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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
[x]
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the
quarterly period ended March 31, 2005
OR
[
] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the
transition period from ________to_______
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
incorporation
or organization) |
|
(I.R.S.
Employer
Identification
No.) |
| |
|
|
|
24th
Floor, 6750 Building, Ayala Avenue
Makati,
Metro Manila, Philippines |
|
Not
Applicable |
|
(Address
of principal executive offices) |
|
(Zip
Code) |
| |
011
63 2 892-0276 |
|
| |
(Registrant’s
telephone number, including area code) |
|
| |
|
|
| |
|
|
| |
(Former
name, former address and former fiscal year, if changed since last
report) |
|
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]
All of
the shares of common equity of CE Casecnan Water and Energy Company, Inc. are
privately held by a limited group of investors. As of April 29, 2005, the number
of outstanding common stock was 767,162 shares, $0.038 par value.
TABLE
OF CONTENTS
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Item
1. |
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3 |
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Item
2. |
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10 |
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Item
3. |
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13 |
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Item
4. |
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13 |
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Item
1. |
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14 |
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Item
2. |
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14 |
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Item
3. |
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14 |
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Item
4. |
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14 |
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Item
5. |
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Item
6. |
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15 |
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16 |
2
Report
of Independent Registered Public Accounting Firm
To the
Board of Directors and Stockholders of
CE
Casecnan Water and Energy Company, Inc.
We have
reviewed the accompanying balance sheet of CE Casecnan Water and Energy Company,
Inc. (the "Company") as of March 31, 2005, and the related statements of
operations and cash flows for each of the three-month periods ended
March 31, 2005 and 2004. These interim financial statements are the
responsibility of the Company's management.
We
conducted our review in accordance with standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical review procedures and
making inquiries of persons responsible for financial and accounting matters. It
is substantially less in scope than an audit conducted in accordance with
standards of the Public Company Accounting Oversight Board, 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 standards of the Public Company Accounting
Oversight Board (United States), the balance sheet as of December 31, 2004,
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 February 11, 2005, we expressed an unqualified opinion on those financial
statements. In our opinion, the information set forth in the accompanying
balance sheet as of December 31, 2004, 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 29,
2005
3
CE
CASECNAN WATER AND ENERGY COMPANY, INC.
BALANCE
SHEETS
(Amounts
in thousands of U.S. Dollars, except share data)
| |
|
As
of |
|
| |
|
March
31, |
|
December
31, |
|
| |
|
2005 |
|
2004 |
|
| |
|
(Unaudited) |
|
|
|
| |
|
|
|
|
|
|
ASSETS |
|
Current
assets: |
|
|
|
|
|
|
|
|
Cash
and cash equivalents |
|
$ |
44,168 |
|
$ |
16,732 |
|
|
Restricted
cash and investments |
|
|
39,707 |
|
|
39,444 |
|
|
Trade
receivable, net |
|
|
19,075 |
|
|
25,242 |
|
|
Accrued
interest and other receivables |
|
|
930 |
|
|
1,986 |
|
|
Prepaid
insurance and other current assets |
|
|
4,731 |
|
|
4,831 |
|
|
Total
current assets |
|
|
108,611 |
|
|
88,235 |
|
|
Restricted
cash and investments |
|
|
16,158 |
|
|
16,063 |
|
|
Bond
issue costs, net |
|
|
2,445 |
|
|
2,678 |
|
|
Property,
plant and equipment, net |
|
|
359,750 |
|
|
365,132 |
|
|
Deferred
income tax |
|
|
5,371 |
|
|
5,371 |
|
|
Total
assets |
|
$ |
492,335 |
|
$ |
477,479 |
|
| |
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY |
|
Current
liabilities: |
|
|
|
|
|
|
|
|
Accounts
payable |
|
$ |
11,245 |
|
$ |
12,185 |
|
|
Dividends
payable |
|
|
15,900 |
|
|
15,900 |
|
|
Accrued
interest |
|
|
14,877 |
|
|
8,482 |
|
|
Other
accrued expenses |
|
|
295 |
|
|
295 |
|
|
Payable
to affiliates |
|
|
35,113 |
|
|
35,148 |
|
|
Current
portion of long-term debt |
|
|
54,753 |
|
|
54,753 |
|
|
Total
current liabilities |
|
|
132,183 |
|
|
126,763 |
|
| |
|
|
|
|
|
|
|
|
Notes
payable |
|
|
51,263 |
|
|
51,263 |
|
|
Deferred
revenue |
|
|
7,767 |
|
|
6,120 |
|
|
Long-term
debt, net of current portion |
|
|
142,345 |
|
|
142,345 |
|
|
Total
liabilities |
|
|
333,558 |
|
|
326,491 |
|
| |
|
|
|
|
|
|
|
|
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 |
|
|
34,941 |
|
|
27,152 |
|
|
Total
stockholders’ equity |
|
|
158,777 |
|
|
150,988 |
|
|
Total
liabilities and stockholders’ equity |
|
$ |
492,335 |
|
$ |
477,479 |
|
The
accompanying notes are an integral part of these financial
statements.
4
CE
CASECNAN WATER AND ENERGY COMPANY, INC.
STATEMENTS
OF OPERATIONS
(Amounts
in thousands of U.S. Dollars)
| |
|
Three
Months |
|
| |
|
Ended
March 31, |
|
| |
|
2005 |
|
2004 |
|
| |
|
(Unaudited) |
|
Revenue: |
|
|
|
|
|
|
|
|
Lease
rentals and service contracts |
|
$ |
21,149 |
|
$ |
19,915 |
|
|
Operating
expenses: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
5,434 |
|
|
5,713 |
|
|
Plant
operations and other operating expenses |
|
|
2,018 |
|
|
1,981 |
|
|
Total
operating expenses |
|
|
7,452 |
|
|
7,694 |
|
| |
|
|
|
|
|
|
|
|
Operating
income |
|
|
13,697 |
|
|
12,221 |
|
| |
|
|
|
|
|
|
|
|
Other
income (expense): |
|
|
|
|
|
|
|
|
Interest
expense |
|
|
(6,628 |
) |
|
(7,560 |
) |
|
Interest
income |
|
|
570 |
|
|
650 |
|
|
Other |
|
|
150 |
|
|
(120 |
) |
|
Total
other expense, net |
|
|
(5,908 |
) |
|
(7,030 |
) |
| |
|
|
|
|
|
|
|
|
Net
income |
|
$ |
7,789 |
|
$ |
5,191 |
|
The
accompanying notes are an integral part of these financial
statements.
5
CE
CASECNAN WATER AND ENERGY COMPANY, INC.
STATEMENTS
OF CASH FLOWS
(Amounts
in thousands of U.S. Dollars)
| |
|
Three
Months |
|
| |
|
Ended
March 31, |
|
| |
|
2005 |
|
2004 |
|
| |
|
(Unaudited) |
|
| |
|
|
|
|
|
Cash
flows from operating activities: |
|
|
|
|
|
|
|
|
Net
income |
|
$ |
7,789 |
|
$ |
5,191 |
|
|
Adjustments
to reconcile net income to cash flows from operating
activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
5,434 |
|
|
5,713 |
|
|
Amortization
of bond issue costs |
|
|
233 |
|
|
295 |
|
|
Changes
in other items: |
|
|
|
|
|
|
|
|
Trade
receivable, net |
|
|
6,167 |
|
|
(886 |
) |
|
Accrued
interest and other receivables |
|
|
1,056 |
|
|
2,771 |
|
|
Prepaid
insurance and other current assets |
|
|
100 |
|
|
(178 |
) |
|
Accounts
payable and other accrued expenses |
|
|
(940 |
) |
|
346 |
|
|
Accrued
interest |
|
|
6,395 |
|
|
7,667 |
|
|
Deferred
revenue |
|
|
1,647 |
|
|
1,164 |
|
|
Net
cash flows from operating activities |
|
|
27,881 |
|
|
22,083 |
|
| |
|
|
|
|
|
|
|
|
Cash
flows from investing activities: |
|
|
|
|
|
|
|
|
Additions
to property, plant and equipment |
|
|
(52 |
) |
|
(422 |
) |
|
Collection
of ROP Note (Note 2) |
|
|
- |
|
|
97,000 |
|
|
Net
cash flows (used in) from investing activities |
|
|
(52 |
) |
|
96,578 |
|
| |
|
|
|
|
|
|
|
|
Cash
flows from financing activities: |
|
|
|
|
|
|
|
|
Increase
in restricted cash and investments for debt service |
|
|
|
|
|
|
|
|
obligations
and dividends payable |
|
|
(358 |
) |
|
(75,669 |
) |
|
Decrease
in payable to affiliates |
|
|
(35 |
) |
|
(120 |
) |
|
Cash
dividends paid |
|
|
- |
|
|
(45,050 |
) |
|
Net
cash flows used in financing activities |
|
|
(393 |
) |
|
(120,839 |
) |
| |
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents |
|
|
27,436 |
|
|
(2,178 |
) |
|
Cash
and cash equivalents at beginning of period |
|
|
16,732 |
|
|
4,513 |
|
|
Cash
and cash equivalents at end of period |
|
$ |
44,168 |
|
$ |
2,335 |
|
| |
|
|
|
|
|
|
|
|
Supplemental
disclosure: |
|
|
|
|
|
|
|
|
Interest
paid |
|
$ |
324 |
|
$ |
403 |
|
|
Dividends
declared but not paid |
|
$ |
- |
|
$ |
7,950 |
|
The
accompanying notes are an integral part of these financial
statements.
6
CE
CASECNAN WATER AND ENERGY COMPANY, INC.
NOTES
TO FINANCIAL STATEMENTS
(Unaudited)
The
accompanying unaudited interim financial statements have been prepared by CE
Casecnan Water and Energy Company, Inc. ("CE Casecnan" or the "Company")
pursuant to the rules and regulations of the United States Securities and
Exchange Commission for interim financial reporting. In the opinion of the
management of the Company, the accompanying unaudited financial statements
contain all adjustments (consisting of normal recurring accruals) necessary to
present fairly the financial position as of March 31, 2005, and the results of
operations and cash flows for each of the three-month periods ended
March 31, 2005 and 2004. The results of operations for the three-month
period ended March 31, 2005 are not necessarily indicative of the results to be
expected for the full year.
The
Company has a contract with the Republic of the Philippines (“ROP”), through the
Philippine National Irrigation Administration (“NIA”) (a ROP-owned and
controlled corporation), for the development and construction of a hydroelectric
power plant and related facilities under a build-own-operate-transfer agreement
(the “Project Agreement”), covering a 20-year cooperation period (the
“Cooperation Period”). At the end of the Cooperation Period, the combined
irrigation and 150 megawatt (“MW”) hydroelectric power generation project (the
“Casecnan Project”) will be transferred to the ROP at no cost on an “as is”
basis. The ROP also signed a Performance Undertaking, which affirms and
guarantees the obligations of NIA under the contract.
The
Casecnan Project is dependant upon sufficient rainfall to generate electricity
and deliver water. The seasonality of rainfall patterns and the variability of
rainfall from year to year, all of which are outside the control of the Company,
have a material impact on the amounts of electricity generated and water
delivered by the Casecnan Project. Rainfall has historically been highest from
June through December and lowest from January through May.
The
unaudited financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company’s Annual Report on Form
10-K for the year ended December 31, 2004. In particular, the Company’s
significant accounting policies are presented in Note 2 to the financial
statements included therein.
The
Company’s operations consist of one reportable segment, the water delivery and
electricity generation industry.
|
2. |
NIA
Arbitration Settlement |
On
October 15, 2003, the Company closed a transaction settling an arbitral
proceeding which the Company had initiated against NIA in August 2002. In
connection with the settlement, CE Casecnan entered into an agreement with NIA
(the “Supplemental Agreement”) which supplements and amends the Project
Agreement in certain respects. As part
of the settlement, NIA delivered to CE Casecnan a ROP $97.0 million 8.375%
Note due 2013 (the "ROP Note"). The Company had the option, between
January 14, 2004 and February 14, 2004 to put the ROP Note to the ROP,
for a price of par plus accrued interest.
On
January 14, 2004, CE Casecnan exercised its right to put the ROP Note to
the ROP and, in accordance with the terms of the put, CE Casecnan received
$99.2 million (representing $97.0 million par value plus accrued
interest) from the ROP on January 21, 2004.
|
3. |
Related
Party Transactions |
In the
normal course of business, the Company transacts with its affiliates in the form
of advances for operating expenses. The payable to affiliates was
$35.1 million at March 31, 2005 and December 31, 2004, respectively.
Costs incurred by the Company in transactions with related parties amounted to
$0.3 million for the three-month periods ended March 31, 2005 and
2004.
As of
March 31, 2005 and December 31, 2004, the Company had outstanding
$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 which is payable every May 15 and November 15.
Interest expense on the unsecured notes was $0.6 million and $0.4
million during the three-month periods ended March 31, 2005 and 2004,
respectively. Any overdue payment of principal and interest payable on the notes
shall increase the annual interest by two percent. At March 31, 2005,
the effective interest rate on the notes was 4.49%. 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 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. The Company intends to extend
the term of the notes or to convert them into some form of capital such that no
current assets will be used or current liabilities created to retire the
notes.
7
| 4.
|
Commitments
and Contingencies |
Stockholder
Litigation
Pursuant
to the share ownership adjustment mechanism in the CE Casecnan stockholder
agreement, which is based upon proforma financial projections of the Casecnan
Project prepared following commencement of commercial operations, in February
2002, MidAmerican Energy Holdings Company’s (“MidAmerican”) indirect wholly
owned subsidiary, CE Casecnan Ltd., advised the minority stockholder
of the Company, 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. The Company is not a defendant in the
action. On January 21, 2004, CE Casecnan Ltd., LPG and the Company entered
into a status quo agreement pursuant to which the parties agreed to set aside
certain distributions related to the shares subject to the LPG dispute and CE
Casecnan agreed not to take any further actions with respect to such
distributions without at least 15 days’ prior notice to LPG. Accordingly, 15% of
the dividend declarations in 2004, totaling $15.9 million
($8.0 million in the first quarter of 2004), was set aside in a separate
bank account in the name of the Company and is shown as restricted cash and
investments and dividends payable in the accompanying balance sheets at March
31, 2005 and December 31, 2004, respectively. The court is currently
expected to rule on the first phase of the litigation before the end of the
second quarter of 2005.
Real
Property Tax
On
December 6, 2004, the Municipality of Alfonso Castaneda (the
“Municipality”), Province of Nueva Vizcaya (the “Province”) passed an ordinance
which required the submission of a tax clearance from each of the provincial
treasurer and municipal treasurer as a condition to issuing to CE Casecnan the
annual renewal of its license to operate and business permit. On
January 17, 2005, the Office of the Treasurer of the Municipality
provided CE Casecnan a copy of such ordinance and threatened to close the
Casecnan Project pending submittal by CE Casecnan of the tax clearance
certificate. CE Casecnan cannot obtain a tax clearance certificate from the
Province until real property taxes due to the Province are paid. Pursuant to the
Supplemental Agreement, before paying such real property taxes CE Casecnan
must either receive direction from NIA and the Philippine Department of Finance
or be subject to risk of imminent assessment of penalties for non payment. These
taxes have been fully accrued as of March 31, 2005 and December 31, 2004 as part
of accounts payable and trade receivable. CE Casecnan continues to seek such
direction but as of April 29, 2005, it has not been received. CE Casecnan
filed an action in the Regional Trial Court on January 21, 2005,
against the Municipality and was granted a temporary restraining order barring
the Municipality from closing the Casecnan Project. On
February 7, 2005, the temporary restraining order was extended until
the court resolves the petition for an injunction. CE Casecnan also has
filed an appeal with the Philippine Department of Justice challenging the
validity of the municipal ordinance. As of April 29, 2005, the order of the
court affirming the agreement of the parties to maintain in status quo remains
in force.
CE
Casecnan intends to continue discussing this matter with appropriate Philippine
government officials in an effort to resolve the situation. CE Casecnan believes
the risk of the Casecnan Project being closed is remote.
8
Value-added
Tax Legislation
The
Philippine House and Senate each has passed a bill which reimposes value-added
tax on electricity but prohibits certain electricity generators from passing on
the value-added tax to their customers. The House and Senate bills are being
reconciled in a Philippine congressional bicameral conference committee.
If signed into law, a final bill prohibiting CE Casecnan from invoicing NIA for,
and getting paid, value-added tax may trigger the change in law provision of the
Project Agreement, which obligates NIA to negotiate amendments to the Project
Agreement which would keep CE Casecnan whole for the adverse impact of such a
change in law. CE Casecnan believes that a failure by NIA to
agree to such amendments would entitle CE Casecnan to demand that the Philippine
government purchase CE Casecnan's interest in the project at a price equal to
the net present value of the energy and water delivery fee payments over the
remaining term of the Project Agreement. NIA and the Philippine government may
challenge any efforts by CE Casecnan to demand that its interest be so
purchased. CE Casecnan is closely monitoring developments in this
regard in the Philippines, and intends to vigorously defend its rights should a
final bill containing a no pass through provision be signed into law.
Concentration
of Risk
NIA’s
payments of obligations under the Project Agreement are substantially
denominated in U.S. 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, including obligations pertaining to its outstanding debt. 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.
9
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. The Company’s actual results in
the future could differ significantly from the historical results.
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. 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 the Company’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, the Company 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.
Business
The
Company has a contract with the Republic of the Philippines (“ROP”), through the
Philippine National Irrigation Administration (“NIA”) (a ROP-owned and
controlled corporation), for the development and construction of a hydroelectric
power plant and related facilities under a build-own-operate-transfer agreement
(“Project Agreement”), covering a 20-year cooperation period (“Cooperation
Period”). At the end of the Cooperation Period, the combined irrigation and 150
MW hydroelectric power generation project (the “Casecnan Project”) will be
transferred to the ROP at no cost on an “as is” basis. The ROP also signed a
Performance Undertaking, which, among others, affirms and guarantees the
obligations of NIA under the contract.
In
connection with the settlement of an arbitral proceeding on October 15, 2003, CE
Casecnan entered into an agreement with NIA (the “Supplemental Agreement”) which
supplements and amends the Project Agreement in certain respects.
Seasonality
The
Casecnan Project is dependant upon sufficient rainfall to generate electricity
and deliver water. The seasonality of rainfall patterns and the variability of
rainfall from year to year, all of which are outside the control of the Company,
have a material impact on the amounts of electricity generated and water
delivered by the Casecnan Project. Rainfall has historically been highest from
June through December and lowest from January through May. Therefore, portions
of the water delivery fees and variable energy fees (described below) can
produce significant variability in revenue between reporting
periods.
Under the
Supplemental Agreement, the water delivery fee is payable in a fixed monthly
payment based upon an average annual water delivery of 801.9 million cubic
meters, pro-rated to approximately 66.8 million cubic meters per month,
multiplied by the applicable per cubic meter rate through December 25,
2008. For each contract year starting from December 25, 2003 and ending on
December 25, 2008, a water delivery credit is computed equal to
801.9 million cubic meters minus the greater of actual water deliveries or
700.0 million cubic meters - the minimum threshold. The water delivery
credit at the end of the contract year is available to be earned in the
succeeding contract years ending December 25, 2008. The cumulative
water delivery credit at December 25, 2008, if any, shall be amortized from
December 25, 2008 through December 25, 2013. Accordingly, in
recognizing revenue, the water delivery fees are recorded each month pro-rated
to approximately 58.3 million cubic meters per month until the minimum
threshold has been reached for the contract year. Subsequent water delivery fees
within the contract year are based on actual water delivered.
10
The
Company earns variable energy fees based upon actual energy delivered in each
month in excess of 19.0 gigawatt-hours ("GWh"), payable at a rate of $0.1509 per
kilowatt-hour ("kWh"). Starting in 2009, the per kWh rate for energy deliveries
in excess of 19.0 GWh per month is reduced to $0.1132 (escalating at 1% per
annum thereafter), provided that any deliveries of energy in excess of 490.0
GWh, but less than 550.0 GWh per year are paid at a rate of 1.3 Philippine pesos
per kWh and deliveries in excess of 550.0 GWh per year are at no cost to NIA.
Within each contract year, no variable energy fees are payable until energy in
excess of the cumulative 19.0 GWh per month for the contract year to date has
been delivered.
Results
of Operations for the Three-Month Periods Ended March 31, 2005 and
2004
The
following table provides certain operating data of the Casecnan Project for the
three-month periods ended March 31, 2005 and 2004:
| |
|
2005 |
|
2004 |
|
|
Electricity
produced (GWh) |
|
|
42.4 |
|
|
41.0 |
|
|
Water
delivered (million cubic meters) |
|
|
73.0 |
|
|
72.0 |
|
For
accounting purposes, the Project Agreement with NIA contains both an operating
lease and a service contract, which the Company accounted for pursuant to the
provisions of Statement of Financial Accounting Standards No. 13, "Accounting
for Leases". Pursuant to the provisions of the Project Agreement, the Company
earned water and energy fees as follows (in millions):
| |
|
2005 |
|
2004 |
|
|
Water
delivery fees |
|
$ |
12.9 |
|
$ |
12.0 |
|
|
Guaranteed
energy fees |
|
|
9.1 |
|
|
9.1 |
|
|
Variable
energy fees |
|
|
0.7 |
|
|
0.3 |
|
|
Deferred
water delivery fees |
|
|
(1.6 |
) |
|
(1.5 |
) |
|
Total
lease rentals and service contracts revenue |
|
$ |
21.1 |
|
$ |
19.9 |
|
Revenue
increased by $1.2 million to $21.1 million for the three-month period
ended March 31, 2005 from $19.9 million for the three-month period
ended March 31, 2004. The increase in water delivery fees was mainly due to
the 7.5% increase in the water delivery rate based on a contractual annual
escalation factor. The increase in the variable energy fees was due primarily to
the wetter conditions in the first quarter of 2005 than in 2004. The deferred
water delivery fees represent the difference between the actual water delivery
fees earned and water delivery fees invoiced pursuant to the Supplemental
Agreement.
In the
first quarter of 2005, depreciation expense decreased by $0.3 million due
to a lower depreciable base. In April 2004, property, plant and equipment
was reduced by the $18.9 million collected under the contractor arbitration
settlement.
Interest
expense decreased to $6.6 million for the three-month period ended
March 31, 2005 from $7.6 million for the three-month period ended
March 31, 2005, due to lower outstanding debt balances resulting from the
scheduled repayment of debt.
Liquidity
and Capital Resources
NIA’s
payments of obligations under the Project Agreement are substantially
denominated in U.S. 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, including obligations pertaining to its outstanding debt. No
stockholders, partners or affiliates of the Company, including MidAmerican
Energy Holdings Company (“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.
The
Company's cash and cash equivalents were $44.2 million and
$16.7 million at March 31, 2005 and December 31, 2004, respectively.
11
The
Company generated cash flows from operations of $27.9 million and
$22.1 million for the three-month periods ended March 31, 2005 and
2004, respectively. The increase in cash from operations in 2005 was primarily
due the collection of billed revenues.
The
Company used $0.1 million for and generated $96.6 million from
investing activities for the three-month periods ended March 31, 2005 and 2004,
respectively. On January 21, 2004, the Company collected $97.0 million from
the put of the ROP
$97.0 million 8.375% Note due 2013 received
in connection with the NIA Arbitration Settlement.
The
Company used $0.4 million and $120.8 million for financing activities
for the three-month periods ended March 31, 2005 and 2004,
respectively. During the three-month period ended March 31, 2004, the Company
increased its restricted cash related to obligations for debt service and unpaid
dividends by $75.7 million and distributed dividends out of its cash funds
amounting to $45.1 million, of which $8.0 million was set aside in a
separate bank account in the name of the Company and shown as restricted cash
and investments and dividends payable in the balance sheet.
Stockholder
Litigation
Pursuant
to the share ownership adjustment mechanism in the CE Casecnan stockholder
agreement, which is based upon proforma financial projections of the Casecnan
Project prepared following commencement of commercial operations, in February
2002, MidAmerican’s indirect wholly owned subsidiary, CE Casecnan Ltd., advised
the minority stockholder of the Company, 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. The Company is not a defendant in the
action. On January 21, 2004, CE Casecnan Ltd., LPG and the Company entered
into a status quo agreement pursuant to which the parties agreed to set aside
certain distributions related to the shares subject to the LPG dispute and CE
Casecnan agreed not to take any further actions with respect to such
distributions without at least 15 days’ prior notice to LPG. Accordingly, 15% of
the dividend declarations in 2004, totaling $15.9 million
($8.0 million in the first quarter of 2004), was set aside in a separate
bank account in the name of the Company and is shown as restricted cash and
investments and dividends payable in the accompanying balance sheets at March
31, 2005 and December 31, 2004, respectively. The court is currently
expected to rule on the first phase of the litigation before the end of the
second quarter of 2005.
Real
Property Tax
On
December 6, 2004, the Municipality of Alfonso Castaneda (the
“Municipality”), Province of Nueva Vizcaya (the “Province”) passed an ordinance
which required the submission of a tax clearance from each of the provincial
treasurer and municipal treasurer as a condition to issuing to CE Casecnan the
annual renewal of its license to operate and business permit. On
January 17, 2005, the Office of the Treasurer of the Municipality
provided CE Casecnan a copy of such ordinance and threatened to close the
Casecnan Project pending submittal by CE Casecnan of the tax clearance
certificate. CE Casecnan cannot obtain a tax clearance certificate from the
Province until real property taxes due to the Province are paid. Pursuant to the
Supplemental Agreement, before paying such real property taxes CE Casecnan
must either receive direction from NIA and the Philippine Department of Finance
or be subject to risk of imminent assessment of penalties for non payment. These
taxes have been fully accrued as of March 31, 2005 and December 31, 2004 as part
of accounts payable and trade receivable. CE Casecnan continues to seek such
direction but as of April 29, 2005, it has not been received. CE Casecnan
filed an action in the Regional Trial Court on January 21, 2005,
against the Municipality and was granted a temporary restraining order barring
the Municipality from closing the Casecnan Project. On
February 7, 2005, the temporary restraining order was extended until
the court resolves the petition for an injunction. CE Casecnan also has
filed an appeal with the Philippine Department of Justice challenging the
validity of the municipal ordinance. As of April 29, 2005, the order of the
court affirming the agreement of the parties to maintain in status quo remains
in force.
CE
Casecnan intends to continue discussing this matter with appropriate Philippine
government officials in an effort to resolve the situation. CE Casecnan believes
the risk of the Casecnan Project being closed is remote.
12
Value-added
Tax Legislation
The
Philippine House and Senate each has passed a bill which reimposes value-added
tax on electricity but prohibits certain electricity generators from passing on
the value-added tax to their customers. The House and Senate bills are being
reconciled in a Philippine congressional bicameral conference committee.
If signed into law, a final bill prohibiting CE Casecnan from invoicing NIA for,
and getting paid, value-added tax may trigger the change in law provision of the
Project Agreement, which obligates NIA to negotiate amendments to the Project
Agreement which would keep CE Casecnan whole for the adverse impact of such a
change in law. CE Casecnan believes that a failure by NIA to
agree to such amendments would entitle CE Casecnan to demand that the Philippine
government purchase CE Casecnan's interest in the project at a price equal to
the net present value of the energy and water delivery fee payments over the
remaining term of the Project Agreement. NIA and the Philippine government may
challenge any efforts by CE Casecnan to demand that its interest be so
purchased. CE Casecnan is closely monitoring developments in this
regard in the Philippines, and intends to vigorously defend its rights should a
final bill containing a no pass through provision be signed into law.
Contractual Obligations
and Commercial Commitments
During
the three months ended March 31, 2005, there were no material changes
in the contractual obligations and commercial commitments
from the information provided in Item 7 of the Company’s Annual Report on Form
10-K for the year ended December 31, 2004.
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, 2004 describes the significant accounting
policies and methods used in the preparation of the financial statements.
Estimates are used for, but not limited to, the impairment of long-lived assets
and accounting for the allowance for doubtful accounts. Actual results could
differ from 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, 2004.
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, 2004. CE Casecnan’s exposure to market risk has not
changed materially since December 31, 2004.
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
March 31, 2005. 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 changes during the quarter covered by this report in the Company’s
internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
13
For a
description of certain legal proceedings affecting the Company, please review
Note 4 to the Interim Financial Statements, "Commitments and
Contingencies".
Not
applicable.
Not
applicable.
Not
applicable.
Not
applicable.
The
exhibits listed on the accompanying Exhibit Index are filed as part of this
Quarterly Report.
14
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 6, 2005 |
|
/s/
Patrick J. Goodman |
| |
|
Patrick
J. Goodman |
| |
|
Senior
Vice President and Chief Financial Officer |
15
|
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. |
16