Ce Casecnan Water & Energy 10-Q 2006 Q3 Quarterly report

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 September 30, 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 མ 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 October 26, 2006, the number of outstanding shares of $0.038 par value common stock was 767,162.

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	12
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	18
Item 4.	Controls and Procedures	18

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	19
Item 1A.	Risk Factors	19
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	19
Item 3.	Defaults Upon Senior Securities	19
Item 4.	Submission of Matters to a Vote of Security Holders	19
Item 5.	Other Information	19
Item 6.	Exhibits	19
Signatures		20
Exhibit Index		21

2

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

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 September 30, 2006, and the related statements of operations for each of the three-month and nine-month periods ended September 30, 2006 and 2005 and of changes in stockholders’ equity and of cash flows for each of the nine-month periods ended September 30, 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

October 26, 2006

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CE CASECNAN WATER AND ENERGY COMPANY, INC.

BALANCE SHEETS (Unaudited)

(Amounts in thousands of U.S. Dollars, except share data)

	As of
	September 30,		December 31,
	2006		2005
ASSETS
Current assets:
Cash and cash equivalents	$	25,547	$	42,317
Restricted cash and investments		83,196		44,956
Trade receivable, net		19,817		26,638
Prepaid insurance and other current assets		4,845		5,215
Total current assets		133,405		119,126
Bond issue costs, net		1,229		1,745
Property, plant and equipment, net		329,621		344,051
Deferred income tax		5,095		5,095
Total assets	$	469,350	$	470,017
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and other accrued liabilities	$	9,274	$	7,156
Dividends payable		27,450		17,550
Accrued interest		17,942		10,592
Payable to affiliates		34,268		35,358
Current portion of long-term debt		36,873		36,015
Total current liabilities		125,807		106,671
Notes payable		51,263		51,263
Deferred revenue		19,397		13,756
Long-term debt, net of current portion		87,465		106,330
Total liabilities		283,932		278,020
Commitments and contingencies (Note 5)
Stockholders’ equity:
Common 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		61,582		68,161
Total stockholders’ equity		185,418		191,997
Total liabilities and stockholders’ equity	$	469,350	$	470,017

The accompanying notes are an integral part of these financial statements.

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CE CASECNAN WATER AND ENERGY COMPANY, INC.

STATEMENTS OF OPERATIONS (Unaudited)

(Amounts in thousands of U.S. Dollars)

	Three Months						Nine Months
	Ended September30,						Ended September 30,
	2006			2005			2006			2005
Revenue:
Lease rentals and service contracts	$	40,585		$	27,721		$	95,118		$	69,503
Operating expenses:
Depreciation		5,515			5,317			16,260			16,198
Plant operations and other operating expenses		2,547			2,552			6,627			6,689
Total operating expenses		8,062			7,869			22,887			22,887
Operating income		32,523			19,852			72,231			46,616
Other income (expense):
Interest expense		(5,247	)		(5,982	)		(16,371	)		(18,916	)
Interest income		690			148			2,269			1,281
Other, net		1,336			(102	)		2,963			(52	)
Total other expense, net		(3,221	)		(5,936	)		(11,139	)		(17,687	)
Income before provision for income tax		29,302			13,916			61,092			28,929
Provision for income tax		557			13			1,671			13
Net income	$	28,745		$	13,903		$	59,421		$	28,916

The accompanying notes are an integral part of these financial statements.

5

CE CASECNAN WATER AND ENERGY COMPANY, INC.

STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)

(Amounts in thousands of U.S. Dollars)

	Outstanding				Additional
	Common		Common		Paid-in		Retained
	Shares		Stock		Capital		Earnings			Total
January 1, 2005		767,162	$	29	$	123,807	$	27,152		$	150,988
Net income		-		-		-		28,916			28,916
Dividends declared		-		-		-		(11,000	)		(11,000	)
Balance, September 30, 2005		767,162	$	29	$	123,807	$	45,068		$	168,904
January 1, 2006		767,162	$	29	$	123,807	$	68,161		$	191,997
Net income		-		-		-		59,421			59,421
Dividends declared		-		-		-		(66,000	)		(66,000	)
Balance, September 30, 2006		767,162	$	29	$	123,807	$	61,582		$	185,418

The accompanying notes are an integral part of these financial statements.

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CE CASECNAN WATER AND ENERGY COMPANY, INC.

STATEMENTS OF CASH FLOWS (Unaudited)

(Amounts in thousands of U.S. Dollars)

	Nine Months
	Ended September 30,
	2006			2005
Cash flows from operating activities:
Net income	$	59,421		$	28,916
Adjustments to reconcile net income to cash flows from operating activities:
Depreciation		16,260			16,198
Amortization of bond issue costs		516			700
Changes in other items:
Trade receivable, net		6,821			(2,894	)
Prepaid insurance and other current assets		370			3,701
Accounts payable and other accrued liabilities		2,118			(2,623	)
Accrued interest		7,350			6,562
Deferred revenue		5,641			5,031
Net cash flows from operating activities		98,497			55,591
Cash flows from investing activities:
Additions to property, plant and equipment		(1,830	)		(92	)
Increase in restricted cash and investments for debt service obligations and dividends payable		(38,240	)		(640	)
Net cash flows used in investing activities		(40,070	)		(732	)
Cash flows from financing activities:
Increase (decrease) in payable to affiliates		(1,090	)		384
Repayment of project financing debt		(18,007	)		(27,376	)
Cash dividends paid		(56,100	)		(9,350	)
Net cash flows used in financing activities		(75,197	)		(36,342	)
Net change in cash and cash equivalents		(16,770	)		18,517
Cash and cash equivalents at beginning of period		42,317			16,732
Cash and cash equivalents at end of period	$	25,547		$	35,249
Supplemental disclosure:
Interest paid	$	9,656		$	13,230
Dividends declared but not paid	$	9,900		$	1,650

The accompanying notes are an integral part of these financial statements.

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CE CASECNAN WATER AND ENERGY COMPANY, INC.

NOTES TO FINANCIAL STATEMENTS

(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”) 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 September 30, 2006, and the results of operations for each of the three-month and nine-month periods ended September 30, 2006 and 2005 and the changes in stockholders’ equity and the cash flows for the nine-month periods ended September 30, 2006 and 2005. The results of operations for the three-month and nine-month periods ended September 30, 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 Project Agreement. 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 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 dependent 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 can produce significant variability in revenue between reporting periods.

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. New AccountingPronouncements

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes,” and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a return. Guidance is also provided on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact of adopting FIN 48 on its financial position and results of operations.

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3. Restricted cash and Investments

Restricted cash and investments consist of the following (in thousands):

	September 30, 2006		December 31, 2005
Debt service reserve fund	$	51,713	$	26,718
Dividend set aside account		31,483		18,238
	$	83,196	$	44,956

4. 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 $34.3 million and $35.4 million at September 30, 2006 and December 31, 2005, respectively. Costs incurred by the Company in transactions with related parties amounted to $1.0 million and $0.5 million for the three-month periods ended September 30, 2006 and 2005, respectively, and $1.6 million and $1.1 million for the nine-month periods ended September 30, 2006 and 2005, respectively.

As of September 30, 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 each May 15 and November 15. Interest expense on the notes was $1.4 million and $0.7 million during the three-month periods ended September 30, 2006 and 2005, respectively, and $3.9 million and $1.9 million during the nine-month periods ended September 30, 2006 and 2005, respectively. Any overdue payment of principal or interest payable on the notes shall increase the annual interest rate by two percentage points. At September 30, 2006, the effective interest rate on the notes was 10.53%. 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 other form of capital prior to maturity.

5. 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, 2005 and 2006, totaling $27.5 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. The appeal is fully briefed and is expected to be resolved sometime in 2007. The parties are proceeding in the trial court on LPG’s remaining claim against MidAmerican for damages for alleged breach of fiduciary duty. This claim is expected to be resolved sometime in 2007.

9

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 complaint has been amended and the action is proceeding. The matter is currently in the early stages of discovery. 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 installments during 2006. CE Casecnan has received the first four payments, totaling $3.9 million. The last payment of $0.6 million is due on December 25, 2006.

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. As agreed, NIA has reimbursed CE Casecnan a total of $3.9 million in 2006. The final payment of $0.8 million is due on December 25, 2006.

The Company billed the 2006 real property taxes to NIA pursuant to the Supplemental Agreement and received timely payment from NIA. On April 27, 2006, CE Casecnan filed protests to the treasurers of the Province of Nueva Vizcaya and the Province of Nueva Ecija in order to preserve the rights and remedies of NIA which is ultimately liable for the tax. As a government owned and controlled corporation, NIA may be subject to a lower assessment level or be exempt from the tax.

10

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. On April 25, 2006, CE Casecnan filed an appeal with the Regional Trial Court of Nueva Vizcaya. 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”) provides that power generation is not a public utility operation and does not require a franchise.

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. On June 30, 2006, CE Casecnan filed an appeal to the Regional Trial Court of Nueva Vizcaya after the province failed to act on the protest within the period required by law. CE Casecnan moved to consolidate the two cases, which was granted by the court. The consolidated cases are set for pre-trial on November 24, 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.

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 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 Project Agreement. 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 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 dependent 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.

12

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. The per cubic meter water delivery fee rate is $0.029 per cubic meter as of January 1, 1994 and escalated at 7.5% per annum, pro-rated on a monthly basis, through the end of the fifth year of the Cooperation Period and then kept flat at that level for the last 15 years of the Cooperation Period. 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, reduced to 0.98 Philippine pesos starting 2009 and escalated at 1% per annum thereafter. 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 September 30, 2006 and 2005

The following table provides certain operating data of the Casecnan Project for the three-month periods ended September 30, 2006 and 2005:

	2006	2005
Electricity produced (GWh)	190.7	148.2
Water delivered (million cubic meters)	358.4	258.9

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	$	14.4		$	13.4
Guaranteed energy fees		9.1			9.1
Variable energy fees		19.0			6.9
Deferred water delivery fees		(1.9	)		(1.7	)
Total lease rentals and service contracts revenue	$	40.6		$	27.7

Revenue increased by $12.9 million to $40.6 million for the three-month period ended September 30, 2006 from $27.7 million for the same period in 2005. The increase in water delivery fees was due to the contractual 7.5% annual escalation factor. The increase in the variable energy fees was due primarily to the higher rainfall which resulted in higher electricity production in the third 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.

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Interest expense decreased by $0.7 million to $5.2 million for the three-month period ended September 30, 2006 from $6.0 million for the same period in 2005, due to lower outstanding debt balances resulting from the scheduled repayment of debt.

Interest income increased to $0.7 million for the three-month period ended September 30, 2006 from $0.1 million for the same period in 2005 primarily due to higher interest rates and higher average cash and cash equivalents and restricted cash and investments balances.

Other, net increased to $1.3 million for the three-month period ended September 30, 2006 from $(0.1) million for the same period in 2005. The higher other, net 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.

Income tax expense increased to $0.6 million for the three-month period ended September 30, 2006 from $- million for the same period in 2005. The income tax expense relates to VAT recoveries and interest income earned outside the Philippines which are not covered by the income tax holiday.

Results of Operations for the Nine-Month Periods Ended September 30, 2006 and 2005

The following table provides certain operating data of the Casecnan Project for the nine-month period ended September 30, 2006 and 2005:

	2006	2005
Electricity produced (GWh)	369.4	224.0
Water delivered (million cubic meters)	676.9	387.6

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	$	42.6		$	39.6
Guaranteed energy fees		27.3			27.3
Variable energy fees		30.8			7.6
Deferred water delivery fees		(5.6	)		(5.0	)
Total water and energy fees	$	95.1		$	69.5

Revenue increased by $25.6 million to $95.1 million for the nine-month period ended September 30, 2006 from $69.5 million for the same period in 2005. The $3.0 million increase in water delivery fees was due to the 7.5% increase in the water delivery rate based on a contractual annual escalation factor. The $23.2 million increase in variable energy fees was due primarily to higher rainfall in the first nine months of 2006 than in 2005 which resulted in higher water deliveries and electricity production. 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 by $2.5 million to $16.4 million for the nine-month period ended September 30, 2006 from $18.9 million for the same period in 2005 due to lower outstanding debt balances resulting from the scheduled repayment of debt.

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Interest income increased by $1.0 million to $2.3 million for the nine-month period ended September 30, 2006 from $1.3 million for the same period in 2005 due to higher interest rates and higher cash and cash equivalents and restricted cash and investments balances.

Other, net increased to $3.0 million for the nine-month period ended September 30, 2006 from $(0.1) million for the same period in 2005. The higher other, net was due primarily to VAT recoveries exceeding obligations as a result of a change in the VAT law which became effective on November 1, 2005.

Income tax expense increased to $1.7 million for the nine-month period ended September 30, 2006 from $- million for the same period in 2005. The income tax expense relates to VAT recoveries and interest income earned outside the Philippines which are not covered by the income tax holiday.

Liquidity and Capital Resources

The Company’s cash and cash equivalents were $25.5 million and $42.3 million at September 30, 2006 and December 31, 2005, respectively.

The Company generated cash flows from operations of $98.5 million and $55.6 million for the nine-month periods ended September 30, 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, reimbursements from NIA for property taxes paid by CE Casecnan in 2005 and lower interest payments.

Cash flows used in investing activities were $40.1 million and $0.7 million for the nine-month periods ended September 30, 2006 and 2005, respectively. The Company increased its restricted cash and investments related to obligations for debt service and unpaid dividends by $38.2 million, of which $25.0 million relates to timing of the payments of debt service and $13.2 million relates to the increase in unpaid dividends.

Cash flows used in financing activities $75.2 million and $36.3 million for the nine-month periods ended September 30, 2006 and 2005, respectively. The Company declared dividends totaling $66.0 million during the nine-month period ended September 30, 2006 and $11.0 million during the same period in 2005 (of which $9.9 million and $1.7 million, respectively, were placed in an escrow account in the name of the Company and shown as restricted cash and investments and dividends payable in the accompanying balance sheets). The Company also repaid $18.0 million and $27.4 million on the balance of its outstanding debt obligations during the nine-month periods ended September 30, 2006 and 2005, respectively.

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, 2005 and 2006, totaling $27.5 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. The appeal is fully briefed and is expected to be resolved sometime in 2007. The parties are proceeding in the trial court on LPG’s remaining claim against MidAmerican for damages for alleged breach of fiduciary duty. This claim is expected to be resolved sometime in 2007.

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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 complaint has been amended and the action is proceeding. The matter is currently in the early stages of discovery. 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 installments during 2006. CE Casecnan has received the first four payments, totaling $3.9 million. The last payment of $0.6 million is due on December 25, 2006.

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. As agreed, NIA has reimbursed CE Casecnan a total of $3.9 million in 2006. The final payment of $0.8 million is due on December 25, 2006.

The Company billed the 2006 real property taxes to NIA pursuant to the Supplemental Agreement and received timely payment from NIA. On April 27, 2006, CE Casecnan filed protests to the treasurers of the Province of Nueva Vizcaya and the Province of Nueva Ecija in order to preserve the rights and remedies of NIA which is ultimately liable for the tax. As a government owned and controlled corporation, NIA may be subject to a lower assessment level or be exempt from the tax.

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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. On April 25, 2006, CE Casecnan filed an appeal with the Regional Trial Court of Nueva Vizcaya. 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”) provides that power generation is not a public utility operation and does not require a franchise. 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. On June 30, 2006, CE Casecnan filed an appeal to the Regional Trial Court of Nueva Vizcaya after the province failed to act on the protest within the period required by law. CE Casecnan moved to consolidate the two cases, which was granted by the court. The consolidated cases are set for pre-trial on November 24, 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.

ContractualObligations andCommercialCommitments

During the nine months ended September 30, 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.

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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, 2005. CE Casecnan’s exposure to market risk has not changed materially since December 31, 2005.

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 September 30, 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.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

For a description of certain legal proceedings affecting the Company, please review Note 3 “Commitments and Contingencies” to the Interim Financial Statements.

Item 1A. Risk Factors.

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.

Item 2. Unregistered Sales of Equity 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.

The exhibits listed on the accompanying Exhibit Index are filed as part of this Quarterly Report.

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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: October 26, 2006	/s/ Patrick J. Goodman
	Patrick J. Goodman
	Senior Vice President and Chief Financial Officer

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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.

 

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