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 June 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.)
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)
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 July 31, 1995. The Company's common stock is 100% owned by GTE
Corporation.
<TABLE>
PART I. FINANCIAL INFORMATION
GTE NORTHWEST INCORPORATED AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
(Thousands of Dollars)
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Local network services $ 94,722 $ 84,920 $ 186,662 $ 168,911
Network access services 87,242 97,669 174,787 195,854
Long distance services 29,558 8,900 58,931 12,555
Equipment sales and services 19,591 16,169 34,456 30,612
Other 3,861 16,611 8,404 27,311
234,974 224,269 463,240 435,243
OPERATING EXPENSES:
Cost of sales and services 48,773 53,316 98,489 101,437
Depreciation and amortization 48,970 42,824 100,394 84,574
Marketing, selling, general
and administrative 71,650 73,045 141,098 146,575
169,393 169,185 339,981 332,586
Net operating income 65,581 55,084 123,259 102,657
OTHER (INCOME) DEDUCTIONS:
Interest expense 13,946 13,129 27,910 23,980
Other - net 184 (99) 2 (1,663)
INCOME BEFORE INCOME TAXES 51,451 42,054 95,347 80,340
INCOME TAXES 17,326 15,578 32,680 29,733
NET INCOME $ 34,125 $ 26,476 $ 62,667 $ 50,607
</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
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 $62.7 and $50.6 for the six months ended June 30, 1995 and
1994, respectively, reflecting an increase of 24% or $12.1. 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 $463.2 and $435.2 for the six months ended
June 30, 1995 and 1994, respectively, reflecting an increase of 6% or $28.0.
Local network services revenues were $186.7 and $168.9 for the six months
ended June 30, 1995 and 1994, respectively, reflecting an increase of 11%
or $17.8. The increase is primarily due to continued customer growth as
reflected by a 5% increase in access lines, which generated additional
revenues of $6.6, and $3.7 of growth in extended area service revenue.
The increase is also due to $2.2 in higher installation revenues and a
$5.4 growth in sales of custom calling features (e.g. SmartCall
(Trademark), CLASS services, etc.), CentraNet (Trademark) 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 area rates in Oregon.
Network access services revenues were $174.8 and $195.9 for the six months
ended June 30, 1995 and 1994, respectively, reflecting a decrease of 11% or
$21.1. The decrease is primarily due to a $26.7 reduction in access
revenues associated with the conversion by Oregon and Washington in May 24,
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). 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 a decrease of $3.9 associated with
rate reductions. These decreases are partially offset by a 12.1% increase
in minutes of use which generated additional revenues of $11.7.
Long distance services revenues were $58.9 and $12.6 for the six months
ended June 30, 1995 and 1994, respectively, reflecting an increase of
$46.3. The increase is primarily due to a $50.2 increase in intraLATA toll
revenues due to conversion to the PTC plan mentioned above.
2
GTE NORTHWEST INCORPORATED AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Equipment sales and services revenues were $34.5 and $30.6 for the six
months ended June 30, 1995 and 1994, respectively, reflecting an increase
of 13% or $3.9. The increase is primarily associated with higher revenues
of $2.2 related to the settlement of certain interstate billing and
collection activities and a $1.3 growth in voice messaging revenues.
Other operating revenues were $8.4 and $27.3 for the six months ended
June 30, 1995 and 1994, respectively, reflecting a decrease of 69% or $18.9.
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 $6.0 decrease in directory advertising revenues attributable to the
timing of directory publications.
OPERATING EXPENSES
Operating expenses were $340.0 and $332.6 for the six months ended
June 30, 1995 and 1994, respectively, reflecting an increase of 2% or $7.4.
The increase is primarily due to $9.0 in higher access charges associated
with the transition to the PTC plan and an increase in depreciation and
amortization, primarily related to rate adjustments of $9.2 in Oregon and
Washington. These increases were partially offset by $3.2 in lower data
processing costs, a $4.6 decline in software 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 was $27.9 and $24.0 for the six months ended June 30, 1995
and 1994, respectively, reflecting an increase of 16% or $3.9. The
increase is primarily due to higher average long-term debt levels for the
first six months of 1995 compared to the same period in 1994.
Income taxes were $32.7 and $29.7 for the six months ended June 30, 1995
and 1994, respectively, reflecting an increase of 10% or $3.0. 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.
3
GTE NORTHWEST INCORPORATED AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Implementation of the re-engineering plan began during 1994 and is expected
to be completed by the end of 1996. Expenditures of $41.8 have been made
since inception of the re-engineering plan, including $16.3 during the
first six months of 1995. These expenditures were primarily associated
with the consolidation of customer contact, network operations and operator
service centers, separation benefits from employee 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 June 30, 1995, $83.2 remains in the
restructuring reserve, of which $36.8 is classified as a current liability.
Management believes the reserve is adequate to cover future expenditures.
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 reflected 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:
Tariff Productivity Sharing Parameters
Entity Factor 50% 100%
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)
Since the Company's access fees are 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
tarrifs effective August 1, 1995 under the interim rules to reduce rates
$17.2, annually. The FCC is continuing to consider how the price cap plan
should be modified in order to adapt the system to the emergence of
competition.
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.
4
GTE NORTHWEST INCORPORATED AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
REGULATORY ACCOUNTING
The Company follows the accounting for regulated enterprises prescribed by
SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation."
In general, SFAS No. 71 requires companies to depreciate plant and
equipment over lives approved by regulators which may extend beyond the
assets' actual economic and technological lives. SFAS No. 71 also requires
deferral of certain costs and obligations based upon approvals received
from regulators to permit recovery in the future. Consequently, the
recorded net book value of certain assets and liabilities, primarily
telephone plant and equipment, may be greater than that which would
otherwise be recorded by unregulated enterprises. On an ongoing basis,
the Company reviews the continued applicability of SFAS No. 71 based on
the current regulatory and competitive environment. Although recent
developments suggest that the telecommunications industry will become
increasingly competitive, the degree to which regulatory oversight of LECs,
including the Company, will be lifted and competition will be permitted to
establish the cost of service to the consumer is uncertain. As a result,
the Company continues to believe that accounting under SFAS No. 71 is
appropriate. If the Company were to determine that the use of SFAS No. 71
was no longer appropriate, it would be required to write-off the deferred
costs and obligations referred to above. It may also be necessary for the
Company to reduce the carrying value of its plant and equipment to the
extent that it exceeds fair market value. At this time, it is not possible
to estimate the amount of the Company's plant and equipment, if any, that
would be considered unrecoverable in such circumstances. The financial
impact of such a determination, however, which would be non-cash, could be
material.
5
GTE NORTHWEST INCORPORATED AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, December 31,
1995 1994
(Thousands of Dollars)
CURRENT ASSETS:
Cash $ 19,944 $ 953
Receivables, less allowances
of $6,321 and $7,745, respectively 184,779 231,884
Materials and supplies 12,742 11,915
Deferred income tax benefits 5,215 7,459
Prepayments and other 11,627 3,922
Total current assets 234,307 256,133
PROPERTY, PLANT AND EQUIPMENT:
Original cost 3,051,810 2,989,912
Accumulated depreciation (975,866) (910,694)
Net property, plant and equipment 2,075,944 2,079,218
OTHER ASSETS 79,628 70,682
TOTAL ASSETS $ 2,389,879 $ 2,406,033
See Notes to Condensed Consolidated Financial Statements.
6
GTE NORTHWEST INCORPORATED AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
June 30, December 31,
1995 1994
(Thousands of Dollars)
CURRENT LIABILITIES:
Short-term debt, including current maturities $ 46,235 $ 58,278
Accounts payable 90,175 106,053
Accrued taxes 34,098 55,845
Accrued payroll and vacations 28,996 17,569
Accrued interest 13,287 13,617
Accrued dividends 21,492 10,693
Accrued restructuring costs and other 90,833 84,903
Total current liabilities 325,116 346,958
LONG-TERM DEBT 658,256 658,040
RESERVES AND DEFERRED CREDITS:
Deferred income taxes 337,606 323,415
Employee benefit obligations 39,471 37,956
Restructuring costs and other 53,685 72,368
Total reserves and deferred credits 430,762 433,739
PREFERRED STOCK, subject to
mandatory redemption -- 2,400
SHAREHOLDER'S EQUITY:
Common stock 448,000 448,000
Other capital 57,687 57,687
Reinvested earnings 470,058 459,209
Total shareholder's equity 975,745 964,896
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,389,879 $ 2,406,033
See Notes to Condensed Consolidated Financial Statements.
7
GTE NORTHWEST INCORPORATED AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
1995 1994
(Thousands of Dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 62,667 $ 50,607
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation and amortization 100,394 84,574
Deferred income taxes and investment
tax credits 16,349 14,446
Provision for uncollectible accounts 7,900 2,149
Changes in current assets and
current liabilities (9,167) (19,686)
Other - net (8,586) (9,528)
Net cash from operating activities 169,557 122,562
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (95,131) (124,701)
Other - net 26 425
Net cash used in investing activities (95,105) (124,276)
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt issued -- 200,460
Long-term debt and preferred stock retired (12,805) (3,948)
Dividends paid to shareholders (41,018) (13,769)
Decrease in short-term debt (1,638) (164,711)
Net cash from (used in) financing
activities (55,461) 18,032
Increase in cash 18,991 16,318
Cash at beginning of period 953 2,535
Cash at end of period $ 19,944 $ 18,853
See Notes to Condensed Consolidated Financial Statements.
8
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 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) Reclassifications of prior year data have been made in the financial
statements where appropriate to conform to the 1995 presentation.
9
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
second quarter of 1995.
10
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: August 8, 1995 WILLIAM M. EDWARDS, III
WILLIAM M. EDWARDS, III
Controller
(Chief Accounting Officer)
11
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> JUN-30-1995
<CASH> 19,944
<SECURITIES> 0
<RECEIVABLES> 191,100
<ALLOWANCES> 6,321
<INVENTORY> 12,742
<CURRENT-ASSETS> 234,307
<PP&E> 3,051,810
<DEPRECIATION> 975,866
<TOTAL-ASSETS> 2,389,879
<CURRENT-LIABILITIES> 325,116
<BONDS> 658,256
<COMMON> 448,000
0
0
<OTHER-SE> 527,745
<TOTAL-LIABILITY-AND-EQUITY> 2,389,879
<SALES> 463,240
<TOTAL-REVENUES> 463,240
<CGS> 98,489
<TOTAL-COSTS> 339,981
<OTHER-EXPENSES> 2
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,910
<INCOME-PRETAX> 95,347
<INCOME-TAX> 32,680
<INCOME-CONTINUING> 62,667
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 62,667
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
