<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 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 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)
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
October 31, 1996. 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,
------------------------- --------------------------
1996 1995 1996 1995
------- ------- -------- --------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
REVENUES AND SALES
Local services $104,045 $97,395 $306,461 $284,057
Network access services 96,111 86,683 283,097 261,470
Toll services 29,700 29,260 87,579 88,191
Other services and sales 44,315 41,038 96,639 91,276
------- ------- -------- --------
Total revenues and sales 274,171 254,376 773,776 724,994
------- ------- -------- --------
OPERATING COSTS AND EXPENSES
Costs of services and sales 100,227 88,676 270,365 259,223
Selling, general and administrative 38,433 44,480 106,004 121,822
Depreciation and amortization 51,100 49,589 151,280 149,983
------- ------- -------- --------
Total operating costs and expenses 189,760 182,745 527,649 531,028
------- ------- -------- --------
OPERATING INCOME 84,411 71,631 246,127 193,966
OTHER EXPENSE
Interest - net 13,732 13,750 38,689 40,738
Other - net -- -- 182 --
------- ------- -------- --------
INCOME BEFORE INCOME TAXES 70,679 57,881 207,256 153,228
Income taxes 24,618 20,121 72,812 52,801
------- ------- -------- --------
NET INCOME $46,061 $37,760 $134,444 $100,427
======= ======= ======== ========
</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
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1996 1995
------ ------
<S> <C> <C>
Net income $134.4 $100.4
</TABLE>
Net income increased 34% or $34 for the nine months ended September 30, 1996,
compared to the same period in 1995, primarily due to higher revenues and sales
as well as lower selling, general and administrative costs and lower interest
expense.
Revenues and Sales
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1996 1995
------ ------
<S> <C> <C>
Local services $306.5 $284.1
Network access services 283.1 261.4
Toll services 87.6 88.2
Other services and sales 96.6 91.3
------ ------
Total revenues and sales $773.8 $725.0
</TABLE>
Total revenues and sales increased 7% or $48.8 for the nine months ended
September 30, 1996, compared to the same period in 1995.
Local service revenues increased 8% or $22.4 for the nine months ended September
30, 1996, compared to the same period in 1995. The number of switched access
lines increased 5% for the nine months ended September 30, 1996, which generated
local service revenues of $10.2. The increase also resulted from a $6 growth in
sales of CentraNet(trademark) and custom calling features, such as
SmartCall(trademark), and a $1.8 increase in measured usage service revenues. In
addition, growth in data services, primarily Integrated Services Digital Network
(ISDN) and Digital Channel Services (DCS) that permit rapid transmission of
voice, data, image and text, resulted in an increase in revenues of $2.8.
Network access service revenues increased 8% or $21.7 for the nine months ended
September 30, 1996, compared to the same period in 1995. Minutes of use
increased 10% for the nine months ended September 30, 1996, compared to the
same period in 1995, generating revenues of $16.2. Growth in special access
lines producing additional revenues of $4.9 and an increase in access lines
resulting in higher end user access charge revenues of $2.2 also contributed to
this increase. In addition, revenues increased by $2.5 reflecting the net
effect of the changes in interstate access revenues associated with the Federal
Communications Commission's (FCC) 1995 and 1996 price caps. These increases
were partially offset by $4.8 of lower Universal Service Fund support payments.
Toll service revenues decreased 1% or $0.6 for the nine months ended September
30, 1996, compared to the same period in 1995. Lower revenues resulting from
optional discount calling plans and 10XXX intraLATA toll competition were
effectively offset by an increase in toll volumes. Private line toll revenues
also declined during the period.
2
<PAGE> 4
GTE NORTHWEST INCORPORATED AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
Other services and sales revenues increased 6% or $5.3 for the nine months
ended September 30, 1996, compared to the same period in 1995, primarily
reflecting growth in both private branch exchange phone system sales and the
associated maintenance contracts and in voice messaging revenues. These
increases are partially offset by intraLATA settlements with other
local-exchange carriers (LEC) for billing and collection services recorded in
the second quarter of 1995.
Operating Costs and Expenses
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1996 1995
------ ------
<S> <C> <C>
Total operating costs and expenses $527.6 $531.0
</TABLE>
Total operating costs and expenses decreased 1% or $3.4 for the nine months
ended September 30, 1996, compared to the same period in 1995. The decrease is
primarily driven by an $8.2 reduction in labor and benefit costs associated
with productivity gains from process re-engineering and other cost containment
programs. The decrease also resulted from a $4.9 decrease in access charges
incurred to terminate customers' intraLATA toll calls outside of the Company's
service territory and a $3.8 reduction in end-user uncollectibles. In
addition, the impact of $2.5 in pension settlement gains recorded in the second
quarter of 1995 was offset by settlement gains of $3.1 recorded in the first
quarter of 1996, which resulted from lump-sum payments from the Company's
pension plans. These decreases were offset by an $18 reserve recorded in the
third quarter of 1996, for potential business and occupational tax settlements
covering the period from January 1, 1989 to June 30, 1992 and a $1.3 reserve,
also recorded during the third quarter of 1996, for inside wire maintenance
costs, which are both discussed in Other Matters.
Other Expense
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1996 1995
------ ------
<S> <C> <C>
Interest - net $38.7 $40.7
Income taxes 72.8 52.8
</TABLE>
Interest - net decreased 5% or $2 for the nine months ended September 30, 1996,
compared to the same period in 1995, primarily due to the favorable effects of
the long-term debt refinancing program completed in June 1996.
Income taxes increased 38% or $20 for the nine months ended September 30, 1996,
compared to the same period in 1995, primarily due to a corresponding increase
in pre-tax income.
3
<PAGE> 5
GTE NORTHWEST INCORPORATED AND SUBSIDIARY
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 $22.3 have been incurred, including $17.6 to
re-engineer customer service processes and $4.7 to re-engineer administrative
processes. Since the plan's inception at the beginning of 1994, costs of
approximately $83 have been incurred, including $59.7 to re-engineer customer
service processes and $12.2 to re-engineer administrative processes. The
restructuring costs also include $11.1 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, $42 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 Oregon and Washington. Arbitration hearings began in
October 1996 to determine the prices and terms of unresolved issues. State
commission decisions are expected to be issued over a period extending through
the first quarter of 1997.
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 4.0% to 5.3% for its Washington (GTE)
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 $0.9, effective July 1, 1996.
4
<PAGE> 6
GTE NORTHWEST INCORPORATED AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
The Company's intrastate business is regulated by the state regulatory
commissions in California, Idaho, Oregon and Washington.
In September 1995, the Company filed to merge the local tariffs of GTE
Northwest and former Contel of the Northwest and to make certain changes in its
prices and service offerings. In 1996, the Washington Utility and
Transportation Commission (WUTC) approved the filing allowing rate increases
for some services and decreases for others resulting in a favorable annual
revenue impact of $2.2.
Since 1990, the Oregon commission has been reviewing the cost structure of
Oregon telecommunications services to determine if network elements should be
unbundled to respond to emerging competition in the telecommunications markets.
On July 19, 1996, the Oregon commission issued an Order in this proceeding
which ordered the unbundling of more than two hundred network elements.
Pricing for the rate elements was established in the Order which, in most
cases, includes a contribution to joint and common costs. Tariff prices for
existing bundled services were not changed by the Order. On September 23,
1996, the Company filed for clarification, reconsideration and rehearing of the
Commission's Order. The Company's filing is based on various unresolved legal,
operational and pricing issues as well as the numerous ongoing interconnection
negotiations that are in progress in Oregon.
In September 1996, representatives from the Company and the State of Washington
met to discuss issues identified in business and occupational tax audits
covering the period from January 1, 1989 to June 30, 1992. These audit issues
are unresolved at this time. However, an $18 reserve was established by the
Company in September 1996, as a contingency for tax payments related to these
issues.
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.
In 1996, GTE, through a separate subsidiary, began offering long distance
service to its customers in selected states, including California, Idaho and
Washington, 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 NORTHWEST INCORPORATED AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
(Thousands of Dollars)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and temporary investments $ 1,111 $ 16,310
Receivables, less allowances of $15,545 and $13,268 219,691 213,470
Inventories and supplies 19,736 11,882
Deferred income tax benefits 8,777 14,626
Other 11,245 6,677
------------ -----------
Total current assets 260,560 262,965
------------ -----------
PROPERTY, PLANT AND EQUIPMENT, at cost 3,202,010 3,118,259
Accumulated depreciation (2,026,456) (1,924,141)
------------ -----------
Total property, plant and equipment, net 1,175,554 1,194,118
------------ -----------
OTHER ASSETS, primarily employee benefit plans 74,241 50,679
------------ -----------
Total assets $ 1,510,355 $ 1,507,762
============ ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Short-term obligations, including current maturities $ 26,182 $ 48,994
Accounts payable 52,366 87,118
Taxes payable 30,285 31,164
Accrued interest 16,853 10,008
Accrued payroll costs 21,599 27,220
Dividends payable 48,005 19,140
Accrued restructuring costs 41,954 64,315
Other 81,281 57,354
------------ -----------
Total current liabilities 318,525 345,313
------------ -----------
Long-term debt 697,177 684,017
Deferred income taxes 34,464 18,789
Other liabilities 63,372 52,556
------------ -----------
Total liabilities 1,113,538 1,100,675
------------ -----------
SHAREHOLDER'S EQUITY:
Common stock (17,920,000 shares issued) 448,000 448,000
Additional paid-in capital 57,671 57,671
Retained deficit (108,854) (98,584)
------------ -----------
Total shareholder's equity 396,817 407,087
------------ -----------
Total liabilities and shareholder's equity $ 1,510,355 $ 1,507,762
============ ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE> 8
GTE NORTHWEST INCORPORATED AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------------
1996 1995
--------- ---------
(Thousands of Dollars)
<S> <C> <C>
OPERATIONS
Net income $ 134,444 $ 100,427
Adjustments to reconcile net income
to net cash from operations:
Depreciation and amortization 151,280 149,983
Deferred income taxes 27,435 24,506
Provision for uncollectible accounts 12,612 17,178
Change in current assets and current liabilities (68,754) (1,062)
Other - net (16,349) (4,806)
--------- ---------
Net cash from operations 240,668 286,226
--------- ---------
INVESTING
Capital expenditures (130,848) (150,201)
Other - net 1,724 --
--------- ---------
Net cash used in investing (129,124) (150,201)
--------- ---------
FINANCING
Long-term debt issued 171,656 --
Long-term debt retired (2,221) (13,766)
Dividends (115,849) (62,515)
Decrease in short-term obligations, excluding current maturities (197,797) (38,100)
Other - net 17,468 --
--------- ---------
Net cash used in financing (126,743) (114,381)
--------- ---------
Increase (decrease) in cash and temporary investments (15,199) 21,644
Cash and temporary investments:
Beginning of period 16,310 953
--------- ---------
End of period $ 1,111 $ 22,597
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
7
<PAGE> 9
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 period.
These condensed consolidated 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) The Company issued $175 million of 7 7/8% debentures in June 1996 to
refinance the debt called and redeemed in the fourth quarter of 1995.
During 1995, the Company entered into forward contracts to sell $175
million of U.S. Treasury bonds in order to hedge against future
changes in market interest rates related to the debt the Company
called and redeemed in the fourth quarter of 1995, and refinanced in
June 1996. A gain of approximately $17 million occurred upon the
settlement of the forward contracts and will be amortized over the
life of the associated refinanced debt as an offset to interest
expense.
(3) Reclassifications of prior year data have been made, where
appropriate, to conform to the 1996 presentation.
8
<PAGE> 10
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 Consolidated 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.
9
<PAGE> 11
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 Northwest Incorporated
------------------------------
(Registrant)
Date: November 13, 1996 William M. Edwards, III
----------------- ------------------------------
William M. Edwards, III
Vice President - Controller
(Principal Accounting Officer)
10
<PAGE> 12
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
--------- -----------------------------------------------------
<S> <C>
12 Statement re: Calculation of the Consolidated Ratio
of Earnings to Fixed Charges
27 Financial Data Schedule
</TABLE>
<PAGE> 1
Exhibit 12
GTE NORTHWEST INCORPORATED AND SUBSIDIARY
STATEMENT OF THE CONSOLIDATED 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 $134,444
Add - Income taxes 72,812
- Fixed charges 42,215
--------
Adjusted earnings $249,471
========
Fixed charges:
Interest expense $ 39,531
Portion of rent expense
representing interest 2,684
--------
Adjusted fixed charges $ 42,215
========
RATIO OF EARNINGS TO FIXED CHARGES 5.91
</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> 1,111
<SECURITIES> 0
<RECEIVABLES> 235,236
<ALLOWANCES> 15,545
<INVENTORY> 19,736
<CURRENT-ASSETS> 260,560
<PP&E> 3,202,010
<DEPRECIATION> 2,026,456
<TOTAL-ASSETS> 1,510,355
<CURRENT-LIABILITIES> 318,525
<BONDS> 697,177
0
0
<COMMON> 448,000
<OTHER-SE> (51,183)
<TOTAL-LIABILITY-AND-EQUITY> 1,510,355
<SALES> 773,776
<TOTAL-REVENUES> 773,776
<CGS> 270,365
<TOTAL-COSTS> 527,649
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 182
<INTEREST-EXPENSE> 38,689
<INCOME-PRETAX> 207,256
<INCOME-TAX> 72,812
<INCOME-CONTINUING> 134,444
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 134,444
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
