EXHIBIT 99.B TO FORM 10-K
OF
PETER KIEWIT SONS', INC.
FOR
FISCAL YEAR ENDED DECEMBER 28, 1996
FINANCIAL STATEMENTS AND OTHER INFORMATION
OF
KIEWIT DIVERSIFIED GROUP
FOR
FISCAL YEAR ENDED DECEMBER 28, 1996
TABLE OF CONTENTS
Page
Business Description......................................................1
Market for Common Equity and Related Stockholder Matters.................
Selected Financial Data..................................................
Management's Discussion and Analysis of Financial Condition and Results of
Operations...............................................................
Financial Statements and Supplementary Data..............................
KIEWIT DIVERSIFIED GROUP
Kiewit Diversified Group Inc. ("KDG") is engaged in the coal
mining, energy generation and distribution, telecommunications, and
other businesses. KDG is a wholly owned subsidiary of Peter Kiewit
Sons', Inc. ("PKS"). KDG is a Delaware corporation formed in 1985.
PKS is a Delaware corporation formed in 1941. Both have principal
offices in Omaha, Nebraska. PKS has two principal classes of
common stock, Class C Construction & Mining Group stock and Class D
Diversified Group stock. The value of each class is linked to the
separate operations of each Group, under terms of the PKS' charter
(see "Market for Common Equity and Related Stockholder Matters"
below). All Class C shares and most Class D shares are owned by
current employees of PKS; almost all of the remaining Class D
shares are owned by former employees and family members.
PKS entered the coal mining business in 1943. In 1988, KDG
started a telecommunications business, MFS Communications Company,
Inc. ("MFS"). During its development stage, KDG furnished most of
MFS' capital. MFS had its initial public offering in 1993. In
1995, PKS distributed to its Class D stockholders all its shares of
MFS (which merged into WorldCom Inc. at the end of 1996). In 1993,
KDG purchased a controlling interest in C-TEC Corporation, a
publicly traded telecommunications company. KDG currently owns 62%
of the voting stock, but only 48% of the common stock of C-TEC
(which has two classes of common stock, one with multiple votes per
share). In 1991, KDG began purchasing shares of the publicly
traded CalEnergy Company, Inc. ("CalEnergy") and now owns 30% of
its voting stock. Both C-TEC and CalEnergy are publicly traded
companies and more detailed information about each of them is
contained in their separate Forms 10-K. The description in this
Exhibit 99.B of the CalEnergy and C-TEC businesses is a condensed
version of the more complete business descriptions in their
respective Forms 10-K.
KDG reports financial information about three business segments:
coal mining, energy generation and distribution, and
telecommunications. Additional financial information about these
segments, including revenue, operating earnings, equity earnings,
identifiable assets, capital expenditures and depreciation,
depletion and amortization, as well as foreign operations
information, is contained in Note 3 to the KDG's consolidated
financial statements.
COAL MINING
KDG is engaged in coal mining through its subsidiary, KCP.
KCP has a 50% interest in three mines, which are operated by KCP.
Decker Coal Company ("Decker") is a joint venture with Western
Minerals, Inc., a subsidiary of The RTZ Corporation PLC. Black
Butte Coal Company ("Black Butte") is a joint venture with Bitter
Creek Coal Company, a subsidiary of Union Pacific Resources Group
Inc. Walnut Creek Mining Company ("Walnut Creek") is a general
partnership with Phillips Coal Company, a subsidiary of Phillips
Petroleum Company. The Decker Mine is located in southeastern
Montana, the Black Butte Mine is in southwestern Wyoming, and the
Walnut Creek Mine is in east-central Texas.
Production and Distribution. The coal mines use the surface
mining method. During surface mining operations, topsoil is
removed and stored for later use in land reclamation. After
removal of topsoil, overburden in varying thicknesses is stripped
from above coal seams. Stripping operations are usually conducted
by means of large, earth-moving machines called draglines, or by
fleets of trucks, scrapers and power shovels. The exposed coal is
fractured by blasting and is loaded into haul trucks or onto
overland conveyors for transportation to processing and loading
facilities. Coal delivered by rail from Decker originates on the
Burlington Northern Railroad. Coal delivered by rail from Black
Butte originates on the Union Pacific Railroad. Coal is also
hauled by trucks from Black Butte to the nearby Jim Bridger Power
Plant. Coal is delivered by trucks from Walnut Creek to the
adjacent facilities of the Texas-New Mexico Power Company.
Customers. The coal is sold primarily to electric utilities,
which burn coal in order to produce steam to generate electricity.
Approximately 92% of sales are made under long-term contracts, and
the remainder are made on the spot market. Approximately 80%, 80%,
and 71% of KCP's revenues in 1996, 1995, and 1994, respectively,
were derived from long-term contracts with Commonwealth Edison
Company (with Decker and Black Butte) and The Detroit Edison
Company (with Decker). The primary customer of Walnut Creek is the
Texas-New Mexico Power Company.
Contracts. Customers enter into long-term contracts for coal
primarily to secure a reliable source of supply at a predictable
price. KCP's major long-term contracts have remaining terms
ranging from 1 to 31 years. A majority of KCP's long-term
contracts provide for periodic price adjustments. The price is
typically adjusted through the use of various indices for items
such as materials, supplies, and labor. Other portions of the
price are adjusted for changes in production taxes, royalties, and
changes in cost due to new legislation or regulation, and in most
cases, such cost items are directly passed through to the customer
as incurred. In most cases the price is also adjusted based on the
heating content of the coal.
Decker has a sales contract with Detroit Edison Company which
provides for the delivery of a minimum of 42 million tons of low
sulphur coal during the period 1997 through 2005, with annual
shipments ranging from 5.2 million tons in 1997 to 1.7 million tons
in 2005.
KCP and its mining ventures have entered into various
agreements with Commonwealth Edison Company ("Commonwealth") which
stipulate delivery and payment terms for the sale of coal. The
agreements as amended provide for delivery of 100 million tons
during the period 1997 through 2014, with annual shipments ranging
from 1.8 million tons to 13.1 million tons. These deliveries
include 20 million tons of coal reserves previously sold to
Commonwealth. Since 1993, the amended contract between
Commonwealth and Black Butte provides that Commonwealth's delivery
commitments will be satisfied, not with coal produced from the
Black Butte mine, but with coal purchased from three unaffiliated
mines in the Powder River Basin of Wyoming. The contract amendment
allows Black Butte to purchase alternate source coal at a price
below its production costs, and to pass the cost savings through to
Commonwealth while maintaining the profit margins available under
the original contract.
The contract between Walnut Creek and Texas-New Mexico Power
Company provides for delivery of between 42 and 90 million tons of
coal during the period 1989 through 2027. The actual tons provided
will depend on the number of power units constructed and operated
by TNP. The maximum amount KCP is expecting to ship in any one
year is between 1.6 and 3.2 million tons.
KCP also has other sales commitments, including those with
Sierra Pacific, Idaho Power, Solvay Minerals, Pacific Power &
Light, Minnesota Power, and Mississippi Power, that provide for the
delivery of approximately 18 million tons through 2005.
Coal Production. Coal production began at the Decker, Black
Butte, and Walnut Creek mines in 1972, 1979, and 1989,
respectively. KCP's share of coal mined in 1996 at the Decker,
Black Butte, and Walnut Creek mines was 5.5, 0.9, and 1.0 million
tons, respectively.
Revenue. KCP's total revenue in 1996 was $234 million.
Revenue attributable to the Decker, Black Butte, and Walnut Creek
entities was $113 million, $101 million, and $18 million,
respectively.
Under a 1992 mine management agreement, KCP pays a KCG
subsidiary and annual fee equal to 30% of KCP's adjusted operating
income. The fee in 1996 was $37 million.
Backlog. At the end of 1996, the backlog of coal to be sold
under KCP's long-term contracts was approximately $1.6 billion,
based on December 1996 market prices. Of this amount, $206 million
is expected to be sold in 1997.
Reserves. At the end of 1996, KCP's share of assigned coal
reserves at Decker, Black Butte, and Walnut Creek was 118, 40, and
32 million tons, respectively. Of these amounts, KCP's share of
the committed reserves of Decker, Black Butte, and Walnut Creek was
51.9, 3.6, and 23.8 million tons, respectively. Assigned reserves
represent coal which can be mined using KCP's current mining
practices. Committed reserves (excluding alternate source coal)
represent KCP's maximum contractual amounts. These coal reserve
estimates represent total proved and probable reserves.
Leases. The coal reserves and deposits of the mines are held
pursuant to leases with the federal government through the Bureau
of Land Management, with two state governments (Montana and
Wyoming), and with numerous private parties.
Competition. The coal industry is highly competitive. KCP
competes not only with other domestic and foreign coal suppliers,
some of whom are larger and have greater capital resources than
KCP, but also with alternative methods of generating electricity
and alternative energy sources. In 1995, KCP's production
represented 1.4% of total U.S. coal production. Demand for KCP's
coal is affected by economic, political and regulatory factors.
For example, recent "clean air" laws may stimulate demand for low
sulphur coal. KCP's western coal reserves generally have a low
sulphur content (less than one percent) and are currently useful
principally as fuel for coal-fired steam-electric generating units.
KCP's sales of its western coal, like sales by other western
coal producers, typically provide for delivery to customers at the
mine. A significant portion of the customer's delivered cost of
coal is attributable to transportation costs. Most of the coal sold
from KCP's western mines is currently shipped by rail to utilities
outside Montana and Wyoming. The Decker and Black Butte mines are
each served by a single railroad. Many of their western coal
competitors are served by two railroads and such competitors'
customers often benefit from lower transportation costs because of
competition between railroads for coal hauling business. Other
western coal producers, particularly those in the Powder River
Basin of Wyoming, have lower stripping ratios (i.e. the amount of
overburden that must be removed in proportion to the amount of
minable coal) than the Black Butte and Decker mines, often
resulting in lower comparative costs of production. As a result,
KCP's production costs per ton of coal at the Black Butte and
Decker mines can be as much as four and five times greater than
production costs of certain competitors. KCP's production cost
disadvantage has contributed to its agreement to amend its long-
term contract with Commonwealth Edison Company to provide for
delivery of coal from alternate source mines rather than from Black
Butte. Because of these cost disadvantages, KCP does not expect
that it will be able to enter into long-term coal purchase
contracts for Black Butte and Decker production as the current
long-term contracts expire. In addition, these cost disadvantages
may adversely affect KCP's ability to compete for spot sales in the
future.
Environmental Regulation. The Company is required to comply
with various federal, state and local laws and regulations
concerning protection of the environment. KCP's share of land
reclamation expenses in 1996 was $5 million. KCP's share of
accrued estimated reclamation costs was $99 million at the end of
1996. The Company does not expect to make significant capital
expenditures for environmental compliance in 1997. The Company
believes its compliance with environmental protection and land
restoration laws will not affect its competitive position since its
competitors in the mining industry are similarly affected by such
laws.
CALENERGY COMPANY, INC.
CalEnergy develops, owns, and operates electric power
production facilities, particularly those using geothermal
resources, in the United States, the Philippines, and Indonesia.
In December 1996, CalEnergy and KDG acquired Northern Electric plc,
an English electric utility company. CalEnergy is a Delaware
corporation formed in 1971 and has its headquarters in Omaha,
Nebraska. CalEnergy common stock is traded on the New York,
Pacific, and London Stock Exchanges. In 1996, CalEnergy had
revenue of $576 million and net income of $92 million. At the end
of 1996, CalEnergy had total assets of $5.7 billion, debt of $3.0
billion, and stockholders' equity of $881 million.
Kiewit's Share. At the end of 1996, KDG owned approximately
30% of the common stock of CalEnergy. Under generally accepted
accounting principles, an investor owning between 20% and 50% of
a company's equity, generally uses the equity method. Under the
equity method, KDG reports its proportionate share of CalEnergy's
earnings, even though it has received no dividends from
CalEnergy. KDG keeps track of the carrying value of its
CalEnergy investment. "Carrying value" is the purchase price of
the investment, plus the investor's proportionate share of the
investee's earnings, less the amortized portion of goodwill, less
any dividends paid. KDG purchased most of its CalEnergy shares
at a premium over the book value of CalEnergy's underlying net
assets. This premium will be amortized over a period of 20
years. The current carrying value of KDG's CalEnergy shares is
$292 million. KDG owns 19.2 million CalEnergy common shares,
which had a market value of $644 million, based on the 1996 year-
end price of $33.50 per share on the New York Stock Exchange.
During 1996, KDG converted $66 million of CalEnergy
debentures into 3.6 million CalEnergy shares and purchased 4.8
million shares for $53 million (by exercising 1.5 million options
at $9 per share and 3.3 million options at $12 per share). KDG
retains one million options to purchase CalEnergy stock at
$11.625 per share. These options expire in 2001.
Acquisitions. In the last two years, CalEnergy has made
three significant acquisitions, in addition to the recent $1.3
billion acquisition of Northern Electric plc (described below).
In January 1995, CalEnergy acquired Magma Power Company
("Magma"), a publicly-traded United States independent power
producer, for approximately $958 million. The Magma acquisition,
combined with CalEnergy's previously existing assets, made
CalEnergy the largest independent geothermal power producer in
the world today (based on CalEnergy's estimate of electric
generating capacity in operation and under construction). In
April 1996, CalEnergy completed the buy-out for approximately $70
million of its partner's interests in four electric generating
plants in Southern California. In August 1996, CalEnergy
acquired Falcon Seaboard Resources, Inc. for approximately $226
million, thereby acquiring significant ownership in three natural
gas-fired electric cogeneration facilities located in New York,
Texas and Pennsylvania and a related gas transmission pipeline.
Power Generation Projects. Power generation facilities are
measured in terms of megawatts (MW) of net electric generating
capacity. Most of CalEnergy's facilities are co-owned and
CalEnergy's fractional ownership interest can be expressed in
terms of MWs. CalEnergy has projects in three stages:
operational (and managed by CalEnergy), under construction (and
financed), and developmental (with executed and awarded power
sales contracts). CalEnergy owns (I) 1,309 MW in 20 operating
facilities with 3,201 MW of capacity, (ii) 314 MW in 5 projects
under construction, with 564 MW of capacity, and (iii) 573 MW in
6 development stage projects, with 1,260 MW of capacity. KDG has
a separate ownership interest in some of the international
projects. KDG owns (i) 87 MW in the projects in operation, (ii)
159 MW in the projects under construction, and (iii) 458 MW in
the Indonesian development stage projects.
Operations -- U.S. Geothermal Plants. Most of CalEnergy's
operating revenues come from geothermal power plants in Southern
California, three in the Coso area and eight in the Imperial
Valley. CalEnergy has ownership interests of 46%, 48%, and 50% in
the three Coso plants. Following the 1996 acquisition of the
remaining 50% interests in four Imperial Valley projects for $70
million, CalEnergy is now the full owner of the eight Imperial
Valley projects. Operations of the Salton Sea Unit IV in the
Imperial Valley began in 1996, following completion of
construction.
These twelve geothermal plants have certain common features.
CalEnergy is the operator of each plant. Each plant has a long-
term contract to supply electric power to Southern California
Edison Company ("Edison"). The agreements provide for both
capacity payments and energy payments for a term of between 20
and 30 years. During the first ten years, energy payments are
based on a pre-set schedule. Thereafter, while the basis for the
capacity payment remains the same, the required energy is
Edison's then-current published "avoided cost of energy" as
determined by the California Public Utility Commission. The
initial ten-year periods expire beginning in 1996 for the first
plant and in 2000 for the last plant. CalEnergy cannot predict
the likely level of Edison's avoided cost of energy prices at the
expiration of the fixed-price periods, but it is currently
substantially below the current energy prices under CalEnergy's
contracts. For 1996, the time period-weighted average of
Edison's avoided cost of energy was 2.5 cents per kWh, compared
to CalEnergy's comparable selling price for energy of 11.3 cents
per kWh. Thus, the revenue generated by each of CalEnergy's
facilities is likely to decline significantly after the
expiration of the fixed-price period.
CalEnergy also owns and operates two geothermal operating
plants, one each in Utah and Nevada.
Operations -- U.S. Gas-Fired Plants. In August 1996
CalEnergy completed the acquisition of Falcon Seaboard Resources,
Inc., including its ownership interest in three operating gas-
fired cogeneration plants located in New York, Texas and
Pennsylvania and a related natural gas pipeline, also located in
New York, for a cash purchase price of $226 million. The three
cogeneration facilities total 520 MW in capacity and sell power
under long-term power purchase agreements. CalEnergy also owns
and operates a 50 MW gas-fired cogeneration facility in Yuma,
Arizona.
Operations -- Philippines Geothermal.
Upper Mahiao.
Construction of the Upper Mahiao Project was completed in
June 1996. The project operating company is receiving full
capacity payments under the "take or pay" provisions of the
contract pending completion by the national power company of a
full transmission line. The plant is presently delivering up to
40 MW over interim transmission lines.
In 1994, construction began on the Upper Mahiao Project, a
119 gross MW geothermal project on the Philippine island of
Leyte. The project was built by and is owned and operated by CE
Cebu Geothermal Power Company, Inc. ("CE Cebu"), a Philippine
corporation owned by CalEnergy. The project will sell 100% of
its capacity on a "take-or-pay" basis to PNOC-Energy Development
Corporation ("PNOC"), which will in turn sell the power to the
National Power Corporation of the Philippines ("NPC"), for
distribution to the island of Cebu, located 40 miles west of
Leyte. NPC is the government-owned and controlled corporation
that is the primary supplier of electricity in the Philippines.
The project was started by Magma, prior to its acquisition by
CalEnergy. KDG has no separate ownership interest in this
project and KCG was not involved in construction.
The total project cost was $218 million. A consortium of
international banks provided approximately $162 million in
project-financed construction loans, supported by political risk
insurance from the Export-Import Bank of the United States ("Ex-
Im Bank"). The construction loan is expected to be converted to
a term loan promptly after NPC completes the full capacity
transmission line, which is expected to occur in 1997. The
largest portion of the term loan for the project will also be
provided by Ex-Im Bank. CalEnergy's equity contribution to the
project is $56 million. Subject to the pledge of the project
company's stock to the lenders, CalEnergy has arranged for
political risk insurance of its equity investment through
Overseas Private Investment Corporation ("OPIC"). The financing
is collateralized by all the assets of the project.
Under the terms of an energy conversion agreement (the "ECA"),
executed in September 1993, CE Cebu will own and operate the
project for ten years, after which the facility will be transferred
to PNOC at no cost. The project is located on land provided by
PNOC at no cost. CE Cebu will take geothermal steam and fluid,
also provided by PNOC at no cost, and convert its thermal energy
into electrical energy to be sold to PNOC on a "take-or-pay" basis.
Specifically, PNOC will be obligated to pay for the electric
capacity, even if PNOC is unable to accept delivery of the
electricity. PNOC will pay to CE Cebu a capacity fee (which, at
the plant's design capacity, is approximately 95% of total contract
revenues) and an energy fee based on the electricity actually
delivered to PNOC (approximately 5% of total contract revenues).
The capacity fee serves to recover the capital costs of the
project, to recover fixed operating costs, and to cover return on
investment. The energy fee is designed to cover all variable
operating and maintenance costs of the power plant. Payments under
the ECA will be denominated in U.S. dollars, or computed in U.S.
dollars and paid in Philippine pesos at the then-current exchange
rate, except for the energy fee, which will be used to pay
Philippine peso-denominated expenses. Significant portions of the
fees will be indexed to U.S. and Philippine inflation rates.
PNOC's obligations are supported by the Philippine government
through a performance undertaking.
Malitbog.
In 1994, CalEnergy started construction of the Malitbog
Project, a 216 net MW geothermal project consisting of three 72 net
MW units, located on the island of Leyte. The project is being
built, and will be owned and operated by Visayas Geothermal Power
Company ("VGPC"), which is wholly owned by CalEnergy. Unit I of
the Malitbog facility was "deemed complete" by PNOC in July 1996,
meaning that construction of the first 72 net MW unit was completed
on time but the required transmission line was not completed and
provided to VGPC. During deemed completion, PNOC is required to
pay, and in fact has been paying, capacity fees under the "take or
pay" provisions of the contract. VGPC is selling 100% of its
capacity on substantially the same basis as described above for the
Upper Mahiao Project to PNOC, which will in turn sell the power to
NPC. This project was started by Magma, prior to its acquisition
by CalEnergy. KDG has no separate ownership interest in this
project and KCG has not participated in construction.
The Malitbog Project has a total project cost of approximately
$280 million, including interest during construction and project
contingency costs. A consortium of international banks and OPIC
have provided a total of $210 million of construction and term loan
facilities, the $135 million international bank portion of which is
supported by political risk insurance from OPIC. CalEnergy's
equity contribution to VGPC was $70 million. CalEnergy's equity
participation is covered by political risk insurance from OPIC.
Units II and III of the Malitbog Project are being constructed
by Sumitomo Corporation, of Japan, pursuant to a fixed-price, date-
certain, turnkey supply and construction contract. Commercial
operation of Units II and III are scheduled to commence in July
1997. The Malitbog ECA is similar to the Upper Mahiao ECA
described above. All facilities (Units I, II, and III) will be
transferred to PNOC ten years after commercial operations begin on
Unit III.
Operations -- England. See discussion under heading
"International Energy -- Northern Electric Acquisition" below.
Construction -- Philippines and Indonesia. See discussion of
the Mahanagdong, Casecnan, and Dieng projects under the heading
"International Energy" below.
Geothermal power production process. Until 1996, almost all
of CalEnergy's projects were geothermal projects. The following is
a summary of the geothermal power production process. First, the
developer locates suitable geothermal resources, drills test wells,
secures permits, negotiates long-term power contracts with an
electric utility, and arranges financing. Second, the project is
constructed. Third, the facility is operated and maintained.
Project revenues from the sale of electricity are applied to
operating costs, rent or royalties, and principal and interest
payments on debt incurred for acquisition and construction costs.
Geothermal resources suitable for commercial extraction require an
underground water reservoir heated to high temperatures.
Production wells are drilled to release the heated fluid under high
pressure. Wells are usually located within one or two miles of the
power plant. From well heads, fluid flows through pipelines to a
series of separators where it is separated into water, brine, and
steam. The steam is passed through a turbine which drives a
generator to generate electricity. Once the steam has passed
through the turbine, it is then cooled and condensed back into
water which is reinjected through wells back into the geothermal
reservoir. Under proper conditions, the geothermal power is a
renewable energy source, with minimal emissions compared to fossil
fuel power plants. The utilization of geothermal power is
preferred by certain governments in order to minimize the import
(e.g., the Philippines), or maximize the export (e.g., Indonesia)
of hydrocarbons. Geothermal power facilities presently enjoy
federal tax benefits and favorable utility regulatory treatment in
the United States.
INTERNATIONAL ENERGY
KDG is an investor with CalEnergy in power projects in the
Philippines and Indonesia and in an electric utility company in
England. In each case, KDG has a direct equity interest and also
benefits indirectly as a 30% stockholder in CalEnergy.
KDG and CalEnergy have a joint venture agreement regarding
international energy projects. If both KDG and CalEnergy agree to
participate in a project, they will share equally development costs
and equity required for financing the project. On a project by
project basis, CalEnergy will be the development manager, managing
partner and/or project operator. The agreement expires in 2001.
Mahanagdong.
In 1994 construction began on the Mahanagdong Project, a 165
gross MW geothermal project on the Philippine island of Leyte. The
project will be built, owned and operated by CE Luzon Geothermal
Power Company, Inc. ("CE Luzon"), a Philippine corporation that
during construction is owned 50% by CalEnergy and 50% by KDG.
After construction, another industrial company has an option to buy
up to a 10% financial interest in CE Luzon. The project will sell
100% of its capacity on a "take-or-pay" basis to PNOC, which will
in turn sell the power to NPC, for distribution to the island of
Leyte.
The total project cost is $320 million, including interest
during construction, project contingency costs and a debt service
reserve fund. The capital structure consists of a project
financing construction and term loan of $240 million provided by
OPIC, Ex-Im Bank, and a consortium of international banks, and
approximately $80 million in equity contributions. KDG and
CalEnergy must make equity contributions of $40 million each. KDG
and CalEnergy have arranged for political risk insurance on their
equity investments through OPIC. Political risk insurance from Ex-
Im Bank has been obtained for the commercial lenders. The
financing is collateralized by all of the assets of the project.
The project is being constructed by KCG under fixed-price, date-
certain, turnkey supply and construction contracts. Completion of
construction is expected during 1997.
The terms of an energy conversion agreement (the "ECA") are
substantially similar to those of the Upper Mahiao ECA, described
above. The ECA provides for an approximately three-year
construction period and a ten-year operations period. At the end
of the operations period, the facility will be transferred to PNOC
at no cost. All of PNOC's obligations under the Mahanagdong ECA
are supported by the Philippine government through a performance
undertaking. The capacity fees are expected to be approximately
97% of total revenues at the design capacity levels and the energy
fees are expected to be approximately 3% of total revenues.
Casecnan.
In November 1995, CE Casecnan Water and Energy Company, Inc.,
a Philippine corporation ("CE Casecnan") started construction on a
combined irrigation and 150 gross MW hydroelectric power generation
project (the "Casecnan Project") located in the central part of the
Philippine island of Luzon. The project will include diversion
structures in the Casecnan and Denip Rivers that will divert water
into a 14 mile long tunnel. The tunnel will transfer the water
from the Casecnan and Denip Rivers into the Pantabangan Reservoir
for irrigation and hydroelectric use in the Central Luzon area. An
underground powerhouse at the end of the water tunnel will house a
power plant with 150 MW capacity. A two mile long tailrace tunnel
will deliver water from the water tunnel and the new powerhouse to
the Pantabangan Reservoir.
The project is being developed under a project agreement
between CE Casecnan and the National Irrigation Administration
("NIA"). CalEnergy and KDG have minimum and maximum ownership
interests in CE Casecnan of 35% to 50% each. Two other
shareholders, who have no financial commitments and will not
participate in construction or operations, may receive interests of
as much as 15% each, depending on projected returns from the
project.
The total project cost is $495 million, funded by bonds issued
by CE Casecnan of $371 million and equity contributions of $62
million each from KDG and CalEnergy. KDG also holds $20 million of
the project bonds. Under the project agreement, CE Casecnan
developed, financed, and is constructing the project over an
originally estimated four-year construction period, and will
thereafter own and operate the project for a 20-year operations
period. During the operating period, NIA is obligated to accept
all deliveries of water and energy, and NIA will pay the CE
Casecnan a guaranteed fee for the delivery of water and a
guaranteed fee for the delivery of electricity, regardless of the
amount of water or electricity actually delivered. In addition,
NIA will pay a fee for all electricity delivered in excess of a
threshold amount. NIA will sell the electric energy it purchases
to NPC. All fees to be paid by NIA to CE Casecnan are payable in
U.S. dollars. The guaranteed fees for the delivery of water and
energy are expected to provide approximately 70% of CE Casecnan's
revenues. At the end of the 20-year period, the project will be
transferred to NIA and NPC for no additional consideration on an
"as is" basis. The Philippine government has provided a
performance undertaking under which NIA's obligations under the
project agreement are guaranteed by the full faith and credit of
the Philippine government.
The Casecnan project is being constructed on a joint and
several basis by Hanbo Corporation and Hanbo Engineering &
Construction Co. Ltd. ("HECC") (together "Contractor"), both of
which are South Korean corporations and are under common ownership
and control. The contractors' obligations under the construction
contract are guaranteed by Hanbo Iron & Steel Company, Ltd. ("Hanbo Steel"),
a large South Korean steel company. In addition, the contractor's
obligations are secured by an unconditional, irrevocable, standby
letter of credit issued by Korea First Bank ("KFB") in the
approximate amount of $118 million. In January 1997, Hanbo
Corporation, HECC and Hanbo Steel each filed to seek bankruptcy
protection in Korea. KFB's credit rating has been
downgraded because of the substantial loans it has made to Hanbo
Steel.
Casecnan has recently received confirmation from HECC that it
intends to fully perform its obligations under the contract. However,
although HECC is currently performing the work, there can be no
assurance that it will remain able to perform fully its obligations
under the contract.
KFB has recently reconfirmed to Casecnan that it will honor its
obligations under the letter of credit. Casecnan is presently
reviewing its rights, obligations, and potential remedies in respect
of the recent developments regarding the Contractor and KFB and
is presently unable to speculate as to the ultimate effect of
such developments on the Casecnan project.
If the Contractor were to materially fail to perform its
obligations under the contract and if KFB were to fail to honor its
obligations under the letter of credit, such actions could have a
material adverse effect on the Casecnan project. However, based on
information currently available, KDG does not believe its investment
is impaired.
Dieng.
In December 1994, Himpurnia California Energy Ltd. ("HCE")
executed a joint operation contract (the "JOC") for the development
of the geothermal steam field and geothermal power facilities at
the Dieng geothermal field, located in Central Java (the "Dieng
Project") with Pertamina, the Indonesian national oil company, and
executed a "take-or-pay" energy sales contract (the "ESC") with
both Pertamina and PLN, the Indonesian national electric utility.
HCE and an Indonesian partner formed a joint venture to develop the
Dieng Project. CalEnergy, KDG, and the Indonesian partner have
47%, 47%, and 6% interests, respectively, in the Dieng Project.
Pursuant to the JOC and ESC, Pertamina has granted to HCE the
geothermal field and wells and other facilities presently located
thereon and the HCE will build, own, and operate the production
units. HCE will accept the field operation responsibility for
developing and supplying the geothermal steam and fluids required
to operate the plants. The JOC is structured as a build-own-
transfer agreement and will expire (subject to extension by mutual
agreement) on the date which is the later of (i) 42 years following
effectiveness of the JOC and (ii) 30 years following the start of
commercial generation of the final unit completed. Upon the
expiration of the JOC, all facilities will be transferred to
Pertamina at no cost. HCE is required to pay Pertamina a
production allowance equal to three percent of HCE's net operating
income from the Dieng Project, plus a further amount based upon the
negotiated value of existing Pertamina geothermal production
facilities that are expected to be made available by Pertamina.
Pursuant to the ESC, PLN agreed to purchase and pay for all of
the project's capacity and energy output on a "take-or-pay" basis
regardless of PLN's ability to accept such energy made available
from the Dieng Project for a term equal to that of the JOC. The
price paid for electricity includes a base energy price for
electricity the plants deliver or are "capable of delivering,"
whichever is greater. Energy price payments are also subject to
adjustment for inflation. PLN will also pay a capacity payment
based on plant capacity. All such payments are payable in U.S.
dollars.
Construction by KCG and CalEnergy of an initial 55 MW unit
began in 1996 and completion is scheduled for late 1997. The total
project cost of Dieng Unit I is $160 million, including equity
contributed by KDG and CalEnergy of $20 million each. Construction
loan financing of $120 million was closed in October 1996; $86
million from Credit Suisse and $34 million by an entity owned
equally by KDG and CalEnergy. Of the latter amount, KDG and
CalEnergy furnished $5 million each in 1996 and expect to furnish
additional funds in 1997. The Dieng field has been explored
domestically for over 20 years and CalEnergy has been active in the
area for more than five years. Pertamina has drilled a total of 27
wells to date. CalEnergy has a significant amount of data, which
it believes to be reliable as to the production capacity of the
field. However, a number of significant steps, both financial and
operational, must be completed before the Dieng Project can proceed
further. These steps, none of which can be assured, include
completing the drilling of wells and the constructing of the plant
for Dieng Unit I and obtaining required regulatory permits and
approvals, completing the well testing, entering into a
construction agreement and other project contracts, and arranging
financing for the other units at Dieng. Up to three additional
units at Dieng are planned, for which KDG has incurred $16 million
in development costs. It is anticipated that most of the capital
needed to construct and operate the Dieng projects and the
development stage projects described below will be raised by
project-financed debt, i.e. the loans will be repaid from revenues
generated by the output of the plants.
Development Stage Projects.
Patuha. CalEnergy and KDG are co-developing a geothermal
power plant at the Patuha geothermal field in Java, Indonesia.
They intend to proceed on a modular basis similar to the Dieng
Project, with an aggregate capacity of up to 400 MW. The total
cost is estimated to be $1 billion. The Patuha Project remains
subject to a number of significant uncertainties, as described
above in connection with the Dieng Project, and there can be no
assurance that the Patuha Project will proceed or reach commercial
operation.
Bali. CalEnergy and KDG are co-developing geothermal
resources on the island of Bali, Indonesia. They intend to proceed
on a modular basis similar to the Dieng Project, with an aggregate
capacity of up to 400 MW. The total cost of the Bali project is
estimated to be $1 billion. CalEnergy presently intends to begin
well testing and exploration in early 1997 and expects to commence
construction of the first unit in 1998. CalEnergy presently
intends to develop the Bali Project and other possible projects in
Indonesia using a structure similar to that contemplated for the
Dieng Project. The Bali Project remains subject to a number of
significant uncertainties, as described above for the Dieng
Project, and there can be no assurance that the Bali Project will
proceed or reach commercial operation. KDG has already incurred
$17 million in development costs for the Patuha and Bali projects.
Northern Electric Acquisition.
In the fall of 1996, CalEnergy and KDG took the first steps
toward expanding their international power businesses beyond the
power generation business through a tender offer for Northern
Electric plc by CE Electric UK plc, which is 70% owned by
CalEnergy and 30% owned by KDG. In December, CE Electric
acquired majority ownership of Northern Electric. The total
amount expected to be paid for all Northern Electric's shares is
approximately $1.32 billion. CE Electric expects to acquire all
the shares by the end of March 1997. As of March 1997, CalEnergy
and KDG have made equity contributions to CE Electric of $410
million and $176 million, respectively. The remaining funds
necessary to complete the acquisition will be provided under a
term loan and revolving credit facility.
Northern Electric is one of the twelve regional electricity
companies created by the privatization of the electricity
industry in the United Kingdom in 1990. Since the regional
electric companies were privatized, all but one has been acquired
by companies, primarily from the United States, attracted both by
the regional electricity business and the strategic opportunity
to participate in a deregulated electricity market in advance of
the coming deregulation of the electricity distribution markets
in the United States and worldwide. Northern Electric is
primarily engaged in the distribution and supply of electricity
in its authorized franchise area in northeast England. The area
covers 5,560 square miles with a population of 3.2 million
people. The head office is at Newcastle upon Tyne. For its
fiscal year ended March 1996, Northern had net assets of $432
million (pound 276 million) and operating revenue of $1.4 billion
(pound 902 million).
As noted above, CalEnergy and KDG expect to learn much
through Northern Electric about deregulated power markets.
Northern Electric provides expertise in supply, distribution, and
marketing in such markets. These capabilities may provide
CalEnergy and KDG with an early competitive advantage in
preparing for electricity deregulation in the United States and
foreign markets. The acquisition further diversifies CalEnergy
and KDG's energy businesses in terms of location, type, risks,
and earnings streams.
C-TEC CORPORATION
C-TEC is a diversified international telecommunications and
high technology company with interests in local telephone, long-
distance telephone, cable television, and engineering and
communications services. C-TEC is a Pennsylvania corporation and
has its headquarters in Princeton, New Jersey. C-TEC common stock
is traded on the NASDAQ National Market System and the Class B
Stock is quoted on NASDAQ and traded over the counter. In 1996 C-
TEC had revenue of $367 million, EBITDA (earnings before,
interest, taxes, depreciation and amortization) of $134 million,
and net income of $8 million. At year-end 1996, C-TEC had total
assets of $917 million, long-term debt of $205 million, and common
stockholders' equity of $377 million. The five operating divisions
of C-TEC and their 1996 revenues are: C-TEC Cable Systems ($160
million), Commonwealth Telephone Company ($139 million),
Commonwealth Long Distance ($35 million), Commonwealth
Communications ($29 million), and RCN Telecom Services ($4
million).
Kiewit's Share. In 1993 KDG purchased a controlling interest
in C-TEC. Through a subsidiary, KDG owns 42% of the outstanding
shares of C-TEC common stock and 66% of the C-TEC Class B common
stock. Holders of common stock are entitled to one vote per share;
holders of Class B stock are entitled to 15 votes per share. KDG
thus owns 48% of the outstanding shares, but is entitled to 62% of
the available votes. Since KDG has voting control, KDG must
consolidate C-TEC within its financial statements. On KDG's
balance sheet, each asset and liability of C-TEC is added to the
similar items for the rest of KDG. The 52% of C-TEC that it does
not own is subtracted as a single item ("minority interest") on
KDG's balance sheet. KDG keeps track of the carrying value of its
C-TEC investment. "Carrying value" is the purchase price of shares
plus the investor's proportionate share of the investee's earnings
less the amortized portion of goodwill less any dividends paid.
KDG's investment in C-TEC has a carrying value of $355 million.
The 1996 year-end public market value of KDG's 13.3 million shares
of C-TEC (at $23 5/8 per share of common and Class B stock) was
$315 million.
C-TEC Cable Systems. C-TEC Cable Systems is a cable
television operator with cable television systems located in New
York, New Jersey, Michigan, and Pennsylvania. The company owns and
operates cable television systems serving 338,000 customers and is
the majority owner and manager of cable television systems with an
additional 40,000 customers, ranking it among the top 25 multiple
system operators in the United States. The company must
periodically seek renewal of franchise agreements from local
government authorities. To date, all of Cable Systems' franchises
have been renewed or extended, generally at or prior to their
stated expirations and on acceptable terms. Competition for the
Cable Systems' services traditionally has come from providers of
broadcast television, video rentals, and direct broadcast satellite
received on home dishes. Future competition is expected from
telephone companies.
Commonwealth Telephone Company. Commonwealth Telephone
Company is a Pennsylvania public utility providing local telephone
service to a 19 county, 5,067 square mile service territory in
Pennsylvania. The telephone company services 240,000 main access
lines, an increase of 5.7% over 1995. The company also provides
network access, long distance, and billing and collection services
to interexchange carriers. The telephone company's business
customer base is diverse in size as well as industry, with very
little concentration. The ten largest business customers combined
account for only 2.3% of revenue, with the largest single customer
accounting for only about 0.5%. The telephone company sought and
was granted status as a rural telephone company with respect to the
provisions of the Telecommunications Act of 1996. This status will
afford limited protection to the company's primarily rural customer
base from a rapid transition to local exchange competition. In
January 1997, the Pennsylvania Public Telephone Commission approved
the company's "Petition for Alternative Regulation and Network
Modernization Plan," which will allow the company to move from
traditional rate of return regulation to a price cap formula in
return for a commitment to network modernization.
Commonwealth Long Distance. Commonwealth Long Distance
operates principally in Pennsylvania. The company began operations
in 1990 by servicing the local service area of the Commonwealth
Telephone Company. In 1992 and 1993, sales offices were opened in
other areas of Pennsylvania. During 1996, the company statewide
certification and is also certified now in 47 states. The company
provides switched services, is a reseller of several types of
services, and employs the networks of several long distance
providers on a wholesale basis.
Commonwealth Communications. Commonwealth Communications Inc.
provides telecommunications engineering and facilities management
services to large corporate clients, hospitals and universities
throughout the Northeastern United States and sells, installs and
maintains PBX systems in Pennsylvania and New Jersey. Commonwealth
Communications also provides cable and data network engineering and
project management of network construction. This group is being
combined with Commonwealth Telephone Company and will focus on the
Eastern Pennsylvania market.
RCN Telecom Services. RCN Telecom Services provides local and
long distance telephone service, video programming and internet
access to households located in New York City and Boston. RCN
currently has 417 signed building access agreements which represent
82,733 households located in high density housing such as co-ops,
condominiums and apartment complexes in the Boston and New York
markets. RCN has 36,545 video programming customers, 2,968
telephone customers and 58 Internet customers in these two markets.
RCN also has 4,474 video programming customers at the University of
Delaware.
RCN's New York system operates two cable programming delivery
systems - one that is fiber-based and one that uses a microwave
network acquired from Liberty Cable in New York in March 1996. The
fiber-based customers are served by facilities of MFS. Telephone
service in New York is provisioned on the fiber-based network and
through the resale of the NYNEX network.
RCN's Boston system operates primarily on a fiber-based network
obtained from MFS and provides both telephone and cable programming
over this network. In December, RCN signed an agreement forming a
joint venture with Boston Edison under which the joint venture will
use and expand upon Boston Edison's 200 mile fiber optic network to
reach a market of approximately 650,000 customers throughout the
Greater Boston area. The joint venture will offer bundled
telecommunications services.
RCN New York and the RCN Joint Venture with Boston Edison were
granted Open Video Systems certification from the Federal
Communications Commission ("FCC") in February 1997. This
certification allows RCN to deliver video services in New York City
and Boston based on the Telecommunications Act of 1996. Prior to
this certification, RCN offered video services using MFS' network.
RCN's telephone service is regulated by the States of New York and
Massachusetts and the FCC. In New York, RCN is certified to
provide competitive local exchange services and to resell long
distance services. In Massachusetts, RCN is registered to offer
local exchange carrier services and to resell long distance. RCN
also has authority from the FCC to offer international service.
RCN is a competitor to the incumbent telephone and cable
television companies, primarily NYNEX, Time Warner Cable and
Cablevision Systems.
C-TEC International. In January 1995, C-TEC purchased a 40%
equity position in Megacable, S.A. de C.V., Mexico's second largest
cable television operator, currently serving 174,000 subscribers in
12 cities.
Regulation. The Federal Telecommunications Act of 1996
established a framework for deregulation of the communications
industry. The Act should stimulate growth and competition in
virtually every component of the communications industry. The FCC
and state regulators must work out the specific implementation
process. Companies are permitted to combine historically separate
lines of business into one, and provide combined services in
markets of their own choice. In addition, there will be relief
from the earnings restrictions and price controls that have
governed the local telephone business for many years and were
imposed on the cable industry in 1992 by the Federal Cable
Television Consumer Protection and Competition Act of 1992 (the
"1992 Act"). The rate regulation provisions of the 1992 Act have
not had a materially adverse effect on C-TEC's financial condition
and results of operations. With the passage of the 1996 Act, all
cable systems rates ore deregulated as effective competition enters
the franchise area, or by March 31, 1999, whichever comes sooner.
C-TEC anticipates that certain provisions of the 1992 Act that do
not relate to rate regulation, such as the provisions relating to
retransmission consent and customer service standards, will reduce
future operating margins.
Restructuring Plans. C-TEC pursued a restructuring plan in
1996 that would have involved the sale of its cable television
businesses to a third party, but abandoned that plan when it
could not negotiate an attractive transaction due to the
depressed market for cable TV properties. C-TEC has instead
announced a plan in February 1997 to divide itself into three
separate publicly held companies:
CTCo, containing the Commonwealth Telephone Company and
Commonwealth Communications Inc.;
C-TEC Michigan, containing the cable television operations in
Michigan; and
RCN Corporation, which will consist of RCN Telecom Services;
cable television operations in New York, New Jersey, and
Pennsylvania; and C-TEC International.
C-TEC believes that investors and the market are more likely to
understand and properly value three separate businesses than the
current combined company. The plan is contingent upon receiving
a favorable IRS ruling on the tax-free nature of the spin-offs.
If the reorganization and spin-offs occur, KDG will own less than
50% of the outstanding shares voting rights of each of the three
companies, and will account for each company using the equity
method of accounting. (See Note 20 to the Company's consolidated
financial statements for balance sheets and earnings statements
of the Company presented as if equity method accounting for the
Company's investment in C-TEC had been used in prior years.)
OTHER BUSINESSES
PKS INFORMATION SERVICES, INC.
PKS Information Services, Inc. ("PKSIS"), provides computer
operations outsourcing and systems integration services to
customers on an international basis. PKSIS provides its
outsourcing services to firms that desire to focus resources on
their core businesses, while avoiding the capital and overhead
costs of operating their own computer centers. Systems integration
services help customers define, develop, and implement cost-
effective information systems. PKSIS signed six new computer
outsourcing contracts, and three contract extensions with existing
customers, during 1996. The systems integration business was
awarded several new contracts to develop and support customers'
mainframe and client/server applications, and to convert customers'
source code to make it century date compliant.
PKSIS opened a software engineering center at the National
Technological Park of Limerick, Ireland to undertake large scale
development projects, system conversions, and code restructuring
and software re-engineering. PKSIS also purchased LexiBridge
Corporation of Shelton, Connecticut. LexiBridge's combination of
workbench tools and methodology provides a complete strategy for
converting mainframe-based application systems to client/server
architecture, while ensuring year 2000 compliance. In 1996, 91% of
PKSIS' revenue was from external customers and the remainder was
from affiliates.
SR91 TOLLROAD
KDG has invested $12 million for a 65% interest in
California Private Transportation Company, L.P. which developed,
financed, and currently operates the 91 Express Lanes, a ten
mile, four lane tollroad in Orange County, California. The fully
automated highway uses an electronic toll collection system and
variable pricing to adjust tolls to demand. Capital costs at
completion were $130 million, $110 million of which was funded
with limited recourse debt. Revenue collected over the 35-year
franchise period is used for operating expenses, debt repayment,
and profit distributions. The tollroad opened in December 1995
and achieved operating break-even in 1996. Over 80,000 customers
have registered to use the tollroad and weekday volumes exceed
26,000 vehicles per weekday.
UNITED INFRASTRUCTURE COMPANY
UIC is an equal partnership between Kiewit Infrastructure
Corp., a wholly owned subsidiary of KDG, and Bechtel
Infrastructure Enterprises, Inc. UIC was formed in 1993 to
develop North American infrastructure projects. During 1996, UIC
began to focus primarily on water infrastructure projects,
principally through U.S. Water, a partnership formed with United
Utilities PLC, a U.K. company. U.S. Water has acquired the
concession to operate facilities at North Brunswick, New Jersey,
and is actively pursuing similar concessions nationwide. KDG has
invested $8 million through UIC in U.S. Water. KDG has also
invested $3 million through UIC in Airport Group International
Inc. to develop airport privatization projects.
KIEWIT MUTUAL FUND
Kiewit Mutual Fund, a registered investment company, was
formed in 1994. Initially formed to manage the Company's internal
investments, shares in Kiewit Mutual Fund are now available for
purchase by the general public. The Fund's investors currently
include individuals and unrelated companies, as well as Kiewit-
affiliated joint ventures, pension plans, and subsidiaries. Kiewit
Mutual Fund has six series: Money Market Portfolio, Government
Money Market Portfolio, Short-Term Government Portfolio,
Intermediate-Term Bond Portfolio, Tax-Exempt Portfolio, and the
Equity Portfolio. In February 1997, the Fund adopted a master-
feeder structure. Each of the Portfolios invests in a
corresponding series of the Kiewit Investment Trust, which now
manages the underlying securities holdings. The structure will
allow smaller mutual funds and institutional investors to pool
their assets with Kiewit Investment Trust, providing lower expense
ratios for all participants. The registered investment adviser of
Kiewit Investment Trust is Kiewit Investment Management Corp., a
subsidiary of KDG (60%) and KCG (40%). At the end of 1996, Kiewit
Mutual Fund had net assets of $883 million.
OTHER
In February 1997, KDG purchased an office building in Aurora,
Colorado for $21 million. By investing in real estate, KDG defers
taxes on a portion of the $40 million of taxable gain otherwise
recognizable with respect to the Whitney Benefits litigation
settlement in 1995. KDG may make additional real estate
investments in 1997 with a view toward deferring the balance of
that taxable gain. KDG has also made investments in several
development-stage companies, but does not expect earnings from
these companies in 1997.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Market Information. There is no established public trading
market for PKS' common stock. However, PKS is generally required
to repurchase shares at a formula price upon demand.
PKS Repurchase Duty. Under PKS' Certificate of Incorporation
effective January 1992, PKS has three authorized classes of common
stock: Class B Construction & Mining Group Nonvoting Restricted
Redeemable Convertible Exchangeable Common Stock ("Class B"), Class
C Construction & Mining Group Restricted Redeemable Convertible
Exchangeable Common Stock ("Class C"), and Class D Diversified
Group Convertible Exchangeable Common Stock ("Class D"). There are
no outstanding Class B shares; the last Class B shares were
converted into Class D shares on January 1, 1997. Class C shares
can be issued only to KCG employees and can be resold only to PKS
at a formula price based on the year-end book value of the
Construction & Mining Group. PKS is generally required to
repurchase Class C shares for cash upon stockholder demand. Class
D shares have a formula price based on the year-end book value of
the Diversified Group. PKS must generally repurchase Class D
shares for cash upon stockholder demand at the formula price,
unless the Class D shares become publicly traded.
Formula values. The formula price of the Class D shares is
based on the book value of KDG and its subsidiaries, plus one-half
of the book value, on a stand-alone basis, of the parent company,
Peter Kiewit Sons', Inc. Book value is derived from the audited,
consolidated financial statements of PKS and subsidiaries as of the
end of each fiscal year. PKS as a stand-alone entity does not have
a significant book value.
The formula price of the Class C shares is based on the book
value of Kiewit Construction Group Inc. ("KCG") and its
subsidiaries, including Kiewit Mining Group Inc.("KMG"), plus one-
half of the book value of the unconsolidated parent company.
Conversion. Under PKS' Certificate of Incorporation, Class C
shares are convertible into Class D shares at the end of each year.
Between October 15 and December 15 of each year a Class C
stockholder may elect to convert some or all of his or her shares.
Conversion occurs on the following January 1. The conversion ratio
is the relative formula prices of Class C and Class D shares
determined as of the last Saturday in December, i.e. the last day
in PKS's fiscal year.
Class D shares may be converted into Class C shares only as
part of an annual offering of Class C shares to KCG employees.
Instead of purchasing the offered shares for cash, a KCG employee
owning Class D shares may convert such shares into Class C shares
at the applicable conversion ratio.
Restrictions. Ownership of Class C shares is generally
restricted to active KCG employees. Upon retirement, termination
of employment, or death, Class C shares must be resold to PKS at
the applicable formula price, but may be converted into Class D
shares if the terminating event occurs during the annual conversion
period.
Class D shares are not subject to ownership or transfer
restrictions.
D Stock Listing. In October 1996, PKS' Board of Directors
directed management to pursue a listing of Class D stock on a major
securities exchange or the NASDAQ National Market as soon as
practical during 1998. The Board does not foresee circumstances
under which PKS would list the Class D stock prior to 1998. The
Board believes that a listing will provide PKS with a capital
structure more suitable for the further development of KDG's
business plan. It would also provide liquidity for Class D
shareholders without impairing PKS' capital base.
The Board's action does not ensure that a listing of Class D
stock will occur in 1998, or at any time. The Board could delay or
abandon plans to list the stock if it determined that such action
would be in the best interests of all PKS' shareholders. In
addition, PKS' ability to list Class D stock will be subject to
factors beyond its control, including the laws, regulations, and
listing eligibility criteria in effect at the time a listing is
sought, as well as stock market conditions at the time.
Furthermore, the Board might decide to couple the listing of Class
D stock with a public offering of newly-issued Class D shares in
order to raise additional capital for KDG. Such an offering could
delay or alter the listing plan.
Dividends and Prices. During 1995 and 1996 PKS declared or
paid the following dividends on its Class D shares. The table also
shows the stock price after each dividend payment or other
valuation event.
Dividend
Dividend Dividend Per Price Stock
Declared Paid Share Class Adjusted Price
D Dec. 31, 1994 60.25
Sep. 25, 1995* Sep. 30, 1995* 19.85* D Sep. 30, 1995 40.40
Oct. 27, 1995 Jan. 5, 1996 0.50 D Dec. 30, 1995 49.50
Oct. 25, 1996 Jan. 4, 1997 0.50 D Dec. 28, 1996 54.25
* MFS Spin-off (see Note 3 to KDG's consolidated
financial statements).
Although the PKS Board of Directors announced in August 1993
that PKS did not intend to pay regular dividends on Class D shares
in the foreseeable future, the Board declared a special dividend of
$0.50 per Class D share in both October 1995 and 1996.
Stockholders. On March 15, 1997, PKS had the following
numbers of stockholders and outstanding shares for each class of
its common stock:
Class Stockholders Shares Outstanding
B 0 0
C 1,120 9,262,707
D 1,846 24,483,786
KIEWIT DIVERSIFIED GROUP
SELECTED FINANCIAL DATA
The following selected financial data for each of the years in the period 1992
to 1996 have been derived from audited financial statements. The historical
financial information for the Kiewit Diversified and Kiewit Construction &
Mining Groups supplements the consolidated financial information of PKS and,
taken together, includes all accounts which comprise the corresponding
consolidated financial information of PKS.
(dollars in millions, Fiscal Year Ended
except per share amounts) 1996 1995 1994 1993 1992
Results of Operations:
Revenue (1) $ 652 $ 580 $ 537 $ 267 $ 243
Earnings from continuing
operations 113 140 33 181 80
Net earnings (2) 113 140 33 181 99
Per Common Share:
Earnings from continuing
operations 4.85 6.45 1.63 9.08 3.95
Net earnings 4.85 6.45 1.63 9.08 4.92
Dividends (3) .50 .50 - .50 1.95
Stock price (4) 54.25 49.50 60.25 59.40 50.65
Book value 54.23 49.49 60.36 59.52 50.75
Financial Position:
Total assets (1) 2,523 2,488 3,549 2,759 1,709
Current portion of
long-term debt (1) 57 40 30 11 1
Long-term debt,
less current portion (1) 320 361 899 452 18
Stockholders' equity (5) 1,257 1,140 1,231 1,191 1,021
(1) In September 1995, the Group dividended its investment in MFS to Class
D shareholders. MFS' results of operations have been classified as a
single line item on the statements of earnings. MFS is consolidated in
the 1992-1994 balance sheets.
In October 1993, the Group acquired 35% of the outstanding shares of
C-TEC Corporation that had 57% of the available voting rights. At
December 28, 1996, the Group owned 48% of the outstanding shares and
62% of the voting rights.
In January 1994, MFS issued $500 million of 9.375% Senior Discount
Notes.
(2) In 1993, through two public offerings, the Group sold 29% of MFS,
resulting in a $137 million after-tax gain. In 1995 and 1994,
additional MFS stock transactions resulted in $2 million and $35
million after-tax gains to the Group and reduced its ownership in MFS
to 66% and 67%.
(3) The 1996, 1995 and 1992 dividends include $.50 for dividends declared
in 1996, 1995 and 1992 but paid in January of the subsequent year.
(4) Pursuant to the Certificate of Incorporation, the stock price
calculation is computed annually at the end of the fiscal year.
(5) Unless Class D Stock becomes publicly traded, PKS is generally
committed to purchase all Class D Stock at the amount computed, in
accordance with the Certificate of Incorporation, when put to PKS by a
stockholder. The aggregate redemption value of the Class D Stock at
December 28, 1996 was $1,269 million.
KIEWIT DIVERSIFIED GROUP
Management's Discussion and Analysis of Financial Condition
and Results of Operations
The financial statements of the Diversified Group include the financial
position, results of operations and cash flows for the businesses of PKS other
than its construction business and materials businesses, and
include certain PKS corporate assets and liabilities and related
transactions. The Group's share of corporate assets and liabilities and
related transactions includes amounts to reflect certain financial
activities, corporate general and administrative costs, common stock
transactions and income taxes. See Notes 1 and 4 to the Group's
financial statements.
Results of Operations 1996 vs. 1995
Coal Mining. Revenue and net earnings improved primarily due to increased
alternate source tons sold to Commonwealth Edison Company in 1996 and the
liquidation of a captive insurance company which insured against black lung
disease. Upon liquidation, KDG received a refund of premiums paid plus
interest in excess of reserves established by KDG for this liability. Since
1993, the amended contract with Commonwealth provides that delivery
commitments will be satisfied with coal produced by unaffiliated mines in the
Powder River Basin in Wyoming. Excluding alternate coal sales, coal produced
at the Group's mines did not change significantly from 1995 levels. KDG
expects a decline in coal revenue and earnings after 1998 as certain long-term
contracts begin to expire.
Telecommunications. Revenue for the telecommunications segment increased 13%
to $367 million for fiscal 1996. C-TEC's telephone group's $10 million, or
8%, increase in sales and C-TEC's cable group's $33 million or 26% increase in
revenue were the primary contributors to the improved results. The increase
in telephone group revenue is due to higher intrastate access revenue from the
growth in access minutes, an increase of 13,000 access lines, and higher
internet access and video conferencing sales. Cable group revenue increased
primarily due to higher average subscribers and the effects of rate increases
in April 1995 and February 1996. Subscriber counts increased primarily due to
the acquisition of Pennsylvania Cable Systems formerly Twin County Trans
Video, Inc., in September 1995, and the consolidation of Mercom, Inc. since
August 1995. The Pennsylvania Cable System and Mercom account for $23 million
of the increase in cable revenue in 1996.
The 1996 operating expenses for the telecommunications business increased $38
million or 18% compared to 1995. The telephone group experienced a 9%
increase in expenses and the cable group's costs increased 31%. The increase
for the telephone group is primarily attributable to higher payroll expenses
resulting from additional personnel, wage increases and higher overtime. Also
contributing to the increase, were fees associated with the internet access
services and consulting services for a variety of regulatory and operational
matters. The cable group's increase is due to increased depreciation,
amortization and compensation expenses associated with the acquisition of the
Pennsylvania Cable System and the consolidation of Mercom's operations. Also
contributing to the higher costs were rate increases for existing programming
and the costs for additional programming.
General and Administrative Expenses. General and administrative expenses
declined 6% to $180 million in 1996. Decreases in expenses associated with
legal and environmental matters were partially offset by higher mine
management fees paid to the Construction and Mining Group, the costs
attributable to C-TEC and the opening of the SR91 toll road. C-TEC's
corporate overhead and other costs increased approximately 13% in 1996. This
increase is attributable to the costs associated with the development of the
RCN business in New York and Boston, the acquisition of Pennsylvania Cable
Systems, the consolidation of Mercom and the investigation of the feasibility
of various restructuring alternatives to increase shareholder value.
Equity Earnings, net. The loss on the Casecnan project and losses on several
other investments were partially offset by an increase in equity earnings from
CalEnergy of $10 million and C-TEC's investment in Megacable S.A. de C.V. of
$2 million. CalEnergy's increase is attributable to an increase in the
Group's proportionate share of CalEnergy's earnings and improvements in those
earnings. The Casecnan loss resulted from the variance in borrowing and
investing interest rates on the funds generated by the project's debt offering
in 1995.
Investment Income, net. Investment income increased 11% in 1996 compared to
1995. Increases in gains on the sale of marketable and equity securities and
interest income were partially offset by a slight decline in dividend income.
Interest Expense, net. Interest expense in 1996 increased 43% as compared to
1995. The increase is primarily due to the CPTC debt that was capitalized
through July 1996, and C-TEC's redeemable preferred stock, issued in the
Pennsylvania Cable System acquisition, that began accruing interest in 1996.
Gain on Subsidiary's Stock Transactions, net. The issuance of MFS stock for
acquisitions by MFS and the exercise of MFS employee stock options resulted in
a $3 million net gain to the Group in 1995. The Group has recognized gains
and losses from the sale and issuance of stock by MFS on the statement of
earnings. With the Spin-off of MFS, these types of gains will no longer be
recognized for MFS transactions.
Other, net. The decline of other income in 1996 is primarily attributable to
the 1995 settlement of the Whitney Benefits litigation.
Income Tax Benefit (Provision). The effective income tax rate for 1996
differs from the statutory rate of 35% primarily because of adjustments to
prior year tax provisions, partially offset by state taxes and nondeductible
amounts associated with goodwill amortization. In 1995, the rate is lower
than 35% due primarily to $93 million of income tax benefits from the reversal
of certain deferred tax liabilities originally recognized on gains from MFS
stock transactions that are no longer required due to the tax-free spin-off of
MFS and adjustments to prior year tax provisions.
Results of Operations 1995 vs. 1994
Coal Mining. Mining revenue decreased 4% in 1995 primarily due to a decrease
in spot sales. Spot sales were lower due to reduced demand in the Group's spot
coal markets because of a mild winter and high hydro-electricity generation in
the western United States. The decrease in spot sales was partially offset by
an increase in alternate source coal sales due to the acceleration of coal
shipments to the current year from future years and the shift of certain coal
shipments from mined coal to alternate source coal.
Direct costs, as a percentage of revenue, decreased 4% as a result of the
additional higher margin alternate source coal sales and a decline in lower
margin spot coal sales.
Telecommunications. With the Spin-off of MFS, the telecommunications segment
is now solely comprised of C-TEC. C-TEC's primary operations are telephone
and cable. In 1995, telecommunication revenue increased 12% over 1994. Sales
of the telephone group increased $7 million to $129 million, a 6% increase
over 1994. Increases in access lines for the local network service and rate
increases for intrastate access traffic were primarily responsible for the
improvement. Sales for the cable group increased 34% to $127 million in 1995.
The acquisition of Twin County Trans Video, Inc. in September and the
consolidation of Mercom, Inc.'s results since August contributed $18 million
and $6 million to C-TEC's revenue in 1995. In addition, subscriber increases
of approximately 16,000 over 1994 and rate increases effective in April 1995
account for an $8 million increase in cable revenue. Revenues from other
operating groups increased $17 million, a 32% increase over 1994 primarily due
to the resale of long distance telephone services to another long distance
reseller, improvements in switched business, 1-800 service sales and third
party revenues from C-TEC's communication services business. The arrangement
with the third party reseller terminated in the second quarter of 1995.
Partially offsetting C-TEC's increase in revenue was the sale of the mobile
services group in 1994 which contributed $23 million in revenue that year.
C-TEC's direct costs increased $30 million or 15% in 1995. The telephone
group's cost of revenue increased primarily because of higher payroll expenses
and higher depreciation expense. The acquisitions of Mercom and Twin County
led to a 37% increase in direct costs for the cable group. In addition,
higher basic programming costs resulting from increased subscribers, channel
additions and rate increases contributed to the increase. Direct expenses
for C-TEC's other operating groups increased because of costs associated with
the resale of long distance services and communication services work performed
for third parties. Partially offsetting these increases was the elimination of
direct costs associated with the mobile services group, which was sold in
1994.
General and Administrative Expenses. General and administrative expenses
increased 48% in 1995. Higher benefits costs attributable to the retired
packaging employees, and increase in expenses for legal and environmental
matters and increases in C-TEC's expenses were partially offset by lower
payroll expenses. C-TEC's 10% increase in costs resulted primarily from
expenses associated with RCN, higher professional fees for evaluation of
strategic alternatives for enhancing shareholder value and higher compensation
expenses.
Equity Earnings, net. The significant improvement in equity earnings in 1995
is primarily attributable to CalEnergy. The successful merger of Magma
Energy's operations in CalEnergy in 1995 is primarily responsible for the $5
million increase in the Group's share of CalEnergy's earnings. Partially
offsetting this increase was an equity loss of $3 million from C-TEC's
investment in Megacable S.A. de C.V. purchased in January 1995. The
remainder of the increase is due to other equity investments contributing
individually insignificant increases in earnings.
Investment Income, net. Investment income increased 120% to $53 million in
1995. Improvements in interest income and declines in losses on the sales of
securities and international energy project development expenses all
contributed to the increase in investment income. Interest earned on the
Whitney Benefits settlement proceeds contributed to an increase in investment
income. C-TEC's proceeds from its rights offering and the sale of its mobile
services group also contributed to a higher average portfolio balance and
increased interest income.
Interest Expense, net. Interest expense in 1995 decreased 36% as compared to
1994. The decline is primarily due to C-TEC's prepayment of the senior
secured notes in December 1994.
Gain on Subsidiary's Stock Transactions, net. The issuance of MFS stock for
acquisitions by MFS and the exercise of MFS employee stock options resulted in
a $3 million net gain to the Group in 1995. In 1994 the Group settled a
contingent purchase price obligation resulting from MFS' 1990 purchase of CFO.
The former shareholders of CFO accepted MFS stock previously held by the
Group, valued at market prices, as payment of the obligation. This
transaction, along with the issuances of stock for acquisitions and employee
stock options, resulted in a $54 million net gain before taxes. The Group has
recognized gains and losses from sales and issuances of stock by MFS on the
statement of earnings. With the Spin-off of MFS, these types of gains will no
longer be recognized for MFS transactions.
Other, net. In 1995, other income primarily includes settlement proceeds of
$135 million from the Whitney Benefits litigation. Other income also
included gains and losses from the disposition of property, plant and
equipment and other assets in 1995 and 1994.
Equity Loss in MFS. The expansion activities announced in 1993 and 1995
required significant initial development and roll out expenses in advance of
anticipated revenues and continued to negatively affect the operating results
of MFS. After September 30, 1995, the Group no longer included MFS' results
in its financial statements.
Income Tax Benefit (Provision). The effective income tax rate for 1995
differed from the statutory rate of 35% due primarily to $93 million of income
tax benefits from the reversal of certain deferred tax liabilities originally
recognized on gains from previous MFS stock transactions that were no longer
required due to the tax-free spin-off of MFS and adjustments to prior year tax
provisions. In 1994, the rate is lower than 35% primarily due to adjustments
to prior year tax provisions.
Financial Condition - December 28, 1996
The Group, excluding C-TEC, described in a separate paragraph below, generated
$80 million from operations, primarily coal mining in 1996. However, due to
the significant investing activities described below, the Group's working
capital decreased $250 million or 40% during 1996.
Investing activities include $319 million of investments and acquisitions and
$30 million of capital expenditures, including $16 million for the remaining
construction costs of the SR91 toll road. The investments and acquisitions
primarily include KDG's $176 million investment in CE Electric, the exercise
of CalEnergy options to purchase CalEnergy stock for $53 million, a $9
million investment in a Philippine power project, and a $51 million
investment in three Indonesian power projects. These capital outlays were
partially funded by $7 million of net proceeds from the sale of property,
plant and equipment and other assets.
Financing sources include $20 million for the exchange of Class C Stock for
Class D Stock and $19 million for the construction financing of the SR91 toll
road. Financing uses primarily consist of $11 million for the
payment of dividends, $11 million for stock repurchases, and $2 million of
payments on stockholder notes.
C-TEC's working capital decreased $92 million or 81% in 1996. Cash provided
by operations of $121 million were partially offset by $53 million used in
investing activities and $41 million used in financing activities. C-TEC's
significant activities that reduced working capital, include $87 million of
capital expenditures, $27 million for the acquisition of Freedom and $74
million of net proceeds from the sale of short-term investments. Its
financing activities include $19 million of long-term debt borrowings and $55
million of long-term debt payments.
The Group anticipates making significant investments in its energy and
infrastructure businesses - including its joint venture agreement with
CalEnergy covering international power project development activities and
opportunities to acquire capital intensive businesses which provide for long-
term growth. Other long-term liquidity uses include payment of income taxes
and repurchasing the Group's stock. The Group's current financial condition
future cash flows and borrowing capacity should be sufficient for future
operating and investing activities.
In February 1997, the Group purchased an office building in Aurora, Colorado
for $21 million. By investing in real estate, the Group is able to defer $40
million of a taxable gain recognized with respect to the Whitney Benefits
litigation. The Group may make a similar real estate investment in 1997 to
defer the balance of the taxable gain.
Also in February 1997, C-TEC announced a plan to separate its operations along
business lines into three separate, publicly traded companies:
CTCo, containing the local telephone group and related engineering
business;
C-TEC Michigan, containing the cable television operations in Michigan;
and
RCN Corporation, which will consist of RCN Telecom Services; cable
television operations in New York, New Jersey, and Pennsylvania; and the
investment in Megacable S.A. de C.V., a cable operator in Mexico. RCN
Telecom Services is a provider of packaged local and long distance
telephone, video, and internet access services provided over fiber optic
networks to residential customers in Boston and New York City.
The restructuring will permit investors and the financial market to better
understand and evaluate C-TEC's various businesses. In addition, the
restructuring will allow C-TEC to raise capital for the future expansion of
the RCN Business on the most efficient terms.
The plan is contingent upon receipt of a private letter ruling from the
Internal Revenue Service regarding the tax-free nature of the spin-off,
the receipt of other regulatory approvals, and certain other conditions.
If the reorganization and spin-offs occur, the Group will own less than 50%
of the outstanding shares and voting rights of each entity and will
account for each entity using the equity method.
In March, 1997, C-TEC paid the minority shareholders of Freedom $15
million of the contingent consideration outlined in the original purchase
agreement and $15 million to acquire the remaining minority interest of
Freedom. C-TEC also paid $10 million to terminate a marketing services
agreement with the former minority shareholders of Freedom.
In October 1996, the PKS Board of Directors declared a special $.50 per share
dividend payable to Class D shareholders on January 4, 1997 to shareholders of
record on January 3, 1997. In January 1997, Class C shareholders converted
1.7 million shares, with a redemption value of $71 million, into Class D
Stock.
In October 1996, the PKS Board of Directors directed management to pursue a
listing of PKS Class D Stock on a major securities exchange or the NASDAQ
National Market as soon as practical during 1998. The Board does not
foresee circumstances under which PKS would list the Class D Stock prior to
1998. The Board believes that a listing will provide PKS with a capital
structure more suitable for the further development of the Diversified
Group's business plan. It would also provide liquidity for Class D
shareholders without impairing PKS' capital base.
The Board's action does not ensure that a listing of Class D Stock will occur
in 1998, or any time. The Board could delay or abandon plans to list the
stock if it determined that such action would be in the best interests of all
PKS' shareholders. In addition, PKS' ability to list Class D Stock will be
subject to factors beyond its control, including the laws, regulations, and
listing eligibility criteria in affect at the time a listing is sought, as
well as stock market conditions at the time. Furthermore, the Board might
decide to couple the listing of Class D Stock with a public offering of
newly-issued Class D shares in order to raise additional capital for the
Diversified Group. Such an offering could delay or alter the listing plan.
Class C shareholders are currently able to convert their shares into Class D
Stock pursuant to PKS' Certificate of Incorporation. If such a listing
occurs, Class C shareholders will continue to be able to convert their
shares into Class D Stock. However, PKS will not be obligated to
repurchase Class D Stock from Class D shareholders.
In 1995, a Group and CalEnergy venture ("Casecnan") closed financing for
the construction of a $495 million combined irrigation and 150 MW
hydroelectric power generation facility located on the island of Luzon
in the Philippines. The Group and CalEnergy have each made $62 million of
equity contributions to the project.
The Casecnan project is being constructed on a joint and several basis by
Hanbo Corporation and Hanbo Engineering & Construction Co. Ltd. ("HECC"),
(together, "Contractor"), both of which are South Korean corporations.
Hanbo Corporation and HECC are under common ownership. The contractors'
obligations under the construction contract are guaranteed by Hanbo Iron
& Steel Company, Ltd. ("Hanbo Steel"), a large South Korean steel company.
In addition, the Contractor's obligations are secured by an unconditional,
irrevocable standby letter of credit issued by Korea First Bank ("KFB") in
the approximate amount of $118 million. Hanbo Corporation, HECC and
Hanbo Steel have each filed to seek bankruptcy protection in Korea and
KFB's credit rating has been downgraded because of the substantial loans
it has made to Hanbo Steel.
Casecnan has recently received confirmation from HECC that it intends to
fully perform its obligations under the contract. However, although HECC
is currently performing the work, there can be no assumptions that it will
remain able to perform fully its obligations under the contract.
KFB has recently reconfirmed to Casecnan that it will honor its obligations
under the letter of credit.
Casecnan is presently reviewing its rights, obligations and potential
remedies in respect of the recent developments regarding the Contractor
and KFB and is presently unable to speculate as to the ultimate effect of
such developments on the Casecnan project.
If Contractor were to materially fail to perform its obligations under the
contract and if KFB were to fail to honor its obligations under the Casecnan
letter of credit, such actions could have a material adverse effect on the
Casecnan project. However, based on information available, the Group does
not currently believe its investment is impaired.
EXHIBIT 99.B
KIEWIT DIVERSIFIED GROUP
Index to Financial Statements
and Financial Statement Schedule and
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Report of Independent Accountants
Financial Statements as of December 28, 1996 and
December 30, 1995 and for the three years ended
December 28, 1996:
Statements of Earnings
Balance Sheets
Statements of Cash Flows
Statements of Changes in Stockholders' Equity
Notes to Financial Statements
Financial Statement Schedule for the three years
ended December 28, 1996:
II - Valuation and Qualifying Accounts and Reserves
Schedules not indicated above have been omitted because of the absence of the
conditions under which they are required or because the information called for
is shown in the financial statements or in the notes thereto.
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
Peter Kiewit Sons', Inc.
We have audited the financial statements and the financial statement schedule
of Kiewit Diversified Group, a business group of Peter Kiewit Sons', Inc. (as
defined in Note 1 to these financial statements) as listed in the index on the
preceding page of this exhibit to Form 10-K. These financial statements and
financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above, when read in
conjunction with the consolidated financial statements of Peter Kiewit Sons',
Inc. and Subsidiaries, present fairly, in all material respects, the financial
position of Kiewit Diversified Group as of December 28, 1996 and December 30,
1995 and the results of its operations and its cash flows for each of the
three years in the period ended December 28, 1996 in conformity with generally
accepted accounting principles. In addition, in our opinion the financial
statement schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Omaha, Nebraska
March 14, 1997 except for Note 20,
as to which the date is March 21, 1997.
KIEWIT DIVERSIFIED GROUP
Statements of Earnings
For the three years ended December 28, 1996
(dollars in millions, except per share data) 1996 1995 1994
Revenue $ 652 $ 580 $ 537
Cost of Revenue (384) (345) (327)
------ ------ ------
268 235 210
General and Administrative Expenses (180) (191) (129)
------ ------ ------
Operating Earnings 88 44 81
Other Income (Expense):
Equity earnings, net 4 5 1
Investment income, net 59 53 24
Interest expense, net (33) (23) (36)
Gain on subsidiary's stock transactions, net - 3 54
Other, net 7 130 -
------- ------ ------
37 168 43
Equity Loss in MFS - (131) (102)
------- ------ ------
Earnings Before Income Taxes and
Minority Interest 125 81 22
Income Tax (Provision) Benefit (12) 71 10
Minority Interest in Net (Income)
Loss of Subsidiaries - (12) 1
------- ------ ------
Net Earnings $ 113 $ 140 $ 33
======= ====== ======
Net Earnings Per Common and
Common Equivalent Share $ 4.85 $ 6.45 $ 1.63
======= ====== ======
See accompanying notes to financial statements.
KIEWIT DIVERSIFIED GROUP
Balance Sheets
December 28, 1996 and December 30, 1995
(dollars in millions) 1996 1995
Assets
Current Assets:
Cash and cash equivalents $ 147 $ 363
Marketable securities 372 443
Restricted securities 25 30
Receivables, less allowance of $3 and $2 76 81
Other 28 39
------- -------
Total Current Assets 648 956
Property, Plant and Equipment, at cost:
Land 18 17
Buildings and leasehold improvements 159 152
Equipment 810 717
-------- -------
987 886
Less accumulated depreciation and amortization (345) (289)
-------- -------
Net Property, Plant and Equipment 642 597
Investments 806 470
Intangible Assets, net 353 371
Other Assets 74 94
--------- -------
$ 2,523 $ 2,488
========= =======
See accompanying notes to financial statements.
KIEWIT DIVERSIFIED GROUP
Balance Sheets
December 28, 1996 and December 30, 1995
(continued)
(dollars in millions) 1996 1995
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 79 $ 70
Current portion of long-term debt:
Telecommunications 55 36
Other 2 4
Accrued costs and billings in excess of
revenue on uncompleted contracts 12 10
Accrued reclamation and other mining costs 19 18
Other 82 77
------- -------
Total Current Liabilities 249 215
Long-Term Debt, less current portion:
Telecommunications 207 264
Other 113 97
Deferred Income Taxes 165 235
Retirement Benefits 48 54
Accrued Reclamation Costs 98 99
Other Liabilities 168 170
Minority Interest 218 214
Stockholders' Equity (Redeemable Common Stock,
$1,269 million aggregate redemption value):
23,180,243 shares outstanding in 1996 and
23,024,974 shares outstanding in 1995
Common equity 1,235 1,125
Foreign currency adjustment (2) (1)
Net unrealized holding gain 24 16
------- -------
Total Stockholders' Equity 1,257 1,140
------- -------
$ 2,523 $ 2,488
======= =======
See accompanying notes to financial statements.
KIEWIT DIVERSIFIED GROUP
Statements of Cash Flows
For the three years ended December 28, 1996
(dollars in millions) 1996 1995 1994
Cash flows from continuing operations:
Net earnings $ 113 $ 140 $ 33
Adjustments to reconcile net earnings to net
cash provided by continuing operations:
Depreciation, depletion and amortization 132 96 165
(Gain) loss on sale of property, plant and
equipment, and other investments (3) (7) 16
Gain on subsidiary's stock transactions, net - (3) (54)
Equity (earnings) loss, net (4) 119 (7)
Non-cash interest expense - - 40
Minority interest in subsidiaries - 12 (50)
Retirement benefits paid (6) (2) (6)
Deferred income taxes (62) (147) (37)
Change in working capital items:
Receivables (1) 11 (28)
Other current assets 6 - (48)
Payables 9 (3) 23
Other liabilities 13 69 (2)
Other 4 (4) 24
----- ---- -----
Net cash provided by continuing operations 201 281 69
Cash flows from investing activities:
Proceeds from sales and maturities of
marketable securities 378 383 1,568
Purchases of marketable securities (311) (440) (1,401)
Decrease (increase) in restricted securities 6 19 (39)
Acquisitions, excluding cash acquired (296) (229) (207)
Proceeds from sale of cellular properties - - 182
Proceeds from sale of property, plant
and equipment, and other investments 7 14 7
Capital expenditures (117) (118) (485)
Investments in affiliates (53) (29) (33)
Acquisition of minority interest - - (6)
Other (8) (2) (14)
----- ---- -----
Net cash used in investing activities $(394) $(402) $(428)
See accompanying notes to financial statements.
KIEWIT DIVERSIFIED GROUP
Statements of Cash Flows
For the three years ended December 28, 1996
(continued)
(dollars in millions) 1996 1995 1994
Cash flows from financing activities:
Long-term debt borrowings $ 38 $ 49 $ 691
Payments on long-term debt,
including current portion (60) (49) (305)
Issuances of common stock - 2 1
Issuances of subsidiaries' stock 1 - 70
Repurchases of common stock (11) (3) (20)
Dividends paid (11) - -
Exchange of Class C Stock for
Class D Stock, net 20 155 42
Other - - (1)
------ ------- ------
Net cash (used in) provided by
financing activities (23) 154 478
Proceeds from sales of discontinued
packaging operations - 29 5
Cash and cash equivalents of MFS at
beginning of year - (22) -
Effect of exchange rates on cash - 2 -
----- ------ -----
Net change in cash and cash equivalents (216) 42 124
Cash and cash equivalents at beginning of year 363 321 197
----- ------ -----
Cash and cash equivalents at end of year $ 147 $ 363 $ 321
===== ====== =====
Supplemental disclosure of cash flow information:
Taxes $ 55 $ 132 $ 66
Interest 38 33 39
Noncash investing and financing activities:
Conversion of CalEnergy convertible debentures
to common stock $ 66 $ - $ -
Dividend of investment in MFS - 399 -
Issuance of C-TEC redeemable preferred stock
for acquisition - 39 -
Issuances of MFS stock for acquisitions - - 71
MFS stock transactions to settle
contingent purchase price adjustment - - 25
See accompanying notes to financial statements.
KIEWIT DIVERSIFIED GROUP
Statements of Changes in Stockholders' Equity
For the three years ended December 28, 1996
(dollars in millions, except per share data) 1996 1995 1994
Common equity:
Balance at beginning of year $ 1,125 $ 1,238 $ 1,182
Issuances of stock - 5 1
Repurchases of stock (11) (3) (20)
Exchange of Class C Stock for Class D Stock, net 20 155 42
Net earnings 113 140 33
Dividend of investment in MFS - (399) -
Dividends (per share: $.50 in 1996 and 1995(a)) (12) (11) -
------- -------- -------
Balance at end of year 1,235 1,125 1,238
Other equity adjustments:
Balance at beginning of year 15 (7) 9
Foreign currency adjustment (1) (1) -
Net unrealized holding gain (loss) 8 23 (16)
------- -------- ------
Balance at end of year 22 15 (7)
------- -------- ------
Total stockholders' equity $ 1,257 $ 1,140 $ 1,231
======= ======== =======
(a) Dividend declared in 1996 and 1995 but paid in January of the subsequent
year.
See accompanying notes to financial statements.
KIEWIT DIVERSIFIED GROUP
Notes to Financial Statements
(1) Basis of Presentation
The Class C Stock and the Class D Stock are designed to provide
stockholders with separate securities reflecting the performance of Peter
Kiewit Sons', Inc.'s ("PKS") construction and materials business
("Construction & Mining Group") and its other businesses ("Diversified
Group").
The financial statements of the Diversified Group include the financial
position, results of operations and cash flows for PKS' businesses other
than its Construction & Mining Group businesses, held by a wholly-owned
subsidiary, Kiewit Diversified Group Inc. ("KDG") and certain PKS
corporate assets and liabilities and related transactions. These financial
statements have been prepared using the historical amounts included in
the PKS consolidated financial statements.
Although the financial statements of PKS' Diversified Group and
Construction & Mining Group separately report the assets, liabilities and
stockholders' equity of PKS attributed to each such group, legal title to
such assets and responsibility for such liabilities will not be affected
by such attribution. Holders of Class D Stock and Class C Stock are
stockholders of PKS. Accordingly, the PKS consolidated financial
statements and related notes should be read in conjunction with these
financial statements.
(2) Summary of Significant Accounting Policies
Principles of Group Presentation
These financial statements include the accounts of the Diversified Group
("the Group"). The Group's and Construction & Mining Group's financial
statements, taken together, comprise all of the accounts included in the
PKS consolidated financial statements. The Group's enterprises include
coal mining, energy generation and distribution, telecommunications, and
information services businesses and California Private Transportation
Company, L.P. ("CPTC"), the owner operator of the SR91 toll road in southern
California. The Group's only reportable segments are coal mining, energy
generation and distribution, and telecommunications.
The Group consolidates C-TEC Corporation ("C-TEC") because it controls
more than 50% of the voting rights. Fifty-percent-owned mining joint
ventures are consolidated on a pro rata basis. Investments in other
companies in which the Group exercises significant influence over
operating and financial policies are accounted for by the equity method.
In addition, the Group accounts for its investments in international
energy projects using the equity method. All significant intercompany
accounts and transactions, except those directly between the Group and
the Construction & Mining Group, have been eliminated.
The results of operations of MFS Communications Company, Inc. ("MFS"),
which later merged into WorldCom Inc., have been classified as a single
line item on the statements of earnings and consolidated in the 1994
statement of cash flows (See Note 3).
The Group invests in the portfolios of the Kiewit Mutual Fund, ("KMF"),
a registered investment company. KMF is not consolidated in the Group's
financial statements.
Coal Sales Contracts
The Group's coal is sold primarily under long-term contracts with
electric utilities, which burn coal in order to generate steam to produce
electricity. A substantial portion of the Group's coal sales were made
under long-term contracts during 1996, 1995 and 1994. The remainder of
the Group's sales are made on the spot market where prices are
substantially lower than those in the long-term contracts. As the long-
term contracts expire, a higher proportion of the Group's sales will
occur on the spot market.
The coal industry is highly competitive. The Group competes not only
with other domestic and foreign coal suppliers, some of whom are larger
and have greater capital resources than the Group, but also with
alternative methods of generating electricity and alternative energy
sources. Many of the Group's competitors are served by two railroads
and, due to the competition, often benefit from lower transportation
costs than the Group, which is served by a single railroad.
Additionally, many competitors have lower stripping ratios than the
Group, often resulting in lower comparative costs of production.
The Group is also required to comply with various federal, state and
local laws concerning protection of the environment. The Group believes
its compliance with environmental protection and land restoration laws
will not affect its competitive position since its competitors are
similarly affected by such laws.
The Group and its mining ventures have entered into various agreements
with its customers which stipulate delivery and payment terms for the
sale of coal. Prior to 1993, one of the primary customers deferred
receipt of certain commitments by purchasing undivided fractional
interests in coal reserves of the Group and the mining ventures.
Under these arrangements, revenue was recognized when cash was
received. The agreements with this customer were renegotiated in
1992. In accordance with the renegotiated agreements, there were no
sales of interests in coal reserves subsequent to January 1, 1993. The
Group has the obligation to deliver the coal reserves to the customer in
the future if the customer exercises its option. If the option is
exercised, the Group presently intends to deliver coal from
unaffiliated mines. In the opinion of management, the Group has
sufficient coal reserves to cover the above sales commitments.
The Group's coal sales contracts are with several electric utility and
industrial companies. In the event that these customers do not fulfill
contractual responsibilities, the Group would pursue the available legal
remedies.
Telecommunications Revenues
C-TEC's most significant operating groups are its local telephone service
and cable system operations. C-TEC's telephone network access revenues
are derived from net access charges, toll rates and settlement
arrangements for traffic that originates or terminates within C-TEC's
local telephone company. Revenues from telephone services and basic and
premium cable programming services are recorded in the month service is
provided.
The telecommunications industry is subject to local, state and federal
regulation. Consequently, the ability of the telephone and cable groups
to generate increased volume and profits is largely dependent upon
regulatory approval to expand customer bases, increase prices and limit
expenses.
Competition for the cable group's services traditionally has come from
broadcast television, video rentals and direct broadcast satellite
received on home dishes. Future competition is expected from telephone
companies.
Concentration of credit risk with respect to accounts receivable is
limited due to the dispersion of customer base among geographic areas and
remedies provided by the terms of contracts and statutes.
Energy Generation and Distribution
The Group engages in the development, generation, distribution and supply
of electricity to customers throughout the world. The international power
markets are characterized by numerous strong and capable competitors,
many of which have more extensive and more diversified developmental or
operating experience and greater financial resources than the Group.
The successful development, construction and operation of international power
projects is contingent upon, among other things, negotiation on terms
satisfactory to the Group of financing, engineering, construction, fuel
supply and power sales contracts with other project participants, receipt
of governmental permits and consents and timely implementation of
construction. The future growth of the Group is dependent, in large
part, upon the demand for additional electrical generating capacity and
its ability to obtain contracts to supply portions of this capacity.
There can be no assurance that developmental efforts on any particular
project will be successful.
The financing and development of international projects entail
significant political and financial risks against which the Group may not
be able to insure. The uncertainty of the legal environment in certain
foreign countries could make it more difficult for the Group to enforce
its rights under agreements relating to the projects. The Group's
international projects may, in certain cases, be terminated by the
applicable foreign governments.
Depreciation and Amortization
Property, plant and equipment are recorded at cost. Depreciation and
amortization for the majority of the Group's property, plant and
equipment are computed on accelerated and straight-line methods.
Depletion of mineral properties is provided primarily on an units-of-
extraction basis determined in relation to estimated reserves.
In accordance with industry practice, certain telephone plant owned by
C-TEC valued at $238 million is depreciated based on the estimated
remaining lives of the various classes of depreciable property and
straight-line composite rates. When property is retired, the original
cost, plus cost of removal, less salvage, is charged to accumulated
depreciation.
Intangible Assets
Intangible assets primarily consist of amounts allocated upon purchase of
existing operations, franchises and subscriber lists. These assets are
amortized on a straight-line basis over the expected period of benefit,
which does not exceed 40 years.
The Group adopted statement of financial accounting standards No. 121
("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of", in 1996. The Group reviews the
carrying amount of intangible assets for impairment whenever events or
changes in circumstances indicate that the carrying amount may
not be recoverable. Measurement of any impairment would include a
comparison of estimated future operating cash flows anticipated to be
generated during the remaining life of the asset to the net carrying
value of the asset. No impairment losses have been recognized by the
Group pursuant to SFAS 121.
Pension Plans
The Group maintains defined benefit plans primarily for packaging
employees who retired prior to the disposition of the packaging
operations. Benefits paid under the plans are based on years of service
for hourly employees and years of service and rates of pay for salaried
employees.
Through December 31, 1996, substantially all of C-TEC's employees are
included in a trusteed noncontributory defined benefit plan. Upon
retirement, employees are provided a monthly pension based on length of
service and compensation.
The plans are funded in accordance with the requirements of the Employee
Retirement Income Security Act of 1974.
Reserves for Reclamation
The Group follows the policy of providing an accrual for reclamation of
mined properties, based on the estimated cost of restoration of such
properties, in compliance with laws governing strip mining. It is at
least reasonably possible that the estimated cost of restoration will be
revised in the near term.
Foreign Currencies
The local currencies of foreign subsidiaries are the functional
currencies for financial reporting purposes. Assets and liabilities are
translated into U.S. dollars at year-end exchange rates. Revenue and
expenses are translated using average exchange rates prevailing during
the year. Gains or losses resulting from currency translation are
recorded as adjustments to stockholders' equity.
Subsidiary Stock Sales and Issuances
The Group recognizes gains and losses from the sale and issuance of stock
by its subsidiaries.
Earnings Per Share
Primary earnings per share of Class D Stock have been computed using the
weighted average number of shares outstanding during each year after
giving effect to stock options considered to be dilutive common stock
equivalents. The number of shares used in computing primary earnings
per share were 23,263,688, 21,718,792 and 20,438,806 in 1996, 1995 and
1994. Fully diluted earnings per share have not been presented because
it is not significantly different from primary earnings per share.
Income Taxes
Deferred income taxes are provided on the temporary differences between
the financial reporting basis and the tax basis of the Group's assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Reclassifications
Where appropriate, items within the financial statements and notes
thereto have been reclassified from previous years to conform to current
year presentation.
Fiscal Year
The Group's fiscal year ends on the last Saturday in December. There were
52 weeks in fiscal years 1996 and 1995 and 53 weeks in the 1994 fiscal
year.
C-TEC has a calendar fiscal year.
(3) MFS Spin-off
In September 1995, the PKS Board of Directors approved a plan to make a
tax-free distribution of its entire ownership interest in MFS to the
Class D stockholders (the "Spin-off") effective on September 30, 1995.
PKS completed an exchange offer prior to the Spin-off whereby 4,000,000
shares of Class C Stock, were exchanged for 1,666,384 shares of Class D
Stock on terms similar to those under which Class C Stock can be converted
into Class D Stock during the annual conversion period provided for in PKS'
Certificate of Incorporation. The conversion ratio used in the exchange
was calculated using final 1994 stock prices adjusted for 1995 dividends.
After the exchange offer discussed above, shares were distributed on the
basis of approximately 1.741 shares of MFS Common Stock and approximately
.651 shares of MFS Preferred Stock for each share of outstanding Class D
Stock.
The net investment in MFS distributed on September 30, 1995 was
approximately $399 million.
Operating results of MFS through September 30, 1995 and for fiscal 1994
are summarized as follows:
(dollars in millions) 1995 1994
Revenue $ 412 $ 287
Loss from operations (176) (136)
Net loss (196) (151)
Group's share of loss in MFS (131) (102)
Included in the income tax benefit on the statement of earnings for the
year ended December 30, 1995, is $93 million of tax benefits from the
reversal of certain deferred tax liabilities recognized on gains from
previous MFS stock transactions that were not taxed due to the Spin-off.
(4) Corporate Activities
Financial Structure
PKS, in addition to specifically attributable items, has corporate
assets, liabilities and related income and expense which are not
separately identified with the ongoing operations of the Group or the
Construction & Mining Group. The items attributable to the Group and the
Group's 50% portion of PKS are as follows:
(dollars in millions) 1996 1995
Marketable securities $ 5 $ 10
Property, plant and equipment, net 5 5
Other assets 1 1
----- -----
Total Assets $ 11 $ 16
===== =====
Accounts payable $ 17 $ 21
Long-term debt, including current portion 1 3
----- -----
Total Liabilities $ 18 $ 24
===== =====
1996 1995 1994
Net investment income $ - $ - $ 7
Other income (expense) 1 - (4)
Corporate General and Administrative Costs
A portion of PKS' corporate general and administrative costs has been
allocated to the Group based upon certain measures of business activity,
such as employment, investments and sales, which management believes to
be reasonable. These allocations were $6 million, $5 million and $8
million in 1996, 1995 and 1994. Due to a realignment of the corporate
overhead departments at the beginning of 1995, a portion of the
administrative functions and personnel previously allocated to the Group
is now located at the Group.
Income Taxes
All domestic members of the PKS affiliated group are included in the
consolidated U.S. income tax return filed by PKS as allowed by the
Internal Revenue Code. Accordingly, the provision for income taxes and
the related payments or refunds of tax are determined on a consolidated
basis.
The financial statement provision and actual cash tax payments have been
reflected in the Group's and Construction & Mining Group's financial
statements in accordance with PKS' tax allocation policy for such
groups. In general, such policy provides that the consolidated tax
provision and related cash flows and balance sheet amounts are allocated
between the Group and the Construction & Mining Group, for group
financial statement purposes, based principally upon the financial
income, taxable income, credits, preferences and other amounts
directly related to the respective groups. The provision for estimated
United States income taxes for the Group does not differ materially from
that which would have been determined on a separate return basis.
(5) Acquisitions
In 1996, CE Electric UK plc ("CE Electric") made an unsolicited $1.3
billion offer to acquire Northern Electric plc ("Northern"), a regional
electricity distribution and supply company in the United Kingdom. CE
Electric is owned 70% by CalEnergy and 30% by the Group. As of December
24, CE Electric had acquired a majority of Northern's shares. At
December 28, 1996 the Group had invested $176 million in CE Electric.
The remaining funds necessary for CE Electric to complete the acquisition will
be provided under a term loan and revolving credit facility.
CE Electric accounted for the transaction as a purchase and recorded
goodwill of $397 million representing the purchase price in excess of the
fair market value of the assets acquired. The goodwill is being
amortized over a 40 year period.
The following is summarized financial information of CE Electric as of
December 31, 1996:
Financial Position (dollars in millions) 1996
Current assets $ 583
Other assets 1,772
------
Total assets 2,355
Current liabilities 785
Other liabilities 718
Preferred stock 153
Minority interest 112
------
Total liabilities 1,768
------
Net assets $ 587
======
Equity in Net Assets $ 176
======
In March 1996, Kiewit Telecom Holding Inc. ("KTH"), a subsidiary of
Kiewit Diversified Group Inc., entered into an asset purchase agreement,
along with other ancillary agreements, with Liberty Cable Company, Inc.
to purchase an 80% interest in Freedom New York, L.L.C. ("Freedom") for $27
million. Freedom provides subscription televisions services using microwave
frequencies in New York City and selected areas of New Jersey. In
conjunction with its decision to close discussions concerning the sale of
the cable television unit and favorable regulatory conditions due to the
Telecommunications Act of 1996, C-TEC purchased Freedom from KTH in
August 1996, essentially at KTH's cost. The purchase price was allocated
on the basis of the fair value of property, plant and equipment and
identifiable intangible assets acquired and liabilities assumed. C-TEC
is also liable for up to $15 million of additional purchase price if
Freedom attains specified subscriber levels. The contingent
consideration is not included in the original purchase price or the fair
value adjustments and is accrued as it is earned.
CE Electric and Freedom's 1995 and 1996 operating results prior to the
acquisitions were not significant relative to the Group's results after
giving effect to certain pro-forma adjustments related to the
acquisitions, primarily increased amortization and interest expense.
(6) Investments
Investments consist of the following at December 28, 1996 and December
30, 1995:
(dollars in millions) 1996 1995
CalEnergy Company Inc. $ 292 $ 218
CE Electric UK, plc (Note 5) 176 -
International energy projects 149 96
Equity securities (Note 8) 75 59
C-TEC investments:
Megacable S.A. de C.V. 74 77
Other 12 10
Other 28 10
----- ------
$ 806 $ 470
===== ======
In 1996, the Group exercised 1.5 million CalEnergy options at a price of
$9 per share and 3.3 million CalEnergy options at a price of $12 per
share. In addition, the Group converted its $66 million of 9.5%
Convertible Subordinated Debentures into 3.6 million shares of CalEnergy
common stock. At December 28, 1996, the Group owns 19.2 million shares
or 30% of CalEnergy's outstanding common stock and has a cumulative
investment in CalEnergy common stock of $292 million, $25 million in
excess of the Group's proportionate share of CalEnergy's equity. The
excess investment is being amortized over 20 years. Equity earnings, net
of goodwill amortization, were $20 million, $10 million and $5 million in
1996, 1995 and 1994. The Group also recognized investment income from
CalEnergy debt securities of $4 million, $6 million and $5 million in
1996, 1995 and 1994. CalEnergy common stock is traded on the
New York Stock Exchange. On December 28, 1996, the market value of
the Group's investment in CalEnergy common stock was $644 million.
The Group has 1 million options to purchase additional CalEnergy stock at
a price of $11.625 per share which expire in 2001.
The following is summarized financial information of CalEnergy Company,
Inc.:
Financial Position (dollars in millions) 1996 1995
Current assets $ 945 $ 418
Other assets 4,768 2,236
-------- -------
Total assets 5,713 2,654
Current liabilities 1,232 162
Other liabilities 3,301 1,948
Minority interest 299 -
-------- -------
Total liabilities 4,832 2,110
-------- -------
Net assets $ 881 $ 544
======== =======
Group's Share
Equity in net assets $ 267 $ 116
Goodwill 25 37
Convertible debentures - 65
-------- -------
Investment in CalEnergy $ 292 $ 218
======== =======
Operations (dollars in millions) 1996 1995 1994
Revenue $ 576 $ 399 $ 186
Net income available to common stockholders 92 62 32
Group's Share
Net Income 22 13 7
Goodwill Amortization (2) (3) (2)
------ ------- -----
Equity in net income of CalEnergy $ 20 $ 10 $ 5
====== ======= =====
In 1993, the Group and CalEnergy formed a venture to develop power
projects outside of the United States. Since 1993, construction has
begun on the Mahanagdong, Casecnan and Dieng power projects. The
Mahanagdong project is a 165 MW geothermal power facility located on
the Philippine island of Leyte. The Casecnan project is a combined
irrigation and 150 MW hydroelectric power generation facility
located on the island of Luzon in the Philippines. Dieng Unit I is a 55
MW geothermal facility on the Indonesian island of Java. Up to
three additional facilities at Dieng are in development. The
venture also has conducted significant additional development drilling
at the Patuha and Bali sites in Indonesia, and continues to pursue power
project opportunities around the world. In 1996, the Group and
CalEnergy agreed to extend the power project venture for another
five years. KCG is currently constructing the Mahanagdong and Dieng facilities.
Generally, costs associated with the development, financing and
construction of the international energy projects have been capitalized
by each of the projects and will be amortized over the life of each
project.
The following is summarized financial information for the international
energy projects:
Financial Position
(dollars in millions) Mahanagdong Casecnan Dieng Other Total
1996
Current Assets $ 1 $ 441 $ 15 $ 10 $ 467
Other Assets 239 51 118 36 444
--------- -------- ----- ----- -----
Total Assets 240 492 133 46 911
Current Liabilities 15 9 24 11 59
Other Liabilities 153 372 35 - 560
--------- -------- ----- ----- -----
Total Liabilities
(with recourse only to
the projects) 168 381 59 11 619
--------- -------- ----- ----- ----
Net Assets $ 72 $ 111 $ 74 $ 35 $292
========= ======== ===== ===== ====
Group's Share
Equity in Net Assets $ 36 $ 55 $ 36 $ 17 $144
Loan to Project - - 5 - 5
--------- -------- ----- ----- ----
$ 36 $ 55 $ 41 $ 17 $149
========= ======== ===== ===== ====
Financial Position
(dollars in millions) Mahanagdong Casecnan Dieng Other Total
1995
Current Assets $ - $ 493 $ 3 $ 1 $ 497
Other Assets 148 8 18 3 177
-------- -------- ----- ----- -----
Total Assets 148 501 21 4 674
Current Liabilities 15 7 6 1 29
Other Liabilities 79 371 - - 450
-------- -------- ----- ----- -----
Total Liabilities
(with recourse only
to the projects) 94 378 6 1 479
-------- -------- ----- ----- -----
Net Assets $ 54 $ 123 $ 15 $ 3 $ 195
======== ======== ===== ===== =====
Group's Share
Equity in Net Assets $ 27 $ 61 $ 7 $ 1 $ 96
======== ======== ===== ===== =====
In late 1995, the Casecnan joint venture closed financing for the
construction of the project with bonds issued by the project company.
The difference between the interest expense on the debt and the interest
earned on the unused funds prior to payment of construction costs
resulted in a loss to the venture of $12 million in 1996. The Group's
share of this loss was $6 million. No income or losses were incurred by
the international projects in 1994 or 1995.
The Casecnan project is being constructed on a joint and several basis
by Hanbo Corporation and Hanbo Engineering & Construction Co. Ltd.
("HECC"),(together, "Contractor") both of which are South Korean corporations.
Hanbo Corporation and HECC are under common ownership. The
contractors' obligations under the construction contract are guaranteed
by Hanbo Iron & Steel Company, Ltd. ("Hanbo Steel"), a large South
Korean steel company. In addition, the contractor's obligations are
secured by an unconditional, irrevocable standby letter of credit issued
by Korea First Bank ("KFB") in the approximate amount of $118 million.
Hanbo Corporation, HECC and Hanbo Steel have each filed to seek bankruptcy
protection in Korea and KFB's credit rating has been downgraded
because of the substantial loans it has made to Hanbo Steel.
Casecnan has recently received confirmation from HECC that it intends to fully
perform its obligations under the contract. However, although HECC is
currently performing the work, there can be no assumption that it will
remain able to perform fully its obligations under the contract.
KFB has recently reconfirmed to Casecnan that it will honor its obligations
under the letter of credit.
Casecnan is presently reviewing its rights, obligations and potential remedies
in respect of the recent developments regarding the Contractor and KFB and is
presently unable to speculate as to the ultimate effect of such development on
the Casecnan project.
If Contractor were to materially fail to perform its obligations under the
contract and if KFB were to fail to honor its obligations under the Casecnan
letter of credit, such actions could have a material adverse effect on the
Casecnan project. However, based on information available the Group does not
currently believe its investment is impaired.
Investments also include C-TEC's 40% ownership of Megacable S.A. de
C.V., Mexico's second largest cable operator, accounted for using the
equity method.
(7) Gain on Subsidiary's Stock Transactions, net
In 1994, the Group settled a contingent purchase price adjustment
resulting from MFS' 1990 purchase of Chicago Fiber Optic
Corporation ("CFO"). The former shareholders of CFO accepted MFS stock
previously held by the Group, valued at current market prices, as
payment of the obligation.
The above transaction, along with the stock issuances by MFS for
acquisitions and employee stock options, reduced the Group's ownership
in MFS prior to the Spin-off in 1995 to 66% and to 67% at the end of
1994. As a result, the Group recognized gains of $3 million and $54
million in 1995 and 1994 representing the increase in the Group's
proportionate share of MFS' equity. Deferred income taxes had been
established on these gains prior to the Spin-off.
(8) Disclosures about Fair Value of Financial Instruments
The following methods and assumptions were used to determine
classification and fair values of financial instruments:
Cash and Cash Equivalents
Cash equivalents generally consist of funds invested in the Kiewit Mutual
Fund-Money Market Portfolio and highly liquid instruments purchased with
an original maturity of three months or less. The securities are stated
at cost, which approximates fair value.
Marketable Securities, Restricted Securities and Non-current Investments
The Group has classified all marketable securities, restricted securities
and marketable non-current investments not accounted for under the equity
method as available-for-sale. Restricted securities primarily include
investments in various portfolios of the Kiewit Mutual Fund that are
restricted by agreement to fund equity contributions to international
energy projects and certain reclamation liabilities of its coal mining
ventures. The amortized cost of the securities used in computing
unrealized and realized gains and losses is determined by specific
identification. Fair values are estimated based on quoted market prices
for the securities on hand or for similar investments. Net unrealized
holding gains and losses are reported as a separate component of
stockholders' equity, net of tax.
At December 28, 1996 and December 30, 1995 the amortized cost, unrealized
holding gains and losses, and estimated fair values of marketable
securities, restricted securities and marketable non-current investments
were as follows:
Unrealized Unrealized
Amortized Holding Holding Fair
(dollars in millions) Cost Gains Losses Value
1996:
Kiewit Mutual Fund:
Short-term government $ 100 $ - $ - $ 100
Intermediate term bond 65 2 - 67
Tax exempt 126 2 - 128
Equity 5 2 - 7
Corporate debt securities
(held by C-TEC) 47 - - 47
Collateralized mortgage obligations - 1 - 1
Other securities 20 2 - 22
-------- ------ ----- ------
$ 363 $ 9 $ - $ 372
======== ====== ===== ======
Restricted Securities:
Kiewit Mutual Fund:
Short-term government $ 8 $ - $ - $ 8
Intermediate term bond 8 - - 8
Equity 7 2 - 9
-------- ------ ----- ------
$ 23 $ 2 $ - $ 25
======== ====== ===== ======
Non-current Investments:
Equity securities $ 49 $ 26 $ - $ 75
======== ====== ===== ======
1995:
Kiewit Mutual Fund:
Short-term government $ 84 $ 1 $ - $ 85
Intermediate term bond 69 4 - 73
Tax exempt 130 4 - 134
Equity 4 1 - 5
U.S. debt securities 2 - - 2
Federal agency securities
(held by C-TEC) 8 - - 8
Corporate debt securities
(held by C-TEC) 113 - - 113
Collateralized mortgage
obligations - 2 - 2
Other securities 21 - - 21
--------- ------ ----- ------
$ 431 $ 12 $ - $ 443
========= ====== ===== ======
Restricted Securities:
Kiewit Mutual Fund:
Short-term government $ 15 $ - $ - $ 15
Intermediate term bond 7 - - 7
Equity 6 1 - 7
Municipal debt securities 1 - - 1
--------- ------ ----- ------
$ 29 $ 1 $ - $ 30
========= ====== ===== ======
Non-current investments:
Equity securities $ 46 $ 13 $ - $ 59
========= ====== ===== ======
Other securities primarily includes bonds issued by the Casecnan project
and purchased by the Group.
For debt securities, amortized costs do not vary significantly from
principal amounts. Realized gains and losses on sales of marketable and
equity securities were $3 million and $- million in 1996, $1 million and
$2 million in 1995, and $2 million and $16 million in 1994.
At December 28, 1996, the contractual maturities of the debt securities are
as follows:
(dollars in millions) Amortized Cost Fair Value
Corporate debt securities:
1-5 years $ 47 $ 47
===== =====
Other securities:
5-10 years $ 20 $ 22
===== =====
Maturities for the mutual fund, equity securities and collateralized
mortgage obligations have not been presented as they do not have a single
maturity date.
Long-term Debt
The fair value of debt was estimated using the incremental borrowing
rates of the Group for debt of the same remaining maturities. With the
exception of C-TEC, the fair value of debt approximates the carrying
amount. C-TEC's Senior Secured Notes and the Credit Agreement with
National Bank for Cooperatives have an aggregate fair value of $251
million (See Note 10).
(9) Intangible Assets
Intangible assets consist of the following at December 28, 1996 and
December 30, 1995:
(dollars in millions) 1996 1995
C-TEC:
Goodwill $ 198 $ 199
Franchise and subscriber lists 229 224
Other 34 96
CPTC intangibles and other 23 22
------ ------
484 541
Less accumulated amortization (131) (170)
------ -------
$ 353 $ 371
====== =======
(10) Long-Term Debt
At December 28, 1996 and December 30, 1995, long-term debt was as
follows:
(dollars in millions) 1996 1995
Telecommunications:
C-TEC Long-term Debt (with recourse only to C-TEC):
Credit Agreement - National Bank for Cooperatives
(7.51% due 2009) $ 110 $ 119
Senior Secured Notes
(9.65% due 1999) 134 150
Term Credit Agreement - Morgan Guaranty Trust Company
(7% due 2002) 18 19
Promissory Note - Twin County Acquisition - 4
Revolving Credit Agreements and Other - 8
------ -----
262 300
Other:
CPTC Long-term Debt (with recourse only to CPTC):
Bank Note
(7.7% due 2008) 65 51
Institutional Note
(9.45% due 2017) 35 35
OCTA Debt
(9.0% due 2006) 6 6
Subordinated Debt
(9.5% No Maturity) 2 -
----- -----
108 92
Other:
9.6% to 11.1% Notes to former stockholders
due 1999-2001 1 3
Other 6 6
----- -----
7 9
----- -----
377 401
Less current portion (57) (40)
----- -----
$ 320 $ 361
===== =====
(10) Long-Term Debt (cont.)
Telecommunications
In March 1994, C-TEC's telephone group entered into a $135 million Credit
Agreement with the National Bank for Cooperatives. The funds were used
to prepay outstanding borrowings with various agencies of the U.S.
government. Substantially all the assets of C-TEC's telephone group are
subject to liens under this Credit Agreement. In addition, the telephone
group is restricted from paying dividends in excess of the prior year net
income.
The Senior Secured notes are collateralized by pledges of the stock of C-
TEC's cable group. The notes contain restrictive covenants which
require, among other things, specific debt to cash flow ratios.
Mercom, a consolidated subsidiary of C-TEC, has pledged the common stock
of its operating subsidiaries as collateral for the Term Credit Agreement
("Agreement") with Morgan Guaranty Trust Company ("Morgan"). In
addition, a first lien on certain material assets of Mercom and its
subsidiaries has been granted to Morgan. The Agreement contains a
restrictive covenant which requires Mercom to maintain a specified debt
to cash flow ratio.
In connection with the acquisition of Twin County Trans Video, Inc. in
1995, C-TEC Cable Systems, Inc., a wholly owned subsidiary of C-TEC,
issued a $4 million 5% promissory note. The note was unsecured. In
September 1996, the note was cancelled in settlement of certain purchase
price adjustments.
C-TEC's cable group had Revolving Credit agreements which were
collateralized by a pledge of the stock of the cable group subsidiaries
which expired in December 1996.
Other
In August 1996, CPTC converted its construction financing note into a term
note with a consortium of banks ("Bank Debt"). The interest rate on the
Bank Debt is based on LIBOR plus a varying rate with interest payable
quarterly. Upon completion of the toll road, CPTC entered into an interest
rate swap arrangement with the same parties. The swap expires in
January 2004 and has an underlying interest rate of 6.96%.
The institutional note is with Connecticut General Life Insurance
Company, a subsidiary of CIGNA Corporation. The note converted into a
term loan upon completion of the toll road.
Substantially all the assets of CPTC and the partners' equity interest in
CPTC secure the term debt.
Orange County Transportation Authority holds $6 million of subordinated
debt which is due in varying amounts over 10 years. Interest accrues at
9% and is payable quarterly beginning in 2000.
The remaining subordinated debt was incurred in July 1996 to facilitate
the completion of the project. The debt is payable to the partners and
is generally subordinated to all other debt of CPTC. Interest on the
subordinated debt compounds annually at 9.5% and is payable only as CPTC
generates excess cash flows.
CPTC capitalized interest of $5 million, $7 million and $4 million in
1996, 1995 and 1994.
Scheduled maturities of long-term debt through 2001 are as follows (in
millions): 1997 - $57; 1998 - $60; 1999 - $61; 2000 - $17 and $19 in
2001.
(11) Income Taxes
An analysis of the income tax (provision) benefit before minority
interest for the three years ended December 28, 1996 follows:
(dollars in millions) 1996 1995 1994
Current:
U.S. federal $ (64) $ (69) $ (21)
Foreign (4) (4) (2)
State (6) (3) (4)
------ ------ -----
(74) (76) (27)
Deferred:
U.S. federal 61 140 27
Foreign - 3 4
State 1 4 6
------ ------ -----
62 147 37
------ ------ -----
$ (12) $ 71 $ 10
====== ====== =====
The United States and foreign components of earnings for tax reporting
purposes, before equity loss in MFS (recorded net of tax), minority
interest and income taxes follows:
(dollars in millions) 1996 1995 1994
United States $ 129 $ 211 $ 123
Foreign (4) 1 1
------ ------ ------
$ 125 $ 212 $ 124
====== ====== ======
A reconciliation of the actual income tax (provision) benefit and the tax
computed by applying the U.S. federal rate (35%) to the earnings before
equity loss in MFS (recorded net of tax), minority interest and income
taxes for the three years ended December 28, 1996 follows:
(dollars in millions) 1996 1995 1994
Computed tax at statutory rate $ (44) $ (74) $ (43)
State income taxes (3) - -
Depletion 3 2 3
Dividend exclusion - - 2
Goodwill amortization (4) (3) (2)
Tax exempt interest 2 2 3
Prior year tax adjustments 44 51 51
MFS deferred tax - 93 -
Taxes on foreign operations (4) - -
Other (6) - (4)
------ ------ ------
$ (12) $ 71 $ 10
====== ====== ======
During the three years ended December 28, 1996, the Group settled a
number of disputed issues related to prior years that have been included
in prior year tax adjustments.
Possible taxes, beyond those provided on remittances of undistributed
earnings of foreign subsidiaries, are not expected to be material.
The components of the net deferred tax liabilities for the years ended
December 28, 1996 and December 30, 1995 were as follows:
(dollars in millions) 1996 1995
Deferred tax liabilities:
Investments in securities $ 12 $ 7
Investments in joint ventures 45 54
Investments in subsidiaries 14 9
Asset bases - accumulated depreciation 225 254
Coal sales 15 42
Other 16 14
----- -----
Total deferred tax liabilities 327 380
Deferred tax assets:
Compensation - retirement benefits 29 28
Provision for estimated expenses 26 22
Net operating losses of subsidiaries 6 5
Foreign and general business tax credits 67 59
Alternative minimum tax credits 16 20
Other 19 20
Valuation allowances (6) (4)
----- -----
Total deferred tax assets 157 150
----- -----
Net deferred tax liabilities $ 170 $ 230
===== =====
(12) Employee Benefit Plans
The Group's defined benefit pension plans cover primarily packaging
employees who retired prior to the disposition of the packaging
operations. The income (expense) related to these plans was
approximately $1 million, ($7) million and ($1) million in 1996, 1995 and
1994. The accrued pension liability associated with the plan is not
significant at December 28, 1996 and December 30, 1995.
C-TEC maintains a separate defined benefit plan for substantially all of
its employees. The prepaid pension cost and expense related to this plan
is not significant at December 28, 1996 and December 30, 1995, and for
the three years ended December 28, 1996.
Effective December 31, 1996, C-TEC will no longer accrue benefits under
the defined benefit pension plan for employees other than those
consisting primarily of the telephone group. The employees will become
fully vested in their benefit accrued through that date. C-TEC
recognized a curtailment gain of approximately $4 million which primarily
resulted from the reduction of the projected benefit obligation.
The Group also had a long-term incentive plan, consisting of stock
appreciation rights, for certain employees. This plan concluded in 1994.
The expense related to this plan was $2 million in 1994.
(13) Postretirement Benefits
In addition to providing pension and other supplemental benefits, the
Group provides certain health care and life insurance benefits primarily
for packaging employees who retired prior to the disposition of certain
packaging operations and C-TEC employees who retired prior to 1993.
Employees become eligible for these benefits if they meet minimum age and
service requirements or if they agree to contribute a portion of the
cost. These benefits have not been funded.
In March 1995, the Group settled its liability with respect to certain
postretirement life insurance benefits. The Group purchased insurance
coverage from a third party insurance company for approximately $14
million to be paid over seven years. The settlement did not have a
material impact on the Group's financial position, results of operations
or cash flows.
The net periodic costs for health care benefits were less than $1 million
in 1996 and 1995 and $1 million in 1994. In all years, the costs related
primarily to interest on accumulated benefits.
The accrued postretirement benefit liability, primarily for packaging
employees who retired prior to the disposition of the packaging
operations, as of December 28, 1996 was as follows:
Health
(dollars in millions) Insurance
Retirees $ 30
Fully eligible active plan participants -
Other active plan participants -
------
Total accumulated postretirement benefit obligation 30
Unrecognized prior service cost 17
Unrecognized net loss (5)
------
Accrued postretirement benefit liability $ 42
======
The unrecognized prior service cost resulted from certain modifications
to the postretirement benefit plan for packaging employees which reduced
the accumulated postretirement benefit obligation. The Group may make
additional modifications in the future.
A 7.7% increase in the cost of covered health care benefits was assumed
for fiscal 1997. This rate is assumed to gradually decline to 6.2% in
the year 2020 and remain at that level thereafter. A 1% increase in the
health care trend rate would increase the accumulated postretirement
benefit obligation ("APBO") by less than $1 million at year-end 1996.
The weighted average discount rate used in determining the APBO was 7.5%.
(14) Stockholders' Equity
PKS is generally committed to purchase all Class D Stock in accordance
with the Certificate of Incorporation. Issuances and repurchases
of common shares, including conversions, for the three years ended
December 28, 1996 were as follows:
Class
D Stock
Shares issued in 1994 777,556
Shares repurchased in 1994 396,684
Shares issued in 1995 2,675,553
Shares repurchased in 1995 42,147
Shares issued in 1996 410,485
Shares repurchased in 1996 255,216
(15) Class D Stock Plan
Under the 1995 Class D Stock Plan ("the Plan"), the Group may grant
options, stock appreciation rights or other benefits of up to 1 million
shares of Class D Common Stock ("Shares") during the ten year term of the
plan. The Group may not grant more than 500,000 Shares in any two year
period and may not grant any one participant more than 200,000 Shares.
Stock options must have an exercise price that is not less than the fair
market value of the Shares on the grant date and become exercisable at a
rate of 20% per year over a five year period. Stock options expire if
not exercised within ten years from the date of grant. Grants of 1995
options were conditioned upon approval of the Plan by PKS shareholders
which was obtained in June 1996.
Transactions involving stock options granted under the Plan are
summarized as follows:
Option Price Weighted Avg
Shares Per Share Option Price
Balance December 31, 1994 - $ - $ -
Options Granted 268,000 40.40 40.40
Options Cancelled - - -
Options Exercised - - -
-------
Balance December 30, 1995 268,000 $ 40.40 $ 40.40
========= =======
Options Granted 179,000 $ 49.50 $ 49.50
Options Cancelled (3,000) 40.40 40.40
Options Exercised - - -
-------
Balance December 28, 1996 444,000 $40.40 - $49.50 $ 44.07
======= =============== ========
Options exercisable
December 30, 1995 - $ - $ -
December 28, 1996 53,000 40.40 40.40
The weighted average remaining life for the 444,000 options outstanding
on December 28, 1996 is 9.4 years.
The Group has elected to adopt only the required disclosure provisions
and not the optional expense recognition provisions under Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", that established a fair value method of accounting for
stock options and other equity instruments. The compensation cost for
1995 and 1996 that would have been recognized in the statements of
earnings if the fair value based method had been applied to the grants of
options made in 1995 and 1996 is not material.
(16) Industry and Geographic Data
The Group operates primarily in three reportable segments: coal mining,
energy generation and distribution, and telecommunications. Other
primarily includes the Group's information services business, CPTC,
corporate overhead not attributable to a specific segment and marketable
securities. MFS is included in the 1994 telecommunications identifiable
assets, capital expenditures and depreciation and amortization balances.
Equity earnings is included due to the significant equity investments in
the energy generation and distribution businesses.
In 1996, 1995 and 1994 Commonwealth Edison Company accounted for 23%, 23%
and 22% of the Group's revenues.
A summary of the Group's operations by industry and geographic region
is as follows:
Industry Data Coal Telecom-
(dollars in millions) Mining Energy munications Other Consolidated
1996
Revenue $ 234 $ - $ 367 $ 51 $ 652
Operating Earnings 94 (2) 31 (35) 88
Equity Earnings, net - 14 (1) (9) 4
Identifiable Assets 387 649 1,100 387 2,523
Capital Expenditures 2 - 87 28 117
Depreciation, Depletion
& Amortization 12 - 106 14 132
1995
Revenue $ 216 $ - $ 325 $ 39 $ 580
Operating Earnings 77 (2) 37 (68) 44
Equity Earnings, net - 10 (3) (2) 5
Identifiable Assets 368 356 1,143 621 2,488
Capital Expenditures 4 - 72 42 118
Depreciation, Depletion
& Amortization 7 - 81 8 96
1994
Revenue $ 225 $ - $ 291 $ 21 $ 537
Operating Earnings 76 - 27 (22) 81
Equity Earnings, net - 5 - (4) 1
Identifiable Assets 407 219 2,575 348 3,549
Capital Expenditures 3 - 426 56 485
Depreciation, Depletion
& Amortization 11 - 149 5 165
KIEWIT DIVERSIFIED GROUP
Notes to Financial Statements
(16) Industry and Geographic Data (cont.)
Geographical Data Coal Telecom-
(dollars in millions) Mining Energy munications Other Consolidated
1996
Revenue
United States $ 234 $ - $ 367 $ 51 $ 652
Other - - - - -
------- ----- ------- ----- -------
$ 234 $ - $ 367 $ 51 $ 652
====== ===== ======= ===== =======
Operating Earnings
United States $ 94 $ (3) $ 31 $ (35) $ 87
Other - 1 - - 1
------ ----- ------- ----- -------
$ 94 $ (2) $ 31 $ (35) $ 88
====== ===== ======= ===== =======
Identifiable Assets
United States $ 387 $ 323 $ 1,100 $ 387 $ 2,197
Other - 326 - - 326
------ ----- ------- ----- -------
$ 387 $ 649 $ 1,100 $ 387 $ 2,523
====== ===== ======= ===== =======
1995
Revenue
United States $ 216 $ - $ 325 $ 39 $ 580
Other - - - - -
------ ----- ------- ----- -------
$ 216 $ - $ 325 $ 39 $ 580
====== ===== ======= ===== =======
Operating Earnings
United States $ 77 $ - $ 37 $(68) $ 46
Other - (2) - - (2)
------ ----- ------- ---- -------
$ 77 $ (2) $ 37 $(68) $ 44
====== ===== ======= ==== =======
Identifiable Assets
United States $ 368 $ 260 $ 1,143 $621 $ 2,392
Other - 96 - - 96
------ ----- ------- ---- -------
$ 368 $ 356 $ 1,143 $621 $ 2,488
====== ===== ======= ==== =======
KIEWIT DIVERSIFIED GROUP
Notes to Financial Statements
(16) Industry and Geographic Data (cont.)
Geographical Data Coal Telecom-
(dollars in millions) Mining Energy munications Other Consolidated
1994
Revenue
United States $ 225 $ - $ 291 $ 21 $ 537
Other - - - - -
------- ------ ------- ------ ------
$ 225 $ - $ 291 $ 21 $ 537
======= ====== ======= ===== ======
Operating Earnings
United States $ 76 $ - $ 27 $ (22) $ 81
Other - - - - -
------- ------ ------- ----- ------
$ 76 $ - $ 27 $ (22) $ 81
======= ====== ======= ===== ======
Identifiable Assets
United States $ 407 $ 219 $ 2,575 $ 348 $3,549
Other - - - - -
------- ------ ------- ----- ------
$ 407 $ 219 $ 2,575 $ 348 $3,549
======= ====== ======= ===== ======
(17) Related Party Transaction
The Group receives certain mine management services from the Construction
& Mining Group. The expense for these services was $37 million for 1996,
$30 million for 1995 and $29 million for 1994, and is recorded in general
and administrative expenses.
(18) Fair Value of Financial Instruments
The estimated fair value of the Group's financial instruments is as
follows:
(dollars in millions)
1996 1995
Carrying Fair Carrying Fair
Amount Value Amount Value
Cash and cash equivalents (Note 8) $ 147 $ 147 $ 363 $ 363
Marketable securities (Note 8) 372 372 443 443
Restricted securities (Note 8) 25 25 30 30
Investment in equity securities
including CalEnergy Company
(Notes 6 & 8) 367 719 212 270
CalEnergy convertible debentures - - 65 65
Long-term debt (Notes 8 & 10) 377 384 401 417
(19) Other Matters
In October 1996, the PKS Board of Directors directed management to pursue a
listing of PKS Class D Stock on a major securities exchange or the NASDAQ
National Market as soon as practical during 1998. The Board does not
foresee circumstances under which PKS would list the Class D Stock prior to
1998. The Board believes that a listing will provide PKS with a capital
structure more suitable for the further development of the Diversified
Group's business plan. It would also provide liquidity for Class D
shareholders without impairing PKS' capital base.
The Board's action does not ensure that a listing of Class D Stock will
occur in 1998, or any time. The Board could delay or abandon plans to list
the stock if it determined that such action would be in the best interests
of all PKS' shareholders. In addition, PKS' ability to list Class D Stock
will be subject to factors beyond its control, including the laws,
regulations, and listing eligibility criteria in affect at the time a
listing is sought, as well as stock market conditions at the time.
Furthermore, the Board might decide to couple the listing of Class D Stock
with a public offering of newly-issued Class D shares in order to raise
additional capital for the Diversified Group. Such an offering could delay
or alter the listing plan.
Class C shareholders are currently able to convert their shares to Class D
Stock pursuant to PKS' Certificate of Incorporation. If such a listing
occurs, Class C shareholders will continue to be able to convert their
shares. However, PKS would not be obligated to repurchase Class D Stock
from shareholders.
In 1994, several former shareholders of a subsidiary of MFS filed a lawsuit
against MFS, KDG and the chief executive officer of MFS, in the United
States District Court for the Northern District of Illinois, Case No. 94C-
1381. Plaintiffs allege that MFS fraudulently concealed information from
them, causing them to sell their shares of the subsidiary to MFS at an
inadequate price. The lawsuit was settled in July, 1996. KDG had
previously agreed to indemnify MFS and the chief executive officer against
any liabilities arising from this lawsuit. The settlement, net of reserves
established, did not materially affect the Group's financial position,
results of operations or cash flows.
In May 1995, the lawsuit titled Whitney Benefits, Inc. and Peter Kiewit
Sons' Co. v. The United States was settled. In 1983, plaintiffs alleged
that the enactment of the Surface Mining Control and Reclamation Act of 1977
had prevented the mining of their Wyoming coal deposit and constituted a
government taking without just compensation. In settlement of all claims,
plaintiffs agreed to deed the coal deposits to the government and the
government agreed to pay plaintiffs $200 million, of which Peter Kiewit
Sons' Co., a KDG subsidiary, received approximately $135 million in June
1995 and recorded it in other income on the statements of earnings.
The Group is involved in various other lawsuits, claims and regulatory
proceedings incidental to its business. Management believes that any
resulting liability, beyond that provided, should not materially affect
the Group's financial position, future results of operations or future
cash flows.
In many pending proceedings, the Group is one of numerous defendants who
may be "potentially responsible parties" liable for the cleanup of
hazardous substances deposited in landfills or other sites. The Group
has established reserves to cover its probable liabilities for
environmental cases and believes that any additional liabilities will not
materially affect the Group's financial position, future results of
operations or future cash flows.
The Group leases various buildings and equipment under both operating and
capital leases. Minimum rental payments on buildings and equipment
subject to noncancelable operating leases during the next 7 years
aggregate $58 million.
It is customary in the Group's industries to use various financial
instruments in the normal course of business. These instruments include
items such as letters of credit. Letters of credit are conditional
commitments issued on behalf of the Group in accordance with specified
terms and conditions. As of December 28, 1996, the Group had outstanding
letters of credit of approximately $24 million.
(20) Subsequent Events
In January 1997, approximately 1.7 million shares of Class C Stock,
with a redemption value of $71 million, were converted into approximately
1.3 million shares of Class D Stock.
In February 1997, the Group purchased an office building in Aurora,
Colorado for $21 million. By investing in real estate, the Group is able
to defer $40 million of the taxable gain recognized with respect to the
Whitney Benefits settlement. The Group may make additional real estate
investments in 1997 to defer the balance.
Also in February 1997, C-TEC announced a plan to separate its operations
along business lines into three separate, publicly traded companies:
CTCo, containing the local telephone group and related engineering
business;
C-TEC Michigan, containing the cable television operations in
Michigan;
and
RCN Corporation, which will consist of RCN Telecom Services; cable
television operations in New York, New Jersey and Pennsylvania;
and the investment in Megacable S.A. de C.V., a cable operator in
Mexico. RCN Telecom Services is a provider of packaged local and
long distance telephone, video, and internet access services
provided over fiber optic networks to residential customers in
Boston and New York City.
The restructuring will permit investors and the financial market to better
understand and evaluate C-TEC's various businesses. In addition, the
restructuring will allow C-TEC to raise capital for the future expansion of
the RCN business on the most efficient terms.
The plan is contingent upon receipt of a private letter ruling from the
Internal Revenue Service regarding the tax-free nature of the spin-off,
the receipt of other regulatory approvals, and certain other conditions.
If the reorganization and spin-offs occur, KDG will own less than 50% of
the outstanding shares and voting rights of each entity and will account
for each entity using the equity method.
The following is financial information of the Group had C-TEC been
accounted for utilizing the equity method as of December 28, 1996 and
December 30, 1995 and for each of the three years ended December 28,
1996.
(dollars in millions) 1996 1995
Assets
Current Assets:
Cash and cash equivalents $ 71 $ 314
Marketable securities 325 323
Restricted securities 25 30
Receivables 34 34
Other 4 16
------ ------
Total Current Assets 459 717
Net Property, Plant and Equipment 174 167
Investments 1,075 744
Intangible Assets, net 23 22
Other Assets 49 56
------- ------
$ 1,780 $1,706
======= ======
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 41 $ 42
Current portion of long-term debt 2 4
Accrued reclamation and other mining costs 19 18
Other 19 25
------- -------
Total Current Liabilities 81 89
Long-term Debt, less current portion 113 97
Deferred Income Taxes 64 124
Retirement Benefits 45 51
Accrued Reclamation Costs 98 99
Other Liabilities 118 98
Minority Interest 4 8
Stockholders' Equity 1,257 1,140
-------- -------
$ 1,780 $ 1,706
======== =======
KIEWIT DIVERSIFIED GROUP
Notes to Financial Statements
(20) Subsequent Events (cont.)
(dollars in millions) 1996 1995 1994
Revenue $ 285 $ 255 $ 246
Cost of Revenue (134) (133) (132)
------- ------ ------
151 122 114
General and Administrative Expenses (94) (115) (60)
------- ------ ------
Operating Earnings 57 7 54
Other Income (Expense):
Equity earnings, net - 17 (6)
Investment income, net 45 38 17
Interest expense, net (5) (1) (3)
Gain on subsidiary's stock transactions, net - 3 54
Other, net 12 125 4
-------- ------ ------
52 182 66
Equity Loss in MFS - (131) (102)
-------- ------ ------
Earnings Before Income Taxes and
Minority Interest 109 58 18
Income Tax Benefit 2 82 15
Minority Interest in Net
Loss of Subsidiaries 2 - -
--------- ------ ------
Net Earnings $ 113 $ 140 $ 33
========= ====== ======
In March 1997, C-TEC paid the minoirty shareholders of Freedom $15 million
for the contingent consideration outlined in the original purchase (Note 5)
and $15 million to acquire the remaining minority interest. These amount will
be allocated to goodwill and are expected to be amortized over a period of
approximately 6 years. C-TEC also paid $10 million to terminate a marketing
services agreement with the minority shareholders of Freedom. C-TEC will
charge this amount to operations for the quarter ended March 31, 1997.
SCHEDULE II
KIEWIT DIVERSIFIED GROUP
Valuation and Qualifying Accounts and Reserves
Additions
Balance Charged to Amounts Balance
Beginning Costs and Charged to End of
(dollars in millions) of Period Expenses Reserves Other Period
Year ended December 28, 1996
C-TEC's allowance for doubtful
trade accounts $ 2 $ 1 $ - $ - $ 3
Reserves:
Retirement benefits 54 - (6) - 48
Year ended December 30, 1995
C-TEC's allowance for doubtful
trade accounts $ 2 $ - $ - $ - $ 2
Reserves:
Retirement benefits 67 3 (2) (14)(a) 54
Year ended December 31, 1994
C-TEC's allowance for doubtful
trade accounts $ 2 $ 1 $ (1) $ - $ 2
Reserves:
Retirement benefits 71 2 (6) - 67
(a) The Group settled its liability with respect to certain postretirement life
insurance benefits by purchasing insurance coverage from a third party
insurance company.