<PAGE> 1
________________________________________________________________
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 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
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Forty Year 3-1/4% Debentures due
February 1, 1996 New York Stock Exchange
Registered pursuant to Section 12 (g) of the Act: None.
THE REGISTRANT, AN INDIRECT, WHOLLY-OWNED SUBSIDIARY OF
U S WEST, INC., MEETS THE CONDITIONS SET FORTH IN GENERAL
INSTRUCTION J(1)(a) AND (b) OF FORM 10-K AND IS THEREFORE FILING
THIS FORM WITH REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL
INSTRUCTION J(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_
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of the registrants
knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ***
*** Not applicable in that registrant is an indirect, wholly
owned subsidiary.
The total number of pages contained in this report, including
exhibits, is 42 and the exhibit index is on page 38.
----------------------------------------------------------------
<PAGE> 2
U S WEST COMMUNICATIONS, INC.
FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Description Page
PART I
<S> <C> <C>
1. Business (Abbreviated pursuant to General
Instruction J(2)) . . . . . . . . . . . . 3
2. Properties (Abbreviated pursuant to General
Instruction J(2)) . . . . . . . . . . . 6
3. Legal Proceedings . . . . . . . . . . . . 7
4. Submission of Matters to a Vote of Security
Holders (Inapplicable).
<CAPTION>
PART II
<S> <C> <C>
5. Market for the Registrant's Common Equity and
Related Shareowner Matters (Inapplicable).
6. Selected Financial Data (Omitted pursuant to General
Instruction J(2)).
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Omitted
pursuant to General Instruction J(2).
See "Management's Discussion.") . . . . . . . 8
8. Consolidated Financial Statements and
Supplementary Data. . . . . . . . . . . . 21
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure (None).
<CAPTION>
PART III
<S> <C> <C>
10. Directors and Executive Officers of the Registrant
(Omitted pursuant to General Instruction J(2)).
11. Executive Compensation (Omitted pursuant to General
Instruction J(2)).
12. Security Ownership of Certain Beneficial Owners
and Management (Omitted pursuant to General
Instruction J(2)).
13. Certain Relationships and Related Transactions
(Omitted pursuant to General Instruction J(2)).
<CAPTION>
PART IV
<S> <C> <C>
14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K . . . . . . . . . . . . . . 38
</TABLE>
2
<PAGE> 3
U S WEST COMMUNICATIONS, INC.
FORM 10-K
PART I
ITEM 1. BUSINESS
General
U S WEST Communications, Inc. (the "Company") is incorporated
under the laws of the State of Colorado and has its principal
offices at 1801 California Street, Denver, Colorado, 80202,
telephone number (303) 896-3099. The Company is an indirect,
wholly owned subsidiary of U S WEST, Inc. ("U S WEST").
The Company was formed January 1, 1991, when Northwestern Bell
Telephone Company ("Northwestern Bell") and Pacific Northwest
Bell Telephone Company ("Pacific Northwest Bell") were merged
into The Mountain States Telephone and Telegraph Company
("Mountain Bell"), which simultaneously changed its name to
U S WEST Communications, Inc. U S WEST acquired ownership of
Mountain Bell, Northwestern Bell and Pacific Northwest Bell on
January 1, 1984, when American Telephone and Telegraph Company
("AT&T") transferred its ownership interests in these three
wholly-owned operating telephone companies to U S WEST. This
divestiture was made pursuant to a court approved consent decree
entitled the Modification of Final Judgment ("MFJ"), which arose
out of an antitrust action brought by the United States
Department of Justice against AT&T.
Company Operations
The Company provides telecommunications services in the
states of Arizona, Colorado, Idaho, Iowa, Minnesota, Montana,
Nebraska, New Mexico, North Dakota, Oregon, South Dakota, Utah,
Washington and Wyoming (the "14 state region"). The Company
serves approximately 80% of the population in these states and
approximately 40% of the land area. At December 31, 1994, the
Company had approximately 14,336,000 telephone network access
lines in service, a 3.6% increase over year end 1993. (4.0%
growth excluding the effects of the sale of 60,000 lines in rural
telephone exchanges.)
Under the terms of the MFJ, the 14 state region was divided
into 29 geographical areas called local access and transport
areas ("LATAs") with each LATA generally centered on a
metropolitan area or other identifiable community of interest.
The principal types of telecommunications services offered by the
Company are (i) local service, (ii) intraLATA long-distance
service and (iii) exchange access service (which connects
customers to the facilities of interLATA service providers).
For the year ended December 31, 1994, local service, exchange
access service and intraLATA long distance service accounted for
45%, 33% and 15%, respectively, of the sales and other revenues
of the Company. In 1994, revenues from a single customer, AT&T,
accounted for approximately 13% of the Company's sales and other
revenues.
Research and Development
The Company recognized $23, $42 and $55 for research and
development expense in 1994, 1993 and 1992, respectively.
Approximately half of this activity was conducted at Bell
Communications Research, Inc., one-seventh of which is owned by
Company.
3
<PAGE> 4
U S WEST COMMUNICATIONS, INC.
FORM 10-K
PART I
ITEM 1. BUSINESS (continued)
Regulation
The Company is subject to varying degrees of regulation by
state commissions with respect to intrastate rates and service,
and access charge tariffs. Under traditional rate of return
regulation, intrastate rates are generally set on the basis of
the amount of revenues needed to produce an authorized rate of
return (refer to page 9 of Management's Discussion).
The Company has sought alternative forms of regulation
("AFOR") plans which provide for competitive parity, enhanced
pricing flexibility and improved capability in bringing to market
new products and services. In a number of states where AFOR
plans have been adopted, such actions have been accompanied by
requirements to refund revenues, reduce existing rates or upgrade
service, any of which could have adverse short-term effects on
earnings. Similar agreements may have resulted under traditional
rate of return regulation (refer to page 18 of Management's
Discussion).
The Company is also subject to the jurisdiction of the
Federal Communications Commission ("FCC") with respect to
interstate access tariffs (that specify the charges for the
origination and termination of interstate communications) and
other matters. The Company's interstate services have been
subject to price cap regulation since January 1991. Price caps
are a form of incentive regulation and, ostensibly, limit prices
rather than profits. However, the FCC's price cap plan includes
sharing of earnings in excess of authorized levels with
interexchange carriers. The Company believes that competition
will ultimately be the determining factor in pricing telecom-
munications services. In January 1994, the FCC announced that it
will begin reviewing its current form of regulation.
Competition
Historically, communications, entertainment and information
services were provided by different companies in different
industries. The convergence of these technologies is changing
both the competitive environment and the way the Company does
business. This convergence, which is being fueled by techno-
logical advances, will lead to more intense competition from
companies with which the Company has not historically competed.
The Company's principal current competitors are competitive
access providers ("CAPs"). Competition from CAPs is currently
limited to providing large business customers (with high-volume
traffic) private line access to the facilities of interexchange
carriers. AT&T's entrance into the cellular communications
market through its acquisition of McCaw Cellular Communications,
Inc. may create increased competition in local exchange as well
as cellular services. The loss of local exchange customers to
competitors would affect multiple revenue streams, including
those related to local and access services, and long distance
network services, and could have a material, adverse effect on
the Company's operations.
In addition to CAPs and providers of wireless services, a
major potential source of future competition includes cable
television companies which may offer telecommunications and
other information services in addition to existing video
services.
4
<PAGE> 5
U S WEST COMMUNICATIONS, INC.
FORM 10-K
PART I
ITEM 1. BUSINESS (continued)
Competition (continued)
Competition from long distance companies continues to erode the
Company's market share of intraLATA long distance services such
as WATS and "800." These revenues have declined over the last
several years as customers have migrated to interexchange
carriers that have the ability to offer these services on both an
intraLATA and interLATA basis. The Company is prohibited from
providing interLATA long distance services.
The actions of state and federal public policymakers will
play an important role in determining how increased competition
affects the Company. The Company is working with regulators and
legislators to help ensure that public policies keep pace with
our rapidly changing industry and allow the Company to bring new
services to the marketplace.
The Company supports regulatory reform. It is increasingly
apparent that the legal and regulatory framework under which the
Company operates, which includes restrictions on equipment
manufacturing, prohibitions on cross-ownership of cable
television by telephone companies and restrictions on the
transport of communications, entertainment and information
across LATA boundaries, limits both competition and consumer
choice. The Company believes that it is in the public interest
to lift these restrictions and to place all competitors under
the same rules to ensure the industry's technological develop-
ment and long-term financial health.
Competitive Strategy
The Company intends to implement its competitive strategy by
focusing on three key objectives: 1) business growth through the
development of broadband networks; 2) customer loyalty through
continuous improvement in customer service; and 3) improved
productivity through systems re-engineering and other cost
controls.
5
<PAGE> 6
U S WEST COMMUNICATIONS, INC.
FORM 10-K
PART I
ITEM 2. PROPERTIES
The properties of the Company do not lend themselves to
description by character and location of principal units. At
December 31, 1994, the percentage distribution of total net
telephone plant by major category for the Company was as
follows:
<TABLE>
<CAPTION>
<S> <C> <C>
a. Connecting lines not on customers'
premises ............................ 36%
b. Central office equipment ............ 39%
c. Land and buildings (occupied
principally by central offices) ..... 14%
d. General equipment and vehicles ...... 10%
e. Miscellaneous equipment and inside
wiring (substantially all of which
are on the premises of customers) ... 1%
</TABLE>
At December 31, 1994, substantially all of the installations of
central office equipment were located in buildings owned by the
Company situated on land which it owns in fee, while many
garages, and administrative and business offices were in leased
quarters.
Total investment in telephone plant increased to $29.4 billion
at December 31, 1994, from $28.0 billion at December 31, 1993,
after giving effect to retirements, but before deducting
accumulated depreciation. The Company's 1994 capital
expenditures of $2.5 billion were substantially devoted to the
continued modernization of telephone plant, including
investments in fiber optic cable, to improve customer services
and network productivity. 1995 capital expenditures are
anticipated to be $2.1 billion and the majority of these are
expected to be financed through internally generated funds.
6
<PAGE> 7
U S WEST COMMUNICATIONS, INC.
FORM 10-K
PART I
ITEM 3. LEGAL PROCEEDINGS
With respect to lawsuits, proceedings and other claims pending
at year-end, it is the opinion of management that after final
disposition, any monetary liability or financial impact to the
Company beyond that provided at year-end, would not be material
to the consolidated financial position of the Company.
7
<PAGE> 8
U S WEST COMMUNICATIONS, INC.
FORM 10-K
PART II
<TABLE>
MANAGEMENT'S DISCUSSION. (Dollars in millions)
<CAPTION>
RESULTS OF OPERATIONS
---------------------------------------------------------------
Change
1994 1993 $ %
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues $8,998 $8,656 $342 4.0
Operating expenses
Employee-related expenses 2,930 2,870 60 2.1
Other operating expenses 1,653 1,646 7 0.4
Taxes other than income
taxes 378 380 (2) (0.5)
Depreciation and
amortization 1,887 1,806 81 4.5
Restructuring charge - 880 (880) -
Interest expense 331 374 (43) (11.5)
Gain on sales of rural
telephone exchanges 82 - 82 -
Other expense - net 20 13 7 53.8
---------------------------------------------------------------
Income before income taxes
and extraordinary items 1,881 687 1,194 -
Provision for income taxes 706 252 454 -
---------------------------------------------------------------
Income before extraordinary
item 1,175 435 740 -
Extraordinary items (net of tax)
Discontinuance of SFAS
No. 71 - (3,041) 3,041 -
Early extinguishment of debt - (77) 77 -
---------------------------------------------------------------
Net income (loss) $1,175 ($2,683) $3,858 -
===============================================================
</TABLE>
The Company's volume growth resulted in a normalized increase
in net income of $101 or 9.9% for the year ended December 31,
1994, compared with the same period last year. Net income in
1994 was normalized for a gain of $51 on the sale of certain
rural telephone exchanges. For 1993, normalizing items
include the restructuring charge of $534 (after tax), the
federally mandated income tax increase of $54 and the 1993
extraordinary charges of $3,041 for the discontinuance of
Statement of Financial Accounting Standards ("SFAS") No. 71,
and $77 for the early extinguishment of debt.
Volume growth also resulted in a 7.4 percent increase in
earnings before interest, taxes, depreciation and
amortization and other ("EBITDA"), also excluding the 1993
restructuring charge. The Company believes EBITDA is an
important indicator of the operational strength of the
business.
8
<PAGE> 9
U S WEST COMMUNICATIONS, INC.
FORM 10-K
PART II
MANAGEMENT'S DISCUSSION. (Dollars in millions)
OPERATING REVENUES
Total operating revenues were $8,998, a $342 or 4.0% increase
over the prior year. In the tables below, price changes
primarily represent the aggregate effects of price changes
resulting from regulatory proceedings and growth represents
increased market penetration (through increased access lines and
additional sales of products and services to existing
customers). Different regulatory commissions govern the
interstate and intrastate jurisdictions, resulting in varying
price and refund impacts.
<TABLE>
Local Service
<CAPTION>
Price Refund Increase
Changes Activity Growth Other $ %
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ (12) $ 30 $ 216 $ 4 $ 238 6.2
----------------------------------------------------------------
</TABLE>
Local service revenues include local telephone exchange, local
private line and public telephone services. The increase in
local service revenues was primarily attributable to access line
growth, which exceeded 5 percent in the states of Arizona,
Colorado, Idaho and Utah.
Access Charges
Access charges are collected primarily from the interexchange
carriers for their use of the local exchange network. For
interstate access services, there is also a fee collected
directly from telephone customers. Approximately 35 percent of
access revenues and 13 percent of total revenues are derived
from providing access service to AT&T.
<TABLE>
Interstate Access Service
<CAPTION>
Price Refund Increase
Changes Activity Growth Other $ %
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ (39) $ 18 $ 148 $ (5) $ 122 5.7
----------------------------------------------------------------
</TABLE>
An increase of 7.8 percent in interstate billed access
minutes of use more than offset the effects of price decreases.
Interstate price reductions have been phased in by the Federal
Communications Commission ("FCC") over a number of years. In
response to competitive pressure and FCC orders, the Company
reduced its annual interstate access prices by approximately
$40 during 1994, in addition to $60, effective July 1, 1993.
The Company believes access prices will continue to decline,
whether mandated by the FCC or as a result of an increasingly
competitive market for access services.
9
<PAGE> 10
U S WEST COMMUNICATIONS, INC.
FORM 10-K
PART II
MANAGEMENT'S DISCUSSION. (Dollars in millions)
OPERATING REVENUES (Continued)
<TABLE>
Intrastate Access Service
<CAPTION>
Price Refund Increase
Changes Activity Growth Other $ %
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ (10) $ (4) $ 51 $ 10 $ 47 6.9
---------------------------------------------------------------
</TABLE>
Intrastate access charges increased primarily as a result of
higher demand. Intrastate minutes of use grew by 13 percent in
1994. Demand for private line services, for which revenues are
generally not usage-sensitive, also increased.
<TABLE>
Long-Distance Network Service
<CAPTION>
Price Refund Decrease
Changes Activity Growth Other $ %
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ (8) $ 1 $ (43) $ (63) $ (113) (7.8)
---------------------------------------------------------------
</TABLE>
Long-distance network service ("long-distance") revenues are
derived from calls made within the Company's service area
boundaries, commonly referred to as "LATAs." The effects of
competition continue to impact long-distance revenues.
Long-distance revenues decreased principally due to the effects
of multiple toll carrier plans implemented in Oregon and
Washington in May and July 1994, respectively. These
regulatory arrangements allow independent telephone companies
to act as toll carriers. The impact in 1994 was a decrease in
long-distance revenue of $68, partially offset by an increase of
$10 in intrastate access revenue and a decrease of $48 in access
fees (otherwise paid to independent companies). These
regulatory arrangements decreased net income by approximately
$6 in 1994 and will decrease 1995 net income by $10 to $12.
Other Services
Other services revenues are derived from billing and collection
services provided to interexchange carriers, and new services
such as voice messaging. The 8.6 percent increase in 1994 was
due to higher revenue from these billing and collection
services, and continued market penetration of new service
offerings.
OPERATING EXPENSES
Total operating expenses were $6,848, a $146 or 2.2% increase
over the same period last year, excluding the 1993 restructuring
charge.
10
<PAGE> 11
U S WEST COMMUNICATIONS, INC.
FORM 10-K
PART II
MANAGEMENT'S DISCUSSION. (Dollars in millions)
OPERATING EXPENSES (continued)
Employee-related costs include basic salaries and wages,
overtime, contract labor, benefits (including pension and health
care) and payroll taxes. Higher costs of approximately $90 were
a result of additional overtime payments, contract labor, and
basic salaries and wages, all related to the implementation of
customer service and streamlining initiatives. A pension credit
reduction of $66 resulted from a change in actuarial
assumptions, including decreases in the discount rate and the
expected long-term rate of return on plan assets. Partially
offsetting these increases were the effects of employees leaving
the Company under the restructuring program, lower health-care
benefit costs including a reduction in the accrual for post-
retirement benefits and lower incentive compensation payments
to employees.
During the summer of 1994, increased customer demand put
additional stress on current processes and systems, and affected
the quality of service in certain markets. The pace of the
Company's restructuring program also contributed to quality of
service issues. However, the issues pertaining to quality of
service underscore the need to re-engineer the business. The
Company achieved target levels of service at year end by
implementing customer service initiatives and slowing the pace
of its restructuring program. To continue improving upon the
level of service quality achieved by year-end 1994, the Company
will incur additional near-term costs for temporary employees,
overtime and contract labor. The Company will also stretch out
its 1993 restructuring plan an additional year, to 1997. As a
result of these actions, the annual benefits related to
restructuring will not be fully realized until 1998 (see
"Restructuring Charges").
Other operating expenses include access charges, network
software expenses, cost of services and products provided by
affiliates, and other administrative expenses. Contributing to
the increase in other operating expenses were additional network
software expenses and advertising costs incurred for the
increased deployment of new products and expansion of markets
for existing products. The increase was partially offset by the
$48 reduction in access expense related to the effects of the
multiple toll carrier plan (see "Long-Distance Network
Service").
The increase in depreciation and amortization expense was
primarily a result of a higher depreciable asset base and
increased depreciation rates. The Company's discontinuance of
SFAS No. 71 in September 1993 has resulted in the use of shorter
asset lives to more closely reflect the economic lives of
telephone plant. The Company continues to pursue improved
capital recovery within the regulated environment.
INTEREST AND OTHER
Interest expense decreased in 1994 due to the effects of a debt
refinancing program in 1993 and a reclassification of
capitalized interest. Pursuant to the discontinuance of SFAS
No. 71, interest capitalized as a component of telephone plant
construction is now being reflected as an offset to interest
expense, rather than as an income component of other income
(expense).
11
<PAGE> 12
U S WEST COMMUNICATIONS, INC.
FORM 10-K
PART II
MANAGEMENT'S DISCUSSION. (Dollars in millions)
INTEREST AND OTHER (continued)
Other expense increased over the same period last year due to
the reclassification of capitalized interest to interest expense
in 1994.
PROVISION FOR INCOME TAXES
The increase in the effective tax rate resulted primarily from
the effects of discontinuing SFAS No. 71, an increase in 1994
income before income taxes and the 1993 restructuring charge.
Partially offsetting these increases is the cumulative effect on
deferred income taxes from the 1993 federally mandated increase
in income taxes.
RESTRUCTURING CHARGES
The Company's 1993 results reflect an $880 million restructuring
charge (pretax). The related restructuring plan (the "Plan") is
designed to provide faster, more responsive customer services
while reducing the costs of providing these services. As part
of the Plan, the Company is developing new systems that will
enable it to monitor networks to reduce the risk of service
interruptions, activate telephone service on demand, provide
automated inventory systems and centralize its service centers
so that customers can have their telecommunications needs
resolved with one phone call. The Company is consolidating its
existing 560 customer service centers into 26 centers in 10
cities and reducing its total work force by approximately 9,000
employees (including the remaining employee reductions pursuant
to the restructuring plan announced in 1991).
Implementation of the Plan is expected to extend into 1997,
rather than being completed in 1996 as originally scheduled.
Implementation schedules are driven by customer demand and
related service issues, concerns with system stability as major
customer impacting systems are integrated, and staffing
agreements negotiated with the Company's unions. These changes
do not alter the Company's plan to fundamentally re-engineer the
way it conducts business in the emerging competitive
environment. The total cash expenditures of $880 under the Plan
remain unchanged.
12
<PAGE> 13
U S WEST COMMUNICATIONS, INC.
FORM 10-K
PART II
MANAGEMENT'S DISCUSSION. (Dollars in millions)
RESTRUCTURING CHARGES (continued)
<TABLE>
Following is a schedule of the costs included in the Plan:
<CAPTION>
Actual Estimate
------ -------------------
1994 1995 1996 1997 Total
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash expenditures
Employee separation $ 19 $ 61 $ 72 $ 73 $ 225
Systems development 118 128 114 - 360
Real estate 50 80 - - 130
Relocation 21 54 4 26 105
Retraining and other 8 19 10 23 60
----------------------------------------------------------------
Total cash expenditures 216 342 200 122 880
Remaining 1991 plan
employee costs 56 - - - 56
----------------------------------------------------------------
Total (1) $ 272 $ 342 $ 200 $ 122 $ 936
================================================================
<FN>
<F1>
(1) The Plan also provides for capital expenditures of $440 over
the life of the restructuring plan. In 1994, capital
expenditures related to restructuring were $265.
</FN>
</TABLE>
Employee separation costs include severance payments, health-
care coverage and postemployment education benefits. Systems
development costs include the replacement of existing, single-
purpose systems with new systems designed to provide integrated,
end-to-end customer service. The work-force reductions would
not be possible without the development and installation of the
new systems, which will eliminate the current, labor-intensive
interfaces between existing processes. Real estate costs
include preparation costs for the new service centers. 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.
The Company estimates that full implementation of the Plan will
reduce employee-related expenses by approximately $400 per year.
These savings are expected to be offset by the effects of
inflation.
The following estimates of employee separations and related
amounts reflect the extension of employee reductions into 1997.
<TABLE>
<CAPTION>
Estimate Actual Estimate
--------------- ------------------
1994 1994(2) 1995 1996 1997 Total
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Employee
separations (1)
Managerial 1,061 497 814 580 559 2,450
Occupational 1,887 1,683 1,136 1,845 1,886 6,550
----------------------------------------------------------------
Total 2,948 2,180 1,950 2,425 2,445 9,000
================================================================
</TABLE>
13
<PAGE> 14
U S WEST COMMUNICATIONS, INC.
FORM 10-K
PART II
MANAGEMENT'S DISCUSSION. (Dollars in millions)
<TABLE>
RESTRUCTURING CHARGES (continued)
<CAPTION>
Estimate Actual Estimate
--------------- -----------------
1994 1994(2) 1995 1996 1997 Total
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Employee separation
amounts (1)
Managerial $ 22 $ 5 $ 29 $ 21 $ 20 $ 75
Occupational 15 14 32 51 53 150
----------------------------------------------------------------
Total 37 19 61 72 73 225
Remaining 1991 reserve 56 56 - - - 56
----------------------------------------------------------------
Total $ 93 $ 75 $ 61 $ 72 $ 73 $ 281
================================================================
<FN>
<F1>
(1) The "network" and "all other" categories previously
displayed are no longer used in this schedule due to the
changes in organizational boundaries occurring as a result
of re-engineering. The new consolidated service centers
consist of employees grouped by processes rather than by
organization.
<F2>
(2) Includes the remaining employees and the separation amounts
associated with the balance of the 1991 restructuring
reserve at December 31, 1993.
</FN>
</TABLE>
As a result of extending the plan into 1997, employee reductions
and separations amounts shown above have been reduced by 1,519
and $41 in 1995, and 175 and $14 in 1996, respectively, and
increased by 2,445 and $73, respectively, in 1997.
Systems Development
The Company's existing information management systems were
largely developed to support analog technology in a monopoly
environment. These systems are increasingly inadequate due to
the effects of increased competition, new forms of regulation
and changing technology that have driven consumer demand for
new services that can be delivered quickly, reliably and
economically. The sequential systems currently in place are
slow, labor-intensive and costly to maintain, and often cannot
be adapted to support new product and service offerings,
including future multimedia services envisioned by U S WEST.
The systems re-engineering program in place involves development
of new systems for the following core processes:
Service delivery - to support service on demand for all
products and services, including repair. These systems will
permit one customer service representative to handle all facets
of a customer's requirements as contrasted to the numerous
points of customer interface required today.
Service assurance - for performance monitoring from one
location and remote testing in the new environment, including
identification and resolution of faults prior to customer
impact, and one-system dispatch environment.
Capacity provisioning - for integrated planning of future
network capacity, including the installation of software
controllable service components.
14
<PAGE> 15
U S WEST COMMUNICATIONS, INC.
FORM 10-K
PART II
MANAGEMENT'S DISCUSSION. (Dollars in millions)
RESTRUCTURING CHARGES (continued)
Systems Development (continued)
The direct, incremental and nonrecurring systems development
costs contained in the Plan are comprised of the following
amounts:
<TABLE>
<CAPTION>
Estimate Actual Estimate
-------- ------ ---------------
1994 1994 1995 1996 Total
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Service delivery $ 35 $ 21 $ 15 $ 37 $ 73
Service assurance 45 12 17 35 64
Capacity provisioning 17 57 92 30 179
All other 8 28 4 12 44
----------------------------------------------------------------
Total $ 105 $ 118 $ 128 $ 114 $ 360
================================================================
</TABLE>
Original estimates of system expenditures in 1995 and 1996 were
$140 and $115, respectively. Though current estimates in total
are not materially different, the timing and amount of
expenditures by category has changed.
The majority of systems development labor will be supplied
through the use of temporary employees, contractors and new
employees with special skills. While it is likely that a small
number of the new employees will be retained after completion of
the Plan due to their specialized skills, it is planned that
any related increase in headcount will be offset through other
employee reductions.
Systems expenses charged to current operations consist of all
costs associated with the information management function,
including planning, developing, testing and maintaining data
bases for general purpose computers, in addition to systems
costs related to maintenance of telephone network applications.
The key related administrative (i.e. general purpose) systems
include customer service, order entry, billing and collection,
accounts payable, payroll, human resources and property records.
Ongoing systems costs comprised approximately six percent of
total operating expenses in 1994, 1993 and 1992. The Company
expects systems costs charged to current operations as a percent
of total operating expenses to approximate the current level
throughout the life of the Plan. However, systems costs could
increase relative to other operating costs as the business
becomes more technology dependent.
15
<PAGE> 16
U S WEST COMMUNICATIONS, INC.
FORM 10-K
PART II
MANAGEMENT'S DISCUSSION. (Dollars in millions)
RESTRUCTURING CHARGES (continued)
Progress Under the Plan
Following is a schedule of progress achieved under the Plan in
1994:
<TABLE>
<CAPTION>
Expenditures
------------------------
Estimate Actual
--------------------------------------------------------------
<S> <C> <C>
Employee separation $ 93 $ 75
Systems development 105 118
Real estate 119 50
Relocation 70 21
Retraining and other 34 8
--------------------------------------------------------------
1994 restructuring reserve activity $ 421 $ 272
==============================================================
</TABLE>
The Company anticipated Plan expenditures of approximately $421
in 1994. However, the Company slowed the pace of its
re-engineering implementation to address issues pertaining to
the quality of service.
The Company's 1991 restructuring plan included a pretax charge
of $240 due to planned work-force reductions of approximately
6,000 employees. All expenditures and work-force reductions
associated with the 1991 plan were completed by the end of 1994.
OTHER ITEMS
Federal Regulatory Issues
In January 1995, the 9th U.S. Circuit Court of Appeals in
San Francisco upheld the June 15, 1994, Seattle Federal District
Court ruling that affirmed U S WEST's challenge to the
constitutionality of the telephone company video programming
restriction in the 1984 Cable Act. The act prevents telephone
companies from providing video programming within their regions.
U S WEST argued, and the courts agreed, that the restriction
violates its First Amendment right to free speech. The
decision would allow the Company to provide video programming
directly to its regional telephone subscribers. The Federal
Government can appeal to the U.S. Supreme Court. The Company
is evaluating its options in light of this ruling. In January
1995, the FCC instituted a proceeding to modify and promulgate
rules on the provision of video programming.
In January 1995, the U.S. Circuit Court of Appeals for the
District of Columbia overruled the FCC's "range-of-rates"
decision. This FCC decision permitted non-dominant carriers to
file ranges for rates, rather than specific price points. The
Court of Appeals held that the Communications Act requires all
carriers to specify prices on their tariffs. The effect of this
decision will be to require non-dominant carriers (like MCI,
or Time Warner's Full Service Network) to file tariffs with
considerably more price detail.
16
<PAGE> 17
U S WEST COMMUNICATIONS, INC.
FORM 10-K
PART II
MANAGEMENT'S DISCUSSION. (Dollars in millions)
OTHER ITEMS (continued)
Federal Regulatory Issues (continued)
In October 1994, the 9th U.S. Circuit Court of Appeals
overruled the FCC's Computer III non-structural separation
decision for the provision of enhanced services on an integrated
basis. The effect of the decision is to return to the provision
of such service through a separate subsidiary, which could make
it more difficult for local exchange carriers to offer enhanced
services. In January 1995, the FCC granted a waiver for the
continued provision of enhanced services, pending further
proceedings by the FCC.
In August 1994, the U.S. Circuit Court of Appeals for the
District of Columbia upheld an FCC ruling that neither telephone
companies nor customer programmers need to obtain a franchise
from local governments to provide Video Dial Tone ("VDT")
service. The decision means that local telephone companies will
avoid additional franchise fees related to the provisioning of
VDT services.
In June 1994, the U.S. Circuit Court of Appeals for the District
of Columbia overturned the FCC's requirement that local
telephone companies allow physical collocation by third parties
(competitive access providers), within their central offices,
for the installation and operation of equipment that connects to
the local telephone network. The decision essentially affirms
the private property rights of corporations. The court also
ordered the FCC to reconsider its requirement that allows
competitors to interconnect equipment to the local network
from a point outside a central office. In light of the rulings,
the Company is evaluating how it can provide future inter-
connection services.
On June 20, 1994, the seven regional Bell operating companies
("RBOCs") asked the divestiture court for a waiver of the
Court's restriction on the RBOCs' provision of wireless long-
distance services. The consent decree restricts the RBOCs from
providing long-distance services as well as manufacturing. The
request for a waiver closely follows a recommendation by the
Department of Justice that the RBOCs be allowed to provide
wireless long-distance services.
The FCC has adopted a regulatory structure known as "Open
Network Architecture" ("ONA"), under which the Company is
required to unbundle its telephone network services in a manner
that will accommodate the service needs of the growing number
of information service providers. Under ONA, the number of
local exchange service competitors could increase significantly.
The Company's interstate services have been subject to price cap
regulation since January 1991. Price caps are a form of
incentive regulation designed to limit prices rather than
profits. The price cap plan is currently under review by the
FCC.
17
<PAGE> 18
U S WEST COMMUNICATIONS, INC.
FORM 10-K
PART II
MANAGEMENT'S DISCUSSION. (Dollars in millions)
OTHER ITEMS (continued)
State Regulatory Issues
The Company has sought alternative forms of regulation ("AFOR")
plans that provide for competitive parity, enhanced pricing
flexibility and improved capability in bringing to market new
products and services. In a number of states where AFOR plans
have been adopted, such actions have been accompanied by
agreements to refund revenues, reduce existing rates or upgrade
service, any of which could have adverse short-term effects on
earnings. Similar results may have occurred under traditional
rate of return regulation. In addition to the FCC price cap
plan, the Company has AFOR plans in the states of Colorado,
Idaho, Minnesota, Nebraska, North Dakota, Oregon and South
Dakota.
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 certain 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 an interexchange carrier and other
parties that relates to the Tax Reform Act of 1986. This case
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
$140.
Interest Rate Risk Management
The Company is exposed to market risks arising from changes in
interest rates. Derivative financial instruments are used by
the Company to manage these risks. The objective of the
Company's interest rate risk management program is to minimize
the total cost of debt. To meet this objective the Company uses
risk-reducing and risk-adjusting strategies. Interest rate
forward contracts were used in 1993 to reduce the debt issuance
risks associated with interest rate fluctuations. Interest rate
swaps are used to adjust the risks of the debt portfolio on a
consolidated basis by varying the ratio of fixed- to floating-
rate debt. The market value of the debt portfolio and its
risk-adjusting derivative instruments are monitored and compared
to predetermined benchmarks to evaluate the effectiveness of the
risk management program.
In 1993, the Company refinanced $2.7 billion of callable debt
with new lower-cost fixed-rate debt. The Company achieved an
annual interest expense reduction of approximately $35 as a
result of this refinancing. In conjunction with the
refinancing, the Company executed forward contracts to sell U.S.
Treasury securities to reduce debt issuance risks and to lock in
the cost of $1.5 billion of the future debt issue. At December
31, 1994, deferred credits of $8 and deferred charges of $51 on
closed interest rate forward contracts are included as part of
the carrying value of the underlying debt. The deferred credits
and charges are being recognized as a yield adjustment over the
life of the debt, which matures at various dates through 2043.
The net deferred charge is directly offset by the lower coupon
rate achieved on the new debt.
18
<PAGE> 19
U S WEST COMMUNICATIONS, INC.
FORM 10-K
PART II
MANAGEMENT'S DISCUSSION. (Dollars in millions)
OTHER ITEMS (continued)
Interest Rate Risk Management (continued)
Notional amounts on interest rate swaps outstanding at December
31, 1994, were $781 with various maturities that extend to 1999.
The estimated effect of the Company's interest rate derivative
transactions was to adjust the level of fixed-rate debt from
73.8 percent to 86.2 percent of the total debt portfolio.
19
<PAGE> 20
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareowner and Board of Directors of U S WEST
Communications, Inc.
We have audited the consolidated financial statements and the
consolidated financial statement schedules of U S WEST
Communications, Inc. listed in the index on page 38 of this
Form 10-K. These financial statements and financial statement
schedules are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial
statements and financial statement schedules based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of U S WEST Communications, Inc. as of
December 31, 1994 and 1993, and the consolidated results of its
operations and its cash flows for each of the three years in
the period ended December 31, 1994, in conformity with generally
accepted accounting principles. In addition, in our opinion,
the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken
as a whole, present fairly, in all material respects, the
information required to be included therein.
As discussed in Note 6 of the Notes to Consolidated Financial
Statements, the Company discontinued accounting for its
operations in accordance with Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types
of Regulation," in 1993. As discussed in Note 13 of the Notes
to Consolidated Financial Statements, the Company changed its
method of accounting for postretirement benefits other than
pensions and other postemployment benefits in 1992.
/s/ COOPERS & LYBRAND L.L.P.
Coopers & Lybrand L.L.P.
Denver, Colorado
January 18, 1995
20
<PAGE> 21
U S WEST COMMUNICATIONS, INC.
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
----------------------------------------------------------------
Year Ended December 31,
(Dollars in millions) 1994 1993 1992
----------------------------------------------------------------
<S> <C> <C> <C>
OPERATING REVENUES
Local service $4,067 $3,829 $3,674
Interstate access service 2,269 2,147 2,047
Intrastate access service 729 682 673
Long-distance network service 1,329 1,442 1,420
Other services 604 556 510
-------- -------- -------
Total operating revenues 8,998 8,656 8,324
-------- -------- -------
OPERATING EXPENSES
Employee-related expenses 2,930 2,870 2,829
Other operating expenses 1,653 1,646 1,590
Taxes other than income taxes 378 380 348
Depreciation and amortization 1,887 1,806 1,735
Restructuring charges - 880 -
-------- -------- -------
Total operating expenses 6,848 7,582 6,502
-------- -------- -------
Income from operations 2,150 1,074 1,822
Interest expense 331 374 402
Gain on sales of rural
telephone exchanges 82 - -
Other expense - net 20 13 35
-------- -------- -------
Income before income taxes,
extraordinary items and
cumulative effect of change
in accounting principles 1,881 687 1,385
Provision for income taxes 706 252 435
--------- -------- -------
Income before extraordinary
items and cumulative effect
of change in accounting
principles 1,175 435 950
Extraordinary items
Discontinuance of SFAS No. 71,
net of tax - (3,041) -
Early extinguishment of debt,
net of tax - (77) -
Cumulative effect of change in
accounting principles
(accounting for postemployment
and postretirement benefits),
net of tax - - (1,724)
--------- -------- --------
NET INCOME (LOSS) $1,175 ($2,683) ($774)
========= ======== ========
The accompanying notes are an integral part of the consolidated
financial statements.
</TABLE>
21
<PAGE> 22
U S WEST COMMUNICATIONS, INC.
<TABLE>
CONSOLIDATED BALANCE SHEETS
<CAPTION>
----------------------------------------------------------------
December 31, December 31,
(Dollars in millions) 1994 1993
----------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $114 $67
Accounts receivable, net of
allowance for credit losses
of $28 and $27 in 1994 and
1993, respectively 1,450 1,391
Materials and supplies 120 108
Deferred tax asset 280 292
Other 48 59
------- -------
Total current assets 2,012 1,917
------- -------
Property, plant and equipment,
at cost
In service 28,791 27,464
Under construction 591 521
Held for future use 24 27
------- -------
29,406 28,012
Less accumulated
depreciation 16,444 15,465
------- -------
Net property, plant
and equipment 12,962 12,547
------- -------
Other 726 698
------- -------
Total assets $15,700 $15,162
======= =======
The accompanying notes are an integral part of the consolidated
financial statements.
</TABLE>
22
<PAGE> 23
U S WEST COMMUNICATIONS, INC.
<TABLE>
CONSOLIDATED BALANCE SHEETS
<CAPTION>
-----------------------------------------------------------------
December 31, December 31,
(Dollars in millions) 1994 1993
-----------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREOWNER'S EQUITY
Current liabilities
Short-term debt $1,485 $1,260
Accounts payable 883 935
Employee compensation 283 303
Current portion of restructuring
charges 317 421
Property taxes payable 207 200
Advance billings and customer
deposits 211 198
Other accrued liabilities 465 495
-------- --------
Total current liabilities 3,851 3,812
-------- --------
Long-term debt 4,242 4,092
Postretirement and postemployment
benefit obligations 2,393 2,592
Deferred taxes and credits 1,530 1,526
Shareowner's equity
Common shares - one share
without par value, owned by
parent 7,286 6,742
Retained earnings (deficit) (3,602) (3,602)
-------- --------
Total shareowner's equity 3,684 3,140
-------- --------
Total liabilities and
shareowner's equity $15,700 $15,162
======== ========
Contingencies (refer to Note 3 of the Notes to the Consolidated
Financial Statements)
The accompanying notes are an integral part of the consolidated
financial statements.
</TABLE>
23
<PAGE> 24
U S WEST COMMUNICATIONS, INC.
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
-----------------------------------------------------------------
Year Ended December 31,
(Dollars in millions) 1994 1993 1992
-----------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $1,175 ($2,683) ($774)
Adjustments
Depreciation and
amortization 1,887 1,806 1,735
Deferred income taxes
and amortization
of investment tax credit 223 (204) (31)
Discontinuance of SFAS
No. 71 - 3,041 -
Restructuring charge - 880 -
Cumulative effect of change
in accounting principles - - 1,724
Gain on sales of rural
telephone exchanges (82) - -
Changes in operating assets
and liabilities
Accounts receivable (59) (67) 30
Materials, supplies and
other (53) (76) 20
Accounts payable and
accrued liabilities (116) 130 158
Restructuring payments (272) (104) (80)
Other - net (202) (20) 73
------- ------- -------
Cash provided by operating
activities 2,501 2,703 2,855
------- ------- -------
INVESTING ACTIVITIES
Expenditures for property,
plant and equipment (2,230) (2,190) (2,087)
Other - net 96 42 52
------- ------- -------
Cash used for investing
activities (2,134) (2,148) (2,035)
------- ------- -------
FINANCING ACTIVITIES
Net proceeds from
short-term debt 342 708 3
Proceeds from long-term debt 251 2,282 344
Repayments of long-term debt (285) (2,948) (670)
Dividends paid (1,172) (852) (864)
Equity infusions from parent 544 269 370
------- ------- -------
Cash used for financing
activities (320) (541) (817)
------- ------- -------
CASH AND CASH EQUIVALENTS
Increase 47 14 3
Beginning balance 67 53 50
------- ------- -------
Ending balance $114 $67 $53
======= ======= =======
The accompanying notes are an integral part of the consolidated
financial statements.
</TABLE>
24
<PAGE> 25
U S WEST COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The Consolidated Financial Statements
include the accounts of U S WEST Communications, Inc. and its
wholly-owned subsidiaries (the "Company"). The Company is an
indirect, wholly owned subsidiary of U S WEST, Inc. The Company
was formed as a result of the January 1, 1991, merger of The
Mountain States Telephone and Telegraph Company, Northwestern
Bell Telephone Company and Pacific Northwest Bell Telephone
Company. The merger was accounted for as a transfer of assets
among entities under common control similar to that of a pooling-
of-interests.
In the third quarter of 1993, the Company discontinued accounting
for its operations under Statement of Financial Accounting
Standards ("SFAS") No. 71, "Accounting for the Effects of Certain
Types of Regulation." Refer to Note 6 of the Notes to
Consolidated Financial Statements.
Certain reclassifications within the Consolidated Financial
Statements have been made to conform to the current year
presentation.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include
highly liquid investments with original maturities of three
months or less which are readily convertible into cash and which
are not subject to significant risk resulting from changes in
interest rates.
MATERIALS AND SUPPLIES: New and reusable materials are carried
principally at average cost, except for significant individual
items which are valued based on specific costs. Non-reusable
material is carried at its estimated salvage value.
PROPERTY, PLANT AND EQUIPMENT: The investment in property, plant
and equipment is carried at cost less accumulated depreciation.
Additions, replacements and substantial betterments are
capitalized. Capitalized costs include applicable salaries and
employee benefits, materials, taxes and certain other items. The
cost of repairs and maintenance for property, plant and equipment
is charged to expense as incurred.
The Company's provision for depreciation of property, plant and
equipment is based on various straight-line group methods using
remaining useful (economic) lives based on industry-wide studies.
Prior to discontinuing SFAS No. 71, depreciation was based on
lives specified by regulatory commissions. When depreciable
property, plant and equipment is retired or sold, the original
cost less the net salvage value is generally charged to
accumulated depreciation.
The Company capitalizes interest related to qualifying
construction projects and amortizes this cost over the remaining
service lives of the related assets. Capitalized interest is
recorded as a reduction of interest expense. Prior to the
Company's discontinuance of SFAS No. 71, capitalized interest
was recorded as an element of other expense. Total amounts
capitalized by the Company were $36, $19 and $23 in 1994, 1993
and 1992, respectively.
REVENUE RECOGNITION: Local telephone service revenues are
generally billed monthly in advance. These revenues are
recognized when services are provided. Nonrecurring and usage
sensitive revenues derived from installation, exchange access
and long distance services are billed and recognized monthly as
services are provided.
25
<PAGE> 26
U S WEST COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
FINANCIAL INSTRUMENTS: Net interest income or expense on
interest rate swaps is recognized over the life of the swaps as
an adjustment to interest expense. Gains and losses on forward
contracts, designated as hedges of interest rate exposure on debt
refinancings, are deferred and recognized as an adjustment to
interest expense over the life of the underlying debt.
COMPUTER SOFTWARE: The cost of computer software, whether
purchased or developed internally, is charged to expense with two
exceptions. Initial operating system software is capitalized and
amortized over the life of the related hardware, and initial
network applications software is capitalized and amortized over
three years. Subsequent upgrades to capitalized software are
expensed. Capitalized computer software of $146 and $148 at
December 31, 1994 and 1993, respectively is recorded in property,
plant and equipment. The Company amortized capitalized computer
software costs of $86, $51 and $24 in 1994, 1993 and 1992,
respectively.
INCOME TAXES: The provision for income taxes consists of an
amount for taxes currently payable and an amount for tax
consequences deferred to future periods in accordance with SFAS
No. 109. The Company implemented SFAS No. 109, "Accounting for
Income Taxes," in 1993. Adoption of the new standard did not
have a material effect on the financial position or results of
operations, primarily because of the Company's earlier adoption
of SFAS No. 96.
For financial statement purposes, investment tax credits are
being amortized over the economic lives of the related property,
plant and equipment in accordance with the deferred method of
accounting for such credits.
NOTE 2: MAJOR CUSTOMER
The Company provides network access services to interexchange
carriers, the largest volume of which is provided to AT&T.
During 1994, 1993 and 1992, billings for all services to AT&T
approximated $1,130, $1,159 and $1,191, respectively. The
decreases are primarily due to price decreases prescribed by the
Federal Communications Commission ("FCC"). Related accounts
receivable at December 31, 1994 and 1993, totaled $98 and $97,
respectively.
NOTE 3: 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 certain 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 an interexchange carrier and other
parties that relates to the Tax Reform Act of 1986. This case 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 $140.
26
<PAGE> 27
U S WEST COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
NOTE 4: RELATED PARTY TRANSACTIONS
The Company purchases various services, as noted, from affiliated
companies. The amount paid by the Company for these services is
determined in accordance with FCC and state cost allocation
rules, which prescribe various cost allocation methodologies that
are dependent upon the service provided. Management believes
that such cost allocation methods are reasonable. The costs of
those services are billed to the regulated company.
It is not practicable to provide a detailed estimate of the
expenses which would be recognized on a stand-alone basis.
However, the Company believes that corporate services, including
those related to shareholder relations, procurement, tax, legal
and human resources, are obtained more economically through
affiliates than they would be on a stand-alone basis, since the
Company absorbs only a portion of the total costs. Additionally,
through its 1/7 ownership interest in Bellcore (see footnote 1
below), the Company obtains benefits associated with research and
development activities which exceed the Company's share of the
total costs.
<TABLE>
<CAPTION>
The Company's operations include the following charges for these
services:
-----------------------------------------------------------------
Year Ended December 31,
1994 1993 1992
------------------------------------------------------------------
<S> <C> <C> <C>
Research and development (1) $266 $177 $199
Procurement 114 107 96
Corporate services 97 101 89
Marketing services 66 66 49
Telecommunications 13 16 18
Leased office space 12 11 10
Other 36 34 36
-----------------------------------------------------------------
Total $604 $512 $497
=================================================================
<FN>
<F1>
(1) Includes charges related to research, development and
maintenance of existing technologies performed by Bellcore, a
telecommunications research entity in which the Company has
1/7 ownership interest.
</FN>
</TABLE>
27
<PAGE> 28
U S WEST COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
NOTE 5: RESTRUCTURING CHARGES
The Company's 1993 results reflect an $880 million restructuring
charge (pretax). The related restructuring plan (the "Plan") is
designed to provide faster, more responsive customer services
while reducing the costs of providing these services. As part of
the Plan, the Company is developing new systems that will enable
it to monitor networks to reduce the risk of service
interruptions, activate telephone service on demand, provide
automated inventory systems and centralize its service centers so
that customers can have their telecommunications needs resolved
with one phone call. The Company is consolidating its existing
560 customer service centers into 26 centers in 10 cities and
reducing its total work force by approximately 9,000 employees
(including the remaining employee reductions associated with the
restructuring plan announced in 1991). The Plan provides for
the reduction of 2,450 management and 6,550 occupational
employees.
<TABLE>
<CAPTION>
Following is a schedule of the costs included in the 1993
restructuring charge:
<S> <C>
Employee separation $ 225
Systems development 360
Real estate 130
Relocation 105
Retraining and other 60
--------------------------------------------------------------
Total $ 880
==============================================================
</TABLE>
Employee separation costs include severance payments, health-care
coverage and postemployment education benefits. Systems
development costs include the replacement of existing, single-
purpose systems with new systems designed to provide integrated,
end-to-end customer service. The work-force reductions would
not be possible without the development and installation of the
new systems, which will eliminate the current, labor-intensive
interfaces between existing processes. Real estate costs include
preparation costs for the new service centers. The relocation
and retraining costs are related to moving employees to the sites
of the new service centers and retraining employees on the new
methods and systems required in the new, restructured mode of
operation.
<TABLE>
<CAPTION>
During 1994, 497 management and 1,683 occupational employees left
the Company. The following table shows amounts charged to the
restructuring reserve:
<S> <C>
Employee separation (1) $ 75
Systems development 118
Real estate 50
Relocation 21
Retraining and other 8
-----------------------------------------------------------------
1994 restructuring reserve activity $ 272
=================================================================
<FN>
<F1>
(1) Includes $56 associated with work-force reductions under
the 1991 restructuring plan.
</FN>
</TABLE>
The Company's 1991 restructuring plan included a pretax charge
of $240 due to planned work-force reductions of approximately
6,000 employees. The balance of the unused reserve at December
31, 1993, was $56. All expenditures and work-force reductions
under the 1991 plan were completed by the end of 1994.
28
<PAGE> 29
U S WEST COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
NOTE 6: DISCONTINUANCE OF SFAS NO. 71
The Company incurred a non-cash, extraordinary charge of $3
billion, net of an income tax benefit of $2.3 billion, in
conjunction with its decision to discontinue accounting for its
operations in accordance with SFAS No. 71, "Accounting for the
Effects of Certain Types of Regulation," as of September 30,
1993. SFAS No. 71 generally applies to regulated companies that
meet certain requirements, including a requirement that a company
be able to recover its costs, competition notwithstanding, by
charging its customers at prices established by its regulators.
The Company's decision to discontinue the application of SFAS No.
71 was based on the belief that competition, market conditions
and the development of broadband technology, more than prices
established by regulators, will determine the future cost
recovery by the Company. As a result of this change, the
remaining asset lives of the Company's telephone plant have been
shortened to more closely reflect the useful (economic) lives of
such plant.
Following is a list of the major categories of property, plant
and equipment and the manner in which lives were affected by the
discontinuance of SFAS No. 71:
<TABLE>
<CAPTION>
Average Life (years)
-----------------------------
Before After
Category Discontinuance Discontinuance
-----------------------------------------------------------------
<S> <C> <C>
Digital switch 17-18 10
Digital circuit 11-13 10
Aerial copper cable 18-28 15
Underground copper cable 25-30 15
Buried copper cable 25-28 20
Fiber cable 30 20
Buildings 27-49 27-49
General purpose computers 6 6
</TABLE>
The Company employed two methods to determine the amount of the
extraordinary charge. The "economic life" method assumed that a
portion of the plant-related effect is a regulatory asset that was
created by the under-depreciation of plant under regulation. This
method yielded the plant-related adjustment that was confirmed by
the second method, a discounted cash flows analysis.
<TABLE>
<CAPTION>
Following is a schedule of the nature and amounts of the after-tax
charge recognized as a result of the Company's discontinuance of
SFAS No. 71:
<S> <C>
Plant-related $3,124
Tax-related regulatory assets and liabilities (208)
Other regulatory assets and liabilities 125
------
Total $3,041
======
</TABLE>
29
<PAGE> 30
U S WEST COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
NOTE 7: PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
The composition of property, plant and equipment follows:
------------------------------------------------------------------
December 31,
----------------------
1994 1993
------------------------------------------------------------------
<S> <C> <C>
Land and buildings $2,438 $2,393
Telephone network equipment 11,622 11,093
Outside plant 11,897 11,386
General purpose computers and other 2,858 2,619
Construction in progress 591 521
------------------------------------------------------------------
29,406 28,012
------------------------------------------------------------------
Less accumulated depreciation on:
Buildings 655 623
Telephone network equipment 6,733 6,326
Outside plant 7,442 7,064
General purpose computers and other 1,614 1,452
------------------------------------------------------------------
16,444 15,465
------------------------------------------------------------------
Property, plant and equipment - net $12,962 $12,547
==================================================================
</TABLE>
In 1994, the Company sold certain rural telephone exchanges with a
cost basis of $122. The Company received consideration for the
sales of $93 in cash and $81 in replacement property. The Company
will receive an additional $30 of replacement property in 1995.
NOTE 8: LEASE COMMITMENTS
The Company has entered into operating leases for office
facilities, equipment and real estate. Total commitments under
non-cancelable operating leases at December 31, 1994, follow:
<TABLE>
<CAPTION>
------------------------------------------------------------------
Operating
Leases
------------------------------------------------------------------
<S> <C>
1995 $ 75
1996 73
1997 68
1998 65
1999 55
Thereafter 357
------------------------------------------------------------------
Total minimum lease payments $693
==================================================================
</TABLE>
Rent expense under operating leases was $194 in 1994, $184 in 1993
and $185 in 1992.
30
<PAGE> 31
U S WEST COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
NOTE 9: DEBT
<TABLE>
<CAPTION>
The components of short-term debt follow:
------------------------------------------------------------------
December 31,
-----------------------
1994 1993
------------------------------------------------------------------
<S> <C> <C>
Commercial paper $1,321 $ 979
Current portion of long-term debt 164 281
------------------------------------------------------------------
Short-term debt $1,485 $1,260
==================================================================
</TABLE>
The weighted average interest rate on commercial paper was 5.92
percent and 2.73 percent at December 31, 1994 and 1993,
respectively.
Under formal lines of credit with major banks, the Company is
permitted to borrow up to $600, all of which was available at
December 31, 1994.
Interest rates and maturities on long-term debt follow:
<TABLE>
<CAPTION>
December 31,
----------------------
1994 1993
------------------------------------------------------------------
<S> <C> <C>
Maturing within 5 years:
6 % to 6 5/8 % due 1995 $ - $ 92
7 1/2 % to 7 5/8 % due 1996 370 370
5 2/3 % to 7 1/2 % due 1997 42 17
4 7/8 % to 5 5/8 % due 1998 335 335
6 1/4 % to 6 5/8 % due 1999 226 -
Maturing thereafter:
Up to 6% with various maturities
through 2007 501 501
Above 6% to 9% with various
maturities through 2043 2,435 2,435
Above 9% to 12% with various
maturities through 2030 320 320
------------------------------------------------------------------
4,229 4,070
Unamortized discount (net) and debt
issuance costs (122) (124)
Other 135 146
------------------------------------------------------------------
Long-term debt $4,242 $4,092
==================================================================
</TABLE>
Interest payments (net of amounts capitalized) were $344, $386 and
$406, respectively, for 1994, 1993 and 1992.
During 1993, the Company refinanced debt issues aggregating $2.7
billion in principal amount to take advantage of favorable
interest rates. The refinancing resulted in an extraordinary
charge to income of $77, net of a tax benefit of $48.
31
<PAGE> 32
U S WEST COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
NOTE 10: FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair values of cash equivalents, other current amounts receivable
and payable, and short-term debt, approximate the carrying amount
due to their short-term nature.
The fair value of long-term debt is based on quoted market prices
where available or, if not available, is based on discounting
future cash flows using current interest rates. The fair values
of interest rate swaps approximate their recorded value.
As of December 31, 1994 and 1993, the carrying amount of the
Company's debt was $5,727 and $5,352, respectively, and the fair
value was $5,200 and $5,500, respectively.
NOTE 11: DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into interest rate swap agreements to manage
its market exposure to fluctuations in interest rates. Swap
agreements are primarily used to effectively convert existing
commercial paper to fixed rate debt. This allows the Company to
achieve interest savings over issuing fixed rate debt directly.
Under an interest rate swap, the Company agrees with another
party to exchange interest payments at specified intervals over
a defined term. Interest payments are calculated by reference to
the notional amount based on the fixed and variable rate terms of
the swap agreements. The net interest received or paid as part of
the interest rate swap is accounted for as an adjustment to
interest expense.
The Company also entered into a currency swap to convert Swiss
franc-denominated debt to dollar-denominated debt. This allowed
the Company to achieve interest savings over issuing fixed rate
dollar-denominated debt. Under the currency swap, the Company
agreed with another party to exchange dollars for francs within
the terms of the loan which include periodic interest payments
and principal upon origination and maturity. The currency swap
and foreign currency debt are combined and accounted for as if
dollar-denominated debt were issued directly.
The following table summarizes terms of swaps as of December 31,
1994. Variable rates are primarily indexed to the 30 day
commercial paper rate.
<TABLE>
<CAPTION>
Weighted
Average Rate
------------
Notional
Amount Maturities Receive Pay
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Variable to fixed $710 1995-1999 6.14 6.19
Currency 71 1999 - 6.53
------------------------------------------------------------------
</TABLE>
32
<PAGE> 33
U S WEST COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
NOTE 11: DERIVATIVE FINANCIAL INSTRUMENTS (continued)
In 1993, the Company executed forward contracts to sell U.S.
Treasury Securities to reduce debt issuance risks by allowing the
Company to lock in the treasury rate component of the future debt
issue. At December 31, 1994, deferred credits of $8 and deferred
charges of $51 on closed interest rate forward contracts are
included as part of the carrying value of the underlying debt. The
deferred credits and charges are being recognized as a yield
adjustment over the life of the debt, which matures at various
dates through 2043. The net deferred charge is directly offset by
the lower coupon rate achieved on the debt issuance. At December
31, 1994, there were no open forward contracts on interest rates.
The counterparties to these derivative contracts are major
financial institutions. The Company is exposed to credit loss in
the event of non-performance by these counterparties. The Company
manages this exposure by monitoring the credit standing of the
counterparty and establishing dollar and term limitations which
correspond to the respective credit rating of each counterparty.
The Company does not have significant exposure to an individual
counterparty and does not anticipate non-performance by any
counterparty.
NOTE 12: COMMON SHAREOWNER'S EQUITY
<TABLE>
<CAPTION>
Transactions affecting shareowner's equity follow:
------------------------------------------------------------------
Common Retained
shares earnings Total
-------------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1991 $6,073 $1,764 $7,837
-------------------------------------------------------------------
Net loss - (774) (774)
Dividends declared - (989) (989)
Equity infusions 384 - 384
Other - net - (1) (1)
-------------------------------------------------------------------
Balance at December 31, 1992 6,457 - 6,457
-------------------------------------------------------------------
Net loss - (2,683) (2,683)
Dividends declared - (919) (919)
Equity infusions 285 - 285
Other - net - - 0
-------------------------------------------------------------------
Balance at December 31, 1993 6,742 (3,602) 3,140
-------------------------------------------------------------------
Net income - 1,175 1,175
Dividends declared - (1,175) (1,175)
Equity infusions 544 - 544
Other - net - - 0
-------------------------------------------------------------------
Balance at December 31, 1994 $7,286 ($3,602) $3,684
===================================================================
</TABLE>
33
<PAGE> 34
U S WEST COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
NOTE 13: EMPLOYEE BENEFITS
Pension Plans
The Company is a participant in a defined benefit pension plan
administered by U S WEST, which covers substantially all
management and occupational employees. Prior to 1993, the
Company was a participant in two defined benefit pension plans
administered by U S WEST, which were merged into one plan
effective January 1, 1993. Benefits for management employees are
based upon a final pay formula, while occupational benefits are
based upon a flat benefit formula. The projected unit credit
method is used for financial reporting purposes and the aggregate
cost method for funding purposes. No funding was required in
1994, 1993 or 1992. Net pension credits for 1994, 1993 and 1992
were $0, $66 and $102, respectively.
Postretirement Benefits Other Than Pensions
The Company provides certain health care and life insurance
benefits for retired employees. Effective January 1, 1992, the
Company adopted Statement of Financial Accounting Standards
("SFAS") No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions." SFAS No. 106 mandates that
employers reflect in their current expenses an accrual for the
cost of providing retirement medical and life insurance benefits
to current and future retirees. Prior to 1992, the Company
recognized these costs as they were paid. Adoption of SFAS No.
106 resulted in a one-time, non-cash charge against 1992 earnings
of $1,675, net of a deferred tax benefit of $1,022, for the prior
service of active and retired employees. The effect upon 1992
income before change in accounting principle of adopting SFAS No.
106 was approximately $36.
In conjunction with the adoption of SFAS No. 106, for financial
reporting purposes, the Company elected to immediately recognize
the accumulated postretirement benefit obligation for current and
future retirees, net of the fair value of plan assets.
The Company used the projected unit credit method for the
determination of postretirement medical costs for financial
reporting purposes. Net postretirement benefit costs for 1994,
1993 and 1992 were $220, $248 and $258, respectively. The amount
funded by the Company will generally follow the amount of expense
allowed in regulatory jurisdictions.
Other Postemployment Benefits
The Company also adopted SFAS No. 112, "Employers' Accounting for
Postemployment Benefits," effective January 1, 1992. SFAS No. 112
requires that employers accrue for the estimated costs of
benefits, such as workers' compensation and disability, provided
to former or inactive employees who are not eligible for
retirement. Adoption of SFAS No. 112 resulted in a one-time,
non-cash charge against 1992 earnings of $49, net of a deferred
tax benefit of $30.
34
<PAGE> 35
U S WEST COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
NOTE 14: INCOME TAXES
The Company is included in the consolidated tax return of
U S WEST. Under an agreement with U S WEST, the Company
recognizes income taxes on a separate return basis. At December
31, 1994 and 1993, the Company had outstanding taxes payable to
U S WEST of $29 and $96, respectively.
For financial statement purposes, investment tax credits are being
amortized over the economic lives of the related property, plant
and equipment in accordance with the deferred method of accounting
for such credits.
<TABLE>
<CAPTION>
The components of the provision for income taxes follow:
------------------------------------------------------------------
Year Ended December 31,
---------------------------------------
1994 1993 1992
------------------------------------------------------------------
<S> <C> <C> <C>
Federal income taxes
Current $415 $394 $393
Deferred 228 (122) 31
Investment tax credits-net (47) (56) (63)
------------------------------------------------------------------
596 216 361
------------------------------------------------------------------
State and local
Current 68 62 59
Deferred 42 (26) 15
------------------------------------------------------------------
110 36 74
------------------------------------------------------------------
Provision for income taxes $706 $252 $435
==================================================================
</TABLE>
The unamortized balance of investment tax credits were $231 and
$280 at December 31, 1994 and 1993, respectively.
Amounts paid for income taxes were $551, $338, and $465
respectively, for 1994, 1993 and 1992.
35
<PAGE> 36
U S WEST COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
NOTE 14: INCOME TAXES (Continued)
<TABLE>
<CAPTION>
The effective tax rate differs from the statutory tax rate as
follows:
-----------------------------------------------------------------
Year Ended December 31,
----------------------------------
1994 1993 1992
-----------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory tax rate * 35.0 % 35.0 % 34.0 %
Investment tax credit
amortization (1.6) (3.3) (4.7)
State income taxes - net
of federal effect 3.8 3.9 3.5
Rate differential on reversing
temporary differences - (2.4) (4.2)
Depreciation on capitalized
overheads - 1.5 2.0
Tax law change - catch-up
adjustment - 3.5 -
Restructuring charge - (1.5) -
Other 0.3 (0.1) 0.8
-----------------------------------------------------------------
Effective tax rate 37.5 % 36.6 % 31.4 %
=================================================================
<FN>
<F1>
* Federal statutory tax rate increase effective January 1, 1993
</FN>
<CAPTION>
The components of the net deferred tax liability follow:
-----------------------------------------------------------------
December 31,
1994 1993
-----------------------------------------------------------------
<S> <C> <C>
Property, plant and equipment
temporary differences $1,380 $1,284
State deferred taxes - net of
federal effect 181 170
Other 74 78
-----------------------------------------------------------------
Deferred tax liabilities 1,635 1,532
-----------------------------------------------------------------
Pension, postretirement and
postemployment benefits 692 747
Unamortized investment tax credit 81 98
State deferred taxes - net of
federal effect 146 164
Restructuring 229 328
Other 167 147
-----------------------------------------------------------------
Deferred tax assets 1,315 1,484
-----------------------------------------------------------------
Net deferred tax liability $320 $48
=================================================================
</TABLE>
The current portion of the deferred tax asset was $280 and $292
at December 31, 1994 and 1993, respectively, resulting primarily
from restructuring charges and compensation-related items.
On August 10, 1993, federal legislation was enacted that
increased the corporate tax rate from 34 percent to 35 percent
retroactive to January 1, 1993. The cumulative effect on
deferred taxes of the 1993 increase in income tax rates was
$54.
36
<PAGE> 37
U S WEST COMMUNICATIONS, INC.
SUPPLEMENTARY FINANCIAL DATA
(Dollars in millions)
QUARTERLY FINANCIAL DATA (Unaudited)
<TABLE>
<CAPTION>
-----------------------------------------------------------------
Quarter 1st 2nd 3rd 4th
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
1994
Operating revenues $2,218 $2,243 $2,267 $2,270
Operating income 541 536 545 528
Net income 297 295 285 298
-----------------------------------------------------------------
1993
Operating revenues $2,141 2,151 $2,148 $2,216
Operating income (loss) 499 477 (407) 505
Net income (loss) 267 193 (3,417) 274
-----------------------------------------------------------------
</TABLE>
First, second and fourth quarters' net income in 1994 includes
gains on sales of certain rural exchanges of $15, $16 and $20,
respectively.
Second quarter 1993 net income reflects the costs associated with
the refinancing of debt in the amount of $50.
Third quarter 1993 operating loss reflects the restructuring
charge of $880 ($534 after-tax) described in Note 5 of the Notes
to Consolidated Financial Statements.
Third quarter 1993 net loss includes, in addition to the effects
of the restructuring charge, the impacts of discontinuing the
application of SFAS No. 71 of $3,041, the cumulative effect of a
federally mandated increase in income taxes of $54 and the early
extinguishment of debt of $27.
37
<PAGE> 38
U S WEST COMMUNICATIONS, INC.
FORM 10-K
PART IV
<TABLE>
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
<CAPTION>
(a) Documents filed as a part of this report: Page
<S> <C>
(1) Report of Independent Accountants . . . . . 20
(2) Consolidated Financial Statements and
Supplementary Data:
Consolidated Statements of Income -
for the years ended December 31, 1994,
1993 and 1992. . . . . . . . . . . 21
Consolidated Balance Sheets -
as of December 31, 1994 and 1993 . . . . 22
Consolidated Statements of Cash Flows -
for the years ended December 31, 1994,
1993 and 1992 . . . . . . . . . . 24
Notes to Consolidated Financial Statements . 25
Supplementary Financial Data (Unaudited). . 37
(3) Consolidated Financial Statement Schedules:
II - Valuation and Qualifying Accounts . . 42
</TABLE>
Financial statement schedules other than those listed above
have been omitted because the required information is contained
in the Consolidated Financial Statements and notes thereto, or
because such schedules are not required or applicable.
38
<PAGE> 39
U S WEST COMMUNICATIONS, INC.
FORM 10-K
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
(b) Reports on Form 8-K:
No filings on Form 8-K were made in 1994.
(c) Exhibits
Exhibits identified in parentheses below, on file with the
Securities and Exchange Commission ("SEC"), are incorporated
herein by reference as exhibits hereto.
<TABLE>
<CAPTION>
Exhibit
Number
<S> <C>
(2a) 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. (Incorporated herein by this
reference to Exhibit 2a to Form SE filed on January 8,
1991, File No. 1-3040).
(2b) 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. (Incorporated herein
by this reference to Exhibit 2b to Form SE filed on
January 8, 1991, File No. 1-3040).
(3a.1) Articles of Incorporation of the Registrant as amended
December 22, 1980 (Exhibit 3a to Form 10-K for the period
ended December 31, 1983, File No. 1-3040).
(3a.2) Articles of Amendment to the Articles of Incorporation
of The Mountain States Telephone and Telegraph Company
(renamed U S WEST Communications, Inc.) as filed with the
Colorado Secretary of State. (Incorporated herein by
this reference to Exhibit 3 to Form SE filed on January
8, 1991, File No. 1-3040).
3a.3 Articles of Amendment to the Articles of Incorporation of
U S WEST Communications, Inc. as filed with the Colorado
Secretary of State on June 24, 1993.
3a.4 Statement of Reduction of Stated Capital of U S WEST
Communications, Inc. as filed with the Colorado Secretary
of State on October 18, 1993.
(3b) Bylaws of the Registrant as amended February 16, 1993.
(4) 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) 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, including 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) 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) 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).
</TABLE>
39
<PAGE> 40
U S WEST COMMUNICATIONS, INC.
FORM 10-K
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
<TABLE>
<CAPTION>
(c) Exhibits - continued
<S> <C>
(10d) 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 and Central Services Organization (Exhibit 10e
to Form 10-K for the period ended December 31, 1983, File
No. 1-3040).
(10e) Agreement Concerning Patents, Technical Information and
Copyrights 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) Agreement Concerning Contingent 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) Agreement Concerning Trademarks, Trade Names and Service
Marks effective December 31, 1983, between American
Telephone and Telegraph Company, American Information
Technologies Corporation, 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) 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).
12 Computation of Ratio of Earnings to Fixed Charges.
23 Consent of Independent Accountants.
24 Powers of Attorney.
27 Financial Data Schedule.
</TABLE>
40
<PAGE> 41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Denver, State of
Colorado, on March 28, 1995.
U S WEST COMMUNICATIONS, INC.
/s/ DAVID R. LAUBE
By
---------------------------
David R. Laube
Vice President, Controller
and Treasurer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the date
indicated.
Principal Executive Officer:
A. Gary Ames, President and Chief Executive Officer
Principal Financial Officer:
James T. Helwig, Vice President and Chief Financial Officer
Principal Accounting Officer:
David R. Laube, Vice President, Controller and Treasurer
Directors:
/s/ A. GARY AMES
/s/ JAMES T. HELWIG
/s/ JAMES M. OSTERHOFF
/s/ DAVID R. LAUBE
By
------------------------
David R. Laube
(for himself and as Attorney-in-Fact)
Dated: March 28, 1995
41
<PAGE> 42
U S WEST COMMUNICATIONS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(Dollars in millions)
<TABLE>
<CAPTION>
----------------------------------------------------------------
Balance Charged Balance
at Charged to at end
beginning to other Deduc- of
Description of period expense accounts tions period
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR
CREDIT LOSSES
Year 1994 $ 27 55 - 54 $ 28
Year 1993 27 55 - 55 27
Year 1992 32 55 1 61 27
RESERVES RELATED
TO 1993 BUSINESS
RESTRUCTURING,
INCLUDING FORCE
AND FACILITY
CONSOLIDATION
Year 1994 $880 - - 216 $664
Year 1993 - 880 - - 880
RESERVES RELATED
TO 1991 BUSINESS
RESTRUCTURING,
INCLUDING FORCE
REDUCTIONS
Year 1994 $56 - - 56 $0
Year 1993 160 - - 104 56
Year 1992 240 - - 80 160
<FN>
<F1>
(a) Allowance for credit losses does not include those amounts
charged directly to expense in the charged to expense
category. These amounts were $10, $10 and $9, respectively,
for 1994, 1993 and 1992.
<F2>
(a) Allowance for credit losses deductions represents customer
accounts written off during the period, net of recoveries.
</FN>
</TABLE>
42
<PAGE> 1
EXHIBIT 3a.3
[STATE SEAL]
STATE OF COLORADO
DEPARTMENT OF
STATE
CERTIFICATE
I, NATALIE MEYER, Secretary of State of the State of
Colorado hereby certify that the prerequisites for the issuance of
this certificate have been fulfilled in compliance with law and are
found to conform to law.
Accordingly, the undersigned, by virtue of the authority
vested in me by law, hereby issues A CERTIFICATE OF AMENDMENT OF
U S WEST COMMUNICATIONS, INC.
Dated: OCTOBER 18, 1993
/s/ NATALIE MEYER
---------------------------------------
SECRETARY OF STATE
<PAGE> 2
STATEMENT OF
REDUCTION OF STATED CAPITAL
OF
U S WEST COMMUNICATIONS, INC.
Pursuant to the provisions of Section 7-6-105 of the Colorado
Corporation Code, the undersigned corporation states that the
following statements are true and correct:
FIRST: The name of the corporation is U S WEST Communications, Inc.
SECOND: The following resolutions were adopted by the sole
shareholder of the corporation as of October 1, 1993, in the manner
prescribed by the Colorado Corporation Code:
RESOLVED, that the stated capital of U S WEST
Communications, Inc. be, and it hereby is,
reduced to One Dollar ($1.00) by transferring
$6,592,797,000 (or such other amount as would
leave a stated capital of $1.00) to capital
surplus; and it is
FURTHER RESOLVED, that the proper officers of U S WEST
Communications, Inc. be, and they hereby are,
authorized to make such entries as shall be
necessary or proper to reflect such changes in
stated capital and surplus on the books of
account of said corporation.
THIRD: The stated capital of the corporation after giving effect to
the foregoing resolutions is One Dollar ($1.00).
FOURTH: The number of shares of the corporation outstanding at the
time of such adoption was one (1); and the number of shares
entitled to vote thereon was one (1).
FIFTH: The number of shares voted for such amendment was one (1).
DATED this 11th day of October, 1993.
U S WEST Communications, Inc.
/s/ A. GARY AMES
By:________________________________
A. Gary Ames
President and Chief Executive Officer
/s/ TERRY K. STEPHENS
By:________________________________
Terry K. Stephens
Assistant Secretary
<PAGE> 1
EXHIBIT 3a.4
[STATE SEAL]
STATE OF COLORADO
DEPARTMENT OF
STATE
CERTIFICATE
I, NATALIE MEYER, Secretary of State of the State of
Colorado hereby certify that the prerequisites for the issuance of
this certificate have been fulfilled in compliance with law and are
found to conform to law.
Accordingly, the undersigned, by virtue of the authority
vested in me by law, hereby issues A CERTIFICATE OF AMENDMENT TO
U S WEST COMMUNICATIONS, INC.
Dated: JUNE 24, 1993
/s/ NATALIE MEYER
_____________________________
SECRETARY OF STATE
<PAGE> 2
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
U S WEST COMMUNICATIONS, INC.
Pursuant to the provisions of the Colorado Corporation Code, the
undersigned Corporation adopted the following Articles of Amendment
to the Articles of Incorporation:
FIRST: The name of the Corporation is U S WEST Communications,
Inc.
SECOND: The following amendment was adopted by the sole shareholder
of the Corporation on June 15, 1993, in the manner prescribed by the
Colorado Corporation Code:
RESOLVED, that Article V of the Corporation's Articles of
Incorporation be, and it hereby is, amended to
read as follows:
"Article V. The Board of Directors shall consist
of one or more members, with the number specified
in or fixed in accordance with the Bylaws."
THIRD: The number of shares of the Corporation outstanding at the
time of such adoption was one (1); and the number of shares
entitled to vote thereon was one (1).
FOURTH: The number of shares voted for such amendment was one (1).
DATED this 24th day of June, 1993.
U S WEST Communications, Inc.
/s/ A. GARY AMES
By:________________________________
President and Chief Executive Officer
/s/ TERRY K. STEPHENS
By:________________________________
Assistant Secretary
<PAGE> 3
VERIFICATION
STATE OF COLORADO )
) ss.
COUNTY OF ARAPAHOE )
I, Glenda M. Hijar, a Notary Public, hereby certify that on
the 24th day of June 1993, personally appeared before me A. Gary
Ames and Terry K. Stephens who, being by me first duly sworn,
declared that they signed the foregoing document as President and
Chief Executive Officer and Assistant Secretary, respectively, of
U S WEST Communications, Inc., that they are eighteen years of age
or more, and that the statements contained therein are true.
IN WITNESS WHEREOF, I have hereunto set my hand and
official seal this 24th day of June, 1993.
/s/ GLENDA M. HIJAR
___________________________________
Notary Public
My Commission Expires: September 1, 1993
[NOTARIAL SEAL]
EXHIBIT 12
U S WEST COMMUNICATIONS, Inc.
RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Millions)
<TABLE>
<CAPTION>
Quarter Ended
12/31/94 12/31/93
------------------------------------ ----------- -----------
<S> <C> <C>
Income before income taxes (1) $477 $415
Interest expense (net of amounts
capitalized) 88 88
Interest factor on rentals (1/3) 18 19
----------- -----------
Earnings $583 $522
Interest expense 104 88
Interest factor on rentals (1/3) 18 19
----------- -----------
Fixed charges $122 $107
Ratio of earnings to fixed charges 4.78 4.88
------------------------------------ ----------- -----------
<CAPTION>
Year-to-Date
12/31/94 12/31/93
------------------------------------ ----------- -----------
<S> <C> <C>
Income before income taxes and
extraordinary items $1,881 $687
Interest expense (net of amounts
capitalized) 331 374
Interest factor on rentals (1/3) 70 67
----------- -----------
Earnings $2,282 $1,128
Interest expense 367 374
Interest factor on rentals (1/3) 70 67
----------- -----------
Fixed charges $437 $441
Ratio of earnings to fixed charges 5.22 2.56
------------------------------------ ----------- -----------
<FN>
<F1>
(1) The year end 1993 ratio includes a one-time restructuring
charge of $880. Excluding the restructuring charge the ratio of
earnings to fixed charges would have been 4.55.
</FN>
</TABLE>
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, U S WEST Communications, Inc., a Colorado
corporation (hereinafter referred to as the "Company"), proposes to
file with the Securities and Exchange Commission, under the
provisions of the Securities Exchange Act of 1934, as amended, an
annual report on Form 10-K for the fiscal year ended December 31,
1994; and
WHEREAS, the undersigned is an officer or Director, or both
of the Company and holds the office, or offices, in the Company as
indicated below his name;
NOW THEREFORE, each of the undersigned hereby constitutes
and appoints A. GARY AMES, DAVID R. LAUBE, BARBARA M. JAPHA, and
STEPHEN E. BRILZ, and each of them, as attorneys for him and in his
name, place, and stead, and in each of his offices and capacities
in the Company, to execute and file such annual report, and
thereafter to execute and file any amendment or amendments thereto
on Form 10-K/A, hereby giving and granting to said attorneys full
power and authority to do and perform all and every act and thing
whatsoever requisite and necessary to be done in and about the
premises as fully, to all intents and purposes, as he might or
could do if personally present at the doing thereof, hereby
ratifying and confirming all that said attorneys may or shall
lawfully do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his
hand this 28th day of February, 1995.
/s/ JAMES T. HELWIG
----------------------------------------------
James T. Helwig
Vice President and Chief Financial Officer and
Director
<PAGE> 2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, U S WEST Communications, Inc., a Colorado
corporation (hereinafter referred to as the "Company"), proposes to
file with the Securities and Exchange Commission, under the
provisions of the Securities Exchange Act of 1934, as amended, an
annual report on Form 10-K for the fiscal year ended December 31,
1994; and
WHEREAS, the undersigned is an officer or Director, or both
of the Company and holds the office, or offices, in the Company as
indicated below his name;
NOW THEREFORE, each of the undersigned hereby constitutes
and appoints A. GARY AMES, DAVID R. LAUBE, BARBARA M. JAPHA, and
STEPHEN E. BRILZ, and each of them, as attorneys for him and in his
name, place, and stead, and in each of his offices and capacities
in the Company, to execute and file such annual report, and
thereafter to execute and file any amendment or amendments thereto
on Form 10-K/A, hereby giving and granting to said attorneys full
power and authority to do and perform all and every act and thing
whatsoever requisite and necessary to be done in and about the
premises as fully, to all intents and purposes, as he might or
could do if personally present at the doing thereof, hereby
ratifying and confirming all that said attorneys may or shall
lawfully do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his
hand this 28th day of February, 1995.
/s/ JAMES M. OSTERHOFF
-------------------------------------
James M. Osterhoff
Director
<PAGE> 3
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, U S WEST Communications, Inc., a Colorado
corporation (hereinafter referred to as the "Company"), proposes to
file shortly with the Securities and Exchange Commission, under the
provisions of the Securities Exchange Act of 1934, as amended, an
annual report on Form 10-K for the fiscal year ended December 31,
1994; and
WHEREAS, the undersigned is an officer or Director, or both
of the Company and holds the office, or offices, in the Company as
indicated below his name;
NOW THEREFORE, each of the undersigned hereby constitutes
and appoints A. GARY AMES, DAVID R. LAUBE, BARBARA M. JAPHA, and
STEPHEN E. BRILZ, and each of them, as attorneys for him and in his
name, place, and stead, and in each of his offices and capacities
in the Company, to execute and file such annual report, and
thereafter to execute and file any amendment or amendments thereto
on Form 10-K/A, hereby giving and granting to said attorneys full
power and authority to do and perform all and every act and thing
whatsoever requisite and necessary to be done in and about the
premises as fully, to all intents and purposes, as he might or
could do if personally present at the doing thereof, hereby
ratifying and confirming all that said attorneys may or shall
lawfully do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his
hand this 28th day of February, 1995.
/s/ A. GARY AMES
-----------------------------------------
A. Gary Ames
President and Chief Executive Officer and
Director
<PAGE> 4
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, U S WEST Communications, Inc., a Colorado
corporation (hereinafter referred to as the "Company"), proposes to
file shortly with the Securities and Exchange Commission, under the
provisions of the Securities Exchange Act of 1934, as amended, an
annual report on Form 10-K for the fiscal year ended December 31,
1994; and
WHEREAS, the undersigned is an officer or Director, or both
of the Company and holds the office, or offices, in the Company as
indicated below his name;
NOW THEREFORE, each of the undersigned hereby constitutes
and appoints A. GARY AMES, DAVID R. LAUBE, BARBARA M. JAPHA, and
STEPHEN E. BRILZ, and each of them, as attorneys for him and in his
name, place, and stead, and in each of his offices and capacities
in the Company, to execute and file such annual report, and
thereafter to execute and file any amendment or amendments thereto
on Form 10-K/A, hereby giving and granting to said attorneys full
power and authority to do and perform all and every act and thing
whatsoever requisite and necessary to be done in and about the
premises as fully, to all intents and purposes, as he might or could
do if personally present at the doing thereof, hereby ratifying and
confirming all that said attorneys may or shall lawfully do, or
cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his
hand this 28th day of February, 1995.
/s/ DAVID R. LAUBE
----------------------------------------
David R. Laube
Vice President, Controller and Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000068622
<NAME> TERRY K. STEPHENS
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 114
<SECURITIES> 0
<RECEIVABLES> 1,478
<ALLOWANCES> 28
<INVENTORY> 120
<CURRENT-ASSETS> 2,012
<PP&E> 29,406
<DEPRECIATION> 16,444
<TOTAL-ASSETS> 15,700
<CURRENT-LIABILITIES> 3,851
<BONDS> 4,242
<COMMON> 7,286
0
0
<OTHER-SE> (3,602)
<TOTAL-LIABILITY-AND-EQUITY> 15,700
<SALES> 8,998
<TOTAL-REVENUES> 8,998
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,793
<LOSS-PROVISION> 55
<INTEREST-EXPENSE> 331
<INCOME-PRETAX> 1,881
<INCOME-TAX> 706
<INCOME-CONTINUING> 1,175
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,175
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the
registration statement of U S WEST Communications, Inc. on Forms S-3
(File Nos. 33-49647 and 33-51125) of our report, which includes an
explanatory paragraph regarding the discontinuance of accounting for
operations in accordance with Statement of Financial Accounting
Standard No. 71, "Accounting for the Effects of Certain Types of
Regulation," in 1993, and a change in the method of accounting for
postretirement benefits other than pensions and other postemployment
benefits in 1992, dated January 18, 1995, on our audits of the
consolidated financial statements and financial statement schedules
of U S WEST Communications, Inc. as of December 31, 1994 and 1993,
and for the three years ended December 31, 1994, 1993, and 1992,
which report is included in this Annual Report on Form 10-K.
/s/ COOPERS & LYBRAND, L.L.P.
Denver, Colorado
March 28, 1995
