SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended
Commission File
December 30, 199527, 1997
Number 0-15658
PETER KIEWIT SONS', INC.
(Exact name of registrant as specified in its charter)
Delaware 47-0210602
(State of Incorporation) (I.R.S. EmployerEmployer)
Identification No.)
1000 Kiewit Plaza, Omaha, Nebraska 68131
(Address of principal executive offices) (Zip Code)
(402) 342-2052
(Registrant's telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act:
None.
Securities registered pursuant to Section 12(g) of the Act:
Class B Construction & Mining Group Nonvoting Restricted
Redeemable Convertible ExchangeableC Common Stock, par value $.0625
Class C Construction & Mining Group Restricted Redeemable
Convertible Exchangeable Common Stock, par value $.0625
Class D Diversified Group Convertible Exchangeable Common Stock, par value $.0625
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 registrant's Class C stock is not publicly traded, and
therefore there is no ascertainable aggregate market value of
voting stock held by nonaffiliates. The registrant's Class D
stock has been trading on the Nasdaq OTC Bulletin Board. The
aggregate market value of the Class D stock held by nonaffiliates
as of March 14, 1998 was $7.3 billion.
As of March 15, 1996,1998, the number of outstanding shares of
each class of the Company's common stock was:
Class B -263,468
Class C -9,957,413- 7,681,020
Class D -23,222,259- 146,943,752
Portions of the Company's definitive Proxy Statement for the 19961998
Annual Meeting of Stockholders are incorporated by reference into
Part III of this Form 10-K.
TABLE OF CONTENTS
Page
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Executive Officers of the Registrant
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Index to Financial Statements and Financial Statement Schedules of Registrant
PART I
ITEM 1. BUSINESS.BUSINESS
Peter Kiewit Sons', Inc. (the("PKS" or the "Company") is one of
the largest construction contractors in North America and also
owns energy,information services, telecommunications and infrastructurecoal mining
businesses. The Company pursues these activities through two
subsidiaries, Kiewit Construction Group Inc. ("KCG") and Level 3
Communications, Inc., formerly known as Kiewit Diversified Group
Inc. ("KDG"Level 3"). The organizational structure is shown by the
following chart.
Class C Stock
Peter Kiewit Sons', Inc.
Kiewit Construction Group Inc.
Kiewit Construction companyMaterials Operations
Construction Operations
Kiewit Mining Group Inc.
Kiewit Diversified GroupClass D Stock
Level 3 Communications, Inc.
PKS Information Services, Inc.
Level 3 Communications, LLC
Kiewit Energy Group Inc.
Kiewit Coal Properties Inc.
CalEnergy Company,Cable Michigan, Inc. (24%)
Energy Projects
Infrastructure Projects48.5%
Commonwealth Telephone Enterprises, Inc. 48.4%
RCN Corporation C-TEC Corporation (58%)46.1%
The Company has two principal classes of common stock, Class
C Construction & Mining Group stockRestricted Redeemable Convertible
Exchangeable Common Stock, par value $.0625 per share (the "Class
C stock") and Class D Diversified Group stock.Convertible Exchangeable
Common Stock par value $.0625 per share (the Class D stock").
The value of each classClass C stock is linked to the separateCompany's
construction and materials operations (the "Construction Group").
The value of Class D stock is linked to the operations of each Group,Level 3
(the "Diversified Group"), under the terms of the Company's
charter (see Item 5 below). All Class C shares and historically
most Class D shares arehave been owned by current and former
employees of the Company; almost all of the
remaining shares are owned by former employeesCompany and their family members. The Company
was incorporated in Delaware in 1941 to continue a construction
business founded in Omaha, Nebraska in 1884. The Company entered
the coal mining business in 1943 and the telecommunications
business in 1988. In 1995, the Company distributed to its Class
D stockholders all of its shares of MFS Communications Company,
Inc. ("MFS") (which was later acquired by WorldCom, Inc.).
Through subsidiaries, the Company owns 58%48.5% of the votingcommon stock
of a telecommunications
company,Cable Michigan, Inc., 48.4% of Commonwealth Telephone
Enterprises, Inc., formerly known as C-TEC Corporation ("C-TEC")
and 46.1% of RCN Corporation (collectively, the "C-TEC
Companies"), the three companies that resulted from the
restructuring of C-TEC, which was completed in September 1997.
RCN Corporation, Cable Michigan, Inc. and now owns 24% of the
voting stock of CalEnergy Company,Commonwealth Telephone
Enterprises, Inc. ("CE"). C-TEC and CE are publicly traded companies and more detailed
information about each of them is contained in their separate
FormsAnnual Reports on Form 10-K. MFS Spin-off. On September 30, 1995,Prior to January 2, 1998, the
Company made a tax-
free distributionwas also engaged in the alternative energy business
through its ownership of its entire ownership interest in MFS
Communications24% of the voting stock of CalEnergy
Company, Inc. ("MFS"CalEnergy") and certain international development
projects in conjunction with CalEnergy.
On December 8, 1997, the Company's stockholders ratified the
decision of the Company's Board of Directors (the "PKS Board") to
its Class D stockholders.separate the Company distributed 40.1 million sharesbusiness conducted by the Construction Group and the
business conducted by the Diversified Group (collectively, the
"Business Groups") into two independent companies. In connection
with the consummation of MFS common stock and
15 million sharesthis transaction, the PKS Board declared
a dividend of MFS Series B Convertible Preferred Stock
("Preferred Stock"). For each Class D share, holders received
1.741 shareseight-tenths of MFS common stock and .651one share of MFS Preferred
Stock.
The Company completed an exchange offer before the Spin-off.
Four million Class B and Class C shares were exchanged for
1,666,384 Class D shares, following principles derived from the Company's certificate of incorporation concerning annual stock
conversion rights (see Item 5 below). The exchange ratio was
calculated using relative stock formula values. Eachnewly
created Class R Convertible Common Stock, par value $.01 per
share ("Class R stock") with respect to each outstanding share of
Class BC stock. The Class R stock or Class C stock ($25.10) was exchanged for .416598
shareis convertible in shares of
Class D stock ($60.25)pursuant to a defined formula. In addition, the
Company has announced that effective March 31, 1998, the Company,
through a resolution of the PKS Board, shall cause each
outstanding share of Class C stock to be mandatorily exchanged
(the "Share Exchange") pursuant to provisions of the PKS Restated
Certificate of Incorporation (the "PKS Certificate") for one
outstanding share of Common Stock, par value $.01 per share, of
PKS Holdings, Inc. ("PKS Holdings"), a recently formed, direct,
wholly owned subsidiary of PKS, to which the eight-tenths of one
share of Class R Stock would attach (collectively, the
"Transaction"). Segment information.In connection with the consummation of the
Transaction, the Company will change its name to Level 3
Communications, Inc. and PKS Holdings, Inc. will change its name
to Peter Kiewit Sons', Inc. The Company has announced that the
PKS Board has approved in principle a plan to force conversion of
all 6,538,231 shares of Class R Stock outstanding. Due to
certain provisions of the Class R stock, conversion will not be
forced prior to May 1998, and the final decision to force
conversion would be made at that time. The decision may be made
not to force conversion if it were decided that conversion is not
in the best interest of the then stockholders of the Company.
The Transaction is intended to separate the Business Groups
into two independent companies. The PKS Board believes that
separation of the Business Groups will (i) permit Level 3 to
attract and retain the senior management and employees needed to
implement and develop Level 3's expansion plan (which is
discussed below), (ii) enable Level 3 to access the capital
markets in order to fund its expansion plan on more advantageous
terms than would be available to Level 3 as part of the Company,
(iii) enable Level 3 to pursue strategic investments and
acquisitions, as part of the expansion plan, which could be
foreclosed to Level 3 as part of the Company and (iv) allow the
directors and management of each Business Group to focus their
attention and financial resources on that Business Group's
business. Except for the anticipated effect of the Transaction
on the management of the construction business, the PKS Board
does not believe that the Transaction will have any other
significant effect on the construction business.
For purposes of this filing, the Company has filed as
exhibits to this Form 10-K, Financial Statements and Other
Information for each of the Construction Group (Exhibit 99.A) and
the Diversified Group or Level 3 (Exhibit 99.B). These exhibits
generally follow the format of Form 10-K and consist of separate
financial statements for each Group and excerpts of other
information from this Form 10-K pertaining to each Business
Group.
For 1997 results, the Company reports financial information
about threefor four business segments: construction, mining,construction; information services;
telecommunications; and telecommunications.coal mining. Additional financial
information about the
Company's businessthese segments, including revenue, operating
earnings, equity earnings, identifiable assets, capital
expenditures, and depreciation, depletion and amortization, as
well as foreign operations information, is contained in Note 1613
to the Company's consolidated financial statements.
KIEWIT CONSTRUCTION GROUP
CONSTRUCTION OPERATIONS
The construction business is conducted by operating
subsidiaries of Kiewit Construction Group Inc. (collectively,
"KCG"). KCG and its joint ventures perform construction services
for a broad range of public and private customers primarily in
the United States and Canada. New contract awards during 19951997
were distributed among the following construction markets:
transportation including(including highways, bridges, airports, railroads,
and airports (54%)mass transit) -- 62%, marine (10%)power, heat, cooling -- 18%, sewercommercial
buildings -- 8%, water supply -- 2%, mining -- 2%, sewage and
waste disposal (9%), water supply systems
(7%), residential (4%), mining (4%), dams-- 1% and reservoirs (3%), oil
and gas (3%), and commercial buildings (2%)other markets -- 7%.
AKCG primarily performs its services as a general contractor.
As a general contractor, KCG is responsible for the overall
direction and management of construction projects and for
completion of each contract in accordance with terms, plans, and
specifications. KCG plans and schedules the projects, procures
materials, hires workers as needed, and awards subcontracts. KCG
generally requires performance and payment bonds or other
assurances of operational capability and financial capacity from
its subcontractors.
Contract Types. KCG performs its construction work under
various types of contracts, including fixed unit or lump-sum
price, guaranteed maximum price, and cost-reimbursable contracts.
Contracts are either competitively bid and awarded or negotiated.
KCG's governmentpublic contracts generally provide for the payment of a
fixed price for the work performed. Profit on a fixed-price
contract is realized on the difference between the contract price
and the actual cost of construction, and the contractor bears the
risk that it may not be able to perform all the work for the
specified amount. Construction contracts generally provide for
progress payments as work is completed, with a retainage to be
paid when performance is substantially complete. Construction
contracts frequently contain penalties or liquidated damages for
late completion and infrequently provide bonuses for early
completion.
KCG's private contracts are generally "cost plus" contracts; the
contractor is reimbursed for its costs and also receives a flat fee
or a fee based on a percentage of its costs. KCG also performs
"guaranteed maximum" contracts, under which the contractor and
owner share in savings if costs are less than the maximum price.
Government Contracts. Public contracts accounted for 67%74% of
the combined prices of contracts awarded to KCG during 1995.1997.
Most of these contracts were awarded by government and
quasi-government units under fixed price contracts after
competitive bidding. Most public contracts are subject to
termination at the election of the government. In the event of
termination, the contractor is entitled to receive the contract
price on completed work and payment of termination related costs.
Backlog. At the end of 1995,1997, KCG had backlog (anticipated
revenue from uncompleted contracts) of $2.0$3.9 billion, a declinean increase
from $2.2$2.3 billion at the end of 1994.1996. Of current backlog,
$300 millionapproximately $1.0 billion is not expected to be completed during
1996.1998. In 19951997 KCG was low bidder on 229226 jobs with total contract
prices of $1.5$3.5 billion, an average price of $6.7$15.3 million per
job. There were 1619 new projects with contract prices over $25
million, accounting for 58%76% of the successful bid volume.
Competition. A contractor's competitive position is based
primarily on its prices for construction services and its
reputation for quality, timeliness, experience, and financial
strength. The construction industry is highly competitive and
lacks firms with dominant market power. In 1995,1997 Engineering News
Record, a construction trade publication, ranked KCG as the 9th
largest U.S. contractor in terms of 19941996 revenue and 13th12th largest
in terms of 19941996 new contract awards. It ranked KCG 2nd1st in the
transportation market by 1994in terms of 1996 revenue. The U.S. Department of
Commerce reports that the total value of construction put in place
in 1995 was $527 billion. KCG's U.S. revenues for the same period
were $2.0 billion, or 0.4% of the total domestic market.
Joint Ventures. KCG frequently enters into joint ventures
to efficiently allocate expertise and resources among the
venturers and to spread risks associated with particular
projects. In most joint ventures, if one venturer is financially
unable to bear its share of expenses, the other venturers may be
required to pay those costs. KCG prefers to act as the sponsor
of its joint ventures. The sponsor generally provides the
project manager, the majority of venturer-provided personnel, and
accounting and other administrative support services. The joint
venture generally reimburses the sponsor for such personnel and
services on a negotiated basis. The sponsor is generally
allocated a majority of the venture's profits and losses and
usually has a controlling vote in joint venture decision making.
In 19951997 KCG derived 83%70% of its joint venture revenue from
sponsored joint ventures and 17%30% from non-sponsored joint
ventures. KCG's share of joint venture revenue accounted for 30%28%
of its 19951997 total revenue.
Demand. The volume and profitability of KCG's construction
work depends to a significant extent upon the general state of
the economies of the United States and Canada, and the volume of
work available to contractors. Fluctuating demand cycles are
typical of the industry, and such cycles determine to a large
extent the degree of competition for available projects. KCG's
construction operations could be adversely affected by labor
stoppages or shortages, adverse weather conditions, shortages of
supplies, or governmental action. The volume of available
government work is affected by budgetary and political
considerations. A significant decrease in the amount of new
government contracts, for whatever reasons, would have a material
adverse effect on KCG.
Locations. KCG structures its construction operations
around 1920 principal operating offices located throughout the U.S.
and Canada, with headquarters in Omaha, Nebraska. Through its
decentralized system of management, KCG has been able to quickly
respond to changes in the local markets. At the end of 1995,1997, KCG
had current projects in 3033 states and 56 Canadian provinces. Internationally, KCG
also participates in the construction of a tunnel
under Denmark's Great Belt Channel and a geothermal power plantplants
in the Philippines.Philippines and Indonesia.
Properties. KCG has 1920 district offices, of which 1416 are in
owned facilities and 54 are leased. KCG owns or leases numerous
shops, equipment yards, storage facilities, warehouses, and
construction material quarries. Since construction projects are
inherently temporary and location-specific, KCG owns
approximately 800950 portable offices, shops, and transport
trailers. KCG has a large equipment fleet, including
approximately 3,0004,500 trucks, pickups, and automobiles, and 1,5002,000
heavy construction vehicles, such as graders, scrapers, backhoes,
and cranes.
MATERIALS OPERATIONS
Several KCG subsidiaries, primarily in Arizona and Oregon,
produce construction materials, including ready-mix concrete,
asphalt, sand and gravel. KCG also has quarrying operations in
New Mexico and Wyoming, which produce landscaping materials and
railroad ballast. Kiewit Mining Group Inc. ("KMG"), a subsidiary
of KCG, provides mine management services to Kiewit Coal
Properties Inc., a subsidiary of PKS. KMG also owns a 48%
interest in an underground coal mine near Pelham, Alabama.
LEVEL 3 COMMUNICATIONS, INC.
Level 3 engages in the information services,
telecommunications, coal mining and energy businesses, through
ownership of operating subsidiaries, joint venture investments
and ownership of substantial positions in public companies.
Level 3 also holds smaller positions in a number of development
stage or startup ventures.
INFORMATION SERVICES
PKS Information Services, Inc. ("PKSIS") is a full service
information technology company that provides computer operations
outsourcing and systems integration services to customers located
throughout the United States as well as abroad. Utilizing all
computing environments from mainframes to client/server
platforms, PKSIS offers custom-tailored computer outsourcing
services. PKSIS also provides network and systems integration
and network management services for various computer platforms.
In addition, PKSIS develops, implements and supports applications
software. Through its subsidiary NET Twenty-One, Inc., PKSIS'
strategy is to focus on assisting its customers in "Web-enabling"
legacy software applications, that is, migrating computer
applications from closed computing and networking environments to
network platforms using Transmission Control Protocol/Internet
Protocol ("TCP/IP") technology that are then accessed using Web
browsers.
The computer outsourcing services offered by PKSIS through
its subsidiary PKS Computer Services, Inc. include networking and
computing services necessary both for older mainframe-based
systems and newer client/server-based systems. PKSIS provides
its outsourcing services to clients that desire to focus their
resources on core businesses, rather than expending capital and
incurring overhead costs to operate their own computing
environment. PKSIS believes that it is able to utilize its
expertise and experience, as well as operating efficiencies, to
provide its outsourcing customers with levels of service equal to
or better than those achievable by the customer itself, while at
the same time reducing the customer's cost for such services.
This service is particularly useful for those customers moving
from older computing platforms to more modern client/server
networks.
PKSIS' systems integration services help customers define,
develop and implement cost-effective information services. In
addition, through PKS Systems Integration, Inc., PKSIS offers
reengineering services that allow companies to convert older
legacy software systems to modern networked computing systems,
with a focus on reengineering software to enable older software
application and data repositories to be accessed by Hypertext
Markup Language (HTML)-based browsers ("Web browsers") over the
Internet or over private or limited access TCP/IP networks.
PKSIS, through its Suite 2000-SM line of services, provides
customers with a multi-phased service for converting programs and
application so that date-related information is accurately
processed and stored before and after the year 2000. Through the
process of converting a customer's legacy software for year 2000
compliance, PKSIS is able to provide additional insight and
advice to further stream-line and improve the customer's
information systems.
PKSIS has established a software engineering facility at the
National Technology Park in Limerick, Ireland, to undertake:
large scale development projects; system conversions; and code
restructuring and software re-engineering. PKSIS has also
established relationships with domestic and international
partners to provide such activities as well as establishing
recently a joint venture in India.
PKSIS' subsidiary, LexiBridge Corporation of Shelton,
Connecticut, provides customers with a combination of workbench
tools and methodology that provide a complete strategy for
converting mainframe-based application systems to client/server
architecture, while at the same time ensuring year 2000
compliance.
In 1997, 93% of PKSIS' revenue was from external customers
and the remainder was from affiliates.
Level 3 recently has determined to increase substantially
the emphasis it places on and the resources devoted to its
information services business, with a view to becoming a
facilities-based provider (that is, a provider of information
services that owns or leases a substantial portion of the plant,
property and equipment necessary to provide those services) of a
broad range of integrated information services to business (the
"Expansion Plan"). Pursuant to the Expansion Plan, Level 3
intends to expand substantially its current information services
business, through both the expansion of the business of PKSIS and
the creation, through a combination of construction, purchase and
leasing of facilities and other assets, of a substantial,
facilities-based communications network that utilizes Internet
Protocol or IP technology.
In order to grow and expand substantially the information
services it provides, Level 3 has developed a comprehensive plan
to construct, purchase and lease local and backbone facilities
necessary to provide a wide range of communications services over
a network that uses Internet Protocol based technology. These
services include:
A number of business-oriented communications services using
a combination of network facilities Level 3 would
construct, purchase and lease from third parties, which
services may include fax services that are transmitted in
part over an Internet Protocol network and are
offered at a lower price than public circuit-switched telephone
network- based fax service and voice message storing and
forwarding that are transmitted in part over the same
Internet Protocol technology based network; and
After construction, purchase and lease of local and
backbone facilities, a range of Internet access services at
varying capacity levels and, as technology development
allows, at specified levels of quality of service and
security.
Level 3 believes that, over time, a substantial number of
businesses will convert existing computer application systems
(which run on standalone or networked computing platforms
utilizing a wide variety of operating systems, applications and
data repositories) to computer systems that communicate using
Internet Protocol and are accessed by users employing Web
browsers. Level 3 believes that such a conversion will occur for
the following reasons:
Internet Protocol has become a de facto networking standard
supported by numerous hardware and software vendors and, as
such, provides a common protocol for connecting computers
utilizing a wide variety of operating systems;
Web browsers can provide a standardized interface to data
and applications and thus help to minimize costs
of training personnel to access and use these resources;
and
As a packet-switched technology, in many instances,
Internet Protocol utilizes network capacity more
efficiently than the circuit-switched public telephone
network. Consequently, certain services provided over an
Internet Protocol network may be less costly than the same
services provided over public switched telephone network.
Level 3 further believes that businesses will prefer to
contract for assistance in making this conversion with those
vendors able to provide a full range of services from initial
consulting to Internet access with requisite quality and security
levels.
Pursuant to the Expansion Plan, Level 3's strategy will be
to attempt to meet this customer need by: (i) growing and
expanding its existing capabilities in computer network systems,
consulting, outsourcing, and software reengineering, with
particular emphasis on conversion of legacy software systems to
systems that are compatible with Internet Protocol networks and
Web browsers access; and (ii) creating a national end-to-end
Internet Protocol based network through a combination of
construction, purchase and leasing of assets. Level 3 intends to
optimize its international network to provide Internet based
communications services to businesses at low cost and high
quality, and to design its network, to the extent possible, to
more readily include future technological upgrades than older,
less flexible networks owned by competitors.
To implement its strategy, Level 3 has formulated a long
term business plan that provides for the development of an end-to-
end network optimized for the Internet Protocol. Initially,
Level 3 will offer its services over facilities, both local and
national, that are in part leased from third parties to allow for
the offering of services during the construction of its own
facilities. Over time, it is anticipated that the portion of
Level 3's network that includes leased facilities will decrease
and the portion of facilities that have been constructed, and are
owned, by Level 3 will increase. Over the next 4 to 6 years, it
is anticipated that the Level 3 network will encompass local
facilities in approximately 40 North American markets, leased
backbone facilities in approximately 10 additional North American
markets, a national or inter-city network covering approximately
15,000 miles, the establishment of local facilities in
approximately 10 European and 4 Asian markets and an inter-city
network covering approximately 2,000 miles across Europe. Level
3 intends to design and construct its inter-city network using
multiple conduits. Level 3 believes that the spare conduits will
allow it to deploy future technological innovations and expand
capacity without incurring significant overbuild costs. The
foregoing description of the Level 3 network and the Expansion
Plan constitutes a forward-looking statement. The actual
configuration of the network, including the number of markets
served and the expanse of the inter-city networks will depend on
a variety of factors including Level 3's ability to: access
markets; design fiber optic network backbone routes; attract and
retain qualified personnel; design, develop and deploy enterprise
support systems that will allow Level 3 to build and operate a
packet switched network that interconnects with the public
switched network, install fiber optic cable and facilities;
obtain rights-of-way, building access rights, unbundled loops and
required government authorizations, franchises and permits; and
to negotiate interconnection and peering agreements.
The operations to be conducted as a result of the Expansion
Plan will be subject to extensive federal and state regulation.
Federal laws and Federal Communications Commission regulations
apply to interstate telecommunications while state regulatory
authorities exercise jurisdiction over telecommunications both
originating and terminating within a state. Generally,
implementation of the Expansion Plan will require obtaining and
maintaining certificates of authority from regulatory bodies in
most states where services are to be offered.
With respect to the Expansion Plan, Level 3 is devoting
substantially more management time and capital resources to its
information services business with a view to making the
information services business, over time, the principal business
of Level 3. In that respect, the management of Level 3 has been
conducting a comprehensive review of the existing Level 3
businesses to determine how those businesses will complement
Level 3's focus on information services businesses as a result of
the Expansion Plan. For example, the management of Level 3
negotiated the sale of its energy interests (see "- CalEnergy"
below) because it believed that the ongoing ownership by Level 3
of an interest in an energy businesses was not compatible with
its focus on the information services business, and because sale
of those assets provided a substantial portion of the money
necessary to fund the early stages of the Expansion Plan.
In addition, the Construction Group and Level 3 are
currently discussing a restructuring of the current mine
management arrangement between the two Business Groups. Level 3
also is reviewing its involvement in a number of start-up and
development stage businesses and recently completed the sale of
its interest in United Infrastructure Company ("UIC"). Level 3
is also currently discussing with the Construction Group the sale
of Kiewit Investment Management Corp. to the Construction Group.
Level 3 has no current intention, however, to sell, dispose or
otherwise alter its ownership interest in the C-TEC Companies.
C-TEC COMPANIES
On September 30, 1997, C-TEC completed a tax-free
restructuring, which divided C-TEC into three public companies: C-
TEC, which changed its name to Commonwealth Telephone
Enterprises, Inc. ("Commonwealth Telephone"), RCN Corporation
("RCN") and Cable Michigan, Inc. ("Cable Michigan").
Businesses of the C-TEC Companies. Commonwealth Telephone
owns the following businesses: Commonwealth Telephone Company
(the rural local exchange carrier business); Commonwealth
Communications (the communications engineering business); the
Pennsylvania competitive local exchange carrier business; and
long distance operations in certain areas of Pennsylvania. RCN
owns the following businesses: its competitive
telecommunications services operations in New York City and
Boston; its cable television operations in New York, New Jersey
and Pennsylvania; its 40% interest in Megacable S.A. de C.V.,
Mexico's second largest cable operator; and its long distance
operations (other than the operations in certain areas of
Pennsylvania). Cable Michigan owns and operates cable television
systems in the State of Michigan and owns a 62% interest in
Mercom, Inc., a publicly held Michigan cable television operator.
Ownership of the C-TEC Companies. In connection with the
restructuring and as a result of the conversion of certain shares
of C-TEC held by Level 3, Level 3 now holds 13,320,485 shares of
RCN common stock, 3,330,119 shares of Cable Michigan common
stock, and 8,880,322 shares of Commonwealth Telephone common
stock. Such ownership represents 48.5% of the outstanding common
stock of Cable Michigan, 48.4% of the outstanding common stock of
Commonwealth Telephone and 46.1% of the outstanding common stock
of RCN.
Each of the shares of RCN common stock, Cable Michigan
common stock and Commonwealth Telephone Common Stock is traded on
the National Association of Securities Dealers, Inc.'s National
Market (the "Nasdaq National Market").
In its filings with the Securities and Exchange Commission,
the board of directors of C-TEC concluded that the distributions
were in the best interests of the shareholders because the
distributions will, among other things, (i) permit C-TEC to raise
financing to fund the development of the RCN business on more
advantageous economic terms than the other alternatives
available, (ii) facilitate possible future acquisitions and joint
venture investments by RCN and Cable Michigan and possible future
offerings by RCN, (iii) allow the management of each company to
focus attention and financial resources on its respective
business and permit each company to offer employees incentives
that are more directly linked to the performance of its
respective business, (iv) facilitate the ability of each company
to grow in both size and profitability, and (v) permit investors
and the financial markets to better understand and evaluate C-
TEC's various businesses.
Accounting Method. Since the ownership by Level 3 of the
equity and voting rights of each of RCN, Cable Michigan and
Commonwealth Telephone at the end of 1997 was less than 50%,
under generally accepted accounting principles, Level 3 uses the
equity method to account for its investments in each of these
companies. Under the equity method, Level 3 reports its
proportionate share of each of Commonwealth Telephone's, RCN's
and Cable Michigan's earnings, even though it has received no
dividends from those companies. Level 3 keeps track of the
carrying value of its investment in each of the C-TEC Companies.
"Carrying value" is the purchase price of the investment, plus
the investor's proportionate share of the investee's earnings,
less the amortized portion of goodwill, less any dividends paid.
Level 3 purchased its C-TEC Companies shares at a premium over
the book value of the underlying net assets. This premium is
being amortized over a period of between 30 to 40 years. At
December 27, 1997 the carrying value of Level 3's Commonwealth
Telephone shares was $75 million, RCN shares was $214 million and
Cable Michigan shares was $46 million.
Description of the C-TEC Companies. RCN is developing
advanced fiber optic networks to provide a wide range of
telecommunications services including local and long distance
telephone, video programming and data services (including high
speed Internet access), primarily to residential customers in
selected markets in the Boston to Washington, D.C. corridor.
Cable Michigan is a cable television operator in the State of
Michigan which, as of December 31, 1997, served approximately
204,000 subscribers. These figures include the approximately
42,000 subscribers served by Mercom, a 62% owned subsidiary of
Cable Michigan. Clustered primarily around the Michigan
communities of Grand Rapids, Traverse City, Lapeer and Monroe
(Mercom), Cable Michigan's systems serve a total of approximately
400 municipalities in suburban markets and small towns.
Commonwealth Telephone Company is a Pennsylvania public utility
providing local telephone service to a 19 county, 5,067 square
mile service territory in Pennsylvania. The telephone company
services approximately 259,000 main access lines. The company
also provides network access, long distance, and billing and
collection services to interexchange carriers. The telephone
company's business customer base is diverse in size as well as
industry, with very little concentration. Commonwealth Long
Distance operates principally in Pennsylvania, providing switched
services and resale of several types of services, using the
networks of several long distance providers on a wholesale basis.
Commonwealth Communications Inc. provides telecommunications
engineering and facilities management services to large corporate
clients, hospitals and universities throughout the Northeastern
United States and sells, installs and maintains PBX systems in
Pennsylvania and New Jersey. In January 1995, C-TEC purchased a
40% equity position in Megacable, Mexico's second largest cable
television operator, serving approximately 174,000 subscribers in
12 cities.
For more information on the business of each of RCN, Cable
Michigan and Commonwealth Telephone, please see the individual
filings of Annual Reports on Form 10-K for each of such companies
as filed with the Securities and Exchange Commission.
COAL MINING
The CompanyLevel 3 is engaged in coal mining through its subsidiaries, Kiewit Mining Group Inc. ("KMG") andsubsidiary,
Kiewit Coal Properties Inc. ("KCP"). KCP has a 50% interest in
three mines, which are operated by KMG.KCP. Decker Coal Company
("Decker") is a joint venture with Western Minerals, Inc., a
subsidiary of The RTZ Corporation PLC. Black Butte Coal Company
("Black Butte") is a joint venture with Bitter Creek Coal
Company, a subsidiary of Union Pacific Corporation.Resources Group Inc.
Walnut Creek Mining Company ("Walnut Creek") is a general
partnership with Phillips Coal Company, a subsidiary of Phillips
Petroleum Company. The Decker Minemine is located in southeastern
Montana, the Black Butte Minemine is in southwestern Wyoming, and the
Walnut Creek Minemine is in east-central Texas. KCP
also owns two smaller coal mines. KMG manages all the coal mines,
as well as KCG's construction aggregate quarries. In 1995, KMG
exchanged its interests in a Nevada precious minerals mine for
publicly traded stock of Kinross Gold Corporation.
Production and Distribution. The coal mines use the surface
mining method. During surface mining operations, topsoil is
removed and stored for later use in land reclamation. After
removal of topsoil, overburden in varying thicknesses is stripped
from above coal seams. Stripping operations are usually conducted
by means of large, earth-moving machines called draglines, or by
fleets of trucks, scrapers and power shovels. The exposed coal
is fractured by blasting and is loaded into haul trucks or onto
overland conveyors for transportation to processing and loading
facilities. Coal delivered by rail from Decker originates on the
Burlington Northern Railroad. Coal delivered by rail from Black
Butte originates on the Union Pacific Railroad. Coal is also
hauled by trucks from Black Butte to the nearby Jim Bridger Power
Plant. Coal is delivered by trucks from Walnut Creek to the
adjacent facilities of the Texas-New Mexico Power Company.
Customers. The coal produced from the KCP mines is sold
primarily to electric utilities, which burn coal in order to
generateproduce steam to producegenerate electricity. Approximately 94%89% of
sales are made under long-term contracts, and the remainder are
made on the spot market. Approximately 80%79%, 71%,80% and 84%80% of KCP's
revenues in 1995, 1994,1997, 1996 and 1993,1995, respectively, were derived from
long-term contracts with Commonwealth Edison Company (with Decker
and Black Butte) and The Detroit Edison Company (with Decker).
The soleprimary customer of Walnut Creek is the Texas-New Mexico
Power Company.
Contracts. Customers enter into long-term contracts for
coal primarily to secure a reliable source of supply at a
predictable price. KCP's major long-term contracts have
remaining terms ranging from 21 to 3330 years. A majority of KCP's
long-term contracts provide for periodic price adjustments. The
price is typically adjusted through the use of various indices
for items such as materials, supplies, and labor. Other portions
of the price are adjusted for changes in production taxes,
royalties, and changes in cost due to new legislation or
regulation, and inregulation. In most cases, suchthese cost items are directly passed
through directly to the customer as incurred. In most cases the price is
also adjusted based on the heating content of the coal.
Decker has a sales contract with Detroit Edison Company whichthat
provides for the delivery of a minimum of 4736 million tons of low
sulphur coal during the period 19961998 through 2005, with annual
shipments ranging from 5.2 million tons in 19961998 to 1.7 million
tons in 2005.
KCP and its mining ventures have entered into various
agreements with Commonwealth Edison Company ("Commonwealth"),
which stipulate delivery and payment terms for the sale of coal.
The agreements as amended provide for delivery of 10388 million tons
during the period 19961998 through 2015,2014, with annual shipments
ranging from 1.61.8 million tons to 1013.1 million tons. These
deliveries include 15 million tons of coal reserves previously
sold to Commonwealth. Since 1993, the amended contract between
Commonwealth and Black Butte provides that Commonwealth's
delivery commitments will be satisfied, not with coal produced
from the Black Butte mine, but with coal purchased from three
unaffiliated mines in the Powder River Basin of Wyoming and Decker.Wyoming. The
contract amendment allows Black Butte to purchase alternate
source coal at a price below its production costs, and to pass
the cost savings through to Commonwealth while maintaining the
profit margins available under the original contract.
The contract between Walnut Creek Coal Company and Texas-New Mexico Power
Company provides for delivery of between 42 and 90 million tons
of coal during the period 1989 through 2017.2027. The actual tons
provided will depend on the number of power units constructed and
operated by TNP. The maximum amount KCP is expecting to ship in
any one year is between 1.6 and 3.2 million tons.
KCP also has other sales commitments, including those with
Sierra Pacific, Idaho Power, Solvay Minerals, and Pacific Power &
Light, Minnesota Power, and Mississippi Power, that provide for
the delivery of approximately 913 million tons through 2005.
Coal Production. Coal production commencedbegan at the Decker, Black
Butte, and Walnut Creek mines in 1972, 1979, and 1989,
respectively. KCP's share of coal mined in 19951997 at the Decker,
Black Butte, and Walnut Creek mines was 5.2, 0.5,5.9, 1.0, and 1.0.9 million
tons, respectively.
Revenue. KCP's total revenue in 19951997 was $216$222 million.
Revenue attributable to the Decker, Black Butte, and Walnut Creek
entities was $109$114 million, $90$89 million, and $17 million,
respectively.
Under a 1992 mine management agreement, KCP pays a KCG
subsidiary an annual fee equal to 30% of KCP's adjusted operating
income. The fee in 1997 was $32 million.
Backlog. At the end of 1995,1997, the backlog of coal to be sold
under KCP's long-term contracts was approximately $1.6$1.4 billion,
based on December 19951997 market prices. Of this amount, $205$213
million is expected to be sold in 1996.1998.
Reserves. At the end of 1995,1997, KCP's share of assigned coal
reserves at Decker, Black Butte, and Walnut Creek was 124, 49,111, 39,
and 3331 million tons, respectively. Of these amounts, KCP's share
of the committed reserves of Decker, Black Butte, and Walnut
Creek was 57.3, 3.8,46, 2, and 20.423 million tons, respectively. Assigned
reserves represent coal whichthat can be mined using KCP's current
mining practices. Committed reserves (excluding alternate source
coal) represent KCP's maximum contractual amounts. These coal
reserve estimates represent total proved and probable reserves.
Leases. The coal reserves and deposits of the mines are
held pursuant to leases with the federal government through the
Bureau of Land Management, with two state governments (Montana
and Wyoming), and with numerous private parties.
Competition. The coal industry is highly competitive. KCP
competes not only with other domestic and foreign coal suppliers,
some of whom are larger and have greater capital resources than
KCP, but also with alternative methods of generating electricity
and alternative energy sources. In 1994,1996, KCP's production
represented 1.4%1.5% of total U.S. coal production. Demand for KCP's
coal is affected by economic, political and regulatory factors.
For example, recent "clean air" laws may stimulate demand for low
sulphur coal. KCP's western coal reserves generally have a low
sulfursulphur content (less than one percent) and are currently useful
principally as fuel for coal-fired steam-electric generating
units.
KCP's sales of its western coal, like sales by other western
coal producers, typically provide for delivery to customers at
the mine. A significant portion of the customer's delivered cost
of coal is attributable to transportation costs. Most of the
coal sold from KCP's western mines is currently shipped by rail
to utilities outside Montana and Wyoming. The Decker and Black
Butte mines are each served by a single railroad. Many of their
western coal competitors are served by two railroads and such
competitors' customers often benefit from lower transportation
costs because of competition between railroads for coal hauling
business. Other western coal producers, particularly those in
the Powder River Basin of Wyoming, have lower stripping ratios
(i.e.(that is, the amount of overburden that must be removed in
proportion to the amount of minable coal) than the Black Butte
and Decker mines, often resulting in lower comparative costs of
production. As a result, KCP's production costs per ton of coal
at the Black Butte and Decker mines can be as much as four and
five times greater than production costs of certain competitors.
KCP's production cost disadvantage has contributed to its
agreement to amend its long-
termlong-term contract with Commonwealth
Edison Company to provide for delivery of coal from alternate
source mines rather than from Black Butte. Because of these cost
disadvantages, KCP does not expect that it will be able to enter
into long-term coal purchase contracts for Black Butte and Decker
production as the current long-term contracts expire. In
addition, these cost disadvantages may adversely affect KCP's
ability to compete for spot sales in the future.
Environmental Regulation. The Company is required to comply
with various federal, state and local laws and regulations
concerning protection of the environment. KCP's share of land
reclamation expenses in 19951997 was $5.7$3.6 million. KCP's share of
accrued estimated reclamation costs was $100 million at the end
of 1995.1997. The Company does not expect to make significant capital
expenditures for environmental compliance in 1996.1998. The Company
believes its compliance with environmental protection and land
restoration laws will not affect its competitive position since
its competitors in the mining industry are similarly affected by
such laws.
Intergroup Transactions. KCP, an indirect subsidiary of KDG,
contains the coal mining joint ventures and related long-term coal
contracts, mining properties, and equipment. KMG, an indirect
subsidiary of KCG, is the employer of senior management involved in
mining operations. KMG manages the coal mines for KCP. KCP pays
KMG an annual coal mining management fee equal to 30% of KCP's
adjusted operating income. The fee in 1995 was $30 million. The
financial results of KCP are reflected in the formula value of
Class D Diversified Group common stock, while the financial results
of KMG are reflected in the formula value of the Class B&C
Construction and Mining Group common stock.
TELECOMMUNICATIONS
C-TEC CORPORATION
C-TEC Corporation. In 1993 the Company purchased a
controlling interest in C-TEC Corporation ("C-TEC"). Through its
subsidiary, RCN Corporation ("RCN"), the Company owns 44% of the
outstanding shares of C-TEC common stock and 60% of the C-TEC Class
B common stock. Holders of common stock are entitled to one vote
per share; holders of Class B stock are entitled to 15 votes per
share. The Company thus owns 49% of the outstanding shares, but is
entitled to 58% of the available votes. C-TEC common stock is
traded on the NASDAQ National Market System, and the Class B Stock
is quoted on NASDAQ and traded over the counter. C-TEC is a
Pennsylvania corporation and traces its origin to 1897 with the
founding of Commonwealth Telephone Company. C-TEC has its
executive offices in Princeton, New Jersey. In 1995 C-TEC had
revenue of $325 million, net income of $23 million, total assets of
$952 million, long-term debt of $263 million, and stockholders'
equity of $370 million. The four operating groups of C-TEC and
their 1995 revenues are: telephone ($129 million), cable ($127
million), long distance ($39 million), and communications services
($29 million).
Telephone Group. The Telephone Group consists of a
Pennsylvania public utility providing local telephone service to a
19 county, 5,067 square mile service territory in Pennsylvania.
The Telephone Group services 226,000 main access lines, of which
174,000 are residential and 52,000 are business related. In
addition to providing local telephone service, this Group provides
network access and long distance services to interexchange
carriers. Revenue is also derived from equipment sales and
internet access services.
Cable Group. The Cable Group is a cable television operator
with cable television systems located in New York, New Jersey,
Michigan, and Pennsylvania. The Cable Group owns and operates
cable television systems serving approximately 334,000 customers
and manages cable television systems with an additional 39,000
customers, ranking it among the top 20 multiple system operators in
the United States.
The Cable Group made several acquisitions in 1995. In
January, the Cable Group purchased the assets of Higgins Lake
Cable, Inc., which provides cable television service to
approximately 3,200 subscribers in northern Michigan. Also in
January, C-TEC purchased a 40% equity position in Megacable, S.A.
de C.V., Mexico's second largest cable television operator,
currently serving 174,000 subscribers in 12 cities. The Cable
Group acquired Twin County Trans Video, Inc., which provides cable
television service to approximately 74,000 subscribers in eastern
Pennsylvania. As a result of a stock rights offering in August
1995, the Group now owns 62% (an increase from 43%) of the voting
stock of Mercom, Inc., which provides cable television service in
Michigan and Florida.
The Cable Group must periodically seek renewal of franchise
agreements from local government authorities. To date, all of the
Group's franchises have been renewed or extended, generally at or
prior to their stated expirations and on acceptable terms.
Competition for the Cable Group's services traditionally has come
from providers of broadcast television, video rentals, and direct
broadcast satellite received on home dishes. Future competition is
expected from telephone companies.
Long Distance Group. The Long Distance Group principally
operates in Pennsylvania. The Group began operations in 1990 by
servicing the local service area of the Telephone Group. In 1992
and 1993, sales offices were opened in other areas of Pennsylvania.
The Long Distance Group provides switched services, is a reseller
of several types of services, and employs the networks of several
long distance providers on a wholesale basis.
Communications Services Group. The Communications Services
Group provides telecommunications-related engineering and technical
services in the northeastern U.S.
Regulation. Effective in February, the Federal
Telecommunications Act of 1996 established a framework for
deregulation of the communications industry. The Federal
Communications Commission ("FCC") and state regulators must work
out the specific implementation process. The Act should foster
competition by telephone companies in the cable television business
and cable companies in the telephone business. The Company's local
exchange telephone subsidiary, Commonwealth Telephone Company
("CTCo"), is subject to a rate-making process regulated by the
Pennsylvania Public Utility Commission ("PPUC"). Consequently, the
ability of the Telephone Group to generate increased income is
largely dependent on its ability to increase its subscriber base,
obtain higher message volumes and control its expenses.
The Cable Group is subject to the Federal Cable Television
Consumer Protection and Competition Act of 1992, which regulated
certain subscriber rates, mandatory carriage of local broadcast
stations, and retransmission consent. The most significant
provision of the Act requires the FCC to establish rules to ensure
that rates for basic services are reasonable for subscribers in
areas without effective competition. Few municipalities served by
C-TEC are subject to effective competition. The overall effect of
the Act's provisions on Cable Group's operations is not yet
determinable.
Restructuring. In November 1995, C-TEC announced that it had
engaged an investment banker to assist with evaluating strategic
alternatives for its various business units with a view toward
enhancing shareholder value. C-TEC is now planning to distribute
to its shareholders in a tax-free spin-off the Telephone Group, the
Communications Services Group, and certain other assets. Following
the spin-off, C-TEC plans to combine its remaining businesses,
which will consist of its domestic Cable Group, with a third party
pursuant to a tax-free, stock-for-stock transaction. C-TEC has
received a number of inquiries regarding its domestic Cable Group
and is holding discussions with interested parties.
Subsequent Event -- Sale of Certain Businesses to RCN. Under
the terms of an agreement dated March 27, 1996, RCN will pay C-TEC
approximately $123 million for certain of C-TEC's assets, including
the Long Distance Group, C-TEC International, which holds the 40%
interest in Megacable, S.A. de C.V., and Residential Communications
Network, a start-up joint effort with RCN which plans to provide
telecommunications services to the residential market. RCN will
purchase Residential Communications Network for cash in a
transaction expected to close in April 1996. RCN's purchase of the
other businesses for cash or C-TEC stock, at RCN's option, is
expected to close in the second half of 1996. The transactions are
subject to certain conditions including the receipt of all
necessary regulatory approvals. The agreement with RCN contains a
repurchase option under which C-TEC can reacquire the businesses if
a restructuring of C-TEC's main businesses does not occur.
Additionally, C-TEC retains a warrant to reacquire a six percent
stake in Residential Communications Network. The agreement with
RCN was approved by a special committee of the board of directors
of C-TEC, composed of directors unaffiliated with either RCN or the
Company.
RCN CORPORATION
On February 20, 1996, RCN entered into an asset purchase
agreement, along with other ancillary agreements, with Liberty
Cable Company, Inc. ("Liberty") to purchase an 80% interest in
certain private cable systems in New York City and selected areas
of New Jersey. These cable systems provide subscription television
services using microwave frequencies. RCN paid the sellers $27
million on the closing date, March 6, 1996. In addition, RCN
delivered a $15 million note that it expects to pay in full during
1996.
OTHER OPERATIONS
CALENERGY COMPANY, INC.
CalEnergy Company, Inc. ("CE"), formerly named California
Energy Company, Inc., develops, constructs,owns, and operates electric power
production facilities, primarily utilizingparticularly those using geothermal
resources, in the western United States, the Philippines, and Indonesia.
CEIn December 1996, CalEnergy and Level 3 acquired Northern
Electric plc, an English electric utility company. CalEnergy is
a Delaware corporation formed in 1971 and has its headquarters in
Omaha, Nebraska. CECalEnergy common stock is traded on the New
York, Pacific, and London Stock Exchanges. In 1995, CE1997, CalEnergy
had revenue of $399 million,$2.3 billion and a net incomeloss of $63 million, before
preferred dividends,$84 million. At the
end of 1997, CalEnergy had total assets of $2,654 million, long-term$7.5 billion, debt of
$1,294 million,$3.5 billion, and stockholders' equity of $544 million.
Kiewit Energy Company ("KEC") currently owns 24% (12.3 million
shares, including 1.5 million shares purchased in February 1996) of
CE's outstanding common stock. KEC has options to purchase 3.3
million common shares at $12 per share and 1 million common shares
at $11.625. KEC holds $64,850,000 of debentures paying 9.5%
interest, convertible into 3.5 million common shares at a
conversion price of $18.375 per share. If KEC were to exercise all
its options and convert its debentures, it would own approximately
34% of CE's common shares. A 1991 agreement entitles KEC to have
three members on CE's board of directors. KEC accounts for its
investment in CE common shares by the equity method, i.e. the
amount included in KEC's net earnings is CE's net earnings
multiplied by the percentage of CE's common shares owned by KEC,
adjusted for income taxes and goodwill and amortization.
Following its acquisition of Magma Power Company in early
1995, CE became the largest independent geothermal power producer
in the world. Power production facilities are measured in terms of
megawatts (MW) of net electric generating capacity. Most of CE's
facilities are co-owned and CE's fractional ownership interest can
be expressed in terms of MWs. CE's has projects in three stages:
operational (and managed by CE), under construction (and financed),
and developmental (with executed and awarded power sales
contracts). CE owns 358 MW of operating facilities having 575 MW
of aggregate capacity; most of the operating facilities are in
Southern California. Under construction are four geothermal power
projects in the Philippines with aggregate capacity of 540 MW; CE
owns 449 MW in the four projects; and KEC owns 74 MW in one
project. Also under construction in the Philippines is a 150 MW
hydroelectric power project, in which CE and KEC own 52 MW each.
In the development stage are seven projects in Indonesia, the
Philippines, and the United States with potential aggregate
capacity of 1,478 MW; CE expects to own 786 MW in the developmental
projects; and KEC expects to own 508 MW in the Indonesian projects
only.
In 1993, KDG and KCG (together "Kiewit") and CE signed a joint
venture agreement concerning their international activities, which
provides that if both Kiewit and CE agree to participate in a
project, they will share all development costs equally. Kiewit and
CE will each provide 50% of the equity required for financing a
project developed by the joint venture and CE will operate and
manage such project. The agreement creates a joint development
structure under which, on a project by project basis, CE will be
the development manager, managing partner and/or project operator,
an equal equity participant with Kiewit and a preferred participant
in the construction consortium and Kiewit will be an equal equity
participant and the preferred turnkey construction contractor.
The Company participates in the Mahanagdong project in the
Philippines in three ways: through KCG, the lead member of the
construction consortium, through KEC as a direct equity investor,
and indirectly through KEC's ownership interest in CE. In the
Casecnan project in the Philippines, KCG does not participate in
construction, but KEC participates as both a direct equity investor
and indirectly as an equity investor through its CE ownership. KEC
also owns $20 million of bonds issued in connection with the
project. Kiewit expects to be a co-developer and an equal equity
participant with CE in the Dieng, Patuha, and Bali projects in
Indonesia.
Geothermal power production process. First, the developer
locates suitable geothermal resources, drills test wells, secures
permits, negotiates long-term power contracts with an electric
utility, and arranges financing. Second, the project is
constructed. Third, the facility is operated and maintained.
Project revenues from the sale of electricity are applied to
operating costs, rent or royalties, and principal and interest
payments on debt incurred for acquisition and construction costs.
Geothermal resources suitable for commercial extraction require an
underground water reservoir heated to high temperatures.
Production wells are drilled to release the heated fluid under high
pressure. Wells are usually located within one or two miles of the
power plant. From well heads, fluid flows through pipelines to a
series of separators where it is separated into water, brine, and
steam. The steam is passed through a turbine which drives a
generator to generate electricity. Once the steam has passed
through the turbine, it is then cooled and condensed back into
water which is reinjected through wells back into the geothermal
reservoir. Under proper conditions, the geothermal power is
renewable energy source, with minimal emissions compared to fossil
fuel power plants. The utilization of geothermal power is
preferred by certain governments in order to minimize the import
(e.g., the Philippines), or maximize the export (e.g., Indonesia)
of hydrocarbons. Geothermal power facilities also enjoy federal
tax benefits and favorable utility regulatory treatment in the
United States.
Operations/United States. Most of CE's operating revenues
come from geothermal power plants in Southern California, three in
the Coso area and seven in the Imperial Valley. These operations
have certain common features. Each plant involves a partnership or
joint venture in which CE has an approximately one-half interest
and is the operator of the plant. Each plant has long-term
contract to supply electric power to Southern California Edison
Company ("Edison"). The agreements provide for both capacity
payments and energy payments for a term of between 20 and 30 years.
During the first ten years, energy payments are based on a pre-set
schedule. Thereafter, while the basis for the capacity payment
remains the same, the required energy payment is Edison's then-
current published "avoided cost of energy" as determined by the
California Public Utility Commission. The initial ten-year periods
expire beginning in 1996 for the first plant and in 2000 for the
tenth plant. CE cannot predict the likely level of Edison's
avoided cost of energy prices at the expiration of the fixed-price
periods, but it is currently substantially below the current energy
prices under CE's contracts. For 1995, the time period-weighted
average of Edison's avoided cost of energy was 2.1 cents per kWh,
compared to CE's comparable selling price for energy of 11.34 cents
per kWh. Thus, the revenue generated by each of CE's ten
facilities is likely to decline significantly after the expiration
of the fixed-price period.
The Coso projects were refinanced through the sale of notes in
a 1992 private placement. The outstanding balance of the notes at
the end of 1995 was $203 million. Assets of the Coso projects are
pledged to satisfy repayment of the notes, but the obligations are
non-recourse to CE. Six of the seven Imperial Valley projects are
subject to financing agreements. The combined outstanding balances
of the notes at the end of 1995 was $507 million. All of the
obligations are non-recourse to CE.
CE has five other operating plants, one each in Arizona, Utah,
and Nevada, and two in California. An expansion to an Imperial
Valley plant is under construction. In addition, two projects are
in the development stage.
Construction Stage/Philippines. CE has four projects in the
Philippines under construction.
Mahanagdong. In 1994 construction began on the Mahanagdong
Project, a 180 gross MW geothermal project on the Philippine island
of Leyte. The Mahanagdong Project will be built, owned and
operated by CE Luzon Geothermal Power Company, Inc. ("CE Luzon"),
a Philippine corporation that during construction is indirectly
owned 50% by CE and 50% by KEC. Up to a 10% financial interest in
CE Luzon may be sold at completion to another industrial company at
the option of such company. The Mahanagdong Project will sell 100%
of its capacity on a "take-or-pay" basis (described below) to PNOC-
Energy Development Corporation ("EDC"), which will in turn sell the
power to the National Power Corporation of the Philippines ("NPC"),
for distribution to the island of Luzon. NPC is the government-
owned and controlled corporation that is the primary supplier of
electricity in the Philippines.
Mahanagdong has a total project cost of $320 million,
including interest during construction, project contingency costs
and a debt service reserve fund. The capital structure consists of
a project financing construction and term loan of $240 million
provided by the Overseas Private Investment Corporation ("OPIC"),
the Export-Import Bank of the United States ("Exim Bank"), and a
consortium of international banks, and approximately $80 million in
equity contributions. Political risk insurance from Exim Bank has
been obtained for the commercial lenders. KEC and CE will each
make an equity investment in the Mahanagdong Project of
approximately $40 million. KEC and CE have arranged for political
risk insurance on their equity investments through OPIC. The
financing is collateralized by all the assets of the project.
The Mahanagdong Project is being constructed by subsidiaries
of KCG and CE under fixed-price, date-certain, turnkey supply and
construction contracts. KCG and CE subsidiaries have 80% and 20%
interests, respectively, in the contracts.
Under the terms of an energy conversion agreement, executed on
September 18, 1993 (the "Mahanagdong ECA"), CE Luzon will build,
own and operate the Mahanagdong Project during the estimated three-
year construction period and a ten-year cooperation period.$1.4 billion.
At the end of the cooperation period, the facility will be transferred to
EDC at no cost. The Mahanagdong Project will be located on land
provided by EDC at no cost. It will take geothermal steam and
fluid, also provided by EDC at no cost, and convert its thermal
energy into electrical energy to be sold to EDC on a "take-or-pay"
basis. Specifically, EDC will be obligated to pay for the electric
capacity that is nominated each year by CE Luzon, irrespective of
whether EDC is willing or able to accept delivery of such capacity.
EDC will pay to CE Luzon a fee (the "Capacity Fee") based on the
plant capacity nominated to EDC in any year (which, at the plant's
design capacity, is1997, Level 3 owned approximately 97% of total contract revenues)
and a fee (the "Energy Fee") based on the electricity actually
delivered to EDC (approximately 3% of total contract revenues).
The Capacity Fee serves to recover the capital costs24% of the
project, to recover fixed operating costscommon stock of CalEnergy. Under generally accepted accounting
principles, an investor owning between 20% and to cover return on
investment. The Energy Fee is designed to cover all variable
operating and maintenance costs50% of a company's
equity, generally uses the equity method. Under the equity
method, Level 3 reports its proportionate share of CalEnergy's
earnings, even though it has received no dividends from
CalEnergy. Level 3 keeps track of the power plant. Payments undercarrying value of its
CalEnergy investment. "Carrying value" is the Mahanagdong ECA will be denominated in U.S. dollars, or
computed in U.S. dollars and paid in Philippine pesos at the then-
current exchange rate, except for the Energy Fee, which will be
used to pay Philippine peso-denominated expenses. The
convertibility of Philippine peso receipts into U.S. dollars is
insured by OPIC. Significant portionspurchase price of
the Capacity Fee and
Energy Fee will be indexed to U.S. and Philippine inflation rates,
respectively. EDC's payment requirements, and its other
obligations underinvestment, plus the Mahanagdong ECA, are supported by the
Governmentinvestor's proportionate share of the
Philippines through a performance undertaking.
Upper Mahiao. In 1994 construction began oninvestee's earnings, less the Upper Mahiao
Project, a 128 gross MW geothermal project on Leyte. The Upper
Mahiao Project will be built, owned and operated by CE Cebu
Geothermal Power Company, Inc. ("CE Cebu"), a Philippine
corporation that is approximately 100% indirectly owned by CE. It
will sell 100% of its capacity on a "take-or-pay" basis to EDC, on
substantially the same terms as described above for the Mahanagdong
Project, which will in turn sell the power to NPC for distribution
to the island of Cebu, located about 40 miles west of Leyte. The
Upper Mahiao Project will have a total project cost of $218
million. A consortium of international banks has committed to
provide $162 million in a project-financed construction loan. The
largestamortized portion of goodwill, less
any dividends paid. At December 27, 1997 the term loan for the project will also be
provided by Exim Bank. CE's equity contribution to the Upper
Mahiao Project is $56carrying value of
Level 3's CalEnergy shares was $337 million. Malitbog. In 1994 construction began on the Malitbog Project,
a 231 gross MW geothermal project on Leyte. The Malitbog Project
will be built, owned and operated by Visayas Geothermal Power
Company ("VGPC"), a Philippine general partnership that is wholly
owned, indirectly, by CE. VGPC will sell 100% ofOn January 2, 1998,
Level 3 sold its capacity, on
substantially the same terms as described above for the Mahanagdong
Project, to EDC, which willentire interest in turn sell the power to NPC. The
Malitbog Project has a total project cost of $280 million. A
consortium of international banks and OPIC have provided a total of
$210 million of construction and term loan facilities. CE's equity
contribution was $70 million.
Casecnan. In November 1995 CE closed the financing and
started construction on the combined irrigation and hydroelectric
power generation project (the "Casecnan Project"), a 150 gross MW
hydroelectric power project located in the central part of the
island of Luzon. The Casecnan Project will include diversion
structures in the Casecnan and Denip Rivers that will divert water
into a 14 mile long tunnel. The tunnel will transfer the water
from the Casecnan and Denip Rivers into the Pantabangan Reservoir
for irrigation and hydroelectric use in the Central Luzon area. An
underground powerhouse at the end of the water tunnel will house a
power plantCalEnergy along with 150 MW capacity.
CE Casecnan Water and Energy Company, Inc., a Philippine
corporation ("CE Casecnan") is developing the Casecnan Project
under the terms of the project agreement between CE Casecnan and
the National Irrigation Administration ("NIA"). CE and KEC have
minimum and maximum ownershipits
interests in CE Casecnan of 35% to
50% each. Two other shareholders, who have no financial
commitments and will not participate in construction or operations,
may receive interests of as much as 15% each, depending on
projected returns from the project. Under the project agreement,
CE Casecnan will develop, finance and construct the Casecnan
Project over an estimated four-year construction period, and
thereafter own and operate the Casecnan Project for a 20 year
cooperation period. During the cooperation period, NIA is
obligated to accept all deliveries of water and energy, and so long
as the Casecnan Project is physically capable of operating, NIA
will pay the CE Casecnan a guaranteed fee for the delivery of water
and a guaranteed fee for the delivery of electricity, regardless of
the amount of water or electricity actually delivered. In
addition, NIA will pay a fee for all electricity delivered in
excess of a threshold amount up to a specified amount. NIA will
sell the electric energy it purchases to NPC, although NIA's
obligations to CE Casecnan under the Project Agreement are not
dependent on NPC's purchase of the electricity from NIA. All fees
to be paid by NIA to CE Casecnan are payable in U.S. dollars. The
guaranteed fees for the delivery of water and energy are expected
to provide approximately 70% of CE Casecnan's revenues. At the end
of the cooperation period, the Casecnan Project will be transferred
to NIA and NPC for no additional consideration on an "as is" basis.
The Republic of the Philippines has provided a performance
undertaking under which NIA's obligations under the Project
Agreement are guaranteed by the full faith and credit of the
Republic of the Philippines. The total cost of the Casecnan
Project, includingseveral development construction, testing and startup,
is estimated to be approximately $495 million.
Construction Stage/Indonesia
Dieng. In December 1994, Himpurnia California Energy Ltd.
("HCE") executed a joint operation contract (the "Dieng JOC") for
the development of the geothermal steam field and geothermal power
facilities at the Dieng geothermal field, located in Central Java
(the "Dieng Project") with Pertamina, the Indonesian national oil
company, and executed a "take-or-pay" energy sales contract (the
"Dieng ESC") with both Pertamina and PLN, the Indonesian national
electric utility. HCE was formed with an Indonesian partner to
develop the Dieng Project (the "Dieng JV"). CE, KEC, and the
Indonesian partner have 47%, 47%, and 6% interests, respectively,
in the Dieng JV.
Pursuant to the Dieng JOC and ESC, Pertamina will grant to the
Dieng JV the geothermal field and wells and other facilities
presently located thereon and the Dieng JV will build, own and
operate power production units with an aggregate capacity of up to
400 MW. HCE will accept the field operation responsibility for
developing and supplying the geothermal steam and fluids required
to operate the plants. The Dieng JOC is structured as a build-own-
transfer agreement and will expire (subject to extension by mutual
agreement) on the date which is the later of (i) 42 years following
effectiveness of the Dieng JOC and (ii) 30 years following the date
of commencement of commercial generation of the final unit
completed. Upon the expiration of the proposed Dieng JOC, all
facilities will be transferred to Pertamina at no cost. The Dieng
JV is required to pay Pertamina a production allowance equal to
three percent of Dieng JV's net operating income from the Dieng
Project, plus a further amount based upon the negotiated value of
existing Pertamina geothermal production facilities that are
expected to be made available by Pertamina.
Pursuant to the Dieng ESC, PLN agreed to purchase and pay for
all of the Project's capacity and energy output on a "take-or-pay"
basis regardless of PLN's ability to accept such energy made
available from the Dieng Project for a term equal to that of the
Dieng JOC. The price paid for electricity includes a base energy
price per kWh multiplied by the number of kWhs the plants deliver
or are "capable of delivering," whichever is greater. Energy price
payments are also subject to adjustment for inflation. PLN will
also pay a capacity payment based on plant capacity. All such
payments are payable in U.S. dollars.
Construction of an initial 55 MW unit is expected to begin in
the second quarter of 1996. A consortium consisting of KCG and CE
will construct the Dieng Project and provide all related design,
engineering and supply work pursuant to fixed price, date certain,
turnkey construction and supply contracts. HCE will be responsible
for operating and managing the Dieng Project. CE and KEC presently
intend to proceed on a modular basis with construction of three
additional units to follow Dieng Unit I, resulting in an aggregate
first phase net capacity at this site of 220 MW. The total project
cost of these units is estimated to be $450 million. The next
phase is expected to expand the total capacity to 400 MW. The cost
of the full Dieng Project is estimated to be approximately $1
billion. It is anticipated that most of the capital needed to
construct and operate the Dieng projects and the development stage
projects described below will be raised by project-financed debt,
i.e. the loans will be repaid from revenues generated by the output
of the plants.
Development Stage Projects.
Patuha. CE and KEC are co-developing a geothermal power plant
at the Patuha geothermal field in Java, Indonesia. They intendNorthern Electric
plc. to proceed on a modular basis similar to the Dieng Project, with an
aggregate capacity of up to 400 MW. The total cost is estimated to
be $1CalEnergy for approximately $1.16 billion.
Construction of the first unit is expected to begin
in 1996. Bali. CE and KEC are co-developing geothermal resources
on the island of Bali, Indonesia. They intend to proceed on a
modular basis similar to the Dieng Project, with an aggregate
capacity of up to 400 MW. The total cost of the Bali project is
estimated to be $1 billion. Construction of the first unit is
expected to begin in 1997. Alto Peak. CE is developing a 70 net
MW geothermal project on the Philippine island of Leyte. KEC is
not a participant in this project.
INFORMATION SERVICES
PKS Information Services, Inc. ("PKSIS"), provides computer
outsourcing and systems integration services to customers on a
nationwide basis. PKSIS provides its outsourcing services to firms
that desire to focus resources on their core businesses while
avoiding the capital and overhead costs of operating their own
computer centers. Systems integration services help customers
define, develop, and implement cost-effective information systems.
PKSIS manages a wide-area network (WAN) on a nationwide basis and
is engaged in the design, installation, and maintenance of high-
performance local area networks (LANs) and multi-tiered distributed
architectures that utilize the latest hardware and software
technologies. PKSIS develops a unified architecture of hardware,
software, and communications technologies in order to meet the
customer's specific design, operational, and management objectives.
Better service and better value are the result of a total focus on
integrating capital, technology, and expert people on a scale
basis. PKSIS' operations and computing equipment are located in an
89,000 square foot computer center in Omaha, Nebraska. The PKSIS
computer center was engineered to: (i) ensure fault tolerance, and
(ii) enable scale economies in hardware, software, and people. The
first point ensures non-stop operation for the customers. The
second promises more cost-effective computing services than most
organizations can deliver themselves. In 1995, 83 percent of
PKSIS' revenue was from external customers and the remainder was
from affiliates.
ENERGY PROJECTS
Kiewit Fuels. Kiewit Fuels Inc., an 80% owned KDG subsidiary,
has acquired a patented, low-cost process to produce additives
known as renewable ethers (EtBE and MtBE) to make cleaner burning
gasoline. Kiewit Fuels is investigating opportunities to utilize
the process.
INFRASTRUCTURE PROJECTS
California Private Transportation Company. KDGOTHER BUSINESSES
SR91 Tollroad. Level 3 has invested $12 million infor a 65%
equity interest and $4.3 million loan to California Private
Transportation Company, L.P. which developed, arranged financing, constructed,financed, and
nowcurrently operates the SR9191 Express Lanes, a ten mile, four lane
tollroad in Orange County.County, California. The fully automated
highway uses an electronic toll collection system and variable
pricing to adjust tolls to demand. Capital costs at completion
were $130 million, $110 million of which was funded with limited
recourse debt. Revenue collected over the 35-year franchise
period is used for operating expenses, debt repayment, and profit
distributions. The tollroad opened for traffic in December 1995.1995 and achieved
operating break-even in 1996. Approximately 100,000 customers
have registered to use the tollroad and weekday volumes typically
exceed 29,000 vehicles per day.
United Infrastructure Company. KDG is investigating North
American infrastructure privatization opportunities through United
Infrastructure Company,UIC was an equal partnership
withbetween Kiewit Infrastructure Corp., a wholly owned subsidiary of
Level 3, and Bechtel Infrastructure Enterprises, Inc.
KIEWIT MUTUAL FUND("Bechtel"). UIC was formed in 1993 to develop North American
infrastructure projects. During 1996, UIC began to focus
primarily on water infrastructure projects, principally through
U.S. Water, a partnership formed with United Utilities PLC, a
U.K. company. As part of the strategic decision to concentrate
on its information services business and the Expansion Plan, on
December 31, 1997 Level 3 sold its entire interest in UIC to
Bechtel for $10 million.
Kiewit Mutual Fund. Kiewit Mutual Fund, a Delaware business
trust and a registered investment company, was formed in 1994.
Initially formed to manage the Company's internal investments,
shares in Kiewit Mutual Fund are now available for purchase by
the general public. The Fund's investors currently include
individuals and unrelated companies, as well as
Kiewit-
affiliatedCompany-affiliated joint ventures, pension plans, and
subsidiaries. Kiewit Mutual Fund has fivesix series: Money Market
Portfolio, Government Money Market Portfolio, Short-Term
Government Portfolio, Intermediate-Term Bond Portfolio,
Tax-Exempt Portfolio, and the Equity Portfolio. In February
1997, the Fund adopted a master- feeder structure. Each of the
Portfolios invests in a corresponding series of the Kiewit
Investment Trust, which now manages the underlying securities
holdings. The structure will allow smaller mutual funds and
institutional investors to pool their assets with Kiewit
Investment Trust, providing lower expense ratios for all
participants. The registered investment adviser of Kiewit
Mutual FundInvestment Trust is Kiewit Investment Management Corp., a
subsidiary of KDGLevel 3 (60%) and KCG (40%). At the end of 1997,
Kiewit Mutual Fund had net assets of $1.3 billion. As part of
the strategic decision to concentrate on its information services
business and the Expansion Plan, it is anticipated that Level 3
will sell its interest in Kiewit Investment Management Corp. to
the Construction Group.
Other. In February 1997, Level 3 purchased an office
building in Aurora, Colorado for $21 million. By investing in
real estate, Level 3 defers taxes on a portion of the $40 million
of taxable gain otherwise recognizable with respect to the
Whitney Benefits litigation settlement in 1995. Level 3 may make
additional real estate investments in 1998 with a view toward
deferring the balance of that taxable gain. Level 3 has also
made investments in several development-stage companies, but does
not expect earnings from these companies in 1998.
GENERAL INFORMATION
Year 2000. The Company. The Company has conducted a review
of its computer systems to identify those systems that could be
affected by the "Year 2000" computer issue, and has developed and
is implementing a plan to resolve the issue. The Year 2000 issue
results from computer programs written with date fields of two
digits, rather than four digits, thus resulting in the inability
of the computer programs to distinguish between the year 1900 and
2000.
The Company expects that its Year 2000 compliance project
will be completed before the Year 2000 date change. During the
execution of this project, the Company has and will continue to
incur internal staff costs as well as consulting and other
expenses. These costs will be expensed, as incurred, in
compliance with GAAP. The expenses associated with this project,
as well as the related potential effect on the Company's earnings
is not expected to have a material effect on its future operating
results or financial condition. There can be no assurance,
however, that the Year 2000 problem will not adversely affect the
Company and its business.
PKSIS. PKS Computer Services, Inc., the computer
outsourcing subsidiary of PKSIS, has developed a comprehensive
approach to address the potential operational risks associated
with the Year 2000, and began to implement remediation plans in
1997. As part of its plans PKS Computer Services is: working
with its key suppliers to verify their operational viability
through the Year 2000; reviewing building infrastructure
components that may be affected by the Year 2000 issue, which
components include fire alarms systems, security systems, and
automated building controls; identifying hardware inventories
that are affected by date logic that is not Year 2000 compliant,
which hardware includes mainframe computers, mid-range computers,
micro-computers, and network hardware. To the extent that
vendors identify items that are not Year 2000 compliant, PKS
Computer Services will work with the hardware vendor to develop a
plan that will enable continuous operations through the Year
2000.
PKS Computer Services is responsible for providing an
operating environment in which its customers applications are
run. As a result, PKS Computer Services will confirm the system
software inventories that it is responsible for managing. PKS
Computer Services will then develop a plan with each of its
customers that indicate that they intend to be customers in the
year 2000 to provide for Year 2000 compliance.
PKS Computer Services believes that many of the required
changes for hardware and operating environments will be included
in the costs that are incurred for annual maintenance.
PKS Systems Integration LLC provides a wide variety of
information technology services to its customers. In fiscal year
1997 approximately 80% of the revenue generated by PKSIS related
to projects involving Year 2000 assessment and renovation
services performed by PKS Systems Integration for its customers.
These contracts generally require PKS Systems Integration to
identify date affected fields in certain application software of
its customers and, in many cases, PKS Systems Integration
undertakes efforts to remediate those date-affected fields so
that the applicable applications are able to process date-related
information occurring on or before the Year 2000. Thus, Year
2000 issues affect many of the services PKS Systems Integration
provides to its customers. This exposes PKS Systems Integration
to potential risks that may include problems with services
provided by PKS Systems Integration to its customers and the
potential for claims arising under PKS Systems Integration
customer contracts. PKS Systems Integration attempts to
contractually limit its exposure to liability for Year 2000
compliance issues. However, there can be no assurance as to the
effectiveness of such contractual limitations.
The expenses associated with this project by PKSIS, as well
as the related potential effect on PKSIS's earnings is not
expected to have a material effect on its future operating
results or financial condition. There can be no assurance,
however, that the Year 2000 problem, and any loss incurred by any
customers of PKSIS as a result of the Year 2000 problem will not
materially and adversely affect PKSIS and its business.
Environmental Protection. Compliance with federal, state,
and local provisions regulating the discharge of materials into
the environment, or otherwise relating to the protection of the
environment, has not and is not expected to have a material
effect upon the capital expenditures, earnings, or competitive
position of the Company and its subsidiaries.
Employees. At the end of 1995,1997, the Company and its
majority-owned subsidiaries employed approximately 14,30017,700 people
--
10,400- - 16,200 in Construction, 2,000 in Mining, 1,400 in
Telecommunications,construction and materials operations, 500 by coal
mining companies, 800 at PKSIS, and 200 in Information Services,corporate and 300 in
corporateLevel 3
positions. This does not include the employees of the C-TEC
Companies.
ITEM 2. PROPERTIES.
The properties used in the construction segment are
described under a separate heading in Item 1 above. Properties
relating to the Company's coal mining segment are described as
part of the general business description of the coal mining
business. Level 3 has announced that segmentit has acquired 46 acres in
Item 1 above. The
propertiesthe Northwest corner of the telecommunications segment includeInterlocken office park and will
build a campus facility that is expected to eventually encompass
over 500,000 square feet of office space. Interlocken is located
within the City of Broomfield, Colorado, and within Boulder
County, Colorado. It is anticipated that the first phase of this
facility will be constructed by the end of June 1999. In
addition, Level 3 has leased approximately 50,000 square feet of
temporary office space in Louisville, Colorado to allow for the
relocation of the majority of its employees (other than those of
C-
TEC's Telephone Group (switching centers, cables and wires
connecting the telephone company toPKSIS) while its customers, and other
telephone instruments and equipment), C-TEC's Cable Group (head-
end, distribution and subscriber equipment), and various office and
storage buildings.permanent facilities are under construction.
The Company considers its properties to be adequate for its
present and foreseeable requirements.
ITEM 3. LEGAL PROCEEDINGS.
General. The Company and its subsidiaries are parties to
many pending legal proceedings. Management believes that any
resulting liabilities for legal proceedings, beyond amounts
reserved, will not materially affect the Company's financial
condition, future results of operations, or future cash flows.
Environmental Proceedings. In a large number of proceedings,
the Company, its subsidiaries, or their predecessors are among
numerous defendants who may be "potentially responsible parties"
liable for the cleanup of hazardous substances deposited in
landfills or other sites. Management believes that any resulting
liabilities for environmental legal proceedings, beyond amounts
reserved, will not materially affect the Company's financial
condition, future results of operations, or future cash flows.
Whitney Litigation. In May 1995, the lawsuit titled Whitney
Benefits, Inc. and Peter Kiewit Sons' Co. v. The United States was
settled. In 1983, plaintiffs alleged that the enactment of the
Surface Mining Control and Reclamation Act of 1977 had prevented
the mining of their Wyoming coal deposits and constituted a
government taking without just compensation. In settlement of all
claims, plaintiffs agreed to deed the coal deposits to the
government and the government agreed to pay plaintiffs $200
million, of which Peter Kiewit Sons' Co., a KDG subsidiary,
received approximately $135 million in June 1995.
MFS Litigation. In March 1994, several former stockholders
of an MFS subsidiary filed a lawsuit against MFS, KDG, and the
chief executive officer of MFS, in the United States District Court
for the Northern District of Illinois, Case No. 94C-1381. These
shareholders sold shares of the subsidiary to MFS in September
1992. MFS completed an initial public offering in May 1993.
Plaintiffs allege that MFS fraudulently concealed material
information about its plans from them, causing them to sell their
shares at an inadequate price. Plaintiffs have alleged damages of
at least $100 million. Defendants have meritorious defenses and
have vigorously contested this lawsuit. Defendants expect that a
trial will be held in 1996. Prior to the initial public offering,
KDG agreed to indemnify MFS against any liabilities arising from
the September 1992 sale; if MFS is deemed to be liable to
plaintiffs, KDG will be required to satisfy MFS's liabilities
pursuant to the indemnification agreement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.
NoAt a special meeting of stockholders held on December 8,
1997, the following matters were submitted to a vote.
1. Ratification of the decision of the PKS Board to
separate the construction business of PKS and the diversified
business of PKS into two independent companies through the
declaration of a dividend of eight-tenths of one share of newly
created Class R Convertible Common Stock, par value $.01 per
share ("Class R stock"), of PKS with respect to each outstanding
share of Class C Construction & Mining Group Restricted
Redeemable Convertible Exchangeable Common Stock, par value
$.0625 per share ("Class C stock"), of PKS, and mandatory
exchange of each outstanding share of Class C stock for one
outstanding share of Common Stock, par value $.01 per share, of
PKS Holdings, Inc. (collectively, the "Transaction").
Class C stock Class D stock
Affirmative votes: 9,031,714 21,673,495
Negative votes: 30,926 185,412
Abstentions: 11,020 64,227
2. Approval of amendments to the PKS Certificate (the
"Initial Certificate Amendments"), to: (i) create the Class R
Stock to be distributed in the Transaction; (ii) increase from
50,000,000 to 500,000,000 the number of shares of Class D
Diversified Group Convertible Exchangeable Common Stock, par
value $.0625 per share ("Class D stock"), which PKS is authorized
to issue; (iii) designate 10 shares of Class D stock as "Class D
Stock, Non-Redeemable Series"; and (iv) eliminate the requirement
that the Certificate of Incorporation of PKS Holdings as in
effect at the time of the Share Exchange be substantially similar
to the PKS Certificate.
Class C stock Class D stock
Affirmative votes: 9,030,927 21,735,628
Negative votes: 28,676 147,676
Abstentions: 14,057 39,830
3. Approval of amendments to the PKS Certificate to be
effected only if the Transaction is consummated, to: (i)
redesignate Class D stock as "Common Stock, par value $.01 per
share", and Class D Stock, Non-Redeemable Series as "Common
Stock, Non-Redeemable Series"; (ii) authorize the issuance of
series of preferred stock, the terms of which are to be
determined by the board of directors; (iii) modify the repurchase
rights to which the holders of Class D stock are entitled; (iv)
delete the provisions regarding Class C stock; (v) classify the
board of directors; (vi) prohibit stockholder action by written
consent; (vii) empower the board of directors, exclusively, to
call special meetings of the stockholders; (viii) require a
supermajority vote of security holders duringstockholders to amend the fourth quarterby-laws; and (ix)
make certain other non-substantive changes consistent with the
implementation of 1995.the foregoing.
Class C stock Class D stock
Affirmative votes: 9,011,554 21,472,115
Negative votes: 30,696 381,726
Abstentions: 31,410 69,293
4. Approval of the amendment and restatement of the Peter
Kiewit Sons', Inc. 1995 Class D stock Plan.
Class C stock Class D stock
Affirmative votes: 8,958,084 21,268,757
Negative votes: 70,566 536,914
Abstentions: 45,010 117,463
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.REGISTRANT
The table below shows information as of March 15, 19961998 about
each director and executive officer of the Company, including his
business experience during the past five years (1991-1996). The Company
considers its executive officers to be its directors who are
employed by the Company or one of its subsidiaries.years. The Company's
directors and officers are elected annually and each was elected
on June 10, 19957, 1997 to serve until his successor is elected and
qualified or until his death, resignation or removal.
Name Business Experience (1991-1996) Age PKS Director Since
Walter Scott, Jr.* Chairman of the Board and 66 09/27/79- Chairman
President, 64PKS (for more 04/22/64- Director
than the past five years);
also a director of Berkshire
Hathaway, Inc., Burlington
Resources, Inc., CalEnergy,
ConAgra, Inc., Commonwealth
Telephone Enterprises, Inc.,
RCN Corporation, U.S. Bancorp
and Valmont Industries, Inc.
Peter Kiewit, Jr. Attorney, of counsel to the 71 01/13/66
law firm of Gallagher &
Kennedy of Phoenix, Arizona
(for more than the past five
years)
William L. GrewcockGrewcock* Vice Chairman, 70PKS (for more 72 01/11/68
than the past five years)
Robert E. JulianB. Daugherty Director (and formerly 75 01/08/86
Chairman of the Board and
Chief Executive Vice President;Officer)
Valmont Industries, Inc.
(for more than the past
five years)
Charles M. Harper Former Chairman of the 69 01/08/86
Board and Chief Financial 56Executive
Officer (1991-1995); Treasurer (1991-1993)of RJR Nabisco
Holdings Corp. Currently
a director (and formerly
Chairman of the Board and
Chief Executive Officer)
of ConAgra, Inc. and also
a director of E.I. DuPont
de Nemours and Company,
Norwest Corp. and Valmont
Industries, Inc.
Kenneth E. StinsonStinson* Executive Vice President, 5355 01/07/87
PKS (for more than the
past five years); Chairman
since 1993) and CEO (since
1992), KCG; also a director
of ConAgra, Inc. and Valmont
Industries, Inc.
Richard GearyGeary* Executive Vice President, 62 04/29/88
KCG; President 61of Kiewit
Pacific Co.
Leonard W. Kearney, a KCG
construction subsidiary
(for more than the past five years)
George B. Toll, Jr.* Executive Vice President, KCG;61 06/05/93
KCG (since 1994); Vice
President, Kiewit
55
ConstructionPacific Co., a KCG
construction subsidiary
(1992-1994)
James Q. Crowe* President and Chief 48 06/05/93
Executive Officer,
Level 3 (since August 1,
1997); Chairman of the
Board, WorldCom, Inc., an
International
telecommunications company
(January 1997-July 1997);
Chairman of the Board, MFS
Communications Company, Inc.,
an international
telecommunications company
(1992-1996) (MFS was a
Diversified Group subsidiary
until 1995); also a director
of Commonwealth Telephone
Enterprises, Inc., RCN
Corporation, and Kiewit
Western Co.InaCom
Communications, Inc.
Richard R. Jaros Executive Vice President (since 1993); 4446 06/05/93
(1993-1997) and Chief
Financial Officer (since 1995);
Vice(1995-1997),
PKS; President (1991-1992)of Level 3
(1996-1997); President and
COO of CE (1992-3)
George B. Toll, Jr.CalEnergy (1992-1993);
also a director of CalEnergy,
Commonwealth Telephone
Enterprises, Inc., RCN
Corporation and WorldCom, Inc.
Richard W. Colf* Vice President, Kiewit 54 06/03/95
Pacific Co., a KCG
construction subsidiary
(for more than the past
five years)
Bruce E. Grewcock* Executive Vice President, 44 06/04/94
KCG (since 59
1994)1996); ViceChairman
(since 1996), President
Kiewit Pacific
Co. (1991-1994)
Richard W. Colf Vice President, Kiewit Pacific Co. 52
Bruce E. Grewcock President (since 1992),(1992-1996) and Sr. Vice
President 42
(1991-1992), Vice President (1991)(1992) of Kiewit
Mining Group Inc.; also a
director of Kinross Gold
Corporation
Tait P. JohnsonJohnson* President, Gilbert 48 06/03/95
Industrial Corporation, a
KCG construction subsidiary
(for more than the past five
years); President (1992-1996),
Gilbert Southern Corp. 46, a KCG
construction subsidiary
Allan K. Kirkwood* Senior Vice President, 54 06/07/97
Kiewit Pacific Co., a KCG
construction subsidiary
(for more than the past
five years)
Identified by asterisks are the ten persons currently
serving as executive officers of PKS. Executive officers are
those directors who are employed by PKS or its subsidiaries.
Bruce E. Grewcock is the son of William L. Grewcock.
The PKS Board has an Audit Committee, a Compensation
Committee and an Executive Committee.
The Audit Committee members are Messrs. Johnson, Kirkwood
and Kiewit. The functions of the Audit Committee are to
recommend the selection of the independent auditors; review the
results of the annual audit; inquire into important internal
control, accounting and financial matters; and report and make
recommendations to the full PKS Board. The Audit Committee had
four meetings in 1997.
The Compensation Committee members are Messrs. Daugherty,
Harper, and Kiewit, none of whom are employees of PKS. This
committee reviews the compensation of the executive officers of
PKS. This committee has also assumed the functions of the former
Management Compensation Committee, the purpose of which was to
review the compensation, securities ownership, and benefits of
the employees of PKS other than its executive officers. The
Compensation Committee had one formal meeting in 1997.
The Executive Committee members are Messrs. Scott
(Chairman), William Grewcock, Stinson, and Crowe. This committee
exercises the powers of the PKS Board between meetings of the PKS
Board, except powers assigned to other committees. During 1997,
the Executive Committee had no formal meetings, acted by written
consent action in lieu of a meeting on two occasions, and had
several informal meetings.
PKS does not have a nominating committee. The PKS
Certificate provides that the incumbent directors elected by
holders of Class C Stock may nominate a slate of Class C
directors to be elected by holders of Class C Stock and the
incumbent directors elected by holders of Class D Stock may
nominate a slate of directors to be elected by holders of Class D
Stock, for election at the annual meeting of stockholders.
The PKS Board had six formal meetings in 1997 and acted by
written consent action on six occasions. In 1997, no director
attended less than 75% of the meetings of the PKS Board and the
committees of which he was a member.
Directors who are employees of PKS or its subsidiaries do
not receive directors' fees. Non-employee directors are paid
annual directors' fees of $30,000, plus $1,200 for attending each
meeting of the PKS Board, and $1,200 for attending each meeting
of a committee of the PKS Board.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Market Information. There is no established public trading
market forAs of December 27, 1997, the Company's
common stock.stock is not listed on any national securities exchange or
the Nasdaq National Market. However, the Class D stock is
currently quoted on the National Association of Securities
Dealers, Inc.'s OTC Bulletin Board. During the fourth quarter of
1997, the only quarter during which this trading occurred, the
range of the high and low bid information for the Class D stock
was $24.60 to $29.00. The Company has announced that the common
stock of Level 3 Communications, Inc. (renamed from Peter Kiewit
Sons', Inc. in connection with the Transaction) will begin
trading on the Nasdaq National Market on April 1, 1998.
Company Repurchase Duty. Pursuant to the current terms of
the PKS Certificate, the Company is generally required to
repurchase shares at a formula price upon demand. Company repurchase duty. Under the Company'sPKS
Certificate of
Incorporation effective January 1992, the Company has three classes
of common stock: Class B Construction & Mining Group Nonvoting
Restricted Redeemable Convertible Exchangeable Common Stock
("Class B"), Class C Construction & Mining Group Restricted Redeemable
Convertible Exchangeable Common Stock ("Class C"),stock, and Class D Diversified Group Convertible Exchangeable Common Stock ("Class
D").stock. There are no
outstanding Class B andstock; the last Class B stock were converted
into Class D stock on January 1, 1997. Class C ("Class B&C") sharesstock can be
issued only to Company employees and can be resold only to the
Company at a formula price based on the year-end book value of
the Construction & Mining Group. The Company is generally required to
repurchase Class B&C sharesC stock for cash upon stockholder demand. Class
D shares
havestock has a formula price based on the year-end book value of
the Diversified Group. The Company must generally repurchase
Class D sharesstock for cash upon stockholder demand at the formula
price, unless the Class D sharesstock become publicly traded.
Formula values. The formula price of the Class D sharesstock is
based on the book value of Kiewit Diversified Group Inc. ("KDG")Level 3 and its subsidiaries, plus
one-half of the book value, on a stand-
alonestand-alone basis, of the parent
company, Peter Kiewit Sons', Inc.PKS. The formula price of the Class B&C sharesC stock is based on
the book value of Kiewitthe Construction Group Inc. ("KCG") and its subsidiaries,
including Kiewit Mining Group Inc.("KMG"),
plus one-half of the book value of the unconsolidated parent
company. A significant element of the Class B&CC formula price is
the subtraction of the book value of property, plant, and
equipment used in construction activities ($110122 million in 1995)1997).
A significant annual
intercompany transaction reducesConversion. Under the value of the Class D shares
and increases the value of the Class B&C shares. The primary
assets of the Company's mining segment are coal mining leases and
long-term coal contracts owned by Kiewit Coal Properties
Inc.("KCP"), a subsidiary of KDG. However, the coal mining
properties are managed and operated by KMG. KCP paid mine
management fees of $30 million to KMG in 1995.
Conversion.PKS Certificate, Class C shares arestock is
convertible into Class D sharesstock at the end of each year. Between
October 15 and December 15 of each year a Class C stockholder may
elect to convert some or all of his or her shares. Conversion
occurs on the following January 1. The conversion ratio is the
relative formula prices of Class C and Class D sharesstock determined
as of the last Saturday in December, i.e.that is, the last day in the
Company's fiscal year. Class D sharesstock may be converted into Class
C sharesstock only as part of an annual offering of Class C sharesstock to
employees. Instead of purchasing the offered shares for cash, an
employee owning Class D sharesstock may convert such shares into Class
C sharesstock at the applicable conversion ratio.
Restrictions. Ownership of Class C sharesstock is generally
restricted to active Company employees. Upon retirement,
termination of employment, or death, Class C sharesstock must be resold
to the Company at the applicable formula price, but may be
converted into Class D sharesstock if the terminating event occurs
during the annual conversion period. Class D shares arestock is not
subject to ownership or transfer restrictions.
Dividends and Prices. During 19941996 and 19951997 the Company
declared or paid the following dividends on its common stock.
The table also shows the stock price after each dividend payment
or other valuation event.
Dividend Dividend
Declared Dividend Paid Per Price Stock
Declared Paid Share Class Price Adjusted Stock Price
Oct. 29, 1993 Jan. 6, 1994 $ 0.40 B&C Dec. 25, 1993 $22.35
Apr. 22, 1994 May 1, 1994 0.45 B&C May 1, 1994 21.90
Oct. 21, 1994 Jan. 5, 1995 0.45 B&C Dec. 31, 1994 25.55
Apr. 28, 1994 May 1, 1995 0.45 B&C May 1, 1995 25.10
Oct. 27, 1995 Jan. 5, 1996 0.60 B&C$0.60 C Dec. 30, 1995 32.40
D$32.40
Apr. 26, 1996 May 1, 1996 0.60 C May 1, 1996 31.80
Oct. 25, 1996 Jan. 4, 1997 0.70 C Dec. 25, 1993 59.40
D28, 1996 40.70
Apr. 23, 1997 May 1, 1997 0.70 C May 1, 1997 40.00
Oct. 22, 1997 Jan. 5, 1998 0.80 C Dec. 31, 1994 60.25
Sep. 25, 1995* Sep. 30, 1995* 19.85* D Sep. 30, 1995 40.4027, 1997 51.20
Oct. 27, 1995 Jan. 5, 1996 0.50 D Dec. 30, 1995 49.509.90*
Oct. 25, 1996 Jan. 4, 1997 0.50 D Dec. 28, 1996 10.85*
D Dec. 27, 1997 11.65*
* MFS Spin-off (see p. 2)All stock prices for the Class D stock reflect a dividend of
four shares of Class D stock for each outstanding share of Class
D stock that was effective on December 26, 1997.
The Company's current dividend policy is to pay a regular
dividend on Class C stock of about 15% to 20% of the prior year's
ordinary earnings of the Construction Group, with any special
dividends to be based on extraordinary earnings. Although the
PKS Board of Directors announced in August 1993 that the Company did not
intend to pay regular dividends on Class D shares
instock for the
foreseeable future, on October 27, 1995, the PKS Board declared a special dividend of
$0.50 per share onof Class D stock in both October 1995 and 1996.
A dividend of 4 shares payableof Class D Stock for each share of
Class D Stock was effected on January 5, 1996 to stockholders of record on that date.December 26, 1997.
Stockholders. On March 15, 1996,1998, and after giving effect to
a dividend of 4 shares of Class D Stock for each outstanding
share of Class D stock effected on December 26, 1997, the Company
had the following numbers of stockholders and outstanding shares
for each class of its common stock:
Class of Stock Stockholders Shares Outstanding
B 4 263,468- -
C 1,140 9,957,413996 7,681,020
D 1,723 23,222,2592,121 146,943,752
Recent Sales of Unregistered Securities. On April 1, 1997,
the Company sold 10,000 shares of Class D stock to Charles Harper
and Robert Daugherty and 8,000 shares of Class D stock to Peter
Kiewit Jr. at a sale price of $49.50 per share. Each of Messrs
Harper, Daugherty and Kiewit are members of the PKS Board of
Directors. The sale was effected pursuant to an exemption from
registration under the Securities Act of 1933 contained in
Section 4(2) of such Act.
ITEM 6. SELECTED FINANCIAL DATA.
PETER KIEWIT SONS', INC.
SELECTED CONSOLIDATED FINANCIAL DATA
The Selected Financial Data of Peter Kiewit Sons', Inc. ("PKS"), the
Kiewit Construction & Mining Group ("B&CC Stock") and the
Kiewit
Diversified Group ("D Stock") appear below and on the next fourtwo
pages. The consolidated data of PKS are presented below with the
exception of per common share data which is presented in the
Selected Financial Data of the respective groups.Groups.
(dollars in millions, Fiscal Year Ended
except per share amounts) 1997 1996 1995 1994 1993 1992 1991
Results of Operations:
Revenue (1) $ 2,902332 $ 2,704652 $ 2,050580 $ 1,918537 $ 2,049267
Earnings from continuing
operations 244 110 261 162 4983 104 126 28 174
Net earnings (2) 248 221 244 110 261 181 441
Financial Position:
Total assets (1) 3,463 4,492 3,634 2,549 2,6322,779 3,066 2,945 4,048 3,236
Current portion of
long-term debt (1) 42 33 15 3 1557 40 30 11
Long-term debt, less
current portion (1) 370 908 462 30 110137 320 361 899 452
Stockholders' equity (3) 2,230 1,819 1,607 1,736 1,671
1,458 1,396
(1) In October 1993, the Company acquired 35% of the outstanding
shares of C-TEC Corporation that had 57% of the available
voting rights. On December 28, 1996 the Company owned 48%
of the outstanding shares and 62% of the voting rights.
As a result of the C-TEC restructuring, the Company owns less
than 50% of the outstanding shares and voting rights of the
three entities, and therefore accounted for each entity using
the equity method in 1997. The Company consolidated C-TEC
from 1993 through 1996.
The financial position and results of operations of Kiewit
Construction & Mining Group have been classified as
discontinued operations due to the pending spin-off from
Peter Kiewit Sons', Inc.
In September 1995, the Company dividended its investment in
MFS to Class D Shareholders.shareholders. MFS' results of operations have
been classified as a single line item on the statements of
earnings. MFS is consolidated in the 1994-19911993 and 1994 balance
sheets.
In October 1993, the Company acquired 35% of the
outstanding shares of C-TEC Corporation that have 57% of
the available voting rights. In December 1994, the
Company increased its ownership to 49% and 58%,
respectively.
In January 1994, MFS, Communications Company, Inc.
("MFS"), issued $500 million of 9.375% Senior
Discount Notes.
In September 1997, Level 3 agreed to sell its energy segment to
CalEnergy Company, Inc. The transaction closed on January 2,
1998.
(2) In 1993, through two public offerings, the Company sold 29%
of its subsidiary, MFS, resulting in a $137 million after-tax
gain. In 1995 and 1994, additional MFS stock transactions
resulted in $2 million and $35 million after-tax gains to the
Company and reduced its ownership in MFS to 66% and 67%.
(3) The aggregate redemption value of common stock at December
30, 199527, 1997 was $1.5$2.1 billion.
KIEWIT CONSTRUCTION & MINING GROUP
SELECTED FINANCIAL DATA
The following selected financial data for each of the years in
the period 19911993 to 19951997 have been derived from audited financial
statements. The historical financial information for the Kiewit
Construction & Mining and Kiewit Diversified Groups supplements the
consolidated financial information of PKS and, taken together,
includes all accounts which comprise the corresponding
consolidated financial information of PKS.
(dollars in millions, Fiscal Year Ended
except per share amounts) 1997 1996 1995 1994 1993 1992 1991
Results of Operations:
Revenue $ 2,764 $ 2,303 $ 2,330 $ 2,175 $ 1,783
$ 1,675 $ 1,834
Net earnings 155 108 104 77 80
82 23
Per Common Share (1):Share:
Net earnings
Basic 15.99 10.13 7.78 4.92 4.63
4.48 1.12Diluted 15.35 9.76 7.62 4.86 4.59
Dividends (2)(1) 1.50 1.30 1.05 0.90 0.70
0.70 0.30
Stock price (3)(2) 51.20 40.70 32.40 25.55 22.35
18.70 14.40
Book value 64.38 51.02 42.90 31.39 27.43 23.31 19.25
Financial Position:
Total assets 987 9631,341 1,038 976 967 889 862 849
Current portion of
long-term debt 5 - 2 3 4 2 7
Long-term debt, less
current portion 22 12 9 9 10
12 13
Stockholders' equity (4)(3) 652 562 467 505 480
437 400
KIEWIT CONSTRUCTION & MINING GROUP
SELECTED FINANCIAL DATA
(continued)
(1) In connection with the January 1992 reorganization, each
share of previous Class B and Class C Stock was exchanged
for one share of new Class B&C Stock and one share of new
Class D Stock. Therefore, for purposes of computing Class
B&C Stock per share data, the number of shares for 1991 is
assumed to be the same as the corresponding number of
shares of previous Class B and Class C Stock. Fully
diluted earnings per share have not been presented because
it is not materially different from earnings per share.
(2) The 1997, 1996, 1995, 1994 and 1993 dividends include $.80,
$.70, $.60, $.45 and $.40 for dividends declared in 1997,
1996, 1995, 1994 and 1993, respectively, but paid in
January of the subsequent year.
1991 reflects dividends paid by PKS on its previous Class
B and Class C Stock that have been attributed to Kiewit
Construction & Mining Group and Kiewit Diversified Group
based upon the relative formula values of each group which
were determined at the end of the preceding year.
Accordingly, the dividends may bear no relationship to the
dividends that would have been declared by the Board in
that year had the new Class B&C Stock and the Class D
Stock been outstanding.
(3)(2) Pursuant to the Restated Certificate of Incorporation, the stock
price calculation is computed annually at the end of the
fiscal year.
(4)(3) Ownership of the Class B&CC Stock is restricted to certain
employees conditioned upon the execution of repurchase
agreements which restrict the employees from transferring
the stock. PKS is generally committed to purchase all
Class B&CC Stock at the amount computed, when put to PKS by a
stockholder, pursuant to the Restated Certificate of Incorporation.
The aggregate redemption value of the B&CClass C Stock at
December 30, 199527, 1997 was $359$527 million.
KIEWIT
DIVERSIFIED GROUP
SELECTED FINANCIAL DATA
The following selected financial data for each of the years in
the period 19911993 to 19951997 have been derived from audited financial
statements. The historical financial information for the
Kiewit
Diversified Group and Kiewit Construction & Mining GroupsGroup
supplements the consolidated financial information of PKS and,
taken together, includes all accounts which comprise the
corresponding consolidated financial information of PKS.
(dollars in millions, Fiscal Year Ended
except per share amounts) 1997 1996 1995 1994 1993 1992 1991
Results of Operations:
Revenue (1) $ 332 $ 652 $ 580 $ 537 $ 267
$ 243 $ 215
Earnings from continuing operations 83 104 126 28 174
Net earnings (2) 93 113 140 33 181
80 26
Net earnings (2) 140 33 181 99 418
Per Common Share (3):Share:
Earnings from continuing operations
6.45 1.63 9.08 3.95 1.26Basic .66 .90 1.17 .27 1.74
Diluted .66 .90 1.17 .27 1.74
Net earnings
6.45 1.63 9.08 4.92 20.30Basic .74 .97 1.29 1.32 1.82
Diluted .74 .97 1.29 1.32 1.81
Dividends (4) .50(3) - .50 1.95 0.70.10 .10 - .10
Stock price (5) 49.50 60.25 59.40 50.65 47.85(4) 11.65 10.85 9.90 12.05 11.88
Book value 49.49 60.36 59.52 50.75 47.9311.65 10.85 9.90 12.07 11.90
Financial Position:
Total assets (1) 2,490 3,537 2,759 1,709 1,8012,127 2,504 2,478 3,543 2,756
Current portion of long-term debt (1) 3 57 40 30 11
1 8
Long-term debt,less current portion (1) 137 320 361 899 452
18 97
Stockholders' equity (6)(5) 1,578 1,257 1,140 1,231 1,191
1,021 996
KIEWIT DIVERSIFIED GROUP
SELECTED FINANCIAL DATA
(continued)
(1) In October 1993, the Group acquired 35% of the outstanding
shares of C-TEC Corporation that had 57% of the available
voting rights. At December 28, 1996, the Group owned 48% of
the outstanding shares and 62% of the voting rights.
As a result of the C-TEC restructuring, the Group owns less
than 50% of the outstanding shares and voting rights of each
of the three entities, and therefore accounted for each
entity using the equity method in 1997. The Company
consolidated C-TEC from 1993 to 1996.
In September 1995, the Group dividended its investment in MFS to
Class D Shareholders.shareholders. MFS' results of operations have been
classified as a single line item on the statements of
earnings. MFS is consolidated in the 1994-
19911993 and 1994 balance
sheets.
In October 1993, the Group acquired 35% of the outstanding
shares of C-TEC Corporation that have 57% of the available
voting rights. In December 1994, the Group increased its
ownership to 49% and 58%, respectively.
In January 1994, MFS issued $500 million of 9.375% Senior
Discount Notes.
In September 1997, the Group agreed to sell its energy segment
to CalEnergy Company, Inc. The transaction closed on January
2, 1998.
(2) In 1993, through two public offerings, the Group sold 29% of
MFS, resulting in a $137 million after-tax gain. In 1995 and
1994, additional MFS stock transactions resulted in $2
million and $35 million after-tax gains to the Group and
reduced its ownership in MFS to 66% and 67%.
(3) In connection with the January 1992 reorganization, each
share of previous Class B and Class C Stock was exchanged
for one share of new Class B&C Stock and one share of
new Class D Stock. Therefore, for purposes of computing
Class D Stock per share data, the number of shares for
1991 is assumed to be the same as the corresponding
number of shares of previous Class B and Class C Stock.
Fully diluted earnings per share have not been presented
because it is not materially different from earnings per
share.
(4) The 1996, 1995 and 19921993 dividends include $.50$.10 for
dividends declared in 1996, 1995 and 19921993 but paid in
January of the subsequent year.
1991 reflects dividends paid by PKS on
its previous Class B and Class C Stock that have been
attributed to Kiewit Diversified Group and Kiewit
Construction & Mining Group based upon the relative
formula values of each group which were determined at the
end of the preceding year. Accordingly, the dividends
may bear no relationship to the dividends that would have
been declared by the Board in that year had the new
Class D Stock and the new Class B&C Stock been
outstanding.
(5)(4) Pursuant to the Restated Certificate of Incorporation, the stock price
calculation is computed annually at the end of the fiscal
year.
(6)(5) Unless Class D Stock becomes publicly traded, PKS is
generally committed to purchase all Class D Stock at the
amount computed, in accordance with the Restated
Certificate of
Incorporation, when put to PKS by a stockholder. The
aggregate redemption value of the Class D Stock at December
30, 199527, 1997 was $1,151$1,578 million.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSISANALLYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This item contains information about Peter Kiewit Son's,Sons', Inc.
(the "Company") as a whole. Separate reports containing
management's discussion and analysis of financial condition and
results of operations for the Kiewit Construction & Mining Group
and the Kiewit Diversified Group have been filed as Exhibits 99.A
and 99.B to this Form 10-K. The Company will furnish aA copy of such exhibitsExhibit 99.A will be
furnished without charge upon the written request of a
stockholder addressed to: Stock Registrar, Peter Kiewit Sons',
Inc., 1000 Kiewit Plaza, Omaha, Nebraska 68131. Exhibit 99.B
can be obtained by contacting Investor Relations, Level 3 Communications,
Inc., 3555 Farnam Street, Omaha, Nebraska 68131.
The following discussion of Results of Operations should be
read in conjunction with the segment information contained in
Note 13 of the Consolidated Financial Statements.
This document contains forward looking statements and
information that are based on the beliefs of management as well
as assumptions made by and information currently available to the
Company. When used in this document, the words "anticipate",
"believe", "estimate" and "expect" and similar expressions, as
they relate to the Company or its management, are intended to
identify forward-looking statements. Such statements reflect the
current views of the Company with respect to future events and
are subject to certain risks, uncertainties and assumptions.
Should one or more of these risks or uncertainties materialize,
or should underlying assumptions prove incorrect, actual results
may vary materially from those described in this document.
Results of Operations 19951997 vs. 1994
Construction. Construction1996
Coal Mining. Revenue from the Group's coal mines declined 5%
in 1997 compared to 1996. Alternate source coal revenue increaseddeclined
by $154$16 million or 7% in 1995. Contributing to the increase were joint
venture revenues and the inclusion of two additional months of
materials revenue generated by the APAC-Arizona ("APAC")
companies which were acquired on February 28, 1994.1997. The Company's share of joint venture revenue rose by 32%mine's primary customer,
Commonwealth Edison, accelerated its contractual commitments in
1995 and
accounted1996 for 30% of total construction revenue in 1995 and 24%
in 1994. The San Joaquin Toll Road Joint Venture ("San Joaquin")
in southern California contributed $225 million and $111 million
to revenue in 1995 and 1994. Contract backlog at December 30,
1995 was $2 billion, of which 10% is attributable to foreign
operations, principally, Canada and the Philippines. Projects on
the west coast account for 36% of the total backlog which
includes San Joaquin backlog of $133 million. San Joaquin is
scheduled for completionalternate source, thus reducing its obligations in 1997.
In 1995, gross margins rose 16% from $170 million in 1994 to
$197 million in 1995. The growing materials market had a
significant effect on margins. Increased operational
efficiencies, as well as joint ventures, including substantial
claim settlements, also impacted margins.
Mining. Mining revenue in 1995 increased slightly from
1994. Spot sales were lower in 1995 due to reduced demand in the
Company's spot market area because of a mild winter and high
hydro-electricity generation in the Western United States. Sales
of precious metals were greater in 1995 when compared to 1994 as
a result of the liquidation of essentially all of the precious
metal inventory. Alternate source coal sales were also higher in
1995 dueaddition to the accelerationdecline in tonnage shipped, the price of coal
shipmentssold to Commonwealth declined 1%. Revenue attributable to other
contracts increased by approximately $4 million. The actual
amount of coal shipped to these customers increased 5% in 1997,
but the current
year from future years and the shifting of certain coal shipments
from mined coal to alternate source coal.
Direct costs,price at which it was sold was 4% lower than 1996.
Margin, as a percentage of revenue, declined 2%11% from 1996 to
1997. Margins in 19951996 were higher than normal due to the
additional high margin alternate source coal sold to Commonwealth
in 1996 and the refund of premiums from a captive insurance
company that insured against black lung disease. The decline in
Commonwealth shipments and an overall decline in average selling
price, adversely affected the results for 1997. If current
market conditions continue, the Group expects a decline in coal
revenue and earnings after 1998 as certain long-term contracts
begin to expire.
Information Services. Revenue increased by 126% to $94
million in 1997 from $42 million in 1996. Revenue from computer
outsourcing services increased 20% to $49 million in 1997 from
$41 million in 1996. The increase was due to new computer
outsourcing contracts signed in 1997. Revenue for systems
integration grew to $45 million in 1997 from less than $1 million
in 1996. Strong demand for Year 2000 renovation services fueled
the growth for systems integration's revenues.
Margin, as a percent of revenue, decreased to 28% in 1997 from
41% in 1996 for the computer outsourcing business. The reduction
of the gross margin was due to up-front migration costs
associated with new contracts and significant increases in
personnel costs due to the tightening supply of computer
professionals. Gross margin for the systems integration business
was approximately 40% in 1997. A comparison to 1996 gross margin
is not meaningful due to the start-up nature of the business.
General and Administrative Expenses. Excluding C-TEC,
general and administrative expenses increased 20% to $114 million
in 1997. The increase was primarily attributable to a $41
million increase in the information services business' general
and administrative expenses. The majority of the increase is
attributable to additional compensation expense that was incurred
due to the conversion of a subsidiary's option and SAR plans to the
Class D Stock option plan. The remainder of the increase relates to
the increased expenses for new sales offices established in 1997 for the
systems integration business and the additional personnel hired in 1997
to implement the expansion plan.
Exclusive of the information services business, general and
administrative expenses decreased 26% to $62 million in 1997. A
decrease in professional services and the mine management fees
were partially offset by increased compensation expense. Due to
the favorable resolution of certain environmental and legal
matters, costs that were previously accrued for these issues were
reversed in 1997. Partially offsetting this reduction were
legal, tax and consulting expenses associated with the CalEnergy
transaction and the separation of the Construction and Mining
Group and Diversified Group.
Equity Losses. The losses for the Group's equity investments
increased from $9 million in 1996 to $43 million in 1997. Had
the C-TEC entities been accounted for using the equity method in
1996, the losses would have increased to $13 million. The
expenses associated with the deployment and marketing of the
advanced fiber networks in New York, Boston and Washington D.C.,
and the costs incurred in connection with the buyout of a
marketing contract with minority shareholders are primarily
responsible for the increase in equity losses attributable to RCN
from $6 million in 1996 to $26 million in 1997. The Group's
share of Cable Michigan's losses decreased to $6 million in 1997
from $8 million in 1996. This improvement is attributable to the
gains recognized on the sale of Cable Michigan's Florida cable
systems. Commonwealth Telephone's earnings were consistent with
that of 1996. The Group recorded equity earnings of $9 million
in each year attributable to Commonwealth Telephone. The Group
also recorded equity losses attributable to several developing
businesses.
Investment Income. Investment income increased 7% in 1997
after excluding C-TEC's $14 million of investment income in 1996.
Gains recognized on the sale of marketable securities, primarily
within the Kiewit Mutual Fund ("KMF"), increased from $3 million
in 1996 to $9 million in 1997. In 1997, KMF repositioned the
securities within its portfolios to more closely track the
overall market. Partially offsetting these additional gains was
a decline in interest income due to an overall reduction of yield
earned by the KMF portfolios.
Interest Expense. Interest expense increased significantly in
1997 after excluding $28 million of interest attributable to C-
TEC in 1996. CPTC, the owner-operator of a privatized tollroad
in California, incurred interest costs of approximately $9
million and $11 million in 1996 and 1997. In 1996, interest of
$5 million was capitalized due to the construction of the
tollroad. Construction was completed in August 1996, and all
interest incurred subsequent to that date was charged against
earnings. Interest associated with the financing of the Aurora,
Colorado property of $1 million, also contributed to the increase
in interest expense.
Other Income. Other income in 1996 includes $2 million of
other expenses attributable to C-TEC. Excluding these losses,
other income declined from $8 million in 1996 to $1 million in
1997. The absence of gains on the sale of timberland properties
and other assets, which accounted for $6 million of income in
1996, is responsible for the decline.
Income Tax (Provision) Benefit. The effective income tax rate
for 1997 is less than the expected statutory rate of 35% due
primarily to prior year tax adjustments, partially offset by the
effect of nondeductible compensation expense associated with the
conversion of the information services option and SAR plans to
the Class D Stock plan. In 1996, the effective rate was also
lower than the statutory rate due to prior year tax adjustments.
These adjustments were partially offset by nondeductible costs
associated with goodwill amortization and taxes on foreign
operations. In 1997 and 1996, the Group settled a number of
disputed tax issues related to prior years that have been
included in prior year tax adjustments.
Discontinued Operations - Construction. The Construction and
Mining Group's operations can be separated into two components;
construction and materials. Construction revenues increased $414
million during 1997 compared to 1996. The consolidation of ME
Holding Inc. (due to the increase in ownership from 49% to 80%)
("ME Holding") contributed $261 million, almost two-thirds of the
increase. In addition to ME Holding several large projects and
joint ventures became fully mobilized during the latter part of
the year and were well into the "peak" construction phase.
Material revenues increased 19% to $290 million in 1997 from
$243 million in 1996. The acquisition of additional plant sites
accounts for 22% of the increase in sales. The remaining
increase was a result of the additionalstrong market for material products
in Arizona. This raised sales volume from existing plant sites
and allowed for slightly higher selling prices. The inclusion of
$10 million of revenues from the Oak Mountain facility in Alabama
also contributed to the increase.
Construction margins increased to 13% of revenue in 1997 as
compared to 10% in 1996. The favorable resolution of project
uncertainties, several change order settlements, and cost savings
or early completion bonuses received during the year contributed
to this increase.
Material margins decreased from 10% of revenue in 1996 to 4% in
1997. Losses at the Oak Mountain facility in Alabama were the
source of the decrease. The materials margins from sources other
than Oak Mountain remained stable as higher unit sales and
selling prices were offset by increases in raw materials costs.
General and administrative expenses of the Construction Group
increased 11% in 1997 after deducting $17 million of expenses
attributable to ME Holding. Compensation and profit sharing
expenses increased $9 million and $2 million, respectively, from
1996. The increase in these costs is a direct result of higher
construction earnings.
The effective income tax rates in 1997 and 1996 for the
Construction Group differ from the expected statutory rate of 35%
primarily due to state income taxes and prior year tax
adjustments.
Discontinued Operations - Energy. Income from discontinued
operations increased to $29 million in 1997 from $9 million in
1996. The acquisition of Northern Electric, plc. in late 1996 and the
commencement of operations at the Mahanagdong geothermal facility
in July, 1997 were the primary factors that resulted in the
increase.
In October 1997, CalEnergy sold approximately 19.1 million
shares of its common stock. This sale reduced the Group's
ownership in CalEnergy to approximately 24% but increased its
proportionate share of CalEnergy's equity. It is the Group's
policy to recognize gains or losses on the sale of stock by its
investees. The Group recognized an after-tax gain of
approximately $44 million from transactions in CalEnergy stock in
the fourth quarter of 1997.
On July 2, 1997, the Labour Party in the United Kingdom
announced the details of its proposed "Windfall Tax" to be levied
against privatized British utilities. This one-time tax is 23%
of the difference between the value of Northern Electric, plc. at
the time of privatization and the utility's current value based
on profits over a period of up to four years. CE Electric
recorded an extraordinary charge of approximately $194 million
when the tax was enacted in July, 1997. The total after-tax
impact to Level 3, directly through its investment in CE Electric
and indirectly through its interest in CalEnergy, was $63
million.
Results of Operations 1996 vs. 1995
Coal Mining. Revenue and net earnings improved primarily due
to increased alternate source tons sold to Commonwealth Edison
Company in 1996 and the liquidation of a captive insurance
company which insured against black lung disease. Upon
liquidation, the Group received a refund of premiums paid plus
interest in excess of reserves established by the Group for this
liability. Since 1993, the amended contract with Commonwealth
provided that delivery commitments would be satisfied with coal
sales.
Lower margin metal sales and renegotiated coal contracts
partially offsetproduced by unaffiliated mines in the higher margins on additional alternate
source coal sales.
Telecommunications. WithPowder River Basin in
Wyoming. Coal produced at the spin-off of MFS, the
Telecommunications segment now consists solely of C-TEC
Corporation ("C-TEC"). C-TEC's primary operations are telephone
and cable. InGroup's mines did not change
significantly from 1995 telecommunication revenuelevels
Information Services. Revenue increased 12% over
1994. Sales of the telephone group increased $717% to $42 million to $129
million, a 6% increase over 1994. Increases in
access lines for
local network service and rate increases for intrastate access
traffic were primarily responsible for the improvement. Sales
for the cable group increased 34% to $1271996 from $36 million in 1995. The increase was primarily due to
new computer outsourcing contracts signed in 1996. Less than $1
million of revenue was generated by the operations of the new
systems integration business, started in February, 1996.
Margin, as a percent of revenue, for the outsourcing business
decreased to 41% in 1996 from 45% in 1995. The reduction of the
margin was primarily due to up-front migration costs for new
customers which were recognized as an expense when incurred.
Telecommunications. Revenue for the telecommunications segment
increased 13% to $367 million for fiscal 1996. C-TEC's telephone
group's $10 million, or 8%, increase in sales and C-TEC's cable
group's $33 million or 26% increase in revenue were the primary
contributors to the improved results. The increase in telephone
group revenue is due to higher intrastate access revenue from the
growth in access minutes, an increase of 13,000 access lines, and
higher internet access and video conferencing sales. Cable group
revenue increased primarily due to higher average subscribers and
the effects of rate increases in April 1995 and February 1996.
Subscriber counts increased primarily due to the acquisition of
Pennsylvania Cable Systems, formerly Twin County Trans Video,
Inc., in September 1995, and the consolidation of Mercom, Inc.'s results
since August contributed
$18 million1995. Pennsylvania Cable Systems and $6 million to C-TEC's revenue in 1995. In
addition, subscriber increases of approximately 16,000 over 1994
and rate increases effective in April 1995Mercom account
for an $8$23 million of the increase in cable revenue. Revenues from otherrevenue in 1996.
The 1996 operating groupsexpenses for the telecommunications business
increased $17$38 million or 32%18% compared to 1994 primarily
due to the resale of long distance telephone services to another
long distance reseller, improvements in switched business, 800
service sales and third party revenues from C-TEC's communication
services business. The arrangement with the third party reseller
terminated in the second quarter of 1995. Partially offsetting C-
TEC's increase in revenue was the sale of the mobile services
group in 1994 which contributed $23 million in revenue that year.
C-TEC's direct costs increased $30 million or 15% in 1995. The telephone
group experienced a 9% increase in expenses and the cable group's
costs of revenue increased 31%. The increase for the telephone group was
primarily because ofattributable to higher payroll expenses resulting from
additional personnel, wage increases and higher depreciation expense. The
acquisitions of Mercom and Twin County led to a 37% increase in
direct costs for the cable group. In addition, higher basic
programming costs resulting from increased subscribers, channel
additions and rate increases contributedovertime. Also
contributing to the increase. Direct
expenses for C-TEC's other operating groups increased because of
costsincrease, were fees associated with the
resale of long distanceinternet access services and communicationconsulting services work performed for third parties.
Partially offsetting these increasesa variety of
regulatory and operational matters. The cable group's increase
was the elimination of
direct costsdue to increased depreciation, amortization and compensation
expenses associated with the mobile services group which was
sold in 1994.acquisition of Pennsylvania Cable
Systems and the consolidation of Mercom's operations. Also
contributing to the higher costs were rate increases for existing
programming and the costs for additional programming.
General and Administrative Expenses. General and
administrative expenses increased 18%declined 5% to $181 million in 1995. An increase1996.
Decreases in expenses forassociated with legal and environmental
and legal matters waswere partially offset by lower payroll expenseshigher mine management fees paid
to the Construction & Mining Group, the costs attributable to C-
TEC and the opening of the SR91 toll road. C-TEC's corporate
overhead and other costs increased approximately 13% in 1996.
This increase is attributable to costs associated with the
development of the RCN business in New York and Boston, the
acquisition of Pennsylvania Cable Systems, the consolidation of
Mercom and the investigation of the feasibility of various
restructuring alternatives.
Equity Earnings, net. Losses attributable to the Group's
equity investments increased to $9 million in 1996 from $5
million in 1995. The additional losses were attributable to an
overallenterprise engaged in the renewable fuels business and to C-TEC's
investment in MegaCable S.A. de C.F., Mexico's second largest
cable television operator.
Investment Income, net. Investment income increased 24% in
1996 compared to 1995. Increased gains on the sale of marketable
and equity securities and interest income were partially offset
by a slight decline in C-
TEC's generaldividend income.
Interest Expense, net. Interest expense in 1996 increased 43%
compared to 1995. The increase was primarily due to interest on
the CPTC debt that was capitalized through July 1996, and administrative costs.C-TEC's
redeemable preferred stock, issued in the Pennsylvania Cable
Systems acquisition, that began accruing interest in 1996.
Gain on Subsidiary's Stock Transactions, net. The issuance of
MFS stock for acquisitions by MFS and the exercise of MFS
employee stock options resulted in a $3 million net gain to the
CompanyGroup in 1995.
In 1994 the Company settled a contingent
purchase price obligation resulting from MFS' 1990 purchaseOther, net. The decline of Chicago Fiber Optic Corporation ("CFO"). The former shareholders
of CFO accepted MFS stock previously held by the Company, valued
at market prices, as payment of the obligation. This
transaction, along with the issuances of stock for acquisitions
and employee stock options, resultedother income in a $28 million net gain
before taxes. The Company has recognized gains and losses from
sales and issuances of stock by MFS on the statement of
earnings. With the Spin-off of MFS, these types of gains will no
longer be recognized for MFS transactions.
Investment Income, net. Investment income increased 84% to
$79 million in 1995. Improvements in interest income and equity
earnings, primarily from CalEnergy Company, Inc. ("CE"), and
declines in losses on the sales of securities and international
energy project development expenses all contributed to the
increase in investment income. Proceeds from the C-TEC rights
offering and the sale of its mobile services group, along with
the Whitney Benefits settlement contributed to a higher average
portfolio balance and increased interest income. The Company
also recognized equity earnings, net of goodwill amortization,
from CE of $10 million in 1995 compared to $5 million in 1994.
This increase is1996 was primarily
attributable to the successful merger1995 settlement of Magma Energy operations into CE in 1995. In 1995, losses on
the sale of securities declined 87% from 1994 primarily due to
the reallocation of the Company's investment portfolio from fixed
rate securities to mutual funds portfolios with differing
investment objectives. Developmental expenses declined 75% in
1995 primarily due to the reimbursement of prior year expenses
and the capitalization of current year amounts.
Interest Expense, net. Interest expense in 1995 decreased
33% compared to 1994. The decline is primarily due to C-TEC's
prepayment of senior secured notes in December 1994.
Other, net. In 1995, other income primarily includes a $21
million gain on the exchange of the Company's gold operations in
Nevada for the common stock of Kinross Gold Corporation and
settlement proceeds of $135 million from the Whitney Benefits
litigation. Other income also includes gains and losses from the
disposition of property, plant and equipment and other assets in
1995 and 1994.
Equity Loss in MFS. MFS is a leading provider of
communication services to business. Through its operating
subsidiaries, MFS provides a wide range of high quality voice,
data, network system integration and other enhanced services.
The Company's losses associated with MFS continued to increase,
primarily because of the accelerated expansion activities
announced in 1993 and 1995. These expansion activities require
significant initial development and roll out expenses in advance
of anticipated revenues and continue to negatively effect the
operating results of MFS. After September 30, 1995, the date of
the Spin-off, the Company no longer includes MFS' results in its
financial statements.
Income Tax Benefit (Provision). The effective income tax rate
for 19951996 differs from the statutory rate of 35% primarily because
of adjustments to prior year tax provisions, partially offset by
state taxes and nondeductible amounts associated with goodwill
amortization. In 1995, the rate was lower than 35% due primarily
to $93 million of income tax benefits from the reversal of
certain deferred tax liabilities originally recognized on gains
from previous MFS stock transactions that arewere no longer required due to
the tax-free spin-off of MFS, and adjustments of
prior year tax provisions. In 1994, the rate is lower than 35%
primarily due to adjustments to prior year tax
provisions.
ResultsDiscontinued Operations - Construction. Revenue from
construction decreased 1% to $2,303 million in 1996. This
resulted from the completion of Operations 1994 vs. 1993
Construction. Construction revenue increased by $386
million or 22%several major projects during the
year, while many new contracts were still in 1994. The Company'sthe start-up phase.
KCG's share of joint venture revenue also rose 22% in 1994 and accounted for 24%remained at 30% of total
construction revenuerevenues in 1994 and 1993. Several large contracts
awarded1996. Revenue from materials increased by less than
1% in 1992 and early 1993 contributed to the overall
increase in revenues, the largest of which was San Joaquin. Also
contributing to the increase were revenues generated from the
APAC acquisition. Contract backlog at December 31, 1994 was $2.2
billion, of which 16% was attributable to foreign operations,
principally, Canada and the Philippines. Projects on the west
coast accounted1996. Increased demand for 40% of the total backlog.
Direct costs associated with construction contracts increased
$404 million or 26% to $2.0 billion in 1994. Costs as a
percentage of revenue were approximately 92% and 89% for 1994 and
1993.
In 1994, the margins were adversely affected by cost overruns
and a more competitive market environment. A $20 million
reduction of reserves previously established for the Denmark
tunnel project favorably impacted 1993 margins.
Mining. Mining revenue increased $16 million or 7% in
1994. This increase was primarily due to an increase in spot
sales. Mining gross profits were 46% in 1994 and 47% in 1993.
Alternate source coal sales by Black Butte and Decker in 1994
were consistent with 1993. Alternate source coal consists of
coal purchased from unaffiliated mines locatedaggregates in the Powder
River Basin area of WyomingArizona
market was offset by a decline in precious metal sales. KCG sold
its gold and from a minesilver operations in which the Company
has a 50% interest. In 1994, alternate source coal sales
accounted for 30% of revenuesNevada to Kinross Gold
Corporation ("Kinross") and 47% of gross profits compared
to 31% and 51%essentially liquidated its metals
inventory in 1993.
Telecommunications. C-TEC generated telecommunications
revenue for the Company of $291 million and $48 million in 1994
and 1993. The 1993 figures represent activity from the
acquisition date. C-TEC's telephone group and cable group had
revenue of $122 million and $95 million. The cellular group,
sold in 1994, the long distance group and communications services
group generated the balance. Overall, C-TEC's revenues increased
5% in 1994. Increases in interstate access revenues for the
telephone group, 9,300 additional subscribers for the cable group
and increased business and residential market penetration for the
long distance group all contributed to the increase in revenue.
The cost of revenue for C-TEC included1995.
Opportunities in the Company's
results was $189 millionconstruction and $42 million in 1994 and 1993. The
costs in 1994 are primarily attributablematerials industry
continued to the telephone group -
$57 million and the cable group - $71 million. C-TEC's cost of
revenue increased at a higher rate than revenue in 1994. The
costs associated with developing the long distance business,
primarily the opening of four new sales offices in late 1993,
advertising expenses and promotional and discount campaigns
designed to obtain a greater market share were the reasons for
the increase.
General and Administrative Expenses. General and
administrative expenses in 1994 exceeded those of 1993 by 46%.
The inclusion of a full year of C-TEC's operations is responsible
for the majority of the increase. Overall, C-TEC's general and
administrative expenses remained fairly consistent in 1994. The
remaining increase in general and administrative expenses was
attributable to an increase in payroll expenses partially offset
by lower professional fees.
Gain on Subsidiary's Stock Transactions, net. In 1994,
the Company settled a contingent purchase price adjustment
resulting from MFS' 1990 purchase of CFO. The former
shareholders of CFO accepted MFS stock previously held by the
Company, valued at market prices, as payment of the obligation.
This transaction,expand along with the MFS issuanceeconomy. Because of the
increased opportunities, KCG was able to be selective in the
construction projects it pursued. Gross margins for construction
increased from 8% in 1995 to 10% in 1996. This resulted from the
completion of several large projects and increased efficiencies
in all aspects of the construction process. Gross margins for
materials declined from 13% in 1995 to 10% in 1996. The lack of
higher margin precious metals sales in 1996 combined with
slightly lower construction materials margins produced the
reduction in operating margin.
In 1995, the exchange of KCG's gold and silver operations in
Nevada for 4,000,000 shares of common stock of Kinross led to a
$21 million gain for KCG. The gain was the Cylixdifference between
KCG's book value in the gold and RealCom acquisitionssilver operations and MFS employee stock options,
resulted in a $54 million pre-tax gain to the Company. Deferred
taxes were provided on these gains.
Investment Income, net. The improvement in investmentmarket
value of the Kinross shares at the time of the exchange. Other
income was directly attributable to a declinealso primarily comprised of $38mining management fees
from the Diversified Group, of $37 million and $30 million in
losses from the sale1996 and writedown of derivative1995, and other
securities. Partially offsetting the decline in losses was a $5
million decrease in interest and dividend income, and the
recognition of $4 million of developmental expenses associated
with the international energy projects being jointly developed by
the Company and CE.
Interest Expense, net. Interest expense increased
significantly in 1994. The interestgains on the debt assumed in the
C-TEC acquisition, $33 million, was primarily responsible for the
increase.
Other, net. Debt prepayment penalties incurred by C-TEC
were primarily responsible for the decline.
Income Tax Benefit (Provision). The effective income tax
rate for 1994 and 1993 differed from the statutory rate of 35%
due primarily to adjustments of prior year tax provisions.
Dividend exclusions and mineral depletion deductions also
contributed to the lower effective rate in 1993.
Financial Condition - December 30, 1995
The Company's working capital, exclusive of MFS, decreased
$19 million or 2% during 1995. The decrease was mainly due to
cash used to fund investing activities. The decrease was
partially offset by cash flows from operations, including the
receipt of the Whitney settlement of $135 million.
Investing activities include $161 million of capital
expenditures, $260 million of investments and $36 million of
deferred development costs. The investments primarily include C-
TEC's $84 million outlay for 40% of Megacable and $37 million
outlay for Twin County, KDG's $85 million investment in two
Philippine power projects, $29 million purchase of CE stock, $8
million investment in geothermal power plants in Indonesia and $6
million for a 19% interest in a healthcare software development
company. These outlays were partially offset by $29 million of
proceeds from the saledisposition of property, plant
and equipment and other investments.
Financing sources include $30assets of $17 million and $ 12 million in
1996 and 1995.
The effective income tax rate for 1996 differs from the
statutory rate of 35% primarily because of adjustments to prior
year tax provisions and state taxes. In 1995, the rate was
higher than 35% due primarily to state income taxes.
Discontinued Operations - Energy. Income from discontinued
operations declined in 1996 by 36% to $9 million. Losses
attributable to the Group's interest in the Casecnan project,
additional development expenses for international activities, and
the costs associated with the Northern Electric transaction were
partially offset by increased equity earnings from CalEnergy.
Financial Condition - December 27, 1997
The Group's working capital, excluding C-TEC and discontinued
operations, increased $392 million or 106% during 1997. This is
due to the $182 million of long-term debt
borrowingcash generated by operations,
primarily coal operations, and the significant financing
activities described below.
Investing activities include $452 million to purchase
marketable securities, $42 million of investments and $26 million
of capital expenditures, including $14 million for the construction financing ofexisting
information services business and $6 million for a privately owned
toll road, $45corporate jet.
The investments primarily include the Group's $22 million
investment in the Pavilion Towers office complex, located in
Aurora, Colorado, and $15 million of short-term borrowings and $25 million
frominvestments in developing
businesses. Funding a portion of these activities was the sale
of the Company's common stock. Financing uses
consistedmarketable securities of C-TEC's $27$167 million.
Sources of financing include $138 million outlay for the netissuance of
Class D Stock, $72 million for the exchange of Class C stock for
Class D stock and $16 million for the financing for Pavilion
Towers. Uses consist primarily of $12 million for the payment
of long-term debt, $6dividends, and $2 million of payments on stockholders' notes, $6
million for stock repurchases and $13 million of Class B&C Stock
dividends.
In 1995, the Company received the final payment ($29
million) for the sale of certain discontinued packaging
operations.
In additionlong-term debt.
Prior to the telecommunications activities described
below, the Company anticipates investing between $45 and $85
million annually in its construction and mining businesses,
including opportunities to acquire additional materials
businesses. The Company also anticipates making significant
investments in its infrastructure and energy businesses -
including its joint ventureexecution of an agreement with CE covering
internationalCalEnergy in
September, 1997, the Group invested $31 million in the Dieng,
Patuha and Bali power project development activities - and
searching for opportunities to acquire capital intensive
businesses which provide for long-term growth. Other long-term
liquidity uses include payment of income taxes and repurchasing
the Company's stock. The Company's current financial condition
and borrowing capacity should be sufficient for future operating
and investing activities.projects in Indonesia.
In October 1995,1996, the PKS Board of Directors declared
dividendsdirected PKS
management to pursue a listing of $.60Class D Stock as a way to
address certain issues created by PKS' two-class capital stock
structure and $.50 per sharethe need to attract and retain the best management
for PKS' businesses. During the course of its examination of the
consequences of a listing of Class B&CD Stock, management concluded
that a listing of Class D Stock would not adequately address
these issues, and instead began to study a separation of the
Construction and Mining Group and the Diversified Group. At the
regular meeting of the Board on July 23, 1997, management
submitted to the Board for consideration a proposal for
separation of the Construction and Mining Group and Diversified
Group through a spin-off of the Construction and Mining Group
("the Transaction"). At a special meeting on August 14, 1997,
the Board approved the Transaction.
In connection with the sale of approximately 10 million Class D shares
to employees in 1997, the Company has retained the right to purchase
the relevant Class D shares at the then current Class D Stock price
if the Transaction is definitely abandoned by formal action of the
PKS Board or the employees voluntarily terminate their employment
on various dates prior to January 1, 1999.
The separation of the Construction and Mining Group and the
Diversified Group was contingent upon a number of conditions,
including the favorable ratification by a majority of both Class
C and Class D Stock, respectively, payableshareholders and the receipt by the Company of an
Internal Revenue Service ruling or other assurance acceptable to
the Board that the separation would be tax-free to U.S.
shareholders. On December 8, 1997, PKS' Class C and Class D
shareholders approved the transaction and on March 5, 1998 PKS
received a favorable ruling from the Internal Revenue Service.
The Transaction is anticipated to be effective on March 31, 1998.
Level 3 has recently decided to substantially increase its
emphasis on and resources to its information services to
business. Pursuant to the plan, Level 3 intends to expand
substantially its current information services business, through
the expansion of its existing business and the creation, through
a combination of construction, leasing and purchase of facilities
and other assets, of a substantial facilities-based internet
communications network.
Using this network Level 3 intends to provide (a) a range of
internet access services at varying capacity levels and, as
technology development allows, at specified levels of quality of
service and security and (b) a number of business oriented
communications services which may include fax service, which are
transmitted in part over private or limited access Transmission
Control Protocol/Internet Protocol ("TCP/IP") networks and are
offered at lower prices than public telephone network-based fax
service, and voice message storing and forwarding over the same
TCP/IP-based networks.
Level 3 believes that over time, a substantial number of
businesses will convert existing computer application systems to
computer systems which communicate using TCP/IP and are accessed
by users employing Web browsers. Level 3 further believes that
businesses will prefer to contract for assistance in making this
conversion with those vendors able to provide a full range of
services from initial consulting to internet access with
requisite quality and security levels.
Level 3 anticipates that the capital expenditures required to
implement this expansion plan will be substantial. Level 3
estimates that these costs may be in excess of $500 million in
1998 and could exceed $1.5 billion in 1999. Level 3's current
financial condition, borrowing capacity and proceeds from the
CalEnergy transaction described below should be sufficient for
immediate operating, implemention and investing activities.
However, Level 3 expects to raise capital from both the equity
and debt markets due to the significant capital requirements of
the information services expansion plan.
In connection with the Expansion Plan, Level 3 expects to
devote substantially more management time and capital resources
to its information services business with a view to making the
information services business, over time, the principal business
of Level 3. In that respect, management is conducting a
comprehensive review of the existing Level 3 businesses to
determine how those businesses will complement Level 3's focus on
information services. If it is decided that an existing business
is not compatible with the information services business and if a
suitable buyer can be found, Level 3 may dispose of that
business.
In January 1996.1998, Level 3 and CalEnergy closed the sale of Level
3's energy assets to CalEnergy. Level 3 received proceeds of
$1,159 million and expects to recognize an after-tax gain of
approximately $324 million in 1998. The after-tax proceeds from
this transaction of approximately $967 million will be used to
fund the expansion plan of the information services business.
In November 1995, C-TECJanuary 1998, Class C shareholders converted 2.3 million
shares, with a redemption value of $122 million, into 10.5
million shares of Class D Stock.
In February 1998, Level 3 announced that it had engaged an
investment bankerwas moving its
corporate headquarters to assist with evaluating strategic alternatives
for its various business units withBroomfield, Colorado, a view toward enhancing
shareholder value. C-TEC is now planning to distribute to its
shareholders in a tax-free spin-off the Telephone Group, the
Communications Services Group, and certain other assets. Following
the spin-off, C-TEC plans to combine its remaining businesses,
which will consistnorthwest
suburb of its domestic Cable Group, with a third
party pursuant to a tax-free, stock-for-stock transaction. C-TEC
has received a number of inquiries regarding its domestic Cable
Group and is holding discussions with interested parties.
In March, under the terms of an agreement, RCN Corporation
("RCN") will pay C-TEC approximately $123 million for certain of
C-TEC's assets, including the Long Distance Group, C-TEC International,
which holds the 40% interest in Megacable, S.A. de C.V., and Residential
Communications Network, a start-up joint effort with RCN which plans to
provide telecommunications services to the residential market. RCN will
purchase Residential Communications Network for cash in a transaction
expected to close in April 1996. RCN's purchase of the other businesses for
cash or C-TEC stock, at RCN's option,Denver. The campus facility is expected to closeencompass
over 500,000 square feet of office space at a construction cost
of over $70 million. Level 3 is leasing space in the second half of 1996.Denver area
while the campus is under construction. The transactions are subject to certain conditions
including the receipt of all necessary regulatory approvals. The agreement
with RCN contains a repurchase option under which C-TEC can reacquire
the businesses if a restructuring of C-TEC's main businesses does not
occur. Additionally, C-TEC retains a warrant to reacquire a six percent
stake in Residential Communications Network. The agreement with RCN was
approved by a special committeefirst phase of the
boardcomplex is scheduled for completion in the summer of directors of C-TEC, composed
of directors unaffiliated with either RCN or the Company.
Also in1999.
In March RCN entered into an asset purchase
agreement, along with other ancillary agreement, with Liberty
Cable Company, Inc. ("Liberty") to purchase an 80 percent
interest in certain private cable systems in New York City and
selected areas of New Jersey. The transaction closed1998, PKS announced that its Class D Stock will begin
trading on March 6,
1996. The cable systems provide subscription television
services using microwave frequencies. RCN deposited $27
million in an escrow account which was releasedApril 1 on the closing date.
In addition, RCN issued a $15 million promissory note thatNasdaq National Market under the symbol
"LVLT". The Nasdaq listing will follow the separation of Level 3
and the Construction Group of PKS, which is expected to be
completed on March 31, 1998. In connection with the separation,
PKS' construction subsidiary will be renamed "Peter Kiewit Sons',
Inc." and PKS Class D Stock will become the common stock of Level
3 Communications, Inc.
PKS' certificate of incorporation gives stockholders the
right to exchange their Class C Stock for Class D Stock under a
set conversion formula. That right will be eliminated as a
result of the separation of Level 3 and the Construction Group.
To replace that conversion right, Class C stockholders received
6.5 million shares of a new Class R stock in January, 1998, which
is convertible into Class D Stock in accordance with terms
ratified by stockholders in December 1997.
The PKS Board of Directors has approved in principle a plan
to force conversion of all shares of Class R stock outstanding.
Due to certain provisions of the Class R stock, conversion will
not be forced prior to May 1998, and the final decision to force
conversion would be made by Level 3's Board of Directors at that
time. Level 3's Board may choose not to force conversion if it
were to decide that conversion is not in the best interests of
the stockholders of Level 3. If, as currently anticipated, Level
3's Board determines to force conversion of the Class R stock on
or before June 30, 1998, certain adjustments will be made to the
cost sharing and risk allocation provisions of the separation
agreement between Level 3 and the Construction business.
If Level 3's Board of Directors determines to force
conversion of the Class R stock, each share of Class R stock will
be convertible into $25 worth of Level 3 (Class D) common stock,
based upon the average trading price of the Level 3 common stock
on the Nasdaq National Market for the last fifteen trading days
of the month prior to the determination by the Board of Directors
to force conversion. When the spin-off occurs, Level 3 will
increase paid in 1996.capital and reduce retained earnings by the fair
value of the Class R shares.
Immediately prior to the spin-off of the Kiewit Construction
and Mining Group, the Company will recognize a gain equal to the
difference between the carrying value of the Construction and
Mining Group and its fair value. The Company will then reflect
the fair value of Kiewit Construction and Mining Group as a
dividend to shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Financial statements and supplementary financial information
for Peter Kiewit Sons', Inc. and Subsidiaries begin on page P1.
Separate financial statements and financial statement schedules forother information pertaining to
the Kiewit Construction & Mining Group and the Kiewit Diversified
Group have been filed as Exhibits 99.A and 99.B to this report.
The Company will furnish a copy of such exhibits without charge
upon the written request of a stockholder addressed to Stock
Registrar, Peter Kiewit Sons', Inc., 1000 Kiewit Plaza, Omaha,
Nebraska 68131.
ITEMItem 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Part III is incorporated by
reference fromto the Company's definitive proxy statement for the
1998 Annual Meeting of Stockholders to be held on June 8, 1996.filed with the
Securities and Exchange Commission. However, certain information
is set forth under the caption "Executive"Directors and Executive Officers
of the Registrant" following Item 4 above.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Financial statements and financial statement schedules
required to be filed for the registrant under Items 8 or 14 are
set forth following the index page at page P1.
Exhibits filed as a part of this report are listed below.
Exhibits incorporated by reference are indicated in parentheses.
Exhibit Number Description
3.1 Restated Certificate of Incorporation,
effective January 8, 1992 (Exhibit 3.1 to
Company's Form 10-K for 1991).
3.2 Certificate of Amendment of Restated Certificate of
Incorporation of Peter Kiewit Sons', Inc., effective
December 8, 1997.
3.4 By-laws, composite copy, including all amendments, as of
March 19, 1993 (Exhibit 3.4 to Company's Form 10-K for
1992).
10.1 Separation Agreement, dated December 8, 1997, by and among
PKS, Kiewit Diversified Group Inc., PKS Holdings, Inc. and
Kiewit Construction Group Inc.
10.2 Amendment No. 1 to Separation Agreement, dated March 18,
1997, by and among PKS, Kiewit Diversified Group Inc., PKS
Holdings, Inc. and Kiewit Construction Group Inc.
21 List of subsidiaries of the Company.
23 Consent of Coopers & Lybrand LLP
27 Financial data schedules.
99.A Kiewit Construction & Mining Group Financial Statements and
Financial Statement Schedules and Management's
Discussion and Analysis of Financial Condition and
Results of Operations.Other Information.
99.B Kiewit Diversified Group Financial Statements and Financial Statement Schedules and Management's
Discussion and Analysis of Financial Condition and
Results of Operations.Other
Information.
(b) No reports on Form 8-K waswere filed by the Company during the
fourth quarter of 1995.1997.
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, on the 29th30th day of March, 1996.1998.
PETER KIEWIT SONS', INC.
By: /s/ Richard R. Jaros
Richard R. Jaros
Executive Vice President
Chief Financial OfficerWalter Scott, Jr.
Name: Walter Scott, Jr.
Title: Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities
indicated on the 29th30th day of March, 1996.1998.
/s/ Walter Scott, Jr. Chairman of the Board and President
Walter Scott, Jr. (principal executive officer)
/s/ Richard R. Jaros Director,Douglas Bradbury Executive Vice President-
RichardPresident of Level 3
R. Jaros Chief Financial OfficerDouglas Bradbury Communications, Inc.
(principal financial officer)
/s/ Eric J. Mortensen Controller
Eric J. Mortensen (principal accounting officer)
/s/ Richard W. Colf /s/ Richard R. Jaros
Richard W. Colf, Director Richard R. Jaros,
Director
/s/ James Q. Crowe /s/ Tait P. Johnson
James Q. Crowe, Director Tait P. Johnson,
Director
/s/ Robert B. Daugherty /s/ Robert E. JulianAllan K. Kirkwood
Robert B. Daugherty, Director Robert E. Julian,Allan K. Kirkwood,
Director
/s/ Richard Geary /s/ Leonard W. KearneyPeter Kiewit, Jr.
Richard Geary, Director Leonard W. Kearney,Peter Kiewit, Jr.,
Director
/s/ Bruce E. Grewcock /s/ Peter Kiewit, Jr.
Bruce E. Grewcock, Director Peter Kiewit, Jr., Director
/s/ William L. Grewcock /s/ Kenneth E. Stinson
William L.Bruce E. Grewcock, Director Kenneth E. Stinson,
Director
/s/ Charles M. HarperWilliam L. Grewcock /s/ George B. Toll, Jr.
Charles M. Harper,William L. Grewcock, Director George B. Toll, Jr.,
Director
LIST OF SUBSIDIARIES
OF
PETER KIEWIT SONS', INC.
DECEMBER 30, 1995
Peter Kiewit Sons', Inc. (Delaware)
Kiewit Construction Group Inc. (Delaware)
Kiewit Construction Company (Delaware)
Kiewit Pacific Co. (Delaware)
Kiewit Mining Group Inc. (Delaware)
Kiewit Western Co. (Delaware)
Gilbert Southern Corp. (Delaware)
Kiewit Diversified Group Inc. (Delaware)
PKS Information Services, Inc. (Delaware)
Continental Holdings Inc. (Wyoming)
CCC Canada Holding, Inc. (Delaware)
The Continental Group of Canada, Inc.
(Ontario)
Continental Kiewit Inc. (Delaware)
Kiewit Energy Group Inc. (Delaware)
Kiewit Coal Properties Inc. (Delaware)
Black Butte Coal Company (50%)
(joint venture)
Decker Coal Company (50%) (joint venture)
Kiewit Energy Company (Delaware)
CalEnergy Company, Inc. (24%) (Delaware)
Peter Kiewit Sons' Co. (Nebraska)
RCN Corporation (90%) (Delaware)
C-TEC Corporation (50%) (Pennsylvania)
Commonwealth Telephone Company
(Pennsylvania)
C-TEC Cable Systems, Inc. (Delaware)
The subsidiaries listed above include "significant" subsidiaries as
defined in Rule 1-02(w) of Regulation S-X, and certain other
subsidiaries./s/ Charles M. Harper
Charles M. Harper, Director
PETER KIEWIT SONS', INC. AND SUBSIDIARIES
Index to Financial Statements
and Financial Statement Schedule
Report of Independent Accountants
Consolidated
Financial Statements as of December 30, 199527, 1997 and December 31, 199428, 1996
and for the three years ended December 30, 1995:27, 1997:
Consolidated Statements of Earnings
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statements of Changes in Stockholders' Equity
Notes to Consolidated Financial Statements
Consolidated Financial Statement Schedule for the
three years ended December 30, 1995:
II--Valuation and Qualifying Accounts and Reserves
Schedules not indicated above have been omitted because of the
absence of the conditions under which they are required or because
the information called for is shown in the consolidated financial
statements or in the notes thereto.
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
Peter Kiewit Sons', Inc.
We have audited the consolidated financial statements and the
financial statement schedule of Peter
Kiewit Sons', Inc. and Subsidiaries as listed in the index on the
preceding page of this Form 10-K. These financial statements and the financial
statement schedule are
the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements and financial statement schedule 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 consolidated financial
position of Peter Kiewit Sons', Inc. and Subsidiaries as of
December 30, 199527, 1997 and December 31, 1994,28, 1996, and the consolidated
results of their operations and their cash flows for each of the
three years in the period ended December 30, 199527, 1997 in conformity
with generally accepted accounting principles.
In
addition, in our opinion, the financial statement schedule
referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included
therein.
COOPERSCoopers & LYBRANDLybrand L.L.P.
Omaha, Nebraska
March 19, 199630, 1998
PETER KIEWIT SONS', INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
For the three years ended December 30, 199527, 1997
(dollars in millions, except per share data) 1997 1996 1995 1994 1993
Revenue $ 2,902332 $ 2,704652 $ 2,050580
Cost of Revenue (2,474) (2,314) (1,742)
------- ------- --------
428 390 308(175) (384) (345)
------ ------ -----
157 268 235
General and Administrative Expenses (266) (225) (154)(114) (181) (190)
------ ----------- -----
Operating Earnings 162 165 15443 87 45
Other Income (Expense): Income:
Equity losses, net (43) (9) (5)
Investment income, net 45 56 45
Interest expense, net (15) (33) (23)
Gain on Subsidiary's Stock Transactions,subsidiary's stock transactions, net - - 3
54 211
Investment Income,Other, net 79 43 17
Interest Expense, net (25) (38) (14)
Other,net 157 16 241 6 125
------ ------ -----
---- ----
214 75 238(12) 20 145
Equity Loss in MFS - - (131)
(102) (13)------ ------ ----- ----- ----
Earnings Before Income Taxes, and
Minority Interest
245 138 379and Discontinued Operations 31 107 59
Income Tax Benefit (Provision) 11 (29) (118)48 (3) 79
Minority Interest in Net Loss (Income) Loss
of Subsidiaries 4 - (12)
1 ------- ------ -----
----Income from Continuing Operations 83 104 126
Discontinued Operations:
Construction, net of income tax
(expense) of ($107), ($72) and ($60) 155 108 104
Energy, net of income tax benefit (expense)
of $1, ($9) and ($8) 10 9 14
------ ------ -----
Income from Discontinued Operations 165 117 118
------ ------ -----
Net Earnings $ 248 $ 221 $ 244
$ 110 $ 261
============= ====== =====
=====
Net Earnings Attributable to Class
B&C Stock $ 104 $ 77 $ 80
======= ===== =====
Net Earnings Attributable toPer Share:
Continuing Operations:
Class D Stock
Basic $ 140.66 $ 33.90 $1.17
====== ====== =====
Diluted $ 181
======= =====.66 $ .90 $1.17
====== ====== =====
Net Earnings Per Common and Common
Equivalent Share:Income:
Class B&CC Stock
Basic $15.99 $10.13 $7.78
====== ====== =====
Diluted $15.35 $ 7.78 $4.92 $4.63
======= =====9.76 $7.62
====== ====== =====
Class D Stock
Basic $ 6.45 $1.63 $9.08
=======.74 $ .97 $1.29
====== ====== =====
Diluted $ .74 $ .97 $1.29
====== ====== =====
See accompanying notes to consolidated financial statements.
PETER KIEWIT SONS', INC.INC AND SUBSIDIARIES
Consolidated Balance Sheets
December 30, 199527, 1997 and December 31, 199428, 1996
(dollars in millions, except per share data) 1995 1994millions) 1997 1996
Assets
Current Assets:
Cash and cash equivalents $ 45787 $ 400147
Marketable securities 604 910678 372
Restricted securities 22 17
Receivables, less allowance of $12$-, and $9 329 414
Note receivable from sale of$3 42 76
Investment in discontinued operations - 29
Costs and earnings in excess of billings on
uncompleted contracts 78 126
Investment in construction joint ventures 73 69
Deferred income taxes 66 74energy 643 608
Other 59 81
---- ----22 26
------- ------
Total Current Assets 1,666 2,1031,494 1,246
Property, Plant and Equipment, at cost:
Land 33 3015 18
Buildings 98 206and leasehold improvements 122 159
Equipment 1,246 1,739
----- -----
1,377 1,975275 810
------- ------
412 987
Less accumulated depreciation and amortization (710) (731)
----- -----(228) (345)
------- ------
Net Property, Plant and Equipment 667 1,244184 642
Investments 538 313383 189
Investments in Discontinued Operations-Construction 652 562
Intangible Assets, net 515 74921 353
Other Assets 77 8345 74
------- -------------
$ 3,463 $ 4,4922,779 $3,066
======= =============
See Note 17 for 1997 pro forma balance sheet information.
See accompanying notes to consolidated financial statements.
PETER KIEWIT SONS', INC. AND SUBSIDIARIESSUBSIDAIRIES
Consolidated Balance Sheets
December 30, 199527, 1997 and December 31, 199428, 1996
(continued)
(dollars in millions, except per share data) 1995 1994millions) 1997 1996
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 24031 $ 344
Short-term borrowings 45 -79
Current portion of long-term debt:
Telecommunications 36 26- 55
Other 6 73 2
Accrued reclamation and other mining costs and billings in excess of
revenue on uncompleted contracts 121 143
Accrued insurance costs 79 7519 19
Deferred income taxes 15 5
Other 139 20621 87
------ ------
Total Current Liabilities 666 80189 247
Long-Term Debt, less current portion:
Telecommunications 264 827- 207
Other 106 81137 113
Deferred Income Taxes 236 302
Retirement Benefits 54 6783 148
Accrued Reclamation Costs 100 10398
Other Liabilities 139 216 127
Minority Interest 214 4481 218
Stockholders' Equity:
Preferred stock, no par value, authorized
250,000 shares:
no shares outstanding in 19951997 and 19941996 - -
Common stock, $.0625 par value, $1.5$2.1
billion aggregate redemption value:
Class B, authorized 8,000,000 shares:
- outstanding in 1997 and 263,468
outstanding in 1995 and 1,000,400
outstanding in 19941996 - -
Class C, authorized 125,000,000 shares:
10,616,90110,132,343 outstanding in 19951997 and 15,087,02810,743,173
outstanding in 19941996 1 1
Class D, authorized 50,000,000500,000,000 shares:
23,024,974135,517,140 outstanding in 19951997 and 20,391,568115,901,215
outstanding in 19941996 8 1
1Class R, authorized 8,500,000 shares:
- outstanding in 1997 and 1996 - -
Additional paid-in capital 210 182427 235
Foreign currency adjustment (6)(7) (7)
Net unrealized holding gain (loss) 17 (8)2 23
Retained earnings 1,384 1,567
----- -----1,799 1,566
------ ------
Total Stockholders' Equity 1,607 1,736
----- -----
$ 3,463 $ 4,492
======= =======2,230 1,819
------ ------
$2,779 $3,066
====== ======
See Note 17 for 1997 pro forma balance sheet information.
See accompanying notes to consolidated financial statementsstatements.
PETER KIEWIT SONS', INC. AND SUBSIDIARIESSUBSIDAIRIES
Consolidated Statements of Cash Flows
For the three years ended December 30, 199527, 1997
(dollars in millions) 1997 1996 1995 1994 1993
Cash flows from continuing operations:
Net EarningsIncome from continuing operations $ 24483 $ 110104 $ 261126
Adjustments to reconcile net
earningsincome from
continuing operations to net
cash provided by continuing operations:
Depreciation, depletion and amortization 152 217 99
(Gain) loss24 132 96
Gain on sale of property, plant and
equipment, and other investments (40) 5 23(9) (3) (7)
Gain on subsidiary's stock transactions, net - - (3)
(54) (211)Compensation expense attributable
to stock options 21 - -
Equity (earnings) loss 116 (10) (10)
Noncash interest expense - 40 -losses, net 43 10 130
Minority interest in subsidiaries 12 (50) (3)
Decline in market value of investments(4) - - 2112
Retirement benefits paid (7) (6) (2)
(6) (17)Federal income tax refunds 146 - 35
Deferred income taxes (147) (40) 57(103) (68) (152)
Change in working capital items:
Receivables 3 (49) 9(9) (1) 11
Other current assets 19 (67) (48)(1) 6 -
Payables - 42 47(3) 9 (3)
Other liabilities 80 19(5) 13 34
Other 6 - 8 45
----- ----- -----(4)
------ ------ ------
Net cash provided by continuing operations 434 165 286182 196 273
Cash flows from investing activities:
Proceeds from sales and maturities of
marketable securities 605 1,876 4,927167 378 383
Purchases of marketable securities (613) (1,718) (5,231)
Acquisitions, excluding(452) (311) (440)
Increase in restricted securities (2) (2) (2)
Investments and acquisitions, net of
cash acquired (231) (254) (146)
Proceeds from sale of cellular properties - 182 -(42) (59) (136)
Proceeds from sale of property, plant
and equipment, and other investments 29 20 381 7 14
Capital expenditures (161) (513) (192)
Investments in affiliates (29) (34) (14)
Acquisition of minority interest - (6)(26) (117) (118)
Other 3 (8) (2)
Deferred development costs and other (38) (49) (35)
----- ----- ----------- ------ ------
Net cash used in investing activities $ (438)(351) $ (496)(112) $ (655)(301)
See accompanying notes to consolidated financial statements.
PETER KIEWIT SONS', INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the three years ended December 30, 199527, 1997
(continued)
(dollars in millions) 1997 1996 1995 1994 1993
Cash flows from financing activities:
Long-term debt borrowings $ 5217 $ 69338 $ 2149
Payments on long-term debt, including
current portion (52) (309) (8)
Net change in short-term borrowings 45 - (80)(2) (60) (49)
Issuances of common stock 25 21 24138 - 2
Issuances of subsidiaries' stock - 70 4581 -
Repurchases of common stock (6) (31) (54)- (11) (3)
Dividends paid (13) (13) (27)
----- ----- -----(12) (11) -
Exchange of Class C Stock for Class
D Stock, net 72 20 155
------ ------ ------
Net cash provided by (used in)
financing activities 51 431 334213 (23) 154
Cash flows from discontinued packaging
operations:
Discontinued energy operations 3 5 8
Investments in discontinued energy operations (31) (282) (101)
Proceeds from sales of discontinued
packaging operations 29 5 110
Other cash provided by
discontinued packaging operations - - 20
----- ----- -----29
------ ------ ------
Net cash provided byused in discontinued packaging operations 29 5 130(28) (277) (64)
Cash and cash equivalents of C-TEC in 1997
and MFS in 1995 at beginning of year (22)(76) - -(22)
Effect of exchange rates on cash 3 (1) (2)
----- ------ - 2
------ ------ ------
Net increasechange in cash and cash equivalents 57 104 93(60) (216) 42
Cash and cash equivalents at beginning of year 400 296 203
----- ----- -----147 363 321
------ ------ ------
Cash and cash equivalents at end of year $ 45787 $ 400147 $ 296
===== =====363
====== ====== ======
Supplemental disclosure of cash
flow information:
Taxes paid $ 20162 $ 11555 $ 83132
Interest 35 41 7paid 13 38 33
Noncash investing and financing activities:
Conversion of CalEnergy convertible
debentures to common stock $ - $ 66 $ -
Dividend of investment in MFS $399 $ - $ - 399
Issuance of C-TEC redeemable preferred stock
for acquisition 39 - - Disposition of gold operations in
exchange of Kinross common stock 21 - -
Issuance of MFS stock for acquisitions - 71 -
MFS stock transactions to settle contingent
purchase price adjustment - 25 -39
See accompanying notes to consolidated financial statements.
PETER KIEWIT SONS', INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
For the three years ended December 30, 1995
Class Class Net
B & C D Additional Foreign Unrealized
Common Common Paid-in Currency Holding Retained
Stock Stock Capital Adjustment Gain (Loss) Earnings Total
(dollars in millions)
Balance at
December 26,
1992 $ 1 $ 1 $ 145 $ 3 $ - $ 1,308 $1,458
Issuances
of stock - - 24 - - - 24
Repurchases
of stock - - (5) - - (49) (54)
Foreign
currency
adjustment - - - (6) - - (6)
Net
unrealized
holding gain - - - - 9 - 9
Net earnings - - - - - 261 261
Dividends:(a)
Class B&C
($.70 per
common share) - - - - - (11) (11)
Class D ($.50
per common
share) - - - - - (10) (10)
----- ----- ---- ---- ---- ---- ----
Balance at
December 25,
1993 1 1 164 (3) 9 1,499 1,671
Issuances of
stock - - 21 - - - 21
Repurchases
of stock - - (3) - - (28) (31)
Foreign
currency
adjustment - - - (4) - - (4)
Net
unrealized
holding
(loss) - - - - (17) - (17)
Net
earnings - - - - - 110 110
Dividends:(b)
Class B&C
($.90 per
common
share) - - - - - (14) (14)
------ ----- ----- ---- ---- ----- -----
Balance at
December
31, 1994 $ 1 $ 1 $ 182 $ (7) $ (8) $ 1,567 $ 1,73627, 1997
Net
Class Class Unrealized
B&C D Additional Foreign Holding
(dollars in Common Common Paid-in Currency Gain Retained
millions) Stock Stock Capital Adjustment (Loss) Earnings Total
Balance at
December 31, 1994 $ 1 $ 1 $ 182 $ (7) $ (8) $ 1,567 $1,736
Issuances of stock - - 29 - - - 29
Repurchases of stock - - (1) - - (5) (6)
Foreign currency
adjustment - - - 1 - - 1
Net unrealized
holding gain - - - - 25 - 25
Net earnings - - - - - 244 244
Dividends:(a)
Class C ($1.05
per common share) - - - - - (12) (12)
Class D ($.10 per
common share) - - - - - (11) (11)
MFS Dividend - - - - - (399) (399)
----- ----- ----- ----- ----- ----- -----
Balance at
December 30, 1995 $ 1 1 210 (6) 17 1,384 1,607
Issuances of stock - - 27 - - - 27
Repurchases of stock - - (2) - - (14) (16)
Foreign currency
adjustment - - - (1) - - (1)
Net unrealized
holding gain - - - - 6 - 6
Net earnings - - - - - 221 221
Dividends: (b)
Class C ($1.30
per common share) - - - - - (13) (13)
Class D ($.10 per
common share) - - - - - (12) (12)
----- ----- ----- ----- ----- ----- -----
Balance at
December 28, 1996 $ 1 $ 1 $ 235 $ (7) $ 23 $1,566 $1,819
See accompanying notes to consolidated financial statements
PETER KIEWIT SONS', INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
For the three years ended December 30, 199527,1997
(continued)
Class Class Net
B & C D Additional Foreign Unrealized
Common Common Paid-in Currency Holding Retained
Stock Stock Capital Adjustment Gain (Loss) Earnings Total
Balance at
December
31, 1994 $ 1 $ 1 $ 182 $ (7) $ (8) $ 1,567 $1,736
Issuances
of stock - - 29 - - - 29
Repurchases
of stock - - (1) - - (5) (6)
Foreign
currency
adjustment - - - 1 - - 1
Net
unrealized
holding gain - - - - 25 - 25
Net earnings - - - - - 244 244
Dividends: (c)
Class B&C
($1.05 per
common
share) - - - - - (12) (12)
Class D
($.50 per
common
share) - - - - - (11) (11)
MFS
Dividend - - - - - (399) (399)
Balance
at
December
30, 1995 $ 1 $ 1 $ 210 $ (6) $ 17 $1,384 $ 1,607
Net
Class Class Unrealized
Class Class Foreign Holding
(dollars in B&C D Additional Currency Gain Retained
millions) Stock Stock Capital Adjustment (Loss) Earnings Total
Balance at
December 28, 1996 $ 1 $ 1 $ 235 $ (7) $ 23 $1,566 $1,819
Issuances of stock - - 172 - - - 172
Repurchases of stock - - - - - (2) (2)
Option Activity - - 27 - - - 27
Class D Stock Split - 7 (7) - - - -
Foreign currency
adjustment - - - - - - -
Net unrealized
holding loss - - - - (21) - (21)
Net earnings - - - - - 248 248
Dividends: (c)
Class C ($1.50 per
common share) - - - - - (13) (13)
---- ---- ----- ----- ---- ------ ------
Balance at
December 27, 1997 $ 1 $ 8 $ 427 $ (7) $ 2 $1,799 $2,230
==== ==== ===== ===== ==== ====== ======
(a)Includes $.40$.60 and $.10 per share for dividends on Class B&C Stock
declared in 1993 but paid in January 1994.
(b)Includes $.45 per share for dividends on Class B&C Stock
declared in 1994 but paid in January 1995.
(c)Includes $.60 and $.50 per share for dividends on Class B&C
StockC and
Class D Stock, respectively, declared in 1995 but paid in
January 1996.
(b) Includes $.70 and $.10 per share for dividends on Class C and
Class D Stock, respectively, declared in 1996 but paid in
January 1997.
(c) Includes $.80 per share for dividends on Class C declared in
1997 put paid in January 1998.
See accompanying notes to consolidated financial statements.
PETER KIEWIT SONS', INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of
Peter Kiewit Sons', Inc. and subsidiaries in which it owns more than 50% of the voting stockhas
control ("PKS" or "the Company"), which are engaged in
enterprises primarily related to construction, coal mining,
energy generation, information services, and telecommunications.
Fifty-percent-owned mining joint ventures are consolidated on a
pro rata basis. Investments in other companies in which the
Company exercises significant influence over operating and
financial policies, andincluding construction joint ventures and
energy projects, are accounted for by the equity method. In
addition, the Company accounts for its investments in
international energy projects using the equity method. The
Company accounts for its share of the operations of the construction
joint ventures on a pro rata basis in the consolidated statements
of earnings. All significant intercompany accounts and
transactions have been eliminated.
In 1997, the Company agreed to sell its energy assets to
CalEnergy Company, Inc. ("CalEnergy") and to spin-off the
construction business. Therefore, the assets and
liabilities, and results of operations, of both businesses
have been classified as discontinued operations on the
consolidated balance sheet, statements of earnings and cash
flows. (See notes 2 and 3)
On September 5, 1997, C-TEC Corporation ("C-TEC") announced that
its board of directors had approved the planned restructuring
of C-TEC into three publicly traded companies. The
transaction was effective September 30, 1997. As a result of
the restructuring plan, the Company owns less than 50% of the
outstanding shares and voting rights of each entity, and
therefore has accounted for each entity using the equity
method as of the beginning of 1997. In accordance with
Generally Accepted Accounting Principles, C-TEC's financial
position, results of operations and cash flows are
consolidated in the 1996 and 1995 financial statements.
The results of operations of MFS Communications Company, Inc.
("MFS"), (which later merged into WorldCom Inc.) prior to its
spin-off on September 30, 1995, have been classified as a
single line item on the statements of earnings
The Company invests in the portfolios of the Kiewit Mutual Fund,
("KMF"), a registered investment company. KMF is not
consolidated in the Company's financial statements.
Description of Business Groups
Holders of Class C Stock ("Construction & Mining Group") and
Class D Stock ("Diversified Group") are stockholders of PKS.
The Construction & Mining Group ("KCG") contains the
Company's traditional construction and materials operations
performed by Kiewit Construction Group Inc. The Diversified
Group through Level 3 Communications, Inc. (formerly Kiewit
Diversified Group Inc.) ("Level 3") contains coal mining
properties owned by Kiewit Coal Properties Inc., energy
investments, including a 24% interest in CalEnergy and a 30%
interest in CE Electric UK plc ("CE Electric"), investments
in international energy projects, information services
businesses, telecommunications companies owned by C-TEC, as
well as other assets. Corporate assets and liabilities which
are not separately identified with the ongoing operations of
the Construction & Mining Group or the Diversified Group are
allocated equally between the groups.
Construction Contracts
The CompanyKCG operates generally within North Americathe United States and Canada as a
general contractor and engages in various types of
construction projects for both public and private owners.
Credit risk is minimal with public (government) owners since
the CompanyKCG ascertains that funds have been appropriated by the
governmental project owner prior to commencing work on public
projects. Most public contracts are subject to termination
at the election of the government. In the event of
termination, the CompanyKCG is entitled to receive the contract price on
completed work and reimbursement of termination related
costs. Credit risk with private owners is minimized because
of statutory mechanics liens, which give the CompanyKCG high priority in
the event of lien foreclosures following financial
difficulties of private owners.
The construction industry is highly competitive and lacks firms
with dominant market power. A substantial portion of the Company'sKCG's
business involves construction contracts obtained through
competitive bidding. The volume and profitability of the Company'sKCG's
construction work depends to a significant extent upon the
general state of the economies in which it operates and the
volume of work available to contractors. The Company'sKCG's construction
operations could be adversely affected by labor stoppages or
shortages, adverse weather conditions, shortages of supplies,
or other governmental action.
The CompanyKCG recognizes revenue on long-term construction contracts and
joint ventures on the percentage-of-completion method based
upon engineering estimates of the work performed on
individual contracts. Provisions for losses are recognized on
uncompleted contracts when they become known. Claims for
additional revenue are recognized in the period when allowed.
It is at least reasonably possible that engineering estimates
of the work performed on individual contracts will be revised
in the near term.
Assets and liabilities arising from construction
activities, the operating cycle of which extends over
several years, are classified as current in the financial
statements. A one-year time period is used as the basis
for classification of all other current assets and
liabilities.
PETER KIEWIT SONS', INC.
Notes to Consolidated Financial Statements
Coal Sales Contracts
The Company'sLevel 3's coal is sold primarily under long-term contracts with
electric utilities, which burn coal in order to generate
steam to produce electricity. A substantial portion of the Company'sLevel
3's coal sales were made under long-
termlong-term contracts during
1995, 19941997, 1996 and 1993.1995. The remainder of the Company'sLevel 3's sales are
made on the spot market where prices are substantially lower
than those in the long-term contracts. As the long-term
contracts expire, a higher proportion of the Company'sLevel 3's sales
will occur on the spot market.
The coal industry is highly competitive. The CompanyLevel 3 competes not
only with other domestic and foreign coal suppliers, some of
whom are larger and have greater capital resources than the Company,Level
3, but also with alternative methods of generating
electricity and alternative energy sources. Many of the Company'sLevel
3's competitors are served by two railroads and, due to the
competition, often benefit from lower transportation costs
than the CompanyLevel 3 which is served by a single railroad.
Additionally, many competitors have lower stripping ratios
than the Company,Level 3, often resulting in lower comparative costs of
production.
The CompanyLevel 3 is also required to comply with various federal, state
and local laws concerning protection of the environment.
The CompanyLevel 3 believes its compliance with environmental protection
and land restoration laws will not affect its competitive
position since its competitors are similarly affected by such
laws.
The CompanyLevel 3 and its mining ventures have entered into various
agreements with its customers which stipulate delivery and
payment terms for the sale of coal. Prior to 1993, one of
the primary customers deferred receipt of certain commitments
by purchasing undivided fractional interests in coal reserves
of the CompanyLevel 3 and the mining ventures. Under the arrangements,agreements,
revenue was recognized when cash was received. The
agreements with this customer were renegotiated in 1992. In
accordance with the renegotiated agreements, there were no
sales of interests in coal reserves subsequent to January 1,
1993. The CompanyLevel 3 has the obligation to deliver the coal
reserves to the customer in the future if the customer
exercises its option. If the option is exercised, the CompanyLevel 3
presently intends to deliver coal from unaffiliated mines and a mine
in which the Company has a 50% interest.mines.
In the opinion of the management, the CompanyLevel 3 has sufficient coal
reserves to cover the above sales commitments.
The Company'sLevel 3's coal sales contracts are with several electric utility
and industrial companies. In the event that these customers
do not fulfill contractual responsibilities, the CompanyLevel 3 would
pursue the available legal remedies.
Information Services Revenue
Information services revenue is primarily derived from the
computer outsourcing business and the systems integration
business. Level 3 provides outsourcing service, typically
through contracts ranging from 3-5 years, to firms that
desire to focus their resources on their core businesses.
Under these contracts, Level 3 recognizes revenue in the
month the service is provided. The systems integration
business helps customers define, develop and implement cost-
effective information systems. Revenue from these services
is billed on a time and materials basis or percentage of
completion basis depending on the extent of the services
provided.
Telecommunications Revenues
C-TEC Corporation's ("C-TEC"),Revenue
In 1996 and 1995 C-TEC's most significant operating groups are
its local telephone service and cable system operations.
C-TEC's telephone network access revenues are derived from
net access charges, toll rates and settlement arrangements
for traffic that originates or terminates within C-TEC's
local telephone company. Revenues from telephone services
and basic and premium cable programming services are recorded
in the month the service is provided.
The telecommunications industry is subject to local, state and
federal regulation. Consequently, the ability of the
telephone and cable groups to generate increased volume and
profits is largely PETER KIEWIT SONS', INC.
Notes to Consolidated Financial Statements
dependent upon regulatory approval to
expand customer bases and increase prices and limit expenses.prices.
Competition for the cable group's services traditionally has come
from broadcast television, video rentals and direct broadcast
satellite received on home dishes. Future competition is
expected from telephone companies.
Concentration of credit risk with respect to accounts receivable
are limited due to the dispersion of customer base among
geographic areas and remedies provided by terms of contracts
and statutes.
As noted previously, the investment in C-TEC has been
accounted for using the equity method in 1997.
Depreciation and AmortizationAmortization.
Property, plant and equipment are recorded at cost. Depreciation
and amortization for the majority of the Company's property,
plant and equipment are computed on accelerated and
straight-line methods. Depletion of mineral properties is
provided primarily on an units-of-extraction basis determined
in relation to estimated reserves.
In accordance with industry practice, certain telephone
plant owned by C-TEC valued at $233 million is depreciated
based on the estimated remaining lives of the various
classes of depreciable property and straight-line composite
rates. When property is retired, the original cost, plus
cost of removal, less salvage, is charged to accumulated
depreciation.
Intangible Assets
Intangible assets primarily include amounts allocated upon
purchase of existing operations, franchisefranchises and subscriber
lists and development costs.lists. These assets are amortized on a straight-line basis
over the expected period of benefit, which does not exceed 40
years.
Long Lived Assets
The Company reviews the carrying amount of intangiblelong lived assets for
impairment whenever events or changes in cir-
cumstancescircumstances
indicate that the carrying amount may not be recoverable.
Measurement of any impairment would include a comparison of
estimated future operating cash flows anticipated to be
generated during the remaining life of the asset to the net
carrying value of the asset.
Pension Plans
The Company maintains defined benefit plans primarily for
packaging employees who retired prior to the disposition of
the packaging operations. Benefits paid under the plans
are based on years of service for hourly employees and
years of service and rates of pay for salaried employees.
Substantially all of C-TEC's employees are included in a
trusteed noncontributory defined benefit plan. Upon
retirement, employees are provided a monthly pension based
on length of service and compensation.
The plans are funded in accordance with the requirements of
the Employee Retirement Income Security Act of 1974.
PETER KIEWIT SONS', INC.
Notes to Consolidated Financial Statements
Reserves for Reclamation
The CompanyLevel 3 follows the policy of providing an accrual for
reclamation of mined properties, based on the estimated cost
of restoration of such properties, in compliance with laws
governing strip mining. It is at least reasonably possible
that the estimated cost of restoration will be revised in the
near-term.
Foreign Currencies
TheGenerally, local currencies of foreign subsidiaries are the
functional currencies for financial reporting purposes.
Assets and liabilities are translated into U.S. dollars at
year-end exchange rates. Revenue and expenses are translated
using average exchange rates prevailing during the year.
Gains or losses resulting from currency translation are
recorded as adjustments to stockholders' equity.
Subsidiary and Investee Stock Sales and IssuancesActivity
The Company recognizes gains and losses from the salessale, issuance
and issuancesrepurchase of stock by its subsidiaries.
Earnings Per Share
PrimaryIn 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share". The
Statement establishes standards for computing and presenting
earnings per share and requires the restatement of common stockprior per
share data presented. Basic earnings per share have been
computed using the weighted average number of shares outstanding during
each year. Fullyperiod. Diluted earnings per share is computed by
including stock options and convertible debentures considered
to be dilutive common stock equivalents.
Potentially dilutive stock options are calculated in accordance
with the treasury stock method which assumes that proceeds
from the exercise of all options are used to repurchase
common stock at the average market value. The number of
shares remaining after the proceeds are exhausted represent
the potentially dilutive effect of the options. The
potentially dilutive convertible debentures are calculated in
accordance with the "if converted" method. This method
assumes that the after-tax interest expense associated with
the debentures is an addition to income and the debentures
are converted into equity with the resulting common shares
being aggregated with the weighted average shares
outstanding.
The following details the earnings per share calculations for
Class D Stock and Class C Stock:
Class D Stock 1997 1996 1995
Income from continuing operations
available to common shareholders
(in millions) $ 83 $ 104 $ 126
Add: Interest expense, net of tax
effect associated with convertible
debentures - - -*
-------- -------- --------
Income from continuing operations
for fully diluted shares 83 104 126
Income from discontinued operations 10 9 14
--------- -------- --------
Net Income $ 93 $ 113 $ 140
========= ======== ========
Total number of weighted average shares
outstanding used to compute basic
earnings per share (in thousands) 124,647 116,006 108,594
Additional dilutive stock options 539 311 -
Additional dilutive shares assuming
conversion of convertible debentures - - 257
--------- ------- -------
Total number of shares used to
compute diluted earnings per share have not been presented because it is not materially
different from primary125,186 116,317 108,851
========= ======= =======
Continuing Operations:
Basic earnings per share. Theshare $ .66 $ .90 $ 1.17
========= ======= =======
Diluted earnings per share $ .66 $ .90 $ 1.17
========= ======= =======
Discontinued Operations:
Basic earnings per share $ .08 $ .07 $ .12
========= ======= =======
Diluted earnings per share $ .08 $ .07 $ .12
========= ======= =======
Net Income:
Basic earnings per share $ .74 $ .97 $ 1.29
========= ======= =======
Diluted earnings per share $ .74 $ .97 $ 1.29
========= ======= =======
*Interest expense attributable to convertible debentures was
less than $1 million in 1995.
Class C Stock 1997 1996 1995
Net income available to common
shareholders (in millions) $ 155 $ 108 $ 104
Add: Interest expense, net of tax effect
associated with convertible debentures 1 -* -*
-------- ------- --------
Net income for diluted shares $ 156 $ 108 $ 104
======== ======= ========
Total number of weighted average
shares outstanding used to compute
basic earnings per share (in thousands) 9,728 10,656 13,384
Additional dilutive shares assuming
conversion of convertible debentures 441 437 312
-------- -------- --------
Total number of shares used in computingto
compute diluted earnings per share were as
follows:
1995 1994 1993
Class B & C 13,384,434 15,697,724 17,290,97110,169 11,093 13,696
======== ======== ========
Net Income
Basic earnings per share $ 15.99 $ 10.13 $ 7.78
======== ======== ========
Diluted earnings per share $ 15.35 $ 9.76 $ 7.62
======== ======== ========
*Interest expense attributable to convertible debentures was
less than $1 million in 1996 and 1995.
Stock Dividend
Effective December 26, 1997, the PKS Board of Directors
approved a dividend of four shares of Class D 21,718,792 20,438,806 19,941,885Stock for every
one share of Class D Stock held. All share information and
per share data have been restated to reflect this dividend.
Income Taxes
Deferred income taxes are provided for the temporary
differences between the financial reporting basis and tax
basis of the Company's assets and liabilities using enacted
tax rates in effect for the year in which the differences are
expected to reverse.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from those estimates.
PETER KIEWIT SONS'Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board
("FASB") issued SFAS No. 130, "Reporting Comprehensive
Income", INC.
Noteswhich requires that changes in comprehensive income
be shown in a financial statement that is displayed with the
same prominence as other financial statements.
Also in 1997, the FASB issued SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information",
which changes the way public companies report information
about segments. SFAS No. 131, which is based on the
management approach to Consolidated Financial Statementssegment reporting includes
requirements to report selected segment information
quarterly, and entity wide disclosures about products and
services, major customers, and geographic data.
These statements are effective for financial statements for
periods beginning after December 15, 1997. Management does
not expect adoption of these statements to materially affect
the Company's financial statements.
Reclassifications
Where appropriate, items within the consolidated financial
statements and notes thereto have been reclassified from
previous years to conform to current year presentation.
Fiscal Year
The Company's fiscal year ends on the last Saturday in December.
There were 52 weeks in fiscal years 1997, 1996 and 1995.
(2) Reorganization
In October 1996, the PKS Board of Directors directed PKS
management to pursue a listing of Class D Stock as a way to
address certain issues created by PKS' two-class capital
stock structure and the need to attract and retain the best
management for PKS' businesses. During the course of its
examination of the consequences of a listing of Class D
Stock, management concluded that a listing of Class D Stock
would not adequately address these issues, and instead began
to study a separation of the Construction and Mining Group
and the Diversified Group. At the regular meeting of the
Board on July 23, 1997, management submitted to the Board for
consideration a proposal for separation of the Construction
and Mining Group and Diversified Group through a spin-off of
the Construction and Mining Group ("the Transaction"). At a
special meeting on August 14, 1997, the Board approved the
Transaction.
The separation of the Construction and Mining Group and the
Diversified Group was contingent upon a number of conditions,
including the favorable ratification by a majority of both
Class C and Class D shareholders and the receipt by the
company of an Internal Revenue Service ruling or other
assurance acceptable to the Board that the separation would
be tax-free to U.S. shareholders. On December 8, 1997, PKS'
Class C and Class D shareholders approved the transaction
and on March 5, 1998 PKS received a favorable ruling from the
Internal Revenue Service. The Transaction is anticipated to
be effective on March 31, 1998. As a result of these events
the Company has reflected the financial position and results of
operations of the Kiewit Construction and Mining Group as discontinued
operations on the consolidated balance sheets and consolidated
statements of earnings for all periods presented. The activities
of the Construction and Mining Group have been removed from the
statements of cash flows. The financial statements of Kiewit
Construction and Mining Group can be found in Exhibit 99.A of
this document.
The following is summarized financial information of the
Kiewit Construction and Mining Group:
Operations (dollars in millions) 1997 1996 1995
Revenue $ 2,764 $ 2,303 $ 2,330
Net income 155 108 104
Financial Position (dollars in millions) 1997 1996
Current assets $ 1,057 $ 764
Other assets 284 274
-------- -------
Total assets $ 1,341 $ 1,038
======== =======
Current liabilities 579 397
Other liabilities 99 79
Minority interest 11 -
------- -------
Total liabilities 689 476
------- -------
Net assets $ 652 $ 562
======= =======
Immediately prior to the spin-off of the Kiewit Construction and
Mining Group, the Company will recognize a gain equal to the
difference between the carrying value of the Construction and
Mining Group and its fair value. The Company will then reflect
the fair value of Kiewit Construction and Mining Group as a dividend
to shareholders.
Level 3 has recently decided to substantially increase its
emphasis on and resources to its information services business.
Pursuant to the plan, Level 3 intends to expand substantially
its current information services business, through the
expansion of its existing business and the creation, through a
combination of construction, leasing and purchase of facilities
and other assets, of a substantial facilities-based internet
communications network (the "Expansion Plan").
Using the network Level 3 intends to provide (a) a range of
internet access services at varying capacity levels and, as
technology development allows, at specified levels of quality
of service and security and (b) a number of business oriented
communications services which may include fax service, which
are transmitted in part over private or limited access
Transmission Control Protocol/Internet Protocol ("TCP/IP")
networks and are offered at lower prices than public telephone
network-based fax service, and voice message storing and
forwarding over the same TCP/IP-based networks.
(3) Discontinued Energy Operations:
In connection with the Expansion Plan, Level 3 expects to devote
substantially more management time and capital resources to its
information services business with a view to making the
information services business, over time, the principal
business of Level 3. In that respect, the management is
conducting a comprehensive review of the existing Level 3
businesses to determine how those businesses will complement
Level 3's focus on information services. If it is decided that
an existing business is not compatible with the information
services business and if a suitable buyer can be found, Level 3
may dispose of that business.
On September 10, 1997, Level 3 and CalEnergy entered into an
agreement whereby CalEnergy contracted to purchase Level 3's
energy investments for $1,155 million, subject to adjustments.
These energy investments include approximately 20.2 million
shares of CalEnergy common stock (assuming the exercise of 1
million options held by Level 3), Level 3's 30% ownership
interest in CE Electric and Level 3's investments, made jointly
with CalEnergy, in international power projects in Indonesia
and the Philippines. The transaction was subject to the
satisfactory completion of certain provisions of the agreement
and closed on January 2, 1998. These assets comprised the
energy segment of Level 3. Therefore, the Company has
reflected these assets, the earnings and losses attributable to
these assets, and the related cash flow items as discontinued
operations on the balance sheets, statements of earnings and
cash flows for all periods presented.
In order to fund the purchase of these assets, CalEnergy sold,
in October 1997, approximately 19.1 million shares of its
common stock at a price of $37.875 per share. This sale
reduced Level 3's ownership in CalEnergy to approximately 24%
but increased its proportionate share of CalEnergy's equity.
It is the Company's policy to recognize gains or losses on the
sale of stock by its investees. Level 3 recognized an after-
tax gain of approximately $44 million from transactions in
CalEnergy stock in the fourth quarter of 1997.
The Agreement with CalEnergy included a provision whereby
CalEnergy and Level 3 shared equally any proceeds from the
offering above or below a specified amount. The offering was
conducted at a price above that provided in the agreement and
therefore, Level 3 received additional proceeds of $16 million
at the time of closing.
Level 3 expects to recognize an after-tax gain on the
disposition of its energy assets in 1998 of approximately $324
million. The after-tax proceeds from the transaction of
approximately $967 million will be used to fund the expansion
plan of the information services business.
The following is summarized financial information for
discontinued energy operations:
Income from Discontinued Operations 1997 1996 1995
Operations
Equity in:
CalEnergy earnings, net $ 16 $ 20 $ 10
CE Electric earnings, net 17 (2) -
International energy projects earnings, net 5 (5) 6
Investment income from CalEnergy - 5 6
Income tax expense (9) (9) (8)
----- ----- ------
Income from operations $ 29 $ 9 $ 14
===== ===== ======
CalEnergy Stock Transactions
Gain on investee stock activity $ 68 $ - $ -
Income tax expense (24) - -
----- ----- ------
$ 44 $ - $ -
===== ===== ======
Extraordinary Loss - Windfall Tax
Level 3's share from CalEnergy $ (39) $ - $ -
Level 3's share from CE Electric (58) - -
Income tax benefit 34 - -
----- ----- ------
Extraordinary loss $ (63) $ - $ -
===== ===== ======
Investments in Discontinued Operations 1997 1996
Investment in CalEnergy $ 337 $ 292
Investment in CE Electric 135 176
Investment in international energy projects 186 149
Restricted securities 2 8
Deferred income tax liability (17) (17)
------- -------
Total $ 643 $ 608
======= =======
At December 27, 1997, Level 3 owned 19.2 million shares or 24%
of CalEnergy's outstanding common stock and had a cumulative
investment in CalEnergy common stock of $337 million. CalEnergy
common stock is traded on the New York Stock Exchange. On
December 27, 1997, the market value of Level 3's
investment in CalEnergy common stock was $548 million.
The following is summarized financial information of CalEnergy
Company, Inc.:
Operations (dollars in millions) 1997 1996 1995
Revenue $ 2,271 $ 576 $ 399
Income before extraordinary item 52 92 62
Extraordinary item - Windfall tax (136) - -
Level 3's share:
Income before extraordinary item 18 22 13
Goodwill amortization (2) (2) (3)
------- ------ -----
Equity in income of CalEnergy before
extraordinary item $ 16 $ 20 $ 10
======= ====== =====
Extraordinary item - Windfall tax $ (39) $ - $ -
======= ====== =====
Financial Position (dollars in millions) 1997 1996
Current assets $ 2,053 $ 945
Other assets 5,435 4,768
--------- --------
Total assets 7,488 5,713
Current liabilities 1,440 1,232
Other liabilities 4,494 3,301
Minority interest 134 299
--------- --------
Total liabilities 6,068 4,832
--------- --------
Net assets $ 1,420 $ 881
========= ========
Level 3's share:
Equity in net assets $ 337 $ 267
Goodwill - 25
--------- --------
Investment in CalEnergy $ 337 $ 292
========= ========
In December 1996, CE Electric, which is 70% owned by CalEnergy
and 30% owned by Level 3, acquired majority ownership of the
outstanding ordinary share capital of Northern Electric, plc.
pursuant to a tender offer (the "Tender Offer") commenced in
the United Kingdom by CE Electric in November 1996. As of
March 1997, CE Electric effectively owned 100% of Northern's
ordinary shares.
As of December 27, 1997, CalEnergy and Level 3 had contributed to
CE Electric approximately $410 million and $176 million,
respectively, of the approximately $1.3 billion required to
acquire all of Northern's ordinary and preference shares in
connection with the Tender Offer. The remaining funds
necessary to consummate the Tender Offer were provided by a
term loan and a revolving facility agreement obtained by CE
Electric. Level 3 has not guaranteed, and is not otherwise
subject to recourse for, amounts borrowed under these
facilities.
On July 2, 1997, the Labour Party in the United Kingdom
announced the details of its proposed "Windfall Tax" to be
levied against privatized British utilities. This one-time tax
is 23% of the difference between the value of Northern
Electric, plc. at the time of privatization and the utility's
current value based on profits over a period of up to four
years. CE Electric recorded an extraordinary charge of
approximately $194 million when the tax was enacted in July
1997. The total after-tax impact to Level 3 directly through
its investment in CE Electric and indirectly through its
interest in CalEnergy, was $63 million.
The following is summarized financial information of CE
Electric as of December 31, 1997 and December 31, 1996:
Operations (dollars in millions) 1997 1996
Revenue $ 1,564 $ 37
Income before extraordinary item 58 -
Extraordinary item - Windfall tax (194) -
Level 3's share:
Income before extraordinary item $ 17 $ -
Management fee paid to CalEnergy - (2)
-------- ------
17 (2)
======== ======
Extraordinary item - Windfall tax $ (58) $ -
======== ======
Financial Position (dollars in millions) 1997 1996
Current assets $ 419 $ 583
Other assets 2,519 1,772
------- -------
Total assets 2,938 2,355
Current liabilities 1,166 785
Other liabilities 1,265 718
Preferred stock 56 153
Minority interest - 112
------- ------
Total liabilities 2,487 1,768
------- ------
Net assets $ 451 $ 587
======= ======
Level 3's Share:
Equity in net assets $ 135 $ 176
======= ======
CE Electric's 1995 and 1996 operating results prior to the
acquisition were not significant relative to Level 3's results
after giving effect to certain pro forma adjustments related to
the acquisitions, primarily increased amortization and interest
expense.
In 1993, Level 3 and 53 weeksCalEnergy formed a venture to develop power
projects outside of the United States. Since 1993,
construction has begun on the Mahanagdong, Casecnan and Dieng
power projects. The Mahanagdong project is a 165 MW geothermal
power facility located on the Philippine island of Leyte. The
Casecnan project is a combined irrigation and 150 MW
hydroelectric power generation facility located on the island
of Luzon in the fiscal year 1994.
C-TECPhilippines. Dieng Unit I is a 55 MW
geothermal facility on the Indonesian island of Java. An
additional five units are expected to be constructed on a
modular basis at the Dieng site, as geothermal resources are
developed. In June 1997, Level 3 and CalEnergy closed a $400
million revolving credit facility to finance the development
and construction of the remaining Indonesian projects. The
credit facility is collateralized by the Indonesian assets and
is nonrecourse to Level 3.
Generally, costs associated with the development, financing and
construction of the international energy projects have been
capitalized by each of the projects and will be amortized over
the life of each project.
The following is summarized financial information for the
international energy projects:
Financial Position
(dollars in millions) Mahanagdong Casecnan Dieng Other Total
1997
Current assets $ 42 $ 334 $ 87 $ 67 $ 530
Other assets 252 148 240 171 811
------ ------ ----- ------ -----
Total assets 294 482 327 238 1,341
Current liabilities 11 12 88 61 172
Other liabilities 186 372 123 56 737
------- ------ ----- ------ -----
Total liabilities
(with recourse only
to the projects) 197 384 211 117 909
------- ------ ----- ------ -----
Net assets $ 97 $ 98 $ 116 $ 121 $ 432
======= ====== ===== ====== =====
Group's share:
Equity in net assets $ 48 $ 49 $ 46 $ 43 $ 186
======= ====== ===== ====== =====
1996
Current assets $ 1 $ 441 $ 15 $ 10 $ 467
Other assets 239 51 118 36 444
------- ------ ----- ----- -----
Total assets 240 492 133 46 911
Current liabilities 15 9 24 11 59
Other liabilities 153 372 35 - 560
------- ------ ----- ----- -----
Total liabilities
(with recourse only
to the projects) 168 381 59 11 619
------- ------- ------ ----- -----
Net assets $ 72 $ 111 $ 74 $ 35 $ 292
======= ======= ====== ===== =====
Group's share:
Equity in net assets $ 36 $ 55 $ 36 $ 17 $ 144
Loan to Project - - 5 - 5
------- ------- ------ ----- -----
$ 36 $ 55 $ 41 $ 17 $ 149
======= ======= ====== ===== =====
In late 1995, the Casecnan joint venture closed financing for
the construction of the project with bonds issued by the
project company. The difference between the interest expense
on the debt and the interest earned on the unused funds prior
to payment of construction costs resulted in a loss to the
venture of $12 million in 1997 and 1996. Level 3's share of
these losses were $6 million in each year. The Mahanagdong
facility commenced operation in July, 1997. Level 3's
proportionate share of the earnings attributable to Mahanagdong
was $7 million 1997. No income or losses were incurred by the
international projects in 1995. In addition to the equity
earnings and losses, Level 3 has project development and
insurance expenses, and received management fee income related
to the international projects in all years.
In late 1995, a calendar fiscal year.
(2)Level 3 and CalEnergy venture, CE Casecnan
Water and Energy Company, Inc. ("CE Casecnan") closed financing
and commenced construction of a $495 million irrigation and
hydroelectric power project located on the Philippine island of
Luzon. Level 3 and CalEnergy each made $62 million of equity
contributions to the project.
The CE Casecnan project was being constructed on a joint and
several basis by Hanbo Corporation and Hanbo Engineering &
Construction Co. Ltd. On May 7, 1997, CE Casecnan announced
that it had terminated the Hanbo Contract. In connection with
the contract termination, CE Casecnan made a $79 million draw
request under the letter of credit issued by Korea First Bank
("KFB") to pay for certain transition costs and other damages
under the Hanbo Contract. KFB failed to honor the draw
request; the matter is being litigated. If KFB would not be
required to honor its obligations under the letter of credit,
such action may have a material adverse effect on the CE
Casecnan project. Level 3 does not expect the outcome of the
litigation to affect its financial position due to the
transaction with CalEnergy.
(4) MFS Spin-off
TheIn September 1995, the PKS Board of Directors approved a plan to
make a tax-
freetax-free distribution of its entire ownership interest
in MFS Communications Company, Inc. ("MFS"), effective September
30, 1995, to the Class D stockholders (the "Spin-off") at a
special meetingeffective
on September 25,30, 1995. The Spin-off was completed after PKS and Kiewit Diversified
Group, Inc., a wholly owned first tier subsidiary of PKS
("KDG"), agreed with MFS to effect a recapitalization of MFS
pursuant to which KDG exchanged a portion of the MFS Common
Stock held by KDG for certain high-vote convertible
preferred stock. In addition, prior to completing the Spin-
off, PKS purchased additional shares of MFS Common Stock
which were subsequently distributed to the Class D
stockholders.
PKS completed an exchange offer prior to the Spin-off
whereby 4,000,000 shares of Class B Stock and Class C Stock
(Class B&C") were exchanged for 1,666,384 shares of Class
D Stock on terms similar to those under which Class B&C
Stock can be converted into Class D Stock during the annual
conversion period provided for in the Company's Certificate
of Incorporation. The conversion ratio used in the exchange
was calculated using final 1994 stock prices adjusted for
1995 dividends.
After the recapitalization of MFS and the exchange offer
discussed above, sharesShares were distributed on the basis of
approximately 1.741.348 shares of MFS Common Stock and approximately
.651.130 shares of MFS Preferred Stock for each share of
outstanding Class D Stock.
The net investment in MFS distributed on September 30, 1995 was
approximately $399 million.
The results of operations of MFS have been classified as a
single line item on the statements of earnings for the
three years ended December 30, 1995. MFS is consolidated
in the 1994 balance sheet and the 1994 and 1993 statements
of cash flows.
PETER KIEWIT SONS', INC.
Notes to Consolidated Financial Statements
Operating results of MFS through September 30, 1995 and for
fiscal years 1994 and 1993 are
summarized as follows:
(dollars in millions) 1995
1994 1993
Revenue $ 412 $ 287 $ 141
Loss from operations (176)
(136) (31)
Net loss (196)
(151) (16)
PKS'Level 3's share of loss in MFS (131) (102) (13)
Included in the income tax benefit on the consolidated statement of earnings
for the year ended December 30, 1995, is $93 million of tax
benefits from the reversal of certain deferred tax liabilities
recognized on gains from previous MFS stock transactions that
willwere not be taxed due to the Spin-off.
(3) Acquisitions
During 1995, the Company and its subsidiaries acquired the
entities described below. The Company has accounted for
the transactions as purchases and consolidated the
operating results since the acquisition dates. Purchase
prices in excess of the fair market values of net assets
acquired have been recorded as goodwill, in intangible
assets.
C-TEC completed the first step of an acquisition of Twin
County Trans Video, Inc. ("Twin County") in May 1995. Twin
County provides cable television service to 74,000
subscribers in eastern Pennsylvania. In consideration for
40% of the capital stock of Twin County, C-TEC paid $26
million in cash and issued a $4 million note of its
subsidiary, C-TEC Cable Systems, Inc. In addition, C-TEC
paid $11 million in consideration of a noncompete
agreement. The remaining outstanding common stock of Twin
County was acquired in September 1995 in exchange for $52
million stated value redeemable preferred stock of C-TEC.
The preferred stock has a stated dividend rate of 5%,
beginning January 1, 1996. The fair value of the preferred
stock, as determined by an independent appraiser, is $39
million and is recorded in other liabilities. Goodwill of
$18 million is being amortized over 10 years.
Pursuant to a stock rights offering in August 1995, C-TEC
acquired majority voting control of Mercom, Inc. ("Mercom")
through the exercise of stock rights and over subscription
privileges. Immediately prior to the rights offering, C-
TEC owned 43% of the outstanding common stock of Mercom and
accounted for it under the equity method. For the
aggregate consideration of approximately $7 million, C-TEC
increased its ownership interest to 62% and accordingly
consolidated Mercom in its financial statements. C-TEC's
total investment exceeded the underlying equity of Mercom
by $11 million which is amortized over 15 years.
PETER KIEWIT SONS', INC.
Notes to Consolidated Financial Statements
The following unaudited pro forma information shows the
results of the Company as though the C-TEC acquisitions
occurred at the beginning of 1995 and 1994. These results
include certain adjustments, primarily increased
amortization, and do not necessarily indicate future
results, nor the results of historical operations had the
acquisitions actually occurred on the assumed dates.
(in millions, except per share data) 1995 1994
Revenue $ 2,920 $ 2,741
Net Earnings 239 102
Earnings Per Share of Class D Stock 6.23 1.26
(4)(5) Gain on Subsidiary's Stock Transactions, net
In May 1993, MFS sold 12.7 million shares of common stock
to the public at an initial offering price of $20 per share
for $233 million, net of certain transaction costs. An
additional 4.6 million shares were sold to the public in
September 1993, at a price of $50 per share for $218
million, net of certain transaction costs. Substantially
all of the net proceeds from the offerings funded MFS'
growth.
In 1994, the Company settled a contingent purchase price
adjustment resulting from MFS' 1990 purchase of Chicago
Fiber Optic Corporation ("CFO"). The former shareholders
of CFO accepted MFS stock previously held by the Company,
valued at current market prices, as payment of the
obligation.
The above transactions, along with the stockStock issuances by MFS for acquisitions and employee stock
options, reduced the Company'sLevel 3's ownership in MFS prior to 71%,the Spin-
off in 1995 to 66% from 67% and 66% at the
end of 1993, 1994 and at September 30, 1995.in 1994. As a result, the CompanyLevel 3
recognized gainsa gain of $211 million, $54 million
and $3 million in 1993, 1994 and 1995 representing the
increase in itsLevel 3's proportionate share of MFSMFS' equity.
Deferred income taxes had been established on these gainsthis gain prior
to the Spin-off.
(5)(6) Disclosures about Fair Value of Financial Instruments
The following methods and assumptions were used to determine
classification and fair values of financial instruments:
Cash and Cash Equivalents
Cash equivalents generally consist of funds invested in the
Kiewit Mutual Fund-Money Market Portfolio and highly liquid
instruments purchased with an original maturity of three months
or less. The securities are stated at cost, which approximates
fair value.
PETER KIEWIT SONS', INC.
Notes to Consolidated Financial Statements
Marketable Securities, Restricted Securities and Non-current
Investments
The CompanyLevel 3 has classified all marketable securities, restricted
securities and marketable non-current investments not accounted
for under the equity method as available-for-sale. Restricted
securities primarily include investments in various portfolios
of the Kiewit Mutual Fund that are restricted to fund certain
reclamation liabilities of its coal mining ventures. Due to
the anticipated increase in capital expenditures, Level 3 has
reclassified its investments in marketable equity securities
from non-current to current in 1997. The amortized cost of the
securities used in computing unrealized and realized gains and
losses is determined by specific identification. Fair values
are estimated based on quoted market prices for the securities
on hand or for similar investments. Fair values
of certificates of deposit approximate cost. Net unrealized holding
gains and losses are reported as a separate component of
stockholders' equity, net of tax.
PETER KIEWIT SONS', INC.
Notes to Consolidated Financial Statements
The following summarizesAt December 27, 1997 and December 28, 1996 the amortized cost,
unrealized holding gains and losses, and estimated fair values
of marketable securities, restricted securities and marketable
non-current investments at December 30, 1995
and December 31, 1994.were as follows:
Unrealized Unrealized
Amortized Holding Holding Fair
(dollars in millions) Cost Gains Losses Value
19951997:
Marketable Securities:
Kiewit Mutual Fund:
Short-term government $ 121 $ 2234 $ - $ 123- $ 234
Intermediate term bond 90 5195 3 - 95198
Tax exempt 138154 3 - 157
Equity 7 4 - 142
Equity 10 2 - 12
Equity securities 8 3 - 11
U.S. debt securities 58 - - 58
Federal agency securities 8 - - 8
Municipal debt securities 14 - - 14
Corporate debt securities 134 - - 134
Collateralized mortgage
obligations - 21 - 2
Certificates of deposit 51
Equity securities 48 9 - 57
Other securities 20 - - 5
---- ---- ---- ----20
------ ----- ----- ------
$ 586658 $ 1820 $ - $ 604
===== ====== ===== =====
Non-current Investments:
Equity securities $ 68678
Restricted Securities:
Kiewit Mutual Fund:
Intermediate term bond $ 10 $ - $ 78- $ 10
Equity 12 - - 12
------ ----- ----- ------
$ 22 $ - $ - $ 22
====== ===== ===== ===== =====
1994======
1996:
Marketable Securities:
Kiewit Mutual Fund:
Short-term government $ 69100 $ - $ 1- $ 68100
Intermediate term bond 23265 2 - 5 22767
Tax exempt 39126 2 - 1 38128
Equity securities 45 2 - 1 3
U.S. Debt securities 322 - 3 319
Federal agency securities 77 - - 77
Municipal debt securities 15 - - 157
Corporate debt securities
145(held by C-TEC) 47 - 2 143- 47
Collateralized mortgage
obligations 12- 1 3 10
Certificates of deposit 10 - 1
Other securities 20 2 - 1022
------ ----- ----- -----
$ 363 $ 9 $ - $ 372
====== ===== ===== =====
Restricted Securities:
Kiewit Mutual Fund:
Intermediate term bond $ 8 $ - $ - $ 8
Equity 7 2 - 9
------ ----- ----- ----
---- ----
$ 92515 $ 12 $ 16 $910- $ 17
====== ===== ===== ====
====
Non-current Investments:investments:
Equity securities $ 5949 $ 526 $ 2- $ 6275
====== ===== ===== ====
====
PETER KIEWIT SONS', INC.
Notes to Consolidated Financial StatementsOther securities consist of bonds issued by the Casecnan
project and purchased by Level 3.
For debt securities, amortized costs do not vary significantly
from principal amounts. Realized gains and losses on sales of
marketable and equity securities were $9 million and $- million
in 1997, $3 million and $- million in 1996, and $1 million and
$3$2 million in 1995, $2 million and $18 million
in 1994 and $31 million and $64 million in 1993.1995.
At December 30, 199527, 1997, the contractual maturities of the debt
securities are as follows:
(dollars in millions) Amortized Cost Fair Value
U.S. debtOther securities:
Less than 1 year $ 42 $ 42
1-5 years 16 16
-------- -------
$ 58 $ 58
======== ========
Federal agency securities:
Less than 1 year $ 8 $ 8
======== =======
Municipal debt securities:
1-510+ years $ 1120 $ 11
5-10 years - -
Over 10 years 3 3
------- -------
$ 14 $ 14
======== ========
Corporate debt securities:
Less than 1 year $ 33 $ 33
1-5 years 81 81
5-10 years 20
20
------- -------
$ 134 $ 134
======= =======
Certificates of deposit:
Less than 1 year $ 4 $ 4
1-5 years 1 1
------- -------
$ 5 $ 5
======= ============= ======
Maturities for the mutual fund, equity securities and
collateralized mortgage obligations have not been presented as
they do not have a single maturity date.
Short-term Borrowings.
Short-term borrowings approximate fair value due to the
short period of time to maturity.
PETER KIEWIT SONS', INC.
Notes to Consolidated Financial Statements
Long-term Debt
The fair value of debt was estimated using the incremental
borrowing rates of the CompanyLevel 3 for debt of the same remaining
maturities. With the exception of C-TEC, theThe fair value of the debt approximates the
carrying amount.
C-TEC's Senior
Secured Notes and(7) Investments
Investments consist of the Credit Agreement with National Bank
for Cooperatives have an aggregate fair value of $253
million.
(6) Retainage on Construction Contracts
Marketable securitiesfollowing at December 30, 199527, 1997 and
December 31,
1994 include approximately $62 million and $61 million of
investments which are being held by the owners of various
construction projects in lieu of retainage.
Receivables at December 30, 1995 and December 31, 1994
include approximately $50 million and $48 million of
retainage on uncompleted projects, the majority of which is
expected to be collected within one year.
(7) Investment in Construction Joint Ventures
The Company has entered into a number of construction joint
venture arrangements. Under these arrangements, if one
venturer is financially unable to bear its share of the
costs, the other venturers will be required to pay those
costs.
Summary joint venture financial information follows:
Financial Position28, 1996:
(dollars in millions) 1995 1994
Total Joint Ventures
Current assets1997 1996
Commonwealth Telephone Enterprises Inc. $ 65575 $ 563-
RCN Corporation 214 -
Cable Michigan 46 -
Pavilion Towers 22 -
Equity securities (Note 6) - 75
C-TEC investments:
Megacable S.A. de C.V. - 74
Other assets (principally construction
equipment) 52 50
------- -------
707 613
Current liabilities (584) (503)
------- -------
Net assets- 12
Other 26 28
------ ------
$ 123383 $ 110
=======189
====== Company's Share
Equity in net assets $ 67 $ 67
Receivable from joint ventures 6 2
------- ------
Investment in construction joint ventures $ 73 $ 69
======= ======
PETER KIEWIT SONS', INC.
Notes to Consolidated Financial Statements
Operations (dollars in millions) 1995 1994 1993
Total Joint Ventures
Revenue $ 1,211 $ 1,034 $ 906
Costs 1,108 937 841
------- ------- -----
Operating income $ 103 $ 97 $ 65
======= ======= =====
Company's Share
Revenue $ 691 $ 523 $ 430
Costs 622 473 372
------- ------ -----
Operating income $ 69 $ 50 $ 58
======= ====== =====
ManagementOn September 5, 1997, C-TEC announced that its board of
directors had approved the planned restructuring of C-TEC into
three publicly traded companies effective September 30, 1997.
Under the terms of the nonsponsored Denmark tunnel project
completed a cost estimate in 1993 which indicated a
favorable variancerestructuring C-TEC shareholders
received stock in the estimated costsfollowing companies:
- Commonwealth Telephone Enterprises, Inc., containing the local
telephone group and related engineering business;
- Cable Michigan, Inc., containing the cable television
operations in Michigan; and
- RCN Corporation, Inc., which consists of RCN Telecom Services;
C-TEC's existing cable systems in the project.Boston-Washington D.C.
corridor; and the investment in Megacable S.A. de C.V., a cable
operator in Mexico. RCN Telecom Services is a provider of
packaged local and long distance telephone, video, and internet
access services provided over fiber optic networks to residential
customers in Boston, New York City and Washington D.C.
As a result of this cost estimate and negotiations with the owner, the Company's management reduced reserves by $20
million which had been maintained to provide for the
Company's share of estimated losses on the project. Based on
1995 estimates, management believes that the resolutionrestructuring, Level 3 owns less than 50% of
the uncertainties in completingoutstanding shares and voting rights of each entity, and
therefore accounts for each entity using the tunnel should not
materially affectequity method as
of the Company'sbeginning of 1997. C-TEC's financial position, future results
of operations or futureand cash flows.
(8) Investments
In Februaryflows are consolidated in the 1996 and
1995 CalEnergy Company, Inc. ("CE"), formerly
named California Energy Company Inc., an equity method
investee, completed the purchase of Magma Power Company.
The cash transaction, valued at $950 million, was partially
financed by the sale of 17 million shares of CE common stock
at $17 per share. As part of this offering, the Company
purchased 1.5 million shares. In addition, during the
second quarter of 1995, the Company purchased an additional
200,000 common shares of CE. At December 30, 1995, the
Company owns 21% of CE's outstanding common stock and has a
cumulative investment in CE common stock of $153 million,
$37 million in excess of the Company's proportionate share
of CE's equity. The excess investment is being amortized
over 20 years. Equity earnings, net of goodwill
amortization, were $10 million, $5 million and $7 million in
1995, 1994 and 1993. CE common stock is traded on the New
York Stock Exchange. On December 30, 1995, the market value
of the Company's investment in CE common stock was $211
million.
PETER KIEWIT SONS', INC.
Notes to Consolidated Financial Statements
In 1995, 1994 and 1993, the Company also recorded dividends
in kind of $1 million, $5 million and $5 million declared by
CE consisting of voting convertible preferred stock. The
stock dividends brought the Company's total investment in
convertible preferred stock to $65 million. In March 1995,
CE exchanged the preferred stock for 9.5% Convertible
Subordinated Debentures (the "Debentures") that pay interest
semi-annually. The Debentures mature in December 2003 and
are convertible into CE common stock at a conversion price
of $18.375 per share any time prior to maturity. CE may
prepay the Debentures if the share price of CE stock is at
least 150% of the conversion price for any 20 trading days
out of any 30 consecutive trading days.
On February 20, 1996 the Company exercised 1.5 million CE
options at a price of $9 per share. The transaction
increased the Company's ownership interest in CE to 24%. In
addition, the Company has 4.3 million options to purchase
additional CE stock at prices of $11.625 - $12 per shareconsolidated financial statements.
The following is summarized financial information of CalEnergy Company Inc.:
Financial Position (dollars in millions) 1995 1994
Current assets $ 418 $ 518
Other assets 2,236 613
-------- ------
Total assets 2,654 1,131
Current liabilities 564 309
Other liabilities 1,546 578
Redeemable preferred stock - 64
------ ----
Total liabilities 2,110 951
------ ----
Net assets $ 544 $ 180
======== =====the three
entities created as result of the C-TEC restructuring:
Operations (dollars in millions) 1997 1996 1995
1994 1993Commonwealth Telephone Enterprises
Revenue $ 399197 $ 186 $ 132
====== ===== =====174
Net income available to common stockholders 20 20 31
Level 3's share:
Net income 10 10 15
Goodwill amortization (1) (1) 1
------ ------ ------
Equity in net income $ 629 $ 329 $ 4316
====== ====== ======
Cable Michigan
Revenue $ 81 $ 76 $ 60
Net loss available to common stockholders (4) (8) (10)
Level 3's share:
Net loss (2) (4) (5)
Goodwill amortization (4) (4) (4)
------ ------ -----
Equity in net loss $ (6) $ (8) $ (9)
====== ====== =====
RCN Corporation
Revenue $ 127 $ 105 $ 91
Net income (loss) available to
common stockholders (52) (6) 2
Level 3's share:
Net income (loss) (26) (3) 1
Goodwill amortization - (3) 1
------ ------ -----
Equity in net (loss) income $ (26) $ (6) $ 2
====== ====== =====
Commonwealth
Telephone Cable RCN
Enterprises Michigan Corporation
Financial Position (in millions) 1997 1996 1997 1996 1997 1996
Current assets $ 71 $ 51 $ 23 $ 10 $ 698 $ 143
Other assets 303 266 120 139 453 485
----- ----- ----- ----- ------ -----
Total assets 374 317 143 149 1,151 628
Current liabilities 76 59 16 24 70 57
Other liabilities 260 189 166 190 708 175
Minority interest - - 15 15 16 5
----- ----- ----- ----- ------ -----
Total liabilities 336 248 197 229 794 237
----- ----- ----- ----- ------ -----
Net assets (liabilities) $ 38 $ 69 $ (54) $ (80) $ 357 $ 391
===== ===== ===== ===== ====== =====
Level 3's Share:
Equity in net assets $ 18 $ 33 $ (26) $ (38) $ 173 $ 189
Goodwill 57 72 72 75 41 41
----- ----- ----- ----- ------ -----
$ 75 $ 91 $ 46 $ 37 $ 214 $ 230
===== ===== ===== ===== ====== ======
On December 27, 1997 the market value of Level 3's investments
in Commonwealth Telephone, Cable Michigan and RCN was $215
million, $76 million and $485 million, respectively.
In 1995, a $3 million purchase increasedFebruary 1997, Level 3 purchased the Company's
interestPavillion Towers office
buildings in an electrical contracting business to 49%. The
cumulative investmentAurora, Colorado for $22 million.
Investments in common stock, accounted for on the
equity method, totals $26 million, $3 million in excess1996 also include C-TEC's 40% ownership of
the Company's share of equity. The excess investment is
being amortized over 15 years. The contracting business is
not publicly traded and does not have a readily determinable
market value. The Company is committed to acquire 80%
ownership by 1997.
PETER KIEWIT SONS', INC.
Notes to Consolidated Financial Statements
In January 1995, C-TEC purchased, for $84 million in cash, a
40% equity position in
Megacable S.A. Dede C.V.
("Megacable"), Mexico's second largest cable television
operator,
with 174,000 subscribers in twelve cities. C-TEC
accountsaccounted for its investment using the equity method.
The
excess cost over the underlying net assets of Megacable,
approximately $94 million, is being amortized on a straight
line basis over 15 years. C-TEC's share of Megacable's
earnings, net of goodwill amortization was a $3 million loss
in 1995.
Pursuant to a joint venture agreement with CE, the Company
is an equity investor in the Mahanagdong geothermal
power project and the Casecnan power/irrigation project in
the Philippines. Both projects are under construction. To
date the Company has invested $89 million in the Philippine
projects. The Company also expects to be an equity investor
with CE in additional geothermal projects in Indonesia. To
date investments in these projects total $9 million.
Investments also include equity securities classified as
non-current and carried at the fair value of $78 million.
(9)(8) Intangible Assets
Intangible assets consist of the following at December 30, 199527, 1997
and December 31, 1994:28, 1996:
(dollars in million) 1995 1994millions) 1997 1996
CPTC intangibles and other $ 23 $ 23
C-TEC:
Goodwill $ 216 $ 483- 198
Franchise and subscriber lists 224 145
Licenses and right-of-way - 15
Noncompete agreements 86 15
Deferred development costs 47 65
Toll road franchise costs 109 75229
Other 4 19
---- -----
686 817- 34
------ ------
23 484
Less accumulated amortization (171) (68)
----- -----(2) (131)
------ ------
$ 51521 $ 749
===== =====
PETER KIEWIT SONS', INC.
Notes to Consolidated Financial Statements
(10) Short-Term Borrowings
The Company has established lines of credit with Union Bank
of Switzerland for $35 million, Bank of America for $50
million and Banque de Nationale de Paris for $30 million.
Under these agreements the Company had $45 million
outstanding at December 30, 1995 at a weighted average
interest rate of 5.78%.
(11)353
====== ======
(9) Long-Term Debt
At December 30, 199527, 1997 and December 31, 1994,28, 1996, long-term debt was
as follows:
(dollars in millions) 1995 1994
Telecommunications:1997 1996
CPTC Long-term Debt (with recourse only to CPTC):
Bank Note
(7.7% due 2008) $ 65 $ 65
Institutional Note
(9.45% due 2017) 35 35
OCTA Debt
(9.0% due 2006) 8 6
Subordinated Debt
(9.5% No Maturity) 6 2
------ ------
114 108
Other:
Pavilion Towers Debt (8.4% due 2007) 15 -
Capitalized Leases 6 1
Other 5 6
------- ------
26 7
C-TEC Long-term Debt (with recourse only to C-TEC):
Credit Agreement - National Bank for Cooperatives
(7.51% due 2009) $ 119 $ 128- 110
Senior Secured Notes -
( 9.65% due 1999) (includes unamortized premium of $5 and $6 based on
imputed rate of 6.12%) 150 156- 134
Term Credit Agreement - Morgan Guaranty
Trust Company (7% due 2002) 19 - Promissory Note18
-------- ------
- Twin County Acquisition
(5% due 2003) 4 -
Revolving Credit Agreements and Other 8 4
MFS Long-term Debt (with recourse only to MFS):
9.375% Senior Discount Notes, Due 2004,
with semi-annual interest payments 1999-2004 - 549
Notes Payable, Due 1995, (Prime plus 1.5%) - 16
----- -----
300 853
Other PKS Long-term Debt:
9.5% to 11.1% Notes to former stockholders due 1996-2001 6 12
6.25% to 8.75% Convertible debentures due 2002-2005 8 8
Construction loans and other 98 68
---- ----
112 88
---- ----
412 941262
-------- ------
140 377
Less current portion (42) (33)
---- -----(3) (57)
-------- ------
$ 370137 $ 908
===== =====
PETER KIEWIT SONS', INC.
Notes to Consolidated Financial Statements320
======== ======
CPTC:
In March 1994, C-TEC's telephone groupAugust 1996, CPTC converted its construction financing note
into a term note with a consortium of banks ("Bank Debt"). The
interest rate on the Bank Debt is based on LIBOR plus a varying
rate with interest payable quarterly. Upon completion of the
SR91 toll road, CPTC entered into a $135
million Credit Agreementan interest rate swap
arrangement with the Nationalsame parties. The swap expires in January
2004 and fixes the interest rate on the Bank for
Cooperatives ("National").Debt from 9.21% to
9.71% during the term of the swap agreement.
The funds were used to prepay
outstanding borrowingsinstitutional note is with Connecticut General Life
Insurance Company, a subsidiary of CIGNA Corporation. The note
converted into a term loan upon completion of the United States of America.SR91 toll
road.
Substantially all the assets of C-TEC's telephone group are
subjectCPTC and the partners' equity
interest in CPTC secure the term debt.
Orange County Transportation Authority holds $8 million of
subordinated debt which is due in varying amounts over 10
years. Interest accrues at 9% and is payable quarterly
beginning in 2000.
In July 1996, CPTC borrowed from the partners $2 million to
liens under this Credit Agreement. In addition,facilitate the telephone group is restricted from paying dividends in
excess of the prior year net income.
The Senior Secured notes are collateralized by pledges of
the stock of C-TEC's cable group. The notes contain
restrictive covenants which require, among other things,
specific debt to cash flow ratios.
Mercom, a consolidated subsidiary of C-TEC, has pledged the
common stock of its operating subsidiaries as collateral for
the Term Credit Agreement ("Agreement") with Morgan Guaranty
Trust Company ("Morgan"). In addition, a first lien on
certain material assets of Mercom and its subsidiaries has
been granted to Morgan. The Agreement contains a
restrictive covenant which requires Mercom to maintain a
specified debt to cash flow ratio.
In connection with the acquisition of Twin County Trans
Video, Inc., C-TEC Cable Systems, Inc., a wholly owned
subsidiary of C-TEC, issued a $4 million 5% promissory note.
The note is unsecured.
C-TEC's cable group has Revolving Credit agreements which
are collateralized by a pledge of the stock of the cable
group subsidiaries. At December 30, 1995 the borrowings
available under the agreement total $12 million. The
commitments are reduced on a quarterly basis through
maturity in September 1996. The cable group had borrowings
of $7 million (6.7% weighted average interest rate) as of
December 1995.
The convertible debentures are convertible during October of
the fifth year preceding their maturity date. Each annual
series may be redeemed in its entirety prior to the due date
except during the conversion period. Debentures were
converted into 59,935, 12,594 and 14,322 shares of Class C
common stock and 69,022, 12,594 and 14,322 shares of Class
D common stock in 1995, 1994 and 1993 . As part of the
exchange offer completed prior to the MFS Spin-off, all
holders of 1990 and 1991 debentures and 1993 D debentures
converted their debentures into Class C and Class D common
stock. At December 30, 1995, 360,453 shares of Class C
common stock are reserved for future conversions.
Other PKS debt consists primarily of construction financing
of a privately owned toll road which will be converted to
term debt upon completion of the project. VariableIn 1997, CPTC
borrowed an additional $4 million from the partners in order to
comply with equity maintenance provisions of the contracts with
the State of California and its lenders. The debt is generally
subordinated to all other debt of CPTC. Interest on the
subordinated debt compounds annually at 9.5% and is payable
only as CPTC generates excess cash flows.
CPTC capitalized interest rates on this debt ranged from 7% to 10% at December 30,
1995. The Company capitalizedof $- million, $5 million and $7
million of interest in 1997, 1996 and 1995.
Other:
In June 1997, a mortgage with Metropolitan Life was
established. The Pavilion Towers building in Aurora, CO
collateralizes this debt.
Scheduled maturities of long-term debt through 20002002 are as
follows (in millions): 1996 - $42; 1997 - $57; 1998 - $63;$3; 1999 -$6; 2000 - $64$5; 2001 -
$6 and $17$8 in 2000.
PETER KIEWIT SONS', INC.
Notes to Consolidated Financial Statements
(12)2002.
(10) Income Taxes
An analysis of the income tax (provision) benefit (provision)attributable
to earnings from continuing operations before income taxes and
minority interest for the three years ended December 30,
199527, 1997
follows:
(dollars in millions) 1997 1996 1995 1994 1993
Current:
U.S. federal $ (127) $ (54) $ (52)(61) $ (66)
Foreign - (10) (2)(4) (4)
State (9) (5) (7)(1) (6) (3)
------ ----- ------ (136) (69) (61)------
(55) (71) (73)
Deferred:
U.S. federal 146 27 (59)103 67 145
Foreign (4) 5- - 3
State - 1 State 5 8 14
------- ----- -----
147 40 (57)------ ------
103 68 152
------- ----- ----------- ------
$ 1148 $ (29)(3) $ (118)
======79
======= ====== ======
The United States and foreign components of earnings from
continuing operations for tax reporting purposes, before equity
loss in MFS (recorded net of tax), minority interest and income
taxes follow:follows:
(dollars in millions) 1997 1996 1995 1994 1993
United States $ 37031 $ 224106 $ 385187
Foreign 6 16 7- 1 3
------ ------ -----------
$ 37631 $ 240107 $ 392190
====== ======= =========== ======
A reconciliation of the actual income tax (provision) benefit
(provision)
and the tax computed by applying the U.S. federal rate (35%) to
the earnings from continuing operations before equity loss in
MFS (recorded net of tax), minority interest and income taxes
for the three years ended December 30, 199527, 1997 follows:
(dollars in millions) 1997 1996 1995 1994 1993
Computed tax at statutory rate $ (132)(11) $ (84)(37) $ (137)(67)
State income taxes (8)(1) (3) (4)-
Depletion 3 4 4
Dividend exclusion3 2
Goodwill amortization - 3 4(3) (2)
Tax exempt interest 3 4 -2 2 2
Prior year tax adjustments 56 54 1362 44 51
Compensation expense attributable
to options (7) - -
MFS deferred tax 93 - - Goodwill amortization (4)93
Taxes on foreign operations - (2) 1
Other - (5) 1
------- -------(7) (1)
------ ------ ------
$ 1148 $ (29)(3) $ (118)
======= ======= =======
PETER KIEWIT SONS', INC.
Notes79
====== ====== ======
During the three years ended December 27, 1997, the Company
settled a number of disputed tax issues related to Consolidated Financial Statements
The Company files a consolidated federal incomeprior years
that have been included in prior year tax return
including its domestic subsidiaries as allowed by the
Internal Revenue Code.adjustments.
Possible taxes, beyond those provided on remittances of
undistributed earnings of foreign subsidiaries, are not
expected to be material.
The components of the net deferred tax liabilities for the
years ended December 30, 199527, 1997 and December 31, 199428, 1996 were as
follows:
(dollars in millions) 1995 19941997 1996
Deferred tax liabilities:
Investments in securities $ 157 $ (5)11
Investments in joint ventures 8 69
Investments in subsidiaries 10 9933 45
Asset bases - accumulated depreciation 194 200
Deferred coal53 225
Coal sales 39 1141 15
Other 26 32
------- -------16 16
----- ------
Total deferred tax liabilities 292 406150 312
Deferred tax assets:
Construction accounts 3 12
Insurance claims 37 39
Compensation - retirement benefits 28 2125 29
Investment in subsidiaries 8 2
Provision for estimated expenses 24 107 26
Net operating losses of subsidiaries 5 84- 6
Foreign and general business tax credits 3 67
Alternative minimum tax credits of
subsidiary 5 13- 16
Other 26 519 19
Valuation allowanceallowances - (6)
(52)
------- ------------- ------
Total deferred tax assets 122 178
------- --------52 159
----- ------
Net deferred tax liabilities $ 17098 $ 228
======= ========
(13) Employee Benefit Plans
The Company makes contributions, based on collective
bargaining agreements related153
===== ======
(11) Stockholders' Equity
PKS is generally committed to its construction
operations, to several multi-employer union pension plans.
These contributions are includedpurchase all common stock in
the cost of revenue.
Under federal law, the Company may be liable for a portion
of plan deficiencies; however, there are no known
deficiencies.
The Company's defined benefit pension plans cover primarily
packaging employees who retired prior to the disposition of
the packaging operations. The expense related to these
plans was approximately $7 million, $1 million and $7
million in 1995, 1994 and 1993.
C-TEC maintains a separate defined benefit plan for
substantially all of its employees. The prepaid pension
cost and expense related to this plan is not significant at
December 30, 1995 and December 31, 1994, and for the three
years ended December 30, 1995.
PETER KIEWIT SONS', INC.
Notes to Consolidated Financial Statements
The Company also had a long-term incentive plan, consisting
of stock appreciation rights, for certain employees. This
plan concluded in 1994. The expense related to this plan
was $2 million and $3 million in 1994 and 1993.
Substantially all employees of the Company,accordance with the exceptionCertificate of C-TEC employees, are covered under the
Company's profit sharing plans. The expense related to these
plans was $3 million, $2 million and $2 million in 1995,
1994 and 1993.
(14) Postretirement Benefits
In addition to providing pension and other supplemental
benefits, the Company provides certain health care and life
insurance benefits primarily for packaging employees who
retired prior to the disposition of certain packaging
operations and C-TEC employees who retired prior to 1993.
Employees become eligible for these benefits if they meet
minimum age and service requirements or if they agree to
contribute a portion of the cost. These benefits have not
been funded.
In March 1995, the Company settled its liability with
respect to certain postretirement life insurance benefits.
The Company purchased insurance coverage from a third party
insurance company for approximately $14 million to be paid
over seven years. The settlement did not have a material
impact on the Company's financial position, results of
operations or cash flows.
The net periodic costs for health care benefits were less
than $1 million in 1995, $1 million in 1994 and $4 million
in 1993. In all years, the costs related primarily to
interest on accumulated benefits.
The accrued postretirement benefit liability as of December
30, 1995 was as follows:
Health
(dollars in millions) Insurance
Retirees $ 31
Fully eligible active plan participants -
Other active plan participants -
------
Total accumulated postretirement
benefit obligation 31
Unrecognized prior service cost 19
Unrecognized net loss (7)
------
Accrued postretirement benefit liability $ 43
======
The unrecognized prior service cost resulted from certain
modifications to the postretirement benefit plan for
packaging employees which reduced the accumulated
postretirement benefit obligation. The Company may make
additional modifications in the future.
PETER KIEWIT SONS', INC.
Notes to Consolidated Financial Statements
A 7.7% increase in the cost of covered health care benefits
was assumed for fiscal 1995. This rate is assumed to
gradually decline to 6.2% in the year 2020 and remain at
that level thereafter. A 1% increase in the health care
trend rate would increase the accumulated postretirement
benefit obligation ("APBO") by less than $1 million at
year-end 1995. The weighted average discount rate used in
determining the APBO was 6.75%.
(15) Stockholders' Equity
Class B and Class C shares can be issued only to Company
employees and can be resold only to the Company at a formula
price based on the book value of the Construction & Mining
Group. The Company is generally required to repurchase
Class B and Class C shares for cash upon stockholder demand.
Class D shares have a formula price based on the book value
of the Diversified Group. The Company must generally
repurchase Class D shares for cash upon stockholder demand
at the formula price, unless the Class D shares become
publicly traded. Although almost all the Class D shares are
owned by employees and former employees, such shares are not
subject to ownership or transfer restrictions.
For the three years ended December 30, 1995, issuancesIncorporation. Issuances and
repurchases of common shares, including conversions, for the
three years ended December 27, 1997 were as follows:
Class B Class
C ClassB&C Stock D
Common Common Common
Stock Stock Stock
Shares issued in 1993 - 1,027,657 748,026
Shares repurchased in 1993 76,600 2,217,122 841,808
Shares issued in 1994 - 1,018,144 777,556
Shares repurchased in 1994 180,000 2,247,186 396,684
Shares issued in 1995 - 1,021,875 2,675,553530,610
Shares repurchased in 1995 736,932 5,492,002 42,147
PETER KIEWIT SONS'136,057 210,735
Class B&C shares converted
to Class D shares 6,092,877 12,847,155
Shares issued in 1996 896,640 -
Shares repurchased in 1996 146,893 1,276,080
Class B&C shares converted
to Class D shares 623,475 2,052,425
Shares issued in 1997 893,924 13,113,015
Shares repurchased in 1997 44,256 14,805
Class B&C shares converted
to Class D shares 1,723,966 6,517,715
The 1996 activity includes 150,995 Class D shares converting to 47,007 Class
C shares. The 1997 activity includes 1,880 Class D shares converting to 510
Class C shares.
(12) Class D Stock Plan
In December 1997, stockholders approved amendments to the 1995
Class D Stock Plan ("the Plan"). The amended plan, among other
things, increases the number of shares reserved for issuance
upon the exercise of stock based awards to 35,000,000,
increases the maximum number of options granted to any one
participant to 5,000,000, provides for the acceleration of
vesting in the event of a change in control, allows for the
grant of stock based awards to directors of Level 3 and other
persons providing services to Level 3, and allows for the grant
of nonqualified stock options with an exercise price less than
the fair market value of Class D Stock.
In December 1997, Level 3 converted both option and stock
appreciation rights plans of a subsidiary, to the Class D Stock
plan. This conversion resulted in the issuance of 3.7 million
options to purchase Class D Stock at $9 per share. Level 3
recognized an expense, and a corresponding increase in equity,
as a result of the transaction. This increase in equity and
the conversion of the stock appreciation rights liability to equity
are reflected as option activity in the statement of Changes in
Stockholders' Equity. The options vest over three years and expire
in December 2002.
Level 3 has elected to adopt only the required disclosure
provisions and not the optional expense recognition provisions
under SFAS No. 123 "Accounting for Stock Based Compensation",
INC.
Noteswhich established a fair value based method of accounting for
stock options and other equity instruments. The fair value of
the options outstanding was calculated using the Black-Scholes
method using risk-free interest rates ranging from 5.5% to
Consolidated Financial Statements
(16)6.77% and expected lives of 75% of the total life of the option.
Level 3 used an expected volatility rate of 0%, which is
allowed for private entities under SFAS No. 123. Once Level 3's
stock is listed, volatility factors will be incorporated in
determining fair value. Level 3's net income and earnings per
share for 1997 and 1996 would have been reduced to the pro forma
amounts shown below had SFAS No. 123 been applied.
1997 1996
Net Income of Level 3
As Reported $ 93 $ 113
Pro Forma 93 112
Basic Earnings per Share
As Reported $ .74 $ .97
Pro Forma .74 .97
Diluted Earning per Share
As Reported $ .74 $ .97
Pro Forma .74 .96
The 1995 historical and pro forma and as reported amounts did not vary as
the options granted in 1995 had not vested.
Transactions involving stock options granted under the Plan are
summarized as follows:
Option Price Weighted Avg.
Shares Per Share Option Price
Balance December 31, 1994 - $ - $ -
Options granted 1,340,000 8.08 8.08
Options cancelled - - -
Options exercised - - -
---------
Balance December 30, 1995 1,340,000 $ 8.08 $ 8.08
======== ========
Options granted 895,000 $ 9.90 $ 9.90
Options cancelled (15,000) 8.08 8.08
Options exercised - - -
---------
Balance December 28, 1996 2,220,000 $8.08 - $9.90 $ 8.81
============= ========
Options granted 7,495,465 $9.00 - $10.85 $ 9.93
Options cancelled (53,000) $9.90 $ 9.90
Options exercised (2,318,465) $8.08 - $9.90 $ 8.93
----------
Balance December 27, 1997 7,344,000 $8.08 - $10.85 $ 9.91
========== ============== ========
Options exercisable
December 30, 1995 - $ - $ -
December 28, 1996 265,000 8.08 8.08
December 27, 1997 1,295,269 $8.08 - $9.90 8.70
The weighted average remaining life for the 7,344,000 options
outstanding on December 27, 1997 is 8.3 years.
(13) Industry and Geographic Data
The Company operatesconducts in continuing operations primarily in
three reportable segments: information services, telecommunications
and coal mining. Other primarily includes CPTC and corporate overhead
not attributable to a specific segment and marketable securities.
Equity earnings is included due to the significant equity
investments in the telecommunications business.
In 1997, 1996 and 1995 Commonwealth Edison Company accounted
for 43%, 23% and 23% of Level 3's revenues.
Industry and geographic data for the construction mining and telecommunications.
MFS' resultsenergy
businesses have been classified as a single line item on
the statements of earnings and consolidated on the balance
sheet in 1994 and 1993.recorded under discontinued operations.
A summary of the Company's operations by industry and
geographic area
and industryregion is as follows:
Geographic Data (dollars in millions) 1995 1994 1993
Revenue:
United States $ 2,535 $ 2,425 $ 1,823
Canada 281 233 175
Other 86 46 52
------- ------- -------
$ 2,902 $ 2,704 $ 2,050
======= ======= =======
Operating earnings:
United States $ 145 $ 151 $ 129
Canada 7 14 3
Other 10 - 22
------- ------- -------
$ 162 $ 165 $ 154
======= ======= =======
Identifiable assets:
United States $ 2,521 $ 3,832 $ 2,901
Canada 90 102 82
Other 116 27 29
Corporate (1) 736 531 622
------- ------- -------
$ 3,463 $ 4,492 $ 3,634
======= ======= =======
(1) Principally cash, cash equivalents, marketable
securities, notes receivable from sales of discontinued
operations and investments in all years.
PETER KIEWIT SONS', INC.
Notes to Consolidated Financial Statements
Industry Data (dollars in millions) 1995 1994 1993
Revenue:
Construction $ 2,297 $ 2,143 $ 1,757
Mining 247 246 230
Telecommunications 325 291 48
Other 33 24 15
------- ------- -------
$ 2,902 $ 2,704 $ 2,050
======= ======= =======
Operating earnings:
Construction $ 81 $ 55 $ 85
Mining 107 106 98
Telecommunications 37 27 6
Other (63) (23) (35)
------- ------- -------
$ 162 $ 165 $ 154
======= ======= =======
Identifiable assets:
Construction $ 910 $ 896 $ 816
Mining 415 396 440
Telecommunications 1,141 2,551 1,682
Other 261 118 74
Corporate (1) 736 531 622
------- ------ ------
$ 3,463 $ 4,492 $ 3,634
======= ======= =======
Capital expenditures:
Construction $ 79 $ 61 $ 48
Mining 4 3 5
Telecommunications 72 426 127
Other 6 12 5
Corporate - 11 7
------- ------ -------
$ 161 $ 513 $ 192
======= ======= =======
Depreciation, depletion and amortization:
Construction $ 56 $ 49 $ 43
Mining 7 11 13
Telecommunications 81 149 35
Other 5 6 6
Corporate 3 2 2
------- ------- ------
$ 152 $ 217 $ 99
======= ======= =======
(1) Principally cash, cash equivalents, marketable
securities, notes receivable from sales of discontinued
operations and investments in all years.
PETER KIEWIT SONS', INC.
Notes to Consolidated Financial Statements
(17) Summarized Financial Information
Holders of Class B&C Stock (Construction & Mining Group) and
Class D Stock (Diversified Group) are stockholders of PKS.
The Construction & Mining Group contains the Company's
traditional construction and materials operations performed
by Kiewit Construction Group Inc. and certain mining
services performed by Kiewit Mining Group Inc. The
Diversified Group contains coal mining properties owned by
Kiewit Coal Properties Inc., communications companies owned
by C-TEC, a minority interest in CE and miscellaneous
investments. Corporate assets and liabilities which are not
separately identified with the ongoing operations of the
Construction & Mining Group or the Diversified Group are
allocated equally between the groups.
A summary of the results of operations and financial
position for the Construction & Mining Group and the
Diversified Group follows. These summaries were derived
from the audited financial statements of the respective
groups which are exhibits to this Annual Report.
All significant intercompany accounts and transactions,
except those directly between the Construction & Mining
Group and the Diversified Group, have been eliminated.
(dollars in millions except per share) 1995 1994 1993
Construction & Mining Group:
Results of Operations:
Revenue $ 2,330 $ 2,175 $ 1,783
======= ======= =======
Net Earnings $ 104 $ 77 $ 80
======= ======= =======
Earnings Per Share $ 7.78 $ 4.92 $ 4.63
======= ======= =======
Working capital $ 248 $ 333 $ 372
Total assets 987 963 889
Long-term debt,less current portion 9 9 10
Stockholders' equity 467 505 480
Included within the results of operations is mine management
income from the Diversified Group of $19 million, after-tax, in 1995,
1994 and 1993.
PETER KIEWIT SONS', INC.
Notes to Consolidated Financial Statements
(dollars in millions except share data) 1995 1994 1993
Diversified Group:
Results of Operations:
Revenue $ 580 $ 537 $ 267
====== ===== =====
Net Earnings $ 140 $ 33 $ 181
====== ===== =====
Earnings per Share $ 6.45 $1.63 $9.08
====== ===== =====
Financial Position:
Working capital $ 752 $ 969 $ 993
Total assets 2,490 3,537 2,759
Long-term debt, less current portion 361 899 452
Stockholders' equity 1,140 1,231 1,191
Included within results of operations is mine management fees paid
to the Construction & Mining Group of $19 million, after-tax, in 1995,
1994 and 1993.
(18) Other Matters
In June 1995, the Company exchanged its interest in a wholly-
owned subsidiary involved in gold mining activities for
4,000,000 common shares of Kinross Gold Corporation
("Kinross"), a publicly traded corporation. The Company
recognized a $21 million pre-tax gain on the exchange based
on the difference between the book value of the subsidiary
and the fair market value of the Kinross stock on the date
of the transaction. This gain is included in other income
in the consolidated statements of earnings.
In May 1995, the lawsuit titled Whitney Benefits, Inc. and
Peter Kiewit Sons' Co. v. The United States was settled.
In 1983, plaintiffs alleged that the enactment of the
Surface Mining Control and Reclamation Act of 1977 had
prevented the mining of their Wyoming coal deposits and
constituted a government taking without just compensation.
In settlement of all claims, plaintiffs agreed to deed the
coal deposits to the government and the government agreed to
pay plaintiffs $200 million, of which Peter Kiewit Sons'
Co., a KDG subsidiary, received approximately $135 million
in June 1995 and recorded it in other income on the
consolidated statement of earnings.
In 1994, several former stockholders of a MFS subsidiary
filed a lawsuit against MFS, KDG and the chief executive
officer of MFS, in the United States District Court for the
Northern District of Illinois, Case No. 94C-1381. These
shareholders sold shares of the subsidiary to MFS in
September 1992. MFS completed an initial public offering in
May 1993. Plaintiffs allege that MFS fraudulently
concealed material information about its plans from them,
causing them to sell their shares at an inadequate price.
Plaintiffs have alleged damages of at least $100 million.
Defendants have meritorious defenses and intend to
vigorously contest this lawsuit. Defendants expect that a
trial will be held in 1996. Prior to the initial public
offering, KDG agreed to indemnify MFS against any
liabilities arising from the September 1992 sale; if MFS is
deemed to be liable to plaintiffs, KDG will be required to
satisfy MFS' liabilities pursuant to the indemnity
agreement.
PETER KIEWIT SONS', INC.
Notes to Consolidated Financial Statements
The Company is involved in various other lawsuits, claims
and regulatory proceedings incidental to its business.
Management believes that any resulting liability, beyond
that provided, should not materially affect the Company's
financial position, future results of operations or future
cash flows.
In many pending proceedings, the Company is one of numerous
defendants who may be "potentially responsible parties"
liable for the cleanup of hazardous substances deposited in
landfills or other sites. The Company has established
reserves to cover its probable liabilities for environmental
cases and believes that any additional liabilities will not
materially affect the Company's financial condition, future
results of operations or future cash flows.
It is customary in the Company's industries to use various
financial instruments in the normal course of business.
These instruments include items such as letters of credit.
Letters of credit are conditional commitments issued on
behalf of the Company in accordance with specified terms and
conditions. As of December 30, 1995, the Company had
outstanding letters of credit of approximately $140
million.
A subsidiary of the Company, Continental Holdings Inc.,
remains contingently liable as a guarantor of $53 million of
debt relating to various businesses which have been sold.
The Company leases various buildings and equipment under
both operating and capital leases. Minimum rental payments
on buildings and equipment subject to noncancelable
operating leases during the next 29 years aggregate $88
million.
In November 1995, C-TEC announced that it had engaged an
investment banker to assist with evaluating strategic
alternatives for its various business units with a view
toward enhancing shareholder value. C-TEC is now planning
to distribute to its shareholders in a tax-free spin-off the
Telephone Group, the Communications Services Group, and
certain other assets. Following the spin-off, C-TEC plans
to combine its remaining businesses, which will consist of
its domestic Cable Group, with a third party pursuant to a
tax-free, stock-for-stock transaction. C-TEC has received
a number of inquiries regarding its domestic Cable Group
and is holding discussions with interest parties.
(19) Subsequent Events
In March 1996, RCN Corporation ("RCN") a subsidiary of KDG,
entered into an asset purchase agreement, along with other
ancillary agreements, with Liberty Cable Company, Inc.
("Liberty") to purchase an 80 percent interest in certain
private cable systems in New York City and selected areas of
New Jersey. The transaction closed on March 6, 1996. The
cable systems provide subscription television services using
microwave frequencies. RCN deposited $27 million in an
escrow account which was released on the closing date.
In addition, RCN issued a $15 million promissory note
that is expected to be paid during 1996.
In March, under the terms of an agreement, RCN will pay C-TEC
approximately $123 million for certain of C-TEC's assets, including
Long Distance Group, C-TEC International, which holds the 40%
interest in Megacable, S.A. de C.V., and Residential Communications
Network, a start-up joint effort with RCN which plans to provide
telecommunications services to the residential market. RCN will
purchase Residential Communications Network for cash in a
transaction expected to close in April 1996. RCN's purchase of
the other business for cash or C-TEC stock, at RCN's option, is
expected to close in the second half of 1996. The transactions
are subject to certain conditions including the receipt of all
necessary regulatory approvals. The agreement with RCN contains
a repurchase option under which C-TEC can reacquire the businesses
if a restructuring of C-TEC's main businesses does not occur.
Additionally, C-TEC retains a warrant to reacquire a six percent
stake in Residential Communications Network. The agreement with
RCN was approved by a special committee of the board of directors
of C-TEC, composed of directors unaffiliated with either RCN or
the Company.
SCHEDULE II
PETER KIEWIT SONS', INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts and Reserves
Additions Amounts
Balance, Charged to Charged Balance
Beginning Costs and to End of
(dollars in millions) of Period Expenses Reserves Other Period
Year ended December 30, 1995
Allowance for doubtful
trade accounts $ 9 $ 5 $ (2) $ - $ 12
Reserves:
Insurance claims 75 18 (14) - 79
Retirement benefits 67 3 (2) (14) (a) 54
Year ended December 31, 1994
Allowance for doubtful
trade accounts $ 7 $ 5 $ (3) $ - $ 9
Reserves:
Insurance claims 67 19 (11) - 75
Retirement benefits 71 2 (6) - 67
Year ended December 25, 1993
Allowance for doubtful
trade accounts $ 7 $ 5 $ (6) $ 1 $ 7
Reserves:
Insurance claims 66 14 (13) - 67
Retirement benefits 74 12 (17) 2 71
(a) The Company settled its liability with respect to certain
postretirement life insurance benefits by purchasing insurance
coverage from a third party insurance company.
Telecom-
Industry Data munications
(dollars in Information C-TEC Coal Discontinued
millions) Services Entities) Mining Other Operations Consolidated
1997
Revenue $ 94 $ - $ 222 $ 16 $ - $ 332
Operating
Earnings (16) - 82 (23) - 43
Equity Losses,
net - (23) - (20) - (43)
Identifiable
Assets 61 336 449 588 1,295 2,779
Capital
Expenditures 14 - 3 9 - 26
Depreciation,
Depletion &
Amortization 8 - 8 8 - 24
1996
Revenue $ 42 $ 367 $ 234 $ 9 $ - $ 652
Operating
Earnings (3) 31 94 (35) - 87
Equity Losses,
net (1) (1) - (7) - (9)
Identifiable
Assets 29 1,100 387 380 1,170 3,066
Capital
Expenditures 11 87 2 17 - 117
Depreciation,
Depletion &
Amortization 10 106 12 4 - 132
1995
Revenue $ 36 $ 325 $ 216 $ 3 $ - $ 580
Operating
Earnings 4 37 77 (73) - 45
Equity
Losses, net - (3) - (2) - (5)
Identifiable
Assets 34 1,143 368 614 786 2,945
Capital
Expenditures 6 72 4 36 - 118
Depreciation,
Depletion &
Amortization 5 81 7 3 - 96
Telecom-
Geographic Data munications
(dollars in Information C-TEC Coal Discontinued
millions) Services Entities) Mining Other Operations Consolidated
1997
Revenue:
United States $ 94 $ - $ 222 $ 16 $ - $ 332
Other - - - - - -
------ ------- ------ ----- ------ --------
$ 94 $ - $ 222 $ 16 $ - $ 332
====== ======= ====== ===== ====== =======
Operating Earnings:
United States $ (16) $ - $ 82 $ (23) $ - $ 43
Other - - - - - -
----- ------- ------ ----- ------ -------
$ (16) $ - $ 82 $ (23) $ - $ 43
===== ======= ====== ===== ====== =======
Identifiable Assets:
United States $ 59 $ 336 $ 499 $ 588 $ 870 $ 2,352
Other 2 - - - 425 427
----- ------- ------ ----- ------ -------
$ 61 $ 336 $ 499 $ 588 $1,295 $ 2,779
===== ======= ====== ===== ====== =======
1996
Revenue:
United States $ 42 $ 367 $ 234 $ 9 $ - $ 652
Other - - - - - -
----- ------- ------ ----- ------ -------
$ 42 $ 367 $ 234 $ 9 $ - $ 652
===== ======= ====== ===== ====== =======
Operating Earnings:
United States $ (3) $ 31 $ 94 $ (35) $ - $ 87
Other - - - - - -
----- ------- ------ ----- ------- -------
$ (3) $ 31 $ 94 $ (35) $ - $ 87
===== ======= ====== ===== ======= =======
Identifiable Assets:
United States $ 29 $ 1,100 $ 387 $ 380 $ 761 $ 2,657
Other - - - - 409 409
----- ------- ------ ----- ------- -------
$ 29 $ 1,100 $ 387 $ 380 $ 1,170 $ 3,066
===== ======= ====== ===== ======= =======
1995
Revenue:
United States $ 36 $ 325 $ 216 $ 3 $ - $ 580
Other - - - - - -
----- ------- ------ ---- ------- -------
$ 36 $ 325 $ 216 $ 3 $ - $ 580
===== ======= ====== ==== ======= =======
Operating Earnings:
United States $ 4 $ 37 $ 77 $(73) $ - $ 45
Other - - - - - -
----- ------- ------ ---- ------- -------
$ 4 $ 37 $ 77 $(73) $ - $ 45
===== ======= ====== ==== ======= =======
Identifiable Assets:
United States $ 34 $ 1,143 $ 368 $614 $ 614 $ 2,773
Other - - - - 172 172
----- ------- ----- ---- ------- -------
$ 34 $ 1,143 $ 368 $614 $ 786 $ 2,945
===== ======= ===== ==== ======= =======
(14) Related Party Transactions
Level 3 receives certain mine management services from the
Construction & Mining Group. The expense for these services
was $32 million for 1997, $37 million for 1996 and $30 million
for 1995, and is recorded in general and administrative
expenses. The revenue earned by the Construction and Mining
Group is included in discontinued operations.
(15) Fair Value of Financial Instruments
The carrying and estimated fair values of Level 3's financial
instruments are as follows:
1997 1996
Carrying Fair Carrying Fair
(dollars in millions) Amount Value Amount Value
Cash and cash equivalents (Note 6) $ 87 $ 87 $ 147 $ 147
Marketable securities (Note 6) 678 678 372 372
Restricted securities (Note 6) 22 22 17 17
Investment in equity securities
(Notes 6 & 7) - - 75 75
Investment in C-TEC entities (Note 7) 335 776 355 315
Investments in discontinued
operations (Note 4) 643 854 608 960
Long-term debt (Notes 6 & 9) 140 140 377 384
(16) C-TEC Restructuring
The following is financial information of the Company had C-TEC
been accounted for utilizing the equity method as of December
27, 1997 and December 28, 1996 and for each of the three years
ended December 27, 1997. The 1997 financial statements include
C-TEC accounted for utilizing the equity method and are
presented here for comparative purposes only.
Operations (dollars in millions) 1997 1996 1995
Revenue $ 332 $ 285 $ 255
Cost of Revenue (175) (134) (133)
------ ------ ------
157 151 122
General and Administrative Expenses (114) (95) (114)
------ ------ ------
Operating Earnings 43 56 8
Other (Expense) Income:
Equity earnings (losses), net (43) (13) 7
Investment income, net 45 42 30
Interest expense, net (15) (5) (1)
Gain on subsidiary's stock transactions, net - - 3
Other, net 1 11 120
----- ----- ------
(12) 35 159
Equity Loss in MFS - - (131)
Earnings from Continuing Operations
before Income Taxes and Minority Interest 31 91 36
Income Tax Benefit 48 11 90
Minority Interest in Net Loss of Subsidiaries 4 2 -
----- ----- ------
Income from Continuing Operations 83 104 126
Income from Discontinued Operations 165 117 118
----- ----- ------
Net Earnings $ 248 $ 221 $ 244
===== ===== ======
Financial Position (dollars in millions) 1997 1996
Assets
Current Assets:
Cash and cash equivalents $ 87 $ 71
Marketable securities 678 325
Restricted securities 22 17
Receivables 42 34
Investment in Discontinued operations - Energy 643 608
Other 22 12
------- -------
Total Current Assets 1,494 1,067
Net Property, Plant and Equipment 184 174
Investments 383 458
Investments in Discontinued Operations-Construction 652 562
Intangible Assets, net 21 23
Other Assets 45 49
------- -------
$ 2,779 $ 2,333
======= =======
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 31 $ 41
Current portion of long-term debt 3 2
Accrued reclamation and other mining costs 19 19
Other 36 27
------- --------
Total Current Liabilities 89 89
Long-term Debt, less current portion 137 113
Deferred Income Taxes 83 47
Accrued Reclamation Costs 100 98
Other Liabilities 139 163
Minority Interest 1 4
Stockholders' Equity 2,230 1,819
-------- --------
$ 2,779 $ 2,333
======== ========
(17) Pro Forma Information (unaudited).
The following information represents the pro forma financial
position of Level 3 after reflecting the impact of the
transactions with CalEnergy (Note 3), the conversion of Class C
shares to Class D shares (Note 19) and transactions related to
the spin-off of the Construction and Mining Group (Note 2), all
of which took place or are expected to happen in the first
quarter of 1998.
1997 1997
(dollars in millions) Historical Adjustments Pro Forma
Current Assets
Cash & marketable securities $ 765 $ 122 (a) $ 2,046
1,159 (b)
Investment in discontinued
operations - energy 643 (643)(b) -
Other current assets 86 86
------- ------ -------
Total Current Assets 1,494 638 2,132
Property, Plant & Equipment, net 184 184
Investment in Discontinued Operations -
Construction 652 (122)(a) -
350 (c)
(880)(d)
Other Non-current assets 449 449
------- ------ -------
$ 2,779 $ (14) $ 2,765
======= ====== =======
Current Liabilities $ 89 $ 192 (b) $ 281
Non-current Liabilities 459 459
Minority Interest 1 1
Stockholders' Equity 2,230 324 (b) 2,024
350 (c)
(880)(d)
------- ------- -------
$ 2,779 $ (14) $ 2,765
======= ======= =======
(a) Reflect conversion of 2.3 million Class C shares to 10.5
million Class D shares
(b) Reflect sale of energy assets to CalEnergy and related income
tax liability.
(c) Reflect fair value gain on the distribution of the
Construction and Mining Group.
(d) Reflect spin-off of the Construction and Mining Group.
(18) Other Matters
In connection with the sale of approximately 10 million Class D
shares to employees in 1997, the Company has retained the right
to purchase the relevant Class D shares at the then current Class
D Stock price if the Transaction is definitely abandoned by formal
action of the PKS Board or the employees voluntarily terminate their
employment on various dates prior to January 1, 1999.
In May 1995, the lawsuit titled Whitney Benefits, Inc. and
Peter Kiewit Sons' Co. v. The United States was settled. In
1983, plaintiffs alleged that the enactment of the Surface
Mining Control and Reclamation Act of 1977 had prevented the
mining of their Wyoming coal deposit and constituted a
government taking without just compensation. In settlement of
all claims, plaintiffs agreed to deed the coal deposits to the
government and the government agreed to pay plaintiffs $200
million, of which Peter Kiewit Sons' Co., a Level 3 subsidiary,
received approximately $135 million in June 1995 and recorded
it in other income on the statements of earnings.
The Company is involved in various other lawsuits, claims and
regulatory proceedings incidental to its business. Management
believes that any resulting liability, beyond that provided,
should not materially affect the Company's financial position,
future results of operations or future cash flows.
Level 3 leases various buildings and equipment under both
operating and capital leases. Minimum rental payments on
buildings and equipment subject to noncancelable operating
leases during the next 7 years aggregate $29 million.
It is customary in Level 3's industries to use various
financial instruments in the normal course of business. These
instruments include items such as letters of credit. Letters
of credit are conditional commitments issued on behalf of Level
3 in accordance with specified terms and conditions. As of
December 27, 1997, Level 3 had outstanding letters of credit of
approximately $22 million.
(19) Subsequent Events
In January 1998, approximately 2.3 million shares of Class C
Stock, with a redemption value of $122 million, were converted
into 10.5 million shares of Class D Stock.
In March 1998, PKS announced that its Class D Stock will begin
trading on April 1 on the Nasdaq National Market under the
symbol "LVLT". The Nasdaq listing will follow the separation
of the Level 3 and the Construction Group of PKS, which is
expected to be completed on March 31, 1998. In connection with
the separation, PKS' construction subsidiary will be renamed
"Peter Kiewit Sons', Inc." and PKS Class D stock will become
the common stock of Level 3 Communications, Inc.
PKS' certificate of incorporation gives stockholders the right to
exchange their Class C Stock for Class D Stock under a set
conversion formula. That right will be eliminated as a result
of the separation of Level 3 and the Construction Group. To
replace that conversion right, Class C stockholders received
6.5 million shares of a new Class R stock in January, 1998,
which is convertible into Class D Stock in accordance with
terms ratified by stockholders in December 1997.
The PKS Board of Directors has approved in principle a plan to
force conversion of all shares of Class R stock outstanding.
Due to certain provisions of the Class R stock, conversion will
not be forced prior to May 1998, and the final decision to
force conversion would be made by Level 3's Board of Directors
at that time. Level 3's Board may choose not to force
conversion if it were to decide that conversion is not in the
best interests of Level 3 stockholders. If, as currently
anticipated, Level 3's Board determines to force conversion of
the Class R stock on or before June 30, 1998, certain
adjustments will be made to the cost sharing and risk
allocation provisions of the separation agreement between Level
3 and the Construction business.
If Level 3's Board of Directors determines to force conversion of
the Class R stock, each share of Class R stock will be
convertible into $25 worth of Level 3 (Class D) common stock,
based upon the average trading price of the Level 3 common
stock on the Nasdaq National Market for the last fifteen
trading days of the month prior to the determination by the
Board of Directors to force conversion. When the spin-off occurs,
Level 3 will increase paid in capital and reduce retained earnings
by the fair value of the Class R shares.