<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, 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 214-718-5600
(Former name, former address and formal 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, 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 Six Months Ended
June 30, June 30,
-------------------------- --------------------------
1996 1995 1996 1995
-------- -------- -------- --------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
REVENUES AND SALES:
Local services $102,001 $ 94,722 $202,416 $186,662
Network access services 98,506 87,242 186,986 174,787
Toll services 27,928 29,558 57,879 58,931
Other services and sales 24,288 27,364 52,324 50,238
-------- -------- -------- --------
Total revenues and sales 252,723 238,886 499,605 470,618
-------- -------- -------- --------
OPERATING COSTS AND EXPENSES:
Costs of services and sales 78,760 85,741 170,138 170,547
Selling, general and administrative 41,773 39,280 67,571 77,342
Depreciation and amortization 50,516 48,970 100,180 100,394
-------- -------- -------- --------
Total operating costs and expenses 171,049 173,991 337,889 348,283
-------- -------- -------- --------
OPERATING INCOME 81,674 64,895 161,716 122,335
OTHER (INCOME) EXPENSES:
Interest - net 12,432 13,444 24,957 26,988
Other - net -- -- 182 --
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 69,242 51,451 136,577 95,347
Income taxes 24,346 17,326 48,194 32,680
-------- -------- -------- --------
NET INCOME $ 44,896 $ 34,125 $ 88,383 $ 62,667
======== ======== ======== ========
</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>
Six Months Ended
June 30,
-----------------------
1996 1995
----- -----
<S> <C> <C>
Net income $88.4 $62.7
</TABLE>
Net income increased 41% or $25.7 for the six months ended June 30, 1996,
compared to the same period in 1995, primarily due to higher revenues and sales
and lower operating costs and expenses.
Revenues and Sales
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------
1996 1995
------ ------
<S> <C> <C>
Local services $202.4 $186.7
Network access services 187.0 174.8
Toll services 57.9 58.9
Other services and sales 52.3 50.2
------ ------
Total revenues and sales $499.6 $470.6
</TABLE>
Total revenues and sales increased 6% or $29 for the six months ended June 30,
1996, compared to the same period in 1995.
Local service revenues increased 8% or $15.7 for the six months ended June 30,
1996, compared to the same period in 1995. The number of switched access lines
increased 6% for the six months ended June 30, 1996, which generated $7.3 of
additional revenues. This increase also reflects a $3.9 growth in sales of
CentraNet(R) and custom calling features, such as SmartCall(R), and an increase
in measured usage service revenues of $2.6. In addition, the increase includes
growth of $2.2 in data services, primarily Integrated Services Digital Network
(ISDN) and Digital Channel Services (DCS), that permit rapid transmission of
voice, data, image and text.
Network access service revenues increased 7% or $12.2 for the six months ended
June 30, 1996, compared to the same period in 1995. Minutes of use increased
10% for the six months ended June 30, 1996, compared to the same period in
1995, which generated $10.1 of additional revenues. The increase also reflects
growth in special access lines which generated additional revenues of $3 and
higher end user access charge revenues of $1.8 corresponding to the increase in
access lines. These increases were partially offset by reductions in revenues
of $2.3 reflecting the net effect of the changes in interstate access revenues
associated with the Federal Communication Commission's (FCC) price cap and $3.5
of lower Universal Service Fund support payments.
2
<PAGE> 4
GTE NORTHWEST INCORPORATED AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
Toll service revenues decreased 2% or $1 for the six months ended June 30,
1996, compared to the same period in 1995. Lower revenues resulting from
optional discount calling plans and from 10XXX intraLATA toll competition were
effectively offset by an increase in toll volumes. Private line toll revenues
also declined during the period.
Other services and sales revenues increased 4% or $2.1 for the six months ended
June 30, 1996, compared to the same period in 1995, primarily reflecting growth
in private branch exchange phone system sales and the associated maintenance
contracts and growth in voice messaging revenues. These increases are
partially offset by intraLATA settlements for billing and collection services
recorded in the second quarter of 1995.
Operating Costs and Expenses
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------
1996 1995
------ ------
<S> <C> <C>
Total operating costs and expenses $337.9 $348.3
</TABLE>
Total operating costs and expenses decreased 3% or $10.4 for the six months
ended June 30, 1996, compared to the same period in 1995. The decrease is
primarily due to a $4.6 decrease in access charges incurred by the Company to
terminate its customers' intraLATA toll calls outside of the Company's service
territory. The decrease is also attributable to lower labor and benefit costs
of $4.5 associated with ongoing cost-reduction programs from process
re-engineering activities. The impact of $2.5 in pension settlement gains
recorded in the second quarter of 1995 was partially 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.
Income Taxes
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------
1996 1995
----- -----
<S> <C> <C>
Income taxes $48.2 $32.7
</TABLE>
Income taxes increased 47% or $15.5 for the six months ended June 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 six months of
1996, costs of approximately $16.5 have been incurred, including $12.7 to
re-engineer customer service processes and $3.8 to re-engineer administrative
processes. Since the plan's inception at the beginning of 1994, costs of
approximately $77.2 have been incurred, including $54.8 to re-engineer customer
service processes and $11.3 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 June 30, 1996, $47.8 remains in the restructuring reserve which
management believes is adequate to cover future expenditures.
On August 1, 1996, the Federal Communications Commission (FCC) voted to release
its 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). The terms of the FCC's
Report and Order (Order) were published on August 8, 1996, and GTE is in the
process of reviewing the Order.
The Order acknowledges that the Telecommunications Act calls for negotiation of
terms and prices for Competitive Entry Terms between the local-exchange carrier
(LEC) and the competing carriers. The Order, among other things, prescribes
the rules for interconnection of a LEC's facilities with those of carriers
competing in the local-exchange market and the pricing methodology to be used
by states in establishing interconnection rates. The FCC methodology calls for
the states to use forward-looking costs defined as Total Element Long Run
Incremental Cost (TELRIC), including a reasonable amount of forward-looking
joint and common costs. State regulatory commissions are to establish the
appropriate prices based on this methodology. The FCC also identified network
elements to be unbundled and priced by the states using the same TELRIC plus
reasonable joint and common costs. Proxy prices for the various network
elements are set out and may be used by states which have not approved cost
studies by statutory deadlines for completing any arbitration of issues
unresolved by negotiation between the LEC and other carriers. Access to the
unbundled elements are to be at technically feasible points.
Additionally, the Order mandated use of a method of determining a LEC's avoided
costs for purposes of resale rates. States are to determine the specific rates
using this methodology but, on an interim basis, may instead elect to use a
default range of rates established by the FCC. The default discount rates
range from 17% - 25% off retail rates.
To continue to support universal service, the FCC established a temporary
access framework. A competitor purchasing local service for resale or
providing only long distance service must pay full current access rates. If
unbundled local switching is purchased, the competitor must pay 75% of the
existing Transport Interconnection Charge and all of the existing Carrier
Common Line Charge. A competitor providing its own switching facility pays no
access charges even if it purchases an unbundled loop from a LEC.
The Order also provides for mutual compensation for interconnection but
presumes calling will be balanced and permits "bill and keep" arrangements. If
the LEC demonstrates calling is not balanced, interconnection prices are to be
set by the state for both carriers at the LEC's forward-looking costs.
GTE is still reviewing the impact of the approximately 700-page Order. In
addition, the FCC is scheduled to release additional rules relating to
universal service and access charge reform in the second quarter of 1997.
Until all the rules have been issued, it is difficult to determine the effect
on GTE. However, GTE has concerns about the Order as it relates to the ability
of a local-exchange carrier to recover all of its present costs from its
ongoing retail customers and the wholesale prices to be set by state regulatory
agencies pursuant to the FCC's guidelines.
GTE plans to appeal various aspects of the Order. Although it is too early to
determine the impact of these rules, GTE believes that, if implemented as
contained in the Order, they may advantage new entrants and competitors in a
LEC's territory. Thus, while the Order may contribute to some market erosion in
GTE's franchised territories, it may also advantage GTE outside of its
franchised territory.
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(SM). GTE plans to
offer this service in all 28 states where it currently offers local telephone
service by December 1996.
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 local-exchange carriers
(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.
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, or
building blocks, 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 over two hundred
building blocks. Pricing for the rate elements was established in the order
which, in most cases, include a contribution to joint and common costs. Tariff
prices for existing bundled services were not changed by the order. The
revenue impacts are not known at this time.
4
<PAGE> 6
GTE NORTHWEST INCORPORATED AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
------------ ------------
(Thousands of Dollars)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and temporary investments $ 23,721 $ 16,310
Receivables, less allowances of $12,901 and $13,268 242,492 213,470
Inventories and supplies 18,725 11,882
Deferred income tax benefits 7,453 14,626
Other 7,034 6,677
------------ ------------
Total current assets 299,425 262,965
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, at cost 3,162,197 3,118,259
Accumulated depreciation (1,985,011) (1,924,141)
------------ ------------
Total property, plant and equipment, net 1,177,186 1,194,118
------------ ------------
OTHER ASSETS, primarily employee benefit plans 64,783 50,679
------------ ------------
Total assets $ 1,541,394 $ 1,507,762
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Short-term obligations, including current maturities $ 67,782 $ 48,994
Accounts payable 85,078 87,118
Taxes payable 30,648 31,164
Accrued interest 10,589 10,008
Accrued payroll costs 19,686 27,220
Dividends payable 39,692 19,140
Accrued restructuring costs 47,759 64,315
Other 52,977 57,354
------------ ------------
Total current liabilities 354,211 345,313
------------ ------------
NON-CURRENT LIABILITIES:
Long-term debt 697,995 684,017
Deferred income taxes 26,954 18,789
Other liabilities 63,473 52,556
------------ ------------
Total non-current liabilities 788,422 755,362
------------ ------------
SHAREHOLDER'S EQUITY:
Common stock (17,920,000 shares issued) 448,000 448,000
Additional paid-in capital 57,671 57,671
Retained deficit (106,910) (98,584)
------------ ------------
Total shareholder's equity 398,761 407,087
------------ ------------
Total liabilities and shareholder's equity $ 1,541,394 $ 1,507,762
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE> 7
GTE NORTHWEST INCORPORATED AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------------------
1996 1995
------------ -------------
(Thousands of Dollars)
<S> <C> <C>
OPERATIONS:
Net income $ 88,383 $ 62,667
Adjustments to reconcile net income
to net cash from operations:
Depreciation and amortization 100,180 100,394
Deferred income taxes 15,338 16,349
Provision for uncollectible accounts 7,706 7,900
Changes in current assets and current liabilities (73,117) (9,167)
Other - net (4,940) (8,586)
------------ -------------
Net cash from operations 133,550 169,557
------------ -------------
INVESTING:
Capital expenditures (82,529) (95,131)
Other - net 959 26
------------ -------------
Net cash used in investing (81,570) (95,105)
------------ -------------
FINANCING:
Long-term debt issued 171,656 --
Long-term debt retired (1,339) (12,805)
Dividends (76,157) (41,018)
Decrease in short-term obligations, excluding current maturities (156,197) (1,638)
Other - net 17,468 --
------------ -------------
Net cash used in financing (44,569) (55,461)
------------ -------------
Increase in cash and temporary investments 7,411 18,991
Cash and temporary investments:
Beginning of period 16,310 953
------------ -------------
End of period $ 23,721 $ 19,944
============ =============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE> 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 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.
7
<PAGE> 9
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 second
quarter of 1996.
8
<PAGE> 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, thereunto duly authorized.
GTE Northwest Incorporated
-----------------------------
(Registrant)
Date: August 14, 1996 William M. Edwards, III
--------------- ------------------------------
William M. Edwards, III
Vice President - Controller
(Principal Accounting Officer)
9
<PAGE> 11
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>
Six Months Ended
June 30, 1996
----------------
<S> <C>
Net earnings available for fixed charges:
Income from continuing operations $ 88,383
Add - Income taxes 48,194
- Fixed charges 26,882
--------
Adjusted earnings $163,459
========
Fixed charges:
Interest expense $ 25,478
Portion of rent expense
representing interest 1,404
--------
Adjusted fixed charges $ 26,882
========
RATIO OF EARNINGS TO FIXED CHARGES 6.08
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 23,721
<SECURITIES> 0
<RECEIVABLES> 255,393
<ALLOWANCES> 12,901
<INVENTORY> 18,725
<CURRENT-ASSETS> 299,425
<PP&E> 3,162,197
<DEPRECIATION> 1,985,011
<TOTAL-ASSETS> 1,541,394
<CURRENT-LIABILITIES> 354,211
<BONDS> 697,995
<COMMON> 448,000
0
0
<OTHER-SE> (49,239)
<TOTAL-LIABILITY-AND-EQUITY> 1,541,394
<SALES> 499,605
<TOTAL-REVENUES> 499,605
<CGS> 170,138
<TOTAL-COSTS> 337,889
<OTHER-EXPENSES> 182
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,957
<INCOME-PRETAX> 136,577
<INCOME-TAX> 48,194
<INCOME-CONTINUING> 88,383
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 88,383
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
