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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1998
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 1-14087
USW-C, Inc.
A Delaware Corporation IRS Employer No. 84-0953188
1801 California Street, Denver, Colorado 80202
Telephone Number 303-672-2700
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 __
The registrant is an indirect wholly owned subsidiary of U S WEST, Inc. At May
15, 1998, 100 shares of the Registrant's common stock was outstanding.
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This Quarterly Report on Form 10-Q for USW-C, Inc. presents unaudited historical
financial information as if the Separation (as described more fully in Note B to
the Combined Financial Statements) had occurred prior to the periods being
reported; excluding however certain effects of the Separation, such as the
assumption of indebtedness and the issuance of shares in connection with the Dex
Alignment (as defined in Note B to the Combined Financial Statements). This Form
10-Q should be read in conjunction with the Unaudited Pro Forma Condensed
Combined Financial Statements which have been filed separately by USW-C, Inc. on
Form 8-K dated May 15, 1998. Please note that prior to the Separation, USW-C,
Inc. had no significant assets or operations.
USW-C, INC.
FORM 10-Q
TABLE OF CONTENTS
Item Page
PART I - FINANCIAL INFORMATION
1. USW-C, Inc. Financial Information
Combined Statements of Income -
Three Months Ended March 31, 1998 and 1997 3
Combined Balance Sheets -
March 31, 1998 and December 31, 1997 4
Combined Statements of Cash Flows -
Three Months Ended March 31, 1998 and 1997 6
Notes to Combined Financial Statements 7
2. USW-C, Inc. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II - OTHER INFORMATION
1. Legal Proceedings 20
6. Exhibits and Reports on Form 8-K 20
Form 10-Q - Part I
COMBINED STATEMENTS OF INCOME USW-C, Inc.
(Unaudited)
- ---------------------------------------------------------------------------------- ---------------------------
Three Months Ended
March 31,
Dollars in millions 1998 1997
- ---------------------------------------------------------------------------- ------------------ --------------
Operating revenues
Local service $1,350 $1,231
Interstate access service 698 687
Intrastate access service 206 200
Long-distance network service 201 250
Directory service 307 287
Other services 247 212
------------------ --------------
Total operating revenues 3,009 2,867
Operating expenses:
Employee-related expenses 1,006 926
Other operating expenses 555 516
Taxes other than income taxes 101 112
Depreciation and amortization 532 536
------------------ --------------
Total operating expenses 2,194 2,090
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Operating income 815 777
Interest expense 97 103
Gain on sale of rural telephone exchanges: - 18
Other expense - net 25 22
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Income before income taxes 693 670
Provision for income taxes 259 250
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NET INCOME $ 434 $ 420
================== ==============
See Notes to Combined Financial Statements.
Form 10-Q - Part I
COMBINED BALANCE SHEETS USW-C, Inc.
(Unaudited)
- ------------------------------------------------------------------------ ---------------- --------------------
March 31, December 31,
Dollars in millions 1998 1997
- ------------------------------------------------------------------------ ---------------- --------------------
ASSETS
Current assets:
Cash and cash equivalents $ 373 $ 27
Accounts and notes receivable - net 1,616 1,717
Inventories and supplies 179 150
Deferred directory costs 263 257
Deferred tax asset 238 271
Prepaid and other 82 82
---------------- --------------------
Total current assets 2,751 2,504
Gross property, plant and equipment 33,930 33,651
Accumulated depreciation 19,679 19,343
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Property, plant and equipment - net 14,251 14,308
Other assets 849 855
---------------- --------------------
Total assets $ 17,851 $ 17,667
================ ====================
See Notes to Combined Financial Statements.
Form 10-Q - Part I
COMBINED BALANCE SHEETS USW-C, Inc.
(Unaudited), continued
- -------------------------------------------------------------------- ------------------- ---------------------
March 31, December 31,
Dollars in millions 1998 1997
- -------------------------------------------------------------------- ------------------- ---------------------
LIABILITIES AND EQUITY
Current liabilities:
Short-term debt $ 590 $ 497
U S WEST debt 334 198
Accounts payable 1,172 1,377
Employee compensation 315 412
Dividends payable 291 259
Advanced billings and customer deposits 350 336
Other 1,298 1,120
------------------- ---------------------
Total current liabilities 4,350 4,199
Long-term debt 4,931 5,020
Postretirement and other postemployment
benefit obligations 2,525 2,534
Deferred income taxes 825 791
Deferred credits and other 770 756
Contingencies
New U S WEST equity 4,450 4,367
------------------- ---------------------
Total liabilities and equity $ 17,851 $ 17,667
=================== =====================
See Notes to Combined Financial Statements.
Form 10-Q - Part I
COMBINED STATEMENTS OF CASH FLOWS USW-C, Inc.
(Unaudited)
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Three Months Ended March 31, 1998 1997
- ----------------------------------------------------------------------------------- ------------- ------------
(Dollars in millions)
OPERATING ACTIVITIES
Net income $434 $ 420
Adjustments to net income:
Depreciation and amortization 532 536
Gain on sale of rural telephone exchanges - (18)
Deferred income taxes and amortization of investment tax credits 65 22
Changes in operating assets and liabilities:
Postretirement medical and life costs, net of cash fundings (20) (8)
Accounts receivable 101 81
Inventories, supplies and other current assets (41) (38)
Accounts payable and accrued liabilities 135 219
Other - net 3 (8)
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Cash provided by operating activities 1,209 1,206
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INVESTING ACTIVITIES
Expenditures for property, plant and equipment (563) (401)
Proceeds from sale of rural telephone exchanges - 7
Proceeds from (payments on) disposals of
property, plant and equipment 19 (7)
Purchase of PCS licenses (18) -
------------ ------------
Cash used for investing activities (562) (401)
------------ ------------
FINANCING ACTIVITIES
Net proceeds from (repayments of) short-term debt 119 (429)
Net repayments of U S WEST debt (44) (32)
Repayments of long-term debt (23) (55)
Proceeds from issuance of common stock 17 24
Dividends paid on common stock (259) (237)
Dividends paid to U S WEST (90) (75)
Purchases of treasury stock (21) -
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Cash used for financing activities (301) (804)
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CASH AND CASH EQUIVALENTS
Increase 346 1
Beginning balance 27 80
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Ending balance $373 $ 81
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See Notes to Combined Financial Statements.
Form 10-Q - Part I
USW-C, Inc.
NOTES TO COMBINED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 1998
(Dollars in millions)
(Unaudited)
A. Summary of Significant Accounting Policies
Basis of Presentation. USW-C, Inc. ("New U S WEST" or the "Company") is
incorporated under the laws of the State of Delaware and is currently an
indirect wholly-owned subsidiary of U S WEST, Inc. ("U S WEST").
The Combined Financial Statements have been prepared by New U S WEST pursuant to
the interim reporting rules and regulations of the Securities and Exchange
Commission ("SEC"). Certain information and footnote disclosures normally
accompanying financial statements prepared in accordance with generally accepted
accounting principles ("GAAP") have been condensed or omitted pursuant to such
SEC rules and regulations. In the opinion of New U S WEST's management, the
Combined 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 Combined Financial Statements be read
in conjunction with the 1997 New U S WEST Combined Financial Statements and
notes thereto included in U S WEST's proxy statement mailed to all shareowners
on April 20, 1998.
B. U S WEST Separation
On October 25, 1997, the Board of Directors of U S WEST adopted a proposal to
separate U S WEST into two independent companies (the "Separation"). U S WEST
currently conducts its business through two groups: the U S WEST Communications
Group (the "Communications Group"), which includes the communications businesses
of U S WEST, and the U S WEST Media Group (the "Media Group"), which includes
the multimedia businesses of U S WEST. As a result of the Separation, the
Communications Group will become an independent public company and will be
renamed "U S WEST, Inc." In addition, Media Group's directory business known as
U S WEST Dex, Inc. ("Dex") will be aligned with New U S WEST (the "Dex
Alignment"). Following the Separation, U S WEST will continue as an independent
public company comprised of the current businesses of Media Group other than Dex
and will be renamed "MediaOne Group, Inc." ("MediaOne").
Form 10-Q - Part I
USW-C, Inc.
NOTES TO COMBINED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 1998
(Dollars in millions)
(Unaudited)
The Separation will be implemented pursuant to the terms of a separation
agreement between U S WEST and New U S WEST (the "Separation Agreement"). In
connection with the Dex Alignment, (i) U S WEST will distribute, as a dividend,
an aggregate of $850 in value of New U S WEST common stock to holders of Media
Group common stock and (ii) $3.9 billion of U S WEST debt, currently allocated
to Media Group, will be refinanced by New U S WEST (the "Dex Indebtedness").
The New U S WEST Combined Financial Statements include the combined historical
results of operations, balance sheets and cash flows of the businesses that
comprise the Communications Group and Dex, as if such businesses operated as a
separate entity for all periods and as of all dates presented. Certain of the
terms of the Separation Agreement and the Dex Alignment, including the
refinancing of $3.9 billion of Dex Indebtedness by New U S WEST, the issuance of
$850 of New U S WEST Common Stock, the transfer to New U S WEST of certain
assets and liabilities of U S WEST and the allocation of certain costs and
expenses of the Separation, are not reflected in the accompanying New U S WEST
Combined Financial Statements. As a result, historical earnings per share of New
U S WEST are not meaningful until the financial effects of the Separation, which
are significant, are reflected in the historical statements of New U S WEST. The
full financial effects of the Separation and Dex Alignment will be reflected in
the financial statements in conjunction with the Separation's effective date
(the "Separation Date"). These Combined Financial Statements should be read in
conjunction with the New U S WEST Unaudited Pro Forma Condensed Combined
Financial Statements which have been separately filed under Form 8-K dated May
15,1998.
Further information about the Separation is contained in U S WEST's proxy
statement mailed to all shareowners on April 20, 1998. U S WEST shareowners have
been asked to consider and approve the Separation at its annual meeting to be
held on June 4, 1998. Subject to shareowner approval, the transaction is
expected to be completed by mid-June 1998.
Form 10-Q - Part I
USW-C, Inc.
NOTES TO COMBINED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 1998
(Dollars in millions)
(Unaudited)
C. Contingencies
At U S WEST Communications, Inc. ("U S WEST Communications") there are pending
regulatory actions in local regulatory jurisdictions that call for price
decreases, refunds or both.
Oregon. On May 1, 1996, the Oregon Public Utilities Commission ("OPUC") approved
a stipulation terminating prematurely U S WEST Communications' alternative form
of regulation ("AFOR") plan, and it then undertook a review of U S WEST
Communications' earnings. In May 1997, the OPUC ordered U S WEST Communications
to reduce its annual revenues by $97, effective May 1, 1997, and to issue a
one-time refund, including interest, of approximately $102 to reflect the
revenue reduction for the period May 1, 1996 through April 30, 1997. The
one-time refund is for interim rates which became subject to refund when U S
WEST Communications' AFOR plan was terminated on May 1, 1996.
U S WEST Communications filed an appeal of the order and asked for an immediate
stay of the refund with the Oregon Circuit Court which granted U S WEST
Communications' request for a stay, pending a full review of the OPUC's order.
On February 19, 1998, the Oregon Circuit Court entered a judgment in U S WEST
Communications' favor on most of the appealed issues. The OPUC appealed on March
19, 1998. The potential exposure, including interest, at March 31, 1998, is not
expected to exceed $210.
Utah. In another proceeding, the Utah Supreme Court has remanded a Utah Public
Service Commission ("UPSC") order to the UPSC for hearing, thereby establishing
two exceptions to the rule against retroactive ratemaking: 1) unforeseen and
extraordinary events, and 2) misconduct. The UPSC's initial order denied a
refund request from interexchange carriers ("IXCs") and other parties related to
the Tax Reform Act of 1986. The potential exposure, including interest, at March
31, 1998, is not expected to exceed $160.
State Regulatory Accruals. U S WEST Communications has accrued $148 at March 31,
1998, which represents its estimated liability for all state regulatory
proceedings, predominately the items discussed above. It is possible that the
ultimate liability could exceed the recorded liability by an amount up to
approximately $220. U S WEST Communications will continue to monitor and
evaluate the risks associated with its local regulatory jurisdictions, and will
adjust estimates as new information becomes available.
Form 10-Q - Part I
USW-C, Inc.
NOTES TO COMBINED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 1998
(Dollars in millions)
(Unaudited)
In addition to its estimated liability for state regulatory proceedings, U S
WEST Communications has an accrued liability of approximately $230 at March 31,
1998 related to refunds in the state of Washington. U S WEST Communications
expects that the majority of these refunds will be issued to ratepayers, IXCs
and independent local exchange carriers ("LECs") during the second- and
third-quarters of 1998.
D. Subsequent Event - Debt Refinancing
In connection with the Separation, New U S WEST and MediaOne are seeking to
refinance substantially all of the indebtedness issued or guaranteed by U S WEST
(the "U S WEST Indebtedness") through a combination of tender offers,
prepayments, defeasance, consent solicitations and/or exchange offers (the
"Refinancing").
After the Separation and related Refinancing, New U S WEST will have
approximately $9.9 billion of debt, which will include $5.5 billion of U S WEST
Communications indebtedness and $4.4 billion of U S WEST Indebtedness, which
includes the effects of the Refinancing (which includes the Dex Indebtedness)
and the funding of certain costs of the Separation. New U S WEST, through its
financing subsidiary U S WEST Capital Funding, Inc. ("Capital Funding"), will
initially finance the repurchase or repayment of U S WEST Indebtedness with
commercial paper. Following consummation of the Separation, New U S WEST will
issue medium and long-term securities to refinance a portion of the commercial
paper.
In May 1998, New U S WEST entered into revolving bank credit facilities to
support its commercial paper program. New U S WEST's credit facility totals $4.5
billion; $3.5 billion matures in one year and $1.0 billion matures in five
years.
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions)
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, intraLATA
toll, wireless, data and directories markets, (ii) changes in demand for the
Company's products and services, including optional custom calling features,
(iii) higher than anticipated employee levels, capital expenditures, and
operating expenses (such as costs associated with year 2000 remediation), (iv)
the loss of significant customers, (v) pending regulatory actions in state
jurisdictions, (vi) regulatory changes affecting the telecommunications
industries, including changes that could have an impact on the competitive
environment in the local exchange market, (vii) a change in economic conditions
in the various markets served by the Company's operations that could adversely
affect the level of demand for telephone, wireless, directories or other
services offered by the Company, (viii) greater than anticipated competitive
activity requiring new pricing for services, (ix) higher than anticipated
start-up costs associated with new business opportunities, (x) increases in
fraudulent activity with respect to wireless services, (xi) delays in the
Company's ability to begin offering interLATA long-distance services, (xii)
consumer acceptance of broadband services, including telephony, data, and
wireless services, or (xiii) delays in the development of anticipated
technologies, or the failure of such technologies to perform according to
expectations.
Results of Operations - First Quarter 1998 Compared with First Quarter 1997
The following discussion is based on the New U S WEST Combined Financial
Statements prepared in accordance with GAAP. The financial information for New U
S WEST included in the following discussion combines the historical results of
operations, balance sheets and cash flows of the businesses that comprise the
Communications Group and Dex as if such businesses operated as a separate entity
for all periods and as of all dates presented.
Certain terms of the Separation Agreement, including the refinancing of $3.9
billion of Dex Indebtedness by New U S WEST, the issuance of $850 of New U S
WEST Common Stock in connection with the Dex Alignment, the transfer of certain
assets and liabilities of U S WEST to New U S WEST and the allocation of certain
costs and expenses in connection with the Separation, are not reflected in the
discussion below. As a result, historical earnings per share of
Form 10-Q - Part I
Item 2. Management's Discussion and Anlysis of Financial Condition and Results
of Operations (Dollars in millions), continued
New U S WEST are not meaningful until the financial effects of the Separation,
which are significant, are reflected in the historical statements of New U S
WEST. These financial effects will be included in historical results upon
execution of the Separation Agreement. This discussion should be read in
conjunction with the New U S WEST Unaudited Pro Forma Condensed Combined
Financial Statements which have been filed separately on Form 8-K dated May 15,
1998.
Net Income
- --------------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31, Increase
1998 1997 $ %
- -------------------------------------------------------------------------------------------------------------------
Reported net income $434 $420 $14 3.3
Adjustment to reported net income:
Gain on sale of rural telephone exchanges(1) - (11) 11 -
------------------------------------------------
Normalized income $434 $409 $25 6.1
===================================================================================================================
<FN>
(1) In first-quarter 1997, New U S WEST sold certain rural telephone exchanges
in Nebraska for a pretax gain of $18 and an after-tax gain of $11.
</FN>
During 1998, New U S WEST's normalized income increased $25, or 6.1 percent, to
$434. The increase in normalized income is primarily due to higher demand for
services partially offset by interstate access rate reductions, higher expenses
related to interconnection and start-up costs associated with growth
initiatives, including wireless personal communications services ("PCS").
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions), continued
Operating Revenues
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Three Months Ended Increase
March 31, (Decrease)
-------------------------------------------------
1998 1997 $ %
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Communications and related services
Local service $1,350 $1,231 $119 9.7
Interstate access service 698 687 11 1.6
Intrastate access service 206 200 6 3.0
Long-distance network services 201 250 (49) (19.6)
Other services 255 219 36 16.4
------------------------------------------------
2,710 2,587 123 4.8
Directory services 307 287 20 7.0
Intersegment eliminations (8) (7) (1) (14.3)
------------------------------------------------
Total $3,009 $2,867 $142 5.0
=========================================================================================================
Communications and Related Services
Local Service Revenues. During 1998, local service revenues increased $119, or
9.7 percent, to $1,350, primarily as a result of access line growth and
increased demand for new product and service offerings, and existing central
office features. Total reported access lines increased 568,000, or 3.6 percent,
during the past 12 months, of which 284,000 was attributable to second lines.
Second line installations increased 25.2 percent. Access lines grew 634,000, or
4.1 percent, when adjusted for sales of approximately 66,000 rural telephone
access lines during the past twelve months. Also contributing to the increase in
revenues were rate increases of $17 in various states, and interim compensation
revenues from IXCs as a result of the FCC payphone orders which took effect in
April 1997.
Interstate Access Service Revenues. Interstate access service revenues increased
$11, or 1.6 percent, to $698 during 1998, primarily due to a change in the
classification of universal service fundings which increased revenues by $19. In
1997 these fundings were offset against interstate access service revenues
through a contra-revenue account. Beginning in 1998 these fundings are recorded
as access expense within other operating expense. Excluding the effects of the
reclassification, interstate access revenues declined $8, or 1.2 percent,
primarily due to the effects of lower prices under the FCC's current price cap
plan and the effects of 1997 true-ups to sharing-related accruals. Partially
offsetting these decreases were the effects of a 6.1 percent increase in billed
interstate access minutes of use and increased demand for private line services.
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions), continued
Intrastate Access Service Revenues. Intrastate access service revenues increased
$6 in 1998, or 3.0 percent, to $206, primarily due to a 7.1 percent increase in
billed intrastate minutes of use and higher demand for private line services.
Partially offsetting the increase were net rate reductions of $5 in local
jurisdictions, the majority of which were in the state of Washington.
Long Distance Network Services Revenues. Long-distance network services revenues
decreased $49, or 19.6 percent, to $201, primarily due to the effects of
competition and rate reductions of $14 in local jurisdictions. Also contributing
to the decline were the implementation of multiple toll carrier plans ("MTCPs")
in various jurisdictions in 1997. The MTCPs essentially allow independent
telephone companies to act as toll carriers and are net income neutral with the
reduction in toll revenues largely offset by increased intrastate access service
revenues and lower access expense.
Other Services Revenues. Revenues from other services increased $36, or 16.4
percent, to $255, primarily as a result of greater sales of inside wire
maintenance and continued market penetration in voice messaging services.
Increased sales of wireless communication services and other unregulated
products and services also contributed to the increase.
Directory Services
Revenues related to Yellow Pages directory advertising, which represent 99
percent of directory services revenues, increased $20, or 7.0 percent, to $304.
The increase is driven by a 5.8 percent increase in revenue per local advertiser
primarily resulting from price increases of 4.7 percent and an increase in
volume and complexity of advertisements sold.
Intersegment Eliminations
Intersegment eliminations consist primarily of sales of customer lists, billing
and collection services and other services by U S WEST Communications to Dex at
market price. Also included are commercial property management services provided
by U S WEST Business Resources, Inc. to Dex.
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions) , continued
Costs and Expenses
--------------------------------------------------------------------------------------------------------------------
Three Months Ended Increase
March 31, (Decrease)
-------------------------------------------------
1998 1997 $ %
--------------------------------------------------------------------------------------------------------------------
Employee-related expenses $1,006 $926 $80 8.6
Other operating expenses 555 516 39 7.6
Taxes other than income taxes 101 112 (11) (9.8)
Depreciation and amortization 532 536 (4) (0.7)
Interest expense 97 103 (6) (5.8)
Gain on sale of rural telephone exchanges - 18 (18) -
Other expense - net 25 22 3 13.6
--------------------------------------------------------------------------------------------------------------------
Employee-Related Expenses. Total employee-related expenses increased $80, or 8.6
percent, to $1,066 during 1998 primarily due to higher contract labor costs and
increased salaries and wages. The higher contract labor costs were predominately
a result of systems development work (which includes expenses related to
interconnection and year 2000 costs) and marketing and sales efforts. Higher
salaries and wages were a result of workforce increases and wage increases.
Other Operating Expenses. Other operating expenses increased $39, or 7.6
percent, to $555 during 1998. The increase is primarily due to interconnection
expenses of approximately $30 and costs associated with growth initiatives
(primarily PCS). Other operating expenses also increased $19 due to the change
in the classification of the universal service funding expenses. Partially
offsetting the increases were reduced access expense (primarily due to
dial-around competition and the MTCPs) and a 1997 reserve adjustment associated
with billing and collection activities performed for IXCs.
Taxes Other Than Income Taxes. Taxes other than income taxes decreased $11, or
9.8 percent, primarily as a result of adjustments related to the 1997 property
tax accrual.
Interest Expense. Interest expense decreased $6, or 5.8 percent, to $97,
primarily as a result of lower average debt levels as compared to 1997.
Partially offsetting the decrease was a reduction in the amount of interest
capitalized resulting from a lower average balance of telecommunications plant
under construction. Interest expense will increase significantly after the
Separation due to the Dex Alignment, which will result in the refinancing of
$3.9 billion of Dex Indebtedness.
Gain On Sale of Rural Telephone Exchanges. In 1997, the Company sold certain
rural telephone exchanges in Nebraska resulting in a pretax gain of $18.
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions), continued
Other Expense - Net. Other expense increased primarily due to additional
interest expense associated with the Company's state regulatory liabilities.
Liquidity and Capital Resources
Operating Activities
Cash provided by operating activities was $1,209 and $1,206 during the first
three months of 1998 and 1997, respectively. The slight increase during 1998, as
compared with 1997, reflects the effects of business growth in both the
communications and directory businesses, lower tax payments and lower
restructuring expenditures largely offset by a reduction in accounts payable.
The Company's operating cash flow during the second- and third-quarters of 1998
will be affected by the payment of approximately $205 of rate refunds and $25 of
interest in the state of Washington. The rate refunds are for revenues that were
collected subject to refund (with interest) from May 1, 1996 through January 31,
1998.
Operating cash flow will also be affected during the second-quarter of 1998 by
the payment of New U S WEST's allocated share of Separation costs, estimated at
$45 (after-tax).
Investing Activities
Total capital expenditures, on a cash basis, were $563 during first-quarter
1998, of which the majority related to access line growth and continued
improvement of the telecommunications network. Expenditures associated with
entering wireless communications markets and meeting the Telecommunications Act
requirements including interconnection and local number portability also
impacted capital expenditures.
During first-quarter 1998, New U S WEST paid $18 to purchase PCS licenses in
connection with its launch of PCS service in various markets.
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions), continued
Financing Activities
Debt Activity
During first quarter, total debt increased $140 and the percentage of debt to
total capital increased from 56.7 percent at December 31, 1997 to 56.8 percent
at March 31, 1998.
Total debt and the percentage of debt to total capital will increase
significantly during the second quarter of 1998 due to the Dex Alignment, which
will result in the refinancing of $3.9 billion of Dex Indebtedness by New U S
WEST and a corresponding reduction in equity. In addition, New U S WEST will
incur additional debt in 1998 to fund certain one-time expenses associated with
the Separation and costs associated with the Refinancing. During the
second-quarter of 1998, New U S WEST will pay to MediaOne $122 for its
allocated, after-tax share of Refinancing costs. See "Effects of the Separation
and the Refinancing."
Historically, U S WEST has funded the nonregulated activities of New U S WEST,
including Dex, with short-term advances. The net repayments of such short-term
advances were $44 and $32 during the first-quarter of 1998 and 1997,
respectively. Upon execution of the Separation Agreement, management anticipates
New U S WEST will fund the nonregulated businesses, including Dex, with
short-term advances.
Prior to the Separation, Dex paid dividends to U S WEST equal to its net income
adjusted for the amortization of intangibles. These dividends totaled $90 and
$75 during the first-quarter of 1998 and 1997, respectively.
U S WEST Communications and New U S WEST Credit Ratings
During the first quarter of 1998, Moody's downgraded U S WEST Communications'
senior unsecured debt from Aa3 to A2 due to recent regulatory rulings and
financial challenges associated with the Separation. See "Contingencies." U S
WEST Communications' debt remains under review by Moody's for possible downgrade
pending clarification of New U S WEST's corporate structure and future strategic
initiatives.
On May 7, 1998, Duff & Phelps reaffirmed U S WEST Communications' senior
unsecured debt and commercial paper ratings of AA- and D-1+. In addition, Duff &
Phelps announced that the credit ratings to be assigned to the senior unsecured
debt and commercial paper of Capital Funding following the consummation of the
Separation will be A and D-1, respectively.
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions), continued
Other Items
U S WEST from time to time engages in preliminary discussions regarding
restructurings, dispositions and other similar transactions. Any such
transaction may include, among other things, the transfer of certain assets,
businesses or interests, or the incurrence or assumption of indebtedness, and
could be material to the financial condition and results of operations of U S
WEST. There is no assurance that any such discussions will result in the
consummation of any such transaction.
Effects of the Separation and the Refinancing
In connection with the Separation, New U S WEST and MediaOne are seeking to
refinance substantially all of the U S WEST Indebtedness through a combination
of tender offers, prepayments, defeasance, consent solicitations and/or exchange
offers.
After the Separation and related Refinancing, New U S WEST will have
approximately $9.9 billion of debt, which will include $5.5 billion of U S WEST
Communications indebtedness and $4.4 billion of U S WEST Indebtedness, which
includes the effects of the Refinancing (which includes the Dex Indebtedness)
and the funding of certain costs of the Separation. New U S WEST, through its
financing subsidiary Capital Funding, will initially finance the repurchase or
repayment of U S WEST Indebtedness with commercial paper. Following consummation
of the Separation, New U S WEST will issue medium and long-term securities to
refinance a portion of the commercial paper.
U S WEST, after consultation with and based upon the advice of its financial
advisors, believes that New U S WEST has sufficient financing capability to
accomplish the refinancings described above.
In May 1998, New U S WEST entered into revolving bank credit facilities to
support its commercial paper program. New U S WEST's credit facility totals $4.5
billion; $3.5 billion matures in one year and $1.0 billion matures in five
years.
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions), continued
Contingencies
At U S WEST Communications there are pending regulatory actions in local
regulatory jurisdictions that call for price decreases, refunds or both.
Oregon. On May 1, 1996, the OPUC approved a stipulation terminating prematurely
U S WEST Communications' AFOR plan, and it then undertook a review of U S WEST
Communications' earnings. In May 1997, the OPUC ordered U S WEST Communications
to reduce its annual revenues by $97, effective May 1, 1997, and to issue a
one-time refund, including interest, of approximately $102 to reflect the
revenue reduction for the period May 1, 1996 through April 30, 1997. The
one-time refund is for interim rates which became subject to refund when U S
WEST Communications' AFOR plan was terminated on May 1, 1996.
U S WEST Communications filed an appeal of the order and asked for an immediate
stay of the refund with the Oregon Circuit Court which granted U S WEST
Communications' request for a stay, pending a full review of the OPUC's order.
On February 19, 1998, the Oregon Circuit Court entered a judgment in U S WEST
Communications' favor on most of the appealed issues. The OPUC appealed on March
19, 1998. The potential exposure, including interest, at March 31, 1998, is not
expected to exceed $210.
Utah. In another proceeding, the Utah Supreme Court has remanded a UPSC order to
the UPSC for hearing, thereby establishing two exceptions to the rule against
retroactive ratemaking: 1) unforeseen and extraordinary events, and 2)
misconduct. The UPSC's initial order denied a refund request from IXCs and other
parties related to the Tax Reform Act of 1986. The potential exposure, including
interest, at March 31, 1998, is not expected to exceed $160.
State Regulatory Accruals. U S WEST Communications has accrued $148 at March 31,
1998, which represents its estimated liability for all state regulatory
proceedings, predominately the items discussed above. It is possible that the
ultimate liability could exceed the recorded liability by an amount up to
approximately $220. U S WEST Communications will continue to monitor and
evaluate the risks associated with its local regulatory jurisdictions, and will
adjust estimates as new information becomes available.
In addition to its estimated liability for state regulatory proceedings, U S
WEST Communications has an accrued liability of approximately $230 at March 31,
1998 related to refunds in the state of Washington. U S WEST Communications
expects that the majority of these refunds will be issued to ratepayers, IXCs
and independent LECs during the second- and third-quarters of 1998.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company and its subsidiaries are subject to claims and proceedings arising
in the ordinary course of business. While complete assurance cannot be given as
to the outcome of any contingent liabilities, in the opinion of the Company, any
financial impact to which the Company and its subsidiaries are subject is not
expected to be material in amount to the Company's operating results or its
financial position.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number
10A 364-Day $3.5 Billion Credit Agreement with Morgan Guaranty Trust Company of
New York as Administrative Agent.
10B Five-Year $1 Billion Credit Agreement with Morgan Guaranty Trust Company of
New York as Administrative Agent.
12 Statement regarding computation of earnings to fixed charges ratio of
USW-C, Inc.
27 Financial Data Schedule
(b) Reports on Form 8-K filed during the First Quarter of 1998:
No reports on Form 8-K were filed during the First Quarter of 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
/S/ Allan R. Spies
May 15, 1998 USWC-C, Inc.
Allan R. Spies
Executive Vice President and
Chief Financial Officer