<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, 1997
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
July 31, 1997. 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,
-------------------------- --------------------------
1997 1996 1997 1996
-------- -------- -------- --------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
REVENUES AND SALES
Local services $107,775 $100,505 $215,427 $199,413
Network access services 105,545 98,506 203,100 186,986
Toll services 27,806 27,928 55,977 57,879
Other services and sales 28,355 25,784 58,726 55,327
-------- -------- -------- --------
Total revenues and sales 269,481 252,723 533,230 499,605
-------- -------- -------- --------
OPERATING COSTS AND EXPENSES
Costs of services and sales 86,851 78,760 176,182 170,138
Selling, general and administrative 38,005 41,773 75,568 67,571
Depreciation and amortization 52,919 50,516 106,638 100,180
-------- -------- -------- --------
Total operating costs and expenses 177,775 171,049 358,388 337,889
-------- -------- -------- --------
OPERATING INCOME 91,706 81,674 174,842 161,716
OTHER (INCOME) EXPENSE
Interest - net 13,615 12,432 27,112 24,957
Gain on disposition of assets -- -- (5,101) --
Other - net 226 -- 226 182
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 77,865 69,242 152,605 136,577
Income taxes 27,852 24,346 54,525 48,194
-------- -------- -------- --------
NET INCOME $ 50,013 $ 44,896 $ 98,080 $ 88,383
======== ======== ======== ========
</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,
----------------------
1997 1996
---- ----
<S> <C> <C>
Net income $98.1 $88.4
</TABLE>
Net income increased 11% or $9.7 for the six months ended June 30, 1997,
compared to the same period in 1996. The increase is largely the result of
higher revenues from local and network access services along with a $3.3
after-tax gain on the sale of assets, partially offset by an increase in
operating costs and expenses.
REVENUES AND SALES
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------
1997 1996
------ ------
<S> <C> <C>
Local services $215.4 $199.4
Network access services 203.1 187.0
Toll services 56.0 57.9
Other services and sales 58.7 55.3
------ ------
Total revenues and sales $533.2 $499.6
</TABLE>
Total revenues and sales increased 7% or $33.6 during the first half of 1997,
compared to the same period in 1996.
Local service revenues increased 8% or $16 through the first six months of
1997, compared to the same period in 1996, primarily due to access line growth
and demand for custom calling features and other enhanced services. The number
of access lines grew by 6% which resulted in additional revenues of $5.8.
Revenues from SmartCall(R) and CLASS services grew by $5.7 for the period,
driven by demand for custom calling features such as Caller ID and automatic
call return/redial. Revenues from CentraNet(R) and digital services, such as
Integrated Services Digital Network (ISDN) and Digital Channel Services (DCS),
also contributed a combined $4.6 toward the increase.
Network access service revenues increased 9% or $16.1 for the six months ended
June 30, 1997, compared to the same period in 1996, largely due to increased
demand for access services by interexchange carriers and customer demand for
increased bandwidth services. A 14% increase in minutes of use resulted in
$16.4 of additional access revenues while growth in demand for increased
bandwidth services caused special access revenues to grow by $6.6. The
increase also reflects $4.7 of higher support payments received from the
National Exchange Carrier Association (NECA). The year-to-date increase is
partially offset by an $8.4 decline in revenues associated with the sharing
provisions and rate changes of the Federal Communication Commission's (FCC)
1996 price cap. The increase is also offset by a $3 decrease in revenues
relating to the Company's authorization in January 1997 to operate as the
Primary Toll Carrier (PTC) for certain jurisdictions in Washington and Oregon,
as described in Other Matters.
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 3% or $1.9 for the six months ended June 30,
1997, compared to the same period in 1996. The decrease is primarily due to
lower toll volumes resulting from intraLATA (local access transport area) toll
competition, including 10XXX and 1+ presubscription, partially offset by $4.4
in favorable toll settlements related to the Company's new PTC status mentioned
above.
Other services and sales increased 6% or $3.4 through the first six months of
1997, compared to the same period in 1996, as revenues from voice messaging and
radio paging services grew by $2.3. Revenues from billing and collection
services increased $1.1.
OPERATING COSTS AND EXPENSES
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------
1997 1996
---- ----
<S> <C> <C>
Total operating costs and expenses $358.4 $337.9
</TABLE>
Total operating costs and expenses increased 6% or $20.5 through the first half
of 1997, compared to the same period in 1996. The increase is primarily due to
$9.2 in higher selling and marketing costs, including $3.6 from an increase in
advertising expenses. The increase also includes $2.9 from access charges
incurred to terminate customers' intraLATA toll calls outside the Company's
service territory, $2.8 from higher general operating taxes, and $6.4 from
increased depreciation expense associated with additions to plant balances.
OTHER (INCOME) EXPENSE
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------
1997 1996
------ ------
<S> <C> <C>
Interest - net $27.1 $25.0
Gain on disposition of assets (5.1) --
Income taxes 54.5 48.2
</TABLE>
Interest - net increased 8% or $2.1 for the six months ended June 30, 1997,
compared to the same period in 1996, primarily due to higher average short-term
debt levels.
In the first quarter of 1997, the Company recorded a $5.1 pre-tax gain on the
sale of a portion of its telephone plant-in-service, inventories and supplies,
and customers in the state of Washington (representing 1,800 access lines).
Income taxes increased 13% or $6.3 for the six months ended June 30, 1997,
compared to the same period in 1996, primarily due to a corresponding increase
in pre-tax income.
OTHER MATTERS
Federal Regulatory Developments
In July 1997, the U.S. Court of Appeals for the Eighth Circuit (Eighth Circuit)
issued an opinion and order vacating significant portions of the FCC's rules
purporting to implement the local competition provisions of the
3
<PAGE> 5
GTE Northwest Incorporated and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Telecommunications Act of 1996 (the Telecommunications Act). The Company's
parent, GTE, together with other incumbent local-exchange carriers (ILECs) and
a number of state commissions, had challenged various portions of the FCC
rules.
In its opinion, the Eighth Circuit ruled that the FCC had no jurisdiction to
promulgate rules setting the prices at which ILECs must make available to
competitors unbundled network elements and services for resale. In addition,
the Eighth Circuit made a number of other rulings favorable to GTE, including
that the FCC's rule allowing requesting carriers to pick and choose among
individual provisions of other interconnection agreements, rather than to adopt
the terms and conditions of a single agreement in its entirety, was unlawful;
that the FCC does not have the authority to review interconnection agreements
approved by state commissions or to enforce the terms of such agreements; that
the FCC rule requiring ILECs to provide interconnection and unbundled network
elements (UNEs) at levels of quality that are superior to those levels at which
the ILECs provide them to themselves was unlawful; and that it is the
requesting carriers, not the ILECs, that must combine UNEs.
On the other hand, the Eighth Circuit rejected certain arguments advanced by
GTE. For example, it ruled that a requesting carrier may gain access to all of
the UNEs that, when combined by the requesting carrier, are sufficient to
enable the requesting carrier to provide a finished service, and it upheld most
of the standards applied by the FCC in determining which network elements an
ILEC must make available.
The time for parties to seek rehearing before the Eighth Circuit has not yet
expired. In addition, the FCC has announced that it intends to seek Supreme
Court review of the Eighth Circuit's ruling.
In May 1997, the FCC issued orders on universal service and access charge
reform. GTE Midwest Incorporated, a separate subsidiary of GTE and affiliate
of the Company, has filed petitions for review of each of these orders in
Federal Court, and GTE is currently assessing the effect of these orders.
In its order on access charge reform, the FCC revised the price cap plan for
regulating ILECs by requiring price cap local-exchange carriers (LECs) to
increase their productivity factor to 6.5% retroactive to July 1996. The order
also eliminated the sharing requirements of the price cap rules. In June 1997,
in accordance with the order, the Company submitted its 1997 annual price cap
filing. The 1997 interstate access filing resulted in an annual price reduction
of $14, effective July 1, 1997. Prior to this order, the Company had submitted
a rate change filing in May 1997, as the Company's access rates were priced
significantly below the FCC's maximum price. This rate change filing resulted in
an annual price increase of $8 effective June 3, 1997. Overall, the net effect
of these access filings resulted in an annual price reduction of $6.
In accordance with the Telecommunications Act, the Company is continuing to
negotiate with requesting carriers over the terms of interconnection, UNEs 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. Since December 1996, state commission decisions
determining the prices and terms of unresolved issues have been released in
Oregon and Washington. Subsequent decisions are expected to be issued
throughout 1997.
Interim rates for interconnection and UNEs have been established through
negotiation and arbitration decisions. These interim rates will be used until
permanent rates are established through state commission proceedings
investigating cost studies. The Company filed cost studies in Washington
during the first quarter of 1997, with additional filings to begin in the
other states in which it operates during the second half of 1997 and
throughout 1998.
4
<PAGE> 6
GTE Northwest Incorporated and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Additional state commission proceedings have begun to establish rules and
procedures to implement state universal service funds (USF). USF proceedings
have begun in Idaho and additional proceedings are scheduled to begin during
the remainder of 1997 and into 1998.
State Regulatory Developments
In 1992, the Company filed tariffs in both Washington and Oregon that would
allow it to operate under a Primary Toll Carrier (PTC) plan in its service
areas. Under this plan, the toll billed to end users for intraLATA toll calls
originating in the Company's service area are retained by the Company. The
Company, in turn, pays access charges to the company terminating the call based
on that company's approved access charge tariff. Likewise, the Company will
receive access charges for terminating any intraLATA toll call that originates
outside of its service area based on its approved access charge tariff. On
January 28, 1993, the Washington Utility and Transportation Commission (WUTC)
authorized the Company to operate as a PTC in its service areas, effective July
1, 1994. As a result of the order, the Company reduced its toll rates by an
average of 4.5%, its switched access rates by $8.4 and special access rates by
$2.6. In Oregon, the Company filed for authority to operate under a PTC plan,
and on February 22, 1994, the Oregon Public Utilities Commission (OPUC)
approved the Company's request, effective May 1, 1994. The OPUC also ordered
$5.1 of local and access rate reductions, effective April 1, 1994. The Company
was authorized a return on equity (ROE) of 10.36% and a rate of return (ROR) of
9.48%. On January 1, 1997, the Company received authorization to operate as
the PTC in the interstate/intraLATA jurisdictions in both Washington and
Oregon, and temporarily entered into a "bill and keep" billing arrangement
during the period of transition from a secondary carrier in those jurisdictions
to the PTC.
On December 27, 1995, the WUTC issued an order setting the structure for local
interconnection and competition between LECs and alternative local-exchange
carriers. The order required the Company to file an unbundled local loop tariff
and an interim number portability tariff by January 26, 1996. Number portability
has been accomplished on an interim basis through remote call forwarding offered
at a discounted price. Also, a local interconnection tariff implementing bill
and keep compensation was required by January 16, 1996. The parties were
directed to file cost studies by July 15, 1996. The order also opened up a bona
fide request procedure for further resale and unbundling. On November 21, 1996,
the WUTC opened a generic cost docket to develop a cost methodology and
establish permanent rates for interconnection, UNEs, resale and number
portability. Hearings were completed on July 28, 1997. A commission order is
expected late in the fourth quarter of 1997 with new permanent rates effective
January 1, 1998. The revenue impacts are not known at this time.
Other Developments
In May 1997, the Company's parent, GTE, announced initiatives to become a
leading national provider of telecommunications service, including the
acquisition of BBN Corporation, a leading provider of end-to-end Internet
solutions. In addition, GTE announced a strategic alliance with Cisco Systems,
Inc. to jointly develop enhanced data and Internet services for customers; and,
the purchase of a national, state-of-the-art fiber-optic network from Qwest
Communications.
5
<PAGE> 7
GTE Northwest Incorporated and Subsidiary
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---------- ----------
(Thousands of Dollars)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $64,432 $2,074
Receivables, less allowances of $17,458 and $17,384 237,874 258,275
Inventories and supplies 23,659 14,361
Deferred income tax benefits 4,333 2,744
Other 15,392 17,749
---------- ----------
Total current assets 345,690 295,203
---------- ----------
Property, plant and equipment, at cost 3,317,132 3,258,268
Accumulated depreciation (2,094,834) (2,067,357)
---------- ----------
Total property, plant and equipment, net 1,222,298 1,190,911
---------- ----------
Employee benefit plans and other assets 93,835 84,266
---------- ----------
Total assets $1,661,823 $1,570,380
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Short-term obligations, including current maturities $ 882 $ 60,879
Notes payable to affiliates 91,745 --
Accounts payable 141,973 93,558
Taxes payable 28,433 24,614
Accrued interest 11,276 10,602
Accrued payroll costs 17,145 25,834
Dividends payable 42,757 27,753
Other 86,993 73,686
---------- ----------
Total current liabilities 421,204 316,926
---------- ----------
Long-term debt 677,414 697,242
Deferred income taxes 61,718 45,982
Employee benefit plans 67,470 62,873
Other liabilities 6,648 25,311
---------- ----------
Total liabilities 1,234,454 1,148,334
---------- ----------
Shareholder's equity:
Common stock (17,920,000 shares issued) 448,000 448,000
Additional paid-in capital 57,671 57,671
Retained deficit (78,302) (83,625)
---------- ----------
Total shareholder's equity 427,369 422,046
---------- ----------
Total liabilities and shareholder's equity $1,661,823 $1,570,380
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE> 8
GTE Northwest Incorporated and Subsidiary
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------
1997 1996
--------- ---------
(Thousands of Dollars)
<S> <C> <C>
OPERATIONS
Net income $ 98,080 $ 88,383
Adjustments to reconcile net income
to net cash from operations:
Depreciation and amortization 106,638 100,180
Deferred income taxes 6,033 15,338
Gain on disposition of assets (5,101) --
Provision for uncollectible accounts 7,770 7,706
Changes in current assets and current liabilities 43,046 (73,117)
Other - net (23,813) (4,940)
--------- ---------
Net cash from operations 232,653 133,550
--------- ---------
INVESTING
Capital expenditures (113,972) (82,529)
Proceeds from disposition of assets 9,901 --
Other - net -- 959
--------- ---------
Net cash used in investing (104,071) (81,570)
--------- ---------
FINANCING
Long-term debt issued -- 171,656
Long-term debt retired, including premiums paid on early retirement (20,223) (1,339)
Dividends (77,753) (76,157)
Increase (decrease) in short-term obligations, excluding current 31,752 (156,197)
maturities
Other - net -- 17,468
--------- ---------
Net cash used in financing (66,224) (44,569)
--------- ---------
Increase in cash and cash equivalents 62,358 7,411
Cash and cash equivalents
Beginning of period 2,074 16,310
--------- ---------
End of period $ 64,432 $ 23,721
========= =========
</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 (SEC). 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
1996 Annual Report on Form 10-K.
(2) In the first quarter of 1997, the Company sold a portion of its
telephone plant-in-service, inventories and supplies and customers
(representing 1,800 access lines) in the state of Washington to Pend
Oreille Telephone Company for $7.6 million in cash. A pre-tax gain of
$5.1 million was recorded on the sale.
(3) In May 1997, the Company paid $0.2 million in premiums on the retirement
of $20 million of long-term debt redeemed prior to stated maturity.
(4) In January 1997, the SEC issued amendments to its rules which clarify
and expand disclosure requirements for derivative financial instruments.
As of June 30, 1997, there has been no significant change in the market
risk, or accounting policy associated with derivative financial
instruments as stated in the Company's 1996 Annual Report on Form 10-K.
(5) Reclassifications of prior year data have been made, where appropriate,
to conform to the 1997 presentation.
8
<PAGE> 10
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.
(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 1997.
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: August 13, 1997 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>
Six Months Ended
June 30, 1997
<S> <C>
Net earnings available for fixed charges:
Income from continuing operations $ 98,080
Add - Income taxes 54,525
- Fixed charges 28,380
--------
Adjusted earnings $180,985
========
Fixed charges:
Interest expense $ 27,387
Portion of rent expense
representing interest 993
--------
Adjusted fixed charges $ 28,380
========
RATIO OF EARNINGS TO FIXED CHARGES 6.38
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 64,432
<SECURITIES> 0
<RECEIVABLES> 255,332
<ALLOWANCES> 17,458
<INVENTORY> 23,659
<CURRENT-ASSETS> 345,690
<PP&E> 3,317,132
<DEPRECIATION> 2,094,834
<TOTAL-ASSETS> 1,661,823
<CURRENT-LIABILITIES> 421,204
<BONDS> 677,414
0
0
<COMMON> 488,000
<OTHER-SE> (20,631)
<TOTAL-LIABILITY-AND-EQUITY> 1,661,823
<SALES> 533,230
<TOTAL-REVENUES> 533,230
<CGS> 176,182
<TOTAL-COSTS> 358,388
<OTHER-EXPENSES> 226
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,112
<INCOME-PRETAX> 152,605
<INCOME-TAX> 54,525
<INCOME-CONTINUING> 98,080
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 98,080
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
