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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 1-3040
U S WEST Communications, Inc.
A Colorado Corporation IRS Employer No. 84-0273800
1801 California Street, Denver, Colorado 80202
Telephone Number (303) 896-3099
THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF U S WEST, INC., MEETS THE
CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1) OF FORM 10-Q AND IS THEREFORE
FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL
INSTRUCTION H(2).
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No __
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Form 10-Q - Part I U S WEST Communications, Inc.
FORM 10-Q
TABLE OF CONTENTS
Item Page
- ---- ----
PART I - FINANCIAL INFORMATION
1. Financial Statements
Consolidated Statements of Income -
Three and Six Months Ended June 30, 1996 and 1995 3
Consolidated Balance Sheets -
June 30, 1996 and December 31, 1995 4
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1996 and 1995 5
Notes to Consolidated Financial Statements 6
2. Management's Analysis - (Reduced disclosure format pursuant to
General Instruction H(2)) 9
PART II - OTHER INFORMATION
1. Legal Proceedings 18
6. Exhibits and Reports on Form 8-K 18
Form 10-Q - Part I U S WEST Communications, Inc.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
June 30. June 30. June 30, June 30,
Dollars in millions 1996 1995 1996 1995
Operating revenues:
Local service $ 1,179 $ 1,076 $ 2,324 $ 2,126
Interstate access service 626 591 1,248 1,180
Intrastate access service 189 184 379 372
Long-distance network 278 294 568 593
services
Other services 168 153 329 304
--------- ---------- ---------- ----------
Total operating revenues 2,440 2,298 4,848 4,575
Operating expenses:
Employee-related expenses 864 767 1,677 1,497
Other operating expenses 373 365 762 756
Taxes other than income taxes 97 104 192 207
Depreciation and amortization 513 498 1,024 992
--------- ---------- ---------- ----------
Total operating expenses 1,847 1,734 3,655 3,452
--------- ---------- ---------- ----------
Income from operations 593 564 1,193 1,123
Interest expense 101 95 204 186
Gains on sales of rural telephone exchanges 49 15 49 78
Other income (expense) - net 2 (20) (15) (33)
--------- ---------- ---------- ----------
Income before income taxes and cumulative effect
of change in accounting principle 543 464 1,023 982
Provision for income taxes 208 175 391 370
--------- ---------- ---------- ----------
Income before cumulative effect of change in
accounting principle 335 289 632 612
Cumulative effect of change in accounting
principle - net of tax - - 34 -
--------- ---------- ---------- ----------
See Notes to Consolidated Financial Statements.
NET INCOME $ 335 $ 289 $ 666 $ 612
========= ========== ========== ==========
Form 10-Q - Part I U S WEST Communications, Inc.
CONSOLIDATED BALANCE SHEETS (Unaudited)
June 30, December 31,
Dollars in millions 1996 1995
ASSETS
Current assets:
Cash and cash equivalents $ 67 $ 191
Accounts and notes receivable - net 1,507 1,546
Inventories and supplies 136 142
Deferred tax asset 202 240
Prepaid and other 74 43
---------- --------------
Total current assets 1,986 2,162
---------- --------------
Gross property, plant and equipment 31,522 30,988
Accumulated depreciation 17,863 17,540
---------- --------------
Property, plant and equipment - net 13,659 13,448
Other assets 790 740
---------- --------------
Total assets $ 16,435 $ 16,350
========== ==============
LIABILITIES AND SHAREOWNER'S EQUITY
Current liabilities:
Short-term debt $ 1,132 $ 995
Accounts payable 674 864
Employee compensation 241 281
Current portion of restructuring charge 202 270
Other 1,222 1,081
---------- --------------
Total current liabilities 3,471 3,491
---------- --------------
Long-term debt 5,390 5,411
Postretirement and other postemployment 2,290 2,316
benefit obligations
Deferred taxes, credits and other 1,385 1,386
Shareowner's equity:
Common shares - one share without 7,516 7,348
par value
Cumulative deficit (3,617) (3,602)
---------- --------------
Total shareowner's equity 3,899 3,746
---------- --------------
Total liabilities and shareowner's equity $ 16,435 $ 16,350
========== ==============
Contingencies (See Note B to the Consolidated Financial Statements)
See Notes to Consolidated Financial Statements.
Form 10-Q - Part I U S WEST Communications, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Six Months
Ended Ended
June 30, June 30,
Dollars in millions 1996 1995
OPERATING ACTIVITIES
Net income $ 666 $ 612
Adjustments to net income:
Depreciation and amortization 1,024 992
Gains on sales of rural telephone exchanges (49) (78)
Deferred income taxes and amortization
of investment tax credits (4) 56
Cumulative effect of change in accounting (34) -
principle - net of tax
Changes in operating assets and liabilities:
Restructuring payments (74) (172)
Postretirement medical and life costs - (30) (211)
net of cash fundings
Accounts and notes receivable 45 (102)
Inventories, supplies and other (23) (41)
Accounts payable and accrued liabilities (83) 41
Other - net 18 4
------------ ------------
Cash provided by operating activities 1,456 1,101
------------ ------------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment (1,259) (1,090)
Proceeds from sales of rural telephone exchanges 111 114
Payments on disposals of property, plant and
equipment (7) (2)
------------ ------------
Cash (used for) investing activities (1,155) (978)
------------ ------------
FINANCING ACTIVITIES
Net proceeds from issuance of short-term debt 302 569
Repayments of long-term debt (245) (132)
Dividends paid on common stock (630) (629)
Equity infusions from parent 148 -
------------ ------------
Cash (used for) financing activities (425) (192)
------------ ------------
CASH AND CASH EQUIVALENTS
Decrease (124) (69)
Beginning balance 191 114
------------ ------------
Ending balance $ 67 $ 45
============ ============
See Notes to Consolidated Financial Statements
Form 10-Q - Part I U S WEST Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 1996 and 1995
(Dollars in millions)
(Unaudited)
A. Summary of Significant Accounting Policies
Consolidated Financial Statements
U S WEST Communications, Inc. (the "Company") is incorporated under the laws
of the State of Colorado and is an indirect wholly owned subsidiary
of U S WEST, Inc.
("U S WEST").
The Consolidated Financial Statements have been prepared by the Company,
pursuant to the interim reporting rules and regulations of the Securities and
Exchange Commission ("SEC"). Certain information and footnote disclosures
normally accompanying financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to the interim SEC rules and regulations. In the opinion of the
Company's management, the Consolidated Financial Statements include all
adjustments, consisting of only normal recurring adjustments, necessary to
present fairly the financial information set forth therein. It is suggested
that these Consolidated Financial Statements be read in conjunction with the
financial statements and notes thereto included in the Company's Form 10-K for
the year ended December 31, 1995.
New Accounting Standard
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121
requires that long-lived assets and associated intangibles be written down to
fair value whenever an impairment review indicates that the carrying value
cannot be recovered on an undiscounted cash flow basis. SFAS No. 121 also
requires that a company no longer record depreciation expense on assets held
for sale.
Form 10-Q - Part I U S WEST Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
New Accounting Standard (Continued)
Adoption of SFAS No. 121 resulted in income of $34 (net of tax of $22) from
the cumulative effect of reversing depreciation expense recorded in prior
years related to rural telephone exchanges held for sale. Depreciation
expense was reversed from the date the Company formally committed to a plan to
dispose of the rural exchange assets through January 1, 1996. The income has
been recorded as a cumulative effect of change in accounting principle in
accordance with SFAS No. 121. The carrying value of the rural exchange assets
was approximately $338 at December 31, 1995. As a result of adopting SFAS No.
121, depreciation expense for the six months ended June 30, 1996 was reduced
by $16 ($10 after tax). In 1996, depreciation expense will decrease
approximately $30 as a result of adopting SFAS No. 121. The combined effects
of lower depreciation expense and the cumulative effect of adoption of the new
standard will be directly offset by lower recognized gains on future rural
exchange sales.
B. Contingencies
There are pending regulatory actions in local regulatory jurisdictions that
call for price decreases, refunds or both. In one such instance, the Utah
Supreme Court has remanded a Utah Public Service Commission ("PSC") order to
the PSC for reconsideration, thereby establishing two exceptions to the rule
against retroactive ratemaking: 1) unforeseen and extraordinary events, and
2) misconduct. The PSC's initial order denied a refund request from
interexchange carriers and other parties related to the Tax Reform Act of
1986. This action is still in the discovery process. If a formal filing -
made in accordance with the remand from the Supreme Court - alleges that the
exceptions apply, the range of possible risk is $0 to $155.
Form 10-Q - Part I U S WEST Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
B. Contingencies (Continued)
On April 11, 1996, the Washington State Utilities and Transportation
Commission ("WUTC" or the "Commission") acted on the Company's 1995 rate
request. In February 1995, the Company sought to increase revenues by raising
rates for basic residential services over a four-year period. The two major
issues in this proceeding involve the Company's requests for improved capital
recovery and elimination of the imputation of Yellow Pages revenue. Instead of
granting the Company's request, the Commission ordered approximately $91.5 in
annual revenue reductions, effective May 1, 1996. Based on the above ruling,
the Company filed a lawsuit with the King County Superior Court (the "Court")
for an appeal of the order, a temporary stay of the ordered rate reduction and
an authorization to implement a revenue increase.
On April 29, 1996, the Court stayed the rate decreases ordered by the WUTC.
The Court granted the stay for a period of six months or until a decision is
made on the Company's appeal. Effective May 1, 1996, the Company began
collecting revenues subject to refund with interest. The Company expects its
appeal to be successful and plans not to accrue any of the amounts subject to
refund. However, an adverse judgment on the appeal would have a significant
impact on the Company's future results of operations.
Form 10-Q - Part I U S WEST Communications, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions)
Results of Operations
Comparative details of income before cumulative effect of change in accounting
principle for the six months ended June 30 follow:
Six Six
Months Months
Ended Ended
June 30, June 30, Percent
1996 1995 Change
Income before cumulative effect of
change in accounting principle $ 632 $ 612 3.3
--------- --------- ------
Adjusted to exclude certain nonoperating items, the Company's year-to-date
1996 income before cumulative effect of change in accounting principle was
$592, an increase of $29, or 5.2 percent, compared with the same period in
1995. The nonoperating adjustments include the 1996 current year, after-tax
impact of $10 from adopting SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and after-tax
gains of $30 and $49 on the sales of rural telephone exchanges during the
first six months of 1996 and 1995, respectively.
Effective January 1, 1996, the Company adopted SFAS No. 121 (See Footnote A),
which among other things, requires that companies no longer record
depreciation expense on assets held for sale. Adoption of SFAS No. 121
resulted in a one-time gain of $34 related to the cumulative effect of change
in accounting principle.
Increased income at the Company is attributable to higher demand for services.
Partially offsetting the effects of higher demand was an increase in costs
incurred to address the requirements associated with accelerating business
growth. Further offsetting the effects of higher demand were costs associated
with continuing service-improvement initiatives, expenditures related to new
business initiatives and flood conditions in the Pacific Northwest during the
first quarter of 1996.
Form 10-Q - Part I U S WEST Communications, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Results of Operations (Continued)
Increased demand for the Company's services resulted in growth in earnings
before interest, taxes, depreciation, amortization and other ("EBITDA") of 4.8
percent for the first half of 1996. EBITDA also excludes the gains on sales
of certain rural telephone exchanges in 1996 and 1995. The Company believes
EBITDA is an important indicator of the operational strength of its
businesses. EBITDA, however, should not be considered as an alternative to
operating or net income as an indicator of the performance of the Company's
business or as an alternative to cash flows from operating activities as a
measure of liquidity, in each case determined in accordance with generally
accepted accounting principles.
Operating Revenues
An analysis of changes in the Company's operating revenues follows:
Higher Increase Increase
Six Months Ended (Lower) (Higher) (Decrease) (Decrease)
June 30, 1996 1995 Prices Refunds Demand Other Dollars Percent
Local service $2,324 $2,126 $ 17 $ (5) $ 194 $ (8) $ 198 9.3
Interstate access 1,248 1,180 (33) (7) 110 (2) 68 5.8
Intrastate access 379 372 (15) - 24 (2) 7 1.9
Long-distance network 568 593 (5) - (15) (5) (25) (4.2)
Other services 329 304 - - - 25 25 8.2
------ ------ -------- --------- -------- ------- ----------- ----------
Total $4,848 $4,575 $ (36) $ (12) $ 313 $ 8 $ 273 6.0
====== ====== ======== ========= ======== ======= =========== ==========
Local service revenues increased principally as a result of higher demand for
services. Total reported access lines increased 586,000, or 4.0 percent
during the last 12 months, of which 228,000 is attributed to second lines.
Second line installations increased 32 percent during the past year. Access
line growth was 4.9 percent when adjusted for sales of approximately 124,000
rural telephone access lines during the last 12 months. Also contributing to
the increase in local service revenues was expanded growth in new product and
service offerings, such as caller identification and call waiting. Local
service revenues from new product and service offerings were approximately $80
in the first half of 1996, an increase of approximately 120 percent compared
to the same period last year.
Form 10-Q - Part I U S WEST Communications, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Operating Revenues (Continued)
Higher revenues from interstate access services resulted from access line
growth and an increase of 9.5 percent in interstate billed access minutes of
use. The increased volume of business was partially offset by the effects of
price reductions and refunds. Intrastate access revenues increased slightly
due to higher demand, largely offset by the effects of price reductions.
Long-distance network revenues decreased primarily due to the effects of
competition, rate reductions and the implementation of a multiple toll carrier
plan (MTCP) in Iowa in May 1996. The MTCP allows independent telephone
companies to act as toll carriers. The impact of the MTCP for the six months
ended June 30, 1996 was long-distance revenue losses of $6, offset by
increases in intrastate access revenues of $1 and decreases in other operating
expenses (i.e. access expense) of $6.
Excluding the effects of the MTCP, long-distance network revenues decreased
3.2 percent for six months ended June 30, 1996. Erosion of long-distance
revenue will continue due to the loss of exclusivity of 1+ dialing in
Minnesota, which became effective in February 1996, and in Arizona, effective
in April 1996.
Revenues from other services increased primarily as a result of continued
market penetration in voice messaging services and increases in inside wire
services.
Costs and Expenses
Six Months Ended Six Months Ended
June 30, June 30,
Percent
1996 1995 Change
Employee-related expenses $ 1,677 $ 1,497 12.0
Other operating expenses 762 756 0.8
Taxes other than income taxes 192 207 (7.2)
Depreciation and amortization 1,024 992 3.2
Interest expense 204 186 9.7
Other expense - net 15 33 (54.5)
Employee-related expenses increased $180 compared to the prior year. This
increase is primarily attributable to continued efforts to meet the
requirements associated with accelerating business growth, service-improvement
initiatives and new business initiatives.
Form 10-Q - Part I U S WEST Communications, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Costs and Expenses (Continued)
Salaries and wages increased employee-related expenses by approximately $73
over the prior year, primarily due to inflation-driven base wage increases.
The increase is also attributable to absorbing certain employee transfers from
affiliate companies during 1995. Salaries and wages were reduced through
restructuring; however, costs associated with employee transfers, along with
other workforce additions needed to meet the increased business growth and
service-improvement initiatives, have offset these benefits.
Overtime payments and contract labor increased approximately $85 over the
prior year. The increase in contract labor is primarily due to increased
network operations costs incurred to meet accelerating business growth and
marketing organization costs associated with the implementation of new
products and services. Additionally, approximately $15 of this increase is
attributable to severe flooding in Washington and Oregon during the first
quarter of 1996. Partially offsetting the increase in employee-related
expenses was a reduction in the postretirement benefits accrual and lower
travel and conference expenses.
The increase in other operating expenses is primarily due to increased
uncollectibles, higher advertising costs and greater materials and supplies
expense. Offsetting these increases were lower affiliate expenses and the
effect of the MTCP implemented in Iowa in May of 1996. Taxes other than income
taxes decreased primarily as a result of timing.
Increased depreciation and amortization expense was attributable to the
effects of a higher depreciable asset base, partially offset by the effects of
1995 sales of rural telephone exchanges and the adoption of SFAS No. 121.
Interest expense increased due to equal effects of slightly higher debt
levels, as well as higher interest rates associated with refinancing
commercial paper in the latter part of 1995.
Form 10-Q - Part I U S WEST Communications, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Restructuring Charge
The Company's 1993 results reflected an $880 restructuring charge (pretax).
The related restructuring plan (the "Restructuring Plan") is designed to
provide faster, more responsive customer services while reducing the costs of
providing these services.
Following are schedules of the costs and planned workforce reductions included
in the Restructuring Plan:
Actual Actual Estimate Estimate
Restructuring Plan Costs 1994 1995 1996 1997 Total
Cash expenditures:
Employee separation (1)<F1> $ 19 $ 76 $ 33 $ 127 $ 255
Systems development 118 129 113 - 360
Real estate 50 66 14 - 130
Relocation 21 21 20 13 75
Retraining and other 8 23 22 7 60
------- ------- --------- --------- ------
Total cash expenditures 216 315 202 147 880
Remaining 1991 plan employee costs (1) 56 - - - 56
------- ------- --------- --------- ------
Total $ 272 $ 315 $ 202 $ 147 $ 936
======= ======= ========= ========= ======
<FN>
<F1>
(1) Employee separation costs, including the balance of the 1991 restructuring reserve
at
December 31, 1993 aggregate $311.
</FN>
Actual Actual Estimate(1)<F1> Estimate(1)<F1>
Workforce Reductions 1994 1995 1996 1997 Total
Employee separations
Managerial 497 682 202 1,357 2,738
Occupational 1,683 1,643 798 3,138 7,262
------ ------ --------------- --------------- ------
Total 2,180 2,325 1,000 4,495 10,000
====== ====== =============== =============== ======
<FN>
<F1>
(1) Certain of the workforce reductions scheduled for 1997 may occur in 1996.
The Restructuring Plan is expected to be substantially complete by the end of
1997.
</FN>
Form 10-Q - Part I U S WEST Communications, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Restructuring Charge (Continued)
Employee separation costs include severance payments, health-care coverage and
postemployment education benefits associated with the planned reduction of
10,000 employees. System development costs include new systems and the
application of enhanced system functionality to existing single-purpose
systems to provide integrated, end-to-end customer service. Real estate costs
include preparation costs for the new service centers. The Company has
consolidated its 560 customer service centers into 26 centers in 10 cities.
The relocation and retraining costs are related to moving employees to the new
service centers and retraining employees on the methods and systems required
in the new, restructured mode of operation.Progress Under The Restructuring
Plan:
Following is a reconciliation of restructuring activity during the first six
months of 1996:
Reserve Balance First half Reserve Balance
December 31, 1995 1996 Activity June 30, 1996
Employee separations
Managerial $ 63 $ 12 $ 51
Occupational 97 9 88
------------------ -------------- ----------------
Total separations 160 139
Systems development
Service delivery 44 18 26
Service assurance 26 3 23
Capacity provisioning 42 17 25
All other 1 1 -
------------------ -------------- ----------------
Total systems 113 39 74
Real estate 14 3 11
Relocation 33 2 31
Retraining and other 29 9 20
------------------ -------------- ----------------
Total $ 349 $ 74 $ 275
================== ============== ================
Form 10-Q - Part I U S WEST Communications, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Restructuring Charge (Continued)
Progress Under The Restructuring Plan (Continued):
First half Cumulative
1994 1995 1996 Separations
Separations Separations Separations June 30, 1996
Employee separations
Managerial 497 682 190 1,369
Occupational 1,683 1,643 261 3,587
----------- ----------- ----------- -------------
Total 2,180 2,325 451 4,956
=========== =========== =========== =============
Contingencies
There are pending regulatory actions in local regulatory jurisdictions that
call for price decreases, refunds or both. In one such instance, the Utah
Supreme Court has remanded a Utah Public Service Commission ("PSC") order to
the PSC for reconsideration, thereby establishing two exceptions to the rule
against retroactive ratemaking: 1) unforeseen and extraordinary events, and 2)
misconduct. The PSC's initial order denied a refund request from
interexchange carriers and other parties related to the Tax Reform Act of
1986. This action is still in the discovery process. If a formal filing -
made in accordance with the remand from the Supreme Court - alleges that the
exceptions apply, the range of possible risk is $0 to $155.
On April 11, 1996, the Washington State Utilities and Transportation
Commission ("WUTC" or the "Commission") acted on the Company's 1995 rate
request. In February 1995, the Company sought to increase revenues by raising
rates for basic residential services over a four-year period. The two major
issues in this proceeding involve the Company's requests for improved capital
recovery and elimination of the imputation of Yellow Pages revenue. Instead of
granting the Company's request, the Commission ordered approximately $91.5 in
annual revenue reductions, effective May 1, 1996. Based on the above ruling,
the Company filed a lawsuit with the King County Superior Court (the "Court")
for an appeal of the order, a temporary stay of the ordered rate reduction and
an authorization to implement a revenue increase.
Form 10-Q - Part I U S WEST Communications, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Contingencies (Continued)
On April 29, 1996, the Court stayed the rate decreases ordered by the WUTC.
The Court granted the stay for a period of six months or until a decision is
made on the Company's appeal. Effective May 1, 1996, the Company began
collecting revenues subject to refund with interest. The Company expects its
appeal to be successful and plans not to accrue any of the amounts subject to
refund. However, an adverse judgment on the appeal would have a significant
impact on the Company's future results of operations.
Regulatory Environment
On August 1, 1996, the Federal Communications Commission ("FCC") established a
framework of minimum national rules that will enable the states and the FCC to
begin implementing the local competition provision of the Telecommunications
Act of 1996. The FCC's order relies heavily on the states to develop specific
rates and procedures consistent with the FCC's general rules. Included in the
order are stipulations that require local exchange carriers ("LECs") to: a)
provide interconnection to any requesting telecommunications carrier at any
technically feasible point, equal in quality to that provided by the incumbent
LEC; b) provide unrestricted access to network services on an unbundled basis;
c) provide physical collocation of equipment necessary for interconnection at
the incumbent LEC's premises, unless physical collocation is not practical for
technical reasons or because of space limitations; and d) offer for resale any
telecommunications services that the LEC provides at retail to subscribers who
are not telecommunications carriers. The order also stipulates that
commercial mobile radio service operators ("CMRS") are entitled to reciprocal
compensation arrangements and that a LEC may not charge a CMRS provider for
terminating LEC-originated traffic. The FCC's order continues to provide for
access charge recovery by LECs from interexchange carriers until it further
evaluates the issues of access charge reform and universal service. The
Company is evaluating the effects of the order.
Form 10-Q - Part I U S WEST Communications, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Other Items
In connection with the Washington State Utilities and Transportation
Commission's $91.5 rate reduction order (See "Contingencies"), U S WEST
Communications' debt securities have been placed on rating watch by Duff &
Phelps. U S WEST Communications' senior unsecured debt and commercial paper
ratings have also been lowered by Standard and Poor's in connection with a
February 27, 1996, announcement by U S WEST, Inc. of a planned merger with
Continental Cablevision, Inc. The senior unsecured debt was lowered to A-plus
from AA-minus and the commercial paper was lowered to A-1 from A-1-plus. The
credit rating of U S WEST Communications' debt securities was reaffirmed by
Moody's and is under review by Fitch.
Some of the information presented in or in connection with this report
constitutes "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Although the Company believes that
its expectations are based on reasonable assumptions within the bounds of its
knowledge of its business and operations, there can be no assurance that
actual results will not differ materially from its expectations. Factors that
could cause actual results to differ from expectations include: (i) greater
than anticipated competition from new entrants into the local exchange and
intralata toll markets, (ii) changes in demand for products and services,
including optional custom calling features, (iii) higher than anticipated
employee levels, capital expenditures, and operating expenses as a result of
unusually rapid in-region growth, (iv) the gain or loss of significant
customers, and (v) regulatory changes affecting the telecommunications
industry, including changes that could have an impact on the competitive
environment in the local exchange market.
Form 10-Q - Part II U S WEST Communications, Inc.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On April 11, 1996, the Washington State Utilities and Transportation
Commission ("WUTC" or the "Commission") acted on the Company's 1995 rate
request. In February 1995, the Company sought to increase revenues by raising
rates for basic residential services over a four-year period. The two major
issues in this proceeding involve the Company's requests for improved capital
recovery and elimination of the imputation of Yellow Pages revenue. Instead of
granting the Company's request, the Commission ordered approximately $91.5 in
annual revenue reductions, effective May 1, 1996. Based on the above ruling,
the Company filed a lawsuit with the King County Superior Court (the "Court")
for an appeal of the order, a temporary stay of the ordered rate reduction and
an authorization to implement a revenue increase.
On April 29, 1996, the Court stayed the rate decreases ordered by the WUTC.
The Court granted the stay for a period of six months or until a decision is
made on the Company's appeal. Effective May 1, 1996, the Company began
collecting revenues subject to refund with interest. The Company expects its
appeal to be successful and plans not to accrue any of the amounts subject to
refund. However, an adverse judgment on the appeal would have a significant
impact on the Company's future results of operations.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No.
- ------------------------------------------------------------------
12 Statement regarding computation of earnings
to fixed charges ratio of U S WEST
Communications, Inc.
27 Financial Data Schedule
(b) Reports on Form 8-K Filed During the Second Quarter of 1996:
(i) Form 8-K report dated April 4, 1996, concerning changes in
the registrant's certifying accountant.
Form 10-Q - Part II U S WEST Communications, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
U S WEST Communications, Inc
/s/ Allan R. Spies
____________________________
Allan R. Spies
Vice President and Controller
August 12, 1996