<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ended September 30, 1996
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 1-7077
GTE SOUTHWEST INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 75-0573444
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
600 Hidden Ridge, HQE04B12 - Irving, Texas 75038
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code 972-718-5600
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- -----
The Company had 6,500,000 shares of $100 stated value common stock outstanding
at October 31, 1996. The Company's common stock is 100% owned by GTE
Corporation.
<PAGE> 2
PART I. FINANCIAL INFORMATION
GTE SOUTHWEST INCORPORATED
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1996 1995 1996 1995
------- ------- -------- --------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
REVENUES AND SALES
Local services $145,566 $135,100 $ 431,982 $ 387,325
Network access services 160,377 147,585 467,188 423,836
Toll services 46,722 55,906 139,576 162,322
Other services and sales 74,707 52,632 203,249 153,788
-------- -------- ---------- ----------
Total revenues and sales 427,372 391,223 1,241,995 1,127,271
-------- -------- ---------- ----------
OPERATING COSTS AND EXPENSES
Cost of services and sales 159,088 142,008 445,753 433,487
Selling, general and administrative 80,326 67,166 223,029 192,654
Depreciation and amortization 87,189 82,357 254,704 250,455
-------- -------- ---------- ----------
Total operating costs and expenses 326,603 291,531 923,486 876,596
-------- -------- ---------- ----------
OPERATING INCOME 100,769 99,692 318,509 250,675
OTHER (INCOME) EXPENSE
Interest - net 13,465 14,930 40,244 47,600
Gain on disposition of assets -- (15,191) (4,322) (21,583)
Other - net -- (3,500) -- (5,500)
-------- -------- ---------- ----------
INCOME BEFORE INCOME TAXES 87,304 103,453 282,587 230,158
Income taxes 28,217 34,715 93,098 77,343
-------- -------- ---------- ----------
NET INCOME $ 59,087 $ 68,738 $ 189,489 $ 152,815
======== ======== ========== ==========
</TABLE>
Per share data is omitted since the Company's common stock is
100% owned by GTE Corporation (GTE).
See Notes to Condensed Financial Statements.
1
<PAGE> 3
GTE SOUTHWEST INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in Millions)
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -----------------------
1996 1995 1996 1995
------- ------- ------ ------
<S> <C> <C> <C> <C>
Net income $59.1 $68.7 $189.5 $152.8
</TABLE>
Net income decreased 14% or $9.6 and increased 24% or $36.7 for the three and
nine months ended September 30, 1996, respectively, compared to the same
periods in 1995. The three month decrease is primarily due to increases in
operating costs and expenses. The nine month increase is primarily due to
higher revenues and sales, partially offset by increases in operating costs and
expenses.
Revenues and Sales
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1996 1995 1996 1995
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Local services $ 145.6 $ 135.1 $ 432.0 $ 387.3
Network access services 160.4 147.6 467.2 423.9
Toll services 46.7 55.9 139.6 162.3
Other services and sales 74.7 52.6 203.2 153.8
-------- -------- --------- ---------
Total revenues and sales $ 427.4 $ 391.2 $ 1,242.0 $ 1,127.3
</TABLE>
Total revenues and sales increased 9% or $36.2 and 10% or $114.7 for the three
and nine months ended September 30, 1996, respectively, compared to the same
periods in 1995.
Local service revenues increased 8% or $10.5 and 12% or $44.7 for the three and
nine months ended September 30, 1996, respectively, compared to the same
periods in 1995. The number of switched access lines increased 4% for both the
three and nine months ended September 30, 1996, which generated additional
revenues of $2.2 and $9.2, respectively. The increases also reflect growth of
$4.5 and $11.6 in sales of CentraNet(R) and custom calling features, such as
SmartCall(R), and a favorable impact on local service revenues of $3.8 and
$19.2 resulting from the discontinuance of the monthly provision related to the
Company's 1989 Texas rate case and the monthly amortization of the associated
reserve previously established. In addition to these items, the increases
reflect a slight growth in revenues associated with the continued expansion of
local area calling zones and the Expanded Local Calling surcharge, as discussed
in Other Matters.
Network access service revenues increased 9% or $12.8 and 10% or $43.3 for the
three and nine months ended September 30, 1996, respectively, compared to the
same periods in 1995. Minutes of use increased 8% and 11% for the three and
nine months ended September 30, 1996, which generated $7.1 and $26.4 of
additional revenues, respectively. The increases also reflect higher end user
access charge revenues associated with access line growth of $1.9 and $6.1 and
growth in special access revenues of $2.8 and $10.8. The nine month increase
is also due to additional revenues of $2.2 reflecting the net effect of the
changes in interstate access revenues associated with the Federal Communication
Commission's (FCC) 1995 and 1996 price caps and favorable impacts on network
access service revenue of $5.1 resulting from the discontinuance of the monthly
provision related to the Company's 1989 Texas rate case and the monthly
amortization of the associated reserve previously established.
2
<PAGE> 4
GTE SOUTHWEST INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
Toll service revenues decreased 16% or $9.2 and 14% or $22.7 for the three and
nine months ended September 30, 1996, respectively, compared to the same
periods in 1995. The decreases are driven by declines in revenues resulting
from a net decrease in toll volumes, primarily relating to 10XXX intraLATA toll
competition, and the expansion of local area calling zones.
Other services and sales revenues increased 42% or $22.1 and 32% or $49.4 for
the three and nine months ended September 30, 1996, respectively, compared to
the same periods in 1995. The increases are primarily related to $3.9 and
$11.1 of additional equipment sales, $3.6 and $13.2 of growth in Tele-Go(R)
personal phone service revenues and additional revenues of $13.9 and $22
resulting from service bureau contracts. Through service bureau contracts, the
Company provides general, administrative and operational services (e.g.,
invoice and payroll processing, billing and collection services, human resource
services, etc.) on a contractual basis to certain affiliates, other
local-exchange carriers (LECs) and other companies.
Operating Costs and Expenses
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total operating costs and expenses $326.6 $291.5 $923.5 $876.6
</TABLE>
Total operating costs and expenses increased 12% or $35.1 and 5% or $46.9 for
the three and nine months ended September 30, 1996, respectively, compared to
the same periods in 1995. The increases are primarily due to a $15.8 reserve
for right-of-way settlement costs in the state of Texas and a $2.1 reserve for
inside wire maintenance settlement costs recorded in the third quarter of 1996
and discussed in Other Matters. The increases are also due to higher
contractor charges of $9 and $14.6 and investments in the Infrastructure Fund
Assessment for the provision of broadband facilities to schools, libraries and
hospitals of $2.3 and $6.9. The three month increase is also due to $4.5 in
increased labor and benefit costs, partially offset by a $4.3 reduction in
costs related to actuarial adjustments to the Company's benefit plans recorded
in the third quarter of 1996. The year-to-date increase is also due to
additional purchases of digital network software of $2.1 and a $0.9 increase in
actuarial adjustments to the Company's benefit plans. The nine month increase
is partially offset by lower labor and benefit costs of $7.8 associated with
ongoing cost-reduction programs from process re-engineering activities. The
impact of $5.8 in pension settlement gains recorded in the second quarter of
1995 was partially offset by settlement gains of $3.3 recorded in the first
quarter of 1996 which resulted from lump-sum payments from the Company's
pension plans.
Other (Income) Expense
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -----------------------
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest - net $13.5 $14.9 $40.2 $47.6
Gain on disposition of assets -- (15.2) (4.3) (21.6)
Other - net -- (3.5) -- (5.5)
Income taxes 28.2 34.7 93.1 77.3
</TABLE>
Interest - net decreased 9% or $1.4 and 16% or $7.4 for the three and nine
months ended September 30, 1996, respectively, compared to the same periods in
1995, which reflects lower interest rates associated with the high-coupon debt
refinancing program initiated during the fourth quarter of 1995. These
decreases also reflect increases in interest income from affiliate notes
receivable.
3
<PAGE> 5
GTE SOUTHWEST INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
In the second quarter of 1996, the Company recorded $4.3 of pre-tax gains on
the sales of certain properties in the state of Texas. On September 30, 1995,
the Company recorded a $16.3 pre-tax gain on the sale of certain non-strategic
properties in the state of Texas. On May 14, 1995, the Company recorded a $5.3
pre-tax gain on the sale of its unconsolidated investment in Metropolitan
Houston Metro Paging Service, Inc.
Other - net income decreased $3.5 and $5.5 for the three and nine months ended
September 30, 1996, compared to the same periods in 1995, due to the 1995
reversal of expired representation and warranty reserves related to certain
1994 property dispositions for which the period of exposure had expired.
Income taxes decreased 19% or $6.5 and increased 20% or $15.8 for the three and
nine months ended September 30, 1996, respectively, compared to the same
periods in 1995. The three month decrease is primarily due to the
corresponding decrease in pre-tax income and adjustments to prior years' tax
provision. The nine month increase is primarily the result of corresponding
increases in pre-tax income offset by adjustments to prior years' tax
provision.
CAPITAL RESOURCES AND LIQUIDITY
Management believes that the Company has adequate internal and external
resources available to meet ongoing operating requirements for construction of
new plant, modernization of facilities and payment of dividends. The Company
generally funds its construction program from operations, although external
financing is available. Short-term borrowings can be obtained through
commercial paper borrowings or borrowings from GTE. On July 1, 1996, the
Company began participating with other affiliates in a $1,500 syndicated line
of credit to back up commercial paper borrowings. Through this shared
arrangement, the Company can issue up to $300 of commercial paper.
The Company's primary source of funds during the first nine months of 1996 was
cash from operations of $360.9 compared to $335.8 for the same period in 1995.
The year-to-year increase in cash from operations reflects improved results
from operations, partially offset by an increase in working capital
requirements. Cash from operations is also being utilized to fund the
Company's re-engineering plan.
The Company's capital expenditures during the first nine months of 1996 were
$265.1 compared to $236.5 for the same period in 1995. The 1996 expenditures
reflect the Company's continued access line growth and modernization of current
facilities and introduction of new products and services, including broadband
digital services and switched digital services. These expenditures were
partially offset by cash proceeds of $12.3 and $36.4 received from the sale of
non- strategic properties, as discussed above, in the first nine months of 1996
and 1995, respectively. The Company anticipates capital expenditures for 1996
to increase from the 1995 level, reflecting the continued modernization of
facilities and anticipated growth.
Cash used in financing activities was $107.9 during the first nine months of
1996 compared to $115.5 for the same period in 1995. Financing activities
included dividend payments of $29.5 in the first nine months of 1996 compared
to $118.2 for the same period in 1995. Short-term financing, including the
net change in affiliate notes, decreased $214.7 for the first nine months of
1996, compared to an increase of $15.2 for the same period in 1995. In January
1996, the Company issued $150 of 6% debentures to refinance $105.8 of
commercial paper.
4
<PAGE> 6
GTE SOUTHWEST INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
OTHER MATTERS
In connection with the re-engineering plan, during the first nine months of
1996, costs of approximately $21 have been incurred, including $18.3 to
re-engineer customer service processes and $2.7 to re-engineer administrative
processes. Since the plan's inception at the beginning of 1994, costs of
approximately $137.1 have been incurred, including $100.7 to re-engineer
customer service processes and $20.6 to re-engineer administrative processes.
The restructuring costs also include $15.8 to consolidate facilities and
operations and other related costs. These expenditures were primarily
associated with the closure and relocation of various service centers, software
enhancements and separation benefits associated with employee reductions.
Implementation of the re-engineering plan is expected to be substantially
completed by the end of 1996. As of September 30, 1996, $61.9 remains in the
restructuring reserve which management believes is adequate to cover future
expenditures.
On August 8, 1996, the FCC published its Report and Order (Order) containing
rules implementing Section 251 of the Telecommunications Act of 1996 (the
Telecommunications Act) dealing with interconnection, unbundling of network
elements and wholesale prices and other terms for competitive entry into
local-exchange service (Competitive Entry Terms). On August 9, 1996, the FCC
released its Second Report and Order implementing the provision of number
portability and dialing parity in accord with the Telecommunications Act.
GTE believes that if the Order were implemented as drafted, it would cause
irreparable harm to LECs by providing unfair advantages to other carriers who
will compete with the LECs in providing local service in the LEC's local
territory.
On September 16, 1996, GTE filed an appeal and motion for stay of the Order with
the United States Court of Appeals for the District of Columbia. This appeal
argued that the FCC had no jurisdiction to impose national pricing rules for
what is essentially local service. This appeal was subsequently transferred to
the Court of Appeals for the Eighth Circuit together with appeals by other LECs
and state regulatory commissions. On October 15, 1996, the Eighth Circuit
granted a partial stay. The stay delays implementation of the Order's pricing
provisions and associated rules as well as the rules requiring GTE and other
LECs to permit requesting carriers to select terms and conditions from various
agreements between them and other carriers for purposes of interconnection.
Additionally, the Court scheduled oral argument on the merits for the week of
January 13, 1997. On November 12, 1996, the Supreme Court denied applications
to vacate the stay filed by the FCC and various companies seeking to enter the
local-exchange business.
While GTE cannot predict the outcome of the Court's final decision, GTE intends
to continue to vigorously present its position in Court.
GTE is continuing to negotiate with requesting carriers over the terms of
interconnection, unbundled network elements and resale rates. In some cases,
the parties have been unable to agree within the statutory period for
negotiation and have gone to arbitration before various state regulatory
commissions, including New Mexico, Oklahoma and Texas. It is expected that in
December 1996, the first state commission decision determining the prices and
terms of unresolved issues will be released. Subsequent decisions are expected
to be issued over a period extending through the first quarter of 1997.
In 1996, GTE, through a separate subsidiary, began offering long distance
service to its customers in selected states, including New Mexico and Texas,
marketed under the name GTE Easy Savings Plan(service mark). GTE plans to offer
this service by December 31, 1996 in all 50 states, including the 28 states
where it currently offers local telephone service.
5
<PAGE> 7
GTE SOUTHWEST INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
The Company submitted its 1996 annual interstate access filing on April 2,
1996, utilizing the FCC's interim price cap rules. In doing so, the Company
changed its productivity factor from 5.3% to 4.0% for its Oklahoma tariff
entity. On June 24, 1996, the FCC ordered all LECs subject to price cap
regulation, including the Company, to update their GDP-PI inflation factors
through the fourth quarter of 1995. Overall, the final 1996 interstate access
filing resulted in an annual price reduction of $5, effective July 1, 1996.
On August 2, 1996, the Public Utility Commission of Texas (TPUC) approved an
interim Expanded Local Calling (ELC) surcharge to be assessed on customers in
non-ELC exchanges consistent with the Public Utility Regulatory Act (PURA).
The amount of surcharge is 92 cents per line, beginning September 16, 1996, and
will generate approximately $14.6 annually. The interim surcharge is subject
to refund pending outcome of the final order expected in December 1996.
On March 7, 1996, the Oklahoma Communications Commission (OCC) approved a
comprehensive set of rules designed to implement competition according to the
provisions of the Telecommunications Act. These rules outline the
certification process for new entrants and substantially mirror the
interconnection requirements of the Telecommunications Act. Subsequently, in
May 1996 AT&T received approval for certification to provide local telephone
service in Oklahoma.
Eleven separate class action lawsuits have been brought against the Company and
five of its affiliates relating to the provision of inside wire maintenance
services. All cases are in different stages in the various legal systems. On
August 8, 1996, a preliminary settlement was reached in one of the cases. The
Court has conditionally certified this case as a national class of plaintiffs
for settlement purposes. While all cases have not yet been consolidated, it is
GTE's intent to consolidate all pending lawsuits and effect a nationwide
settlement of all inside wire claims. A fairness hearing will be held on
December 18, 1996. This hearing will allow for any objections to the
settlement and could finally approve the settlement. If accepted, all pending
lawsuits would be dismissed and future lawsuits would be precluded from 1987 to
the date of settlement. Management believes that the Company has adequately
provided for this settlement in its financial statements.
The Company is managing two lawsuits and a TPUC Complaint with Texas cities
involving disputes over amounts owed under right-of-way contracts. On
September 30, 1996, the Company and 21 of the cities announced an agreement in
principle that will end the right-of-way disputes between them. Final approval
by the cities and the Company is pending, but the settlement will include
implementation of new right-of-way agreements. Management believes that the
Company has adequately provided for these disputes in its financial statements.
6
<PAGE> 8
GTE SOUTHWEST INCORPORATED
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------ ------------
(Thousands of Dollars)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and temporary investments $ 18,062 $ 17,825
Receivables, less allowances of $22,319 and $21,182 278,632 274,838
Note receivable from affiliate 72,392 3,000
Inventories and supplies 25,321 20,452
Deferred income tax benefits 23,165 32,033
Prepaid taxes and other 47,275 45,630
------------ ------------
Total current assets 464,847 393,778
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, at cost 5,011,722 4,854,212
Accumulated depreciation (3,030,031) (2,887,706)
------------ ------------
Total property, plant and equipment, net 1,981,691 1,966,506
------------ ------------
OTHER ASSETS, primarily employee benefit plans 116,935 86,276
------------ ------------
Total assets $ 2,563,473 $ 2,446,560
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term obligations, including current maturities $ 1,943 $ 49,862
Accounts payable 105,871 145,518
Taxes payable 33,969 36,940
Accrued interest 17,962 6,657
Accrued payroll costs 43,933 46,038
Dividends payable 57,952 198
Accrued restructuring costs 61,887 82,872
Other 128,670 121,078
------------ ------------
Total current liabilities 452,187 489,163
------------ ------------
Long-term debt 866,851 827,082
Deferred income taxes 180,279 178,003
Employee benefit plans 169,000 145,799
Other liabilities 70,960 84,404
------------ ------------
Total liabilities 1,739,277 1,724,451
------------ ------------
PREFERRED STOCK, subject to mandatory redemption 8,250 8,390
------------ ------------
SHAREHOLDERS' EQUITY:
Preferred stock 7,600 7,600
Common stock (6,500,000 shares issued) 650,000 650,000
Additional paid-in capital 48,751 48,751
Retained earnings 109,595 7,368
------------ ------------
Total shareholders' equity 815,946 713,719
------------ ------------
Total liabilities and shareholders' equity $ 2,563,473 $ 2,446,560
============ ============
</TABLE>
See Notes to Condensed Financial Statements.
7
<PAGE> 9
GTE SOUTHWEST INCORPORATED
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------------
1996 1995
----------- ----------
(Thousands of Dollars)
<S> <C> <C>
OPERATIONS
Net income $ 189,489 $ 152,815
Adjustments to reconcile net income
to net cash from operations:
Depreciation and amortization 254,704 250,455
Deferred income taxes 11,144 16,922
Gain on disposition of assets (4,322) (21,583)
Provision for uncollectible accounts 27,428 26,351
Change in current assets and current liabilities (116,457) 16,877
Other - net (1,099) (106,012)
----------- ----------
Net cash from operations 360,887 335,825
----------- ----------
INVESTING
Capital expenditures (265,079) (236,530)
Proceeds from disposition of assets 12,344 36,386
Other - net -- (5,469)
----------- ----------
Net cash used in investing (252,735) (205,613)
----------- ----------
FINANCING
Long-term debt issued 147,884 1,048
Long-term debt and preferred stock retired (11,596) (13,546)
Dividends (29,508) (118,183)
Net change in affiliate notes (108,895) 29,755
Decrease in short-term obligations, excluding current maturities (105,800) (14,595)
----------- ----------
Net cash used in financing (107,915) (115,521)
----------- ----------
Increase in cash and temporary investments 237 14,691
Cash and temporary investments:
Beginning of period 17,825 10,462
----------- ----------
End of period $ 18,062 $ 25,153
=========== ==========
</TABLE>
See Notes to Condensed Financial Statements.
8
<PAGE> 10
GTE SOUTHWEST INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
(1) The unaudited condensed financial statements included herein have been
prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. However, in
the opinion of management of the Company, the condensed financial
statements include all adjustments, which consist only of normal
recurring accruals, necessary to present fairly the financial information
for such period. These condensed financial statements should be read in
conjunction with the financial statements and the notes thereto included
in the Company's 1995 Annual Report on Form 10-K.
(2) In the second quarter of 1996, the Company sold a portion of its
telephone plant-in-service, inventories and supplies and customers in the
state of Texas to various parties for $11 million in cash. A pre-tax
gain of $4.3 million was recorded on the sale.
(3) Reclassifications of prior year data have been made, where appropriate,
to conform to the 1996 presentation.
9
<PAGE> 11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits required by Item 601 of Regulation S-K.
(12) Statement re: Calculation of the Ratio of Earnings to Fixed
Charges
(27) Financial Data Schedule
(b) The Company filed no reports on Form 8-K during the third quarter of
1996.
10
<PAGE> 12
SIGNATURE
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.
GTE Southwest Incorporated
------------------------------
(Registrant)
Date: November 14, 1996 William M. Edwards, III
------------------------------- ------------------------------
William M. Edwards, III
Vice President - Controller
(Principal Accounting Officer)
11
<PAGE> 13
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------------ ------------------------------------------------------------
<S> <C>
12 Statement re: Calculation of the Ratio of Earnings to Fixed
Charges
27 Financial Data Schedule
</TABLE>
<PAGE> 1
Exhibit 12
GTE SOUTHWEST INCORPORATED
STATEMENT OF THE RATIO OF EARNINGS TO FIXED CHARGES
(Thousands of Dollars)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1996
------------------
<S> <C>
Net earnings available for fixed charges:
Income from continuing operations $ 189,489
Add - Income taxes 93,098
- Fixed charges 49,221
---------------
Adjusted earnings $ 331,808
===============
Fixed charges:
Interest expense $ 45,110
Portion of rent expense
representing interest 4,111
---------------
Adjusted fixed charges $ 49,221
===============
RATIO OF EARNINGS TO FIXED CHARGES 6.74
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 18,062
<SECURITIES> 0
<RECEIVABLES> 373,343
<ALLOWANCES> 22,319
<INVENTORY> 25,321
<CURRENT-ASSETS> 464,847
<PP&E> 5,011,722
<DEPRECIATION> 3,030,031
<TOTAL-ASSETS> 2,563,473
<CURRENT-LIABILITIES> 452,187
<BONDS> 866,851
8,250
7,600
<COMMON> 650,000
<OTHER-SE> 158,346
<TOTAL-LIABILITY-AND-EQUITY> 2,563,473
<SALES> 1,241,995
<TOTAL-REVENUES> 1,241,995
<CGS> 445,753
<TOTAL-COSTS> 923,486
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40,244
<INCOME-PRETAX> 282,587
<INCOME-TAX> 93,098
<INCOME-CONTINUING> 189,489
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 189,489
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
