SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
----------------------
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended
SEPTEMBER 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
----------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
24th Floor, 6750 Building, Ayala Avenue
Makati, Metro Manila Philippines Not Applicable
--------------------------------------------- --------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (632) 892-0276
---------------
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
--------- ----------
Former name, former address and former fiscal year, if changed since last
report. Not Applicable
---------------
767,162 shares of Common Stock, $0.038 par value were outstanding as of November
13, 2002.
<page>
CE CASECNAN WATER AND ENERGY COMPANY, INC.
Form 10-Q
September 30, 2002
-------------
C O N T E N T S
PART I: FINANCIAL INFORMATION Page
- ------------------------------
Item 1. Financial Statements
- -------
Report of Independent Public Accountants 3
Balance Sheets, September 30, 2002 and December 31, 2001 4
Statements of Income for the Three and Nine Months Ended
September 30, 2002 and 2001 5
Statements of Cash Flows for the Nine Months Ended
September 30, 2002 and 2001 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
- ------- Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures on Market Risk 22
- -------
Item 4. Controls and Procedures 22
- -------
PART II: OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 23
- -------
Item 2. Changes in Securities 23
- -------
Item 3. Defaults on Senior Securities 23
- -------
Item 4. Submission of Matters to a Vote of Security Holders 23
- -------
Item 5. Other Information 23
- -------
Item 6. Exhibits and Reports on Form 8-K 23
- -------
Signatures 24
Officer Certifications 25
<page>
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 September 30, 2002 and the related statements of income for
the three and nine months ended September 30, 2002 and 2001 and of cash flows
for the nine months ended September 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
November 7, 2002
(3)
<page>
CE CASECNAN WATER AND ENERGY COMPANY, INC.
BALANCE SHEETS
(Amounts in thousands U.S. Dollars, except share data)
<table>
<caption>
=======================================================================================
September 30, December 31,
2002 2001
(Unaudited) (Audited)
- ---------------------------------------------------------------------------------------
A S S E T S
-----------
<s>
Current assets:
Cash $ 5,446 $ 1,078
Trade receivable, net 41,365 8,012
Accrued interest and other receivables 6,691 6,601
Restricted cash 15,957 -
Prepaid expenses and other current assets 4,353 3,285
- ------------------------------------------------------------------------------------
Total current assets 73,812 18,976
Restricted cash and investments 5,978 5,978
Bond issue costs, net 5,591 6,712
Property, plant and equipment, net 451,541 466,455
Deferred income tax 5,371 5,371
Other assets 7,118 11,700
- ------------------------------------------------------------------------------------
$ 549,411 $ 515,192
====================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 5,507 $ 4,626
Accrued interest 12,939 5,014
Payable to affiliates 34,616 34,699
Current portion of long-term debt 38,146 35,200
- ------------------------------------------------------------------------------------
Total current liabilities 91,208 79,539
- ------------------------------------------------------------------------------------
Notes payable 51,263 40,763
- ------------------------------------------------------------------------------------
Long-term debt, net of current portion 267,191 287,925
- ------------------------------------------------------------------------------------
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
Retained earnings/(accumulated deficit) 15,913 (16,871)
- ------------------------------------------------------------------------------------
139,749 106,965
- ------------------------------------------------------------------------------------
$ 549,411 $ 515,192
====================================================================================
</table>
The accompanying notes are an integral part of these financial statements.
(4)
<page>
CE CASECNAN WATER AND ENERGY COMPANY, INC.
STATEMENTS OF INCOME
(Amounts in thousands U.S. Dollars, except share data)
(Unaudited)
<table>
<caption>
================================================================================================
Three Months Ended Nine Months Ended
September 30 September 30
---------------------------------------------------
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------
<s>
Revenues
Delivery of water $ 20,480 $ - $ 60,262 $ -
Sale of electricity 18,660 - 36,849 -
- ------------------------------------------------------------------------------------------------
39,140 - 97,111 -
- ------------------------------------------------------------------------------------------------
Operating expenses
Depreciation 5,844 - 17,583 -
Plant operations 2,638 312 6,705 743
Doubtful accounts expense 3,177 - 8,062 -
- ------------------------------------------------------------------------------------------------
11,659 312 32,350 743
- ------------------------------------------------------------------------------------------------
Operating income (loss) 27,481 (312) 64,761 (743)
- ------------------------------------------------------------------------------------------------
Other income (expenses)
Interest income 62 89 158 958
Interest expense (10,602) (10,713) (32,106) (33,365)
Capitalized interest - 10,713 - 33,365
Other expense (22) - (29) -
- ------------------------------------------------------------------------------------------------
(10,562) 89 (31,977) 958
- ------------------------------------------------------------------------------------------------
Income (loss) before income taxes 16,919 (223) 32,784 215
Income tax benefit (expense) - 50 - (48)
- ------------------------------------------------------------------------------------------------
Net income (loss) $ 16,919 $ (173) $ 32,784 $ 167
================================================================================================
Net income (loss) per share $ 22.05 $ (0.23) $ 42.73 $ 0.22
==================================================================================================
Average number of common shares outstanding 767,162 767,162 767,162 767,162
==================================================================================================
</table>
The accompanying notes are an integral part of these financial statements.
(5)
<page>
CE CASECNAN WATER AND ENERGY COMPANY, INC.
STATEMENTS OF CASH FLOWS
(Amounts in thousands U.S. Dollars)
(Unaudited)
<table>
<caption>
===============================================================================================
Nine Months Ended
September 30
---------------------
2002 2001
- -----------------------------------------------------------------------------------------------
<s>
Cash flows from operating activities
Net income $ 32,784 $ 167
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 17,583 -
Amortization of bond issue costs 1,121 1,203
Provision for deferred income taxes - 48
Changes in current assets and current liabilities:
Increase in trade receivable (33,353) -
(Increase) decrease in accrued interest and other receivables (90) 525
Increase in prepaid expenses and other current assets (1,068) (65)
Increase (decrease) in accounts payable and accrued expenses 881 (96)
Increase in accrued interest 7,925 9,316
Decrease in payable to affiliates (83) -
- -----------------------------------------------------------------------------------------------
Net cash provided by operating activities 25,700 11,098
- -----------------------------------------------------------------------------------------------
Cash flows from investing activities
Additions to development and construction costs (2,669) (56,054)
Decrease in restricted cash and investments - 1
Decrease (increase) in other assets 4,582 (1,162)
Increase in accounts payable and accrued expenses
related to development and construction costs - 4,371
- -----------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 1,913 (52,844)
- -----------------------------------------------------------------------------------------------
Cash flows from financing activities
(Increase) decrease in restricted cash and investments (15,957) 47,922
Increase in payable to affiliates related to construction - 8,128
Repayment of bonds payable (17,788) (14,625)
Increase in notes payable 10,500 -
- -----------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (23,245) 41,425
- -----------------------------------------------------------------------------------------------
Net increase (decrease) in cash 4,368 (321)
Cash at beginning of period 1,078 703
- -----------------------------------------------------------------------------------------------
Cash at end of period $ 5,446 $ 382
===============================================================================================
Supplemental cash flow disclosures:
Cash interest paid net of amount capitalized 21,689 (10,518)
Cash taxes paid - -
===============================================================================================
</table>
The accompanying notes are an integral part of these financial statements.
(6)
<page>
CE CASECNAN WATER AND ENERGY COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
As of and for the three and nine months ended September 30, 2002 and 2001
(UNAUDITED)
Note 1 - General
- ----------------
The accompanying unaudited interim financial statements have been prepared by CE
Casecnan Water and Energy Company, Inc. (CE Casecnan or the Company) without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC) for interim financial reporting. In the opinion of the
management, the accompanying unaudited financial statements contain all
adjustments (consisting only of normal recurring accruals) necessary to present
fairly the financial position of the Company as of September 30, 2002, the
results of its operations for the three and nine months ended September 30, 2002
and 2001 and its cash flows for the nine months ended September 30, 2002 and
2001. The results of operations for the three and nine months ended September
30, 2002 and 2001 are not necessarily indicative of the results to be expected
for the full year.
The accompanying unaudited interim financial statements and notes thereto should
be read in conjunction with the audited financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2001. In particular, the Company's significant accounting policies
and practices are presented in Note 2 to the financial statements included
therein.
The Company's operations 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 September 30, 2002 and December 31, 2001 consists of (in
thousands):
==========================================================================
September 30, December 31,
2002 2001
- --------------------------------------------------------------------------
Water delivery fee $36,875 $4,474
Guaranteed energy delivery fee 3,676 2,059
Excess energy delivery fee 9,397 2,000
- --------------------------------------------------------------------------
49,948 8,533
Less - allowance for doubtful accounts 8,583 521
- --------------------------------------------------------------------------
$41,365 $8,012
==========================================================================
(7)
<page>
Included in total revenues of $39.1 million and $97.1 million for the three and
nine months ended September 30, 2002, are $8.8 million and $25.3 million,
respectively, related to the tax portion of the water delivery fees due from NIA
under the Project Agreement. As of September 30, 2002, the cumulative unpaid
portion of such fees since commercial operation of the Project totaled $27.1
million. As NIA has not yet paid any portion of these fees, the allowances for
doubtful accounts as of September 30, 2002 and December 31, 2001 represent the
Company's estimate of the uncollectible portion of the amounts due from NIA.
The tax portion of the water delivery fees were not assumed in any revenue
calculations at the time the Securities were issued and accordingly, failure to
receive these amounts should not adversely impact the Company's ability to make
regularly scheduled principal and interest payments on its outstanding debt. In
connection with the unpaid portion of such fees, on August 16, 2002, the Company
commenced arbitration against NIA by serving it with a Request for Arbitration
under International Chamber of Commerce rules.
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 $34.6 million and $34.7 million at September 30, 2002
and December 31, 2001.
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.
(8)
<page>
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
amounting to $125 thousand per day of delay. As of September 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 million it incurred from the claimed force
majeure events to the extent it is unable to recover from its insurer. On April
20, 2001, the Contractor filed a further supplement seeking an additional
compensation for damages of approximately $62 million for the alleged force
majeure event (and geologic conditions) related to the collapse of the surge
shaft. The Contractor has alleged that the circumstances surrounding the placing
of the Casecnan Project into commercial operation on
(9)
<page>
December 11, 2001 amounted to a repudiation of the Construction Contract and has
filed a claim for unspecified quantum meruit damages. The Contractor also has
alleged that the delay liquidated damages clause in the EPC Contract is
unenforceable as a penalty. 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 a final
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
from September 24 to October 3, 2001. Further hearings were held from January 21
to February 1, 2002, and from March 14 to 19, 2002. From November 4 to 6,
hearings were held on the Contractor's claim with respect to the alleged
unenforceability of the delay liquidated damages clause. On November 7, 2002,
the ICC issued the arbitration tribunal's partial award with respect to the
Contractor's force majeure and geologic conditions claims. The arbitral panel
awarded the Contractor 18 days of schedule relief in the aggregate for all of
the force majeure events, and awarded the Contractor $3.8 million with respect
to the cost of the collapsed surge shaft, which shall be capitalized as costs
related to the construction of the Project and included in accounts payable and
accrued expenses. All of the Contractor's other claims that have been heard by
the arbitral tribunal were denied.
Further hearings on the Contractors repudiation and quantum meruit claims are
scheduled for January 20 through 23 and January 28 through 31, 2003. These
claims, and the alleged unenforceability of the delay liquidated damages clause,
have not been ruled on by the arbitration tribunal.
NIA arbitration
- ---------------
On August 16, 2002, CE Casecnan commenced arbitration against NIA by serving it
with a Request for Arbitration under ICC rules (the Request for Arbitration). In
the Request for Arbitration, CE Casecnan claims that NIA has breached its
obligations under the Casecnan Project Agreement by failing to reimburse CE
Casecnan for certain tax payments and by failing to pay the portion of the Water
Delivery Fee under the Casecnan Project Agreement attributable to certain tax
payments. The Casecnan Project Agreement provides for arbitration in accordance
with International Chamber of Commerce rules by a panel of three arbitrators in
Singapore. CE Casecnan is awaiting NIA's formal answer to the Request for
Arbitration. CE Casecnan intends to vigorously pursue its claims in these
proceedings.
(10)
<page>
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 at 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,
as of September 30, 2002, the Company has accrued $1.6 million for liquidated
damages, payable to NIA for 120 days of delay, capitalized as costs related to
the construction of the Project. This is included in accounts payable and
accrued expenses in the balance sheet.
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. Any material failure of NIA to fulfill its obligations under
the Project Agreement and any material failure of the Philippine Government 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.
(11)
<page>
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 Casecnan Project's tariff
structure and implementation. No further hearings are scheduled at this time.
The Company has and intends to continue to respond to such questions and to
vigorously defend the Casecnan Project against any allegations, which may be
made. The Company believes the allegations made with respect to the Casecnan
Project to be without merit.
(12)
<page>
CE CASECNAN WATER AND ENERGY COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 operating 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.
Business of the Company
- -----------------------
CE Casecnan Water and Energy Company, Inc. ("Company" or "CE Casecnan") is a
privately held Philippine corporation formed in September of 1994 solely to
develop, construct, own and operate the Casecnan project, a multi-purpose
irrigation and hydroelectric power facility with a rated capacity of
approximately 150 Megawatts ("MW") located on the island of Luzon in the
Republic of the Philippines (the "Casecnan Project"). The Casecnan Project
commenced commercial operation on December 11, 2001.
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, 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.
(13)
<page>
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.
Deferred Income Tax Assets and Liabilities
- ------------------------------------------
Deferred income tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial reporting bases
of assets and liabilities and their related tax bases. Deferred income tax
assets and liabilities are measured using the tax rate expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. A valuation allowance is provided for deferred income
tax assets if it is more likely than not that a tax benefit will not be
realized.
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,
(14)
<page>
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.
Results of Operations
- ---------------------
The Casecnan Project commenced commercial operations on December 11, 2001.
Revenues of $39.1 million for the three months and $97.1 million for the nine
months ended September 30, 2002 consist of revenue for the delivery of water and
the sale of electricity. Revenues from delivery of water and the sale of
electricity comprised 52% and 48%, respectively, of the total revenues for the
quarter, while the year to date revenues from delivery of water and the sale of
electricity comprised 62% and 38%, respectively, of the total revenues for the
year to date. Revenues from sale of electrical energy for the quarter consists
of 49% guaranteed energy fees and 51% excess energy fees while the year-to-date
sale of electricity consists of 74% guaranteed energy fees and 26% excess energy
fees. The increase in rainfall in the third quarter resulted in the high excess
energy fees.
The following table provides operating data of the Casecnan Project:
- --------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
2002 2002
- --------------------------------------------------------------------------------
Capacity factor 52% 24%
- --------------------------------------------------------------------------------
Nameplate rating (NMW) 150 150
- --------------------------------------------------------------------------------
Electricity produced (kWh in millions) 172 237
- --------------------------------------------------------------------------------
Water delivered (cubic meters in millions) 261 360
- --------------------------------------------------------------------------------
Depreciation expense for the three and nine months ended September 30, 2002 was
$5.8 million and $17.6 million, respectively. There was no depreciation expense
for the three and nine months ended September 30, 2001 as the Company began
operations and usage of property, plant and equipment in the fourth quarter of
fiscal year 2001.
Plant operation costs of $2.6 million and $0.3 million were incurred during the
three months ended September 30, 2002 and 2001, respectively. Plant operation
costs for the nine months ended September 30, 2002 and 2001 were $6.7 million
and $0.7 million, respectively. The increase in costs in 2002 resulted from the
commencement of commercial operations of the Casecnan Project on December 11,
2001.
(15)
<page>
Doubtful accounts expense was $3.2 million and $8.1 million in the three and
nine months ended September 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 third quarter of 2002 to $62 thousand from $89 thousand
in the same period in 2001. Interest income was $0.2 million and $1.0 million,
respectively for the nine months ended September 30, 2002 and 2001. These
decreases are primarily due to lower cash balances.
Interest expense inclusive of bond issue costs in the third quarter of 2002 was
$10.6 million compared to $10.7 million for the same period in 2001. Year to
date interest expense was $32.1 million in 2002, compared to $33.4 million for
the same period in 2001, a 3.9% 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.
Income tax expense for the three and nine months ended September 30, 2002 was
zero due to the Casecnan Project's income tax holiday that is in effect for six
years from December 11, 2001, the date of commercial operations. Deferred tax
benefit/(provision) for the three and nine months in 2001 was $50 thousand and
$(48) thousand, respectively.
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.
Since November 2001, 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.
(16)
<page>
As of September 30, 2002, the Company also had 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 nine months ended September 30, 2002 is
$25.7 million. The majority of the cash flow from operations came from the
collections of water delivery fees and guaranteed energy fees of $63.8 million,
partially offset by interest payments on the Securities.
The Company expects to spend $3.7 million for capital expenditures for 2002.
Due to the delay in the Project entering commercial operations and the failure
to receive delay liquidated damages from the Contractor, the Company's ability
to make principal and interest payments on the Securities on November 15, 2002
was contingent on rainfall through October being at or near the levels expected
by the hydrology model and on receiving the resulting excess energy fees. These
amounts have been received and the Company presently expects to meet the
November 15, 2002 debt service payments. Going forward, the Company's liquidity
could be affected by changing excess energy fees resulting from unexpected
weather patterns and by other factors, including NIA meeting its obligations
under the Project Agreement.
The Company believes that it will generate and collect adequate revenue to
sustain operations and provide for the operation of its business for the next 12
months.
At September 30, 2002 and December 31, 2001, the Company did not have any
relationships or transactions with persons or entities that derive benefits from
their non-independent relationship with the Company or its related parties
except as disclosed herein.
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
(17)
<page>
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
amounting to $125 thousand per day of delay. As of September 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 repudiation of the Construction Contract and has filed a claim for
unspecified quantum meruit damages. The Contractor also has alleged that the
delay liquidated damages clause in the EPC Contract is unenforceable as a
penalty. 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 a final
arbitration award. Hearings on the force majeure
(18)
<page>
claims were held in London from July 2 to 14, 2001, and hearings on the
Contractor's April 20, 2001 supplement from September 24 to October 3, 2001.
Further hearings were held from January 21 to February 1, 2002, and from March
14 to 19, 2002. From November 4 to 6, hearings were held on the Contractor's
claim with respect to the alleged unenforceability of the delay liquidated
damages clause. On November 7, 2002, the ICC issued the arbitration tribunal's
partial award with respect to the Contractor's force majeure and geologic
conditions claims. The arbitral panel awarded the Contractor 18 days of schedule
relief in the aggregate for all of the force majeure events, and awarded the
Contractor $3.8 million with respect to the cost of the collapsed surge shaft,
which shall be capitalized as costs related to the construction of the Project
and included in accounts payable and accrued expenses. All of the Contractor's
other claims that have been heard by the arbitral tribunal were denied.
Further hearings on the Contractors repudiation and quantum meruit claims are
scheduled for January 20 through 23 and January 28 through 31, 2003. These
claims, and the alleged unenforceability of the delay liquidated damages clause,
have not been ruled on by the arbitration tribunal.
NIA arbitration
- ---------------
On August 16, 2002, CE Casecnan commenced arbitration against NIA by serving it
with a Request for Arbitration under ICC rules (the Request for Arbitration). In
the Request for Arbitration, CE Casecnan claims that NIA has breached its
obligations under the Casecnan Project Agreement by failing to reimburse CE
Casecnan for certain tax payments and by failing to pay the portion of the Water
Delivery Fee under the Casecnan Project Agreement attributable to certain tax
payments. The Casecnan Project Agreement provides for arbitration in accordance
with International Chamber of Commerce rules by a panel of three arbitrators in
Singapore. CE Casecnan is awaiting NIA's formal answer to the Request for
Arbitration. CE Casecnan intends to vigorously pursue its claims in these
proceedings.
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 at 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
(19)
<page>
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 September 30,
2002, payable to NIA for 120 days of delay. This is included in accounts payable
and accrued expenses in the balance sheet.
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. 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.
(20)
<page>
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. No further
hearings are scheduled at this time. 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.
(21)
<page>
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 10K for the year ended December 31,
2001. CE Casecnan's exposure to market risk has not changed materially since
December 31, 2001.
Item 4: Controls and Procedures
CE Casecnan Water and Energy Company's chief executive officer and chief
financial officer have established "disclosure controls and procedures" (as
defined in Rule 13a-14(c) and Rule 15d-14(c) of the Securities and Exchange Act
of 1934) to ensure that material information of the companies and their
subsidiaries is made known to them by others within the respective companies.
Under their supervision, an evaluation of the disclosure controls and procedures
was performed within 90 days prior to the filing of this quarterly report. Based
on that evaluation, the above-mentioned officers have concluded that, as of the
date of the evaluation, the disclosure controls and procedures were operating
effectively. Additionally, the above-mentioned officers find that there have
been no signification changes in internal controls, or in other factors that
could significantly affect internal controls, subsequent to the date of that
evaluation.
(22)
<page>
CE CASECNAN WATER AND ENERGY COMPANY, INC.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings.
- ------
See Note 5 to the financial statements and discussion in management's
discussion and analysis.
Item 2 - Changes in Securities.
- ------
Not applicable.
Item 3 - Defaults on Senior Securities.
- ------
Not applicable.
Item 4 - Submission of Matters to a Vote of Security Holders.
- ------
Not applicable.
Item 5 - Other Information.
- ------
Not applicable.
Item 6 - Exhibits and Reports on Form 8-K.
- ------
(a) Exhibits
(b) Reports on Form 8-K:
The Company issued a Current Report on form 8-K dated August 14, 2002 with
certification of its chief executive officer and chief financial officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
The Company issued a Current Report on Form 8-K dated August 19, 2002 announcing
that it had commenced international arbitration to require the National
Irrigation Administration of the Philippine (NIA) to perform its contractual
obligation to reimburse certain taxes paid during construction of the Casecnan
Multipurpose Project.
(23)
<page>
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: November 14, 2002 /s/ Patrick J. Goodman
----------------------------
Patrick J. Goodman
Senior Vice President & Chief Financial Officer
(24)
<page>
SECTION 302 CERTIFICATION FOR FORM 10-Q
CERTIFICATIONS
- --------------
I, David A. Baldwin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CE Casecnan Water and
Energy Company, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
(25)
<page>
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ David A. Baldwin
--------------------
David A. Baldwin
President
(chief executive officer)
(26)
<page>
I, Patrick J. Goodman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CE Casecnan Water and
Energy Company, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation,
(27)
<page>
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002
/s/ Patrick J. Goodman
-------------------------------------------------
Patrick J. Goodman
Senior Vice President and Chief Financial Officer
(28)