U S West Communications will cut 9,000 jobs and change accounting standards to bolster competitiveness as the battle for local telephone customers heats up.
The company's bonds firmed slightly after its announcement Friday, traders said. U S West Communications' 7 1/2% debentures due 2023 tightened by about two basis points, bid 88 basis points over comparable Treasuries from 90.
The job phaseouts, part of an effort to provide better customer service, will take place over the next three years, the company said in a release.
Those changes, together with the accounting changes, will mean a $3.8 billion after-tax hit to parent company U S West Inc.'s third-quarter net income, the release says.
"Competition is rapidly spreading from long-distance to local markets, Richard McCormick, U S West chairman and chief executive officer, said in the release. "It's coming from local access, cable and wireless companies, and it's changing all the rules of our business, including accounting rules that we apply when reporting our results."
Tim Caffrey, a Standard & Poor's Corp. analyst, called U S West Communications' actions "aggressive cost-cutting."
"It's more than just cost cutting; they are really changing the way they run the company's operations," Caffrey said.
Following the U S West Communications announcement, Standard & Poor's affirmed the company's AA-minus senior unsecured debt rating and its A-1-plus commercial paper rating.
The action affects about $5.4 billion of debt. The ratings are not on CreditWatch.
Caffrey noted, however, that ratings of U S West Inc., U S West Capital Funding, and U S West Financial Services Inc. remain on CreditWatch for a possible downgrade. U S West Communications is the local telephone subsidiary of U S West Inc.
According to U S West spokeswoman Lois Leach, U S West Communications saw increasing competition ahead and surveyed its customers to find out what changes they wanted to prevent them from going elsewhere.
In response to customers' requests, the company is "re-engineering" many of its internal operations and streamlining its business to increase efficiency.
"Improving customer service is the driving force behind these changes," Gary Ames, U S West Communications president and chief executive officer, said in the release. "Sadly, it also will involve the phaseout of 9,000 jobs, over the next three years. This is a side effect of competition that's very painful to all of us."
To serve its customers better, U S West Communications will invest in new technology and rework may of its internal operations. That reworking will entail shifting work from 560 small offices scattered throughout 14 states to 26 new centers, Leach said.
The customer service improvement plan will account for $610 million of the $3.8 billion after tax impact on third-quarter earnings. The accounting changes will represent $3.2 billion.
"We are trying to make our books look more like our competitors," Leach said.
The Financial Accounting Standards Board sets accounting rules for all publicly traded companies. Regulated companies, like U S West Communications, and unregulated companies follow different provisions of Generally Accepted Accounting Principles.
Regulated companies that qualify follow GAAP provisions contained in Financial Accounting Standard 71.
However, as technology advances and competition increases, those standards are no longer appropriate for U S West, Leach said. For instance, US West Communications is required to carry on its books the cost of depreciating digital switches over 18 years. But with the accounting changes announced Friday, the company will reflect "shorter, more market-based depreciation" on its financial books and the depreciation time for those digital switches will be trimmed to 10 years.
In secondary trading, spreads on high-grade issues ended unchanged. High-yield issues were slightly firmer, but activity was thin owing to observance of the Jewish New Year.
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