SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended
JUNE 30, 2002
COMMISSION FILE NO. 333-608
CE CASECNAN WATER AND ENERGY COMPANY, INC.
(Exact name of registrant as specified in its charter)
PHILIPPINES Not Applicable
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
24th Floor, 6750 Building, Ayala Avenue
Makati, Metro Manila Philippines Not Applicable
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (632) 892-0276
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Former name, former address and former fiscal year, if changed since last
report. Not Applicable
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767,162 shares of Common Stock, $0.038 par value were outstanding as of July 9,
2002.
CE CASECNAN WATER AND ENERGY COMPANY, INC.
Form 10-Q
June 30, 2002
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C O N T E N T S
PART I: FINANCIAL INFORMATION Page
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Item 1. Financial Statements
Report of Independent Public Accountants 3
Balance Sheets, June 30, 2002 and December 31, 2001 4
Statements of Income for the Three and Six Months Ended
June 30, 2002 and 2001 5
Statements of Cash Flows for the Six Months Ended
June 30, 2002 and 2001 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 19
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Item 2. Changes in Securities 19
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Item 3. Defaults on Senior Securities 19
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Item 4. Submission of Matters to a Vote of Security Holders 19
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Item 5. Other Information 19
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Item 6. Exhibits and Reports on Form 8-K 19
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Signatures 20
Report of Independent Accountants
To the Board of Directors and Stockholders of CE Casecnan Water and Energy
Company, Inc.
We have reviewed the accompanying balance sheets of CE Casecnan Water and Energy
Company, Inc. as of June 30, 2002 and 2001 and the related statements of income
for the three and six months ended June 30, 2002 and 2001 and of cash flows for
the six months ended June 30, 2002 and 2001. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical review procedures to the
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying interim financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We previously audited in accordance with auditing standards generally accepted
in the United States of America, the balance sheet as of December 31, 2001, and
the related statements of income, changes in stockholders' equity and of cash
flows for the year then ended (not presented herein), and in our report dated
February 26, 2002, we expressed an unqualified opinion on those financial
statements. In our opinion, the information set forth in the accompanying
balance sheet information as of December 31, 2001, is fairly stated in all
material respects in relation to the balance sheet from which it has been
derived.
Makati City, Philippines
July 9, 2002
CE CASECNAN WATER AND ENERGY COMPANY, INC.
BALANCE SHEETS
(Amounts in thousands U.S. Dollars, except share data)
===============================================================================
June 30, December 31,
2002 2001
(Unaudited) (Audited)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
A S S E T S
Current assets:
Cash $ 5,004 $ 1,078
Trade receivable, net 24,850 8,012
Accrued interest and other receivables 6,560 6,601
Restricted cash 4,238 -
Prepaid expenses and other current assets 2,868 3,285
- ---------------------------------------------------------- -------------------
- ---------------------------------------------------------- -------------------
Total current assets 43,520 18,976
Restricted cash and investments 5,978 5,978
Bond issue costs, net 5,965 6,712
Property, plant and equipment, net 456,033 466,455
Deferred income tax 5,371 5,371
Other assets 8,613 11,700
- ---------------------------------------------------------- -------------------
$525,480 $515,192
========================================================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 4,971 $ 4,626
Accrued interest 4,367 5,014
Payable to affiliates 36,712 34,699
Current portion of long-term debt 38,146 35,200
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Total current liabilities 84,196 79,539
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Notes payable 51,263 40,763
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Long-term debts, net of current portion 267,191 287,925
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Commitments and contingencies (Note 5)
- ---------------------------------------------------------- -------------------
Stockholders' equity
Capital stock
Authorized - 2,148,000 shares at one Philippine peso
($0.038) par value per share
Issued and outstanding - 767,162 shares 29 29
Additional paid-in capital 123,807 123,807
Accumulated deficit (1,006) (16,871)
- ---------------------------------------------------------- -------------------
122,830 106,965
- ---------------------------------------------------------- -------------------
$525,480 $ 515,192
========================================================== ===================
The accompanying notes are an integral part of these financial statements.
CE CASECNAN WATER AND ENERGY COMPANY, INC.
STATEMENTS OF INCOME
(Amounts in thousands U.S. Dollars, except share data)
(Unaudited)
====================================================================================================
Three Months Ended Six Months Ended
June 30 June 30
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2002 2001 2002 2001
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Revenues
Delivery of water $ 21,294 $ - $ 39,782 $ -
Sale of electricity 9,095 - 18,189 -
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30,389 - 57,971 -
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Operating expenses
Depreciation 5,599 - 11,739 -
Plant operations 2,330 215 4,067 431
Doubtful accounts expense 2,625 - 4,885 -
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10,554 215 20,691 431
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Operating income (loss) 19,835 (215) 37,280 (431)
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Other income (expenses)
Interest income 62 131 96 869
Interest expense (10,707) (11,224) (21,504) (22,652)
Capitalized interest - 11,224 - 22,652
Other expense - - (7) -
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(10,645) 131 (21,415) 869
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Income (loss) before income taxes 9,190 (84) 15,865 438
Income tax benefit (expense) - 19 - (98)
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Net income (loss) $ 9,190 $ (65) $ 15,865 $ 340
====================================================================================================
Net income (loss) per share $ 11.98 ($0.09) $ 20.68 $ 0.44
====================================================================================================
Average number of common shares
outstanding 767,162 767,162 767,162 767,162
=====================================================================================================
The accompanying notes are an integral part of these financial statements.
CE CASECNAN WATER AND ENERGY COMPANY, INC.
STATEMENTS OF CASH FLOWS
(Amounts in thousands U.S. Dollars)
(Unaudited)
========================================================================================================================
Six Months Ended
June 30
----------------------------------
----------------------------------
2002 2001
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income $ 15,865 $ 340
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 11,739 -
Amortization of bond issue costs 747 802
Provision for income taxes - 98
Changes in current assets and current liabilities:
Increase in trade receivable (16,838) -
Decrease in accrued interest and other receivables 41 579
Decrease (increase) in prepaid expenses and other current assets 417 (47)
Increase in accounts payable and accrued expenses 345 21
Decrease in accrued interest (647) (204)
Increase in payable to affiliates related to operations 2,013 -
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 13,682 1,589
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Additions to development and construction costs (1,317) (36,434)
Decrease in restricted cash and investments - 45,349
Decrease (increase) in other assets 3,087 (805)
Decrease in accounts payable and accrued expenses
related to development and construction costs - (376)
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 1,770 7,734
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Increase in restricted cash and investments (4,238) -
Increase in payable to affiliates related to construction - 5,652
Repayment of bonds payable (17,788) (14,625)
Increase in notes payable 10,500 -
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (11,526) (8,973)
- ------------------------------------------------------------------------------------------------------------------------
Net increase in cash 3,926 350
Cash at beginning of period 1,078 703
- ------------------------------------------------------------------------------------------------------------------------
Cash at end of period $ 5,004 $ 1,053
========================================================================================================================
The accompanying notes are an integral part of these financial statements.
CE CASECNAN WATER AND ENERGY COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF AND FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002
Note 1 - General
In the opinion of the management of CE Casecnan Water and Energy Company, Inc.
(CE Casecnan or the Company), the accompanying unaudited financial statements
contain all adjustments (consisting only of normal recurring accruals) necessary
to present fairly the financial position of the Company as of June 30, 2002 and
December 31, 2001, the results of its operations for the three and six months
ended June 30, 2002 and 2001 and its cash flows for the six months ended June
30, 2002 and 2001.
The results of operations for the three and six months ended June 30, 2002 and
2001 are not necessarily indicative of the results to be expected for the full
year.
The Company's operations have been in one reportable segment, the domestic water
and electricity generation industry.
Note 2 - Trade receivable
Trade receivable pertains to a receivable from the Philippine National
Irrigation Administration (NIA) for water delivered to NIA and the electricity
generated and delivered by the Company to the Philippine National Power
Corporation (NPC) on behalf of NIA.
Trade receivable as of June 30, 2002 and December 31, 2001 consists of (in
thousands):
========================================================== ==================
June 30, December 31, 2001
2002
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- ---------------------------------------------------------- ------------------
Water delivery fee $26,580 $4,474
Guaranteed energy delivery fee 3,676 2,059
Excess energy delivery fee - 2,000
- ---------------------------------------------------------- ------------------
30,256 8,533
Less - allowance for doubtful accounts 5,406 521
- ---------------------------------------------------------- ------------------
$24,850 $8,012
========================================================== ==================
NIA has not paid the tax reimbursement portion of the amounts due for water
delivery fees under the Project Agreement as of June 30, 2002 of $19.6 million.
The Company is in discussions with NIA and representatives of the Philippine
Government regarding the tax reimbursement amounts.
Note 3 - Related party transactions
In the normal course of business, the Company transacts with its affiliates in
the form of advances for construction related and operating expenses. The
payable to affiliates was $36.7 million and $34.7 million at June 30, 2002 and
December 31, 2001, respectively.
The Company has $51.3 million of unsecured subordinated notes payable to CE
Casecnan Ltd. due November 15, 2005. The unsecured notes bear interest at LIBOR
plus two (2%) percent which is payable every May 15 and November 15. Any overdue
amounts of principal or interest payable on the notes shall bear interest at the
stated rate plus two (2%) percent. 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 on
such notes are subject in all respects to the terms of the Subordination
Agreement dated November 15, 2001 between CE Casecnan Ltd. and the Company in
favor of the Trustee, the Collateral Agent, the co-collateral agent, the
Depositary, any party that becomes a Permitted Counterparty under an Interest
Rate/Currency Protection Agreement, any party that becomes a working capital
facility agent and any other Person that becomes a secured party under the
Intercreditor Agreement.
Note 4 - Current portion of long-term debt
Floating Rate Notes (FRNs) of $13.1 million and Series B Bonds of $4.3 million
will become due and payable on November 15, 2002 and an additional $16.9 million
Series A and $3.8 million Series B Bonds will be due and payable on May 15,
2003.
Note 5 - Commitments and contingencies
Construction contract arbitration
On May 7, 1997, the Company entered into a fixed-price, date certain, turnkey
engineering, procurement and construction contract to complete the construction
of the Casecnan Project (Construction Contract). The work under the Construction
Contract was conducted by a consortium consisting of Cooperativa Muratori
Cementisti CMC di Ravenna and Impresa Pizzarotti & C. Spa., working together
with Siemens A.G., Sulzer Hydro Ltd., Black & Veatch and Colenco Power
Engineering Ltd. (collectively, the Contractor).
On November 20, 1999, the Construction Contract was amended to extend the
Guaranteed Substantial Completion Date for the Casecnan Project to March 31,
2001. This amendment was approved by the lenders' independent engineer under the
Trust Indenture. In January 2001, the Company received a new working schedule
from the Contractor that showed a completion date of August 31, 2001. The delay
in completion was attributable in part to the collapse in December 2000 of the
Casecnan Project's partially completed vertical surge shaft and the need to
drill a replacement surge shaft.
Upon the receipt of the working schedule, the Company sought and obtained from
the lender's independent engineer approval for a revised construction schedule
under the Trust Indenture. In connection with the revised schedule, the ultimate
parent company of CE Casecnan agreed to make available up to $11.6 million of
additional funds under certain conditions pursuant to a Shareholder Support
Letter dated February 8, 2001 (Shareholder Support Letter). The ultimate parent
company has fully satisfied its obligations under the Shareholder Support
Letter.
The receipt of the new working schedule did not change the Guaranteed
Substantial Completion Date under the Construction Contract, and the Contractor
was still contractually obligated either to complete the Casecnan Project by
March 31, 2001 or to pay liquidated damages for the delay in completion. As of
June 30, 2002, the Company has received approximately $6.0 million of liquidated
damages from demands made on the demand guarantees posted by Commerzbank on
behalf of the Contractor.
On February 12, 2001, the Contractor filed a Request for Arbitration with the
International Chamber of Commerce seeking an extension of the Guaranteed
Substantial Completion Date by up to 153 days through August 31, 2001 resulting
from various alleged force majeure events. In its March 20, 2001 Supplement to
Request for Arbitration, the Contractor also sought compensation for alleged
additional costs of approximately $4.0 million it incurred from the claimed
force majeure events to the extent it is unable to recover from its insurer. On
April 20, 2001, the Contractor filed a further supplement seeking an additional
compensation for damages of approximately $62.0 million for the alleged force
majeure event (and geologic conditions) related to the collapse of the surge
shaft. The Contractor has alleged that the circumstances surrounding the placing
of the Casecnan Project into commercial operation on December 11, 2001 amounted
to a rescission of the Construction Contract and has filed a claim for
unspecified quantum meruit damages. CE Casecnan believes all such allegations
and claims are without merit and is vigorously contesting the Contractor's
claims. The arbitration is being conducted applying New York law and pursuant to
the rules of the International Chamber of Commerce. Although the outcome of the
arbitration, as with any litigious proceeding, is difficult to assess, the
Company believes it will prevail and receive additional liquidated damages in
the arbitration.
On June 25, 2001, the arbitration tribunal temporarily enjoined CE Casecnan from
making calls on the demand guaranty posted by Banca di Roma in support of the
Contractor's obligations to CE Casecnan for delay liquidated damages. On April
26, 2002, CE Casecnan and the Contractor mutually agreed that no demands would
be made on the Banca di Roma demand guaranty except pursuant to an arbitration
award. Hearings on the force majeure claims were held in London from July 2 to
14, 2001, and hearings on the Contractor's April 20, 2001 supplement were held
from September 24 to October 3, 2001. Further hearings were held from January 21
to February 1, 2002 and additional hearings were held from March 14 to 19, 2002.
The Company is awaiting the arbitration tribunal's ruling.
Shareholder Agreement litigation
The Casecnan Project commenced commercial operations on December 11, 2001.
Pursuant to the share ownership adjustment mechanism in the Shareholder
Agreement, which is based upon pro-forma financial projections of the Casecnan
Project prepared following commencement of commercial operations, MidAmerican
Energy Holdings Company (MidAmerican), through its wholly owned indirect
subsidiary CE Casecnan Ltd., has advised the minority shareholder LaPrairie
Group Contractors (International) Ltd. (LPG) that MidAmerican's ownership
interest in the Company will increase to 100%. On July 8, 2002, LPG filed a
complaint in the Superior Court of the State of California, City and County of
San Francisco against, inter alia, CE Casecnan Ltd. and MidAmerican. The Company
is not named as a defendant. In the complaint, LPG seeks compensatory and
punitive damages for alleged breaches of the Shareholder Agreement and alleged
breaches of fiduciary duties allegedly owed by MidAmerican and CE Casecnan Ltd.
to LPG. The complaint also seeks injunctive relief against all the defendants
and a declaratory judgment that LPG is entitled to maintain its 15% interest in
the Company. The Company does not expect any material financial impact as a
result of this litigation.
Project transmission line
Under the Project Agreement, if NIA is able to accept delivery of water into the
Pantabangan Reservoir and NPC has completed the Project's related transmission
line, the Company is liable to pay NIA $5,500 per day for each day of delay in
completion of the Casecnan Project beyond July 27, 2000, increasing to $13,500
per day for each day of delay in completion beyond November 27, 2000. The
Project transmission line was completed on August 13, 2001 when NIA completed
the installation and testing of the Project's metering equipment. Accordingly,
the Company has accrued $1.6 million for liquidated damages as of June 30, 2002,
payable to NIA for 120 days of delay. This is included in accounts payable and
accrued expenses in the related balance sheets.
Concentration of risk
NIA's payments under the Project Agreement will be substantially denominated in
United States Dollars and are expected to be the Company's sole source of
operating revenues. Because of the Company's dependence on NIA, any material
failure of NIA to fulfill its obligations under the Project Agreement and any
material failure of the Republic of the Philippines to fulfill its obligations
under the Performance Undertaking would significantly impair the ability of the
Company to meet its existing and future obligations. No shareholders, 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.
Regulatory environment
The Philippine Congress has passed the Electric Power Industry Reform Act of
2001 which is aimed at restructuring the power industry, privatization of the
NPC and introduction of a competitive electricity market, among others. The
passage of the bill may have an impact on the Company's future operations and
the industry as a whole, the effect of which is not yet determinable and
estimable.
In connection with an interagency review of approximately 40 independent power
project contracts in the Philippines in July 2002, the Casecnan Project
(together with four other projects) has reportedly been identified as raising
legal and financial questions and, with those other contracts, has been
prioritized for renegotiation. No written report has yet been issued with
respect to the interagency review, and the timing and nature of steps, if any,
that the Philippine Government may take in this regard are not known.
Accordingly, it is not known what, if any, impact the government's review will
have on the operations of the Company. Company representatives, together with
certain current and former government officials, also have been requested to
appear, and have appeared, before a Philippine Senate committee which has raised
questions and made allegations with respect to the Project's tariff structure
and implementation. The Company expects that these hearings will continue,
although their exact scope and nature is difficult to assess. The Company has
and intends to continue to respond to such questions and to vigorously defend
the Project against any allegations which may be made. The Company believes the
allegations made with respect to the Project to be without merit. To the extent
disputes arise under the Project Agreement with respect to the Company's
obligations, rights and remedies thereunder, such disputes will be determined by
international arbitration in a neutral forum conducted in accordance with the
rules of the International Chamber of Commerce.
Note 6 - Other footnote information
Reference is made to the Company's December 31, 2001 audited financial
statements included in Form 10-K that provides information necessary or useful
to the understanding of the Company's business and financial statement
presentations. In particular, the Company's significant accounting policies and
practices are presented in Note 2 to the financial statements included in the
report.
CE CASECNAN WATER AND ENERGY COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The Casecnan Project commenced commercial operations on December 11, 2001.
The revenue of $30.4 million for the three months and $58.0 million for the six
months ended June 30, 2002 consists of revenue for the delivery of water and
delivery of electrical energy. Revenue from delivery of water and delivery of
electrical energy are 70% and 30%, respectively, of the total revenue for this
quarter. Revenue from sales of electrical energy consists only of guaranteed
energy delivery fees. The prevailing dry season resulted in zero excess energy
deliveries.
Depreciation expense for the three and six months ended June 30, 2002 was $5.6
million and $11.7 million, respectively.
Plant operation costs of $2.3 million and $0.2 million were incurred during the
three months ended June 30, 2002 and 2001, respectively. Plant operation costs
for the six months ended June 30, 2002 and 2001 were $4.1 million and $0.4
million, respectively. The increase in costs in 2002 resulted from the
commencement of commercial operations of the Casecnan Project on December 11,
2001.
Doubtful accounts expense was $2.6 million and $4.9 million in the three and six
months ended June 30, 2002, respectively. The doubtful accounts expense was
based on the Company's assessment of the collectibility of the accounts
receivable.
Interest income consists of income on cash and restricted investments. Interest
income decreased in the second quarter of 2002 to $62 thousand from $131
thousand in the same period in 2001. Interest income was $0.1 million and $0.9
million, respectively for the six months ended June 30, 2002 and 2001. These
decreases are primarily due to lower cash balances.
Interest expense inclusive of bond issue costs in the second quarter of 2002 was
$10.7 million compared to $11.2 million for the same period in 2001, a 4.6%
decrease. Year to date interest expense was $21.5 million in 2002, compared to
$22.7 million for the same period in 2001, a 5.1% decrease. The decrease in
interest expense resulted from scheduled repayments of principal of the
Company's Floating Rate Notes and Series B bonds, offset in part by the issuance
of unsecured subordinated notes to CE Casecnan, Ltd.
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 financial statements included in the report on Form 10-K describes the
significant accounting policies and methods used in the preparation of the
financial statements. Estimates are used for, but not limited to, the accounting
for the allowance for doubtful accounts, income taxes and impairment of
long-lived assets. Actual results could differ from these estimates. The
following critical accounting policies are impacted significantly by judgments,
assumptions and estimates used in the preparation of the financial statements.
Allowance for Doubtful Accounts
The allowance for doubtful accounts is based on the Company's assessment of the
collectibility of a specific customer's account. This assessment requires
judgment regarding the ability of the customer to repay the amounts owed to the
Company. Any change in the Company's assessment of the collectibility of
accounts receivable that was not previously provided for could significantly
impact the calculation of such allowance and the results of operations.
Impairment of long-lived assets
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Triggering events include a significant change in the extent or
manner in which long-lived assets are being used or in its physical condition,
in legal factors, or in the business climate that could affect the value of the
long-lived assets, including changes in regulation. The interpretation of such
events requires judgment from management as to whether such an event has
occurred and is required. If an event occurs that could affect the carrying
value of the asset and management does not identify it as a triggering event,
future results of operations could be significantly affected.
Upon the occurrence of a triggering event, the carrying amount of a long-lived
asset is reviewed to assess whether the recoverable amount has declined below
its carrying amount. The recoverable amount is the estimated net future cash
flows that the Company expects to recover from the future use of the asset,
undiscounted and without interest, plus the asset's residual value on disposal.
Where the recoverable amount of the long-lived asset is less than the carrying
value, an impairment loss would be recognized to write down the asset to its
fair value which is based on discounted estimated cash flows from the future use
of the asset.
The estimated cash flows arising from future use of the asset that are used in
the impairment analysis requires judgment regarding what the Company would
expect to recover from future use of the asset. Any changes in the estimates of
cash flows arising from future use of the asset or the residual value of the
asset on disposal based on changes in the market conditions, changes in the use
of the assets, management's plans, the determination of the useful life of the
assets and technology change in the industry could significantly change the
calculation of the fair value or recoverable amount of the asset and the
resulting impairment loss, which could significantly affect the results of
operations.
Liquidity and Capital Resources
CE Casecnan financed a portion of the costs of the Casecnan Project through the
issuance of $125.0 million of its 11.45% Senior Secured Series A Notes due 2005,
$171.5 million of its 11.95% Senior Secured Series B Bonds due 2010 and $75.0
million of its Senior Secured Floating Rate Notes due 2002 (Securities),
pursuant to an indenture (Trust Indenture) dated November 27, 1995, as amended
to date.
The Securities are senior debt of the Company and are secured by an assignment
of all revenues that will be received from the Casecnan Project, a collateral
assignment of all material contracts, a lien on any accounts and funds on
deposit under a Deposit and Disbursement Agreement, a pledge of 100% of the
capital stock of the Company and a lien on all other material assets and
property interests of the Company. The Securities rank pari passu with and will
share the collateral on a pro rata basis with other senior secured debt, if any.
The Securities are subject to certain optional and mandatory redemption
provisions as defined in the Trust Indenture. The Securities contain customary
events of default and restrictive covenants.
CE Casecnan has received $51.3 million from its parent, CE Casecnan Ltd. and
issued unsecured subordinated notes payable, the proceeds from which were used
primarily to finance the interest and principal payments for the notes and
bonds.
The Company may from time to time seek to retire its outstanding debt through
cash purchases and/or exchanges for equity securities, in open market purchases,
privately negotiated transactions or otherwise. Such repurchases or exchanges,
if any, will depend on prevailing market conditions, the Company's liquidity
requirements, contractual restrictions and other factors. The amounts involved
may be material.
As of December 31, 2001, the Company also received $6.0 million of liquidated
damages from demands made on demand guarantees posted by Commerzbank on behalf
of the Contractor.
The cash flow from operations for the six months ended June 30, 2002 is $13.7
million. The majority of the cash flow from operations came from the collections
of water delivery fees and guaranteed energy fees of $37.7 million, partially
offset by interest payments on the Securities.
The Company expects to spend $2.7 million for capital expenditures for 2002.
Due to the combined effect of the delay in the Project entering commercial
operation, the failure to receive delay liquidated damages from the Contractor
and NIA's failure to pay the tax reimbursement portion of the water delivery
fee, the Company's ability to make principal and interest payments on the
Securities on November 15, 2002 will be contingent on rainfall through September
being at or near the levels expected by the hydrology model and on receiving the
resultant excess energy delivery fees.
Construction contract arbitration
On May 7, 1997, the Company entered into a fixed-price, date certain, turnkey
engineering, procurement and construction contract to complete the construction
of the Casecnan Project (Construction Contract). The work under the Construction
Contract was conducted by a consortium consisting of Cooperativa Muratori
Cementisti CMC di Ravenna and Impresa Pizzarotti & C. Spa., working together
with Siemens A.G., Sulzer Hydro Ltd., Black & Veatch and Colenco Power
Engineering Ltd. (collectively, the Contractor).
On November 20, 1999, the Construction Contract was amended to extend the
Guaranteed Substantial Completion Date for the Casecnan Project to March 31,
2001. This amendment was approved by the lenders' independent engineer under the
Trust Indenture. In January 2001, the Company received a new working schedule
from the Contractor that showed a completion date of August 31, 2001. The delay
in completion was attributable in part to the collapse in December 2000 of the
Casecnan Project's partially completed vertical surge shaft and the need to
drill a replacement surge shaft.
Upon the receipt of the working schedule, the Company sought and obtained from
the lender's independent engineer approval for a revised construction schedule
under the Trust Indenture. In connection with the revised schedule, the ultimate
parent company of CE Casecnan agreed to make available up to $11.6 million of
additional funds under certain conditions pursuant to a Shareholder Support
Letter dated February 8, 2001 (Shareholder Support Letter). The ultimate parent
company has fully satisfied its obligations under the Shareholder Support
Letter.
The receipt of the new working schedule did not change the Guaranteed
Substantial Completion Date under the Construction Contract, and the Contractor
was still contractually obligated either to complete the Casecnan Project by
March 31, 2001 or to pay liquidated damages for the delay in completion. As of
March 31, 2002, the Company has received approximately $6.0 million of
liquidated damages from demands made on the demand guarantees posted by
Commerzbank on behalf of the Contractor.
On February 12, 2001, the Contractor filed a Request for Arbitration with the
International Chamber of Commerce seeking an extension of the Guaranteed
Substantial Completion Date by up to 153 days through August 31, 2001 resulting
from various alleged force majeure events. In its March 20, 2001 Supplement to
Request for Arbitration, the Contractor also sought compensation for alleged
additional costs of approximately $4.0 million it incurred from the claimed
force majeure events to the extent it is unable to recover from its insurer. On
April 20, 2001, the Contractor filed a further supplement seeking an additional
compensation for damages of approximately $62.0 million for the alleged force
majeure event (and geologic conditions) related to the collapse of the surge
shaft. The Contractor has alleged that the circumstances surrounding the placing
of the Casecnan Project into commercial operation on December 11, 2001 amounted
to a rescission of the Construction Contract and has filed a claim for
unspecified quantum meruit damages. CE Casecnan believes all such allegations
and claims are without merit and is vigorously contesting the Contractor's
claims. The arbitration is being conducted applying New York law and pursuant to
the rules of the International Chamber of Commerce. Although the outcome of the
arbitration, as with any litigious proceeding, is difficult to assess, the
Company believes it will prevail and receive additional liquidated damages in
the arbitration.
On June 25, 2001, the arbitration tribunal temporarily enjoined CE Casecnan from
making calls on the demand guaranty posted by Banca di Roma in support of the
Contractor's obligations to CE Casecnan for delay liquidated damages. On April
26, 2002, CE Casecnan and the Contractor mutually agreed that no demands would
be made on the Banca di Roma demand guaranty except pursuant to an arbitration
award. Hearings on the force majeure claims were held in London from July 2 to
14, 2001, and hearings on the Contractor's April 20, 2001 supplement were held
from September 24 to October 3, 2001. Further hearings were held from January 21
to February 1, 2002 and additional hearings were held from March 14 to 19, 2002.
The Company is awaiting the arbitration tribunal's ruling.
Shareholder Agreement litigation
The Casecnan Project commenced commercial operations on December 11, 2001.
Pursuant to the share ownership adjustment mechanism in the Shareholder
Agreement, which is based upon pro-forma financial projections of the Casecnan
Project prepared following commencement of commercial operations, MidAmerican
Energy Holdings Company (MidAmerican), through its wholly owned indirect
subsidiary CE Casecnan Ltd., has advised the minority shareholder LaPrairie
Group Contractors (International) Ltd. (LPG) that MidAmerican's ownership
interest in the Company will increase to 100%. On July 8, 2002, LPG filed a
complaint in the Superior Court of the State of California, City and County of
San Francisco against, inter alia, CE Casecnan Ltd. and MidAmerican. The Company
is not named as a defendant. In the complaint, LPG seeks compensatory and
punitive damages for alleged breaches of the Shareholder Agreement and alleged
breaches of fiduciary duties allegedly owed by MidAmerican and CE Casecnan Ltd.
to LPG. The complaint also seeks injunctive relief against all the defendants
and a declaratory judgment that LPG is entitled to maintain its 15% interest in
the Company. The Company does not expect any material financial impact as a
result of this litigation.
Project transmission line
Under the Project Agreement, if NIA is able to accept delivery of water into the
Pantabangan Reservoir and NPC has completed the Project's related transmission
line, the Company is liable to pay NIA $5,500 per day for each day of delay in
completion of the Casecnan Project beyond July 27, 2000, increasing to $13,500
per day for each day of delay in completion beyond November 27, 2000. The
Project transmission line was completed on August 13, 2001 and NIA has completed
the installation and testing of the Project's metering equipment. Accordingly,
the Company has accrued $1.6 million for liquidated damages as of March 31,
2002, payable to NIA for 120 days of delay and this was shown as part of
accounts payable and accrued expenses in the balance sheets.
Concentration of risk
NIA's payments under the Project Agreement will be substantially denominated in
United States Dollars and are expected to be the Company's sole source of
operating revenues. Because of the Company's dependence on NIA, any material
failure of NIA to fulfill its obligations under the Project Agreement and any
material failure of the Republic of the Philippines to fulfill its obligations
under the Performance Undertaking would significantly impair the ability of the
Company to meet its existing and future obligations. No shareholders, 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.
Regulatory environment
The Philippine Congress has passed the Electric Power Industry Reform Act of
2001 which is aimed at restructuring the power industry, privatization of the
NPC and introduction of a competitive electricity market, among others. The
passage of the bill may have an impact on the Company's future operations and
the industry as a whole, the effect of which is not yet determinable and
estimable.
In connection with an interagency review of approximately 40 independent power
project contracts in the Philippines, in July 2002 the Casecnan Project
(together with four other projects) has reportedly been identified as raising
legal and financial questions and with those other contracts has been
prioritized for renegotiation. No written report has yet been issued with
respect to the interagency review, and the timing and nature of steps, if any,
that the Philippine Government may take in this regard are not known.
Accordingly, it is not known what, if any, impact the government's review will
have on the operations of the Company.
Company representatives, together with certain current and former government
officials, also have been requested to appear, and have appeared, before a
Philippine Senate committee which has raised questions and made allegations with
respect to the Project's tariff structure and implementation. The Company
expects that these hearings will continue, although their exact scope and nature
is difficult to assess. The Company has and intends to continue to respond to
such questions and to vigorously defend the Project against any allegations
which may be made. The Company believes the allegations made with respect to the
Project to be without merit. To the extent disputes arise under the Project
Agreement with respect to the Company's obligations, rights and remedies
thereunder, such disputes will be determined by international arbitration in a
neutral forum conducted in accordance with the rules of the International
Chamber of Commerce.
Safe Harbor Statement Under the Private Securities Litigation Reform Act
Certain information included in this report contains forward-looking statements
made pursuant to the Private Securities Litigation Reform Act of 1995 (Reform
Act). Such 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 Reform Act, the Company has
identified important factors that could cause actual results to differ
materially from such expectations, including development uncertainty, operating
uncertainty, acquisition uncertainty, uncertainties relating to doing business
outside of the United States, uncertainties relating to domestic and
international economic and political conditions and uncertainties regarding the
impact of regulations, changes in government policy, industry deregulation and
competition as discussed in the Company's Securities and Exchange Commission
filings, including the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2001. The Company assumes no responsibility to update
forward-looking information contained herein.
CE CASECNAN WATER AND ENERGY COMPANY, INC.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings.
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See Note 5 to the financial statements.
Item 2 - Changes in Securities.
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Not applicable.
Item 3 - Defaults on Senior Securities.
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Not applicable.
Item 4 - Submission of Matters to a Vote of Security Holders.
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Not applicable.
Item 5 - Other Information.
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Not applicable.
Item 6 - Exhibits and Reports on Form 8-K.
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(a) Exhibits:
None.
(b) Reports on Form 8-K:
None.
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.
Date: August 14, 2002 /s/ Patrick J. Goodman
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Patrick J. Goodman
Senior Vice President & Chief Financial Officer