<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934]
For the fiscal year ended December 31, 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
Securities registered pursuant to Section 12(b) of the act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
NONE
Securities registered pursuant to Section 12(g) of the Act:
NONE
(TITLE OF CLASS)
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
--- ---
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO
THIS FORM 10-K. X
---
THE COMPANY HAD 17,920,000 SHARES OF NO PAR VALUE COMMON STOCK OUTSTANDING AT
FEBRUARY 28, 1997. THE COMPANY'S COMMON STOCK IS 100% OWNED BY GTE CORPORATION.
THE COMPANY MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION J (1) (a) AND
(b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE
FORMAT.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Page
Part I
<S> <C> <C>
1. Business 1
2. Properties 5
3. Legal Proceedings 5
4. Submission of Matters to a Vote of Security Holders - This item
has been omitted in accordance with the relief provisions under
General Instruction J of Form 10-K
Part II
5. Market for the Registrant's Common Equity and Related 6
Shareholder Matters
6. Selected Financial Data - This item has been omitted in accordance
with the relief provisions under General Instruction J of Form
10-K
7. Management's Discussion and Analysis of Financial 7
Condition and Results of Operations
8. Financial Statements and Supplementary Data 11
9. Changes in and Disagreements with Accountants on 30
Accounting and Financial Disclosure
Part III
The following items have been omitted in accordance with the relief provisions
under General Instruction J of Form 10-K:
10. Directors and Executive Officers of the Registrant
11. Executive Compensation
12. Security Ownership of Certain Beneficial Owners and Management
13. Certain Relationships and Related Transactions
Part IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 31
</TABLE>
<PAGE> 3
PART I
Item 1. Business
GTE Northwest Incorporated (the Company) (formerly General Telephone Company of
the Northwest, Inc., formerly West Coast Telephone Company) was incorporated in
Washington on March 31, 1964. The Company is a wholly-owned subsidiary of GTE
Corporation (GTE). Together with its wholly-owned subsidiary, GTE West Coast
Incorporated, the Company provides communications services in the states of
California, Idaho, Oregon and Washington.
On November 30, 1994, the Company sold all of its local exchange properties
(representing 7,000 access lines) in the state of Montana to Citizens Utilities
Company. Additional information related to this transaction can be found in
Note 4 of the Company's consolidated financial statements included in Item 8.
The Company's principal line of business is providing communications services
ranging from local telephone service for the home and office to highly complex
voice and data services for industry. The Company provides local telephone
service within its franchise area and intraLATA (Local Access Transport Area)
toll service between the Company's facilities and the facilities of other
telephone companies within the Company's LATAs. InterLATA service to other
points in and out of the states in which the Company operates is provided
through connection with interexchange (long distance) common carriers. These
common carriers are charged fees (access charges) for interconnection to the
Company's local facilities. Business and residential customers also pay access
charges to connect to the local network to obtain long distance service. The
Company earns other revenues by providing such services as billing and
collection and operator services to interexchange carriers.
The number of access lines in the states in which the Company operates as of
December 31, 1996, was as follows:
Access
State Lines Served
- ----------- -------------
Washington 957,775
Oregon 522,618
Idaho 130,049
California 13,727
---------
Total 1,624,169
=========
At December 31, 1996, the Company had 3,462 employees.
The Company has written agreements with the Communications Workers of America
(CWA) and the International Brotherhood of Electrical Workers (IBEW) covering
substantially all non-management employees. In 1996, a new contract was reached
with the IBEW. During 1997, no contracts will expire.
REGULATORY AND COMPETITIVE TRENDS
The Company is subject to regulation by the regulatory bodies of the states of
California, Idaho, Oregon and Washington as to its intrastate business
operations and by the Federal Communications Commission (FCC) as to its
interstate operations.
Advances in technology, together with a number of regulatory, legislative and
judicial actions, continue to accelerate and expand the level of competition
and opportunities available to the Company. Presently, the Company is subject
to competition from numerous sources, including competitive access providers
(CAPs) for network access services. In addition, competition from alternative
local-exchange carriers (ALECs), interexchange carriers (IXCs), wireless
carriers and cable providers, as well as more recent entry by media and
computer companies, is expected to increase in the rapidly changing
telecommunications marketplace.
On February 8, 1996, the Telecommunications Act of 1996 (the Telecommunications
Act) became law. This
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comprehensive telecommunications reform legislation addresses a wide range of
competitive and regulatory issues that will affect the future development of
local and long distance services, cable television and information services.
The new law removes regulatory and court-ordered barriers to competition
between segments of the industry, enabling local-exchange, long distance,
wireless and cable companies to compete in offering voice, video and
information services.
The Telecommunications Act requires the FCC and state commissions to open
local-exchange markets and to set new guidelines for interconnection, loosens
restrictions barring local telephone companies from entering the cable
television market, and preserves universal service while equalizing the
responsibility for contribution among all carriers.
Following passage of the Telecommunications Act, the FCC has undertaken to
issue rules governing three areas: interconnection, universal service and
access charge reform. In August 1996, the FCC released its rules implementing
the provision of number portability and dialing parity in accord with the
Telecommunications Act. In August 1996, the FCC also adopted its rules
governing interconnection, unbundling of network elements and wholesale prices
and other terms for competitive entry into local-exchange service. These rules
generally require local-exchange carriers (LECs) to make their services
available to competitors at a wholesale discount and to make their network
elements available to competitors at below-cost prices. GTE petitioned for
judicial review of these rules on the grounds that they were inconsistent with
the Telecommunications Act. In October 1996, the U.S. Court of Appeals for the
Eighth Circuit granted GTE's request for stay of the pricing provisions of the
FCC's rules pending the Court's resolution of the merits of GTE's petition.
Oral arguments on the merits were held in January 1997, and the Court's ruling
is expected in the spring of 1997.
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. Since November 1996, a number of state commission decisions
determining the prices and terms of unresolved issues were released (See Note
12 of the Company's consolidated financial statements included in Item 8).
Subsequent decisions are expected to be issued over a period extending through
the first half of 1997.
The Company has exercised its right under the Telecommunications Act to
challenge state regulatory commission arbitration orders that govern agreements
between the Company and its competitors. The Company has filed complaints in
federal district courts in Oregon and Washington.
In November 1996, the Federal-State Joint Board released its recommended
universal service plan, and in December 1996, the FCC issued its access reform
proposals. Both proposals incorporate a pricing methodology similar to the one
that GTE is appealing in the interconnection case. A final order in the
universal service proceeding must be adopted by early May 1997, and a decision
on the access reform proceeding is expected shortly thereafter.
A key provision of the Telecommunications Act eliminated the legal restraints
of the GTE Consent Decree which kept the Company from providing interLATA long
distance services. This action will simplify GTE's ability to market local,
intraLATA and interLATA service to its customers as a bundled service. In
February 1996, GTE executed an agreement whereby WorldCom, Inc. will provide,
on a non-exclusive basis, a full array of telecommunications services in
support of GTE's entry into the interLATA long distance market. In March 1996,
GTE, through a separate subsidiary, began offering long distance service to its
customers in selected markets. GTE now offers the service, marketed under the
name GTE Easy Savings Plan (sm), in all 50 states.
The Telecommunications Act forbids states from imposing any barriers to entry
into local and toll competition. To date, local competition has been authorized
in all 28 states, including California, Idaho, Oregon and Washington. In
addition, nineteen states, including California, Idaho and Washington, have
authorized plans that would allow customers to pre-subscribe to a specific
carrier to handle their intraLATA toll calls. Pre-subscribed customers will
simply dial "1" before the telephone number in order to complete intraLATA
calls. GTE has proposals pending in all nine of the states, including
Oregon, which have not ordered implementation.
Federal and state regulatory activity continued to change the traditional
cost-based, rate-of-return regulatory framework for intrastate and interstate
telephone service. Regulatory authorities have adopted various forms of
alternative regulation, which provide economic incentives to telephone service
providers to improve productivity and provide the
2
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foundation for implementing pricing flexibility necessary to address
competitive entry into the Company's markets. Regulatory commissions in the
states of Washington, Oregon and Idaho continue to remain under the traditional
cost-based, rate-of-return regulatory framework for intrastate telephone
service.
For the provision of interstate access services, the Company operates under the
terms of the FCC's price cap incentive plan. The "price cap" mechanism serves
to limit the rates a carrier may charge, rather than just regulating the rate
of return which may be achieved. Under this approach, the maximum prices that
the LEC may charge are increased or decreased each year by a price index based
upon inflation less a predetermined productivity target. LECs have limited
pricing flexibility provided they do not exceed the allowed price cap.
Further information regarding the Company's activities with the various
regulatory agencies and revenue arrangements with other telephone companies is
discussed in Note 12 of the Company's consolidated financial statements
included in Item 8.
The Company continues to support greater competition in telecommunications,
provided that, overall, the actions to eliminate existing legal and regulatory
barriers benefit consumers by allowing an opportunity for all service providers
to participate equally in a competitive marketplace under comparable
conditions.
The Company intends to continue to respond aggressively to regulatory and legal
developments that allow for increased competition and opportunities in the
marketplace. The Company expects its financial results to benefit from reduced
costs and the introduction of new products and services that will result in
increased usage of its telephone networks. However, it is likely that such
improvements will be offset, in part, by continued strategic pricing reductions
and the effects of increased competition.
INITIATIVES
In 1996, the Company and its parent, GTE, continued to position themselves to
respond aggressively to competitive developments and benefit from new
opportunities.
GTE Northwest Incorporated (the Company):
Restructuring and Cost Control
During 1996, the Company substantially completed the implementation of its
three-year $125 million re-engineering program. Total costs of the program
included $83.8 million related to improvements in customer service processes,
$30.1 million related to improvements in administrative processes and $11.1
million related to the consolidation of facilities and operations and other
related costs. These costs were primarily associated with the closure and
relocation of various service centers, software enhancements and separation
benefits related to employee reductions.
GTE Corporation (GTE):
Video Services
The Telecommunications Act eliminates the telephone company programming ban and
allows GTE the flexibility to choose whether it will enter the wireline video
distribution business through an open video platform arrangement or via a
standard cable television operation (Title VI). The legislation also allows GTE
to deploy video networks which are fully integrated with its telephone
operations.
GTE, through a separate subsidiary, made its initial entry into the video
market under Title VI. The most technologically-advanced hybrid fiber/coaxial
network available is being deployed. At the end of 1996, GTE had been granted
six franchises, three in California and three in Florida. Construction of the
networks in those markets is underway and approximately 7,000 video subscribers
were acquired in 1996, bringing GTE's total video subscribers to approximately
15,000.
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<PAGE> 6
Internet Access
GTE, through a separate subsidiary, was the first local-exchange carrier to
introduce nationwide Internet services to residential and business customers in
1996. By year-end 1996, GTE's Internet access service, marketed as GTE Internet
Solutions, was offered in over 350 cities covering 49 states, including
California, Washington, Oregon and Idaho. An agreement with UUNET Technologies
provides the Internet backbone and local dialing capabilities. Over 70,000
customers were subscribing to GTE Internet Solutions at December 31, 1996.
GTE Long Distance
One of the most significant impacts of the Telecommunications Act's passage was
the removal of certain restrictions previously included in GTE's Consent
Decree. Prior to February 8, 1996, GTE was restricted from jointly marketing
the products and services of the Company with those of GTE's interexchange
subsidiaries. With this joint marketing restriction lifted, GTE can now offer
its customers many services on one monthly bill, with one point of contact.
This opportunity facilitated GTE's entry into the long distance business. By
December 31, 1996, GTE, through a separate subsidiary, was offering the
service, marketed under the name GTE Easy Savings Plan (sm), in all 50 states
and was serving over 825,000 customers.
ENVIRONMENTAL MATTERS
GTE maintains monitoring and compliance programs related to environmental
matters. Currently, the Company has been named as a potentially responsible
party at a number of "Superfund Sites". GTE has reviewed each site in which it
has an involvement to establish an expected remediation cost. Based on this
review, management believes the Company is not subject to administrative or
judicial proceedings which would result in a material adverse effect on the
Company's results of operations or financial position. The Company has
established adequate reserves for estimated remediation and cleanup costs.
The Company's annual expenditures for site cleanups and environmental
compliance have not been and are not expected to be material. Costs incurred
include the Company's share of cleanup expenses for Superfund Sites, outlays
required to keep existing operations in compliance with environmental
regulations and an underground storage tank replacement program.
4
<PAGE> 7
Item 2. Properties
The Company's property consists principally of land, structures and equipment
required to provide various telecommunications services. All of these
properties, located in the states of California, Idaho, Oregon, and Washington,
are generally in good operating condition and adequate to satisfy the needs of
the business. Substantially all of the Company's property is subject to the
liens of its respective mortgages securing funded debt. From January 1, 1992 to
December 31, 1996, the Company made capital expenditures of $1.2 billion for
new plant and facilities required to meet telecommunication service needs and
to modernize plant and facilities. These additions were equal to 36% of gross
plant of $3.3 billion at December 31, 1996.
In the fourth quarter of 1995, the Company discontinued the use of Statement of
Financial Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation" (FAS 71).
In general, FAS 71 required the Company to depreciate its telephone plant and
equipment over lives approved by regulators which, in many cases, extended
beyond the assets' economic lives. FAS 71 also required the deferral of certain
costs based upon approvals received from regulators to recover such costs in
the future. As a result of these requirements, the recorded net book value of
certain assets and liabilities, primarily telephone plant and equipment, were
in many cases higher than that which would otherwise have been recorded based
on their economic lives. See Note 2 to the Company's consolidated financial
statements included in Item 8.
Item 3. Legal Proceedings
There are no pending legal proceedings which would have a material impact on
the Company's consolidated financial statements.
5
<PAGE> 8
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters
Market information is omitted since the Company's common stock is wholly-owned
by GTE Corporation (GTE).
SHAREHOLDER SERVICES
The First National Bank of Boston, Transfer Agent and Registrar for GTE and the
Company's common stock, should be contacted with any questions relating to
shareholder accounts. This includes the following:
o Account information
o Dividends
o Market prices
o Transfer instructions
o Statements and reports
o Change of address
Shareholders may call toll-free at 1-800-225-5160 anytime, seven days a week.
Customer Service Representatives are available Monday through Friday between
the hours of 8 a.m. and 5 p.m. Eastern Time. Outside the United States call
1-617-575-2990.
Or write to:
Bank of Boston
c/o Boston EquiServe, L.P.
P.O. Box 9121
Boston, MA 02205-9121
For overnight delivery services, use the following address:
Bank of Boston
c/o Boston EquiServe, L.P.
Blue Hills Office Park
150 Royall Street
Canton, MA 02021
The Bank of Boston address where shareholders, banks and brokers may deliver
certificates is One Exchange Place, 55 Broadway in New York City.
PARENT COMPANY ANNUAL REPORT
To obtain a copy of the 1996 annual report of our parent company or the annual
Form 10-K filed with the Securities and Exchange Commission, call
1-800-225-5160.
INFORMATION VIA THE INTERNET
Internet World Wide Web users can access information on GTE through the
following universal resource:
http://www.gte.com
PRODUCTS AND SERVICES HOTLINE
Shareholders may call 1-800-828-7280 to receive information concerning GTE
products and services.
6
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in Millions)
BUSINESS OPERATIONS
GTE Northwest Incorporated (the Company), a wholly-owned subsidiary of GTE
Corporation (GTE), provides local-exchange, network access and toll services in
the states of California, Idaho, Oregon, and Washington. At December 31, 1996,
the Company served 1,624,169 access lines in its service territories.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1996 1995
--------- ---------
<S> <C> <C>
Net income (loss) $ 187.4 $ (431.0)
</TABLE>
The net loss for 1995 includes extraordinary charges (net of tax) of $573.2 for
the discontinuance of Statement of Financial Accounting Standards No. 71,
"Accounting for the Effects of Certain Types of Regulation" (FAS 71), and $8
for the early retirement of debt in the fourth quarter of 1995. Excluding the
extraordinary charges taken in 1995, the net income for 1996 increased 25% or
$37.2. The 1996 increase is primarily due to continued customer growth
reflected by a 9% increase in access lines, minutes of use growth and lower
overall operating costs and expenses, offset by an increase in taxes.
REVENUES AND SALES
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------
1996 1995
-------- ----------
<S> <C> <C>
Local services $ 409.4 $ 397.4
Network access services 378.3 355.0
Toll services 117.0 115.7
Other services and sales 157.3 153.3
-------- ---------
Total revenues and sales $1,062.0 $ 1,021.4
</TABLE>
Total revenues and sales increased 4% or $40.6 in 1996.
Local service revenues are based on fees charged to customers for providing
local-exchange service within designated franchise areas. In 1996, local
service revenues increased 3% or $12. The 1996 increase is primarily due to
continued customer growth as reflected by a 6% increase in access lines, which
generated additional revenues of $15.2. The increase is also due to a $12.7 net
growth in sales of custom calling features (e.g. SmartCall(R)/CLASS services,
etc.), CentraNet(R) and integrated digital services. These increases were
offset by a one-time favorable adjustment in 1995 of $14.4 which related
primarily to interexchange carrier billing.
Network access service revenues are based on fees charged to interexchange
carriers that use the Company's local-exchange network in providing long
distance services. In addition, business and residential customers pay access
fees to connect to the local network to obtain long distance service. Cellular
service providers and other local-exchange carriers also pay access charges for
cellular and intraLATA (Local Access Transport Area) toll calls hauled or
terminated by the Company. Revenues derived from network access services
increased 7% or $23.3 in 1996. The 1996 increase is primarily due to a $20.6
growth in carrier switched access revenues associated with a 10% upswing in
minutes of use.
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A growth in access lines generated additional revenues of $5.6 in special
access revenues. The increase is also due to $2.5 of higher end user access
charge revenues corresponding to the increase in access lines and a $6.3
increase in intraLATA access revenues. These increases are partially offset by
a decrease of $2.6 reflecting the net effect of the changes in interstate rates
associated with the Federal Communications Commission's (FCC) 1995 and 1996
Price Cap. The increases are also partially offset by $10.3 of lower support
payments received from the National Exchange Carrier Association (NECA).
Toll service revenues are based on fees charged for service beyond a customer's
local calling area but within the LATA. In 1996, toll service revenues
increased 1% or $1.3. The 1996 increase is primarily due to higher toll
activity, partially offset by the effects of 10XXX intraLATA toll competition,
expansion of local calling areas and a decrease in settlement activity.
Other service and sales revenues increased 3% or $4 in 1996. The 1996 increase
is due to higher sales totaling $6.9 of voice messaging, radio paging and
miscellaneous carrier revenues, primarily DB800, a system which acts as a master
data source for nationwide services. These increases were partially offset by
intraLATA settlements with other local-exchange carriers (LECs) for billing and
collection services recorded in the second quarter of 1995.
OPERATING COSTS AND EXPENSES
Years Ended December 31,
-------------------------
1996 1995
---------- --------
Cost of services and sales $ 372.1 $ 367.1
Selling, general and administrative 149.4 167.5
Depreciation and amortization 204.0 205.0
--------- --------
Total operating costs and expenses $ 725.5 $ 739.6
Total operating costs and expenses decreased 2% or $14.1 in 1996. The decrease
is primarily driven by a $12.2 reduction in labor and benefit costs associated
with productivity gains from process re-engineering and other cost containment
programs. The decrease also results from a $4.6 decrease in access charges
incurred to terminate customers' intraLATA toll calls outside of the Company's
service territory and a $7 reduction in end user uncollectibles. These
decreases are 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 in the
third quarter of 1996, for inside wire maintenance costs, both discussed in
further detail below.
OTHER (INCOME) EXPENSE
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1996 1995
---------- ---------
<S> <C> <C>
Interest - net $ 52.7 $ 54.4
Other - net (7.5) --
Income taxes 103.8 77.2
</TABLE>
Interest - net decreased 3% or $1.7 in 1996. The 1996 decrease is attributable
to the favorable effects of the long-term debt refinancing program completed in
June 1996.
Other - net income of $7.5 in 1996 represents the reversal of expired
representation and warranty reserves related to certain 1994 property
dispositions.
Income taxes increased 34% or $26.6 in 1996, reflecting higher pre-tax income
and certain adjustments to prior year's tax liabilities.
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REGULATORY AND COMPETITIVE TRENDS
The Company is subject to regulation by the regulatory bodies of the states of
California, Idaho, Oregon and Washington as to its intrastate business
operations and by the FCC as to its interstate operations.
Significant regulatory and legislative developments occurred during 1996,
including the passage of the Telecommunications Act of 1996 (the
Telecommunications Act). The Telecommunications Act is intended to promote
competition in all sectors of the telecommunications marketplace, while
preserving and advancing universal telephone service.
As a result of the Telecommunications Act, the Company may be faced with
increased competition from numerous sources, including competitive access
providers (CAPs), alternative local-exchange carriers (ALECs), interexchange
carriers (IXCs), wireless carriers, cable providers, media and computer
companies. These companies collectively have the ability to offer a broad array
of voice, video and data services to business and residential customers.
Following passage of the Telecommunications Act, the FCC has undertaken to
issue rules governing three areas: interconnection, universal service and
access charge reform. In August 1996, the FCC adopted its rules governing
interconnection. These rules generally require LECs to make their services
available to competitors at a wholesale discount and to make their network
elements available to competitors at below-cost prices. GTE petitioned for
judicial review of these rules on the grounds that they were inconsistent with
the Telecommunications Act. In October 1996, the U.S. Court of Appeals for the
Eighth Circuit granted GTE's request for a stay of the pricing provisions of
the FCC's rules pending the Court's resolution of the merits of GTE's petition.
Oral arguments on the merits were held in January 1997, and the Court's ruling
is expected in the spring of 1997.
In November 1996, the Federal-State Joint Board released its recommended
universal service plan, and in December 1996, the FCC issued its access reform
proposals. Both proposals incorporate a pricing methodology similar to the one
that GTE is appealing in the interconnection case. A final order in the
universal service proceeding must be adopted by early May 1997, and a decision
on the access reform proceeding is expected shortly thereafter.
A key provision of the Telecommunications Act eliminated the legal restraints
of the GTE Consent Decree which kept the Company from providing interLATA long
distance services. This action will simplify GTE's ability to market local
intraLATA and interLATA service to its customers as a bundled service. In
February 1996, GTE executed an agreement whereby WorldCom, Inc. will provide,
on a nonexclusive basis, a full array of telecommunications services in support
of GTE's entry into the interLATA long distance market. In March 1996, GTE,
through a separate subsidiary, began offering long distance service to its
customers in selected markets. GTE now offers the service, marketed under the
name GTE Easy Savings Plan (sm), in all 50 states.
The Telecommunications Act forbids states from imposing any barriers to entry
into local and toll competition. To date, local competition has been authorized
in all 28 states, including California, Idaho, Oregon and Washington. In
addition, nineteen states, including California, Idaho and Washington, have
authorized plans that would allow customers to pre-subscribe to a specific
carrier to handle their intraLATA toll calls. Pre-subscribed customers will
simply dial "1" before the telephone number in order to complete intraLATA
calls. GTE has proposals pending in all nine of the states, including Oregon,
which have not ordered implementation.
Federal and state regulatory activity continued to change the traditional
cost-based, rate-of-return regulatory framework for intrastate and interstate
telephone service. Regulatory authorities have adopted various forms of
alternative regulation, which provide economic incentives to telephone service
providers to improve productivity and provide the foundation for implementing
pricing flexibility necessary to address competitive entry into the Company's
markets. Regulatory commissions in the states of Washington, Oregon and Idaho
continue to remain under the traditional cost-based, rate-of-return regulatory
framework for intrastate telephone service.
For the provision of interstate access services, the Company operates under the
terms of the FCC's price cap incentive plan. The "price cap" mechanism serves
to limit the rates a carrier may charge, rather than just regulating the rate
of return which may be achieved. Under this approach, the maximum prices that
the LEC may charge are increased or
9
<PAGE> 12
decreased each year by a price index based upon inflation less a predetermined
productivity target. LECs have limited pricing flexibility provided they do not
exceed the allowed price cap.
Further information regarding the Company's activities with the various
regulatory agencies and revenue arrangements with other telephone companies is
discussed in Note 12 of the Company's consolidated financial statements
included in Item 8.
The Company continues to support greater competition in telecommunications,
provided that, overall, the actions to eliminate existing legal and regulatory
barriers benefit consumers by allowing an opportunity for all service providers
to participate equally in a competitive marketplace under comparable
conditions.
The Company intends to continue to respond aggressively to regulatory and legal
developments that allow for increased competition and opportunities in the
marketplace. The Company expects its financial results to benefit from reduced
costs and the introduction of new products and services that will result in
increased usage of its telephone networks. However, it is likely that such
improvements will be offset, in part, by continued strategic pricing reductions
and the effects of increased competition.
OTHER MATTERS
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. Management believes that the Company has adequately provided for this
issue in its financial statements for the year ended December 31, 1996.
Eleven separate class action lawsuits have been brought against GTE and twelve
of its subsidiaries (GTE Defendants), including the Company, relating to the
provision of inside wire maintenance services. On August 6, 1996, the GTE
Defendants and class counsel executed and filed a settlement agreement in one
of the lawsuits. The Court preliminarily approved the agreement and
conditionally certified a national class of plaintiffs for settlement purposes.
A fairness hearing on the settlement was held on December 18, 1996. On January
21, 1997, the Court approved the settlement as written and issued a permanent
injunction to prohibit future lawsuits covering any claims from 1987 to the
date of settlement. Pursuant to the settlement, a proof of claim form was
inserted into the March 1997 customer bills for the national class to request
their benefits under the settlement. Management believes that the Company has
adequately provided for this settlement in its financial statements for the
year ended December 31, 1996.
INITIATIVES
In 1996, the Company and its parent, GTE, continued to position themselves to
respond aggressively to competitive developments and benefit from new
opportunities. Further information regarding these initiatives is discussed in
Item 1.
INFLATION
The Company's management generally does not believe inflation has a significant
impact on the Company's earnings. However, increases in costs or expenses not
otherwise offset by increases in revenues could have an adverse effect on
earnings.
10
<PAGE> 13
Item 8. Financial Statements and Supplementary Data
GTE Northwest Incorporated and Subsidiary
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31 1996 1995 1994
- ----------------------- ----------- ----------- -----------
(Thousands of Dollars)
<S> <C> <C> <C>
REVENUES AND SALES (a)
Local services $ 409,380 $ 397,348 $ 347,387
Network access services 378,310 355,002 359,307
Toll services 116,974 115,739 72,317
Other services and sales 157,316 153,331 136,957
----------- ----------- -----------
Total revenues and sales 1,061,980 1,021,420 915,968
----------- ----------- -----------
OPERATING COSTS AND EXPENSES (b)
Cost of services and sales 372,110 367,072 355,142
Selling, general and administrative 149,425 167,525 164,166
Depreciation and amortization 204,039 205,019 181,992
----------- ----------- -----------
Total operating costs and expenses 725,574 739,616 701,300
----------- ----------- -----------
OPERATING INCOME 336,406 281,804 214,668
OTHER (INCOME) EXPENSE
Interest - net 52,687 54,400 49,800
Gain on disposition of assets -- -- (11,940)
Other - net (7,519) -- --
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 291,238 227,404 176,808
Income taxes 103,812 77,217 58,159
----------- ----------- -----------
INCOME BEFORE EXTRAORDINARY CHARGES 187,426 150,187 118,649
Extraordinary charges -- (581,167) --
----------- ----------- -----------
NET INCOME (LOSS) $ 187,426 $ (430,980) $ 118,649
=========== =========== ===========
</TABLE>
(a) Includes billings to affiliates of $43,640, $43,752 and $42,368 for the
years 1996-1994, respectively.
(b) Includes billings from affiliates of $54,098, $61,631 and $55,040 for the
years 1996-1994, respectively.
See Notes to Consolidated Financial Statements.
11
<PAGE> 14
GTE Northwest Incorporated and Subsidiary
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31 1996 1995
- ----------- ----------- -----------
(Thousands of Dollars)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,074 $ 16,310
Receivables, less allowances of $17,384 and $13,268 258,275 213,470
Inventories and supplies 14,361 11,882
Deferred income tax benefits 2,744 14,626
Other 17,749 6,677
----------- -----------
Total current assets 295,203 262,965
----------- -----------
Property, plant and equipment, net 1,190,911 1,194,118
Employee benefit plans and other assets 84,266 50,679
----------- -----------
Total assets $ 1,570,380 $ 1,507,762
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Short-term obligations, including current maturities $ 60,879 $ 48,994
Accounts payable 47,209 58,896
Affiliate payables and accruals 46,349 28,222
Advanced billings and customer deposits 25,509 19,789
Taxes payable 24,614 31,164
Accrued interest 10,602 10,008
Accrued payroll costs 25,834 27,220
Dividends payable 27,753 19,140
Accrued restructuring costs -- 64,315
Other 48,177 37,565
----------- -----------
Total current liabilities 316,926 345,313
----------- -----------
Long-term debt 697,242 684,017
Deferred income taxes 45,982 18,789
Employee benefit plans 62,873 45,187
Other liabilities 25,311 7,369
----------- -----------
Total liabilities 1,148,334 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 (83,625) (98,584)
----------- -----------
Total shareholder's equity 422,046 407,087
----------- -----------
Total liabilities and shareholder's equity $ 1,570,380 $ 1,507,762
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
12
<PAGE> 15
GTE Northwest Incorporated and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31 1996 1995 1994
- ----------------------- --------- --------- ---------
(Thousands of Dollars)
OPERATIONS
<S> <C> <C> <C>
Income before extraordinary charges $ 187,426 $ 150,187 $ 118,649
Adjustments to reconcile income before extraordinary
charges to net cash from operations:
Depreciation and amortization 204,039 205,019 181,992
Deferred income taxes 39,075 37,184 6,568
Gain on disposition of assets, net of tax -- -- (7,504)
Provision for uncollectible accounts 15,828 23,442 9,642
Change in current assets and current liabilities:
Receivables - net (60,566) (5,028) (18,200)
Other current assets (529) (2,722) 4,662
Accrued taxes and interest (18,978) (24,593) 2,822
Other current liabilities (12,518) (37,953) (61,243)
Other - net (32,695) (5,407) (11,020)
--------- --------- ---------
Net cash from operations 321,082 340,129 226,368
--------- --------- ---------
INVESTING
Capital expenditures (196,986) (208,856) (260,717)
Proceeds from sale of assets -- -- 21,842
Other - net 1,726 16 2,763
--------- --------- ---------
Net cash used in investing (195,260) (208,840) (236,112)
--------- --------- ---------
FINANCING
Long-term debt issued 171,656 -- 195,934
Long-term debt and preferred stock retired (11,224) (156,028) (4,213)
Dividends (163,854) (118,366) (40,550)
Increase (decrease) in short-term obligations,
excluding current maturities (154,104) 168,497 (143,009)
Other - net 17,468 (10,035) --
--------- --------- ---------
Net cash from (used in) financing (140,058) (115,932) 8,162
--------- --------- ---------
Increase (decrease) in cash and cash equivalents (14,236) 15,357 (1,582)
Cash and cash equivalents:
Beginning of year 16,310 953 2,535
--------- --------- ---------
End of year $ 2,074 $ 16,310 $ 953
========= ========= =========
Cash paid during the year for:
Interest $ 53,030 $ 59,899 $ 48,347
Income taxes 84,309 61,578 45,766
</TABLE>
See Notes to Consolidated Financial Statements.
13
<PAGE> 16
GTE Northwest Incorporated and Subsidiary
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
Additional Retained
Common Paid-In Earnings
Stock Capital (Deficit) Total
--------- ---------- --------- ---------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Shareholders' equity, December 31, 1993 $ 448,000 $ 57,687 $ 391,749 $ 897,436
Net income 118,649 118,649
Dividends declared (51,189) (51,189)
--------- --------- --------- ---------
Shareholders' equity, December 31, 1994 448,000 57,687 459,209 964,896
Net loss (430,980) (430,980)
Dividends declared (126,813) (126,813)
Premium on redemption of preferred stock,
subject to mandatory redemption (16) -- (16)
--------- --------- --------- ---------
Shareholder's equity, December 31, 1995 448,000 57,671 (98,584) 407,087
Net income 187,426 187,426
Dividends declared (172,467) (172,467)
--------- --------- --------- ---------
Shareholder's equity, December 31, 1996 $ 448,000 $ 57,671 $ (83,625) $ 422,046
========= ========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
14
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
GTE Northwest Incorporated (the Company) provides a wide variety of
communications services ranging from local telephone service for the home and
office to highly complex voice and data services for various industries. At
December 31, 1996, the Company served 1,624,169 access lines in the states of
California, Idaho, Oregon, and Washington. The Company is a wholly-owned
subsidiary of GTE Corporation (GTE).
BASIS OF PRESENTATION
The Company prepares its consolidated financial statements in accordance with
generally accepted accounting principles which require that management make
estimates and assumptions that affect reported amounts. Actual results could
differ from those estimates.
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, GTE West Coast Incorporated. All significant
intercompany transactions have been eliminated.
The Company discontinued applying the provisions of Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of Certain Types of
Regulation" (FAS 71), in the fourth quarter of 1995 (see Note 2).
Reclassifications of prior-year data have been made, where appropriate, to
conform to the 1996 presentation.
TRANSACTIONS WITH AFFILIATES
GTE Supply (100% owned by GTE) provides construction and maintenance equipment,
supplies and electronic repair services to the Company. These purchases and
services amounted to $59.8 million, $56.2 million and $55.2 million for the
years 1996-1994, respectively. Such purchases and services are recorded in the
accounts of the Company, at cost, which includes a normal return realized by
GTE Supply.
The Company is billed for certain printing and other costs associated with
telephone directories, data processing services and equipment rentals, and
receives management, consulting, research and development and pension
management services from other affiliated companies. These charges amounted to
$54.1 million, $61.6 million and $55 million for the years 1996-1994,
respectively. The amounts charged for these affiliated transactions are based
on a proportional cost allocation method.
The Company's consolidated financial statements include allocated expenses
based on the sharing of certain executive, administrative, financial,
accounting, marketing, personnel, engineering, and other support services being
performed at consolidated work centers among the domestic GTE Telephone
Operating Companies. The amounts charged for these affiliated transactions are
based on a proportional cost allocation method as filed with the Federal
Communications Commission (FCC).
The Company has an agreement with GTE Directories Corporation (Directories)
(100% owned by GTE), whereby the Company provides its subscriber lists, billing
and collection and other services to Directories. Revenues from these
activities amounted to $43.6 million, $43.8 million and $42.4 million for the
years 1996-1994, respectively.
TELEPHONE PLANT
In 1996, the Company began providing for depreciation on a straight-line basis
over the estimated economic lives of its assets (see Note 2). The Company had
previously provided for depreciation on a straight-line basis over asset lives
approved by regulators. Maintenance and repairs of property are charged to
income as incurred. Additions to, replacements and renewals of property are
charged to telephone plant accounts. Property retirements are charged in
15
<PAGE> 18
total to the accumulated depreciation account. No adjustment to depreciation is
made at the time properties are retired or otherwise disposed of, except in the
case of significant sales or extraordinary retirements of property where profit
or loss is recognized.
REVENUE RECOGNITION
Revenues are recognized when earned. This is generally based on usage of the
Company's local-exchange networks or facilities. For other products and
services, revenues are generally recognized when services are rendered or
products are delivered to customers.
INVENTORIES AND SUPPLIES
Inventories and supplies are stated at the lower of cost, determined
principally by the average cost method, or net realizable value.
EMPLOYEE BENEFIT PLANS
Pension and postretirement health care and life insurance benefits earned
during the year as well as interest on accumulated benefit obligations are
accrued currently. Prior service costs and credits resulting from changes in
plan benefits are amortized over the average remaining service period of the
employees expected to receive benefits. Material curtailment/settlement gains
and losses associated with employee separations are recognized in the period in
which they occur.
STOCK OPTION PLANS
In 1995, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS
123). As permitted by FAS 123, the Company continues to apply the recognition
and measurement provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25). The difference between the
recognition and measurement provisions of FAS 123 and APB 25 is not significant
to the Company's results of operations.
INCOME TAXES
The Company's results are included in GTE's consolidated federal income tax
return. The Company participates in a tax-sharing agreement with GTE and remits
tax payments to GTE based on its tax liability on a separate company basis.
Deferred tax assets and liabilities are established for temporary differences
between the way certain income and expense items are reported for financial
reporting and tax purposes and subsequently adjusted to reflect changes in tax
rates expected to be in effect when the temporary differences reverse. A
valuation allowance is established for any deferred tax asset for which
realization is not likely.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include investments in short-term, highly liquid
securities, which have maturities when purchased of three months or less.
16
<PAGE> 19
2. EXTRAORDINARY CHARGES
In response to legislation (see Note 12) and the increasingly competitive
environment, the Company discontinued the use of FAS 71 in the fourth quarter
of 1995.
As a result of the decision to discontinue FAS 71, the Company recorded a
non-cash, after-tax extraordinary charge of $573.2 million (net of tax benefits
of $331.3 million) in the fourth quarter of 1995. The charge primarily
represents a reduction in the net book value of telephone plant and equipment
through an increase in accumulated depreciation. In addition to the one-time
charge, beginning in 1996, the Company, shortened the depreciable lives of its
telephone plant and equipment as follows:
<TABLE>
<CAPTION>
Depreciable Lives
---------------------------
Asset Category Average Before After
-------------- -------------- -------
<S> <C> <C>
Copper 20-30 15
Switching 17-19 10
Circuit 11-13 8
Fiber 25-30 20
</TABLE>
In addition, during 1995, the Company redeemed prior to stated maturity, $140.9
million of long-term debt. These redemptions resulted in an after-tax
extraordinary charge of $8 million (net of tax benefits of $4.7 million).
3. RESTRUCTURING COSTS
During 1993, the Company recorded one-time restructuring costs of $125 million,
which reduced net income by $77 million, primarily for incremental costs
related to implementation of the Company's re-engineering plan to improve
customer-responsiveness and product quality, reduce the time necessary to
introduce new products and services and further reduce costs. The restructuring
costs included $83.8 million to re-engineer customer service processes and
$30.1 million to re-engineer administrative processes. The restructuring costs
also included $11.1 million 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. The re-engineering plan was
substantially completed in 1996, consistent with the original cost estimates.
4. PROPERTY REPOSITIONING
On November 30, 1994, the Company sold 7,000 access lines in Montana to
Citizens Utilities Company for $21.8 million in cash and recorded a pre-tax
gain of $11.9 million. The proceeds from this transaction were used to repay
short-term commercial paper borrowings.
5. PREFERRED STOCK
In August 1995, the Company retired its remaining shares of preferred stock,
subject to mandatory redemption, with cash from operations.
17
<PAGE> 20
6. COMMON STOCK
The authorized common stock of the Company consists of 20,000,000 shares
without par value. All outstanding shares of common stock are held by GTE.
There were no shares of common stock held by or for the account of the Company
and no shares were reserved for officers and employees, or for options,
warrants, conversions or other rights.
Under the most restrictive terms of the Company's indentures, the Company would
have been prohibited from paying dividends on its common stock due solely to
the recording of the 1995 extraordinary charge discussed in Note 2. However,
the most restrictive indenture contains a provision which allows the trustees
and the holders to modify the agreement. As such, in December 1995, the
agreement was modified allowing the Company to continue to declare and pay
dividends on its common stock.
7. DEBT
Long-term debt as of December 31, was as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
(Thousands of Dollars)
<S> <C> <C>
First mortgage bonds:
6 % Series P, due 1996 $ -- $ 9,000
6 1/4 % Series Q, due 1998 13,600 13,600
7 1/8 % Series R, due 1999 18,000 18,000
7 7/8 % Series U, due 2002 20,000 20,000
8 1/4 % Series W, due 2007 48,000 48,000
8 3/4 % Series BB, due 2016 75,000 75,000
6 1/8 % Series FF, due 1999 125,000 125,000
9.67 % Series HH, due 2010 11,027 13,236
Debentures:
7 3/8 % Series A, due 2001 200,000 200,000
7 7/8 % Series B, due 2026 175,000 --
Other:
Commercial paper expected to be
refinanced on a long-term basis -- 175,000
Capitalized leases -- 15
--------- ---------
Total principal amount 685,627 696,851
Premium (discount) - net 12,494 (2,937)
--------- ---------
Total 698,121 693,914
Less: current maturities (879) (9,897)
--------- ---------
Total long-term debt $ 697,242 $ 684,017
========= =========
</TABLE>
In June 1996, the Company issued $175 million of 7 7/8% Series B Debentures,
due 2026. Net proceeds were applied toward the repayment of short-term
borrowings incurred in connection with the redemption of long-term debt in
December 1995 prior to stated maturity (see Note 2). Net proceeds were also
used to finance the Company's construction program and for general corporate
purposes.
18
<PAGE> 21
Long-term debt as of December 31, 1995 includes $175 million of commercial
paper which the Company refinanced during the first half of 1996, as discussed
above and in Note 8.
The aggregate principal amount of bonds and debentures that may be issued is
subject to the restrictions and provisions of the Company's indentures. None of
the securities shown above were held in sinking or other special funds of the
Company or pledged by the Company. Debt premiums and discounts on the Company's
outstanding long-term debt are amortized over the lives of the respective
issues. Substantially all of the Company's telephone plant is subject to the
liens of the indentures under which the bonds listed above were issued.
Estimated payments of long-term debt during the next five years are: $0.9
million in 1997; $14.5 million in 1998; $143.9 million in 1999; $0.9 million in
2000; and $200.9 million in 2001.
Total short-term obligations as of December 31, were as follows:
<TABLE>
<CAPTION>
1996 1995
---------- --------
(Thousands of Dollars)
<S> <C> <C>
Commercial paper - average rates 5.4% and 5.8% $ 60,000 $ 38,800
Notes payable to affiliate - average rate 6.1% -- 297
Current maturities of long-term debt 879 9,897
--------- --------
Total $ 60,879 $ 48,994
========= ========
</TABLE>
On July 1, 1996, the Company began participating with other affiliates in a
$1.5 billion syndicated line of credit to back up commercial paper borrowings.
Through this shared arrangement, the Company can issue up to $300 million of
commercial paper.
8. FINANCIAL INSTRUMENTS
At December 31, 1995, the Company had entered into forward contracts to sell
$175 million of U.S. Treasury Bonds to hedge against changes in market interest
rates related to the debt the Company issued during the first half of 1996. A
gain of approximately $17 million occurred upon the settlement of the forward
contracts and is being amortized over the life of the associated refinanced
debt as an offset to interest expense.
The fair values of financial instruments, other than long-term debt, closely
approximate their carrying value. As of December 31, 1996, the estimated fair
value of long-term debt based on either reference to quoted market prices or an
option pricing model, was lower than the carrying value by approximately $3
million. The estimated fair value of long-term debt as of December 31, 1995,
exceeded the carrying value by approximately $23 million.
19
<PAGE> 22
9. INCOME TAXES
The income tax provision is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
(Thousands of Dollars)
<S> <C> <C> <C>
Current:
Federal $ 59,492 $ 38,272 $ 48,853
State 5,245 1,761 2,738
--------- --------- ---------
64,737 40,033 51,591
--------- --------- ---------
Deferred:
Federal 37,983 36,659 14,509
State 2,746 4,168 1,234
--------- --------- ---------
40,729 40,827 15,743
--------- --------- ---------
Amortization of deferred investment tax credits (1,654) (3,643) (9,175)
--------- --------- ---------
Total $ 103,812 $ 77,217 $ 58,159
========= ========= =========
</TABLE>
A reconciliation between taxes computed by applying the statutory federal
income tax rate to pre-tax income and income taxes provided in the consolidated
statements of income is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
(Thousands of Dollars)
<S> <C> <C> <C>
Amounts computed at statutory rates $ 101,933 $ 79,574 $ 61,883
State and local income taxes, net of federal income tax benefits 5,194 3,854 2,582
Amortization of deferred investment tax credits, net of federal
income tax benefits (1,075) (3,643) (9,175)
Depreciation of telephone plant construction costs
previously deducted for tax purposes - net -- 3,651 3,184
Rate differentials applied to reversing temporary differences -- (972) (1,721)
Other differences - net (2,240) (5,247) 1,406
--------- --------- ---------
Total provision $ 103,812 $ 77,217 $ 58,159
========= ========= =========
</TABLE>
The tax effects of temporary differences that give rise to the current deferred
income tax benefits and deferred income tax liabilities at December 31, are as
follows:
<TABLE>
<CAPTION>
1996 1995
-------- ---------
(Thousands of Dollars)
<S> <C> <C>
Depreciation and amortization $ 35,070 $ 16,530
Employee benefit obligations (26,196) (21,967)
Prepaid pension cost 26,542 17,988
Investment tax credits 1,721 2,796
Other - net 6,101 (11,184)
-------- --------
Total $ 43,238 $ 4,163
======== ========
</TABLE>
20
<PAGE> 23
10. EMPLOYEE BENEFIT PLANS
RETIREMENT PLANS
The Company sponsors noncontributory defined benefit pension plans covering
substantially all employees. The benefits to be paid under these plans are
generally based on years of credited service and average final earnings. The
Company's funding policy, subject to the minimum funding requirements of U.S.
employee benefit and tax laws, is to contribute such amounts as are determined
on an actuarial basis to provide the plans with assets sufficient to meet the
benefit obligations of the plans. The assets of the plans consist primarily of
corporate equities, government securities and corporate debt securities.
The components of the net pension credit for 1996-1994 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
(Thousands of Dollars)
<S> <C> <C> <C>
Benefits earned during the year $ 10,583 $ 9,394 $ 11,538
Interest cost on projected benefit obligations 25,046 24,358 22,823
Return on plan assets:
Actual (87,174) (103,066) 1,111
Deferred 41,175 62,076 (41,108)
Other - net (8,061) (9,873) (8,141)
--------- --------- ---------
Net pension credit $ (18,431) $ (17,111) $ (13,777)
========= ========= =========
</TABLE>
The expected long-term rate of return on plan assets was 9.0% for 1996 and 8.5%
for 1995 and 1994.
The funded status of the plans and the net prepaid pension cost at December 31,
were as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
(Thousands of Dollars)
<S> <C> <C>
Vested benefit obligations $ 235,785 $ 222,636
========= =========
Accumulated benefit obligations $ 272,354 $ 258,581
========= =========
Plan assets at fair value $ 626,819 $ 564,620
Less: projected benefit obligations 350,895 335,632
--------- ---------
Excess of assets over projected obligations 275,924 228,988
Unrecognized net transition asset (22,338) (26,313)
Unrecognized net gain (181,407) (152,223)
--------- ---------
Net prepaid pension cost $ 72,179 $ 50,452
========= =========
</TABLE>
Assumptions used to develop the projected benefit obligations at December 31,
were as follows:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Discount rate 7.50% 7.50%
Rate of compensation increase 5.25% 5.25%
</TABLE>
21
<PAGE> 24
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Substantially all of the Company's employees are covered under postretirement
health care and life insurance benefit plans. The health care benefits paid
under the plans are generally based on comprehensive hospital, medical and
surgical benefit provisions. The Company funds amounts for postretirement
benefits as deemed appropriate from time to time.
The postretirement benefit cost for 1996-1994 included the following
components:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- ---------
(Thousands of Dollars)
<S> <C> <C> <C>
Benefits earned during the year $ 2,513 $ 2,305 $ 2,761
Interest on accumulated postretirement benefit obligations 10,641 10,608 11,026
Actual (return) loss on plan assets (584) (1,488) 126
Amortization of transition obligation 4,264 4,652 4,904
Other - net (616) 1,157 131
-------- -------- --------
Postretirement benefit cost $ 16,218 $ 17,234 $ 18,948
======== ======== ========
</TABLE>
The following table sets forth the plans' funded status and the accrued
postretirement benefit obligations as of December 31:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
(Thousands of Dollars)
<S> <C> <C>
Accumulated postretirement benefit obligations attributable to:
Retirees $ 93,471 $ 97,865
Fully eligible active plan participants 4,378 3,249
Other active plan participants 50,892 51,552
--------- ---------
Total accumulated postretirement benefit obligations 148,741 152,666
Less: fair value of plan assets 24,222 17,321
--------- ---------
Excess of accumulated obligations over plan assets 124,519 135,345
Unrecognized transition obligation (67,058) (74,835)
Unrecognized net loss 2,713 (18,075)
--------- ---------
Accrued postretirement benefit obligations $ 60,174 $ 42,435
========= =========
</TABLE>
The assumed discount rates used to measure the accumulated postretirement
benefit obligations were 7.5% at December 31, 1996 and December 31, 1995. The
assumed health care cost trend rate was 8.75% in 1996 and averaged 9.75% in
1995 and is assumed to decrease gradually to an ultimate rate of 6.0% in the
year 2004. A one percentage point increase in the assumed health care cost
trend rates for each future year would have increased 1996 costs by $1.7
million and the accumulated postretirement benefit obligations as of December
31, 1996, by $18.2 million.
SAVINGS PLANS
The Company sponsors employee savings plans under section 401(k) of the
Internal Revenue Code. The plans cover substantially all full-time employees.
Under the plans, the Company provides matching contributions in GTE common
stock based on qualified employee contributions. Matching contributions charged
to income were $3.8 million, $3.4 million and $3.1 million in 1996-1994,
respectively.
22
<PAGE> 25
11. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is summarized as follows at December 31:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
(Thousands of Dollars)
<S> <C> <C>
Land $ 12,475 $ 12,745
Buildings 220,544 218,879
Plant and equipment 2,757,934 2,634,360
Other 267,315 252,275
----------- -----------
Total 3,258,268 3,118,259
Accumulated depreciation (See Note 2) (2,067,357) (1,924,141)
----------- -----------
Total property, plant and equipment - net $ 1,190,911 $ 1,194,118
=========== ===========
</TABLE>
Depreciation expense in 1996-1994 was equivalent to a composite average
percentage of 6.4%, 6.7% and 6.3%, respectively.
12. REGULATORY AND COMPETITIVE MATTERS
The Company's intrastate business is regulated by the state regulatory
commissions in California, Idaho, Oregon and Washington. The Company is subject
to regulation by the FCC for its interstate business operations.
INTRASTATE SERVICES
The Company provides local-exchange services to customers within its designated
franchise area. The Company also provides toll services within designated
geographic areas called Local Access and Transport Areas (LATAs) under
agreements with connecting local-exchange carriers (LECs) in conformity with
individual state regulatory orders. The Company also provides long distance
access services directly to interexchange carriers and other customers who
provide services between LATAs.
Oregon
The Company began a major Extended Area Service (EAS) offering in the Portland
metropolitan area in November 1991. This non-optional EAS offering provides
expanded local calling to customers in Portland's metropolitan EAS region
allowing customers to choose between flat rate, measured, or a combination of
flat rate and measured EAS calling plans. On August 29, 1994, the Oregon Public
Utilities Commission (OPUC) ordered the expansion of the Portland Metro area to
add new EAS routes, eleven of which involved the Company's exchanges.
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 million and special access
rates by $2.6 million. In Oregon, the Company filed for authority to operate
under a PTC plan, and on February 22, 1994, the OPUC approved the Company's
request, effective May 1, 1994. The OPUC also ordered $5.1 million 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%.
23
<PAGE> 26
Since 1990, the OPUC 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 OPUC 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 OPUC'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
process in Oregon.
An unbundling order was reissued in the State of Oregon on November 1, 1996. In
the initial order, the prices for the unbundled elements were developed for US
West; however, the rates will apply to the Company. On December 16, 1996, a
compliance tariff was filed that offered the unbundled services to alternative
local-exchange carriers (ALECs), effective January 30, 1997. On January 21,
1997, the OPUC approved an extension of the effective date until April 2, 1997.
The revenue impact is unknown at this time.
During 1995, Oregon had a local competition docket in progress. An order was
issued on January 12, 1996 which granted the application of three ALECs,
Electric Lightwave (ELI), MCI Metro and Metropolitan Fiber Systems, Inc. (MFS),
to provide service in the Company's and US West's exchanges in the greater
Portland area. Subsequently, two more ALECs, AT&T Corp. (AT&T) and Teleport
Communications Group (TCG), have also applied. Eight of the Company's exchanges
were designated as competitive. Interconnection will be based on the same terms
and conditions that incumbent LECs have used to interconnect their networks.
On January 13, and 24, and February 3, 1997, the OPUC issued its decision in
the Company's arbitration with AT&T, Western Wireless and MCI, respectively for
similar issues stated above. The interim discount rates for the Company's
resold services were set at 21% for AT&T, 18.81% (9.405% for volume discount)
for Western Wireless and 15.9% (7.95% for volume discount) for MCI. The Company
has filed a lawsuit in the U.S. District Court challenging portions of the
OPUC's arbitration determinations.
Washington
In 1992, the Company filed tariffs in Washington that would allow it to operate
under a PTC plan in its service areas, as discussed above. On December 21, 1994,
the WUTC authorized an ROE of 11.25% and an overall ROR of 9.76% for the
Company. No rate changes were required.
In September 1995, the Company filed to merge the local tariffs of GTE
Northwest and former Contel of the Northwest and make certain changes in its
prices and service offerings. In 1996, the WUTC approved the filing, allowing
rate increases for some services and decreases for others, resulting in a
favorable impact of $2.2 million.
On September 27, 1995, the WUTC approved the Company's toll discount calling
plan for business. The annual revenue impact of the new calling plan is a
reduction of $1.8 million.
On December 15, 1995, the Company, the WUTC staff and the Consumer Counsel
Section of the Attorney General's office reached a settlement agreement
allowing the Company to adopt the Equal Life Group (ELG) depreciation
methodology on a going forward basis, effective January 1, 1995. There is no
immediate expense impact of adopting ELG. The parties also agreed that, for
regulatory purposes, the Company's existing $17.5 million reserve deficiency
should be amortized over a two-year period beginning January 1, 1995. After
adjusting for the new remaining life rates resulting from the reserve
amortization, annual intrastate depreciation expense increased by approximately
$4.4 million each of the two years.
On December 27, 1995, the WUTC issued an order setting the structure for local
interconnection and competition between LECs and ALECs. The order required the
Company to file an unbundled local loop tariff and an interim number
portability tariff by January 26, 1996. Number portability will be accomplished
on an interim basis through remote call forwarding offered at a discounted
price. Also, a local interconnection tariff implementing bill and keep
24
<PAGE> 27
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. The revenue impacts are
not known at this time.
On December 11, 1996, the WUTC issued its decision in the Company's arbitration
with AT&T to determine interconnection, resale, and unbundling terms and
conditions. Also on January 17, 1997, the WUTC issued its decision in the
Company's arbitration with Sprint and MCI. The interim discount rates for the
Company's resold services were set at 18.81%, 13.03% and 16.63%, respectively.
The Company has filed a lawsuit in the U.S. District Court challenging portions
of the WUTC's arbitration determinations.
California
On December 29, 1995, GTE West Coast Incorporated filed a proposal with the
California Public Utilities Commission (CPUC) to restructure certain rates in
compliance with an order from the CPUC that all small LEC's file by the end of
that year. The Company requested an ROE of 13.36% and an ROR of 11.30%. The
CPUC is expected to issue a decision in April 1997. The estimated revenue
impact is less than $0.5 million.
INTERSTATE SERVICES
For the provision of interstate services, the Company operates under the terms
of the FCC's price cap incentive plan. The "price cap" mechanism serves to
limit the rates a carrier may charge, rather than just regulating the rate of
return which may be achieved. Under this approach, the maximum price that the
LEC may charge is increased or decreased each year by a price index based upon
inflation less a predetermined productivity target. LECs have limited pricing
flexibility provided they do not exceed the allowed price cap.
In March 1995, the FCC adopted interim rules to be utilized by 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 following tariff years:
<TABLE>
<CAPTION>
Sharing Parameters
Tariff Productivity -------------------------------------------
Entity Factor 50% 100%
--------------------------------- ---------------- ------------------- ----------------
1996-1997 Tariff Year
---------------------
<S> <C> <C> <C>
California-West Coast, Inc. 4.0% 12.25% - 13.25% ROR Over 13.25% ROR
Idaho, Oregon,
Washington (GTE),
Washington (Contel) 5.3% None None
1995-1996 Tariff Year
---------------------
Washington (GTE),
California-West Coast, Inc. 4.0% 12.25% - 13.25% ROR Over 13.25% ROR
Idaho, Oregon,
Washington (Contel) 5.3% None None
</TABLE>
Since the Company's access fees were priced significantly below the FCC's
maximum price, the Company was permitted to file tariffs effective May 24, 1995
to increase rates $6 million annually. In addition, the Company filed tariffs,
effective August 31, 1995, under the interim rules to reduce rates $17.2
million annually. On September 20,
25
<PAGE> 28
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 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 million, effective July 1,
1996.
On February 8, 1996, the Telecommunications Act of 1996 (the Telecommunications
Act) became law. This comprehensive telecommunications reform legislation
addresses a wide range of competitive and regulatory issues that will affect
the future development of local and long distance services, cable television
and information services. The new law removes regulatory and court-ordered
barriers to competition between segments of the industry, enabling
local-exchange, long distance, wireless and cable companies to compete in
offering voice, video and information services.
The Telecommunications Act requires the FCC and state commissions to open
local-exchange markets and to set new guidelines for interconnection, loosens
restrictions barring local telephone companies from entering the cable
television market, and preserves universal service while equalizing the
responsibility for contribution among all carriers.
On August 8, 1996, the FCC published its First Report and Order (the Order)
containing rules implementing Section 251 of the Telecommunications Act dealing
with interconnection, unbundling of network elements and wholesale prices and
other terms for competitive entry into local-exchange service. On August 9,
1996, the FCC released its Second Report and Order implementing the provision
of number portability and dialing parity in accordance with the
Telecommunications Act.
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. 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. Additionally, the Court held oral arguments on the merits on January
17, 1997. The Court ruling is expected in the spring of 1997.
While GTE cannot predict the outcome of the Court's final decision, GTE intends
to continue to vigorously present its position in Court.
In November 1996, the Federal-State Joint Board released its recommended
universal service plan, and in December 1996, the FCC issued its access reform
proposals. Both proposals incorporate a pricing methodology similar to the one
that GTE is appealing in the interconnection case. A final order in the
universal service proceeding must be adopted by early May 1997, and a decision
on the access reform proceeding is expected shortly thereafter.
SIGNIFICANT CUSTOMER
Revenues received from AT&T Corp. include amounts for access and billing and
collection during the years 1996-1994 under various arrangements and amounted
to $126 million, $133.4 million and $128.3 million, respectively.
26
<PAGE> 29
13. COMMITMENTS AND CONTINGENCIES
The Company has noncancelable leases covering certain buildings, office space
and equipment. Rental expense was $12.9 million, $12.3 million and $12 million
in 1996-1994, respectively. Minimum rental commitments for noncancelable leases
through 2001 do not exceed $2 million annually and aggregate $5.1 million
thereafter.
The Company is subject to a number of proceedings arising out of the conduct of
its business, including those relating to regulatory actions, commercial
transactions and/or environmental, safety and health matters. Management
believes that the ultimate resolution of these matters will not have a material
adverse effect on the results of operations or the financial position of the
Company.
Recent judicial and regulatory developments, as well as the pace of
technological change, have continued to influence industry trends, including
accelerating and expanding the level of competition. As a result, the Company's
operations face increasing competition in virtually all aspects of its
business. The Company continues to support greater competition in
telecommunications, provided that, overall, the actions to eliminate existing
legal and regulatory barriers benefit consumers by allowing an opportunity for
all service providers to participate in a competitive marketplace under
comparable conditions.
27
<PAGE> 30
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
GTE Northwest Incorporated:
We have audited the accompanying consolidated balance sheets of GTE Northwest
Incorporated (a Washington corporation and wholly-owned subsidiary of GTE
Corporation) and subsidiary as of December 31, 1996 and 1995, and the related
consolidated statements of income, shareholder's equity and cash flows for each
of the three years in the period ended December 31, 1996. These financial
statements and the schedule and exhibit referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and the schedule and exhibit based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of GTE Northwest Incorporated and
subsidiary as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, in 1995, the
Company discontinued applying the provisions of Statement of Financial
Accounting Standards No.71, "Accounting for the Effects of Certain Types of
Regulation".
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The supporting schedule and exhibit listed under
Item 14 are presented for purposes of complying with the Securities and
Exchange Commission's rules and are not a required part of the basic financial
statements. The supporting schedule and exhibit have been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly state in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Dallas, Texas
January 28, 1997
28
<PAGE> 31
MANAGEMENT REPORT
To Our Shareholder:
The management of the Company is responsible for the integrity and objectivity
of the financial and operating information contained in this Annual Report on
Form 10-K, including the consolidated financial statements covered by the
Report of Independent Public Accountants. These statements were prepared in
conformity with generally accepted accounting principles and include amounts
that are based on the best estimates and judgments of management.
The Company has a system of internal accounting controls which provides
management with reasonable assurance that transactions are recorded and
executed in accordance with its authorizations, that assets are properly
safeguarded and accounted for, and that financial records are maintained so as
to permit preparation of financial statements in accordance with generally
accepted accounting principles. This system includes written policies and
procedures, an organizational structure that segregates duties, and a
comprehensive program of periodic audits by the internal auditors. The Company
has also instituted policies and guidelines which require employees to maintain
the highest level of ethical standards.
EILEEN O'NEILL ODUM
President
GERALD K. DINSMORE
Senior Vice President - Finance and Planning
29
<PAGE> 32
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
30
<PAGE> 33
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
<TABLE>
<S> <C>
(a) (1) Financial Statements - See GTE Northwest Incorporated's
consolidated financial statements and report of independent
accountants thereon in the Financial Statements section included
elsewhere herein.
(2) Financial Statement Schedules - Schedules supporting the consolidated
financial statements for the years ended December 31, 1996-1994 (as
required):
II - Valuation and Qualifying Accounts
Note: Schedules other than that listed above are omitted as not applicable,
not required, or the information is included in the consolidated
financial statements or notes thereto.
(3) Exhibits - Included in this report or incorporated by reference.
2.1*Agreement of Merger dated November 18, 1992 between Contel of the
Northwest Inc. and GTE Northwest Incorporated. (Exhibit 2.1 of the
1993 Form 10-K, File No. 0-2908)
3.1*Articles of Incorporation and amendments are referenced in the 1986 and
1987 Form 10-K's, respectively
3.2*Amended Bylaws (Exhibit 3.2 of the 1995 Form 10-K, File No. 0-2908)
4.1*Indenture dated as of April 1, 1994 between GTE Northwest Incorporated
and Bank of America National Trust and Savings Association, as Trustee
(Exhibit 4.1 of the Company's Registration Statement on Form S-3, File
No. 33-52909)
4.2*First Supplemental Indenture dated as of May 1, 1996 between GTE
Northwest Incorporated and First Trust of California, National
Association, as Trustee (as successor trustee to Bank of America
National Trust and Savings Association) (Exhibit 4.3 of the Company's
Registration Statement on Form S-3, File No. 333-2839)
10* Material Contracts - Agreements Between GTE and Certain Executive
Officers (Exhibit 10 of the 1995 Form 10-K, File No. 0-2908)
12 Statements re: Calculation of the Consolidated Ratio of Earnings to
Fixed Charges
23 Consent of Independent Public Accountants
27 Financial Data Schedule
(b) Reports on Form 8-K
</TABLE>
The Company filed no reports on Form 8-K during the fourth quarter of
1996.
* Denotes exhibits incorporated herein by reference to previous filings
with the Securities and Exchange Commission as designated.
31
<PAGE> 34
GTE Northwest Incorporated and Subsidiary
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS For The Years Ended December
31, 1996, 1995 and 1994
(Thousands of Dollars)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
----------------------------------------------------------------------------------------------
Additions
------------------------
Charged Balance
Balance Charged (Credited) Deductions at
at (Credited) to from Close
Beginning to Other Reserves of
Description of Year Income Accounts (Note 1) Year
----------------------------------------------------------------------------------------------
Allowance for uncollectible accounts for the years ended:
<S> <C> <C> <C> <C> <C>
December 31, 1996 $13,268 $15,828 $ 15,855(2) $ 27,567 $17,384
======= ======= ======== ======== =======
December 31, 1995 $ 7,745 $23,442 $ 21,716(2) $ 39,635 $13,268
======= ======= ======== ======== =======
December 31, 1994 $ 6,602 $ 9,642 $ 14,683(2) $ 23,182 $ 7,745
======= ======= ======== ======== =======
Accrued restructuring costs for the years ended (Note 4):
December 31, 1996 $ 64,315 $ -- $(15,778)(3) $ 48,537 $ --
======== ======= ======== ======== ========
December 31, 1995 $ 99,544 $ -- $ -- $ 35,229 $ 64,315
======== ======= ======== ======== ========
December 31, 1994 $125,003 $ -- $ -- $ 25,459 $ 99,544
======== ======= ======== ======== ========
</TABLE>
NOTES:
(1) Charges for which reserve was created.
(2) Recoveries of previously written-off amounts.
(3) Represents amounts necessary to satisfy commitments related to the
re-engineering program that have been reclassified to Accounts Payable
and Accrued Expenses.
(4) See Note 3 to the consolidated financial statements included elsewhere
herein.
32
<PAGE> 35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 March 26, 1997 By Eileen O'Neill Odum
--------------------- --------------------------------------------
Eileen O'Neill Odum
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report is signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Eileen O'Neill Odum President March 26, 1997
- --------------------------- (Principal Executive Officer)
Eileen O'Neill Odum
Gerald K. Dinsmore Senior Vice President - Finance
- --------------------------- and Planning and Director March 26, 1997
Gerald K. Dinsmore (Principal Financial Officer)
William M. Edwards, III Vice President - Controller March 26, 1997
- --------------------------- (Principal Accounting Officer)
William M. Edwards, III
John C. Appel Director March 26, 1997
- ---------------------------
John C. Appel
Richard M. Cahill Director March 26, 1997
- ---------------------------
Richard M. Cahill
Michael B. Esstman Director March 26, 1997
- ---------------------------
Michael B. Esstman
Thomas W. White Director March 26, 1997
- ---------------------------
Thomas W. White
33
<PAGE> 36
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- ---------------------------------------------------------------
<S> <C>
12 Statements re: Calculation of the Ratio of Earnings to Fixed
Charges
23 Consent of Independent Public Accountants
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 12
GTE Northwest Incorporated
STATEMENTS OF THE CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
(Thousands of Dollars)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------------
1996 1995 1994 1993(a) 1993 1992
---------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net earnings available for fixed charges:
Income before extraordinary charges $ 187,426 $ 150,187 $ 118,649 $ 96,421 $ 14,330 $ 126,780
Add - Income tax expense 103,812 77,217 58,159 56,193 5,581 66,586
- Fixed charges 58,051 60,382 56,089 61,955 61,955 58,319
---------- ----------- ----------- ---------- ----------- -----------
Adjusted earnings: $ 349,289 $ 287,786 $ 232,897 $ 214,569 $ 81,866 $ 251,685
========== =========== =========== ========== =========== ===========
Fixed charges:
Interest expense $ 53,745 $ 56,292 $ 52,086 $ 58,185 $ 58,185 $ 54,352
Portion of rent expense
representing interest 4,306 4,090 4,003 3,770 3,770 3,967
---------- ----------- ----------- ---------- ----------- -----------
Adjusted fixed charges: $ 58,051 $ 60,382 $ 56,089 $ 61,955 $ 61,955 $ 58,319
========== =========== =========== ========== =========== ===========
RATIO OF EARNINGS TO FIXED
CHARGES: 6.02 4.77 4.15 3.46 1.32 4.32
</TABLE>
(a) Results for 1993 exclude an after-tax restructuring charge of
approximately $77 million for the implementation of a re-engineering plan
and a one-time after-tax charge of approximately $5.1 million related to
the enhanced early retirement and voluntary separation programs offered to
eligible employees in 1993.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report, dated January 28, 1997, on the financial statements and
supporting schedule and exhibit of GTE Northwest Incorporated included in this
Form 10-K, into the Registration Statement filed on Form S-3 (File No.
333-02839).
Dallas, Texas
March 26, 1997
ARTHUR ANDERSEN LLP
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,074
<SECURITIES> 0
<RECEIVABLES> 275,659
<ALLOWANCES> 17,384
<INVENTORY> 14,361
<CURRENT-ASSETS> 295,203
<PP&E> 3,258,268
<DEPRECIATION> 2,067,357
<TOTAL-ASSETS> 1,570,380
<CURRENT-LIABILITIES> 316,926
<BONDS> 697,242
0
0
<COMMON> 448,000
<OTHER-SE> (25,954)
<TOTAL-LIABILITY-AND-EQUITY> 1,570,380
<SALES> 1,061,980
<TOTAL-REVENUES> 1,061,980
<CGS> 372,110
<TOTAL-COSTS> 725,574
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 52,687
<INCOME-PRETAX> 291,238
<INCOME-TAX> 103,812
<INCOME-CONTINUING> 187,426
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 187,426
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
