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 June 30, 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 July 31, 2003, 767,162 shares of common stock were outstanding.
TABLE OF CONTENTS
-----------------
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.........20
Item 4. Controls and Procedures............................................20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..................................................21
Item 2. Changes in Securities and Use of Proceeds..........................21
Item 3. Defaults Upon Senior Securities....................................21
Item 4. Submission of Matters to a Vote of Security Holders................21
Item 5. Other Information..................................................21
Item 6. Exhibits and Reports on Form 8-K...................................21
SIGNATURES....................................................................22
EXHIBIT INDEX.................................................................23
-2-
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. (the "Company") as of June 30, 2003 and the related statements of
operations for each of the three-month and six-month periods ended June 30, 2003
and 2002 and the statements of cash flows for the six-month periods ended June
30, 2003 and 2002. These interim 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
July 22, 2003
-3-
CE CASECNAN WATER AND ENERGY COMPANY, INC.
BALANCE SHEETS
(In thousands of U.S. Dollars, except share data)
AS OF
------------------------
JUNE 30, DECEMBER 31,
2003 2002
-------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents .................................... $ 1,694 $ 705
Trade receivable, net ........................................ 59,248 51,515
Accrued interest and other receivable ........................ 9,412 7,009
Prepaid insurance and other current assets ................... 3,835 5,562
-------- --------
Total current assets ....................................... 74,189 64,791
-------- --------
Restricted cash and investments ................................ 11,319 7,078
Bond issue costs, net .......................................... 4,539 5,218
Property, plant and equipment, net ............................. 444,718 453,507
Deferred income tax ............................................ 5,371 5,371
Other assets ................................................... - 5,542
-------- --------
TOTAL ASSETS ................................................... $540,136 $541,507
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ........................ $ 9,883 $ 10,785
Accrued interest on notes payable ............................ 2,903 2,048
Accrued interest on long-term debts .......................... 3,924 4,223
Payable to affiliates ........................................ 34,304 33,342
Current portion of long-term debt ............................ 45,414 41,468
-------- --------
Total current liabilities .................................. 96,428 91,866
-------- --------
Notes payable .................................................. 51,263 51,263
Long-term debts, net of current portion ........................ 221,778 246,457
-------- --------
Total liabilities ............................................ 369,469 389,586
-------- --------
Commitments and contingencies (Notes 2 and 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 .............................................. 46,831 28,085
-------- --------
Total stockholders' equity ................................... 170,667 151,921
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..................... $540,136 $541,507
======== ========
The accompanying notes are an integral part of these financial statements.
-4-
CE CASECNAN WATER AND ENERGY COMPANY, INC.
STATEMENTS OF OPERATIONS
(In thousands of U.S. Dollars, except share data)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------- ----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
(UNAUDITED)
REVENUE:
Delivery of water ....................... $ 22,044 $ 21,294 $ 44,486 $ 39,782
Sale of electricity ..................... 11,175 9,095 20,232 18,189
--------- --------- --------- ---------
Total revenue ......................... 33,219 30,389 64,718 57,971
--------- --------- --------- ---------
OPERATING EXPENSES:
Depreciation ............................ 5,745 5,599 11,418 11,739
Plant operations ........................ 4,173 2,330 7,349 4,067
Doubtful accounts ....................... 2,345 2,625 6,412 4,885
--------- --------- --------- ---------
Total operating expenses .............. 12,263 10,554 25,179 20,691
--------- --------- --------- ---------
OPERATING INCOME .......................... 20,956 19,835 39,539 37,280
OTHER INCOME (EXPENSE):
Interest expense ........................ (10,778) (10,707) (20,931) (21,504)
Other, net .............................. 60 62 138 89
--------- --------- --------- ---------
Total other expense, net .............. (10,718) (10,645) (20,793) (21,415)
--------- --------- --------- ---------
NET INCOME ................................ $ 10,238 $ 9,190 $ 18,746 $ 15,865
========= ========= ========= =========
NET INCOME PER SHARE ...................... $ 13.35 $ 11.98 $ 24.44 $ 20.68
========= ========= ========= =========
Average number of common shares outstanding 767,162 767,162 767,162 767,162
========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
-5-
CE CASECNAN WATER AND ENERGY COMPANY, INC.
STATEMENTS OF CASH FLOWS
(In thousands of U.S. Dollars)
SIX MONTHS
ENDED JUNE 30,
--------------------
2003 2002
-------- --------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ....................................................... $ 18,746 $ 15,865
Adjustments to reconcile net cash flows from operating activities:
Depreciation ................................................... 11,418 11,739
Amortization of bond issue costs ............................... 679 747
Changes in other items:
Trade receivable, net ........................................ (7,733) (16,838)
Accrued interest and other receivable ........................ (2,403) 41
Prepaid insurance and other current assets ................... 1,727 417
Accounts payable and accrued expenses ........................ (902) 345
Accrued interest ............................................. 556 (647)
Increase in payable to affiliates related to operations ...... 962 2,013
-------- --------
Net cash flows from operating activities ................... 23,050 13,682
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment ....................... (2,629) (1,317)
Other assets ..................................................... 5,542 3,087
-------- --------
Net cash flows from investing activities ....................... 2,913 1,770
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in restricted cash and investments ...................... (4,241) (4,238)
Decrease in payable to affiliates related to construction ........ - (17,788)
Increase (decrease) in notes payable ............................. (20,733) 10,500
-------- --------
Net cash flows from financing activities ....................... (24,974) (11,526)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS .......................... 989 3,926
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ................... 705 1,078
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ......................... $ 1,694 $ 5,004
======== ========
The accompanying notes are an integral part of these financial statements.
-6-
CE CASECNAN WATER AND ENERGY COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
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 June 30, 2003 and the results of its
operations for the three-month and six-month periods ended June 30, 2003 and
2002 and of cash flows for the six-month periods ended June 30, 2003 and 2002.
The results of operations for the three-month and six-month periods ended June
30, 2003 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
delivery and electricity generation industry.
2. TRADE RECEIVABLE, NET
Trade receivable, net pertains to the receivable due, under the terms of the
Casecnan Project Agreement (the "Project Agreement"), 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 June 30,
2003 and December 31, 2002 consists of the following (in thousands):
JUNE 30, DECEMBER 31,
2003 2002
-------- ------------
Water delivery fee ................ $ 71,971 $ 52,854
Guaranteed energy delivery fee .... 3,676 6,709
Excess energy delivery fee ........ 2,079 4,018
-------- --------
Trade receivable ................ 77,726 63,581
Allowance for doubtful accounts ... (18,478) (12,066)
-------- --------
Trade receivable, net ........... $ 59,248 $ 51,515
======== ========
NIA has paid all amounts due for energy delivery fees under the Project
Agreement as of June 30, 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 since commercial operations began on December
11, 2001.
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
June 30, 2003, CE Casecnan had paid approximately $58.5 million in taxes, which
as a result of the foregoing provisions has resulted 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
-7-
enforcement of the relevant provision of the Project Agreement going forward.
The arbitration is being conducted in accordance with the rules of the
International Chamber of Commerce ("ICC").
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
("BOT") 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. On May 23, 2003 CE Casecnan filed its reply to
NIA's counterclaims. The Company is required to file its brief and supporting
materials on October 17, 2003. Thereafter, NIA will file its response brief and
supporting materials by December 12, 2003. The parties will then exchange
documents in discovery and make rebuttal filings, in advance of the hearings on
the claims and counterclaims which are scheduled for July 2004. CE Casecnan
intends to vigorously contest all of NIA's assertions and counterclaims.
Total revenue was $33.2 million and $30.4 million for the three-month periods
ended June 30, 2003 and 2002, respectively, and $64.7 million and $58.0 million
for the six-month periods ended June 30, 2003 and 2002, respectively. Included
in these amounts was $8.1 million and $8.4 million for the three-month periods
ended June 30, 2003 and 2002, respectively, and $17.7 million and $16.5 million
for the six-month periods ended June 30, 2003 and 2002, 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 $2.3 million and $2.6 million for the three-month periods ended
June 30, 2003 and 2002, respectively, and $6.4 million and $4.9 million for the
six-month periods ended June 30, 2003 and 2002, respectively. As of June 30,
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 $54.0 million and $36.3 million, respectively. The
allowance for doubtful accounts as of June 30, 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 $34.3 million and $33.3 million at June 30, 2003 and
December 31, 2002, respectively. Costs incurred by the Company in transactions
with related parties amounted to $0.4 million and $2.0 million for the
three-month periods ended June 30, 2003 and 2002, respectively, and $1.5 million
and $2.7 million for the six-month periods ended June 30, 2003 and 2002,
respectively.
As of June 30, 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 percent
(2%). Interest expense on the unsecured notes was $0.4 million and $0.5 million
during the three-month periods ended June 30, 2003 and 2002 and $0.8 million and
$0.9 million during the six-month periods ended June 30, 2003 and 2002. At June
30, 2003, the effective interest rate on the notes was 3.25%. The notes may be
prepaid at any time without premium or penalty but with accrued interest, if
any. The unsecured
-8-
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
Depository, 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.
4. COMMITMENTS AND CONTINGENCIES
Construction Contract Arbitration
- ---------------------------------
The Casecnan Project was initially being 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. As
of 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
ICC 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 ICC.
Hearings have been held in connection with this arbitration in July 2001,
September 2001, January 2002, March 2002, November 2002, January 2003 and July
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 June 30, 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. The
$6.0 million was recorded as a reduction in construction costs. On November 7,
2002, the ICC 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 June 30, 2003 and December
31, 2002. All of the Contractor's other claims with respect to force majeure and
geologic conditions were denied.
-9-
If the Contractor were to prevail on its claim that the delay liquidated damages
clause is unenforceable, CE Casecnan 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 paid to the Contractor, CE Casecnan 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.
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 recorded a total of $1.6 million for
liquidated damages as of June 30, 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.
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, among others, 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 were purchased by MidAmerican 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 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 issued letters of authority to audit the tax years 1996
through 1998. In May 2003, the Company paid $1.0 million of final taxes related
to interest expense paid in 1996 to 1998. On June 10, 2003, the BIR issued a
notice stating that the tax investigation for the Company for all internal
revenue taxes for the years 1996 to 1998 is closed and terminated. 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
-10-
market, among other initiatives. The implementation of EPIRA may have an impact
on the Company's future operations in the Philippines and the Philippines power
industry as a whole, the effect of which is not yet determinable or estimable.
In connection with an interagency review of approximately 40 independent power
project contracts in the Philippines, the Casecnan Project (together with four
other unrelated 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 and 2003, 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 BOT project for the development, construction and
operation of the new Manila International Airport. Various members of the
Philippine 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 ICC 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 nongovernmental 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.
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 debt securities
issued by the Republic of the Philippines ("ROP"). The downgrade of the ROP debt
securities by S&P reflected the country's growing debt burden and fiscal
rigidity. On June 13, 2003, S&P downgraded CE Casecnan's senior secured notes
rating to B+ from BB and stated that the outlook for the rating was negative.
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. On June 6, 2003, Moody's downgraded CE
Casecnan's senior secured notes rating to B2 from Ba2.
Concentration of Risk
- ---------------------
NIA's payments of obligations under the Project Agreement are substantially
denominated in United States Dollars and 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 ROP 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.
-11-
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, Inc. ("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. Note 2 to
the Company's Financial Statements included in its Annual Report on form 10-K
for the year ended December 31, 2002 describes the significant accounting
policies and methods used in the preparation of the Financial Statements.
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.
For additional discussion of the Company's critical accounting policies, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2002.
RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED JUNE 30, 2003 AND 2002
Total revenue increased $2.8 million, or 9.2%, to $33.2 million for the
three-month period ended June 30, 2003 from $30.4 million for the three-month
period ended June 30, 2002. Water delivery revenue increased to $22.0 million
for the three-month period ended June 30, 2003 from $21.3 million for the
three-month period ended June 30, 2002 and electricity sales revenue was $11.2
million for the three-month period ended June 30, 2003 and $9.1 million for the
three-month period ended June 30, 2002. The increase in water fees was due to a
7.5% increase in Water Delivery Fee rate as a result of the contractual annual
escalation factor and the accrual of the revenue related to the additional taxes
recoverable during operations pursuant to the contract. See Note 2 - "Trade
receivable, net." Revenues from water delivery, guaranteed energy and excess
energy generated and delivered are 66%, 28% and 6%, respectively, of the total
revenue for the three-month period ended June 30, 2003 while 70%, 30% and 0%,
respectively for the three-month period ended June 30, 2002.
-12-
Operating expenses increased $1.7 million, or 16.0%, to $12.3 million for the
three-month period ended June 30, 2003 from $10.6 million for the three-month
period ended June 30, 2002. Included within operating expenses for the
three-month period ended June 30, 2003 are depreciation, plant operations and
doubtful accounts expense of $5.7 million, $4.2 million and $2.3 million,
respectively. Depreciation expense increased by $0.1 million, doubtful accounts
expense decreased by $0.3 million and plant operations increased by $1.9
million. The increase in plant operations was caused by higher local business
taxes, insurance premium amortization and legal costs.
Interest expense increased slightly by $0.1 million to $10.8 million for the
three-month period ended June 30, 2003 from $10.7 million for the three-month
period ended June 30, 2002. The primary reason for the increase was the payment
of final taxes related to the interest expense paid in 1996 to 1998 to
Philippine bondholders partially offset by the scheduled payment of debt.
RESULTS OF OPERATIONS FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2003 AND 2002
Total revenue increased $6.7 million or 11.6% to $64.7 million for the six-month
period ended June 30, 2003 from $58.0 million for the six-month period ended
June 30, 2002. Water delivery revenue increased to $44.5 million for the
six-month period ended June 30, 2003 from $39.8 million for the six-month period
ended June 30, 2002 and electricity sales revenue was $20.2 million for the
six-month period ended June 30, 2003 and $18.2 million for the six-month period
ended June 30, 2002. The increase in water fees was due to a 7.5% increase in
Water Delivery Fee rate as a result of the contractual annual escalation factor
and the accrual of the revenue related to the additional taxes recoverable
during operations pursuant to the contract. See Note 2 - "Trade Receivable,
net." Revenues from water delivery, guaranteed energy and excess energy
generated and delivered are 69%, 28% and 3%, respectively, of the total revenue
for the six-month period ended June 30, 2003 while 69%, 31% and 0%, respectively
for the six-month period ended June 30, 2002.
Operating expenses increased $4.5 million or 21.7% to $25.2 million for the
six-month period ended June 30, 2003 from $20.7 million for the six-month period
ended June 30, 2002. Included within operating expenses for the six-month period
ended June 30, 2003 are depreciation, plant operations and doubtful accounts
expense of $11.4 million, $7.4 million and $6.4 million, respectively.
Depreciation decreased by $0.3 million while plant operations and doubtful
accounts expense increased by $3.2 million and $1.5 million, respectively. The
increase in plant operations was caused by higher local business taxes,
insurance premium amortization and legal costs.
Interest expense decreased $0.6 million or 2.8% to $20.9 million for the
six-month period ended June 30, 2003 from $21.5 million for the six-month period
ended June 30, 2002. The primary reason for the decrease was the scheduled
payment of debt partially offset by the payment of final taxes related to the
interest expense paid in 1996 to 1998 to Philippine bondholders.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents were $1.7 million and $0.7 million at
June 30, 2003 and December 31, 2002, respectively.
The Company generated cash flows from operations of $23.1 million for the
six-month period ended June 30, 2003, compared with $13.7 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 were lower due to the delayed payment of the May
2002 revenues in July 2002 instead of June 2002.
The Company provided $2.9 million from investing activities for the six-month
period ended June 30, 2003, compared to $1.8 million for the same period in
2002. The increase is due to increased VAT collections totaling $2.4 million
over the amount for the same period in 2002.
-13-
The Company used $25.0 million in financing activities for the six-month period
ended June 30, 2003, compared to $11.5 million for the same period in 2002. The
increase is due to a $20.7 million principal payment on the balance of the
Series A and B bonds in 2003.
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 Casecnan Project Agreement (the "Project Agreement")
between CE Casecnan and the Philippine National Irrigation Administration
("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 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 ("ROP") has provided a Performance Undertaking
under which NIA's obligations under the Project Agreement are guaranteed by the
full faith and credit of the ROP. 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 ROP 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.
Construction Contract Arbitration
- ---------------------------------
The Casecnan Project was initially being 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. As
of 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
ICC 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
-14-
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 ICC.
Hearings have been held in connection with this arbitration in July 2001,
September 2001, January 2002, March 2002, November 2002, January 2003 and July
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 June 30, 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 ICC 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 June
30, 2003 and December 31, 2002. All of the Contractor's other claims with
respect to force majeure and geologic conditions were denied.
If the Contractor were to prevail on its claim that the delay liquidated damages
clause is unenforceable, CE Casecnan 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 paid to the Contractor, CE Casecnan 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.
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
June 30, 2003, CE Casecnan had paid approximately $58.5 million in taxes, which
as a result of the foregoing provisions has resulted 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 is being conducted in accordance with the rules of the ICC.
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 BOT 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.
On May 23, 2003 CE Casecnan filed its reply to NIA's counterclaims. The Company
is required to file its brief and supporting materials on October 17, 2003.
Thereafter, NIA will file its response brief and supporting materials by
December 12, 2003. The parties
-15-
will then exchange documents in discovery and make rebuttal filings, in advance
of the hearings on the claims and counterclaims which are scheduled for July
2004. CE Casecnan intends to vigorously contest all of NIA's assertions and
counterclaims.
Included in revenue was $8.1 million and $8.4 million for the three-month
periods ended June 30, 2003 and 2002, respectively, and $17.7 million and $16.5
million for the six-month periods ended June 30, 2003 and 2002, 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 $2.3 million and $2.6 million for the three-month periods ended
June 30, 2003 and 2002, respectively, and $6.4 million and $4.9 million for the
six-month periods ended June 30, 2003 and 2002, respectively. As of June 30,
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 $54.0 million and $36.3 million, respectively.
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 June 30, 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 "NIA Arbitration."
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, among others, 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 were purchased by MidAmerican 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. MidAmerican 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 such action.
-16-
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 issued letters of authority to audit the tax years 1998,
1997 and 1996. In May 2003, the Company paid $1.0 million of final taxes related
to interest expense paid in 1996 to 1998. On June 10, 2003, the BIR issued a
notice stating that the tax investigation for the Company for all internal
revenue taxes for the years 1996 to 1998 is closed and terminated. 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
Company's future operations in the Philippines and the Philippines power
industry as a whole, the effect of which is not yet determinable or estimable.
In connection with an interagency review of approximately 40 independent power
project contracts in the Philippines, the Casecnan Project (together with four
other unrelated 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 and 2003, 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 BOT project for the development, construction and
operation of the new Manila International Airport. Various members of the
Philippine 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 ICC 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 nongovernmental 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.
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 debt securities
issued by the Republic of the Philippines ("ROP"). The downgrade of the ROP debt
securities by S&P reflected the country's growing debt burden and fiscal
rigidity. On June 13, 2003, S&P downgraded CE Casecnan's senior secured notes
rating to B+ from BB and stated that the outlook for the rating was negative.
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
-17-
of contractual arrangements was becoming inconsistent with their rating approach
that attaches significant benefit to offtake arrangements with those government
supported entities. On June 6, 2003, Moody's downgraded CE Casecnan's senior
secured notes rating to B2 from Ba2.
Concentration of Risk
- ---------------------
NIA's payments of obligations under the Project Agreement are substantially
denominated in United States Dollars and 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 ROP 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.
An evaluation was performed under the supervision and with the participation of
the Company's management, including the chief executive officer and chief
financial officer, regarding the effectiveness of the design and operation of
the Company's disclosure controls and procedures (as defined in Rule 13a-15(e)
promulgated under the Securities and Exchange Act of 1934, as amended) as of
June 30, 2003. Based on that evaluation, the Company's management, including the
chief executive officer and chief financial officer, concluded that the
Company's disclosure controls and procedures were effective. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect internal controls.
-19-
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
See Notes 2 and 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:
The Company filed a current report on Form 8-K on April 30, 2003.
The Company filed a current report on Form 8-K on May 12, 2003.
The Company filed a current report on Form 8-K on June 5, 2003.
The Company filed a current report on Form 8-K on June 9, 2003.
The Company filed a current report on Form 8-K on June 13, 2003.
The Company filed a current report on Form 8-K on June 17, 2003.
-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: August 5, 2003 /s/ Patrick J. Goodman
-------------------------------------------------
Patrick J. Goodman
Senior Vice President and Chief Financial Officer
-21-
EXHIBIT INDEX
Exhibit No.
- -----------
31.1 Chief Executive Officer's Certificate Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Chief Financial Officer's Certificate Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Chief Executive Officer's Certificate Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Chief Financial Officer's Certificate Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
-22-