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 September 30, 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 November 3, 1997:
Class C Common Stock ................... 10,129,725 shares
Class D Common Stock ................... 26,621,725 shares
PETER KIEWIT SONS', INC.
Part I - Financial Information
Item 1. Financial Statements:
Consolidated Condensed Statements of Operations
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 Operations
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
(dollars in millions, except
per share data) 1997 1996 1997 1996
Revenue $ 896 $ 809 $ 2,180 $ 2,186
Cost of Revenue (785) (670) (1,877) (1,842)
------ ------ ------- -------
111 139 303 344
General and Administrative Expenses (53) (53) (147) (177)
------ ------- ------- --------
Operating Earnings 58 86 156 167
Other Income (Expense):
Equity Losses, net (12) (2) (17) (3)
Investment Income, net 12 14 34 48
Interest Expense, net (5) (9) (13) (24)
Other, net 9 5 29 19
------- -------- ------ --------
4 8 33 40
------- -------- ------ --------
Income from Continuing Operations Before
Income Taxes and Minority Interest 62 94 189 207
Provision for Income Taxes (23) (36) (73) (79)
Minority Interest in Net Loss
(Income) of Subsidiaries 1 - 2 (1)
------- -------- ------ -------
Income from Continuing Operations 40 58 118 127
Discontinued Operations:
Income from Operations, net of income
taxes of ($8), ($3), ($15) and ($6) 13 5 26 7
Extraordinary Item - Windfall tax, net of
income tax benefit of $34 (63) - (63) -
-------- -------- ----- ------
Income (Loss) from
Discontinued Operations (50) 5 (37) 7
-------- -------- ----- ------
Net Earnings(Loss) $ (10) $ 63 $ 81 $ 134
======== ======== ===== ======
Earnings Attributable to
Class B&C Stock $ 34 $ 39 $ 84 $ 75
======== ======== ===== ======
Earnings (Loss) Attributable to
Class D Stock:
Continuing Operations 6 19 34 52
Discontinued Operations (50) 5 (37) 7
-------- -------- ----- ------
$ (44) $ 24 $ (3) $ 59
======== ======== ===== ======
See accompanying notes to consolidated condensed financial statements.
PETER KIEWIT SONS', INC.
Consolidated Condensed Statements of Operations
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
(dollars in millions, except
per share data) 1997 1996 1997 1996
Primary Earnings per Share:
Class B&C $ 3.38 $ 3.64 $ 8.76 $ 7.18
======== ======= ======= ======
Class D
Continuing Operations $ .26 $ .76 $ 1.40 $ 2.19
Discontinued Operations:
Income from Operations .55 .22 1.08 .33
Extraordinary Item (2.59) - (2.59) -
-------- ------- ------- ------
Discontinued Operations (2.04) .22 (1.51) .33
-------- ------- ------- ------
Net Income (Loss) $ (1.78) $ .98 $ (.11) $ 2.52
======== ======= ======= ======
Fully Diluted Earnings per Share:
Class B&C $ 3.26 $ 3.53 $ 8.42 $ 6.97
======== ======= ======= ======
Class D
Continuing Operations $ .26 $ .76 $ 1.40 $ 2.19
Discontinued Operations:
Income from Operations .55 .22 1.08 .33
Extraordinary Item (2.59) - (2.59) -
-------- ------- ------- ------
Discontinued Operations (2.04) .22 (1.51) .33
-------- ------- ------- ------
Net Income (Loss) $ (1.78) $ .98 $ (.11) $ 2.52
======== ======= ======= ======
Cash Dividends Declared per Common Share:
Class B&C $ - $ - $ .70 $ .60
======== ======= ======== ======
Class D $ - $ - $ - $ -
======== ======= ======== ======
See accompanying notes to consolidated condensed financial statements.
PETER KIEWIT SONS', INC.
Consolidated Condensed Balance Sheets
September 30, December 28,
1997 1996
(dollars in millions, except per share data) (unaudited)
Assets
Current Assets:
Cash and cash equivalents $ 522 $ 320
Marketable securities 373 426
Restricted securities 22 17
Receivables, less allowance of $15 and $20 463 357
Costs and earnings in excess of
billings on uncompleted contracts 118 80
Investment in construction joint ventures 148 91
Deferred income taxes 46 59
Other 51 45
------- -------
Total Current Assets 1,743 1,395
Property, Plant and Equipment,
less accumulated depreciation and
amortization of $665 and $774 391 807
Investments 531 283
Investments in Discontinued Operations 597 608
Intangible Assets, net 55 368
Other Assets 43 72
------- -------
$ 3,360 $ 3,533
======= =======
See accompanying notes to consolidated condensed financial statements.
PETER KIEWIT SONS', INC.
Consolidated Condensed Balance Sheets
September 30, December 28,
1997 1996
(dollars in millions, except per share data) (unaudited)
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 268 $ 235
Current portion of long-term debt:
Telecommunications - 55
Other 11 2
Accrued costs and billings in excess
of revenue on uncompleted contracts 302 124
Accrued insurance costs 86 81
Other 83 140
------- --------
Total Current Liabilities 750 637
Long-Term Debt, less current portion:
Telecommunications - 207
Other 151 125
Deferred Income Taxes 158 146
Retirement Benefits 40 48
Accrued Reclamation Costs 100 99
Other Liabilities 182 234
Minority Interest 11 218
Stockholders' Equity:
Preferred stock, no par value, authorized
250,000 shares: no shares outstanding - -
Common stock, $.0625 par value,
$1.8 billion aggregate redemption value:
Class B, authorized 8,000,000 shares:
-0- outstanding in 1997 and 263,468 in 1996 - -
Class C, authorized 125,000,000 shares:
10,082,829 outstanding in 1997 and
10,743,173 in 1996 1 1
Class D, authorized 50,000,000 shares:
25,386,725 outstanding in 1997 and
23,219,744 in 1996 1 1
Additional paid-in capital 317 235
Foreign currency adjustment (8) (7)
Net unrealized holding gain 18 23
Retained earnings 1,639 1,566
-------- -------
Total Stockholders' Equity 1,968 1,819
-------- -------
$ 3,360 $ 3,533
======== =======
See accompanying notes to consolidated condensed financial statements.
PETER KIEWIT SONS', INC.
Consolidated Condensed Statements of Cash Flows
(unaudited)
Nine Months Ended
September 30,
(dollars in millions) 1997 1996
Cash flows from continuing operations:
Net cash provided by continuing operations $ 341 $ 226
Cash flows from investing activities:
Proceeds from sales and maturities of
marketable securities 212 312
Purchases of marketable securities (193) (283)
Change in restricted securities 4 2
Proceeds from sale of property, plant
and equipment, and other investments 36 25
Capital expenditures (110) (138)
Acquisitions and investments, net (53) (41)
Other - 3
------- -------
Net cash used in investing activities (104) (120)
Cash flows from financing activities:
Proceeds from long-term debt borrowings 21 35
Payments on long-term debt, including
current portion (2) (40)
Net change in short-term borrowings - (45)
Repurchases of common stock (2) (15)
Dividends paid (25) (25)
Issuance of common stock 83 28
------- --------
Net cash provided by (used in) financing activities 75 (62)
Cash flows from discontinued operations:
Discontinued operations - 3
Investments in discontinued operations (34) (55)
------- ---------
Net cash used by discontinued operations (34) (52)
Cash and cash equivalents of C-TEC at beginning of year (76) -
------- ---------
Net change in cash and cash equivalents 202 (8)
Cash and cash equivalents at beginning of period 320 457
------- ---------
Cash and cash equivalents at end of period $ 522 $ 449
======= =========
Noncash investing activities from discontinued operations:
Conversion of CalEnergy Convertible Debentures
to CalEnergy Common Stock $ - $ 66
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.
On July 1, 1997, the Company paid $5 million to increase its ownership in ME
Holding Inc. ("ME Holding") from 49% to 80%. The Company consolidated ME
Holding in its 1997 financial statements and accounted for it using the
equity method in 1996. The purchase price of $5 million was in the form
of a note payable to the minority shareholder and is payable on demand.
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 Company 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. C-TEC's financial position, results of operations and cash flows are
consolidated in the 1996 consolidated condensed financial statements.
Receivables at September 30, 1997 and December 28, 1996 include approximately
$74 million and $86 million, respectively of retainage on uncompleted
projects, the majority of which is expected to be collected within one year.
Included in accounts receivable are $44 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 nine months ended September 30, 1997 are not
necessarily indicative of the results to be expected for the full year.
When appropriate, items within the consolidated condensed financial statements
have been reclassified from the previous periods to conform to current year
presentation.
2. Discontinued Operations
On September 10, 1997, the Company and CalEnergy Company, Inc. ("CalEnergy")
entered into an agreement whereby CalEnergy contracted to purchase the
Company's energy investments for $1,155 million, subject to adjustments.
These energy investments include approximately 20 million shares of
CalEnergy common stock (assuming the exercise of 1 million options held by the
Company), the Company's 30% ownership interest in CE Electric UK, plc
("CE Electric") and the Company's investments, made jointly with CalEnergy,
in international power projects in Indonesia and the Philippines. The
transaction is subject to the satisfactory completion of certain provisions
of the agreement and is expected to close in early 1998. These assets
comprise the energy segment of the Company. Therefore, the Company has
reflected these assets, the earnings and losses attributable to these
assets, and the related cash flow items as discontinued operations on the
consolidated condensed balance sheets and statements of operations and cash
flows for all periods presented. The Company is no longer required to
provide additional capital to these entities through the closing date.
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 Company's ownership in CalEnergy to
approximately 23% but increased its proportionate share of CalEnergy's equity.
It is the Company policy to recognize gains or losses on the sale of stock by
its investees. The Company expects to recognize an after-tax gain of
approximately $50 million from this transaction in the fourth quarter of 1997.
The agreement with CalEnergy includes a provision whereby CalEnergy and the
Company are to share 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 Company expects to receive additional
proceeds of up to $20 million at the time of closing.
The Company expects to recognize an after-tax gain on the disposition of its
energy assets in 1998 of approximately $300 million. The after-tax proceeds
from the transaction of approximately $960 million will be used to fund the
expansion plan of the information services business.
The following is summarized financial information for discontinued operations:
Three Months Ended Nine Months Ended
September 30, September 30,
Income from Discontinued Operations 1997 1996 1997 1996
Operations
Equity in:
CalEnergy earnings, net $ 13 $ 7 $ 29 $ 14
CE Electric earnings, net 2 - 11 -
Earnings in international
energy projects 6 (1) 1 (6)
CalEnergy debenture interest - 2 - 5
Income tax expense (8) (3) (15) (6)
------ ------ ------ -----
Income from operations $ 13 $ 5 $ 26 $ 7
====== ====== ====== =====
Extraordinary Loss - Windfall Tax
Company's share from CE Electric $ (58) $ - $ (58) $ -
Company's share from CalEnergy (39) - (39) -
Income tax benefit 34 - 34 -
------ ------ ------ -----
Extraordinary Loss $ (63) $ - $ (63) $ -
====== ====== ====== =====
In December 1996, CE Electric which is 70% owned by CalEnergy and 30% owned by
the Company, acquired majority ownership of Northern Electric plc ("Northern")
pursuant to a 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.
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 impact to the Company, directly through its
investment in CE Electric and indirectly through its 30% interest in
CalEnergy, was $63 million.
The following summarizes the investments in discontinued operations:
September 30, December 28,
1997 1996
(unaudited)
Investment in CalEnergy $ 282 $ 292
Investment in CE Electric 129 176
Investment in international energy projects 184 157
Deferred income tax asset (liability) 2 (17)
------ ------
Total $ 597 $ 608
====== ======
3. Earnings Per Share:
Primary and fully diluted earnings (loss) 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. In 1997, operations attributable to Class D Stock resulted in a
loss. Therefore, the anti-dilutive effect of the Class D options was not
included in the per share calculations. The number of shares used in
computing earnings (loss) per share was as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
Primary earnings per share:
Class B&C 10,086,016 11,013,724 9,570,079 10,542,158
Class D 24,585,375 23,181,785 24,513,018 23,207,898
Fully diluted earnings per share:
Class B&C 10,522,849 11,368,613 10,006,912 10,899,549
Class D 24,585,375 23,181,785 24,513,018 23,207,898
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 operations.
4. 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 Company's construction and materials operations
of Kiewit Construction Group Inc. The Diversified Group ("KDG") contains
information services businesses operated by PKS Information Services, Inc.,
coal mining properties owned by Kiewit Coal Properties Inc., communications
companies owned by Commonwealth Telephone Enterprises, Inc., RCN
Corporation, Inc. and Cable Michigan, Inc., California Private
Transportation Company, L.P. ("CPTC"), the owner-operator of the SR91 toll
road in California, and miscellaneous investments. KDG also owns interests
in CalEnergy, CE Electric and several international energy projects in
Indonesia and the Philippines. These energy assets will be sold to CalEnergy
in 1998 pending the satisfactory completion of certain provisions of the
agreement. 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 Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
Results of Operations:
Revenue $ 824 $ 651 $ 1,968 $ 1,729
Net earnings 34 39 84 75
Primary earnings per share 3.38 3.64 8.76 7.18
Fully diluted earnings per share 3.26 3.53 8.42 6.97
September 30, December 28,
1997 1996
Financial Position:
Working capital $ 389 $ 367
Total assets 1,384 1,042
Long-term debt, less current portion 17 12
Stockholders' equity 593 562
Included within the results of operations are mine management fees paid by the
Diversified Group of $7 million and $9 million for the three months ended
September 30, 1997 and 1996 and $23 million and $24 million for the nine
months ended September 30, 1997 and 1996.
(in millions, except per share data)
Diversified Group:
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
Results of Operations:
Revenue $ 80 $ 165 $ 241 $ 482
Net income (loss):
Continuing operations 6 19 34 52
Discontinued operations (50) 5 (37) 7
-------- ------- ------ ------
$ (44) $ 24 $ (3) $ 59
======== ======= ====== ======
Primary and fully diluted earnings
(Loss) per share:
Continuing operations .26 .76 1.40 2.19
Discontinued operations (2.04) .22 (1.51) .33
-------- ------- ------ ------
$ (1.78) $ .98 $(.11) $ 2.52
======== ======= ===== ======
September 30, December 28,
1997 1996
Financial Position:
Working capital $ 604 $ 391
Total assets 2,013 2,511
Long-term debt, less current portion 134 320
Stockholders' equity 1,375 1,257
Included within the results of operations are mine management fees paid to the
Construction & Mining Group of $7 million and $9 million for the three
months ended September 30, 1997 and 1996 and $23 million and $24 million for
the nine months ended September 30, 1997 and 1996.
5. Acquisitions:
In December 1996, CE Electric which is 70% owned by CalEnergy and 30% owned 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 in November 1996. As
of March 1997, CE Electric effectively owned 100% of Northern's ordinary
shares.
As of September 30, 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
and a revolving facility agreement obtained by CE Electric. KDG has not
guaranteed, and is not otherwise subject to recourse for, amounts borrowed
under these facilities.
The Company's investment in CE Electric and the earnings and losses associated
with CE Electric are included in discontinued operations.
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 $14 million of related
liabilities. 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. Oak Mountain's results are consolidated with those of
the Company on a pro-rata basis since the date of acquisition. The coal
mine's results of operations prior to the acquisition were not significant
relative to the Company's results.
6. Investments:
KDG is able to defer the tax on $40 million of 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. In June 1997, KDG closed a $16 million financing agreement with
Metropolitan Life Insurance Company. The 15-year note is collateralized by
the Aurora property and carries an interest rate of 8.38%.
KDG has also begun construction on a second data center for the
information services business in Phoenix, Arizona. The cost of the building,
approximately $11 million, will be applied against the $40 million gain.
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., ("CE 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 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. KDG does not expect the outcome of the
litigation to affect its financial position due to the transactions
contemplated with CalEnergy.
The Company and CalEnergy had agreed to jointly develop and construct
geothermal power facilities at the Dieng and Patuha sites in Indonesia.
Dieng Unit 1 is being constructed and is expected to be placed in commercial
operation later this year. An additional five units are expected to be
constructed on a modular basis as the geothermal resources are developed.
In June 1997, the Company 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 Company.
The Company's investments in the international energy projects and the earnings
and losses associated with these investments are included in discontinued
operations.
7. C-TEC Restructuring:
On September 5, 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.
The restructuring is expected to permit investors and the financial markets to
better understand and evaluate C-TEC's various businesses. In addition, the
restructuring has allowed C-TEC to raise capital on more efficient terms.
In July 1997, C-TEC closed four separate credit facilities with a syndicate
of banks aggregating $410 million and in October 1997, RCN issued $575 million
of debt. These proceeds were used to refinance the cable group's existing
Senior Secured Notes and to fund RCN's continued development.
As a result of the restructuring, KDG 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 consolidated financial statements. The financial position of each
entity at September 30, 1997 and December 28, 1996 (pro-forma) and KDG's
proportionate share of the equity in each entity including allocated
goodwill was as follows:
Commonwealth
Telephone Cable RCN
Enterprises Michigan Corporation
1997 1996 1997 1996 1997 1996
Financial Position:
Current assets $ 81 $ 51 $ 18 $ 10 $ 247 $ 143
Other assets 291 266 124 139 352 485
----- ----- ----- ----- ----- ----
Total assets 372 317 142 149 599 628
Current liabilities 76 59 17 24 72 57
Other liabilities 262 189 163 190 138 175
Minority interest - - 15 15 15 5
----- ----- ----- ----- ----- ----
Total liabilities 338 248 195 229 225 237
----- ----- ----- ----- ----- ----
Net assets (liabilities) $ 34 $ 69 $ (53)$ (80) $ 374 $ 391
===== ====== ===== ===== ===== =====
KDG's Share:
Equity in net assets $ 17 $ 33 $ (26)$ (38)$ 181 $ 189
Goodwill 82 58 58 75 32 41
----- ----- ----- ----- ------ -----
$ 99 $ 91 $ 32 $ 37 $ 213 $ 230
===== ===== ===== ===== ====== =====
The results of operations for each entity for the nine months ended September
30, 1997 and 1996, and KDG's proportionate share, including goodwill
amortization were as follows:
Commonwealth
Telephone Cable RCN
Enterprises Michigan Corporation
1997 1996 1997 1996 1997 1996
Results of Operations:
Revenue $ 145 $139 $ 61 $ 57 $ 92 $ 76
Net income (loss) available
to common stockholders 18 17 (3) (7) (35) (1)
KDG's Share:
Net income (loss) $ 9 $ 8 $ (1) $ (3) $(17) $ -
Goodwill amortization (1) (3) (3) (2) - (2)
------ ---- ----- ----- ---- -----
Equity in net income (loss) $ 8 $ 5 $ (4) $ (5) $(17) $ (2)
====== ==== ===== ===== ==== =====
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 December 28, 1996 and for the three and nine months ended
September 30, 1996. The financial statements for 1997 include C-TEC
accounted for utilizing the equity method. They are presented here for
comparative purposes only.
September 30, December 28,
(dollars in millions) 1997 1996
Assets
Current Assets:
Cash and cash equivalents $ 522 $ 244
Marketable securities 373 379
Restricted securities 22 17
Receivables, less allowance of $15 and $17 463 315
Costs and earnings in excess of billings on
uncompleted contracts 118 80
Investment in construction joint ventures 148 91
Deferred income taxes 46 49
Other 51 32
-------- --------
Total Current Assets 1,743 737
Property, Plant and Equipment, net 391 339
Investments 531 549
Investments in Discontinued Operations 597 608
Intangible Assets, net 55 38
Other Assets 43 47
-------- --------
$ 3,360 $ 2,788
======== ========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 268 $ 197
Current portion of long-term debt 11 2
Accrued costs and billings in excess of revenue
on uncompleted contracts 302 112
Accrued insurance costs 86 81
Other 83 78
-------- --------
Total Current Liabilities 750 470
Long-Term Debt, less current portion 151 125
Deferred Income Taxes 158 45
Retirement Benefits 40 45
Accrued Reclamation Costs 100 99
Other Liabilities 182 181
Minority Interest 11 4
Total Stockholders' Equity 1,968 1,819
-------- ---------
$ 3,360 $ 2,788
======== =========
Three Months Ended Nine Months Ended
September 30, September 30,
(dollars in millions) 1997 1996 1997 1996
Revenue $ 896 $ 719 $ 2,180 $ 1,913
Cost of Revenue (785) (611) (1,877) (1,659)
------- ------- ------- -------
111 108 303 254
General and Administrative Expenses (53) (32) (147) (113)
------- ------- ------- -------
Operating Earnings 58 76 156 141
Other Income (Expense):
Equity Earnings (Loss), net (12) 2 (17) (4)
Investment Income, net 12 12 34 39
Interest Expense, net (5) (1) (13) (4)
Other, net 9 4 29 24
------- -------- ------- ------
4 17 33 55
------- -------- ------- ------
Income from Continuing Operations
Before Income Taxes and
Minority Interest 62 93 189 196
Provision for Income Taxes (23) (36) (73) (72)
Minority Interest in Net Loss
of Subsidiaries 1 1 2 3
--------- --------- ------- -------
Income from Continuing Operations 40 58 118 127
Income (Loss) from Discontinued
Operations (50) 5 (37) 7
--------- ---------- ------- -------
Net Earnings (Loss) $ (10) $ 63 $ 81 $ 134
========= ========== ======= =======
Nine Months Ended
September 30,
(dollars in millions) 1997 1996
Cash flows from continuing operations:
Net cash provided by continuing operations $ 341 $ 164
Cash flows from investing activities:
Proceeds from sales and maturities of
marketable securities 212 223
Purchases of marketable securities (193) (261)
Change in restricted securities 4 2
Proceeds from sale of property, plant
and equipment, and other investments 36 25
Capital expenditures (110) (80)
Acquisitions and investments, net (53) (15)
Other - 3
------- ------
Net cash used in investing activities (104) (103)
Cash flows from financing activities:
Proceeds from long-term debt borrowings 21 16
Payments on long-term debt including current portion (2) (6)
Net change in short-term borrowings - (45)
Repurchases of common stock (2) (15)
Dividends paid (25) (24)
Issuance of common stock 83 27
-------- -------
Net cash provided by (used in) financing activities 75 (47)
Cash flows used in discontinued operations (34) (52)
-------- -------
Net change in cash and cash equivalents 278 (38)
Cash and cash equivalents at beginning of period 244 408
-------- -------
Cash and cash equivalents at end of period $ 522 $ 370
======== =======
8. Other Matters:
In October 1996, the Board of Directors ("Board") directed the Company's
management to pursue a listing of Class D Stock as a way to address certain
issues created by the Company's two-class capital stock structure and the
need to attract and retain the best management for the Company's 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 the Diversified Group through split off of KCG (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 Group
would be 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. As a result, the restructuring will probably not occur
until mid-year 1998. The Diversified Group probably will not seek to list
its stock for public trading on a national securities exchange until it
raises capital through a public equity offering or desires to have a listed
equity security available for acquisitions. The Board will retain the right,
even if the stockholders ratify the proposal and favorable tax treatment
is satisfied, to abandon, defer or modify the Transaction if it believes that
it would be in the best interests of all stockholders.
If the Transaction is approved by the Company's shareholders, the historical
financial statements of the Company will be restated to reflect the
historical basis financial information of KCG as discontinued operations.
The separation of KCG from the Company will be accounted for at fair
value and following the Transaction the Company will continue to account for
KDG's results on a historical cost basis. After the Transaction, the
construction and materials business will be operated by the management of KCG
which will continue to account for KCG's results on a historical cost basis
in its separate financial statements.
KDG has recently decided to substantially increase its emphasis on and resources
to its information services business, with a view to becoming a facilities-
based provider of a broad range of integrated information services to
business. Pursuant to the plan, KDG 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, KDG 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 services,
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.
KDG 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. KDG 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 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.
PETER KIEWIT SONS', INC.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
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 Company. When used in this document, the words
"anticipate", "believe", "estimate" and "expect" and similar expressions, as
they relate to the Company or its management, are intended to identify forward-
looking statements. Such statements reflect the current views of the Company
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.
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
the written request addressed to Stock Registrar, Peter Kiewit Sons', Inc.,
1000 Kiewit Plaza, Omaha, Nebraska 68131.
Results of Operations- Third Quarter 1997 vs. Third Quarter 1996
Revenue from each of the Company's business segments for the three months ended
September 30 comprised the following (in millions):
1997 1996
Construction $ 824 $ 651
Coal Mining 50 61
Telecommunications - 90
Information Services 27 11
Other 3 3
Eliminations (8) (7)
------- -------
$ 896 $ 809
======= =======
Construction. KCG's construction operations can be separated into two
components; construction and materials. Construction and materials revenue
for the three months ended September 1997 increased 27%, or $173 million,
from the same period in 1996. Construction revenues were up 26% compared to
1996. The consolidation of ME Holding in 1997 resulted in an additional $77
million of revenue for KCG. In addition to ME Holding, several large
sole contracts and joint ventures became fully mobilized and entered into
their peak construction phase of work. Materials revenue was up 32% in 1997.
Strong market conditions and the acquisition of additional plant facilities
in Arizona were responsible for approximately 66% of the increase
in sales. The remaining sales growth was due to increases in cement costs
which were passed on to customers.
Contract backlog at September 30, 1997 was $3.7 billion of which 8% is
attributable to foreign operations located in Canada and Indonesia.
Domestic projects are spread geographically throughout the U.S. Included
in backlog is $673 million for the "I-15" project awarded in late March. KCG
is the sponsoring partner on the design-build joint venture reconstructing
16 miles of Interstate 15 through the Salt Lake City, Utah area. It is
expected to be completed in December of 2001.
Margins on construction projects for the third quarter of 1997 declined from 11%
to 9% for the same period in 1996. The recognition of income on design-build
contracts tends to be recognized later in the construction cycle due to the
complexities of these types of projects. The awarding of several of these
types of contracts in 1997, including "I-15", resulted in lower margins to the
Company. The completion of the design-build San Joaquin toll road project
in late 1996 contributed to the higher returns in that year. Material
margins, as a percentage of revenue, in 1997 were unchanged from 1996.
Coal Mining. Mining revenue declined 18% in the third quarter of 1997 compared
to the same period in 1996. Commonwealth Edison Company ("Commonwealth")
has the flexibility under the amended contract to accelerate or defer
delivery of alternate source coal provided it accepts delivery of the aggregate
minimum commitment at the end of each year. In early 1996, alternate source
coal shipments fell below minimum levels. These shortfalls were partially
made up in the second and third quarters of 1996. In 1997, the opposite
scenario occurred. Commonwealth took delivery of more coal in the first quarter
than was required but reduced its purchases in the second and third quarters.
Overall, the Company's alternate source coal revenues declined $6 million
for the quarter ended September 30, 1997. Spot coal sales also declined in
1997. In the third quarter of 1996, a customer bought out its remaining 1996
obligations. The customer was not required to take delivery of the coal by
paying 60% of the contracted price.
Costs as a percentage of revenue for the coal mining operations in the third
quarter of 1997 were consistent with that of the prior year. The decline in
revenue from the customer who bought out its obligations in 1996, and
declines in higher margin alternate source coal sales, were offset by improved
mining efficiencies at the Black Butte mine and a decline in costs as the
1996 costs include certain equipment write-offs.
Information Services. The Company's information services business provides
computer operations outsourcing and systems integration services to firms
that desire to focus resources on their core business. Systems integration
services include converting mainframe based systems to client/server
architecture, Year 2000 compliance, code restructuring and software
re-engineering. Revenue attributable to computer outsourcing and systems
integration increased 146% to $27 million for the three months ended
September 30, 1997 compared to the same period in 1996. The increase in revenue
is attributable to signing several new outsourcing contracts in late 1996
and the increased focus of customers on Year 2000 compatibility, code
restructuring and software re-engineering.
The operating costs of the information services business doubled to $16 million
in 1997 primarily due to its continued growth. Hardware, communications
and personnel costs for the systems integration business increased
significantly compared to the prior year. Operational efficiencies
were recognized in 1997 through the increased utilization of existing
computer hardware.
General and Administrative Expenses. In 1997, general and administrative
expenses no longer include the expenses of C-TEC but do include those of ME
Holding. Had C-TEC and ME Holding been accounted for using the equity
method in both years, general and administrative expenses would have been $48
million and $32 million in 1997 and 1996, respectively. The additional costs
associated with the expanding information services business, the professional
fees incurred for the CalEnergy transaction and the proposed separation of
the Construction and Diversified groups and higher compensation costs all
contributed to the increase in administrative expenses.
Equity Losses, net. The telecommunications segment of the Company is now
comprised of the three entities created in the C-TEC restructuring. The
Company's voting rights in each of the three entities has fallen below 50%
and each entity is now accounted for utilizing the equity method. Equity
losses now exclude the earnings of ME Holding which is consolidated in 1997.
Had these entities been accounted for under the equity method in both
periods, equity losses would have been ($9) million in 1997 and $2 million
in 1996. This decline is attributable to the losses incurred by RCN to
develop the Boston, New York and Washington, D.C. markets.
Investment Income, net. Investment income in 1996, excluding C-TEC investment
income of $2 million, was consistent with that of 1997. The 1997 average
portfolio balance and average interest rates for the period did not vary
significantly from that of 1996.
Interest Expense, net. Interest expense increased $4 million in 1997 excluding
C-TEC's $8 million of interest expense in 1996. CPTC incurred $3 million
of interest costs in the third quarter of 1996 of which $1 million was
capitalized due to the construction of the toll road. In 1997, CPTC also
incurred $3 million of interest costs all of which was charged against
earnings. The interest on the debt incurred by KCG to purchase ME Holding
and assumed in the Oak Mountain acquisition, and the debt incurred by KDG to
purchase the real estate in Colorado also contributed to the increase in
interest expense.
Other, net. Other income increased 80% in 1997. Additional gains on the sale
and disposition of construction equipment was the primary factor
contributing to the increase in other income.
Provision for Income Taxes. The effective income tax rates for the third
quarter of 1997 and 1996 were 37% and 38%, respectively. These rates differ
from the expected statutory rate of 35% primarily due to the state income
taxes.
Minority Interest in Net Loss (Income) of Subsidiaries. The losses associated
with the SR91 toll road were partially offset by the income allocated to ME
Holding's minority shareholders in the third quarter of 1997. In 1996,
losses of ($2) million of CPTC were offset by the income of the C-TEC
companies.
Discontinued Operations. Equity earnings, net of tax, increased 160% in the
third quarter of 1997. The Company's proportionate share of CalEnergy's
earnings, net of tax, increased $4 million in the third quarter of 1997 to
$8 million. The conversion of CalEnergy debentures to common stock and the
exercise of options increased the Company's ownership interest in CalEnergy
from 23% at July 1, 1996 to 30% at September 30, 1997. CalEnergy's earnings
also increased primarily due to the completion and commencement of operations
at the Salton Sea Unit IV geothermal facility, the purchase of three
cogeneration facilities and the acquisition of Northern Electric all of
which occurred in the last half of 1996 and the commencement of operations
at the Mahanagdong geothermal facility in July, 1997. In addition to
contributing to CalEnergy's earnings, the Company's proportionate share of
Mahanagdong and Northern Electric, net of tax, also provided $2 million and
$1 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.
Also contained in discontinued operations is the extraordinary loss of $63
million, net of tax, from the Windfall tax imposed by the British government
in 1997.
Results of Operations - Nine Months 1997 vs. Nine Months 1996
Revenue from each of the Company's business segments for the nine months ended
September 30 comprised the following (in millions):
1997 1996
Construction $ 1,968 $ 1,729
Coal Mining 165 172
Telecommunications - 273
Information Services 67 30
Other 9 7
Eliminations (29) (25)
------- -------
$ 2,180 $ 2,186
======= =======
Construction. Construction and materials revenues for the nine months ended
September 30, 1997 increased $239 million or 14% compared to the same period
in 1996. Construction revenues were up 13% compared to 1996. The
inclusion of ME Holding in the consolidated results in 1997 contributed $174
million to construction revenue. Material revenues also increased by 18% in
1997. Strong market conditions in Arizona and the acquisitions of additional
facilities in Arizona and the Pacific Northwest were responsible for 60% of
the sales growth in 1997. The remaining growth was due to higher cement costs
in Arizona that were passed on to customers.
Margins on construction projects as a percentage of revenue for the first nine
months of 1997 increased from 9% to 10% due to change order settlements, cost
efficiencies, and early completion bonuses. Materials margins as a
percentage of revenues decreased slightly from 10% to 9% due to the increased
cost of concrete.
Coal Mining. Coal sales declined 4% during the first nine months of 1997.
Alternate source coal sales decreased $6 million primarily due to the
reduced contractual obligations of customers. Contracted coal sales also
declined slightly in 1997. Reduced coal sales to Detroit Edison Company,
which is temporarily behind in purchasing its 1997 contracted coal, is
partially offset by additional sales to Mississippi Power.
Operating costs as a percentage of revenue were virtually unchanged from the
same period in 1996. The declines in higher margin alternate source coal
sales and proceeds from a customer who had bought out its obligations, were
offset by improved mining efficiencies at the Black Butte mine and a decline
in costs as the 1996 costs include certain equipment write-offs.
Information Services. Revenue for information services business increased 123%
to $67 million for the nine months ended September 30, 1997. The increase
in revenue is attributable to signing several new outsourcing contracts in
late 1996 and the increased focus of customers on Year 2000 compatibility,
code restructuring and software re-engineering.
The operating costs of the information services business increased 86% to
$41 million in 1997 primarily due to its continued growth. Hardware,
communications and personnel costs all increased significantly compared to
the prior year. Operational efficiencies were recognized in 1997
through the increased utilization of existing computer hardware.
General and Administrative Expenses. General and administrative expenses in
1997 and 1996 would have been $137 million and $113 million had C-TEC and ME
Holding been accounted for using the equity method in both years. Increases
in the expenses associated with the information services business,
compensation expenses and professional fees incurred for the proposed
restructuring and the CalEnergy transaction led to the increase in general
and administrative expenses.
Equity Losses, net. Losses attributable to equity investees increased to ($14)
in 1997 from ($4) in 1996 assuming ME Holding and C-TEC were accounted for
using the equity method in both years. The costs of RCN's continued
expansion into Boston, New York City and Washington D.C. and the $10 million
of costs incurred in connection with the buyout of a marketing contract with
minority shareholders are responsible for the increase in equity losses.
Investment Income, net. Investment income, excluding C-TEC's $9 million of
income in 1996, declined 13% in 1997. A reduction in the average
portfolio balance for the period, due to significant investments in CE
Electric and the international energy projects, and a decline in the gains
recognized on sales of securities all contributed to the reduction in
investment income.
Interest Expense, net. Interest expense decreased in 1997 to $13 million from
$24 million in 1996. In 1996, interest expense includes $20 million of
expense attributable to C-TEC. In 1996, CPTC incurred $8 million of
interest costs of which $6 million was capitalized prior to the commencement of
operations on August 1, 1996. In 1997, CPTC incurred $8 million of
interest, all of which was charged against earnings. The interest incurred by
KCG to purchase ME Holding and assumed in the Oak Mountain transaction, and
the borrowing by KDG for the Colorado property account for the remaining
increase in interest expense.
Other, net. Other income is primarily comprised of gains and losses on the
sale and disposition of property, plant and equipment and other assets.
Increased income from the sale of construction equipment of $7 million, and
increases in miscellaneous income, led to the increase in other income.
Provision for Income Taxes. The effective income tax rates of 39% in 1997 and
38% in 1996 differ from the expected statutory rate of 35% primarily due to
state income taxes.
Minority Interest in Net Loss (Income) of Subsidiaries. Minority interest in
1997 is now comprised of the earnings and losses attributable to the
minority shareholders of CPTC and ME Holding. The income and (losses) that
were allocated to CPTC's and ME Holding's minority shareholders were ($3) and
$1 million in 1997.
Discontinued Operations. Equity earnings, net of tax, increased significantly
in 1997. The Company's proportionate share of CalEnergy's earnings, net of
tax, increased $10 million in 1997 to $19 million. An increase in the
Company's share of CalEnergy's earnings and improvement in those earnings,
primarily due to the commencement of operations at a geothermal facility,
and the acquisitions of three congeneration facilities and Northern
Electric, contributed to the increase. The Company's proportionate share of
Northern Electric, which was acquired in December 1996, provided $7 million of
income after taxes.
Also contained in discontinued operations is the extraordinary loss of $63
million, net of tax, from the Windfall tax imposed by the British government
in 1997.
Financial Condition - September 30, 1997 vs. December 28, 1996
Excluding C-TEC, the Company's working capital increased $256 million or 34%
during the first nine months of 1997. The increase was mainly due to cash
provided by operations, including $146 million of tax and interest refunds,
and financing activities. The increase was partially offset by cash used to
fund investing activities and discontinued operations.
Investing activities include $53 million of investments, and $110 million of
capital expenditures, including $89 million for construction equipment and
$11 million for equipment of the information services business. The
investments primarily include KDG's $22 million for a real estate investment
and KCG's $15 million investment in Oak Mountain. These capital outlays
were partially offset by $19 million of net proceeds from the sale of
marketable securities and $36 million of proceeds from the sale of property,
plant and equipment and other assets.
Financing sources include $34 million and $49 million for the issuance of Class
C Stock and Class D Stock, and $16 million and $2 million of long-term debt
borrowing to finance KDG's real estate investment and to modernize KCG's Oak
Mountain mine. Financing uses primarily consisted of $13 million of Class C
dividends and $12 million of Class D dividends.
Prior to the agreement with CalEnergy, the Company invested $34 million in the
Dieng, Patuha and Bali power projects in Indonesia during 1997.
In October 1996, the Board of Directors ("Board") directed the Company's
management to pursue a listing of Class D Stock as a way to address certain
issues created by the Company's two-class capital stock structure and the
need to attract and retain the best management for the Company's 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 the Diversified Group through a split off of KCG. At a special meeting
on August 14, 1997, the Board approved the Transaction.
The separation of the Construction and Mining Group and the Diversified Group
would be 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. As a result, the restructuring will probably not occur until
mid-year 1998. The Diversified Group probably will not seek to list its
stock for public trading on a national securities exchange until it raises
capital through a public equity offering or desires to have a listed equity
security available for acquisitions. The Board will retain the right, even
if the stockholders ratify the proposal and favorable tax treatment is
satisfied, to abandon, defer or modify the Transaction if it believes that it
would be in the best interests of all stockholders.
The Company anticipates making significant investments in its construction and
information services businesses. KDG has recently decided to substantially
increase its emphasis on and resources to its information services business,
with a view to becoming a facilities-based provider of a broad range of
integrated information services to business. Pursuant to the plan, KDG
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, KDG 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 services,
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.
KDG 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. KDG 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.
KDG anticipates that the capital expenditures required to implement this
expansion plan will be substantial. KDG anticipates that these costs may
be in excess of $1 billion per year within approximately two years after
the separation of KCG from the Company.
Subsequent to September 30, 1997, the Company sold $67 million of Class D Stock
to employees and declared a Class C Stock cash dividend of $.80 per share
payable in January 1998. Long-term liquidity uses include payment of
income taxes and repurchasing the Company's stock. The Company's
current financial condition, borrowing capacity and proceeds from the
CalEnergy transaction should be sufficient for immediate operating and
investing activities.
In late 1995, a KDG 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 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. 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.
KDG does not expect the outcome of the litigation to affect its financial
position due to the transactions contemplated with CalEnergy.
On September 5, 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.
The restructuring is expected to permit investors and the financial markets to
better understand and evaluate C-TEC's various businesses. In addition, the
restructuring has allowed C-TEC to raise capital on more efficient terms.
In July 1997, C-TEC closed four separate credit facilities with a syndicate of
banks aggregating $410 million and in October 1997, RCN issued $575 million of
debt. These proceeds were used to refinance the cable group's existing
Senior Secured Notes and to fund RCN's continued development.
PETER KIEWIT SONS', INC.
PART II - OTHER INFORMATION
Item 6. Exhibits & 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 third
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: November 14, 1997 \s\ Eric J. Mortensen
Eric J. Mortensen
Controller and Chief
Accounting Officer
PETER KIEWIT SONS', INC.
INDEX TO EXHIBITS
Exhibit
No.
11 Statement regarding computation of per share earnings
27 Financial Data Schedule (For electronic filing purposes only)
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 and six months ended September 30, 1997 and 1996
Class C Stock
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
Actual weighted shares
outstanding for the period 10,086,016 11,013,724 9,570,079 10,542,158
Dilutive stock options using
average market price - - - -
---------- ---------- --------- ----------
Total number of shares
used to compute primary
earnings per share. 10,086,016 11,013,724 9,570,079 10,542,158
Additional dilutive
stock options using
ending market price - - - -
Additional dilutive shares
assuming conversion of
convertible debentures 436,833 354,889 436,833 357,391
---------- ---------- --------- ---------
Total number of shares
used to compute fully
diluted earnings per share 10,522,849 11,368,613 10,006,912 10,899,549
========== ========== ========== ==========
Net income from continuing
operations available to
common shareholders $ 34,141 $ 40,078 $ 83,858 $ 75,726
Add: Interest expense,
net of tax effect
associated with
convertible debentures 126 96 393 286
---------- ----------- ---------- ---------
Net income from
continuing operations
for fully diluted shares $ 34,267 $ 40,174 $ 84,251 $ 76,012
Discontinued operations:
Income (Loss) from
discontinued operations,
net of tax - - - -
Extraordinary Item -
Windfall Tax - - - -
---------- ----------- --------- --------
Total Discontinued
Operations $ - $ - $ - $ -
---------- ----------- --------- --------
Net Income $ 34,267 $ 40,174 $ 84,251 $ 76,012
========== =========== ========= ========
Primary earnings per share:
Continuing Operations 3.38 3.64 8.76 7.18
Discontinued Operations:
Discontinued operations - - - -
Extraordinary Item -
Windfall tax - - - -
---------- ----------- --------- -------
Total Discontinued
Operations $ - $ - $ - $ -
---------- ----------- --------- -------
Primary earnings per share: $ 3.38 $ 3.64 $ 8.76 $ 7.18
========== =========== ========= =======
Fully diluted earnings
per share
Continuing operations 3.26 3.53 8.42 6.97
Discontinued operations:
Discontinued operations - - - -
Extraordinary Item -
Windfall tax - - - -
---------- ----------- -------- -------
Total Discontinued
Operations - - - -
---------- ----------- -------- -------
Fully diluted earnings
per share $ 3.26 $ 3.53 $ 8.42 $ 6.97
========== =========== ======== =======
Exhibit 11
Peter Kiewit Sons', Inc.
Calculation or Earnings per Share
For the three and six months ended September 30, 1997 and 1996
Class D Stock
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
Actual weighted
shares outstanding
for the period 24,585,375 23,181,785 24,513,018 23,207,898
Dilutive stock options
using average market price - - - -
---------- ---------- ---------- ---------
Total number of shares
used to compute primary
earnings per share. 24,585,375 23,181,785 24,513,018 23,207,898
Additional dilutive
stock options using
ending market price - - - -
Additional dilutive
shares assuming conversion
of convertible debentures - - - -
---------- ---------- ---------- ----------
Total number of shares used
to compute fully diluted
earnings per share. 24,585,375 23,181,785 24,513,018 23,207,898
========== ========== ========== ==========
Net income from continuing
operations available to
common shareholders $ 6,330 $ 17,638 $ 34,369 $ 50,972
Add: Interest expense,
net of tax effect
associated with
convertible debentures - - - -
---------- ---------- ---------- ---------
Net income from continuing
operations for fully
diluted shares $ 6,330 $ 17,638 $ 34,369 $ 50,972
========== ========== ========== =========
Discontinued operations:
Income (Loss) from
discontinued operations,
net of tax 13,478 5,119 26,406 7,589
Extraordinary Item -
Windfall Tax (63,594) - (63,594) -
---------- --------- --------- -------
Total Discontinued
Operations $ (50,116) $ 5,119 $ (37,188) $ 7,589
---------- --------- --------- -------
Net Income $ (43,786) $ 22,757 $ (2,819) $58,561
========== ========= ========= =======
Primary earnings per share:
Continuing Operations 0.26 0.76 1.40 2.19
Discontinued Operations:
Discontinue operations 0.55 0.22 1.08 0.33
Extraordinary Item -
Windfall tax (2.59) - (2.59) -
---------- --------- --------- -------
Total Discontinued
Operations $ (2.04) $ 0.22 $ (1.51) $ 0.33
---------- --------- --------- -------
Primary earnings per share $ (1.78) $ 0.98 $ (0.11) $ 2.52
========== ========= ========= =======
Fully diluted earnings
per share
Continuing operations 0.26 0.76 1.40 2.19
Discontinued operations:
Discontinued operations 0.55 0.22 1.08 0.33
Extraordinary Item -
Windfall tax (2.59) - (2,59) -
---------- --------- --------- ------
Total Discontinued
Operations (2.04) - (1.51) -
---------- --------- --------- ------
Fully diluted earnings
per share $ (1.78) $ 0.98 $ (0.11) $ 2.52
========== ========= ========= ======
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Form
10-Q for the period ending September 30, 1997 and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-27-1997
<PERIOD-END> SEP-30-1997
<CASH> 522
<SECURITIES> 395
<RECEIVABLES> 478
<ALLOWANCES> 15
<INVENTORY> 11
<CURRENT-ASSETS> 1,743
<PP&E> 1,056
<DEPRECIATION> 665
<TOTAL-ASSETS> 3,360
<CURRENT-LIABILITIES> 750
<BONDS> 151
2
0
<COMMON> 0
<OTHER-SE> 1,966
<TOTAL-LIABILITY-AND-EQUITY> 3,360
<SALES> 2,106
<TOTAL-REVENUES> 2,180
<CGS> 1,833
<TOTAL-COSTS> 1,877
<OTHER-EXPENSES> 147
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13
<INCOME-PRETAX> 189
<INCOME-TAX> 36
<INCOME-CONTINUING> 118
<DISCONTINUED> (37)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 81
<EPS-PRIMARY> $8.76<F1>
<EPS-DILUTED> $8.42<F2>
<FN>
<F1>$876 represents Class C Stock earnings per share. Class D earnings per
share:Continuing Operations - $1.40, Discontinued Operations - ($1.51), Total -
($.11).
<F2>$8.42 represents Class C Stock earnings per share. Class D Stock earnings per
share: Continuing Operations - $1.40, Discontinued Operations - ($1.51), Total
- - ($.11).
</FN>
</TABLE>
Exhibit 99.A
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 September 30, 1997 and 1996 and the nine months ended
September 30, 1997 and 1996
Condensed Balance Sheets as of September 30, 1997 and
December 28, 1996
Condensed Statements of Cash Flows for the nine months
ended September 30, 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 Nine Months Ended
September 30, September 30,
(dollars in millions, except
per share data) 1997 1996 1997 1996
Revenue $ 824 $ 651 $ 1,968 $ 1,729
Cost of Revenue (751) (579) (1,781) (1,573)
------ ------- ------- -------
73 72 187 156
General and Administrative Expenses (34) (26) (103) (85)
------ -------- ------- -------
Operating Earnings 39 46 84 71
Other Income (Expense):
Investment Income, net 3 5 10 12
Interest Expense, net (2) - (3) (2)
Other, net 15 12 50 41
------ -------- ------ ------
16 17 57 51
------ -------- ------ ------
Earnings Before Income Taxes
and Minority Interest 55 63 141 122
Provision for Income Taxes (21) (24) (56) (47)
Minority Interest - - (1) -
------ --------- ------ ------
Net Earnings $ 34 $ 39 $ 84 $ 75
====== ========= ====== ======
Primary Earnings per Share $ 3.38 $ 3.64 $ 8.76 $ 7.18
====== ========= ====== ======
Fully Diluted Earnings per Share $ 3.26 $ 3.53 $ 8.42 $ 6.97
====== ========= ====== ======
See accompanying notes to condensed financial statements.
KIEWIT CONSTRUCTION & MINING GROUP
Condensed Balance Sheets
September 30, December 28,
1997 1996
(dollars in millions) (unaudited)
Assets
Current Assets:
Cash and cash equivalents $ 249 $ 173
Marketable securities 34 54
Receivables, less allowance of $15 and $17 429 289
Costs and earnings in excess of
billings on uncompleted contracts 118 80
Investment in construction joint ventures 148 91
Recoverable income taxes 25 6
Deferred income taxes 64 64
Other 15 13
-------- -------
Total Current Assets 1,082 770
Property, Plant and Equipment, less accumulated
depreciation and amortization of $435 and $429 210 165
Investments 59 94
Other Assets 33 13
-------- --------
$ 1,384 $ 1,042
======== ========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable, including retainage
of $35 and $33 $ 250 $ 164
Current portion of long-term debt 10 -
Accrued construction costs and billings in excess
of revenue on uncompleted contracts 299 112
Accrued insurance costs 86 81
Other 48 46
-------- ---------
Total Current Liabilities 693 403
Long-Term Debt, less current portion 17 12
Other Liabilities 71 65
Minority Interest 10 -
Stockholders' Equity
($403 million aggregate redemption value):
10,082,829 outstanding shares in 1997 and
11,006,641 in 1996
Common equity 606 568
Net unrealized holding loss (5) (1)
Foreign currency adjustment (8) (5)
-------- ---------
Total Stockholders' Equity 593 562
-------- ---------
$ 1,384 $ 1,042
======== =========
See accompanying notes to condensed financial statements.
KIEWIT CONSTRUCTION & MINING GROUP
Condensed Statements of Cash Flows
(unaudited)
Nine Months Ended
September 30,
(dollars in millions) 1997 1996
Cash flows from operations:
Net cash provided by operations $ 170 $ 117
Cash flows from investing activities:
Proceeds from sales and maturities of
marketable securities 51 174
Purchases of marketable securities (24) (165)
Proceeds from sales of property, plant and equipment 34 21
Acquisitions and investments, net (16) (3)
Capital expenditures (89) (60)
Other - 3
------ ----
Net cash used in investing activities (44) (30)
Cash flows from financing activities:
Proceeds from long-term debt borrowings 3 -
Payments on long-term debt, including current portion - (2)
Net change in short-term borrowings - (45)
Issuance of common stock 34 27
Repurchases of common stock (2) (4)
Dividends paid (13) (12)
Exchange of Class B&C Stock for Class D Stock, net (72) (19)
------ -----
Net cash used in financing activities (50) (55)
------ -----
Net increase in cash and cash equivalents 76 32
Cash and cash equivalents at beginning of period 173 94
------ -----
Cash and cash equivalents at end of period $ 249 $ 126
====== =====
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.
On July 1, 1997, the Group paid $5 million to increase its ownership in ME
Holding Inc. ("ME Holding") from 49% to 80%. The Group consolidated ME
Holding in its 1997 financial statements and accounted for it using the
equity method in 1996. The purchase price of $5 million was in the form
of a note payable to the minority shareholder and is payable on demand.
Receivables at September 30, 1997 and December 28, 1996 include approximately
$74 million and $86 million of retainage on uncompleted projects, the
majority of which is expected to be collected within one year. Included in
accounts receivable are $44 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 nine months ended September 30, 1997 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 numbers of shares used in computing earnings per
share were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
Primary 10,086,016 11,013,724 9,570,079 10,542,158
Fully Diluted 10,522,849 11,368,613 10,006,912 10,899,549
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 items
attributable to the Group are as follows:
(dollars in millions)
September 30, December 28,
1997 1996
Cash and marketable securities $ 11 $ 13
Property, plant and equipment, net 5 5
Other assets 2 1
------- -------
Total Assets $ 18 $ 19
======= =======
Accounts payable $ 2 $ 8
Long-term debt, including current portion 11 12
------- -------
Total Liabilities $ 13 $ 20
======= =======
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
Other expense, net $ - $ - $ (1) $ (1)
Corporate general and administrative costs have been allocated to the Group.
These allocations were less than $1 million for the three and nine months
ended September 30, 1997 and 1996.
Mine management income from the Diversified Group was $7 million and $9 million
for the three months ended September 30, 1997 and 1996 and $23 million and
$24 million for the nine months ended September 30, 1997 and 1996.
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 $14 million of related
liabilities. 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. Oak Mountain's results are consolidated with those of
the Group on a pro-rata basis since the date of acquisition. The coal mine's
results of operations prior to the acquisition were not significant relative
to the Group's results.
5. Other Matters:
In October 1996, the PKS Board of Directors ("Board") 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 the 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 Group
would be 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. As a result, the restructuring will probably not occur until
mid-year 1998. The Diversified Group probably will not seek to list its
stock for public trading on a national securities exchange until it raises
capital through a public equity offering or desires to have a listed
equity security available for acquisitions. The Board will retain the
right, even if the stockholders ratify the proposal and favorable tax
treatment is satisfied, to abandon, defer or modify the Transaction if it
believes that it would be in the best interests of all stockholders.
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.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations - Third Quarter 1997 vs. Third Quarter 1996
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.
Revenue from each of the Group's business segments for the three months ended
September 30 was (in millions):
1997 1996
Construction $ 741 $ 588
Materials 83 63
------ -----
$ 824 $ 651
====== =====
Construction and Materials. Construction and materials revenue for the three
months ended September 1997 increased 27%, or $173 million, from the same
period in 1996. Construction revenues were up 26% compared to 1996. The
consolidation of ME Holdings in 1997 resulted in an additional $77 million
of revenue for the Group. In addition to ME Holding, several large sole
contracts and joint ventures became fully mobilized and entered into their
peak construction phase of work. Materials revenue was up 32% in
1997. Strong market conditions and the acquisition of additional facilities
in Arizona were responsible for approximately 66% of the increase
in sales. The remaining sales growth was due to increases in cement costs
which were passed on to customers.
Contract backlog at September 30, 1997 was $3.7 billion of which 8% is
attributable to foreign operations located in Canada and Indonesia.
Domestic projects are spread geographically throughout the U.S. Included in
backlog is $673 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. It is expected to be completed in December of 2001.
Margins on construction projects for the third quarter of 1997 declined to
9% from 11% for the same period in 1996. The recognition of income on
design-build contracts tends to be recognized later in the construction
cycle due to the complexities of these types of projects. The awarding of
several of these types of contracts in 1997, including "I-15", resulted in
lower margins to the Group. The completion of the design-build San Joaquin
toll road project in late 1996 contributed to the higher returns in that year.
Material margins, as a percentage of revenue, in 1997 were unchanged from 1996.
General and Administrative Expenses. The consolidation of ME Holding in 1997
accounted for 62% of the increase in general and administrative expenses.
Excluding these costs, general and administrative expenses increased 12% in
the period. Increases in compensation, travel and insurance expenses are
responsible for the increase.
Investment Income, net. Investment income declined $2 million in 1997.
This decline is due to the consolidation of ME Holding in the 1997 financial
statements. Equity earnings derived from the Group's investment in ME
Holding in 1996 was $2 million.
Interest Expense, net. The $2 million of interest expense in 1997 is
attributable to the debt assumed in the Oak Mountain acquisition and debt
incurred to purchase ME Holding.
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 25%
in 1997 compared to 1996. Increases in gains on the disposal of equipment and
other miscellaneous income were partially offset by a decline in mine
management fee income.
Provision for Income Taxes. The effective income tax rates of 38% in 1997 and
1996 are higher than the expected statutory rate of 35% primarily due to
state income taxes.
Results of Operations - Nine Months 1997 vs. Nine Months 1996
Revenue from each of the Group's business segments for the nine months ended
September 30 was (in millions):
1997 1996
Construction $ 1,756 $ 1,549
Materials 212 180
--------- ---------
$ 1,968 $ 1,729
========= =========
Construction and Materials. Construction and materials revenues for the nine
months ended September 30, 1997 increased $239 million or 14% compared to the
same period in 1996. Construction revenues were up 13% compared to 1996.
The inclusion of ME Holding in the consolidated results in 1997 contributed
$174 million to construction revenue. Material revenues also increased
by 18% in 1997.Strong market conditions in Arizona and the acquisitions of
additional facilities in the Arizona and Pacific-Northwest were responsible
for 60% of the sales growth in 1997. The remaining growth was due to higher
cement costs in the Arizona market that were passed on to customers.
Margins on construction projects as a percentage of revenue for the first nine
months of 1997 increased from 9% to 10% due to change order settlements,
cost efficiencies, and early completion bonuses. Materials margins as a
percentage of revenues decreased slightly from 10% to 9% due to the increased
cost of concrete.
General and Administrative Expenses. General and administrative expenses
increased 21% in 1997. This increase is primarily attributable to $10 million
of overhead expenses included as a result of consolidating ME Holding. Also
contributing to the increase were higher professional fees, compensation
expenses and insurance costs.
Interest Expense, net. The increase in interest expense in 1997 is attributable
to the debt incurred to purchase ME Holding and assumed in the Oak Mountain
acquisition. In 1996, the Group incurred short term debt to fund the
conversion of Class C Stock to Class D Stock. These borrowings were repaid
in the second quarter of 1996.
Other, net. An increase in the gains on the sale and disposal of construction
equipment to $23 million from $16 million, was primarily responsible for the
increase in other income. Mine management fee and miscellaneous other
income were relatively unchanged from the same period in 1996.
Provision for Income Taxes. The effective income tax rate of 40% in 1997 and
39% in 1996 differ from the expected statutory rate of 35% primarily due to
state income taxes.
Financial Condition - September 30, 1997 vs. December 28, 1996
The Group's working capital increased $22 million or 6% during the first nine
months of 1997. The increase was primarily due to $165 million of cash
generated by operating activities, the issuance of common stock totaling
$34 million, net proceeds from the sale of marketable securities of $27 million,
proceeds from the sale of property, plant and equipment and other assets of
$34 million and $3 million of debt borrowings. Partially offsetting these
sources were capital expenditures of $89 million, investments and
acquisitions, including $15 million for Oak Mountain, the exchange
of Class B&C stock for Class D Stock and the repurchase of Class C Stock
totaling $74 million, and dividend payments of $13 million.
The Group typically anticipates investing between $40 and $75 million annually
in its construction business, including opportunities to acquire additional
businesses. Through September 30, 1997, the Group had invested $89 million
in new equipment. This amount is higher than normal primarily due to
$25 million of equipment purchases for a highway project located in a
part of the country where existing equipment was not available. Other long
term liquidity uses include the payment of income taxes, repurchases and
conversions of common stock and the payment of dividends, including an $.80
per share dividend declared on October 22, 1997 and payable in
January 1998. 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 ("Board") 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 the Diversified Group through the 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 Group
would be 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. As a result, the restructuring will probably not occur until
mid-year 1998. The Diversified Group probably will not seek to list its
stock for public trading on a national securities exchange until it raises
capital through a public equity offering or desires to have a listed equity
security available for acquisitions. The Board will retain the right, even
if the stockholders ratify the proposal and favorable tax treatment is
satisfied, to abandon, defer or modify the Transaction if it believes that it
would be in the best interests of all stockholders.
Exhibit 99.B
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 Operations for the
three months ended September 30, 1997 and 1996 and
the nine months ended September 30, 1997 and 1996
Condensed Balance Sheets as of September 30, 1997
and December 28, 1996
Condensed Statements of Cash Flows for the
nine months ended September 30, 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 Operations
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
(dollars in millions, except per share data) 1997 1996 1997 1996
Revenue $ 80 $ 165 $ 241 $ 482
Cost of Revenue (42) (98) (126) (295)
----- ----- ----- -----
38 67 115 187
General and Administrative Expenses (26) (36) (67) (116)
----- ----- ----- -----
Operating Earnings 12 31 48 71
Other Income (Expense):
Equity Losses, net (12) (4) (18) (6)
Investment Income, net 9 11 25 39
Interest Expense, net (3) (9) (10) (22)
Other, net 1 2 3 3
----- ----- ----- ----
(5) - - 14
----- ----- ----- ----
Earnings from Continuing Operations
Before Income Taxes and Minority Interest 7 31 48 85
Provision for Income Taxes (2) (12) (17) (32)
Minority Interest in Net Loss (Income)
of Subsidiaries 1 - 3 (1)
----- ----- ----- ----
Income from Continuing Operations 6 19 34 52
Discontinued Operations:
Income from Operations, net of income
taxes of($8),($3),($15) and ($6) 13 5 26 7
Extraordinary Item - Windfall tax, net of
income tax benefit of $34 (63) - (63) -
------ ----- ----- ----
Income (Loss) from Discontinued
Operations (50) 5 (37) 7
------ ----- ----- ----
Net Earnings (Loss) $ (44) $ 24 $ (3) $ 59
====== ===== ===== ====
Primary and Fully Diluted Earnings
(Loss) Per Share
Continuing Operations $ .26 $ .76 $1.40 $2.19
Discontinued Operations:
Income from operations .55 .22 1.08 .33
Extraordinary Item (2.59) - (2.59) -
------ ----- ----- ----
Discontinued Operations (2.04) .22 (1.51) .33
------ ----- ----- -----
Net Income (Loss) $(1.78) $ .98 $(.11) $2.52
====== ===== ===== =====
See accompanying notes to condensed financial statements.
KIEWIT DIVERSIFIED GROUP
Condensed Balance Sheets
September 30, December 28,
1997 1996
(dollars in millions) (unaudited)
Assets
Current Assets:
Cash and cash equivalents $ 273 $ 147
Marketable securities 339 372
Restricted securities 22 17
Receivables, less allowance of $- and $3 45 76
Other 19 33
-------- --------
Total Current Assets 698 645
Property, Plant and Equipment,
less accumulated depreciation and
amortization of $230 and $345 181 642
Investments 472 189
Investments in Discontinued Operations 597 608
Intangible Assets, net 21 353
Other Assets 44 74
--------- --------
$ 2,013 $ 2,511
========= ========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 29 $ 79
Current portion of long-term debt:
Telecommunications - 55
Other 1 2
Accrued costs and billings in excess of
revenue on uncompleted contracts 3 12
Accrued reclamation and other mining costs 17 19
Other 44 87
--------- --------
Total Current Liabilities 94 254
Long-Term Debt, less current portion:
Telecommunications - 207
Other 134 113
Deferred Income Taxes 156 148
Retirement Benefits 40 48
Accrued Reclamation Costs 99 98
Other Liabilities 114 168
Minority Interest 1 218
Stockholders' Equity
($1,377 million aggregate redemption value):
25,386,725 outstanding shares in 1997 and
23,219,744 in 1996
Common equity 1,351 1,235
Foreign currency adjustment - (2)
Net unrealized holding gain 24 24
--------- --------
Total Stockholders' Equity 1,375 1,257
--------- --------
$ 2,013 $ 2,511
========= ========
See accompanying notes to condensed financial statements.
KIEWIT DIVERSIFIED GROUP
Condensed Statements of Cash Flows
(unaudited)
Nine Months Ended
September 30,
(dollars in millions) 1997 1996
Cash flows from continuing operations:
Net cash provided by continuing operations $ 167 $ 122
Cash flows from investing activities:
Proceeds from sales and maturities of marketable
securities 160 138
Purchases of marketable securities (168) (118)
Change in restricted securities 4 2
Capital expenditures (20) (78)
Acquisitions and investments, net (32) (54)
Proceeds from sale of assets and other 1 7
------ -------
Net cash used in investing activities (55) (103)
Cash flows from financing activities:
Proceeds from long-term debt borrowings 17 35
Payments on long-term debt, including current portion (2) (38)
Exchange of Class B&C Stock for Class D Stock, net 72 19
Repurchases of common stock - (11)
Dividends paid (12) (13)
Issuance of common stock 49 1
------ -------
Net cash provided by (used in) financing activities 124 (7)
Cash flows from discontinued operations:
Discontinued operations - 3
Investments in discontinued operations (34) (55)
------ -------
Net cash used in discontinued operations (34) (52)
Cash and cash equivalents of C-TEC at beginning of year (76) -
------ -------
Net change in cash and cash equivalents 126 (40)
Cash and cash equivalents at beginning of period 147 363
------ -------
Cash and cash equivalents at end of period $ 273 $ 323
====== =======
Noncash investing activities from discontinued operations:
Conversion of CalEnergy Convertible Debentures
to CalEnergy Common Stock $ - $ 66
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 ("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 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 B&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.
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. C-TEC's financial position, results of operations and cash flows
are consolidated in the 1996 condensed financial statements.
The results of operations for the nine months ended September 30, 1997 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. Discontinued Operations
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 include approximately 20 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 is subject to the satisfactory completion of certain provisions
of the agreement and is expected to close in early 1998. These assets
comprise 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 condensed
balance sheets and statements of operations and cash flows for all periods
presented. The Group is no longer required to provide additional capital to
these entities through the closing date.
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 23% 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 expects to recognize an after-tax gain of
approximately $50 million from this transaction in the fourth quarter of 1997.
The agreement with CalEnergy includes a provision whereby CalEnergy and the
Group are to share 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 expects to receive additional
proceeds of up to $20 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 $300 million. The after-tax proceeds
from the transaction of approximately $960 million will be used to fund the
expansion plan of the information services business.
The following is summarized financial information for discontinued operations:
Three Months Ended Nine Months Ended
September 30, September 30,
Income from Discontinued Operations 1997 1996 1997 1996
Operations
Equity in:
CalEnergy earnings, net $ 13 $ 7 $ 29 $ 14
CE Electric earnings, net 2 - 11 -
International energy project
earnings, net 6 (1) 1 (6)
CalEnergy debenture interest - 2 - 5
Income tax expense (8) (3) (15) (6)
----- ---- ----- -----
Income from operations $ 13 $ 5 $ 26 $ 7
===== ==== ===== =====
Extraordinary Loss - Windfall Tax
Group's share from CE Electric $ (58) $ - $ (58) $ -
Group's share from CalEnergy (39) - (39) -
Income tax benefit 34 - 34 -
----- ---- ----- -----
Extraordinary loss $ (63) $ - $ (63) $ -
===== ==== ===== =====
In December 1996, CE Electric which is 70% owned by CalEnergy and 30% owned by
the Group, acquired majority ownership of Northern Electric plc ("Northern")
pursuant to a 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.
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 impact to the Group, directly through its investment in CE
Electric and indirectly through its 30% interest in CalEnergy, was $63
million.
The following summarizes the investments in discontinued operations:
September 30, December 28,
1997 1996
(unaudited)
Investment in CalEnergy $ 282 $ 292
Investment in CE Electric 129 176
Investment in international energy projects 184 157
Deferred income tax asset (liability) 2 (17)
------ ------
Total $ 597 $ 608
====== ======
3. 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. In 1997, the operations of the Group resulted in a loss.
Therefore, the anti-dilutive effect of the Class D options was not included
in the per share calculations. The number of shares used in computing both
primary and fully diluted earnings per share were 24,585,375 and 23,181,785
for the three months ended September 30, 1997 and 1996 and 24,513,018 and
23,207,898 for the nine months ending on the same dates.
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 operations.
4. 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)
September 30, December 28,
1997 1996
Cash and marketable securities $ 14 $ 5
Property, plant and equipment, net 10 5
Other assets 9 1
------- -------
Total Assets $ 33 $ 11
======= =======
Accounts payable $ 14 $ 17
Long-term debt, including current portion 1 1
------- -------
Total Liabilities $ 15 $ 18
======= =======
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
Other expense, net $ - $ - $ (1) $ (1)
Corporate general and administrative costs have been allocated to the Group.
These allocations were $1 million for the three months ended September 30,
1997 and 1996 and $4 million for the nine months ended September 30, 1997
and 1996.
Mine management fees paid to the Construction & Mining Group were $7 million
and $9 million for the three months ended September 30, 1997 and 1996 and $23
million and $24 million for the nine months ended September 30, 1997 and 1996.
5. Acquisitions:
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. ("Northern") 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 September 30, 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.
The Group's investment in CE Electric and the earnings and losses associated
with CE Electric are included in discontinued operations.
6. Investments:
The Group is able to defer the tax on $40 million of 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. In June 1997, the Group closed a $16 million financing
agreement with Metropolitan Life Insurance Company. The 15-year note is
collateralized by the Aurora property and carries an interest rate of 8.38%.
The Group has also begun construction of a second data center for the
information services business in Phoenix, Arizona. The cost of the building,
approximately $11 million, will be applied against the $40 million gain. 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., ("CE Casecnan") closed financing and commenced construction
of a $495 million irrigation and hydroelectric power project located on the
Philippines island of Luzon. The Group and CalEnergy have 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 contemplated with CalEnergy.
The Group and CalEnergy had agreed to jointly develop and construct geothermal
power facilities at the Dieng and Patuha sites in Indonesia. Dieng Unit 1 is
being constructed and is expected to be placed in commercial operation later
this year. An additional five units are expected to be constructed on a
modular basis 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.
The Group's investments in the international energy projects and the earnings
and losses associated with these investments are included in discontinued
operations.
7. C-TEC Restructuring:
On September 5, 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.
The restructuring is expected to permit investors and the financial markets
to better understand and evaluate C-TEC's various businesses. In addition,
the restructuring has allowed C-TEC to raise capital on more efficient terms.
In July 1997, C-TEC closed four separate credit facilities with a syndicate
of banks aggregating $410 million and in October 1997, RCN issued $575 million
of debt. These proceeds were used to refinance the cable group's existing
Senior Secured Notes and to fund RCN's continued development.
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 consolidated financial statements. The
financial position of each entity as of September 30, 1997 and December 28,
1996 (pro-forma) and the Group's proportionate share of the equity in
each entity including allocated goodwill was as follows:
Commonwealth
Telephone Cable RCN
Enterprises Michigan Corporation
1997 1996 1997 1996 1997 1996
Financial Position:
Current assets $ 81 $ 51 $ 18 $ 10 $ 247 $ 143
Other assets 291 266 124 139 352 485
----- ----- ---- ----- ------ -----
Total assets 372 317 142 149 599 628
Current liabilities 76 59 17 24 72 57
Other liabilities 262 189 163 190 138 175
Minority interest - - 15 15 15 5
------ ----- ---- ---- ----- -----
Total liabilities 338 248 195 229 225 237
------ ----- ---- ---- ----- -----
Net assets (liabilities) $ 34 $ 69 $ (53) $(80) $ 374 $ 391
====== ===== ===== ==== ===== =====
Group's share:
Equity in net assets $ 17 $ 33 $ (26) $(38) $ 181 $ 189
Goodwill 82 58 58 75 32 41
------ ----- ----- ---- ----- -----
$ 99 $ 91 $ 32 $ 37 $ 213 $ 230
====== ===== ===== ==== ===== =====
The results of operations for each entity for the nine months ended September
30, 1997 and 1996, and the Group's proportionate share, including goodwill
amortization were as follows:
Results of operations:
Revenue $ 145 $ 139 $ 61 $ 57 $ 92 $ 76
Net income (loss) available
to common stockholders 18 17 (3) (7) (35) (1)
Group's share:
Net income (loss) $ 9 $ 8 $ (1) $ (3) $(17) $ -
Goodwill amortization (1) (3) (3) (2) - (2)
------ ----- ----- ---- ---- ----
Equity in net income (loss) $ 8 $ 5 $ (4) $ (5) $(17) $ (2)
====== ===== ===== ==== ==== ====
The following financial information of the Group is presented as if C-TEC had
been accounted for utilizing the equity method in the condensed financial
statements as of December 28, 1996 and for the three and nine months ended
September 30, 1996. The 1997 financial statements include C-TEC
accounted for utilizing the equity method and are presented here for
comparative purposes only:
September 30, December 28,
(dollars in millions) 1997 1996
Assets
Current Assets:
Cash and cash equivalents $ 273 $ 71
Marketable securities 339 325
Restricted securities 22 17
Receivables 45 34
Other 19 19
-------- --------
Total Current Assets 698 466
Net Property, Plant and Equipment 181 174
Investments 472 458
Investments in Discontinued Operations 597 608
Intangible Assets, net 21 23
Other Assets 44 49
-------- --------
$ 2,013 $ 1,778
======== ========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 29 $ 41
Current portion of long-term debt 1 2
Accrued reclamation and other mining costs 17 19
Other 47 34
-------- --------
Total Current Liabilities 94 96
Long-term Debt, less current portion 134 113
Deferred Income Taxes 156 47
Retirement Benefits 40 45
Accrued Reclamation costs 99 98
Other Liabilities 114 118
Minority Interest 1 4
Stockholders' Equity 1,375 1,257
--------- --------
$ 2,013 $ 1,778
========= ========
Three Months Ended Nine Months Ended
September 30, September 30,
(dollars in millions) 1997 1996 1997 1996
Revenue $ 80 $ 75 $ 241 $ 209
Cost of Revenue (42) (39) (126) (112)
------ ----- ------ -----
38 36 115 97
General and Administrative Expenses (26) (15) (67) (52)
------ ------ ------ -----
Operating Earnings 12 21 48 45
Other Income (Expense):
Equity earnings, net (12) - (18) (7)
Investment income, net 9 9 25 30
Interest expense, net (3) (1) (10) (2)
Other, net 1 1 3 8
------ ------ ------ -----
(5) 9 - 29
------- ------ ------ -----
Earnings from Continuing Operations Before
Income Taxes and Minority Interest 7 30 48 74
Provision for Income Taxes (2) (12) (17) (25)
Minority Interest in Net Loss
of Subsidiaries 1 1 3 3
------ ------ ----- -----
Income from Continuing Operations 6 19 34 52
Income (Loss) from Discontinued
Operations (50) 5 (37) 7
------ ------- ----- ------
Net Earnings (Loss) $ (44) $ 24 $ (3) $ 59
====== ======= ===== ======
Nine Months Ended
September 30,
(dollars in millions) 1997 1996
Cash flows from continuing operations:
Net cash provided by continuing operations $ 167 $ 47
Cash flows from investing activities:
Proceeds from sales and maturities of
marketable securities and investments 160 5
Purchases of marketable securities (168) (52)
Change in restricted securities 4 2
Capital expenditures (20) (20)
Acquisitions and investment, net (32) (12)
Other 1 4
------- ------
Net cash used in investing activities (55) (73)
Cash flows from financing activities:
Proceeds from long-term debt borrowings 17 16
Payments on long-term debt, including
current portion (2) (4)
Repurchases of common stock - (11)
Exchange of Class B&C Stock for Class D Stock 72 19
Payment of dividends (12) (12)
Issuance of common stock 49 -
-------- ------
Net cash provided by financing activities 124 8
Cash flows used in discontinued operations (34) (52)
-------- ------
Net change in cash and cash equivalents 202 (70)
Cash and cash equivalents at beginning of period 71 314
-------- ------
Cash and cash equivalents at end of period $ 273 $ 244
======== ======
8. Other Matters:
In October 1996, the PKS Board of Directors ("Board") 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 the
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 Group
would be 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. As a result, the restructuring will probably not occur until
mid-year 1998. The Diversified Group probably will not seek to list its
stock for public trading on a national securities exchange until it raises
capital through a public equity offering or desires to have a listed equity
security available for acquisitions. The Board will retain the right, even
if the stockholders ratify the proposal and favorable tax treatment is
satisfied, to abandon, defer or modify the Transaction if it believes that it
would be in the best interests of all stockholders.
The Group has recently decided to substantially increase its emphasis on and
resources to its information services business, with a view to becoming a
facilities-based provider of a broad range of integrated 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 services,
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 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.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations - Third Quarter 1997 vs. Third Quarter 1996
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.
Revenue from each of the Group's business segments for the three months ended
September 30 comprised the following (in millions):
1997 1996
Coal Mining $ 50 $ 61
Telecommunications - 90
Information Services 27 11
Other 3 3
------- -------
$ 80 $ 165
======= =======
Coal Mining. Mining revenue declined 18% in the third quarter of 1997
compared to the same period in 1996. Commonwealth Edison Company
("Commonwealth") has the flexibility under the amended contract to
accelerate or defer delivery of alternate source coal provided it accepts
delivery of the aggregate minimum commitment at the end of each year. In
early 1996, alternate source coal shipments fell below minimum levels.
These shortfalls were partially made up in the second and third quarters of
1996. In 1997, the opposite scenario occurred. Commonwealth took delivery
of more coal in the first quarter than was required but reduced it purchases
in the second and third quarters. Overall, the Group's alternate source
coal revenues declined $6 million for the quarter ended September 30, 1997.
Spot coal sales also declined in 1997. In the third quarter of 1996, a
customer bought out its remaining 1996 obligations. The customer was not
required to take delivery of the coal by paying 60% of the contracted price
of the coal.
Costs as a percentage of revenue for the coal mining operations in the third
quarter of 1997 were consistent with that of the prior year. The decline in
revenue from the customer who bought out its obligation in 1996, which had
no corresponding costs, and declines in high margin alternate source coal
sales were offset by improved mining efficiencies at the Black Butte mine
and a decline in costs as the 1996 costs include certain equipment write-offs.
Information Services. The Group's information services business provides
computer operations outsourcing and systems integration services to firms
that desire to focus resources on their core business. Systems integration
services include converting mainframe based systems to client/server
architecture, Year 2000 compliance, code restructuring and software
re-engineering. Revenue attributable to computer outsourcing and systems
integration increased 146% to $27 million for the three months ended
September 30, 1997 compared to the same period in 1996. The increase in
revenue is attributable to signing several new outsourcing contracts in late
1996 and the increased focus of customers on Year 2000 compatibility, code
restructuring and software re-engineering.
The operating costs of the information services business doubled to $16 million
in 1997 primarily due to its continued growth. Hardware, communications and
personnel costs for the systems integration business all increased
significantly compared to the prior year. Operational efficiencies
were recognized in 1997 through increased utilization of existing computer
hardware.
General and Administrative Expenses. General and administrative expenses
decreased 28% in the third quarter of 1997 compared to the same period in
1996. The primary reason for the reduction is the exclusion of $21 million
of C-TEC's expenses in 1997. C-TEC is no longer consolidated due to a
reduction in the Group's controlling interest. This was partially offset by
increases in the additional overhead of the expanding information services
business and professional services required for the sale of assets to
CalEnergy and the separation of the Diversified and Construction groups.
Equity Losses, net. The telecommunications segment of the Group is now
comprised of the three entities created in the C-TEC restructuring. As a
result of the restructuring, the Group owns less than 50% of the outstanding
shares and voting rights of each entity and accounts for them utilizing the
equity method. Equity losses increased by $8 million in comparing the third
quarter of 1997 to 1996. Contributing to this increase was the inclusion of
($9) million of equity losses for the three companies that previously
comprised C-TEC. The losses of RCN continue to grow due to the continued
expansion of its Boston, New York, and Washington D.C. markets.
Investment Income, net. Excluding the $2 million attributable to C-TEC in
1996, investment income remained the same for the third quarter. The
average portfolio balance and the average yield were relatively consistent
between the quarters.
Interest Expense, net. Interest expense increased $2 million in 1997,
excluding C-TEC's $8 million of interest expense in 1996. CPTC incurred $3
million of interest costs in the third quarter of 1996 of which $1 million
was capitalized due to the construction of the toll road. In 1997, CPTC also
incurred $3 million of interest expense all of which was charged against
earnings. The interest on the debt incurred by KDG to purchase the real
estate in Colorado also contributed to the increase in interest expense.
Other, net. With the exclusion of $1 million of expense for C-TEC in 1996,
other income decreased 67% for the third quarter of 1997. In 1996, other
income included a gain from the liquidation of a captive insurance company
which insured against black lung disease.
Provision for Income Taxes. The effective income tax rates in 1997 of 37%
and in 1996 of 38% differ from the expected statutory rate of 35% primarily
due to state income taxes.
Minority Interest in Net Loss (Income) of Subsidiaries. The losses associated
with the SR91 toll road comprise minority interest in 1997. In 1996,
losses of ($2) million at CPTC are offset by the income of the C-TEC
companies.
Discontinued Operations. Equity earnings, net of tax, increased 160% in the
third quarter of 1997. The Group's proportionate share of CalEnergy's earnings,
net of tax, increased $4 million in the third quarter of 1997 to $8 million.
The conversion of CalEnergy debentures to common stock and the exercise of
options increased the Group's ownership interest in CalEnergy from 23% at
July 1, 1996 to 30% at September 30, 1997. CalEnergy's earnings also
increased primarily due to the completion and commencement of operations at
the Salton Sea Unit IV geothermal facility, the purchase of three cogeneration
facilities and the acquisition of Northern Electric all of which occurred in
the last half of 1996 and the commencement of operations at the Mahanagdong
geothermal facility in July of 1997. In addition to contributing to CalEnergy's
earnings, the Group's proportionate share of Mahanagdong and Northern Electric,
net of tax, also provided $2 million and $1 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.
Also contained in discontinued operations is the extraordinary loss of $63
million, net of tax, from the Windfall tax imposed by the British government
in 1997.
Results of Operations - Nine Months 1997 vs. Nine Months 1996
Revenue from each of the Group's business segments for the nine months ended
September 30 comprised the following (in millions):
1997 1996
Coal Mining $ 165 $ 172
Telecommunications - 273
Information Services 67 30
Other 9 7
------ ------
$ 241 $ 482
====== ======
Coal Mining. Coal sales declined 4% during the first nine months of 1997.
Alternate source coal sales decreased $6 million primarily due to the reduced
contractual obligations of customers. Contracted coal sales also declined
slightly in 1997. Reduced coal sales to Detroit Edison Company, which is
temporarily behind in purchasing its 1997 contracted coal, were partially
offset by additional sales to Mississippi Power.
Operating costs as a percentage of revenue were virtually unchanged from the
same period in 1996. A decline in higher margin alternate source coal sales
and proceeds from a customer who had bought out its obligations in 1996, were
offset by improved mining efficiencies at the Black Butte mine and a decline in
costs as the 1996 costs include certain equipment write-offs.
Information Services. Revenue for information services business increased 123%
to $67 million for the nine months ended September 30, 1997. The increase in
revenue is attributable to signing several new outsourcing contracts in
late 1996 and the increased focus of customers on Year 2000 compatibility,
code restructuring and software re-engineering.
The operating costs of the information services business increased 86% to $41
million in 1997 primarily due to its continued growth. Hardware,
communications and personnel costs for the systems integration business
all increased significantly compared to the prior year.
Operational efficiencies were recognized in 1997 through increased utilization
of existing computer hardware.
General and Administrative Expenses. General and administrative expenses in 1997
and 1996 would have been $67 million and $52 million had C-TEC been accounted
for using the equity method in both years. Increases in the expenses
associated with the information services business, compensation
expenses and professional fees incurred for the proposed restructuring and
CalEnergy transaction led to the increase in general and administrative
expenses.
Equity Losses, net. Losses attributable to equity investees increased to ($18)
in 1997 from ($7) in 1996 assuming C-TEC was accounted for using the equity
method in both periods. The costs of RCN's continued expansion into Boston,
New York City and Washington D.C. and $10 million of costs incurred in
connection with the buyout of a marketing contract with minority shareholders
are responsible for the increase in equity losses.
Investment Income, net. Excluding C-TEC's $9 million in 1996, investment
income decreased 17% in 1997. A reduction in the average portfolio balance
due to significant investments in CE Electric and international energy projects,
and a decline in gains recognized on the sales of securities, all contributed
to the reduction in investment income.
Interest Expense, net. Without the effect of C-TEC's $20 million in 1996,
interest expense increased $8 million. Primarily contributing to the
increase was CPTC's SR91 toll road. Through September 1996 and 1997, CPTC
incurred $8 million and $8 million of interest on its long-term debt. In 1996,
$6 million of the interest was capitalized due to the construction of the
toll road. In August 1996, the road was opened, therefore, interest incurred
after opening was charged against earnings.
Other, net. Other income is primarily comprised of gains and losses on the
sale and disposition of property, plant and equipment and other assets.
Without C-TEC's $5 million of expenses recognized in 1996, other income
decreased 62%. In 1996, gains were realized from the sale of certain
nonoperating assets. Also in 1996, other income included a gain from the
liquidation of a captive insurance company which insured against black lung
disease.
Provision for Income Taxes. The effective income tax rate in 1996 of 38%
differs from the expected statutory rate of 35% primarily due to the state
income taxes. The effective rate in 1997 is approximately 35%.
Minority Interest in Net Loss (Income) of Subsidiaries. Minority interest in
1997 is now comprised of the earnings attributable to the minority
shareholders of CPTC. The losses that were allocated to CPTC's
minority shareholders were ($3) and ($1) million in 1997 and 1996. In 1996,
C-TEC's minority shareholders earned $2 million.
Discontinued Operations. Equity earnings, net of tax, increased significantly
in 1997. The Group's proportionate share of CalEnergy's earnings, net of
tax, increased $10 million in 1997 to $19 million. An increase in the
Group's share of CalEnergy's earnings and improvement in those earnings,
primarily due to the commencement of operations at a geothermal facility,
and the acquisitions of three congeneration facilities and Northern Electric,
contributed to the increase. The Group's proportionate share of Northern
Electric, which was acquired in December 1996, provided $7 million of income
after taxes.
Also contained in discontinued operations is the extraordinary loss of $63
million, net of tax, from the Windfall tax imposed by the British government
in 1997.
Financial Condition - September 30, 1997 vs. December 28, 1996
Excluding C-TEC, the Group's working capital increased $234 million or 63%
during 1997. An increase in cash flows from operations, primarily due to
$146 million of federal tax and interest refunds, and financing activities.
The increase was partially offset by cash used to fund investing activities
and discontinued operations.
Investing activities primarily consist of $22 million of real estate
investments, $20 million of capital expenditures, including $11 million for
equipment of the information services business, and the net purchase of
marketable securities of $8 million.
Financing sources include $72 million from the exchange of Class B&C Stock for
Class D Stock, $49 million from the issuance of common stock and $17 million
long-term debt borrowings, primarily to purchase the Aurora property. These
sources were partially offset by $12 million for the payment of dividends.
Prior to the agreement with CalEnergy, the Group invested $34 million in the
Dieng, Patuha and Bali power projects in Indonesia during 1997.
In October 1996, the PKS Board of Directors ("Board") 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 and the Diversified Group through a split-off of the Construction
and Mining Group. At a special meeting on August 14, 1997, the Board
approved the Transaction.
The separation of the Construction and Mining Group and the Diversified group
would be 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. As a result, the restructuring will probably not occur until mid-
year 1998. The Diversified Group probably will not seek to list its stock
for public trading on a national securities exchange until it raises capital
through a public equity offering or desires to have a listed equity security
available for acquisitions. The Board will retain the right, even if the
stockholders ratify the proposal and favorable tax treatment is satisfied,
to abandon, defer or modify the Transaction if it believes that it would be in
the best intersts of all stockholders.
The Group has recently decided to substantially increase its emphasis on and
resources to its information services business, with a view to becoming a
facilities-based provider of a broad range of integrated 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 services, 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 anticipates that
these costs may be in excess of $1 billion per year within approximately
two years after the separation of the Construction and Diversified businesses.
Long-term liquidity uses of the Group include payment of income taxes
and repurchasing the Group's stock. The Group's current financial condition,
borrowing capacity and proceeds from the CalEnergy transaction should be
sufficient for immediate operating and investing activities. Subsequent to
September 30, 1997, the Group sold $67 million of Class D Stock to employees.
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 on the
Philippine island of Luzon. The Group and CalEnergy have 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 transactions contemplated with CalEnergy.
On September 5, 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 will consist 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.
The restructuring is expected to permit investors and the financial
markets to better understand and evaluate C-TEC's various businesses. In
addition, the restructuring has allowed C-TEC to raise capital on
more efficient terms. In July 1997, C-TEC closed four separate credit
facilities with a syndicate of banks aggregating $410 million and in
October 1997, RCN issued $575 million of debt. These proceeds were
used to refinance the cable group's existing Senior Secured Notes and to
fund RCN's continued development.
