CH2M Hill Companies 10-Q 2012 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2012

OR

oTRANSITION 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)

Delaware (State or other jurisdiction of
incorporation or organization) 93-0549963 (I.R.S. Employer
Identification No.)

9191 South Jamaica Street,
Englewood, CO (Address of principal executive offices) 80112-5946 (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 x  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “small reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x	Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company 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 x

The number of shares outstanding of the registrant’s common stock as of October 30, 2012 was 30,611,398.

CH2M HILL COMPANIES, LTD.

TABLE OF CONTENTS

	PART I. FINANCIAL INFORMATION
Item 1.	FINANCIAL STATEMENTS
	Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011 (unaudited)	3
	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2012 and 2011 (unaudited)	4
	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2012 and 2011 (unaudited)	5
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011 (unaudited)	6
	Notes to Consolidated Financial Statements (unaudited)	7
Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	18
Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	26
Item 4.	CONTROLS AND PROCEDURES	27
	PART II. OTHER INFORMATION
Item 1.	LEGAL PROCEEDINGS	27
Item 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	28
Item 6.	EXHIBITS	28
SIGNATURES		29

2

CH2M HILL COMPANIES, LTD.

Consolidated Balance Sheets

(Unaudited)

(In thousands, except share data)

	September 30, 2012			December 31, 2011
ASSETS
Current assets:
Cash and cash equivalents	$	266,953		$	208,266
Available-for-sale securities	2,453			2,356
Receivables, net—
Client accounts	779,889			703,062
Unbilled revenue	546,444			448,553
Other	28,764			18,670
Income tax receivable	6,218			43,324
Deferred income taxes	83,237			69,370
Prepaid expenses and other current assets	90,795			69,047
Total current assets	1,804,753			1,562,648
Investments in unconsolidated affiliates	117,954			103,871
Property, plant and equipment, net	209,266			179,722
Goodwill	564,272			503,289
Intangible assets, net	141,264			159,777
Deferred income taxes	147,468			128,743
Employee benefit plan assets and other	68,689			56,805
Total assets	$	3,053,666		$	2,694,855
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	3,931		$	11,334
Accounts payable and accrued subcontractor costs	489,269			398,332
Billings in excess of revenue	430,745			393,754
Accrued payroll and employee related liabilities	343,913			315,650
Other accrued liabilities	234,162			227,539
Total current liabilities	1,502,020			1,346,609
Pension and other employee related liabilities	466,832			466,939
Long-term debt	184,040			81,474
Other long-term liabilities	182,390			133,520
Total liabilities	2,335,282			2,028,542
Commitments and contingencies (Note 12)
Stockholders’ equity:
Preferred stock, $0.01 par value, 50,000,000 shares authorized; none issued	—			—
Common stock, $0.01 par value, 100,000,000 shares authorized; 30,603,871 and 31,050,654 issued and outstanding at September 30, 2012 and December 31, 2011, respectively	306			311
Additional paid-in capital	—			—
Retained earnings	745,899			717,103
Accumulated other comprehensive loss	(39,626		)	(60,855		)
Total CH2M HILL common stockholders’ equity	706,579			656,559
Noncontrolling interests	11,805			9,754
Total equity	718,384			666,313
Total liabilities and stockholders’ equity	$	3,053,666		$	2,694,855

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

3

CH2M HILL COMPANIES, LTD.

Consolidated Statements of Income

(Unaudited)

(In thousands, except share and per share data)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Gross revenue	$	1,603,456		$	1,504,294		$	4,546,012		$	4,132,960
Equity in earnings of joint ventures and affiliated companies	25,257			19,477			44,017			45,544
Operating expenses:
Direct cost of services and overhead	(1,308,010		)	(1,240,963		)	(3,651,650		)	(3,363,840		)
General and administrative	(272,881		)	(242,351		)	(834,923		)	(669,874		)
Operating income	47,822			40,457			103,456			144,790
Interest income (expense):
Interest income and other	133			264			563			848
Interest expense	(3,855		)	(849		)	(6,195		)	(2,886		)
Income before provision for income taxes	44,100			39,872			97,824			142,752
Provision for income taxes	(14,366		)	(12,062		)	(33,408		)	(42,402		)
Net income	29,734			27,810			64,416			100,350
Less: Income attributable to noncontrolling interests	(121		)	(1,482		)	(2,077		)	(10,097		)
Net income attributable to CH2M HILL	$	29,613		$	26,328		$	62,339		$	90,253
Net income attributable to CH2M HILL per common share:
Basic	$	0.95		$	0.85		$	1.99		$	2.93
Diluted	$	0.94		$	0.84		$	1.97		$	2.88
Weighted average number of common shares:
Basic	31,131,918			30,835,245			31,284,402			30,757,440
Diluted	31,459,051			31,420,079			31,717,516			31,362,920

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

4

CH2M HILL COMPANIES, LTD.

Consolidated Statements of Comprehensive Income

(Unaudited)

(In thousands)

	Three Months Ended September 30,						Nine Months EndedSeptember 30,
	2012			2011			2012			2011
Net Income	$	29,734		$	27,810		$	64,416		$	100,350
Other comprehensive income (loss), net of tax:
Net cumulative translation adjustment	19,905			(8,796		)	21,170			(10,196		)
Unrealized gain (loss) on available-for-sale investments and other	(55		)	(574		)	59			(475		)
Other comprehensive income (loss), net of tax	19,850			(9,370		)	21,229			(10,671		)
Comprehensive income	49,584			18,440			85,645			89,679
Less: comprehensive income attributable to noncontrolling interests	(121		)	(1,482		)	(2,077		)	(10,097		)
Comprehensive income attributable to CH2M HILL	$	49,463		$	16,958		$	83,568		$	79,582

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

5

CH2M HILL COMPANIES, LTD.

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

	Nine Months Ended September 30,
	2012			2011
Cash flows from operating activities:
Net income	$	64,416		$	100,350
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	59,627			34,859
Stock-based employee compensation expense	49,145			55,795
Loss (gain) on disposal of property, plant and equipment	783			(31		)
Allowance for doubtful accounts	4,215			7,911
Deferred income taxes	(32,752		)	(41,320		)
Undistributed earnings from unconsolidated affiliates	(44,017		)	(45,544		)
Distributions of income from unconsolidated affiliates	40,841			33,183
Change in assets and liabilities:
Receivables and unbilled revenue	(176,051		)	(31,568		)
Prepaid expenses and other	(59,807		)	(8,363		)
Accounts payable and accrued subcontractor costs	90,115			(22,558		)
Billings in excess of revenue	42,857			64,140
Accrued payroll and employee related liabilities	47,893			35,812
Other accrued liabilities	4,580			3,252
Current income taxes receivable	37,184			(10,908		)
Pension and other long-term employee related liabilities	(15,072		)	5,955
Other long-term liabilities	(19,659		)	(9,715		)
Net cash provided by operating activities	94,298			171,250
Cash flows from investing activities:
Capital expenditures	(36,435		)	(21,374		)
Investments in unconsolidated affiliates	(16,848		)	(22,039		)
Distributions of capital from unconsolidated affiliates	11,226			21,226
Proceeds from sale of property, plant and equipment	641			847
Net cash used in investing activities	(41,416		)	(21,340		)
Cash flows from financing activities:
Borrowings on long-term debt	1,027,400			31,819
Payments on long-term debt	(932,336		)	(42,829		)
Repurchases and retirements of common stock	(101,522		)	(71,634		)
Acquisition payments	(8,975		)	(32,799		)
Excess tax benefits from stock-based compensation	9,806			11,480
Net distributions to noncontrolling interests	(201		)	(9,619		)
Net cash used in financing activities	(5,828		)	(113,582		)
Effect of exchange rates on cash	11,633			(10,444		)
Increase in cash and cash equivalents	58,687			25,884
Cash and cash equivalents, beginning of period	208,266			290,405
Cash and cash equivalents, end of period	$	266,953		$	316,289
Supplemental disclosures:
Cash paid for interest	$	5,985		$	1,868
Cash paid for income taxes	$	16,161		$	75,107

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

6

CH2M HILL COMPANIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

(Unaudited)

(1) SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Summary of Business

CH2M HILL Companies, Ltd. and subsidiaries (“We”, “CH2M HILL” or the “Company”) is a project delivery firm founded in 1946. We are a large employee-controlled professional engineering services firm providing engineering, construction, consulting, design, design-build, procurement, engineering-procurement-construction (“EPC”), operations and maintenance, program management and technical services to U.S. federal, state, municipal and local government agencies, national governments, as well as private industry and utilities, around the world. A substantial portion of our professional fees are derived from projects that are funded directly or indirectly by government entities.

Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial statements. Accordingly, these statements do not include all of the information required by GAAP or the Securities and Exchange Commission (“SEC”) rules and regulations for complete financial statements. 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 at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Estimates and assumptions have been prepared on the basis of the most current and best available information. Actual results could differ from those estimates. Certain prior period amounts have been reclassified to conform to the current presentation.

In the opinion of management, the accompanying unaudited interim consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the results for the interim periods presented. The results of operations for any interim period are not necessarily indicative of results for the full year. These unaudited interim consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011.

Revenue Recognition

We earn revenue from different types of contracts, including cost-plus, fixed-price and time-and-materials. We evaluate contractual arrangements to determine how to recognize revenue. We primarily perform engineering and construction related services and recognize revenue for these 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 estimated. Management evaluates when a change order is probable based upon its experience in negotiating change orders, the customer’s written approval of such changes or separate documentation of change order costs that are identifiable. 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.

Performance incentive and award fee arrangements are included in total estimated contract revenue upon the achievement of some measure of contract performance in relation to agreed-upon targets. We adjust our project revenue estimate by the probable amounts of these performance incentives and award fee arrangements we expect to earn if we achieve the agreed-upon criteria.

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We also perform operations and maintenance services. Revenue is recognized on operations and maintenance contracts on a straight-line basis over the life of the contract once we have an arrangement, service has begun, the price is fixed or determinable and collectability is reasonably assured.

Unbilled Revenue and Billings in Excess of Revenue

Unbilled revenue represents the excess of contract revenue recognized over billings to date on contracts in process. These amounts become billable according to the contract terms, which usually consider the passage of time, achievement of certain milestones or completion of the project.

Billings in excess of revenue represent the excess of billings to date, per the contract terms, over revenue recognized on contracts in process.

Fair Value Measurements

Fair value represents the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Assets and liabilities are valued based upon observable and non-observable inputs. Valuations using Level 1 inputs are based off of unadjusted quoted prices that are available in active markets for the identical assets or liabilities at the measurement date. Level 2 inputs utilize significant other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly; and valuations using Level 3 inputs are based off of significant unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. There were no significant transfers between levels during the nine months ended September 30, 2012.

Available-for-Sale Securities

Available-for-sale securities are carried at fair value, with unrecognized gains and losses reported in accumulated other comprehensive loss, net of taxes. Losses on available-for-sale securities are recognized when a loss is determined to be other than temporary or when realized. The fair value of available-for-sale securities is estimated using Level 1 inputs.

Intangible Assets

We may acquire goodwill or other intangible assets in business combinations. Intangible assets are stated at fair value as of the date acquired in a business combination. We amortize intangible assets with finite lives on a straight-line basis over their expected useful lives, currently up to seven years. For those intangible assets with no legal, regulatory, contractual or other factors that would reasonably limit the useful life of the intangible asset, such as goodwill, management has determined that the life is indefinite and therefore, they are not amortized.

We review our finite-lived intangibles and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Assets which are held and used in operations are considered impaired if the undiscounted future cash flows from the asset do not exceed the net book value. If impaired, the assets are written down to their estimated fair value. We generally measure fair value by considering sale prices for similar assets or by discounting estimated future cash flows from the asset group using an appropriate discount rate.

Goodwill and intangible assets with indefinite lives are tested for impairment on an annual basis, or on an interim basis if events or circumstances indicate that the carrying amount of the assets may not be fully recoverable. An impairment charge is recognized for any amount by which the carrying amount of goodwill or intangible assets with indefinite lives exceeds their fair value. Management performs its impairment tests of goodwill at the reporting unit level, which is one level below the operating segments.

Derivative instruments

We primarily enter into derivative financial instruments to mitigate exposures to changing foreign currency exchange rates. We are primarily subject to this risk on long term projects whereby the currency being paid by our client differs from the currency in which we incurred our costs, as well as, intercompany trade balances among entities with differing currencies. We do not enter into derivative transactions for speculative or trading purposes. All derivatives are carried at fair value on the consolidated balance sheets in other receivables or other accrued liabilities, as applicable. The periodic change in the fair value of the derivative instruments is recognized in earnings.

8

Stockholders’ Equity

The changes in stockholders’ equity for the nine months ended September 30, 2012 are as follows (in thousands, except per share amounts):

	Shares		Amount
Stockholders’ equity, December 31, 2011	31,051		$	666,313
Net income attributable to CH2M HILL	—		62,339
Shares issued and to be issued in connection with stock-based compensation and employee benefit plans	1,047		67,973
Shares and share equivalents purchased, retired and cancelled	(1,494	)	(101,522		)
Other comprehensive income, net of tax	—		21,229
Income attributable to noncontrolling interests	—		2,077
Foreign currency adjustment attributable to noncontrolling interests	—		176
Net distributions to noncontrolling interests	—		(201		)
Stockholders’ equity, September 30, 2012	30,604		$	718,384

9

Comprehensive Income

Comprehensive income includes foreign currency translation adjustments, benefit plan adjustments, and unrealized gains or losses on available-for-sale securities that have been reflected as a component of accumulated other comprehensive income within stockholders’ equity. The following table summarizes the components of accumulated other comprehensive loss attributable to CH2M HILL for the nine months ended September 30, 2012 (in thousands):

	Foreign Currency Items			Unrealized Gains on Securities		Defined Benefit Pension Plans			Accumulated Other Comprehensive Loss
Accumulated other comprehensive (loss) income, December 31, 2011	$	(1,737	)	$	987	$	(60,105	)	$	(60,855	)
Current period other comprehensive income	21,170			59		—			21,229
Accumulated other comprehensive income (loss), September 30, 2012	$	19,433		$	1,046	$	(60,105	)	$	(39,626	)

Stock-Based Compensation Plans

Stock Option Plan

We measure the fair value of each stock option grant at the date of grant using a Black-Scholes option pricing model. The weighted-average grant date fair value of options granted during the three and nine months ended September 30, 2012 was $5.36 and $5.85, respectively, compared to $7.69 and $7.40 for the three and nine months ended September 30 2011, respectively.

We estimate the expected term of options granted based on historical experience of employee exercise behavior. We estimate the volatility of our common stock by using the weighted-average of historical volatility over the same period as the option term. We use the treasury yield curve rates for the risk-free interest rate in the option valuation model with maturities similar to the expected term of the options. We do not anticipate paying any cash dividends on our common stock in the foreseeable future and therefore use an expected dividend yield of zero in the option valuation model. We are required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest. All stock-based payment awards are amortized on a straight-line basis over the requisite vesting periods of the awards.

The total compensation cost recognized for share-based payments for stock options, excluding actual forfeitures, during the three and nine months ended September 30, 2012 was $1.6 million and $4.9 million, respectively, compared to $1.2 million and $3.5 million for the three and nine months ended September 30, 2011, respectively.

Incentive Plans

The Long Term Incentive Plan (“LTIP”) rewards certain executives and senior leaders for the creation of value in the organization through the achievement of specific long-term (three year) goals of earnings growth and strategic initiatives. The Compensation Committee of the Board reviews and endorses participation in the LTIP in any program year and a new plan is established each year. Compensation expense related to common stock awards under the LTIP for the three and nine months ended September 30, 2012 was $3.2 million and $5.7 million, respectively, compared to $3.7 million and $10.7 million for the three and nine months ended September 30, 2011, respectively.

Restricted Stock Plan

The Restricted Stock Plan provides participants with added incentives to continue in the long-term service of our Company. The awards are made for no consideration and vest over various periods, but are considered outstanding at the time of grant. We recognize compensation costs, net of forfeitures, over the vesting term based on the fair value of the restricted stock at the date of grant. The amount of compensation expense recognized under the Restricted Stock Plan for the three and nine months ended September 30, 2012 was $1.1 million and $4.9 million, respectively, compared to $1.6 million and $4.0 million for the three and nine months ended September 30, 2011, respectively.

10

Retirement and Tax-Deferred Savings Plan

The Retirement and Tax-Deferred Savings Plan (“401(k) Plan”) is a profit sharing plan that includes a cash or deferred arrangement that is intended to qualify under Sections 401(a) and 401(k) of the Internal Revenue Code and provides benefits to eligible employees upon retirement.

The 401(k) Plan allows for matching contributions to be made in both cash and stock. Matching contributions may be made in an amount that is based on a percentage of the employee’s contributions for the calendar quarter up to 4% of the employee’s base compensation.  In addition, we have elected to make optional defined contributions to the 401(k) Plan which are estimated each quarter based on 2% of the employee’s base compensation.  Expenses related to matching contributions and defined contributions made in common stock for the 401(k) Plan were $12.8 million and $35.5 million for the three and nine months ended September 30, 2012, respectively, compared to $8.4 million and $35.2 million for the same periods in 2011.

On September 14, 2012, our Board of Directors approved the CH2M HILL Companies, Ltd. Amended and Restated 401(k) Plan which becomes effective January 1, 2013 and allows for matching contributions to be made based on a percentage of the employee’s contributions for the calendar quarter up to the first 6% of the employee’s base pay, although specific subsidiaries or business groups may have different limits on employer matching.  In addition, the amended and restated 401(k) Plan provides for a five-year vesting schedule for employer matching contributions, with 20% vesting per year beginning at the end of the first year of service.  Prior to the amendment and restatement, the 401(k) Plan provided for a six-year vesting schedule, with 20% vesting per year starting after two years of service, for employer matching contributions under the plan.

Recently Adopted Accounting Standards

In September 2011, the FASB issued ASU 2011-08, an amendment to Topic 350, Intangibles—Goodwill and other, which simplifies how entities test goodwill for impairment. Previous guidance under Topic 350 required an entity to test goodwill for impairment using a two-step process on at least an annual basis. First, the fair value of a reporting unit was calculated and compared to its carrying amount, including goodwill. Second, if the fair value of a reporting unit was less than its carrying amount, the amount of impairment loss, if any, was required to be measured. Under the amendment, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads the entity to determine that it is more likely than not that its fair value is less than its carrying amount. If after assessing the totality of events or circumstances, an entity determines that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then the two-step impairment test is unnecessary. If the entity concludes otherwise, then it is required to test goodwill for impairment under the two-step process as described under Topic 350. We adopted this standard in 2011. The adoption of this accounting standard update did not have a material impact on our financial position, results of operations, cash flows and disclosures.

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income, which changes the financial reporting of items reported in other comprehensive income (“OCI”) by eliminating the option to present components of OCI as part of the statement of changes in stockholders’ equity. The amendments in this standard require that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendments in this standard do not change the items that must be reported in OCI, when an item of OCI must be reclassified to net income, or change the option for an entity to present components of OCI gross or net of the effect of income taxes. The amendments in ASU 2011-05 became effective for our interim and annual periods beginning January 1, 2012 and have been applied retrospectively.

In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS, which amends current guidance to result in common fair value measurement and disclosures between accounting principles generally accepted in the United States and International Financial Reporting Standards. The amendments explain how to measure fair value. They do not require additional fair value measurements and are not intended to establish valuations standards or affect valuation practices outside of financial reporting. The amendments in ASU 2011-04 became effective for our interim and annual periods beginning January 1, 2012. The adoption of the provisions of ASU 2011-04 did not have a material impact on our consolidated financial position or results of operations.

(2) SEGMENT INFORMATION

During 2012, we reorganized our reporting structure under which our chief operating decision maker regularly reviews operating results and makes strategic and operating decisions with regards to assessing performance and allocating resources in order to streamline our business and reducing overhead costs. As a result, we formed the Energy, Water, and Facilities (“EWF”) segment and the Government, Environment, and Infrastructure (“GEI”) segment.  The reporting units previously included in the Energy and Water segment in 2011 were moved to the EWF segment and the reporting units previously included in the Government, Environment

11

and Nuclear segment in 2011 were moved to the GEI segment.  Reporting units that were previously included in the Facilities and Infrastructure segment were divided into either the EWF or GEI segment, accordingly.  Additionally, for 2012, the results of operations for reporting units acquired within Halcrow were assigned to the appropriate segment according to the nature of their operations.  We believe this new organizational structure will help us capitalize on cross-market synergies, consolidate our service offerings and optimize our client management process. These changes were effective January 1, 2012 and prior period amounts have been adjusted to conform to the revised organization.

Certain financial information relating to the three and nine months ended September 30, 2012 and 2011 for each segment is provided below (in thousands):

Three Months Ended September 30, 2012	Energy, Water and Facilities		Government, Environment and Infrastructure		Corporate			Financial Statement Balances
Revenue from external customers	$	935,918	$	667,538	$	—		$	1,603,456
Equity in earnings of joint ventures and affiliated companies	9,832		15,425		—			25,257
Operating income (loss)	16,927		38,230		(7,335		)	47,822

Three Months Ended September 30, 2011	Energy, Water and Facilities		Government, Environment and Infrastructure		Corporate			Financial Statement Balances
Revenue from external customers	$	737,017	$	767,277	$	—		$	1,504,294
Equity in earnings of joint ventures and affiliated companies	8,325		11,152		—			19,477
Operating income (loss)	23,056		31,248		(13,847		)	40,457

Nine Months Ended September 30, 2012	Energy, Water and Facilities		Government, Environment and Infrastructure		Corporate			Financial Statement Balances
Revenue from external customers	$	2,562,714	$	1,983,298	$	—		$	4,546,012
Equity in earnings of joint ventures and affiliated companies	14,950		29,067		—			44,017
Operating income (loss)	47,979		71,112		(15,635		)	103,456

Nine Months Ended September 30, 2011	Energy, Water and Facilities		Government, Environment and Infrastructure		Corporate			Financial Statement Balances
Revenue from external customers	$	2,007,274	$	2,125,686	$	—		$	4,132,960
Equity in earnings of joint ventures and affiliated companies	15,524		30,020		—			45,544
Operating income (loss)	76,305		89,056		(20,571		)	144,790

The Corporate segment includes corporate expenses which represent centralized management costs that are not allocable to individual operating segments and primarily include expenses associated with administrative functions such as executive management, corporate development and initiatives, tax and investor relations.

(3) 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 common shares outstanding during the period. Diluted EPS includes the dilutive effect of common stock equivalents, which consist primarily of stock options, and is computed using the weighted-average number of common shares and common stock equivalents outstanding during the period.

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The following table is a reconciliation of basic and diluted EPS (in thousands, except per share amounts):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Numerator:
Net income attributable to CH2M HILL	$	29,613	$	26,328	$	62,339	$	90,253
Denominator:
Basic income per share—weighted average common shares outstanding	31,132		30,835		31,285		30,757
Dilutive effect of common stock equivalents	327		585		433		606
Diluted income per share—adjusted weighted-average common shares outstanding, assuming conversion of common stock equivalents	31,459		31,420		31,718		31,363
Basic net income attributable to CH2M HILL per common share	$	0.95	$	0.85	$	1.99	$	2.93
Diluted net income attributable to CH2M HILL per common share	$	0.94	$	0.84	$	1.97	$	2.88

(4) VARIABLE INTEREST ENTITIES AND EQUITY METHOD INVESTMENTS

We routinely enter into teaming arrangements to perform projects for our clients. Such arrangements are customary in the engineering and construction industry and generally are project specific. The arrangements facilitate the completion of projects that are jointly contracted with our partners. These arrangements are formed to leverage the skills of the respective partners and include consulting, construction, design, design-build, program management and operations and maintenance contracts. Our risk of loss on these arrangements is usually shared with our partners. The liability of each partner is usually joint and several, which means that each partner may become liable for the entire risk of loss on the project.

We perform a qualitative assessment to determine whether our company is the primary beneficiary once an entity is identified as a variable interest entity (“VIE”). A qualitative assessment begins with an understanding of the nature of the risks in the entity as well as the nature of the entity’s activities including terms of the contracts entered into by the entity, ownership interests issued by the entity and how they were marketed, and the parties involved in the design of the entity. All of the variable interests held by parties involved with the VIE are identified and a determination of which activities are most significant to the economic performance of the entity and which variable interest holder has the power to direct those activities that are made. Most of the VIEs with which our company is involved have relatively few variable interests and are primarily related to our equity investments, subordinated financial support, and subcontracting arrangements. We consolidate those VIEs in which we have both the power to direct the activities of the VIE that most significantly impact the VIEs economic performance and the obligation to absorb losses or the right to receive the benefits from the VIE that could potentially be significant to the VIE. As of September 30, 2012, total assets of VIEs that were consolidated were $172.0 million and total liabilities were $134.8 million.

We held investments in unconsolidated affiliates of $118.0 million and $103.9 million at September 30, 2012 and December 31, 2011, respectively. Our proportionate share of net income or loss is included as equity in earnings of joint ventures and affiliated companies in the consolidated statements of income. In general, the equity investment in our unconsolidated affiliates is equal to our current equity investment plus those entities’ undistributed earnings. We provide certain services, including engineering, construction management and computer and telecommunications support, to these unconsolidated entities. These services are billed to the joint ventures in accordance with the provisions of the agreements.

As of September 30, 2012, the total assets of VIEs that were not consolidated were $426.0 million and total liabilities were $351.3 million. The maximum exposure to losses is limited to the funding of any future losses incurred by those entities under their respective contracts.

(5) ACQUISITIONS

On July 29, 2011, we acquired Booz Allen Hamilton’s State and Local Government Transportation and Consulting (“BAH”) business. The purchase price was $28.5 million adjusted for working capital and other purchase price adjustments and was paid in cash. We performed an analysis of the fair market value of the tangible assets acquired and liabilities assumed as well as any identifiable intangible assets purchased. Included in the intangible assets acquired are the estimated fair value of customer relationships of $8.8 million and contracted backlog of $1.2 million, with useful lives of seven and three years, respectively. In addition, we recorded $10.5 million in goodwill related to the acquisition. The results of operations for this acquisition are reported in the GEI operating segment after the date of the acquisition.

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On November 10, 2011, we purchased all the share capital of Halcrow Holdings Limited (“Halcrow”) for approximately £124.0 million ($197.3 million). Halcrow is a United Kingdom-headquartered engineering, planning, design and management services firm specializing in developing infrastructure and buildings. Halcrow has 5,000 employees who provide services to our clients in the United Kingdom, Middle East, Canada, the United States, China, India, Australia, South America, and Europe. Halcrow’s clients include public and private-sector organizations around the world, including local, regional and national governments, asset owners, international funding agencies, regulators, financial institutions, contractors, developers and operators.

The purchase price was paid to the selling stockholders of Halcrow in the form of $41.7 million of cash, $18.8 million of common stock of CH2M HILL, based on the stock price on the closing date, and $136.8 million of notes payable which were satisfied in full in December 2011.

We performed an initial purchase price allocation for the Halcrow acquisition based on estimates of fair values; however, we are currently in the process of finalizing the fair values of certain assets acquired and liabilities assumed. The estimations of fair values include valuations of intangible assets, assessments of tax assets and liabilities, pension-related assets and liabilities, facilities leases and financial guarantees and other items that may affect the allocation of the purchase price. As such, the Halcrow purchase price allocation below is preliminary and is subject to change upon receipt of information needed to complete the valuations, and certain of the final fair value determinations could result in significant adjustments to the carrying value of assets, liabilities and goodwill. We expect to receive all information needed to complete the valuations in November 2012.

The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed from Halcrow as of the purchase date (in thousands):

Current assets	$	249,194
Property, plant and equipment	53,022
Intangible assets	116,834
Goodwill	418,711
Other long-term assets	8,493
Total assets acquired	846,254
Current liabilities	(183,555		)
Debt	(80,874		)
Pension liabilities	(293,819		)
Other long-term liabilities	(90,748		)
Total liabilities assumed	(648,996		)
Net assets acquired	$	197,258

Included in the intangible assets is the preliminary fair value for customer relationships, contracted backlog and the tradename valued at $93.6 million, $19.1 million and $4.2 million, respectively. Customer relationships, contracted backlog and the tradename will be amortized over their useful lives of four, six and three years, respectively.

In connection with the Halcrow acquisition, we assumed a lease obligation for office space which was entered into by a Halcrow subsidiary in 1981 and was previously occupied and used as one of their primary office locations. Halcrow vacated the space and subleased it to other third parties as of the date of acquisition. The lease requires Halcrow to continue to make lease payments until 2080 with rent escalating provisions that fluctuate with market conditions. We have obtained a preliminary third party determination of the fair value of this lease obligation and the associated real property in order to complete the purchase price allocation for the Halcrow acquisition.  As a result, we recorded total lease and related obligations of $66.6 million, of which $66.0 million and $0.6 million are included in other long-term liabilities and other accrued liabilities in the consolidated balance sheets, respectively, as well as a related building asset of $25.9 million.  In addition, we have assumed an operating lease for the associated land on which the building is located with total lease payments due over the remaining term of the lease totaling $37.2 million.  This valuation is preliminary and could change upon finalization by the third party firm.  We expect to receive a final valuation report from the outside valuation firm in November 2012, after which we will make final purchase price allocations in our financial statements.

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(6) GOODWILL AND INTANGIBLE ASSETS

The following table presents the changes in goodwill (in thousands):

	September 30, 2012		December 31, 2011
Balance at beginning of period	$	503,289	$	130,354
Acquisitions	—		386,267
Foreign currency translation	17,908		(13,332		)
Halcrow preliminary purchase price adjustments	43,075		—
Balance at end of period	$	564,272	$	503,289

The following table summarizes the purchase price adjustments and the impact to goodwill for the period ended September 30, 2012:

Lease obligations	$	66,627
Building	(25,924		)
Pension-related liabilities	(16,312		)
Unfavorable operating lease obligations	9,202
Employment tax related liabilities	6,268
Intangible asset valuations	(2,557		)
Other liabilities	5,771
	$	43,075

ThepurchasepriceadjustmentswerenotretrospectivelyreflectedintheconsolidatedfinancialstatementsasofDecember31,2011becausetheamountsarepreliminaryandwillnotbefinalizeduntilthefourthquarterof2012.ManagementexpectstoreflectretrospectiveadjustmentswhenpresentingthecomparativeDecember31,2011consolidatedfinancialstatementsinits2012Form10-K.

Intangible assets with finite lives consist of the following (in thousands):

	Cost		Accumulated Amortization			Net finite-lived intangible assets
September 30, 2012
Contracted backlog	$	80,770	$	(63,546	)	$	17,224
Customer relationships	159,559		(56,063		)	103,496
Tradename	24,809		(4,265		)	20,544
Total finite-lived intangible assets	$	265,138	$	(123,874	)	$	141,264
December 31, 2011
Contracted backlog	$	78,071	$	(59,737	)	$	18,334
Customer relationships	147,450		(37,433		)	110,017
Tradename	11,145		(45		)	11,100
Total finite-lived intangible assets	$	236,666	$	(97,215	)	$	139,451

All intangible assets are being amortized over their expected lives up to seven years. Included in the September 30, 2012 balance above is a tradename valued at $20.3 million which we began amortizing in 2012 over a period of five years due to a change in estimate of the useful life of the tradename. This tradename was classified as an indefinite-lived intangible asset as of December 31, 2011and therefore was not included in the table above as of that date.

The amortization expense reflected in the consolidated statements of income totaled $11.1 million and $2.4 million for the three months ended September 30, 2012 and 2011, respectively, and $29.0 million and $6.5 million for the nine months ended September 30, 2012 and 2011, respectively.  All intangible assets are expected to be fully amortized by the end of 2018.

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(7) PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:

($ in thousands)	September 30, 2012			December 31, 2011
Land	$	23,228		$	22,615
Building and land improvements	110,629			82,786
Furniture and fixtures	23,715			20,679
Computer and office equipment	98,464			89,345
Field equipment	122,649			110,885
Leasehold improvements	82,340			78,874
	461,025			405,184
Less: Accumulated depreciation	(251,759		)	(225,462		)
Net property, plant and equipment	$	209,266		$	179,722

Depreciation expense reflected in the consolidated statements of income was $11.1 million and $7.8 million for the three months ended September 30, 2012 and 2011, respectively, and $30.6 million and $28.4 million for the nine months ended September 30, 2012 and 2011, respectively.

(8) FAIR VALUE OF FINANCIAL INSTRUMENTS

Cash and cash equivalents, receivables, accounts payable and accrued subcontractor costs and billings in excess of revenue are carried at cost, which approximates fair value due to their short maturities. Fair value of long-term debt, including the current portion, is estimated based on Level 2 inputs, except the amount outstanding on the revolving credit facility for which the carrying value approximates fair value. Fair value is determined by discounting future cash flows using interest rates available for issues with similar terms and average maturities.

The carrying values of financial instruments that do not approximate fair value are as follows:

	September 30, 2012				December 31, 2011
($ in thousands)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Mortgage notes payable	$	12,566	$	11,154	$	13,750	$	12,207
Equipment financing	5, 125		4,444		13,764		12,923
Stockholder notes payable	280		258		294		272

The fair value of marketable securities classified as available-for-sale, which totaled $2.5 million and $2.4 million at September 30, 2012 and December 31, 2011, respectively, were valued based on Level 1 inputs whereby a readily determinable market value exists for the specific asset.

We primarily enter into derivative financial instruments to mitigate exposures to changing foreign currency exchange rates. These currency derivative instruments are carried on the balance sheet at fair value and are based upon Level 2 inputs including third party quotes. At September 30, 2012, we had forward foreign exchange contracts on major world currencies with varying durations, none of which extend beyond five years. At September 30, 2012, derivative assets and liabilities recorded were insignificant.  At December 31, 2011, derivative assets and liabilities recorded amounted to $6.7 million and $6.6 million, respectively.

(9) EMPLOYEE BENEFIT PLAN ASSETS

We have investments that support deferred compensation arrangements and other employee benefit plans. These assets are recorded at fair market value primarily using Level 2 inputs. As of September 30, 2012 and December 31, 2011, the fair market value of these assets were $64.2 million and $53.0 million, respectively, and are included in employee benefit plan assets and other on the consolidated balance sheets.

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(10) LINE OF CREDIT AND LONG TERM DEBT

On December 6, 2010, we entered into a Credit Agreement providing for an unsecured revolving Credit Facility (the “Credit Facility”) in an amount up to $600.0 million.  We entered into an amendment to the original Credit Agreement on September 27, 2011 which provides for modifications to certain covenants and other provisions of the Credit Agreement to take into account the acquisition of Halcrow. On April 19, 2012, we amended and restated this agreement for the purposes of increasing the size of the Credit Facility to $900.0 million, extending the maturity to April 19, 2017, increasing the capacity of certain sub-facilities as well as improving our borrowing rates. Under the terms of the revised agreement we may be able to invite existing and new lenders to increase the amount available to be borrowed under the agreement by up to $200 million.  The revised credit facility has a subfacility for the issuance of standby letters of credit in a face amount up to $500.0 million, compared to $300.0 million in the original agreement and a subfacility up to $300.0 million for multicurrency borrowings, which is unchanged from the original agreement.

Revolving loans under the Credit Facility bear interest, at our option, at a rate equal to either (i) the base rate plus a margin based on our consolidated leverage ratio or (ii) the eurodollar rate, based on interest periods of one, two, three or six months, plus a margin based on our consolidated leverage ratio. The base rate is defined as the highest of (i) the “Federal Funds Rate,” as published from time to time by the Federal Reserve Bank of New York, plus 0.5%, (ii) the Agent’s “prime rate” in effect from time to time, and (iii) the one month LIBOR rate in effect from time to time, plus 1.0%.  Our “consolidated leverage ratio” on any date is the ratio of our consolidated total funded debt to our consolidated adjusted earnings before interest, taxes, depreciation and amortization for the preceding four fiscal quarters.  The definition of consolidated adjusted earnings before interest, taxes, depreciation and amortization was amended to allow for the addition of, among other things, all expenses associated with the non-cash portion of all stock-based compensation.  We are also obligated to pay other closing fees, commitment fees and letter of credit fees customary for a credit facility of this size and type.  Under the terms of the revised agreement, the margin added to either the base rate or the eurodollar rate has decreased, which provides us with access to capital at lower overall borrowing rates.

Both the original and revised credit agreements contain customary representations and warranties and conditions to borrowing. They also include customary affirmative and negative covenants, including covenants that limit or restrict our ability to incur indebtedness and other obligations, grant liens to secure their obligations, make investments, merge or consolidate, dispose of assets outside the ordinary course of business, enter into transactions with affiliates, and make certain kinds of payments, in each case subject to customary exceptions for credit facilities of this size and type. We are also required to comply with a minimum consolidated fixed charge coverage ratio and a maximum consolidated leverage ratio. As of September 30, 2012, we were in compliance with the covenants required by the Credit Agreement. There can be no assurance that the capacity under this facility will be adequate to fund future operations or acquisitions we may pursue from time to time.  The remaining borrowing capacity under the Credit Facility was $615.5 million as of September 30, 2012.

At September 30, 2012, we had $170.0 million in outstanding borrowings on the Credit Facility, compared to $65.0 million at December 31, 2011. The average rate of interest charged on that balance was 1.71% as of September 30, 2012. Issued and outstanding letters of credit of $114.5 million were reserved against the Credit Facility at September 30, 2012, compared to $90.6 million at December 31, 2011.

Our nonrecourse and other long-term debt consists of the following:

($ in thousands)	September 30, 2012		December 31, 2011
Nonrecourse:
Mortgage payable in monthly installments to July 2020, secured by real estate, rents and leases. The note bears interest at 5.35%	$	10,644	$	11,429
Mortgage payable in monthly installments to December 2015, secured by real estate. The note bears interest at 6.59%	1,922		2,321
	12,566		13,750
Other:
Revolving credit facility	$	170,000	$	65,000
Equipment financing, due in monthly installments to December 2015, secured by equipment. These notes bear interest ranging from 4.00% to 8.00%	5,125		13,764
Stockholder notes payable	280		294
Total debt	187,971		92,808
Less: current portion of debt	3,931		11,334
Total long-term portion of debt	$	184,040	$	81,474

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(11) PROVISION FOR INCOME TAXES

The effective tax rate for the three months ended September 30, 2012 was 32.7% compared to 31.4% for the same period in the prior year. The effective tax rate for 2012 is higher in comparison to the effective tax rate in 2011 primarily due to the permanent tax benefits of the domestic production deduction recognized in 2011 as well as the 2012 negative impacts of foreign operations partially offset by international tax planning, and the loss in 2012 of the research and experimentation credit.  Our effective tax rate continues to be negatively impacted by the effect of state income taxes, non-deductible foreign net operating losses, the disallowed portion of executive compensation, and disallowed portions of meals and entertainment expenses.

We file income tax returns in the U.S. and various state jurisdictions and non-U.S. jurisdictions.  In the normal course of business, we are subject to examination by taxing authorities throughout the world including such major jurisdictions as the United States and Canada. With few exceptions, we are no longer subject to income tax examinations by tax authorities for years before 2004.

(12) COMMITMENTS AND CONTINGENCIES

We are party to various contractual guarantees and legal actions arising in the normal course of business. Because a large portion of our business comes from U.S. federal, state and municipal sources, our procurement and certain other practices at times are subject to review and investigation 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 or alternatively could result in settlement. Damages assessed in connection with and the cost of defending any such actions could be substantial. While the outcomes of pending proceedings and legal actions are often difficult to predict, management believes that proceedings and legal actions currently pending would not result in a material adverse effect on our results of operations or financial condition even if the final outcome is adverse to our company.

Many claims that are currently pending against us are covered by our professional liability insurance. Management estimates that the levels of insurance coverage (after retentions and deductibles) are generally adequate to cover our liabilities, if any, with regard to such claims. Any amounts that are probable of payment are accrued when such amounts are estimable.  As of September 30, 2012 and December 31, 2011, accruals for potential estimated claim liabilities were $30.3 million and $34.1 million, respectively.

In 2010, we were notified that the U.S. Attorney’s Office for the Eastern District of Washington is investigating overtime practices in connection with the U.S. Department of Energy Hanford tank farms management contract which we transitioned to another contractor in 2008. In 2011 and 2012, eight former CH2M HILL Hanford Group (Hanford CH2M HILL Subsidiary) employees pleaded guilty on felony charges related to time card fraud committed while working on the Hanford Tank Farm Project. As part of its investigation, the U.S. Attorney’s Office raised the possibility of civil and/or criminal charges for possible violations arising from Hanford CH2M HILL’s Subsidiary overtime practices on the project.  In September 2012, the government intervened in a False Claims Act case filed in the District Court for the Eastern District of Washington by one of the employees who plead guilty to time card fraud.  We are cooperating with the government’s investigation and continue to seek an amicable settlement of any potential civil and criminal charges and resolution of any potential False Claims Act allegations with the Department of Justice. Based on the information available to us at this time, we do not believe that the ultimate resolution of this matter will have a material impact on our results of operations or financial condition.

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

The following discussion and analysis is intended to assist in providing an understanding of our financial condition, changes in financial condition and results of operations as a whole and for each of our operating segments and should be read in conjunction with our consolidated financial statements and notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2011.

In the following text, the terms, “we,” “our,” “our company,” and “us” may refer to CH2M HILL.

Certain statements throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report are forward looking and thus reflect our current expectations and beliefs with respect to certain current and future events and financial performance. Such forward looking statements are and will be subject to many risks and uncertainties relating to our operations and business environment that may cause actual results to differ materially from any future results expressed or implied in such forward looking statements. Words such as “believes,” “anticipates,” “expects,” “will,” “plans” and similar expressions are intended to identify forward looking statements.

Additionally, forward looking statements include statements that do not relate solely to historical facts, such as statements which identify uncertainties or trends, discuss the possible future effects of current known trends or uncertainties, or which indicate

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that the future effects of known trends or uncertainties cannot be predicted, guaranteed or assured. All forward looking statements in this report are based upon information available to us on the date of this report. We undertake no obligation to publicly update or revise any forward looking statement, whether as a result of new information, future events, changed circumstances or otherwise, except as required by applicable law.

Our actual results could differ materially from these forward looking statements due to numerous factors including, without limitation, the following: the continuance of, and funding for certain governmental regulation and enforcement programs which create demand for our services; our ability to attract and perform large, longer-term projects; our ability to insure against or otherwise cover the liability risks inherent in our business including environmental liabilities and professional engineering liabilities; our ability to manage the risks inherent in the government contracting business and the delivery of lump sum projects; our ability to manage the costs associated with our fixed price contracts; our ability to manage the risks inherent in international operations, including operations in war and conflict zones, our ability to identify and successfully integrate acquisitions; our ability to attract and retain professional personnel; changes in global business, economic, political and social conditions; intense competition in the global engineering, procurement and construction industry; civil unrest, security issues and other unforeseeable events in countries in which we do business; our failure to receive anticipated new contract awards; difficulties or delays incurred in the execution of contracts; and other risks and uncertainties set forth under Item 1A. Risk Factors in the Annual Report on Form 10-K for the year ended December 31, 2011, as well as other risks and uncertainties set forth from time to time in the reports the Company files with the SEC. Consequently, forward looking statements should not be regarded as representation or warranties by the Company that such matters will be realized.

Overview

We are a large employee-controlled professional engineering services firm providing consulting, engineering, design, design-build, procurement, construction, operations and maintenance, EPC, program management and technical services to U.S. federal, state, municipal and local government agencies, national governments, as well as private industry and utilities, around the world. Founded in 1946, we have approximately 30,000 employees worldwide.

We provide services to a diverse customer base including the U.S. federal and foreign governments and governmental authorities, various U.S. federal government agencies, provincial, state and local municipal governments, major oil and gas companies, refiners and pipeline operators, utilities, metal and mining, automotive, food and beverage and consumer products manufacturers, microelectronics, pharmaceuticals and biotechnology companies. We believe we provide our clients with innovative project delivery using cost-effective approaches and advanced technologies.

Our revenues are dependent upon our ability to attract and retain qualified and productive employees, identify business opportunities, allocate our labor resources to profitable markets, secure new contracts, execute existing contracts, and maintain existing client relationships. Moreover, as a professional services company, the quality of the work generated by our employees is integral to our revenue generation.

The Budget Control Act of 2011 imposed a process, known as sequestration, to implement $1.2 trillion in automatic spending cuts starting in 2013 and effective through fiscal year 2021, unless an alternative federal budget management process is agreed between the US Congress and the President of the United States.  If the sequestration takes effect, the agencies of the US Federal Government may be required to modify or terminate contracts and substantially reduce awards of new work to companies like CH2M HILL, which will likely impact our ability to earn revenue on projects already awarded, win new work from U.S. Government customers and may have an adverse impact on our financial condition.

Acquisitions

We continuously monitor acquisition and investment opportunities that will expand our portfolio of services, provide local resources internationally to serve our customers, add value to the projects undertaken for clients, or enhance our capital strength.

On July 29, 2011, we acquired Booz Allen Hamilton’s State and Local Government Transportation and Consulting business (“BAH”). BAH has approximately 150 employees and provides management consulting, system engineering, vehicle engineering, asset management, train control and communications systems, systems safety and revenue system consulting to transit and rail agencies throughout North America. The cost of the acquisition was $28.5 million adjusted for working capital requirements. The results of operations for BAH have been included in the consolidated financial statements since the acquisition date and are reported in the Government, Environment and Infrastructure (“GEI”) operating segment.

On November 10, 2011, we purchased all the share capital of Halcrow Holdings Limited (“Halcrow”) for approximately £124.0 million ($197.3 million).  Halcrow is a United Kingdom-headquartered engineering, planning, design and management services firm specializing in developing infrastructure and buildings.  Halcrow has 5,000 employees who provide services to its clients

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in the United Kingdom, Middle East, Canada, the United States, China, India, Australia, South America, and Europe. Halcrow’s clients include public and private-sector organizations around the world, including local, regional and national governments, asset owners, international funding agencies, regulators, financial institutions, contractors, developers and operators.

We performed an initial purchase price allocation for the Halcrow acquisition based on estimates of fair values; however, we are currently in the process of finalizing the fair values of certain assets acquired and liabilities assumed. The estimations of fair values include valuations of intangible assets, assessments of tax assets and liabilities, pension-related assets and liabilities, facilities leases and financial guarantees and other items that may affect the allocation of the purchase price. As such, the Halcrow purchase price allocation is preliminary and is subject to change upon receipt of information needed to complete the valuations and certain of the final fair value determinations could result in significant adjustments to the carrying value of assets, liabilities and goodwill. We expect to receive all information needed to complete the valuations in November 2012.

Results of Operations

Revenue and Operating Income of our Reportable Segments

During 2012, we reorganized our reporting structure under which our chief operating decision maker regularly reviews operating results and makes strategic and operating decisions with regards to assessing performance and allocating resources in order to streamline our business and reducing overhead costs. As a result, we formed the Energy, Water, and Facilities (“EWF”) segment and the Government, Environment, and Infrastructure (“GEI”) segment.  The reporting units previously included in the Energy and Water segment in 2011 were moved to the EWF segment and the reporting units previously included in the Government, Environment and Nuclear segment in 2011 were moved to the GEI segment.  Reporting units that were previously included in the Facilities and Infrastructure segment were divided into either the EWF or GEI segment, accordingly.  Additionally, for 2012, the results of operations for reporting units acquired within Halcrow were assigned to the appropriate segment according to the nature of their operations.  We believe this new organizational structure will help us capitalize on cross-market synergies, consolidate our service offerings and optimize our client management process. These changes were effective on January 1, 2012 and prior period amounts have been adjusted to conform to the revised organization.

Certain financial information relating to the three and nine months ended September 30, 2012 and 2011 for each segment is provided below (in millions):

Three Months Ended September 30, 2012 and 2011

	2012							2011							Change
($ in millions)	Revenue		Equity in Earnings		Operating Income (Loss)			Revenue		Equity in Earnings		Operating Income (Loss)			Revenue					Equity in Earnings		Operating Income (Loss)
Energy, Water and Facilities	$	935.9	$	9.8	$	16.9		$	737.0	$	8.3	$	23.1		$	198.9		27.0	%	$	1.5	$	(6.2	)	(26.8	)%
Government, Environment and Infrastructure	667.6		15.5		38.2			767.3		11.2		31.2			(99.7		)	(13.0	)%	4.3		7.0			22.4	%
Corporate	—		—		(7.3		)	—		—		(13.8		)	—			—		—		6.5			(47.1	)%
Total	$	1,603.5	$	25.3	$	47.8		$	1,504.3	$	19.5	$	40.5		$	99.2		6.6	%	$	5.8	$	7.3		18.0	%

Nine Months Ended September 30, 2012 and 2011

	2012							2011							Change
($ in millions)	Revenue		Equity in Earnings		Operating Income (Loss)			Revenue		Equity in Earnings		Operating Income (Loss)			Revenue					Equity in Earnings			Operating Income (Loss)
Energy, Water and Facilities	$	2,562.7	$	15.0	$	48.0		$	2,007.3	$	15.5	$	76.3		$	555.4		27.7	%	$	(0.5	)	$	(28.3	)	(37.1	)%
Government, Environment and Infrastructure	1,983.3		29.0		71.1			2,125.7		30.0		89.1			(142.4		)	(6.7	)%	(1.0		)	(18.0		)	(20.2	)%
Corporate	—		—		(15.6		)	—		—		(20.6		)	—			—		—			5.0			24.3	%
Total	$	4,546.0	$	44.0	$	103.5		$	4,133.0	$	45.5	$	144.8		$	413.0		10.0	%	$	(1.5	)	$	(41.3	)	(28.5	)%

Energy, Water and Facilities

Revenue from our EWF segment increased for the three and nine months ended September 30, 2012, compared to the same periods in the prior year by $198.9 million, or 27.0% and $555.4 million, or 27.7%, respectively.  Approximately $49.8 million and $158.0 million of the revenue increase relates to Halcrow operations in the three and nine months ended September 30, 2012, respectively. The remaining increases in revenue of $149.1 million and $397.4 million are primarily attributable to four new EPC power projects awarded late in 2011 and related operations and maintenance work on the North Slope in our energy and chemicals business.  Additionally, during these periods, we experienced improved volumes in industrial projects for several energy and mining companies within our water business.  These increases were partially offset by the completion of a large construction project in

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Malaysia in 2011 performed by our industrial and advanced technologies (“I&AT”) business.  A reduction of revenues due to the transition of a significant project from the design-build phase to the operations phase also partially offset the revenue increases discussed above.

Operating income decreased for the three months ended September 30, 2012 by $6.2 million, or 26.8% and decreased by $28.3 million, or 37.1% for the nine month period, compared to the prior year periods.  During the three months ended September 30, 2012, approximately $4.4 million of the decrease related to Halcrow operations, which was comprised of $0.8 million of operating loss, $2.5 million of acquisition related amortization expense and $1.1 million in costs incurred to integrate the Halcrow operations.  Approximately $17.5 million of the decrease during the nine months ended September 30, 2012, relates to Halcrow operations which is comprised of $5.9 million of operating loss, $6.9 million of acquisition related amortization expense and $4.7 million in costs incurred to integrate the Halcrow operations with our existing operations.   Excluding Halcrow, operating income was $21.3 million and $65.5 million for the three and nine month periods ended September 30, 2012 compared to $23.1 million and $76.3 million in the comparable prior year periods.  The three and nine months results for 2012 were negatively impacted by write downs on two power projects in the western United States as well as an energy and chemicals (E&C) engineering project in the southern United States.  Offsetting these operating losses was better performance in our E&C construction business driven by project losses recorded in 2011 which did not reoccur in 2012 as well as the recovery of costs on an operations and maintenance project in the southwest United States in the second quarter of 2012.  While revenues from our water business increased slightly for the three and nine months, operating profit for the same periods remained relatively constant due to certain higher margin contracts being completed last year as a well as experiencing slightly higher overhead costs during 2012.

Government, Environment and Infrastructure

Revenue from our GEI segment decreased for the three months and nine months ended September 30, 2012, compared to the same periods in the prior year by $99.7 million, or 13.0% and $142.4 million, or 6.7%, respectively.  Excluding revenue related to Halcrow of $91.0 million and $290.9 million in the three and nine months ended September 30, 2012, the segment experienced a decline of $190.7 million and $433.3 million, in the respective periods.  This decline in revenue was primarily the result of lower volumes in our nuclear markets as a result of a decrease in funding levels for large Department of Energy projects as well as lower design build volumes in the Middle East in our government facilities and infrastructure (“GF&I”) business.  These decreases were partially offset by improved results in our transportation business resulting primarily from the BAH acquisition.

Operating income increased for the three months ended September 30, 2012 compared to the same period in the prior year by $7.0 million, or 22.4% and decreased by $18.0 million, or 20.2% in the nine months ended September 30, 2012.  The operating income improvements in GEI for the three months ended September 30, 2012 were significantly offset by an operating loss of approximately $7.4 million in Halcrow operations which was comprised of $0.9 million of loss from operations, $4.5 million of acquisition related amortization expense and $2.0 million of costs incurred to integrate the Halcrow operations.  Approximately $9.4 million of the decrease during the nine months ended September 30, 2012, relates to Halcrow operations which is comprised of $9.9 million of operating income, $11.6 million of acquisition related amortization expense and $7.7 million in costs incurred to integrate the Halcrow operations with our existing operations.  Excluding Halcrow, operating income was $45.6 million and $80.5 million for the three and nine month periods ended September 30, 2012 compared to $31.2 million and $89.1 million in the comparable prior year periods.  This increase of $14.4 million, excluding Halcrow, for the three months ended September 30, 2012 compared to the prior year relates primarily to volume growth in our transportation business for consulting services in North America and volume growth in our environmental service business.  Also contributing to the increase was minimal additional loss reserves on GF&I design-build projects in the third quarter of 2012.  The decrease of $8.6 million for the nine months ended September 30, 2012, excluding Halcrow, compared to the prior year relates primarily to increased costs on various U.S. government military base facility projects within our GF&I business, resulting in a significant decrease in gross margin. The overall decrease in volume in our nuclear and GF&I markets discussed above also contributed to the decrease in operating income for the quarter.  These decreases in earnings were partially offset by fees earned from the successful completion of the venues on the London 2012 Olympics and continued volume growth in our environmental services business.

Corporate

The Corporate segment includes expenses which represent centralized management costs that are not allocable to individual operating segments and primarily include expenses associated with administrative functions such as executive management, legal, and general business development efforts. Corporate expenses for the three and nine months ended September 30, 2012 were $7.3 million and $15.6 million compared to $13.8 million and $20.6 million for the same periods in the prior year.  The decrease in corporate costs for 2012 is primarily due to a decrease in activities associated with initiatives for potential acquisitions and business development activities offset by increased severance costs associated with overhead reduction efforts.

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Provision for Income Taxes

The effective tax rate for the three months ended September 30, 2012 was 32.7% compared to 31.4% for the same period in the prior year. The effective tax rate for 2012 is higher in comparison to the effective tax rate in 2011 primarily due the permanent tax benefits of the domestic production deduction recognized in 2011 as well as the 2012 negative impacts of foreign operations partially offset by international tax planning, and the loss in 2012 of the research and experimentation credit.  Our effective tax rate continues to be negatively impacted by the effect of state income taxes, non-deductible foreign net operating losses, the disallowed portion of executive compensation, and disallowed portions of meals and entertainment expenses.

Undistributed earnings of our foreign subsidiaries amounted to approximately $121.7 million at September 30, 2012.  These earnings are considered to be permanently reinvested.  Accordingly, no provision for U.S. federal and state income taxes or foreign withholding taxes has been made.  If these earnings were repatriated as of September 30, 2012, approximately $29.2 million of income tax expense would be incurred.

As of September 30, 2012 and December 31, 2011, we had $28.0 million and $27.4 million, respectively, recorded as a liability for uncertain tax positions.  We recognize interest and penalties related to unrecognized tax benefits in income tax expense.  Included in the amounts discussed above are approximately $4.0 million and $2.6 million of accrued interest and penalties related to uncertain tax positions, as of September 30, 2012 and December 31, 2011, respectively.

We file income tax returns in the U.S. and various state jurisdictions and non-U.S. jurisdictions. In the normal course of business, we are subject to examination by taxing authorities throughout the world, including such major jurisdictions as the United States and Canada. With few exceptions, we are no longer subject to income tax examinations by tax authorities for years before 2004.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flows from operations, borrowings under our revolving line of credit and other financing arrangements. Our primary uses of cash are to fund our working capital, acquisitions, capital expenditures and repurchases of stock presented on our internal market. During the nine months ended September 30, 2012, cash provided by operations was $94.3 million compared to $171.3 million of cash provided by operations in the same period last year. The decrease in operating cash flow during the nine months ended September 30, 2012 was primarily attributable to the decrease in net income generated from operations of $64.4 million, compared to $100.4 million in the nine months ended September 30, 2011 as well as an increase in cash required for operating assets and liabilities during the nine months ended September 30, 2012.

We continuously monitor collection efforts and assess the allowance for doubtful accounts. Based on our assessment at September 30, 2012, we have deemed the allowance for doubtful accounts to be adequate; however, economic conditions may adversely impact some of our clients’ ability to pay our bills or the timeliness of their payments.

Cash used in investing activities was $41.4 million in the nine months ended September 30, 2012 compared to $21.3 million for the same period in 2011. The majority of the increase in cash used in our investing activities for the nine months ended September 30, 2012 relates to capital expenditures of $36.4 million compared to $21.4 million spent on capital expenditures in the nine months ended September 30, 2011.  Additionally, investments in affiliates (net of distributions of capital received) resulted in net cash outflow of $5.6 million for the nine months ended September 30, 2012 compared to net cash outflow of $0.8 million for the prior year period.

Cash used in financing activities was $5.8 million in the nine months ended September 30, 2012 compared to $113.6 million for the same period in 2011.  For the nine months ended September 30, 2012, repurchases of stock were $101.5 million compared to $71.6 million for the same period in the prior year. Additionally, the net borrowings of debt were approximately $95.1 million during 2012 compared to net payments on debt of approximately $11.0 million during the nine months ended September 30, 2011.  Finally, in 2012 we paid $7.5 million for tax resolutions related to liabilities on entities purchased in the VECO acquisition that existed prior to the date of acquisition and $1.5 million for the BAH holdback, compared to $32.8 million in 2011.  These payments were made in satisfaction of a portion of the holdback of the purchase price established at the date of each acquisition.

On December 6, 2010, we entered into a Credit Agreement providing for an unsecured revolving Credit Facility (the “Credit Facility”) in an amount up to $600.0 million.  We entered into an amendment to the original Credit Agreement on September 27, 2011 which provides for modifications to certain covenants and other provisions of the Credit Agreement to take into account the acquisition of Halcrow. On April 19, 2012 we amended and restated this agreement for the purposes of increasing the size of the Credit Facility to $900.0 million, extending the maturity to April 19, 2017, increasing the capacity of certain sub-facilities as well as improving our borrowing rates. Under the terms of the revised agreement we may be able to invite existing and new lenders to increase the amount available to be borrowed under the agreement by up to $200 million.  The revised credit facility has a subfacility

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for the issuance of standby letters of credit in a face amount up to $500.0 million, compared to $300.0 million in the original agreement, and a subfacility up to $300.0 million for multicurrency borrowings, which is unchanged from the original agreement.

Revolving loans under the Credit Facility bear interest, at our option, at a rate equal to either (i) the base rate plus a margin based on our consolidated leverage ratio or (ii) the eurodollar rate, based on interest periods of one, two, three or six months, plus a margin based on our consolidated leverage ratio. The base rate is defined as the highest of (i) the “Federal Funds Rate,” as published from time to time by the Federal Reserve Bank of New York, plus 0.5%, (ii) the Agent’s “prime rate” in effect from time to time, and (iii) the one month eurodollar rate in effect from time to time, plus 1.0%.  Our “consolidated leverage ratio” on any date is the ratio of our consolidated total funded debt to our consolidated adjusted earnings before interest, taxes, depreciation and amortization for the preceding four fiscal quarters.  The definition of consolidated adjusted earnings before interest, taxes, depreciation and amortization was amended to allow for the addition of, among other things, all expenses associated with the non-cash portion of all stock-based compensation.  We are also obligated to pay other closing fees, commitment fees and letter of credit fees customary for a credit facility of this size and type.  Under the terms of the revised agreement, the margin added to either the base rate or the eurodollar rate has decreased, which provides us with access to capital at lower overall borrowing rates.

Both the original and revised credit agreements contain customary representations and warranties and conditions to borrowing. They also include customary affirmative and negative covenants, including covenants that limit or restrict our ability to incur indebtedness and other obligations, grant liens to secure their obligations, make investments, merge or consolidate, dispose of assets outside the ordinary course of business, enter into transactions with affiliates, and make certain kinds of payments, in each case subject to customary exceptions for credit facilities of this size and type. We are also required to comply with a minimum consolidated fixed charge coverage ratio and a maximum consolidated leverage ratio. As of September 30, 2012, we were in compliance with the covenants required by the Credit Agreement. There can be no assurance that the capacity under this facility will be adequate to fund future operations or acquisitions we may pursue from time to time.  The remaining borrowing capacity under the revised credit facility is $615.5million at September 30, 2012.

At September 30, 2012, we had $170.0 million in outstanding borrowings on the Credit Facility. The average rate of interest charged on that balance was 1.71% as of September 30, 2012. Issued and outstanding letters of credit of $114.5 million were reserved against the Credit Facility at September 30, 2012, compared to $90.6 million at December 31, 2011.

Depending on the applicable terms and conditions on new debt or equity offerings compared to the opportunity cost of using our internally generated cash, we may either choose to finance new opportunities using borrowings under our Credit Facility, or other debt. In some instances we may use a combination of one or more of these financing mechanisms. As of September 30, 2012, we had other outstanding debt obligations of approximately $18.0 million, the majority of which is long-term in nature and relates to issuances of notes payable and mortgages related to property, plant and equipment.

At September 30, 2012, company-wide issued and outstanding letters of credit and bank guarantee facilities of $187.1 million were outstanding, compared to $138.0 million at December 31, 2011.  Cash held in international accounts at September 30, 2012 and December 31, 2011 was $149.4 million and $139.6 million, respectively.

Off-Balance Sheet Arrangements

We have interests in multiple joint ventures, some of which are considered variable interest entities. These entities facilitate the completion of contracts that are jointly owned with our 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. Our 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 our partners.

There were no substantial changes to other off-balance sheet arrangements or contractual commitments in the three months ended September 30, 2012, when compared to the disclosures provided in our Annual Report on Form 10-K for the year ended December 31, 2011.

Aggregate Contractual Commitments

We maintain a variety of commercial commitments that are generally made available 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 post surety and bid bonds, which are contractual agreements issued by a surety, for the purpose of guaranteeing our performance on contracts and

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to protect owners and are subject to full or partial forfeiture for failure to perform obligations arising from a successful bid. We also carry substantial premium paid, traditional insurance for our business risks including professional liability and general casualty insurance and other coverage which is customary in our industry.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. 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 the understanding of our financial condition and results of operations and require complex management judgment are summarized below. Further detail and information regarding our critical accounting policies and estimates are included in our Annual Report on Form 10-K for the year ended December 31, 2011.

Revenue Recognition

We earn our revenues from different types of services under a variety of different types of contracts, including cost-plus, fixed-price and time-and-materials. We evaluate contractual arrangements to determine how to recognize revenue. We recognize revenue and profit for most 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 contract. In making such estimates, judgments are required to evaluate potential variances in schedule, the cost of materials and labor, productivity, liability claims, contract disputes, or 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 maintenance type contracts. Typically, these contracts may include fixed and variable components along with incentive fees. Revenue is recognized on operations and maintenance 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 collectability 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 revenue 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 income tax provision involves uncertainties in the application of complex tax regulations. For income tax benefits to be recognized, a tax position must be more likely than not to be sustained upon ultimate settlement. We record reserves for uncertain tax positions that do not meet this criterion.

Intangible Assets

We may acquire goodwill or other intangible assets in business combinations. Intangible assets are stated at fair value as of the date acquired in a business combination. We amortize intangible assets with finite lives on a straight-line basis over their expected useful lives, currently up to seven years. For those intangible assets with no legal, regulatory, contractual or other factors that would reasonably limit the useful life of the intangible asset, such as goodwill, management has determined that the life is indefinite and therefore, they are not amortized.

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We review our finite-lived intangibles and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Assets which are held and used in operations are considered impaired if the undiscounted future cash flows from the asset do not exceed the net book value. If impaired, the assets are written down to their estimated fair value. We generally measure fair value by considering sale prices for similar assets or by discounting estimated future cash flows from the asset group using an appropriate discount rate.

Goodwill and intangible assets with indefinite lives are tested for impairment on an annual basis, or on an interim basis if events or circumstances indicate that the carrying amount of the assets may not be fully recoverable. An impairment charge is recognized for any amount by which the carrying amount of goodwill or intangible assets with indefinite lives exceeds their fair value. Management performs its impairment tests of goodwill at the reporting unit level, which is one level below the operating segments.

Pension and Postretirement Employee Benefits

The unfunded or overfunded projected benefit obligation of our defined benefit pension plans and other postretirement benefits is recorded in our consolidated financial statements using actuarial valuations that are based on many assumptions. These assumptions primarily include discount rates, rates of compensation increases for participants, and long-term rates of return on plan assets. We use judgment in selecting these assumptions each year because we have to consider not only the current economic environment in each host country, but also future market trends, changes in interest rates and equity market performance. Changes in these assumptions have an immaterial impact on our net periodic pension costs as most of our defined benefit arrangements have been closed to new entrants and ceased future accruals.

We also use these assumptions as well as applicable regulatory requirements, tax deductibility, reporting considerations and other factors to determine the appropriate funding levels.

Recently Adopted Accounting Standards

In September 2011, the FASB issued ASU 2011-08, an amendment to Topic 350, Intangibles—Goodwill and other, which simplifies how entities test goodwill for impairment. Previous guidance under Topic 350 required an entity to test goodwill for impairment using a two-step process on at least an annual basis. First, the fair value of a reporting unit was calculated and compared to its carrying amount, including goodwill. Second, if the fair value of a reporting unit was less than its carrying amount, the amount of impairment loss, if any, was required to be measured. Under the amendment, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads the entity to determine that it is more likely than not that its fair value is less than its carrying amount. If after assessing the totality of events or circumstances, an entity determines that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then the two-step impairment test is unnecessary. If the entity concludes otherwise, then it is required to test goodwill for impairment under the two-step process as described under Topic 350. We adopted this standard in 2011. The adoption of this accounting standard update did not have a material impact on our financial position, results of operations, cash flows and disclosures.

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income, which changes the financial reporting of items reported in other comprehensive income (“OCI”) by eliminating the option to present components of OCI as part of the statement of changes in stockholders’ equity. The amendments in this standard require that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendments in this standard do not change the items that must be reported in OCI, when an item of OCI must be reclassified to net income, or change the option for an entity to present components of OCI gross or net of the effect of income taxes. The amendments in ASU 2011-05 became effective for our interim and annual periods beginning January 1, 2012 and have been applied retrospectively.

In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS, which amends current guidance to result in common fair value measurement and disclosures between accounting principles generally accepted in the United States and International Financial Reporting Standards. The amendments explain how to measure fair value. They do not require additional fair value measurements and are not intended to establish valuations standards or affect valuation practices outside of financial reporting. The amendments in ASU 2011-04 became effective for our interim and annual periods beginning January 1, 2012. The adoption of the provisions of ASU 2011-04 did not have a material impact on our consolidated financial position or results of operations.

Commitments and Contingencies

We are party to various contractual guarantees and legal actions arising in the normal course of business. Because a large portion of our business comes from the U.S. federal government and various federal agencies, state and municipal sources, our

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procurement and certain other practices at times are subject to review and investigation by U.S. and state attorneys offices. Such state and U.S. federal 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. federal government contracting. These investigations often take years to complete and many result in no adverse action or alternatively could result in settlement. Damages assessed in connection with and the cost of defending any such actions could be substantial. While the outcomes of pending proceedings and legal actions are often difficult to predict, management believes that proceedings and legal actions currently pending would not result in a material adverse effect on our results of operations or financial condition even if the final outcome is adverse to our company.

Many claims that are currently pending against us are covered by our professional liability insurance. Management estimates that the levels of insurance coverage (after retentions and deductibles) are generally adequate to cover our liabilities, if any, with regard to such claims. Any amounts that are probable of payment are accrued when such amounts are estimable.  As of September 30, 2012 and December 31, 2011, accruals for potential estimated claim liabilities were $30.3 million and $34.1 million, respectively.

In 2010, we were notified that the U.S. Attorney’s Office for the Eastern District of Washington is investigating overtime practices in connection with the U.S. Department of Energy Hanford tank farms management contract which we transitioned to another contractor in 2008.  In 2011 and 2012, eight former CH2M HILL Hanford Group (Hanford CH2M HILL Subsidiary) employees pleaded guilty on felony charges related to time card fraud committed while working on the Hanford Tank Farm Project. As part of its investigation, the U.S. Attorney’s Office raised the possibility of civil and/or criminal charges for possible violations arising from Hanford CH2M HILL’s Subsidiary overtime practices on the project.  In September, 2012, the government intervened in a False Claims Act case filed in the District Court for the Eastern District of Washington by one of the employees who plead guilty to time card fraud.  We are cooperating with the government’s investigation and continue to seek an amicable settlement of any potential civil and criminal charges and resolution of any potential False Claims Act allegations with the Department of Justice. Based on the information available to us at this time, we do not believe that the ultimate resolution of this matter will have a material impact on our results of operations or financial condition.  For additional information regarding potential adverse consequences of any potential civil or criminal charges including indictment or conviction of CH2M HILL, its subsidiary companies or its employees, please see Item 1A. Risk Factors in the Form 10-K for the year ended December 31, 2011, including the Risk Factor titled “Many of our projects are funded by U.S. federal, state and local governments and if we violate applicable laws governing this work, we are subject to the risk of suspension or debarment from government contracting activities, which could have a material adverse affect on our business and results of operations.”

In connection with the Halcrow acquisition, we assumed a lease obligation for office space which was entered into by a Halcrow subsidiary in 1981 and was previously occupied and used as one of their primary office locations. Halcrow vacated the space and subleased it to other third parties as of the date of acquisition. The lease requires Halcrow to continue to make lease payments until 2080 with rent escalating provisions that fluctuate with market conditions. We have obtained a preliminary third party determination of the fair value of this lease obligation and the associated real property in order to complete the purchase price allocation for the Halcrow acquisition.  As a result, we recorded total lease and related obligations of $66.6 million, of which $66.0 million and $0.6 million are included in other long-term liabilities and other accrued liabilities in the consolidated balance sheets, respectively, as well as a related building asset of $25.9 million.  In addition, we have assumed an operating lease for the associated land on which the building is located with total lease payments due over the remaining term of the lease totaling $37.2 million.  This valuation is preliminary and could change upon finalization by the third party firm.  We expect to receive a final valuation report from the outside valuation firm in November 2012, after which we will make final purchase price allocations in our financial statements.

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 flows.

Foreign currency exchange rates.  We operate in many countries around the world and as a result, are exposed to foreign currency exchange rate risk on transactions in numerous countries. We are primarily subject to this risk on long term projects whereby the currency being paid by our client differs from the currency in which we incurred our costs, as well as, intercompany trade balances among entities with differing currencies. In order to mitigate this risk, we enter into derivative financial instruments. We do not enter into derivative transactions for speculative or trading purposes. All derivatives are carried at fair value in the consolidated balance sheets and changes in the fair value of the derivative instruments are recognized in earnings. These currency derivative instruments are carried on the balance sheet at fair value and are based upon Level 2 inputs including third party quotes. As of September 30, 2012, we had forward foreign exchange contracts on major world currencies with varying durations, none of which extend beyond five years.

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Interest rates.  Our interest rate exposure is generally limited to our unsecured revolving credit agreement, purchase of interest bearing short-term investments and holdback contingency balances outstanding related to our acquisitions of VECO and BAH. As of September 30, 2012 the outstanding balance on the unsecured revolving credit agreement was $170.0 million and there was approximately $32.3 million outstanding on the holdback contingencies. 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. Based upon the amount outstanding under the unsecured credit agreement and the holdback contingency, a one percentage point change in the assumed interest rate would change our annual interest expense by approximately $2.0 million.

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, 2012 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

We are party to various contractual guarantees and legal actions arising in the normal course of business. Because a large portion of our business comes from U.S. federal, state and municipal sources, our procurement and certain other practices at times are subject to review and investigation 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 or alternatively could result in settlement. Damages assessed in connection with and the cost of defending any such actions could be substantial. While the outcomes of pending proceedings and legal actions are often difficult to predict, management believes that proceedings and legal actions currently pending would not result in a material adverse effect on our results of operations or financial condition even if the final outcome is adverse to our company.

Many claims that are currently pending against us are covered by our professional liability insurance. Management estimates that the levels of insurance coverage (after retentions and deductibles) are generally adequate to cover our liabilities, if any, with regard to such claims. Any amounts that are probable of payment are accrued when such amounts are estimable.

In 2010, we were notified that the U.S. Attorney’s Office for the Eastern District of Washington is investigating overtime practices in connection with the U.S. Department of Energy Hanford tank farms management contract which we transitioned to another contractor in 2008. In 2011 and 2012, eight former CH2M HILL Hanford Group (Hanford CH2M HILL Subsidiary) employees pleaded guilty on felony charges related to time card fraud committed while working on the Hanford Tank Farm Project. As part of its investigation, the U.S. Attorney’s Office raised the possibility of civil and/or criminal charges for possible violations arising from Hanford CH2M HILL’s Subsidiary overtime practices on the project.  In September 2012, the government intervened in a False Claims Act case filed in the District Court for the Eastern District of Washington by one of the employees who plead guilty to time card fraud.  We are cooperating with the government’s investigation and continue to seek an amicable settlement of any potential civil and criminal charges and resolution of any potential False Claims Act allegations with the Department of Justice. Based on the information available to us at this time, we do not believe that the ultimate resolution of this matter will have a material impact on our results of operations or financial condition. For additional information regarding potential adverse consequences of any potential civil or criminal charges including indictment or conviction of CH2M HILL, its subsidiary companies or its employees, please see CH2M HILL’s Risk Factors in the Form 10-K for the year ended December 31, 2011, including the Risk Factor titled “Many of our projects are funded by U.S. federal, state and local governments and if we violate applicable laws governing this work, we are subject to the risk of suspension or debarment from government contracting activities, which could have a material adverse affect on our business and results of operations.”

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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 common shares by our company 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)	3,746	$	56.81	—	—
August	—	—		—	—
September (b)	747,978	51.39		—	—
Total	751,724	51.41		—	—

(a)Shares purchased by our company from terminated employees.

(b)Shares purchased by our company in the Internal Market.

Item 6.  EXHIBITS

Exhibit Index

*10.1	CH2M HILL Companies, Ltd. Death Benefit Only Plan effective September 13, 2012
*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 of Chief Executive Officer 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 of Chief Financial Officer 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)
99.1	Voluntary Separation, Waiver and General Release Agreement entered into on August 10, 2012 by and between CH2M HILL Companies, Ltd. and Robert G. Card (filed as Exhibit 99.1 to CH2M HILL’s Form 8-K on August 10, 2012 (Commission File No. 000-27261), and incorporated herein by reference)
**101.INS	XBRL Instance Document
**101.SCH	XBRL Taxonomy Extension Schema Document
**101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
**101.LAB	XBRL Taxonomy Extension Labels Linkbase Document
**101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document
**101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

*Filed herewith

**XBRL (eXtensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

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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 8, 2012	/s/ MICHAEL A. LUCKI
	Michael A. Lucki
	Senior Vice President and Chief Financial Officer
	(principal financial officer)

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