PETER KIEWIT SONS INC /DE/ - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549
FORM 10-Q

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

 
For the quarterly period ended
September 30, 2004
Commission file number
000-23943

   
PETER KIEWIT SONS’, INC.
(Exact name of registrant as specified in its charter)

 
Delaware
(State of Incorporation)
91-1842817
(I.R.S. Employer Identification No.)

   
Kiewit Plaza, Omaha Nebraska
(Address of principal executive offices)
68131
(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), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes [X] No [  ]

 
The number of shares outstanding of each of the registrant’s classes of common stock as of November 5, 2004:

 
Title of Class
Common Stock, $0.01 par value
Shares Outstanding
31,561,896






   





PETER KIEWIT SONS’, INC.


Index
Page

 
PART I - FINANCIAL INFORMATION

     
Item 1.
Financial Statements.
 
     
  Consolidated Condensed Statements of Earnings for the three and nine months ended
September 30, 2004 and 2003


2

  Consolidated Condensed Balance Sheets as of September 30, 2004 and December 27, 2003
3

  Consolidated Condensed Statements of Cash Flows for the nine months ended
September 30, 2004 and 2003


4

  Notes to Consolidated Condensed Financial Statements
5

     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
13

     
Item 3.
Quantitative and Qualitative Disclosure about Market Risk.
18

     
Item 4.
Controls and Procedures.
18

     
  PART II - OTHER INFORMATION
 
     
Item 1.
Legal Proceedings.
18

     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
19

     
Item 6.
Exhibits
19

     
  Signatures
19

     
     
     



   





PART I – FINANCIAL INFORMATION

Item 1.   Financial Statements.

 
Report of Independent Registered Public Accounting Firm

 
 
 
The Board of Directors and Stockholders

Peter Kiewit Sons’, Inc.:

 
We have reviewed the consolidated condensed balance sheet of Peter Kiewit Sons’, Inc. and subsidiaries as of September 30, 2004, and the related consolidated condensed statements of earnings for the three and nine month periods ended September 30, 2004 and 2003, and the consolidated condensed statements of cash flows for the nine month periods ended September 30, 2004 and 2003.  These consolidated condensed financial statements are the responsibility of the Company’s management. 

 
We conducted our review in accordance with standards of the Public Company Accounting Oversight Board (United States).  A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters.  It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole.  Accordingly, we do not express such an opinion.

 
Based on our review, we are not aware of any material modifications that should be made to the consolidated condensed financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.  

 
We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Peter Kiewit Sons’, Inc. and subsidiaries as of December 27, 2003, and the related consolidated statements of earnings, changes in redeemable common stock and comprehensive income, and cash flows for the year then ended (not presented herein); and in our report dated March 2, 2004, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated condensed balance sheet as of December 27, 2003, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

 
 
(signed)  KPMG LLP

 
 
Omaha, Nebraska

November 5, 2004






1



PETER KIEWIT SONS’, INC.

 
Consolidated Condensed Statements of Earnings

(unaudited)

 
  Three Months Ended

September 30,
  Nine Months Ended

September 30,

    2004
      2003
      2004
      2003
 
    (dollars in millions, except per share data)
 
                               
Revenue
$
893
    $
904
    $
2,405
    $
2,613
 
Cost of revenue
  (755
)
    (799
)
    (2,103
)
    (2,343
)

                               
Margin
  138
      105
      302
      270
 
                               
General and administrative expenses
  (56
)
    (58
)
    (173
)
    (173
)

Gain on sale of operating assets
  2
      6
      8
      15
 
                               
Operating income
  84
      53
      137
      112
 
                               
Other income (expense):
                             
   Investment income
  2
      2
      7
      12
 
   Interest expense
  (1
)
    (5
)
    (3
)
    (6
)

   Other, net
  2
      2
      7
      6
 
    3
      (1
)
    11
      12
 
                               
Income before income taxes and cumulative 
                             
  effect of change in accounting principle
  87
      52
      148
      124
 
                               
Income tax expense
  (30
)
    (20
)
    (53
)
    (48
)

                               
Income before cumulative effect of change in 
                             
   accounting principle
  57
      32
      95
      76
 
                               
Cumulative effect of change in accounting
                             
   principle, net of tax
  -
      -
      -
      3
 
                               
Net income
$
57
    $
32
    $
95
    $
79
 
                               
Basic earnings per share:
                             
  Income before cumulative effect of change in
                             
    accounting principle
$
1.88
    $
1.12
    $
3.16
    $
2.63
 
  Cumulative effect of change in accounting
                             
    principle
  -
      -
      -
      .10
 
                               
Net income
$
1.88
    $
1.12
    $
3.16
    $
2.73
 
                               
Diluted earnings per share:
                             
  Income before cumulative effect of change in
                             
    accounting principle
$
1.81
    $
1.08
    $
3.05
    $
2.53
 
  Cumulative effect of change in accounting
                             
    principle
  -
      -
      -
      .10
 
                               
Net income
$
1.81
    $
1.08
    $
3.05
    $
2.63
 
 
See accompanying notes to consolidated condensed financial statements.




2







PETER KIEWIT SONS’, INC.

 
Consolidated Condensed Balance Sheets

 
  September 30,
   
  2004
  December 27,

  (unaudited)
  2003

  (dollars in millions)

ASSETS

               
Current assets:
             
  Cash and cash equivalents
$
570
    $
481
 
  Available-for-sale securities
  106
      103
 
  Receivables, less allowance of $18 and $7
  445
      419
 
  Unbilled contract revenue
  94
      79
 
  Contract costs in excess of related revenue
  22
      45
 
  Investment in construction joint ventures
  273
      251
 
  Deferred income taxes
  69
      60
 
  Other
  55
      26
 
Total current assets
  1,634
      1,464
 
               
Property, plant and equipment, less accumulated
             
  depreciation and amortization of $542 and $531
  409
      340
 
Other assets
  84
      85
 
  $
2,127
    $
1,889
 
               
LIABILITIES AND REDEEMABLE COMMON STOCK

               
Current liabilities:
             
  Accounts payable, including retainage of $57 and $67
$
217
    $
225
 
  Current portion of long-term debt
  1
      10
 
  Accrued costs on construction contracts
  129
      125
 
  Billings in excess of related costs and earnings
  260
      195
 
  Distributions and costs in excess of investment in construction joint ventures
  50
      28
 
  Accrued insurance costs
  77
      70
 
  Accrued payroll
  43
      39
 
  Other
  27
      21
 
Total current liabilities
  804
      713
 
               
Long-term debt, less current portion
  28
      22
 
Deferred income taxes
  41
      41
 
Accrued reclamation
  24
      6
 
               
Minority interest
  6
      1
 
               
Commitments and contingencies
             
               
Preferred stock, no par value, 250,000 shares authorized, no shares outstanding 
  -
      -
 
Redeemable common stock ($1,002 million and $981 million aggregate redemption value):
             
  Common stock, $.01 par value, 125 million shares authorized 
             
    31,319,331 and 30,242,689 outstanding 
  -
      -
 
  Additional paid-in capital
  292
      243
 
  Accumulated other comprehensive income
  7
      4
 
  Retained earnings
  925
      859
 
Total redeemable common stock
  1,224
      1,106
 
  $
2,127
    $
1,889
 
 
See accompanying notes to consolidated condensed financial statements.




3











PETER KIEWIT SONS’, INC.

 
Consolidated Condensed Statements of Cash Flows

(unaudited)

 
  Nine Months Ended

  September 30,

    2004
      2003
 
    (dollars in millions)
 
               
Cash flows from operations:
             
  Net cash provided by operations
$
196
    $
150
 
               
Cash flows from investing activities:
             
  Proceeds from maturities of available-for-sale securities
  2
      -
 
  Purchases of available-for-sale securities
  (5
)
    (2
)

  Proceeds from sale of stock warrants
  -
      22
 
  Proceeds from sales of property, plant and equipment
  26
      23
 
  Capital expenditures
  (68
)
    (95
)

  Acquisition
  (75
)
    -
 
  Additions to notes receivable
  (1
)
    -
 
  Payments received on notes receivable
  2
      4
 
      Net cash used in investing activities
  (119
)
    (48
)

               
               
Cash flows from financing activities:
             
  Long-term debt borrowings
  6
      -
 
  Payments on long-term debt
  (9
)
    -
 
  Issuances of common stock
  54
      -
 
  Repurchases of common stock
  (19
)
    (76
)

  Dividends paid
  (25
)
    (22
)

  Capital contribution to consolidated joint ventures by minority investors
  4
      -
 
  Other
  -
      1
 
      Net cash provided by (used in) financing activities
  11
      (97
)

               
Effect of exchange rates on cash
  1
      7
 
               
Net increase in cash and cash equivalents
  89
      12
 
               
Cash and cash equivalents at beginning of period
  481
      275
 
               
Cash and cash equivalents at end of period
$
570
    $
287
 
               
               
  Non-cash investing activities:
             
    Stock warrants returned to owner as part of a contract settlement
$
-
    $
3
 
               
  Non-cash financing activities:
             
    Owner account receivable converted to note receivable
$
-
    $
2
 
 
See accompanying notes to consolidated condensed financial statements.




4





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”, which together with its subsidiaries is referred to herein as the "Company") at December 27, 2003 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 and cash flows for the periods presented.  The Company’s accounting policies and certain other disclosures, unless otherwise disclosed herein, are those that are set forth in the notes to the consolidated financial statements contained in the Company’s Annual Report on Form 10-K.  Management believes that the disclosures are adequate to make the information presen
ted not misleading.

   
The Company became aware of accounting errors that occurred during 2002 on two construction contracts.  The errors resulted in an understatement of 2002 net income of less than $1 million.  The Company corrected the errors during the nine months ended September 30, 2003.  One correction decreased net income by $4 million during the first quarter of 2003 and the second correction increased net income by $5 million during the third quarter of 2003.  The Company does not believe that the corrections of these errors is material to 2003 operations.  Excluding these adjustments, net income for the three and nine months ended September 30, 2003 was $27 million and $78 million.

   
The results of operations for the nine months ended September 30, 2004 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 in the previous periods to conform to current year presentation.

   
2.          Recent Accounting Pronouncements:

 
In 2003, the Financial Accounting Standards Board “FASB” issued FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities,” (“FIN 46-R”).  FIN 46-R addresses the consolidation of variable interest entities in which the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, or the equity investors lack one or more of the essential characteristics of a controlling financial interest.  FIN 46-R requires enterprises to consolidate and disclose existing unconsolidated variable interest entities in which they are the primary beneficiaries if the entities do not effectively disperse risk among the parties involved. FIN 46-R also requires disclosures by an enterprise holding significant interests in variable interest entit
ies in which it is not a primary beneficiary.  FIN 46-R applies to variable interest entities created or in which interest is obtained after December 31, 2003.  The adoption of FIN 46-R has not had a material impact on the Company’s financial statements.  The Company will be required to apply FIN 46-R to all other entities subject to this Interpretation by the beginning of the fiscal year ending December 31, 2005.  The Company is currently assessing the impact of FIN 46-R related to such entities.






5





PETER KIEWIT SONS’, INC.

 
Notes to Consolidated Condensed Financial Statements – (Continued)

 
 
3.          Acquisition:

 
On August 20, 2004, the Company acquired the assets and certain liabilities of the Buckskin Mine (“Buckskin”), a coal mine located near Gillette, Wyoming.  The total purchase price was approximately $75 million.  The results of Buckskin’s operations have been included in the consolidated financial statements since that date.  The acquisition occurred as part of the Company’s plan to expand its coal mining businesses.

 
The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed at the date of acquisition.  The Company is in the process of obtaining third-party valuations of the assets and liabilities acquired; thus, the allocation of the purchase price is subject to refinement.  It is not anticipated that any goodwill will result from the final purchase price allocation.

 
  Approximate, as of
 
  August 20, 2004
 
  (dollars in millions)
 
         
Current assets
$
16
   
Property and equipment (including mineral rights)
  80
   
    Total assets 
  96
   
         
Current liabilities 
  4
   
Accrued reclamation 
  17
   
    Total liabilities 
  21
   
         
    Net assets
$
75
   
 
The following unaudited, pro-forma financial information assumes the acquisition occurred at the beginning of 2003.  These results have been prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the acquisition been made at the beginning of 2003, or the results which may occur in the future.

 
  Three Months Ended
  Nine Months Ended

  September 30,
  September 30

    2004
    2003
    2004
    2003

  (dollars in millions, except per share data)

                       
Revenue
$
902
  $
923
  $
2,466
  $
2,671

Income before cumulative effect of change in
                     
   accounting principle
$
59
  $
33
  $
101
  $
77

Net income
$
59
  $
33
  $
101
  $
80

                       
Basic earnings per share:
                     
  Income before cumulative effect of change in
                     
    accounting principle
$
1.95
  $
1.16
  $
3.35
  $
2.67

  Net income
$
1.95
  $
1.16
  $
3.35
  $
2.77

                       
Diluted earnings per share:
                     
  Income before cumulative effect of change in
                     
    accounting principle
$
1.88
  $
1.11
  $
3.24
  $
2.57

  Net income
$
1.88
  $
1.11
  $
3.24
  $
2.67




6



PETER KIEWIT SONS’, INC.

 
Notes to Consolidated Condensed Financial Statements – (Continued)

 
 
4.          Change in Accounting Principle:

 
Effective December 29, 2002, the Company adopted, as required, the provisions of Statement of Financial Accounting Standards No. 143 (SFAS 143), “Accounting for Asset Retirement Obligations.”  SFAS 143 establishes new reporting standards of accounting for the Company’s reclamation liability associated with its coal mining operation. The new reporting standards require retirement obligations to be measured at fair value and displayed as a liability when incurred. Associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and subsequently allocated to expense over the asset’s useful life.  Prior to implementing SFAS 143, reclamation liability was provided without regard to the time value of money.

 
The cumulative effect of implementing SFAS 143 resulted in an increase in net income of $3 million or $.10 per share for the nine months ended September 30, 2003.

 
The following unaudited pro forma information reflects the Company’s results for the three and nine months ended September 30, 2003 as if the change had been retroactively applied:

 
  Three Months Ended
  Nine Months Ended

  September 30,
  September 30,

  2003
  2003

  (dollars in millions, except per share data)

             
Net income
$
32
  $
76
 
             
Net earnings per share:
           
  Basic
$
1.12
  $
2.63
 
             
  Diluted
$
1.08
  $
2.53
 



7



PETER KIEWIT SONS’, INC.

 
Notes to Consolidated Condensed Financial Statements - (Continued)

 
 
5.          Earnings Per Share:

 
Basic earnings per share has been computed using the weighted average number of shares outstanding during each period.  Diluted earnings per share gives effect to convertible debentures considered to be dilutive common stock equivalents.  The potentially dilutive convertible debentures are calculated in accordance with the “if converted” method.  This method assumes that the after-tax interest expense associated with the debentures is an addition to income and the debentures are converted into equity with the resulting common shares being aggregated with the weighted average shares outstanding.

 
  Three Months Ended
September 30,
  Nine Months Ended
September 30,

  2004
  2003
  2004
  2003

  (dollars in millions, except per share data)

   
Net income available to common stockholders
$
57
  $
32
  $
95
  $
79

                       
Add:  Interest expense, net of tax effect,
                     
  associated with convertible debentures
  *
    *
    1
    *

                       
Net income for diluted shares
$
57
  $
32
  $
96
  $
79

                       
Total number of weighted average shares outstanding used
                   <

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2004	Commission file number 000-23943

PETER KIEWIT SONS’, INC. (Exact name of registrant as specified in its charter)

Delaware (State of Incorporation)	91-1842817 (I.R.S. Employer Identification No.)

Kiewit Plaza, Omaha Nebraska (Address of principal executive offices)	68131 (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), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]

The number of shares outstanding of each of the registrant’s classes of common stock as of November 5, 2004:

Title of Class Common Stock, $0.01 par value	Shares Outstanding 31,561,896

PETER KIEWIT SONS’, INC. Index Page

PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements.

	Consolidated Condensed Statements of Earnings for the three and nine months ended September 30, 2004 and 2003	2
	Consolidated Condensed Balance Sheets as of September 30, 2004 and December 27, 2003	3
	Consolidated Condensed Statements of Cash Flows for the nine months ended September 30, 2004 and 2003	4
	Notes to Consolidated Condensed Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	13

Item 3.	Quantitative and Qualitative Disclosure about Market Risk.	18

Item 4.	Controls and Procedures.	18

	PART II - OTHER INFORMATION

Item 1.	Legal Proceedings.	18

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	19

Item 6.	Exhibits	19

	Signatures	19

PETER KIEWIT SONS’, INC.

Consolidated Condensed Statements of Earnings
(unaudited)

	Three Months Ended September 30,								Nine Months Ended September 30,
		2004				2003				2004			2003
		(dollars in millions, except per share data)

Revenue	$	893		$	904			$		2,405		$	2,613
Cost of revenue		(755	)		(799		)			(2,103	)		(2,343	)

Margin		138			105					302			270

General and administrative expenses		(56	)		(58		)			(173	)		(173	)
Gain on sale of operating assets		2			6					8			15

Operating income		84			53					137			112

Other income (expense):
Investment income		2			2					7			12
Interest expense		(1	)		(5		)			(3	)		(6	)
Other, net		2			2					7			6
		3			(1		)			11			12

Income before income taxes and cumulative
effect of change in accounting principle		87			52					148			124

Income tax expense		(30	)		(20		)			(53	)		(48	)

Income before cumulative effect of change in
accounting principle		57			32					95			76

Cumulative effect of change in accounting
principle, net of tax		-			-					-			3

Net income	$	57		$	32			$		95		$	79

Basic earnings per share:
Income before cumulative effect of change in
accounting principle	$	1.88		$	1.12			$		3.16		$	2.63
Cumulative effect of change in accounting
principle		-			-					-			.10

Net income	$	1.88		$	1.12			$		3.16		$	2.73

Diluted earnings per share:
Income before cumulative effect of change in
accounting principle	$	1.81		$	1.08			$		3.05		$	2.53
Cumulative effect of change in accounting
principle		-			-					-			.10

Net income	$	1.81		$	1.08			$		3.05		$	2.63

See accompanying notes to consolidated condensed financial statements.

PETER KIEWIT SONS’, INC.

Consolidated Condensed Balance Sheets

		September 30,
		2004			December 27,
		(unaudited)			2003
		(dollars in millions)
ASSETS

Current assets:
Cash and cash equivalents	$		570	$		481
Available-for-sale securities			106			103
Receivables, less allowance of $18 and $7			445			419
Unbilled contract revenue			94			79
Contract costs in excess of related revenue			22			45
Investment in construction joint ventures			273			251
Deferred income taxes			69			60
Other			55			26
Total current assets			1,634			1,464

Property, plant and equipment, less accumulated
depreciation and amortization of $542 and $531			409			340
Other assets			84			85
	$		2,127	$		1,889

LIABILITIES AND REDEEMABLE COMMON STOCK

Current liabilities:
Accounts payable, including retainage of $57 and $67	$		217	$		225
Current portion of long-term debt			1			10
Accrued costs on construction contracts			129			125
Billings in excess of related costs and earnings			260			195
Distributions and costs in excess of investment in construction joint ventures			50			28
Accrued insurance costs			77			70
Accrued payroll			43			39
Other			27			21
Total current liabilities			804			713

Long-term debt, less current portion			28			22
Deferred income taxes			41			41
Accrued reclamation			24			6

Minority interest			6			1

Commitments and contingencies

Preferred stock, no par value, 250,000 shares authorized, no shares outstanding			-			-
Redeemable common stock ($1,002 million and $981 million aggregate redemption value):
Common stock, $.01 par value, 125 million shares authorized
31,319,331 and 30,242,689 outstanding			-			-
Additional paid-in capital			292			243
Accumulated other comprehensive income			7			4
Retained earnings			925			859
Total redeemable common stock			1,224			1,106
	$		2,127	$		1,889

See accompanying notes to consolidated condensed financial statements.

PETER KIEWIT SONS’, INC.

Consolidated Condensed Statements of Cash Flows
(unaudited)

	Nine Months Ended
	September 30,
		2004			2003
		(dollars in millions)

Cash flows from operations:
Net cash provided by operations	$	196		$	150

Cash flows from investing activities:
Proceeds from maturities of available-for-sale securities		2			-
Purchases of available-for-sale securities		(5	)		(2	)
Proceeds from sale of stock warrants		-			22
Proceeds from sales of property, plant and equipment		26			23
Capital expenditures		(68	)		(95	)
Acquisition		(75	)		-
Additions to notes receivable		(1	)		-
Payments received on notes receivable		2			4
Net cash used in investing activities		(119	)		(48	)


Cash flows from financing activities:
Long-term debt borrowings		6			-
Payments on long-term debt		(9	)		-
Issuances of common stock		54			-
Repurchases of common stock		(19	)		(76	)
Dividends paid		(25	)		(22	)
Capital contribution to consolidated joint ventures by minority investors		4			-
Other		-			1
Net cash provided by (used in) financing activities		11			(97	)

Effect of exchange rates on cash		1			7

Net increase in cash and cash equivalents		89			12

Cash and cash equivalents at beginning of period		481			275

Cash and cash equivalents at end of period	$	570		$	287


Non-cash investing activities:
Stock warrants returned to owner as part of a contract settlement	$	-		$	3

Non-cash financing activities:
Owner account receivable converted to note receivable	$	-		$	2

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”, which together with its subsidiaries is referred to herein as the "Company") at December 27, 2003 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 and cash flows for the periods presented. The Company’s accounting policies and certain other disclosures, unless otherwise disclosed herein, are those that are set forth in the notes to the consolidated financial statements contained in the Company’s Annual Report on Form 10-K. Management believes that the disclosures are adequate to make the information presen ted not misleading.

The Company became aware of accounting errors that occurred during 2002 on two construction contracts. The errors resulted in an understatement of 2002 net income of less than $1 million. The Company corrected the errors during the nine months ended September 30, 2003. One correction decreased net income by $4 million during the first quarter of 2003 and the second correction increased net income by $5 million during the third quarter of 2003. The Company does not believe that the corrections of these errors is material to 2003 operations. Excluding these adjustments, net income for the three and nine months ended September 30, 2003 was $27 million and $78 million.

The results of operations for the nine months ended September 30, 2004 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 in the previous periods to conform to current year presentation.

2. Recent Accounting Pronouncements:

In 2003, the Financial Accounting Standards Board “FASB” issued FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities,” (“FIN 46-R”). FIN 46-R addresses the consolidation of variable interest entities in which the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, or the equity investors lack one or more of the essential characteristics of a controlling financial interest. FIN 46-R requires enterprises to consolidate and disclose existing unconsolidated variable interest entities in which they are the primary beneficiaries if the entities do not effectively disperse risk among the parties involved. FIN 46-R also requires disclosures by an enterprise holding significant interests in variable interest entit ies in which it is not a primary beneficiary. FIN 46-R applies to variable interest entities created or in which interest is obtained after December 31, 2003. The adoption of FIN 46-R has not had a material impact on the Company’s financial statements. The Company will be required to apply FIN 46-R to all other entities subject to this Interpretation by the beginning of the fiscal year ending December 31, 2005. The Company is currently assessing the impact of FIN 46-R related to such entities.

PETER KIEWIT SONS’, INC.

Notes to Consolidated Condensed Financial Statements – (Continued)


3. Acquisition:

On August 20, 2004, the Company acquired the assets and certain liabilities of the Buckskin Mine (“Buckskin”), a coal mine located near Gillette, Wyoming. The total purchase price was approximately $75 million. The results of Buckskin’s operations have been included in the consolidated financial statements since that date. The acquisition occurred as part of the Company’s plan to expand its coal mining businesses.

The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed at the date of acquisition. The Company is in the process of obtaining third-party valuations of the assets and liabilities acquired; thus, the allocation of the purchase price is subject to refinement. It is not anticipated that any goodwill will result from the final purchase price allocation.

					Approximate, as of
					August 20, 2004
					(dollars in millions)

Current assets					$	16
Property and equipment (including mineral rights)						80
Total assets						96

Current liabilities						4
Accrued reclamation						17
Total liabilities						21

Net assets					$	75

The following unaudited, pro-forma financial information assumes the acquisition occurred at the beginning of 2003. These results have been prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the acquisition been made at the beginning of 2003, or the results which may occur in the future.

	Three Months Ended						Nine Months Ended
	September 30,						September 30
		2004		2003				2004		2003
	(dollars in millions, except per share data)

Revenue	$	902	$	923			$	2,466	$	2,671
Income before cumulative effect of change in
accounting principle	$	59	$	33			$	101	$	77
Net income	$	59	$	33			$	101	$	80

Basic earnings per share:
Income before cumulative effect of change in
accounting principle	$	1.95	$	1.16			$	3.35	$	2.67
Net income	$	1.95	$	1.16			$	3.35	$	2.77

Diluted earnings per share:
Income before cumulative effect of change in
accounting principle	$	1.88	$	1.11			$	3.24	$	2.57
Net income	$	1.88	$	1.11			$	3.24	$	2.67

PETER KIEWIT SONS’, INC.

Notes to Consolidated Condensed Financial Statements – (Continued)


4. Change in Accounting Principle:

Effective December 29, 2002, the Company adopted, as required, the provisions of Statement of Financial Accounting Standards No. 143 (SFAS 143), “Accounting for Asset Retirement Obligations.” SFAS 143 establishes new reporting standards of accounting for the Company’s reclamation liability associated with its coal mining operation. The new reporting standards require retirement obligations to be measured at fair value and displayed as a liability when incurred. Associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and subsequently allocated to expense over the asset’s useful life. Prior to implementing SFAS 143, reclamation liability was provided without regard to the time value of money.

The cumulative effect of implementing SFAS 143 resulted in an increase in net income of $3 million or $.10 per share for the nine months ended September 30, 2003.

The following unaudited pro forma information reflects the Company’s results for the three and nine months ended September 30, 2003 as if the change had been retroactively applied:

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2003		2003
	(dollars in millions, except per share data)

Net income	$	32	$	76

Net earnings per share:
Basic	$	1.12	$	2.63

Diluted	$	1.08	$	2.53

PETER KIEWIT SONS’, INC.

Notes to Consolidated Condensed Financial Statements - (Continued)


5. Earnings Per Share:

Basic earnings per share has been computed using the weighted average number of shares outstanding during each period. Diluted earnings per share gives effect to convertible debentures considered to be dilutive common stock equivalents. The potentially dilutive convertible debentures are calculated in accordance with the “if converted” method. This method assumes that the after-tax interest expense associated with the debentures is an addition to income and the debentures are converted into equity with the resulting common shares being aggregated with the weighted average shares outstanding.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2004		2003		2004		2003
	(dollars in millions, except per share data)

Net income available to common stockholders	$	57	$	32	$	95	$	79

Add: Interest expense, net of tax effect,
associated with convertible debentures		*		*		1		*

Net income for diluted shares	$	57	$	32	$	96	$	79

Total number of weighted average shares outstanding used							<