UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities
Exchange Act of 1934
For the period ended September 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: 0-2908
GTE NORTHWEST INCORPORATED
(Exact name of registrant as specified in its charter)
WASHINGTON 91-0466810
(State or other jurisdiction of
(I.R.S. Employer
Incorporation or organization)
Identification No.)
1800 41st Street, Everett, Washington 98201
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code 206-261-
5321
(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 17,230,272 shares of no par value common stock
and 689,728 shares of $25 par value common stock outstanding at
October 31, 1994.
GTE NORTHWEST INCORPORATED AND SUBSIDIARY
INDEX
PART I. FINANCIAL INFORMATION PAGE
Condensed Consolidated Statements of Income . . . . . . . . .
. . . . 1
Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . .
. . . . 2
Condensed Consolidated Balance Sheets - Assets. . . . . . . .
. . . . 6
Condensed Consolidated Balance Sheets - Liabilities and
Shareholders' Equity . . . . . . . . . . . . . . . . . . .
. . . . 7
Condensed Consolidated Statements of Cash Flows . . . . . . .
. . . . 8
Notes to Condensed Consolidated Financial Statements. . . . .
. . . . 9
PART II. OTHER INFORMATION
Items 1 through 6 . . . . . . . . . . . . . . . . . . . . . .
. . . . 10
Signature . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . 11
PART I. FINANCIAL INFORMATION
GTE NORTHWEST INCORPORATED AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine
Months Ended
September 30, September 30,
1994 1993 1994 1993
(Thousands of Dollars)
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Local network services $ 87,663 $ 82,919 $ 256,574 $ 246,952
Network access services 79,565 92,364 275,419 279,114
Long distance services 28,812 2,814 41,367 10,471
Equipment sales and services 15,100 22,065 45,712
57,741
Other 13,235 19,951 40,546 52,847
224,375 220,113 659,618 647,125
OPERATING EXPENSES:
Cost of sales and services 53,922 52,323 155,359 157,185
Depreciation and amortization 43,374 43,572 127,948
127,373
Marketing, selling, general and
administrative 81,173 74,122 227,748 228,772
178,469 170,017 511,055 513,330
Net operating income 45,906 50,096 148,563 133,795
OTHER (INCOME) DEDUCTIONS:
Interest expense 13,898 15,580 37,878 44,354
Other - net (647) (1,301) (2,310)
(1,770)
INCOME BEFORE INCOME TAXES 32,655 35,817 112,995 91,211
INCOME TAXES 12,113 13,505 41,846 32,856
INCOME BEFORE EXTRAORDINARY
CHARGE 20,542 22,312 71,149 58,355
EXTRAORDINARY CHARGE - EARLY
RETIREMENT OF DEBT (net of
income taxes of $2,522) -- 4,501 -- 4,501
NET INCOME $ 20,542 $ 17,811 $ 71,149 $ 53,854
Per share data is omitted since the Company's common stock is 100%
owned by
GTE Corporation (Parent Company).
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
GTE NORTHWEST INCORPORATED AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OPERATING RESULTS
Net income was $20.5 million for the three months and $71.1
million for the nine months ended September 30, 1994 as compared
to $17.8 million and $53.9 million for the same periods in 1993.
Net income for 1993 includes a one-time charge associated with
the enhanced early retirement and voluntary separation programs
recorded in the second quarter of 1993 and the extraordinary
charge (net of tax) related to the early retirement of debt
during the third quarter of 1993. Excluding these special items,
net income decreased 8% or $1.8 million for the three months and
increased 12% or $7.7 million for the nine months ended September
30, 1994 compared to the same periods in 1993. The decrease in
the quarter-end results is due to higher operating expenses
primarily related to the final resolution of certain settlement
activities, partially offset by increased revenue and decreased
interest expense. The increase in the year-to-date results is
primarily due to higher operating revenues, lower interest
expense and lower operating expenses.
Operating Revenues
Operating revenues increased 2% or $4.3 million for the three
months and 2% or $12.5 million for the nine months ended
September 30, 1994.
Local network service revenues increased 6% or $4.7 million for
the three months and 4% or $9.6 million for the nine months ended
September 30, 1994 compared to the same periods in 1993. The
increases are primarily due to growth in optional extended area
service revenue.
Network access service revenues decreased 14% or $12.8 million
for the three months and 1% or $3.7 million for the nine months
ended September 30, 1994 compared to the same periods in 1993.
The decreases are primarily due to the transition by Oregon in
May 1994 and Washington in July 1994 to Originating
Responsibility Plan (ORP) arrangements. Before transitioning to
the ORP, all intralata toll was remitted to U.S. West. In turn,
U.S. West paid the Company access charges for intralata toll that
was originated or terminated by the Company. Under the ORP, the
Company keeps the revenues from originating toll calls and
records them as long distance service revenues. Therefore, under
the ORP, the Company only receives access charges for intralata
toll calls that are terminated by the Company. The decreases are
also due to a $6.7 million rate reduction in Washington effective
February 11, 1994.
Long distance service revenues increased $26.0 million for the
three months and $30.9 million for the nine months ended
September 30, 1994 compared to the same periods in 1993. The
increases are primarily due to growth in long distance message
revenue caused by the transition to the ORP arrangements
discussed above.
Equipment sales and service revenues decreased 32% or $7.0
million for the three months and 21% or $12.0 million for the
nine months ended September 30, 1994 compared to the same periods
in 1993. The decreases are primarily due to lower revenue from
sales of key telephone systems and large private branch exchange
systems.
GTE NORTHWEST INCORPORATED AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Other operating revenues decreased 34% or $6.7 million for the
three months ended and 23% or $12.3 million for the nine months
ended September 30, 1994 compared to the same periods in 1993.
The decrease is primarily due to lower directory advertising
revenue as a result of lower directory sales, lower revenue from
interexchange lease agreements and lower billing and collection
revenue.
Operating Expenses
Operating expenses increased 5% or $8.5 million for the three
months and were essentially flat for the nine months ended
September 30, 1994 compared to the same periods in 1993.
Excluding the $7.8 million pretax charge associated with the
enhanced early retirement and voluntary separation programs
recorded in the second quarter of 1993, operating expenses
increased 1% or $5.6 million for the nine months ended
September 30, 1994, compared to the same period in 1993. The
increases are primarily due to the payment of access charges
under the ORP to other local exchange carriers for intralata toll
calls that are originated by the Company and terminated by
another local exchange carrier, and the final resolution of
certain settlement activities, partially offset by the continuing
cost reduction efforts of the Company and lower expenses relating
to product sales and installation and maintenance.
Restructuring
As previously reported, during the fourth quarter of 1993, the
Company recorded a restructuring charge of $124.9 million
primarily for incremental costs related to implementation of its
three year re-engineering plan. The re-engineering plan will
redesign and streamline processes to improve customer
responsiveness and product quality, reduce the time necessary to
introduce new products and services and reduce costs.
In connection with the re-engineering plan, in the first nine
months of 1994 expenditures of $7.8 million were incurred and
charged to the restructuring reserve. These costs primarily
reflect costs associated with the consolidation of customer
contact, network operations and operator service centers,
separation benefits associated with employee reductions and
incremental expenditures to redesign and streamline processes.
The level of re-engineering activities and related expenditures
are expected to accelerate during the remainder of 1994 and
throughout 1995. There have been no significant changes made to
the overall re-engineering plan as originally reported.
Other (Income) Deductions
Interest expense decreased 11% or $1.7 million for the three
months and 15% or $6.5 million for the nine months ended
September 30, 1994 compared to the same periods in 1993. The
decreases are due to the early retirement of $125 million of high-
coupon first mortgage bonds in November 1993 with proceeds from
the issuance of commercial paper. The commercial paper was
refinanced in May 1994 with the proceeds from the issuance of
$200 million of 7.375% debentures.
GTE NORTHWEST INCORPORATED AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Income taxes decreased 10% or $1.4 million for the three months
and increased 27% or $9.0 million for the nine months ended
September 30, 1994 compared to the same periods in 1993. The
changes are primarily due to changes in pretax income. The
declining effects of the amortization of deferred investment tax
credits partially offset the quarter's decrease and added to the
year-to-date increase.
CAPITAL RESOURCES AND LIQUIDITY
The Company's primary source of funds during the first nine
months of 1994 was cash flow from operating activities of $172.1
million compared to $205.9 million for the same period in 1993.
The decrease primarily reflects timing differences in the payment
of taxes and the collection of receivables.
The Company's capital expenditures during the first nine months
of 1994 were $182.8 million compared to $162.9 million during the
same period in 1993, reflecting the Company's continued growth in
access lines, modernization of facilities and introduction of new
products and services. The Company's anticipated construction
costs for 1994 are approximately $250 million. In 1993, the
Company acquired for book value ($25 million) the Idaho
properties of Contel of the West, Inc., an affiliate.
Cash provided from financing activities was $10.5 million for the
first nine months of 1994 compared to cash used of $15.3 million
for the same period in 1993. In May 1994, the Company issued $200
million of 7.375% debentures to refinance commercial paper issued
to retire primarily high-coupon debt in 1993. Dividends to
shareholders were $28.9 million for the first nine months of 1994
compared to $63.2 million for the same period in 1993. In
addition, the Company received $38 million of cash from the
issuance of common stock to the parent, GTE, in September 1993.
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 borrowing can be obtained
through commercial paper borrowing or borrowing from GTE. In
addition, a $2.8 billion line of credit is available to the
Company through shared lines of credit with GTE and other
affiliates to support short-term financing needs.
OTHER MATTERS
The Company follows the accounting for regulated enterprises
prescribed by Statement of Financial Accounting Standards No. 71,
"Accounting for the Effects of Certain Types of Regulation" ("FAS
71"). In general, FAS 71 requires companies to depreciate plant
and equipment over lives approved by regulators. It also
requires deferral of certain costs and obligations based upon
approvals received from regulators. In the event that
recoverability of
GTE NORTHWEST INCORPORATED AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
these costs becomes unlikely or uncertain, whether resulting from
actual or anticipated increases in competition or specific
regulatory, legislative or judicial actions, continued
application of FAS 71 would no longer be appropriate. If the
Company no longer qualifies for the provisions of FAS 71, the
financial effects of the required accounting change (which would
be non-cash) could be material.
GTE NORTHWEST INCORPORATED AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
September 30,
December 31,
1994 1993
(Thousands of Dollars)
CURRENT ASSETS:
Cash $ 1,699 $ 2,535
Receivables, less allowances
of $4,951 and $6,602, respectively 197,832 199,769
Materials and supplies, at average cost 18,037 12,375
Deferred income tax benefits 16,996 16,598
Net assets held for sale 10,013 10,013
Prepayments and other 2,310 6,487
Total current assets 246,887 247,777
PROPERTY, PLANT AND EQUIPMENT:
Original cost 2,955,590 2,886,310
Accumulated depreciation (897,692)
(887,035)
Net property, plant and equipment 2,057,898 1,999,275
OTHER ASSETS 71,006 56,517
TOTAL ASSETS $ 2,375,791 $ 2,303,569
See Notes to Condensed Consolidated Financial Statements.
GTE NORTHWEST INCORPORATED AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30,
December 31,
1994 1993
(Thousands of Dollars)
CURRENT LIABILITIES:
Short-term debt, including current maturities $ 48,446 $
192,323
Accounts payable 93,652 129,152
Accrued taxes 33,621 54,776
Accrued payroll and vacations 16,502 15,994
Accrued dividends 11,594 54
Accrued interest 17,458 11,304
Accrued restructuring costs and other 97,867 97,395
Total current liabilities 319,140 500,998
LONG-TERM DEBT 659,038 473,241
DEFERRED CREDITS AND RESERVES,
primarily deferred income taxes,
investment tax credits
and restructuring costs 467,569 427,894
PREFERRED STOCK, subject to
mandatory redemption 2,400 4,000
SHAREHOLDER'S EQUITY:
Common stock 448,000 448,000
Other capital 57,687 57,687
Reinvested earnings 421,957 391,749
Total shareholder's equity 927,644 897,436
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,375,791 $
2,303,569
See Notes to Condensed Consolidated Financial Statements.
GTE NORTHWEST INCORPORATED AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
1994 1993
(Thousands of Dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
Income before extraordinary charge $ 71,149 $ 58,355
Adjustments to reconcile income before
extraordinary charge to net cash from
operating activities:
Depreciation and amortization 127,948 127,373
Deferred income taxes and investment
tax credits 24,087 11,348
Provision for uncollectible accounts 5,120
9,373
Changes in current assets and
current liabilities (54,189)
(5,260)
Other - net (1,993)
4,730
Net cash from operating activities 172,122 205,919
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (182,769)
(162,870)
Acquisition of assets -- (25,039)
Other - net (689)
(188)
Net cash used in investing activities (183,458)
(188,097)
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt issued 198,459 123,730
Common stock issued -- 38,000
Long-term debt and preferred stock retired (5,943)
(7,768)
Dividends paid to shareholders (28,940)
(63,196)
Decrease in short-term debt (153,076)
(106,105)
Net cash from (used in) financing
activities 10,500 (15,339)
Increase (decrease) in cash (836)
2,483
Cash at beginning of period 2,535 1,641
Cash at end of period $ 1,699 $ 4,124
See Notes to Condensed Consolidated Financial Statements.
GTE NORTHWEST INCORPORATED AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) The unaudited condensed consolidated 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 consolidated
financial statements include all adjustments, which consist only
of normal recurring accruals, necessary to present fairly the
financial information for such periods. These condensed
consolidated financial statements should be read in conjunction
with the financial statements and the notes thereto included in
the Company's 1993 Annual Report to Shareholders incorporated by
reference in the Annual Report on Form 10-K.
(2) On May 18, 1993, GTE Corporation and GTE Northwest
Incorporated (the Company) entered into asset purchase agreements
with Citizens Utilities Company ("Citizens") whereby the Company
will sell all of their local exchange properties in Montana to
Citizens. The parties intend to close on the properties in the
fourth quarter of 1994. The net assets of $10 million held for
sale represent primarily property, plant and equipment.
(3) During the third quarter of 1993, the Company called $125
million of high-coupon first-mortgage bonds. As a result, a
pretax extraordinary charge of $7.0 million was recorded to
reflect the expenses of calling these bonds. The after-tax
extraordinary charge amounted to $4.5 million.
(4) Reclassifications of prior year data have been made in the
financial statements where appropriate to conform to the 1994
presentation.
GTE NORTHWEST INCORPORATED AND SUBSIDIARY
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K.
(27) Financial Data Schedule.
(b) The Company filed no reports on Form 8-K during the
third quarter
of 1994.
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 hereunto duly authorized.
GTE NORTHWEST INCORPORATED
(Registrant)
Date: November 9, 1994 WILLIAM M. EDWARDS, III
WILLIAM M. EDWARDS, III
Controller
(Chief Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1993
<PERIOD-END> SEP-30-1994
<CASH> 1,699
<SECURITIES> 0
<RECEIVABLES> 202,783
<ALLOWANCES> 4,951
<INVENTORY> 18,037
<CURRENT-ASSETS> 246,887
<PP&E> 2,955,590
<DEPRECIATION> 897,692
<TOTAL-ASSETS> 2,375,791
<CURRENT-LIABILITIES> 319,140
<BONDS> 659,038
<COMMON> 448,000
2,400
0
<OTHER-SE> 479,644
<TOTAL-LIABILITY-AND-EQUITY> 2,375,791
<SALES> 659,618
<TOTAL-REVENUES> 659,618
<CGS> 155,359
<TOTAL-COSTS> 511,055
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 37,878
<INCOME-PRETAX> 112,995
<INCOME-TAX> 41,846
<INCOME-CONTINUING> 71,149
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 71,149
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
