TABLE OF CONTENTS
Business Description
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
Level 3 COMMUNICATIONS, INC.
Level 3 Communications, Inc. ("Level 3") is engaged in the
information services, telecommunications and coal mining
businesses. Level 3 is a wholly owned subsidiary of Peter Kiewit
Sons', Inc. ("PKS" or the "Company"). Level 3 is a Delaware
corporation that was incorporated in 1985. The Company has two
principal classes of common stock, Class C Construction & Mining
Group Restricted Redeemable Convertible Exchangeable Common
Stock, par value $.0625 per share (the "Class C stock") and Class
D Diversified Group Convertible Exchangeable Common Stock par
value $.0625 per share (the Class D stock"). The value of Class
C stock is linked to the Company's construction and materials
operations (the "Construction Group"). The value of Class D
stock is linked to the operations of Level 3 (the "Diversified
Group"), under the terms of the Company's charter (see Item 5
below). All Class C shares and historically most Class D shares
have been owned by current and former employees of the Company
and their family members. The Company was incorporated in
Delaware in 1941 to continue a construction business founded in
Omaha, Nebraska in 1884. The Company entered the coal mining
business in 1943 and the telecommunications business in 1988. In
1995, the Company distributed to its Class D stockholders all of
its shares of MFS Communications Company, Inc. ("MFS") (which
was later acquired by WorldCom, Inc.). Through subsidiaries, the
Company owns 48.5% of the common stock of Cable Michigan, Inc.,
48.4% of Commonwealth Telephone Enterprises, Inc., formerly known
as C-TEC Corporation ("C-TEC") and 46.1% of RCN Corporation
(collectively, the "C-TEC Companies"), the three companies that
resulted from the restructuring of C-TEC, which was completed in
September 1997. RCN Corporation, Cable Michigan, Inc. and
Commonwealth Telephone Enterprises, Inc. are publicly traded
companies and more detailed information about each of them is
contained in their separate Annual Reports on Form 10-K. Prior
to January 2, 1998, the Company was also engaged in the
alternative energy business through its ownership of 24% of the
voting stock of CalEnergy Company, Inc. ("CalEnergy") and certain
international development projects in conjunction with CalEnergy.
On December 8, 1997, the Company's stockholders ratified the
decision of the Company's Board of Directors (the "PKS Board") to
separate the business conducted by the Construction Group and the
business conducted by the Diversified Group (collectively, the
"Business Groups") into two independent companies. In connection
with the consummation of this transaction, the PKS Board declared
a dividend of eight-tenths of one share of the Company's newly
created Class R Convertible Common Stock, par value $.01 per
share ("Class R stock") with respect to each outstanding share of
Class C stock. The Class R stock is convertible in shares of
Class D stock pursuant to a defined formula. In addition, the
Company has announced that effective March 31, 1998, the Company,
through a resolution of the PKS Board, shall cause each
outstanding share of Class C stock to be mandatorily exchanged
(the "Share Exchange") pursuant to provisions of the PKS Restated
Certificate of Incorporation (the "PKS Certificate") for one
outstanding share of Common Stock, par value $.01 per share, of
PKS Holdings, Inc. ("PKS Holdings"), a recently formed, direct,
wholly owned subsidiary of PKS, to which the eight-tenths of one
share of Class R Stock would attach (collectively, the
"Transaction"). In connection with the consummation of the
Transaction, the Company will change its name to Level 3
Communications, Inc. and PKS Holdings, Inc. will change its name
to Peter Kiewit Sons', Inc. The Company has announced that the
PKS Board has approved in principle a plan to force conversion of
all 6,538,231 shares of Class R Stock outstanding. Due to
certain provisions of the Class R stock, conversion will not be
forced prior to May 1998, and the final decision to force
conversion would be made at that time. The decision may be made
not to force conversion if it were decided that conversion is not
in the best interest of the then stockholders of the Company.
The Transaction is intended to separate the Business Groups
into two independent companies. The PKS Board believes that
separation of the Business Groups will (i) permit Level 3 to
attract and retain the senior management and employees needed to
implement and develop Level 3's expansion plan (which is
discussed below), (ii) enable Level 3 to access the capital
markets in order to fund its expansion plan on more advantageous
terms than would be available to Level 3 as part of the Company,
(iii) enable Level 3 to pursue strategic investments and
acquisitions, as part of the expansion plan, which could be
foreclosed to Level 3 as part of the Company and (iv) allow the
directors and management of each Business Group to focus their
attention and financial resources on that Business Group's
business. Except for the anticipated effect of the Transaction
on the management of the construction business, the PKS Board
does not believe that the Transaction will have any other
significant effect on the construction business.
For 1997, Level 3 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 Level 3's consolidated financial statements.
LEVEL 3 COMMUNICATIONS, INC.
Level 3 engages in the information services,
telecommunications, coal mining and energy businesses, through
ownership of operating subsidiaries, joint venture investments
and ownership of substantial positions in public companies.
Level 3 also holds smaller positions in a number of development
stage or startup ventures.
INFORMATION SERVICES
PKS Information Services, Inc. ("PKSIS") is a full service
information technology company that provides computer operations
outsourcing and systems integration services to customers located
throughout the United States as well as abroad. Utilizing all
computing environments from mainframes to client/server
platforms, PKSIS offers custom-tailored computer outsourcing
services. PKSIS also provides network and systems integration
and network management services for various computer platforms.
In addition, PKSIS develops, implements and supports applications
software. Through its subsidiary NET Twenty-One, Inc., PKSIS'
strategy is to focus on assisting its customers in "Web-enabling"
legacy software applications, that is, migrating computer
applications from closed computing and networking environments to
network platforms using Transmission Control Protocol/Internet
Protocol ("TCP/IP") technology that are then accessed using Web
browsers.
The computer outsourcing services offered by PKSIS through
its subsidiary PKS Computer Services, Inc. include networking and
computing services necessary both for older mainframe-based
systems and newer client/server-based systems. PKSIS provides
its outsourcing services to clients that desire to focus their
resources on core businesses, rather than expending capital and
incurring overhead costs to operate their own computing
environment. PKSIS believes that it is able to utilize its
expertise and experience, as well as operating efficiencies, to
provide its outsourcing customers with levels of service equal to
or better than those achievable by the customer itself, while at
the same time reducing the customer's cost for such services.
This service is particularly useful for those customers moving
from older computing platforms to more modern client/server
networks.
PKSIS' systems integration services help customers define,
develop and implement cost-effective information services. In
addition, through PKS Systems Integration, Inc., PKSIS offers
reengineering services that allow companies to convert older
legacy software systems to modern networked computing systems,
with a focus on reengineering software to enable older software
application and data repositories to be accessed by Hypertext
Markup Language (HTML)-based browsers ("Web browsers") over the
Internet or over private or limited access TCP/IP networks.
PKSIS, through its Suite 2000-SM line of services, provides
customers with a multi-phased service for converting programs and
application so that date-related information is accurately
processed and stored before and after the year 2000. Through the
process of converting a customer's legacy software for year 2000
compliance, PKSIS is able to provide additional insight and
advice to further stream-line and improve the customer's
information systems.
PKSIS has established a software engineering facility at the
National Technology Park in Limerick, Ireland, to undertake:
large scale development projects; system conversions; and code
restructuring and software re-engineering. PKSIS has also
established relationships with domestic and international
partners to provide such activities as well as establishing
recently a joint venture in India.
PKSIS' subsidiary, LexiBridge Corporation of Shelton,
Connecticut, provides customers with a combination of workbench
tools and methodology that provide a complete strategy for
converting mainframe-based application systems to client/server
architecture, while at the same time ensuring year 2000
compliance.
In 1997, 93% of PKSIS' revenue was from external customers
and the remainder was from affiliates.
Level 3 recently has determined to increase substantially
the emphasis it places on and the resources devoted to its
information services business, with a view to becoming a
facilities-based provider (that is, a provider of information
services that owns or leases a substantial portion of the plant,
property and equipment necessary to provide those services) of a
broad range of integrated information services to business (the
"Expansion Plan"). Pursuant to the Expansion Plan, Level 3
intends to expand substantially its current information services
business, through both the expansion of the business of PKSIS and
the creation, through a combination of construction, purchase and
leasing of facilities and other assets, of a substantial,
facilities-based communications network that utilizes Internet
Protocol or IP technology.
In order to grow and expand substantially the information
services it provides, Level 3 has developed a comprehensive plan
to construct, purchase and lease local and backbone facilities
necessary to provide a wide range of communications services over
a network that uses Internet Protocol based technology. These
services include:
A number of business-oriented communications services
using a combination of network facilities Level 3 would
construct, purchase and lease from third parties, which services may
include fax services that are transmitted in part over an Internet
Protocol network and are offered at a lower price than public
circuit- switched telephone network-based fax service and voice
message storing and forwarding that are transmitted in part
over the same Internet Protocol technology based network; and
After construction, purchase and lease of local and
backbone facilities, a range of Internet access services at
varying capacity levels and, as technology development allows, at
specified levels of quality of service and security.
Level 3 believes that, over time, a substantial number of
businesses will convert existing computer application systems
(which run on standalone or networked computing platforms
utilizing a wide variety of operating systems, applications and
data repositories) to computer systems that communicate using
Internet Protocol and are accessed by users employing Web
browsers. Level 3 believes that such a conversion will occur for
the following reasons:
Internet Protocol has become a de facto networking
standard supported by numerous hardware and software vendors
and, as such, provides a common protocol for connecting computers
utilizing a wide variety of operating systems;
Web browsers can provide a standardized interface to
data and applications and thus help to minimize costs of
training personnel to access and use these resources; and
As a packet-switched technology, in many instances,
Internet Protocol utilizes network capacity more efficiently
than the circuit-switched public telephone network.
Consequently, certain services provided over an Internet Protocol
network maybe less costly than the same services provided over public
switched telephone network.
Level 3 further believes that businesses will prefer to
contract for assistance in making this conversion with those
vendors able to provide a full range of services from initial
consulting to Internet access with requisite quality and security
levels.
Pursuant to the Expansion Plan, Level 3's strategy will be
to attempt to meet this customer need by: (i) growing and
expanding its existing capabilities in computer network systems,
consulting, outsourcing, and software reengineering, with
particular emphasis on conversion of legacy software systems to
systems that are compatible with Internet Protocol networks and
Web browsers access; and (ii) creating a national end-to-end
Internet Protocol based network through a combination of
construction, purchase and leasing of assets. Level 3 intends to
optimize its international network to provide Internet based
communications services to businesses at low cost and high
quality, and to design its network, to the extent possible, to
more readily include future technological upgrades than older,
less flexible networks owned by competitors.
To implement its strategy, Level 3 has formulated a long
term business plan that provides for the development of an end-to-
end network optimized for the Internet Protocol. Initially,
Level 3 will offer its services over facilities, both local and
national, that are in part leased from third parties to allow for
the offering of services during the construction of its own
facilities. Over time, it is anticipated that the portion of
Level 3's network that includes leased facilities will decrease
and the portion of facilities that have been constructed, and are
owned, by Level 3 will increase. Over the next 4 to 6 years, it
is anticipated that the Level 3 network will encompass local
facilities in approximately 40 North American markets, leased
backbone facilities in approximately 10 additional North American
markets, a national or inter-city network covering approximately
15,000 miles, the establishment of local facilities in
approximately 10 European and 4 Asian markets and an inter-city
network covering approximately 2,000 miles across Europe. Level
3 intends to design and construct its inter-city network using
multiple conduits. Level 3 believes that the spare conduits will
allow it to deploy future technological innovations and expand
capacity without incurring significant overbuild costs. The
foregoing description of the Level 3 network and the Expansion
Plan constitutes a forward-looking statement. The actual
configuration of the network, including the number of markets
served and the expanse of the inter-city networks will depend on
a variety of factors including Level 3's ability to: access
markets; design fiber optic network backbone routes; attract and
retain qualified personnel; design, develop and deploy enterprise
support systems that will allow Level 3 to build and operate a
packet switched network that interconnects with the public
switched network, install fiber optic cable and facilities;
obtain rights-of-way, building access rights, unbundled loops and
required government authorizations, franchises and permits; and
to negotiate interconnection and peering agreements.
The operations to be conducted as a result of the Expansion
Plan will be subject to extensive federal and state regulation.
Federal laws and Federal Communications Commission regulations
apply to interstate telecommunications while state regulatory
authorities exercise jurisdiction over telecommunications both
originating and terminating within a state. Generally,
implementation of the Expansion Plan will require obtaining and
maintaining certificates of authority from regulatory bodies in
most states where services are to be offered.
With respect to the Expansion Plan, Level 3 is devoting
substantially more management time and capital resources to its
information services business with a view to making the
information services business, over time, the principal business
of Level 3. In that respect, the management of Level 3 has been
conducting a comprehensive review of the existing Level 3
businesses to determine how those businesses will complement
Level 3's focus on information services businesses as a result of
the Expansion Plan. For example, the management of Level 3
negotiated the sale of its energy interests (see "- CalEnergy"
below) because it believed that the ongoing ownership by Level 3
of an interest in an energy businesses was not compatible with
its focus on the information services business, and because sale
of those assets provided a substantial portion of the money
necessary to fund the early stages of the Expansion Plan.
In addition, the Construction Group and Level 3 are
currently discussing a restructuring of the current mine
management arrangement between the two Business Groups. Level 3
also is reviewing its involvement in a number of start-up and
development stage businesses and recently completed the sale of
its interest in United Infrastructure Company ("UIC"). Level 3
is also currently discussing with the Construction Group the sale
of Kiewit Investment Management Corp. to the Construction Group.
Level 3 has no current intention, however, to sell, dispose or
otherwise alter its ownership interest in the C-TEC Companies.
C-TEC COMPANIES
On September 30, 1997, C-TEC completed a tax-free
restructuring, which divided C-TEC into three public companies: C-
TEC, which changed its name to Commonwealth Telephone
Enterprises, Inc. ("Commonwealth Telephone"), RCN Corporation
("RCN") and Cable Michigan, Inc. ("Cable Michigan").
Businesses of the C-TEC Companies. Commonwealth Telephone
owns the following businesses: Commonwealth Telephone Company
(the rural local exchange carrier business); Commonwealth
Communications (the communications engineering business); the
Pennsylvania competitive local exchange carrier business; and
long distance operations in certain areas of Pennsylvania. RCN
owns the following businesses: its competitive
telecommunications services operations in New York City and
Boston; its cable television operations in New York, New Jersey
and Pennsylvania; its 40% interest in Megacable S.A. de C.V.,
Mexico's second largest cable operator; and its long distance
operations (other than the operations in certain areas of
Pennsylvania). Cable Michigan owns and operates cable television
systems in the State of Michigan and owns a 62% interest in
Mercom, Inc., a publicly held Michigan cable television operator.
Ownership of the C-TEC Companies. In connection with the
restructuring and as a result of the conversion of certain shares
of C-TEC held by Level 3, Level 3 now holds 13,320,485 shares of
RCN common stock, 3,330,119 shares of Cable Michigan common
stock, and 8,880,322 shares of Commonwealth Telephone common
stock. Such ownership represents 48.5% of the outstanding common
stock of Cable Michigan, 48.4% of the outstanding common stock of
Commonwealth Telephone and 46.1% of the outstanding common stock
of RCN.
Each of the shares of RCN common stock, Cable Michigan
common stock and Commonwealth Telephone Common Stock is traded on
the National Association of Securities Dealers, Inc.'s National
Market (the "Nasdaq National Market").
In its filings with the Securities and Exchange Commission,
the board of directors of C-TEC concluded that the distributions
were in the best interests of the shareholders because the
distributions will, among other things, (i) permit C-TEC to raise
financing to fund the development of the RCN business on more
advantageous economic terms than the other alternatives
available, (ii) facilitate possible future acquisitions and joint
venture investments by RCN and Cable Michigan and possible future
offerings by RCN, (iii) allow the management of each company to
focus attention and financial resources on its respective
business and permit each company to offer employees incentives
that are more directly linked to the performance of its
respective business, (iv) facilitate the ability of each company
to grow in both size and profitability, and (v) permit investors
and the financial markets to better understand and evaluate C-
TEC's various businesses.
Accounting Method. Since the ownership by Level 3 of the
equity and voting rights of each of RCN, Cable Michigan and
Commonwealth Telephone at the end of 1997 was less than 50%,
under generally accepted accounting principles, Level 3 uses the
equity method to account for its investments in each of these
companies. Under the equity method, Level 3 reports its
proportionate share of each of Commonwealth Telephone's, RCN's
and Cable Michigan's earnings, even though it has received no
dividends from those companies. Level 3 keeps track of the
carrying value of its investment in each of the C-TEC Companies.
"Carrying value" is the purchase price of the investment, plus
the investor's proportionate share of the investee's earnings,
less the amortized portion of goodwill, less any dividends paid.
Level 3 purchased its C-TEC Companies shares at a premium over
the book value of the underlying net assets. This premium is
being amortized over a period of between 30 to 40 years. At
December 27, 1997 the carrying value of Level 3's Commonwealth
Telephone shares was $75 million, RCN shares was $214 million and
Cable Michigan shares was $46 million.
Description of the C-TEC Companies. RCN is developing
advanced fiber optic networks to provide a wide range of
telecommunications services including local and long distance
telephone, video programming and data services (including high
speed Internet access), primarily to residential customers in
selected markets in the Boston to Washington, D.C. corridor.
Cable Michigan is a cable television operator in the State of
Michigan which, as of December 31, 1997, served approximately
204,000 subscribers. These figures include the approximately
42,000 subscribers served by Mercom, a 62% owned subsidiary of
Cable Michigan. Clustered primarily around the Michigan
communities of Grand Rapids, Traverse City, Lapeer and Monroe
(Mercom), Cable Michigan's systems serve a total of approximately
400 municipalities in suburban markets and small towns.
Commonwealth Telephone Company is a Pennsylvania public utility
providing local telephone service to a 19 county, 5,067 square
mile service territory in Pennsylvania. The telephone company
services approximately 259,000 main access lines. The company
also provides network access, long distance, and billing and
collection services to interexchange carriers. The telephone
company's business customer base is diverse in size as well as
industry, with very little concentration. Commonwealth Long
Distance operates principally in Pennsylvania, providing switched
services and resale of several types of services, using the
networks of several long distance providers on a wholesale basis.
Commonwealth Communications Inc. provides telecommunications
engineering and facilities management services to large corporate
clients, hospitals and universities throughout the Northeastern
United States and sells, installs and maintains PBX systems in
Pennsylvania and New Jersey. In January 1995, C-TEC purchased a
40% equity position in Megacable, Mexico's second largest cable
television operator, serving approximately 174,000 subscribers in
12 cities.
For more information on the business of each of RCN, Cable
Michigan and Commonwealth Telephone, please see the individual
filings of Annual Reports on Form 10-K for each of such companies
as filed with the Securities and Exchange Commission.
COAL MINING
Level 3 is engaged in coal mining through its subsidiary,
Kiewit Coal Properties Inc. ("KCP"). KCP has a 50% interest in
three mines, which are operated by KCP. Decker Coal Company
("Decker") is a joint venture with Western Minerals, Inc., a
subsidiary of The RTZ Corporation PLC. Black Butte Coal Company
("Black Butte") is a joint venture with Bitter Creek Coal
Company, a subsidiary of Union Pacific Resources Group Inc.
Walnut Creek Mining Company ("Walnut Creek") is a general
partnership with Phillips Coal Company, a subsidiary of Phillips
Petroleum Company. The Decker 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 produced from the KCP mines is sold
primarily to electric utilities, which burn coal in order to
produce steam to generate electricity. Approximately 89% of
sales are made under long-term contracts, and the remainder are
made on the spot market. Approximately 79%, 80% and 80% of KCP's
revenues in 1997, 1996 and 1995, respectively, were derived from
long-term contracts with Commonwealth Edison Company (with Decker
and Black Butte) and The Detroit Edison Company (with Decker).
The primary customer of Walnut Creek is the Texas-New Mexico
Power Company.
Contracts. Customers enter into long-term contracts for
coal primarily to secure a reliable source of supply at a
predictable price. KCP's major long-term contracts have
remaining terms ranging from 1 to 30 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. In most cases, these 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 that
provides for the delivery of a minimum of 36 million tons of low
sulphur coal during the period 1998 through 2005, with annual
shipments ranging from 5.2 million tons in 1998 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 88 million tons
during the period 1998 through 2014, with annual shipments
ranging from 1.8 million tons to 13.1 million tons. These
deliveries include 15 million tons of coal reserves previously
sold to Commonwealth. Since 1993, the amended contract between
Commonwealth and Black Butte provides that Commonwealth's
delivery commitments will be satisfied, not with coal produced
from the Black Butte mine, but with coal purchased from three
unaffiliated mines in the Powder River Basin of Wyoming. 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 13 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 1997 at the Decker,
Black Butte, and Walnut Creek mines was 5.9, 1.0, and .9 million
tons, respectively.
Revenue. KCP's total revenue in 1997 was $222 million.
Revenue attributable to the Decker, Black Butte, and Walnut Creek
entities was $114 million, $89 million, and $17 million,
respectively.
Under a 1992 mine management agreement, KCP pays a KCG
subsidiary an annual fee equal to 30% of KCP's adjusted operating
income. The fee in 1997 was $32 million.
Backlog. At the end of 1997, the backlog of coal to be sold
under KCP's long-term contracts was approximately $1.4 billion,
based on December 1997 market prices. Of this amount, $213
million is expected to be sold in 1998.
Reserves. At the end of 1997, KCP's share of assigned coal
reserves at Decker, Black Butte, and Walnut Creek was 111, 39,
and 31 million tons, respectively. Of these amounts, KCP's share
of the committed reserves of Decker, Black Butte, and Walnut
Creek was 46, 2, and 23 million tons, respectively. Assigned
reserves represent coal that 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 1996, KCP's production
represented 1.5% of total U.S. coal production. Demand for KCP's
coal is affected by economic, political and regulatory factors.
For example, recent "clean air" laws may stimulate demand for low
sulphur coal. KCP's western coal reserves generally have a low
sulphur content (less than one percent) and are currently useful
principally as fuel for coal-fired steam-electric generating
units.
KCP's sales of its western coal, like sales by other western
coal producers, typically provide for delivery to customers at
the mine. A significant portion of the customer's delivered cost
of coal is attributable to transportation costs. Most of the
coal sold from KCP's western mines is currently shipped by rail
to utilities outside Montana and Wyoming. The Decker and Black
Butte mines are each served by a single railroad. Many of their
western coal competitors are served by two railroads and such
competitors' customers often benefit from lower transportation
costs because of competition between railroads for coal hauling
business. Other western coal producers, particularly those in
the Powder River Basin of Wyoming, have lower stripping ratios
(that is, the amount of overburden that must be removed in
proportion to the amount of minable coal) than the Black Butte
and Decker mines, often resulting in lower comparative costs of
production. As a result, KCP's production costs per ton of coal
at the Black Butte and Decker mines can be as much as four and
five times greater than production costs of certain competitors.
KCP's production cost disadvantage has contributed to its
agreement to amend its long-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 1997 was $3.6 million. KCP's share of
accrued estimated reclamation costs was $100 million at the end
of 1997. The Company does not expect to make significant capital
expenditures for environmental compliance in 1998. The Company
believes its compliance with environmental protection and land
restoration laws will not affect its competitive position since
its competitors in the mining industry are similarly affected by
such laws.
CALENERGY COMPANY, INC.
CalEnergy develops, owns, and operates electric power
production facilities, particularly those using geothermal
resources, in the United States, the Philippines, and Indonesia.
In December 1996, CalEnergy and Level 3 acquired Northern
Electric plc, an English electric utility company. CalEnergy is
a Delaware corporation formed in 1971 and has its headquarters in
Omaha, Nebraska. CalEnergy common stock is traded on the New
York, Pacific, and London Stock Exchanges. In 1997, CalEnergy
had revenue of $2.3 billion and a net loss of $84 million. At the
end of 1997, CalEnergy had total assets of $7.5 billion, debt of
$3.5 billion, and stockholders' equity of $1.4 billion.
At the end of 1997, Level 3 owned approximately 24% of the
common stock of CalEnergy. Under generally accepted accounting
principles, an investor owning between 20% and 50% of a company's
equity, generally uses the equity method. Under the equity
method, Level 3 reports its proportionate share of CalEnergy's
earnings, even though it has received no dividends from
CalEnergy. Level 3 keeps track of the 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. At December 27, 1997 the carrying value of
Level 3's CalEnergy shares was $337 million. On January 2, 1998,
Level 3 sold its entire interest in CalEnergy along with its
interests in several development projects and Northern Electric
plc. to CalEnergy for approximately $1.16 billion.
OTHER BUSINESSES
SR91 Tollroad. Level 3 has invested $12 million for a 65%
equity interest and $4.3 million loan to California Private
Transportation Company, L.P. which developed, financed, and
currently operates the 91 Express Lanes, a ten mile, four lane
tollroad in Orange County, California. The fully automated
highway uses an electronic toll collection system and variable
pricing to adjust tolls to demand. Capital costs at completion
were $130 million, $110 million of which was funded with limited
recourse debt. Revenue collected over the 35-year franchise
period is used for operating expenses, debt repayment, and profit
distributions. The tollroad opened in December 1995 and achieved
operating break-even in 1996. Approximately 100,000 customers
have registered to use the tollroad and weekday volumes typically
exceed 29,000 vehicles per day.
United Infrastructure Company. UIC was an equal partnership
between Kiewit Infrastructure Corp., a wholly owned subsidiary of
Level 3, and Bechtel Infrastructure Enterprises, Inc.
("Bechtel"). UIC was formed in 1993 to develop North American
infrastructure projects. During 1996, UIC began to focus
primarily on water infrastructure projects, principally through
U.S. Water, a partnership formed with United Utilities PLC, a
U.K. company. As part of the strategic decision to concentrate
on its information services business and the Expansion Plan, on
December 31, 1997 Level 3 sold its entire interest in UIC to
Bechtel for $10 million.
Kiewit Mutual Fund. Kiewit Mutual Fund, a Delaware business
trust and a registered investment company, was formed in 1994.
Initially formed to manage the Company's internal investments,
shares in Kiewit Mutual Fund are now available for purchase by
the general public. The Fund's investors currently include
individuals and unrelated companies, as well as
Company-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 Level 3 (60%) and KCG (40%). At the end of 1997,
Kiewit Mutual Fund had net assets of $1.3 billion. As part of
the strategic decision to concentrate on its information services
business and the Expansion Plan, it is anticipated that Level 3
will sell its interest in Kiewit Investment Management Corp. to
the Construction Group.
Other. In February 1997, Level 3 purchased an office
building in Aurora, Colorado for $22 million. By investing in
real estate, Level 3 defers taxes on a portion of the $40 million
of taxable gain otherwise recognizable with respect to the
Whitney Benefits litigation settlement in 1995. Level 3 may make
additional real estate investments in 1998 with a view toward
deferring the balance of that taxable gain. Level 3 has also
made investments in several development-stage companies, but does
not expect earnings from these companies in 1998.
GENERAL INFORMATION
Year 2000. PKS Computer Services, Inc., the computer
outsourcing subsidiary of PKSIS, has developed a comprehensive
approach to address the potential operational risks associated
with the Year 2000, and began to implement remediation plans in
1997. As part of its plans PKS Computer Services is: working
with its key suppliers to verify their operational viability
through the Year 2000; reviewing building infrastructure
components that may be affected by the Year 2000 issue, which
components include fire alarms systems, security systems, and
automated building controls; identifying hardware inventories
that are affected by date logic that is not Year 2000 compliant,
which hardware includes mainframe computers, mid-range computers,
micro-computers, and network hardware. To the extent that
vendors identify items that are not Year 2000 compliant, PKS
Computer Services will work with the hardware vendor to develop a
plan that will enable continuous operations through the Year
2000.
PKS Computer Services is responsible for providing an
operating environment in which its customers applications are
run. As a result, PKS Computer Services will confirm the system
software inventories that it is responsible for managing. PKS
Computer Services will then develop a plan with each of its
customers that indicate that they intend to be customers in the
year 2000 to provide for Year 2000 compliance.
PKS Computer Services believes that many of the required
changes for hardware and operating environments will be included
in the costs that are incurred for annual maintenance.
PKS Systems Integration LLC provides a wide variety of
information technology services to its customers. In fiscal year
1997 approximately 80% of the revenue generated by PKSIS related
to projects involving Year 2000 assessment and renovation
services performed by PKS Systems Integration for its customers.
These contracts generally require PKS Systems Integration to
identify date affected fields in certain application software of
its customers and, in many cases, PKS Systems Integration
undertakes efforts to remediate those date-affected fields so
that the applicable applications are able to process date-related
information occurring on or before the Year 2000. Thus, Year
2000 issues affect many of the services PKS Systems Integration
provides to its customers. This exposes PKS Systems Integration
to potential risks that may include problems with services
provided by PKS Systems Integration to its customers and the
potential for claims arising under PKS Systems Integration
customer contracts. PKS Systems Integration attempts to
contractually limit its exposure to liability for Year 2000
compliance issues. However, there can be no assurance as to the
effectiveness of such contractual limitations.
The expenses associated with this project by PKSIS, as well
as the related potential effect on PKSIS's earnings is not
expected to have a material effect on its future operating
results or financial condition. There can be no assurance,
however, that the Year 2000 problem, and any loss incurred by any
customers of PKSIS as a result of the Year 2000 problem will not
materially and adversely affect PKSIS and its business.
Environmental Protection. Compliance with federal, state,
and local provisions regulating the discharge of materials into
the environment, or otherwise relating to the protection of the
environment, has not and is not expected to have a material
effect upon the capital expenditures, earnings, or competitive
position of the Company and its subsidiaries.
Employees. At the end of 1997, the Company and its
majority-owned subsidiaries employed approximately 17,700 people
- - 16,200 in construction and materials operations, 500 by coal
mining companies, 800 at PKSIS, and 200 in corporate and Level 3
positions. This does not include the employees of the C-TEC
Companies.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Market Information. As of December 27, 1997, the Company's
common stock is not listed on any national securities exchange or
the Nasdaq National Market. However, the Class D stock is
currently quoted on the National Association of Securities
Dealers, Inc.'s OTC Bulletin Board. During the fourth quarter of
1997, the only quarter during which this trading occurred, the
range of the high and low bid information for the Class D stock
was $24.60 to $29.00. The Company has announced that the common
stock of Level 3 Communications, Inc. (renamed from Peter Kiewit
Sons', Inc. in connection with the Transaction) will begin
trading on the Nasdaq National Market on April 1, 1998.
Company Repurchase Duty. Pursuant to the current terms of
the PKS Certificate, the Company is generally required to
repurchase shares at a formula price upon demand. Under the PKS
Certificate effective January 1992, the Company has three classes
of common stock: Class B Construction & Mining Group Nonvoting
Restricted Redeemable Convertible Exchangeable Common Stock
("Class B"), Class C stock, and Class D stock. There are no
outstanding Class B stock; the last Class B stock were converted
into Class D stock on January 1, 1997. Class C stock can be
issued only to Company employees and can be resold only to the
Company at a formula price based on the year-end book value of
the Construction Group. The Company is generally required to
repurchase Class C stock for cash upon stockholder demand. Class
D stock has a formula price based on the year-end book value of
the Diversified Group. The Company must generally repurchase
Class D stock for cash upon stockholder demand at the formula
price, unless the Class D stock become publicly traded.
Formula values. The formula price of the Class D stock is
based on the book value of Level 3 and its subsidiaries, plus
one-half of the book value, on a stand-alone basis, of the parent
company, PKS. The formula price of the Class C stock is based on
the book value of the Construction Group and its subsidiaries,
plus one-half of the book value of the unconsolidated parent
company. A significant element of the Class C formula price is
the subtraction of the book value of property, plant, and
equipment used in construction activities ($122 million in 1997).
Conversion. Under the PKS Certificate, Class C stock is
convertible into Class D stock 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 stock determined
as of the last Saturday in December, that is, the last day in the
Company's fiscal year. Class D stock may be converted into Class
C stock only as part of an annual offering of Class C stock to
employees. Instead of purchasing the offered shares for cash, an
employee owning Class D stock may convert such shares into Class
C stock at the applicable conversion ratio.
Restrictions. Ownership of Class C stock is generally
restricted to active Company employees. Upon retirement,
termination of employment, or death, Class C stock must be resold
to the Company at the applicable formula price, but may be
converted into Class D stock if the terminating event occurs
during the annual conversion period. Class D stock is not
subject to ownership or transfer restrictions.
Dividends and Prices. During 1996 and 1997 the Company
declared or paid the following dividends on its common stock.
The table also shows the stock price after each dividend payment
or other valuation event.
Dividend Dividend
Declared Dividend Paid Per Share Class Price Adjusted Stock Price
Oct. 27, 1995 Jan. 5, 1996 0.50 D Dec. 30, 1995 9.90*
Oct. 25, 1996 Jan. 4, 1997 0.50 D Dec. 28, 1996 10.85*
D Dec. 27, 1997 11.65*
* All stock prices for the Class D stock reflect a dividend of
four shares of Class D stock for each outstanding share of Class
D stock that was effective on December 26, 1997.
The Company's current dividend policy is to pay a regular
dividend on Class C stock of about 15% to 20% of the prior year's
ordinary earnings of the Construction Group, with any special
dividends to be based on extraordinary earnings. Although the
PKS Board announced in August 1993 that the Company did not
intend to pay regular dividends on Class D stock for the
foreseeable future, the PKS Board declared a special dividend of
$0.50 per share of Class D stock in both October 1995 and 1996.
A dividend of 4 shares of Class D Stock for each share of
Class D Stock was effected on December 26, 1997.
Stockholders. On March 15, 1998, and after giving effect to
a dividend of 4 shares of Class D Stock for each outstanding
share of Class D stock effected on December 26, 1997, the Company
had the following numbers of stockholders and outstanding shares
for each class of its common stock:
Class of Stock Stockholders Shares Outstanding
B - -
C 996 7,681,020
D 2,121 146,943,752
Recent Sales of Unregistered Securities. On April 1, 1997,
the Company sold 10,000 shares of Class D stock to Charles Harper
and Robert Daugherty and 8,000 shares of Class D stock to Peter
Kiewit Jr. at a sale price of $49.50 per share. Each of Messrs
Harper, Daugherty and Kiewit are members of the PKS Board of
Directors. The sale was effected pursuant to an exemption from
registration under the Securities Act of 1933 contained in
Section 4(2) of such Act.
SELECTED FINANCIAL DATA
The following selected financial data for each of the years in
the period 1993 to 1997 have been derived from audited financial
statements. The historical financial information for the
Diversified Group and Kiewit Construction & Mining Group
supplements the consolidated financial information of PKS and,
taken together, includes all accounts which comprise the
corresponding consolidated financial information of PKS.
(dollars in millions, Fiscal Year Ended
except per share amounts) 1997 1996 1995 1994 1993
Results of Operations:
Revenue (1) $ 332 $ 652 $ 580 $ 537 $ 267
Earnings from continuing operations 83 104 126 28 174
Net earnings (2) 93 113 140 33 181
Per Common Share:
Earnings from continuing operations
Basic .66 .90 1.17 .27 1.74
Diluted .66 .90 1.17 .27 1.74
Net earnings
Basic .74 .97 1.29 .32 1.82
Diluted .74 .97 1.29 .32 1.81
Dividends (3) - .10 .10 - .10
Stock price (4) 11.65 10.85 9.90 12.05 11.88
Book value 11.65 10.85 9.90 12.07 11.90
Financial Position:
Total assets (1) 2,127 2,504 2,478 3,543 2,756
Current portion of long-term debt (1) 3 57 40 30 11
Long-term debt,less current portion (1) 137 320 361 899 452
Stockholders' equity (5) 1,578 1,257 1,140 1,231 1,191
(1) In October 1993, the Group acquired 35% of the outstanding
shares of C-TEC Corporation that had 57% of the available
voting rights. At December 28, 1996, the Group owned 48% of
the outstanding shares and 62% of the voting rights.
As a result of the C-TEC restructuring, the Group owns less
than 50% of the outstanding shares and voting rights of each
of the three entities, and therefore accounted for each
entity using the equity method in 1997. The Company
consolidated C-TEC from 1993 to 1996.
In September 1995, the Group dividended its investment in MFS to
Class D shareholders. MFS' results of operations have been
classified as a single line item on the statements of
earnings. MFS is consolidated in the 1993 and 1994 balance
sheets.
In January 1994, MFS issued $500 million of 9.375% Senior
Discount Notes.
In September 1997, the Group agreed to sell its energy segment
to CalEnergy Company, Inc. The transaction closed on January
2, 1998.
(2) In 1993, through two public offerings, the Group sold 29% of
MFS, resulting in a $137 million after-tax gain. In 1995 and
1994, additional MFS stock transactions resulted in $2
million and $35 million after-tax gains to the Group and
reduced its ownership in MFS to 66% and 67%.
(3) The 1996, 1995 and 1993 dividends include $.10 for
dividends declared in 1996, 1995 and 1993 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
27, 1997 was $1,578 million.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
The financial statements of the Diversified Group ("the Group")
include the financial position, results of operations and cash
flows for the businesses of PKS other than its construction 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 6 to the Group's
financial statements.
This document contains forward looking statements and
information that are based on the beliefs of management as well
as assumptions made by and information currently available to the
Group. When used in this document, the words "anticipate",
"believe", "estimate" and "expect" and similar expressions, as
they relate to the Group or its management, are intended to
identify forward-looking statements. Such statements reflect the
current views of the Group with respect to future events and are
subject to certain risks, uncertainties and assumptions. Should
one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may
vary materially from those described in this document.
Results of Operations 1997 vs. 1996
Coal Mining. Revenue from the Group's coal mines declined 5%
in 1997 compared to 1996. Alternate source coal revenue declined
by $16 million in 1997. The mines primary customer, Commonwealth
Edison, accelerated its contractual commitments in 1996 for
alternate source coal, thus reducing its obligations in 1997. In
addition to the decline in tonnage shipped, the price of coal
sold to Commonwealth declined 1% in 1997. Revenue attributable
to other contracts increased by approximately $4 million. The
actual amount of coal shipped to these customers increased 5% in
1997, but the price at which it was sold was 4% lower than 1996.
Margin, as a percentage of revenue, declined 11% from 1996 to
1997. Margins in 1996 were higher than normal due to the
additional high margin alternate source coal sold to Commonwealth
in 1996 and the refund of premiums from a captive insurance
company that insured against black lung disease. The decline in
Commonwealth shipments and an overall decline in average selling
price adversely affected the results for 1997. If current market
conditions continue, the Group will experience a decline in coal
revenue and earnings after 1998 as certain long-term contracts
begin to expire.
Information Services. Revenue increased by 124% to $94
million in 1997 from $42 million in 1996. Revenue from computer
outsourcing services increased 20% to $49 million in 1997 from
$41 million in 1996. The increase was due to new computer
outsourcing contracts signed in 1997. Revenue for systems
integration grew to $45 million in 1997 from less than $1 million
in 1996. Strong demand for Year 2000 renovation services fueled
the growth for systems integration's revenues.
Margin, as a percent of revenue, decreased to 28% in 1997 from
41% in 1996 for the computer outsourcing business. The reduction
of the gross margin was due to up-front migration costs
associated with new contracts and significant increases in
personnel costs due to the tightening supply of computer
professionals. Gross margin for the systems integration business
was approximately 40% in 1997. A comparison to 1996 gross margin
is not meaningful due to the start-up nature of the business.
General and Administrative Expenses. Excluding C-TEC,
general and administrative expenses increased 20% to $114 million
in 1997. The increase was primarily attributable to a $41
million increase in the information services business' general
and administrative expenses. The majority of the increase is
attributable to additional compensation expense that was incurred
due to the conversion of a subsidiary's option and SAR plans to the
Class D Stock option plan. The remainder of the increase relates
to the increased expenses for new sales offices established in 1997
for the systems integration business and the additional personnel
hired in 1997 to implement the expansion plan.
Exclusive of the information services business, general and
administrative expenses decreased 26% to $62 million in 1997. A
decrease in professional services and the mine management fees
were partially offset by increased compensation expense. Due to
the favorable resolution of certain environmental and legal
matters, costs that were previously accrued for these issues were
reversed in 1997. Partially offsetting this reduction were
legal, tax and consulting expenses associated with the CalEnergy
transaction and the separation of the Construction and Mining
Group and Diversified Group.
Equity Losses. The losses for the Group's equity investments
increased from $9 million in 1996 to $43 million in 1997. Had
the C-TEC entities been accounted for using the equity method in
1996, the losses would have increased to $13 million. The
expenses associated with the deployment and marketing of the
advanced fiber networks in New York, Boston and Washington D.C.,
and the costs incurred in connection with the buyout of a
marketing contract with minority shareholders are primarily
responsible for the increase in equity losses attributable to RCN
from $6 million in 1996 to $26 million in 1997. The Group's
share of Cable Michigan's losses decreased to $6 million in 1997
from $8 million in 1996. This improvement is attributable to the
gains recognized on the sale of Cable Michigan's Florida cable
systems. Commonwealth Telephone's earnings were consistent with
that of 1996. The Group recorded equity earnings of $9 million
in each year attributable to Commonwealth Telephone. The Group
also recorded equity losses attributable to several developing
businesses.
Investment Income. Investment income increased 7% in 1997
after excluding C-TEC's $14 million of investment income in 1996.
Gains recognized on the sale of marketable securities, primarily
within the Kiewit Mutual Fund ("KMF"), increased from $3 million
in 1996 to $9 million in 1997. In 1997, KMF repositioned the
securities within its portfolios to more closely track the
overall market. Partially offsetting these additional gains was
a decline in interest income due to an overall reduction of yield
earned by the KMF portfolios.
Interest Expense. Interest expense increased significantly in
1997 after excluding $28 million of interest attributable to C-
TEC in 1996. CPTC, the owner-operator of a privatized tollroad
in California, incurred interest costs of approximately $9
million and $11 million in 1996 and 1997. In 1996, interest of
$5 million was capitalized due to the construction of the
tollroad. Construction was completed in August 1996, and all
interest incurred subsequent to that date was charged against
earnings. Interest associated with the financing of the Aurora,
Colorado property of $1 million, also contributed to the increase
in interest expense.
Other Income. Other income in 1996 includes $2 million of
other expenses attributable to C-TEC. Excluding these losses,
other income declined from $8 million in 1996 to $1 million in
1997. The absence of gains on the sale of timberland properties
and other assets, which accounted for $6 million of income in
1996, is responsible for the decline.
Income Tax (Provision) Benefit. The effective income tax rate
for 1997 is less than the expected statutory rate of 35% due
primarily to prior year tax adjustments, partially offset by the
effect of nondeductible compensation expense associated with the
conversion of the information services option and SAR plans to
the Class D Stock plan. In 1996, the effective rate was also
lower than the statutory rate due to prior year tax adjustments.
These adjustments were partially offset by nondeductible costs
associated with goodwill amortization and taxes on foreign
operations. In 1997 and 1996, the Group settled a number of
disputed tax issues related to prior years that have been
included in prior year tax adjustments.
Discontinued Operations. Income from discontinued operations
increased to $29 million in 1997 from $9 million in 1996. The
acquisition of Northern Electric in late 1996 and the
commencement of operations at the Mahanagdong geothermal facility
in July, 1997 were the primary factors that resulted in the
increase.
In October 1997, CalEnergy sold approximately 19.1 million
shares of its common stock. This sale reduced the Group's
ownership in CalEnergy to approximately 24% but increased its
proportionate share of CalEnergy's equity. It is the Group's
policy to recognize gains or losses on the sale of stock by its
investees. The Group recognized an after tax gain of
approximately $44 million from transactions in CalEnergy stock in
the fourth quarter of 1997.
On July 2, 1997, the Labour Party in the United Kingdom
announced the details of its proposed "Windfall Tax" to be levied
against privatized British utilities. This one-time tax is 23%
of the difference between the value of Northern at the time of
privatization and the utility's current value based on profits
over a period of up to four years. CE Electric recorded an
extraordinary charge of approximately $194 million when the tax
was enacted on July 31, 1997. The total after-tax impact to the
Group, directly through its investment in CE Electric and
indirectly through its interest in CalEnergy, was $63 million.
Results of Operations 1996 vs. 1995
Coal Mining. Revenue and net earnings improved primarily due
to increased alternate source tons sold to Commonwealth Edison
Company in 1996 and the liquidation of a captive insurance
company which insured against black lung disease. Upon
liquidation, the Group received a refund of premiums paid plus
interest in excess of reserves established by the Group for this
liability. Since 1993, the amended contract with Commonwealth
provided that delivery commitments would be satisfied with coal
produced by unaffiliated mines in the Powder River Basin in
Wyoming. Coal produced at the Group's mines did not change
significantly from 1995 levels
Information Services. Revenue increased 17% to $42 million in
1996 from $36 million in 1995. The increase was primarily due to
new computer outsourcing contracts signed in 1996. Less than $1
million of revenue was generated by the operations of the new
systems integration business, started in February, 1996.
Margin as a percent of revenue for the outsourcing business
decreased to 41% in 1996 from 45% in 1995. The reduction of the
gross margin was primarily due to up-front migration costs for
new customers which were recognized as an expense when incurred.
Telecommunications. Revenue for the telecommunications segment
increased 13% to $367 million for fiscal 1996. C-TEC's telephone
group's $10 million, or 8%, increase in sales and C-TEC's cable
group's $33 million or 26% increase in revenue were the primary
contributors to the improved results. The increase in telephone
group revenue is due to higher intrastate access revenue from the
growth in access minutes, an increase of 13,000 access lines, and
higher internet access and video conferencing sales. Cable group
revenue increased primarily due to higher average subscribers and
the effects of rate increases in April 1995 and February 1996.
Subscriber counts increased primarily due to the acquisition of
Pennsylvania Cable Systems, formerly Twin County Trans Video,
Inc., in September 1995, and the consolidation of Mercom, Inc.
since August 1995. Pennsylvania Cable Systems 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 was
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
was due to increased depreciation, amortization and compensation
expenses associated with the acquisition of Pennsylvania Cable
Systems and the consolidation of Mercom's operations. Also
contributing to the higher costs were rate increases for existing
programming and the costs for additional programming.
General and Administrative Expenses. General and
administrative expenses declined 5% to $181 million in 1996.
Decreases in expenses associated with legal and environmental
matters were partially offset by higher mine management fees paid
to the Construction & Mining Group, the costs attributable to C-
TEC and the opening of the SR91 toll road. C-TEC's corporate
overhead and other costs increased approximately 13% in 1996.
This increase is attributable to costs associated with the
development of the RCN business in New York and Boston, the
acquisition of Pennsylvania Cable Systems, the consolidation of
Mercom and the investigation of the feasibility of various
restructuring alternatives.
Equity Earnings, net. Losses attributable to the Group's
equity investments increased to $9 million in 1996 from $5
million in 1995. The additional losses were attributable to an
enterprise engaged in the renewable fuels business and to C-TEC's
investment in MegaCable S.A. de C.F., Mexico's second largest
cable television operator.
Investment Income, net. Investment income increased 24% in
1996 compared to 1995. Increasesd 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%
compared to 1995. The increase was primarily due to interest on
the CPTC debt that was capitalized through July 1996, and C-TEC's
redeemable preferred stock, issued in the Pennsylvania Cable
Systems acquisition, that began accruing interest in 1996.
Gain on Subsidiary's Stock Transactions, net. The issuance of
MFS stock for acquisitions by MFS and the exercise of MFS
employee stock options resulted in a $3 million net gain to the
Group in 1995.
Other, net. The decline of other income in 1996 was 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.
Discontinued Operations. Income from discontinued operations
declined in 1996 by 36% to $9 million. Losses attributable to
the Group's interest in the Casecnan project, additional
development expenses for international activities, and the costs
associated with the Northern Electric transaction were partially
offsest by increased equity earnings from CalEnergy.
Financial Condition - December 27, 1997
The Group's working capital, excluding C-TEC and discontinued
operations, increased $392 million or 106% during 1997. This is
due to the $182 million of cash generated by operations,
primarily coal operations, and the significant financing
activities described below.
Investing activities include $452 million to purchase
marketable securities, $42 million of investments and $26 million
of capital expenditures, including $14 million for the existing
information services business and $6 million for a corporate jet.
The investments primarily include the Group's $22 million
investment in the Pavilion Towers office complex, located in
Aurora, Colorado, and $15 million of investments in developing
businesses. Funding a portion of the activities was the sale of
marketable securities for $167 million.
Sources of financing include $138 million from the issuance of
Class D Stock, $72 million from the exchange of Class C stock for
Class D stock and $16 million from the financing for Pavilion
Towers. Uses consist primarily of $12 million for the payment
of dividends, and $2 million of payments on long-term debt.
Prior to the execution of an agreement with CalEnergy in
September, 1997, the Group invested $31 million in the Dieng,
Patuha and Bali power projects in Indonesia.
In October 1996, the PKS Board of Directors directed PKS
management to pursue a listing of Class D Stock as a way to
address certain issues created by PKS' two-class capital stock
structure and the need to attract and retain the best management
for PKS' businesses. During the course of its examination of the
consequences of a listing of Class D Stock, management concluded
that a listing of Class D Stock would not adequately address
these issues, and instead began to study a separation of the
Construction and Mining Group and the Diversified Group. At the
regular meeting of the Board on July 23, 1997, management
submitted to the Board for consideration a proposal for
separation of the Construction and Mining Group and Diversified
Group through a split-off of the Construction and Mining Group
("the Transaction"). At a special meeting on August 14, 1997,
the Board approved the Transaction.
The separation of the Construction and Mining Group and the
Diversified was contingent upon a number of conditions, including
the favorable ratification by a majority of both Class C and
Class D shareholders and the receipt by the Company of an
Internal Revenue Service ruling or other assurance acceptable to
the Board that the separation would be tax-free to U.S.
shareholders. On December 8, 1997, PKS' Class C and Class D
shareholders approved the transaction and on March 5, 1998 PKS
received a favorable ruling from the Internal Revenue Service.
The Transaction is anticipated to be effective on March 31, 1998.
In connection with the sale of approximately 10 million Class D shares
to employees in 1997, the Company has retained the right to purchase
the relevant Class D shares at the then current Class D Stock price
if the Transaction is definitively abandoned by formal action of the
PKS Board or the employees voluntarily terminate their employment on
various dates prior to January 1, 1999.
The Group has recently decided to substantially increase its
emphasis on and resources to its information services to
business. Pursuant to the plan, the Group intends to expand
substantially its current information services business, through
the expansion of its existing business and the creation, through
a combination of construction, leasing and purchase of facilities
and other assets, of a substantial facilities-based internet
communications network.
Using this network the Group intends to provide (a) a range of
internet access services at varying capacity levels and, as
technology development allows, at specified levels of quality of
service and security and (b) a number of business oriented
communications services which may include fax service, which are
transmitted in part over private or limited access Transmission
Control Protocol/Internet Protocol ("TCP/IP") networks and are
offered at a lower price than public telephone network-based fax
service, and voice message storing and forwarding over the same
TCP/IP-based networks.
The Group believes that over time, a substantial number of
businesses will convert existing computer application systems to
computer systems which communicate using TCP/IP and are accessed
by users employing Web browsers. The Group further believes that
businesses will prefer to contract for assistance in making this
conversion with those vendors able to provide a full range of
services from initial consulting to internet access with
requisite quality and security levels.
The Group anticipates that the capital expenditures required to
implement this expansion plan will be substantial. The Group
estimates that these costs may be in excess of $500 million in
1998 and could exceed $1.5 billion in 1999. The Group's current
financial condition, borrowing capacity and proceeds from the
CalEnergy transaction described below should be sufficient for
immediate implementing and investing activities including any
acquisitions. However, the Group expects to raise capital from
both the equity and debt markets due to the significant capital
requirements of the information services expansion plan.
In connection with the Expansion Plan, the Group expects to
devote substantially more management time and capital resources
to its information services business with a view to making the
information services business, over time, the principal business
of the Group. In that respect, the management is conducting a
comprehensive review of the existing Group businesses to
determine how those businesses will complement the Group's focus
on information services. If it is decided that an existing
business is not compatible with the information services business
and if a suitable buyer can be found, the Group may dispose of
that business.
In January 1998, the Group and CalEnergy closed the sale of the
Group's energy assets to CalEnergy. The Group received proceeds
of $1,159 million and expects to recognize an after-tax gain of
approximately $324 million in 1998. The after-tax proceeds from
this transaction of approximately $967 million will be used to
fund the expansion plan of the information services business.
In January 1998, Class C shareholders converted 2.3 million
shares, with a redemption value of $122 million, into 10.5
million shares of Class D Stock.
In February 1998, the Group announced that it was moving its
corporate headquarters to Broomfield, Colorado, a northwest suburb
of Denver. The campus facility is expected to encompass over
500,000 square feet of office space at a construction cost of over
$70 million. The Group is leasing space in the Denver area while
the campus is under construction. The first phase of the complex
is scheduled for completion in the summer of 1999.
In March 1998, PKS announced that its Class D Stock will begin
trading on April 1 on the Nasdaq National Market under the symbol
"LVLT." The Nasdaq listing will follow the separation of the
Group and the Construction Group of PKS, which is expected to be
completed on March 31, 1998. In connection with the separation,
PKS' construction subsidiary will be renamed "Peter Kiewit Sons',
Inc." and PKS Class D Stock will become the common stock of
Level 3 Communications, Inc.
PKS' certificate of incorporation gives stockholders the right to
exchange their Class C Stock for Class D Stock under a set
conversion formula. That right will be eliminated as a result of
the separation of the Group and the Construction Group. To
replace that conversion right, Class C stockholders received
shares of a new Class R stock in January, 1998, which is
convertible into Class D Stock in accordance with terms ratified
by stockholders in December 1997.
The PKS Board of Directors has approved in principle a plan to
force conversion of all shares of Class R stock outstanding. Due
to certain provisions of the Class R stock, conversion will not
be forced prior to May 1998, and the final decision to force
conversion would be made by the Level 3 Board of Directors at
that time. The Level 3 Board may choose not to force conversion
if it were decided that conversion is not in the best interests
of the stockholders of Level 3. If, as currently anticipated,
the Level 3 Board determines to force conversion of the Class R
stock on or before June 30, 1998, certain adjustments will be
made to the cost sharing and risk allocation provisions of the
separation agreement between Level 3 and the Construction
business.
If the Level 3 Board of Directors determines to force
conversion of the Class R stock, each share of Class R stock will
be convertible into $25 worth of Level 3 (Class D Stock) common
stock, based upon the average trading price of the Level 3 common
stock on the Nasdaq National Market for the last fifteen trading
days of the month prior to the determination by the Board of
Directors to force conversion. When the spin-off occurs, Level 3
will increase paid in capital and reduce retained earnings by the
fair value of the Class R shares.
DIVERSIFIED GROUP
Index to Financial Statements
Report of Independent Accountants
Financial Statements as of December 27, 1997 and December 28, 1996
and for the three years ended December 27, 1997:
Statements of Earnings
Balance Sheets
Statements of Cash Flows
Statements of Changes in Stockholders' Equity
Notes to Financial Statements
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 of the 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 are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial
statements 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 the Diversified Group
as of December 27, 1997 and December 28, 1996 and the results of
its operations and its cash flows for each of the three years in
the period ended December 27, 1997 in conformity with generally
accepted accounting principles.
Coopers & Lybrand L.L.P.
Omaha, Nebraska
March 30, 1998
DIVERSIFIED GROUP
Statements of Earnings
For the three years ended December 27, 1997
(dollars in millions, except per share data) 1997 1996 1995
Revenue $ 332 $ 652 $ 580
Cost of Revenue (175) (384) (345)
------- ------- -------
157 268 235
General and Administrative Expenses (114) (181) (190)
------- ------- -------
Operating Earnings 43 87 45
Other (Expense) Income:
Equity losses, net (43) (9) (5)
Investment income, net 45 56 45
Interest expense, net (15) (33) (23)
Gain on subsidiary's stock transactions, net - - 3
Other, net 1 6 125
------- ------- -------
(12) 20 145
Equity Loss in MFS - - (131)
------- ------- -------
Earnings Before Income Taxes, Minority Interest
and Discontinued Operations 31 107 59
Income Tax Benefit (Provision) 48 (3) 79
Minority Interest in Net Loss (Income)
of Subsidiaries 4 - (12)
------- ------- -------
Income from Continuing Operations 83 104 126
Discontinued Operations:
Income from Operations, net of income tax
expense of ($9), ($9) and ($8) 29 9 14
Gain on Subsidiary's Stock Transactions, net
of income tax expense of ($24) 44 - -
Extraordinary Item - Windfall tax, net of
income tax benefit of $34 (63) - -
------- ------ --------
Income from Discontinued Operations 10 9 14
------- ------ -------
Net Earnings $ 93 $ 113 $ 140
======= ====== =======
Earnings Per Share:
Continuing Operations:
Basic $ .66 $ .90 $ 1.17
======= ====== =======
Diluted $ .66 $ .90 $ 1.17
======= ====== =======
Net Income:
Basic $ .74 $ .97 $ 1.29
======= ====== =======
Diluted $ .74 $ .97 $ 1.29
======= ====== =======
See accompanying notes to financial statements.
DIVERSIFIED GROUP
Balance Sheets
December 27, 1997 and December 28, 1996
(dollars in millions) 1997 1996
Assets
Current Assets:
Cash and cash equivalents $ 87 $ 147
Marketable securities 678 372
Restricted securities 22 17
Receivables, less allowance of $-, and $3 42 76
Investments in discontinued operations 643 608
Other 22 26
-------- -------
Total Current Assets 1,494 1,246
Property, Plant and Equipment, at cost:
Land 15 18
Buildings and leasehold improvements 122 159
Equipment 275 810
-------- -------
412 987
Less accumulated depreciation and amortization (228) (345)
-------- -------
Net Property, Plant and Equipment 184 642
Investments 383 189
Intangible Assets, net 21 353
Other Assets 45 74
-------- --------
$ 2,127 $ 2,504
======== ========
See Note 19 for 1997 pro forma balance sheet information.
See accompanying notes to financial statements.
DIVERSIFIED GROUP
Balance Sheets
December 27, 1997 and December 28, 1996
(continued)
(dollars in millions) 1997 1996
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 31 $ 79
Current portion of long-term debt:
Telecommunications - 55
Other 3 2
Accrued reclamation and other mining costs 19 19
Deferred income taxes 15 5
Other 21 87
------- -------
Total Current Liabilities 89 247
Long-Term Debt, less current portion:
Telecommunications - 207
Other 137 113
Deferred Income Taxes 83 148
Accrued Reclamation Costs 100 98
Other Liabilities 139 216
Minority Interest 1 218
Stockholders' Equity (Redeemable Common Stock,
$1,578 million aggregated redemption value):
135,517,140 shares outstanding in 1997 and
115,901,215 shares outstanding in 1996
Common equity 1,565 1,235
Foreign currency adjustment - (2)
Net unrealized holding gain 13 24
------- -------
Total Stockholders' Equity 1,578 1,257
------- -------
$ 2,127 $ 2,504
======= =======
See Note 19 for 1997 pro forma balance sheet information.
See accompanying notes to financial statements.
DIVERSIFIED GROUP
Statements of Cash Flows
For the three years ended December 27, 1997
(dollars in millions) 1997 1996 1995
Cash flows from continuing operations:
Income from continuing operations $ 83 $ 104 $ 126
Adjustments to reconcile income from
continuing operations to net
cash provided by continuing operations:
Depreciation, depletion and amortization 24 132 96
Gain on sale of property, plant and
equipment, and other investments (9) (3) (7)
Gain on subsidiary's stock transactions, net - - (3)
Compensation expense attributable to stock options 21 - -
Equity losses, net 43 10 130
Minority interest in subsidiaries (4) - 12
Retirement benefits paid (7) (6) (2)
Federal income tax refunds 146 - 35
Deferred income taxes (103) (68) (152)
Change in working capital items:
Receivables (9) (1) 11
Other current assets (1) 6 -
Payables (3) 9 (3)
Other liabilities (5) 13 34
Other 6 - (4)
------ ------- -------
Net cash provided by continuing operations 182 196 273
Cash flows from investing activities:
Proceeds from sales and maturities of marketable
securities 167 378 383
Purchases of marketable securities (452) (311) (440)
Increase in restricted securities (2) (2) (2)
Investments and acquisitions, net
of cash acquired (42) (59) (136)
Proceeds from sale of property, plant
and equipment, and other investments 1 7 14
Capital expenditures (26) (117) (118)
Other 3 (8) (2)
------ ------- -------
Net cash used in investing activities $ (351) $ (112) $ (301)
See accompanying notes to financial statements.
DIVERSIFIED GROUP
Statements of Cash Flows
For the three years ended December 27, 1997
(continued)
(dollars in millions) 1997 1996 1995
Cash flows from financing activities:
Long-term debt borrowings $ 17 $ 38 $ 49
Payments on long-term debt, including
current portion (2) (60) (49)
Issuances of common stock 138 - 2
Issuances of subsidiaries' stock - 1 -
Repurchases of common stock - (11) (3)
Dividends paid (12) (11) -
Exchange of Class C Stock for
Class D Stock, net 72 20 155
------ ------ -------
Net cash provided by (used in)
financing activities 213 (23) 154
Cash flows from discontinued operations:
Discontinued energy operations 3 5 8
Investments in discontinued energy operations (31) (282) (101)
Proceeds from sales of discontinued
packaging operations - - 29
------ ------ -------
Net cash used in discontinued operations (28) (277) (64)
Cash and cash equivalents of C-TEC
in 1997 and MFS in 1995 at beginning of year (76) - (22)
Effect of exchange rates on cash - - 2
------- ------ -------
Net change in cash and cash equivalents (60) (216) 42
Cash and cash equivalents at beginning of year 147 363 321
------- ------ -------
Cash and cash equivalents at end of year $ 87 $ 147 $ 363
======= ====== =======
Supplemental disclosure of cash
flow information:
Taxes paid $ 62 $ 55 $ 132
Interest paid 13 38 33
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
See accompanying notes to financial statements.
DIVERSIFIED GROUP
Statements of Changes in Stockholders' Equity
For the three years ended December 27, 1997
(dollars in millions, except per share data) 1997 1996 1995
Common equity:
Balance at beginning of year $ 1,235 $ 1,125 $ 1,238
Issuances of stock 138 - 5
Repurchases of stock - (11) (3)
Exchange of Class C Stock for Class D Stock, net 72 20 155
Net earnings 93 113 140
Stock option plan activity 27 - -
Dividend of investment in MFS - - (399)
Dividends (per share: $.10 in 1996 and 1995(a)) - (12) (11)
-------- -------- --------
Balance at end of year 1,565 1,235 1,125
Other equity adjustments:
Balance at beginning of year 22 15 (7)
Foreign currency adjustment 2 (1) (1)
Net unrealized holding gain (loss) (11) 8 23
-------- ------- -------
Balance at end of year 13 22 15
-------- ------- -------
Total stockholders' equity $ 1,578 $ 1,257 $ 1,140
======== ======= =======
(a) Dividend declared in 1996 and 1995 but paid in January of the
subsequent year.
See accompanying notes to financial statements.
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, Level 3
Communications, Inc., (formerly Kiewit Diversified Group Inc.)
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 information
services, telecommunications (C-TEC entities), coal mining 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 information services,
telecommunications and coal mining.
On September 5, 1997, C-TEC Corporation ("C-TEC") announced that
its board of directors had approved the planned restructuring
of C-TEC into three publicly traded companies. The transaction
was effective September 30, 1997. As a result of the
restructuring plan, the Group owns less than 50% of the
outstanding shares and voting rights of each entity, and
therefore has accounted for each entity using the equity method
as of the beginning of 1997. In accordance with Generally
Accepted Accounting Principles, C-TEC's financial position,
results of operations and cash flows are consolidated in the
1996 and 1995 financial statements.
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. 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.), prior to its
spin-off in September 1995, have been classified as a single
line item on the 1995 statement of earnings (See Note 5).
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
1997, 1996 and 1995. 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 Revenue
In 1996 and 1995 C-TEC's most significant operating groups are
its local telephone service and cable system operations. C-
TEC's telephone network access revenues are derived from net
access charges, toll rates and settlement arrangements for
traffic that originates or terminates within C-TEC's local
telephone company. Revenues from telephone services and basic
and premium cable programming services are recorded in the
month service is provided.
The telecommunications industry is subject to local, state and
federal regulation. Consequently, the ability of the telephone
and cable groups to generate increased volume and profits is
largely dependent upon regulatory approval to expand customer
bases and increase prices.
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.
As noted above, the investment in C-TEC has been accounted for
using the equity method in 1997. (See Note 9)
Information Services Revenue
Information services revenue is primarily derived from the
computer outsourcing business and the systems integration
business. The Group provides outsourcing service, typically
through contracts ranging from 3-5 years, to firms that desire
to focus their resources on their core businesses. Under these
contracts, the Group recognizes revenue in the month the
service is provided. The systems integration business helps
customers define, develop and implement cost-effective
information systems. Revenue from these services is billed on
a time and materials basis or percentage of completion basis
depending on the extent of the services provided.
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.
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.
Long Lived Assets
The Group reviews the carrying amount of long lived assets for
impairment whenever events or changes in circumstances
indicate that the carrying amount may not be
recoverable. Measurement of any impairment would include a
comparison of estimated future operating cash flows anticipated
to be generated during the remaining life of the asset to the
net carrying value of the asset.
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
Generally, 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 and Investee Stock Activity
The Group recognizes gains and losses from the sale, issuance
and repurchase of stock by its subsidiaries and equity
investees.
Earnings Per Share
In 1997, the Group adopted Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share". The
Statement establishes standards for computing and presenting
earnings per share and requires the restatement of prior per
share data presented. Basic earnings per share have been
computed using the weighted average number of shares
outstanding during each period . Diluted earnings per share
is computed by including stock options and convertible
debentures considered to be dilutive common stock equivalents.
Potentially dilutive stock options are calculated in accordance
with the treasury stock method which assumes that proceeds from
the exercise of all options are used to repurchase common stock
at the average market value. The number of shares remaining
after the proceeds are exhausted represent the potentially
dilutive effect of the options. The potentially dilutive
convertible debentures are calculated in accordance with the
"if converted" method. This method assumes that the after-tax
interest expense associated with the debentures is an addition
to income and the debentures are converted into equity with the
resulting common shares being aggregated with the weighted
average shares outstanding.
The following details the earnings per share calculations for
Class D Stock:
1997 1996 1995
Income from continuing operations
available to common shareholders
(in millions) $ 83 $ 104 $ 126
Add: Interest expense, net of tax
effect associated with convertible
debentures - - -*
------ ------- -------
Income from continuing operations
for fully diluted shares 83 104 126
Income from discontinued operations 10 9 14
------- -------- -------
Net Income $ 93 $ 113 $ 140
======= ======== =======
Total number of weighted average
shares outstanding used to compute
basic earnings per share
(in thousands) 124,647 116,006 108,594
Additional dilutive stock options 539 311 -
Additional dilutive shares assuming
conversion of convertible debentures - - 257
------- ------- -------
Total number of shares used to
compute diluted earnings per share 125,186 116,317 108,851
======== ======== ========
Continuing Operations:
Basic earnings per share $ .66 $ .90 $ 1.17
======== ======== ========
Diluted earnings per share $ .66 $ .90 $ 1.17
======== ======== ========
Discontinued Operations:
Basic earnings per share $ .08 $ .07 $ .12
======== ======== ========
Diluted earnings per share $ .08 $ .07 $ .12
======== ======== ========
Net Income:
Basic earnings per share $ .74 $ .97 $ 1.29
======== ======== ========
Diluted earnings per share $ .74 $ .97 $ 1.29
======== ======== ========
*Interest expense attributable to convertible debentures was
less than $1 million in 1995.
Stock Dividend
Effective December 26, 1997, the PKS Board of Directors approved
a dividend of four shares of Class D Stock for every one share
of Class D Stock held. All share information and per share
data have been restated to reflect this dividend.
Income Taxes
Deferred income taxes are provided 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.
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 130, "Reporting Comprehensive Income", which
requires that changes in comprehensive income be shown in a
financial statement that is displayed with the same prominence
as other financial statements.
Also in 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information", which
changes the way public companies report information about
segments. SFAS No. 131, which is based on the management
approach to segment reporting includes requirements to report
selected segment information quarterly, and entity wide
disclosures about products and services, major customers, and
geographic data.
These statements are effective for financial statements for
periods beginning after December 15, 1997. Management does not
expect adoption of these statements to materially affect the
Group's financial statements.
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 1997, 1996 and 1995.
(3) Reorganization
In October 1996, the PKS Board of Directors directed PKS
management to pursue a listing of Class D Stock as a way to
address certain issues created by PKS' two-class capital stock
structure and the need to attract and retain the best
management for PKS' businesses. During the course of its
examination of the consequences of a listing of Class D Stock,
management concluded that a listing of Class D Stock would not
adequately address these issues, and instead began to study a
separation of the Construction and Mining Group and the
Diversified Group. At the regular meeting of the Board on July
23, 1997, management submitted to the Board for consideration a
proposal for separation of the Construction and Mining Group
and Diversified Group through a split-off of the Construction
and Mining Group ("the Transaction"). At a special meeting on
August 14, 1997, the Board approved the Transaction.
The separation of the Construction and Mining Group and the
Diversified was contingent upon a number of conditions,
including the favorable ratification by a majority of both
Class C and Class D shareholders and the receipt by PKS of an
Internal Revenue Service ruling or other assurance acceptable
to the Board that the separation would be tax-free to U.S.
shareholders. On December 8, 1997, PKS' Class C and Class D
shareholders approved the transaction and on March 5, 1998 PKS
received a favorable ruling from the Internal Revenue Service.
The Transaction is anticipated to be effective on March 31,
1998.
The Group has recently decided to substantially increase its
emphasis on and resources to its information services business.
Pursuant to the plan, the Group intends to expand substantially
its current information services business, through the
expansion of its existing business and the creation, through a
combination of construction, leasing and purchase of facilities
and other assets, of a substantial facilities-based internet
communications network ("the Expansion Plan").
Using this network the Group intends to provide (a) a range of
internet access services at varying capacity levels and, as
technology development allows, at specified levels of quality
of service and security and (b) a number of business oriented
communications services which may include fax service, which
are transmitted in part over private or limited access
Transmission Control Protocol/Internet Protocol ("TCP/IP")
networks and are offered at lower prices than public telephone
network-based fax service, and voice message storing and
forwarding over the same TCP/IP-based networks.
(4) Discontinued Operations
In connection with the Expansion Plan, the Group expects to
devote substantially more management time and capital resources
to its information services business with a view to making the
information services business, over time, the principal
business of the Group. In that respect, management is
conducting a comprehensive review of the existing Group
businesses to determine how those businesses will complement
the Group's focus on information services. If it is decided
that an existing business is not compatible with the
information services business and if a suitable buyer can be
found, the Group may dispose of that business.
On September 10, 1997, the Group and CalEnergy Company, Inc.
("CalEnergy") entered into an agreement whereby CalEnergy
contracted to purchase the Group's energy investments for
$1,155 million, subject to adjustments. These energy
investments included approximately 20.2 million shares of
CalEnergy common stock (assuming the exercise of 1 million
options held by the Group), the Group's 30% ownership interest
in CE Electric UK, plc ("CE Electric") and the Group's
investments, made jointly with CalEnergy, in international
power projects in Indonesia and the Philippines. The
transaction was subject to the satisfactory completion of
certain provisions of the agreement and closed on January 2,
1998. These assets comprised the energy segment of the Group.
Therefore, the Group has reflected these assets, the earnings
and losses attributable to these assets, and the related cash
flow items as discontinued operations on the balance sheets,
statements of earnings and cash flows for all periods
presented.
In order to fund the purchase of these assets, CalEnergy sold,
in October 1997, approximately 19.1 million shares of its
common stock at a price of $37.875 per share. This sale
reduced the Group's ownership in CalEnergy to approximately 24%
but increased its proportionate share of CalEnergy's equity.
It is the Group's policy to recognize gains or losses on the
sale of stock by its investees. The Group recognized an after-
tax gain of approximately $44 million from transactions in
CalEnergy stock in the fourth quarter of 1997.
The Agreement with CalEnergy included a provision whereby
CalEnergy and the Group shared equally any proceeds from the
offering above or below a specified amount. The offering was
conducted at a price above that provided in the agreement and
therefore, the Group received additional proceeds of $16
million at the time of closing.
The Group expects to recognize an after-tax gain on the
disposition of its energy assets in 1998 of approximately $324
million. The after-tax proceeds from the transaction of
approximately $967 million will be used to fund the expansion
plan of the information services business.
The following is summarized financial information for
discontinued operations:
Income from Discontinued Operations 1997 1996 1995
Operations
Equity in:
CalEnergy earnings, net $ 16 $ 20 $ 10
CE Electric earnings, net 17 (2) -
International energy projects earnings, net 5 (5) 6
Investment income from CalEnergy - 5 6
Income tax expense (9) (9) (8)
----- ------ -----
Income from operations $ 29 $ 9 $ 14
===== ====== =====
CalEnergy Stock Transactions
Gain on investee stock activity $ 68 $ - $ -
Income tax expense (24) - -
----- ----- ----
$ 44 $ - $ -
===== ===== ====
Extraordinary Loss - Windfall Tax
Group's share from CalEnergy $ (39) $ - $ -
Group's share from CE Electric (58) - -
Income tax benefit 34 - -
----- ---- ----
Extraordinary loss $ (63) $ - $ -
===== ==== ====
Investments in Discontinued Operations 1997 1996
Investment in CalEnergy $ 337 $ 292
Investment in CE Electric 135 176
Investment in international energy projects 186 149
Restricted securities 2 8
Deferred income tax liability (17) (17)
------- -------
Total $ 643 $ 608
======= =======
At December 27, 1997, the Group owned 19.2 million shares or
24% of CalEnergy's outstanding common stock and had a
cumulative investment in CalEnergy common stock of $337
million. CalEnergy common stock is traded on the New York Stock
Exchange. On December 27, 1997, the market value of the
Group's investment in CalEnergy common stock was $548
million.
The following is summarized financial information of CalEnergy
Company, Inc.:
Operations (dollars in millions) 1997 1996 1995
Revenue $ 2,271 $ 576 $ 399
Income before extraordinary item 52 92 62
Extraordinary item - Windfall tax (136) - -
Group's share:
Income before extraordinary item 18 22 13
Goodwill amortization (2) (2) (3)
-------- ------ ------
Equity in income of CalEnergy before
extraordinary item $ 16 $ 20 $ 10
======== ====== ======
Extraordinary item - Windfall tax $ (39) $ - $ -
======== ====== ======
Financial Position (dollars in millions) 1997 1996
Current assets $ 2,053 $ 945
Other assets 5,435 4,768
-------- ------
Total assets 7,488 5,713
Current liabilities 1,440 1,232
Other liabilities 4,494 3,301
Minority interest 134 299
-------- -------
Total liabilities 6,068 4,832
-------- --------
Net assets $ 1,420 $ 881
======== ========
Group's share:
Equity in net assets $ 337 $ 267
Goodwill - 25
-------- --------
Investment in CalEnergy $ 337 $ 292
======== ========
In December 1996, CE Electric, which is 70% owned by CalEnergy
and 30% owned by the Group, acquired majority ownership of the
outstanding ordinary share capital of Northern Electric, plc.
pursuant to a tender offer (the "Tender Offer") commenced in
the United Kingdom by CE Electric in November 1996. As of
March 1997, CE Electric effectively owned 100% of Northern's
ordinary shares.
As of December 27, 1997, CalEnergy and the Group had contributed
to CE Electric approximately $410 million and $176 million,
respectively, of the approximately $1.3 billion required to
acquire all of Northern's ordinary and preference shares in
connection with the Tender Offer. The remaining funds
necessary to consummate the Tender Offer were provided by a
term loan and a revolving facility agreement obtained by CE
Electric. The Group has not guaranteed, and is not otherwise
subject to recourse for, amounts borrowed under these
facilities.
On July 2, 1997, the Labour Party in the United Kingdom announced
the details of its proposed "Windfall Tax" to be levied against
privatized British utilities. This one-time tax is 23% of the
difference between the value of Northern Electric, plc. at the
time of privatization and the utility's current value based on
profits over a period of up to four years. CE Electric
recorded an extraordinary charge of approximately $194 million
when the tax was enacted in July 1997. The total after-tax
impact to the Group, directly through its investment in CE
Electric and indirectly through its interest in CalEnergy, was
$63 million.
The following is summarized financial information of CE Electric
as of December 31, 1997 and December 31, 1996:
Operations (dollars in millions) 1997 1996
Revenue $ 1,564 $ 37
Income before extraordinary item 58 -
Extraordinary item - Windfall tax (194) -
Group's share:
Income before extraordinary item $ 17 $ -
Management fee paid to CalEnergy - (2)
-------- ------
$ 17 $ (2)
======== ======
Extraordinary item - Windfall tax $ (58) $ -
======== ======
Financial Position (dollars in millions) 1997 1996
Current assets $ 419 $ 583
Other assets 2,519 1,772
------- -------
Total assets 2,938 2,355
Current liabilities 1,166 785
Other liabilities 1,265 718
Preferred stock 56 153
Minority interest - 112
------- -------
Total liabilities 2,487 1,768
------- -------
Net assets $ 451 $ 587
======= =======
Group's Share:
Equity in net assets $ 135 $ 176
======= =======
CE Electric'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.
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. An
additional five units are expected to be constructed on a
modular basis at the Dieng site, as geothermal resources are
developed. In June 1997, the Group and CalEnergy closed a $400
million revolving credit facility to finance the development
and construction of the remaining Indonesian projects. The
credit facility is collateralized by the Indonesian assets and
is nonrecourse to the Group.
Generally, costs associated with the development, financing and
construction of the international energy projects have been
capitalized by each of the projects and will be amortized over
the life of each project.
The following is summarized financial information for the
international energy projects:
Financial Position
(dollars in millions) Mahanagdong Casecnan Dieng Other Total
1997
Current assets $ 42 $ 334 $ 87 $ 67 $ 530
Other assets 252 148 240 171 811
------- ------- ------ ----- -----
Total assets 294 482 327 238 1,341
Current liabilities 11 12 88 61 172
Other liabilities 186 372 123 56 737
------- ------- ------ ----- -----
Total liabilities
(with recourse only
to the projects) 197 384 211 117 909
------- -------- ------ ----- -----
Net assets $ 97 $ 98 $ 116 $ 121 $ 432
======= ======== ====== ===== =====
Group's share:
Equity in net assets $ 48 $ 49 $ 46 $ 43 $ 186
======= ======== ====== ===== =====
1996
Current assets $ 1 $ 441 $ 15 $ 10 $ 467
Other assets 239 51 118 36 444
------- ------- ----- ----- -----
Total assets 240 492 133 46 911
Current liabilities 15 9 24 11 59
Other liabilities 153 372 35 - 560
------- -------- ------ ----- -----
Total liabilities
(with recourse only
to the projects) 168 381 59 11 619
------- ------- ----- ------ -----
Net assets $ 72 $ 111 $ 74 $ 35 $ 292
======= ======= ===== ====== =====
Group's share:
Equity in net assets $ 36 $ 55 $ 36 $ 17 $ 144
Loan to Project - - 5 - 5
------- ------- ----- ----- -----
$ 36 $ 55 $ 41 $ 17 $ 149
======= ======= ===== ===== =====
In late 1995, the Casecnan joint venture closed financing for
the construction of the project with bonds issued by the
project company. The difference between the interest expense
on the debt and the interest earned on the unused funds prior
to payment of construction costs resulted in a loss to the
venture of $12 million in 1997 and 1996. The Group's share of
these losses were $6 million in each year. The Mahanagdong
facility commenced operation in July, 1997. The Group's
proportionate share of the earnings attributable to Mahanagdong
was $7 million 1997. No income or losses were incurred by the
international projects in 1995. In addition to the equity
earnings and losses, the Group incurred project development and
insurance expenses, and received management fee income related
to the international projects in all years.
In late 1995, a Group and CalEnergy venture, CE Casecnan Water
and Energy Company, Inc. ("CE Casecnan") closed financing and
commenced construction of a $495 million irrigation and
hydroelectric power project located in the Philippines island
of Luzon. The Group and CalEnergy each made $62 million of
equity contributions to the project.
The CE Casecnan project was being constructed on a joint and
several basis by Hanbo Corporation and Hanbo Engineering &
Construction Co. Ltd. On May 7, 1997, CE Casecnan announced
that it had terminated the Hanbo Contract. In connection with
the contract termination, CE Casecnan made a $79 million draw
request under the letter of credit issued by Korea First Bank
("KFB") to pay for certain transition costs and other damages
under the Hanbo Contract. KFB failed to honor the draw
request; the matter is being litigated. If KFB would not be
required to honor its obligations under the letter of credit,
such action may have a material adverse effect on the CE
Casecnan project. The Group does not expect the outcome of the
litigation to affect its financial position due to the
transaction with CalEnergy.
(5) 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. Shares were distributed on the basis of
approximately .348 shares of MFS Common Stock and approximately
.130 shares of MFS Preferred Stock for each share of
outstanding Class D Stock.
The net investment in MFS distributed on September 30, 1995 was
approximately $399 million.
Operating results of MFS through September 30, 1995 are
summarized as follows:
(dollars in millions) 1995
Revenue $ 412
Loss from operations (176)
Net loss (196)
Group's share of loss in MFS (131)
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.
(6) 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) 1997 1996
Marketable securities $ 3 $ 5
Property, plant and equipment, net 10 5
Other assets - 1
------ ------
Total Assets $ 13 $ 11
====== ======
Accounts payable $ 10 $ 17
Noncurrent liabilities 2 1
------ ------
Total Liabilities $ 13 $ 18
====== ======
1997 1996 1995
Other (expense) income (1) 1 -
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 $5 million, $6 million and $5 million in 1997, 1996 and
1995.
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.
(7) Gain on Subsidiary's Stock Transactions, net
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% from 67% in 1994. As a result, the Group
recognized a gain of $3 million in 1995 representing the
increase in the Group's proportionate share of MFS' equity.
Deferred income taxes had been established on this gain 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 to fund certain
reclamation liabilities of its coal mining ventures. Due to
the anticipated increase in capital expenditures, the Group has
reclassified its investments in marketable equity securities
from non-current to current in 1997. The amortized cost of the
securities used in computing unrealized and realized gains and
losses is determined by specific identification. Fair values
are estimated based on quoted market prices for the securities
on hand or for similar investments. Net unrealized holding
gains and losses are reported as a separate component of
stockholders' equity, net of tax.
At December 27, 1997 and December 28, 1996 the amortized cost,
unrealized holding gains and losses, and estimated fair values
of marketable securities, restricted securities and marketable
non-current investments were as follows:
Unrealized Unrealized
Amortized Holding Holding Fair
(dollars in millions) Cost Gains Losses Value
1997:
Marketable Securities:
Kiewit Mutual Fund:
Short-term government $ 234 $ - $ - $ 234
Intermediate term bond 195 3 - 198
Tax exempt 154 3 - 157
Equity 7 4 - 11
Collateralized mortgage
obligations - 1 - 1
Equity securities 48 9 - 57
Other securities 20 - - 20
----- ------ ------ ------
$ 658 $ 20 $ - $ 678
===== ====== ====== ======
Restricted Securities:
Kiewit Mutual Fund:
Intermediate term bond $ 10 $ - $ - $ 10
Equity 12 - - 12
----- ------ ------ -----
$ 22 $ - $ - $ 22
===== ====== ====== =====
Unrealized Unrealized
Amortized Holding Holding Fair
(dollars in millions) Cost Gains Losses Value
1996:
Marketable Securities:
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:
Intermediate term bond $ 8 $ - $ - $ 8
Equity 7 2 - 9
------- ------- --------- ------
$ 15 $ 2 $ - $ 17
======= ======= ========= ======
Non-current investments:
Equity securities $ 49 $ 26 $ - $ 75
======= ======= ========= ======
Other securities consist of 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 $9 million and $- million
in 1997, $3 million and $- million in 1996, and $1 million and
$2 million in 1995.
At December 27, 1997, the contractual maturities of the debt
securities are as follows:
(dollars in millions) Amortized Cost Fair Value
Other securities:
10+ years $ 20 $ 20
====== ======
Maturities for the mutual fund, equity securities and
collateralized mortgage obligations have not been presented as
they do not have a single maturity date.
Long-term Debt
The fair value of debt was estimated using the incremental
borrowing rates of the Group for debt of the same remaining
maturities. The fair value of the debt approximates the
carrying amount.
(9) Investments
Investments consist of the following at December 27, 1997 and
December 28, 1996:
(dollars in millions) 1997 1996
Commonwealth Telephone Enterprises Inc. $ 75 $ -
RCN Corporation 214 -
Cable Michigan 46 -
Pavilion Towers 22 -
Equity securities (Note 8) - 75
C-TEC investments:
Megacable S.A. de C.V. - 74
Other - 12
Other 26 28
------ ------
$ 383 $ 189
====== ======
In September 1997, C-TEC announced that its board of directors
had approved the planned restructuring of C-TEC into three
publicly traded companies effective September 30, 1997. Under
the terms of the restructuring C-TEC shareholders received
stock in the following companies:
Commonwealth Telephone Enterprises, Inc., containing the local
telephone group and related engineering business;
Cable Michigan, Inc., containing the cable television
operations in Michigan; and
RCN Corporation, Inc., which consists of RCN Telecom Services;
C-TEC's existing cable systems in the Boston-Washington D.C.
corridor; and the investment in Megacable S.A. de C.V., a cable
operator in Mexico. RCN Telecom Services is a provider of
packaged local and long distance telephone, video, and internet
access services provided over fiber optic networks to residential
customers in Boston, New York City and Washington D.C.
As a result of the restructuring, the Group owns less than 50%
of the outstanding shares and voting rights of each entity, and
therefore accounts for each entity using the equity method as
of the beginning of 1997. C-TEC's financial position, results
of operations and cash flows are consolidated in the 1996 and
1995 financial statements.
The following is summarized financial information of the three
entities created as result of the C-TEC restructuring:
Operations (dollars in millions) 1997 1996 1995
Commonwealth Telephone Enterprises
Revenue $ 197 $ 186 $ 174
Net income available to common stockholders 20 20 31
Group's share:
Net income 10 10 15
Goodwill amortization (1) (1) 1
------ ----- -----
Equity in net income $ 9 $ 9 $ 16
====== ===== =====
Cable Michigan
Revenue $ 81 $ 76 $ 60
Net loss available to common stockholders (4) (8) (10)
Group's share:
Net loss (2) (4) (5)
Goodwill amortization (4) (4) (4)
------ ------ ----
Equity in net loss $ (6) $ (8) $ (9)
====== ====== ====
RCN Corporation
Revenue $ 127 $ 105 $ 91
Net (loss) income available to
common stockholders (52) (6) 2
Group's share:
Net (loss) income (26) (3) 1
Goodwill amortization - (3) 1
------ ------ ----
Equity in net (loss) income $ (26) $ (6) $ 2
====== ====== ====
Commonwealth
Telephone Cable RCN
Enterprises Michigan Corporation
Financial Position (in millions) 1997 1996 1997 1996 1997 1996
Current assets $ 71 $ 51 $ 23 $ 10 $ 698 $ 143
Other assets 303 266 120 139 453 485
----- ----- ----- ----- ----- -----
Total assets 374 317 143 149 1,151 628
Current liabilities 76 59 16 24 70 57
Other liabilities 260 189 166 190 708 175
Minority interest - - 15 15 16 5
------ ----- ----- ---- ----- ----
Total liabilities 336 248 197 229 794 237
------ ----- ----- ---- ----- ----
Net assets (liabilities) $ 38 $ 69 $ (54) $(80) $ 357 $ 391
====== ===== ===== ==== ===== =====
Group's Share:
Equity in net assets $ 18 $ 33 $ (26) $(38) $ 173 $ 189
Goodwill 57 58 72 75 41 41
------ ----- ----- ---- ----- ----
$ 75 $ 91 $ 46 $ 37 $ 214 $ 230
====== ===== ===== ==== ===== =====
On December 27, 1997 the market value of the Group's
investments in Commonwealth Telephone, Cable Michigan and RCN
was $215 million, $76 million and $485 million, respectively.
In February 1997, the Group purchased the Pavillion Towers
office building in Aurora, Colorado for $22 million.
Investments in 1996 also include C-TEC's 40% ownership of
Megacable S.A. de C.V., Mexico's second largest cable operator,
accounted for using the equity method.
(10) Intangible Assets
Intangible assets consist of the following at December 27, 1997
and December 28, 1996:
(dollars in millions) 1997 1996
CPTC intangibles and other $ 23 $ 23
C-TEC:
Goodwill - 198
Franchise and subscriber lists - 229
Other - 34
------ -------
23 484
Less accumulated amortization (2) (131)
------ --------
$ 21 $ 353
====== ========
At December 27, 1997 and December 28, 1996, long-term debt was
as follows:
(dollars in millions) 1997 1996
CPTC Long-term Debt (with recourse only to CPTC):
Bank Note
(7.7% due 2008) $ 65 $ 65
Institutional Note
(9.45% due 2017) 35 35
OCTA Debt
(9.0% due 2006) 8 6
Subordinated Debt
(9.5% No Maturity) 6 2
------- -------
114 108
Other:
Pavilion Towers Debt (8.4% due 2007) 15 -
Capitalized Leases 6 1
Other 5 6
------- -------
26 7
C-TEC Long-term Debt (with recourse only to C-TEC):
Credit Agreement - National Bank for Cooperatives
(7.51% due 2009) - 110
Senior Secured Notes
( 9.65% due 1999) - 134
Term Credit Agreement - Morgan Guaranty Trust Company
(7% due 2002) - 18
------ ------
- 262
------ ------
140 377
Less current portion (3) (57)
------ ------
$ 137 $ 320
====== ======
CPTC:
In August 1996, CPTC converted its construction financing note
into a term note with a consortium of banks ("Bank Debt"). The
interest rate on the Bank Debt is based on LIBOR plus a varying
rate with interest payable quarterly. Upon completion of the
SR91 toll road, CPTC entered into an interest rate swap
arrangement with the same parties. The swap expires in January
2004 and fixes the interest rate on the Bank Debt from 9.21% to
9.71% during the term of the swap agreement.
The institutional note is with Connecticut General Life
Insurance Company, a subsidiary of CIGNA Corporation. The note
converted into a term loan upon completion of the SR91 toll
road.
Substantially all the assets of CPTC and the partners' equity
interest in CPTC secure the term debt.
Orange County Transportation Authority holds $8 million of
subordinated debt which is due in varying amounts over 10
years. Interest accrues at 9% and is payable quarterly
beginning in 2000.
In July 1996, CPTC borrowed from the partners $2 million to
facilitate the completion of the project. In 1997, CPTC
borrowed an additional $4 million from the partners in order to
comply with equity maintenance provisions of the contract with
the State of California and its lenders. 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 $- million, $5 million and $7
million in 1997, 1996 and 1995.
Other:
In June 1997, a mortgage with Metropolitan Life was
established. The Pavilion Towers building in Aurora, CO
collateralizes this debt.
Scheduled maturities of long-term debt through 2002 are as
follows (in millions): 1998 - $3; 1999 -$6; 2000 - $5; 2001 -
$6 and $8 in 2002.
(12) Income Taxes
An analysis of the income tax benefit (provision) attributable
to earnings from continuing operations before income taxes and
minority interest for the three years ended December 27, 1997
follows:
(dollars in millions) 1997 1996 1995
Current:
U.S. federal $ (54) $ (61) $ (66)
Foreign - (4) (4)
State (1) (6) (3)
------- ------ ------
(55) (71) (73)
Deferred:
U.S. federal 103 67 145
Foreign - - 3
State - 1 4
------- ------ ------
103 68 152
------- ------ ------
$ 48 $ (3) $ 79
======= ====== ======
The United States and foreign components of earnings from
continuing operations for tax reporting purposes, before equity
loss in MFS (recorded net of tax), minority interest and income
taxes follows:
(dollars in millions) 1997 1996 1995
United States $ 31 $ 106 $ 187
Foreign - 1 3
------- ------ -----
$ 31 $ 107 $ 190
======= ====== =====
A reconciliation of the actual income tax benefit (provision)
and the tax computed by applying the U.S. federal rate (35%) to
the earnings from continuing operations before equity loss in
MFS (recorded net of tax), minority interest and income taxes
for the three years ended December 27, 1997 follows:
(dollars in millions) 1997 1996 1995
Computed tax at statutory rate $ (11) $ (37) $ (67)
State income taxes (1) (3) -
Depletion 3 3 2
Goodwill amortization - (3) (2)
Tax exempt interest 2 2 2
Prior year tax adjustments 62 44 51
Compensation expense attributable
to options (7) - -
MFS deferred tax - - 93
Taxes on foreign operations - (2) 1
Other - (7) (1)
------- ------- ------
$ 48 $ (3) $ 79
======= ======= ======
During the three years ended December 27, 1997, the Group
settled a number of disputed tax issues related to prior years
that have been included in prior year tax adjustments.
Possible taxes, beyond those provided on remittances of
undistributed earnings of foreign subsidiaries, are not
expected to be material.
The components of the net deferred tax liabilities for the
years ended December 27, 1997 and December 28, 1996 were as
follows:
(dollars in millions) 1997 1996
Deferred tax liabilities:
Investments in securities $ 7 $ 11
Investments in joint ventures 33 45
Asset bases - accumulated depreciation 53 225
Coal sales 41 15
Other 16 16
------- -------
Total deferred tax liabilities 150 312
Deferred tax assets:
Compensation - retirement benefits 25 29
Investment in subsidiaries 8 2
Provision for estimated expenses 7 26
Net operating losses of subsidiaries - 6
Foreign and general business tax credits 3 67
Alternative minimum tax credits - 16
Other 9 19
Valuation allowances - (6)
------- -------
Total deferred tax assets 52 159
------- -------
Net deferred tax liabilities $ 98 $ 153
======= =======
(13) 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 27, 1997 were as follows:
Class
D Stock
Shares issued in 1995, including conversions
of 12,847,155 13,377,765
Shares repurchased in 1995 210,735
Shares issued in 1996, including conversions
of 2,052,245 2,052,425
Shares repurchased in 1996, including conversions
of 150,995 1,276,080
Shares issued in 1997, including conversions
of 6,517,715 19,630,730
Shares repurchased in 1997, including conversions
of 1,180 14,805
(14) Class D Stock Plan
In December 1997, stockholders approved amendments to the 1995
Class D Stock Plan ("the Plan"). The amended plan, among
other things, increases the number of shares reserved for
issuance upon the exercise of stock based awards to
35,000,000, increases the maximum number of options granted to
any one participant to 5,000,000, provides for the
acceleration of vesting in the event of a change in control,
allows for the grant of stock based awards to directors of the
Group and other persons providing services to the Group, and
allows for the grant of nonqualified stock options with an
exercise price of less than the fair market value of Class D
Stock.
In December 1997, the Group converted both option and stock
appreciation rights plans of a subsidiary, to the Group's
plan. This conversion resulted in the issuance of 3.7 million
options to purchase Class D Stock at $9 per share. The Group
recognized a one time expense, and a corresponding increase in
equity, as a result of the transaction. This increase in equity
and the conversion of the stock appreciation rights liability to
equity are reflected as option activity in the Statement of Changes
in Stockholders' Equity. The options vest over three years and
expire in December 2002.
The Group has elected to adopt only the required disclosure
provisions and not the optional expense recognition provisions
under SFAS No. 123 "Accounting for Stock Based Compensation",
which established a fair value based method of accounting for
stock options and other equity instruments. The fair value of
the options outstanding was calculated using the Black-Scholes
method using risk-free interest rates ranging from 5.5% to 6.77%
and expected lives of 75% of the term of the option. The Group
used an expected volatility rate of 0%, which is allowed for private
entities under SFAS No. 123. Once the Gruop's stock becomes listed,
volatility factors will be incorporated in determining fair value.
The Group's net income and earnings per share for 1997 and 1996
would have been reduced to the pro forma amounts shown below if
SFAS No. 123 had been applied.
1997 1996
Net Income
As Reported $ 93 $ 113
Pro Forma 93 112
Basic Earnings per Share
As Reported $ .74 $ .97
Pro Forma .74 .97
Diluted Earning per Share
As Reported $ .74 $ .97
Pro Forma .74 .96
The 1995 historical pro forma amounts did not vary as the options
granted in 1995 had not vested.
Transactions involving stock options granted under the Plan are
summarized as follows:
Option Price Weighted Avg.
Shares Per Share Option Price
Balance December 31, 1994 - $ - $ -
Options granted 1,340,000 8.08 8.08
Options cancelled - - -
Options exercised - - -
---------
Balance December 30, 1995 1,340,000 $ 8.08 $ 8.08
======== ========
Options granted 895,000 $ 9.90 $ 9.90
Options cancelled (15,000) 8.08 8.08
Options exercised - - -
---------
Balance December 28, 1996 2,220,000 $8.08 - $9.90 $ 8.81
============= ========
Options granted 7,495,465 $9.00 - $10.85 $ 9.93
Options cancelled (53,000) $ 9.90 $ 9.90
Options exercised (2,318,465) $8.08 - $ 9.90 $ 8.93
----------
Balance December 27, 1997 7,344,000 $8.08 - $10.85 $ 9.91
============== ========
Options exercisable
December 30, 1995 - $ - $ -
December 28, 1996 265,000 8.08 8.08
December 27, 1997 1,295,269 $8.08 - $9.90 8.70
The weighted average remaining life for the 7,344,000 options
outstanding on December 27, 1997 is 8.3 years.
(15) Industry and Geographic Data
The Group operates primarily in three reportable segments:
information services, telecommunications and coal mining.
Other primarily includes CPTC and corporate overhead not
attributable to a specific segment and marketable securities.
Equity earnings is included due to the significant equity
investments in the telecommunication business.
In 1997, 1996 and 1995 Commonwealth Edison Company accounted
for 43%, 23% and 23% of the Group's revenues.
A summary of the Group's operations by industry and geographic
region is as follows:
Telecom-
Industry Data Information munications Coal Discontinued
(dollars in Service (C-TEC Mining Other Operations Consolidated
millions) Entities)
1997
Revenue $ 94 $ - $ 222 $ 16 $ - $ 332
Operating
Earnings (16) - 82 (23) - 43
Equity Losses,
net - (23) - (20) - (43)
Identifiable
Assets 61 336 499 588 643 2,127
Capital
Expenditures 14 - 3 9 - 26
Depreciation,
Depletion &
Amortization 8 - 8 8 - 24
1996
Revenue $ 42 $ 367 $ 234 $ 9 $ - $ 652
Operating
Earnings (3) 31 94 (35) - 87
Equity Losses,
net (1) (1) - (7) - (9)
Identifiable
Assets 29 1,100 387 380 608 2,504
Capital
Expenditures 11 87 2 17 - 117
Depreciation,
Depletion &
Amortization 10 106 12 4 - 132
1995
Revenue $ 36 $ 325 $ 216 $ 3 $ - $ 580
Operating
Earnings 4 37 77 (73) - 45
Equity Losses,
net - (3) - (2) - (5)
Identifiable
Assets 34 1,143 368 614 319 2,478
Capital
Expenditures 6 72 4 36 - 118
Depreciation,
Depletion &
Amortization 5 81 7 3 - 96
Telecom-
Geographic Data Information munications Coal Discontinued
(dollars in Services (C-TEC Mining Other Operations Consolidated
millions) Entities)
1997
Revenue:
United States $ 94 $ - $ 222 $ 16 $ - $ 332
Other - - - - - -
---- ----- ----- ----- ------ ------
$ 94 $ - $ 222 $ 16 $ - $ 332
==== ===== ===== ===== ====== ======
Operating Earnings:
United States $(16) $ - $ 82 $ (23) $ - $ 43
Other - - - - - -
---- ------ ----- ----- ------ ------
$(16) $ - $ 82 $ (23) $ - $ 43
==== ====== ===== ===== ====== ======
Identifiable Assets:
United States $ 59 $ 336 $ 499 $ 588 $ 321 $1,803
Other 2 - - - 322 324
---- ------ ----- ------ ------ ------
$ 61 $ 336 $ 499 $ 588 $ 643 $2,127
==== ====== ===== ====== ====== ======
1996
Revenue:
United States $ 42 $ 367 $ 234 $ 9 $ - $ 652
Other - - - - - -
----- ------ ----- ------ ------ ------
$ 42 $ 367 $ 234 $ 9 $ - $ 652
===== ====== ===== ====== ====== ======
Operating Earnings:
United States $ (3) $ 31 $ 94 $ (35) $ - $ 87
Other - - - - - -
----- ------ ----- ------ ------ ------
$ (3) $ 31 $ 94 $ (35) $ - $ 87
===== ====== ===== ====== ====== ======
Identifiable Assets:
United States $ 29 $1,100 $ 387 $ 380 $ 287 $2,183
Other - - - - 321 321
----- ------ ----- ------ ------ ------
$ 29 $1,100 $ 387 $ 380 $ 608 $2,504
===== ====== ===== ====== ====== ======
1995
Revenue:
United States $ 36 $ 325 $ 216 $ 3 $ - $ 580
Other - - - - - -
---- ------ ----- ----- ----- ------
$ 36 $ 325 $ 216 $ 3 $ - $ 580
==== ====== ===== ===== ===== ======
Operating Earnings:
United States $ 4 $ 37 $ 77 $ (73) $ - $ 45
Other - - - - - -
---- ------ ----- ----- ------ ------
$ 4 $ 37 $ 77 $ (73) $ - $ 45
==== ====== ===== ===== ====== ======
Identifiable Assets:
United States $ 34 $1,143 $ 368 $614 $ 223 $2,382
Other - - - - 96 96
---- ------ ----- ---- ----- ------
$ 34 $1,143 $ 368 $614 $ 319 $ 2,478
==== ====== ===== ==== ===== =======
(16) Related Party Transactions
The Group receives certain mine management services from the
Construction & Mining Group. The expense for these services
was $32 million for 1997, $37 million for 1996 and $30 million
for 1995, and is recorded in general and administrative
expenses.
(17) Fair Value of Financial Instruments
The carrying and estimated fair values of the Group's financial
instruments are as follows:
1997 1996
Carrying Fair Carrying Fair
(dollars in millions) Amount Value Amount Value
Cash and cash equivalents (Note 8) $ 87 $ 87 $ 147 $ 147
Marketable securities (Note 8) 678 678 372 372
Restricted securities (Note 8) 22 22 17 17
Investments in C-TEC entities (Note 9) 335 776 355 315
Investment in equity securities (Notes 8 & 9) - - 75 75
Investments in discontinued operations (Note 4) 643 854 608 960
Long-term debt (Notes 8 & 11) 140 140 377 384
(18) C-TEC Restructuring
The following is financial information of the Group had C-TEC
been accounted for utilizing the equity method as of December
27, 1997 and December 28, 1996 and for each of the three years
ended December 27, 1997. The 1997 financial statements include
C-TEC accounted for utilizing the equity method and are
presented here for comparative purposes only.
Operations (dollars in millions) 1997 1996 1995
Revenue $ 332 $ 285 $ 255
Cost of Revenue (175) (134) (133)
------ ----- ------
157 151 122
General and Administrative Expenses (114) (95) (114)
------ ----- -----
Operating Earnings 43 56 8
Other (Expense) Income:
Equity earnings (losses), net (43) (13) 7
Investment income, net 45 42 30
Interest expense, net (15) (5) (1)
Gain on subsidiary's stock transactions, net - - 3
Other, net 1 11 120
------ ------ ------
(12) 35 159
Equity Loss in MFS - - (131)
------ ------- ------
Earnings from Continuing Operations
before Income Taxes and Minority Interest 31 91 36
Income Tax Benefit 48 11 90
Minority Interest in Net Loss of Subsidiaries 4 2 -
------- -------- -----
Income from Continuing Operations 83 104 126
Income from Discontinued Operations 10 9 14
------- -------- -----
Net Earnings $ 93 $ 113 $ 140
======= ======== =====
Financial Position (dollars in millions) 1997 1996
Assets
Current Assets:
Cash and cash equivalents $ 87 $ 71
Marketable securities 678 325
Restricted securities 22 17
Receivables 42 34
Investments in Discontinued Operations 643 608
Other 22 12
------- ------
Total Current Assets 1,494 1,067
Net Property, Plant and Equipment 184 174
Investments 383 458
Intangible Assets, net 21 23
Other Assets 45 49
------- ------
$ 2,127 $1,771
======= ======
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 31 $ 41
Current portion of long-term debt 3 2
Accrued reclamation and other mining costs 19 19
Other 36 27
------- ------
Total Current Liabilities 89 89
Long-term Debt, less current portion 137 113
Deferred Income Taxes 83 47
Accrued Reclamation Costs 100 98
Other Liabilities 139 163
Minority Interest 1 4
Stockholders' Equity 1,578 1,257
------- ------
$ 2,127 $ 1,771
======= =======
(19) Pro Forma Information (unaudited).
The following information represents the pro forma financial
position of the Group after reflecting the impact of the
transactions with CalEnergy (Note 4) and the conversion of
Class C shares to Class D shares (Note 21) both of which occurred
subsequent to the fiscal year end.
1997 1997
(dollars in millions) Historical Adjustments Pro Forma
Current Assets
Cash & marketable securities $ 765 $ 122 (a) $ 2,046
1,159 (b)
Investment in discontinued
Operations 643 (643)(b) -
Other current assets 86 86
------- ----- -------
Total Current Assets 1,494 638 2,132
Property, Plant & Equipment, net 184 184
Other Non-current assets 449 449
------- ----- --------
$ 2,127 $ 638 $ 2,765
======= ===== ========
Current Liabilities $ 89 $ 192 (b) $ 281
Non-current Liabilities 459 459
Minority Interest 1 1
Stockholders' Equity 1,578 122 (a) 2,024
324 (b)
-------- ----- --------
$ 2,127 $ 638 $ 2,765
======== ===== ========
(a) Reflect conversion of 2.3 million Class C shares to 10.5
million Class D shares.
(b) Reflect sale of energy assets to CalEnergy and related income
tax liability.
(20) Other Matters
In connection with the sale of approximately 10 million Class D shares
to employees in 1997, the Company has retained the right to purchase
the relevant Class D shares at the then current Class D Stock price if
the Transaction is definitively abandoned by formal action of the PKS
Board or the employees voluntarily terminate their employment on
various dates prior to January 1, 1999.
In May 1995, the lawsuit titled Whitney Benefits, Inc. and Peter
Kiewit Sons' Co. v. The United States was settled. In 1983,
plaintiffs alleged that the enactment of the Surface Mining
Control and Reclamation Act of 1977 had prevented the mining of
their Wyoming coal deposit and constituted a government taking
without just compensation. In settlement of all claims,
plaintiffs agreed to deed the coal deposits to the government and
the government agreed to pay plaintiffs $200 million, of which
Peter Kiewit Sons' Co., a Level 3 subsidiary, received
approximately $135 million in June 1995 and recorded it in other
income on the statements of earnings.
The 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.
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 $29 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 27, 1997, the Group had outstanding letters of credit
of approximately $22 million.
(21) Subsequent Events
In January 1998, approximately 2.3 million shares of Class C
Stock, with a redemption value of $122 million, were converted
into 10.5 million shares of Class D Stock.
In March 1998, PKS announced that its Class D Stock will begin
trading on April 1 on the Nasdaq National Market under the
symbol "LVLT." The Nasdaq listing will follow the separation
of the Group and the Construction Group of PKS, which is
expected to be completed on March 31, 1998. In connection with
the separation, PKS' construction subsidiary will be renamed
"Peter Kiewit Sons', Inc." and PKS Class D stock will become
the common stock of Level 3 Communications, Inc.
PKS' certificate of incorporation gives stockholders the right
to exchange their Class C Stock for Class D Stock under a set
conversion formula. That right will be eliminated as a result
of the separation of the Group and the Construction Group. To
replace that conversion right, Class C stockholders received
6.5 million shares of a new Class R stock in January, 1998,
which is convertible into Class D Stock in accordance with
terms ratified by stockholders in December 1997.
The PKS Board of Directors has approved in principle a plan to
force conversion of all shares of Class R stock outstanding.
Due to certain provisions of the Class R stock, conversion will
not be forced prior to May 1998, and the final decision to
force conversion would be made by Level 3 Board of Directors at
that time. The Level 3 Board may choose not to force
conversion if it were to decide that conversion is not in the
best interests of the stockholders of Level 3. If, as
currently anticipated, the Level 3 Board determines to force
conversion of the Class R stock on or before June 30, 1998,
certain adjustments will be made to the cost sharing and risk
allocation provisions of the separation agreement between Level
3 and the Construction business.
If the Level 3 Board of Directors determines to force
conversion of the Class R stock, each share of Class R stock
will be convertible into $25 worth of Level 3 (Class D Stock)
common stock, based upon the average trading price of the Level
3 common stock on the Nasdaq National Market for the last
fifteen trading days of the month prior to the determination by
the Board of Directors to force conversion. When the spin-off occurs,
Level 3 will increase paid in capital and reduce retained earnings
by the fair value of the Class R shares.