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, 2006
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 ¨ No T
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See the definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨ | Accelerated filer ¨ | Non-accelerated filer T |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No T
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 May 4, 2006, the number of outstanding shares of $0.038 par value common stock was 767,162.
TABLE OF CONTENTS
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, 2006, and the related statements of operations and cash flows for each of the three-month periods ended March 31, 2006 and 2005. 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, 2005, and the related statements of operations, of changes in stockholders’ equity and of cash flows for the year then ended (not presented herein), and in our report dated February 8, 2006, 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, 2005, is fairly stated in all material respects in relation to the balance sheet from which it has been derived.
/s/ Isla Lipana & Co.
ISLA LIPANA & CO.
A PricewaterhouseCoopers Member Firm
Makati City, Philippines
May 4, 2006
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, | |
| | | 2006 | | 2005 | |
| | | (Unaudited) | | | |
ASSETS |
| Current assets: | | | | | | | |
| Cash and cash equivalents | | $ | 77,926 | | $ | 42,317 | |
| Restricted cash and investments | | | 47,493 | | | 44,956 | |
| Trade receivable, net | | | 21,797 | | | 26,638 | |
| Prepaid insurance and other current assets | | | 5,540 | | | 5,215 | |
| Total current assets | | | 152,756 | | | 119,126 | |
| Bond issue costs, net | | | 1,573 | | | 1,745 | |
| Property, plant and equipment, net | | | 338,961 | | | 344,051 | |
| Deferred income tax | | | 5,095 | | | 5,095 | |
Total assets | | $ | 498,385 | | $ | 470,017 | |
| | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY |
| Current liabilities: | | | | | | | |
| Accounts payable and other accrued liabilities | | $ | 8,749 | | $ | 7,156 | |
| Dividends payable | | | 17,550 | | | 17,550 | |
| Accrued interest | | | 16,089 | | | 10,592 | |
| Payable to affiliates | | | 33,543 | | | 35,358 | |
| Current portion of long-term debt | | | 36,015 | | | 36,015 | |
| Total current liabilities | | | 111,946 | | | 106,671 | |
| | | | | | | | |
| Notes payable | | | 51,263 | | | 51,263 | |
| Deferred revenue | | | 15,637 | | | 13,756 | |
| Long-term debt, net of current portion | | | 106,330 | | | 106,330 | |
| Total liabilities | | | 285,176 | | | 278,020 | |
| | | | | | | | |
| Commitments and contingencies (Note 3) | | | | | | | |
| | | | | | | | |
| Stockholders’ equity: | | | | | | | |
| Capital stock - 2,148,000 shares authorized, 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 | | | 89,373 | | | 68,161 | |
| Total stockholders’ equity | | | 213,209 | | | 191,997 | |
Total liabilities and stockholders’ equity | | $ | 498,385 | | $ | 470,017 | |
| | | | | | | | |
The accompanying notes are an integral part of these financial statements.
CE CASECNAN WATER AND ENERGY COMPANY, INC.
STATEMENTS OF OPERATIONS
(Amounts in thousands of U.S. Dollars)
| | | Three Months | |
| | | Ended March 31, | |
| | | 2006 | | 2005 | |
| | | (Unaudited) |
Revenue: | | | | | | | |
| Lease rentals and service contracts | | $ | 32,727 | | $ | 21,149 | |
Operating expenses: | | | | | | | |
| Depreciation | | | 5,393 | | | 5,434 | |
| Plant operations and other operating expenses | | | 1,995 | | | 2,018 | |
| Total operating expenses | | | 7,388 | | | 7,452 | |
| | | | | | | | |
Operating income | | | 25,339 | | | 13,697 | |
| | | | | | | | |
Other income (expense): | | | | | | | |
| Interest expense | | | (5,668 | ) | | (6,628 | ) |
| Interest income | | | 869 | | | 570 | |
| Other, net | | | 1,208 | | | 150 | |
| Total other expense, net | | | (3,591 | ) | | (5,908 | ) |
| | | | | | | | |
Income before provision for income tax | | | 21,748 | | | 7,789 | |
| | | | | | | | |
Provision for income tax | | | 536 | | | - | |
| | | | | | | | |
Net income | | $ | 21,212 | | $ | 7,789 | |
| | | | | | | | |
The accompanying notes are an integral part of these financial statements.
CE CASECNAN WATER AND ENERGY COMPANY, INC.
STATEMENTS OF CASH FLOWS
(Amounts in thousands of U.S. Dollars)
| | | Three Months | |
| | | Ended March 31, | |
| | | 2006 | | 2005 | |
| | | (Unaudited) | |
| | | | | | | | |
Cash flows from operating activities: | | | | | | | |
| Net income | | $ | 21,212 | | $ | 7,789 | |
| Adjustments to reconcile net income to cash flows from operating activities: | | | | | | | |
| Depreciation | | | 5,393 | | | 5,434 | |
| Amortization of bond issue costs | | | 172 | | | 233 | |
| Changes in other items: | | | | | | | |
| Trade receivable, net | | | 4,841 | | | 6,167 | |
| Prepaid insurance and other current assets | | | (325 | ) | | 1,156 | |
| Accounts payable and other accrued liabilities | | | 1,593 | | | (940 | ) |
| Accrued interest | | | 5,497 | | | 6,395 | |
| Deferred revenue | | | 1,881 | | | 1,647 | |
| Net cash flows from operating activities | | | 40,264 | | | 27,881 | |
| | | | | | | | |
Cash flows from investing activities: | | | | | | | |
| Additions to property, plant and equipment | | | (303 | ) | | (52 | ) |
| Increase in restricted cash and investments for debt service | | | | | | | |
| obligations and dividends payable | | | (2,537 | ) | | (358 | ) |
| Net cash flows used in investing activities | | | (2,840 | ) | | (410 | ) |
| | | | | | | | |
Cash flows from financing activities: | | | | | | | |
| Decrease in payable to affiliates | | | (1,815 | ) | | (35 | ) |
| Net cash flows used in financing activities | | | (1,815 | ) | | (35 | ) |
| | | | | | | | |
Net change in cash and cash equivalents | | | 35,609 | | | 27,436 | |
Cash and cash equivalents at beginning of period | | | 42,317 | | | 16,732 | |
Cash and cash equivalents at end of period | | $ | 77,926 | | $ | 44,168 | |
| | | | | | | | |
Supplemental disclosure: | | | | | | | |
| Interest paid | | $ | 236 | | $ | 324 | |
| | | | | | | | |
The accompanying notes are an integral part of these financial statements.
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, 2006, and the results of operations and cash flows for each of the three-month periods ended March 31, 2006 and 2005. The results of operations for the three-month period ended March 31, 2006 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 (“Project Agreement”), as amended by the Supplemental Agreement dated September 29, 2003 (the “Supplemental 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. Construction of the Casecnan Project commenced in 1995. CE Casecnan is registered with the Philippine Board of Investments as a new operator of hydroelectric power plant with pioneer status under the Omnibus Investments Code of 1987. Under the terms of its registration, CE Casecnan is entitled to certain incentives which include an income tax holiday for six years from the start of commercial operations. The Casecnan Project Cooperation Period began upon commencement of commercial operations on December 11, 2001. The income tax holiday will expire on December 11, 2007.
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, 2005. 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. | 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 $33.5 million and $35.4 million at March 31, 2006 and December 31, 2005, respectively. Costs incurred by the Company in transactions with related parties amounted to $0.3 million for each of the three-month periods ended March 31, 2006 and 2005.
As of March 31, 2006 and December 31, 2005, the Company had outstanding $51.3 million of unsecured subordinated notes payable to CE Casecnan Ltd., a stockholder. On November 1, 2005, the Company extended the due date of the notes from November 15, 2005 to November 1, 2006 and amended the interest rate to 10% per annum. On December 6, 2005, the notes’ original maturity date was changed to November 1, 2015 and the interest rate from LIBOR plus 2% to LIBOR plus 5.25%; provided, however, that CE Casecnan Ltd. can demand payment of the outstanding principal amount at any time prior to the maturity date. The interest is payable every May 15 and November 15. Interest expense on the notes was $1.2 million and $0.6 million during the three-month periods ended March 31, 2006 and 2005, respectively. Any overdue payment of principal or interest payable on the notes shall increase the annual interest by two (2%) percent. At March 31, 2006, the effective interest rate on the notes was 9.8%. The notes may be prepaid at any time without premium or penalty but with accrued interest, if any. The unsecured subordinated notes and any and all payments, whether of principal, interest or otherwise are subject in all respects to the terms of the Subordination Agreement dated November 15, 2001 between CE Casecnan Ltd. and the Company in favor of the Trustee, the Collateral Agent, the co-collateral agent, the Depositary, any party that becomes a Permitted Counterparty under an Interest Rate/Currency Protection Agreement, and 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 repay the notes or convert them to some form of capital prior to maturity.
3. | 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 CE Casecnan Ltd. and MidAmerican. LPG’s complaint, as amended, seeks compensatory and punitive damages arising out of CE Casecnan Ltd.’s and MidAmerican’s alleged improper calculation of the proforma financial projections and alleged improper settlement of the NIA arbitration. 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 and 2005, totaling $17.6 million, 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. On August 4, 2005, the court issued a decision, ruling in favor of LPG on five of the eight disputed issues in the first phase of the litigation. On September 12, 2005, LPG filed a motion seeking the release of the funds which have been set aside pursuant to the status quo agreement referred to above. MidAmerican and CE Casecnan Ltd. filed an opposition to the motion on October 3, 2005, and at the hearing on October 26, 2005, the court denied LPG’s motion. On January 3, 2006, the court entered a judgment in favor of LPG against CE Casecnan Ltd. According to the judgment LPG would retain its ownership of 15% of the shares of the Company and distributions of the amounts deposited into escrow plus interest at 9% per annum. On February 28, 2006, CE Casecnan Ltd. filed an appeal of this judgment and the August 4, 2005 decision. Initial briefs are due May 24, 2006. The appeal is expected to be resolved sometime in 2007.
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 against the Company in the Philippines in connection with certain aspects of its option to repurchase such shares. 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, the Company will vigorously defend such action. On July 1, 2005, MidAmerican and CE Casecnan Ltd. commenced an action against San Lorenzo in the District Court of Douglas County, Nebraska, seeking a declaratory judgment as to MidAmerican’s and CE Casecnan Ltd.'s rights vis-à-vis San Lorenzo in respect of such shares. San Lorenzo filed a motion to dismiss on September 19, 2005. Subsequently, San Lorenzo purported to exercise its option to repurchase such shares. On January 30, 2006, San Lorenzo filed a counterclaim against MidAmerican and CE Casecnan Ltd. seeking declaratory relief that it has effectively exercised its option to purchase 15% of the shares of the Company, that it is the rightful owner of such shares and that it is due all dividends paid on such shares. On March 9, 2006, the court granted San Lorenzo’s motion to dismiss, but has since permitted MidAmerican and CE Casecnan Ltd. to file an amended complaint incorporating the purported exercise of the option. The impact, if any, of San Lorenzo’s purported exercise of its option and the Nebraska litigation on the Company cannot be determined at this time.
Real Property Tax
On July 25, 2005, CE Casecnan paid real property taxes, plus interest and penalties, due to the Province of Nueva Vizcaya of $4.5 million and submitted an invoice for reimbursement of such amount to NIA in accordance with the Supplemental Agreement. A receivable of $4.5 million was recorded for the expected full reimbursement to CE Casecnan in respect of the Province of Nueva Vizcaya tax assessment. On January 24, 2006, NIA, the Philippine Department of Finance (the “DOF”) and CE Casecnan agreed that NIA will reimburse CE Casecnan the full amount of the Province of Nueva Vizcaya tax assessment in five approximately equal installments during 2006. CE Casecnan has received the first two payments, totaling $2.0 million, on March 3, 2006 and March 28, 2006, respectively. The remaining payments, totaling $2.5 million, are due on June 25, September 25, and December 25, 2006, respectively.
On December 28, 2005, CE Casecnan paid real property taxes of $4.7 million to the Province of Nueva Ecija. CE Casecnan has received letters from NIA and the DOF, respectively, authorizing the payment. A receivable of $4.7 million has been recorded for the expected full reimbursement to CE Casecnan in respect of the Province of Nueva Ecija tax assessment. The DOF and CE Casecnan agreed that NIA will reimburse CE Casecnan the full amount of real property taxes with an initial payment of $2.0 million in April 2006 and the remaining balance in three approximately equal installments of $0.9 million on June 25, September 25 and December 25, respectively. The initial payment is expected to be received by CE Casecnan in May 2006.
On January 12, 2006, CE Casecnan received an assessment from the treasurer of the Province of Nueva Vizcaya in the total amount of $1.2 million for the real property taxes for 2006. On March 23, 2006, CE Casecnan received the assessment for 2006 real property taxes amounting to $0.9 million from the treasurer of the Province of Nueva Ecija. CE Casecnan subsequently received written authorization from NIA and the DOF to pay such assessments and thereafter paid both assessments under protest on March 31, 2006. The 2006 real property taxes were billed to NIA pursuant to the Supplemental Agreement and are expected to be reimbursed by NIA to the Company in the ordinary course of business. On April 27, 2006, CE Casecnan filed protests to the treasurers of the Province of Nueva Vizcaya and the Province of Nueva Ecija.
Franchise Tax
On January 27, 2006, CE Casecnan received from the Province of Nueva Vizcaya a franchise tax assessment for the years 2001 to 2004 totaling $1.6 million. CE Casecnan believes that franchise tax is a tax imposed on companies which have a secondary or special franchise from the government. CE Casecnan does not have a government franchise. The Electric Power Industry Reform Act (“EPIRA”) specifically provides that a government franchise is not required to operate a power plant. The EPIRA further provides that power generation is not a public utility operation and that it does not require a franchise. On April 25, 2006, CE Casecnan filed an appeal with the Regional Trial Court of Nueva Vizcaya.
On March 30, 2006, CE Casecnan received from the Province of Nueva Vizcaya a franchise tax assessment for the year 2005 totaling $0.3 million. CE Casecnan filed a protest with the treasurer of the Province of Nueva Vizcaya on April 5, 2006.
Concentration of Risk
NIA’s 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.
The increase in restricted cash and investments for debt service obligations and dividends payable has been reclassified from financing activities to investing activities, while interest and other receivables have been aggregated with prepaid insurance and other assets in the 2005 statement of cash flows to conform to the current period presentation.
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 related thereto included elsewhere in this report. 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, collections, pricing strategies, changes in the utility industry, 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”), as amended by the Supplemental Agreement dated September 29, 2003 (the “Supplemental 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. Construction of the Casecnan Project commenced in 1995. CE Casecnan is registered with the Philippine Board of Investments as a new operator of hydroelectric power plant with pioneer status under the Omnibus Investments Code of 1987. Under the terms of its registration, CE Casecnan is entitled to certain incentives which include an income tax holiday for six years from the start of commercial operations. The Casecnan Project Cooperation Period began upon commencement of commercial operations on December 11, 2001. The income tax holiday will expire on December 11, 2007.
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. The contractual terms for 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 fee credit (deferred revenue) 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 fee 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 fee 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.
The Company earns guaranteed energy fees based upon an assumed delivery of 19.0 gigawatt-hours (“GWh”) per month, at a rate of $0.1596 per kilowatt-hour (“kWh”). The Company earns variable energy fees based upon actual energy delivered in each month in excess of 19.0 GWh, payable at a rate of $0.1509 per kWh. Starting in 2009, the kWh rate for energy deliveries in excess of 19.0 GWh per month is reduced to $0.1132, escalating at 1% per annum thereafter. 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. 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, 2006 and 2005
The following table provides certain operating data of the Casecnan Project for the three-month periods ended March 31, 2006 and 2005:
| | 2006 | | 2005 |
| Electricity produced (GWh) | 120.6 | | 42.4 |
| Water delivered (million cubic meters) | 216.4 | | 73.0 |
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):
| | | 2006 | | | 2005 | |
| Water delivery fees | $ | 13.9 | | $ | 12.9 | |
| Guaranteed energy fees | | 9.1 | | | 9.1 | |
| Variable energy fees | | 11.6 | | | 0.7 | |
| Deferred water delivery fees | | (1.9 | ) | | (1.6 | ) |
| Total lease rentals and service contracts revenue | $ | 32.7 | | $ | 21.1 | |
Revenue increased by $11.6 million to $32.7 million for the three-month period ended March 31, 2006 from $21.1 million for the three-month period ended March 31, 2005. The increase in water delivery fees was mainly due to the contractual 7.5% annual escalation factor. The increase in the variable energy fees was due primarily to the higher than normal rainfall which resulted in higher electricity production in the first quarter of 2006 than in 2005. 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.
Interest expense decreased to $5.7 million for the three-month period ended March 31, 2006 from $6.6 million for the three-month period ended March 31, 2005, due to lower outstanding debt balances resulting from the scheduled repayment of debt.
Other income increased to $1.2 million for the three-month period ended March 31, 2006 from $0.2 million for the three-month period ended March 31, 2005. The higher other income was due to value-added tax (“VAT”) recoveries exceeding obligations as a result of a change in the VAT law which became effective on November 1, 2005 and gains from translation of foreign currency denominated monetary assets and liabilities.
Income tax expense increased to $0.5 million for the three-month period ended March 31, 2006 from zero for the three-month period ended March 31, 2005. The income tax expense relates to interest income earned outside the Philippines which is not covered by the income tax holiday.
Liquidity and Capital Resources
The Company's cash and cash equivalents were $77.9 million and $42.3 million at March 31, 2006 and December 31, 2005, respectively.
The Company generated cash flows from operations of $40.3 million and $27.9 million for the three-month periods ended March 31, 2006 and 2005, respectively. The increase in cash from operations in 2006 was primarily due to higher net income as a result of higher water flows and corresponding variable energy revenues.
The Company used $2.8 million and $0.4 million for investing activities for the three-month periods ended March 31, 2006 and 2005, respectively. During the three-month period ended March 31, 2006, the Company increased its restricted cash related to obligations for debt service and unpaid dividends by $2.5 million.
The Company used $1.8 million and $0.1 million for financing activities for the three-month periods ended March 31, 2006 and 2005, respectively. Advances from MidAmerican to the Company were repaid in March 2006. On April 26, 2006, the Company paid dividends of $45.0 million, $6.8 million of which was deposited into an escrow account pending final resolution of the stockholder litigation described below.
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 CE Casecnan Ltd. and MidAmerican. LPG’s complaint, as amended, seeks compensatory and punitive damages arising out of CE Casecnan Ltd.’s and MidAmerican’s alleged improper calculation of the proforma financial projections and alleged improper settlement of the NIA arbitration. 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 and 2005, totaling $17.6 million, 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. On August 4, 2005, the court issued a decision, ruling in favor of LPG on five of the eight disputed issues in the first phase of the litigation. On September 12, 2005, LPG filed a motion seeking the release of the funds which have been set aside pursuant to the status quo agreement referred to above. MidAmerican and CE Casecnan Ltd. filed an opposition to the motion on October 3, 2005, and at the hearing on October 26, 2005, the court denied LPG’s motion. On January 3, 2006, the court entered a judgment in favor of LPG against CE Casecnan Ltd. According to the judgment LPG would retain its ownership of 15% of the shares of the Company and distributions of the amounts deposited into escrow plus interest at 9% per annum. On February 28, 2006, CE Casecnan Ltd. filed an appeal of this judgment and the August 4, 2005 decision. Initial briefs are due May 24, 2006. The appeal is expected to be resolved sometime in 2007.
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 against the Company in the Philippines in connection with certain aspects of its option to repurchase such shares. 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, the Company will vigorously defend such action. On July 1, 2005, MidAmerican and CE Casecnan Ltd. commenced an action against San Lorenzo in the District Court of Douglas County, Nebraska, seeking a declaratory judgment as to MidAmerican’s and CE Casecnan Ltd.'s rights vis-à-vis San Lorenzo in respect of such shares. San Lorenzo filed a motion to dismiss on September 19, 2005. Subsequently, San Lorenzo purported to exercise its option to repurchase such shares. On January 30, 2006, San Lorenzo filed a counterclaim against MidAmerican and CE Casecnan Ltd. seeking declaratory relief that it has effectively exercised its option to purchase 15% of the shares of the Company, that it is the rightful owner of such shares and that it is due all dividends paid on such shares. On March 9, 2006 the court granted San Lorenzo’s motion to dismiss, but has since permitted MidAmerican and CE Casecnan Ltd. to file an amended complaint incorporating the purported exercise of the option. The impact, if any, of San Lorenzo’s purported exercise of its option and the Nebraska litigation on the Company cannot be determined at this time.
Real Property Tax
On July 25, 2005, CE Casecnan paid real property taxes, plus interest and penalties, due to the Province of Nueva Vizcaya of $4.5 million and submitted an invoice for reimbursement of such amount to NIA in accordance with the Supplemental Agreement. A receivable of $4.5 million was recorded for the expected full reimbursement to CE Casecnan in respect of the Province of Nueva Vizcaya tax assessment. On January 24, 2006, NIA, the Philippine Department of Finance (the “DOF”) and CE Casecnan agreed that NIA will reimburse CE Casecnan the full amount of the Province of Nueva Vizcaya tax assessment in five approximately equal installments during 2006. CE Casecnan has received the first two payments, totaling $2.0 million, on March 3, 2006 and March 28, 2006, respectively. The remaining payments, totaling $2.5 million, are due on June 25, September 25, and December 25, 2006, respectively.
On December 28, 2005, CE Casecnan paid real property taxes of $4.7 million to the Province of Nueva Ecija. CE Casecnan has received letters from NIA and the DOF, respectively, authorizing the payment. A receivable of $4.7 million has been recorded for the expected full reimbursement to CE Casecnan in respect of the Province of Nueva Ecija tax assessment. The DOF and CE Casecnan agreed that NIA will reimburse CE Casecnan the full amount of real property taxes with an initial payment of $2.0 million in April 2006 and the remaining balance in three approximately equal installments of $0.9 million on June 25, September 25 and December 25, respectively. The initial payment is expected to be received by CE Casecnan in May 2006.
On January 12, 2006, CE Casecnan received an assessment from the treasurer of the Province of Nueva Vizcaya in the total amount of $1.2 million for the real property taxes for 2006. On March 23, 2006, CE Casecnan received the assessment for 2006 real property taxes amounting to $0.9 million from the treasurer of the Province of Nueva Ecija. CE Casecnan subsequently received written authorization from NIA and the DOF to pay such assessments and thereafter paid both assessments under protest on March 31, 2006. The 2006 real property taxes were billed to NIA pursuant to the Supplemental Agreement and are expected to be reimbursed by NIA to the Company in the ordinary course of business. On April 27, 2006, CE Casecnan filed protests to the treasurers of the Province of Nueva Vizcaya and the Province of Nueva Ecija.
Franchise Tax
On January 27, 2006, CE Casecnan received from the Province of Nueva Vizcaya a franchise tax assessment for the years 2001 to 2004 totaling $1.6 million. CE Casecnan believes that franchise tax is a tax imposed on companies which have a secondary or special franchise from the government. CE Casecnan does not have a government franchise. The EPIRA specifically provides that a government franchise is not required to operate a power plant. The EPIRA further provides that power generation is not a public utility operation and that it does not require a franchise. On April 25, 2006, CE Casecnan filed an appeal with the Regional Trial Court of Nueva Vizcaya.
On March 30, 2006, CE Casecnan received from the Province of Nueva Vizcaya a franchise tax assessment for the year 2005 totaling $0.3 million. CE Casecnan filed a protest with the treasurer of the Province of Nueva Vizcaya on April 5, 2006.
Concentration of Risk
NIA’s 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.
Contractual Obligations and Commercial Commitments
During the three months ended March 31, 2006, 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, 2005.
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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 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 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, 2005. The Company’s critical accounting policies have not changed since December 31, 2005.
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, 2005. CE Casecnan’s exposure to market risk has not changed materially since December 31, 2005.
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, 2006. 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.
For a description of certain legal proceedings affecting the Company, please review Note 3 “Commitments and Contingencies” to the Interim Financial Statements.
There has been no material change to the Company’s risk factors from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.
Not applicable.
Not applicable.
Not applicable.
Not applicable.
The exhibits listed on the accompanying Exhibit Index are filed as part of this Quarterly Report.
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) |
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| Date: May 4, 2006 | | /s/ Patrick J. Goodman |
| | | Patrick J. Goodman |
| | | Senior Vice President and Chief Financial Officer |
Exhibit No. | | |
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| 31.1 | | Chief Executive Officer’s Certificate Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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| 31.2 | | Chief Financial Officer’s Certificate Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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| 32.1 | | Chief Executive Officer’s Certificate Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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| 32.2 | | Chief Financial Officer’s Certificate Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
