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 28, 199627, 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. Employer)
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 C Common Stock, par value $.0625
Class D 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, 1997,1998, the number of outstanding shares of
each class of the Company's common stock was:
Class C - 9,262,7077,681,020
Class D - 24,483,786146,943,752
Portions of the Company's definitive Proxy Statement for the 19971998
Annual Meeting of Stockholders are incorporated by reference into
Part III of this Form 10-K.
TABLE OF CONTENTS
Page
Item 1. Business
.................................... 1
Item 2. Properties
.....................................
Item 3. Legal Proceedings.................................Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Executive Officers of the Registrant....Registrant
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.........Matters
Item 6. Selected Financial Data..............................Data
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations....Operations
Item 8. Financial Statements and Supplementary Data..................Data
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure...Disclosure
Item 10.Directors10. Directors and Executive Officers of the Registrant...........Registrant
Item 11.Executive Compensation...............................11. Executive Compensation
Item 12.Security12. Security Ownership of Certain Beneficial Owners and Management.............Management
Item 13.Certain13. Certain Relationships and Related Transactions...............Transactions
Item 14.Exhibits,14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..............8-K
Index to Financial Statements and Financial Statement Schedules of Registrant........Registrant
PART I
ITEM 1. 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.
Materials Operations
Construction Operations
Materials Operations
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.(30%)
International Energy
C-TEC 48.5%
Commonwealth Telephone Enterprises, Inc. 48.4%
RCN Corporation (62%)
Infrastructure Projects46.1%
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 Class C stock is linked to the Company's
construction and materials operations.operations (the "Construction Group").
The value of Class D stock is linked to the operations of Kiewit Diversified 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 Class D 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 merged intoacquired by WorldCom, Inc.).
Through subsidiaries, the Company owns 62%48.5% of the votingcommon stock
of another
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 30% of the voting stock of CalEnergy Company,Commonwealth Telephone
Enterprises, Inc.
("CalEnergy"). C-TEC and CalEnergy are publicly traded companies and more detailed
information about each of them is contained in their separate
FormsAnnual Reports on Form 10-K. Prior to January 2, 1998, the
Company was also engaged in the alternative energy business
through its ownership of 24% of the voting stock of CalEnergy
Company, Inc. ("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
separate the business 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 this transaction, the PKS Board declared
a dividend of eight-tenths of one share of the Company's newly
created Class R Convertible Common Stock, par value $.01 per
share ("Class R stock") with respect to each outstanding share of
Class C stock. The Class R stock is convertible in shares of
Class D stock 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"). 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 also fileshas 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 & Mining 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.
TheFor 1997 results, the Company reports financial information
aboutfor four business segments: construction,construction; information services;
telecommunications; and coal mining, energy generation and
distribution, and telecommunications.mining. Additional financial
information about these 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 313
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 19961997
were distributed among the following construction markets:
transportation (including highways, bridges, airports, railroads,
and mass transit) -- 45%62%, dams and reservoirspower, heat, cooling -- 17%18%, commercial
buildings -- 16%8%, water supply -- 2%, mining -- 2%, sewage and
waste disposal -- 12%, power, heat,
cooling - 4%, water supply1% and other markets -- 2%, and mining -- 2%7%.
KCG 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 public 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 of three types: fixed price, guaranteed
maximum, and cost plus. Under a "guaranteed maximum" contract, the
contractor and owner share in savings if costs are less than the
maximum price. Under a "cost plus" contract, the contractor is
reimbursed for its costs and also receives a flat fee or a fee
based on a percentage of its costs.
Government Contracts. Public contracts accounted for 79%74% of
the combined prices of contracts awarded to KCG during 1996.1997.
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 1996,1997, KCG had backlog (anticipated
revenue from uncompleted contracts) of $2.3$3.9 billion, an increase
from $2.0$2.3 billion at the end of 1995.1996. Of current backlog,
$700
millionapproximately $1.0 billion is not expected to be completed during
1997.1998. In 19961997 KCG was low bidder on 284226 jobs with total contract
prices of $1.8$3.5 billion, an average price of $6.4$15.3 million per
job. There were 1519 new projects with contract prices over $25
million, accounting for 45%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 19961997 Engineering News
Record, a construction trade publication, ranked KCG as the 9th
largest U.S. contractor in terms of 19951996 revenue and 11th12th largest
in terms of 19951996 new contract awards. It ranked KCG 1st in the
transportation market and 1st in the heavy construction category,
in terms of 19951996 revenue. The U.S. Department of Commerce reports
that the total value of construction put in place in 1996 was $569
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 19961997 KCG derived 75%70% of its joint venture revenue from
sponsored joint ventures and 25%30% from non-sponsored joint
ventures. KCG's share of joint venture revenue accounted for 30%28%
of its 19961997 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 1996,1997, KCG
had current projects in 3233 states and 6 Canadian provinces. KCG
also participates in the construction of geothermal power plants
in the Philippines and Indonesia.
Properties. KCG has 1920 district offices, of which 1516 are in
owned facilities and 4 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 DIVERSIFIED GROUPKiewit 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
KDGLevel 3 is engaged in coal mining through its subsidiary,
KCP.Kiewit Coal Properties Inc. ("KCP"). KCP has a 50% interest in
three mines, which are operated by 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 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.
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
produce steam to generate electricity. Approximately 92%89% of
sales are made under long-term contracts, and the remainder are
made on the spot market. Approximately 80%79%, 80%, and 71%80% of KCP's
revenues in 1997, 1996 1995, and 1994,1995, respectively, were derived from
long-term contracts with Commonwealth Edison Company (with Decker
and Black Butte) and The Detroit Edison Company (with Decker).
The primary 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 1 to 3130 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 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 4236 million tons of low
sulphur coal during the period 19971998 through 2005, with annual
shipments ranging from 5.2 million tons in 19971998 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 10088 million tons
during the period 19971998 through 2014, with annual shipments
ranging from 1.8 million tons to 13.1 million tons. These
deliveries include 2015 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. 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 and Texas-New Mexico Power
Company provides for delivery of between 42 and 90 million tons
of coal during the period 1989 through 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, Pacific Power &
Light, Minnesota Power, and Mississippi Power, that provide for
the delivery of approximately 1813 million tons through 2005.
Coal Production. Coal production began at the Decker, Black
Butte, and Walnut Creek mines in 1972, 1979, and 1989,
respectively. KCP's share of coal mined in 19961997 at the Decker,
Black Butte, and Walnut Creek mines was 5.5, 0.9,5.9, 1.0, and 1.0.9 million
tons, respectively.
Revenue. KCP's total revenue in 19961997 was $234$222 million.
Revenue attributable to the Decker, Black Butte, and Walnut Creek
entities was $113$114 million, $101$89 million, and $18$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 19961997 was $37$32 million.
Backlog. At the end of 1996,1997, the backlog of coal to be sold
under KCP's long-term contracts was approximately $1.6$1.4 billion,
based on December 19961997 market prices. Of this amount, $206$213
million is expected to be sold in 1997.1998.
Reserves. At the end of 1996,1997, KCP's share of assigned coal
reserves at Decker, Black Butte, and Walnut Creek was 118, 40,111, 39,
and 3231 million tons, respectively. Of these amounts, KCP's share
of the committed reserves of Decker, Black Butte, and Walnut
Creek was 51.9, 3.6,46, 2, and 23.823 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 1995,1996, 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
sulphur 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 19961997 was $5$3.6 million. KCP's share of
accrued estimated reclamation costs was $99$100 million at the end
of 1996.1997. The Company does not expect to make significant capital
expenditures for environmental compliance in 1997.1998. 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.
CALENERGY COMPANY, INC.
CalEnergy develops, owns, and operates electric power
production facilities, particularly those using geothermal
resources, in the United States, the Philippines, and Indonesia.
In December 1996, CalEnergy and KDGLevel 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. CalEnergy common stock is traded on the New
York, Pacific, and London Stock Exchanges. In 1996,1997, CalEnergy
had revenue of $576 million$2.3 billion and a net incomeloss of $92$84 million. At the
end of 1996,1997, CalEnergy had total assets of $5.7$7.5 billion, debt of
$3.0$3.5 billion, and stockholders' equity of $881 million.
Kiewit's Share.$1.4 billion.
At the end of 1996, KDG1997, Level 3 owned approximately 30%24% of the
common stock of CalEnergy. Under generally accepted accounting
principles, an investor owning between 20% and 50% of a company's
equity, generally uses the equity method. Under the equity
method, KDGLevel 3 reports its proportionate share of CalEnergy's
earnings, even though it has received no dividends from
CalEnergy. KDGLevel 3 keeps track of the carrying value of its
CalEnergy investment. "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. KDG purchased most of its CalEnergy shares
at a premium over the book value of CalEnergy's underlying net
assets. This premium will be amortized over a period of 20
years. The current carrying value of KDG's CalEnergy shares is
$292 million. KDG owns 19.2 million CalEnergy common shares,
which had a market value of $644 million, based on the 1996 year-
end price of $33.50 per share on the New York Stock Exchange.
During 1996, KDG converted $66 million of CalEnergy
debentures into 3.6 million CalEnergy shares and purchased 4.8
million shares for $53 million (by exercising 1.5 million options
at $9 per share and 3.3 million options at $12 per share). KDG
retains one million options to purchase CalEnergy stock at
$11.625 per share. These options expire in 2001.
Acquisitions. In the last two years, CalEnergy has made
three significant acquisitions, in addition to the recent $1.3
billion acquisition of Northern Electric plc (described below).
In January 1995, CalEnergy acquired Magma Power Company
("Magma"), a publicly-traded United States independent power
producer, for approximately $958 million. The Magma acquisition,
combined with CalEnergy's previously existing assets, made
CalEnergy the largest independent geothermal power producer in
the world today (based on CalEnergy's estimate of electric
generating capacity in operation and under construction). In
April 1996, CalEnergy completed the buy-out for approximately $70
million of its partner's interests in four electric generating
plants in Southern California. In August 1996, CalEnergy
acquired Falcon Seaboard Resources, Inc. for approximately $226
million, thereby acquiring significant ownership in three natural
gas-fired electric cogeneration facilities located in New York,
Texas and Pennsylvania and a related gas transmission pipeline.
Power Generation Projects. Power generation facilities are
measured in terms of megawatts (MW) of net electric generating
capacity. Most of CalEnergy's facilities are co-owned and
CalEnergy's fractional ownership interest can be expressed in
terms of MWs. CalEnergy has projects in three stages:
operational (and managed by CalEnergy), under construction (and
financed), and developmental (with executed and awarded power
sales contracts). CalEnergy owns (I) 1,309 MW in 20 operating
facilities with 3,201 MW of capacity, (ii) 314 MW in 5 projects
under construction, with 564 MW of capacity, and (iii) 573 MW in
6 development stage projects, with 1,260 MW of capacity. KDG has
a separate ownership interest in some of the international
projects. KDG owns (i) 87 MW in the projects in operation, (ii)
159 MW in the projects under construction, and (iii) 458 MW in
the Indonesian development stage projects.
Operations -- U.S. Geothermal Plants. Most of CalEnergy's
operating revenues come from geothermal power plants in Southern
California, three in the Coso area and eight in the Imperial
Valley. CalEnergy has ownership interests of 46%, 48%, and 50% in
the three Coso plants. Following the 1996 acquisition of the
remaining 50% interests in four Imperial Valley projects for $70
million, CalEnergy is now the full owner of the eight Imperial
Valley projects. Operations of the Salton Sea Unit IV in the
Imperial Valley began in 1996, following completion of
construction.
These twelve geothermal plants have certain common features.
CalEnergy is the operator of each plant. Each plant has a 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 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 last plant. CalEnergy 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 CalEnergy's
contracts. For 1996, the time period-weighted average of
Edison's avoided cost of energy was 2.5 cents per kWh, compared
to CalEnergy's comparable selling price for energy of 11.3 cents
per kWh. Thus, the revenue generated by each of CalEnergy's
facilities is likely to decline significantly after the
expiration of the fixed-price period.
CalEnergy also owns and operates two geothermal operating
plants, one each in Utah and Nevada.
Operations -- U.S. Gas-Fired Plants. In August 1996
CalEnergy completed the acquisition of Falcon Seaboard Resources,
Inc., including its ownership interest in three operating gas-
fired cogeneration plants located in New York, Texas and
Pennsylvania and a related natural gas pipeline, also located in
New York, for a cash purchase price of $226 million. The three
cogeneration facilities total 520 MW in capacity and sell power
under long-term power purchase agreements. CalEnergy also owns
and operates a 50 MW gas-fired cogeneration facility in Yuma,
Arizona.
Operations -- Philippines Geothermal.
Upper Mahiao.
Construction of the Upper Mahiao Project was completed in
June 1996. The project operating company is receiving full
capacity payments under the "take or pay" provisions of the
contract pending completion by the national power company of a
full transmission line. The plant is presently delivering up to
40 MW over interim transmission lines.
In 1994, construction began on the Upper Mahiao Project, a
119 gross MW geothermal project on the Philippine island of
Leyte. The project was built by and is owned and operated by CE
Cebu Geothermal Power Company, Inc. ("CE Cebu"), a Philippine
corporation owned by CalEnergy. The project will sell 100% of
its capacity on a "take-or-pay" basis to PNOC-Energy Development
Corporation ("PNOC"), which will in turn sell the power to the
National Power Corporation of the Philippines ("NPC"), for
distribution to the island of Cebu, located 40 miles west of
Leyte. NPC is the government-owned and controlled corporation
that is the primary supplier of electricity in the Philippines.
The project was started by Magma, prior to its acquisition by
CalEnergy. KDG has no separate ownership interest in this
project and KCG was not involved in construction.
The total project cost was $218 million. A consortium of
international banks provided approximately $162 million in
project-financed construction loans, supported by political risk
insurance from the Export-Import Bank of the United States ("Ex-
Im Bank"). The construction loan is expected to be converted to
a term loan promptly after NPC completes the full capacity
transmission line, which is expected to occur in 1997. The
largest portion of the term loan for the project will also be
provided by Ex-Im Bank. CalEnergy's equity contribution to the
project is $56 million. Subject to the pledge of the project
company's stock to the lenders, CalEnergy has arranged for
political risk insurance of its equity investment through
Overseas Private Investment Corporation ("OPIC"). The financing
is collateralized by all the assets of the project.
Under the terms of an energy conversion agreement (the "ECA"),
executed in September 1993, CE Cebu will own and operate the
project for ten years, after which the facility will be transferred
to PNOC at no cost. The project is located on land provided by
PNOC at no cost. CE Cebu will take geothermal steam and fluid,
also provided by PNOC at no cost, and convert its thermal energy
into electrical energy to be sold to PNOC on a "take-or-pay" basis.
Specifically, PNOC will be obligated to pay for the electric
capacity, even if PNOC is unable to accept delivery of the
electricity. PNOC will pay to CE Cebu a capacity fee (which, at
the plant's design capacity, is approximately 95% of total contract
revenues) and an energy fee based on the electricity actually
delivered to PNOC (approximately 5% of total contract revenues).
The capacity fee serves to recover the capital costs of the
project, to recover fixed operating costs, and to cover return on
investment. The energy fee is designed to cover all variable
operating and maintenance costs of the power plant. Payments under
the 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. Significant portions of the
fees will be indexed to U.S. and Philippine inflation rates.
PNOC's obligations are supported by the Philippine government
through a performance undertaking.
Malitbog.
In 1994, CalEnergy started construction of the Malitbog
Project, a 216 net MW geothermal project consisting of three 72 net
MW units, located on the island of Leyte. The project is being
built, and will be owned and operated by Visayas Geothermal Power
Company ("VGPC"), which is wholly owned by CalEnergy. Unit I of
the Malitbog facility was "deemed complete" by PNOC in July 1996,
meaning that construction of the first 72 net MW unit was completed
on time but the required transmission line was not completed and
provided to VGPC. During deemed completion, PNOC is required to
pay, and in fact has been paying, capacity fees under the "take or
pay" provisions of the contract. VGPC is selling 100% of its
capacity on substantially the same basis as described above for the
Upper Mahiao Project to PNOC, which will in turn sell the power to
NPC. This project was started by Magma, prior to its acquisition
by CalEnergy. KDG has no separate ownership interest in this
project and KCG has not participated in construction.
The Malitbog Project has a total project cost of approximately
$280 million, including interest during construction and project
contingency costs. A consortium of international banks and OPIC
have provided a total of $210 million of construction and term loan
facilities, the $135 million international bank portion of which is
supported by political risk insurance from OPIC. CalEnergy's
equity contribution to VGPC was $70 million. CalEnergy's equity
participation is covered by political risk insurance from OPIC.
Units II and III of the Malitbog Project are being constructed
by Sumitomo Corporation, of Japan, pursuant to a fixed-price, date-
certain, turnkey supply and construction contract. Commercial
operation of Units II and III are scheduled to commence in July
1997. The Malitbog ECA is similar to the Upper Mahiao ECA
described above. All facilities (Units I, II, and III) will be
transferred to PNOC ten years after commercial operations begin on
Unit III.
Operations -- England. See discussion under heading
"International Energy -- Northern Electric Acquisition" below.
Construction -- Philippines and Indonesia. See discussion of
the Mahanagdong, Casecnan, and Dieng projects under the heading
"International Energy" below.
Geothermal power production process. Until 1996, almost all
of CalEnergy's projects were geothermal projects. The following is
a summary of the 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 a
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 presently enjoy
federal tax benefits and favorable utility regulatory treatment in
the United States.
INTERNATIONAL ENERGY
KDG is an investor with CalEnergy in power projects in the
Philippines and Indonesia and in an electric utility company in
England. In each case, KDG has a direct equity interest and also
benefits indirectly as a 30% stockholder in CalEnergy.
KDG and CalEnergy have a joint venture agreement regarding
international energy projects. If both KDG and CalEnergy agree to
participate in a project, they will share equally development costs
and equity required for financing the project. On a project by
project basis, CalEnergy will be the development manager, managing
partner and/or project operator. The agreement expires in 2001.
Mahanagdong.
In 1994 construction began on the Mahanagdong Project, a 165
gross MW geothermal project on the Philippine island of Leyte. The
project will be built, owned and operated by CE Luzon Geothermal
Power Company, Inc. ("CE Luzon"), a Philippine corporation that
during construction is owned 50% by CalEnergy and 50% by KDG.
After construction, another industrial company has an option to buy
up to a 10% financial interest in CE Luzon. The project will sell
100% of its capacity on a "take-or-pay" basis to PNOC, which will
in turn sell the power to NPC, for distribution to the island of
Leyte.
The total project cost is $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
OPIC, Ex-Im Bank, and a consortium of international banks, and
approximately $80 million in equity contributions. KDG and
CalEnergy must make equity contributions of $40 million each. KDG
and CalEnergy have arranged for political risk insurance on their
equity investments through OPIC. Political risk insurance from Ex-
Im Bank has been obtained for the commercial lenders. The
financing is collateralized by all of the assets of the project.
The project is being constructed by KCG under fixed-price, date-
certain, turnkey supply and construction contracts. Completion of
construction is expected during 1997.
The terms of an energy conversion agreement (the "ECA") are
substantially similar to those of the Upper Mahiao ECA, described
above. The ECA provides for an approximately three-year
construction period and a ten-year operations period. At the end
of the operations period, the facility will be transferred to PNOC
at no cost. All of PNOC's obligations under the Mahanagdong ECA
are supported by the Philippine government through a performance
undertaking. The capacity fees are expected to be approximately
97% of total revenues at the design capacity levels and the energy
fees are expected to be approximately 3% of total revenues.
Casecnan.
In November 1995, CE Casecnan Water and Energy Company, Inc.,
a Philippine corporation ("CE Casecnan") started construction on a
combined irrigation and 150 gross MW hydroelectric power generation
project (the "Casecnan Project") located in the central part of the
Philippine island of Luzon. The 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 plant with 150 MW capacity. A two mile long tailrace tunnel
will deliver water from the water tunnel and the new powerhouse to
the Pantabangan Reservoir.
The project is being developed under a project agreement between CE
Casecnan and the National Irrigation Administration ("NIA").
CalEnergy and KDG have minimum and maximum ownership 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.
The total project cost is $495 million, funded by bonds issued
by CE Casecnan of $371 million and equity contributions of $62
million each from KDG and CalEnergy. KDG also holds $20 million of
the project bonds. Under the project agreement, CE Casecnan
developed, financed, and is constructing the project over an
originally estimated four-year construction period, and will
thereafter own and operate the project for a 20-year operations
period. During the operating period, NIA is obligated to accept
all deliveries of water and energy, and 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. NIA will sell the electric energy it purchases
to NPC. 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 20-year period, the project will be
transferred to NIA and NPC for no additional consideration on an
"as is" basis. The Philippine government has provided a
performance undertaking under which NIA's obligations under the
project agreement are guaranteed by the full faith and credit of
the Philippine government.
The Casecnan project is being constructed on a joint and
several basis by Hanbo Corporation and Hanbo Engineering &
Construction Co. Ltd. ("HECC"), (together "Contractor") both of which
are South Korean corporations and are under common ownership and control.
The contractors' obligations under the construction contract are
guaranteed by Hanbo Iron & Steel Company, Ltd. ("Hanbo Steel"), a
large South Korean steel company. In addition, the contractor's
obligations are secured by an unconditional, irrevocable, standby
letter of credit issued by Korea First Bank ("KFB") in the
approximate amount of $118 million. In JanuaryDecember 27, 1997 Hanbo
Corporation, HECC and Hanbo Steel each filed to seek bankruptcy
protection in Korea. KFB's credit rating has been
downgraded because of the substantial loans it has made to Hanbo
Steel. Casecnan has recently received confirmation from HECC that
it intends to fully perform its obligations under the contract.
However, although HECC is currently performing the work, there
can be no assurance that it will remain able to perform fully its
obligations under the contract.
KFB has recently reconfirmed to Casecnan that it will honor its
obligations under the letter of credit. Casecnan is presently reviewing
its rights, obligations and potential remedies in respect of the recent
developments regarding the Contractor and KFB and is presently unable
to speculate as to the ultimate effect of such developments on
the Casecnan project.
If the Contractor were to materially fail to perform its
obligations under the contract and if KFB were to fail to honor its
obligations under the letter of credit, such actions could have a
material adverse effect on the Casecnan project. However, based on
information currently available, KDG does not believe its investment
is impaired.
Dieng.
In December 1994, Himpurnia California Energy Ltd. ("HCE")
executed a joint operation contract (the "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 "ESC") with
both Pertamina and PLN, the Indonesian national electric utility.
HCE and an Indonesian partner formed a joint venture to develop the
Dieng Project. CalEnergy, KDG, and the Indonesian partner have
47%, 47%, and 6% interests, respectively, in the Dieng Project.
Pursuant to the JOC and ESC, Pertamina has granted to HCE the
geothermal field and wells and other facilities presently located
thereon and the HCE will build, own, and operate the production
units. HCE will accept the field operation responsibility for
developing and supplying the geothermal steam and fluids required
to operate the plants. The 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 JOC and (ii) 30 years following the start of
commercial generation of the final unit completed. Upon the
expiration of the JOC, all facilities will be transferred to
Pertamina at no cost. HCE is required to pay Pertamina a
production allowance equal to three percent of HCE'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 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 JOC. The
price paid for electricity includes a base energy price for
electricity 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 by KCG and CalEnergy of an initial 55 MW unit
began in 1996 and completion is scheduled for late 1997. The total
project cost of Dieng Unit I is $160 million, including equity
contributed by KDG and CalEnergy of $20 million each. Construction
loan financing of $120 million was closed in October 1996; $86
million from Credit Suisse and $34 million by an entity owned
equally by KDG and CalEnergy. Of the latter amount, KDG and
CalEnergy furnished $5 million each in 1996 and expect to furnish
additional funds in 1997. The Dieng field has been explored
domestically for over 20 years and CalEnergy has been active in the
area for more than five years. Pertamina has drilled a total of 27
wells to date. CalEnergy has a significant amount of data, which
it believes to be reliable as to the production capacity of the
field. However, a number of significant steps, both financial and
operational, must be completed before the Dieng Project can proceed
further. These steps, none of which can be assured, include
completing the drilling of wells and the constructing of the plant
for Dieng Unit I and obtaining required regulatory permits and
approvals, completing the well testing, entering into a
construction agreement and other project contracts, and arranging
financing for the other units at Dieng. Up to three additional
units at Dieng are planned, for which KDG has incurred $16 million
in development costs. 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. CalEnergy and KDG are co-developing a geothermal
power plant at the Patuha geothermal field in Java, 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 is estimated to be $1 billion. The Patuha Project remains
subject to a number of significant uncertainties, as described
above in connection with the Dieng Project, and there can be no
assurance that the Patuha Project will proceed or reach commercial
operation.
Bali. CalEnergy and KDG 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. CalEnergy presently intends to begin
well testing and exploration in early 1997 and expects to commence
construction of the first unit in 1998. CalEnergy presently
intends to develop the Bali Project and other possible projects in
Indonesia using a structure similar to that contemplated for the
Dieng Project. The Bali Project remains subject to a number of
significant uncertainties, as described above for the Dieng
Project, and there can be no assurance that the Bali Project will
proceed or reach commercial operation. KDG has already incurred
$17 million in development costs for the Patuha and Bali projects.
Northern Electric Acquisition.
In the fall of 1996, CalEnergy and KDG took the first steps
toward expanding their international power businesses beyond the
power generation business through a tender offer for Northern
Electric plc by CE Electric UK plc, which is 70% owned by
CalEnergy and 30% owned by KDG. In December, CE Electric
acquired majority ownership of Northern Electric. The total
amount expected to be paid for all Northern Electric's shares is
approximately $1.32 billion. CE Electric expects to acquire all
the shares by the end of March 1997. As of March 1997, CalEnergy
and KDG have made equity contributions to CE Electric of $410
million and $176 million, respectively. The remaining funds
necessary to complete the acquisition will be provided under a
term loan and revolving credit facility.
Northern Electric is one of the twelve regional electricity
companies created by the privatization of the electricity
industry in the United Kingdom in 1990. Since the regional
electric companies were privatized, all but one has been acquired
by companies, primarily from the United States, attracted both by
the regional electricity business and the strategic opportunity
to participate in a deregulated electricity market in advance of
the coming deregulation of the electricity distribution markets
in the United States and worldwide. Northern Electric is
primarily engaged in the distribution and supply of electricity
in its authorized franchise area in northeast England. The area
covers 5,560 square miles with a population of 3.2 million
people. The head office is at Newcastle upon Tyne. For its
fiscal year ended March 1996, Northern had net assets of $432
million (pound 276 million) and operating revenue of $1.4 billion
(pound 902 million).
As noted above, CalEnergy and KDG expect to learn much
through Northern Electric about deregulated power markets.
Northern Electric provides expertise in supply, distribution, and
marketing in such markets. These capabilities may provide
CalEnergy and KDG with an early competitive advantage in
preparing for electricity deregulation in the United States and
foreign markets. The acquisition further diversifies CalEnergy
and KDG's energy businesses in terms of location, type, risks,
and earnings streams.
C-TEC CORPORATION
C-TEC is a diversified international telecommunications and
high technology company with interests in local telephone, long-
distance telephone, cable television, and engineering and
communications services. C-TEC is a Pennsylvania corporation and
has its headquarters in Princeton, New Jersey. 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. In 1996 C-
TEC had revenue of $367 million, EBITDA (earnings before,
interest, taxes, depreciation and amortization) of $134 million,
and net income of $8 million. At year-end 1996, C-TEC had total
assets of $917 million, long-term debt of $205 million, and common
stockholders' equity of $377 million. The five operating divisions
of C-TEC and their 1996 revenues are: C-TEC Cable Systems ($160
million), Commonwealth Telephone Company ($139 million),
Commonwealth Long Distance ($35 million), Commonwealth
Communications ($29 million), and RCN Telecom Services ($4
million).
Kiewit's Share. In 1993 KDG purchased a controlling interest
in C-TEC. Through a subsidiary, KDG owns 42% of the outstanding
shares of C-TEC common stock and 66% 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. KDG
thus owns 48% of the outstanding shares, but is entitled to 62% of
the available votes. Since KDG has voting control, KDG must
consolidate C-TEC within its financial statements. On KDG's
balance sheet, each asset and liability of C-TEC is added to the
similar items for the rest of KDG. The 52% of C-TEC that it does
not own is subtracted as a single item ("minority interest") on
KDG's balance sheet. KDG keeps track of the carrying value of
Level 3's CalEnergy shares was $337 million. On January 2, 1998,
Level 3 sold its C-TEC investment. "Carrying value" is the purchase price of shares
plus the investor's proportionate share of the investee's earnings
less the amortized portion of goodwill less any dividends paid.
KDG's investmententire interest in C-TEC has a carrying value of $355 million.
The 1996 year-end public market value of KDG's 13.3 million shares
of C-TEC (at $23 5/8 per share of commonCalEnergy along with its
interests in several development projects and Class B stock) was
$315 million.
C-TEC Cable Systems. C-TEC Cable Systems is a cable
television operator with cable television systems located in New
York, New Jersey, Michigan, and Pennsylvania. The company owns and
operates cable television systems serving 338,000 customers and is
the majority owner and manager of cable television systems with an
additional 40,000 customers, ranking it among the top 25 multiple
system operators in the United States. The company must
periodically seek renewal of franchise agreements from local
government authorities. To date, all of Cable Systems' franchises
have been renewed or extended, generally at or priorNorthern Electric
plc. to their
stated expirations and on acceptable terms. CompetitionCalEnergy for the
Cable Systems' 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.
Commonwealth Telephone Company. 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 240,000 main access
lines, an increase of 5.7% over 1995. 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. The ten largest business customers combined
account for only 2.3% of revenue, with the largest single customer
accounting for only about 0.5%. The telephone company sought and
was granted status as a rural telephone company with respect to the
provisions of the Telecommunications Act of 1996. This status will
afford limited protection to the company's primarily rural customer
base from a rapid transition to local exchange competition. In
January 1997, the Pennsylvania Public Telephone Commission approved
the company's "Petition for Alternative Regulation and Network
Modernization Plan," which will allow the company to move from
traditional rate of return regulation to a price cap formula in
return for a commitment to network modernization.
Commonwealth Long Distance. Commonwealth Long Distance
operates principally in Pennsylvania. The company began operations
in 1990 by servicing the local service area of the Commonwealth
Telephone Company. In 1992 and 1993, sales offices were opened in
other areas of Pennsylvania. During 1996, the company statewide
certification and is also certified now in 47 states. The company
provides switched services, is a reseller of several types of
services, and employs the networks of several long distance
providers on a wholesale basis.
Commonwealth Communications. 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. Commonwealth
Communications also provides cable and data network engineering and
project management of network construction. This group is being
combined with Commonwealth Telephone Company and will focus on the
Eastern Pennsylvania market.
RCN Telecom Services. RCN Telecom Services provides local and
long distance telephone service, video programming and internet
access to households located in New York City and Boston. RCN
currently has 417 signed building access agreements which represent
82,733 households located in high density housing such as co-ops,
condominiums and apartment complexes in the Boston and New York
markets. RCN has 36,545 video programming customers, 2,968
telephone customers and 58 Internet customers in these two markets.
RCN also has 4,474 video programming customers at the University of
Delaware.
RCN's New York system operates two cable programming delivery
systems - one that is fiber-based and one that uses a microwave
network acquired from Liberty Cable in New York in March 1996. The
fiber-based customers are served by facilities of MFS. Telephone
service in New York is provisioned on the fiber-based network and
through the resale of the NYNEX network.
RCN's Boston system operates primarily on a fiber-based network
obtained from MFS and provides both telephone and cable programming
over this network. In December, RCN signed an agreement forming a
joint venture with Boston Edison under which the joint venture will
use and expand upon Boston Edison's 200 mile fiber optic network to
reach a market of approximately 650,000 customers throughout the
Greater Boston area. The joint venture will offer bundled
telecommunications services.
RCN New York and the RCN Joint Venture with Boston Edison were
granted Open Video Systems certification from the Federal
Communications Commission ("FCC") in February 1997. This
certification allows RCN to deliver video services in New York City
and Boston based on the Telecommunications Act of 1996. Prior to
this certification, RCN offered video services using MFS' network.
RCN's telephone service is regulated by the States of New York and
Massachusetts and the FCC. In New York, RCN is certified to
provide competitive local exchange services and to resell long
distance services. In Massachusetts, RCN is registered to offer
local exchange carrier services and to resell long distance. RCN
also has authority from the FCC to offer international service.
RCN is a competitor to the incumbent telephone and cable
television companies, primarily NYNEX, Time Warner Cable and
Cablevision Systems.
C-TEC International. In January 1995, 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.
Regulation. The Federal Telecommunications Act of 1996
established a framework for deregulation of the communications
industry. The Act should stimulate growth and competition in
virtually every component of the communications industry. The FCC
and state regulators must work out the specific implementation
process. Companies are permitted to combine historically separate
lines of business into one, and provide combined services in
markets of their own choice. In addition, there will be relief
from the earnings restrictions and price controls that have
governed the local telephone business for many years and were
imposed on the cable industry in 1992 by the Federal Cable
Television Consumer Protection and Competition Act of 1992 (the
"1992 Act"). The rate regulation provisions of the 1992 Act have
not had a materially adverse effect on C-TEC's financial condition
and results of operations. With the passage of the 1996 Act, all
cable systems rates ore deregulated as effective competition enters
the franchise area, or by March 31, 1999, whichever comes sooner.
C-TEC anticipates that certain provisions of the 1992 Act that do
not relate to rate regulation, such as the provisions relating to
retransmission consent and customer service standards, will reduce
future operating margins.
Restructuring Plans. C-TEC pursued a restructuring plan in
1996 that would have involved the sale of its cable television
businesses to a third party, but abandoned that plan when it
could not negotiate an attractive transaction due to the
depressed market for cable TV properties. C-TEC has instead
announced a plan in February 1997 to divide itself into three
separate publicly held companies:
CTCo, containing the Commonwealth Telephone Company and
Commonwealth Communications Inc.;
C-TEC Michigan, containing the cable television operations in
Michigan; and
RCN Corporation, which will consist of RCN Telecom Services;
cable television operations in New York, New Jersey, and
Pennsylvania; and C-TEC International.
C-TEC believes that investors and the market are more likely to
understand and properly value three separate businesses than the
current combined company. The plan is contingent upon receiving
a favorable IRS ruling on the tax-free nature of the spin-offs.
If the reorganization and spin-offs occur, KDG will own less than
50% of the outstanding shares voting rights of each of the three
companies, and will account for each company using the equity
method of accounting. (See Note 20 to the Company's consolidated
financial statements for balance sheets and earnings statements
of the Company presented as if equity method accounting for the
Company's investment in C-TEC had been used in prior years.)$1.16 billion.
OTHER BUSINESSES
PKS INFORMATION SERVICES, INC.
PKS Information Services, Inc. ("PKSIS"), provides computer
operations outsourcing and systems integration services to
customers on an international 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 signed six new computer
outsourcing contracts, and three contract extensions with existing
customers, during 1996. The systems integration business was
awarded several new contracts to develop and support customers'
mainframe and client/server applications, and to convert customers'
source code to make it century date compliant.
PKSIS opened a software engineering center at the National
Technological Park of Limerick, Ireland to undertake large scale
development projects, system conversions, and code restructuring
and software re-engineering. PKSIS also purchased LexiBridge
Corporation of Shelton, Connecticut. LexiBridge's combination of
workbench tools and methodology provides a complete strategy for
converting mainframe-based application systems to client/server
architecture, while ensuring year 2000 compliance. In 1996, 91% of
PKSIS' revenue was from external customers and the remainder was
from affiliates.
SR91 TOLLROAD.
KDGTollroad. Level 3 has invested $12 million for a 65%
equity interest inand $4.3 million loan to California Private
Transportation Company, L.P. which developed, financed, and
currently operates the 91 Express Lanes, a ten mile, four lane
tollroad in Orange 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 in December 1995 and achieved
operating break-even in 1996. Over 80,000Approximately 100,000 customers
have registered to use the tollroad and weekday volumes typically
exceed 26,00029,000 vehicles per weekday.
UNITED INFRASTRUCTURE COMPANY.day.
United Infrastructure Company. UIC iswas an equal partnership
between Kiewit Infrastructure Corp., a wholly owned subsidiary of
KDG,Level 3, and Bechtel Infrastructure Enterprises, Inc.
("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. U.S. Water has acquiredAs part of the concessionstrategic decision to operate facilities at North Brunswick, New Jersey,concentrate
on its information services business and is actively pursuing similar concessions nationwide. KDG has
invested $8 million throughthe Expansion Plan, on
December 31, 1997 Level 3 sold its entire interest in UIC in U.S. Water. KDG has also
invested $3 million through UIC in Airport Group International
Inc. to
develop airport privatization projects.
KIEWIT MUTUAL FUND.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 six 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
Investment Trust is Kiewit Investment Management Corp., a
subsidiary of KDGLevel 3 (60%) and KCG (40%). At the end of 1996,1997,
Kiewit Mutual Fund had net assets of $883 million.
OTHER$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, KDGLevel 3 purchased an office
building in Aurora, Colorado for $21 million. By investing in
real estate, KDGLevel 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. KDGLevel 3 may make
additional real estate investments in 19971998 with a view toward
deferring the balance of that taxable gain. KDGLevel 3 has also
made investments in several development-stage companies, but does
not expect earnings from these companies in 1997.1998.
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 1996,1997, the Company and its
majority-owned subsidiaries employed approximately 14,00017,700 people
--
11,200- - 16,200 in construction and materials operations, 520500 by coal
mining companies, 1,900 at C-TEC, 340800 at PKSIS, and 30200 in corporate and Level 3
positions. This does not include the 4,400 employees of CalEnergy
and Northern Electric plc.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. The
propertiesLevel 3 has announced that it has acquired 46 acres in
the Northwest corner of the energy generationInterlocken office park and distribution segment are
described as partwill
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 general business descriptionmajority of the
CalEnergy and International Energy projects. The properties of the
telecommunications segment includeits employees (other than those of
C-TEC's Commonwealth
Telephone Company (switching centers, cables and wires connecting
the telephone company toPKSIS) while its customers, and other telephone
instruments and equipment), C-TEC Cable Systems (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.
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 1996.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
The table below shows information as of March 15, 19971998 about
each director and executive officer of the Company, including his
business experience during the past five years (1992-1997). 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 8, 19967, 1997 to serve until his successor is elected and
qualified or until his death, resignation or removal.
PKS Director
Name Business Experience (1992-1997) Age PKS Director Since
Walter Scott, Jr.* Chairman of the Board and 66 09/27/79- Chairman
President, PKS 65 1964(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, PKS 71 1968(for more 72 01/11/68
than the past five years)
Robert E. JulianB. Daugherty Director (and formerly 75 01/08/86
Chairman PKSIS (since 1995) 57 1987of the Board and
Chief Executive Vice President; PKS
(1992-1995)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 FinancialExecutive
Officer PKS (1992-1995)
Treasurer, PKS (1992-1993)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, 55 01/07/87
PKS 54 1987(for more than the
past five years); Chairman
(sincesince 1993) and CEO (since
1992), KCG; also a director
of KCGConAgra, Inc. and Valmont
Industries, Inc.
Richard GearyGeary* Executive Vice President, 62 04/29/88
KCG; 62 1988President of Kiewit
Pacific Co., a KCG
construction subsidiary
(for more than the past five years)
George B. Toll, Jr.* Executive Vice President, 61 06/05/93
KCG (since 1994); Vice
President, Kiewit
Pacific Co.
Leonard W. Kearney Vice, a KCG
construction subsidiary
(1992-1994)
James Q. Crowe* President KCG; 56 1989
President, Kiewit Western Co.
President, Kiewit Constructionand 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 InaCom
Communications, Inc.
Richard R. Jaros Executive Vice President PKS
(since 1993) 45 199346 06/05/93
(1993-1997) and Chief
Financial Officer PKS
(since 1995)(1995-1997),
PKS; President KDG
(since 1996)of Level 3
(1996-1997); President and
COO of CECalEnergy (1992-1993);
also a director of CalEnergy,
Commonwealth Telephone
Enterprises, Inc., RCN
Corporation and WorldCom, Inc.
Richard W. Colf* Vice President, PKS (1992)
George B. Toll, Jr.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 1994) 60 19931996); Chairman
(since 1996), President
(1992-1996) and Sr. Vice
President (1992) of Kiewit
Mining Group Inc.; also a
director of Kinross Gold
Corporation
Tait P. Johnson* 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., a KCG
construction subsidiary
Allan K. Kirkwood* Senior Vice President, 54 06/07/97
Kiewit Pacific Co.
(1992-1994)
Richard W. Colf Vice President, Kiewit Pacific Co. 53 1994, 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 Vice President, KCG
(since 1996) 43 1994
Chairman, KMG (since 1996)
President, KMG (1992-1996)
Sr. Vice President, KMG (1992)
Tait P.Committee.
The Audit Committee members are Messrs. Johnson, President (1992-1996)Kirkwood
and 47 1995
sole Director (since 1992)Kiewit. The functions of Gilbert Southern Corp.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 shares;stock; the last Class B sharesstock were converted
into Class D sharesstock on January 1, 1997. Class 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 C sharesstock 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.Level 3 and its subsidiaries, plus
one-half of the book value, on a stand-alone basis, of the parent
company, Peter Kiewit Sons', Inc.PKS. The formula price of the Class C sharesstock is based on
the book value of Kiewitthe Construction Group Inc. and its subsidiaries,
plus one-half of the book value of the unconsolidated parent
company. A significant element of the Class C formula price is
the subtraction of the book value of property, plant, and
equipment used in construction activities ($106122 million in 1996)1997).
Conversion. Under the Company'sPKS Certificate, of Incorporation, 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.
D Stock Listing. In October 1996, the Company's Board of
Directors directed management to pursue a listing of Class D stock
on a major securities exchange or the NASDAQ National Market as
soon as practical during 1998. The Board does not foresee
circumstances under which the Company would list the Class D stock
prior to 1998. The Board believes that a listing will provide the
Company with a capital structure more suitable for the further
development of KDG's business plan. It would also provide
liquidity for Class D shareholders without impairing the Company's
capital base.
The Board's action does not ensure that a listing of Class D
stock will occur in 1998, or at any time. The Board could delay or
abandon plans to list the stock if it determined that such action
would be in the best interests of all the Company's shareholders.
In addition, the Company's ability to list Class D stock will be
subject to factors beyond its control, including the laws,
regulations, and listing eligibility criteria in effect at the time
a listing is sought, as well as stock market conditions at the
time. Furthermore, the Board might decide to couple the listing of
Class D stock with a public offering of newly-issued Class D shares
in order to raise additional capital for KDG. Such an offering
could delay or alter the listing plan.
Dividends and Prices. During 19951996 and 19961997 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. 21, 1994 Jan. 5, 1995 $0.45 C Dec. 31, 1994 $25.55
Apr. 28, 1994 May 1, 1995 0.45 C May 1, 1995 25.10
Oct. 27, 1995 Jan. 5, 1996 0.60$0.60 C Dec. 30, 1995 32.40$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. 28, 1996 40.70
DApr. 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 54.2510.85*
D Dec. 27, 1997 11.65*
* MFS Spin-off (see Note 6 toAll stock prices for the Company's consolidated
financial statements).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 sharesstock of about 15% to 20% of the prior year's
ordinary earnings of the Construction & Mining 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, the PKS Board declared a special dividend of
$0.50 per share of Class D sharestock in both October 1995 and 1996.
A dividend of 4 shares of Class D Stock for each share of
Class D Stock was effected on December 26, 1997.
Stockholders. On March 15, 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 0 0- -
C 1,120 9,262,707996 7,681,020
D 1,846 24,483,7862,121 146,943,752
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., the
Kiewit Construction & Mining Group ("B&CC Stock") and the Kiewit
Diversified Group ("D Stock") appear below and on the next threetwo
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
Results of Operations:
Revenue (1) $ 2,904332 $ 2,867652 $ 2,700580 $ 2,050537 $ 1,918267
Earnings from continuing
operations 83 104 126 28 174
Net earnings (2) 248 221 244 110 261 162
Net earnings (2) 221 244 110 261 181
Financial Position:
Total assets (1) 3,548 3,451 4,504 3,634 2,5492,779 3,066 2,945 4,048 3,236
Current portion of
long-term debt (1) 3 57 42 33 15 340 30 11
Long-term debt, less
current portion (1) 332 370 908 462 30137 320 361 899 452
Stockholders' equity (3) 2,230 1,819 1,607 1,736 1,671
1,458
(1) In September 1995, the Company dividended its investment in MFS to
Class D shareholders. MFS' results of operations have been classified
as a single line item on the statements of earnings. MFS is
consolidated in the 1992-1994 balance sheets. 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. MFS' results of operations have
been classified as a single line item on the statements of
earnings. MFS is consolidated in the 1993 and 1994 balance
sheets.
In January 1994, 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
28, 199627, 1997 was $1.7$2.1 billion.
KIEWIT CONSTRUCTION & MINING GROUP
SELECTED FINANCIAL DATA
The following selected financial data for each of the years in
the period 19921993 to 19961997 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
Results of Operations:
Revenue $ 2,2862,764 $ 2,303 $ 2,330 $ 2,175 $ 1,783
$ 1,675
Net earnings 155 108 104 77 80 82
Per Common Share:
Net earnings
Basic 15.99 10.13 7.78 4.92 4.63
4.48Diluted 15.35 9.76 7.62 4.86 4.59
Dividends (1) 1.50 1.30 1.05 0.90 0.70
0.70
Stock price (2) 51.20 40.70 32.40 25.55 22.35
18.70
Book value 64.38 51.02 42.90 31.39 27.43
23.31
Financial Position:
Total assets 1,036 977 9631,341 1,038 976 967 889 862
Current portion of
long-term debt 5 - 2 3 4 2
Long-term debt, less
current portion 22 12 9 9 10
12
Stockholders' equity (3) 652 562 467 505 480
437
(1) 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.
(2) Pursuant to the Certificate of Incorporation, the stock
price calculation is computed annually at the end of the
fiscal year.
(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 Certificate of Incorporation.
The aggregate redemption value of the B&CClass C Stock at
December 28, 199627, 1997 was $456$527 million.
KIEWIT
DIVERSIFIED GROUP
SELECTED FINANCIAL DATA
The following selected financial data for each of the years in
the period 19921993 to 19961997 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
Results of Operations:
Revenue (1) $ 332 $ 652 $ 580 $ 537 $ 267
$ 243
Earnings from continuing operations 83 104 126 28 174
Net earnings (2) 93 113 140 33 181 80
Net earnings (2) 113 140 33 181 99
Per Common Share:
Earnings from continuing operations
4.85 6.45 1.63 9.08 3.95Basic .66 .90 1.17 .27 1.74
Diluted .66 .90 1.17 .27 1.74
Net earnings
4.85 6.45 1.63 9.08 4.92Basic .74 .97 1.29 1.32 1.82
Diluted .74 .97 1.29 1.32 1.81
Dividends (3) .50 .50 - .50 1.95.10 .10 - .10
Stock price (4) 54.25 49.50 60.25 59.40 50.6511.65 10.85 9.90 12.05 11.88
Book value 54.23 49.49 60.36 59.52 50.7511.65 10.85 9.90 12.07 11.90
Financial Position:
Total assets (1) 2,523 2,488 3,549 2,759 1,7092,127 2,504 2,478 3,543 2,756
Current portion of long-term debt (1) 3 57 40 30 11
1
Long-term debt,less current portion (1) 137 320 361 899 452
18
Stockholders' equity (5) 1,578 1,257 1,140 1,231 1,191
1,021
(1) In September 1995, the Group dividended its investment in MFS to
Class D shareholders. MFS' results of operations have been classified
as a single line item on the statements of earnings. MFS is
consolidated in the 1992-1994 balance sheets. 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. MFS' results of operations have been
classified as a single line item on the statements of
earnings. MFS is consolidated in the 1993 and 1994 balance
sheets.
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) 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.
(4) Pursuant to the Certificate of Incorporation, the stock price
calculation is computed annually at the end of the fiscal
year.
(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 Certificate of
Incorporation, when put to PKS by a stockholder. The
aggregate redemption value of the Class D Stock at December
28, 199627, 1997 was $1,269$1,578 million.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSISANALLYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This item contains information about Peter Kiewit 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 313 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 1997 vs. 1996
vs. 1995Coal Mining. Revenue from the Group's coal mines declined 5%
in 1997 compared to 1996. Alternate source coal revenue declined
by $16 million in 1997. The mine's primary customer,
Commonwealth Edison, accelerated its contractual commitments in
1996 for alternate source, thus reducing its obligations in 1997.
In addition to the decline in tonnage shipped, the price of coal
sold 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 price at which it was sold was 4% lower than 1996.
Margin, as a percentage of revenue, declined 11% from 1996 to
1997. Margins in 1996 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. KCG's constructionThe Construction and
Mining Group's operations can be separated into two components;
construction and materials. RevenueConstruction revenues increased $414
million during 1997 compared to 1996. The consolidation of ME
Holding Inc. (due to the increase in ownership from construction decreased
2%49% to $2,06080%)
("ME Holding") contributed $261 million, in 1996. This resulted from the completion of several
major projects during the year, while many new contracts were still in the
start-up phase. KCG's share of joint venture revenue remained at 30% of
total revenues in 1996. Contract backlog at December 28, 1996 was 2.3
billion, of which 4% is attributable to foreign operations, principally
Canada and the Philippines. Projects on the west coast account for 42%almost two-thirds of the
total backlog. Revenue from materials increased by less than 1% in
1996. Increased demand for aggregates in the Arizona market was offset by
a decline in precious metal sales. KCG sold its gold and silver operation
in Nevadaincrease. In addition to Kinross Gold Corporation ("Kinross") and essentially liquidated
its metals inventory in 1995.
Opportunities in the construction and materials industry continue to expand
along with the economy. Because of the increased opportunities, KCG is able to
be selective in the construction projects it pursues. In 1996, gross margins
for construction increased from 8% in 1995 to 10% in 1996. This resulted from
the completion ofME Holding several large projects and
increased efficiencies in all
aspectsjoint ventures became fully mobilized during the latter part of
the year and were well into the "peak" construction process. Grossphase.
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 strong 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 for materials declined fromincreased to 13% of revenue in 19951997 as
compared to 10% in 1996. The lackfavorable 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
margin precious metals salesconstruction earnings.
The effective income tax rates in 1997 and 1996 combined with slightly lower construction materials margins producedfor the
reductionConstruction 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 operating margin.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 increases inincreased 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, KDGthe Group received a refund of premiums paid plus
interest in excess of reserves established by KDGthe Group for this
liability. Since 1993, the amended contract with Commonwealth
providesprovided that delivery commitments willwould be satisfied with coal
produced by unaffiliated mines in the Powder River Basin in
Wyoming. Excluding the alternate source coal sales, coalCoal produced at KDG'sthe Group's mines did not change
significantly from 1995 levels.
KDG expectslevels
Information Services. Revenue increased 17% to $42 million in
1996 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 declinepercent of revenue, for the outsourcing business
decreased to 41% in coal revenue and earnings after 19981996 from 45% in 1995. The reduction of the
margin was primarily due to up-front migration costs for new
customers which were recognized as certain long-term contracts begin to expire.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, in September 1995, formerly Twin County Trans Video,
Inc., in September 1995, and the consolidation of Mercom, Inc.
since August 1995. The Pennsylvania Cable SystemSystems and Mercom account
for $23 million of the increase in cable revenue in 1996 .1996.
The 1996 operating expenses for the telecommunications business
increased $38 million or 18% compared to 1995. The telephone
group experienced a 9% increase in expenses and the cable group's
costs increased 31%. The increase for the telephone group iswas
primarily attributable to higher payroll expenses resulting from
additional personnel, wage increases and higher overtime. Also
contributing to the increase, were fees associated with the
internet access services and consulting services for a variety of
regulatory and operational matters. The cable group's increase
iswas due to increased depreciation, amortization and compensation
expenses associated with the acquisition of the 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 declined 6%5% to $260$181 million in 1996.
Decreases in expenses associated with legal and environmental
matters were partially offset by higher compensation
and travel expenses as well asmine management fees paid
to the Construction & Mining Group, the costs attributable to C-TECC-
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 the 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 to increase shareholder value.alternatives.
Equity Earnings, net. Equity earningsLosses attributable to the Group's
equity investments increased to $9 million in 1996 improved 50% overfrom $5
million in 1995. An increaseThe additional losses were attributable to an
enterprise engaged in KDG's proportionate share of CalEnergy's earningsthe renewable fuels business and improvements in those earnings, totaling $10 million, along with an
increase in income from KCG's investment in ME Holding, Inc. of $2
million andto C-TEC's
investment in MegacableMegaCable S.A. de C.V. of $2 million
contributed to the higher earnings. Partially offsetting those gains
were losses attributable to the Casecnan project and other investments.
The Casecnan loss resulted from the variance in borrowing and investing
interest rates on the funds generated by the project's debt offering
in 1995.C.F., Mexico's second largest
cable television operator.
Investment Income, net. Investment income improved $5 million or 7%increased 24% in
1996 compared to 1995. GainsIncreased gains on the sale of marketable
and equity securities and a slight
increase in interest income were primarily responsible for the improved
results.partially offset
by a slight decline in dividend income.
Interest Expense, net. The increase in interestInterest expense in 1996 isincreased 43%
compared to 1995. The increase was primarily attributabledue to interest on
the CPTC debt that was capitalized through July 1996, and C-TEC's
redeemable preferred stock, issued in the Pennsylvania cableCable
Systems acquisition, whichthat began accruing interest in 1996, and the interest on KCG's
short-term borrowings which were repaid 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 KDGthe
Group in 1995.
KDG recognized gains and
losses from the sale and issuance of stock by MFS on the statements of
earnings. With the Spin-off of MFS, these types of gains are no longer
recognized for MFS transactions.
Other, net. OtherThe decline of other income in 1996 was primarily
relatesattributable to the gains on the
disposition1995 settlement of property, plant and equipment and other assets. Other income
in 1995 also included the Whitney Benefits
settlement proceeds and the
Kinross transaction gain.litigation.
Income Tax Benefit (Provision) Benefit.. The effective income tax rate
for 1996 differs from the statutory rate of 35% primarily because
of adjustments to prior year tax provisions, partially offset by
state taxes and nondeductible costsamounts 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 MFS stock transactions that were no longer required due to
the tax-free spin-off of MFS, and adjustments to prior year tax
provisions.
Results ofDiscontinued Operations 1995 vs. 1994- Construction. Revenue for the Construction Group increased $155
million, or 7%,from
construction decreased 1% to $2,330$2,303 million in 1996. This
resulted from the completion of several major projects during the
year, while many new contracts were still in the start-up phase.
KCG's share of joint venture revenue remained at 30% of total
revenues in 1996. Revenue from materials increased by less than
1% in 1996. Increased demand for aggregates in the Arizona
market was offset by a decline in precious metal sales. KCG sold
its gold and silver operations in Nevada to Kinross Gold
Corporation ("Kinross") and essentially liquidated its metals
inventory in 1995.
Revenue forOpportunities in the construction and materials components increased 6% and 21%, respectively, in 1995.
Construction's improvement was attributableindustry
continued to a 32% increase in joint venture
revenue which comprised 30%expand along with the economy. Because of the
total revenue in 1995 comparedincreased opportunities, KCG was able to 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% was
attributable to foreign operations, principally Canada and the Philippines.
Projects on the west coast accounted for 36% of the total backlog which
included San Joaquin backlog of $133 million. San Joaquin is scheduled for
completion in 1997. The inclusion of two additional months of materials
revenue generated by APAC-Arizona ("APAC") companies, which were acquired on
February 28, 1994, was the primary factor resultingbe selective in the
increased materials
revenue.construction projects it pursued. Gross margins for KCGconstruction
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 1995.1995 to 10% in 1996. The construction and materials
components each produced similar results. Construction's increased revenue,
primarily from joint ventures, increased operational efficiencies and
substantial claim settlements all contributed to improved results. Materials
benefited from the robust demand forlack of
higher margin precious metals sales in 1996 combined with
slightly lower construction materials margins produced the
reduction in Arizona and
also fromoperating margin.
In 1995, the operational efficiencies generated by the merger of APAC and
KCG's existing materials business in Arizona. Also contributing to the
higher margins was the liquidationexchange of KCG's precious metal inventory in 1995.
Coal Mining. Mining revenue in 1995 decreased 4% from 1994. Spot
sales were lower in 1995 due to reduced demand in KDG's spot coal markets
because of a mild wintergold and high hydro-electricity generation in the western
United States. Partially offsetting the decline in spot sales were higher
alternate source coal sales in 1995 due to the acceleration of coal shipments
to the current year from future years and the shifting of certain coal
shipments from mined coal to alternate source coal.
Direct costs, as a percentage of revenue, declined 4% in 1995. The
increase in higher margin additional alternate sales and the decrease in lower
margin spot coal sales contributed to the improved margins.
Telecommunications. With the spin-off of MFS, the telecommunications
segment consists solely of C-TEC. C-TEC's primary operations are telephone
and cable. In 1995 telecommunications revenue increased 12% over 1994.
Sales of the telephone group increased $7 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 $127
million in 1995. The acquisition of Twin County Trans Video, Inc. in
September, and the consolidation of Mercom, Inc.'s results since August
contributed $18 million 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 1995 accounted for an $8 million increase
in cable revenue. Revenues from other operating groups increased $17
million or 32% compared to 1994 primarily due to the resale of long
distance telephone services to another long distance reseller, improvements
in switched business, 1-800 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's costs of revenue increased primarily because of higher payroll
expenses 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 contributed to the
increase. Direct expenses for C-TEC's other operating groups increased
because of costs associated with the resale of long distance services and
communication services work performed for third parties. Partially
offsetting these increases was the elimination of direct costs associated
with the mobile services group which was sold in 1994.
General and Administrative Expenses. General and administrative expenses
increased 25% in 1995. Higher benefit costs attributable to the retired
packaging employees, an increase in expenses for legal and environmental
matters and increases in C-TEC's expenses were partially offset by lower
payroll expenses. C-TEC's 10% increase in costs resulted primarily from
expenses associated with RCN, higher professional fees for evaluation of
strategic alternatives for enhancing shareholder value and higher compensation
expenses.
Equity Earnings, net. The significant improvement in equity earnings in
1995 was primarily attributable to CalEnergy. The successful merger of Magma
Energy'ssilver operations in
CalEnergy in 1995 was primarily responsibleNevada for the $5
million increase in KDG's share4,000,000 shares of CalEnergy's earnings. Partially offsetting
this increase was an equity losscommon stock of $3 million from C-TEC's investment in
Megacable which was purchased in January 1995. Other equity investments
contributed individually insignificant increases in earnings that account for
the remainder of the increase.
Investment Income, net. Investment income increased 91%Kinross led to $67 million
in 1995. Improvements in interest income and declines in losses on the sales
of securities and international energy project development expenses all
contributed to the increase in investment income. Interest earned on the
Whitney Benefits settlement proceeds contributed to an increase in investment
income. C-TEC's proceeds from its rights offering and the sale of its mobile
services group also contributed to a higher average portfolio balance and
increased interest income.
Interest Expense, net. Interest expense in 1995 decreased 34%
compared to 1994. The decline was primarily due to C-TEC's prepayment
of senior secured notes in December 1994.
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 KDG in 1995. In 1994, KDG settled a
contingent purchase price obligation resulting from MFS' 1990 purchase of
Chicago Fiber Optic Corporation ("CFO"). The former shareholders of CFO
accepted MFS stock previously held by KDG, valued at market prices, as payment
of the obligation. This transaction, along with the issuances of stock for
acquisitions and employee stock options, resulted in a $54 million net gain
before taxes.
Other, net. In 1995, other income primarily included a
$21 million gain onfor KCG. The gain was the exchangedifference between
KCG's book value in the gold and silver operations and the market
value of KDG's gold operations in Nevada for the common stockKinross shares at the time of Kinross Gold Corporation and KDG's settlement proceedsthe exchange. Other
income was also primarily comprised of $135 millionmining management fees
from the Whitney Benefits litigation. Other income also includedDiversified Group, of $37 million and $30 million in
1996 and 1995, and gains and
losses fromon the disposition of property, plant
and equipment and other assets of $17 million and $ 12 million in
19951996 and 1994.
Equity Loss of MFS. The expansion activities announced in 1993 and 1995
required significant initial development and roll out expenses in advance of
anticipated revenues and continued to negatively affect the operating results
of MFS. After September 30, 1995, KDG no longer included MFS' results in its
financial statements.
Income Tax (Provision) Benefit.1995.
The effective income tax rate for 19951996 differs from the
statutory rate of 35% due primarily to $93
millionbecause of income tax benefits from the reversal of certain deferred
tax liabilities originally recognized on gains from MFS stock
transactions that were no longer required due to the tax-free spin-off
of MFS and adjustments to prior
year tax provisions.provisions and state taxes. In 1994,1995, the rate is lowerwas
higher than 35% due primarily due to adjustmentsstate income taxes.
Discontinued Operations - Energy. Income from discontinued
operations declined in 1996 by 36% to prior year tax provisions.$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 28, 1996
Excluding C-TEC, described in a separate paragraph below, the Company's27, 1997
The Group's working capital, decreased $124excluding C-TEC and discontinued
operations, increased $392 million or 14%106% during 1996. The1997. This is
due to the $182 million of cash flows
fromgenerated by operations,
of $243 million partially offsetprimarily coal operations, and the $384 million used in
investingsignificant financing
activities and $36 million used in financing activities.described below.
Investing activities include $102$452 million to purchase
marketable securities, $42 million of investments and $26 million
of capital expenditures, including $14 million for the existing
information services business and $6 million for a corporate 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 investments in developing
businesses. Funding a portion of these activities was the sale
of marketable securities of $167 million.
Sources of financing include $138 million for the issuance of
Class D Stock, $72 million for construction equipmentthe exchange of Class C stock for
Class D stock and $16 million for the remaining construction costsfinancing for Pavilion
Towers. Uses consist primarily of the SR91 toll road, and $324 million of
acquisitions and investments. The investments include a $176 million
investment in CE Electric, an exercise of options to purchase CalEnergy
stock for $53 million and $60 million for Philippine and Indonesian
power projects. These capital outlays were partially offset by $32
million of proceeds from the sale of property, plant and equipment and
other assets.
Financing sources include $19 million of long-term debt borrowings for
the construction financing of the SR91 toll road and $27 million from the
sale of the Company's common stock. Financing uses consisted of the
repayment of $45 million of short-term borrowings, $16 million for stock
repurchases and $24 million of dividends.
C-TEC's working capital decreased $92 million or 81% in 1996. Cash
provided by operations of $121 million were partially offset by $53 million
used in investing activities and $41 million used in financing activities.
C-TEC's significant investing activities which reduced working capital,
include $87 million of capital expenditures, $27$12 million for the acquisitionpayment
of Freedomdividends, and $74$2 million of net proceeds from the sale of
short-term investments. It's financing activities include $19 million ofpayments on long-term debt borrowings and $55 million of long-term debt payments.
In additiondebt.
Prior to the real estate activities described below, the Company
anticipates investing between $45 and $85 million annually in its construction
and mining businesses. The Company is also exploring opportunities to acquire
additional businesses. The Company also anticipates making significant
investments in its energy and infrastructure businesses - including its joint
ventureexecution of an agreement with CE covering international 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, future cash flows and borrowing
capacity should be sufficient for future operating and investing activities.
In October 1996, the PKS Board of Directors declared dividends of
$.70 and $.50 per share for Class B&C and Class D Stock, payableCalEnergy in
January 1997.
In FebruarySeptember, 1997, the Company purchased an office buildingGroup invested $31 million in Aurora,
Colorado for $21 million. By investingthe Dieng,
Patuha and Bali power projects in real estate, KDG is able to defer
$40 million of a taxable gain recognized with respect to the Whitney Benefits
settlement. KDG may make additional real estate investments in 1997 to defer
the balance.Indonesia.
In October 1996, the PKS Board of Directors directed PKS
management to pursue a listing of PKS Class D Stock onas a major securities exchange orway to
address certain issues created by PKS' two-class capital stock
structure and the NASDAQ National Market as soon as practical during 1998. The Board does
not foresee circumstances under which PKS would listneed 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, prior to 1998. The Board believes that a listing will provide PKS with a
capital structure more suitable for the further development of the
Diversified Group's business plan. It would also provide liquidity for
Class D shareholders without impairing PKS' capital base.
The Board's action does not ensuremanagement 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 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.
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 occurconvert 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 or anyand 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 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 January 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 was moving its
corporate headquarters to Broomfield, Colorado, a northwest
suburb of Denver. The campus facility is expected to encompass
over 500,000 square feet of office space at a construction cost
of over $70 million. Level 3 is leasing space in the Denver area
while the campus is under construction. The first phase of the
complex is scheduled for completion in the summer of 1999.
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 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. TheLevel 3's Board could delay or abandon plansmay choose not to list
the stockforce conversion if it
determinedwere to decide that such action would beconversion is not in the best interests of
all PKS' shareholders. In addition PKS' abilitythe stockholders of Level 3. If, as currently anticipated, Level
3's Board determines to listforce conversion of the Class D StockR stock on
or before June 30, 1998, certain adjustments will be subjectmade to factors beyond its control, including the
laws,
regulations,cost sharing and listing eligibility criteria in affect atrisk allocation provisions of the time a
listing is sought, as well asseparation
agreement between Level 3 and the Construction business.
If Level 3's Board of Directors determines to force
conversion of the Class R stock, market conditions ateach share of Class R stock will
be convertible into $25 worth of Level 3 (Class D) common stock,
based upon the time.
Furthermore,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 might decideof Directors
to coupleforce conversion. When the listingspin-off occurs, Level 3 will
increase paid in capital and reduce retained earnings by the fair
value of the Class D Stock
with a public offering of newly-issued Class D shares in order to raise
additional capital for the Diversified Group. Such an offering could
delay or alter the listing plan.
Currently, Class C shareholders are able to convert their shares into
Class D Stock pursuantR shares.
Immediately prior to the Company's Certificatespin-off of Incorporation.
If such listing occurs, Class C shareholders will continue to be able to
convert their shares into Class D Stock. However,the Kiewit Construction
and Mining Group, the Company will no
longer be obligatedrecognize a gain equal to repurchase Class D Stock from Class D shareholders.
In February 1997, C-TEC announced a plan to separate its operations
along business lines into three separate, publicly traded companies:
CTCo, containing the
local telephone group and related engineering
business;
C-TEC Michigan, containingdifference between the cable television operations in
Michigan; and
RCN Corporation, which will consist of RCN Telecom Services; cable
television operations in New York, New Jersey and Pennsylvania; 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 and New York
City.
The restructuring will permit investors and the financial
market to better understand and evaluate C-TEC's various businesses.
In addition, the restructuring will allow C-TEC to raise capital
for the future expansioncarrying value of the RCN business onConstruction and
Mining Group and its fair value. The Company will then reflect
the most efficient terms.
The plan is contingent upon receiptfair value of Kiewit Construction and Mining Group as a
private letter ruling from the
Internal Revenue Service regarding the tax-free nature of the spin-off, the
receipt of other regulatory approvals, and certain other conditions. If the
reorganization and spin-offs occur, KDG will own less than 50% of the
outstanding shares and voting rights of each entity, and will account for each
entity using the equity method.
In March 1997, C-TEC paid the minority shareholders of Freedom
$15 million of the contingent consideration outlined in the original
purchase agreement and $15 milliondividend to acquire the remaining minority
interest of Freedom. C-TEC also paid $10 million to terminate a
marketing services agreement with the former minority shareholders
of Freedom.
In March 1997, a KCG sponsored construction joint venture was
awarded a $1.3 billion contract to reconstruct Interstate I-15 through
the Salt Lake City region. The project is being undertaken in
preparation for the 2002 Olympic Games. KCG's share of this project
is approximately $700 million.
In 1995, a KDG and CalEnergy venture ("Casecnan") closed financing
for the construction of a $495 million combined irrigation and 150 MW
hydroelectric power generation facility located on the island of Luzon in
the Philippines, and KDG and CalEnergy have each made $62 million of equity
contributions to the project.
The Casecnan project is being constructed on a joint and several
basis by Hanbo Corporation and Hanbo Engineering & Construction Co. Ltd.
("HECC"), (together, "Contractor"), both of which are South Korean
corporations. Hanbo Corporation and HECC are under common ownership. The
contractor's obligations under the construction contract are guaranteed by
Hanbo Iron & Steel Company, Ltd. ("Hanbo Steel"), a large South Korean
steel company. In addition, the contractor's obligations are secured by an
unconditional, irrevocable standby letter of credit issued by Korea First
Bank ("KFB") in the approximate amount of $118 million. Hanbo Corporation,
HECC and Hanbo Steel have each filed to seek bankruptcy protection in Korea
and KFB's credit rating has been downgraded because of the substantial loans
it has made to Hanbo Steel.
Casecnan has recently received confirmation from HECC that it
intends to fully perform its obligations under the contract. However,
although HECC is currently performing the work, there can be no assumption
that it will remain able to perform fully its obligations under the contract.
KFB has recently reconfirmed to Casecnan that it will honor its
obligations under the letter of credit.
Casecnan is presently reviewing its rights, obligations and
potential remedies in respect of the recent development regarding the
Contractor and KFB and is presently unable to speculate as to the ultimate
effect of such developments on the Casecnan project.
If Contractor were to materially fail to perform its obligations
under the contract and if KFB were to fail to honor its obligations under the
Casecnan letter of credit, such actions could have a material adverse effect
on the Casecnan project. However, based on information available, KDG does
not currently believe its investment is impaired.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 other 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 7, 1997.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).
11 Statement regarding computation of per share earnings.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
Other Information.
99.B Kiewit Diversified Group Financial Statements and Other
Information.
(b) ANo reports on Form 8-K waswere filed by the Company on October 31, 1996 to
report a tender offer for sharesduring the
fourth quarter of Northern Electric plc by the Company's
affiliate, CE Electric plc.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 28th30th day of March, 1997.1998.
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 28th30th day of March, 1997.1998.
/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
/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 28, 199627, 1997 and December 30, 199528, 1996
and for the three years ended December 28, 1996:27, 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 28, 1996:
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 28, 199627, 1997 and December 30, 1995,28, 1996, and the consolidated
results of their operations and their cash flows for each of the
three years in the period ended December 28, 199627, 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 14, 1997, except for Note 20, as
to which the date is March 26, 1997.30, 1998
PETER KIEWIT SONS', INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
For the three years ended December 28, 199627, 1997
(dollars in millions, except per share data) 1997 1996 1995
1994
Revenue $ 2,904332 $ 2,867652 $ 2,700580
Cost of Revenue (2,412) (2,426) (2,310)
------- -------- -------
492 441 390(175) (384) (345)
------ ------ -----
157 268 235
General and Administrative Expenses (260) (277) (221)
------- -------(114) (181) (190)
------ ------ -----
Operating Earnings 232 164 16943 87 45
Other Income (Expense): Income:
Equity Earnings,losses, net 12 8 3(43) (9) (5)
Investment Income,income, net 72 67 3545 56 45
Interest Expense,expense, net (37) (25) (38)(15) (33) (23)
Gain on Subsidiary's Stock Transactions,subsidiary's stock transactions, net - - 3 54
Other, net 26 159 171 6 125
------ ------ ------
73 212 71-----
(12) 20 145
Equity Loss in MFS - - (131) (102)
------ ------ -----------
Earnings Before Income Taxes, and Minority Interest
305 245 138and Discontinued Operations 31 107 59
Income Tax Benefit (Provision) Benefit (84) 11 (29)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
====== ====== ======
Net=====
Earnings Attributable to Class B&C Stock $ 108 $ 104 $ 77
====== ====== ======
Net Earnings Attributable toPer Share:
Continuing Operations:
Class D Stock
Basic $ 113.66 $ 140 $ 33.90 $1.17
====== ====== ======
Net Earnings Per Common and Common Equivalent Share:
Class B&C Stock $10.13=====
Diluted $ 7.78.66 $ 4.92.90 $1.17
====== ====== =====
Net Income:
Class C Stock
Basic $15.99 $10.13 $7.78
====== ====== =====
Diluted $15.35 $ 9.76 $7.62
====== ====== =====
Class D Stock
Basic $ 4.85.74 $ 6.45 $ 1.63.97 $1.29
====== ====== =====
Diluted $ .74 $ .97 $1.29
====== ====== =====
See accompanying notes to consolidated financial statements.
PETER KIEWIT SONS', INC AND SUBSIDIARIES
Consolidated Balance Sheets
December 27, 1997 and December 28, 1996
(dollars in millions) 1997 1996
Assets
Current Assets:
Cash and cash equivalents $ 87 $ 147
Marketable securities 678 372
Restricted securities 22 17
Receivables, less allowance of $-, and $3 42 76
Investment in discontinued operations - energy 643 608
Other 22 26
------- ------
Total Current Assets 1,494 1,246
Property, Plant and Equipment, at cost:
Land 15 18
Buildings and leasehold improvements 122 159
Equipment 275 810
------- ------
412 987
Less accumulated depreciation and amortization (228) (345)
------- ------
Net Property, Plant and Equipment 184 642
Investments 383 189
Investments in Discontinued Operations-Construction 652 562
Intangible Assets, net 21 353
Other Assets 45 74
------- ------
$ 2,779 $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 28, 199627, 1997 and December 30, 1995
(dollars in millions, except per share data) 1996 1995
Assets
Current Assets:
Cash and cash equivalents $ 320 $ 457
Marketable securities 426 502
Restricted securities 25 30
Receivables, less allowance of $20 and $12 357 390
Costs and earnings in excess of billings on
uncompleted contracts 80 78
Investment in construction joint ventures 91 73
Deferred income taxes 59 66
Other 46 47
------ ------
Total Current Assets 1,404 1,643
Property, Plant and Equipment, at cost:
Land 32 33
Buildings and leasehold improvements 196 189
Equipment 1,353 1,246
------ ------
1,581 1,468
Less accumulated depreciation and amortization (774) (710)
------ ------
Net Property, Plant and Equipment 807 758
Investments 897 549
Intangible Assets, net 368 387
Other Assets 72 114
------- -------
$ 3,548 $ 3,451
======= =======
See accompanying notes to consolidated financial statements.
PETER KIEWIT SONS', INC. AND SUBSIDIARIES
Consolidated Balance Sheets December 28, 1996
and December 30, 1995
(continued)
(dollars in millions, except per share data)millions) 1997 1996 1995
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 23531 $ 240
Short-term borrowings - 4579
Current portion of long-term debt:
Telecommunications - 55
36
Other 3 2
6
Accrued reclamation and other mining costs and billings in excess of revenue on
uncompleted contracts 124 121
Accrued insurance costs 81 7919 19
Deferred income taxes 15 5
Other 134 127
------- -----21 87
------ ------
Total Current Liabilities 631 65489 247
Long-Term Debt, less current portion:
Telecommunications - 207
264
Other 125 106137 113
Deferred Income Taxes 163 236
Retirement Benefits 48 5483 148
Accrued Reclamation Costs 99 100 98
Other Liabilities 238139 216
Minority Interest 1 218 214
Stockholders' Equity:
Preferred stock, no par value, authorized
250,000 shares:
no shares outstanding in 19961997 and 19951996 - -
Common stock, $.0625 par value, $1.7$2.1
billion aggregate redemption value:
Class B, authorized 8,000,000 shares:
- outstanding in 1997 and 263,468
outstanding in 1996 and in 1995 - -
Class C, authorized 125,000,000 shares:
10,132,343 outstanding in 1997 and 10,743,173
outstanding in 1996 and 10,616,901
outstanding in 1995 1 1
Class D, authorized 50,000,000500,000,000 shares:
23,180,243135,517,140 outstanding in 1997 and 115,901,215
outstanding in 1996 and 23,024,9748 1
Class R, authorized 8,500,000 shares:
- outstanding in 1995 1 11997 and 1996 - -
Additional paid-in capital 427 235 210
Foreign currency adjustment (7) (6)(7)
Net unrealized holding gain 2 23 17
Retained earnings 1,799 1,566 1,384
------ ------
Total Stockholders' Equity 2,230 1,819 1,607
------ ------
$3,548 $3,451$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 28, 199627, 1997
(dollars in millions) 1997 1996 1995 1994
Cash flows from continuing operations:
Net earningsIncome from continuing operations $ 22183 $ 244104 $ 110126
Adjustments to reconcile net earningsincome from
continuing operations to net
cash provided by continuing operations:
Depreciation, depletion and amortization 193 152 217
(Gain) loss24 132 96
Gain on sale of property, plant and
equipment, and other investments (20) (40) 5(9) (3) (7)
Gain on subsidiary's stock transactions, net - - (3)
(54)
Equity (earnings) loss, net (12) 116 (10)
Noncash interestCompensation expense attributable
to stock options 21 - -
40Equity losses, net 43 10 130
Minority interest in subsidiaries (4) - 12 (50)
Retirement benefits paid (7) (6) (2)
(6)Federal income tax refunds 146 - 35
Deferred income taxes (103) (68) (147) (40)(152)
Change in working capital items:
Receivables 28 2 (53)(9) (1) 11
Other current assets (11) 19 (67)(1) 6 -
Payables (1) - 42(3) 9 (3)
Other liabilities 43 80 19(5) 13 34
Other (3)6 - 8(4)
------ ------ ------
Net cash provided by continuing operations 364 433 161182 196 273
Cash flows from investing activities:
Proceeds from sales and maturities of
marketable securities 538 465 1,743167 378 383
Purchases of marketable securities (468) (482) (1,551)
Decrease (increase)(452) (311) (440)
Increase in restricted cash 6 19 (39)
Acquisitions, excludingsecurities (2) (2) (2)
Investments and acquisitions, net of
cash acquired (301) (229) (254)
Proceeds from sale of cellular properties - - 182(42) (59) (136)
Proceeds from sale of property, plant
and equipment, and other investments 32 29 201 7 14
Capital expenditures (189) (197) (548)
Investments in affiliates (53) (31) (34)
Acquisition of minority interest - - (6)(26) (117) (118)
Other 113 (8) (2) (14)
------ ------ ------
Net cash used in investing activities $ (424)(351) $ (428) $(501)(112) $ (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 28, 199627, 1997
(continued)
(dollars in millions) 1997 1996 1995 1994
Cash flows from financing activities:
Long-term debt borrowings $ 4117 $ 5238 $ 69349
Payments on long-term debt, including
current portion (61) (52) (309)
Net change in short-term borrowings (45) 45 -(2) (60) (49)
Issuances of common stock 27 25 21138 - 2
Issuances of subsidiaries' stock - 1 - 70
Repurchases of common stock (16) (6) (31)- (11) (3)
Dividends paid (24) (13) (13)(12) (11) -
Exchange of Class C Stock for Class
D Stock, net 72 20 155
------ ------ -----------
Net cash provided by (used in)
provided by
financing activities (77) 51 431213 (23) 154
Cash flows from discontinued operations:
Discontinued energy operations 3 5 8
Investments in discontinued energy operations (31) (282) (101)
Proceeds from sales of discontinued
packaging operations - - 29
5------ ------ ------
Net cash used in discontinued operations (28) (277) (64)
Cash and cash equivalents of C-TEC in 1997
and MFS in 1995 at beginning of year (76) - (22) -
Effect of exchange rates on cash - 3 (1)- 2
------ ------ -----------
Net change in cash and cash equivalents (137) 66 95(60) (216) 42
Cash and cash equivalents at beginning of year 457 391 296147 363 321
------ ------ -----------
Cash and cash equivalents at end of year $ 32087 $ 457147 $ 391363
====== ====== ===========
Supplemental disclosure of cash
flow information:
Taxes paid $ 13362 $ 20155 $ 115132
Interest 40 35 41paid 13 38 33
Noncash investing and financing activities:
Conversion of CalEnergy convertible
debentures to common stock $ 66- $ -66 $ -
Dividend of investment in MFS - - 399 -
Issuance of C-TEC redeemable preferred stock
for acquisition - 39 - Disposition of gold operations in exchange for
Kinross common stock, net - 21 -
Issuance of MFS stock for acquisitions - - 71
MFS stock transactions to settle contingent
purchase price adjustment - - 2539
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 28, 1996
Class Class Net
B&C D Additional Foreign Unrealized
Common Common Paid-in Currency Holding Retained
(dollars in millions) Stock Stock Capital Adjustment Gain (Loss) Earnings Total
Balance at
December 26, 1993 $ 1 $ 1 $ 164 $ (3) $ 9 $1,499 $1,671
Issuances of stock - - 21 - - - 21
Repurchases of stock - - (3) - - (28) (31)
Foreign currency
adjustment - - - (4) - - (4)
Net unrealized
holding (loss) - - - - (17) - (17)
Net earnings - - - - - 110 110
Dividends:(a)
Class B&C ($.90
per common share) - - - - - (14) (14)
------ ---- ---- ----- ---- ------ -----
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:(b)
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 $1,60727, 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.statements
PETER KIEWIT SONS', INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
For the three years ended December 28,199627,1997
(continued)
Net
Class Class Unrealized
Class Class Net
B&C D Additional Foreign Unrealized
Common Common Paid-in Currency Holding Retained
(dollars in B&C D Additional Currency Gain Retained
millions) Stock Stock Capital Adjustment Gain (Loss) Earnings Total
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: (c)
Class B&C ($1.30
per common share) - - - - - (13) (13)
Class D ($.50 per
common share) - - - - - (12) (12)
----- ---- ----- ---- ----- ------ ------
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 $.45$.60 and $.10 per share for dividends on Class B&C Stock declared in 1994
but paid in January 1995.
(b) Includes $.60 and $.50 per share for dividends on Class B&CC and
Class D Stock, respectively, declared in 1995 but paid in
January 1996.
(c)(b) Includes $.70 and $.50$.10 per share for dividends on Class B&CC 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 1997.1998.
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 has
control ("PKS" or "the Company"), which are engaged in
enterprises primarily related to construction, coal mining,
energy generation, and distribution,information services, and telecommunications. The Company consolidates C-TEC Corporation
("C-TEC") because it controls more than 50% of its voting rights.
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, including energy investments and construction joint ventures and
energy projects, are accounted for by 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. MFS is consolidated in
the 1994 statement of cash flows (See Note 6).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 B&CC Stock ("Construction & Mining Group") and
Class D Stock (Diversified Group)("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.) ("KDG"Level 3") contains coal mining
properties owned by Kiewit Coal Properties Inc., energy
investments, including 30%
interestsa 24% interest in CalEnergy Company Inc. ("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
KCG 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
KCG 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, KCG 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 KCG 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 KCG's
business involves construction contracts obtained through
competitive bidding. The volume and profitability of KCG'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. KCG's construction
operations could be adversely affected by labor stoppages or
shortages, adverse weather conditions, shortages of supplies,
or other governmental action.
KCG 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.
Coal Sales Contracts
KDG'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 KDG'sLevel
3's coal sales were made under long-term contracts during
1997, 1996 1995 and 1994.1995. The remainder of KDG'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 KDG'sLevel 3's sales
will occur on the spot market.
The coal industry is highly competitive. KDGLevel 3 competes not
only with other domestic and foreign coal suppliers, some of
whom are larger and have greater capital resources than KDG,Level
3, but also with alternative methods of generating
electricity and alternative energy sources. Many of KDG'sLevel
3's competitors are served by two railroads and, due to the
competition, often benefit from lower transportation costs
than KDGLevel 3 which is served by a single railroad.
Additionally, many competitors have lower stripping ratios
than KDG,Level 3, often resulting in lower comparative costs of
production.
KDGLevel 3 is also required to comply with various federal, state
and local laws concerning protection of the environment.
KDGLevel 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.
KDGLevel 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 KDGLevel 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. KDGLevel 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, KDGLevel 3
presently intends to deliver coal from unaffiliated mines.
In the opinion of the management, KDGLevel 3 has sufficient coal
reserves to cover the above sales commitments.
KDG'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, KDGLevel 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 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 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.
Energy Generation and Distribution
KDG engagesAs noted previously, the investment in C-TEC has been
accounted for using the development, generation, distribution and supply of
electricity to customers throughout the world. The international power
markets are characterized by numerous strong and capable competitors,
many of which have more extensive and more diversified developmental or
operating experience and greater financial resources than KDG.
The successful development, construction and operation of international power
projects is contingent upon, among other things, negotiation on terms
satisfactory to KDG of financing, engineering, construction, fuel supply
and power sales contracts with other project participants, receipt of
governmental permits and consents and timely implementation of
construction. The future growth of KDG is dependent,equity method in large part,
upon the demand for additional electrical generating capacity and its
ability to obtain contracts to supply portions of this capacity. There
can be no assurance that developmental efforts on any particular project
will be successful.
The financing and development of international projects entail
significant political and financial risks against which KDG may not be
able to insure. The uncertainty of the legal environment in certain
foreign countries could make it more difficult for KDG to enforce its
rights under agreements relating to the projects. KDG's international
projects may, in certain cases, be terminated by the applicable foreign
governments.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 $238 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, franchises and subscriber
lists. These assets are amortized on a straight-line basis
over the expected period of benefit, which does not exceed 40
years.
The Company adopted statement of financial accounting standards No. 121
("SFAS 121"), "Accounting for the Impairment of Long-LivedLong Lived Assets and
for Long-Lived Assets to be Disposed Of", in 1996.
The Company reviews the carrying amount of intangiblelong lived assets for
impairment whenever events or changes in circumstances
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.
No impairment losses have been recognized by the
Company pursuant to SFAS 121.
Pension Plans
KDG 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.
Through December 31, 1996, 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.
Reserves for Reclamation
KDGLevel 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 sale, issuance
and issuancerepurchase 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 after
giving effect to Class Dperiod. Diluted earnings per share is computed by
including stock options and convertible debentures considered
to be dilutive common stock equivalents.
FullyPotentially 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:10,169 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 1995 1994
Class B&C 10,655,886 13,384,434 15,697,724and 1995.
Stock Dividend
Effective December 26, 1997, the PKS Board of Directors
approved a dividend of four shares of Class D 23,263,688 21,718,792 20,438,806Stock 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.
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board
("FASB") issued SFAS No. 130, "Reporting Comprehensive
Income", which 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 segment 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 19951995.
(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 53 weeks in the fiscal
year 1994.
C-TEC has a calendar fiscal year.
(2) Summarized Financial Information
A summaryneed to attract and retain the best
management for PKS' businesses. During the course of its
examination of the resultsconsequences of operationsa listing of Class D
Stock, management concluded that a listing of Class D Stock
would not adequately address these issues, and financial position forinstead 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 follows. These
summaries were derivedwas 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
auditedInternal 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 statements of the
respective groups which are exhibits to this Annual Report.
All significant intercompany accountsposition and transactions, except those
directly between the Construction & Mining Group and the Diversified
Group, have been eliminated. Included within the results of
operations are mine management fees paid byof the DiversifiedKiewit Construction and Mining Group toas 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 $24 million, after-tax,cash flows. The financial statements of Kiewit
Construction and Mining Group can be found in 1996Exhibit 99.A of
this document.
The following is summarized financial information of the
Kiewit Construction and $19
million, after-tax, in 1995 and 1994.Mining Group:
Operations (dollars in millions, except per share data)millions) 1997 1996 1995
1994
Construction & Mining Group:
Results of Operations:
Revenue $ 2,2862,764 $ 2,303 $ 2,330
$ 2,175
Net earningsincome 155 108 104
77
Earnings per share 10.13 7.78 4.92
Financial Position:
Working capitalPosition (dollars in millions) 1997 1996
Current assets $ 3741,057 $ 248 $ 333764
Other assets 284 274
-------- -------
Total assets 1,036 977 963
Long-term debt, less current portion 12 9 9
Stockholders' equity 562 467 505
PETER KIEWIT SONS', INC.
Notes to Consolidated Financial Statements
(2) Summarized Financial Information (cont.)
(dollars in millions, except per share data) 1996 1995 1994
Diversified Group:
Results of Operations:
Revenue$ 1,341 $ 1,038
======== =======
Current liabilities 579 397
Other liabilities 99 79
Minority interest 11 -
------- -------
Total liabilities 689 476
------- -------
Net assets $ 652 $ 580 $ 537
Net earnings 113 140 33
Earnings per share 4.85 6.45 1.63
Financial Position:
Working capital $ 399 $ 741 $ 969
Total assets 2,523 2,488 3,537
Long-term debt, less current portion 320 361 899
Stockholders' equity 1,257 1,140 1,231
(3) Industry562
======= =======
Immediately prior to the spin-off of the Kiewit Construction and
Geographic DataMining 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 operates primarily in four reportable segments:
construction, coal mining, energy generationwill then reflect
the fair value of Kiewit Construction and distribution,Mining Group as a dividend
to shareholders.
Level 3 has recently decided to substantially increase its
emphasis on and telecommunications. Other primarily includes KDG'sresources to its information services business.
Pursuant to the plan, Level 3 intends to expand substantially
its current information services business, California Private Transportation Company L.P.,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 ("CPTC"TCP/IP"),
networks and are offered at lower prices than public telephone
network-based fax service, and voice message storing and
forwarding over the owner-
operatorsame 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 SR91 toll road in Southern California, corporate
expensesexisting 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 attributablecompatible 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 a specific segment, and marketable
securities. MFS is included in the 1994 telecommunications identifiable
assets, capital expenditures and depreciation and amortization balances.
Equity earnings is included duepurchase Level 3's
energy investments for $1,155 million, subject to the significant equityadjustments.
These energy investments in
the energy generation and distribution businesses.
A summary of the Company's operations by industry and geographic region
is as follows:
KCG KDG
--------- -------------------------------
Industry Data Construc- Coal Telecom- Elimi- Consoli-
(dollars in millions) tion Mining Energy munications Other nations dated
1996
Revenue $ 2,286 $ 234 $ - $ 367 $ 51 $ (34) $2,904
Operating Earnings 105 94 (2) 31 (35) 39 232
Equity Earnings, net 8 - 14 (1) (9) - 12
Identifiable Assets 1,036 387 649 1,100 387 (11) 3,548
Capital Expenditures 72 2 - 87 28 - 189
Depreciation, Depletion
& Amortization 61 12 - 106 14 - 193
PETER KIEWIT SONS', INC.
Notes to Consolidated Financial Statements
(3) Industry and Geographic Data (cont.)
KCG KDG
--------- ------------------------------
Industry Data Construc- Coal Telecom- Elimi- Consoli-
(dollars in millions) tion Mining Energy munications Other nations dated
1995
Revenue $ 2,330 $ 216 $ - $ 325 $ 39 $ (43) $ 2,867
Operating Earnings 87 77 (2) 37 (67) 32 164
Equity Earnings, net 3 - 10 (3) (2) - 8
Identifiable Assets 977 368 356 1,143 621 (14) 3,451
Capital Expenditures 79 4 - 72 42 - 197
Depreciation, Depletion
& Amortization 56 7 - 81 8 - 152
1994
Revenue $ 2,175 $ 225 $ - $ 291 $ 21 $ (12) $ 2,700
Operating Earnings 59 76 - 27 (22) 29 169
Equity Earnings, net 2 - 5 - (4) - 3
Identifiable Assets 963 407 219 2,575 347 (7) 4,504
Capital Expenditures 76 3 - 426 56 (13) 548
Depreciation, Depletion
& Amortization 52 11 - 149 5 - 217
PETER KIEWIT SONS', INC.
Notes to Consolidated Financial Statements
(3) Industry and Geographic Data (cont.)
KCG KDG
--------- -------------------------------
Geographical Data Construc- Coal Telecom- Elimi- Consoli-
(dollars in millions) tion Mining Energy munications Other nations dated
1996
Revenue
United States $ 2,000 $ 234 $ - $ 367 $ 51 $ (4) $ 2,648
Canada 175 - - - - - 175
Other 111 - - - - (30) 81
------- ------ --- ------ ----- ----- -------
$ 2,286 $ 234 $ - $ 367 $ 51 $ (34) $ 2,904
======= ====== === ====== ===== ===== =======
Operating Earnings
United States $ 84 $ 94 $(3) $ 31 $ (35) $ 39 $ 210
Canada 7 - - - - - 7
Other 14 - 1 - - - 15
------ ------ ---- ------ ----- ----- -------
$ 105 $ 94 $(2) $ 31 $(35) $ 39 $ 232
====== ====== === ====== ==== ===== =======
Identifiable Assets
United States $ 924 $ 387 $323 $1,100 $387 $ (11) $ 3,110
Canada 90 - - - - - 90
Other 22 - 326 - - - 348
------ ------ ---- ------ ---- ----- -------
$1,036 $ 387 $649 $1,100 $387 $ (11) $ 3,548
====== ====== ==== ====== ==== ===== =======
1995
Revenue
United States $ 2,007 $ 216 $ - $ 325 $ 39 $ (8) $ 2,579
Canada 237 - - - - - 237
Other 86 - - - - (35) 51
------- ------ ---- ------ ----- ----- -------
$ 2,330 $ 216 $ - $ 325 $ 39 $ (43) $ 2,867
======= ======= ==== ====== ===== ===== =======
Operating Earnings
United States $ 70 $ 77 $ - $ 37 $ (67) $ 32 $ 149
Canada 7 - - - - - 7
Other 10 - (2) - - - 8
------- ------- ---- ----- ----- ----- -------
$ 87 $ 77 $ (2) $ 37 $ (67) $ 32 $ 164
======= ======= ==== ===== ===== ===== =======
Identifiable Assets
United States $ 867 $ 368 $ 260 $1,143 $ 621 $ (14) $ 3,245
Canada 90 - - - - - 90
Other 20 - 96 - - - 116
------- ------- ---- ------ ----- ----- -------
$ 977 $ 368 $ 356 $1,143 $ 621 $ (14) $ 3,451
======= ======= ===== ====== ===== ===== =======
PETER KIEWIT SONS', INC.
Notes to Consolidated Financial Statements
(3) Industry and Geographic Data (cont.)
KCG KDG
-------- ------------------------------
Geographical Data
Construc- Coal Telecom- Elimi- Consoli-
(dollars in millions) tion Mining Energy munications Other nations dated
1994
Revenue
United States $ 1,915 $ 225 $ - $ 291 $ 21 $ (8) $ 2,444
Canada 214 - - - - - 214
Other 46 - - - - (4) 42
------- ----- ---- -------- ----- ----- --------
$ 2,175 $ 225 $ - $ 291 $ 21 $ (12) $ 2,700
======= ===== ==== ======== ===== ===== =======
Operating Earnings
United States $ 45 $ 76 $ - $ 27 $ (22) $ 29 $ 155
Canada 14 - - - - - 14
------- ----- ---- ------- ----- ---- -------
$ 59 $ 76 $ - $ 27 $ (22) $ 29 $ 169
======= ===== ==== ======= ===== ==== =======
Identifiable Assets
United States $ 834 $ 407 $219 $ 2,575 $ 347 $ (7) $ 4,375
Canada 102 - - - - - 102
Other 27 - - - - - 27
------- ----- ----- ------- ----- ---- -------
$ 963 $ 407 $ 219 $ 2,575 $ 347 $ (7) $ 4,504
======= ===== ===== ======= ===== ==== =======
(4) Investments
Investments consist of the following at December 28, 1996 and December 30, 1995:
(dollars in millions) 1996 1995
KDG
CalEnergy Company Inc. $ 292 $ 218
CE Electric UK, plc (Note 5) 176 -
International energy projects 149 96
Equity securities (Note 8) 75 59
C-TEC investments:
Megacable S.A. de C.V. 74 77
Other 12 10
Other 28 10
KCG
ME Holding Inc. 33 29
Equity securities of Kinross Gold
Corporation (Note 8) 28 30
Other 30 20
------ -----
$ 897 $ 549
====== =====
In 1996, KDG exercised 1.5 million CalEnergy options at a price of $9
per share and 3.3 million CalEnergy options at a price of $12 per share.
In addition, KDG converted its $66 million of 9.5% Convertible
Subordinated Debentures into 3.6include approximately 20.2 million
shares of CalEnergy common stock.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 28, 1996, KDG owns27, 1997, Level 3 owned 19.2 million shares or 30%24%
of CalEnergy's outstanding common stock and hashad a cumulative
investment in CalEnergy common stock of $292 million, $25 million in excess of KDG's
proportionate share of CalEnergy's equity. The excess investment is
being amortized over 20 years. Equity earnings, net of goodwill
amortization, were $20 million, $10 million and $5 million in 1996, 1995
and 1994. KDG also recognized investment income from CalEnergy debt
securities of $4 million, $6 million and $5 million in 1996, 1995 and
1994.$337 million. CalEnergy
common stock is traded on the New York Stock Exchange. On
December 28, 1996,27, 1997, the market value of KDG'sLevel 3's
investment in CalEnergy common stock was $644$548 million.
KDG has 1 million options to purchase additional CalEnergy stock at a
price of $11.625 per share which expire in 2001.
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 1995
Current assets $ 9452,053 $ 418945
Other assets 5,435 4,768
2,236
----------------- --------
Total assets 7,488 5,713 2,654
Current liabilities 1,440 1,232 162
Other liabilities 4,494 3,301 1,948
Minority interest 134 299
-
------- ---------------- --------
Total liabilities 6,068 4,832
2,110
------- ---------------- --------
Net assets $ 1,420 $ 881
$ 544
======= =======
KDG's Share========= ========
Level 3's share:
Equity in net assets $ 337 $ 267
$ 116
Goodwill - 25
37
Convertible debentures - 65
------- ---------------- --------
Investment in CalEnergy $ 337 $ 292
$ 218
======= ================ ========
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 1995 1994
Revenue $ 5761,564 $ 39937
Income before extraordinary item 58 -
Extraordinary item - Windfall tax (194) -
Level 3's share:
Income before extraordinary item $ 18617 $ -
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 income available to common stockholders 92 62 32
KDG's Share
Net Income 22 13 7
Goodwill Amortization (2) (3) (2)
------ ------ -----assets $ 451 $ 587
======= ======
Level 3's Share:
Equity in net income of CalEnergyassets $ 20135 $ 10 $ 5176
======= ======
====== =====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, KDGLevel 3 and CalEnergy 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 Philippines. Dieng Unit I is a 55 MW
geothermal facility on the Indonesian island of Java. UpAn
additional five units are expected to three additional facilities at Dieng are in development. The
venture also has conducted significant additional development drillingbe constructed on a
modular basis at the Patuha and Bali sites in Indonesia, and continues to pursue power
project opportunities around the world.Dieng site, as geothermal resources are
developed. In 1996, KDGJune 1997, Level 3 and CalEnergy agreedclosed a $400
million revolving credit facility to extendfinance the power project venture for another five years.
KCGdevelopment
and construction of the remaining Indonesian projects. The
credit facility is currently constructingcollateralized by the MahanagdongIndonesian assets and
Dieng facilities.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
Internationalinternational 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 Assetsassets $ 1 $ 441 $ 15 $ 10 $ 467
Other Assetsassets 239 51 118 36 444
-------- -------- ------ ------- ------ ----- ----- -----
Total Assetsassets 240 492 133 46 911
Current Liabilitiesliabilities 15 9 24 11 59
Other Liabilitiesliabilities 153 372 35 - 560
-------- -------- ------------ ------ ----- ----- -----
Total Liabilitiesliabilities
(with recourse only
to the projects) 168 381 59 11 619
-------- -------- ------------ ------- ------ ----- -----
Net Assetsassets $ 72 $ 111 $ 74 $ 35 $ 292
======== ======== ============ ======= ====== ===== KDG's Share=====
Group's share:
Equity in Net Assetsnet assets $ 36 $ 55 $ 36 $ 17 $ 144
Loan to Project - - 5 - 5
-------- --------------- ------- ------ ----- ------ -----
$ 36 $ 55 $ 41 $ 17 $ 149
======== ======== ============ ======= ====== =====
Financial Position
(dollars in millions) Mahanagdong Casecnan Dieng Other Total
1995
Current Assets $ - $ 493 $ 3 $ 1 $ 497
Other Assets 148 8 18 3 177
--------- -------- ----- ------ -----
Total Assets 148 501 21 4 674
Current Liabilities 15 7 6 1 29
Other Liabilities 79 371 - - 450
--------- -------- ------ ----- -----
Total Liabilities
(with recourse only
to the projects) 94 378 6 1 479
--------- -------- ------ ----- -----
Net Assets $ 54 $ 123 $ 15 $ 3 $ 195
========= ======== ====== ===== =====
KDG's Share
Equity in Net Assets $ 27 $ 61 $ 7 $ 1 $ 96
========= ======== ===== ===== =====
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 to KDG1996. Level 3's share of
these losses were $6 million in 1996.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 1994 or 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 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 iswas being constructed on a joint and
several basis by Hanbo Corporation and Hanbo Engineering &
Construction Co. Ltd. ("HECC"),(together "Contractor") both of which are South Korean corporations.On May 7, 1997, CE Casecnan announced
that it had terminated the Hanbo Corporation and HECC areContract. In connection with
the contract termination, CE Casecnan made a $79 million draw
request under common ownership. The
contractors' obligations under the construction contract are guaranteed
by Hanbo Iron & Steel Company, Ltd. ("Hanbo Steel"), a large South
Korean steel company. In addition, the contractor's obligations are
secured by an unconditional, irrevocable standby letter of credit issued by Korea First Bank
("KFB") in the approximate amount of $118 million.
Hanbo Corporation, HECCto pay for certain transition costs and Hanbo Steel have each filed to seek bankruptcy
protection in Korea and KFB's credit rating has been downgraded
because of the substantial loans it has made to Hanbo Steel.
Casecnan has recently received confirmation from HECC that it intends to fully
perform its obligationsother damages
under the contract. However, although HECCHanbo Contract. KFB failed to honor the draw
request; the matter is currently performing the work, there canbeing litigated. If KFB would not be
no assumption that it will
remain ablerequired to perform fully its obligations under the contract.
KFB has recently reconfirmed to Casecnan that it will honor its obligations under the letter of credit.
Casecnan is presently reviewing its rights, obligations and potential
remedies in respect of the recent developments regarding the Contractor
and KFB and is presently unable to speculate as to the ultimate effect of
such developments on the Casecnan project.
If Contractor were to materially fail to perform its obligations under the
contract and if KFB were to fail to honor its obligations under the
Casecnan letter of credit,
such actions couldaction may have a material adverse effect on the CE
Casecnan project. However, based on information available,
KDGLevel 3 does not currently believe its investment is impaired.
Investments also include C-TEC's 40% interest in Megacable S.A. de C.V.,
Mexico's second largest cable television operator, and KCG's investment
inexpect the electrical contractor, ME Holding Inc., both accounted for using
the equity method.
(5) Acquisitions
In 1996, CE Electric made an unsolicited $1.3 billion offer to acquire
Northern Electric plc ("Northern"), a regional electricity distribution
and supply company in the United Kingdom. CE Electric is owned 70% by
CalEnergy and 30% by KDG. As of December 24, CE Electric had acquired a
majority of Northern's shares. At December 28, 1996 KDG had invested
$176 million in CE Electric. The remaining funds necessary for CE Electric
to complete the acquisition will be provided under a term loan and revolving
credit facility.
CE Electric has accounted for the transaction as a purchase and recorded
goodwill of $397 million representing the purchase price in excessoutcome of the
fair market value of the assets acquired. The goodwill is being
amortized over a 40 year period.
The following is summarizedlitigation to affect its financial information of CE Electric as
of December 31, 1996:
Financial Position (dollars in millions) 1996
Current assets $ 583
Other assets 1,772
-------
Total assets 2,355
Current liabilities 785
Other liabilities 718
Preferred stock 153
Minority interest 112
-------
Total liabilities 1,768
-------
Net assets $ 587
=======
KDG's equity in net assets $ 176
=======
In March 1996, Kiewit Telecom Holding Inc. ("KTH"), a subsidiary of
Kiewit Diversified Group Inc., entered into an asset purchase agreement,
along with other ancillary agreements, with Liberty Cable Company, Inc.
to purchase an 80% interest in Freedom New York, L.L.C. ("Freedom") for $27
million.Freedom provides subscription television services using microwave
frequencies in New York City and selected areas of New Jersey. In
conjunction with its decision to close discussions concerning the sale
of its cable television unit and favorable regulatory conditionsposition due to the
Telecommunications Act of 1996, C-TEC purchased Freedom from KTH in
August 1996 essentially at KTH's cost. The purchase price was allocated
on the basis of the fair value of property, plant and equipment and
identifiable intangible assets acquired and liabilities assumed. C-
TEC is also liable for up to $15 million of additional purchase price
if Freedom attains specified subscriber levels. The contingent
consideration is not included in the original purchase price or the
fair value adjustments and is accrued as it is earned.
CE Electric and Freedom's combined 1995 and 1996 operating results
prior to the acquisitions were not significant relative to the
Company's or KDG's results after giving effect to certain pro-forma
adjustments related to the acquisitions, primarily increased
amortization and interest expense.
(6)transaction with CalEnergy.
(4) MFS Spin-off
In September 1995, the PKS Board of Directors approved a plan to
make a tax-free distribution of its entire ownership interest
in MFS to the Class D stockholders (the "Spin-off") effective
on September 30, 1995. 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 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.
Operating results of MFS through September 30, 1995 and for fiscal 1994
are
summarized as follows:
(dollars in millions) 1995
1994
Revenue $ 412 $ 287
Loss from operations (176)
(136)
Net loss (196)
(151)
KDG'sLevel 3's share of loss in MFS (131) (102)
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
were not taxed due to the Spin-off.
(7)(5) Gain on Subsidiary's Stock Transactions, net
In 1994, KDG 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
KDG, valued at current market prices, as payment of the obligation.
The above transaction, along with the stockStock issuances by MFS for acquisitions and employee stock
options, reduced KDG'sLevel 3's ownership in MFS prior to the Spin-
off in 1995 to 66% from 67% and 66% at the end of 1994 and at September 30, 1995.in 1994. As a result, KDGLevel 3
recognized gainsa gain of $54 million and $3 million in 1994 and 1995 representing the
increase in itsLevel 3's proportionate share of MFS' equity.
Deferred income taxes had been established on these gainsthis gain prior
to the Spin-off.
(8)(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.
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 by agreement to fund equity contributions to
international energy projects and 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. Net unrealized holding
gains and losses are reported as a separate component of
stockholders' equity, net of tax.
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 28, 1996 and December 30, 1995.were as follows:
Unrealized Unrealized
Amortized Holding Holding Fair
(dollars in millions) Cost Gains Losses Value
19961997:
Marketable Securities:
Kiewit Mutual Fund:
Short-term government $ 122234 $ - $ - $ 122234
Intermediate term bond 75195 3 - 198
Tax exempt 154 3 - 157
Equity 7 4 - 11
Collateralized mortgage
obligations - 1 - 1
Equity securities 48 9 - 57
Other securities 20 - - 20
------ ----- ----- ------
$ 658 $ 20 $ - $ 678
Restricted Securities:
Kiewit Mutual Fund:
Intermediate term bond $ 10 $ - $ - $ 10
Equity 12 - - 12
------ ----- ----- ------
$ 22 $ - $ - $ 22
====== ===== ===== ======
1996:
Marketable Securities:
Kiewit Mutual Fund:
Short-term government $ 100 $ - $ - $ 100
Intermediate term bond 65 2 - 7767
Tax exempt 135126 2 - 137128
Equity 5 2 - 7
U.S. debt securities 13 - - 13
Corporate debt securities
(held by C-TEC) 47 - - 47
Collateralized mortgage
obligations - 1 - 1
Other securities 20 2 - 22
-------- ------- ------ ----------- ----- -----
$ 417363 $ 9 $ - $ 426
======== =======372
====== =========== ===== =====
Restricted Securities:
Kiewit Mutual Fund:
Short-term governmentIntermediate term bond $ 8 $ - $ - $ 8
Intermediate term bond 8 - - 8
Equity 7 2 - 9
-------- ------- ------ ----------- ----- ----
$ 2315 $ 2 $ - $ 25
======== =======17
====== =========== ===== ====
Non-current Investments:investments:
Equity securities $ 7949 $ 26 $ (2) $ 103
======== ======= ====== ======
PETER KIEWIT SONS', INC.
Notes to Consolidated Financial Statements
(8) Disclosures about Fair Value of Financial Instruments (cont.)
Unrealized Unrealized
Amortized Holding Holding Fair
(dollars in millions) Cost Gains Losses Value
1995
Kiewit Mutual Fund:
Short-term government $ 106 $ 2 $ - $ 108
Intermediate term bond 82 5 - 87
Tax exempt 138 4 - 142
Equity 4 1 - 5
U.S. debt securities 15 - - 15
Federal agency securities
(held by C-TEC) 8 - - 8
Municipal debt securities 1 - - 1
Corporate debt securities
(held by C-TEC) 113 - - 113
Collateralized mortgage
obligations - 2 - 275
====== ===== ===== ====
Other securities 21 - - 21
------ ------ ------- -----
$ 488 $ 14 $ - $ 502
====== ====== ======= =====
Restricted Securities:
Kiewit Mutual Fund:
Short-term government $ 15 $ - $ - $ 15
Intermediate term bond 7 - - 7
Equity 6 1 - 7
Municipal debt securities 1 - - 1
------ ------ ------- -----
$ 29 $ 1 $ - $ 30
====== ====== ======= =====
Non-current Investments:
Equity securities $ 76 $ 13 $ - $ 89
====== ====== ======== =====
Other securities primarily includeconsist of bonds issued by the Casecnan
project and purchased by KDG.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 and $2 million and $18 million
in 1994.1995.
At December 28, 199627, 1997, the contractual maturities of the debt
securities are as follows:
(dollars in millions) Amortized Cost Fair Value
U.S. debt securities:
Less than 1 year $ 2 $ 2
1-5 years 11 11
-------- ------
$ 13 $ 13
======== ======
Corporate debt securities:
1-5 years $ 47 $ 47
======== ======
Other securities:
5-1010+ years $ 20 $ 22
========20
====== ======
Maturities for the mutual fund, equity securities and
collateralized mortgage obligations have not been presented as
they do not have a single maturity date.
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 the Credit Agreement with
National Bank for Cooperatives have an aggregate fair value of $251
million (See Note 12).
(9) Retainage on Construction Contracts
Receivables at December 28, 1996 and December 30, 1995 include
approximately $139 million and $111 million of retainage on uncompleted
projects, the majority of which is expected to be collected within one
year. Included in the retainage amounts are $53 million and $61 million
of securities which are being held by the owners of various construction
projects in lieu of retainage. These securities are carried at fair
value which is determined based on quoted market prices for the
securities on hand or for similar investments. Net unrealized holding
gains and losses, if any, are included as a separate component of
stockholders' equity, net of tax.
(10) Investment in Construction Joint Ventures
KCG 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 Position (dollars in millions) 1996 1995
Total Joint Ventures
Current assets $ 435 $ 655
Other assets (principally construction equipment) 47 52
------- -------
482 707
Current liabilities (347) (584)
------- -------
Net assets $ 135 $ 123
======= =======
KCG's Share
Equity in net assets $ 73 $ 67
Receivable from joint ventures 18 6
------- -------
Investment in construction joint ventures $ 91 $ 73
======= =======
PETER KIEWIT SONS', INC.
Notes to Consolidated Financial Statements
(10) Investment in Construction Joint Ventures (cont.)
Operations (dollars in millions) 1996 1995 1994
Total Joint Ventures
Revenue $ 1,370 $ 1,211 $ 1,034
Costs 1,201 1,108 937
-------- -------- --------
Operating income $ 169 $ 103 $ 97
======== ======== ========
KCG's Share
Revenue $ 689 $ 691 $ 523
Costs 619 622 473
-------- -------- --------
Operating income $ 70 $ 69 $ 50
======== ======== ========
(11) Intangible Assets
Intangible assets(7) Investments
Investments consist of the following at December 28, 199627, 1997 and
December 30, 1995:28, 1996:
(dollars in millions) 1997 1996
1995
C-TEC:
GoodwillCommonwealth Telephone Enterprises Inc. $ 19875 $ 199
Franchises and subscriber lists 229 224
Other 34 96
CPTC intangibles and other 40 39
------ -------
501 558
Less accumulated amortization (133) (171)
------- -------
$ 368 $ 387
======= =======
(12) Long-Term Debt
At December 28, 1996 and December 30, 1995, long-term debt was as follows:
(dollars in millions) 1996 1995
Telecommunications-
RCN Corporation 214 -
Cable Michigan 46 -
Pavilion Towers 22 -
Equity securities (Note 6) - 75
C-TEC Long-term Debt (with recourse only to C-TEC):
Credit Agreementinvestments:
Megacable S.A. de C.V. - National Bank for Cooperatives
(7.51% due 2009) $ 110 $ 119
Senior Secured Notes
(9.65% due 1999) 134 150
Term Credit Agreement - Morgan Guaranty Trust Company
(7% due 2002) 18 19
Promissory Note - Twin County Acquisition - 4
Revolving Credit Agreements and74
Other - 8
------- ------
262 30012
Other CPTC Long-term Debt (with recourse only to CPTC):
Bank Note
(7.7% due 2008) 65 51
Institutional Note
(9.45% due 2017) 35 35
OCTA Debt
(9.0% due 2006) 6 6
Subordinated Debt
(9.5% No Maturity) 2 -
-------- ------
108 92
Other Long-term Debt:
9.6% to 11.1% Notes to former stockholders
due 1999-2001 3 6
6.25% to 8.75% Convertible debentures
due 2002-2006 10 8
Other 6 6
-------- ------
19 20
-------- ------
389 412
Less current portion (57) (42)
-------- ------
$ 332 $ 370
======== ======
Telecommunications.
In March 1994, C-TEC's telephone group entered into a $135 million
Credit Agreement with the National Bank for Cooperatives. The funds
were used to prepay outstanding borrowings with various agencies of the
U.S. government. Substantially all the assets of C-TEC's telephone
group are subject to liens under this Credit Agreement. In addition,
the telephone group is restricted from paying dividends in excess of the
prior years 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. in
1995, C-TEC Cable Systems, Inc., a wholly owned subsidiary of C-TEC,
issued a $4 million 5% promissory note. The note was unsecured. In
September 1996, the note was cancelled in settlement of certain purchase
price adjustments.
C-TEC's cable group had Revolving Credit agreements which were
collateralized by a pledge of the stock of the cable group subsidiaries
which expired in December 1996.
Other.
In August 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 toll road, CPTC entered into
an interest rate swap arrangement with the same parties. The swap
expires in January 2004 and has an underlying interest rate of 6.96%.
The institutional note is with Connecticut General Life Insurance
Company, a subsidiary of CIGNA Corporation. The note converted into a
term loan upon completion of the toll road.
Substantially all the assets of CPTC and the partners' equity interest
in CPTC secure the term debt.
Orange County Transportation Authority holds $6 million of subordinated
debt which is due in varying amounts over 10 years. Interest accrues at
9% and is payable quarterly beginning in 2000.
The remaining subordinated debt was incurred in July 1996 to facilitate
the completion of the project. The debt is payable to the partners and
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 of $5 million, $7 million and $4 million in
1996, 1995 and 1994.
The PKS 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 and 12,594
shares of Class C common stock and 69,022 and 12,594 shares of Class D
common stock in 1995 and 1994. As part of the exchange offer completed
prior to the MFS Spin-off, all holders of 1991 debentures and 1993
Class D debentures converted their debentures into Class C and Class D
common stock. At December26 28 1996, 436,833 shares of Class C common
stock are reserved for future conversions.
Scheduled maturities of long-term debt through 2001 are as follows (in
millions): 1997 - $57; 1998 - $60; 1999 - $62; 2000 - $18 and $19 in
2001.
(13) Income Taxes
An analysis of the income tax (provision) benefit before minority
interest for the three years ended December 28, 1996 follows:
(dollars in millions) 1996 1995 1994
Current:
U.S. federal $ (126) $ (127) $ (54)
Foreign (9) - (10)
State (17) ( 9) (5)
------- ------ ------
(152) (136) (69)
Deferred:
U.S. federal 68 146 27
Foreign (3) (4) 5
State 3 5 8
------- ----- -----
68 147 40
------- ----- -----
$ (84) $ 11 $ (29)
======= ===== =====
The United States and foreign components of earnings, for tax reporting
purposes, before equity loss in MFS (recorded net of tax), minority interest
and income taxes follows:
(dollars in millions) 1996 1995 1994
United States $ 284 $ 370 $ 224
Foreign 21 6 16
-------
------ ------
$ 305383 $ 376 $ 240
=======189
====== ======
A reconciliation of the actual income tax (provision) benefit and the
tax computed by applying the U.S. federal rate (35%) to the earnings
before equity loss in MFS (recorded net of tax), minority interest and
income taxes for the three years ended December 28, 1996 follows:
(dollars in millions) 1996 1995 1994
Computed tax at statutory rate $ (107) $ (132) $ (84)
State income taxes (9) (8) (3)
Depletion 4 3 4
Dividend exclusion 3 - 3
Tax exempt interest 2 3 4
Prior year tax adjustments 40 56 54
MFS deferred tax - 93 -
Goodwill amortization (5) (4) (2)
Taxes on foreign operations (5) - -
Other (7) - (5)
------ ------- ------
$ (84) $ 11 $ (29)
====== ======= ======
During the three years ended December 28, 1996, the Company settled a
number of disputed issues related to prior years that have been included
in prior year tax adjustments.
The Company files a consolidated federal income tax return including
its domestic subsidiaries as allowed by the Internal Revenue Code.
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 28, 1996 and December 30, 1995 were as follows:
(dollars in millions) 1996 1995
Deferred tax liabilities:
Investments in securities $ 19 $ 15
Investments in joint ventures 16 25
Investments in subsidiaries 15 10
Asset bases - accumulated depreciation 226 257
Coal sales 15 42
Other 26 21
------- ------
Total deferred tax liabilities 317 370
Deferred tax assets:
Construction accounting 15 3
Insurance claims 34 33
Compensation - retirement benefits 35 32
Provision for estimated expenses 28 24
Net operating losses of subsidiaries 8On September 5,
Foreign and general business tax credits 61 59
Alternative minimum tax credits 16 20
Other 24 30
Valuation allowance (8) (6)
------ -----
Total deferred tax assets 213 200
------ -----
Net deferred tax liabilities $ 104 $ 170
====== =====
(14) Employee Benefit Plans
The Company makes contributions, based on collective bargaining
agreements related to its construction operations, to several
multi-employer union pension plans. These contributions are included 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.
KDG's defined benefit pension plans cover primarily packaging employees
who retired prior to the disposition of the packaging operations. The
income (expense) related to these plans was approximately $1 million,
($7) million and ($1) million in 1996, 1995 and 1994. The accrued
pension liability associated with the plan is not significant at
December 28, 1996 and December 30, 1995.
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 28, 1996 and December 30, 1995, and
for the three years ended December 28, 1996.
Effective December 31, 1996, C-TEC will no longer accrue benefits under
the defined benefit pension plan for employees other than those
consisting primarily of the telephone group. The employees will become
fully vested in their benefit accrued through that date. C-TEC
recognized a curtailment gain of approximately $4 million which
primarily resulted from the reduction of the projected benefit
obligation.
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 in 1994.
Substantially all employees of the Company, with the exception of C-TEC
employees, are covered under the Company's profit sharing plans. The
expense related to these plans were $3 million in 1996 and 1995 and $2
million in 1994.
(15) Postretirement Benefits
In addition to providing pension and other supplemental benefits, KDG
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, KDG 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 KDG's financial position, results of operations or
cash flows.
The net periodic costs for health care benefits were less than $1
million in 1996 and 1995 and $1 million in 1994. In all years, the
costs related primarily to interest on accumulated benefits.
The accrued postretirement benefit liability, primarily for packaging
employees who retired prior to the disposition of the packaging
operations, as of December 28, 1996 was as follows:
Health
(dollars in millions) Insurance
Retirees $ 30
Fully eligible active plan participants -
Other active plan participants -
------
Total accumulated postretirement benefit obligation 30
Unrecognized prior service cost 17
Unrecognized net loss (5)
------
Accrued postretirement benefit liability $ 42
======
The unrecognized prior service cost resulted from certain modifications to the
postretirement benefit plan for packaging employees which reduced the
accumulated postretirement benefit obligation. KDG may make additional
modifications in the future.
A 7.7% increase in the cost of covered health care benefits was assumed
for fiscal 1997. 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 $1 million at year-end 1996. The weighted
average discount rate used in determining the APBO was 7.5%.
(16) 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.
Class D shares are not subject to ownership or transfer restrictions.
However, almost all Class D shares are held by employees and former employees.
For the three years ended December 28, 1996, issuances and
repurchases of common shares, including conversions, were as follows:
Class B Class C Class D
Common Common Common
Stock Stock Stock
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 2,675,553
Shares repurchased in 1995 736,932 5,492,002 42,147
Shares issued in 1996 - 896,640 410,485
Shares repurchased in 1996 - 770,368 255,216
(17) Class D Stock Plan
Under the 1995 Class D Stock Plan ("the Plan"), the Company may grant
stock options, stock appreciation rights or other benefits of up to 1
million shares of Class D Common Stock ("Shares") during the ten year
term of the plan. The Company may not grant more than 500,000 Shares in
any two year period and may not grant any one participant more than
200,000 Shares. Stock options must have an exercise price that is not
less than the fair market value of the Shares on the grant date and
become exercisable at a rate of 20% per year over a five year period.
Stock options expire if not exercised within ten years from the date of
grant. Grants of 1995 options were conditioned upon approval of the Plan by
PKS shareholders which was obtained in June 1996.
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 268,000 40.40 40.40
Options Cancelled - - -
Options Exercised - - -
-------
Balance December 30, 1995 268,000 $ 40.40 $ 40.40
======= =======
Options Granted 179,000 $ 49.50 $ 49.50
Options Cancelled (3,000) 40.40 40.40
Options Exercised - - -
-------
Balance December 28, 1996 444,000 $40.40 - $49.50 $ 44.07
======= =============== ========
Options exercisable
December 30, 1995 - $ - $ -
December 28, 1996 53,000 40.40 40.40
The weighted average remaining life for the 444,000 options outstanding on
December 28, 1996 is 9.4 years.
The Company has elected to adopt only the required disclosure provisions
and not the optional expense recognition provisions under Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", that established a fair value method of accounting for
stock options and other equity instruments. The compensation cost for
1996 and 1995 that would have been recognized in the consolidated
statements of earnings if the fair value based method had been applied
to the grants of options made in 1996 and 1995 is not material.
(18) Fair Value of Financial Instruments.
The estimated fair value of the Company's financial instruments are as
follows:
(dollars in millions) 1996 1995
Carrying Fair Carrying Fair
Amount Value Amount Value
Cash and cash equivalents (Note 8) $ 320 $ 320 $ 457 $ 457
Marketable securities (Note 8) 426 426 502 502
Restricted securities (Note 8) 25 25 30 30
Escrowed securities in lieu of
retainage (Note 9) 53 53 61 61
Investment in equity securities
including CalEnergy (Notes 4 and 8) 395 747 242 300
CalEnergy convertible debenture - - 65 65
Long-term debt (Notes 8 and 12) 389 396 412 428
(19) Other Matters
In October 1996, the PKS Board of Directors directed management to
pursue a listing of PKS Class D Stock on a major securities exchange or
the NASDAQ National Market as soon as practical during 1998. The Board
does not foresee circumstances under which PKS would list the Class D
Stock prior to 1998. The Board believes that a listing will provide PKS
with a capital structure more suitable for the further development of
KDG's business plan. It would also provide liquidity for Class D
shareholders without impairing PKS' capital base.
The Board's action does not ensure that a listing of Class D Stock will
occur in 1998, or any time. The Board could delay or abandon plans to
list the stock if it determined that such action would be in the best
interests of all PKS' shareholders. In addition, PKS' ability to list
Class D Stock will be subject to factors beyond its control, including
the laws, regulations, and listing eligibility criteria in affect at the
time a listing is sought, as well as stock market conditions at the
time. Furthermore, the Board might decide to couple the listing of
Class D Stock with a public offering of newly-issued Class D shares in
order to raise additional capital for KDG. Such an offering could delay
or alter the listing plan.
Class C shareholders are currently able to convert their shares into
Class D Stock pursuant to the Company's Certificate of Incorporation.
If such listing occurs, Class C shareholders will continue to be able
to convert their shares into Class D Stock. However, the Company will
not be obligated to repurchase Class D shares.
In 1994, several former shareholders of a subsidiary of MFS 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. Plaintiffs allege that MFS fraudulently concealed
material information from them, causing them to sell their shares of the
subsidiary to MFS at an inadequate price. The lawsuit was settled in
July, 1996. KDG had previously agreed to indemnify MFS and the chief
executive officer against any liabilities arising from this lawsuit.
The settlement, net of reserves established, did not materially affect
KDG's financial position, results of operations or cash flows.
In June 1995, KCG exchanged its interest in a wholly-owned subsidiary
involved in gold mining activities for 4,000,000 common shares of
Kinross Gold Corporation, a publicly traded corporation.
KCG 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 on 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 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.
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 28, 1996, the Company had
outstanding letters of credit of approximately $125 million.
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 24 years
aggregate $68 million.
(20) Subsequent Events
In January 1997, approximately 1.7 million shares of Class B&C Stock,
with a redemption value of $71 million, were converted into 1.3 million
shares of Class D Stock.
In February 1997, KDG purchased an office building in Aurora, Colorado
for $21 million. By investing in real estate, the Company is able to
defer $40 million of the taxable gain with respect to the Whitney
Benefits settlement. KDG may make additional real estate investments in
1997 to defer the balance.
Also in February 1997, C-TEC announced a plan to separatethat its operations along business linesboard of
directors had approved the planned restructuring of C-TEC into
three separate, publicly traded companies effective September 30, 1997.
Under the terms of the restructuring C-TEC shareholders
received stock in the following companies:
CTCo,- Commonwealth Telephone Enterprises, Inc., containing the local
telephone group and related engineering business;
C-TEC- Cable Michigan, Inc., containing the cable television
operations in Michigan; and
- RCN Corporation, Inc., which will consistconsists of RCN Telecom Services;
C-TEC's existing cable television operationssystems in New York, New Jersey, and Pennsylvania;the 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, and New York City.
The restructuring will permit investorsCity and the financial market to better
understand and evaluate C-TEC's various businesses. In addition,Washington D.C.
As a result of the restructuring, will allow C-TEC to raise capital for the future expansion of
the RCN business on more efficient terms.
The plan is contingent upon receipt of a private letter ruling from the
Internal Revenue Service regarding the tax-free nature of the spin-off,
the receipt of other regulatory approvals, and certain other conditions.
If the reorganization and spin-offs occur, KDG will ownLevel 3 owns less than 50% of
the outstanding shares and voting rights of each entity, and
will accounttherefore accounts for each entity using the equity method.method as
of the beginning of 1997. C-TEC's financial position, results
of operations and cash flows are consolidated in the 1996 and
1995 consolidated financial statements.
The following is summarized financial information of PKS hadthe three
entities created as result of the C-TEC beenrestructuring:
Operations (dollars in millions) 1997 1996 1995
Commonwealth Telephone Enterprises
Revenue $ 197 $ 186 $ 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 $ 9 $ 9 $ 16
====== ====== ======
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 February 1997, Level 3 purchased the Pavillion Towers office
buildings in Aurora, Colorado for $22 million.
Investments in 1996 also include C-TEC's 40% ownership of
Megacable S.A. de C.V., Mexico's second largest cable operator,
accounted for utilizingusing the equity methodmethod.
(8) Intangible Assets
Intangible assets consist of the following at December 27, 1997
and December 28, 1996:
(dollars in the consolidated financial
statements as ofmillions) 1997 1996
CPTC intangibles and other $ 23 $ 23
C-TEC:
Goodwill - 198
Franchise and subscriber lists - 229
Other - 34
------ ------
23 484
Less accumulated amortization (2) (131)
------ ------
$ 21 $ 353
====== ======
(9) Long-Term Debt
At December 27, 1997 and December 28, 1996, long-term debt was
as follows:
(dollars in millions) 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) - 110
Senior Secured Notes
( 9.65% due 1999) - 134
Term Credit Agreement - Morgan Guaranty
Trust Company (7% due 2002) - 18
-------- ------
- 262
-------- ------
140 377
Less current portion (3) (57)
-------- ------
$ 137 $ 320
======== ======
CPTC:
In August 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 an interest rate swap
arrangement with the same parties. The swap expires in January
2004 and December 30, 1995fixes the interest rate on the Bank Debt from 9.21% to
9.71% during the term of the swap agreement.
The institutional note is with Connecticut General Life
Insurance Company, a subsidiary of CIGNA Corporation. The note
converted into a term loan upon completion of the SR91 toll
road.
Substantially all the assets of CPTC 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
facilitate the completion of the project. In 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 of $- million, $5 million and $7
million 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 2002 are as
follows (in millions): 1998 - $3; 1999 -$6; 2000 - $5; 2001 -
$6 and $8 in 2002.
(10) Income Taxes
An analysis of the income tax (provision) benefit attributable
to earnings from continuing operations before income taxes and
minority interest for the three years ended December 28, 1996.27, 1997
follows:
(dollars in millions) 1997 1996 1995
Assets
Current Assets:
CashCurrent:
U.S. federal $ (54) $ (61) $ (66)
Foreign - (4) (4)
State (1) (6) (3)
------ ------ ------
(55) (71) (73)
Deferred:
U.S. federal 103 67 145
Foreign - - 3
State - 1 4
------- ------ ------
103 68 152
------- ------ ------
$ 48 $ (3) $ 79
======= ====== ======
The United States and cash equivalents $ 244 $ 408
Marketable securities 379 382
Restricted securities 25 30
Receivables, less allowanceforeign components of $17earnings from
continuing operations for tax reporting purposes, before equity
loss in MFS (recorded net of tax), minority interest and $10 315 343
Costs and earnings in excess of billings
on uncompleted contracts 80 78
Investment in construction joint ventures 91 73
Deferred income
taxes 49 57
Other 32 33
------- -------
Total Current Assets 1,215 1,404
Property, Plant and Equipment, net 339 328
Investments 1,166 823
Intangible Assets, net 38 38
Other Assets 47 76
------- -------
$ 2,805 $ 2,669
======= =======
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 197 $ 212
Short-term borrowings - 45
Current portion of long-term debt 2 6
Accrued costs and billings in excess of revenue
on uncompleted contracts 112 111
Accrued insurance costs 81 79
Other 71 75
------- --------
Total Current Liabilities 463 528
Long-Term Debt, less current portion 125 106
Deferred Income Taxes 62 125
Retirement Benefits 45 51
Accrued Reclamation Costs 99 100
Other Liabilities 188 144
Minority Interest 4 8
Total Stockholders' Equity 1,819 1,607
------- -------
$ 2,805 $ 2,669
======= =======
PETER KIEWIT SONS', INC.
Notes to Consolidated Financial Statements
(20) Subsequent Events (cont.)follows:
(dollars in millions) 1997 1996 1995
1994
RevenueUnited States $ 2,56731 $ 2,577106 $ 2,413
Cost187
Foreign - 1 3
------ ------ ------
$ 31 $ 107 $ 190
====== ====== ======
A reconciliation of Revenue (2,192) (2,249) (2,119)
--------- -------- --------
375 328 294
Generalthe actual income tax (provision) benefit
and Administrative Expenses (174) (201) (152)
--------- -------- -------
Operating Earnings 201 127 142
Other Income (Expense):
Equity Earnings, net 8 20 (4)
Investment Income, net 58 52 28
Interest Expense, net (9) (3) (5)
Gain on Subsidiary's Stock Transactions, net - 3 54
Other, net 31 154 21
--------- -------- -------
88 226 94
Equity Lossthe 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 27, 1997 follows:
(dollars in millions) 1997 1996 1995
Computed tax at statutory rate $ (11) $ (37) $ (67)
State income taxes (1) (3) -
(131) (102)
--------- -------- -------Depletion 3 3 2
Goodwill amortization - (3) (2)
Tax exempt interest 2 2 2
Prior year tax adjustments 62 44 51
Compensation expense attributable
to options (7) - -
MFS deferred tax - - 93
Taxes on foreign operations - (2) 1
Other - (7) (1)
------ ------ ------
$ 48 $ (3) $ 79
====== ====== ======
During the three years ended December 27, 1997, the Company
settled a number of disputed tax issues related to prior years
that have been included in prior year tax 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 27, 1997 and December 28, 1996 were as
follows:
(dollars in millions) 1997 1996
Deferred tax liabilities:
Investments in securities $ 7 $ 11
Investments in joint ventures 33 45
Asset bases - accumulated depreciation 53 225
Coal sales 41 15
Other 16 16
----- ------
Total deferred tax liabilities 150 312
Deferred tax assets:
Compensation - retirement benefits 25 29
Investment in subsidiaries 8 2
Provision for estimated expenses 7 26
Net operating losses of subsidiaries - 6
Foreign and general business tax credits 3 67
Alternative minimum tax credits - 16
Other 9 19
Valuation allowances - (6)
----- ------
Total deferred tax assets 52 159
----- ------
Net deferred tax liabilities $ 98 $ 153
===== ======
(11) Stockholders' Equity
PKS is generally committed to purchase all common stock in
accordance with the Certificate of Incorporation. Issuances and
repurchases of common shares, including conversions, for the
three years ended December 27, 1997 were as follows:
Class Class
B&C Stock D Stock
Shares issued in 1995 1,021,875 530,610
Shares repurchased in 1995 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",
which 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
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 Before Income Taxesper 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 Minority Interest 289 222 134
Income Tax (Provision) Benefit (70) 22 (24)
Minority Interestpro forma and as reported amounts did not vary as
the options granted in Net Loss of Subsidiaries 21995 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 - - -
---------
-------- -------
Net EarningsBalance December 30, 1995 1,340,000 $ 2218.08 $ 2448.08
======== ========
Options granted 895,000 $ 110
========= ======== =======
On March 21, C-TEC paid the minority shareholders of Freedom $15 million
for the contingent consideration outlined in the original purchase agreement
(Note 5) and $15 million to acquire the remaining minority interest of
Freedom. These amounts will be allocated to goodwill and are expected to
be amortized over a period of approximately 6 years. C-TEC also paid $10
million to terminate a marketing services agreement with the former
minority shareholders of Freedom. C-TEC will charge this amount to
operations for the quarter ended March 31, 1997.
On March 26, 1997, a KCG sponsored construction joint venture was awarded a
$1.3 billion contract to reconstruct Interstate I-15 through the Salt Lake
City region. The project is being undertaken in preparation for the 2002
Olympic Games. KCG's share of this project is approximately $700 million.
SCHEDULE II
PETER KIEWIT SONS', INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts and Reserves
Additions Amounts9.90 $ 9.90
Options cancelled (15,000) 8.08 8.08
Options exercised - - -
---------
Balance Charged to Charged Balance
Beginning Costs and to End of
(dollars in millions) of Period Expenses Reserves Other Period
Year ended December 28, 1996 Allowance for doubtful
trade accounts2,220,000 $8.08 - $9.90 $ 128.81
============= ========
Options granted 7,495,465 $9.00 - $10.85 $ 139.93
Options cancelled (53,000) $9.90 $ (5)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 - $ - $ 20
Reserves:
Insurance claims 79 22 (20) -
81
Retirement benefits 54December 28, 1996 265,000 8.08 8.08
December 27, 1997 1,295,269 $8.08 - (6) - 48
Year ended$9.90 8.70
The weighted average remaining life for the 7,344,000 options
outstanding on 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
(a)27, 1997 is 8.3 years.
(13) Industry and Geographic Data
The Company settled its liability with respectconducts in continuing operations primarily in
three reportable segments: information services, telecommunications
and coal mining. Other primarily includes CPTC and corporate overhead
not attributable to certain
postretirement life insurance benefitsa 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 and energy
businesses have been recorded under discontinued operations.
A summary of the Company's operations by purchasing insurance coverage
from a third party insurance company.
industry and
geographic region is as follows:
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.