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______________________________________________________________________
______________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 1-3040
U S WEST Communications, Inc.
A Colorado Corporation IRS Employer No.
84-0273800
1801 California Street, Denver, Colorado 80202
Telephone Number (303) 896-3099
THE REGISTRANT, A WHOLLY-OWNED SUBSIDIARY OF U S WEST, INC., MEETS
THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1) OF FORM 10-Q
AND IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT
PURSUANT TO GENERAL INSTRUCTION H(2).
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No__
______________________________________________________________________
______________________________________________________________________
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U S WEST Communications, Inc.
Form 10-Q
TABLE OF CONTENTS
Item Page
PART I - FINANCIAL INFORMATION
1. Financial Statements (Unaudited)
Consolidated Statements of Operations -
Three and six months ended June 30, 1994
and 1993 . . . . . . . . . . . . . . 3
Condensed Consolidated Balance Sheets -
June 30, 1994 and December 31, 1993. . . . . 4
Consolidated Statements of Cash Flows -
Six months ended June 30, 1994 and 1993 . . . 6
Notes to Consolidated Financial Statements . . . 7
2. Management's Analysis - (Reduced disclosure format
pursuant to
General Instruction H(2) . . . . . . . . . 8
PART II - OTHER INFORMATION
6. Exhibits and Reports on Form 8-K . . . . . . . 15
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Form 10-Q - Part I U S WEST Communications, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
______________________________________________________________________
Three Months Ended Six Months Ended
June 30, June 30,
(Dollars in millions) 1994 1993 1994 1993
______________________________________________________________________
OPERATING REVENUES
Local service $1,016 $963 $2,001 $1,900
Interstate access service 556 527 1,118 1,065
Intrastate access service 179 170 353 340
Long distance network
service 345 355 696 711
Other services 147 136 293 276
---------- ---------- ---------- ----------
Total operating
revenues 2,243 2,151 4,461 4,292
---------- ---------- ---------- ----------
OPERATING EXPENSES
Employee-related costs 738 706 1,455 1,402
Other operating expenses 401 413 799 821
Taxes other than income
taxes 98 96 195 192
Depreciation and
amortization 470 459 935 901
---------- ---------- ---------- ----------
Total operating
expenses 1,707 1,674 3,384 3,316
---------- ---------- ---------- ----------
Income from
operations 536 477 1,077 976
Interest expense 81 100 161 199
Other income (expense) 17 (13) 31 (13)
---------- ---------- ---------- ----------
Income before income
taxes and
extraordinary item 472 364 947 764
Provision for income
taxes 177 121 355 254
---------- ---------- ---------- ----------
Income before
extraordinary item 295 243 592 510
Extraordinary item
Early extinguishment of
debt, net of tax - (50) - (50)
---------- ---------- ---------- ----------
NET INCOME $295 $193 $592 $460
========== ========== ========== ==========
See Notes to Consolidated Financial Statements.
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Form 10-Q - Part I U S WEST Communications, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
______________________________________________________________________
June 30, December 31
(Dollars in millions) 1994 1993
______________________________________________________________________
ASSETS
Current assets
Cash and cash equivalents $56 $67
Accounts receivable 1,420 1,391
Materials and supplies 121 108
Deferred tax asset 289 292
Other 64 59
---------- ----------
Total current assets 1,950 1,917
---------- ----------
Property, plant and equipment 28,494 28,012
Less: Accumulated depreciation 15,983 15,465
---------- ----------
Net property, plant and equipment 12,511 12,547
---------- ----------
Other 914 698
---------- ----------
Total assets $15,375 $15,162
========== ==========
See Notes to Consolidated Financial Statements.
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Form 10-Q - Part I U S WEST Communications, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
_______________________________________________________________________
June 30, December 31
(Dollars in millions) 1994 1993
_______________________________________________________________________
LIABILITIES AND SHAREOWNER'S EQUITY
Current liabilities
Short-term debt $1,301 $1,260
Accounts payable 676 935
Employee compensation 284 303
Current portion of restructuring
charge 399 421
Other 1,003 893
---------- ----------
Total current liabilities 3,663 3,812
---------- ----------
Long-term debt 4,250 4,092
Postretirement benefit obligation 2,354 2,593
Deferred taxes and credits 1,607 1,525
Shareowner's equity
Common shares - one share
without par value 7,103 6,742
Accumulated deficit (3,602) (3,602)
---------- ----------
Total shareowner's equity 3,501 3,140
---------- ----------
Total liabilities and shareowner's
equity $15,375 $15,162
========== ==========
See Notes to Consolidated Financial Statements.
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Form 10-Q - Part I U S WEST Communications, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
_______________________________________________________________________
Six Months Ended
June 30,
(Dollars in millions) 1994 1993
_______________________________________________________________________
OPERATING ACTIVITIES
Net income $592 $460
Adjustments
Depreciation and amortization 935 901
Deferred income taxes and amortization
of investment tax credit 50 9
Changes in operating assets and
liabilities
Accounts receivable (29) (46)
Materials, supplies and other (37) (61)
Accounts payable and accrued
liabilities 0 (35)
Funding of postretirement benefit
obligation (288) (246)
Other - net (21) 148
---------- ----------
Cash provided by operating
activities 1,202 1,130
---------- ----------
INVESTING ACTIVITIES
Expenditures for property,
plant and equipment (1,165) (1,079)
Other - net 47 17
---------- ----------
Cash used for investing
activities (1,118) (1,062)
---------- ----------
FINANCING ACTIVITIES
Net proceeds from (repayments
of) short-term debt 149 (39)
Proceeds from long-term debt 251 587
Repayments of long-term debt (243) (232)
Dividends paid (612) (497)
Equity infusions from parent 360 121
---------- ----------
Cash used for financing
activities (95) (60)
---------- ----------
CASH AND CASH EQUIVALENTS
Increase (decrease) (11) 8
Beginning balance 67 53
---------- ----------
Ending balance $56 $61
========== ==========
See Notes to Consolidated Financial Statements.
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Form 10-Q - Part I U S WEST Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in millions)
A. Summary of Significant Accounting Policies
Consolidated Financial Statements
The consolidated financial statements have been prepared by
U S WEST Communications, Inc. (the "Company") pursuant to the rules
and regulations of the SEC (Securities and Exchange Commission).
Certain information and footnote disclosures normally accompanying
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to
such SEC rules and regulations. In the opinion of the Company's
management, the consolidated financial statements include all
adjustments, consisting of only normal recurring adjustments,
necessary to present fairly the financial information set forth
therein. It is suggested that these consolidated financial
statements be read in conjunction with the financial statements
and notes thereto included in the Company's Form 10-K for the year
ended December 31, 1993.
Certain reclassifications within the financial statements have
been made to conform to the current year presentation.
Computer Software
The cost of computer software, whether purchased or developed
internally, is charged to expense with two exceptions. Initial
operating system software is capitalized and amortized over the life
of the related hardware, and initial network applications software
is capitalized and amortized over three years. Subsequent
upgrades to capitalized software are expensed.
Research and Development
The Company recognized $42, $55 and $56 for research and
development expense in 1993, 1992 and 1991, respectively.
Approximately half of this activity was conducted at Bell
Communications Research, Inc. ("Bellcore"), one-seventh of which is
owned by the Company.
B. Contingencies
There are pending regulatory actions in local regulatory juris-
dictions which call for price decreases, refunds or both. In one
such instance, the Utah Supreme Court has remanded a Utah Public
Service ("PSC") order to the PSC for reconsideration, thereby
establishing two exceptions to the rule against retroactive
ratemaking: 1) unforeseen and extraordinary events and 2) misconduct.
The Commission's initial order denied a refund request from inter-
exchange carriers and other parties related to the Tax Reform Act
of 1986. If the Commission finds that either of the exceptions
apply, the Company could be liable for refunds, although at this
time any such amount is not reasonably estimable since the case
is still in the discovery process.
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Form 10-Q - Part I U S WEST Communications, Inc.
Item 2. Management's Analysis (Dollars in millions)
RESULTS OF OPERATIONS
Details of operations for the first six months of 1994, including a
comparison to the prior year, are presented in the following table:
_______________________________________________________________________
1994 1993 % Change
_______________________________________________________________________
Operating revenues $4,461 $4,292 3.9
Operating expenses
Employee-related costs 1,455 1,402 3.8
Other operating expenses 799 821 (2.7)
Taxes other than income taxes 195 192 1.6
----------------------------------------------------------------------
Earnings before interest, taxes,
depreciation and amortization,
and other (EBITDA) 2,012 1,877 7.2
Depreciation and amortization 935 901 3.8
Interest expense 161 199 (19.1)
Other income (expense) 31 (13) -
----------------------------------------------------------------------
Income before income taxes and 947 764 24.0
extraordinary item
Provision for income taxes 355 254 39.8
----------------------------------------------------------------------
Income before extraordinary item 592 510 16.1
Extraordinary item, net of tax - (50) -
----------------------------------------------------------------------
Net income $592 $460 28.7
======================================================================
The Company's volume growth resulted in a 7.2 percent increase
in EBITDA (earnings before interest, taxes, depreciation and
amortization, and other income (expense)). Excluding the effects
of a $32 gain on the sale of certain rural telephone exchanges in
the first six months of 1994 and a charge of $50 for the
refinancing of debt in the same period last year, net income
increased $50 or 9.8 percent.
OPERATING REVENUES
In the table that follows, price changes primarily represent the
aggregate effects of regulatory proceedings and growth represents
increased market penetration through both increased access lines and
additional sales to existing customers. Different regulatory commis-
sions govern the interstate and intrastate jurisdictions, resulting in
varying price and refund impacts.
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Form 10-Q - Part I U S WEST Communications, Inc.
Item 2. Management's Analysis (Dollars in millions)
OPERATING REVENUES (continued)
Lower Increase
Price (Higher) (Decrease)
Changes Refunds Growth Other $ %
-----------------------------------------------------------------------
Local service $ (3) $ - $ 104 $ - $ 101 5.3
Interstate access (22) 4 75 (4) 53 5.0
Intrastate access (3) (4) 20 - 13 3.8
Long distance (3) 1 (13) - (15) (2.1)
Other services - - - 17 17 6.2
-----------------------------------------------------------------------
Total $ (31) $ 1 $ 186 $ 13 $ 169 3.9
Local service revenues increased principally as a result of
higher demand for services, as evidenced by an increase of 478,000
access lines, or 3.5 percent, during the last twelve months.
Access line growth was 3.8 percent as adjusted for the sale of
approximately 38,000 rural telephone access lines.
Increased demand for access services more than offset the effects
of rate reductions. Billed access minutes of use increased 8.7
percent over the same period last year. Long distance network
service revenues decreased principally due to the continuing
effects of competition. Revenues from other services increased
primarily as a result of continued market penetration in voice
messaging services.
OPERATING EXPENSES
Employee-related costs increased over the prior year as a result
of additional costs associated with customer service initiatives in
the current year and a change in pension expense (resulting from
changes in actuarial assumptions). Partially offsetting this
increase was a reduction in postretirement benefits expense.
Other operating expenses decreased over the same period last
year due to a reduction in general operating expenses including
access charges paid to independent companies. Taxes other than income
taxes remained essentially flat compared to the same period last year.
Depreciation and amortization expense increased primarily due to the
aggregate effects of a higher depreciable plant base and the discon-
tinuance of Statement of Financial Accounting Standards (SFAS) No. 71,
"Accounting for the Effects of Certain Types of Regulation."
INTEREST EXPENSE AND OTHER
Interest expense decreased as a result of the refinancing of
debt in the the prior year to take advantage of lower interest rates.
A reclassification of capitalized interest costs from other income
(expense) also contributed to the decrease. Pursuant to the discon-
tinuance of SFAS No. 71, interest capitalized as a component of plant
construction is offset against interest expense.
Other income (expense) increased as a result of a pre-tax gain
of $50 from the sale of certain rural telephone exchanges in the
first six months of 1994. Partially offsetting this gain was the
reclassification of capitalized interest to a component of
interest expense.
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Form 10-Q - Part I U S WEST Communications, Inc.
Item 2. Management's Analysis (Dollars in millions)
PROVISION FOR INCOME TAXES
The effective tax rate was 37.5 percent in the first six months
of 1994 compared to 33.3 percent in the same period last year. This
increase is primarily a result of the effects of discontinuing the
application of SFAS No. 71 in the third quarter of 1993, the 1993
federally-mandated increase in income tax rates and an increase in
income before taxes.
OTHER ITEMS
Restructuring Charges
The Company's 1993 third-quarter results included a $880 million
restructuring charge (pretax). The related restructuring plan is
designed to provide faster, more responsive customer services while
reducing the costs of providing these services. As part of the plan,
the Company is developing new systems that will enable it to monitor
networks to reduce the risk of service interruptions, activate
telephone service on demand, provide automated inventory systems and
centralize its service centers so that customers can have their
telecommunications needs resolved with one phone call. The Company
will also reduce its work force by approximately 9,000 employees
(including the remaining employee reductions pursuant to the
restructuring plan announced in 1991) by the end of 1996.
Following is a schedule of the costs included in the restructuring charge:
Employee separation $225
Real estate 130
Relocation 105
Retraining and other 60
Systems development 360
----
Total $880
====
Employee separation costs include severance payments, healthcare
coverage and postemployment education benefits. Real estate costs
include preparation costs for the new service centers. The
relocation and retraining costs are related to moving employees
to the sites of the new service centers and retraining employees
on the new methods and systems required in the new, restructured
mode of operation. Systems development includes the replacement
of existing, single-purpose systems with new systems designed to
provide integrated, end-to-end customer service. The work-force
reductions would not be possible without the development and
installation of the new systems which will eliminate the current,
labor-intensive interfaces between existing systems.
The estimated annual cash expenditures relating to the 1993
restructuring plan are $365, $300 and $215 in 1994, 1995 and 1996,
respectively. In addition to these expenditures, the Company
anticipates incremental capital expenditures related to the
restructuring plan of $450 over the three year life of the plan.
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Form 10-Q - Part I U S WEST Communications, Inc.
Item 2. Management's Analysis (Dollars in millions)
OTHER ITEMS (continued)
Restructuring Charges (continued)
Employee Separation:
The restructuring plan provides for annual employee reductions
and separation amounts as follows:
Employee Reductions 1994* 1995 1996 Total
-------- -------- -------- -------
Network - managerial 602 1,095 977 2,674
Network - occupational 865 1,227 978 3,070
All other - managerial 459 335 323 1,117
All other - occupational 1,022 812 322 2,156
-------- -------- -------- -------
Total 2,948 3,469 2,600 9,017
======== ======== ======== =======
Separation Costs 1994* 1995 1996 Total
-------- -------- -------- -------
Network - managerial $22 $42 $40 $104
Network - occupational 14 28 25 67
All other - managerial 0 13 13 26
All other - occupational 1 19 8 28
-------- -------- -------- -------
Subtotal 37 102 86 225
Remaining 1991 reserve 56 - - 56
-------- -------- -------- -------
Total $93 $102 $86 $281
======== ======== ======== =======
<FN>
* 1994 includes the remaining employees and the separation amounts
associated with the balance of the 1991 restructuring reserve at
12/31/93.
Systems Development:
The Company's existing information management systems were
largely developed with analog technology for a monopoly environment.
These systems are increasingly inadequate due to the effects of
increased competition, new forms of regulation and changing
technology which has driven consumer demand for new services which
can be delivered quickly, reliably and economically. The sequential
systems currently in place are slow, labor intensive and costly to
maintain, and often cannot be adapted to support new product and
service offerings, including future multimedia services envisioned by
U S WEST.
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Form 10-Q - Part I U S WEST Communications, Inc.
Item 2. Management's Analysis (Dollars in millions)
OTHER ITEMS (continued)
Restructuring Charges (continued)
Systems Development (continued):
The systems reengineering program in place involves development
of new systems around the following core processes:
Service Delivery - to support faster and more accurate
delivery of all products and services, including repair.
These systems will permit one customer service
representative to handle all Facets of a customer's
requirements as contrasted to the numerous points of
customer interface required today.
Service Assurance - for automation and centralization of the
network, including earlier identification and more rapid
resolution of network problems.
Capacity Provisioning - for integrated planning of future
network capacity, including the installation of software-
controllable service components.
The direct, incremental and nonrecurring systems development
costs contained in the restructuring plan are comprised of the
following annual amounts:
1994 1995 1996 Total
------ ------- ------- -------
Service delivery systems $35 $45 $20 $100
Service assurance systems 45 40 30 115
All other 25 55 65 145
------ ------- ------- -------
Total $105 $140 $115 $360
====== ======= ======= =======
The majority of systems development labor will be supplied
through the use of temporary employees and/or contractors.
Additionally, the Company estimates that up to 100 employees with
special skills will be hired in order to develop the software
applications contemplated in the current plan. The labor cost for
these employees included in the restructuring plan is approximately
$16 to $18 over the life of the plan. While it is likely that a
number of these employees will be retained after 1996 due to their
specialized skills, it is planned that any related increase in
headcount will be offset through other employee reductions.
Systems expenses charged to current operations consist of all
costs associated with the information management function, including
planning, developing, testing and maintaining data bases for general
purpose computers, in addition to systems costs related to
maintenance of telephone network applications. Key related
administrative (i.e. general purpose) systems include customer
service, order entry, billing and collection, accounts payable,
payroll, human resources and property records. On-going systems
costs comprised approximately six, six and five percent of the total
operating expenses of the Company for 1993, 1992 and 1991,
respectively. The Company expects systems costs charged to current
operations as a percent of total operating expenses to approximate
the current level throughout the life of the restructuring plan.
However, systems costs could increase relative to other operating
costs as the Company becomes more technology-dependent.
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Form 10-Q - Part I U S WEST Communications, Inc.
Item 2. Management's Analysis (Dollars in millions)
OTHER ITEMS (continued)
Restructuring Charges (continued)
Expenditures Under the Plan:
For the second quarter and six months ended June 30, 1994, the
following amounts have been charged against the restructuring reserve:
Second Quarter Six Months
Employee Separations # $ # $
------- ------- ------- -------
Network - managerial 35 $1 55 $2
Network - occupational 212 4 255 5
All other - managerial 63 2 133 6
All other - occupational 155 4 245 9
------- ------- ------- -------
Total 465 $11 688 $22
======= ======= ======= =======
Second Quarter Six Months
Systems Development Costs $ $
---------- ----------
Service delivery systems $5 $5
Service assurance systems 5 9
All other 5 9
---------- ----------
Total $15 $23
========== ==========
Other charges to the reserve were $14, $2 and $2 for real estate,
relocation, and retraining and other, respectively, for the six months
ended June 30, 1994.
During the first half of the year, the Company was in the
start-up phase of the restructuring plan. The Company expects that
charges will accelerate over the remainder of 1994 as the Company
continues consolidation of the customer service centers and develop-
ment of the new systems. The rate of spending for the first six
months of 1994 was slower than anticipated. While the original
estimates for 1994 might not be fully realized, there are
no significant changes to the plan in total. If the original
estimates for 1994 are not fully realized, the impact on the
financial statements will not be material.
The Company's 1991 restructuring plan, a pretax charge of $240,
was adopted to reduce the Company's work force by approximately 6,000
employees. Approximately $34 of the 1991 restructuring charge was
unused at June 30, 1994, as compared to $56 remaining at December 31,
1993. The remaining balance of this reserve will be expended in 1994.
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Form 10-Q - Part I U S WEST Communications, Inc.
Item 2. Management's Analysis (Dollars in millions)
OTHER ITEMS (continued)
Regulatory Issues
On June 10, 1994, the U.S. Court of Appeals in Washington, D. C.
overturned the Federal Communications Commission (FCC) requirement
that local telephone companies allow physical collocation by third
parties (competitive access providers), within their central offices,
for the installation and operation of equipment that connects to the
local telephone network. The court also ordered the FCC to
reconsider its requirement that allows competitors to interconnect
equipment to the local network from a point outside a central office.
U S WEST is evaluating its options with respect to the provision of
interconnection.
On June 15, 1994, a Seattle Federal District Court Judge ruled in
favor of U S WEST's challenge to the constitutionality of the cable
cross-ownership restriction in the 1994 Cable Act. The Act prevents
telephone companies from providing cable TV service within their
regions. U S WEST argued and the court agreed that the cable cross-
ownership restriction violates its First Amendment right to free
speech. U S WEST is evaluating its options in light of this ruling.
On June 20, 1994, the seven regional Bell Operating Companies
(RBOCs) asked for a waiver from the divestiture court to the 1982
consent decree that broke up AT&T and created the RBOCs, which would
allow them to provide wireless long-distance services. The consent
decree restricts the RBOCs from providing long distance services as
well as manufacturing. The request closely follows a recommendation
by the Justice Department that the RBOCs be allowed to provide
wireless long-distance services.
On June 30, 1994, the House of Representatives passed two
landmark bills that together would substantially rewrite the 1934
Communications Act and replace the 1982 consent decree that broke
up the "Bell System." The Senate is expected to consider pending
telecommunications legislation, but it is not clear whether it
will act on a bill before the current session of Congress ends.
Contingencies
There are pending regulatory actions in local regulatory
jurisdictions which call for price decreases, refunds or both.
In one such instance, the Utah Supreme Court has remanded a Utah
Public Service ("PSC") order to the PSC for reconsideration,
thereby establishing two exceptions to the rule against retroactive
ratemaking: 1) unforeseen and extraordinary events and 2)
misconduct. The Commission's initial order denied a refund request
from interexchange carriers and other parties related to the Tax
Reform Act of 1986. If the Commission finds that either of the
exceptions apply, the Company could be liable for refunds, although
at this time any such amount is not reasonably estimable since the
case is still in the discovery process.
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Form 10-Q - Part II U S WEST Communications, Inc.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibits identified in parentheses below, on file with the
Securities and Exchange Commission, are incorporated by
reference as exhibits hereto.
Exhibit
Number
(12) Statement regarding computation of earnings to fixed
charges ratio of U S WEST Communications, Inc.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the second quarter of
1994.
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Form 10-Q U S WEST Communications, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
U S WEST Communications, Inc.
/s/ David R. Laube
August 12, 1994 _____________________________
David R. Laube
Vice President-Controller
and Treasurer
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