U S WEST COMMUNICATIONS INC, 10-K405, 1997-03-28

U S WEST COMMUNICATIONS INC
10-K405, 1997-03-28
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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FORM 10-K

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<S> <C>
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996

/ / 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
</TABLE>

U S WEST COMMUNICATIONS, INC.

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<S> <C>
A COLORADO CORPORATION IRS EMPLOYER NO.
84-0273800

1801 CALIFORNIA STREET, DENVER, COLORADO
80202
TELEPHONE NUMBER (303) 896-3099
</TABLE>

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Securities registered pursuant to Section 12(b) of the Act:
None

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Securities 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 the Form 10-K or any amendment to this
Form 10-K. ***

*** Not applicable in that registrant is an indirect, wholly owned subsidiary.

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U S WEST COMMUNICATIONS, INC.
FORM 10-K
TABLE OF CONTENTS

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ITEM DESCRIPTION PAGE
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PART I

1. Business....................................................................... 1
2. Properties..................................................................... 1
3. Legal Proceedings.............................................................. 1
4. Submission of Matters to a Vote of Security Holders............................ 2

PART II

5. Market for the Registrant's Common Equity and Related Stockholder Matters...... 2
6. Selected Financial Data........................................................ 2
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................... 2
8. Consolidated Financial Statements and Supplementary Data....................... 2
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure................................................................... 2

PART III

10. Directors and Executive Officers of the Registrant............................. 2
11. Executive Compensation......................................................... 2
12. Security Ownership of Certain Beneficial Owners and Management................. 2
13. Certain Relationships and Related Transactions................................. 3

PART IV

14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................ 3
</TABLE>

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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").

COMPANY OPERATIONS

The Company provides telecommunications services to more than 25 million
residential and business customers in the states of Arizona, Colorado, Idaho,
Iowa, Minnesota, Montana, Nebraska, New Mexico, North Dakota, Oregon, South
Dakota, Utah, Washington and Wyoming (collectively, the "Region"). The Company
serves approximately 80 percent of the Region's population and approximately 40
percent of its geographic area.

The principal types of telecommunications services offered by the Company
are (i) local telephone services, (ii) exchange access services (which connects
customers to the facilities of carriers, including long-distance providers and
wirelss operators), and (iii) long-distance network services within Local Access
and Transport Areas ("LATAs") in the Region. For the year ended December 31,
1996, local service, exchange access service and intraLATA long-distance network
service accounted for 49 percent, 33 percent and 11 percent, respectively, of
the total operating revenues of the Company. At December 31, 1996, the Company
had approximately 15,424,000 telephone network access lines in service, a 4.3
percent increase over year-end 1995. Excluding the effect of the sales of
approximately 113,000 rural telephone access lines during 1996, access lines
increased 5.0 percent over year-end 1995. In 1996, revenues from a single
customer, AT&T, accounted for approximately 11 percent of the total operating
revenues of the Company.

ITEM 2. PROPERTIES.

The properties of the Company do not lend themselves to description by
character and location of principal units. At December 31, 1996, the percentage
distribution of total net telephone plant by major category for the Company
follows:

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<S> <C> <C>
a. Connecting lines not on customers' premises.................... 38%
Telephone network equipment (primarily central office
b. equipment)................................................... 39%
c. Land and buildings (occupied principally by central offices)... 12%
d. General purpose computers and other............................ 11%
</TABLE>

At December 31, 1996, 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 $32.5 billion at December
31, 1996, from $31.0 billion at December 31, 1995, after giving effect to
retirements, but before deducting accumulated depreciation. The Company's 1996
capital expenditures of $2.8 billion were substantially devoted to the continued
modernization of telephone plant, to improve customer services and to
accommodate additional line capability in several states. 1997 capital
expenditures are anticipated to be $2.5 billion and the majority of these are
expected to be financed through internally generated funds.

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.

1
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

Not applicable.

ITEM 6. SELECTED FINANCIAL DATA.

Omitted pursuant to General Instruction J(2).

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

Omitted pursuant to General Instruction J(2). See "Management's Analysis of
the Results of Operations." Reference is made to the information set forth on
pages 6 through 13.

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Reference is made to the information set forth on pages 16 through 30.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

Coopers & Lybrand L.L.P. served as the Company's independent auditor, and
Arthur Andersen LLP served as the primary auditing firm for major subsidiaries
within U S WEST Media Group, from 1984 to 1995. In view of the targeted stock
structure that U S WEST adopted in 1995, U S WEST determined, following a
recommendation of the Audit Committee, that it is more efficient and effective
for U S WEST to have a single firm perform the auditing function for its entire
business, including the Company.

During the Company's fiscal years ended December 31, 1995 and December 31,
1994, the reports of Coopers & Lybrand L.L.P. on the Company's financial
statements contained no adverse opinion or disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope or accounting principles.
In addition, during such fiscal years and the interim periods thereafter: (1) no
disagreements with Coopers & Lybrand L.L.P. occurred on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of Coopers &
Lybrand L.L.P., would have caused it to make reference to the subject matter of
the disagreement in connection with its report on the Company's financial
statements; (2) no reportable events involving Coopers & Lybrand L.L.P. occurred
that must be disclosed under applicable securities laws; and (3) the Company did
not consult with Arthur Andersen LLP on items that concerned the application of
accounting principles to a specific transaction, either completed or proposed,
or on the type of audit opinion that might be rendered on the Company's
financial statements.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

Omitted pursuant to General Instruction J(2).

ITEM 11. EXECUTIVE COMPENSATION.

Omitted pursuant to General Instruction J(2).

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

Omitted pursuant to General Instruction J(2).

2
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Omitted pursuant to General Instruction J(2).

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(a) Documents filed as a part of this report:

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(1) Reports of Independent Accountants................................................ 14 through 15
(2) Consolidated Financial Statements and Supplementary Data..........................
Consolidated Statements of Operations for the years ended December 31, 1996, 1995
and 1994.................................................................... 16
Consolidated Balance Sheets as of December 31, 1996 and 1995...................... 17
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995
and 1994.................................................................... 18
Notes to Consolidated Financial Statements........................................ 19 through 30
(3) Consolidated Financial Statement Schedule
II -- Valuation and Qualifying Accounts........................................... 31

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.
</TABLE>

(b) Reports on Form 8-K

U S WEST Communications filed the following reports on Form 8-K during
the fourth quarter of 1996:

(i) report dated November 25, 1996, relating to a press release issued by U
S WEST Communications, Inc. entitled "U S WEST Communications Receives a
King County Superior Court Decision in Washington State Rate Order
Appeal." In addition, on November 26, 1996, U S WEST Communications,
Inc. issued a press release entitled "U S WEST Communications To
Continue Appeal of Washington State Rate Order."

Exhibits identified in parentheses below, on file with the United States
Securities and Exchange Commission ("SEC"), are incorporated herein by
referenced as exhibits hereto.

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<CAPTION>
EXHIBIT
NUMBER
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(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).
</TABLE>

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<CAPTION>
EXHIBIT
NUMBER
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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).
(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 Company 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 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 Power of Attorney.
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4
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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, 1997.

U S WEST COMMUNICATIONS, INC.

By /s/ MICHAEL P. GLINSKY

------------------------------------

Michael P. Glinsky
ACTING CHIEF FINANCIAL OFFICER

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 capacities and on the date indicated.

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PRINCIPAL EXECUTIVE OFFICER:

/s/ Solomon D. Trujillo* President and Chief Executive Officer

PRINCIPAL FINANCIAL OFFICER:

/s/ Michael P. Glinsky Acting Chief Financial Officer

DIRECTORS:

/s/ Michael P. Glinsky

/s/ Solomon D. Trujillo*

*By /s/ MICHAEL P. GLINSKY
--------------------------------------
Michael P. Glinsky
(AS ATTORNEY-IN-FACT)
</TABLE>

Dated: March 28, 1997

5
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U S WEST COMMUNICATIONS, INC.

MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)

Some of the information presented in or in connection with this report
constitutes "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Although the Company believes that its
expectations are based on reasonable assumptions within the bounds of its
knowledge of its business and operations, there can be no assurance that actual
results will not differ materially from its expectations. Factors that could
cause actual results to differ from expectations include: (i) different than
anticipated competition from new entrants into the local exchange and intraLATA
toll markets, (ii) changes in demand for the Company's products and services,
including optional custom calling features, (iii) different than anticipated
employee levels, capital expenditures, and operating expenses as a result of
unusually rapid, in-region growth, (iv) the gain or loss of significant
customers, (v) pending regulatory actions in state jurisdictions, and (vi)
regulatory changes affecting the telecommunications industry, including changes
that could have an impact on the competitive environment in the local exchange
market.

RESULTS OF OPERATIONS -- 1996 COMPARED WITH 1995

Following are details of the Company's reported net income for 1996 and
1995, normalized to exclude the effects of certain nonoperating items.

<TABLE>
<CAPTION>
INCREASE (DECREASE)
--------------------
1996 1995 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Reported net income............................................................ $ 1,267 $ 1,211 $ 56 4.6
Adjustments to reported net income:
Gains on sales of rural telephone exchanges.................................. (36) (85) 49 57.6
Cumulative effect of change in accounting principle(1)....................... (34) -- (34) --
Current year effect of change in accounting principle(1)..................... (15) -- (15) --
Recapitalization costs....................................................... -- 8 (8) --
Early extinguishment of debt................................................. -- 8 (8) --
--------- --------- --------- ---
Normalized income.............................................................. $ 1,182 $ 1,142 $ 40 3.5
--------- --------- --------- ---
--------- --------- --------- ---
</TABLE>

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(1) Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." See the
Consolidated Financial Statements -- Note 2 -- Property, Plant and
Equipment.

The Company's 1996 normalized income was $1,182, an increase of $40, or 3.5
percent, compared with $1,142 in 1995. The increase in normalized income is
primarily attributable to demand for services, evidenced by revenue growth of
5.9 percent. Partially offsetting the increased demand are higher costs incurred
to address business growth, service-improvement initiatives and costs related to
new business opportunities.

The Company expects net income growth in the core business to be partially
offset by cost increases related to growth initiatives such as wireless Personal
Communications Services ("PCS"). Net income growth could also be impacted by
costs related to implementing the interconnection requirements and other
provisions of the Telecommunications Act of 1996. However, the net income impact
will depend on the nature and timing of the requirements, and the type of
recovery mechanisms provided for by the Federal Communications Commission
("FCC") and state commissions. (See "Regulatory Environment.")

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MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS (CONTINUED)

Increased demand for services resulted in growth in earnings before
interest, taxes, depreciation, amortization and other ("EBITDA") of 6.0 percent
in 1996. EBITDA also excludes gains on sales of certain rural telephone
exchanges in 1996 and 1995. The Company believes EBITDA is an important
indicator of the operational strength of its businesses. EBITDA, however, should
not be considered as an alternative to operating or net income as an indicator
of the performance of the Company's business or as an alternative to cash flows
from operating activities as a measure of liquidity, in each case determined in
accordance with generally accepted accounting principles ("GAAP").

Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," which, among other things, requires that companies no longer record
depreciation expense on assets held for sale. Adoption of SFAS No. 121 resulted
in a one-time gain of $34 (net of tax of $22), related to the cumulative effect
of change in accounting principle. See the Consolidated Financial Statements --
Note 2 -- Property, Plant and Equipment.

During 1995, the Company refinanced $145 of long-term debt. Expenses
associated with the refinancing resulted in extraordinary charges of $8, net of
tax benefits of $5.

OPERATING REVENUES

An analysis of operating revenues follows:
<TABLE>
<CAPTION>
INCREASE
LOWER (DECREASE)
PRICE (HIGHER) ---------
1996 1995 DEMAND CHANGES REFUNDS OTHER $
--------- --------- ----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Local service................................. $ 4,770 $ 4,344 $ 413 $ 27 $ 8 $ (22) $ 426
Interstate access............................. 2,507 2,378 250 (48) (69) (4) 129
Intrastate access............................. 770 747 45 (16) -- (6) 23
Long-distance network......................... 1,100 1,189 (53) (7) (1) (28) (89)
Other services................................ 684 626 -- -- -- 58 58
--------- --------- ----- ----- ----- ----- ---------
Total......................................... $ 9,831 $ 9,284 $ 655 $ (44) $ (62) $ (2) $ 547
--------- --------- ----- ----- ----- ----- ---------
--------- --------- ----- ----- ----- ----- ---------

%
---------
<S> <C>
Local service................................. 9.8
Interstate access............................. 5.4
Intrastate access............................. 3.1
Long-distance network......................... (7.5)
Other services................................ 9.3
---
Total......................................... 5.9
---
---
</TABLE>

Approximately 60 percent of the Company's revenues are derived from the
states of Arizona, Colorado, Minnesota and Washington. Approximately 29 percent
of the access lines in service are devoted to providing services to business
customers. The access line growth rate for business customers, who tend to be
heavier users of the network, has consistently exceeded the growth rate of
residential customers. During 1996, business access lines grew 7.6 percent while
residential access lines increased 4.0 percent, when adjusted for the 1996 sales
of rural telephone access lines.

The primary factors that influence changes in revenues are customer demand
for products and services, price changes (including those related to regulatory
proceedings) and refunds. During 1996, revenues from new product and service
offerings were approximately $808, an increase of 51 percent as compared with
1995. These revenues primarily consist of caller identification, voice
messaging, digital switched services and high-speed data network transmission
services.

Local service revenues include local telephone exchange, local private line
and public telephone services. The 9.8 percent increase in local service
revenues is primarily attributable to growth in access lines and increased
demand for new product and service offerings, and existing central office
features. Total reported access lines increased 629,000 during 1996, or 4.3
percent, of which 244,000 is attributed to second lines. Second line
installations increased 30.5 percent compared with 1995. Access lines grew by

7
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MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS (CONTINUED)

742,000, or 5.0 percent, when adjusted for sales of approximately 113,000 rural
telephone access lines during 1996.

Access charges are collected primarily from 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 30 percent of
access revenues and 11 percent of total revenues are derived from providing
access services to AT&T.

Higher revenues from interstate access services were driven by access line
growth and an increase of 8.9 percent in interstate billed access minutes of
use. The increased business volume was partially offset by the effects of price
reductions and sharing related accrued refunds to interexchange carriers. The
Company reduced prices for interstate access services in both 1996 and 1995 as a
result of FCC orders and competitive pressures. Intrastate access revenues
increased primarily due to higher demand partially offset by the effects of
price reductions.

Long-distance revenues are derived from calls made within the LATA
boundaries of the Region. During 1996, long-distance revenues decreased 7.5
percent, primarily due to the effects of competition and the implementation of
multiple toll carrier plans ("MTCPs") in Iowa and Nebraska in May and October
1996, respectively. The MTCPs essentially allow independent telephone companies
to act as toll carriers. The 1996 impact of the MTCPs was a $27 reduction in
long-distance revenues, offset by increases in intrastate access revenues of $5
and decreases in other operating expenses (i.e., access expense) of $21. Similar
changes in other states are scheduled to occur in 1997, though the impact on
1997 net income is not expected to be material.

Excluding the effects of the MTCPs, long-distance revenues decreased 5.2
percent. Long-distance revenues have declined over the last several years as
customers have migrated to interexchange carriers that have the ability to offer
long-distance services on both an intraLATA and interLATA basis. A portion of
revenues lost to competition, however, is recovered through access charges paid
by the interexchange carriers. The Company expects erosion in long-distance
revenue to continue in 1997 due to the loss of exclusivity of 1+ dialing in
Minnesota and Arizona, effective in February and April 1996, respectively, and
continued dial-around activity in other states within the Region, though
management expects the decline to be less than in 1996. The Company is partially
mitigating competitive losses through competitive pricing of intraLATA
long-distance services and increased promotional efforts to retain customers.

Revenues from other services primarily consist of voice messaging services,
inside wire maintenance services, billing and collection services provided to
interexchange carriers, and high-speed data transmission services.

During 1996, revenues from other services increased $58, or 9.3 percent,
primarily as a result of continued market penetration in voice messaging
services and increased inside wire maintenance services.

Future revenues at the Company may be affected by pending regulatory actions
in federal and local regulatory jurisdictions. (See "Regulatory Environment.")

8
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MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS (CONTINUED)

COSTS AND EXPENSES

<TABLE>
<CAPTION>
INCREASE (DECREASE)
--------------------
1996 1995 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Employee-related expenses..................................................... $ 3,377 $ 3,079 $ 298 9.7
Other operating expenses...................................................... 1,574 1,587 (13) (0.8)
Taxes other than income taxes................................................. 379 371 8 2.2
Depreciation and amortization................................................. 2,101 2,022 79 3.9
Interest expense.............................................................. 414 386 28 7.3
Other expense -- net.......................................................... 44 58 (14) (24.1)
</TABLE>

Employee-related expenses include salaries and wages (including both basic
and performance-based pay), overtime, benefits (including pension and health
care), payroll taxes and contract labor. During 1996, total employee-related
expenses increased $298 primarily due to continued efforts to address increased
business growth, service-improvement initiatives and new business opportunities.
Salaries and wages and contract labor, which increased by $133 and $177,
respectively, in 1996, are the two primary factors that impact employee-related
expenses. Salaries and wages increased primarily due to inflation-driven and
contractual wage increases, as well as absorbing certain employee transfers from
affiliate companies during 1995. The contract labor increase supported the
increased business growth and the additional marketing organization costs
related to the launch of new products and services. Employee-related expenses
also include approximately $15 for contract labor and overtime as a result of
flooding in Washington and Oregon in first-quarter 1996. Partially offsetting
these increases was a reduction in postretirement benefits costs due to changes
in actuarial assumptions and favorable costs trends, lower conference and travel
expenses and decreased overtime as a result of accelerated cost reduction
efforts in the latter half of 1996.

The Company will add a certain number of employees to address the needs of
new business opportunities such as wireless PCS. Costs related to these work
force additions could partially offset the benefits of employee separations
achieved through restructuring. (See "Restructuring Charge.")

Other operating expenses include access charges paid to independent local
exchange carriers (incurred for the routing of long-distance traffic through
their facilities), network software expenses and other general and
administrative costs. During 1996, other operating expenses decreased primarily
due to lower affiliate costs and reduced access expense, a portion of which
relates to the 1996 implementation of the MTCPs in Iowa and Nebraska. Partially
offsetting the decrease were higher advertising and bad debt expenses. The
decrease was also partially offset by a reserve adjustment associated with
billing and collection activities performed for interexchange carriers and a
charge related to the discontinuance of the Omaha broadband video service trial.

Taxes other than income taxes, which consist primarily of property taxes,
were relatively flat as compared with 1995. In fourth-quarter 1996, taxes other
than income taxes increased by $23, or 31.9 percent, due to favorable property
tax valuations and mill levies recognized during fourth-quarter 1995.

The increase in depreciation and amortization expense is attributed to the
effects of a higher depreciable asset base, partially offset by the effects of
1995 sales of certain rural telephone exchanges and the adoption of SFAS No.
121.

Interest expense increased primarily due to higher average debt levels and a
decrease in the amount of interest capitalized resulting from a lower average
balance of telecommunications plant under construction.

9
<PAGE>
MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS (Continued)

PROVISION FOR INCOME TAXES

<TABLE>
<CAPTION>
INCREASE
--------------------
1996 1995 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Provision for income taxes......................................................... $ 768 $ 698 $ 70 10.0
Effective tax rate................................................................. 38.4% 36.4% -- --
</TABLE>

The increase in the effective tax rate resulted primarily from the effects
of lower investment tax credit amortization combined with the effects of a
research and experimentation credit recorded in 1995.

RESTRUCTURING CHARGE

In 1993, the Company incurred an $880 restructuring charge (pretax). The
related restructuring plan (the "Restructuring Plan"), which is expected to be
substantially complete by the end of 1997, is designed to provide faster, more
responsive customer services, while reducing the costs of providing these
services. Following is a schedule of the incurred costs that were included in
the Restructuring Plan:

<TABLE>
<CAPTION>
ACTUAL ESTIMATE
------------------------------- -----------
1994 1995 1996 1997 TOTAL
--------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Employee separation..................................................... $ 19 $ 76 $ 102 $ 86 $ 283
Systems development..................................................... 118 129 91 22 360
Real estate............................................................. 50 66 8 6 130
Relocation.............................................................. 21 21 5 -- 47
Retraining and other.................................................... 8 23 20 9 60
--------- --------- --------- ----- ---------
Total................................................................... $ 216 $ 315 $ 226 $ 123 $ 880
--------- --------- --------- ----- ---------
--------- --------- --------- ----- ---------
</TABLE>

Employee separation costs include severance payments, health-care coverage
and postemployment education benefits. Under the Restructuring Plan, the Company
anticipates the separation of 10,000 employees. Annual employee separations and
employee-separation amounts under the Restructuring Plan follow:

OTHER ITEMS

On November 15, 1996, Continental Cablevision, Inc. was merged into a wholly
owned subsidiary of U S WEST (the "Continental Merger"). The Continental Merger
and the regulatory uncertainty surrounding the Washington State Utilities and
Transportation Commission's $91.5 rate reduction order (see the Consolidated
Financial Statements -- Note 11 -- Contingencies) have resulted in a general
downgrading of the Company's credit ratings. The Company's senior unsecured debt
and commercial paper ratings by Moody's, Standard & Poor's and Duff & Phelps
were Aa3, A-plus and AA-minus, and P1, A1 and D-1-plus, respectively, at
December 31, 1996.

10
<PAGE>
MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS (CONTINUED)

REGULATORY ENVIRONMENT

THE TELECOMMUNICATIONS ACT OF 1996

The Telecommunications Act of 1996 (the "Telecommunications Act") replaces
the Modification of Final Judgment, the antitrust consent decree entered into in
1984 in connection with the divestiture by AT&T of its local telephone business
and the formation of U S WEST and the other Regional Bell Operating Companies
("RBOCs"). The Telecommunications Act permits local telephone companies, long-
distance carriers and cable television companies to enter each others' lines of
business. The RBOCs will be permitted to provide interLATA long-distance
services by opening their local networks to facilities-based competition and
satisfying a detailed list of requirements, including providing interconnection
and number portability. The Telecommunications Act also lifts the ban on
cross-ownership between cable television and telephone companies, thereby
permitting the RBOCs to enter into the cable business within their respective
service regions so long as such entry is not achieved through the purchase of
existing cable companies, except in rural communities. The Telecommunications
Act also reaffirms the concept of universal service and directs the FCC and
state regulators to determine universal service funding policy. The FCC and
state regulators have been given the responsibility to interpret and oversee
implementation of large portions of the Telecommunications Act.

On August 8, 1996, the FCC issued an order (the "FCC Order") establishing a
framework of minimum national rules that will enable the states and the FCC to
begin implementing the local competition provisions of the Telecommunications
Act. Key provisions that relate to the Company and other local exchange carriers
("LECs") include:

- Providing interconnection to any requesting telecommunications carrier at
any technically feasible point, equal in quality to that provided by the
incumbent LEC.

- Providing unrestricted access to network services on an unbundled basis.

- Providing physical collocation of equipment necessary for interconnection
at the incumbent LEC, unless physical collocation is not practical for
technical reasons or because of space limitations.

- Offering for resale any telecommunications services that the LEC provides
at retail to subscribers who are not telecommunications carriers.

- Reciprocal compensation arrangements for wireline and wireless local
service providers.

The FCC Order also established rigid costing and pricing rules which, from U
S WEST's perspective, significantly impede negotiations with new entrants to the
local exchange market, state public utility commission ("PUC") interconnection
rulemakings, and interconnection arbitration proceedings. U S WEST appealed the
FCC Order and sought a stay of certain of its provisions, including certain
pricing provisions, pending appellate review. On October 15, 1996, the Eighth
Circuit Court of Appeals ("Eighth Circuit") issued its order granting a stay of
all the pricing provisions of the FCC Order. The stay does not postpone
implementation of the Telecommunications Act. Rather, the effect of the stay is
to have interconnection and network unbundled element pricing be resolved
through negotiations or state PUC arbitration proceedings without the PUCs being
limited in their consideration of relevant costs.

Subsequently, the FCC and certain interexchange carriers requested the
United States Supreme Court (the "Supreme Court") to review and vacate the
Eighth Circuit stay. On October 31, 1996, the Supreme Court denied these
requests. Thereafter, the FCC and certain interexchange carriers petitioned the
Supreme Court for further consideration of vacating the stay. On November 12,
1996, the Supreme Court rejected these further petitions. Thus, the Eighth
Circuit stay will remain in effect until modified by that court or until the
appeal is resolved. A decision on the appeal is expected by May 1997.

11
<PAGE>
MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS (CONTINUED)

The Telecommunications Act will drive key public policy initiatives of the
Company in 1997. These include:

- INTERCONNECTION PROCEEDINGS. Despite the FCC Order being stayed by the
Eighth Circuit, interconnection proceedings throughout local regulatory
jurisdictions are continuing. At December 31, 1996, the Company had
completed 25 state arbitrations in 11 states. An additional 32
arbitrations were pending throughout the Region and 41 parties were still
in negotiations with the Company. The Company advocates that LECs have the
right to recover fully the costs of providing interconnection services and
that they must not be placed at a competitive disadvantage as local and
long-distance markets are opened to competition. The Company is
aggressively defending its views in arbitrations and, when necessary, in
the courts. The Company cannot provide assurance that it will be able to
fully recover its costs related to providing interconnection services.

- FEDERAL ACCESS REFORM. In December 1996, the FCC issued a Notice of
Proposed Rulemaking related to the pricing, terms and conditions for
long-distance carriers to access LEC networks. The FCC has alternatively
proposed a regulatory approach that entails scheduled fee reductions or a
market-based approach that would allow competition to determine access
pricing. The Company advocates a market-based approach that would permit
LECs to gradually reduce access charges as new sources of revenue are
developed through the expansion of wholesale and retail services and in
conjunction with interstate and intrastate rate rebalancing that would
eliminate implicit subsidies. The Company expects new rules to be issued
by May 1997, with implementation of the new rules to occur over a three-
to four-year period.

- UNIVERSAL SERVICE. The Telecommunications Act requires the FCC and state
jurisdictions to preserve universally available and affordable local
telephone service for low-income and high-cost area customers through an
explicit subsidy. A federal-state joint board issued recommendations on
universal service policy during fourth-quarter 1996. Funding
recommendations include an assessment on service providers' gross
telecommunications service revenues net of payments to other carriers. The
Company advocates that universal service support be based on the smallest,
high-cost geographic areas that are reasonably identifiable and that
funding occur through a pass-through surcharge on retail revenues. The
Company expects new FCC rules on universal service to be issued by May
1997.

- LEGISLATIVE INITIATIVES. Key legislative initiatives in local regulatory
jurisdictions in 1997 include: (1) achieving accelerated capital recovery;
(2) rebalancing local service prices to cover actual costs; and (3)
eliminating subsidies.

Due to legal and regulatory uncertainties, the impact of the
Telecommunications Act on the Company's future results is unknown.

OTHER REGULATORY ISSUES

The Company's interstate services have been subject to price cap regulation
since January 1991. Price caps are an alternative form of regulation designed to
limit prices rather than profits. The FCC's price cap plan (the "Price Cap
Plan") includes sharing of earnings in excess of authorized levels. The Price
Cap Plan has resulted in reduced access prices paid by interexchange carriers to
LECs.

The price cap index for most services is annually adjusted for inflation,
productivity level and exogenous costs. The Price Cap Plan provides for three
productivity options, including a no-sharing option, and for increased
flexibility for adjusting prices downward in response to competition. In 1996
and 1995, the Company selected the lowest productivity option in determining
prices. Current FCC deliberations on access charge reform and universal service
will likely impact the nature and duration of the interim rules on price cap
regulation.

12
<PAGE>
MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS (CONTINUED)

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 hearing, thereby establishing two exceptions to the rule against
retroactive ratemaking: (1) unforeseen and extraordinary events, and (2)
misconduct. The PSC's initial order denied a refund request from interexchange
carriers and other parties related to the Tax Reform Act of 1986. The range of
possible risk is $0 to $155 at December 31, 1996.

On April 11, 1996, the Washington State Utilities and Transportation
Commission ("WUTC" or the "Commission") acted on the Company's 1995 rate
request. In February 1995, the Company sought to increase revenues by raising
rates for basic residential services over a four-year period. The two major
issues in this proceeding involve the Company's request for improved capital
recovery and elimination of the imputation of Yellow Pages revenue. Instead of
granting the Company's rate request, the Commission ordered approximately $91.5
in annual revenue reductions, effective May 1, 1996. Based on the above ruling,
the Company filed a lawsuit with the King County Superior Court (the "Court")
for an appeal of the order, a temporary stay of the ordered rate reduction and
an authorization to implement a revenue increase.

On April 29, 1996, the Court stayed the rate decreases ordered by the WUTC.
The Court granted the stay pending its decision on the Company's appeal.
Effective May 1, 1996, the Company began collecting revenues subject to refund
with interest. On November 25, 1996, the Court ruled in favor of the WUTC. The
Company appealed the Court's decision to the Washington State Supreme Court (the
"State Supreme Court") which, on January 22, 1997, granted a stay of the order,
pending the State Supreme Court's full review of the appeal. The Company expects
the State Supreme Court's review to begin in the second quarter of 1997.

The Company expects its appeal to be successful and has not accrued any of
the amounts subject to refund. However, an adverse judgment on the appeal would
have a significant impact on the future results of operations.

13
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareowner and Board of Directors of U S WEST Communications, Inc.:

We have audited the accompanying consolidated balance sheet of U S WEST
Communications, Inc. (a Colorado corporation) and subsidiaries as of December
31, 1996, and the related consolidated statements of operations and cash flows
for the year then ended. These consolidated financial statements and the
schedule referred to below are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements and schedule based on our audit.

We conducted our audit 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 audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of U S WEST Communications,
Inc. and subsidiaries as of December 31, 1996 and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.

Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule II on page 31 is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not a required part of the basic financial statements. The Year 1996 information
on this schedule has been subjected to the auditing procedures applied in our
audit of the basic financial statements and, in our opinion, fairly states in
all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.

ARTHUR ANDERSEN LLP

Denver, Colorado,
February 12, 1997.

14
<PAGE>
REPORT OF INDEPENDENT AUDITORS

To the Shareowner and Board of Directors of U S WEST Communications, Inc.:

We have audited the consolidated Balance Sheet of U S WEST Communications,
Inc. as of December 31, 1995, and the consolidated Statements of Operations and
Cash Flows for each of the two years in the period ended December 31, 1995. In
addition, we have audited the 1995 and 1994 information contained in the
consolidated financial statement schedule of U S WEST Communications, Inc. The
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule 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, 1995, and the consolidated results of
its operations and its cash flows for each of the two years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
In addition, in our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.

COOPERS & LYBRAND L.L.P.

Denver, Colorado
February 12, 1996

15
<PAGE>
U S WEST COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
(DOLLARS IN MILLIONS)
Operating revenues:
Local service...................................................................... $ 4,770 $ 4,344 $ 4,067
Interstate access service.......................................................... 2,507 2,378 2,269
Intrastate access service.......................................................... 770 747 729
Long-distance network services..................................................... 1,100 1,189 1,329
Other services..................................................................... 684 626 604
--------- --------- ---------
Total operating revenues......................................................... 9,831 9,284 8,998

Operating expenses:
Employee-related expenses.......................................................... 3,377 3,079 2,930
Other operating expenses........................................................... 1,574 1,587 1,653
Taxes other than income taxes...................................................... 379 371 378
Depreciation and amortization...................................................... 2,101 2,022 1,887
--------- --------- ---------
Total operating expenses......................................................... 7,431 7,059 6,848
--------- --------- ---------

Income from operations............................................................... 2,400 2,225 2,150
Interest expense..................................................................... 414 386 331
Gains on sales of rural telephone exchanges.......................................... 59 136 82
Other expense -- net................................................................. 44 58 20
--------- --------- ---------
Income before income taxes, extraordinary item and cumulative
effect of change in accounting principle............................................ 2,001 1,917 1,881
Provision for income taxes........................................................... 768 698 706
--------- --------- ---------
Income before extraordinary item and cumulative effect of change in accounting
principle........................................................................... 1,233 1,219 1,175
Extraordinary item -- early extinguishment of debt -- net of tax..................... -- (8) --
--------- --------- ---------
Income before cumulative effect of change in accounting principle.................... 1,233 1,211 1,175
Cumulative effect of change in accounting principle -- net of tax.................... 34 -- --
--------- --------- ---------
NET INCOME........................................................................... $ 1,267 $ 1,211 $ 1,175
--------- --------- ---------
--------- --------- ---------
</TABLE>

The accompanying notes are an integral part of the Consolidated Financial
Statements.

16
<PAGE>
U S WEST COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
(DOLLARS IN
MILLIONS)
Current assets:
Cash and cash equivalents................................................................. $ 92 $ 191
Accounts and notes receivable, less allowance for
credit losses of $37 and $30, respectively.............................................. 1,550 1,546
Inventories and supplies.................................................................. 109 142
Deferred tax asset........................................................................ 152 240
Prepaid and other......................................................................... 57 43
--------- ---------
Total current assets........................................................................ 1,960 2,162
--------- ---------
Gross property, plant and equipment......................................................... 32,451 30,988
Less accumulated depreciation............................................................... 18,522 17,540
--------- ---------
Property, plant and equipment -- net........................................................ 13,929 13,448
Other assets................................................................................ 743 740
--------- ---------
Total assets................................................................................ $ 16,632 $ 16,350
--------- ---------
--------- ---------

LIABILITIES AND SHAREOWNER'S EQUITY

Current liabilities:
Short-term debt........................................................................... $ 834 $ 995
Accounts payable.......................................................................... 998 864
Employee compensation..................................................................... 308 281
Dividends payable......................................................................... 307 299
Current portion of restructuring charge................................................... 123 270
Advanced billing and customer deposits.................................................... 250 223
Accrued property taxes.................................................................... 193 194
Other..................................................................................... 438 365
--------- ---------
Total current liabilities................................................................... 3,451 3,491
--------- ---------
Long-term debt.............................................................................. 5,375 5,411
Postretirement and other postemployment benefit obligations................................. 2,347 2,316
Deferred income taxes....................................................................... 807 749
Unamortized investment tax credits.......................................................... 173 199
Deferred credits and other.................................................................. 419 438

Contingencies

Shareowner's equity
Common shares -- one share without par value, owned by parent............................. 7,677 7,348
Cumulative deficit........................................................................ (3,617) (3,602)
--------- ---------
Total shareowner's equity................................................................... 4,060 3,746
--------- ---------
Total liabilities and shareowner's equity................................................... $ 16,632 $ 16,350
--------- ---------
--------- ---------
</TABLE>

The accompanying notes are an integral part of the Consolidated Financial
Statements.

17
<PAGE>
U S WEST COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
(DOLLARS IN MILLIONS)
OPERATING ACTIVITIES
Net income........................................................................ $ 1,267 $ 1,211 $ 1,175
Adjustments to net income:
Depreciation and amortization................................................... 2,101 2,022 1,887
Gains on sales of rural telephone exchanges..................................... (59) (136) (82)
Cumulative effect of change in accounting principle............................. (34) -- --
Deferred income taxes and amortization of investment tax credits................ 99 158 223
Changes in operating assets and liabilities:
Restructuring payments.......................................................... (226) (315) (272)
Postretirement medical and life costs, net of cash fundings..................... 25 (93) (198)
Accounts receivable............................................................. (12) (96) (59)
Inventories, supplies and other current assets.................................. 6 (45) (53)
Accounts payable and accrued liabilities........................................ 146 24 (116)
Other -- net...................................................................... 25 27 (4)
--------- --------- ---------
Cash provided by operating activities............................................. 3,338 2,757 2,501
--------- --------- ---------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment.................................... (2,392) (2,437) (2,230)
Proceeds from sales of rural telephone exchanges.................................. 174 214 93
Proceeds from (payments on) disposals of property, plant and equipment............ 15 (18) 3
--------- --------- ---------
Cash (used for) investing activities.............................................. (2,203) (2,241) (2,134)
--------- --------- ---------
FINANCING ACTIVITIES
Proceeds from (repayments of) short-term debt -- net.............................. 158 (778) 342
Proceeds from issuance of long-term debt.......................................... 23 1,647 251
Repayments of long-term debt...................................................... (466) (327) (285)
Dividends paid on common stock.................................................... (1,259) (1,037) (1,172)
Equity infusions from U S WEST Communications Group............................... 310 56 544
--------- --------- ---------
Cash (used for) financing activities.............................................. (1,234) (439) (320)
--------- --------- ---------
CASH AND CASH EQUIVALENTS
Increase (decrease)............................................................... (99) 77 47
Beginning balance................................................................. 191 114 67
--------- --------- ---------
Ending balance.................................................................... $ 92 $ 191 $ 114
--------- --------- ---------
--------- --------- ---------
</TABLE>

The accompanying notes are an integral part of the Consolidated Financial
Statements.

18
<PAGE>
U S WEST COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(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. ("U S WEST"). 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.

Certain reclassifications within the Consolidated Financial Statements have
been made to conform to the current year presentation.

INDUSTRY SEGMENT. The Company primarily provides telecommunications
services to more than 25 million residential and business customers in the
Company's region (the "Region"). The Region includes the states of Arizona,
Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, New Mexico, North Dakota,
Oregon, South Dakota, Utah, Washington and Wyoming. Services offered by the
Company include local telephone services, exchange access services (which
connect customers to the facilities of carriers, including long-distance
providers and wireless operators), and long-distance services within Local
Access and Transport Areas ("LATAs") in the Region. The Company provides other
products and services, including caller identification, voice messaging, digital
switched services and high-speed data network transmission services.

Approximately 60 percent of the Company's revenues are derived from the
states of Arizona, Colorado, Minnesota and Washington.

SIGNIFICANT CONCENTRATIONS. The largest volume of the Company's services is
provided to AT&T. During 1996, 1995 and 1994, revenues related to those services
provided to AT&T were $1,046, $1,085 and $1,130, respectively. Related accounts
receivable at December 31, 1996 and 1995 totaled $89 and $91, respectively. As
of December 31, 1996, the Company is not aware of any other significant
concentration of business transacted with a particular customer, supplier or
lender that could, if suddenly eliminated, severely impact operations.

USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.

CASH AND CASH EQUIVALENTS. Cash and cash equivalents include highly liquid
investments with original maturities of three months or less that are readily
convertible into cash and are not subject to significant risk from fluctuations
in interest rates.

INVENTORIES AND SUPPLIES. New and reusable materials of the Company are
carried at average cost, except for significant individual items that are valued
based on specific costs. Nonreusable 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. Costs for normal
repair and maintenance of property, plant and equipment are expensed 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. The

19
<PAGE>
U S WEST COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Company discontinued accounting for its regulated telephone operations under
Statement of Financial Accounting Standard ("SFAS") No. 71, "Accounting for the
Effects of Certain Types of Regulation," in 1993. The average depreciable lives
used for the major categories of telephone property, plant and equipment follow:

<TABLE>
<CAPTION>
AVERAGE LIFE
CATEGORY (YEARS)
- -------------------------------------------------------------------------- -------------------
<S> <C>
General purpose computers................................................. 6
Digital switch............................................................ 10
Digital circuit........................................................... 10
Aerial copper cable....................................................... 15
Underground copper cable.................................................. 15
Buried copper cable....................................................... 20
Fiber cable............................................................... 20
Buildings................................................................. 27-49
</TABLE>

When the depreciable property, plant and equipment of the Company is retired
or sold, the original cost less the net salvage value is generally charged to
accumulated depreciation.

Interest related to qualifying construction projects is capitalized and is
reflected as a reduction of interest expense. Amounts capitalized by the Company
were $31, $39 and $36 in 1996, 1995 and 1994, respectively.

COMPUTER SOFTWARE. The cost of computer software, whether purchased or
developed internally, is charged to expense with two exceptions. Initial
operating systems 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 costs of $187 and $181 at December 31,
1996 and 1995, respectively, are recorded in property, plant and equipment.
Amortization of capitalized computer software costs totaled $81, $69 and $61 in
1996, 1995 and 1994, respectively.

FINANCIAL INSTRUMENTS. Net interest accrued on interest rate swaps is
recognized over the life of the swaps as an adjustment to interest expense.
Gains and losses incurred on executed forward U.S. Treasury Bond contracts, used
to lock in the U.S. Treasury rate component of future debt issues, are deferred
and recognized as an adjustment to interest expense over the life of the
underlying debt. At December 31, 1996, deferred credits of $8 and deferred
charges of $50 on the closed 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.

Currency swaps entered into to convert foreign debt to dollar-denominated
debt are combined with the foreign currency debt and accounted for as if
fixed-rate, dollar-denominated debt were issued directly.

REVENUE RECOGNITION. Local telephone service revenues are generally billed
monthly in advance, and revenues are recognized the following month when
services are provided. Revenues derived from exchange access and long-distance
network services are billed and recorded monthly as services are provided.

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. For financial statement purposes, investment tax credits of the Company
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.

The Company is included in the consolidated federal income tax returns of U
S WEST. The Company recognizes federal income tax expense based upon a pro-rata
allocation agreement with U S WEST. Under

20
<PAGE>
U S WEST COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

the agreement, the Company is allocated income tax consequences or benefits
based upon its pro-rata contribution to the consolidated group's taxable income,
deductions and credits. The amount of federal income tax expense recognized by
the Company is not significantly different than an amount computed on a
stand-alone basis.

The Company is included in combined state tax returns filed by U S WEST. The
Company recognized state income tax expense based upon a stand-alone allocation
policy with U S WEST.

BELL COMMUNICATIONS RESEARCH, INC. ("BELLCORE"). Charges relating to
research, development and maintenance of existing technologies performed by
Bellcore, of which the Company has a one-seventh ownership interest, were $97,
$95, and $122 in 1996, 1995 and 1994, respectively.

In fourth-quarter 1996, the Company and the other Regional Bell Operating
Companies ("RBOCs") entered into an agreement to sell their interests in
Bellcore. The sale is expected to be finalized in late 1997 after the RBOCs
obtain the requisite regulatory approvals. Following the disposition, Bellcore
and other third parties will provide research and development and other services
to the Company on a contract basis.

NEW ACCOUNTING STANDARD. In 1996, U S WEST adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." SFAS No. 121 requires that long-lived assets and associated
intangibles be written down to fair value whenever an impairment review
indicates that the carrying value cannot be recovered on an undiscounted cash
flow basis. SFAS No. 121 also requires that a company no longer record
depreciation expense on assets held for sale. See Note 2 -- Property, Plant and
Equipment -- to the Consolidated Financial Statements.

NOTE 2: PROPERTY, PLANT AND EQUIPMENT

The composition of property, plant and equipment follows:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Land and buildings.......................................................... $ 2,372 $ 2,413
Telephone network equipment................................................. 12,893 12,019
Telephone outside plant..................................................... 13,148 12,353
General purpose computers and other......................................... 3,440 3,437
Construction in progress.................................................... 598 766
--------- ---------
32,451 30,988
--------- ---------
Less accumulated depreciation
Buildings................................................................. 690 675
Telephone network equipment............................................... 7,742 7,221
Telephone outside plant................................................... 8,221 7,851
General purpose computers and other....................................... 1,869 1,793
--------- ---------
18,522 17,540
--------- ---------
Property, plant and equipment -- net........................................ $ 13,929 $ 13,448
--------- ---------
--------- ---------
</TABLE>

In 1996, the Company sold certain rural telephone exchanges with a cost
basis of $243. The Company received consideration for the sales of $306,
including $174 in cash. In 1995, the Company sold certain rural telephone
exchanges with a cost basis of $258 and received consideration for the sales of
$388, including $214 in cash.

21
<PAGE>
U S WEST COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2: PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
ADOPTION OF SFAS NO. 121

Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." SFAS No. 121 requires that long-lived assets and associated intangibles be
written down to fair value whenever an impairment review indicates that the
carrying value cannot be recovered on an undiscounted cash flow basis. SFAS No.
121 also requires that a company no longer record depreciation expense on assets
held for sale. Adoption of SFAS No. 121 resulted in income of $34 (net of tax of
$22) from the cumulative effect of reversing depreciation expense recorded in
prior years related to rural telephone exchanges held for sale. Depreciation
expense was reversed from the date the Company formally committed to a plan to
dispose of the rural telephone exchange assets to January 1, 1996. The income
has been recorded as a cumulative effect of change in accounting principle in
accordance with SFAS No. 121. The carrying values of the rural telephone
exchange assets being held for sale approximates $144 and $338 at December 31,
1996 and 1995, respectively. As a result of adopting SFAS No. 121, depreciation
expense for 1996 was reduced by $24. The combined effects of lower depreciation
expense and the cumulative effect of adoption of the new standard will be
directly offset by lower recognized gains on future rural telephone exchange
sales.

NOTE 3: DEBT

SHORT-TERM DEBT

The components of short-term debt follow:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Notes payable:
Commercial paper................................................................ $ 701 $ 542
Current portion of long-term debt............................................... 133 453
--------- ---------
Total............................................................................. $ 834 $ 995
--------- ---------
--------- ---------
</TABLE>

The weighted average interest rate on commercial paper was 5.57 percent and
5.79 percent at December 31, 1996 and 1995, respectively.

The Company maintains commercial paper programs to finance short-term cash
flow requirements, as well as to maintain a presence in the short-term debt
market. In addition, the Company, which conducts its own borrowing activities,
is permitted to borrow up to $600 under short-term lines of credit, all of which
was available at December 31, 1996.

22
<PAGE>
U S WEST COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3: DEBT (CONTINUED)
LONG-TERM DEBT

Interest rates and maturities of long-term debt at December 31 follow:

<TABLE>
<CAPTION>
MATURITIES
------------------------------------------------------- TOTAL TOTAL
INTEREST RATES 1998 1999 2000 2001 THEREAFTER 1996 1995
- --------------------------------------------------- --------- --------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Up to 5%........................................... $ 35 $ -- $ 90 $ -- $ 150 $ 275 $ 275
Above 5% to 6%..................................... 300 -- -- 50 211 561 561
Above 6% to 7%..................................... -- 71 257 133 1,783 2,244 2,244
Above 7% to 8%..................................... -- -- -- -- 1,646 1,646 1,662
Above 8% to 9%..................................... -- -- -- -- 250 250 250
Above 9% to 10%.................................... -- -- 175 -- -- 175 175
Variable-rate debt indexed to three-month LIBOR and
two- and ten-year constant maturity Treasury
rates............................................. -- 155 -- -- -- 155 180
--------- --------- --------- --------- ----------- --------- ---------
$ 335 $ 226 $ 522 $ 183 $ 4,040 5,306 5,347
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
Capital lease obligations and other................ 191 187
Unamortized discount -- net........................ (122) (123)
--------- ---------
Total.............................................. $ 5,375 $ 5,411
--------- ---------
--------- ---------
</TABLE>

Long-term debt consists principally of debentures and medium-term notes.

During 1995, the Company refinanced $1.5 billion of commercial paper to take
advantage of favorable long-term interest rates. In addition to the commercial
paper, the Company refinanced $145 of long-term debt. Expenses associated with
the refinancing of long-term debt resulted in extraordinary charges to income of
$8, net of tax benefits of $5.

Interest payments by the Company, net of amounts capitalized, were $422,
$367 and $344 in 1996, 1995 and 1994, respectively.

INTEREST RATE RISK MANAGEMENT

The objective of the interest rate risk management program is to minimize
the total cost of debt over time and the debt's interest variability. This is
achieved through interest rate swaps, which adjust the ratio of fixed- to
variable-rate debt.

23
<PAGE>
U S WEST COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 3: DEBT (CONTINUED)

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 accrued under
the interest rate swap is accounted for as an adjustment to interest expense.

During 1995, the Company entered into currency swaps to convert Swiss
franc-denominated debt to U.S. dollar-denominated debt. This allowed the Company
to achieve interest savings over issuing fixed-rate, dollar-denominated debt.
The currency swap and foreign currency debt are combined and accounted for as if
fixed-rate, dollar-denominated debt were issued directly.

The following table summarizes terms of swaps pertaining to the Company as
of December 31, 1996 and 1995. Variable rates are indexed to three-month LIBOR
and two- and ten-year constant maturity Treasury and 30-day commercial paper
rates.

<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------------------------------ ------------------------------------------------
WEIGHTED AVERAGE RATE WEIGHTED AVERAGE RATE
NOTIONAL ---------------------- NOTIONAL ----------------------
AMOUNT MATURITIES RECEIVE PAY AMOUNT MATURITIES RECEIVE PAY
----------- ----------- ----------- --------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Variable to fixed............... $ 180 1997-1999 5.51 5.91 $ 580 1996-1999 5.70 6.56
Currency........................ 204 1999-2001 -- 6.55 204 1999-2001 -- 6.55
</TABLE>

The counterparties to swaps or other interest rate contracts are major
financial institutions. The Company is exposed to credit loss in the event of
nonperformance 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 nonperformance by any counterparty.

NOTE 4: FAIR VALUES OF FINANCIAL INSTRUMENTS

Fair values of cash equivalents, other current amounts receivable and
payable and short-term debt approximate carrying values due to their short-term
nature.

The fair values of interest rate swaps are based on estimated amounts the
Company would receive or pay to terminate such agreements taking into account
current interest rates and creditworthiness of the counterparties.

The fair values of long-term debt are based on quoted market prices where
available or, if not available, are based on discounting future cash flows using
current interest rates.

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1996 1995
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Debt (includes short-term portion)....................... $ 6,209 $ 6,160 $ 6,406 $ 6,700
Interest rate swap agreements -- assets.................. -- (17) -- (19)
Interest rate swap agreements -- liabilities............. -- 10 -- 17
----------- --------- ----------- ---------
Debt -- net.............................................. $ 6,209 $ 6,153 $ 6,406 $ 6,698
----------- --------- ----------- ---------
----------- --------- ----------- ---------
</TABLE>

24
<PAGE>
U S WEST COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5: RESTRUCTURING CHARGE

In 1993, the Company incurred an $880 restructuring charge (pretax). The
related restructuring plan, which is expected to be substantially complete by
the end of 1997, is designed to provide faster, more responsive customer
services, while reducing the costs of providing these services. Following is a
schedule of the incurred costs that were included in the 1993 restructuring
charge:

<TABLE>
<CAPTION>
ACTUAL ESTIMATE
------------------------------- -----------
1994 1995 1996 1997 TOTAL
--------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Employee separation..................................... $ 19 $ 76 $ 102 $ 86 $ 283
Systems development..................................... 118 129 91 22 360
Real estate............................................. 50 66 8 6 130
Relocation.............................................. 21 21 5 -- 47
Retraining and other.................................... 8 23 20 9 60
--------- --------- --------- ----- ---------
Total................................................... $ 216 $ 315 $ 226 $ 123 $ 880
--------- --------- --------- ----- ---------
--------- --------- --------- ----- ---------
</TABLE>

NOTE 6: LEASING ARRANGEMENTS

The Company has entered into operating leases for office facilities,
equipment and real estate. Rent expense under operating leases was $161, $179
and $194 in 1996, 1995 and 1994, respectively. Minimum future lease payments as
of December 31, 1996 under noncancelable operating leases follow:

<TABLE>
<CAPTION>
YEAR
- ----------------------------------------------------------------------------------
<S> <C>
1997.............................................................................. $ 100
1998.............................................................................. 98
1999.............................................................................. 86
2000.............................................................................. 76
2001.............................................................................. 80
Thereafter........................................................................ 501
---------
Total............................................................................. $ 941
---------
---------
</TABLE>

25
<PAGE>
U S WEST COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7: SHAREOWNER'S EQUITY

Following is a reconciliation of the Company's shareowner's equity:

<TABLE>
<CAPTION>
COMMON CUMULATIVE
SHARES DEFICIT TOTAL
----------- ----------- ---------
<S> <C> <C> <C>
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
----------- ----------- ---------
Balance at December 31, 1994.................................... 7,286 (3,602) 3,684
----------- ----------- ---------
Net income.................................................... -- 1,211 1,211
Dividends declared............................................ -- (1,211) (1,211)
Equity infusions.............................................. 62 -- 62
----------- ----------- ---------
Balance at December 31, 1995.................................... 7,348 (3,602) 3,746
----------- ----------- ---------
Net income.................................................... -- 1,267 1,267
Dividends declared............................................ -- (1,267) (1,267)
Equity infusions.............................................. 329 -- 329
Other(1)...................................................... -- (15) (15)
----------- ----------- ---------
Balance at December 31, 1996.................................... $ 7,677 $ (3,617) $ 4,060
----------- ----------- ---------
----------- ----------- ---------
</TABLE>

- ------------------------

(1) During 1996, the Company absorbed an affilated company.

NOTE 8: EMPLOYEE BENEFITS

PENSION PLAN

The Company participates in a defined benefit pension plan sponsored by U S
WEST which covers substantially all management and occupational employees.
Management benefits are based on a final pay formula while occupational benefits
are based on a flat benefit formula. The projected unit credit method is used
for the determination of pension cost for financial reporting purposes and the
aggregate cost method for funding purposes. The Company's policy is to fund
amounts required under the Employee Retirement Income Security Act of 1974
("ERISA") and no funding was required in 1996, 1995 or 1994. Net pension costs
(credits) for 1996, 1995 and 1994 were $(5), $(2) and $0, respectively.

POSTRETIREMENT BENEFITS OTHER THAN PENSIONS

The Company participates in plans sponsored by U S WEST which provide
certain health care and life insurance benefits to retired employees. In
conjunction with the Company's 1992 adoption of SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," U S WEST elected to
immediately recognize the accumulated postretirement benefit obligation for
current and future retirees. However, the Federal Communications Commission
("FCC") and certain state jurisdictions permit amortization of the transition
obligation over the average remaining service period of active employees for
regulatory accounting purposes, with most jurisdictions requiring funding as a
stipulation for rate recovery.

26
<PAGE>
U S WEST COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 8: EMPLOYEE BENEFITS (CONTINUED)

The Company uses the projected unit credit method for the determination of
postretirement medical and life costs for financial reporting purposes. Net
postretirement benefit costs for 1996, 1995 and 1994 were $147, $183 and $220,
respectively. The amount funded by the Company is based on regulatory accounting
requirements.

NOTE 9: INCOME TAXES

The components of the provision for income taxes follow:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Federal:
Current......................................................................... $ 576 $ 467 $ 415
Deferred........................................................................ 104 157 228
Investment tax credits -- net................................................... (29) (38) (47)
--------- --------- ---------
651 586 596
--------- --------- ---------
State and local:
Current......................................................................... 93 73 68
Deferred........................................................................ 24 39 42
--------- --------- ---------
117 112 110
--------- --------- ---------
Provision for income taxes........................................................ $ 768 $ 698 $ 706
--------- --------- ---------
--------- --------- ---------
</TABLE>

Amounts paid for income taxes were $667, $530 and $551 in 1996, 1995 and
1994, respectively.

The effective tax rate differs from the statutory tax rate as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
(IN PERCENT)
Federal statutory tax rate.......................................................... 35.0 35.0 35.0
Investment tax credit amortization.................................................. (0.8) (1.3) (1.6)
State income taxes -- net of federal effect......................................... 3.8 3.8 3.8
Other............................................................................... 0.4 (1.1) 0.3
--- --- ---
Effective tax rate.................................................................. 38.4 36.4 37.5
--- --- ---
--- --- ---
</TABLE>

27
<PAGE>
U S WEST COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9: INCOME TAXES (CONTINUED)
The components of the net deferred tax liability follow:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Property, plant and equipment.................................................. $ 1,501 $ 1,431
State deferred taxes -- net of federal effect.................................. 229 186
Other.......................................................................... 336 64
--------- ---------
Deferred tax liabilities................................................... 2,066 1,681
--------- ---------
Postemployment benefits, including pension..................................... 763 664
Restructuring and other........................................................ 45 119
Unamortized investment tax credit.............................................. 61 70
State deferred taxes -- net of federal effect.................................. 156 130
Other.......................................................................... 386 189
--------- ---------
Deferred tax assets........................................................ 1,411 1,172
--------- ---------
Net deferred tax liability..................................................... $ 655 $ 509
--------- ---------
--------- ---------
</TABLE>

The current portion of the deferred tax asset was $152 and $240 at December
31, 1996 and 1995, respectively, resulting primarily from restructuring charges
and compensation-related items.

At December 31, 1996 and 1995, the Company had outstanding taxes payable to
U S WEST of $35 and $33, respectively.

NOTE 10: RELATED PARTY TRANSACTIONS

The Company purchases various services, as noted below, 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 cost
of those services is billed to the 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 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.

28
<PAGE>
U S WEST COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10: RELATED PARTY TRANSACTIONS (CONTINUED)
The Company's operations include the following charges for services:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Project development and maintenance(1).................................... $ 129 $ 178 $ 266
Procurement............................................................... 102 120 114
Corporate services........................................................ 108 117 97
Marketing services........................................................ 74 74 66
Telecommunications........................................................ 14 10 13
Leased office space....................................................... 8 10 12
Other..................................................................... 16 18 36
--------- --------- ---------
Total..................................................................... $ 451 $ 527 $ 604
--------- --------- ---------
--------- --------- ---------
</TABLE>

- ------------------------------

(1) Includes charges related to maintenance of existing technologies, and
research and development performed by Bellcore.

NOTE 11: CONTINGENCIES

On April 11, 1996, the Washington State Utilities and Transportation
Commission ("WUTC" or the "Commission") acted on the Company's 1995 rate
request. In February 1995, the Company sought to increase revenues by raising
rates for basic residential services over a four-year period. The two major
issues in this proceeding involve the Company's requests for improved capital
recovery and elimination of the imputation of Yellow Pages revenue. Instead of
granting the Company's rate request, the Commission ordered approximately $91.5
in annual revenue reductions, effective May 1, 1996. Based on the above ruling,
the Company filed a lawsuit with the King County Superior Court (the "Court")
for an appeal of the order, a temporary stay of the ordered rate reduction and
an authorization to implement a revenue increase.

29
<PAGE>
U S WEST COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 12: QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
QUARTERLY FINANCIAL DATA
--------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1996
Operating revenues....................................................... $ 2,408 $ 2,440 $ 2,456 $ 2,527
Income before income taxes and cumulative effect of change
in accounting principle................................................ 480 543 477 501
Income before cumulative effect of change in accounting principle........ 297 335 294 307
Net income............................................................... 331 335 294 307

1995
Operating revenues....................................................... $ 2,277 $ 2,298 $ 2,334 $ 2,375
Income before income taxes and extraordinary item........................ 518 464 478 457
Income before extraordinary item......................................... 323 289 305 302
Net income............................................................... 323 289 300 299
</TABLE>

1996 first-quarter net income includes the cumulative and current effects of
$34 and $5, respectively, from adopting SFAS No. 121. 1996 second-quarter net
income includes $30 from gains on the sales of certain rural telephone exchanges
and current effects of $5 from adopting SFAS No. 121. 1996 third-quarter net
income includes $1 from a gain on the sales of certain rural telephone exchanges
and current effects of $3 from adopting SFAS No. 121. 1996 fourth-quarter net
income includes $5 from gains on the sales of certain rural telephone exchanges
and current effects of $2 from adopting SFAS No. 121.

1995 first-quarter net income includes $39 from gains on the sales of
certain rural telephone exchanges. 1995 second-quarter net income includes $10
from gains on the sales of certain rural telephone exchanges. 1995 third-quarter
net income includes $21 from gains on the sales of certain rural telephone
exchanges and $5 for expenses associated with U S WEST's November 1, 1995
recapitalization. 1995 third-quarter net income also includes a charge of $5 for
the early extinguishment of debt. 1995 fourth-quarter net income includes $15
from gains on the sales of certain rural telephone exchanges and other charges
of $6, including an extraordinary charge of $3 for the early extinguishment of
debt and $3 for expenses associated with the recapitalization.

30
<PAGE>
U S WEST COMMUNICATIONS, INC.

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN MILLIONS)

<TABLE>
<CAPTION>
BALANCE AT CHARGED BALANCE
BEGINNING CHARGED TO OTHER AT END
OF PERIOD TO EXPENSE ACCOUNTS DEDUCTIONS OF PERIOD
------------- -------------- ------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR CREDIT LOSSES
Year 1996............................................ $ 30 $ 89(a) -- $ 82(b) $ 37
Year 1995............................................ 28 66(a) -- 64(b) 30
Year 1994............................................ 27 55(a) -- 54(b) 28
RESERVES RELATED TO 1993 BUSINESS RESTRUCTURING,
INCLUDING FORCE AND FACILITY CONSOLIDATION
Year 1996............................................ 349 -- -- 226 123
Year 1995............................................ 664 -- -- 315 349
Year 1994............................................ 880 -- -- 216 664
RESERVES RELATED TO 1991 BUSINESS RESTRUCTURING,
INCLUDING FORCE REDUCTIONS
Year 1996............................................ -- -- -- -- --
Year 1995............................................ -- -- -- -- --
Year 1994............................................ 56 -- -- 56 --
</TABLE>

- ------------------------

Note: Certain reclassifications within the schedule have been made to conform to
the current year presentation.

(a) Does not include amounts charged directly to expense. These amounts were
$7, $6 and $10 for 1996, 1995 and 1994, respectively.

(b) Represents credit losses written off during the period, less collection of
amounts previously written off.

<PAGE>
EXHIBIT 12

U S WEST COMMUNICATIONS, INC.

RATIO OF EARNINGS TO FIXED CHARGES

(DOLLARS IN MILLIONS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1996 1995 1994 1993(1) 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Income before income taxes, extraordinary item and cumulative
effect of change in accounting principles..................... $ 2,001 $ 1,917 $ 1,881 $ 687 $ 1,385
Interest expense (net of amounts capitalized)................... 414 386 331 374 401
Interest factor on rentals...................................... 54 60 70 67 65
--------- --------- --------- --------- ---------
Earnings........................................................ $ 2,469 $ 2,363 $ 2,282 $ 1,128 $ 1,851
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------

Interest expense................................................ $ 445 $ 426 $ 367 $ 374 $ 401
Interest factor on rentals...................................... 54 60 70 67 65
--------- --------- --------- --------- ---------
Fixed charges................................................... $ 499 $ 486 $ 437 $ 441 $ 466
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------

Ratio of earnings to fixed charges.............................. 4.95 4.86 5.22 2.56 3.97
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>

- ------------------------

(1) The 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.

(2) The 1992 ratio is based on earnings before the cumulative effect of change
in accounting principles which reduced net income by $1,724.

<PAGE>
EXHIBIT 23

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation by
reference of our report dated February 12, 1997 on our audit of the consolidated
financial statements and related financial statement schedule of U S WEST
Communications, Inc., as of December 31, 1996 included in this Annual Report on
Form 10-K, into U S WEST Communications, Inc.'s previously filed Registration
Statement on Form S-3 (No. 33-62845)

/s/ ARTHUR ANDERSEN LLP

Denver, Colorado
March 27, 1997

<PAGE>
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,
1996; and

WHEREAS, the undersigned is an officer or Director, or both, of the Company,
and holds the office or offices indicated below his name;

NOW THEREFORE, the undersigned hereby constitutes and appoints MICHAEL P.
GLINSKY 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 executed this Power of
Attorney this 28th day of March, 1997.

/s/ SOLOMON D. TRUJILLO
--------------------------------------
Solomon D. Trujillo
President and Chief Executive Officer
and
Director

<PAGE>
<ARTICLE> 5
<CIK> 0000068622
<NAME> U.S. WEST COMMUNICATIONS, INC.
<MULTIPLIER> 1,000,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 92
<SECURITIES> 0
<RECEIVABLES> 1,550
<ALLOWANCES> 37
<INVENTORY> 109
<CURRENT-ASSETS> 1,960
<PP&E> 32,451
<DEPRECIATION> 18,522
<TOTAL-ASSETS> 16,632
<CURRENT-LIABILITIES> 3,451
<BONDS> 5,375
0
0
<COMMON> 7,677
<OTHER-SE> (3,617)
<TOTAL-LIABILITY-AND-EQUITY> 16,632
<SALES> 9,831
<TOTAL-REVENUES> 9,831
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7,431
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 414
<INCOME-PRETAX> 2,001
<INCOME-TAX> 768
<INCOME-CONTINUING> 1,233
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 34
<NET-INCOME> 1,267
<EPS-PRIMARY> 0
<EPS-DILUTED> 0

</TABLE>