FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period__________to__________
Commission file number 0-15658
PETER KIEWIT SONS', INC.
(Exact name of registrant as specified in its charter)
Delaware 47-0210602
(State of Incorporation) (I.R.S. Employer
Identification No.)
1000 Kiewit Plaza, Omaha, Nebraska 68131
(Address of principal executive offices) (Zip Code)
(402)-342-2052
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports(s)), and (2) has been subject
to such filing requirements for the past 90 days. Yes X No
The number of shares outstanding of each class of the issuer's common stock,
as of May 1, 1997:
Class C Common Stock ..................... 9,262,707 shares
Class D Common Stock .................... 24,507,905 shares
PETER KIEWIT SONS', INC.
Part I - Financial Information
Item 1. Financial Statements:
Consolidated Condensed Statements of Earnings
Consolidated Condensed Balance Sheets
Consolidated Condensed Statements of Cash Flows
Notes to Consolidated Condensed Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
Index to Exhibits
PETER KIEWIT SONS', INC.
Consolidated Condensed Statements of Earnings
(unaudited)
Three Months Ended
March 31,
(dollars in millions, except per share data) 1997 1996
Revenue $ 646 $ 645
Cost of Revenue (548) (561)
------- -------
98 84
General and Administrative Expenses (76) (62)
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Operating Earnings 22 22
Other Income (Expense):
Equity Earnings, net 5 -
Investment Income, net 14 19
Interest Expense, net (8) (8)
Other, net 13 6
------- ------
24 17
------- ------
Earnings Before Income Taxes and
Minority Interest 46 39
Provision for Income Taxes (17) (14)
Minority Interest in Net Loss of Subsidiaries 6 -
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Net Earnings $ 35 $ 25
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Earnings Attributable to Class B&C Stock $ 15 $ 7
======= ======
Earnings Attributable to Class D Stock $ 20 $ 18
======= ======
Primary Earnings per Share:
Class B&C $ 1.65 $ .66
======= ======
Class D $ .79 $ .77
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Fully Diluted Earnings per Share:
Class B&C $ 1.58 $ .65
======= ======
Class D $ .79 $ .77
======= ======
Dividends per Common Share:
Class B&C $ - $ -
======= ======
Class D $ - $ -
======= ======
See accompanying notes to consolidated condensed financial statements.
PETER KIEWIT SONS', INC.
Consolidated Condensed Balance Sheets
March 31, December 28,
1997 1996
(dollars in millions, except per share data) (unaudited)
Assets
Current Assets:
Cash and cash equivalents $ 376 $ 320
Marketable securities 369 426
Restricted securities 22 25
Receivables, less allowance of $20 and $20 370 357
Costs and earnings in excess of
billings on uncompleted contracts 72 80
Investment in construction joint ventures 114 91
Deferred income taxes 72 59
Other 47 46
------ -----
Total Current Assets 1,442 1,404
Property, Plant and Equipment,
less accumulated depreciation and
amortization of $781 and $774 827 807
Investments 934 900
Intangible Assets, net 388 368
Other Assets 70 72
------ ------
$3,661 $3,551
====== ======
See accompanying notes to consolidated condensed financial statements.
PETER KIEWIT SONS', INC.
Consolidated Condensed Balance Sheets
March 31, December 28,
1997 1996
(dollars in millions, except per share data) (unaudited)
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 195 $ 235
Current portion of long-term debt:
Telecommunications 11 55
Other 2 2
Accrued costs and billings in excess
of revenue on uncompleted contracts 168 124
Accrued insurance costs 83 81
Income taxes payable 35 1
Other 125 133
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Total Current Liabilities 619 631
Long-Term Debt, less current portion:
Telecommunications 248 207
Other 127 125
Deferred Income Taxes 229 163
Retirement Benefits 46 48
Accrued Reclamation Costs 102 99
Other Liabilities 238 241
Minority Interest 209 218
Stockholders' Equity:
Preferred stock, no par value, authorized
250,000 shares: no shares outstanding - -
Common stock, $.0625 par value,
$1.7 billion aggregate redemption value:
Class B, authorized 8,000,000 shares:
-0- outstanding in 1997 and
263,468 outstanding in 1996 - -
Class C, authorized 125,000,000 shares:
9,262,707 outstanding in 1997 and
9,954,006 in 1996 1 1
Class D, authorized 50,000,000 shares:
24,481,905 outstanding in 1997 and
23,219,744 in 1996 1 1
Additional paid-in capital 234 235
Foreign currency adjustment (5) (7)
Net unrealized holding gain 12 23
Retained earnings 1,600 1,566
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Total Stockholders' Equity 1,843 1,819
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$ 3,661 $ 3,551
======= =======
See accompanying notes to consolidated condensed financial statements.
PETER KIEWIT SONS', INC.
Consolidated Condensed Statements of Cash Flows
(unaudited)
Three Months Ended
March 31,
(dollars in millions) 1997 1996
Cash flows from operations:
Net cash provided by operations $ 139 $ 53
Cash flows from investing activities:
Proceeds from sales and maturities of
marketable securities 80 97
Purchases of marketable securities (26) (113)
Change in restricted securities 3 3
Proceeds from sale of property, plant
and equipment, and other investments 23 9
Capital expenditures (65) (33)
Acquisitions and investments in affiliates (76) (54)
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Net cash used in investing activities (61) (91)
Cash flows from financing activities:
Proceeds from long-term debt borrowings - 6
Payments on long-term debt, including
current portion (3) (8)
Net change in short-term borrowings - (20)
Repurchases of common stock (1) (12)
Dividends paid (19) (18)
Other 1 -
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Net cash used in financing activities (22) (52)
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Net change in cash and cash equivalents 56 (90)
Cash and cash equivalents at beginning of period 320 457
------- ------
Cash and cash equivalents at end of period $ 376 $ 367
======= ======
See accompanying notes to consolidated condensed financial statements.
PETER KIEWIT SONS', INC.
Notes to Consolidated Condensed Financial Statements
1. Basis of Presentation
The consolidated condensed balance sheet of Peter Kiewit Sons', Inc. ("PKS")
and subsidiaries (the "Company") at December 28, 1996 has been condensed
from the Company's audited balance sheet as of that date. All other
financial statements contained herein are unaudited and, in the opinion of
management, contain all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of financial position and
results of operations for the periods presented. The Company's accounting
policies and certain other disclosures are set forth in the notes to the
consolidated financial statements contained in the Company's Annual Report
on Form 10-K for the year ended December 28, 1996.
Receivables at March 31, 1997 and December 28, 1996 include approximately $85
million and $86 million, respectively of retainage on uncompleted projects,
the majority of which is expected to be collected within one year. Included
in the retainage amounts are $47 million and $53 million of securities which
are being held by the owners of various construction projects in lieu of
retainage.
The results of operations for the three months ended March 31, 1997 and 1996
are not necessarily indicative of the results to be expected for the full year.
Where appropriate, items within the consolidated condensed financial statements
have been reclassified from the previous periods to conform to current year
presentation.
2. Earnings Per Share:
Primary and fully diluted earnings per share of common stock have been computed
using the weighted average number of shares outstanding during each period
after giving effect to common stock equivalents and other dilutive
securities. The number of shares used in computing earnings per share was
as follows:
Three Months Ended
March 31,
1997 1996
Primary earnings per share:
Class B&C 9,321,469 10,257,392
Class D 24,525,029 23,236,057
Fully diluted earnings per share:
Class B&C 9,758,302 10,619,814
Class D 24,525,029 23,236,057
In March 1997, the Financial Accounting Standards Board issued 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 period earnings per share
data presented. This statement is effective for financial statements
issued for periods ending after December 15, 1997 and earlier application
is not permitted. Basic and diluted earnings per share, as defined in SFAS
No. 128, are not expected to vary significantly from the primary and fully
diluted earnings per share shown on the consolidated statements of earnings.
3. Summarized Financial Information:
Holders of Class B&C Stock (Construction & Mining Group) and Class D Stock
(Diversified Group) are stockholders of PKS. The Construction & Mining
Group ("KCG") contains the construction and materials operations of Kiewit
Construction Group Inc. The Diversified Group ("KDG") contains coal mining
properties owned by Kiewit Coal Properties Inc., energy investments,
including 30% interests in CalEnergy Company, Inc. ("CalEnergy") and
CE Electric UK, plc ("CE Electric"), investments in international energy
projects, telecommunications companies owned by C-TEC Corporation ("C-TEC"),
California Private Transportation Company, L.P. ("CPTC"), the owner-operator
of the SR91 toll road in California, and miscellaneous investments, all owned
by Kiewit Diversified Group Inc. Corporate assets and liabilities which are
not separately identified with the ongoing operations of the Construction &
Mining Group or the Diversified Group are allocated equally between the two
groups.
A summary of the results of operations and financial position for the
Construction & Mining Group and the Diversified Group follows. The summary
information for December 28, 1996 was derived from the audited financial
statements of the respective groups which were exhibits to the 1996
Form 10-K. All other summary information was derived from the unaudited
financial statements of the respective groups which are exhibits to this
Form 10-Q. All significant intercompany accounts and transactions, except
those directly between the Construction & Mining Group and the Diversified
Group, have been eliminated.
(in millions, except per share data)
Construction & Mining Group:
Three Months Ended
March 31,
1997 1996
Results of Operations:
Revenue $ 478 $ 502
Net earnings 15 7
Primary earnings per share 1.65 .66
Fully diluted earnings per share 1.58 .65
March 31, December 28,
1997 1996
Financial Position:
Working capital $ 311 $ 374
Total assets 1,006 1,036
Long-term debt, less current portion 12 12
Stockholders' equity 507 562
Included within the results of operations is mine management income from the
Diversified Group of $9 million in 1997 and $7 million in 1996.
(in millions, except per share data)
Diversified Group:
Three Months Ended
March 31,
1997 1996
Results of Operations:
Revenue $ 176 $ 155
Net earnings 20 18
Primary earnings per share .79 .77
Fully diluted earnings per share .79 .77
March 31, December 28,
1997 1996
Financial Position:
Working capital $ 512 $ 399
Total assets 2,664 2,523
Long-term debt, less current portion 363 320
Stockholders' equity 1,336 1,257
Included within the results of operations is mine management expense paid to the
Construction & Mining Group of $9 million in 1997 and $7 million in 1996.
4. Acquisitions:
In 1996, C-TEC purchased 80% of Freedom New York, L.L.C. ("Freedom"). Freedom
provides subscription television services using microwave frequencies in New
York City and selected areas of New Jersey. In March 1997, C-TEC paid $40
million (including $10 million of non-capitalizable costs) in connection with
a series of transactions which resulted in C-TEC having a 100% ownership
interest in the assets of Freedom. The acquisition was accounted for as a
purchase. The purchase price (net of non-capitalizable costs) exceeded the
fair value of net assets by $25 million, which is recognized as goodwill and
is being amortized over approximately 6 years.
On December 24, 1996, CE Electric plc ("CE Electric") which is 70% owned
indirectly by CalEnergy and 30% owned indirectly by KDG, acquired majority
ownership of the outstanding ordinary share capital of Northern Electric plc
("Northern") pursuant to a tender offer (the "Tender Offer") commenced in the
United Kingdom by CE Electric on November 5, 1996. As of March 18, 1997, CE
Electric effectively owned 100% of Northern's ordinary shares.
As of March 31, 1997, CalEnergy and KDG 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 ($921 million) and
revolving facility agreement obtained by CE Electric. KDG has not guaranteed,
and is not otherwise subject to recourse for, amounts borrowed under these
facilities.
5. Investments:
The Company is able to defer $40 million of the taxable gain with respect to the
1995 Whitney Benefits litigation settlement by investing in real estate. In
February 1997, KDG purchased an office building in Aurora, Colorado for $22
million. KDG may make additional real estate investments to defer the
remaining balance.
In late 1995, a KDG and CalEnergy venture, CE Casecnan Water and Energy
Company, Inc., ("Casecnan") closed financing and commenced construction of a
$495 million irrigation and hydroelectric power project located on the
Philippine island of Luzon. KDG and CalEnergy have each made $62 million of
equity contributions to the project.
The Casecnan project was being constructed on a joint and several basis by Hanbo
Corporation and Hanbo Engineering & Construction Co. Ltd. ("HECC"),
(together, "Contractors"), both of which are South Korean corporations.
Hanbo Corporation and HECC are under common ownership. The Contractors'
obligations under the construction contract ("Hanbo Contract") are
guaranteed by Hanbo Iron & Steel Company, Ltd. ("Hanbo Steel"), a
large South Korean steel company. In addition, the Contractors' obligations
are secured by an unconditional, irrevocable standby letter of credit issued
by Korea First Bank ("KFB") in the approximate amount of $118 million.
During the first quarter of 1997 Hanbo Corporation, HECC and Hanbo Steel each
filed to seek bankruptcy protection in Korea and KFB's credit rating was
downgraded because of the substantial loans it made to Hanbo Steel.
On May 7, 1997, Casecnan announced that it had terminated the Hanbo Contract
and had entered into a new engineer, procure and construct contract to
complete the construction of the project (the "Replacement Contract").
The work under the Replacement Contract will be conducted by a consortium of
contractors and subcontractors including Siemens A.G., Sulzer Hydro Ltd.,
Black & Veatch and Colenco Power Engineering Ltd., and will be headed by
Cooperativa Muratori Cementista CMC di Ravenna and Impressa Pizzarotti &
C. Spa. The Hanbo Contract was terminated because of events of default
under that contract including the fact that the Contractors had filed for
court receivership protection in South Korea. In connection with the
contract termination, Casecnan made a draw request under the letter of credit
issued by KFB to pay for certain transition costs and other damages under
the Hanbo Contract. If KFB should fail to honor its obligations under the
letter of credit, such action may have a material adverse effect on the
Casecnan project. However, based on information available, KDG does not
currently believe its investment is impaired.
6. C-TEC Restructuring:
In February 1997, C-TEC announced a plan to separate its operations along
business lines into three separate, publicly traded companies:
CTCo, containing the local telephone group and related engineering business;
C-TEC Michigan, containing the cable television operations in Michigan; and
RCN Corporation, which will consist of RCN Telecom Services; cable television
operations in New York, New Jersey and Pennsylvania; and the investment in
Megacable S.A. de C.V., a cable operator in Mexico. RCN Telecom Services is
a provider of packaged local and long distance telephone, video, and internet
access services provided over fiber optic networks to residential customers
in Boston and New York City.
The restructuring should permit investors and the financial market to better
understand and evaluate C-TEC's various businesses. In addition, the
restructuring will allow C-TEC to raise capital on the most efficient terms.
In April 1997, C-TEC obtained three committed credit facilities with a
syndicate of banks aggregating $395 million. C-TEC intends to use these
credit facilities to refinance the existing Senior Secured Notes and to fund
its network expansion plans, primarily the RCN businesses.
The restructuring is contingent upon receipt of a private letter ruling from
the Internal Revenue Service regarding the tax-free nature of the spin-offs,
the receipt of other regulatory approvals, and other conditions. If the
reorganization and spin-offs occur, KDG will own less than 50% of the
outstanding shares and voting rights of each entity, and will therefore
account for each entity using the equity method.
On May 12, 1997, C-TEC announced that it had proposed to acquire the 38%
of the common stock of Mercom Inc. ("Mercom") not currently owned by it in
exchange of 8.7% of the common stock of C-TEC Michigan. The proposed exchange
ratio is based on the assumption that C-TEC Michigan will have $125 million of
net debt outstanding at the time of the transaction.
C-TEC anticipates that Mercom's Board of Directors will form a special
committee comprised of directors unaffiliated with C-TEC to reveiw and
evaluate the proposal. The proposal is subject to certain conditions,
including the consummation of C-TEC's restructuring and the receipt of all
required regulatory approvals. C-TEC reserves the right to withdraw
its proposal at any time prior to the execution of a definitive agreement.
There can be no assurance as to the terms of any transaction or that any
transaction will take place.
The following is financial information of the Company had C-TEC been accounted
for utilizing the equity method in the consolidated condensed financial
statements as of March 31, 1997, and December 28, 1996 and for the three
months ended March 31, 1997 and 1996:
March 31, December 28,
(dollars in millions) 1997 1996
Assets
Current Assets:
Cash and cash equivalents $ 321 $ 244
Marketable securities 356 379
Restricted securities 22 25
Receivables, less allowance of $17 and $17 320 315
Costs and earnings in excess of billings on
uncompleted contracts 72 80
Investment in construction joint ventures 114 91
Deferred income taxes 62 49
Other 32 32
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Total Current Assets 1,299 1,215
Property, Plant and Equipment, net 350 339
Investments 1,201 1,166
Intangible Assets, net 40 38
Other Assets 45 47
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$ 2,935 $ 2,805
======= =======
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 160 $ 197
Current portion of long-term debt 2 2
Accrued costs and billings in excess of revenue
on uncompleted contracts 154 112
Accrued insurance costs 83 81
Other 102 71
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Total Current Liabilities 501 463
Long-Term Debt, less current portion 127 125
Deferred Income Taxes 127 62
Retirement Benefits 44 45
Accrued Reclamation Costs 102 99
Other Liabilities 187 188
Minority Interest 4 4
Total Stockholders' Equity 1,843 1,819
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$ 2,935 $ 2,805
======= =======
Three Months Ended
March 31,
(dollars in millions) 1997 1996
Revenue $ 550 $ 556
Cost of Revenue (480) (501)
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70 55
General and Administrative Expenses (41) (40)
------ ------
Operating Earnings 29 15
Other Income (Expense):
Equity Earnings, net 1 -
Investment Income, net 11 15
Interest Expense, net (3) (1)
Other, net 14 7
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23 21
------- ------
Earnings Before Income Taxes and Minority Interest 52 36
Provision for Income Taxes (18) (11)
Minority Interest in Net Loss of Subsidiaries 1 -
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Net Earnings $ 35 $ 25
======= =======
Three Months Ended
March 31,
(dollars in millions) 1997 1996
Cash flows from operations:
Net cash provided by operations $ 135 $ 43
Cash flows from investing activities:
Proceeds from sales and maturities of
marketable securities 46 37
Purchases of marketable securities (26) (78)
Change in restricted securities 3 3
Proceeds from sale of property, plant
and equipment, and other investments 23 9
Capital expenditures (39) (19)
Acquisitions and investments in affiliates (46) (54)
------- ------
Net cash used in investing activities (39) (102)
Cash flows from financing activities:
Proceeds from long-term debt borrowings - 6
Payments on long-term debt, including
current portion - (2)
Net change in short-term borrowings - (20)
Repurchases of common stock (1) (12)
Dividends paid (19) (18)
Other 1 -
------ ------
Net cash used in financing activities (19) (46)
------ ------
Net change in cash and cash equivalents 77 (105)
Cash and cash equivalents at beginning of period 244 408
------ ------
Cash and cash equivalents at end of period $ 321 $ 303
====== ======
7. Other Matters:
The Company is involved in various lawsuits, claims and regulatory proceedings
incidental to its business. Management believes that any resulting liability
for legal proceedings beyond that provided should not materially affect the
Company's financial position, future results of operations or future cash
flows.
8. Subsequent Event:
In April 1997, KCG and a partner each invested $15 million to acquire a 96%
interest in Oak Mountain Energy L.L.C. ("Oak Mountain"). Oak Mountain then
acquired the existing assets of an underground coal mine in Alabama for
approximately $18 million and assumed approximately $16 million of related
debt. Oak Mountain intends to use the remaining cash and $30 million of
nonrecourse bank borrowings to retire the existing debt and further develop and
modernize the mine.
PETER KIEWIT SONS', INC.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Separate management's discussion and analysis of financial condition and results
of operations for the Kiewit Construction & Mining Group and the Kiewit
Diversified Group have been filed as part of Exhibits 99.A and 99.B to this
report. The Company will furnish a copy of each exhibit without charge upon
written request addressed to Stock Registrar, Peter Kiewit Sons', Inc., 1000
Kiewit Plaza, Omaha, Nebraska 68131.
Revenue from each of the Company's business segments for the three months ended
March 31, comprised the following (in millions):
1997 1996
Construction $ 478 $ 502
Coal Mining 61 53
Telecommunications 96 90
Other 19 12
Eliminations (8) (12)
------ ------
$ 646 $ 645
====== ======
Results of Operations- First Quarter 1997 vs. First Quarter 1996
Construction. Construction and materials revenue for the first quarter of 1997
decreased $24 million or 5% from the same period in 1996. This was a direct
result of the substantial completion of the San Joaquin Toll Road project at
the end of 1996. Although construction revenue was down, materials revenue
increased 6% due to the strong demand for aggregates in the Arizona market.
Contract backlog at March 31, 1997 was $3.3 billion of which 4% is attributable
to foreign operations located in Canada, Indonesia and the Philippines.
Domestic projects are spread geographically throughout the U.S. Included in
backlog is $780 million for the "I-15" project awarded in late March. The
Company is the sponsoring partner on the design-build joint venture
reconstructing 16 miles of Interstate 15 through the Salt Lake City, Utah
area. The project is expected to be completed in December of 2001 and
includes a 10 year maintenance contract.
Margins on construction projects for the first quarter of 1997 increased to 7%
compared to 5% for the same time period in 1996. Claim settlements were the
primary factor for this increase. Materials margins decreased slightly to 6%
for the first quarter of 1997 from 7% for the same time period in 1996 due to
increased competition in the market.
Coal Mining. Mining revenue increased $8 million in the first quarter of 1997
compared to 1996. Increased sales of alternate source, spot market and
contracted coal all contributed to the improvement. Alternate source coal
sales to Commonwealth Edison Company ("Commonwealth") in the first quarter of
1997 were 33% of its commitment for all of 1997. In 1996, first quarter
alternate source coal sales were 25% of its 1996 commitment. The increase
in 1997 alternate source coal sales contributed $4 million to the improvement
in revenue. Commonwealth has the flexibility under the amended contract to
accelerate and defer delivery of alternate source coal provided it accepts
delivery of the aggregate minimum commitment at the end of each year. Thus,
the increased revenue recognized in the first quarter of 1997 may not
continue and could even decline throughout the remaining periods of 1997.
An increase in spot sales, due to a decline in hydroelectric power generated in
the northwestern United States, and contract sales, attributable to new and
accelerated contractual commitments, are responsible for the remainder of
the increase in coal revenue.
Operating margins as a percentage of revenue were virtually unchanged from the
first quarter of 1996. The increased level of high margin alternate source
coal sales continued to offset the lower margin on increased spot sales.
Telecommunications. Telecommunications revenue, generated by C-TEC,
increased 7% in 1997. C-TEC's telephone and cable groups each experienced
similar growth. Sales of the telephone group increased primarily due to
higher internet access revenue, video conferencing system sales, and growth in
interstate access lines and access minutes. The increase in the cable group's
revenue is attributable to 9,300 additional average subscribers over the same
period in 1996 and the effects of rate increases during the first quarter of
1997. C-TEC also experienced revenue growth from the RCN businesses. The
video subscribers obtained in the 1996 Freedom transaction are responsible for
the additional sales.
Expenses attributable to telecommunications revenue increased 13% in the first
quarter of 1997 compared to the same period in 1996. Costs for the telephone
group grew 15% in 1997. The telephone group's costs in 1996 were positively
impacted by a one-time postemployment benefit adjustment that did not recur in
1997. Increases in advertising, internet service costs and
compensation expenses, due to personnel additions and wage increases, also
contributed to the higher costs in 1997. Higher basic programming expenses
in 1997 led to a 7% increase in costs for the cable group. The costs
associated with the development of the RCN businesses, including depreciation
and amortization expense and personnel related expenses also contributed to
the overall increase in telecommunications costs.
General and Administrative Expenses. General and administrative expenses
increased 23% in 1997. The expenses of Freedom, acquired by C-TEC in 1996,
and certain non-capitalized costs of $10 million incurred
in connection with the March 1997 transactions with Freedom's minority
shareholders were primarily responsible for the higher costs. Excluding
C-TEC, a decline in professional service expenses was offset
by slight increases in insurance and other administrative expenses.
Equity Earnings, net. Equity earnings increased significantly in 1997.
KDG's proportionate share of CalEnergy's earnings increased $5 million in
the first quarter of 1997 to $8 million. The improvement in CalEnergy's
earnings resulted from the completion and commencement of operations of the
Salton Sea Unit IV and two Philippine geothermal facilities, the purchase of
three cogeneration facilities and the acquisition of Northern Electric, all
of which occurred after March 31, 1996. In addition to contributing to
CalEnergy's earnings, KDG's proportionate share of Northern Electric also
provided $3 million of income. Partially offsetting these gains were losses
attributable to the Casecnan project. The Casecnan loss during construction
results from the variance in borrowing and investing interest rates on the
funds generated by the project's debt offering in 1995.
Investment Income, net. Investment income for the first three months of 1997
decreased 26% compared to the same period in 1996. A decrease in interest
income, primarily due to a decline in the average portfolio balance, was
partially offset by a gain on the sale of securities.
Interest Expense, net. Interest expense remained the same in 1997. CPTC
incurred $3 million of interest in 1996 and 1997. The 1996 interest was
capitalized due to the construction of the SR91 toll road. CPTC's 1997
interest expense was offset by a reduction in C-TEC's and KCG's interest
expense due to a decline in their outstanding debt and short-term
borrowings, respectively.
Other, net. Other income increased 117% in 1997 compared to 1996. This
result is primarily attributable to an increase in net gains from the
disposition of construction equipment in 1997.
Minority Interest in Net Loss of Subsidiaries. C-TEC's losses, primarily due
to the development of the RCN businesses and certain non-capitalized costs
incurred in connection with the March 1997 transactions with Freedom's
minority shareholders, and the losses associated with the SR91 toll road,
resulted in the increased losses attributable to minority shareholders.
Provision for Income Taxes. The effective income tax rate in 1997 and 1996
approximates the expected statutory rate of 35%.
Financial Condition - March 31, 1997 vs. December 28, 1996
Excluding C-TEC, described in a separate paragraph below, the Company's working
capital increased $46 million or 6% during 1997. An increase in cash flows
from operations, primarily due to $83 million of federal tax and interest
refunds, was partially offset by investing and financing activities.
Investing activities include $46 million of investments, primarily $22 million
for real estate and $18 million for international energy projects, and $39
million of capital expenditures, principally construction equipment.
These outflows were partially offset by the net sale of marketable securities
of $20 million and proceeds from the sale of construction equipment of $22
million.
Financing activities primarily consist of the payment of $19 million of
dividends on the Company's Class C Stock and Class D Stock and $1 million of
stock repurchases. In April 1997, the Company declared a $.70 per share
dividend on outstanding Class C Stock payable in May 1997.
C-TEC's working capital was consistent with that at the end of 1996. The
series of transactions with Freedom's minority shareholders for $40 million,
and $26 million of capital expenditures to expand the RCN, cable and
telephone networks were partially offset by $34 million of proceeds from the
sale and maturity of short-term investments. In addition to those
activities, C-TEC reclassified $44 million of long-term debt from current to
noncurrent. C-TEC intends to refinance the Senior Secured Notes with the
proceeds from new credit facilities.
The Company anticipates making significant investments in its construction and
mining businesses. The Company continues to explore opportunities to acquire
additional businesses. The Company also anticipates making significant
investments in its energy and infrastructure businesses - including its joint
venture agreement with CalEnergy covering international power project
development activities - and searching for opportunities to acquire
businesses which provide for long-term growth. Other long-term liquidity
uses include payment of income taxes and repurchasing the Company's stock.
The Company's current financial condition, future cash flows and borrowing
capacity should be sufficient for immediate operating and investing
activities.
In October 1996, the PKS Board of Directors directed management to pursue a
listing of PKS Class D Stock on a major securities exchange or the NASDAQ
National Market as soon as practical during 1998. The Board does not
foresee circumstances under which PKS would list the Class D Stock prior
to 1998. The Board believes that a listing will provide PKS with a capital
structure more suitable for the further development of the Diversified
Group's business plan. It would also provide liquidity for Class D
shareholders without impairing PKS' capital base.
The Board's action does not ensure that a listing of Class D Stock will occur
in 1998, or any time. The Board could delay or abandon plans to list the
stock if it determined that such action would be in the best interest of all
PKS' shareholders. In addition, PKS' ability to list Class D Stock will be
subject to factors beyond its control, including the laws, regulations, and
listing eligibility criteria in effect at the time a listing is sought, as
well as stock market conditions at the time. Furthermore, the Board might
decide to couple the listing of Class D Stock with a public offering of
newly-issued Class D shares in order to raise additional capital for the
Diversified Group. Such an offering could delay or alter the listing plan.
In January 1997, approximately 1.7 million shares of Class B&C Stock, with a
redemption value of $71 million, were converted into approximately 1.3
million shares of Class D Stock. If the listing described above does occur,
Class C shareholders will continue to be able to convert their shares.
However, PKS would not be obligated to repurchase Class D Stock from
shareholders.
In February 1997, C-TEC announced a plan to separate its operations along
business lines into three separate, publicly traded companies:
CTCo, containing the local telephone group and related engineering business;
C-TEC Michigan, containing the cable television operations in Michigan; and
RCN Corporation, which will consist of RCN Telecom Services; cable television
operations in New York, New Jersey and Pennsylvania; and the investment in
Megacable S.A. de C.V., a cable operator in Mexico. RCN Telecom Services
is a provider of packaged local and long distance telephone, video, and
internet access services provided over fiber optic networks to residential
customers in Boston and New York City.
The restructuring should permit investors and the financial market to better
understand and evaluate C-TEC's various businesses. In addition, the
restructuring will allow C-TEC to raise capital on the most efficient terms.
In April 1997, C-TEC obtained three committed credit facilities with a
syndicate of banks aggregating $395 million. C-TEC intends to use these
credit facilities to refinance the existing Senior Secured Notes and to fund
its network expansion plans, primarily, the RCN businesses.
The restructuring is contingent upon receipt of a private letter ruling from
the Internal Revenue Service regarding the tax-free nature of the spin-offs,
the receipt of other regulatory approvals, and other conditions. If the
reorganization and spin-offs occur, KDG will own less than 50% of the
outstanding shares and voting rights of each entity, and will therefore
account for each entity using the equity method.
On May 12, 1997 C-TEC announced that it had proposed to acquire the 38% of the
common stock of Mercom not currently owned by it in exchange of 8.75% of the
common stock of C-TEC Michigan. The proposed exchange ratio is based on the
assumption that C-TEC Michigan will have $125 million of net debt outstanding
at the time of the transaction.
C-TEC anticipates that Mercom's Board of Directors will form a special committee
composed of directors unaffiliated with C-TEC to review and evaluate the
proposal. The proposal is subject to certain conditions, including the
consummation of C-TEC's restructuring and the receipt of all required
regulatory approvals. C-TEC reserves the right to withdraw its proposal at
any time prior to the execution of a definitive agreement. There can be no
assurance as to the terms of any transaction or that any transaction will
take place.
In late 1995, a KDG and CalEnergy venture, CE Casecnan Water and Energy
Company, Inc., ("Casecnan") closed financing and commenced construction of a
$495 million irrigation and hydroelectric power project located on the
Philippine island of Luzon. KDG and CalEnergy have each made $62 million
of equity contributions to the project.
The Casecnan project was being constructed on a joint and several basis by Hanbo
Corporation and Hanbo Engineering & Construction Co. Ltd. ("HECC"),
(together, "Contractors"), both of which are South Korean corporations.
Hanbo Corporation and HECC are under common ownership. The Contractors'
obligations under the construction contract ("Hanbo Contract") are guaranteed
by Hanbo Iron & Steel Company, Ltd. ("Hanbo Steel"), a large South Korean
steel company. In addition, the Contractors' obligations are secured by an
unconditional, irrevocable standby letter of credit issued by Korea First Bank
("KFB") in the approximate amount of $118 million. During the first quarter
of 1997 Hanbo Corporation, HECC and Hanbo Steel each filed to seek bankruptcy
protection in Korea and KFB's credit rating was downgraded because of the
substantial loans it made to Hanbo Steel.
On May 7, 1997, Casecnan announced that it had terminated the Hanbo Contract
and had entered into a new engineer, procure and construct contract to
complete the construction of the project (the "Replacement Contract").
The work under the Replacement Contract will be conducted by a consortium of
contractors and subcontractors including Siemens A.G., Sulzer Hydro Ltd.,
Black & Veatch and Colenco Power Engineering Ltd., and will be headed by
Cooperativa Muratori Cementista CMC di Ravenna and Impressa Pizzarotti & C.
Spa. The Hanbo Contract was terminated because of events of default under
that contract including the fact that the Contractors had filed for court
receivership protection in South Korea. In connection with the contract
termination, Casecnan made a draw request under the letter of credit issued
by KFB to pay for certain transition costs and other damages under the Hanbo
Contract. If KFB should fail to honor its obligations under the letter of
credit, such action may have a material adverse effect on the Casecnan
project. However, based on information available, KDG does not currently
believe its investment is impaired.
PETER KIEWIT SONS', INC.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits filed as part of this report are listed below.
Exhibit
Number
11 Statement regarding computation of per share earnings
27 Financial Data Schedule
99.A Kiewit Construction & Mining Group Financial Statements and
Management's Discussion and Analysis of Financial Condition and
Results of Operations.
99.B Kiewit Diversified Group Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of
Operations.
(b) No reports on Form 8-K were filed by the Company during the first
quarter of 1997.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PETER KIEWIT SONS', INC.
Dated: May 15, 1997 \s\ Richard R. Jaros
Richard R. Jaros
Executive Vice President
Chief Financial Officer
PETER KIEWIT SONS', INC.
INDEX TO EXHIBITS
Exhibit
No.
11 Statement regarding computation of per share earnings
27 Financial Data Schedule
99.A Kiewit Construction & Mining Group Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations.
99.B Kiewit Diversified Group Financial Statements and Management's Discussion
and Analysis of Financial Condition and Results of Operations.
Exhibit 11
Peter Kiewit Sons', Inc.
Calculation or Earnings per Share
For the three months ended March 31, 1997 and 1996
Class C Stock Class D Stock
Three Months Ended Three Months Ended
March 31, March 31,
1997 1996 1997 1996
Actual weighted shares
outstanding for the period 9,321,469 10,257,392 24,441,494 23,236,057
Dilutive stock options using
average market price - - 85,535 -
--------- ---------- ---------- ----------
Total number of shares used to
compute primary earnings per
share. 9,321,469 10,257,392 24,525,029 23,236,057
Additional dilutive stock options
using ending market price - - - -
--------- ---------- ---------- ----------
Additional dilutive shares assuming
conversion of convertible
debentures 436,833 362,422 - -
--------- --------- ---------- ---------
Total number of shares used to
compute fully diluted earnings
per share. 9,758,302 10,619,814 24,525,029 23,236,057
========= ========== ========== ==========
Net income available to common
shareholders $ 15,336 $ 6,771 $ 19,468 $ 18,003
Add: Interest expense, net
of tax effect associated
with convertible debentures 127 89 - -
-------- ---------- ----------- ---------
Net income for fully
diluted shares $ 15,463 $ 6,860 $ 19,468 $ 18,003
======== ========== =========== =========
Primary earnings per share $ 1.65 $ 0.66 $ 0.79 $ 0.77
======== ========== =========== =========
Fully diluted earnings
per share $ 1.58 $ 0.65 $ 0.79 $ 0.77
======== ========== =========== =========
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Form
10-Q for the period ending March 31, 1997 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-27-1997
<PERIOD-END> MAR-31-1997
<CASH> 376
<SECURITIES> 391
<RECEIVABLES> 390
<ALLOWANCES> 20
<INVENTORY> 18
<CURRENT-ASSETS> 1,442
<PP&E> 1,608
<DEPRECIATION> 781
<TOTAL-ASSETS> 3,661
<CURRENT-LIABILITIES> 619
<BONDS> 375
2
0
<COMMON> 0
<OTHER-SE> 1,841
<TOTAL-LIABILITY-AND-EQUITY> 3,661
<SALES> 532
<TOTAL-REVENUES> 646
<CGS> 468
<TOTAL-COSTS> 548
<OTHER-EXPENSES> 76
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8
<INCOME-PRETAX> 46
<INCOME-TAX> 17
<INCOME-CONTINUING> 20
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20
<EPS-PRIMARY> $1.65<F1>
<EPS-DILUTED> $1.58<F2>
<FN>
<F1>$1.65 represents Class C Stock earnings per share, Class D Stock earnings per
share; $.79
<F2>$1.58 represents Class C Stock earnings per share, Class D Stock earnings per
share; $.79
</FN>
</TABLE>
KIEWIT CONSTRUCTION & MINING GROUP
Index to Financial Statements and
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Financial Statements:
Condensed Statements of Earnings for the three months
ended March 31, 1997 and 1996
Condensed Balance Sheets as of March 31, 1997 and
December 28, 1996
Condensed Statements of Cash Flows for the three months
ended March 31, 1997 and 1996
Notes to Condensed Financial Statements
Management's Discussion and Analysis of Financial Condition
and Results of Operations
KIEWIT CONSTRUCTION & MINING GROUP
Condensed Statements of Earnings
(unaudited)
Three Months Ended
March 31,
(dollars in millions, except per share data) 1997 1996
Revenue $ 478 $ 502
Cost of Revenue (446) (478)
------ -------
32 24
General and Administrative Expenses (32) (30)
------- -------
Operating Loss - (6)
Other Income (Expense):
Investment Income, net 3 4
Interest Expense, net - (1)
Other, net 22 14
------- -------
25 17
------- -------
Earnings Before Income Taxes 25 11
Provision for Income Taxes (10) (4)
------- -------
Net Earnings $ 15 $ 7
======= =======
Primary Earnings per Share $ 1.65 $ .66
======= =======
Fully Diluted Earnings per Share $ 1.58 $ .65
======= =======
See accompanying notes to condensed financial statements.
KIEWIT CONSTRUCTION & MINING GROUP
Condensed Balance Sheets
March 31, December 28,
1997 1996
(dollars in millions) (unaudited)
Assets
Current Assets:
Cash and cash equivalents $ 118 $ 173
Marketable securities 44 54
Receivables, less allowance of $17 and $17 290 289
Costs and earnings in excess of
billings on uncompleted contracts 72 80
Investment in construction joint ventures 114 91
Deferred income taxes 73 64
Other 14 13
-------- -------
Total Current Assets 725 764
Property, Plant and Equipment, less accumulated
depreciation and amortization of $416 and $429 174 165
Investments 94 94
Other Assets 13 13
-------- -------
$ 1,006 $ 1,036
======== =======
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable, including retainage
of $34 and $33 $ 135 $ 164
Accrued construction costs and billings
in excess of revenue on uncompleted
contracts 154 112
Accrued insurance costs 83 81
Other 42 33
-------- -------
Total Current Liabilities 414 390
Long-Term Debt, less current portion 12 12
Other Liabilities 73 72
Stockholders' Equity (Redeemable common stock,
$377 million aggregate redemption value):
9,262,707 outstanding shares in 1997 and
9,954,006 in 1996
Common equity 512 568
Net unrealized holding loss (2) (1)
Foreign currency adjustment (3) (5)
-------- -------
Total Stockholders' Equity 507 562
-------- -------
$ 1,006 $ 1,036
======== =======
See accompanying notes to condensed financial statements.
KIEWIT CONSTRUCTION & MINING GROUP
Condensed Statements of Cash Flows
(unaudited)
Three Months Ended
March 31,
(dollars in millions) 1997 1996
Cash flows from operations:
Net cash provided by operations $ 27 $ 50
Cash flows from investing activities:
Proceeds from sales and maturities of
marketable securities 21 36
Purchases of marketable securities (11) (34)
Proceeds from sales of property, plant and equipment 22 8
Acquisitions (3) (3)
Capital expenditures (32) (12)
------ -----
Net cash used in investing activities (3) (5)
Cash flows from financing activities:
Payments on long-term debt, including
current portion - (1)
Net change in short-term borrowings - (20)
Repurchases of common stock (1) (3)
Dividends paid (7) (6)
Exchange of Class B&C Stock for Class D Stock, net (71) (19)
------ -----
Net cash used in financing activities (79) (49)
------ -----
Net decrease in cash and cash equivalents (55) (4)
Cash and cash equivalents at beginning of period 173 94
------ -----
Cash and cash equivalents at end of period $ 118 $ 90
====== =====
See accompanying notes to condensed financial statements.
KIEWIT CONSTRUCTION & MINING GROUP
Notes to Condensed Financial Statements
1. Basis of Presentation:
The condensed balance sheet of Kiewit Construction & Mining Group (the "Group")
at December 28, 1996 has been condensed from the Group's audited balance
sheet as of that date. All other financial statements contained herein are
unaudited and have been prepared using the historical amounts included in
the Peter Kiewit Sons', Inc. ("PKS") consolidated condensed financial
statements. The Group's accounting policies and certain other disclosures are
set forth in the notes to the financial statements contained in PKS' Annual
Report on Form 10-K as an exhibit for the year ended December 28, 1996.
Although the financial statements of PKS' Construction & Mining Group and
Diversified 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 C Stock and Class D Stock are stockholders of PKS.
Accordingly, the PKS consolidated condensed financial statements and related
notes as well as those of the Kiewit Diversified Group should be read in
conjunction with these financial statements.
Receivables at March 31, 1997 and December 28, 1996 include approximately $85
million and $86 million of retainage on uncompleted projects, the majority
of which is expected to be collected within one year. Included in the
retainage amounts are $47 million and $53 million of securities which are
being held by owners of various construction projects in lieu of retainage.
The results of operations for the three months ended March 31, 1997 and 1996
are not necessarily indicative of the results to be expected for the full year.
Where appropriate, items within the condensed financial statements have been
reclassified from the previous periods to conform to current year presentation.
2. Earnings Per Share:
Primary earnings per share of common stock have been computed using the weighted
average number of shares outstanding during each period. In addition, fully
diluted earnings per share reflect the dilutive effect of convertible
debentures. The number of shares used in computing earnings per share was as
follows:
Three Months Ended
March 31,
1997 1996
Primary 9,321,469 10,257,392
Fully Diluted 9,758,302 10,619,814
In March 1997, the Financial Accounting Standards Board issued 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 period earnings per share
data presented. This statement is effective for financial statements
issued for periods ending after December 15, 1997 and earlier application
is not permitted. Basic and diluted earnings per share, as defined in SFAS
No. 128, are not expected to vary significantly from the primary and fully
diluted earnings per share shown on the statements of earnings.
3. Summarized Financial Information:
The Group's 50% portion of PKS' corporate assets and liabilities and related
transactions, which are not separately identified with the ongoing operations
of the Construction & Mining Group or the Diversified Group, and specifically
attributable items to the Group are as follows:
(dollars in millions)
March 31, December 28,
1997 1996
Cash and marketable securities $ 13 $ 13
Property, plant and equipment, net 5 5
Other assets 1 1
------- ------
Total Assets $ 19 $ 19
======= ======
Accounts payable $ 1 $ 8
Long-term debt, including current portion 12 12
------- ------
Total Liabilities $ 13 $ 20
======= ======
Three Months Ended
March 31,
1997 1996
Other expense, net $ - $ (1)
Corporate general and administrative costs have been allocated to the Group.
These allocations were less than $1 million for the three months ended March
31, 1997 and 1996.
Mine management income from the Diversified Group was $9 million and $7 million
for the three months ended March 31, 1997 and 1996.
4. Other Matters:
The Group is involved in various 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.
5. Subsequent Event:
In April 1997, the Group and a partner each invested $15 million to acquire a
96% interest in Oak Mountain Energy L.L.C. ("Oak Mountain"). Oak Mountain
then acquired the existing assets of an underground coal mine in Alabama for
approximately $18 million and assumed approximately $16 million of related
debt. Oak Mountain intends to use the remaining cash and $30 million of
nonrecourse bank borrowings to retire the existing debt and further develop
and modernize the mine.
KIEWIT CONSTRUCTION & MINING GROUP
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations - First Quarter 1997 vs. First Quarter 1996
Revenue from each of the Group's businesses was (in millions):
Three Months Ended
March 31,
1997 1996
Construction $ 424 $ 451
Materials 54 51
------- ------
$ 478 $ 502
======= ======
Construction. Construction and material revenue for the first quarter of 1997
decreased $24 million or 5% from the same period in 1996. This was a direct
result of the substantial completion of the San Joaquin Toll Road project at
the end of 1996. Although construction revenue was down, materials
revenue was up 6% due to the strong demand for aggregates in the Arizona
market.
Contract backlog at March 31, 1997 was $3.3 billion of which 4% is attributable
to foreign operations located in Canada, Indonesia and the Philippines.
Domestic projects are spread geographically throughout the U.S. Included
in backlog is $780 million for the "I-15" project awarded in late March. The
Group is the sponsoring partner on the design-build joint venture reconstructing
16 miles of Interstate 15 through the Salt Lake City, Utah area. The project
is expected to be completed in December of 2001 and includes a 10 year
maintenance contract.
Margins on construction projects for the first quarter of 1997 increased to 7%
compared to 5% for the same time period in 1996. Claim settlements were the
primary factor for this increase. Materials margins decreased slightly to 6%
for the first quarter of 1997 from 7% for the same time period in 1996 due to
increased competition in the market.
General and Administrative Expenses. General and administrative expenses
increased 7% in 1997. The increase was attributable to the higher
compensation and insurance costs.
Investment Income, net. Investment income declined slightly in 1997 compared
to 1996. A decrease in the average portfolio balance led to a decline in
interest income.
Interest Expense, net. The repayment of short term borrowings in the first
and second quarter of 1996 was responsible for the reduction of interest
expense.
Other, net. Other income is primarily comprised of mine management income
from the Diversified Group and gains and losses on the disposition of
property, plant and equipment and other assets. Other income increased
57% in 1997 as compared to 1996. The increase is primarily due to higher mine
management fee income and increased gains on the disposition of construction
equipment.
Provision for Income Taxes. The effective income tax rates in 1997 and 1996
are slightly higher than the expected statutory rate of 35% due to state
income tax expense.
Financial Condition - March 31, 1997 vs. December 28, 1996
The Group's working capital decreased $63 million or 17% during the first
quarter of 1997. The decline was primarily due to the exchange for Class
D Stock of $71 million and dividend payments of $7 million. In addition to
the cash used in financing activities, the Group had capital expenditures of
$32 million. Partially funding these outflows was $27 million of cash provided
by operations, $10 million of net proceeds from the sale and maturity of
marketable securities and $22 million of proceeds from the sale of property,
plant and equipment.
The Group anticipates investing between $40 and $75 million annually in its
construction business. In addition to normal spending, the Group expects to
make significant investments in new construction joint ventures in 1997,
including the I-15 project in Utah. The Group continues to explore
opportunities to acquire additional businesses and is committed to purchase
additional shares of an electrical contractor, ME Holding Inc. in 1997.
Other long term liquidity uses include the payment of income taxes, repurchases
and conversions of common stock and the payment of dividends, including a $.70
per share dividend declared in April and payable in May 1997. The Group's
current financial condition and borrowing capacity together with anticipated
cash flows from operations should be sufficient for immediate cash
requirements and future investing activities.
In October 1996, the PKS Board of Directors directed management to pursue a
listing of PKS Class D Stock on a major securities exchange or the NASDAQ
National Market as soon as practical during 1998. The Board does not foresee
circumstances under which PKS would list the Class D Stock prior to 1998.
The Board believes that a listing will provide PKS with a capital structure
more suitable for the further development of the Diversified Group's business
plan. It would also provide liquidity for Class D shareholders without
impairing PKS' capital base.
The Board's action does not ensure that a listing of Class D Stock will occur
in 1998, or any time. The Board could delay or abandon plans to list the
stock if it determined that such action would be in the best interests of all
PKS' shareholders. In addition, PKS' ability to list Class D Stock will be
subject to factors beyond its control, including the laws, regulations, and
listing eligibility criteria in effect at the time a listing is sought, as
well as stock market conditions at the time. Furthermore, the Board might
decide to couple the listing of Class D Stock with a public offering of
newly-issued Class D shares in order to raise additional capital for the
Diversified Group. Such an offering could delay or alter the listing plan.
In January 1997, approximately 1.7 million shares of Class B&C Stock, with a
redemption value of $71 million, were converted into approximately 1.3
million shares of Class D Stock. If the listing described above does occur,
Class C shareholders will continue to be able to convert their shares.
However, PKS would not be obligated to repurchase Class D Stock from
shareholders.
KIEWIT DIVERSIFIED GROUP
Index to Financial Statements and
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Financial Statements:
Condensed Statements of Earnings for the
three months ended March 31, 1997 and 1996
Condensed Balance Sheets as of March 31, 1997
and December 28, 1996
Condensed Statements of Cash Flows for the
three months ended March 31, 1997 and 1996
Notes to Condensed Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
KIEWIT DIVERSIFIED GROUP
Condensed Statements of Earnings
(unaudited)
Three Months Ended
March 31,
(dollars in millions, except per share data) 1997 1996
Revenue $ 176 $ 155
Cost of Revenue (110) (95)
------ ------
66 60
General and Administrative Expenses (53) (39)
------ ------
Operating Earnings 13 21
Other Income (Expense):
Equity Earnings, net 5 (1)
Investment Income, net 11 16
Interest Expense, net (8) (7)
Other, net - (1)
------ ------
8 7
------ ------
Earnings Before Income Taxes and
Minority Interest 21 28
Provision for Income Taxes (7) (10)
Minority Interest in Net Loss
of Subsidiaries 6 -
----- -----
Net Earnings $ 20 $ 18
====== =====
Primary Earnings per Share $ .79 $ .77
====== =====
Fully Diluted Earnings per Share $ .79 $ .77
====== =====
See accompanying notes to condensed financial statements.
KIEWIT DIVERSIFIED GROUP
Condensed Balance Sheets
March 31, December 28,
1997 1996
(dollars in millions) (unaudited)
Assets
Current Assets:
Cash and cash equivalents $ 258 $ 147
Marketable securities 325 372
Restricted securities 22 25
Receivables, less allowance of $3 and $3 89 76
Other 32 28
------- ------
Total Current Assets 726 648
Property, Plant and Equipment,
less accumulated depreciation and
amortization of $365 and $345 653 642
Investments 840 806
Intangible Assets, net 373 353
Other Assets 72 74
------- ------
$ 2,664 $2,523
======= ======
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 69 $ 79
Current portion of long-term debt:
Telecommunications 11 55
Other 2 2
Accrued costs and billings in excess
of revenue on uncompleted contracts 14 12
Accrued reclamation and other mining costs 15 19
Other 103 82
------- ------
Total Current Liabilities 214 249
Long-Term Debt, less current portion:
Telecommunications 248 207
Other 115 113
Deferred Income Taxes 229 165
Retirement Benefits 46 48
Accrued Reclamation Costs 101 98
Other Liabilities 166 168
Minority Interest 209 218
Stockholders' Equity (Redeemable common stock
$1,328 million aggregate redemption value):
24,481,905 outstanding shares in 1997 and
23,219,744 in 1996
Common equity 1,324 1,235
Foreign currency adjustment (2) (2)
Net unrealized holding gain 14 24
------ ------
Total Stockholders' Equity 1,336 1,257
------ ------
$2,664 $2,523
====== ======
See accompanying notes to condensed financial statements.
KIEWIT DIVERSIFIED GROUP
Condensed Statements of Cash Flows
(unaudited)
Three Months Ended
March 31,
(dollars in millions) 1997 1996
Cash flows from operations:
Net cash provided by operations $ 112 $ 16
Cash flows from investing activities:
Proceeds from sales and maturities of
marketable securities and investments 59 61
Purchases of marketable securities (14) (79)
Change in restricted securities 3 3
Capital expenditures (33) (20)
Acquisitions and investment in affiliates (73) (64)
------- -----
Net cash used in investing activities (58) (99)
Cash flows from financing activities:
Proceeds from long-term debt borrowings - 6
Payments on long-term debt, including
current portion (3) (7)
Repurchases of common stock - (9)
Exchange of Class B&C Stock for Class D Stock 71 19
Payments of dividends (12) (12)
Other 1 -
------ -----
Net cash provided by (used in) financing activities 57 (3)
------ -----
Net change in cash and cash equivalents 111 (86)
Cash and cash equivalents at beginning of period 147 363
------ -----
Cash and cash equivalents at end of period $ 258 $ 277
====== =====
See accompanying notes to condensed financial statements.
KIEWIT DIVERSIFIED GROUP
Notes to Condensed Financial Statements
1. Basis of Presentation:
The condensed balance sheet of Kiewit Diversified Group (the "Group") at
December 28, 1996 has been condensed from the Group's audited balance sheet
as of that date. All other financial statements contained herein are
unaudited and have been prepared using historical amounts included in the
Peter Kiewit Sons', Inc. ("PKS") consolidated condensed financial statements.
The Group's accounting policies and certain other disclosures are set forth in
the notes to the financial statements contained in PKS' Annual Report on
Form 10-K as an exhibit for the year ended December 28, 1996.
Although the financial statements of PKS' Construction & Mining Group and
Diversified Group separately report their 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 C Stock and Class D Stock are stockholders of PKS.
Accordingly, the PKS consolidated condensed financial statements and related
notes as well as those of the Kiewit Construction & Mining Group should be
read in conjunction with these financial statements.
The results of operations for the three months ended March 31, 1997 and 1996
are not necessarily indicative of the results to be expected for the full
year.
Where appropriate, items within the condensed financial statements have been
reclassified from the previous periods to conform to current year presentation.
2. Earnings Per Share:
Primary and fully diluted earnings per share of common stock have been computed
using the weighted average number of shares outstanding during each period
after giving effect to stock options considered to be dilutive common stock
equivalents. The number of shares used in computing both primary and fully
diluted earnings per share were 24,525,029 and 23,236,057 for the three
months ended March 31, 1997 and 1996.
In March 1997, the Financial Accounting Standards Board issued 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 period earnings per share data
presented. This statement is effective for financial statements issued for
periods ending after December 15, 1997 and earlier application is not
permitted. Basic and diluted earnings per share, as defined in SFAS No. 128,
are not expected to vary significantly from the primary and fully diluted
earnings per share shown on the statements of earnings.
3. Summarized Financial Information:
The Group's 50% portion of PKS' corporate assets and liabilities and related
transactions, which are not separately identified with the ongoing operations
of the Construction & Mining Group or the Diversified Group, and specifically
attributable items are as follows:
(dollars in millions)
March 31, December 28,
1997 1996
Cash and marketable securities $ 34 $ 5
Property, plant and equipment, net 5 5
Other assets 1 1
------- -------
Total Assets $ 40 $ 11
======= =======
Accounts payable $ 2 $ 17
Long-term debt, including current portion 1 1
------- ------
Total Liabilities $ 3 $ 18
======= =======
Three Months Ended
March 31,
1997 1996
Other expense, net $ - $ (1)
Corporate general and administrative costs have been allocated to the Group.
These allocations were $1 million and $2 million for the three months ended
March 31, 1997 and 1996.
Mine management expense paid to the Construction & Mining Group was $9 million
and $7 million for the three months ended March 31, 1997 and 1996.
4. Acquisitions:
In 1996, C-TEC purchased 80% of Freedom New York, L.L.C. ("Freedom"). Freedom
provides subscription television services using microwave frequencies in New
York City and selected areas of New Jersey. In March 1997, C-TEC paid $40
million (including $10 million of non-capitalizable costs) in connection with
a series of transactions which resulted in C-TEC having a 100% ownership
interest in the assets of Freedom. The acquisition was accounted for as a
purchase. The purchase price (net of non-capitalizable costs) exceeded the
fair value of net assets acquired by $25 million, which is recognized as
goodwill and is being amortized over approximately 6 years.
On December 24, 1996, CE Electric plc ("CE Electric") which is 70% owned
indirectly by CalEnergy and 30% owned by the Group, acquired majority
ownership of the outstanding ordinary share capital of Northern Electric plc
("Northern") pursuant to a tender offer (the "Tender Offer") commenced in the
United Kingdom by CE Electric on November 5, 1996. As of March 18, 1997,
CE Electric effectively owned 100% of Northern's ordinary shares.
As of March 31, 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 ($921 million) and
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.
5. Investments:
The Group is able to defer $40 million of the taxable gain with respect to the
1995 Whitney Benefits litigation settlement by investing in real estate. In
February 1997, the Group purchased an office building in Aurora, Colorado for
$22 million. The Group may make additional real estate investments to defer
the remaining balance.
In late 1995, a Group and CalEnergy venture, CE Casecnan Water and Energy
Company, Inc., ("Casecnan") closed financing and commenced construction of a
$495 million irrigation and hydroelectric power project located on the
Philippine island of Luzon. The Group and CalEnergy have each made $62
million of equity contributions to the project.
The Casecnan project was being constructed on a joint and several basis by Hanbo
Corporation and Hanbo Engineering & Construction Co. Ltd. ("HECC"), (together,
"Contractors"), both of which are South Korean corporations.
Hanbo Corporation and HECC are under common ownership. The Contractors'
obligations under the construction contract ("Hanbo Contract") are guaranteed
by Hanbo Iron & Steel Company , Ltd. ("Hanbo Steel"), a large South Korean
steel company. In addition, the Contractors' obligations are secured by an
unconditional, irrevocable standby letter of credit issued by Korea First
Bank ("KFB") in the approximate amount of $118 million. During the first
quarter of 1997 Hanbo Corporation, HECC and Hanbo Steel each filed to seek
bankruptcy protection in Korea and KFB's credit rating was downgraded
because of the substantial loans it made to Hanbo Steel.
On May 7, 1997, Casecnan announced that it had terminated the Hanbo Contract
and had entered into a new engineer, procure and construct contract to
complete the construction of the project (the "Replacement Contract").
The work under the Replacement Contract will be conducted by a consortium
of contractors and subcontractors including Siemens A.G., Sulzer Hydro Ltd.,
Black & Veatch and Colenco Power Engineering Ltd., and will be headed by
Cooperativa Muratori Cementista CMC di Ravenna and Impressa Pizzarotti & C.
Spa. The Hanbo Contract was terminated because of events of default under
that contract including the fact that the Contractors had filed for court
receivership protection in South Korea. In connection with the contract
termination, Casecnan made a draw request under the letter of credit issued by
KFB to pay for certain transition costs and other damages under the Hanbo
Contract. If KFB should fail to honor its obligations under the letter of
credit, such action may have a material adverse effect on the Casecnan
project. However, based on information available, the Group does not
currently believe its investment is impaired.
6. C-TEC Restructuring:
In February 1997, C-TEC announced a plan to separate its operations along
business lines into three separate, publicly traded companies:
CTCo, containing the local telephone group and related engineering business;
C-TEC Michigan, containing the cable television operations in Michigan; and
RCN Corporation, which will consist of RCN Telecom Services; cable television
operations in New York, New Jersey and Pennsylvania; and the investment in
Megacable S.A. de C.V., a cable operator in Mexico. RCN Telecom Services
is a provider of packaged local and long distance telephone, video, and
internet access services provided over fiber optic networks to residential
customers in Boston and New York City.
The restructuring should permit investors and the financial market to better
understand and evaluate C-TEC's various businesses. In addition, the
restructuring will allow C-TEC to raise capital on the most efficient terms.
In April 1997, C-TEC obtained three committed credit facilities with a
syndicate of banks aggregating $395 million. C-TEC intends to use these credit
facilities to refinance the existing Senior Secured Notes and to fund its
network expansion plans, primarily the RCN businesses.
The restructuring is contingent upon receipt of a private letter ruling from
the Internal Revenue Service regarding the tax-free nature of the spin-offs,
the receipt of other regulatory approvals, and other conditions. If the
reorganization and spin-offs occur, the Group will own less than 50% of
the outstanding shares and voting rights of each entity, and will therefore
account for each entity using the equity method.
On May 12, 1997, C-TEC announced that it had proposed to acquire the 38% of
the common stock of Mercom Inc. ("Mercom") not currently owned by it in exchange
of 8.75% of the common stock of C-TEC Michigan. The proposed exchange ratio
is based on the assumption that C-TEC Michigan will have $125 million of net
debt outstanding at the time of the transaction.
C-TEC anticipates that Mercom's Board of Directors will form a special
committee composed of directors unaffiliated with C-TEC to reveiw and evaluate
the proposal. The proposal is subject to certain conditions, including
the consummation of C-TEC's restructuring and the receipt of all required
regulatory approvals. C-TEC reserves the right to withdraw its proposal
at any time prior to the execution of a definitive agreement. There can be no
assurance as to the terms of any transaction or that any transaction will
take place.
The following is financial information of the Group had C-TEC been accounted
for utilizing the equity method in the condensed financial statements as of
March 31, 1997 and December 28, 1996 and for the three months ended
March 31, 1997 and 1996:
March 31, December 28,
Financial Position (dollars in millions) 1997 1996
Assets
Current Assets:
Cash and cash equivalents $ 203 $ 71
Marketable securities 312 325
Restricted securities 22 25
Receivables 39 34
Other 7 4
------ -----
Total Current Assets 583 459
Net Property, Plant and Equipment 176 174
Investments 1,107 1,075
Intangible Assets, net 25 23
Other Assets 47 49
------ ------
$1,938 $1,780
====== ======
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 34 $ 41
Current portion of long-term debt 2 2
Accrued reclamation and other mining costs 15 19
Other 45 19
------ ------
Total Current Liabilities 96 81
Long-term Debt, less current portion 115 113
Deferred Income Taxes 127 64
Retirement Benefits 44 45
Accrued Reclamation Costs 101 98
Other Liabilities 115 118
Minority Interest 4 4
Stockholders' Equity 1,336 1,257
------ ------
$1,938 $1,780
====== ======
Three Months Ended
March 31,
Operations (dollars in millions) 1997 1996
Revenue $ 80 $ 66
Cost of Revenue (42) (35)
------ ------
38 31
General and Administrative Expenses (18) (17)
------ ------
Operating Earnings 20 14
Other Income (Expense):
Equity earnings, net 1 (1)
Investment income, net 8 12
Interest expense, net (3) -
Other, net 1 -
------- -----
7 11
Earnings Before Income Taxes and
Minority Interest 27 25
Provision for Income Taxes (8) (7)
Minority Interest in Net Loss of Subsidiaries 1 -
------ -----
Net Earnings $ 20 $ 18
====== =====
Three Months Ended
March 31,
(dollars in millions) 1997 1996
Cash flows from operations:
Net cash provided by operations $ 108 $ (7)
Cash flows from investing activities:
Proceeds from sales and maturities of
marketable securities and investments 25 1
Purchases of marketable securities (14) (44)
Change in restricted securities 3 3
Capital expenditures (7) (6)
Acquisitions and investment in affiliates (43) (51)
-------- -------
Net cash used in investing activities (36) (97)
Cash flows from financing activities:
Proceeds from long-term debt borrowings - 6
Payments on long-term debt, including
current portion - (1)
Repurchases of common stock - (9)
Exchange of Class B&C Stock for Class D Stock 71 19
Payments of dividends (12) (12)
Other 1 -
------- ------
Net cash provided by financing activities 60 3
------- ------
Net change in cash and cash equivalents 132 (101)
Cash and cash equivalents at beginning of period 71 314
------- ------
Cash and cash equivalents at end of period $ 203 $ 213
======= ======
7. Other Matters:
The Group is involved in various lawsuits, claims and regulatory proceedings
incidental to its business. Management believes that any resulting liability
for legal proceedings beyond that provided should not materially affect the
Group's financial position, future results of operations or future cash flows.
KIEWIT DIVERSIFIED GROUP
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations - First Quarter 1997 vs. First Quarter 1996
Revenue from each of the Group's business segments for the three months ended
March 31, comprised the following (in millions):
1997 1996
Coal Mining $ 61 $ 53
Telecommunications 96 90
Other 19 12
------ -----
$ 176 $ 155
====== =====
Coal Mining. Mining revenue increased $8 million in the first quarter of 1997
compared to 1996. Increased sales of alternate source, spot market and
contracted coal all contributed to the improvement. Alternate source coal
sales to Commonwealth Edison Company ("Commonwealth") in the first quarter of
1997 were 33% of its commitment for all of 1997. In 1996, first quarter
alternate source coal sales were 25% of its 1996 commitment. The increase
in 1997 alternate source coal sales contributed $4 million to the
improvement in revenue. Commonwealth has the flexibility under the amended
contract to accelerate and defer delivery of alternate source coal provided
it accepts delivery of the aggregate minimum commitment at the end of each
year. Thus, the increased revenue recognized in the first quarter of 1997
may not continue and could even decline throughout the remaining periods of
1997.
An increase in spot sales, due to a decline in hydroelectric power generated
in the northwestern United States, and contract sales, attributable to new
and accelerated contractual commitments, are responsible for the remainder
of the increase in coal revenue.
Operating margins as a percentage of revenue were virtually unchanged from the
first quarter of 1996. The increased level of high margin alternate source
coal sales continued to offset the lower margin on increased spot sales.
Telecommunications. Telecommunications revenue, generated by C-TEC,
increased 7% in 1997. C-TEC's telephone and cable groups each experienced
similar growth. Sales of the telephone group increased primarily due to
higher internet access revenue, video conferencing system sales, and a growth
in interstate access lines and access minutes. The increase in the cable
group's revenue is attributable to 9,300 additional average subscribers over
the same period in 1996 and the effects of rate increases during the first
quarter of 1997. C-TEC also experienced revenue growth from the RCN
businesses. The video subscribers obtained in the 1996 Freedom transaction
are responsible for the additional sales.
Expenses attributable to telecommunications revenue increased 13% in the first
quarter of 1997 compared to the same period in 1996. Costs for the telephone
group grew 15% in 1997. The telephone group's costs in 1996 were positively
impacted by a one-time postemployment benefit adjustment that did not recur in
1997. Increases in advertising, internet service costs and compensation
expenses due to personnel additions and wage increases, also contributed to
the higher costs 1997. Higher basic programming expenses in 1997 led to
a 7% increase in costs for the cable group. The costs associated with the
development of the RCN businesses, including depreciation and amortization
expense and personnel related expenses also contributed to the overall
increase in telecommunications costs.
General and Administrative Expenses. General and administrative expenses
increased 36% in 1997. The expenses of Freedom, acquired by C-TEC in 1996,
and certain non-capitalized costs of $10 million incurred in connection with
the March 1997 transactions with Freedom's minority shareholders were
primarily responsible for the higher costs. Also contributing to the
increase were mine management fees and computer operations partially offset
by decreases in professional services and other administrative expenses.
Equity Earnings, net. Equity earnings increased $6 million in 1997. The
Group's proportionate share of CalEnergy's earnings increased $5 million in
the first quarter of 1997 to $8 million. The improvement in CalEnergy's
earnings resulted from the completion and commencement of operations of the
Salton Sea Unit IV and two Philippine geothermal facilities, the purchase of
three cogeneration facilities and the acquisition of Northern Electric, all
of which occurred after March 31, 1996. In addition to contributing to
CalEnergy's earnings, the Group's proportionate share of Northern Electric also
provided $3 million of income. Partially offsetting these gains were losses
attributable to the Casecnan project. The Casecnan loss during construction
results from the variance in borrowing and investing interest rates on the funds
generated by the project's debt offering in 1995.
Investment Income, net. Investment income decreased 31% in 1997 compared to
1996. A decrease in interest income, primarily due to a decline in the
average portfolio balance, was partially offset by gains on the sale of
securities.
Interest Expense. Interest expense increased slightly in 1997 compared to
1996. CPTC incurred $3 million of interest in 1996 and 1997. The 1996
interest was capitalized due to the construction of the SR91 toll road.
CPTC's 1997 interest expense was partially offset by a reduction in C-TEC's
interest expense due to a decline in their outstanding debt.
Minority Interest in Net Loss of Subsidiaries. C-TEC's losses, primarily due
to the development of the RCN businesses and certain non-capitalized
costs incurred in connection with the March 1997 transactions with Freedom's
minority shareholders and the losses associated with the SR91 toll road,
resulted in the increased losses attributable to minority shareholders.
Provision for Income Taxes. The effective income tax rates in 1997 and 1996
approximate the expected statutory rate of 35%.
KIEWIT DIVERSIFIED GROUP
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Financial Condition - March 31, 1997 vs. December 28, 1996
Excluding C-TEC, described in a separate paragraph below, the Group's working
capital increased $109 million or 29% during 1997. An increase in cash flows
from operations, primarily due to $83 million of federal tax and interest
refunds and financing activities, was partially offset by investing activities.
Investing activities primarily consist of $22 million of real estate
investments, $18 million of investments in international energy projects and $7
million of capital expenditures. These outflows were partially offset by
the net sale of marketable securities of $11 million.
Financing activities primarily consist of the payment of $12 million of
dividends and $71 million from the conversion of Class B&C Stock to Class D
Stock.
C-TEC's working capital was consistent with that at the end of 1996. The
series of transactions with Freedom's minority shareholders for $40 million,
and $26 million of capital expenditures to expand the RCN, cable and
telephone networks were partially offset by $34 million of proceeds from
the sale and maturity of short-term investments. In addition to those
activities, C-TEC reclassified $44 million of long-term debt from current to
noncurrent. C-TEC intends to refinance the Senior Secured Notes with the
proceeds from new credit facilities.
The Group anticipates making significant investments in its energy and
infrastructure businesses - including its joint venture agreement with
CalEnergy covering international power project development activities -
and searching for opportunities to acquire businesses which provide for long-
term growth. Other long-term liquidity uses include payment of income taxes
and repurchasing the Group's stock. The Group's current financial condition,
cash flows from operations, and borrowing capacity should be sufficient for
immediate operating and investing activities.
In October 1996, the PKS Board of Directors directed management to pursue a
listing of PKS Class D Stock on a major securities exchange or the NASDAQ
National Market as soon as practical during 1998. The Board does not foresee
circumstances under which PKS would list the Class D Stock prior to 1998.
The Board believes that a listing will provide PKS with a capital structure
more suitable for the further development of the Diversified Group's
business plan. It would also provide liquidity for Class D shareholders
without impairing PKS' capital base.
The Board's action does not ensure that a listing of Class D Stock will occur
in 1998, or any time. The Board could delay or abandon plans to list the
stock if it determined that such action would be in the best interests of all
PKS' shareholders. In addition, PKS' ability to list Class D Stock will be
subject to factors beyond its control, including the laws, regulations, and
listing eligibility criteria in effect at the time a listing is sought, as
well as stock market conditions at the time. Furthermore, the Board might
decide to couple the listing of Class D Stock with a public offering of
newly-issued Class D shares in order to raise additional capital for the
Diversified Group. Such an offering could delay or alter the listing plan.
In January 1997, approximately 1.7 million shares of Class B&C Stock, with a
redemption value of $71 million were converted into approximately 1.3 million
shares of Class D Stock. If the listing described above does occur, Class C
shareholders will continue to be able to convert their shares. However, PKS
would not be obligated to repurchase Class D Stock from shareholders.
In February 1997, C-TEC announced a plan to separate its operations along
business lines into three separate, publicly traded companies:
CTCo, containing the local telephone group and related engineering business;
C-TEC Michigan, containing the cable television operations in Michigan; and
RCN Corporation, which will consist of RCN Telecom Services; cable
television operations in New York, New Jersey and Pennsylvania; and the
investment in Megacable S.A. de C.V., a cable operator in Mexico.
RCN Telecom Services, is a provider of packaged local and long distance
telephone, video, and internet access services provided over fiber optic
networks to residential customers in Boston and New York City.
The restructuring should permit investors and the financial market to better
understand and evaluate C-TEC's various businesses. In addition, the
restructuring will allow C-TEC to raise capital on the most efficient terms.
In April 1997, C-TEC obtained three committed credit facilities with a syndicate
of banks aggregating $395 million. C-TEC intends to use these facilities to
refinance the existing Senior Secured Notes and to fund its network expansion
plans, primarily the RCN businesses.
The restructuring is contingent upon receipt of a private letter ruling from
the Internal Revenue Service regarding the tax-free nature of the spin-offs,
the receipt of other regulatory approvals, and other conditions. If the
reorganization and spin-offs occur, the Group will own less than 50% of the
outstanding shares and voting rights of each entity, and will therefore
account for each entity using the equity method.
On May 12, 1997, C-TEC announced that it had proposed to acquire the 38% of the
common stock of Mercom not currently owned by it in the exchange of 8.75% of
the common stock of C-TEC Michigan. The proposed exchange ratio is based
on the assumption that C-TEC Michigan will have $125 million of net debt
outstanding at the time of the transaction.
C-TEC anticipates that Mercom's Board of Directors will form a special
committee composed of directors unaffiliated with C-TEC to review and evaluate
the proposal. The proposal is subject to certain conditions, including the
consummation of C-TEC's restructuring and the receipt of all required
regulatory approvals. C-TEC reserves the right to withdraw its proposal
at any time or any time prior to the execution of a definitive agreement.
There can be no assurance as to the terms of any transaction or that any
transaction will take place.
In late 1995, a Group and CalEnergy venture, CE Casecnan Water and Energy
Company, Inc., ("Casecnan") closed financing and commenced construction of a
$495 million irrigation and hydroelectric power project located on the
Philippine island of Luzon. The Group and CalEnergy have each made $62
million of equity contributions to the project.
The Casecnan project was being constructed on a joint and several basis by Hanbo
Corporation and Hanbo Engineering & Construction Co. Ltd. ("HECC"),
(together, "Contractors"), both of which are South Korean corporations.
Hanbo Corporation and HECC are under common ownership. The Contractors'
obligations under the construction contract ("Hanbo Contract") are guaranteed
by Hanbo Iron & Steel Company , Ltd. ("Hanbo Steel"), a large South Korean
steel company. In addition, the Contractors' obligations are secured by an
unconditional, irrevocable standby letter of credit issued by Korea First Bank
("KFB") in the approximate amount of $118 million. During the first quarter of
1997 Hanbo Corporation, HECC and Hanbo Steel each filed to seek bankruptcy
protection in Korea and KFB's credit rating was downgraded because of the
substantial loans it made to Hanbo Steel.
On May 7, 1997, Casecnan announced that it had terminated the Hanbo Contract and
had entered into a new engineer, procure and construct contract to complete
the construction of the project (the "Replacement Contract"). The work under
the Replacement Contract will be conducted by a consortium of contractors
and subcontractors including Siemens A.G., Sulzer Hydro Ltd., Black & Veatch
and Colenco Power Engineering Ltd., and will be headed by Cooperativa Muratori
Cementista CMC di Ravenna and Impressa Pizzarotti & C. Spa. The Hanbo
Contract was terminated because of events of default under that contract
including the fact that the Contractors had filed for court receivership
protection in South Korea. In connection with the contract termination,
Casecnan made a draw request under the letter of credit issued by KFB to pay
for certain transition costs and other damages under the Hanbo Contract.
If KFB should fail to honor its obligations under the letter of credit, such
action may have a material adverse effect on the Casecnan project. However,
based on information available, the Group does not currently believe its
investment is impaired.
