)
Payments on disposals of property, plant and equipment................................. (30) (14)
Other.................................................................................. - (24)
-------------- --------------equipment....................... (35) (18)
--------- ---------
Cash used for investing activities..................................................... (2,620) (1,918)
-------------- --------------activities........................................... (2,623) (1,645)
--------- ---------
FINANCING ACTIVITIES
Net proceeds from short-term debt...................................................... 986 457debt............................................ 876 555
Proceeds from issuance of long-term debt...............................................debt..................................... 992 17 -
Repayments of long-term debt........................................................... (307) (411)debt................................................. (270) (280)
Dividends paid on common stock......................................................... (1,084) (842)
Equity infusions from U S WEST......................................................... - 63
-------------- --------------stock............................................... (821) (697)
--------- ---------
Cash used forprovided by (used for) financing activities..................................................... (388) (733)
-------------- --------------activities............................. 777 (405)
--------- ---------
CASH AND CASH EQUIVALENTS
Increase (decrease).............................................................................................................................. 180 (2)
31
Beginning balance......................................................................balance............................................................ 61 68
26
-------------- ----------------------- ---------
Ending balance......................................................................... $66 $57
============== ==============balance............................................................... $ 241 $ 66
========= =========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
U S WEST Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine5
Qwest Corporation
Notes to Condensed Consolidated Financial Statements
Three and six months ended SeptemberJune 30, 19992000
(dollars in millions)
(unaudited)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation.BASIS OF PRESENTATION. The condensed consolidated financial statements
include the accounts of Qwest Corporation (the "Company", formerly U S WEST
Communications, Inc. (the "Company") and its wholly owned subsidiaries. We are a wholly owned subsidiaryOn June 30, 2000, Qwest
Communications International Inc. ("Qwest") completed its acquisition (the
"Merger") of our parent company, U S WEST, Inc. ("U S WEST"). Each outstanding
share of U S WEST common stock was converted into the right to receive 1.72932
shares of Qwest common stock (and cash in lieu of fractional shares), resulting
in the issuance of approximately 882 million Qwest shares. In addition, all
outstanding U S WEST stock options were converted into options to acquire Qwest
common stock. The total value of the consideration was approximately
$40 billion. We are a wholly owned subsidiary of Qwest.
The condensed consolidated interim financial statements are unaudited. We
prepared the financial statements in accordance with the instructions for Form
10-Q and, therefore, did not include all information and footnotes required by
generally accepted accounting principles. In our opinion, we made all the
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly our consolidated results of operations, financial position and
cash flows as of SeptemberJune 30, 19992000 and for all periods presented. The
statements are subject to year-end audit adjustment. A description of
our accounting policies and other financial information areis included in the
audited consolidated financial statements filed with the Securities and Exchange
Commission in ourthe U S WEST Communications, Inc. Form 10-K/A10-K for the year ended
December 31, 1998.1999. The condensed consolidated results of operations for the three and ninesix
months ended SeptemberJune 30, 19992000 are not necessarily indicative of the results
expected for the full year.
We reclassified prior period revenue amounts to conform to the current year
presentation. For a description of the reclassifications, see U S WEST's Form
8-K filed April 21, 1999.
On January 1, 1999, we adopted the accounting provisions required by the
American Institute of Certified Public Accountants' Statement of Position
("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." SOP 98-1, among other things, requires that certain
costs of internal use software, whether purchased or developed internally, be
capitalized and amortized over the estimated useful life of the software.
Adoption of the SOP resulted in an increase in net income for the three months
ended September 30, 1999 of $40 and $124 for the nine months ended September 30,
1999.
NOTE 2: SEGMENT INFORMATION
We operate in three segments: retail, services, wholesale services and network services. The
retail services segment provides local telephone services, including wireless
services, data services and long-distance services. The wholesale services
segment provides exchange access services that connect customers to the
facilities of interexchange carriers and interconnection to our
telecommunications network to competitive local exchange carriers. Our network
services segment provides access to our telecommunications network, including
our information technologies, primarily to our retail services and wholesale
services segments. We provide our services to more than 25 million residential
and business customers in Arizona, Colorado, Idaho, Iowa, Minnesota,
6
Montana, Nebraska, New Mexico, North Dakota, Oregon, South Dakota, Utah,
Washington and Wyoming.
Following is a breakout of our segments, which has been extracted from the
financial statements of U S WEST.Qwest. Separate segment data is not provided to our
chief operating decision-maker for the Company. Certain revenues and expenses of
U S WESTQwest are included in the segment data, which have been eliminated in the
reconciling items column. Additionally, because significant operating expenses
of the retail services and wholesale services segments are not allocated to the segments
for decision-making purposes, management does not believe the segment margins
are representative of the actual operating results of the segments. The margin
for the retail services and wholesale services segments excludes network and corporate
expenses. The margin for the network services segment excludes corporate
expense. The "other" category includes our corporate expenses and intersegment
eliminations. Asset information by segment is not provided to our chief
operating decision-maker.
The total communications and related services
column represents a total of the retail services, wholesale services and network
services segments.
Total
Communications
and
Retail Wholesale Network Related Reconciling Consolidated
(in millions) Services Services Services Services Other Items Total
-------- -------- -------- -------- ----- ----- -----
----------- ------------
Three Months Ended
SeptemberJune 30,
2000
Revenues......... $ 2,410 $ 818 $ 68 $ 3,296 $ - $ (274) $ 3,022
Margin........... 1,510 578 (672) 1,416 (213) (551) (1) 652
Capital
expenditures.. 175(2) 58(2) 1,164 1,397 - (38) 1,359
1999
----
Operating
revenues......... $2,270 $725 $63 $3,058 $- ($143) $2,915Revenues......... $ 2,222 $ 719 $ 65 $ 3,006 $ - $ (164) $ 2,842
Margin........... 1,560 5491,543 526 (699) 1,410 (34) (714)1,370 (3) (734) (1) 662633
Capital
expenditures..... 144(2) 25 877 $1,046 (5) (26) 1,015
1998
----
Operating
revenues......... $2,157 $643 $51 $2,851 $- ($112) 2,739
Margin........... 1,554 464 (726) 1,292 (11) (702) (1) 579
Capital
expenditures..... 49(2) - 507 556 27 (10) 573expenditures.. 93(2) 9(2) 831 933 38 (74) 897
- --------------------____________________
(1) Adjustments made to arrive at consolidated income before income taxes
include the following:
Three Months Ended SeptemberJune 30,
------------------------------------------
1999 1998
------------------- -------------------
2000 1999
------------------- -------------------
Taxes other than income taxes................................... $99 $79$ 95 $ 104
Depreciation and amortization................................... 571 544577 557
Interest expense................................................ 102 103125 98
Other amounts applicable to U S WEST, Inc....................... (67) (44)Qwest............................... (259) (37)
Other expense-net............................................... 9 2013 12
------------------- -------------------
$714 $702$ 551 $ 734
=================== ===================
(2) Capital expenditures reported for the retail services segment include only
expenditures for wireless services and certain data services. Additional capital expenditures relating to thosethese services are included
in network services capital expenditures.
7
Total
Communications
and
Retail Wholesale Network Related Reconciling Consolidated
(in millions) Services Services Services Services Other Items Total
-------- -------- -------- -------- ----- ----- -----
Nine----------- ------------
Six Months Ended
SeptemberJune 30,
2000
Revenues......... $ 4,734 $ 1,565 $ 142 $ 6,441 $ - $ (468) $ 5,973
Margin........... 2,978 1,160 (1,333) 2,805 $(188) (1,282)(1) 1,335
Capital
expenditures.. 329(2) 82(2) 2,214 2,625 - (37) 2,588
1999
----
Operating
revenues......... $6,660 $2,134 $178 $8,972 $- ($415) $8,557Revenues......... $ 4,390 $ 1,409 $ 115 $ 5,914 $ - $ (284) $ 5,630
Margin........... 4,607 1,604 (2,083) 4,128 (70) (2,178)3,047 1,055 (1,384) 2,718 (36) (1,464) (1) 1,8801,218
Capital
expenditures..... 348(2) 65 2,346 2,759 33 (64) 2,728
1998
Operating
revenues......... $6,337 $1,916 $150 $8,403 $- ($300) $8,103
Margin........... 4,662 1,423 (2,031) 4,054 (199) (2,215) (1) 1,640
Capital
expenditures..... 286(2) - 1,539 1,825 68 (30) 1,863expenditures.. 204(2) 40(2) 1,469 1,713 38 (124) 1,627
- --------------------____________________
(1) Adjustments made to arrive at consolidated income before income taxes
include the following:
NineSix Months Ended SeptemberJune 30,
------------------------------------------
1999 1998
------------------- -------------------
Restructuring costs............................................. $- $129
2000 1999
------------------- -------------------
Taxes other than income taxes................................... 289 262$ 201 $ 190
Depreciation and amortization................................... 1,713 1,5801,141 1,142
Interest expense................................................ 289 288244 187
Other amounts applicable to U S WEST, Inc....................... (146) (120)Qwest............................... (323) (79)
Other expense-net............................................... 33 7619 24
------------------- -------------------
$2,178 $2,215$ 1,282 $ 1,464
=================== ===================
(2) Capital expenditures reported for the retail services segment include only
expenditures for wireless services and certain data services. Additional capital expenditures relating to thosethese services are included
in network services capital expenditures.
In addition to the operating revenues disclosed above, intersegment operating revenues of the retail services and network services segment were:
Three Months Ended SeptemberJune 30, NineSix Months Ended SeptemberJune 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
---- ---- ---- ------------------------------- ------------------------
2000 1999 2000 1999
----- ----- ----- -----
Retail services................................ $13 $7 $34 $22services............................. $ 30 $ 8 $ 54 $ 14
Wholesale services............................ 28 12 47 19
Network services............................... 15 16 46 48services.............................. 11 17 27 31
NOTE 3: COMMITMENTS AND CONTINGENCIES
Commitments
We have entered into an agreement with Olympic Properties of the United
States to sponsor the 2002 Salt Lake City Winter Olympics and the U.S. Olympic
Teams through 2004. As of September 30, 1999, we have a remaining commitment of
$49 to be paid in a combination of cash and services through 2004.
Contingencies
OnCONTINGENCIES
In May 1, 1996, the Oregon Public Utilities Commission ("OPUC") approved a
stipulation terminating prematurely our alternative form of regulation ("AFOR")
plan and it then undertook a
8
review of our earnings. In May 1997, the OPUC ordered us to reduce our annual
revenues by $97 million, effective May 1, 1997, and to issue a one-time refund,
including interest, of approximately $102 million to reflect the revenue
reduction for the period May 1, 1996 through April 30, 1997. This
one-time refund for interim rates became subject to refund when our AFOR plan
was terminated on May 1, 1996.
We filed an appeal of the order and asked for an immediate stay of the
refund with the Oregon Circuit Court which granted our request, for a stay,
pending a full
review of the OPUC's order. OnIn February 19, 1998, the Oregon Circuit Court entered a
judgment in our favor on most of the appealed issues. The OPUC appealed to the
Oregon Court of Appeals onin March 19, 1998, and the appeal remains pending. We
continue to charge interim rates, subject to refund, during the pendency of that
appeal.
OnIn September 9, 1999, we reachedthe Company and OPUC staff entered into a tentative
settlement agreement with the
OPUC staff whereby we would refund approximately $230$270 million to
current and provide ongoing rate
reductionsformer Oregon customers of $63. The agreement is subject to public hearingthe Company and issue temporary bill
credits of $63 million annually until the OPUC sets final rates. In April 2000,
the OPUC approval.announced its acceptance of the settlement agreement. We have reserved
for the proposed refund.
Other Contingencies. On October 1, 1999, a Fifth Amended Class Action Complaint
was filedrefunds.
We have pending regulatory actions in the District Court, Larimer County, Colorado, againstlocal regulatory jurisdictions which
call for price decreases, refunds or both. These actions are generally routine
and incidental to our business. We will continue to monitor and evaluate risks
associated with our local regulatory jurisdictions.
OTHER CONTINGENCIES. Through July 2000, U S WEST and usthe Company have been
served with four class action complaints purportedly on behalf of 220,000over 300,000
customers in the Statestates of Colorado.Colorado, Arizona, Oregon and New Mexico. The
complaint allegescomplaints allege, inter alia, that from 1993 to the present, we and U S WEST, in
violation of alleged statutory and common law obligations, willfully delayed the
provision of local telephone service to the purported class members. In
addition, the complaints allege that U S WEST misrepresented the date on which
such local telephone service was to be provided to the purported class members.
The complaint seekscomplaints seek compensatory damages for purported class members,
disgorgement of profits and punitive damages. The CompanyManagement believes that we have
substantial defenses to the claims asserted and U S WEST intendintends to vigorously defend
this
action.
The New Mexico Public Regulation Commission is expected shortlyagainst these actions.
We and our parent, Qwest, have been named as a defendant in various other
litigation matters. Management intends to rule on
a petition by its Staff to require us to reduce revenues on an interim basis by
$29. Rates are interim pending the completion of a full rate case during 2000.
We are subject to other legal proceedingsvigorously defend against these
outstanding claims. Management believes it has adequate accrued loss
contingencies and claims that, arise in the
ordinary course of business. Although there can be no assurance ofalthough the ultimate dispositionoutcome of these matters, it is management's opinion, based upon the
information availableclaims cannot be
ascertained at this time, that thecurrent pending or threatened litigation matters are
not expected outcome, individually or
in the aggregate, will notto have a material adverse effectimpact on our condensed consolidated
results of operations or financial position.
NOTE 4: SALE OF EXCHANGES
In June 1999, we entered into a series of definitive agreements to sell
local-exchange telephone properties serving approximately 530,000 access lines
in nine states for approximately $1,650 in cash, subject to adjustment. Approval
of the sale is subject to review by federal and state regulatory agencies. The
transfer of ownership, which will occur on a state-by-state basis, is expected
to be completed over the next two years.9
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (dollars in millions)
Special Note Regarding Forward-Looking Statements
SomeSPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q contains financial projections, synergy estimates and other
"forward-looking statements" as that term is used in federal securities laws
about Qwest Corporation's (the "Company") financial condition, results of
operations and business. These statements include, among others:
- statements concerning the information presentedbenefits that we expect will result from
our business activities and certain transactions we have completed,
such as increased revenues, decreased expenses and avoided expenses
and expenditures; and
- statements of our expectations, beliefs, future plans and strategies,
anticipated developments and other matters that are not historical
facts.
These statements may be made expressly in this Form 10-Q constitutes
"forward-looking statements" within the meaning10-Q. You can find many
of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"). Although U S WEST
Communications, Inc. (the "Company,these statements by looking for words such as "believes," which"expects,"
"anticipates," "estimates," or similar expressions used in this Form 10-Q.
These forward-looking statements are subject to numerous assumptions, risks
and uncertainties that may also be referred to as "we," "us"
or "our") believes that its expectations are based on reasonable assumptions
within the bounds of its knowledge of its businesses and operations, there can
be no assurance that actual results will not differ materially fromcause our
expectations. Factors that could cause actual results to differbe materially different
from expectations include:
o greater than anticipatedany future results expressed or implied by us in those statements.
The most important facts that could prevent us from achieving our stated
goals include, but are not limited to, the following:
- potential fluctuation in our quarterly results;
- volatility of Qwest's stock price;
- intense competition from new entrants intoin the local
exchange, intraLATA (local access transport area) toll, wireless and data
markets, causing loss of customers and increased price competition;
ocommunications services market;
- changes in demand for our products and services, including optional custom
calling features;
o higher than anticipated employee levels, capital expendituresservices;
- dependence on new product development and operating
expenses (such as costs associated with interconnection and Year 2000
remediation);
o the loss of significant customers;
o pending and future state and federal regulatory changes affecting the
telecommunications industry, including changes that could have an impact on
the competitive environment and service pricing in the local exchange
market;
o acceleration of the deploymentde-
ployment of advanced new services, to customers, such as broadband data, wireless
and video services, which wouldcould require substantial expenditure of
financial and other resources o a change in economic conditionsexcess of contemplated levels;
- rapid and significant changes in technology and markets;
- adverse changes in the various markets served by our
operations;
o higher than anticipated start-up costs associated with newregulatory or legislative environment affect-
ing Qwest's business opportunities;
oand delays in ourQwest's ability to begin offering interLATA long-distance services;
o consumer acceptance of broadbandlong-
distance services including telephony, data, videobetween local access and wireless services;
o delaystransport areas ("LATAs")
in the development14 state U S WEST, Inc. ("U S WEST") region;
- failure to maintain necessary rights of anticipated technologies, orway; and
- failure to achieve the failure of
such technologiesprojected synergies and financial results
expected to perform according to expectations; and
oresult from the timing and completionacquisition of U S WEST'S recently announced merger withWEST timely or at all
and difficulties in combining the operations of Qwest Communications International Inc. ("Qwest") and U S WEST.
10
Because the subsequent
integration of the businesses of the two companies.
These cautionary statements should not be construed as an exhaustive list
or as any admission by us regarding the adequacy of the disclosures. We cannot
always predict or determine after the fact what factors would causeare subject to risks and uncertainties, actual
results tomay differ materially from those indicatedexpressed or implied by ourthe
forward-looking statements. We caution you not to place undue reliance on the
statements, which speak only as of the date of this Form 10-Q.
The cautionary statements contained or referred to in this section should
be considered in connection with any subsequent written or oral forward-looking
statements that we or other statements. In addition, consider statements that include
the terms "believes," "belief," "expects," "plans," "objectives," "anticipates,"
"intends," or the like to be uncertain and forward-looking. All cautionary
statements should be read as being applicable to all forward-looking statements
wherever they appear.persons acting on our behalf may issue. We do not
undertake any obligation to review or confirm analysts' expectations or
estimates or to release publicly update or reviseany revisions to any forward-looking statements
whether as a result of new information, futureto reflect events or otherwise. In lightcircumstances after the date of these risks, uncertainties and assumptions,this Form 10-Q or to
reflect the forward-looking events discussed herein might not occur.
Resultsoccurrence of Operationsunanticipated events.
RESULTS OF OPERATIONS
Three and NineSix Months Ended SeptemberJune 30, 19992000 Compared with 1998
Net income for the quarter ended September 30, 1999
increased by $51, or
14.2% to $411 compared to net income of $360 for the quarter ended September 30,
1998. Net income for the nine months ended September 30, 1999, increased $157 or
15.5% to $1,167, compared to net income of $1,010 for the nine months ended
September 30, 1998. We experienced a 6.4% and 5.6% increase in revenues for the
three and nine months ended September 30, 1999, respectively, over the
comparable 1998 periods. These increases were partially offset by increases in
expenses to support our growth initiatives, enhanced customer service and
greater network costs.
The following sections provide a more detailed discussion of the changes in
revenues and expenses.
Operating RevenuesREVENUES (in millions)
Three Months NineIncrease/ Six Months Increase/
Ended SeptemberJune 30, Decrease) Ended SeptemberJune 30, 1999 1998 Increase 1999 1998 Increase(Decrease)
------------------- --------------- --------------------- ---------------
2000 1999 2000 1999
------ ------ ------ ------
Local services....... $ 2,074 $ 1,915 $ 159 8.3% $ 4,119 $ 3,786 $ 333 8.8%
Access services revenues........ $1,979 $1,805 $174 9.6% $5,779 $5,291 $488 9.2%..... 735 700 35 5.0 1,445 1,372 73 5.3
Long-distance
services ......... 96 150 (54) (36.0) 202 321 (119) (37.1)
Other services ...... 117 77 40 51.9 207 151 56 37.1
Local services revenues.LOCAL SERVICES. Local services revenues include retail and wholesale basic
monthly service fees, fees for calling services such as voice messaging and
caller identification, wireless revenues, subscriber access line charges ("SLCs"),
MegaBit(TM) data services, local number portability ("LNP") charges, public
phone revenues, interconnection, paging and installation and connection charges.
State public serviceutility commissions ("PUCs") regulate most local service rates.
Local services revenues increased primarily due to greater sales of
wireless and calling services. Wireless services accounted for $44 and $116 of
the revenue increases for the three and nine months ended September 30, 1999,
respectively. Revenues from calling services increased $30Revenue growth for the quarter ended SeptemberJune 30, 19992000 was primarily
attributable to greater wireless sales ($63 million), increased demand for basic
telephone services ($49 million) and $96increased sales of calling services ($16
million). Revenue growth for the ninesix months ended SeptemberJune 30, 1999, over
comparable 1998 periods. Additionally, access line growth contributed2000 was primarily
attributable to the
rise in revenues. Second line additions by residential and small business
customers contributed to access line growth due to continuinggreater wireless sales ($129 million), increased demand for
Internet accessbasic telephone services ($74 million) and data transport capabilities. Asincreased sales of the end of the third
quarter of 1999, we had added 504,000 access lines, an increase of 3.1% over the
end of the third quarter of 1998. Of this increase, residential second line
installations accounted for 240,000 lines, an increase of 16.0% compared with
the end of the third quarter of 1998.calling services
($39 million). Also contributing to the revenue growth were greater revenues from
inside wire maintenance plans, LNP charges,
interconnection, revenues and increases in the subscriber base of our Megabit(TM)MegaBit (TM) data
services. Partially offsettingservices, paging services and LNP charges. Offsetting these increases in revenue
were net regulatory rate adjustmentschanges and refundsaccruals for regulatory proceedings of
$2$36 million and $17 million for the three and six months ended SeptemberJune 30, 1999 and
$21 for the nine months ended September 30, 1999, over the comparable 1998
periods.
While local services revenues increased in 1999, the growth rate has
declined from 1998. The decline in the growth rate was primarily attributable to
increased competition as well as our customer retention strategy of offering
bundles of services to customers at lower prices in return for entering into
longer-term contracts. Additionally, some business customers have opted to
migrate from multiple single lines to high capacity lines, which decreases local
services revenues but increases access services revenues. We believe we may
continue to experience declining growth rates as the level of customer demand
slows and competition increases. In June 1999, we entered into a series of
definitive agreements to sell 530,000 access lines in nine states for $1,650 in
cash, subject to adjustment. The access lines accounted for 3.8% of fiscal 1998
local services revenues. While the sale is expected to provide us with a
one-time gain, it will negatively impact future local services revenue growth.
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1998 Increase 1999 1998 Increase
Access services revenues........ $688 $660 $28 4.2% $2,057 $1,996 $61 3.1%
Access services revenues.2000,
respectively.
11
ACCESS SERVICES. Access services revenues are derived primarily from
charging interexchange carriers ("IXCs"), such as AT&T and MCI WorldCom, for use of
our local network to connect customers to their long-distance networks. Also
included in access services revenues are special access and private line
revenues from end-users buying dedicated local exchange capacity to support
their private networks.
The growth in access services revenues was attributable to increasedIncreased demand for private line and special access services, which increased $48as well as
demand from IXCs resulted in increases of $78 million and $153 million for the
quarter ended September 30, 1999 and $134 for the ninesix months ended SeptemberJune 30, 1999
over the comparable 1998 periods. Additionally, demand from interexchange
carriers contributed to the revenue increase.2000, respectively. Access minutes of use
increased 5.3%2.7% and 5.2%, respectively,3.7% for the three and ninesix months ended SeptemberJune 30, 1999. The growth in access minutes of use was partially offset by2000.
Offsetting demand increases were FCC and state mandated rate reductions
of $52aggregating $29 million and $64 million for the threequarter and six months ended
SeptemberJune 30, 1999 and $113 for the
nine months ended September 30, 1999.
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1998 Decrease 1999 1998 Decrease
Long-distance services
revenues...................... $138 $199 ($61) (30.7%) $459 $595 ($136) (22.9%)
Long-distance services revenues.2000, respectively.
LONG-DISTANCE SERVICES. Long-distance services revenues are derived from
customer calls to locations outside of their local calling area but within the
same LATA. The decreasedecreases in long-distance services revenues for the three and
ninesix months ended SeptemberJune 30, 1999 was2000 were primarily attributable to greater competition,competi-
tion and strategic price reductions and the expansion in the number and
size of extended area services, resulting in revenue declines of $55a $48
million and $118,$105 million, respectively. Mandated rate reductions of $8$9 million
and $25$19 million for the three and ninesix months ended SeptemberJune 30, 1999, respectively,2000 also contributedcontribu-
ted to the revenue decreases. As of September 30, 1999, customers in the 14 states in which we
operate were able to choose an alternative provider for intraLATA calls without
dialing a special access code when placing a call.declines.
We believe we will continue to experience further declines in long-distance
services revenues as regulatory actions provide for increased levels of
competition. We are responding to competition through competitive pricing of
intraLATA long-distance services and increased promotional efforts to retain
customers. See "Special Note Regarding Forward-Looking Statements" on page 11.
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1998 Increase 1999 1998 Increase
Other services revenues......... $110 $75 $35 46.7% $262 $221 $41 18.6%
Other services revenues.10.
OTHER SERVICES. Other services revenues include billing and collection
services for interexchangeIXCs, collocation services for other competitive local exchange
carriers ("CLECs") and sales of customer equipment. The increases for the three
and ninesix months ended SeptemberJune 30, 19992000 were primarily attributable to increased
billing and collection revenues.
Operating Expenses12
OPERATING EXPENSES (in millions)
Three Months NineIncrease/ Six Months Increase/
ended June 30, (Decrease) Ended SeptemberJune 30, Ended September 30,
1999 1998 Increase 1999 1998 Increase(Decrease)
------------------ -------------- -------------------- -------------
2000 1999 2000 1999
----- ----- ------ ------
Employee-related
expenses... $935 $868 $67 7.7% $2,719 $2,550 $169 6.6%expenses........... $ 803 $ 892 $ (89) (10.0)% $ 1,601 $ 1,785 $(184) (10.3)%
Other operating
expenses........... 736 650 86 13.2 1,513 1,274 239 18.7
Depreciation and
amortization....... 577 557 20 3.6 1,141 1,142 (1) (0.1)
Merger-related
expenses........... 116 - 116 100.0 120 - 120 100.0
Other expense-net..... 138 110 28 25.4 263 211 52 24.6
Employee-related expenses. Employee-related expenses include salaries and
wages, benefits, payroll taxes and contract labor.
Employee relatedEmployee-related expenses for 1998 include $16 ofdecreased primarily due to improvements in
benefit-related costs, relatedprimarily in our pension plan, mainly attributable to
the
third quarter 1998 work stoppage. Excluding these costs, employee-related
expenses increased 9.7% and 7.3%, respectively,favorable returns on pension plan assets. Pension credits were $72 million for
the three and ninesecond quarter of 2000 compared to $46 million for the second quarter of
1999. Pension credits were $141 million for the six months ended SeptemberJune 30, 1999. Employee-related2000
compared to $64 million for the comparable 1999 period. Partially offsetting the
decreases in expenses was increased because of
increased commitments towards improving customer service, including meeting
requests for installation, repair services and customer services, resulting in
higher labor costs. Additionally,employee levels related to growth in several
sectors of the business, primarily wireless communications,and data communications.
Additionally, increased commitments towards improving customer services,
including responding to requests for installation and repair services, resulted
in increased employee levels.higher labor costs. Across-the-board wage increases also contributed tooffset the increasedecreases
in employee-related expenses.
Partially offsetting these increases was the
capitalization in 1999 of employee-related expenses associated with developing
internal use software due to the adoption of the AICPA's Statement of Position
("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." In accordance with the SOP, $22 and $60 were
capitalized for the quarter and nine months ended September 30, 1999,
respectively. An increase in pension credits of $31 also offset the increase in
employee-related expenses for the nine months ended September 30, 1999.
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1998 Increase 1999 1998 Decrease
Other operating expenses........ $636 $625 $11 1.8% $1,923 $1,969 ($46) (2.3%)
Other operating expenses.OTHER OPERATING EXPENSES. Other operating expenses include access charges
paid to carriers for the routing of local and long-distance traffic through
their facilities, taxes other than income taxes, and other selling, general and
administrative costs. Included in the nine months ended September 30, 1998 were
$129 of separation costs associated with the split from MediaOne Group, Inc. and
asset impairment charges. Excluding these charges, other operating expenses
increased $83, or 4.5% for the nine months ended September 30, 1999. The increases in other operating expenses for the quarterthree
and ninesix months ended SeptemberJune 30, 1999,2000, were primarily attributable to the
following:
o increased costs of product sales associated with our growth initiatives,
including wireless handset costs,
o higher access charge expenses resulting from regulatory rulings that
require usincreased provision for uncollectibles, primarily attributable to pay access charges to carriers for calls that originate on
our network and terminate on other carriers' networks,
o higher property taxes,
o Year 2000 remediation costs,in-
creased wireless revenues; and
o higherincreased rent expense.
Offsetting the increases in other operating expense for the three and six
months ended June 30, 2000 was the reduction in access expense related to
increased computer hardware leasing and
increasesend-users dialing toll calls using IXCs.
13
A decrease in leasing costs associated with telephone poles.
In addition,property taxes due to adjustments related to 1999 property taxes
also partially offset the increase in other operating expenses for the ninethree
months ended SeptemberJune 30, 1999, was also due to higher marketing2000.
DEPRECIATION AND AMORTIZATION EXPENSE. The increase in depreciation and
advertising costs
for wireless communications services and calling services such as caller
identification.
Offsetting the increases in other operating expenses were the effects of
capitalizing $59 and $184amortization expense for the quarter and nine months ended SeptemberJune 30, 1999, respectively, of costs associated with developing internal use software in
accordance with SOP 98-1.
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1998 Increase 1999 1998 Increase
Depreciation and
amortization expense........ $571 $544 $27 5.0% $1,713 $1,580 $133 8.4%
Depreciation and amortization expense. Depreciation and amortization expense
increased2000, was primarily
dueattributable to higher overall property, plant and equipment balances resulting
from our continued investment in our network. Additionally,The decline in depreciation and
amortization expense for the useful
lives of certain assets were reduced, reflecting changes in technology, causing
greater depreciation expense. Partially offsetting the increasessix months ended June 30, 2000 was attributable to
the cessation of depreciation, beginning in April 1999, associated with the 530,000 access
lines that are
under definitive sales agreements entered intowere approved to be sold in 1999.
MERGER-RELATED EXPENSES. In connection with the Merger, we incurred several
one-time charges that were primarily employee-related. Included in the second quartercharges
were severance and benefit payments to employees who left the Company upon
consummation of 1999.the Merger. Additionally, retention bonus payments were made
that were subject to consummation of the Merger. We anticipate additional
merger-related expenses, including additional severance and retention bonuses,
contract terminations and asset impairment charges will be recognized in future
quarters. See "Special Note Regarding Forward-Looking Statements" on page 10.
OTHER EXPENSE-NET. Interest expense increased $27 million and $57 million
for the three and six months ended June 30, 2000, respectively, over the
comparable 1999 periods. The increases were due to higher average debt balances
to fund growth initiatives.
SEGMENT RESULTS. Segment results represent margins which, for segment
reporting purposes, exclude certain costs and expenses, including depreciation
and amortization. See Note 2 to the consolidated financial statements.
Three Months NineIncrease Six Months Increase
Ended SeptemberJune 30, (Decrease) Ended SeptemberJune 30, 1999 1998 Decrease 1999 1998 Decrease(Decrease)
------------------ ---------------- ------------------- ---------------
Other expense-net........... $111 $123 ($12) (9.8%) $322 $364 ($42) (11.5%)
Other expense-net. Interest expense for the three and nine months ended
September 30, 1999 of $102 and $289, respectively, remained consistent with the
comparable prior periods of $103 and $288, respectively.
Also included in other expense-net was other expense of $9 for the quarter ended
September 30, 1999, compared to $20 for the quarter ended September 30, 1998 and
other expense of $33 for the nine months ended September 30, 1999, compared to
$76 for the prior comparable period. The decreases in other expense were due to
a reduction in regulatory interest expense and gains on sales of real estate.
Additionally, the decrease in other expense-net for the nine months ended
September 30, 1999 was also due to the reduction in interest expense
attributable to an anticipated settlement of federal income tax liabilities for
tax years still under audit.
Three Months Nine Months
Ended September 30, Ended September 30, Increase(in millions) 2000 1999 1998 Increase2000 1999
1998 (Decrease)------ ------ ------- -------
Segment margin
results:
Retail segment.................. $1,560 $1,554 $6 0.4% $4,607 $4,662 ($55) (1.2%)services........ 1,510 1,543 (33) (2.1)% 2,978 3,047 (69) (2.3)%
Wholesale segment............... 549 464 85 18.3 1,604 1,423 181 12.7services..... 578 526 52 9.9 1,160 1,055 105 10.0
Network segment.................services....... (672) (699) (726) 27 3.9 (1,333) (1,384) 51 3.7 (2,083) (2,031) (52) (2.6)
Segment results. For segment reporting purposes, segment margins exclude certain
costs and expenses, including depreciation and amortization, corporate expenses
and taxes other than income. See Note 2 to the consolidated financial
statements.
MarginMargins from the retail services segment decreased for the nine months ended
September 30, 1999 from the comparable prior period due to increased
operating expenses
increasing at a greater rate than revenue growth.expenses. Revenue from the retail services segment increased 5.1%8.4% and
7.8% for the ninethree and six months ended SeptemberJune 30, 19992000, respectively over the
comparable 1998 period,1999 periods, primarily due to growth in local services revenue.revenues. The
revenue increase was more thanincreases were offset by higher operating expenses driven by growth
initiatives and costs associated with enhancing customer service. For the quarter ended September 30, 1999, the retail margin was
consistent compared to the prior comparable period. Margins from
the wholesale services segment increased as a result of greater demand for
access services and interconnectinterconnection services, partially offset by price reductions as
mandated by both federal and state regulatory
14
authorities and higher operating costs associated with access charge expenses.
Margins from the network services segment increased for
three months ended September 30, 1999, due to higher levels of software
capitalization. Margins from the network services segment decreased for the nine
months ended September 30, 1999 as a result of expenditures to support growth in
both the retail and wholesale services segments.reduced operating
expenses.
Three Months Six Months
Ended SeptemberJune 30, Increase Ended SeptemberJune 30, 1999 1998 Increase
1999 1998 Increase--------------------- ---------------- ---------------------- ---------------
(in millions) 2000 1999 2000 1999
------ ------ ------ ------
Provision for income
taxes........................... $251 $219 $32 14.6% $713 $630 $83 13.2taxes.............. $ 247 $ 246 $ 1 0.4% $ 505 $ 462 $ 43 9.3%
Provision for income taxes.PROVISION FOR INCOME TAXES. The effective tax rate for the three months
ended SeptemberJune 30, 19992000 of 37.9% remained consistent withdecreased from the comparable 1999 rate of 38.9%.
The decrease in the effective rate was primarily attributable to a lower
composite state tax rate for the three
months ended September 30, 1998 of 37.8%.2000. The effective tax rate for the ninesix months
ended SeptemberJune 30, 19992000 of 37.9% remained37.8% was consistent with the rate for
the ninesix months ended
SeptemberJune 30, 19981999 rate of 38.4%37.9%.
Risk ManagementQUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Over time, we are exposed to market risks arising from changes in interest
rates. The objective of our interest rate risk management program is to manage
the level and volatility of our interest expense. We may employ derivative
financial instruments to manage our interest rate risk exposure. We have also
employed financial derivatives to hedge interest rate and foreign currency
exposures associated with particular debt issues to synthetically obtain below
market interest rates. We do not use derivative financial instruments for
trading purposes.
As of SeptemberJune 30, 19992000 and December 31, 1998,1999, approximately $761$692 million and
$123,$218 million, respectively, of floating-rate debt was exposed to changes in
interest rates. This exposure is primarily linked to commercial paper rates and
changes in 3-month LIBOR. A hypothetical increase of 1%one percentage point in
commercial paper rates and
3-month LIBOR would not have had a material effect on our earnings. As
of SeptemberJune 30, 19992000 and December 31, 1998,1999, we also had $222$300 million and
$228,$522 million, respectively, of long-term fixed rate debt obligations maturing in
the following 12 months. Any new debt obtained to refinance this debt would be
exposed to changes in interest rates. A hypothetical 10% change in the interest
rates on this debt would not have had a material effect on our earnings.
As of Septemberune 30, 1999, all outstanding interest rate swaps and the
associated debt instrument have matured. As of December 31, 1998, we had
interest rate swaps with notional amounts of $155. The swaps synthetically
transformed certain of the Company's floating rate issues into fixed rate
obligations.
As of September 30, 19992000 and December 31, 1998,1999, we had also entered into
cross-currency swaps with notional amounts of $133 and $204, respectively.million. The cross-currency
swaps synthetically transform $100$92 million and $182$94 million of Swiss Franc
borrowings at SeptemberJune 30, 19992000 and December 31, 1998,1999, respectively, into U.S.
dollar obligations. Any gains (losses) on the cross-currency swaps would be
offset by losses (gains) on the Swiss Franc debt obligations.
Recent Regulatory Developments
Interconnection.Other assets at December 31, 1999 included marketable equity securities
recorded at fair value of $334 million including net unrealized gains of
$325 million. The securities have exposure
15
to price risk. We transferred the marketable securities we held at December 31,
1999 to another wholly owned subsidiary of Qwest.
RECENT REGULATORY DEVELOPMENTS
ACCESS REFORM. In May 2000, the FCC issued an order (the "Order"adopted the access reform and universal
service proposal developed by the Coalition for Affordable Local and Long
Distance Service ("CALLS plan"). The five year plan significantly reduces
switched access rates, eliminates the Presubscribed Interexchange Carrier Charge
("PICC") while raising current SLC caps, and establishes a new $650 million
universal fund to replace implicit subsidies in 1996 relating tointerstate access charges. The
CALLS plan is mandatory for the Act2000-01 annual price cap tariff filing and
carriers that established interconnection costing and pricing rules which, from our
perspective, significantly impeded negotiations with new entrants to the local
exchange market, state regulatory commission interconnection rulemakings and
interconnection arbitration proceedings.
On January 25, 1999, the U.S. Supreme Court ("Supreme Court") issued a
ruling on our appealopt out of the Order. The Supreme Court affirmed in part and
reversed in partvoluntary provisions of the FCC Order. Although the decision stated that the Act was
ambiguous and self-contradictory, the Supreme Court ruled that:
o the FCC has authorityCALLS plan will be
required to conduct a forward-looking cost study to set pricing methodology;
o unbundled network elementstheir rates. We have
appealed the order and asked for a stay of certain provisions. The Federal
Communications Commission ("UNEs"FCC") must be provided in cases where
necessary ordenied the lack of availability would impair competition;
o Incumbent local exchange carriers ("ILECs") must sell on a bundled basis,
at the competitive local exchange carriers' ("CLECs") request network
elements the ILEC uses itself on a bundled basis; and
o CLECs may pick and choose pricing or other terms and conditions from
multiple contracts within certain bounds.
The impact of the Supreme Court ruling is unclear since state
regulatory commissions generally follow the FCC's pricing and unbundling
requirements in setting UNE prices. Further review of the legality of the FCC's
pricing rules has been argued at the Eighth Circuit Court of Appeals. On
November 5, 1999, the FCC released its order addressing the Supreme Court
directives regarding unbundling and Interconnection. The full impact of this
order is presently unclear. However, it largely reaffirms, and in some instances
expands, the FCC's earlier unbundling decisions and may create significant risks
of arbitrage for private line, special access and local business revenues.
Appeals of this order are likely. See "Special Note Regarding Forward Looking
Statements" on page 11.
InterLATA Long-Distance Entry. Several regional Bell operating companies have
filed for entry into the interLATA long-distance business. Although many of
these applications have been approved by state regulatory commissions, the FCC
has rejected all applications to date.
We view entry into this business as important to our strategy of providing
an integrated bundle of services to our customers. In 1999, we withdrew our
previously filed applications to enter the interLATA long-distance business in
Wyoming and Montana. We filed an application to enter the interLATA
long-distance business in Arizona in 1999. In April 1999, the Nebraska Public
Service Commission indicated it needed additional information before making a
recommendation to the FCC. We expect to file our first interLATA entry
application with the FCC for its review in 2000. See "Special Note Regarding
Forward-Looking Statements" on page 11.
Access Reform. In its access reform order, the FCC mandated a substantial
restructuring of interstate access pricing. A significant portion of the
services that were charged using minutes-of-use pricing are now being charged
using a combination of minutes-of-use rates, flat-rate presubscribed
interexchange carrier charges ("PICCs") and subscriber line charges ("SLCs").
Although an increase in the SLC to multi-line business users occurred on July 1,
1997, the bulk of the mandated pricing changes occurred on January 1, 1998.
Additional mandated pricing changes occurred on January 1, 1999 and July 1, 1999
and further changes will be implemented on January 1, 2000 and 2001. The net
effect of these changes will be to decrease minutes-of-use charges and increase
flat-rate charges (i.e., PICCs and SLCs).stay.
The access reform order also continued in place the current rules under
which ILECs may not assess interstate access charges onto allow information service
providers to avoid access charges. This will continue to negatively impact
results of in-region local exchange operations as the volume of information
service-related usage continues to increase without an associated increase in
revenues.
In 2000, the incumbent local exchange carriers ("ILECs") and purchasers of UNEs.
InWorldCom
appealed the February 1999 the FCC issued an order declaring that Internet traffic is interstate and opened a proceeding to determine the appropriate regulatory
structure.be
interstate. The FCC order required no change in the current agreements to remain intact for
reciprocal compensation with CLECs until it rules on this matter. Pending beforeIn March 2000,
the FCC are several areasU.S. Court of access reform includingAppeals partially vacated and remanded the reduction of interstate ratesorder back to reflect the
receipt of universal service
support, changing the rate structureFCC. Until this is resolved, there will remain uncertainty regarding our local
exchange business' payment obligation for switched access to a flat rated
structure, an industry proposal for changing the general access structure
including the removal of the productivity factor and a court remanded review of
the productivity factor. Action on these items is expected by mid-2000 but some
items may be decided in 1999.
Advanced Telecommunications Services. On March 31, 1999, the FCC issued an order
establishing expanded collocation requirements for both conventional voice and
advanced services. The FCC also issued a FNPRM on "line sharing." Line sharing
allows a CLEC to provide advanced services over the same loop that the ILEC uses
to provide analog voice service. We expect the FCC to issue an order on line
sharing in the fourth quarter of 1999.
Long-Term Number Portability Tariffs.Internet traffic.
COURT REMAND OF 6.5% PRODUCTIVITY FACTOR. In July 1999, the FCC issued an order on
our LNP tariff that was originally effective in February 1999. The FCC's order
reduced our tariff from $0.54 per access line to $0.43 per access line. The FCC
also required that the difference between $0.54 and $0.43, previously collected
by the Company, be refunded to customers. We expect to pay the refund in the
fourth quarter of 1999.
Court Remand of 6.5% Productivity Factor. On May 21, 1999, the District of Columbia
U.S. Court of Appeals issued a ruling reversing and remanding back to the FCC
its order requiring ILECs to retroactively increase the productivity offset to
price caps to 6.5% in their annual price cap filings. The Court found that the
FCC's order did not justify the increase. The FCC must revise and
reissue its order by April 2000.
Universal Service Fees. On October 8,In December 1999, the FCC issued orders in responsea
notice of proposed rulemaking responding to the Fifth Circuitissues raised in the Court's
remand. As part of adopting CALLS, the FCC noted that the CALLS participants
have agreed to waive any right to recoupment they might be entitled to seek if
the FCC could not justify the 6.5% productivity factor on remand. We are
reviewing this issue and considering our options.
ADVANCED TELECOMMUNICATIONS SERVICES. In March 2000, the District of
Columbia U.S. Court of Appeals mandate on Universal Service. These orders
were effective on November 1, 1999. Thepartially vacated and remanded back to the FCC
will allowits order establishing expanded collocation requirements for both conventional
voice and advanced services. We also appealed the feesDecember 1999 FCC order
requiring that line sharing be provided as an unbundled network element ("UNE").
Line sharing allows a CLEC to provide advanced services over the ILECs paysame loop that
the ILEC uses to support Universal Service to be recovered in access indefinitely. ILECs that
wish to do so may remove the fees from access and establishprovide analog voice service. Previously, CLECs purchased a
separate loop to provision advanced services. In March 2000, we and GTE appealed
the FCC's December 1999 order on remand concerning the application of the
unbundling requirement to the provision of advanced services.
16
INTERLATA LONG-DISTANCE ENTRY. We filed applications to enter the interLATA
long-distance business in ten of the states in the U S WEST region and continue
to work with the state PUCs in those states to gain approval. We are addressing
operational support system issues and have agreed to participate in multistate
testing where the states are agreeable. We intend to file entry applications
with our remaining state PUCs by the end user
charge. Theof the first quarter of 2001 with FCC
also changedfilings following favorable state action. See "Special Note Regarding
Forward-Looking Statements" on page 10.
NUMBER POOLING. In March 2000, the rules to remove the intrastate end user
revenues from the base for calculating the fees. A tariff filing, effective
November 1, 1999, will reduce the access rates which recover these fees.
Access Pricing Flexibility. The FCC issued an order on pricing flexibility on
August 27, 1999.substantially
changing the way telephone numbers are allocated among carriers in order to
avoid the premature exhaustion of telephone numbers in North America. This new
approach must be in place by mid-2001 in our region and will require significant
modifications to operational support systems and switch software with costs
exceeding $345 million. The FCC removes many vestigeshas issued a further notice of regulation including price
caps for intraLATA interstate toll because long distance parity has been
achieved for all 14 states. Various levels of pricing flexibility upproposed
rulemaking to and
including the removal of Price Cap regulation are possible when competitive
triggers are reached by geographic areas for special access and switched access
transport. Some pricing flexibility is granted for switched access and
subscriber line charges when certain levels of competition are demonstrated by
geographical area.
Contingenciesdetermine how ILECs may recover these costs in a competitively
neutral way.
CONTINGENCIES
We have pending regulatory actions in local regulatory jurisdictions. See
Note 3 to the condensed consolidated financial statements.
Other Items
From time to time, we engage in discussions regarding restructurings,
dispositions, acquisitions and other similar transactions. Any such transaction
could include, among other things, the transfer, sale or acquisition of
significant assets, businesses or interests, including joint ventures, or the
incurrence, assumption or refinancing of indebtedness, and could be material to
our financial condition and results of operations. There is no assurance that
any such discussions will result in the consummation of any such transaction.
Year 2000 Costs
Background. We have conducted a comprehensive review of our computer-based
systems and related software and are taking measures to ensure that such systems
will properly recognize the year 2000 and continue to process beyond December
31, 1999. The systems we evaluated include systems within (i) the Public
Switched Telephone Network (the "Network"), (ii) Information Technologies
("IT"), and (iii) individual Business Units (the "Business Units").
The Network, which processes voice and data information relating to our
core communications business, relies on remote switches, central office
equipment, interoffice equipment and loop transport equipment that is
predominantly provided to us by telecommunications network vendors. IT is
comprised of our internal business systems that employ hardware and software on
an enterprise-wide basis, including operational, financial and administrative
functions. The Business Units, which include internal organizations such as
finance, procurement, directory services, operator services, wireless, data
networks, real estate, etc., employ systems that support desktop and
departmental applications, as well as embedded computer chip technologies, which
relate specifically to each of our Business Unit's functions and generally are
not part of the Network or IT.
We have approached year 2000 remediation activities through five general
phases: (i) inventory/assessment, (ii) planning, (iii) conversion, (iv)
testing/certification and (v) implementation. Additionally, we are continuously
monitoring and improving our year 2000 related activities and progress,
communicating with our customers and vendors, participating in cooperative
testing with others and taking steps to assure that we have contingency plans in
place prior to the end of 1999. These activities will continue through the
remainder of 1999.
Network update. With regard to the Network, we are working with our
telecommunications network vendors to obtain and convert to compliant releases
of hardware and software. We also are testing, at our own initiative, in
cooperation with certain of our customers, vendors and other major wireline
telecommunications companies, network equipment over multiple configurations
involving a broad spectrum of services. Toward this end, we participate in the
Telco Year 2000 Forum (the "Forum"), an organization that addresses the year
2000 readiness of network elements and network interoperability. The Forum has
contracted with Telcordia (formerly known as Bellcore), a former affiliate
engaged in telecommunications industry research, development and maintenance
activities, to engage in inter-region interoperability testing. No significant
issues have been found to date. We also participate in (i) the FCC's Network
Reliability and Interoperability Council IV working group, which is tasked to
evaluate the year 2000 readiness of the public telecommunications network, and
(ii) the Alliance for Telecommunications Industry Solutions ("ATIS"), which is
testing inter-network interoperability, and which, in conjunction with the
Cellular Telecommunications Industry Association ("CTIA"), is testing network
interoperability with wireless networks. Our inventory/assessment, planning,
conversion and network testing/certification phases for the Network are
complete. Cooperative testing with certain customers, vendors and other
telecommunications companies is expected to continue for the rest of the year.
As of September 30, 1999, our Network remediation implementation was complete.
Substantial progress has been made with Network contingency planning activities.
We anticipate that the remainder of the Network contingency planning activities
will be complete by the fourth quarter, 1999.
IT update. Within IT, we have identified approximately 570 applications that
support our critical business processes, such as billing and collections,
network monitoring, repair and ordering. The inventory/assessment, planning
phases and conversion for such IT applications are complete. As of September 30,
1999, approximately 99% of IT testing activities and 99% of IT implementation
had been completed. We anticipate that each of these phases for IT will be
complete by November 1999. Substantial progress has been made with IT
contingency planning activities. We anticipate that the remainder of the IT
contingency planning activities will be complete by the fourth quarter, 1999.
Business Units update. Within our Business Units, it is estimated that as of
September 30, 1999, approximately 100% of the inventory/assessment activity,
100% of the planning activity, 99.8% of the conversion activity and 99% of the
testing and remediation implementation activities were complete. We anticipate
that each of these phases will be complete in the Business Units for major
conversions and upgrades by the fourth quarter of 1999. We have recently
initiated Business Unit contingency planning activities and we anticipate those
will be complete by the fourth quarter, 1999.
Costs relating to year 2000. We have spent approximately $232 from the beginning
of 1997 through the end of the third quarter of 1999 on year 2000 projects and
activities. Virtually all year 2000 related expenditures are being funded
through operations.
Contingency plan. We cannot provide assurance that the results of our year 2000
compliance efforts or the costs of such efforts will not differ materially from
estimates or expectations. Accordingly, we are developing year 2000 specific
business continuity and contingency plans to address high risk areas as they are
identified. Our year 2000 contingency planning activities will include training
of crisis managers on year 2000 issues and potential business impacts to their
particular process areas, reviewing and modifying existing business continuity
plans to address year 2000 issues and establishing rapid response teams and
communications procedures for each of the major critical operations and
facilities to handle potential post-implementation year 2000 failures. These
year 2000 specific contingency planning activities are to be in place by the
fourth quarter of 1999.NEW ACCOUNTING STANDARDS
In addition, we have in place our standard overall
business continuity, contingency and disaster recovery plans (such as diesel
generator back-up power supply sources for our Network, Network rerouting
capabilities, computer data and records safe-keeping and back-up and recovery
procedures) which will be verified, and as appropriate, augmented for specific
year 2000 contingencies.
Dependencies. Within Network, we are highly dependent upon our
telecommunications network vendors to provide year 2000 compliant hardware and
software in a timely manner, and on third parties that are assisting us in the
focused testing and implementation phases regarding the Network. Because of
these dependencies, we have developed and implemented a vendor compliance
process whereby we have obtained written assurances of timely year 2000
compliance from most of our critical vendors (not only for Network, but also for
IT and the Business Units). In addition, we monitor and actively participate in
coordinated Network testing activities, as discussed above, with respect to the
Forum, ATIS and Telcordia. Within IT, we depend on the development of software
by experts, both internal and external, and the availability of critical
resources with the requisite skill sets. Because of this dependency, we have
developed detailed timetables, resource plans and standardized year 2000 testing
requirements for identified critical applications (irrespective of whether these
applications are used primarily by IT, the Network or the Business Units).
Within the Business Units, we are dependent on vendor supplied goods and
services and operability of the Network and critical IT and Business Unit
specific applications. Because of these dependencies, we are implementing the
same type of vendor compliance processes and application planning and testing
processes at the Business Units, as discussed above with respect to the Network
and IT. Overall, we have sought compliance assurances from approximately 7,765
vendors concerning approximately 25,769 products and have received assurances
for 99.6% of those products as of September 30, 1999. During 1999, we will
continue to pursue assurances of timely year 2000 compliance for the remaining
critical vendors.
As with any large-scale computer-related project such as year 2000
remediation, the testing phase may require resources in excess of other project
phases and the other project phases may be affected by and dependent upon the
results of the testing phase.
Summary. In management's view, the most reasonably likely worse case scenario
for year 2000 failure prospects we face is that a limited number of important IT
and/or Business Unit specific applications may unexpectedly fail. In addition,
there may be unexpected problems with the Network relating to the year 2000. Our
failure or the failure by certain of our vendors to remediate year 2000
compliance issues in advance of the year 2000 and to execute appropriate
contingency plans in the event that a critical failure is experienced, could
result in significant and costly disruption of our operations, possibly
impacting the Network and impairing our ability to bill or collect revenues.
However, while no assurance can be given, management believes that our efforts
at remediation and testing, year 2000 specific contingency planning, and overall
business continuity, contingency and disaster recovery planning will likely be
successful, and that the aforementioned "worse case scenario" is unlikely to
develop or significantly disrupt our financial operations.
The above discussion regarding year 2000 contains many statements that are
"forward-looking" within the meaning of the Reform Act. Although we believe that
our estimates are based on reasonable assumptions, we cannot assure you that
actual results will not differ materially from these expectations, beliefs or
estimates. See "Special Note Regarding Forward-Looking Statements" on page 11.
New Accounting Standards
On June 15, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("FAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. FAS
No. 133 requires, among other things, that all derivative instruments be
recognized at fair value as assets or liabilities onin the consolidated balance
sheetsheets and that changes in fair value generally be recognized currently in earnings
unless specific hedge accounting criteria are met. TheThis standard is effective
for our 2001 fiscal year, thoughalthough earlier adoption is permitted. Financial
statement impacts of adopting the new standard depend upon the amount and nature
of the future use of derivative instruments and their relative changes in
valuation over time. Had we adopted FAS No. 133 in 1999,2000, its impact on the
consolidated financial statements would not have been material.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (the "Bulletin"), "Revenue Recognition in Financial
Statements," which addresses revenue recognition issues. The Bulletin requires,
in certain cases, nonrefundable up-front fees for services to be deferred and
recognized over the expected period of performance. The Bulletin also requires
that incremental direct costs incurred in obtaining the up-front fees be
deferred and recognized over the same period as the up-front fees. The
implementation of the Bulletin has been delayed until the fourth quarter of 2000
for fiscal years beginning after December 15, 1999. The application of this
Bulletin will be retroactive to January 1, 2000. We are assessing the types of
transactions that may be impacted by this pronouncement. The impact of the
Bulletin on the consolidated financial statements is not yet known.
17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
OurLEGAL PROCEEDINGS
The Company and its subsidiaries are subject to claims and proceedings
arising in the ordinary course of business. For a discussion of these actions,
see "NoteNote 3: Commitments"Commitments and Contingencies" - to the Consolidated Financial
Statements.
Item 2. Changes in Securities and Use of Proceeds
The following describes securities issued by us within the past fiscal
quarter and prior to the filing of this Form 10-Q which were privately placed
and not registered under the Securities Act of 1933, as amended (the "Securities
Act"). We believe that the following issuances of securities were exempt from
the registration requirements of the Securities Act, pursuant to the exemptions
set forth in Section 4(2), Rule 144A, and Regulation S thereof.
(a) On November 1, 1999, and in reliance on Rule 144A and Regulation S of
the Securities Act, we issued 7.20% Notes (the "Notes") in the aggregate
principal amount of $750,000,000. The Notes will mature and the principal
amount, together with interest accrued and unpaid thereon, will be payable on
November 1, 2004. The Notes will bear interest from November 1, 1999 at an
interest rate of 7.20% per annum. Interest will be computed on the basis of a
360-day year of twelve 30-day months. Salomon Smith Barney Inc., ABN AMRO
Incorporated, Banc of America Securities LLC, and Chase Securities Inc.
(collectively, the "Initial Purchasers") purchased the Notes for resale to
"qualified institutional buyers" as defined under Rule 144A, and non-U.S.
persons under Regulation S, at 99.81% of their principal amount ($748,575,000
aggregate proceeds to us before deducting commissions and expenses payable by
us). The Initial Purchasers received a commission in the amount of $4,500,000.
We plan to use the net proceeds from the sale of the Notes to repay a portion of
our commercial paper indebtedness and for general corporate purposes. The Notes
are subject to registration rights that require us to offer registered exchange
notes within 225 days of closing.condensed consolidated
financial statements.
Item 6. Exhibits and Reports on FormEXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed for the Company through the filing of this Form 10-Q.EXHIBITS
Exhibit No.
(2a)- ----------
(2.1) Articles of Merger including the Plan of Merger between The
Mountain States Telephone and Telegraph Company (renamed
U S WEST Communications, Inc.) and Northwestern Bell Telephone
Company. (IncorporatedCompany (incorporated herein by this reference to Exhibit 2a to
Form SE filed on January 8, 1991, File No. 1-3040).
(2b)(2.2) Articles of Merger including the Plan of Merger between The
Mountain States Telephone and Telegraph Company (renamed
U S WEST Communications, Inc.) and Pacific Northwest Bell
Telephone Company. (IncorporatedCompany (incorporated herein by this reference
to Exhibit 2b to Form SE filed on January 8, 1991, File No.
1-3040).
(3a)3.1 Amended Articles of Incorporation of the Registrant filed with
the Secretary of State of Colorado on July 6, 2000, evidencing
change of Registrant's name from U S WEST Communications, Inc.
to Qwest Corporation.
(3.2) Restated Articles of Incorporation of the Registrant.
(IncorporatedRegistrant (incorpor-
ated herein by this reference to Exhibit 3a to Form 10-K/A filedf
iled on April 13, 1998, File No. 1-3040).
(3b)(3.3) Bylaws of the Registrant, as amended. (Incorporatedamended incorporated herein by
this reference to Exhibit 3b to Form 10-K/A filed on April 13,
1998, File No. 1-3040).
44.1 No instrument which defines the rights of holders of long and
intermediate term debt of the Registrant is filed herewith
pursuant to Regulation S-K, Item 601(b) (4) (iii) (A). Pursuant
to this regulation, the Registrant hereby agrees to furnish a
copy of any such instrument to the SEC upon request.
(10a)(4.2) Registration Rights Agreement, dated October 26, 1999, between
U S WEST Communications, Inc. and the initial purchasers named
therein (Exhibit 4a to Form 10-K for the period ended December
31, 1999, File No. 1-3040).
18
Exhibit No.
- ----------
(4.3) Indenture, dated as of October 15, 1999, by and between U S WEST
Communications, Inc. and Bank One Trust Company, NA as Trustee
(Exhibit 4b to Form 10-K for the period ended December 31, 1999,
File No. 1-3040). The form or forms of debt securities with
respect to each particular series of debt securities regis-
tered hereunder will be filed as an exhibit to a Current Report
on Form 8-K of U S WEST Communications, Inc. and incorporated
herein by reference.
(10.1) Reorganization and Divestiture Agreement, dated as of November
1, 1983, between American Telephone and Telegraph Company, U S
WEST, Inc., and certain of their affiliated companies, includingin-
cluding The Mountain States Telephone and Telegraph Company,
Northwestern Bell Telephone Company, Pacific Northwest Bell
Telephone Company and NewVector Communications, Inc. (Exhibit
10a to Form 10-K for the period ended December 31, 1983, File
No. 1-3040).
(10b)(10.2) Shared Network Facilities Agreement, dated as of January 1,
1984, between American Telephone and Telegraph Company, AT&T
Communications of the Midwest, Inc. and The Mountain States
Telephone and Telegraph Company. (Exhibit 10b to Form 10-K for
the period ended December 31, 1983, File No. 1-3040).
(10c)(10.3) Agreement Concerning Termination of the Standard Supply
Contract, effective December 31, 1983, between American
Telephone and Telegraph Company, Western Electric Company,
Incorporated, The Mountain States Telephone and Telegraph
Company and Central Services Organization (Exhibit 10d to Form
10-K for the period ended December 31, 1983, File No. 1-3040).
(10d)(10.4) Agreement Concerning Certain Centrally Developed Computer
Systems, effective December 31, 1983, between American
Telephone and Telegraph Company, Western Electric Company,
Incorporated, The Mountain States Telephone and Telegraph
Company and Central Services Organization (Exhibit 10e to Form
10-K for the period ended December 31, 1983, File No. 1-3040).
(10e)(10.5) Agreement Concerning Patents, Technical Information and CopyrightsCopy-
rights, effective December 31, 1983, between American
Telephone and Telegraph Company and U S WEST, Inc. (Exhibit 10f
to Form 10-K for the period ended December 31, 1983, File No.
1-3040).
(10f)19
Exhibit No.
- ----------
(10.6) Agreement Concerning Liabilities, Tax Matters and Termination of
Certain Agreements, dated as of November 1, 1983, between
American Telephone and Telegraph Company, U S WEST, Inc., The
Mountain States Telephone and Telegraph Company and certain of
their affiliates (Exhibit 10g to Form 10-K for the period ended
December 31, 1983, File No. 1-3040).
(10g)(10.7) Agreement Concerning Trademarks, Trade Names and Service Marks,
effective December 31, 1983, between American Telephone and
Telegraph Company, American Information Technologies Corporation,Corpora-
tion, Bell Atlantic Corporation, BellSouth Corporation,
Cincinnati Bell, Inc., NYNEX Corporation, Pacific Telesis Group,
The Southern New England Telephone Company, Southwestern Bell
Corporation and U S WEST, Inc. (Exhibit 10i to Form 10-K for
the period ended December 31, 1984, File No. 1-3040).
(10h)(10.8) Shareholders' Agreement, dated as of January 1, 1988, between
Ameritech Services, Inc., Bell Atlantic Management Services,
Inc., BellSouth Services, Incorporated, NYNEX Service Company,
Pacific Bell, Southwestern Bell Telephone Company, The Mountain
States Telephone and Telegraph Company, Northwestern Bell
Telephone Company and Pacific Northwest Bell Telephone Company
(Exhibit 10h to Form SE dated March 5, 1992, File No. 1-3040).
(10i)(10.9) Form of Agreement for Purchase and Sale of Telephone Exchanges,
dated as of June 16, 1999, between Citizens Utilities Company
and U S WEST Communications, Inc. (Exhibit 99B99-B to Form 8-K
dated June 17, 1999, File No. 1-3040).
(10j)(10.10) 364-Day $800 Million Credit Agreement dated May 19, 1999, with
The Banks Listed Thereinthe banks listed therein and Morgan Guaranty Trust Company of
New York, as administrative agent. (10k)(Exhibit 10-J to Form 10-Q
for the period ended June 30, 1999, File No. 1-3040).
(10.11) Amendment No. 1 to Credit Agreement, dated as of June 11, 1999,
to the 364-Day $800 Million Credit Agreement, dated as of May
19, 1998,1999, among U S WEST Communications, Inc.,the Company, U S WEST, Inc., the Banksbanks listed
on the signature pages theretotherein and Morgan Guaranty Trust Company of New York, as
administrative agent. (Exhibit 10-K to Form 10-Q for the period
ended June 30, 1999, File No. 1-3040).
(10.12) 364-Day $4.0 Billion Credit Agreement dated as of May 5, 2000,
among U S WEST Capital Funding, Inc., the Company and U S WEST,
Inc., the banks listed therein, and Morgan Guaranty Trust
Company of New York, as administrative agent (Exhibit 10-L to
Form 10-Q for the period ended March 31, 2000, File No. 1-3040).
20
Exhibit No.
- ----------
27 Financial Data Schedule
- -------------------___________________
( ) Previously filed.
(b) Reports on Form 8-K filed during the Third Quartersecond quarter of 19992000 and through the
filing of this form 10-Q:Form 10-Q.
(i) Form 8-K, dated October 22, 1999April 28, 2000, providing unaudited thirdnotification of the release
of the first quarter financial
statements2000 earnings of the Company.
(ii) Form 8-K, dated April 28, 2000, providing notification of a press
release announcing that the Company had extended its exchange offer
for the Company$750 billion of 7.20% Notes due November 1, 2004.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
U S WEST Communications, Inc.Qwest Corporation
/s/ ROBERT S. WOODRUFF
By: /S/ Allan R. Spies
___________________________________
Allan R. SpiesRobert S. Woodruff
Executive Vice President - Finance and
Chief Financial Officer
November 10, 1999
August 11, 2000
22