<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 June 30, 1997
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 July 31, 1997. 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 Six Months Ended
June 30, June 30,
-------------------------- -------------------------
1997 1996 1997 1996
-------- -------- -------- --------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
REVENUES AND SALES
Local services $154,633 $139,988 $313,364 $282,279
Network access services 171,443 155,525 329,864 306,811
Toll services 35,533 46,216 76,157 92,854
Other services and sales 49,733 61,603 109,661 113,822
-------- -------- -------- --------
Total revenues and sales 411,342 403,332 829,046 795,766
-------- -------- -------- --------
OPERATING COSTS AND EXPENSES
Cost of services and sales 144,352 138,079 273,364 280,157
Selling, general and administrative 64,550 76,935 115,001 130,664
Depreciation and amortization 91,108 85,986 184,162 167,205
-------- -------- -------- --------
Total operating costs and expenses 300,010 301,000 572,527 578,026
-------- -------- -------- --------
OPERATING INCOME 111,332 102,332 256,519 217,740
OTHER (INCOME) EXPENSE
Interest - net 13,119 13,170 27,623 26,779
Gain on disposition of assets -- (4,322) -- (4,322)
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 98,213 93,484 228,896 195,283
Income taxes 33,412 31,402 77,666 64,881
-------- -------- -------- --------
NET INCOME $ 64,801 $ 62,082 $151,230 $130,402
======== ======== ======== ========
</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 Six Months Ended
June 30, June 30,
----------------------- -----------------------
1997 1996 1997 1996
----- ----- ------ ------
<S> <C> <C> <C> <C>
Net income $64.8 $62.1 $151.2 $130.4
</TABLE>
Net income grew by 4% or $2.7 during the three months ended June 30, 1997 and
16% or $20.8 year-to-date, compared to the same periods in 1996. The increases
are largely the result of higher revenues from local and network access
services partially offset by lower revenues from toll services and other
services and sales. A slight decline in operating expenses also contributed to
the increase.
REVENUES AND SALES
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ -----------------------
1997 1966 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Local services $154.6 $140.0 $313.4 $282.3
Network access services 171.5 155.5 329.8 306.8
Toll services 35.5 46.2 76.1 92.9
Other services and sales 49.7 61.6 109.7 113.8
------ ------ ------ ------
Total revenues and sales $411.3 $403.3 $829.0 $795.8
</TABLE>
Total revenues and sales increased 2% or $8 and 4% or $33.2 for the three and
six months ended June 30, 1997, respectively, compared to the same periods in
1996.
Local service revenues increased 10% or $14.6 and 11% or $31.1 for the three
and six months ended June 30, 1997, respectively, compared to the same periods
in 1996, primarily due to access line growth and demand for custom calling
features and other enhanced services. The number of access lines increased 7%
during both periods, which generated additional revenues of $3.7 and $8.6 for
the three and six month periods, respectively. Revenues from SmartCall(R) and
CLASS services, driven by demand for custom calling features such as Caller ID
and automatic call return/redial, grew by $2.4 for the quarter and $8.1
year-to-date. Revenues from CentraNet(R) and digital services, such as
Integrated Services Digital Network (ISDN) and Digital Channel Services (DCS),
contributed a combined $4.7 toward the second quarter increase and $8.7 through
the first six months of 1997. In addition to these factors, rate changes in
local calling plans stimulated increases of $2.9 in the second quarter and $5.8
year-to-date.
Network access service revenues grew 10% or $16 and 7% or $23 for the three and
six months ended June 30, 1997, respectively, compared to the same periods in
1996. Minutes of use increased 9% and 7% during the three and six month
periods, which resulted in additional access revenues of $8.4 and $13.6,
respectively. Special access revenues grew by $3.8 and $6.1 for the three and
six month periods, respectively, due to customer demand for increased bandwidth
services. Increases during the periods also reflect growth in revenues from
meet-point billing arrangements totaling $2.9 and $5. Lower support payments
received from the National Exchange Carrier Association (NECA) partially offset
these increases by $2.8 in the second quarter and $5.6 year-to-date.
2
<PAGE> 4
GTE Southwest Incorporated
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Toll service revenues decreased 23% or $10.7 and 18% or $16.8 for the three and
six months ended June 30, 1997, respectively, compared to the same periods in
1996. The decreases are largely due to revenue reductions of $7.5 and $12.5
resulting from the termination, at the end of 1996, of transitional support
payments originating from the Company's exit from the Texas intraLATA (local
access transport area) toll pool. The decreases are also driven by lower toll
volumes, primarily relating to 10XXX intraLATA toll competition.
Other services and sales revenues decreased 19% or $11.9 in the second quarter
of 1997, compared to the same period in 1996, largely as a result of an $11.2
decrease in directory advertising revenue due to the timing of publications.
The year-to-date decrease of 4% or $4.1 is primarily due to the second quarter
decline in directory advertising revenue partially offset by $2.2 growth in
revenues from voice messaging and radio paging services.
OPERATING COSTS AND EXPENSES
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ -----------------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Total operating costs and expenses $300.0 $301.0 $572.5 $578.0
</TABLE>
Total operating costs and expenses remained essentially unchanged in the second
quarter of 1997 and decreased 1% or $5.5 year-to-date, compared to the same
periods in 1996. The year-to-date decreases are largely the result of a $4
decline in uncollectibles, $4.1 from lower data processing expenses, and $4.5
due to reduced investment payments related to the Infrastructure Fund
Assessment for the provision of broadband facilities to schools, libraries and
hospitals. The decrease also includes the impact of $16.2 in settlement gains
recorded in the first quarter of 1997, partially offset by a $3.3 settlement
gain recorded in the same period in 1996, both of which resulted in lump sum
payments from the Company's pension plans. The year-to-date decrease is
partially offset by $6.2 in higher advertising costs and $17 from an increase
in depreciation expense associated with additions to plant balances and
prospective rate changes reflecting revised salvage values.
OTHER (INCOME) EXPENSE
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1997 1996 1997 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
Gain on disposition of assets $ -- $(4.3) $ -- $(4.3)
Income taxes 33.4 31.4 77.7 64.9
</TABLE>
In the second quarter of 1996, the Company recorded $4.3 of pre-tax gains on
the sales of certain non-strategic properties in the state of Texas.
Income taxes increased 6% or $2 and 20% or $12.8 for the three and six months
ended June 30, 1997, respectively, compared to the same periods in 1996,
primarily due to corresponding increases in pre-tax income.
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
3
<PAGE> 5
GTE Southwest Incorporated
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Company generally funds its construction program from operations, although
external financing is available. Short-term financings can be obtained through
borrowings from the Company's parent, GTE, or GTE Funding Incorporated, an
affiliate of the Company. On July 1, 1996, the Company began participating
with other affiliates in a $1,500 syndicated line of credit. The Company has
an existing shelf registration statement outstanding for an additional $150 of
debentures.
The Company's principal source of funds during the first six months of 1997 was
cash from operations of $229.8 compared to $202.1 for the same period in 1996.
The year-to-year increase in cash from operations primarily reflects improved
results from operations partially offset by an increase in working capital
requirements.
The Company's capital expenditures during the first six months of 1997 were
$209.4 compared to $176.9 for the same period in 1996. The 1997 expenditures
reflect the Company's continued access line growth and modernization of current
facilities to support new products and expanded services. The Company
anticipates capital expenditures to increase for the remainder of 1997 compared
to 1996, reflecting the continued expansion of existing networks, upgrades
associated with the support of expanded services and compliance with the local
number portability requirements of the Telecommunications Act of 1996 (the
Telecommunications Act).
In the second quarter of 1996, proceeds totaling $11 were generated from the
sale of certain non-strategic properties. The Company recorded a pre-tax gain
of $4.3 from this sale.
Cash used in financing activities was $19.2 during the first half of 1997
compared to $7.4 for the same period in 1996. Financing activities included
dividend payments of $125 in the first six months of 1997 compared to $0.6 for
the same period in 1996. In May 1997, the Company redeemed, prior to stated
maturity, $29.8 of long-term debt and preferred stock, compared to total
retirements of $10 during the same period in 1996. In January 1996, the
Company issued $150 of 6% debentures to refinance $105.8 of commercial paper.
Short-term financing, including the net change in affiliate notes, increased
$136.2 compared to a decrease of $144.7 for the same period in 1996.
OTHER MATTERS
Federal Regulatory Developments
In July 1997, the U.S. Court of Appeals for the Eighth Circuit (Eighth Circuit)
issued an opinion and order vacating significant portions of the Federal
Communication Commission's (FCC) rules purporting to implement the local
competition provisions of the Telecommunications Act. The Company's parent,
GTE, together with other incumbent local-exchange carriers (ILECs) and a number
of state commissions, had challenged various portions of the FCC rules.
In its opinion, the Eighth Circuit ruled that the FCC had no jurisdiction to
promulgate rules setting the prices at which ILECs must make available to
competitors unbundled network elements and services for resale. In addition,
the Eighth Circuit made a number of other rulings favorable to GTE, including
that the FCC's rule allowing requesting carriers to pick and choose among
individual provisions of other interconnection agreements, rather than to adopt
the terms and conditions of a single agreement in its entirety, was unlawful;
that the FCC does not have the authority to review interconnection agreements
approved by state commissions or to enforce the terms of such agreements; that
the FCC rule requiring ILECs to provide interconnection and unbundled network
elements (UNEs) at levels of quality that are superior to those levels at which
the ILECs provide them to themselves was unlawful; and that it is the
requesting carriers, not the ILECs, that must combine UNEs.
On the other hand, the Eighth Circuit rejected certain arguments advanced by
GTE. For example, it ruled that a
4
<PAGE> 6
GTE Southwest Incorporated
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
requesting carrier may gain access to all of the UNEs that, when combined by
the requesting carrier, are sufficient to enable the requesting carrier to
provide a finished service, and it upheld most of the standards applied by the
FCC in determining which network elements an ILEC must make available.
The time for parties to seek rehearing before the Eighth Circuit has not yet
expired. In addition, the FCC has announced that it intends to seek Supreme
Court review of the Eighth Circuit's ruling.
In May 1997, the FCC issued orders on universal service and access charge
reform. GTE Midwest Incorporated, a separate subsidiary of GTE and affiliate
of the Company, has filed petitions for review of each of these orders in
Federal Court, and GTE is currently assessing the effect of these orders.
In its order on access charge reform, the FCC revised the price cap plan for
regulating ILECs by requiring price cap local-exchange carriers (LECs) to
increase their productivity factor to 6.5% retroactive to July 1996. The order
also eliminated the sharing requirements of the price cap rules. In June 1997,
in accordance with the order, the Company submitted its 1997 annual price cap
filing. The 1997 interstate access filing resulted in an annual price reduction
of $51.2, effective July 1, 1997. Prior to this order, the Company had
submitted a rate change filing in May 1997, as the Company's access rates were
priced significantly below the FCCs maximum price. This rate change filing
resulted in an annual price increase of $24.6, effective June 3, 1997. Overall,
the net effect of these access filings resulted in an annual price reduction of
$25.5.
In accordance with the Telecommunications Act, the Company is continuing to
negotiate with requesting carriers over the terms of interconnection, UNEs 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. Since December 1996, state commission decisions
determining the prices and terms of unresolved issues have been released in
Texas, Oklahoma and New Mexico. Subsequent decisions are expected to be issued
throughout 1997.
Interim rates for interconnection and UNEs have been established through
negotiation and arbitration decisions. These interim rates will be used until
permanent rates are established through state commission proceedings
investigating cost studies. Cost studies have been filed in Texas, and
additional studies are expected to be filed during the second half of 1997 and
throughout 1998.
Additional state commission proceedings have begun to establish rules and
procedures to implement state universal service funds (USF). USF proceedings
have begun in Arkansas, Oklahoma and Texas and decisions are expected to take
place throughout the remainder of 1997 and the first quarter of 1998. Separate
USF proceedings to address discount rates for intrastate telecommunication
services to elementary schools, secondary schools and public libraries have
also begun in Texas, and a decision is expected to take place during the third
quarter of 1997.
State Regulatory Developments
On March 7, 1996, the Oklahoma Corporation 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. On December 12, 1996, the OCC issued its decision in the
Company's arbitration with AT&T to determine interconnection, resale, and
unbundling terms and conditions. The interim discount rate for the Company's
resold services was set at 16.1%. Interim rates based on the FCC proxy rates
will be used for
5
<PAGE> 7
Southwest Incorporated
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
interconnection and UNE's until permanent discounts are established upon
further GTE investigation into cost methodology, which is expected to take
place in the third quarter of 1997. The Company has filed a lawsuit in the
U.S. District Court challenging portions of the OCC's arbitration
determinations.
On August 2, 1996, the Public Utility Commission of Texas (TPUC) approved an
interim Expanded Local Calling (ELC) surcharge of 92 cents per line to be
assessed on customers in non-ELC exchanges consistent with the Public Utility
Regulatory Act (PURA). The Company began billing the interim rate on September
16, 1996. On November 21, 1996, the Company filed a Stipulation and Settlement
Agreement. A final order, approved in February 1997, stipulated a surcharge of
73 cents per line which will generate approximately $11.6 annually. The
difference in the interim surcharge and the stipulated surcharge was refunded
to the ratepayers in April 1997.
On December 12, 1996, the TPUC issued its decision in the Company's arbitration
with AT&T and MCI to determine interconnection, resale and unbundling terms and
conditions. The interim discount rate for the Company's resold services was
set at 22.99%. The Company filed revised cost studies on June 10, 1997.
Interim rates were ordered and negotiated permanent rates must be established
by September 15, 1997. The Company filed a lawsuit in the U.S. District Court
challenging portions of the TPUC's arbitration determinations. On March 13,
1997, the case was dismissed without prejudice to refiling because approval of
an arbitrated agreement had not been received from the TPUC. The Company
refiled its lawsuit against MCI on March 27, 1997 after the MCI contract was
approved by the TPUC on March 26, 1997. The AT&T contract was approved on May
21, 1997 and the Company refiled its lawsuit in this arbitration on the same
day.
On February 10, 1997, the TPUC ordered implementation of intraLATA 1+
pre-subscription which allows customers to choose their primary carrier for
intraLATA toll calls. The Company converted all capable offices to 1+
pre-subscription on August 6, 1997. As a result of this conversion, customers
in Texas will be able to choose the ILEC or an alternative local-exchange
company (ALEC) to carry all intraLATA toll calls when the customer dials one
plus the called number.
On January 2, 1997, the New Mexico Corporation Commission (NMCC) issued an
order on Western Wireless' petition for arbitration. In this order, the
Company was required to set wholesale local switching rates at incremental cost
plus a 15% general services allocator. On February 18, 1997, the Company filed
a Complaint for Declaratory and Injunctive Relief in the U.S. District Court
challenging portions of the NMCC's arbitration order including the wholesale
rate calculation.
Other Developments
In May 1997, the Company's parent, GTE, announced initiatives to become a
leading national provider of telecommunications service, including the
acquisition of BBN Corporation, a leading provider of end-to-end Internet
solutions. In addition, GTE announced a strategic alliance with Cisco Systems,
Inc. to jointly develop enhanced data and Internet services for customers; and,
the purchase of a national, state-of-the-art fiber-optic network from Qwest
Communications.
6
<PAGE> 8
GTE Southwest Incorporated
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------- ------------
(Thousands of Dollars)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 24,288 $ 23,134
Receivables, less allowances of $23,126 and $26,633 321,409 312,047
Notes receivable from affiliates -- 79,727
Inventories and supplies 31,838 20,310
Deferred income tax benefits 8,642 12,684
Prepaid taxes and other 31,809 11,940
----------- -----------
Total current assets 417,986 459,842
----------- -----------
Property, plant and equipment, at cost 5,204,921 5,043,830
Accumulated depreciation (3,233,504) (3,058,086)
----------- -----------
Total property, plant and equipment, net 1,971,417 1,985,744
----------- -----------
Employee benefit plans and other assets 144,173 123,270
----------- -----------
Total assets $ 2,533,576 $ 2,568,856
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term obligations, including current maturities $ 8,487 $ 1,669
Notes payable to affiliates 69,507 --
Accounts payable 123,607 168,125
Taxes payable 23,186 35,059
Accrued interest 10,728 10,785
Accrued payroll costs 35,638 43,732
Dividends payable 79,433 49,752
Other 119,225 137,507
----------- -----------
Total current liabilities 469,811 446,629
----------- -----------
Long-term debt 834,871 866,894
Deferred income taxes 153,901 169,383
Employee benefit plans 204,091 192,362
Other liabilities 40,483 54,687
----------- -----------
Total liabilities 1,703,157 1,729,955
----------- -----------
Preferred stock, subject to mandatory redemption 1,510 6,450
----------- -----------
Shareholder's 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 122,558 126,100
----------- -----------
Total shareholder's equity 828,909 832,451
----------- -----------
Total liabilities and shareholder's equity $ 2,533,576 $ 2,568,856
=========== ===========
</TABLE>
See Notes to Condensed Financial Statements.
7
<PAGE> 9
GTE Southwest Incorporated
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------------
1997 1996
----------- ----------
(Thousands of Dollars)
<S> <C> <C>
OPERATIONS
Net income $ 151,230 $ 130,402
Adjustments to reconcile net income
to net cash from operations:
Depreciation and amortization 184,162 167,205
Deferred income taxes 2,925 4,575
Gain on disposition of assets -- (4,322)
Provision for uncollectible accounts 15,290 19,293
Changes in current assets and current liabilities (125,789) (103,912)
Other - net 1,961 (11,126)
----------- ----------
Net cash from operations 229,779 202,115
----------- ----------
INVESTING
Capital expenditures (209,439) (176,886)
Proceeds from disposition of assets -- 10,972
----------- ----------
Net cash used in investing (209,439) (165,914)
----------- ----------
FINANCING
Long-term debt issued -- 147,884
Long-term debt and preferred stock retired, including premiums paid
on early retirement (30,336) (9,968)
Dividends (125,000) (570)
Net change in affiliate notes 136,150 (38,926)
Decrease in short-term obligations, excluding current maturities -- (105,800)
----------- ----------
Net cash used in financing (19,186) (7,380)
----------- ----------
Increase in cash and cash equivalents 1,154 28,821
Cash and cash equivalents:
Beginning of period 23,134 17,825
----------- ----------
End of period $ 24,288 $ 46,646
=========== ==========
</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 1996 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 1997 presentation.
9
<PAGE> 11
GTE Southwest Incorporated
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 second quarter of
1997.
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: August 14, 1997 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>
12
<PAGE> 1
Exhibit 12
GTE Southwest Incorporated
STATEMENT OF THE RATIO OF EARNINGS TO FIXED CHARGES
(Thousands of Dollars)
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1997
----------------
<S> <C>
Net earnings available for fixed charges:
Income from continuing operations $151,230
Add - Income taxes 77,666
- Fixed charges 31,343
--------
Adjusted earnings $260,239
========
Fixed charges:
Interest expense $ 29,630
Portion of rent expense
representing interest 1,713
--------
Adjusted fixed charges $ 31,343
========
RATIO OF EARNINGS TO FIXED CHARGES 8.30
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 24,288
<SECURITIES> 0
<RECEIVABLES> 344,535
<ALLOWANCES> 23,126
<INVENTORY> 31,838
<CURRENT-ASSETS> 417,986
<PP&E> 5,204,921
<DEPRECIATION> 3,233,504
<TOTAL-ASSETS> 2,533,576
<CURRENT-LIABILITIES> 469,811
<BONDS> 834,871
1,510
7,600
<COMMON> 650,00
<OTHER-SE> 171,309
<TOTAL-LIABILITY-AND-EQUITY> 2,533,576
<SALES> 829,046
<TOTAL-REVENUES> 826,046
<CGS> 273,364
<TOTAL-COSTS> 572,527
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,623
<INCOME-PRETAX> 228,896
<INCOME-TAX> 77,666
<INCOME-CONTINUING> 151,230
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 151,230
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>