CH2M Hill Companies 10-Q 2005 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

(Mark One)

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM                  TO               

Commission File Number 000-27261

CH2M HILL Companies, Ltd.

(Exact name of registrant as specified in its charter)

Oregon	93-0549963
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification Number)
9191 South Jamaica Street,
Englewood, CO	80112-5946
(Address of principal executive offices)	(Zip Code)
(303) 771-0900
(Registrant’s telephone number, including area code)

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 ý No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).     Yes ý  No o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes o  No ý

As of November 3, 2005, the registrant had 31,980,900 shares of common stock, $0.01 par value per share, issued and outstanding.

CH2M HILL COMPANIES, LTD. AND SUBSIDIARIES

SEPTEMBER 30, 2005

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
	Item 1.  Consolidated Condensed Financial Statements (unaudited):
	Balance Sheets as of September 30, 2005 and December 31, 2004
	Statements of Income for the Three- and Nine-month Periods Ended September 30, 2005 and 2004
	Statements of Cash Flows for the Nine-month Periods Ended September 30, 2005 and 2004
	Notes to Consolidated Condensed Financial Statements
	Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3.  Quantitative and Qualitative Disclosures about Market Risk
	Item 4.  Controls and Procedures
PART II. OTHER INFORMATION
	Item 1.  Legal Proceedings
	Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
	Item 3.  Defaults Upon Senior Securities
	Item 4.  Submission of Matters to a Vote of Security Holders
	Item 5.  Other Information
	Item 6.  Exhibits
SIGNATURES

Part I - FINANCIAL INFORMATION

Item 1 - Consolidated Condensed Financial Statements

CH2M HILL COMPANIES, LTD. AND SUBSIDIARIES

Consolidated Condensed Balance Sheets

(Unaudited)

(Dollars in thousands, except share data)

	September 30, 2005			December 31, 2004
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	50,473		$	55,885
Receivables, net
Client accounts	317,841			302,743
Unbilled revenue	264,070			210,089
Other	4,079			7,146
Prepaid expenses and other assets	20,571			14,936
Total current assets	657,034			590,799
INVESTMENTS IN UNCONSOLIDATED AFFILIATES	129,311			58,697
PROPERTY, PLANT and EQUIPMENT, net	27,940			26,061
GOODWILL	35,115			34,780
INTANGIBLE ASSETS, net	27,045			33,343
OTHER ASSETS, net	33,545			34,743
DEFERRED INCOME TAXES	53,047			53,047
TOTAL ASSETS	$	963,037		$	831,470
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt	$	1,340		$	2,813
Accounts payable	129,272			123,248
Billings in excess of revenues	109,223			88,084
Accrued incentive compensation	25,832			34,500
Employee related liabilities	117,790			105,416
Accrued project costs	51,641			54,235
Other current liabilities	75,974			75,392
Current deferred income taxes	48,458			18,734
Total current liabilities	559,530			502,422
OTHER LONG-TERM LIABILITIES	96,572			95,008
LONG-TERM DEBT	3,036			4,190
Total liabilities	659,138			601,620
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ EQUITY
Preferred stock Class A $0.02 par value, 500,000 shares authorized; no shares issued	—			—
Common stock, $0.01 par value, 100,000,000 shares authorized; 31,956,445 and 31,214,918 issued and outstanding at September 30, 2005 and December 31, 2004, respectively	320			312
Additional paid-in capital	42,428			36,968
Retained earnings	276,785			208,019
Accumulated other comprehensive loss	(15,634		)	(15,449		)
Total shareholders’ equity	303,899			229,850
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	963,037		$	831,470

The accompanying notes are an integral part of these consolidated condensed financial statements.

1

CH2M HILL COMPANIES, LTD.

Consolidated Condensed Statements of Income

(Unaudited)

(Dollars in thousands except share and per share data)

	Three-Month Period Ended September 30,						Nine-Month Period Ended September 30,
	2005			2004			2005			2004
Gross revenue	$	801,105		$	733,881		$	2,267,182		$	2,016,508
Operating expenses:
Direct cost of services and overhead	(643,169		)	(596,578		)	(1,821,060		)	(1,622,990		)
General and administrative	(151,712		)	(129,773		)	(432,279		)	(375,988		)
Operating income	6,224			7,530			13,843			17,530
Other income (expense):
Equity in earnings of joint ventures and affiliated companies	82,918			7,745			99,393			22,337
Gain on sale of equity investment	—			—			—			1,528
Interest income	585			1,213			1,457			2,342
Interest expense	(531		)	(505		)	(1,337		)	(1,566		)
Income before provision for income taxes	89,196			15,983			113,356			42,171
Provision for income taxes	(34,967		)	(5,099		)	(44,589		)	(15,655		)
Net income	$	54,229		$	10,884		$	68,767		$	26,516
Net income per common share:
Basic	$	1.69		$	0.35		$	2.15		$	0.84
Diluted	$	1.66		$	0.34		$	2.12		$	0.83
Weighted-average number of common shares:
Basic	32,084,654			31,323,644			31,927,810			31,584,593
Diluted	32,625,806			31,774,043			32,496,308			32,002,881

The accompanying notes are an integral part of these consolidated condensed financial statements.

2

CH2M HILL COMPANIES, LTD. AND SUBSIDIARIES

Consolidated Condensed Statements of Cash Flows

(Unaudited)

(Dollars in thousands)

	Nine-Month Period Ended September 30,
	2005			2004
Cash flows from operating activities:
Net income	$	68,767		$	26,516
Adjustments to reconcile net income to net cash used in operating activities -
Depreciation and amortization	11,782			11,599
Realized gain on sale of investment	—			(1,528		)
Stock-based compensation for employees and employee benefit plans	21,880			21,525
Allowance for uncollectible accounts	1,965			1,875
Deferred income tax expense	29,232			1,565
Equity in earnings of unconsolidated affiliates, net	(61,420		)	(9,421		)
Change in current assets and liabilities
Receivables and unbilled revenue	(43,280		)	(49,480		)
Prepaid expenses and other	(4,076		)	3,740
Accounts payable	(5,964		)	(50,413		)
Billings in excess of revenues	12,708			5,985
Employee related liabilities	67			8,818
Other accrued liabilities	50			55,806
Other	598			2,984
Net cash provided by operating activities	32,309			29,571
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures	(7,109		)	(4,731		)
Cash increase upon consolidation of affiliated companies	7,699			—
Investments in unconsolidated affiliates	(14,256		)	1,741
Net cash used in investing activities	(13,666		)	(2,990		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing on line of credit	102,700			418,100
Payments on line of credit and long-term debt	(105,382		)	(417,625		)
Purchases and retirements of stock	(20,287		)	(28,662		)
Net cash used in financing activities	(22,969		)	(28,187		)
EFFECT OF EXCHANGE RATE CHANGES ON CASH	(1,086		)	(731		)
DECREASE IN CASH AND CASH EQUIVALENTS	(5,412		)	(2,337		)
CASH AND CASH EQUIVALENTS, beginning of period	55,885			30,885
CASH AND CASH EQUIVALENTS, end of period	$	50,473		$	28,548
SUPPLEMENTAL DISCLOSURES:
Cash paid for income taxes	$	24,245		$	8,430
Cash paid for interest	$	1,437		$	773

The accompanying notes are an integral part of these consolidated condensed financial statements.

3

CH2M HILL COMPANIES, LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(In thousands, except share and per share data)

(1)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited interim financial information has been prepared in accordance with the interim reporting rules and regulations of the U.S. Securities and Exchange Commission and therefore does not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States (GAAP). The preparation of financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Estimates have been prepared on the basis of the most current and best available information and actual results could differ from those estimates.  Certain amounts in the prior period have been reclassified to conform to current period presentation.

In the opinion of CH2M HILL Companies, Ltd.’s (CH2M HILL) management, the accompanying unaudited consolidated condensed financial statements of the interim periods presented contain all adjustments necessary to present fairly the financial position of CH2M HILL as of September 30, 2005 and the results of operations and cash flows for the periods presented. All such adjustments are of a normal recurring nature. The results of operations for the three- and nine-month periods ended September 30, 2005 are not necessarily indicative of the results that may be achieved for a full year and cannot be used to indicate financial performance for the entire year. These financial statements should be read in conjunction with the notes to the consolidated financial statements contained in CH2M HILL’s Annual Report on Form 10-K for the year ended December 31, 2004.

Shareholders’ Equity

The significant changes in shareholders’ equity for the nine-month period ended September 30, 2005 are as follows:

	Shares		Amount
Shareholders’ Equity, December 31, 2004	31,214,918		$	229,850
Net income	—		68,767
Shares issued in connection with stock-based compensation and employee benefit plans	2,044,061		25,531
Shares purchased and retired	(1,302,534	)	(20,287		)
Other	—		38
Shareholders’ Equity, September 30, 2005	31,956,445		$	303,899

Stock-Based Compensation Plans

CH2M HILL accounts for its stock-based employee compensation plans using the intrinsic value method under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. The following table illustrates the pro forma effect on net income and earnings per share if CH2M HILL had applied the fair value recognition provisions of Statement of Financial Accounting Standard (SFAS) No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation. The following pro forma disclosures are required under SFAS No. 148, “Accounting for Stock-Based Compensation Transition and Disclosure – an Amendment of SFAS No. 123.”

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	Three-Month Period Ended September 30,						Nine-Month Period Ended September 30,
	2005			2004			2005			2004
Net income, as reported	$	54,229		$	10,884		$	68,767		$	26,516
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects	4,309			6,211			11,544			13,174
Deduct: Stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects	(4,716		)	(6,498		)	(12,597		)	(14,074		)
Pro forma net income	$	53,822		$	10,597		$	67,714		$	25,616
Earnings per share:
Basic – as reported	$	1.69		$	0.35		$	2.15		$	0.84
Basic – pro forma	$	1.68		$	0.34		$	2.12		$	0.81
Diluted – as reported	$	1.66		$	0.34		$	2.12		$	0.83
Diluted – pro forma	$	1.65		$	0.33		$	2.08		$	0.80

The assumptions used in calculating the pro forma disclosures are as follows:

	2005		2004
Risk free interest rate	3.84	%	2.12	%
Expected dividend yield	0.00	%	0.00	%
Expected lives	4.6 Years		4.4 Years
Expected volatility	0.001	%	0.001	%

New Accounting Standards

In December 2004, the FASB issued SFAS No. 123 (Revised) “Share-Based Payments,” (SFAS 123(R)), which replaces SFAS No. 123 and supercedes APB No. 25, “Accounting for Stock Issued to Employees.”  SFAS 123(R) is effective as of the beginning of the first interim or annual reporting period that begins after December 15, 2005. SFAS 123(R) requires that the costs resulting from all share-based payment transactions be recognized in the financial statements. SFAS 123(R) generally applies to all awards granted after the required effective date, but does not apply to awards granted in periods before the required effective date, except if prior awards are modified, repurchased or cancelled after the effective date.  SFAS 123(R) also applies to unvested awards outstanding as of the effective date. SFAS 123(R) also amends SFAS No. 95, “Statement of Cash Flows,” to require that excess tax benefits be reported as a financing cash inflow rather than as a reduction of taxes paid. Adoption of SFAS 123(R) will require CH2M HILL to record an expense for stock-based compensation plans using the fair value method.  The implementation of SFAS 123(R) will have an impact on CH2M HILL’s financial statements as management has historically recorded compensation expense in accordance with the instrinsic value method under APB No. 25. CH2M HILL will adopt SFAS No. 123(R) on January 1, 2006 and management is currently assessing the impact on CH2M HILL’s consolidated financial statements.

5

The American Jobs Creation Act created a temporary incentive for U.S. multinationals to repatriate accumulated earnings outside of the U.S. by providing an 85% dividend received deductions for controlled foreign corporations.  In December 2004, the FASB issued FASB Staff Position (FSP) No. 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004,” which provides accounting and disclosure guidance for this repatriation provision.  CH2M HILL has completed its evaluation of the new repatriation provisions and has determined that it will not pursue the repatriation of accumulated earnings outside of the U.S.  It is management’s intention to continue to indefinitely reinvest the undistributed foreign earnings.

In June 2005, the Emerging Issues Task Force issued EITF No. 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights” (EITF No. 04-5).  This issue provides a framework for evaluating whether a general partner or group of general partners or managing members controls a limited partnership or limited liability company and therefore should consolidate the entity.  Although CH2M HILL has yet to complete the analysis, management does not believe that the adoption of EITF No. 04-5 will have a material impact on its financial position, net earnings or cash flows.

(2) SEGMENT INFORMATION

Certain financial information relating to the three- and nine-month periods ended September 30, 2005 and 2004 for each segment is provided below.  The financial information for the three- and nine-month periods ended September 30, 2004 for each segment has been reclassified to conform to the current period presentation.

Three-Month Period Ended September 30, 2005	Federal		Civil Infrastructure			Industrial		Other			Financial Statement Balances
Revenues from external customers	$	246,817	$	270,050		$	284,238	$	—		$	801,105
Inter-segment sales	2,381		5,803			4,427		(12,611		)	—
Equity in earnings of joint ventures and affiliated companies	82,928		(66		)	56		—			82,918
Segment profit (loss)	82,196		8,684			3,343		(5,027		)	89,196
Three-Month Period Ended September 30, 2004	Federal		Civil Infrastructure			Industrial		Other			Financial Statement Balances
Revenues from external customers	$	283,538	$	212,656		$	237,687	$	—		$	733,881
Inter-segment sales	1,743		4,197			2,599		(8,539		)	—
Equity in earnings of joint ventures and affiliated companies	6,552		1,122			71		—			7,745
Segment profit (loss)	8,246		9,492			2,099		(3,854		)	15,983
Nine-month Period Ended September 30, 2005	Federal		Civil Infrastructure			Industrial		Other			Financial Statement Balances
Revenues from external customers	$	770,679	$	760,525		$	735,978	$	—		$	2,267,182
Inter-segment sales	6,807		15,693			14,285		(36,785		)	—
Equity in earnings of joint ventures and affiliated companies	93,911		5,279			203		—			99,393
Segment profit (loss)	95,014		24,738			5,698		(12,094		)	113,356
Nine-Month Period Ended September 30, 2004	Federal		Civil Infrastructure			Industrial		Other			Financial Statement Balances
Revenues from external customers	$	755,660	$	631,164		$	629,684	$	—		$	2,016,508
Inter-segment sales	7,083		12,488			3,582		(23,153		)	—
Equity in earnings of joint ventures and affiliated companies	17,820		4,413			104		—			22,337
Segment profit (loss)	23,760		21,453			6,339		(9,381		)	42,171

6

(3) COMPREHENSIVE INCOME

Comprehensive income includes unrealized gains and losses on equity investments and foreign currency translation gains or losses that have been reflected as a component of shareholders’ equity and have not impacted net income.  The following table summarizes the components of comprehensive income for the three- and nine-month periods ended September 30, 2005 and 2004:

	Three-Month Period Ended September 30,						Nine-Month Period Ended September 30,
	2005			2004			2005			2004
Net income	$	54,229		$	10,884		$	68,767		$	26,516
Change in unrealized gains (losses) on equity investments	323			(711		)	775			1,025
Change in foreign currency translation gains (losses)	(813		)	859			(960		)	151
Comprehensive income	$	53,739		$	11,032		$	68,582		$	27,692

(4) EARNINGS PER SHARE

Basic earnings per share (EPS) excludes the dilutive effect of common stock equivalents and is computed by dividing net income by the weighted-average number of shares outstanding during the period.  Diluted EPS includes the dilutive effect of common stock equivalents, which consist of stock options, and is computed using the weighted-average number of shares and common stock equivalents outstanding during the period.

A reconciliation of basic and diluted EPS for the three- and nine-month periods ended September 30 follows (in thousands, except per share amounts):

	Three-Month Period Ended September 30,				Nine-Month Period Ended September 30,
	2005		2004		2005		2004
Numerator:
Net Income	$	54,229	$	10,884	$	68,767	$	26,516
Denominator:
Basic income per share- weighted-average shares outstanding	32,085		31,324		31,928		31,585
Dilutive effect of common stock equivalents	541		450		568		418
Diluted income per share- adjusted weighted-average shares outstanding, assuming conversion of common stock equivalents		32,626		31,774		32,496		32,003
Basic net income per share	$	1.69	$	0.35	$	2.15	$	0.84
Diluted net income per share	$	1.66	$	0.34	$	2.12	$	0.83

(5) INVESTMENTS IN UNCONSOLIDATED AFFILIATES

CH2M HILL routinely enters into joint ventures to service the needs of its clients.  Such arrangements are customary in the engineering and construction industry and generally are project specific.  CH2M HILL accounts for its investments in affiliated unconsolidated companies using the equity method of accounting. As of September 30, 2005 and December 31, 2004, the investments in unconsolidated affiliates were $129,311 and $58,697, respectively. CH2M HILL’s proportionate share of net income or loss is included as equity in earnings of joint ventures and affiliated companies on the accompanying consolidated condensed statements of income.  As of September 30, 2005, CH2M HILL had the following significant investments in affiliated unconsolidated companies accounted for under the equity method of accounting:

7

	% Ownership
Domestic:
AGVIQ-CH2M HILL Joint Venture	49.0	%
BPC Airport Partners Joint Venture	34.5	%
CH2M HILL/ VT Griffin	49.0	%
CH2M – WG Idaho, LLC	50.5	%
Environmental Engineering Solutions	38.0	%
Holm II, Inc./CH2M HILL Constructors, Inc.	50.0	%
Johnson Controls-Hill, LLC	25.0	%
Kaiser-Hill Company, LLC	50.0	%
Kakivik Asset Management	33.3	%
Milwaukee Transportation Partners, LLC	50.0	%
OMI/Thames Water Stockton, Inc.	50.0	%
Parsons CH2M HILL Program Management Consultants	45.0	%
Pizzagalli/CCI Joint Venture	50.0	%
Stockton D/B Joint Venture	50.0	%
Washington-IDC	23.0	%
Foreign:
BTC Group	33.3	%
CH2M HILL BECA, Ltd.	50.0	%
CH2M HILL/ Parsons, a Joint Venture	50.0	%
CH2M PB JV, Pte	50.0	%
CHDE Water	50.0	%
CHBM Water Joint Venture	50.0	%
Maroochy Alliance Joint Venture	40.0	%

CH2M HILL’s largest unconsolidated joint venture is Kaiser-Hill Company, LLC (Kaiser-Hill), in which CH2M HILL owns a 50% interest.  Kaiser-Hill’s revenues are derived from the U.S. Department of Energy’s (DOE) Performance Based Integrating Management Contract for the Rocky Flats Closure Project in Golden, Colorado.  Kaiser-Hill is compensated through a base fee affected, up or down, by its performance against the agreed site target closure costs.  The ultimate fee will also be impacted by the schedule to achieve site closure and the safety of Kaiser-Hill’s performance.

During the three-month periods ended September 30, 2005 and 2004, CH2M HILL recognized earnings from Kaiser-Hill of $76.2 million and $5.1 million, respectively, and $86.3 million and $15.5 million for the nine-month periods ended September 30, 2005 and 2004, respectively.  The third quarter earnings for 2005 include an incremental fee of $71.2 million ($43.3 million, net of tax) as Kaiser-Hill recognized revenue related to the impact of favorable performance against the agreed upon target closure costs, the schedule to achieve site closure, and its job site safety.  In the third quarter of 2005, Kaiser-Hill recognized additional performance fees as a result of the elimination of job site risks and other contract uncertainties.   In addition, although some remaining close-out activities remain to be completed, including the DOE’s review and acceptance of the site work, Kaiser-Hill declared physical completion of the site on October 13, 2005.

During the nine-month periods ended September 30, 2005 and 2004, we received $31.5 million and $7.0 million, respectively, of distributed earnings from Kaiser-Hill.  Our investment in Kaiser-Hill as of September 30, 2005 was $90.1 million compared to $35.2 million, at December 31, 2004.  The majority of this increase is related to the recording of the additional performance fees.  Kaiser-Hill’s ability to distribute cash is based on pre-negotiated payment terms in accordance with its contract with the DOE and can be different from the earnings recognized for accounting purposes.  We anticipate receiving a majority of the undistributed earnings in 2006.

8

Summarized financial information for the three- and nine-month periods ended September 30, 2005 and 2004, for CH2M HILL’s unconsolidated affiliates is as follows:

	Three-Month Period Ended September 30,						Nine-Month Period Ended September 30,
	2005			2004			2005			2004
RESULTS OF OPERATIONS:
Revenues	$	564,714		$	243,910		$	1,056,290		$	631,403
Direct costs	(393,422		)	(221,905		)	(844,359		)	(572,828		)
Gross margin	171,292			22,005			211,931			58,575
General and administrative expenses	(2,889		)	(6,613		)	(10,235		)	(15,305		)
Operating income	168,403			15,392			201,696			43,270
Other expense, net	(199		)	(140		)	(65		)	(630		)
Net Income	$	168,204		$	15,252		$	201,631		$	42,640

In January 2003, the FASB issued Interpretation (FIN) No. 46, “Consolidation of Variable Interest Entities,” which provides guidance on when to consolidate variable interest entities (VIEs). In December 2003, the FASB revised FIN 46 with FIN 46R which conformed FIN 46 to previously issued FASB Staff Positions. CH2M HILL adopted the provisions of FIN 46R immediately for entities created after December 31, 2003. For entities created before December 31, 2003, CH2M HILL adopted FIN 46R in the first quarter of 2005, as required.

CH2M HILL has interests in multiple joint ventures that are considered VIEs under FIN 46R. These entities facilitate the completion of contracts that are jointly owned with CH2M HILL’s joint venture partners. These joint ventures are formed to leverage the skills of the respective partners and include consulting, construction, design, project management and operations and maintenance contracts. CH2M HILL’s risk of loss on joint ventures is similar to what the risk of loss would be if the project was self-performed, other than the fact that the risk is shared with CH2M HILL’s partner(s).

CH2M HILL has classified entities identified as VIEs into two groups, the first of which includes those entities that CH2M HILL has consolidated under the guidance of FIN 46R in the first quarter of 2005 and the second group which includes those entities which CH2M HILL was not required to consolidate. At September 30, 2005, the assets and liabilities, including minority interest balances, of the identified VIEs that were consolidated are $55,080 and $56,019, respectively. At September 30, 2005, the assets and liabilities of the identified VIEs that were not consolidated are $38,810 and $31,543, respectively.

CH2M HILL has consolidated certain affiliates under the guidance of FIN 46R in the first quarter of 2005. Therefore, the results of operations from those affiliates are not included in the above 2005 financial information.  The cumulative effect of consolidating these joint ventures, as of January 1, 2005, did not have a material impact on the consolidated financial statements.

9

(6) GOODWILL AND INTANGIBLE ASSETS

Intangible assets with finite lives consist of the following:

	Cost		Accumulated Amortization			Net finite-lived intangible assets
September 30, 2005
Contracts-in-place	$	26,594	$	(21,823	)	$	4,771
Patents and trademarks	5,219		(4,460		)	759
Contracted backlog	2,947		(2,410		)	537
Non-compete agreements and other	1,267		(615		)	652
Total finite-lived intangible assets	$	36,027	$	(29,308	)	$	6,719
December 31, 2004
Contracts-in-place	$	26,594	$	(18,640	)	$	7,954
Patents and trademarks	5,219		(2,346		)	2,873
Contracted backlog	2,947		(1,611		)	1,336
Non-compete agreements and other	2,330		(1,476		)	854
Total finite-lived intangible assets	$	37,090	$	(24,073	)	$	13,017

The contracts-in-place are amortized on a straight-line basis over the total life of the contracts of one to seven years. The other intangible assets are being amortized over their expected lives of one to six years.  The amortization expense reflected in the accompanying consolidated condensed statements of income totaled $1,974 and $1,988 for the three-month period ended September 30, 2005 and 2004, respectively, and $5,926 and $6,528 for the nine-month period ended September 30, 2005 and 2004, respectively.

Indefinite-lived intangible assets consist of the following:

	September 30,		December 31,
	2005		2004
Goodwill	$	35,115	$	34,780
Tradename	20,326		20,326
Total indefinite-lived intangible assets	$	55,441	$	55,106

(7) LINE OF CREDIT

CH2M HILL has an unsecured revolving line of credit with a maximum borrowing capacity of $160,000.  The credit facility may be used for general corporate purposes, permitted acquisitions and to support letters of credit. During the third quarter of 2005, CH2M HILL borrowed an average of $771 under this credit facility for general corporate purposes.  There were no amounts outstanding under the credit facility at September 30, 2005 or December 31, 2004.

The credit facility, as amended in August 2005, expires in July 2009.  At the option of CH2M HILL, the credit facility bears interest at a rate equal to either the London InterBank Offered Rate plus 1.00% to 1.75%, or the lender’s applicable base rate plus margin of 0.0% to 0.25% based on CH2M HILL’s ratio of funded debt to earnings before interest, taxes, depreciation and amortization, as defined. A commitment fee of approximately 0.20% to 0.35% per year on the unused portion of the line of credit is payable based on CH2M HILL’s ratio of funded debt to earnings before interest, taxes, depreciation and amortization, as defined.

The agreement requires CH2M HILL to, among other things, maintain minimum levels of net worth, a minimum coverage ratio of certain fixed charges, and a minimum leverage ratio. As of September 30, 2005, CH2M HILL was in compliance with the covenants required by the agreement.

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The agreement also allows CH2M HILL to issue letters of credit to support various trade activities. Issued letters of credit are reserved against the borrowing base of the line of credit. At September 30, 2005 and December 31, 2004, there were $26,008 and $20,382 issued and outstanding letters of credit, respectively.

(8) COMMITMENTS AND CONTINGENCIES

CH2M HILL maintains a variety of commitments that are generally made to provide support for various provisions in its engineering and construction contracts.  Letters of credit are provided to clients in the ordinary course of the contracting business in lieu of retention or for performance and completion guarantees on engineering and construction contracts.  CH2M HILL also posts surety bonds, which are contractual agreements issued by a surety, for the purpose of guaranteeing our performance on contracts. Bid bonds are also issued by a surety to protect owners and are subject to full or partial forfeiture for failure to perform obligations arising from a successful bid.

The office of the United States Attorney for the District of Connecticut has informed CH2M HILL that it is investigating a possible Clean Water Act (CWA) misdemeanor violation at two wastewater treatment facilities in Connecticut operated by a CH2M HILL subsidiary.  The investigation centers on the subsidiary employees’ failures to comply with sampling and reporting requirements of CWA.  These alleged violations do not involve environmental contamination.  CH2M HILL is cooperating with the investigation and is in the final stages of negotiations with the United States Attorney for the District of Connecticut to resolve the matter through a settlement, but no assurance can be given as to the eventual outcome of these negotiations.

CH2M HILL is party to various contractual guarantees and legal actions arising in the normal course of business.  From time to time, agencies of the U.S. government investigate whether CH2M HILL’s operations are being conducted in accordance with applicable regulatory requirements.  Because a large portion of CH2M HILL’s business comes from federal, state and municipal sources, CH2M HILL’s procurement practices at times are also subject to review and occasional investigations by U.S. and state attorneys offices.  Such state and U.S. government investigations, whether relating to government contracts or conducted for other reasons, could result in administrative, civil or criminal liabilities, including repayments, fines or penalties or could lead to suspension or debarment from future U.S. government contracting. These investigations often take years to complete and many result in no adverse action.  Damages assessed in connection with and the cost of defending any such actions could be substantial.  While the outcome of pending proceedings are often difficult to predict, as of September 30, 2005 management believes that no ongoing litigation or investigation is likely to result in a material adverse impact on CH2M HILL’s consolidated financial statements.

CH2M HILL has presented a claim to the Internal Revenue Service (IRS) relating to the research and experimentation tax credit for the years 1996-2003.  Although CH2M HILL is seeking resolution with the IRS, CH2M HILL only recognizes tax benefits related to these credits for financial statement purposes when it is probable that such benefits will be realized.  The amount of the tax credit claimed is significant, however, the ultimate amount to be realized and the timing of the recognition of the tax credit will depend upon the final resolution with the IRS.

On October 19, 2005, CH2M HILL closed on an operating lease facility which will be used for the construction of a fourth corporate headquarters building in Colorado.  The building is expected to be completed in 2007 and the lease term will be approximately sixty-nine months.  Yearly payments on the lease are estimated to be approximately $1.1 million and the lease requires CH2M HILL to guarantee a residual value of the facility equal to an amount not greater than 85% of the total facility costs.  The total facilities costs are estimated to be approximately $23.0 million.

(9) ACQUISITIONS

On October 1, 2005, the Company completed its acquisition of BBS Corp.  The Ohio-based firm specializes in planning, design, and construction administration of water and wastewater treatment, distribution, and collection systems.  Under the terms of the agreement, the Company paid $8.3 million in cash to acquire the stock of BBS Corp.  The Company will account for this acquisition under the purchase method of accounting.

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CH2M HILL COMPANIES, LTD.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis explains our general financial condition, changes in financial condition and results of operations as a whole and as to each of our operating segments including:

•      Factors affecting our business

•      Our revenues and profits

•      The source of our revenues and profits

•      Variations of revenues and profits from year to year

•      Cash sources and utilizations

•      The impact of the above on our overall financial condition

The following discussion and information contained elsewhere in this report contains, in addition to historical information, forward-looking statements, including without limitation, statements containing the words “believes,” “anticipates,” “expects” and words of similar import and statements regarding our strategy, financial performance and operations that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those described in the “Risk Factors” discussion of our Annual Report on Form 10-K for the year ended December 31, 2004 filed with the Securities and Exchange Commission (SEC) on February 24, 2005.  You should review this section in conjunction with our financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2004.

Our reports are available free of charge through our website as soon as reasonably practicable after we file them with, or furnish them to, the SEC.  Our website address is www.ch2m.com.  Our SEC filings, which include our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to such filings, are located in the About Us/Employee Ownership section of our website.

Introduction

We are one of the largest engineering services firms worldwide and are employee-owned. Our business provides engineering, construction, operation, major project management and related technical services to municipal, state, federal and private sector clients worldwide. Founded in 1946, we operate in more than 110 countries and have nearly 14,500 employees worldwide.

We believe we provide our clients with innovative project delivery using cost-effective approaches and advanced technologies. We continuously monitor acquisition and investment opportunities that will expand our portfolio of services, add value to the projects undertaken for clients, or enhance our capital strength. We believe that we are well positioned geographically, technically and financially to compete worldwide in the key markets we have elected to pursue and the clients we serve.

The engineering and construction industry continues to undergo substantial change as public and private clients privatize and outsource many of the services that were formerly provided internally. Numerous mergers and acquisitions in the industry have resulted in a group of larger firms that offer a full complement of single-source services including studies, designs, construction, operations, maintenance and in some instances, facility ownership. Included in the current trend is the movement towards longer-term contracts for the expanded array of services, e.g., 5 to 20 year contracts. These larger, longer, more full-service contracts require us to have substantially greater financial capital than has historically been necessary to remain competitive.

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We provide services to our clients through three operating segments — Federal, Civil Infrastructure and Industrial — which are aligned with the types of clients we serve.  The structure provides for better decision making on an enterprise-wide basis.  For example, while our Federal segment generally provides a comprehensive range of services to the U.S. Federal government, it also provides services to international governments. Our Civil Infrastructure segment generally provides a comprehensive range of services to various state and local governments. Our Industrial segment generally provides a comprehensive range of services to various private sector clients.

Results of Operations for the Three- and Nine-Month Periods Ended September 30, 2005 Compared to the Same Periods of 2004

Revenues and pre-tax profit or loss for the three- and nine-month periods ended September 30, 2005 and 2004 by operating segment were as follows:

Three-Month Period Ended September 30,

(in millions)

	Revenues								Pre-Tax Profit (Loss)
	2005				2004				2005			2004
Federal	$	246.8	30.8	%	$	283.5	38.6	%	$	82.2		$	8.3
Civil Infrastructure	270.1		33.7	%	212.7		29.0	%	8.7			9.5
Industrial	284.2		35.5	%	237.7		32.4	%	3.3			2.1
Corporate	—		—		—		—		(5.0		)	(3.9		)
Total	$	801.1	100.0	%	$	733.9	100.0	%	$	89.2		$	16.0

Nine-Month Period Ended September 30,

(in millions)

	Revenues								Pre-Tax Profit (Loss)
	2005				2004				2005			2004
Federal	$	770.7	34.0	%	$	755.7	37.5	%	$	95.0		$	23.8
Civil Infrastructure	760.5		33.5	%	631.1		31.3	%	24.8			21.5
Industrial	736.0		32.5	%	629.7		31.2	%	5.7			6.3
Corporate			—		—		—		(12.1		)	(9.4		)
Total	$	2,267.2	100.0	%	$	2,016.5	100.0	%	$	113.4		$	42.2

The above financial information for the three- and nine-month periods ended September 30, 2004 for each segment has been reclassified to conform to the current period presentation.

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Federal

Revenues decreased for the three-month period ended September 30, 2005, compared to the same period in the prior year by $36.7 million or 12.9% and increased for the nine-month period ended September 30, 2005, compared to the same period in the prior year by $15.0 million or 2.0%. Our nuclear business reported a decrease in revenue of approximately $19.2 million or 11.9% for the third quarter of 2005 versus the same period in 2004, due to reduced spending on our contract with the U.S. Department of Energy (DOE) at the Hanford River Protection Project.  Our environmental services business reported decreased revenues in the third quarter of 2005 compared to the same period last year due to completion of our Johnston Atoll project in 2004 and an overall decline in federal environmental work as some funds have been shifting to homeland security projects. Our CH2M HILL services business also reported a slight decrease in revenues resulting from our completed work on three reconstruction projects in Iraq, Qatar and Jordan that were awarded by the U.S. Department of Defense in 2004. For the nine-month period ended September 30, 2005, compared to the same period in the prior year, our nuclear revenues increased by $57.7 million or 13.7% driven by our contracts with the DOE at the Hanford River Protection and the Mound projects.  Our services business reported increased revenues for the same period. This revenue increase was partially offset by lower revenue in the environmental services business as funds continue to be shifted by the Federal government to homeland security projects.

Pre-tax profit increased for the three- and nine-month periods ended September 30, 2005, compared to the same periods last year by $73.9 million and $71.2 million, respectively. Included in the three- and nine-month period results is an increase in equity earnings of joint ventures of $71.2 million from Kaiser-Hill for our share of additional feesrelated to the impact of favorable performance against the agreed upon target closure costs, the schedule to achieve site closure, and its job site safety. (See the discussion of Joint Ventures below for further information).  Also included for these periods, are equity earnings of joint ventures associated with the Idaho cleanup project, which commenced in the second quarter of 2005. Excluding the Kaiser-Hill performance fee, pre-tax profit was $2.7 million or 33.7% higher in the third quarter of 2005 compared to the same period in 2004.  Although revenues decreased, profit increased due to the above mentioned equity income on the Idaho project slightly offset by decreased earnings at our Hanford project. For the nine-month period ended September 30, 2005, pre-tax profit excluding the Kaiser-Hill performance fee, was consistent with the results of the same period of 2004 as the increase in Idaho equity earnings of joint ventures was largely offset by reduced results in our CH2M HILL Services business caused in part by a cost overrun in a project in Jordan.

Civil Infrastructure

Revenues increased for the three- and nine-month periods ended September 30, 2005 compared to the same period in 2004 by $57.4 million and $129.4 million, or 27.0% and 20.5%, respectively. A large part of the increase was attributable to continued growth from successful pursuits in transportation design/build projects and a slight increase in transportation consulting. These new projects included significant highway design/build contracts in Colorado, Oregon, Western Canada and Mexico.  Additionally, our water business reported increased revenues compared to the prior three- and nine-month periods of last year related primarily to an increase in our international operations, driven by our Changi project in Singapore, Sydney Pump Station project in Australia, Water Program Management project in Iraq and the USAID project in the West Bank and the consolidation of certain joint ventures, previously reported as equity in earnings.  The international market remains strong due to population and economic growth in certain regions, aging infrastructure, capacity shortfalls and regulatory requirements. Our operations and maintenance business (O&M) reported a slight improvement in revenues compared to the same three- and nine-month periods of last year.  This increase is attributable to the successful development of additional work within existing projects as well as new core market service contracts throughout the United States and Canada.

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Pre-tax profit decreased by $0.8 million, or 8.4%, for the three-month period ended September 30, 2005 and increased by $3.3 million, or 15.3% for the nine-month period ended September 30, 2005, compared to the same periods last year. For the quarter ended September 30, 2005 compared to the same period last year, our transportation and water businesses experienced a decrease in pre-tax profit primarily as a result of project delivery issues on certain projects in the U.S. and abroad. Additionally, significant business development expenditures were incurred to secure two bid wins in North America.  Partially offsetting these negative results was our O&M business, which produced significant improvements in pre-tax profits for the three-month period compared to prior year primarily attributable to improvement in project controls, risk management processes and controlled overhead spending. In addition, our O&M business was successful in exiting two significantly underperforming contracts in the latter half of 2004 and improving the gross margins on existing projects.  For the nine-month period ended September 30, 2005, our O&M business produced significant improvements in pre-tax profits which were partially offset by lower pre-tax profits in the transportation and water businesses.

Industrial

Revenues increased for the three- and nine-month periods ended September 30, 2005 compared to the same periods last year by $46.5 million and $106.3 million, or 19.6% and 16.9%, respectively. The increase in revenues is primarily due to significant new business in our chemicals, energy and industrial systems and information solutions businesses.  Our chemicals sector has experienced strong performance as the overall economic market conditions have improved, driven by a significant chemical project.  We experienced significant growth in our energy and industrial systems business primarily resulting from an increase in volume from our facilities work we are performing for the U.S. Air Force, primarily in the Pacific Rim.  Lastly, our information solutions business showed revenue growth in 2005 as the telecommunications markets began showing signs of renewed spending levels particularly in the wireless sectors worldwide.  These increases were partially offset from declines in our power, bio-pharma and electronics businesses.  Delays in customer awards of large, full-service manufacturing and bio-pharma construction contracts and completion of certain large electronics and power projects in 2004 contributed to the decline in these businesses.

Pre-tax profit increased for the three-month period ended September 30, 2005 compared to the same period of 2004 by $1.2 million or 57.1% and decreased by $0.6 million or 9.5% for the nine-month period ended September 30, 2005 compared to 2004.  The increase for the quarter ended September 30, 2005 is primarily fueled by the increase in volumes from our chemical, energy and industrial systems and information solution business.  For the nine-month period ended September 30, 2005, increased profits in our chemical and general manufacturing businesses were offset by decreases in earnings in the bio-pharma, power and electronics business in comparison to the same period in the prior year. Additionally, competition in our communications business is resulting in competitive pricing measures that are lowering pre-tax profits.

Joint Ventures

We routinely enter into joint ventures to service the needs of our clients. Such arrangements are customary in the engineering and construction industry and generally are project specific. For the quarters ended September 30, 2005 and 2004, we reported total equity in earnings of joint ventures and affiliated companies of $82.9 million and $7.7 million, respectively.  For the nine-month periods ended September 30, 2005 and 2004, we reported total equity in earnings of joint ventures and affiliated companies of $99.4 million and $22.3 million, respectively.

Our largest unconsolidated joint venture is Kaiser-Hill, in which we own a 50% interest.  Kaiser-Hill’s current contract with the DOE, which has been effective since 2000, is a site closure contract.  Under the contract, Kaiser-Hill is compensated through a base fee affected, up or down, by its performance against the agreed upon site target closure costs.  For every dollar that the DOE saves, Kaiser-Hill receives a fee increase ranging from 20 to 30 cents up to an agreed upon maximum.  At the same time, for every dollar the cleanup is over budget, the fee is reduced by 20 to 30 cents down to an agreed upon minimum.  The ultimate fee will also be impacted by the schedule to achieve site closure and the safety of Kaiser-Hill’s performance.

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During the three-month periods ended September 30, 2005 and 2004, we recognized earnings from Kaiser-Hill of $76.2 million and $5.1 million, respectively, and $86.3 million and $15.5 million for the nine-month periods ended September 30, 2005 and 2004, respectively.  The third quarter earnings for 2005 include an incremental fee of $71.2 million ($43.3 million, net of tax) as Kaiser-Hill recognized revenue related to the impact of favorable performance against the agreed upon target closure costs, the schedule to achieve site closure, and its job site safety.  In the third quarter of 2005, Kaiser-Hill recognized additional performance fees as a result of the elimination of job site risks and other contract uncertainties.   Although Kaiser-Hill declared physical completion of the site on October 13, 2005, certain contract provisions related to the close out remain, which inherently involves risks.  Some of the remaining close-out activities include the DOE reviewing and accepting the site work and forwarding final payment.  As a result, Kaiser-Hill will continue to recognize revenue as the remaining risks and uncertainties are eliminated or sufficiently mitigated.

During the nine-month periods ended September 30, 2005 and 2004, we received $31.5 million and $7.0 million, respectively, of distributed earnings from Kaiser-Hill.  Our investment in Kaiser-Hill as of September 30, 2005 was $90.1 million compared to $35.2 million, at December 31, 2004.  The majority of this increase is related to the recognition of the additional performance fees.  Kaiser-Hill’s ability to distribute cash is based on pre-negotiated payment terms in accordance with its contract with the DOE and can be different from the earnings recognized for accounting purposes.  We anticipate receiving the majority of the undistributed earnings in 2006.

Income Taxes

Our effective tax rate for the three-month period ended September 30, 2005 was 39.2% compared to 31.9% for the same period last year and the nine-month period ended September 30, 2005 was 39.3% compared to 37.1% for the same period last year.  The increase in the effective tax rates for the three- and nine-month periods ended September 30, 2005 compared to prior periods, is primarily due to a decrease in the 2005 tax benefits realized under the extraterritorial income exclusion rules, foreign tax credits and a significant increase in non-deductible intangible assets and meals and entertainment expenses in the current periods.  Our effective tax rate continues to be higher than the U.S. statutory income tax rate of 35.0% due to the effect of state income taxes, non-deductible foreign net operating losses, disallowed portions of meals and entertainment expenses, and intangible asset amortization not deductible for tax purposes.

We have presented a claim to the Internal Revenue Service (IRS) relating to the research and experimentation tax credit for the years 1996-2003.  Although we are seeking resolution with the IRS, we only recognize tax benefits related to these credits for financial statement purposes when it is probable that such benefits will be realized.  The amount of the tax credit claimed is significant.  However, the ultimate amount to be realized and the timing of the recognition of the tax credit will depend upon the final resolution with the IRS.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flows from operations and borrowings under our unsecured revolving line of credit. Our primary uses of cash are to fund our working capital, acquisitions, capital expenditures and purchases of stock presented on our internal market. We believe, based on our total cash and credit capacity at September 30, 2005 of $184.5 million, we have sufficient resources to fund our operations, anticipated capital expenditure requirements, as well as purchases of stock presented on our internal market, should we choose to do so, for the next 12 months and beyond.

(Amounts in millions)

Cash on hand			$	50.5
Line of credit capacity	160.0
Issued letters of credit	(26.0	)
Net credit capacity available			134.0
Total capacity			$	184.5

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Billings and collections on accounts receivable can impact our operating cash flows. We continuously monitor collection efforts and assess the allowance for doubtful accounts. Based on this assessment at September 30, 2005, we have deemed the allowance for doubtful accounts to be adequate; however, future economic conditions may adversely impact some of our clients’ ability to pay our bills or the timeliness of their payments. Consequently, it may also impact our timing of cash receipts necessary to meet our operating needs.

We are a professional services organization and, therefore, we do not require significant outflows of cash for capital expenditures. Our capital expenditures are primarily for office equipment and leasehold improvements. Capital expenditures during the nine-month period ended September 30, 2005 and the nine-month period ended September 30, 2004 were $7.1 million and $4.7 million, respectively. We have a formal operating lease program under which most of our computers and related equipment is procured on an ongoing basis.

We used $20.3 million in cash for purchases of stock presented on our internal market during the nine-month period ended September 30, 2005 compared to $28.7 million for the same period of 2004.

The credit facility may be used for general corporate purposes, permitted acquisitions and to support letters of credit.  The credit facility, as amended in August 2005, expires in July 2009.  At our option, the credit facility bears interest at a rate equal to either the London InterBank Offered Rate plus 1.00% to 1.75%, or the lender’s applicable base rate plus margin of 0.0% to 0.25% based on our ratio of funded debt to earnings before interest, taxes, depreciation and amortization, as defined. A commitment fee of approximately 0.20% to 0.35% per year on the unused portion of the line of credit is payable based on our ratio of funded debt to earnings before interest, taxes, depreciation and amortization, as defined.  During the three-month period ended September 30, 2005, our average daily borrowing was $0.7 million under our credit facility for general corporate purposes. It is likely, but uncertain, that we will continue to utilize our credit facility periodically during the remainder of 2005 depending on the timing of cash receipts and disbursements.  There were no amounts outstanding under our line of credit at September 30, 2005 or December 31, 2004.

The agreement requires us to, among other things, maintain minimum levels of net worth, a minimum coverage ratio of certain fixed charges, and a minimum leverage ratio.  As of September 30, 2005 we were in compliance with the covenants required by the agreement.

The agreement also allows us to issue letters of credit to support various trade activities. Issued letters of credit are reserved against the borrowing base of the line of credit. At September 30, 2005 and December 31, 2004 there were $26.0 million and $20.4 million issued and outstanding letters of credit, respectively.

On October 19, 2005, we closed on an operating lease facility which will be used for the construction of a fourth corporate headquarters building in Colorado.  The building is expected to be completed in 2007 and the lease term will be approximately sixty-nine months.  Yearly payments on the lease are estimated to be approximately $1.1 million and the lease requires us to guarantee a residual value of the facility equal to an amount not greater than 85% of the total facility costs.  The total facilities costs are estimated to be approximately $23.0 million.

Aggregate Commercial Commitments

We maintain a variety of commercial commitments that are generally made to provide support for various provisions in engineering and construction contracts.  Letters of credit are provided to clients in the ordinary course of the contracting business in lieu of retention or for performance and completion guarantees on engineering and construction contracts.  We also post surety bonds, which are contractual agreements issued by a surety, for the purpose of guaranteeing our performance on contracts.  Bid bonds are also issued by a surety to protect owners and are subject to full or partial forfeiture for failure to perform obligations arising from a successful bid.

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Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated condensed financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of these financial statements requires us to make estimates and judgments that affect both the results of operations as well as the carrying values of our assets and liabilities.  Some of our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. We base estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities as of the date of the financial statements that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The accounting policies that we believe are most critical to your understanding of our financial results and condition and require complex management judgment are summarized below. Further detail and information regarding our critical accounting policies and estimates are included in our 2004 Form 10-K.

Revenue Recognition

We earn our revenues from different types of services under a variety of different types of contracts, including cost-plus, firm fixed-price and time-and-materials.  In recognizing revenue, we evaluate each contractual arrangement to determine the appropriate authoritative literature to apply.  We recognize revenue and profit for a majority of our contracts on the percentage-of-completion method where progress towards completion is measured by relating the actual cost of work performed to date to the current estimated total cost of the respective contracts.  In making such estimates, judgments are required to evaluate potential variances in schedule, the cost of materials and labor, productivity, liability claims, contract disputes, and achievement of contract performance standards.

Change orders are included in total estimated contract revenue when it is probable that the change order will result in an addition to contract value and can be reliably estimated.  Losses on construction and engineering contracts in process are recognized in their entirety when the loss becomes evident and the amount of loss can be reasonably estimated.

We have a history of making reasonable estimates of the extent of progress towards completion, total contract revenue and total contract costs on our engineering and construction contracts.  However, due to uncertainties inherent in the estimation process, it is possible that actual total contract revenue and completion costs may vary from estimates.

A portion of our contracts are operations and management type contracts. Typically, these contracts may include fixed and variable components along with incentive fees. Revenue is recognized on operations and management contracts on a straight line basis over the life of the contract once we have an arrangement, delivery has occurred, the price is fixed or determinable and collectibility is reasonably assured.

Income Taxes

In determining net income for financial statement purposes, we must make estimates and judgments in the calculation of tax assets and liabilities and in the determination of the recoverability of the deferred tax assets.  The tax assets and liabilities arise from temporary differences between the tax return and the financial statement recognition of revenues and expenses.

We must assess the likelihood that we will be able to recover our deferred tax assets.  If recovery is not likely, we must increase our tax provision by recording a valuation allowance for the deferred tax assets that we estimate will not ultimately be recoverable.

In addition, the calculation of our tax assets and liabilities involves dealing with uncertainties in the application of complex tax regulations.  We may recognize a tax asset or adjust taxes payable for anticipated state or federal tax credits, such as those relating to the research and experimentation tax credit.

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Pension Benefits

We have two frozen and one active noncontributory defined benefit pension plans.  Our earnings and shareholders’ equity may be impacted by these qualified defined benefit plans because FASB Statement of Financial Accounting Standard (SFAS) No. 87, “Employers’ Accounting for Pensions,” requires that the amounts we record be computed using actuarial valuations.  These valuations include many assumptions, but the two most critical assumptions are the discount rate and the expected long-term rate of return on plan assets.  We use judgment in selecting these assumptions each year because we have to consider not only current market conditions, but also make judgments about future market trends, changes in the interest rates and equity market performance.  We also have to consider factors like the timing and amounts of expected contributions to the plans and benefit payments to plan participants.

New Accounting Standards

In December 2004, the FASB issued SFAS No. 123 (Revised) “Share-Based Payment,” which replaces SFAS No. 123 and supercedes APB No. 25, “Accounting for Stock Issued to Employees”.  SFAS 123(R) is effective as of the beginning of the first interim or annual reporting period that begins after December 15, 2005. SFAS 123(R) requires that the costs resulting from all share-based payment transactions be recognized in the financial statements. SFAS 123(R) generally applies to all awards granted after the required effective date, but does not apply to awards granted in periods before the required effective date, except if prior awards are modified, repurchased or cancelled after the effective date. SFAS 123(R) also applies to unvested awards outstanding as of the effective date.  SFAS 123(R) also amends SFAS No. 95, “Statement of Cash Flows,” to require that excess tax benefits be reported as a financing cash inflow rather than as a reduction of taxes paid. Adoption of SFAS 123(R) will require us to record an expense for stock based compensation plans using the fair value method.  The implementation of SFAS 123(R) will have an impact on our financial statements as we have historically recorded compensation expense in accordance with the instrinsic value method under APB No. 25. We will adopt SFAS No. 123(R) on January 1, 2006 and are currently assessing the impact on the consolidated financial statements.

The American Jobs Creation Act created a temporary incentive for U.S. multinationals to repatriate accumulated earnings outside of the U.S. by providing an 85% dividend received deductions for controlled foreign corporations.  In December 2004, the FASB issued FASB Staff Position (FSP) No. 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004,” which provides accounting and disclosure guidance for this repatriation provision.  We have completed our evaluation of the new repatriation provisions and have determined that we will not pursue the repatriation of accumulated earnings outside of the U.S.  It is our intention to continue to indefinitely reinvest our undistributed foreign earnings.

In June 2005, the Emerging Issues Task Force issued EITF No. 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights.” (EITF No. 04-5) This issue provides a framework for evaluating whether a general partner or group of general partners or managing members controls a limited partnership or limited liability company and therefore should consolidate the entity.  Although we have yet to complete our analysis, we do not believe that the adoption of EITF No. 04-5 will have a material impact on our financial position, net earnings or cash flows.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

In the ordinary course of our operations we are exposed to certain market risks, primarily changes in foreign currency exchange rates and interest rates.  This risk is monitored to limit the effect of foreign currency exchange rate and interest rate fluctuations on earnings and cash flow.

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Foreign currency exchange rates. We are exposed to foreign currency exchange risks in the normal course of our international business operations. Our investments in foreign subsidiaries with a functional currency other than the U.S. dollar are generally considered long-term. We may engage in forward foreign exchange contracts to reduce our economic exposure to changes in exchange rates. Generally, forward contracts are entered into to hedge specific commitments and anticipated transactions but not for speculative or trading purposes.

Interest rates.  Our interest rate exposure is generally limited to our unsecured revolving credit agreement and a building lease agreement that calls for monthly lease payments at a variable interest rate. Historically, we have used short-term variable rate borrowings under the unsecured revolving credit agreement on a limited basis.  There were no amounts outstanding under the unsecured revolving credit agreement at September 30, 2005. Our variable lease payments on the building lease agreement are estimated to be approximately $0.1 million per month, based on current interest rates. We have assessed the market risk exposure on these financial instruments and determined that any significant changes to the fair value of these instruments would not have a material impact on our consolidated results of operations, financial position or cash flows.

Item 4.  Controls and Procedures

We carried out an evaluation as of the last day of the period covered by this Quarterly Report on Form 10-Q, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (Exchange Act). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (a) are effective to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is timely recorded, processed, summarized and reported and (b) include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2005 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II. OTHER INFORMATION

Item 1.    Legal Proceedings

The office of the United States Attorney for the District of Connecticut has informed us that it is investigating a possible Clean Water Act (CWA) misdemeanor violation at two wastewater treatment facilities in Connecticut operated by a CH2M HILL subsidiary.  The investigation centers on the subsidiary employees’ failures to comply with sampling and reporting requirements of CWA.  These alleged violations do not involve environmental contamination.  We are cooperating with the investigation and are in the final stages of negotiations with the United States Attorney for the District of Connecticut to resolve the matter through a settlement, but no assurance can be given as to the eventual outcome of these negotiations.

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Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

The following table covers the purchases of our securities by CH2M HILL during the period covered by this report.

Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
July (a)	2,498	$	14.94	—	—
August (a)	—	$	14.94	—	—
September (b)	168,650	$	15.11	—	—
Total	171,148	$	15.11	—	—

(a)  Shares purchased by CH2M HILL from terminated employees.

(b)  Shares purchased by CH2M HILL in the Internal Market.

Item 3.  Defaults Upon Senior Securities

Not applicable

Item 4.  Submission of Matters to a Vote of Security Holders

Not applicable

Item 5.  Subsequent Event

On October 1, 2005, the Company completed its acquisition of BBS Corp.  The Ohio-based firm specializes in planning, design, and construction administration of water and wastewater treatment, distribution, and collection systems.  Under the terms of the agreement the Company paid $8.3 million in cash to acquire the stock of BBS Corp.  The Company will account for this acquisition under the purchase method of accounting.

Item 6.    Exhibits

Exhibits
* 31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*32.1	Certification pursuant to the requirements set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. Section 1350)
*32.2	Certification pursuant to the requirements set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. Section 1350)

*Filed herewith

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	CH2M HILL Companies, Ltd.
Date: November 4, 2005	/c/ Samuel H. Iapalucci
	Samuel H. Iapalucci
	Executive Vice President and Chief Financial Officer

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Index of Exhibits

* 31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*32.1	Certification pursuant to the requirements set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. Section 1350)
*32.2	Certification pursuant to the requirements set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. Section 1350)

*Filed herewith

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