<PAGE> 1
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, 1995
------------------------------------------------------------
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.)
600 Hidden Ridge, HQE04B12 - Irving, Texas 75038
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 214-718-5600
-----------------------------
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
The registrant, a wholly owned subsidiary of GTE Corporation, meets the
conditions set forth in General Instruction H(1) (a) and (b) 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
--- ---
The Company had 17,920,000 shares of no par value common stock outstanding at
September 30, 1995. The Company's common stock is 100% owned by GTE
Corporation.
<PAGE> 2
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,
--------------------------- ---------------------------
1995 1994 1995 1994
---------- ---------- ---------- ----------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Operating revenues:
Local network services $ 97,395 $ 87,663 $ 284,057 $ 256,574
Network access services 86,683 79,565 261,470 275,419
Long distance services 29,260 28,812 88,191 41,367
Equipment sales and services 19,612 15,100 54,068 45,712
Other 13,097 13,235 21,501 40,546
---------- ---------- ---------- ----------
246,047 224,375 709,287 659,618
---------- ---------- ---------- ----------
Operating expenses:
Cost of sales and services 90,583 94,722 262,749 273,150
Depreciation and amortization 49,589 43,374 149,983 127,948
Selling, general and administrative 34,244 40,440 102,589 109,380
---------- ---------- ---------- ----------
174,416 178,536 515,321 510,478
---------- ---------- ---------- ----------
Net operating income 71,631 45,839 193,966 149,140
---------- ---------- ---------- ----------
Interest expense - net 13,750 13,184 40,738 36,145
---------- ---------- ---------- ----------
Income before income taxes 57,881 32,655 153,228 112,995
Income taxes 20,121 12,113 52,801 41,846
---------- ---------- ---------- ----------
Net income $ 37,760 $ 20,542 $ 100,427 $ 71,149
========== ========== ========== ==========
</TABLE>
Per share data is omitted since the Company's common stock is 100% owned by GTE
Corporation (GTE).
See Notes to Condensed Consolidated Financial Statements.
1
<PAGE> 3
GTE NORTHWEST INCORPORATED AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
RESULTS OF OPERATIONS
Net income was $100.4 and $71.1 for the nine months ended September 30, 1995
and 1994, respectively, reflecting an increase of 41% or $29.3. The increase
is primarily due to higher revenues associated with customer growth, partially
offset by increased depreciation and amortization costs.
OPERATING REVENUES
Operating revenues were $709.3 and $659.6 for the nine months ended September
30, 1995 and 1994, respectively, reflecting an increase of 8% or $49.7.
Local network services revenues were $284.1 and $256.6 for the nine months
ended September 30, 1995 and 1994, respectively, reflecting an increase of 11%
or $27.5. The increase is primarily due to continued customer growth as
reflected by a 6% increase in access lines, which generated additional revenues
of $10.0, and $5.0 of growth in extended area service revenue. The increase is
also due to $3.5 in higher installation revenues and a $9.9 growth in sales of
custom calling features (e.g. SmartCall(R), CLASS services, etc.), CentraNet(R)
and Integrated Services Digital Network (ISDN), a service that permits rapid
transmission of voice, data, image and text over one line. These increases
were partially offset by a $1.3 reduction in basic exchange rates in Oregon.
Network access services revenues were $261.5 and $275.4 for the nine months
ended September 30, 1995 and 1994, respectively, reflecting a decrease of 5% or
$13.9. The decrease is primarily due to a $25.7 reduction in access revenues
associated with the conversion by Oregon and Washington in May 1994 and July
1994 respectively, to a Primary Toll Carrier (PTC) plan. Before transitioning
to the PTC plan, all intraLATA toll was remitted to US WEST, Inc. In turn, US
WEST, Inc. paid the Company access charges for intraLATA toll that was
originated or terminated by the Company. Under the PTC plan, the Company keeps
the revenue from originating toll calls, records them as long distance service
revenues and remits access charges to the local exchange carriers (LECs) for
calls terminating outside the Company's service areas. Therefore, under the
PTC plan, the Company only receives access revenues for intraLATA toll calls
that are terminated by the Company. On an overall basis, the PTC plan is
intended to be income neutral to the Company since decreases in access revenues
are offset by increases in toll revenues and corresponding access charge
expenses. The decrease is also due to $6.3 of lower revenues attributable to
the interstate sharing reserve, which is associated with the sharing
requirements of the FCC Price Cap, and lower revenues of $6.3 associated with
rate reductions and interstate rate changes. These decreases are partially
offset by a 12% increase in minutes of use which generated additional revenues
of $17.9, a 25% growth in dedicated lines which generated additional revenues
of $3.0, and $2.0 in higher end user access charge revenues corresponding to
the increase in access lines.
Long distance services revenues were $88.2 and $41.4 for the nine months ended
September 30, 1995 and 1994, respectively, reflecting an increase of $46.8.
The increase is primarily due to a $51.7 increase in intraLATA toll revenues
due to conversion to the PTC plan mentioned above. The increase was partially
offset by $5.0 of long distance revenue reductions due to the continued growth
in extended area calling zones mentioned above in the discussion of local
network services revenues.
2
<PAGE> 4
GTE NORTHWEST INCORPORATED AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Equipment sales and services revenues were $54.1 and $45.7 for the nine months
ended September 30, 1995 and 1994, respectively, reflecting an increase of 18%
or $8.4. The increase is primarily due to higher private branch exchange phone
system sales and the related maintenance contracts of $3.5, increased growth in
Radio Paging and voice messsaging revenues of $2.7 and higher revenues of $2.2
related to the settlement of certain interstate billing and collection
activities.
Other operating revenues were $21.5 and $40.5 for the nine months ended
September 30, 1995 and 1994, respectively, reflecting a decrease of 47% or
$19.0. The decrease is primarily due to $12.0 in lower billing and collection
revenues associated with the conversion to the PTC plan mentioned above, and a
$11.0 increase in uncollectibles.
OPERATING EXPENSES
Operating expenses were $515.3 and $510.5 for the nine months ended September
30, 1995 and 1994, respectively, reflecting an increase of 1% or $4.8. The
increase is primarily due to an $18.4 increase in depreciation and
amortization, primarily related to rate adjustments in Oregon and Washington,
$3.3 of higher access charges associated with the transition to the PTC plan,
and higher pole rental costs of $1.4. These increases were partially offset by
a $12.8 decrease in labor and benefits costs reflecting reductions in workforce
associated with the Company's re-engineering plan, a $3.7 decline in data
processing costs and $2.5 in settlement gains recorded in the second quarter of
1995 which resulted from lump-sum payments from the Company's pension plans.
OTHER DEDUCTIONS
Interest expense - net was $40.7 and $36.1 for the nine months ended September
30, 1995 and 1994, respectively, reflecting an increase of 13% or $4.6. The
increase is primarily due to higher average long-term debt levels for the first
nine months of 1995 compared to the same period in 1994.
Income taxes were $52.8 and $41.9 for the nine months ended September 30, 1995
and 1994, respectively, reflecting an increase of 26% or $10.9. The increase
is primarily related to corresponding increases in pretax income, partially
offset by adjustments to prior years' tax liabilities.
OTHER MATTERS
As previously reported, results for 1993 included a one-time pretax
restructuring charge of $125.0, which reduced net income by $77.0, primarily
for incremental costs related to implementation of the Company's 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 further reduce costs.
Implementation of the re-engineering plan began during 1994 and is expected to
be completed by the end of 1996. Expenditures of $50.6 have been made since
inception of the re-engineering plan, including $25.2 during the first nine
months of 1995. These expenditures were primarily associated with the
consolidation of customer contact, network operations and operator service
centers, separation benefits associated with workforce reductions and
incremental expenditures to redesign and streamline processes. There have been
no significant changes made to the overall re-engineering plan as originally
reported. As of September 30, 1995, $74.4 remains in the restructuring reserve
which management believes is adequate to cover future expenditures.
3
<PAGE> 5
GTE NORTHWEST INCORPORATED AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
In March 1995, the Federal Communications Commission (FCC) adopted interim
rules to be utilized by local exchange carriers (LECs), including the Company,
for their 1995 Annual Price Cap Filing. The interim rules allowed LECs to
select from three productivity/sharing options for each tariff entity. Each of
the three options required an increase to the 3.3% productivity factor used
since 1991. The Company selected the following productivity factors and
sharing thresholds for use in the 1995-1996 tariff year:
<TABLE>
<CAPTION>
Sharing Parameters
Tariff Productivity -------------------------------------------
Entity Factor 50% 100%
- ----------------------------------- ---------------- ------------------ ------------------
<S> <C> <C> <C>
Washington (GTE), 4.0% 12.25 - 13.25% ROR Over 13.25% ROR
California-West Coast, Inc.
Idaho, Oregon, 5.3% None None
Washington (Contel)
</TABLE>
Since the Company's access fees were priced significantly below the FCC's
maximum price, the Company was permitted to file tarrifs effective May 24, 1995
to increase rates $6.0, annually. In addition the Company filed tariffs
effective August 31, 1995 under the interim rules to reduce rates $17.2
annually. On September 20, 1995 the FCC released its proposed rulemaking
proceeding on price caps which proposes specific changes to reflect and
encourage emerging competition in local and access services markets and to
establish the path towards decreased regulation of LECs' services. On
September 27, 1995 the FCC solicited comments on a number of specific issues
regarding methods for establishing the price caps, such as productivity
measurements, sharing, the common line formula, and exogenous costs. The
Company anticipates the FCC will issue an order prior to the July 1996 annual
filing.
Federal telecommunications legislation has been passed by both the Senate and
House of Representatives. The bills must now be reconciled by the joint
Senate/House conference committee.
In April 1995, GTE filed a motion with the U.S. District Court for the District
of Columbia to remove the 1984 Consent Decree, which restricts the manner in
which the Company can provide interLATA services. GTE believes that the
Consent Decree is no longer required since GTE has since divested its interests
in the entities whose purchase gave rise to the Consent Decree.
REGULATORY ACCOUNTING
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
which may extend beyond the assets' actual economic life. FAS 71 also requires
deferral of certain costs based upon approvals received from regulators to
recover such costs in the future. Consequently, the carrying value of certain
assets and liabilities, primarily telephone plant and equipment, may be greater
than that which would otherwise be recorded by unregulated enterprises.
4
<PAGE> 6
GTE NORTHWEST INCORPORATED AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
In connection with an ongoing review of the continued applicability of FAS 71,
the Company has commenced a study of the economic lives of its telephone plant
and equipment. The study is expected to be completed by the end of the fourth
quarter of 1995. If the Company were to discontinue the application of FAS 71
and compute the effect on its telephone plant and equipment in a manner similar
to the seven Regional Bell Operating Companies which have discontinued FAS 71,
the after-tax charge resulting from the reduction in carrying value of the
Company's property, plant and equipment, which would be non-cash in nature, is
estimated to be between $450 and $600. This potential accounting charge will
have no effect on the Company's customers or its liquidity and capital
resources. Management expects that such a charge, which would be recorded
primarily as a reduction of the net book value of the fixed assets of the
Company, would not significantly affect depreciation expense on existing plant
and equipment in the near future.
5
<PAGE> 7
GTE NORTHWEST INCORPORATED AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------ ------------
(Thousands of Dollars)
<S> <C> <C>
Current assets:
Cash $ 22,597 $ 953
Receivables, less allowances
of $12,371 and $7,745, respectively 173,894 231,884
Materials and supplies 17,680 11,915
Deferred income tax benefits 4,074 7,459
Prepayments and other 15,639 3,922
------------ ------------
Total current assets 233,884 256,133
------------ ------------
Property, plant and equipment:
Original cost 3,082,086 2,989,912
Accumulated depreciation (999,498) (910,694)
------------ ------------
Net property, plant and equipment 2,082,588 2,079,218
------------ ------------
Prepaid pension costs 43,954 29,724
------------ ------------
Other assets 34,968 40,958
------------ ------------
Total assets $ 2,395,394 $ 2,406,033
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements
6
<PAGE> 8
GTE NORTHWEST INCORPORATED AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------ ------------
(Thousands of Dollars)
<S> <C> <C>
Current liabilities:
Short-term debt, including current maturities $ 9,553 $ 58,278
Accounts payable 98,411 106,053
Accrued taxes 38,505 55,845
Accrued payroll and vacations 24,088 17,569
Accrued interest 17,276 13,617
Accrued dividends 55,851 10,693
Accrued restructuring costs and other 106,350 84,903
------------ ------------
Total current liabilities 350,034 346,958
------------ ------------
Long-term debt 657,641 658,040
------------ ------------
Reserves and deferred credits:
Deferred income taxes 344,659 323,415
Employee benefit obligations 41,687 37,956
Restructuring costs and other 43,738 72,368
------------ ------------
Total reserves and deferred credits 430,084 433,739
------------ ------------
Preferred stock, subject to mandatory redemption -- 2,400
------------ ------------
Shareholder's equity:
Common stock 448,000 448,000
Other capital 57,671 57,687
Reinvested earnings 451,964 459,209
------------ ------------
Total shareholder's equity 957,635 964,896
------------ ------------
Total liabilities and shareholders' equity $ 2,395,394 $ 2,406,033
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
7
<PAGE> 9
GTE NORTHWEST INCORPORATED AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------------
1995 1994
------------ ------------
(Thousands of Dollars)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 100,427 $ 71,149
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 149,983 127,948
Deferred income taxes 24,506 21,224
Provision for uncollectible accounts 17,178 5,120
Changes in current assets and current liabilities (1,062) (41,310)
Other-net (4,806) (18,767)
------------ ------------
Net cash from operating activities 286,226 165,364
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (150,201) (179,370)
Other - net -- 2,729
------------ ------------
Net cash used in investing activities (150,201) (176,641)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt issued -- 198,459
Long-term debt and preferred stock retired (13,766) (5,943)
Dividends paid to shareholders (62,515) (28,940)
Decrease in short-term debt (38,100) (153,135)
------------ ------------
Net cash from (used in) financing activities (114,381) 10,441
------------ ------------
Increase (decrease) in cash 21,644 (836)
Cash at beginning of period 953 2,535
------------ ------------
Cash at end of period $ 22,597 $ 1,699
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements
8
<PAGE> 10
GTE NORTHWEST INCORPORATED AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
(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 1994
Annual Report on Form 10-K.
(2) On August 1, 1995, the Company redeemed all outstanding shares of
preferred stock with cash from operations.
(3) 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
which may extend beyond the assets' actual economic life. FAS 71 also requires
deferral of certain costs based upon approvals received from regulators to
recover such costs in the future. Consequently, the carrying value of certain
assets and liabilities, primarily telephone plant and equipment, may be greater
than that which would otherwise be recorded by unregulated enterprises.
In connection with an ongoing review of the continued applicability of FAS 71,
the Company has commenced a study of the economic lives of its telephone plant
and equipment. The study is expected to be completed by the end of the fourth
quarter of 1995. If the Company were to discontinue the application of FAS 71
and compute the effect on its telephone plant and equipment in a manner similar
to the seven Regional Bell Operating Companies which have discontinued FAS 71,
the after-tax charge resulting from the reduction in carrying value of the
Company's property, plant and equipment, which would be non-cash in nature, is
estimated to be between $450 and $600. This potential accounting charge will
have no effect on the Company's customers or its liquidity and capital
resources. Management expects that such a charge, which would be recorded
primarily as a reduction of the net book value of the fixed assets of the
Company, would not significantly affect depreciation expense on existing plant
and equipment in the near future.
(4) Reclassifications of prior year data have been made in the financial
statements where appropriate to conform to the 1995 presentation.
9
<PAGE> 11
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) GTE Northwest Incorporated filed a report on Form 8-K dated
September 28, 1995 on October 2, 1995, under Item 5 "Other
Events". No financial statements were filed with this report.
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 hereunto duly authorized.
GTE NORTHWEST INCORPORATED
----------------------------
(Registrant)
Date: October 31, 1995 William M. Edwards, III
--------------------- ------------------------------------------
William M. Edwards, III
Controller
(Chief Accounting Officer)
11
<PAGE> 13
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1995
<CASH> 22,597
<SECURITIES> 0
<RECEIVABLES> 186,265
<ALLOWANCES> 12,371
<INVENTORY> 17,680
<CURRENT-ASSETS> 233,884
<PP&E> 3,082,086
<DEPRECIATION> 999,498
<TOTAL-ASSETS> 2,395,394
<CURRENT-LIABILITIES> 350,034
<BONDS> 657,641
<COMMON> 448,000
0
0
<OTHER-SE> 509,635
<TOTAL-LIABILITY-AND-EQUITY> 2,395,394
<SALES> 709,287
<TOTAL-REVENUES> 709,287
<CGS> 262,749
<TOTAL-COSTS> 515,321
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40,738
<INCOME-PRETAX> 153,228
<INCOME-TAX> 52,801
<INCOME-CONTINUING> 100,427
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 100,427
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
