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 March 31, 2003
Commission File No. 001-12995
CE CASECNAN WATER AND ENERGY COMPANY, INC.
------------------------------------------
(Exact name of registrant as specified in its charter)
Philippines Not Applicable
------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
24th Floor, 6750 Building, Ayala Avenue
Makati, Metro Manila, Philippines Not Applicable
--------------------------------- --------------
(Address of principal executive offices) (Zip Code)
(632) 892-0276
--------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: N/A
Securities registered pursuant to Section 12(g) of the Act: N/A
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 [ ] No [x]
As of May 12, 2003, 767,162 shares of common stock were outstanding.
TABLE OF CONTENTS
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements................................................3
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................13
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........19
Item 4. Controls and Procedures............................................19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..................................................20
Item 2. Changes in Securities and Use of Proceeds..........................20
Item 3. Defaults Upon Senior Securities....................................20
Item 4. Submission of Matters to a Vote of Security Holders................20
Item 5. Other Information..................................................20
Item 6. Exhibits and Reports on Form 8-K...................................20
SIGNATURES....................................................................21
CERTIFICATIONS................................................................22
EXHIBIT INDEX.................................................................24
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders of CE Casecnan Water and Energy
Company, Inc.
We have reviewed the accompanying balance sheets of CE Casecnan Water and Energy
Company, Inc. as of March 31, 2003 and the related statements of operations and
of cash flows for the three months ended March 31, 2003 and 2002. These
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical review procedures to the
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 generally accepted auditing standards, 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 accompanying interim financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We previously audited in accordance with auditing standards generally accepted
in the United States of America, the balance sheet as of December 31, 2002, and
the related statements of operations, changes in stockholders' equity and of
cash flows for the year then ended (not presented herein), and in our report
dated January 24, 2003, we expressed an unqualified opinion on those financial
statements. In our opinion, the information set forth in the accompanying
balance sheet information as of December 31, 2002, is fairly stated in all
material respects in relation to the balance sheet from which it has been
derived.
/s/ Joaquin Cunanan & Co.
JOAQUIN CUNANAN & CO.
A PricewaterhouseCoopers Member Firm
Makati City, Philippines
April 21, 2003
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CE CASECNAN WATER AND ENERGY COMPANY, INC.
BALANCE SHEETS
(In thousands of U.S. Dollars, except share data)
AS OF
-----------------------
MARCH 31, DECEMBER 31,
2003 2002
--------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents .......................................... $ 4,040 $ 705
Trade receivable, net .............................................. 48,237 51,515
Accrued interest and other receivable .............................. 8,514 7,009
Prepaid insurance .................................................. 2,469 3,532
Other current assets ............................................... 2,561 2,030
-------- --------
Total current assets ............................................. 65,821 64,791
-------- --------
Restricted cash and investments ...................................... 32,058 7,078
Bond issue costs, net ................................................ 4,879 5,218
Property, plant and equipment, net ................................... 449,421 453,507
Deferred income tax .................................................. 5,371 5,371
Other assets ......................................................... 2,472 5,542
-------- --------
TOTAL ASSETS ......................................................... $560,022 $541,507
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses .............................. $ 11,236 $ 10,785
Accrued interest on notes payable .................................. 2,478 2,048
Accrued interest on long-term debts ................................ 12,668 4,223
Payable to affiliates .............................................. 34,023 33,342
Current portion of long-term debt .................................. 41,468 41,468
-------- --------
Total current liabilities ........................................ 101,873 91,866
-------- --------
Notes payable ........................................................ 51,263 51,263
Long-term debts, net of current portion .............................. 246,457 246,457
-------- --------
Total liabilities .................................................. 399,593 389,586
-------- --------
Commitments and contingencies (Note 4)
Stockholders' equity:
Capital stock - authorized 2,148,000 shares, one Philippine peso
($0.038) par value; 767,162 shares issued and outstanding .......... 29 29
Additional paid-in capital ........................................... 123,807 123,807
Retained earnings .................................................... 36,593 28,085
-------- --------
Total stockholders' equity ......................................... 160,429 151,921
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........................... $560,022 $541,507
======== ========
The accompanying notes are an integral part of these financial statements.
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CE CASECNAN WATER AND ENERGY COMPANY, INC.
STATEMENTS OF OPERATIONS
(In thousands of U.S. Dollars, except share data)
THREE MONTHS
ENDED MARCH 31,
----------------------
2003 2002
--------- ---------
(UNAUDITED)
REVENUE:
Delivery of water ............................ $ 22,442 $ 18,488
Sale of electricity .......................... 9,057 9,094
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Total revenue .............................. 31,499 27,582
--------- ---------
OPERATING EXPENSES:
Depreciation ................................. 5,673 6,140
Plant operations ............................. 3,176 1,737
Doubtful accounts ............................ 4,067 2,260
--------- ---------
Total operating expenses ................... 12,916 10,137
--------- ---------
OPERATING INCOME ............................... 18,583 17,445
OTHER INCOME (EXPENSE):
Interest expense ............................. (10,153) (10,797)
Other, net ................................... 78 27
--------- ---------
Total other expense, net ................... (10,075) (10,770)
--------- ---------
INCOME BEFORE PROVISION FOR INCOME TAXES ....... 8,508 6,675
Provision for income taxes ..................... -- --
--------- ---------
NET INCOME ..................................... $ 8,508 $ 6,675
========= =========
NET INCOME PER SHARE ........................... $ 11.09 $ 8.70
========= =========
Average number of common shares outstanding .... 767,162 767,162
========= =========
The accompanying notes are an integral part of these financial statements.
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CE CASECNAN WATER AND ENERGY COMPANY, INC.
STATEMENTS OF CASH FLOWS
(In thousands of U.S. Dollars)
THREE MONTHS
ENDED MARCH 31,
--------------------
2003 2002
-------- --------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ......................................................... $ 8,508 $ 6,675
Adjustments to reconcile net cash flows from operating activities:
Depreciation ..................................................... 5,673 6,140
Amortization of bond issue costs ................................. 339 374
Changes in other items:
Trade receivable, net .......................................... 3,278 (14,996)
Accrued interest and other receivable .......................... (1,505) (1,536)
Prepaid insurance and other current assets ..................... 532 461
Accounts payable and accrued expenses .......................... 451 1,138
Accrued interest ............................................... 8,875 8,598
-------- --------
Net cash flows from operating activities ..................... 26,151 6,854
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to development property, plant and equipment ............. (1,587) (700)
Other assets ....................................................... 3,070 3,153
-------- --------
Net cash flows from investing activities ......................... 1,483 2,453
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in restricted cash ........................................ (24,980) (8,004)
Increase (decrease) in payable to affiliates ....................... 681 (593)
-------- --------
Net cash flows from financing activities ......................... (24,299) (8,597)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS ............................ 3,335 710
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ..................... 705 1,078
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ........................... $ 4,040 $ 1,788
======== ========
SUPPLEMENTAL DISCLOSURE:
Interest paid, net of amounts capitalized .......................... $ -- $ 1,834
-------- ========
Income taxes paid .................................................. $ -- $ --
======== ========
The accompanying notes are an integral part of these financial statements.
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CE CASECNAN WATER AND ENERGY COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
1. GENERAL
The accompanying unaudited interim financial statements have been prepared by CE
Casecnan Water and Energy Company, Inc. ("CE Casecnan" or the "Company") without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission for interim financial reporting. In the opinion of the management,
the accompanying unaudited financial statements contain all adjustments
(consisting only of normal recurring accruals) necessary to present fairly the
financial position of the Company as of March 31, 2003 and the results of its
operations and cash flows for the three months ended March 31, 2003 and 2002.
The results of operations for the three months ended March 31, 2003 and 2002 are
not necessarily indicative of the results to be expected for the full year.
The accompanying unaudited interim financial statements and notes thereto should
be read in conjunction with the audited financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2002. In particular, the Company's significant accounting policies and
practices are presented in Note 2 to the financial statements included therein.
The Company's operations consist of one reportable segment, the domestic water
and electricity generation industry.
2. TRADE RECEIVABLE, NET
Trade receivable, net pertains to the receivable due from the Philippine
National Irrigation Administration ("NIA") for water delivered to NIA and the
electricity generated and delivered by the Company to the Philippine National
Power Corporation ("NPC") on behalf of NIA. Trade receivable, net at March 31,
2003 and December 31, 2002 consists of the following (in thousands):
MARCH 31, DECEMBER 31,
2003 2002
--------- ------------
(UNAUDITED)
Water delivery fee ................. $ 60,694 $ 52,854
Guaranteed energy delivery fee ..... 3,676 6,709
Excess energy delivery fee ......... -- 4,018
-------- --------
Trade receivable ................. 64,370 63,581
Allowance for doubtful accounts .... (16,133) (12,066)
-------- --------
Trade receivable, net ............ $ 48,237 $ 51,515
======== ========
NIA has paid all amounts due for energy delivery fees under the Project
Agreement as of March 31, 2003, and all amounts due for Water Delivery Fees
under the Project Agreement except the tax compensation portion of the Water
Delivery Fees, none of which has been paid.
Under the terms of the Project Agreement, NIA has the option of timely
reimbursing CE Casecnan directly for certain taxes CE Casecnan has paid. If NIA
does not so reimburse CE Casecnan, the taxes paid by CE Casecnan result in an
increase in the Water Delivery Fee. The payment of certain other taxes by CE
Casecnan results automatically in an increase in the Water Delivery Fee. As of
March 31, 2003, CE Casecnan has paid approximately $58.1 million in taxes, which
as a result of the foregoing provisions results in an increase in the Water
Delivery Fee. NIA has failed to pay the portion of the Water Delivery Fee each
month related to the payment of these taxes by CE Casecnan. As a result of this
non-payment, on August 19, 2002, CE Casecnan filed a Request for Arbitration
against NIA, seeking payment of such portion of the Water Delivery Fee and
enforcement of the relevant provision of the Project Agreement going forward.
The arbitration will be conducted in accordance with the rules of the
International Chamber of Commerce.
NIA filed its Answer and Counterclaim on March 31, 2003. In its Answer, NIA
asserts, among other things, that most of the taxes which CE Casecnan has
factored into the Water Delivery Fee compensation formula do not fall
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within the scope of the relevant section of the Project Agreement, that the
compensation mechanism itself is invalid and unenforceable under Philippine law
and that the Project Agreement is inconsistent with the Philippine
build-operate-transfer law. As such, NIA seeks dismissal of CE Casecnan's claims
and a declaration from the arbitral tribunal that the taxes which have been
taken into account in the Water Delivery Fee compensation mechanism are not
recoverable thereunder and that, at most, certain taxes may be directly
reimbursed (rather than compensated for through the Water Delivery Fee) by NIA.
NIA also counterclaims for approximately $7 million which it alleges is due to
it as a result of the delayed completion of the Casecnan Project. On April 23,
2003, NIA filed a Supplemental Counterclaim in which it asserts that the Project
Agreement is contrary to law and to public policy and by way of relief seeks a
declaration that the Project Agreement is void from the beginning or should be
cancelled, or an order for reformation of the Project Agreement. The Company
intends to vigorously contest all of NIA's assertions and counterclaims.
The three member arbitration panel has been confirmed by the International
Chamber of Commerce and an initial organizational hearing was held on April 28,
2003. Hearings on this matter are scheduled for July 2004.
Total revenue for the three months ended March 31, 2003 and 2002 were $31.5
million and $27.6 million, respectively. Included in these amounts, for the
three months ended March 31, 2003 and 2002, were $9.6 million and $8.1 million,
respectively, of tax compensation for Water Delivery Fees under the Project
Agreement, none of which has been paid and the uncollectible portion of which
the Company currently estimates to be $4.1 million and $2.3 million,
respectively. As of March 31, 2003 and December 31, 2002, the cumulative unpaid
portion of the tax compensation portion of the Water Delivery Fees invoiced
since the start of commercial operations totaled $45.9 million and $36.3
million, respectively. The allowance for doubtful accounts as of March 31, 2003
and December 31, 2002 represents the Company's current estimate of the
uncollectible portion of such unpaid portion of the Water Delivery Fees and does
not reflect any projections related to future billings and their collections.
Any change in the Company's assessment of the potential outcome of the pending
arbitration with NIA, and future disputes, if any, could significantly impact
such allowance and the results of operations. The receivable, net of the
allowance for doubtful accounts for the period since commercial operations
began, remains less than the amount of taxes paid.
3. RELATED PARTY TRANSACTIONS
In the normal course of business, the Company transacts with its affiliates in
the form of advances for construction related and operating expenses. The
payable to affiliates was $34.0 million and $33.3 million at March 31, 2003 and
December 31, 2002, respectively. Costs incurred by the Company in transactions
with related parties amounted to $0.6 million and $0.4 million for the three
months ended March 31, 2003 and 2002, respectively.
As of March 31, 2003 and December 31, 2002, the Company has issued $51.3 million
of unsecured subordinated notes payable to CE Casecnan Ltd., a stockholder, due
November 15, 2005. The unsecured notes bear interest at LIBOR plus two (2%)
percent which is payable every May 15 and November 15. Interest expense on the
unsecured notes was $0.4 million during the three months ended March 31, 2003
and 2002. Any overdue payment of principal or interest payable on the notes
shall increase the annual interest by two (2%) percent. At March 31, 2003, the
effective interest rate on the notes was 3.4%. The notes may be prepaid at any
time without premium or penalty but with accrued interest, if any. The unsecured
subordinated notes and any and all payments, whether of principal, interest or
otherwise are subject in all respects to the terms of the Subordination
Agreement dated November 15, 2001 between CE Casecnan Ltd. and the Company in
favor of the Trustee, the Collateral Agent, the co-collateral agent, the
Depositary, any party that becomes a Permitted Counterparty under an Interest
Rate/Currency Protection Agreement, any party that becomes a working capital
facility agent and any other Person that becomes a secured party under the
Intercreditor Agreement.
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4. COMMITMENTS AND CONTINGENCIES
Replacement Contract
- --------------------
The Casecnan Project was initially constructed pursuant to a fixed-price,
date-certain, turnkey construction contract (the "Hanbo Contract") on a joint
and several basis by Hanbo Corporation ("Hanbo") and Hanbo Engineering and
Construction Co., Ltd. ("HECC"), both of which are South Korean corporations. On
May 7, 1997, the Company terminated the Hanbo Contract due to defaults by Hanbo
and HECC including the insolvency of both companies. On the same date, the
Company entered into a new fixed-price, date certain, turnkey engineering,
procurement and construction contract to complete the construction of the
Casecnan Project (the "Replacement Contract"). The work under the Replacement
Contract was conducted by a consortium consisting of Cooperativa Muratori
Cementisti CMC di Ravenna and Impresa Pizzarotti & C. Spa., (collectively, the
"Contractor"), working together with Siemens A.G., Sulzer Hydro Ltd., Black &
Veatch and Colenco Power Engineering Ltd.
On November 20, 1999, the Replacement Contract was amended to extend the
Guaranteed Substantial Completion Date for the Casecnan Project to March 31,
2001. This amendment was approved by the lenders' independent engineer under the
Trust Indenture.
On February 12, 2001, the Contractor filed a Request for Arbitration with the
International Chamber of Commerce seeking schedule relief of up to 153 days
through August 31, 2001 resulting from various alleged force majeure events. In
its March 20, 2001 Supplement to Request for Arbitration, the Contractor also
seeks compensation for alleged additional costs of approximately $4 million it
incurred from the claimed force majeure events to the extent it is unable to
recover from its insurer. On April 20, 2001, the Contractor filed a further
supplement seeking an additional compensation for damages of approximately $62
million for the alleged force majeure event (and geologic conditions) related to
the collapse of the surge shaft. The Contractor has alleged that the
circumstances surrounding the placing of the Casecnan Project into commercial
operation in December 2001 amounted to a repudiation of the Replacement Contract
and has filed a claim for unspecified quantum meruit damages, and has further
alleged that the delay liquidated damages clause which provides for payments of
$125,000 per day for each day of delay in completion of the Casecnan Project for
which the Contractor is responsible is unenforceable. The arbitration is being
conducted applying New York law and pursuant to the rules of the International
Chamber of Commerce.
Hearings have been held in connection with this arbitration in July 2001,
September 2001, January 2002, March 2002, November 2002 and January 2003. As
part of those hearings, on June 25, 2001, the arbitration tribunal temporarily
enjoined CE Casecnan from making calls on the demand guaranty posted by Banca di
Roma in support of the Contractor's obligations to CE Casecnan for delay
liquidated damages. As a result of the continuing nature of that injunction, on
April 26, 2002, CE Casecnan and the Contractor mutually agreed that no demands
would be made on the Banca di Roma demand guaranty except pursuant to an
arbitration award. As of March 31, 2003, however, CE Casecnan has received
approximately $6.0 million of liquidated damages from demands made on the demand
guarantees posted by Commerzbank on behalf of the Contractor. On November 7,
2002, the International Chamber of Commerce issued the arbitration tribunal's
partial award with respect to the Contractor's force majeure and geologic
conditions claims. The arbitration panel awarded the Contractor 18 days of
schedule relief in the aggregate for all of the force majeure events and awarded
the Contractor $3.8 million with respect to the cost of the collapsed surge
shaft. The $3.8 million is shown as part of the accounts payable and accrued
expenses balance at March 31, 2003 and December 31, 2002. All of the
Contractor's other claims with respect to force majeure and geologic conditions
were denied.
Further hearings on the Contractor's repudiation and quantum meruit claims, the
alleged unenforceability of the delay liquidated damages clause and certain
other matters had been scheduled for March 24 through March 28, 2003, but were
postponed as a result of the commencement of military action in Iraq. The
hearings have been rescheduled for June 30 through July 11, 2003.
If the Contractor were to prevail on its claim that the delay liquidated damages
clause is unenforceable, the Company would not be entitled to collect such delay
damages for the period from March 31, 2001 through December 11, 2001. If the
Contractor were to prevail in its repudiation claim and prove quantum meruit
damages in excess of amounts
-9-
paid to the Contractor, the Company could be liable to make additional payments
to the Contractor. CE Casecnan believes all of such allegations and claims are
without merit and is vigorously contesting the Contractor's claims.
Casecnan NIA Arbitration
- ------------------------
Under the terms of the Project Agreement, NIA has the option of timely
reimbursing CE Casecnan directly for certain taxes CE Casecnan has paid. If NIA
does not so reimburse CE Casecnan, the taxes paid by CE Casecnan result in an
increase in the Water Delivery Fee. The payment of certain other taxes by CE
Casecnan results automatically in an increase in the Water Delivery Fee. As of
March 31, 2003, CE Casecnan has paid approximately $58.1 million in taxes, which
as a result of the foregoing provisions results in an increase in the Water
Delivery Fee. NIA has failed to pay the portion of the Water Delivery Fee each
month, related to the payment of these taxes by CE Casecnan. As a result of this
non-payment, on August 19, 2002, CE Casecnan filed a Request for Arbitration
against NIA, seeking payment of such portion of the Water Delivery Fee and
enforcement of the relevant provision of the Project Agreement going forward.
The arbitration will be conducted in accordance with the rules of the
International Chamber of Commerce.
NIA filed its Answer and Counterclaim on March 31, 2003. In its Answer, NIA
asserts, among other things, that most of the taxes which CE Casecnan has
factored into the Water Delivery Fee compensation formula do not fall within the
scope of the relevant section of the Project Agreement, that the compensation
mechanism itself is invalid and unenforceable under Philippine law and that the
Project Agreement is inconsistent with the Philippine build-operate-transfer
law. As such, NIA seeks dismissal of CE Casecnan's claims and a declaration from
the arbitral tribunal that the taxes which have been taken into account in the
Water Delivery Fee compensation mechanism are not recoverable thereunder and
that, at most, certain taxes may be directly reimbursed (rather than compensated
for through the Water Delivery Fee) by NIA. NIA also counterclaims for
approximately $7 million which it alleges is due to it as a result of the
delayed completion of the Casecnan Project. On April 23, 2003, NIA filed a
Supplemental Counterclaim in which it asserts that the Project Agreement is
contrary to Philippine law and public policy and by way of relief seeks a
declaration that the Project Agreement is void from the beginning or should be
cancelled, or alternatively, an order for reformation of the Project Agreement
or any portions or sections thereof which may be determined to be contrary to
such law and or public policy. The Company intends to vigorously contest all of
NIA's assertions and counterclaims.
The three member arbitration panel has been confirmed by the International
Chamber of Commerce and an initial organizational hearing was held on April 28,
2003. Hearings on this matter are scheduled for July 2004.
Project Transmission Line
- -------------------------
Under the Project Agreement, if NIA is able to accept delivery of water into the
Pantabangan Reservoir and NPC has completed the Casecnan Project's related
transmission line, the Company was liable to pay NIA $5,500 per day for each day
of delay in completion of the Casecnan Project beyond July 27, 2000, increasing
to $13,500 per day for each day of delay in completion beyond November 27, 2000.
The Casecnan Project transmission line was completed on August 13, 2001 and NIA
has completed the installation and testing of the Casecnan Project's metering
equipment. Accordingly, the Company has accrued $1.6 million for liquidated
damages as of March 31, 2003 and December 31, 2002, payable to NIA for 120 days
of delay and this is shown as part of accounts payable and accrued expenses in
the balance sheets.
Casecnan Stockholder Litigation
- -------------------------------
Pursuant to the share ownership adjustment mechanism in the CE Casecnan
stockholder agreement, which is based upon pro forma financial projections of
the Casecnan Project prepared following commencement of commercial operations,
in February 2002, MidAmerican Energy Holdings Company ("MidAmerican"), through
its indirect wholly owned subsidiary CE Casecnan Ltd., advised the minority
stockholder LaPrairie Group Contractors (International) Ltd., ("LPG"), that
MidAmerican's indirect ownership interest in CE Casecnan had increased to 100%
effective from commencement of commercial operations. On July 8, 2002, LPG filed
a complaint in the Superior Court of the State of California, City and County of
San Francisco against, inter alia, CE Casecnan Ltd. and
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MidAmerican. In the complaint, LPG seeks compensatory and punitive damages for
alleged breaches of the stockholder agreement and alleged breaches of fiduciary
duties allegedly owed by CE Casecnan Ltd. and MidAmerican to LPG. The complaint
also seeks injunctive relief against all defendants and a declaratory judgment
that LPG is entitled to maintain its 15% interest in CE Casecnan. The impact, if
any, of this litigation on the Company cannot be determined at this time.
In February 2003, San Lorenzo Ruiz Builders and Developers Group, Inc. ("San
Lorenzo"), an original shareholder substantially all of whose shares in the
Company MidAmerican purchased in 1998, threatened to initiate legal action in
the Philippines in connection with certain aspects of its option to repurchase
such shares on or prior to commercial operation of the Casecnan Project. The
Company believes that San Lorenzo has no valid basis for any claim and, if named
as a defendant in any action that may be commenced by San Lorenzo, will
vigorously defend any such action.
BIR Audit
- ---------
The Bureau of Internal Revenue ("BIR"), consistent with the Philippine
government's public statements to increase tax revenues, has commenced auditing
the Company for all taxes, including income taxes, for the years 2001 and 2000.
In addition, the BIR has issued letters of authority to audit the tax years
1998, 1997 and 1996. The only basis on which tax years prior to 1999 can be
audited is if the BIR successfully argues in a Philippine administrative or
court proceeding that the tax returns for those years are false or fraudulent in
some respect. The Company believes that any allegations that such tax years'
filings are false or fraudulent are without merit and accordingly that any audit
of such tax years is improper and without proper legal basis, although the
outcome of any audit by the Philippine tax authorities in light of the
government's public statements to increase tax revenues is uncertain. If the
Company is ultimately held liable the amounts assessed may be material. The
Company further believes that it currently is in compliance with applicable tax
laws and regulations with respect to all of its tax returns and filings.
Political Risks
- ---------------
The Philippine Congress has passed the Electric Power Industry Reform Act of
2001 ("EPIRA"), which is aimed at restructuring the Philippine power industry,
privatization of the NPC and introduction of a competitive electricity market,
among other initiatives. The implementation of EPIRA may have an impact on the
Comapny's future operations in the Philippines and the Philippines power
industry as a whole, the effect of which is not yet determinable and estimable.
In connection with an interagency review of approximately 40 independent power
project contracts in the Philippines, the Casecnan Project (together with four
other projects) has reportedly been identified as raising legal and financial
questions and, with those projects, has been prioritized for renegotiation. No
written report has yet been issued with respect to the interagency review, and
the timing and nature of steps, if any that the Philippine Government may take
in this regard are not known. Accordingly, it is not known what, if any, impact
the government's review will have on the operations of the Company. Company
representatives, together with certain current and former government officials,
also have been requested to appear, and have appeared during 2002, before a
Philippine Senate committee which has raised questions and made allegations with
respect to the Casecnan Project's tariff structure and implementation.
On May 5, 2003, the Philippine Supreme Court issued its ruling in a case
involving an unsolicited build-operate-transfer ("BOT") project for the
development, construction and operation of the new Manila International Airport.
Various members of Congress and labor unions initiated the action in the
Philippine Supreme Court on September 17, 2002 seeking to enjoin the enforcement
of the BOT agreement with an international consortium known as PIATCO (the
"PIATCO Agreement"). The PIATCO Consortium is unrelated to the Company. On March
4, 2003, PIATCO separately initiated an International Chamber of Commerce
arbitration pursuant to the terms of the PIATCO Agreement. The Supreme Court, in
its ruling, stated that there were no unresolved factual issues and therefore it
had original jurisdiction and concluded that the pendency of the arbitration did
not preclude the court from ruling on a case brought by non-parties to the
PIATCO Agreement, such as members of the Philippine Congress or non-governmental
organizations. In a public speech on November 29, 2002 prior to the December 10,
2002 oral arguments before the Philippine Supreme Court, Philippine President
Arroyo stated that she would not honor the PIATCO Agreement because the
executive branch's legal department had concluded it was "null and void". In
light of that announcement, the project owners stopped work on the project,
which is approximately 90% complete and accordingly has not been placed into
commercial operation. In its 10 to 3 ruling (with one abstention) issued on May
5, 2003, the Philippine Supreme Court ruled that the PIATCO Agreement was
contrary to Philippine law and public policy and was "null and void". CE
Casecnan is assessing the impact of the PIATCO ruling on the Casecnan Project.
-11-
As previously disclosed, on April 24, 2003 Standard & Poor's Ratings Services
("S&P") lowered its rating of CE Casecnan to `BB' from `BB+' as a result of
S&P's downgrade of the Republic of the Philippines. The downgrade of the
Philippines by S&P reflected the Country's growing debt burden and fiscal
rigidity.
On May 8, 2003, Moody's Investors Service ("Moody's") placed the Ba2 senior
secured notes rating of CE Casecnan on review for possible downgrade, noting
NIA's supplemental counterclaim seeking to have the Project Agreement declared
void. Moody's noted that actions by government related agencies and the
resulting instability of contractual arrangements was becoming inconsistent with
their rating approach that attaches significant benefit to offtake arrangements
with those government supported entities.
Concentration of Risk
- ---------------------
NIA's payments of obligations under the Project Agreement will be substantially
denominated in United States Dollars and are expected to be the Company's sole
source of operating revenues. Because of the Company's dependence on NIA, any
material failure of NIA to fulfill its obligations under the Project Agreement
and any material failure of the Republic of the Philippines to fulfill its
obligations under the Performance Undertaking would significantly impair the
ability of the Company to meet its existing and future obligations. No
stockholders, partners or affiliates of the Company, including MidAmerican, and
no directors, officers or employees of the Company will guarantee or be in any
way liable for payment of the Company's obligations. As a result, payment of the
Company's obligations depends upon the availability of sufficient revenues from
the Company's business after the payment of operating expenses.
-12-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following is management's discussion and analysis of certain significant
factors which have affected the financial condition and results of operations of
CE Casecnan Water and Energy Company ("CE Casecnan" or the "Company"), during
the periods included in the accompanying statements of operations. This
discussion should be read in conjunction with the Company's historical financial
statements and the notes to those statements.
FORWARD-LOOKING STATEMENTS
From time to time, CE Casecnan may make forward-looking statements within the
meaning of the federal securities laws that involve judgments, assumptions and
other uncertainties beyond the control of the Company or any of its subsidiaries
individually. These forward-looking statements may include, among others,
statements concerning revenue and cost trends, cost recovery, cost reduction
strategies and anticipated outcomes, pricing strategies, changes in the utility
industry, planned capital expenditures, financing needs and availability,
statements of CE Casecnan's expectations, beliefs, future plans and strategies,
anticipated events or trends and similar comments concerning matters that are
not historical facts.
These types of forward-looking statements are based on current expectations and
involve a number of known and unknown risks and uncertainties that could cause
the actual results and performance of the Company to differ materially from any
expected future results or performance, expressed or implied, by the
forward-looking statements. In connection with the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995, CE Casecnan has identified
important factors that could cause actual results to differ materially from
those expectations, including weather effects on revenues and other operating
uncertainties, uncertainties relating to economic and political conditions and
uncertainties regarding the impact of regulations, changes in government policy
and competition. The Company does not assume any responsibility to update
forward-looking information contained herein.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States of America
requires management to make judgments, assumptions and estimates that affect the
amounts reported in the Financial Statements and accompanying notes. Estimates
are used for, but not limited to, the accounting for the allowance for doubtful
accounts and deferred income taxes. Actual results could differ from these
estimates. The following critical accounting policies are impacted significantly
by judgments, assumptions and estimates used in the preparation of the financial
statements.
Allowance for Doubtful Accounts
- -------------------------------
The allowance for doubtful accounts is based on the Company's assessment of the
collectibility of payments from the Philippine National Irrigation
Administration ("NIA"). This assessment requires judgment regarding the outcome
of pending disputes and the ability of the customer to pay the amounts owed to
the Company. Any change in the Company's assessment of the collectibility of
accounts receivable that was not previously provided for could significantly
impact the calculation of such allowance and the results of operations.
Deferred Income Tax Assets and Liabilities
- ------------------------------------------
Deferred income tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial reporting bases
of assets and liabilities and their related tax bases. Deferred income tax
assets and liabilities are measured using the tax rate expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. A valuation allowance is provided for deferred income
tax assets if it is more likely than not that a tax benefit will not be
realized.
-13-
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
Total revenue increased $3.9 million or 14.1% to $31.5 million for the three
months ended March 31, 2003 from $27.6 million for the three months ended March
31, 2002. Water delivery revenue increased to $22.4 million for the three months
ended March 31, 2003 from $18.5 million for the three months ended March 31,
2002 and electricity sales revenue was $9.1 million for the three months ended
March 31, 2003 and March 31, 2002. The increase in water fees was due to a 7.5%
increase in Water Delivery Fee rate as a result of the annual escalation factor
and the accrual of the revenue related to the additional taxes recoverable
during operations pursuant to the contract. See Note 4 - "Commitments and
Contingencies, Casecnan NIA Arbitration." Revenues from water delivery,
guaranteed energy and excess energy generated and delivered are 71%, 29% and 0%,
respectively, of the total revenue for the three months ended March 31, 2003
while 67%, 33% and 0%, respectively for the three months ended March 31, 2002.
Operating expenses increased $2.8 million or 27.7% to $12.9 million for the
three months ended March 31, 2003 from $10.1 million for the three months ended
March 31, 2002. The increase was caused by higher doubtful accounts expense,
higher local business taxes, higher insurance premium amortization and higher
legal costs. Included within operating expenses for the three months ended March
31, 2003 are depreciation, plant operations and doubtful accounts expense of
$5.7 million, $3.2 million and $4.1 million, respectively. Depreciation
decreased by $0.5 million while plant operations and doubtful accounts expense
increased from prior year amounts of $1.7 million and $2.3 million,
respectively.
Interest expense decreased $0.6 million or 5.6% to $10.2 million for the three
months ended March 31, 2003 from $10.8 million for the three months ended March
31, 2002. The primary reason for the decrease was the repayment of the floating
rate notes as well as a 5% reduction in the balance of the Series B bonds due to
a principal payment of $8.6 million in 2002.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents were $4.0 million and $0.7 million at
March 31, 2003 and December 31, 2002, respectively.
The Company generated cash flows from operations of $26.2 million for the three
months ended March 31, 2003, compared with $6.9 million for the same period in
2002. The increase from 2002 was primarily due to the collection of November
2002 revenues in February 2003 instead of December 2002. In addition, operating
cash flows in 2002 was lower due to the delayed payment of the February 2002
revenues in April 2002 instead of March 2002.
The Company provided $1.5 million from investing activities for the three months
ended March 31, 2003, compared to $2.5 million for the same period in 2002. The
decrease is due to increased cash used for additions to property, plant and
equipment totaling $0.9 million over the amount for the same period in 2002.
The Company used $24.3 million in financing activities for the three months
ended March 31, 2003, compared to $8.6 million for the same period in 2002. The
increase is due to increased funding of the Company's debt service reserve fund
totaling $17.0 million over the amount for the same period in 2002, partially
offset by the Company's payable to affiliates increase of $0.7 million in the
first three months of 2003 compared to a decrease of $0.6 million for the same
period in 2002.
CE Casecnan constructed and operates the Casecnan Project, which was developed
as an unsolicited proposal under the Philippine build-operate-transfer ("BOT")
law, under the terms of the Project Agreement between CE Casecnan and NIA. Under
the Project Agreement, CE Casecnan developed, financed and constructed the
Casecnan Project over the construction period, and owns and operates the
Casecnan Project for 20 years (the "Cooperation Period"). During the Cooperation
Period, NIA is obligated to accept all deliveries of water and energy, and so
long as the Casecnan Project is physically capable of operating and delivering
in accordance with
-14-
agreed levels set forth in the Project Agreement, NIA is obligated to pay CE
Casecnan a fixed fee for the delivery of a threshold volume of water and a fixed
fee for the delivery of a threshold amount of electricity. In addition, NIA is
obligated to pay a fee for all electricity delivered in excess of the threshold
amount up to a specified amount.
The Republic of the Philippines has provided a Performance Undertaking under
which NIA's obligations under the Project Agreement are guaranteed by the full
faith and credit of the Republic of the Philippines. The Project Agreement and
the Performance Undertaking provide for the resolution of disputes by binding
arbitration in Singapore under international arbitration rules.
NIA's payment obligations under the Project Agreement are the Company's sole
source of operating revenues. Because of the Company's dependence on NIA, any
material failure of NIA to fulfill its obligations under the Project Agreement
and any material failure of the Republic of the Philippines to fulfill its
obligations under the Performance Undertaking would significantly impair the
ability of the Company to meet its obligations pertaining to its outstanding
debt.
The Casecnan Project was initially constructed pursuant to a fixed-price,
date-certain, turnkey construction contract (the "Hanbo Contract") on a joint
and several basis by Hanbo Corporation ("Hanbo") and Hanbo Engineering and
Construction Co., Ltd. ("HECC"), both of which are South Korean corporations. On
May 7, 1997, the Company terminated the Hanbo Contract due to defaults by Hanbo
and HECC including the insolvency of both companies. On the same date, the
Company entered into a new fixed-price, date certain, turnkey engineering,
procurement and construction contract to complete the construction of the
Casecnan Project (the "Replacement Contract"). The work under the Replacement
Contract was conducted by a consortium consisting of Cooperativa Muratori
Cementisti CMC di Ravenna and Impresa Pizzarotti & C. Spa., (collectively, the
"Contractor"), working together with Siemens A.G., Sulzer Hydro Ltd., Black &
Veatch and Colenco Power Engineering Ltd.
On November 20, 1999, the Replacement Contract was amended to extend the
Guaranteed Substantial Completion Date for the Casecnan Project to March 31,
2001. This amendment was approved by the lenders' independent engineer under the
Trust Indenture.
On February 12, 2001, the Contractor filed a Request for Arbitration with the
International Chamber of Commerce seeking schedule relief of up to 153 days
through August 31, 2001 resulting from various alleged force majeure events. In
its March 20, 2001 Supplement to Request for Arbitration, the Contractor
requested compensation for alleged additional costs of approximately $4 million
it incurred from the claimed force majeure events to the extent it is unable to
recover from its insurer. On April 20, 2001, the Contractor filed a further
supplement seeking an additional compensation for damages of approximately $62
million for the alleged force majeure event (and geologic conditions) related to
the collapse of the surge shaft. The Contractor also has alleged that the
circumstances in which the Company assumed control of the Casecnan Project and
placed it into commercial operation on December 11, 2001 amounted to a
repudiation of the Construction Contract and has filed a claim for unspecified
quantum meruit damages, and has further alleged that the delay liquidated
damages clause which provides for payments of $125,000 per day for each day of
delay in completion of the Casecnan Project for which the Contractor is
responsible is unenforceable. The arbitration is being conducted applying New
York law and in accordance with the rules of the International Chamber of
Commerce.
Hearings have been held in connection with this arbitration in July 2001,
September 2001, January 2002, March 2002, November 2002 and January 2003. As
part of those hearings, on June 25, 2001, the arbitration tribunal temporarily
enjoined CE Casecnan from making calls on the demand guaranty posted by Banca di
Roma in support of the Contractor's obligations to CE Casecnan for delay
liquidated damages. As a result of the continuing nature of that injunction, on
April 26, 2002, CE Casecnan and the Contractor mutually agreed that no demands
would be made on the Banca di Roma demand guaranty except pursuant to an
arbitration award. As of March 31, 2003, however, CE Casecnan has received
approximately $6.0 million of liquidated damages from demands made on the demand
guarantees posted by Commerzbank on behalf of the Contractor. On November 7,
2002, the International Chamber of Commerce issued the arbitration tribunal's
partial award with respect to the Contractor's
-15-
force majeure and geologic conditions claims. The arbitration panel awarded the
Contractor 18 days of schedule relief in the aggregate for all of the force
majeure events and awarded the Contractor $3.8 million with respect to the cost
of the collapsed surge shaft. The $3.8 million is shown as part of the accounts
payable and accrued expenses balance at March 31, 2003 and December 31, 2002.
All of the Contractor's other claims with respect to force majeure and geologic
conditions were denied.
Further hearings on the Contractor's repudiation and quantum meruit claims, the
alleged unenforceability of the delay liquidated damages clause and certain
other matters had been scheduled for March 24 through March 28, 2003, but were
postponed as a result of the commencement of military action in Iraq. The
hearings have been rescheduled for June 30 through July 11, 2003.
If the Contractor were to prevail on its claim that the delay liquidated damages
clause is unenforceable, the Company would not be entitled to collect such delay
damages for the period from March 31, 2001 through December 11, 2001. If the
Contractor were to prevail in its repudiation claim and prove quantum meruit
damages in excess of amounts already paid to the Contractor, the Company could
be liable to make additional payments to the Contractor. CE Casecnan believes
all such allegations and claims are without merit and is vigorously contesting
the Contractor's claims.
Casecnan NIA Arbitration
- ------------------------
Under the terms of the Project Agreement, NIA has the option of timely
reimbursing CE Casecnan directly for certain taxes CE Casecnan has paid. If NIA
does not so reimburse CE Casecnan, the taxes paid by CE Casecnan result in an
increase in the Water Delivery Fee. The payment of certain other taxes by CE
Casecnan results automatically in an increase in the Water Delivery Fee. As of
March 31, 2003, CE Casecnan has paid approximately $58.1 million in taxes, which
as a result of the foregoing provisions results in an increase in the Water
Delivery Fee. NIA has failed to pay the portion of the Water Delivery Fee each
month, related to the payment of these taxes by CE Casecnan. As a result of this
non-payment, on August 19, 2002, CE Casecnan filed a Request for Arbitration
against NIA, seeking payment of such portion of the Water Delivery Fee and
enforcement of the relevant provision of the Project Agreement going forward.
The arbitration will be conducted in accordance with the rules of the
International Chamber of Commerce.
NIA filed its Answer and Counterclaim on March 31, 2003. In its Answer, NIA
asserts, among other things, that most of the taxes which CE Casecnan has
factored into the Water Delivery Fee compensation formula do not fall within the
scope of the relevant section of the Project Agreement, that the compensation
mechanism itself is invalid and unenforceable under Philippine law and that the
Project Agreement is inconsistent with the Philippine build-operate-transfer
law. As such, NIA seeks dismissal of CE Casecnan's claims and a declaration from
the arbitral tribunal that the taxes which have been taken into account in the
Water Delivery Fee compensation mechanism are not recoverable thereunder and
that, at most, certain taxes may be directly reimbursed (rather than compensated
for through the Water Delivery Fee) by NIA. NIA also counterclaims for
approximately $7 million which it alleges is due to it as a result of the
delayed completion of the Casecnan Project. On April 23, 2003, NIA filed a
Supplemental Counterclaim in which it asserts that the Project Agreement is
contrary to Philippine law and public policy and by way of relief seeks a
declaration that the Project Agreement is void from the beginning or should be
cancelled, or alternatively, an order for reformation of the Project Agreement
or any portions or sections thereof which may be determined to be contrary to
such law and or public policy. The Company intends to vigorously contest all of
NIA's assertions and counterclaims.
The three member arbitration panel has been confirmed by the International
Chamber of Commerce and an initial organizational hearing was held on April 28,
2003. Hearings on this matter are scheduled for July 2004.
Project Transmission Line
- -------------------------
Under the Project Agreement, if NIA is able to accept delivery of water into the
Pantabangan Reservoir and NPC has completed the Casecnan Project's related
transmission line, the Company was liable to pay NIA $5,500 per day for each day
of delay in completion of the Casecnan Project beyond July 27, 2000, increasing
to $13,500 per day for each
-16-
day of delay in completion beyond November 27, 2000. The Casecnan Project
transmission line was completed on August 13, 2001 and NIA has completed the
installation and testing of the Casecnan Project's metering equipment.
Accordingly, the Company has accrued $1.6 million for liquidated damages as of
March 31, 2003 and December 31, 2002, payable to NIA for 120 days of delay and
this is shown as part of accounts payable and accrued expenses in the balance
sheets. In its counterclaim in the pending ICC arbitration, NIA has asserted
that it is due approximately $7 million of liquidated damages as a result of the
delayed completion of the Casecnan Project. See "Casecnan NIA Arbitration."
Casecnan Stockholder Litigation
- -------------------------------
Pursuant to the share ownership adjustment mechanism in the CE Casecnan
stockholder agreement, which is based upon pro forma financial projections of
the Casecnan Project prepared following commencement of commercial operations,
in February 2002, MidAmerican Energy Holdings Company ("MidAmerican"), through
its indirect wholly owned subsidiary CE Casecnan Ltd., advised the minority
stockholder LaPrairie Group Contractors (International) Ltd., ("LPG"), that
MidAmerican's indirect ownership interest in CE Casecnan had increased to 100%
effective from commencement of commercial operations. On July 8, 2002, LPG filed
a complaint in the Superior Court of the State of California, City and County of
San Francisco against, inter alia, CE Casecnan Ltd. and MidAmerican. In the
complaint, LPG seeks compensatory and punitive damages for alleged breaches of
the stockholder agreement and alleged breaches of fiduciary duties allegedly
owed by CE Casecnan Ltd. and MidAmerican to LPG. The complaint also seeks
injunctive relief against all defendants and a declaratory judgment that LPG is
entitled to maintain its 15% interest in CE Casecnan. The impact, if any, of
this litigation on the Company cannot be determined at this time.
In February 2003, San Lorenzo Ruiz Builders and Developers Group, Inc. ("San
Lorenzo"), an original shareholder substantially all of whose shares in the
Company MidAmerican purchased in 1998, threatened to initiate legal action in
the Philippines in connection with certain aspects of its option to repurchase
such shares on or prior to commercial operation of the Casecnan Project. The
Company believes that San Lorenzo has no valid basis for any claim and, if named
as a defendant in any action that may be commenced by San Lorenzo, will
vigorously defend any such action.
BIR Audit
- ---------
The Bureau of Internal Revenue ("BIR"), consistent with the Philippine
government's public statements to increase tax revenues, has commenced auditing
the Company for all taxes, including income taxes, for the years 2001 and 2000.
In addition, the BIR has issued letters of authority to audit the tax years
1998, 1997 and 1996. The only basis on which tax years prior to 1999 can be
audited is if the BIR successfully argues in a Philippine administrative or
court proceeding that the tax returns for those years are false or fraudulent in
some respect. The Company believes that any allegations that such tax years'
filings are false or fraudulent are without merit and accordingly that any audit
of such tax years is improper and without proper legal basis, although the
outcome of any audit by the Philippine tax authorities in light of the
government's public statements to increase tax revenues is uncertain. If the
Company is ultimately held liable the amounts assessed may be material. The
Company further believes that it currently is in compliance with applicable tax
laws and regulations with respect to all of its tax returns and filings.
Political Risks
- ---------------
The Philippine Congress has passed the Electric Power Industry Reform Act of
2001 ("EPIRA"), which is aimed at restructuring the Philippine power industry,
privatization of the NPC and introduction of a competitive electricity market,
among other initiatives. The implementation of EPIRA may have an impact on the
Comapny's future operations in the Philippines and the Philippines power
industry as a whole, the effect of which is not yet determinable and estimable.
In connection with an interagency review of approximately 40 independent power
project contracts in the Philippines, the Casecnan Project (together with four
other projects) has reportedly been identified as raising legal and financial
questions and, with those projects, has been prioritized for renegotiation. No
written report has yet been issued with respect to the interagency review, and
the timing and nature of steps, if any that the Philippine Government may take
in this regard are not known. Accordingly, it is not known what, if any, impact
the government's review will have on the operations of the Company. Company
representatives, together with certain current and former government officials,
also have been requested to appear, and have appeared during 2002, before a
Philippine Senate committee
-17-
which has raised questions and made allegations with respect to the Casecnan
Project's tariff structure and implementation. On May 5, 2003, the Philippine
Supreme Court issued its ruling in a case involving an unsolicited
build-operate-transfer ("BOT") project for the development, construction and
operation of the new Manila International Airport. Various members of Congress
and labor unions initiated the action in the Philippine Supreme Court on
September 17, 2002 seeking to enjoin the enforcement of the
build-operate-transfer agreement with an international consortium known as
PIATCO (the "PIATCO Agreement"). The PIATCO Consortium is unrelated to the
Company. On March 4, 2003, PIATCO separately initiated an International Chamber
of Commerce arbitration pursuant to the terms of the PIATCO Agreement. The
Supreme Court, in its ruling, stated that there were no unresolved factual
issues and therefore it had original jurisdiction and concluded that the
pendency of the arbitration did not preclude the court from ruling on a case
brought by non-parties to the PIATCO Agreement, such as members of the
Philippine Congress or non-governmental organizations. In a public speech on
November 29, 2002 prior to the December 10, 2002 oral arguments before the
Philippine Supreme Court, Philippine President Arroyo stated that she would not
honor the PIATCO Agreement because the executive branch's legal department had
concluded it was "null and void". In light of that announcement, the project
owners stopped work on the project, which is approximately 90% complete and
accordingly has not been placed into commercial operation. In its 10 to 3 ruling
(with one abstention) issued on May 5, 2003, the Philippine Supreme Court ruled
that the PIATCO Agreement was contrary to Philippine law and public policy and
was "null and void". CE Casecnan is assessing the impact of the PIATCO ruling on
the Casecnan Project.
As previously disclosed, on April 24, 2003 Standard & Poor's Ratings Services
("S&P") lowered its rating of CE Casecnan to `BB' from `BB+' as a result of
S&P's downgrade of the Republic of the Philippines. The downgrade of the
Philippines by S&P reflected the Country's growing debt burden and fiscal
rigidity.
On May 8, 2003, Moody's Investors Service ("Moody's") placed the Ba2 senior
secured notes rating of CE Casecnan on review for possible downgrade, noting
NIA's supplemental counterclaim seeking to have the Project Agreement declared
void. Moody's noted that actions by government related agencies and the
resulting instability of contractual arrangements was becoming inconsistent with
their rating approach that attaches significant benefit to offtake arrangements
with those government supported entities.
Concentration of Risk
- ---------------------
NIA's payments of obligations under the Project Agreement will be substantially
denominated in United States Dollars and are expected to be the Company's sole
source of operating revenues. Because of the Company's dependence on NIA, any
material failure of NIA to fulfill its obligations under the Project Agreement
and any material failure of the Republic of the Philippines to fulfill its
obligations under the Performance Undertaking would significantly impair the
ability of the Company to meet its existing and future obligations. No
stockholders, partners or affiliates of the Company, including MidAmerican, and
no directors, officers or employees of the Company will guarantee or be in any
way liable for payment of the Company's obligations. As a result, payment of the
Company's obligations depends upon the availability of sufficient revenues from
the Company's business after the payment of operating expenses.
-18-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
For quantitative and qualitative disclosures about market risk affecting CE
Casecnan, see Item 7A "Qualitative and Quantitative Disclosures About Market
Risk" of CE Casecnan's Annual Report on Form 10-K for the year ended December
31, 2002. CE Casecnan's exposure to market risk has not changed materially since
December 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES.
CE Casecnan Water and Energy Company's chief executive officer and chief
financial officer have established "disclosure controls and procedures" (as
defined in Rule 13a-14(c) and Rule 15d-14(c) of the Securities and Exchange Act
of 1934) to ensure that material information of the companies and their
subsidiaries is made known to them by others within the respective companies.
Under their supervision, an evaluation of the disclosure controls and procedures
was performed within 90 days prior to the filing of this quarterly report. Based
on that evaluation, the above-mentioned officers have concluded that, as of the
date of the evaluation, the disclosure controls and procedures were operating
effectively. Additionally, the above-mentioned officers find that there have
been no signification changes in internal controls, or in other factors that
could significantly affect internal controls, subsequent to the date of that
evaluation.
-19-
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
See Note 4 to the financial statements and discussion in management's discussion
and analysis.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS:
The exhibits listed on the accompanying Exhibit Index are filed as part
of this Quarterly Report.
(b) REPORTS ON FORM 8-K:
None.
-20-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CE CASECNAN WATER AND ENERGY COMPANY, INC.
------------------------------------------
(Registrant)
Date: May 12, 2003 /s/ Patrick J. Goodman
-------------------------------------------------
Patrick J. Goodman
Senior Vice President and Chief Financial Officer
-21-
SECTION 302 CERTIFICATION FOR FORM 10-Q
CERTIFICATIONS
- --------------
I, David A. Baldwin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CE Casecnan Water and
Energy Company, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 12, 2003
/s/ David A. Baldwin
-------------------------
David A. Baldwin
President
(chief executive officer)
SECTION 302 CERTIFICATION FOR FORM 10-Q
CERTIFICATIONS
- --------------
I, Patrick J. Goodman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CE Casecnan Water and
Energy Company, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 12, 2003
/s/ Patrick J. Goodman
--------------------------------
Patrick J. Goodman
Senior Vice President and Chief Financial Officer
(chief financial officer)
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EXHIBIT INDEX
Exhibit No.
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99.1 Chief Executive Officer's Certificate Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Chief Financial Officer's Certificate Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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