SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the calendar year ended December 31, 2002
Commission File No. 333-00608
CE CASECNAN WATER AND ENERGY COMPANY, INC.
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(Exact name of registrant as specified in its charter)
Philippines Not applicable
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(State or other (IRS Employer
jurisdiction of incorporation Identification No.)
or organization)
24th Floor 6750 Building, Ayala Avenue Not applicable
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Makati, Manila, Philippines (Zip Code)
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(Address of principal executive offices)
Registrant's telephone number, including area code: (632) 892-0276
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Securities registered pursuant to Section 12(b) of the Act: N/A
Securities registered pursuant to Section 12(g) of the Act: N/A
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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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
Indicate by check mark whether the registrant is an accelerated filer (or
defined in Exchange Act Rule 12b-2):
Yes No X
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767,162 shares of Common Stock, $0.038 par value, were outstanding on March
15, 2003.
TABLE OF CONTENTS
PART I.........................................................................3
ITEM 1. BUSINESS..............................................................3
General......................................................................3
The Casecnan Project.........................................................3
Terms of the Securities....................................................5
General...............................................................5
Payment of Principal and Interest.....................................6
Priority of Payments..................................................7
Debt Service Reserve Fund.............................................7
Optional Redemption...................................................7
Mandatory Redemption..................................................7
Change in Control Put.................................................7
Profit Distributions..................................................8
Ranking and Security for the Securities...............................8
Ratings...............................................................8
Nature of Recourse on the Securities..................................8
Incurrence of Additional Debt.........................................8
Principal Covenants..................................................10
Insurance.................................................................10
Regulatory Matters........................................................10
Employees.................................................................10
ITEM 2. PROPERTIES............................................................11
ITEM 3. LEGAL PROCEEDINGS.....................................................11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................12
PART II.......................................................................13
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.13
ITEM 6. SELECTED FINANCIAL DATA...............................................13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...........................................13
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK...........19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...........................20
Reports of Independent Public Accountants...................................21
Balance Sheets.............................................................22
Statements of Operations...................................................23
Statements of Changes in Stockholders' Equity...............................24
Statements of Cash Flows....................................................25
Notes to Financial Statements...............................................26
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE...........................................34
PART III......................................................................35
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...................35
ITEM 11. EXECUTIVE COMPENSATION...............................................36
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......36
Description of Capital Stock................................................36
Principal Stockholders......................................................37
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTION........................38
ITEM 14. CONTROLS AND PROCEDURES..............................................38
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K......38
SIGNATURES....................................................................39
CERTIFICATIONS................................................................40
EXHIBIT INDEX.................................................................42
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PART I
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This report contains statements that do not directly or exclusively relate to
historical facts. These statements are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. You can
typically identify forward-looking statements by the use of forward-looking
words, such as "may", "will", "could", "project", "believe", "anticipate",
"expect", "estimate", "continue", "potential", "plan", "forecast" and similar
terms. These statements represent our intentions, plans, expectations and
beliefs and are subject to risks, uncertainties and other factors. Many of these
factors are outside our control and could cause actual results to differ
materially from such forward-looking statements. These factors include, among
others:
o general economic and business conditions in the Philippines;
o governmental, statutory, regulatory or administrative initiatives
affecting us or the power generation industry;
o weather effects on sales and revenues;
o general industry trends;
o increased competition in the power generation industry;
o availability of qualified personnel;
o financial or regulatory accounting principles or policies imposed by
the Public Company Accounting Oversight Board, the Financial
Accounting Standards Board ("FASB"), the Securities and Exchange
Commission ("SEC") and similar entities with regulatory oversight; and
o other business or investment considerations that may be disclosed from
time to time in our SEC filings or in other publicly disseminated
written documents.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
The foregoing review of factors should not be construed as exclusive.
ITEM 1. BUSINESS
GENERAL
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CE Casecnan Water and Energy Company, Inc. (the "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 operations on December 11, 2001.
The Securities (described herein) are recourse only to the Company. MidAmerican
Energy Holdings Company ("MidAmerican") has not guaranteed directly or
indirectly the payment or performance of any Company obligations.
The Company's principal executive office is located at 24th Floor, 6750
Building, Ayala Avenue, Makati City, Philippines, and its telephone number is 63
2 892 0276. The Company's principal office is located at Pantabangan in the
Province of Nueva Ecija, Philippines.
THE CASECNAN PROJECT
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The Casecnan Project is located in the central part of the island of Luzon. It
consists generally of diversion structures in the Casecnan and Taan rivers that
capture and divert excess water in the Casecnan watershed by means of concrete,
in-stream diversion weirs and transfer that water through a transbasin tunnel of
approximately 23 kilometers (including the intake adit
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from the Taan to the Casecnan river), with a diameter of approximately 6.5
meters to an existing underutilized water storage reservoir at Pantabangan.
During the water transfer, the elevation differences between the two watersheds
allows electrical energy to be generated at a 150 MW rated capacity power plant,
which is located in an underground powerhouse cavern at the end of the water
tunnel. A tailrace discharge tunnel of approximately three kilometers delivers
water from the water tunnel and the new powerhouse to the Pantabangan reservoir,
providing additional water for irrigation and increasing the potential
electrical generation at two downstream existing hydroelectric facilities of the
Philippine National Power Corporation ("NPC"), the government-owned and
controlled corporation that is the primary supplier of electricity in the
Philippines. Since the water has been determined to remain suitable for
irrigation throughout the Casecnan Project operations of capturing, diverting
and transferring the water, other than removing sediments at the diversion
structures, no treatment is required. Once in the reservoir at Pantabangan, the
water is under the control of, and for the use of the Philippine National
Irrigation Administration ("NIA").
In early 1994, then President Fidel Ramos recognized the need for an irrigation
and hydroelectric project that would provide increased water flows for
irrigation to the rice growing area of Central Luzon, which would be
environmentally sound, technically feasible and economically viable, and would
involve no flooding or relocation of local residents. At that time, he directed
the Philippine Department of Agriculture and NPC to work together with other
interested agencies to develop a combined irrigation and hydroelectric project.
Shortly thereafter, the Philippine government was approached by the Company with
a proposal for a project to be developed in the Casecnan area on a
build-own-operate-transfer ("BOOT") basis, that is, an arrangement under which
the Company, as developer, would agree to build during the construction period
and thereafter own and operate the Casecnan Project for a twenty-year
cooperation period (the "Cooperation Period"), after which, ownership and
operation of the Project would be transferred to NIA at no cost on an "as-is"
basis. After conclusion of a public solicitation for competing proposals, NIA
selected the Company as the BOOT developer and entered into a project agreement
with the Company (the "Project Agreement"). The Casecnan Project was
subsequently designated a high priority project under Republic Act No. 529 by
the National Economic and Development Authority of the Philippines.
CE Casecnan constructed and operates the Casecnan Project under the terms of the
Project Agreement between CE Casecnan and NIA. Under the Project Agreement, CE
Casecnan developed, financed and constructed the Casecnan Project during the
construction period and will own and operate the Project during the 20-year
Cooperation Period. During the Cooperation Period, NIA is obligated to accept
all deliveries of water and energy, and so long as the Casecnan Project is
physically capable of operating and delivering in accordance with agreed levels
set forth in the Project Agreement, NIA will pay CE Casecnan a fixed fee for the
delivery of water and a fixed fee for the delivery of a threshold amount of
electricity. In addition, NIA will pay a fee for all electricity delivered in
excess of the threshold amount up to a specified amount. The water delivery fee
is a fixed monthly amount, to be received in US Dollars at the end of each
month, based on 801.9 million cubic meters of water flow past the water delivery
point per year, pro-rated to 66.8 million cubic meters per month. The unit price
for water is established at $0.029 per cubic meter (subject to adjustment as set
forth in the Project Agreement) as of January 1, 1994 and escalated at seven and
one-half percent (7.5%) per annum, pro-rated on a monthly basis, through the end
of the fifth year of the Cooperation Period and then kept flat at that level for
the last fifteen years of the Cooperation Period. The unit price for water is to
be adjusted by $.00043 for each $1.0 million of certain taxes and fees paid by
the Company as specified in the Project Agreement. The unit price of water as of
December 31 2002 is $0.1017. Actual deliveries of water greater than or less
than 66.8 million cubic meters in any month will not result in any adjustment of
the water delivery fee. The guaranteed energy fee is a fixed monthly amount, to
be received in US Dollars at the end of each month, based on energy deliveries
of 228.0 million kilowatt-hour ("kWh") per year, pro-rated to 19.0 million kWh
per month. Actual deliveries of energy less than 19.0 million kWh per month will
not result in any reduction of the guaranteed energy fee but will result in an
adjustment to the excess energy fee. The unit price for guaranteed energy is
$0.1596 per kWh. The excess energy fee is a variable amount, to be received in
US Dollars at the end of each month, for electrical energy delivered in that
month in excess of 19.0 million kWh. No excess energy delivery fee will be due
until all cumulative electrical energy shortfalls below 19.0 million kWh in
previous months have been made up. The unit price of excess energy is $0.1509
per kWh. NIA will sell the electricity it purchases to NPC, although NIA's
obligations to CE Casecnan under the Project Agreement are not dependent on
NPC's purchase of the electricity from NIA. All fees to be paid by NIA to CE
Casecnan are payable in US Dollars. The fixed fees paid for the delivery of
water and energy, regardless of the amount of electricity or water actually
delivered, are expected to provide approximately 78% of CE Casecnan's revenues.
At the end of the Cooperation Period, the Casecnan Project will be transferred
to NIA at no additional consideration on an "as is" basis.
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The 20-year Cooperation Period under the Project Agreement commenced on December
11, 2001, the start of the Project's commercial operations. NIA has paid all
amounts invoiced for energy delivery fees under the Project Agreement and all
amounts invoiced for water delivery fees under the Project Agreement except the
tax compensation portion of the water delivery fees, none of which has been paid
(see "Casecnan NIA Arbitration").
The Project Agreement provides for additional compensation to CE Casecnan upon
the occurrence of certain events, including increases in Philippine taxes and
adverse changes in Philippine law. Upon the occurrence and during the
continuance of certain force majeure events, including those associated with
Philippine political action, NIA may be obligated to buy the Casecnan Project
from CE Casecnan at a buyout price expected to be in excess of the aggregate
principal amount of the outstanding CE Casecnan debt securities, together with
accrued but unpaid interest.
The Republic of the Philippines has provided a Performance Undertaking under
which NIA's obligations under the Project Agreement are guaranteed by the full
faith and credit of the Republic of the Philippines. The Project Agreement and
the Performance Undertaking provide for the resolution of disputes by binding
arbitration in Singapore under international arbitration rules.
NIA's payment obligations under the Project Agreement are the Company's sole
source of operating revenues. Because of the Company's dependence on NIA, any
material failure of NIA to fulfill its obligations under the Project Agreement
and any material failure of the Republic of the Philippines to fulfill its
obligations under the Performance Undertaking would significantly impair the
ability of the Company to meet its obligations under the Securities.
CE Casecnan financed a portion of the costs of the Casecnan Project through the
issuance of $125 million of its 11.45% Senior Secured Series A Notes due 2005
(the "Series A Notes"), $171.5 million of its 11.95% Senior Secured Series B
Bonds due 2010 (the "Series B Bonds") and $75 million of its Senior Secured
Floating Rate Notes due 2002 ("FRNs"), pursuant to an indenture dated November
27, 1995 (as amended to date, the "Trust Indenture"). During 2002, the Company
repaid all amounts due under the FRNs.
CONCENTRATION OF RISK
NIA's payments under the Project Agreement are substantially denominated in
United States Dollars and are 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
stockholders, partners or affiliates of the Company, including MidAmerican, and
no directors, officers or employees of the Company will guarantee or be in any
way liable for payment of the Company's obligations. As a result, payment of the
Company's obligations depends upon the availability of sufficient revenues from
the Company's business after the payment of operating expenses.
In connection with an interagency review of approximately 40 independent power
project contracts in the Philippines, the Casecnan Project (together with four
other projects) has reportedly been identified as raising legal and financial
questions and, with those projects, 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 during 2002, 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 Senate hearings are scheduled at this time although hearings before a
Philippine House committee were scheduled for the first quarter of 2003.
TERMS OF THE SECURITIES
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GENERAL
In November 1995, the Company issued and sold (i) the Series A Notes, (ii) the
Series B Bonds, and (iii) the FRNs. The Series A Notes, Series B Bonds and FRNs
are herein referred to collectively as the "Securities". During 2002, the
Company repaid all amounts due under the FRNs.
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The Securities are direct obligations of the Company, secured solely by the
Company's collateral.
PAYMENT OF PRINCIPAL AND INTEREST
Interest on the Series A Notes and the Series B Bonds is payable semiannually
every May 15 and November 15 (the "Securities Interest Payment Date"), which
commenced on May 15, 1996, to the registered Holders thereof at the close of
business on May 1 and November 1, as the case may be, preceding each Securities
Interest Payment Date. The initial average life of the Series A Notes was 8.84
years, and the initial average life of the Series B Bonds was 11.57 years.
The $125 million principal Series A Notes due November 15, 2005 is payable in
semiannual installments, commencing May 15, 2003, as follows:
PERCENTAGE OF PRINCIPAL
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PAYMENT DATE AMOUNT PAYABLE
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May 15, 2003 13.50%
November 15, 2003 13.50%
May 15, 2004 17.00%
November 15, 2004 17.00%
May 15, 2005 19.50%
November 15, 2005 19.50%
The remaining balance of the $171.5 million principal of the Series B Bonds due
November 15, 2010 is payable in semiannual installments as follows:
PERCENTAGE OF
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INITIAL PRINCIPAL
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PAYMENT DATE AMOUNT PAYABLE
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May 15, 2003 2.25%
November 15, 2003 2.25%
May 15, 2004 2.00%
November 15, 2004 2.00%
May 15, 2005 1.75%
November 15, 2005 1.75%
May 15, 2006 10.50%
November 15, 2006 10.50%
May 15, 2007 11.00%
November 15, 2007 11.00%
May 15, 2008 11.00%
November 15, 2008 11.00%
May 15, 2009 4.00%
November 15, 2009 4.00%
May 15, 2010 5.00%
November 15, 2010 5.00%
The $75.0 million principal of the FRNs due November 15, 2002 was payable in
semiannual installments, which commenced on November 15, 2000, and was completed
on November 15, 2002. The FRNs bore interest at LIBOR plus 3.00% per annum.
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PRIORITY OF PAYMENTS
Prior to completion of the Casecnan Project pursuant to the Replacement
Contract, all net proceeds of the Securities and any liquidated damages proceeds
were deposited in the Construction Fund and disbursed to pay for budgeted
construction or restoration costs, including interest and, where applicable,
principal on the Securities.
After completion of the Casecnan Project, except as otherwise provided for with
respect to mandatory redemptions and loss proceeds, all revenues received by the
Company from the Casecnan Project have been and will continue to be paid to the
Revenue Fund maintained by the Depositary (other than payments required to be
used for VAT payments to the Republic of the Philippines). Amounts paid to the
Revenue Fund have been and will continue to be distributed in the following
order of priority: (a) to pay operating and maintenance costs; (b) to pay
certain administrative costs of the agents for the Secured Parties under the
Financing Documents; (c) to pay principal of, premium (if any) and interest on
the Securities (including any increased costs necessary to gross up such
payments for certain withholding taxes and other assessments and charges), and
principal and interest on other senior debt, if any; (d) to cause the Debt
Service Reserve Fund to equal the Debt Service Reserve Fund Required Balance, as
defined below; (e) to pay indemnification expenses and other expenses to the
Secured Parties and certain other costs, and (f) to the Distribution Fund or
Distribution Suspense Fund, as applicable.
DEBT SERVICE RESERVE FUND
At the completion of the Casecnan Project, the Company established a Debt
Service Reserve Fund for the benefit of the Holders of the Securities, which
will be funded in cash from operating revenues as described under "Priority of
Payments" above. Such amounts will be deposited to the Debt Service Reserve Fund
from time to time to the extent required to cause it to equal the Debt Service
Reserve Fund Required Balance which is intended to approximate the highest
amount of the payments of principal and interest to be made on the Securities
during any semiannual period over the next three years from the last debt
service payment.
OPTIONAL REDEMPTION
On and after the seventh anniversary of the Closing (as defined in the Trust
Indenture), the Series A Notes are subject to optional redemption by the
Company, in whole and not in part, at par plus accrued interest to the
Redemption Date.
The Series B Bonds are subject to optional redemption by the Company, at any
time, in whole or in part, pro rata, at par plus accrued interest to the
redemption date plus a premium, calculated to "make whole" to comparable U.S.
treasury securities plus 150 basis points.
The Company also has the option to redeem the Securities, in whole or in part,
at par plus accrued interest at any time if, as a result of any change in
Philippine tax law or in the application or interpretation of Philippine tax law
occurring after the date of issuance of the Securities, the Company is required
to pay certain additional amounts described in the Trust Indenture.
MANDATORY REDEMPTION
The Securities are subject to mandatory redemption, pro rata, at par plus
accrued interest to the redemption date; (a) upon the receipt by the Company of
loss proceeds that exceed $15 million in respect of certain events of property
or casualty loss or similar events, unless the funds are to be utilized by the
Company for an Approved Restoration Plan; or (b) upon the receipt by the Company
of proceeds realized in connection with a Project Agreement Buyout.
CHANGE IN CONTROL PUT
When a Change in Control occurs, each Holder will have the right to require the
Company to repurchase all or any part of such Holder's Securities at a cash
purchase price equal to 101% of the principal amount thereof, plus accrued
interest to the date of repurchase in accordance with the procedures set forth
in the Trust Indenture. There is no assurance that upon a Change in Control the
Company will have sufficient funds to repurchase the Securities.
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PROFIT DISTRIBUTIONS
Prior to the completion of the Casecnan Project, no profit distributions were
permitted to be made to the Company or its stockholders and there were no such
profits. After completion, profit distributions may be made only from and to the
extent of amounts on deposit in the Distribution Fund or Distribution Suspense
Fund. Distributions are subject to the prior satisfaction of the following
conditions:
(a) The amounts contained in the Principal Fund and the Interest Fund will be
equal to or greater than the aggregate scheduled principal and interest
payments next due on the Securities;
(b) No Default or Event of Default under the Trust Indenture shall have
occurred and be continuing;
(c) The Debt Service Coverage Ratio for the preceding 12-month period is equal
to or greater than 1.35 to 1 as certified by an officer of the Company;
(d) The projected Debt Service Coverage Ratio of the Securities for the
succeeding 12-month period is equal to or greater than 1.35 to 1, as
certified by an officer of the Company; and,
(e) The Debt Service Reserve Fund has a balance equal to or greater than the
Debt Service Reserve Fund Required Balance.
There were no profit distributions to the Company or its stockholders in 2002 or
2001.
RANKING AND SECURITY FOR THE SECURITIES
The Securities are senior debt of the Company and are secured by (a) an
assignment of all revenues received by the Company from the Casecnan Project;
(b) a collateral assignment of all material contracts; (c) a lien on any
accounts and funds on deposit under the Depositary Agreement; (d) a pledge of
approximately 100% of the capital stock of the Company, subject to release in
certain circumstances relating to accessing political risk insurance for the
benefit of the stockholders; and (e) a lien on all other material assets and
property interests of the Company. The Securities will rank pari passu with and
will share the Collateral on a pro rata basis with certain other senior secured
debt, if any (provided that the Debt Service Reserve Fund shall be held as
collateral solely for the obligations under the Securities). The proceeds of any
political risk insurance covering the capital investment will not be part of the
collateral for the Securities. While under the Trust Indenture the Company may
incur certain permitted debt senior to the Securities, it has no present
intention to do so.
RATINGS
Moody's and Standard & Poor's have assigned the Securities ratings of "Ba2" and
"BB+", respectively. There is no assurance that any such credit rating will
remain in effect for any given period of time or that such rating will not be
lowered, suspended or withdrawn entirely by the applicable rating agency, if, in
such rating agency's judgment, circumstances so warrant.
NATURE OF RECOURSE ON THE SECURITIES
The Company's obligations to make payments of principal, premium, if any, and
interest on the Securities are obligations solely of the Company secured solely
by the collateral. Neither the stockholders of the Company nor any affiliates,
including MidAmerican, incorporator, officer, director or employee thereof or of
the Company guaranteed the payment of, nor have any obligation with respect to
payment of the Securities, except to the extent that affiliates of MidAmerican
who are stockholders of the Company have pledged their stockholdings in the
Company as security for the notes and bonds issued by the Company. 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.
INCURRENCE OF ADDITIONAL DEBT
The Company shall not incur any debt other than "Permitted Debt." "Permitted
Debt" means:
(a) The Securities;
-8-
(b) After the completion of the Casecnan Project, debt incurred to finance the
construction of capital improvements to the Casecnan Project, which are
required to ensure compliance with applicable law or anticipated changes
therein; provided that no such debt may be incurred unless at the time of
incurrence of such debt, an independent engineer confirms the
reasonableness of (i) a certification by the Company (containing customary
assumptions and qualifications) that the proposed capital improvements are
reasonably expected to enable the Casecnan Project to comply with
applicable or anticipated legal requirements and (ii) the calculations of
the Company that demonstrate, after giving effect to the incurrence of such
debt, that the minimum project Debt Service Coverage Ratio (x) for the next
four consecutive fiscal quarters, commencing with the quarter in which such
debt is incurred, taken as one annual period, and (y) for each subsequent
fiscal year through the final maturity date, will not be less than 1.3 to
1;
(c) After the completion of the Casecnan Project, debt incurred to finance the
construction of capital improvements to the Casecnan Project not required
by applicable law, so long as after giving effect to the incurrence of such
debt (i) no default or event of default has occurred and is continuing, and
(ii)(A) the independent engineer confirms the reasonableness of (I) a
certification by the Company (containing customary assumptions and
qualifications) that the proposed capital improvements are technically
feasible and prudent and (II) the calculations of the Company that
demonstrate, after giving effect to the incurrence of such debt, (x) the
minimum project Debt Service Coverage Ratio for the next four consecutive
fiscal quarters, commencing with the quarter in which such debt is
incurred, taken as one annual period, and in every fiscal year thereafter,
will not be less than 1.4 to 1 and (y) the average projected Debt Service
Coverage Ratio for all succeeding fiscal years until the final maturity
date will not be less than 1.7 to 1, or (B) the rating agencies confirm
that the incurrence of such debt will not result in a rating downgrade;
(d) After the completion of the Casecnan Project, working capital debt in an
aggregate amount outstanding at any time not to exceed $5 million;
(e) Debt incurred in connection with certain permitted interest rate and
currency hedging arrangements;
(f) Subordinated debt from affiliates in an aggregate amount not to exceed $150
million prior to completion and $100 million after completion, which shall
be used to finance capital, operating or other costs with respect to the
Casecnan Project;
(g) Debt incurred for purposes for which permitted liens may be incurred;
(h) Debt contemplated to be incurred pursuant to the Casecnan Project
documents, including obligations in connection with any letter of credit in
an aggregate amount outstanding at any time not to exceed $15 million;
(i) Purchase money debt and other debts in the ordinary course of business to
support the operation and maintenance of the Casecnan Project, in an
aggregate amount not to exceed $35 million at any time;
(j) Permitted refinancing debt, if, as certified by an authorized officer of
the Company at the time of incurrence, (A)(i) after giving effect to the
incurrence of such debt, (x) the minimum projected Debt Service Coverage
Ratio for the next four consecutive fiscal quarters in which such debt is
incurred, taken as one annual period, and in every fiscal year thereafter,
will not be less than 1.5 to 1, and (y) for each subsequent fiscal year
through the final maturity date, the average project Debt Service Coverage
Ratio will not be less than 2.0 to 1, and (ii) the final maturity and
average life of the debt incurred each exceed those of the debt remaining,
(B) each principal payment equals that of each corresponding principal
payment of the debt being replaced or (C) the rating agencies confirm that
the incurrence of such debt will not result in a rating downgrade; and
(k) Debt incurred by the Company prior to the completion of the Casecnan
Project as necessary for financing, engineering, construction, completion,
testing and start-up of the Casecnan Project in accordance with an Approved
Completion Plan in order to achieve completion ("Pre-Completion Additional
Debt"), provided that (i) the rating agencies confirm that the incurrence
of such debt will not result in a rating downgrade; or (ii)(A) the
independent engineer has confirmed (subject to customary assumptions and
qualifications) as reasonable, the technical feasibility of the Approved
Completion Plan including a certification that (subject to customary
assumptions and qualifications) the net proceeds of such Debt and other
funds available to the Company (from Liquidated Damages Proceeds or
otherwise) are reasonably expected to be sufficient to fund the costs of
reaching completion; and (B) the Company certifies at the time of
incurrence (with customary assumptions and qualifications) that (x) the
Approved Completion Plan is technically feasible and prudent, (y)
-9-
after giving effect to the incurrence of such debt, the minimum projected
Debt Service Coverage Ratio for the four fiscal quarters commencing with
the quarter that commences immediately after the projected date of
commercial operation of the Casecnan Project, taken as one annual period,
and in every fiscal year thereafter, will not be less than 1.3 to 1, and
(z) after giving effect to incurrence of such debt, the average projected
Debt Service Coverage Ratio for all succeeding Calendar Years until the
final maturity date will not be less than 1.5 to 1.
PRINCIPAL COVENANTS
Principal covenants under the Trust Indenture require the Company, subject to
certain exceptions and qualifications, (a) not to incur (i) any debt except
Permitted Debt or (ii) any lien upon any of its assets except permitted liens;
(b) not to enter into any transaction of merger or consolidation, change its
form of organization, liquidate, wind-up or dissolve itself; (c) not to enter
into non-arm's length transactions or agreements with affiliates; (d) not to
engage in any business other than as contemplated by the Trust Indenture; (e)
not to enter into certain change orders under the Turnkey Construction Contract
or amend the Approved Construction Budget and Schedule (or an Approved
Completion Plan), or amend, terminate or otherwise modify any material Project
Document to which it is a party, except as permitted under the Trust Indenture;
(f) not to sell, lease or transfer any property or assets material to the
Casecnan Project except in the ordinary course of business; (g) to construct the
Casecnan Project in accordance with the Approved Construction Budget and
Schedule; (h) to operate and maintain the Casecnan Project in accordance with
the Approved Operation and Maintenance Budget; (i) to maintain insurance as
required under the Trust Indenture; and (j) to enter into an interest rate
agreement for the Floating Rate Notes, within 30 days of Closing, at a LIBOR cap
of up to 7.5%.
INSURANCE
- ---------
The Company maintains insurance with respect to the Casecnan Project of a type
and in such amounts as are generally carried by companies engaged in similar
businesses and owning similar projects that are financed in a similar manner.
This coverage includes casualty insurance, including flood and earthquake
coverage, business interruption insurance, primary and excess liability
insurance, automobile insurance and workers compensation insurance. However, the
proceeds of such insurance may not be adequate to cover reduced revenues,
increased expenses or other liabilities arising from the occurrence of
catastrophic events. Moreover, there can be no assurance that such insurance
coverage will be available in the future at commercially reasonable rates or
that the amounts for which the Company is insured will cover all losses.
Nevertheless, the Company will not reduce or cancel the coverage if the
Insurance Consultant determines it is not reasonable to do so and insurance is
available on commercially reasonable terms.
REGULATORY MATTERS
- ------------------
The Philippine Congress has passed the Electric Power Industry Reform Act of
2001 (EPIRA), which is aimed at restructuring the Philippine power industry,
privatization of the NPC and introduction of a competitive electricity market,
among other initiatives. The implementation of EPIRA may have an impact on the
Philippines power industry as a whole and the Company's future operations in the
Philippines, 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, the Casecnan Project (together with four
other projects) has reportedly been identified as raising legal and financial
questions and, with those projects, 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,
were requested to appear and did appear during 2002 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 Senate
hearings are scheduled at this time although hearings before a Philippine House
committee were scheduled for the first quarter of 2003.
EMPLOYEES
- ---------
At December 31, 2002, the Company had 42 full-time employees consisting of
operations, maintenance, logistics, compliance, and engineering personnel. At
the powerhouse control room, personnel monitor, direct and control the
operations and maintenance of the whole Casecnan Project. The control room is
staffed 24 hours per day and is the contact point for the Casecnan Project's
customers and others. At the diversion structures, personnel are responsible to
ensure that
-10-
the trash racks at the tunnel intakes are kept clean and maintained and that
excessive sediment build-up behind the structure is prevented.
ITEM 2. PROPERTIES
CE Casecnan's principal property is the approximately 150 MW hydroelectric power
facility that was completed in December 2001.
ITEM 3. LEGAL PROCEEDINGS
The Casecnan Project was initially being constructed pursuant to a fixed-price,
date-certain, turnkey construction contract (the "Hanbo Contract") on a joint
and several basis by Hanbo Corporation ("Hanbo") and Hanbo Engineering and
Construction Co., Ltd. ("HECC"), both of which are South Korean corporations. As
of May 7, 1997, the Company terminated the Hanbo Contract due to defaults by
Hanbo and HECC including the insolvency of both companies. On the same date, the
Company entered into a new fixed-price, date certain, turnkey engineering,
procurement and construction contract to complete the construction of the
Casecnan Project (the "Replacement Contract"). The work under the Replacement
Contract was conducted by a consortium consisting of Cooperativa Muratori
Cementisti CMC di Ravenna and Impresa Pizzarotti & C. Spa., (collectively, the
"Contractor"), working together with Siemens A.G., Sulzer Hydro Ltd., Black &
Veatch and Colenco Power Engineering Ltd.
On November 20, 1999, the Replacement 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.
On February 12, 2001, the Contractor filed a Request for Arbitration with the
International Chamber of Commerce seeking schedule relief of 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
requested 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 also has alleged that the
circumstances in which the Company assumed control of the Casecnan Project and
placed it 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, and has further alleged that the delay liquidated
damages clause which provides for payments of $125,000 per day for each day of
delay in completion of the Project for which the Contractor is responsible is
unenforceable. The arbitration is being conducted applying New York law and in
accordance with the rules of the International Chamber of Commerce.
Hearings have been held in connection with this arbitration in July 2001,
September 2001, January 2002, March 2002, November 2002 and January 2003. As
part of those hearings, 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. As a result of the continuing nature of that injunction, 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. As of December 31, 2002, however, CE Casecnan 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 November 7,
2002, the International Chamber of Commerce issued the arbitration tribunal's
partial award with respect to the Contractor's force majeure and geologic
conditions claims. The arbitration 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. The $3.8 million is shown as part of the accounts payable and accrued
expenses balance at the end of December 31, 2002. All of the Contractor's other
claims with respect to force majeure and geologic conditions were denied.
Further hearings on the Contractor's repudiation and quantum meruit claims, the
alleged unenforceability of the delay liquidated damages clause and certain
other matters had been scheduled for March 24 through March 28, 2003, but were
postponed as a result of the commencement of military action in Iraq. The
arbitral tribunal has requested the parties to indicate the earliest possible
date on which they are available and will then reschedule the hearings.
-11-
If the Contractor were to prevail on its claim that the delay liquidated damages
clause is unenforceable, the Company would not be entitled to collect such delay
damages for the period from March 31, 2001 through December 11, 2001. If the
Contractor were to prevail in its repudiation claim and prove quantum meruit
damages in excess of amounts already paid to the Contractor, the Company could
be liable to make additional payments to the Contractor. CE Casecnan believes
all such allegations and claims are without merit and is vigorously contesting
the Contractor's claims.
CASECNAN NIA ARBITRATION
Under the terms of the Project Agreement, NIA has the option of timely
reimbursing CE Casecnan directly for certain taxes CE Casecnan has paid. If NIA
does not so reimburse CE Casecnan, the taxes paid by CE Casecnan result in an
increase in the Water Delivery Fee. The payment of certain other taxes by CE
Casecnan results automatically in an increase in the Water Delivery Fee. As of
December 31, 2002, CE Casecnan has paid approximately $56.7 million in taxes
which as a result of the foregoing provisions has resulted in an increase in the
Water Delivery Fee. NIA has failed to pay the portion of the Water Delivery Fee
each month which relates to the payment of these taxes by CE Casecnan. As a
result of this non-payment, on August 19, 2002, CE Casecnan filed a Request for
Arbitration against NIA, seeking payment of such portion of the Water Delivery
Fee and enforcement of the relevant provision of the Project Agreement going
forward. The arbitration will be conducted in accordance with the rules of the
International Chamber of Commerce. NIA is expected to file its answer late in
the first quarter or early in the second quarter, 2003. The three member
arbitration panel has been confirmed by the International Chamber of Commerce
and an initial organizational hearing is scheduled for the second quarter, 2003.
CASECNAN STOCKHOLDER LITIGATION
Pursuant to the share ownership adjustment mechanism in the CE Casecnan
stockholder agreement, which is based upon pro forma financial projections of
the Casecnan Project prepared following commencement of commercial operations,
in February 2002, MidAmerican, through its indirect wholly owned subsidiary CE
Casecnan Ltd., advised the minority stockholder LaPrairie Group Contractors
(International) Ltd., ("LPG"), that MidAmerican's indirect ownership interest in
CE Casecnan had increased to 100% effective from commencement of commercial
operations. On July 8, 2002, LPG filed a complaint in the Superior Court of the
State of California, City and County of San Francisco against, inter alia, CE
Casecnan Ltd. and MidAmerican. In the complaint, LPG seeks compensatory and
punitive damages for alleged breaches of the stockholder agreement and alleged
breaches of fiduciary duties allegedly owed by CE Casecnan Ltd. and MidAmerican
to LPG. The complaint also seeks injunctive relief against all defendants and a
declaratory judgment that LPG is entitled to maintain its 15% interest in CE
Casecnan. The impact, if any, of this litigation on the Company cannot be
determined at this time.
In February 2003, San Lorenzo Ruiz Builders and Developers Group, Inc. ("San
Lorenzo"), an original shareholder substantially all of whose shares in the
Company MidAmerican purchased in 1998, threatened to initiate legal action in
the Philippines in connection with certain aspects of its option to repurchase
such shares on or prior to commercial operation of the Project. The Company
believes that San Lorenzo has no valid basis for any claim and, if named as a
defendant in any action that may be commenced by San Lorenzo, will vigorously
defend any such action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
-12-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Not Applicable.
ITEM 6. SELECTED FINANCIAL DATA
The selected data presented below are derived from the Company's audited
financial statements.
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
=============================================================================================
YEAR ENDED DECEMBER 31
- ---------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
- ---------------------------------------------------------------------------------------------
Total revenue $138,264 $ 8,174 $ -- $ -- $ --
Operating expenses 44,849 3,922 451 -- --
Net income (loss) to common
stockholders 44,956 2,867 4,857 699 381
Net income (loss) per share $ 58.60 $ 3.74 $ 6.33 $ 0.91 $ 0.50
Total assets 541,507 515,192 482,373 522,398 553,433
Notes payable 51,263 40,763 -- -- --
Long-term debt, including current
portion 287,926 323,125 352,750 371,500 371,500
Total liabilities 389,586 408,227 378,275 423,157 454,891
Stockholders' equity 151,921 106,965 104,098 99,241 98,542
=============================================================================================
(1) Commenced commercial operations on December 11, 2001.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is management's discussion and analysis of certain significant
factors which have affected the financial condition and results of operations of
the Company during the periods included in the accompanying statements of
operations. This discussion should be read in conjunction with "Selected
Financial Data" and the Company's historical financial statements and the notes
to those statements included elsewhere in this report.
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 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
and deferred income taxes. 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 payments from NIA. This assessment requires judgment regarding
the outcome of pending disputes and the ability of the customer to pay the
-13-
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.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2002 AND 2001
Revenue increased to $138.3 million for the year ended December 31, 2002 from
$8.2 million for the year ended December 31, 2001. Water delivery revenue
increased to $82.6 million for the year ended December 31, 2002 from $4.1
million for the year ended December 31, 2001 and electricity sales revenue
increased to $55.7 million for the year ended December 31, 2002 from $4.1
million for the year ended December 31, 2001. The increase in both sources of
revenue is due to a full year of operations during 2002 as the Casecnan Project
began commercial operations on December 11, 2001. Revenues from water delivery,
guaranteed energy and excess energy generated and delivered are 60%, 26% and
14%, respectively, of the total revenue for the year ended December 31, 2002
while 50%, 26% and 24%, respectively for the year ended December 31, 2001.
The following table provides operating data of the Casecnan Project for the year
ended December 31, 2002 and 2001:
----------------------------------------------------------------------
2002 2001
----------------------------------------------------------------------
Capacity factor 26.9% 28.0%
Nameplate rating (MW) 153 153
Electricity produced (kWh in millions) 360.1 26.2
Water delivered (cubic meters in millions) 563.2 36.5
The 2001 figure for electricity produced includes all energy for the year, both
commissioning and cooperation period revenues. The 2001 capacity factor
calculation only includes the 21.6GWh of energy produced during December 11-31,
2001, the part of the year in which the plant was under commercial operations.
The 2002 figure for energy produced includes 7.5 GWh of energy for which the
Company was paid pursuant to the terms of the Project Agreement which provide
for payment in respect of energy that could have been delivered in circumstances
where the Project was not dispatched at its full capacity. For the same reason,
the 2002 figure for water delivered includes 12.2 million cubic meters of water
spilled.
Operating expenses increased to $44.8 million for the year ended December 31,
2002 from $3.9 million for the year ended December 31, 2001 due to a full year
of operations during 2002. Included within operating expenses for the year ended
December 31, 2002 are depreciation, plant operations and doubtful accounts
expense of $23.2 million, $10.1 million and $11.5 million, respectively. These
expenses increased from prior year amounts of $1.2 million, $2.2 million and
$0.5 million, respectively.
Interest expense decreased to $42.5 million for the year ended December 31, 2002
from $44.2 million for the year ended December 31, 2001. The primary reason for
the decrease was the payment of the FRNs as well as a 5% reduction in the
balance of the Series B bonds due to a payment of $8.6 million in 2002.
In connection with the completion of the Casecnan Project on December 11, 2001,
capitalization of interest expense to the carrying value of the Casecnan Project
ceased. Interest totaling $41.7 million for the year ended December 31, 2001 was
capitalized.
Interest income decreased to $0.2 million for the year ended December 31, 2002
from $1.5 million for the year ended December 31, 2001. The primary reason for
the decrease was the declining cash balances as by the end of 2001 most escrowed
funds had been used for the construction activities.
-14-
Tax expense in 2002 of $6.1 million consists of a payment to the Philippine BIR
for the settlement of taxes related to interest income for the years 2001, 2000
and 1999.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2001
The Casecnan Project commenced commercial operations on December 11, 2001.
The revenue of $8.2 million for the year ended December 31, 2001 consists of
revenue for the delivery of water and generation and delivery of electrical
energy. Revenue from water delivery, guaranteed energy and excess energy
generated and delivered are 50%, 26% and 24%, respectively, of the total revenue
for the year.
A total of $0.9 million was used to finance the costs of start-up activities in
2001 compared to $0.5 million in 2000. Plant operations and doubtful accounts
expense aggregating $2.7 million were incurred during 2001. Depreciation expense
of $1.2 million was for the period after project completion up to December 31,
2002.
Interest expense, including bond issue amortization, was $44.2 million and $48.3
million in 2001, and 2000, respectively and such are related to the notes and
bonds payable issued by the Company in the fourth quarter of 1995. Interest
capitalized during construction was $41.7 million and $47.5 million in 2001, and
2000, respectively. Interest earned on cash balances declined to $1.5 million in
2001 from $7.6 million in 2000 due to declining cash balances as funds were used
for the construction activities.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents were $0.7 million, $1.1 million and $0.7
million at December 31, 2002, 2001 and 2000, respectively.
The Company generated cash flows from operations of $34.9 million for the year
ended December 31, 2002, compared with a use of $22.9 million for the same
period in 2001 and cash flows of $10.0 million in 2000. The increase from 2001
was primarily due to increased net income of $42.1 million and non-cash expenses
of $21.9 million partially offset by changes in working capital activities. Net
income for the year 2001 was lower by $2.0 million compared to 2000.
The Company used $9.4 million for investing activities for the year ended
December 31, 2002, compared to $3.4 million and $1.9 million for the same period
in 2001 and 2000, respectively. During 2001 and 2000, capital expenditures were
offset by using investments as well as liquidated damages received. In the
current year, capital expenditures were $8.3 million compared to $48.6 million
and $82.7 million in 2001 and 2000, respectively.
The Company used $25.9 million and $9.8 million for financing activities for the
years ended December 31, 2002 and 2000, respectively, compared to providing
$26.6 million for the same period in 2001. During 2002, the Company repaid
long-term debt of $35.2 million and issued new notes payable of $10.5 million
while in 2001 the Company repaid long-term debt of $29.6 million and issued new
notes payable of $40.8 million and in 2000, the Company repaid long-term debt of
$18.8 million.
CE Casecnan constructed and operates the Casecnan Project under the terms of the
Project Agreement between CE Casecnan and NIA. Under the Project Agreement, CE
Casecnan developed, financed and constructed the Casecnan Project over the
construction period, and owns and operates the Casecnan Project for 20 years
(the "Cooperation Period"). During the Cooperation Period, NIA is obligated to
accept all deliveries of water and energy, and so long as the Casecnan Project
is physically capable of operating and delivering in accordance with agreed
levels set forth in the Project Agreement, NIA is obligated to pay CE Casecnan a
fixed fee for the delivery of a threshold volume of water and a fixed fee for
the delivery of a threshold amount of electricity. In addition, NIA is obligated
to pay a fee for all electricity delivered in excess of the threshold amount up
to a specified amount.
NIA's payment obligations under the Project Agreement are the Company's sole
source of operating revenues. Because of the Company's dependence on NIA, any
material failure of NIA to fulfill its obligations under the Project Agreement
and any material failure of the Republic of the Philippines to fulfill its
obligations under the Performance Undertaking would significantly impair the
ability of the Company to meet its obligations under the Securities.
-15-
The Casecnan Project was initially constructed pursuant to a fixed-price,
date-certain, turnkey construction contract (the "Hanbo Contract") on a joint
and several basis by Hanbo Corporation ("Hanbo") and Hanbo Engineering and
Construction Co., Ltd. ("HECC"), both of which are South Korean corporations. On
May 7, 1997, the Company terminated the Hanbo Contract due to defaults by Hanbo
and HECC including the insolvency of both companies. On the same date, the
Company entered into a new fixed-price, date certain, turnkey engineering,
procurement and construction contract to complete the construction of the
Casecnan Project (the "Replacement Contract"). The work under the Replacement
Contract was conducted by a consortium consisting of Cooperativa Muratori
Cementisti CMC di Ravenna and Impresa Pizzarotti & C. Spa., (collectively, the
"Contractor"), working together with Siemens A.G., Sulzer Hydro Ltd., Black &
Veatch and Colenco Power Engineering Ltd.
On November 20, 1999, the Replacement 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.
On February 12, 2001, the Contractor filed a Request for Arbitration with the
International Chamber of Commerce seeking schedule relief of 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
requested 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 also has alleged that the
circumstances in which the Company assumed control of the Casecnan Project and
placed it 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, and has further alleged that the delay liquidated
damages clause which provides for payments of $125,000 per day for each day of
delay in completion of the Project for which the Contractor is responsible is
unenforceable. The arbitration is being conducted applying New York law and in
accordance with the rules of the International Chamber of Commerce.
Hearings have been held in connection with this arbitration in July 2001,
September 2001, January 2002, March 2002, November 2002 and January 2003. As
part of those hearings, 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. As a result of the continuing nature of that injunction, 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. As of December 31, 2002, however, CE Casecnan 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 November 7,
2002, the International Chamber of Commerce issued the arbitration tribunal's
partial award with respect to the Contractor's force majeure and geologic
conditions claims. The arbitration 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. The $3.8 million is shown as part of the accounts payable and accrued
expenses balance at the end of December 31, 2002. All of the Contractor's other
claims with respect to force majeure and geologic conditions were denied.
Further hearings on the Contractor's repudiation and quantum meruit claims, the
alleged unenforceability of the delay liquidated damages clause and certain
other matters had been scheduled for March 24 through March 28, 2003, but were
postponed as a result of the commencement of military action in Iraq. The
arbitral tribunal has requested the parties to indicate the earliest possible
date on which they are available and will then reschedule the hearings.
If the Contractor were to prevail on its claim that the delay liquidated damages
clause is unenforceable, the Company would not be entitled to collect such delay
damages for the period from March 31, 2001 through December 11, 2001. If the
Contractor were to prevail in its repudiation claim and prove quantum meruit
damages in excess of amounts already paid to the Contractor, the Company could
be liable to make additional payments to the Contractor. CE Casecnan believes
all such allegations and claims are without merit and is vigorously contesting
the Contractor's claims.
CASECNAN NIA ARBITRATION
Under the terms of the Project Agreement, NIA has the option of timely
reimbursing CE Casecnan directly for certain taxes CE Casecnan has paid. If NIA
does not so reimburse CE Casecnan, the taxes paid by CE Casecnan result in an
increase
-16-
in the Water Delivery Fee. The payment of certain other taxes by CE
Casecnan results automatically in an increase in the Water Delivery Fee. As of
December 31, 2002, CE Casecnan has paid approximately $56.7 million in taxes
which as a result of the foregoing provisions has resulted in an increase in the
Water Delivery Fee. NIA has failed to pay the portion of the Water Delivery Fee
each month which relates to the payment of these taxes by CE Casecnan. As a
result of this non-payment, on August 19, 2002, CE Casecnan filed a Request for
Arbitration against NIA, seeking payment of such portion of the Water Delivery
Fee and enforcement of the relevant provision of the Project Agreement going
forward. The arbitration will be conducted in accordance with the rules of the
International Chamber of Commerce. NIA is expected to file its answer late in
the first quarter or early in the second quarter, 2003. The three member
arbitration panel has been confirmed by the International Chamber of Commerce
and an initial organizational hearing is scheduled for the second quarter, 2003.
CASECNAN STOCKHOLDER LITIGATION
Pursuant to the share ownership adjustment mechanism in the CE Casecnan
stockholder agreement, which is based upon pro forma financial projections of
the Casecnan Project prepared following commencement of commercial operations,
in February 2002, MidAmerican, through its indirect wholly owned subsidiary CE
Casecnan Ltd., advised the minority stockholder LaPrairie Group Contractors
(International) Ltd., ("LPG"), that MidAmerican's indirect ownership interest in
CE Casecnan had increased to 100% effective from commencement of commercial
operations. On July 8, 2002, LPG filed a complaint in the Superior Court of the
State of California, City and County of San Francisco against, inter alia, CE
Casecnan Ltd. and MidAmerican. In the complaint, LPG seeks compensatory and
punitive damages for alleged breaches of the stockholder agreement and alleged
breaches of fiduciary duties allegedly owed by CE Casecnan Ltd. and MidAmerican
to LPG. The complaint also seeks injunctive relief against all defendants and a
declaratory judgment that LPG is entitled to maintain its 15% interest in CE
Casecnan. The impact, if any, of this litigation on the Company cannot be
determined at this time.
In February 2003, San Lorenzo Ruiz Builders and Developers Group, Inc. ("San
Lorenzo"), an original shareholder substantially all of whose shares in the
Company MidAmerican purchased in 1998, threatened to initiate legal action in
the Philippines in connection with certain aspects of its option to repurchase
such shares on or prior to commercial operation of the Project. The Company
believes that San Lorenzo has no valid basis for any claim and , if named as a
defendant in any action that may be commenced by San Lorenzo, will vigorously
defend any such action.
-17-
BIR AUDIT
The Bureau of Internal Revenue ("BIR"), consistent with the Philippine
government's public statements to increase tax revenues, has commenced auditing
the Company for all taxes, including income taxes, for the years 2001, 2000 and
1999. In addition, the BIR has issued letters of authority to audit the tax
years 1998, 1997 and 1996. The only basis on which tax years prior to 1999 can
be audited is if the BIR successfully argues in a Philippine administrative or
court proceeding that the tax returns for those years are false or fraudulent in
some respect. The Company believes that any allegations that such tax years'
filings are false or fraudulent are without merit and accordingly that any audit
of such tax years is improper and without proper legal basis, although the
outcome of any audit by the Philippine tax authorities in light of the
government's public statements to increase tax revenues is uncertain. If the
Company is ultimately held liable the amounts assessed may be material. The
Company further believes that it currently is in compliance with applicable tax
laws and regulations with respect to all of its tax returns and filings.
CONTRACTUAL OBLIGATIONS
The Company has contractual obligations and commercial commitments that may
affect its financial condition. Contractual obligations to make future payments
arise from long-term debt and notes payable. Material obligations as of December
31, 2002 are as follows (in thousands):
- ----------------------------------------------------------------------------------
Payments Due by Period
- ----------------------------------------------------------------------------------
Less Than 2-3 4-5 After 5
Contractual cash obligations Total 1 Year Years Years Years
- ----------------------------------------------------------------------------------
(in thousands)
Long-term debt $287,925 $41,468 $104,112 $73,745 $68,600
Other long-term obligations 51,263 -- 51,263 -- --
- --------------------------------------------------------------------------------
Total contractual cash obligations $339,188 $41,468 $155,375 $73,745 $68,600
- --------------------------------------------------------------------------------
-18-
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion of the Company's exposure to various market risks
contains "forward-looking statements" that involve risks and uncertainties.
These projected results have been prepared utilizing certain assumptions
considered reasonable in the circumstances and in light of information currently
available to the Company. Actual results could differ materially from those
projected in the forward-looking information.
Interest Rate Risk
- ------------------
At December 31, 2002, the Company had fixed-rate long-term debt of $287.9
million in principal amount and having a fair value of $288.1 million. These
instruments are fixed-rate and therefore do not expose the Company to the risk
of earnings loss due to changes in market interest rates. However, the fair
value of these instruments would decrease by approximately $12.8 million if
interest rates were to increase by 10% from their levels at December 31, 2002.
In general, such a decrease in fair value would impact earnings and cash flows
only if the Company were to reacquire all or a portion of these instruments
prior to their maturity.
-19-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Accountants 21
Balance Sheets as of December 31, 2002 and 2001 22
Statements of Income for Each of the Three Years in the Period
Ended December 31, 2002 23
Statements of Changes in Stockholders' Equity for Each of the Three
Years in the Period Ended December 31, 2002 24
Statements of Cash Flows for Each of the Three Years in the Period
Ended December 31, 2002 25
Notes to Financial Statements 26
-20-
Report of Independent Accountants
To the Board of Directors and Stockholders of
CE CASECNAN WATER AND ENERGY COMPANY, INC.
We have audited the accompanying balance sheets of CE Casecnan Water and Energy
Company, Inc. as of December 31, 2002 and 2001, and the related statements of
income, of changes in stockholders' equity and of cash flows for each of the
three years in the period ended December 31, 2002. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CE Casecnan Water and Energy
Company, Inc. as of December 31, 2002 and 2001, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States of America.
/s/ JOAQUIN CUNANAN & CO.
JOAQUIN CUNANAN & CO.
A PRICEWATERHOUSECOOPERS MEMBER FIRM
Makati City, Philippines
January 24, 2003
-21-
CE CASECNAN WATER AND ENERGY COMPANY, INC.
BALANCE SHEETS
DECEMBER 31, 2002 and 2001
(Amounts in thousands U.S. Dollars, except share data)
====================================================================================
2002 2001
- ------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 705 $ 1,078
Trade receivable, net (Note 3) 51,515 8,012
Accrued interest and other receivable 7,009 6,601
Prepaid insurance 3,532 1,813
Other current assets 2,030 1,472
- ------------------------------------------------------------------------------------
Total current assets 64,791 18,976
Restricted cash and investments (Note 2) 7,078 5,978
Bond issue costs, net (Note 2) 5,218 6,712
Property, plant and equipment, net (Notes 2 and 4) 453,507 466,455
Deferred income tax (Notes 2 and 6) 5,371 5,371
Other assets 5,542 11,700
- ------------------------------------------------------------------------------------
$541,507 $ 515,192
====================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses (Note 8) $ 10,785 $ 4,626
Accrued interest on notes payable 2,048 192
Accrued interest on long-term debts 4,223 5,014
Payable to affiliates (Note 7) 33,342 34,507
Current portion of long-term debt (Notes 5) 41,468 35,200
- ------------------------------------------------------------------------------------
Total current liabilities 91,866 79,539
- ------------------------------------------------------------------------------------
Notes payable (Notes 7) 51,263 40,763
- ------------------------------------------------------------------------------------
Long-term debts, net of current portion (Notes 5) 246,457 287,925
- ------------------------------------------------------------------------------------
Commitments and contingencies (Note 9)
- ------------------------------------------------------------------------------------
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 (deficit) 28,085 (16,871)
- ------------------------------------------------------------------------------------
151,921 106,965
- ------------------------------------------------------------------------------------
$541,507 $ 515,192
====================================================================================
The accompanying notes are an integral part of these financial statements.
-22-
CE CASECNAN WATER AND ENERGY COMPANY, INC.
STATEMENTS OF INCOME
FOR THE YEARS IN THE PERIOD ENDED DECEMBER 31, 2002
(Amounts in thousands U.S. Dollars, except share data)
====================================================================================
2002 2001 2000
- ------------------------------------------------------------------------------------
Revenues (Notes 2 and 3)
Delivery of water $ 82,564 $ 4,114 $ --
Sale of electricity 55,700 4,060 --
- ------------------------------------------------------------------------------------
138,264 8,174 --
- ------------------------------------------------------------------------------------
Operating expenses
Depreciation (Note 2) 23,211 1,249 --
Plant operations 10,093 2,152 451
Doubtful accounts expense (Note 3) 11,545 521 --
- ------------------------------------------------------------------------------------
44,849 3,922 451
- ------------------------------------------------------------------------------------
Operating income (loss) 93,415 4,252 (451)
- -------------------------------------------------------------------------------------
Other income (expenses)
Interest expense (Notes 5 and 7) (42,508) (44,162) (48,349)
Capitalized interest (Note 2) -- 41,652 47,454
Interest income 236 1,450 7,605
Other (105) -- --
- ------------------------------------------------------------------------------------
(42,377) (1,060) 6,710
Income before provision for income tax 51,038 3,192 6,259
Provision for income taxes (Note 6 and Note 9) 6,082 325 1,402
Net income $ 44,956 $ 2,867 $ 4,857
====================================================================================
Net income per share (Note 2) $ 58.60 $ 3.74 $ 6.33
====================================================================================
Average number of common shares outstanding 767,162 767,162 767,162
====================================================================================
The accompanying notes are an integral part of these financial statements.
-23-
CE CASECNAN WATER AND ENERGY COMPANY, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2002
(Amounts in thousands U.S. Dollars, except share data)
==========================================================================================
Outstanding Additional Retained
Common Common Paid-in Earnings
Shares Stock Capital (Deficit) Total
- ------------------------------------------------------------------------------------------
Balance, January 1, 2000 767,162 $29 $123,807 $(24,595) $ 99,241
Net income -- -- -- 4,857 4,857
- ------------------------------------------------------------------------------------------
Balance, December 31, 2000 767,162 29 123,807 (19,738) 104,098
Net income -- -- -- 2,867 2,867
- ------------------------------------------------------------------------------------------
Balance, December 31, 2001 767,162 29 123,807 (16,871) 106,965
Net income -- -- -- 44,956 44,956
- ------------------------------------------------------------------------------------------
Balance, December 31, 2002 767,162 $29 $123,807 $ 28,085 $151,921
==========================================================================================
The accompanying notes are an integral part of these financial statements.
-24-
CE CASECNAN WATER AND ENERGY COMPANY, INC.
STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2002
(Amounts in thousands U.S. Dollars)
========================================================================================================
2002 2001 2000
- --------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income $ 44,956 $ 2,867 $ 4,857
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation 23,211 1,249 --
Amortization of bond issue costs 1,494 1,603 2,270
Provision for deferred income tax -- 325 1,402
Changes in assets and liabilities
Increase in trade receivable, net (43,503) (8,012) --
Decrease (increase) in accrued interest and other receivable (408) (6,028) 1,177
Increase in prepaid insurance (1,719) (1,813) --
Increase other current assets (558) (1,430) (42)
Increase in accounts payable and accrued expenses 6,159 385 381
Decrease in accrued interest on long-term debts (791) (551) --
Increase in accrued interest on notes payable 1,856 192 --
Decrease (increase) in other assets 6,158 (11,700) --
- --------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 36,855 (22,913) 10,045
- --------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Additions to development and construction costs (10,263) (48,583) (82,713)
Liquidated damages received -- 5,978 --
Decrease (increase) in restricted:
Cash and short-term investments (1,100) (5,978) 42,063
Investments -- 41,945 74,253
Increase (decrease) in accounts payable and accrued
expenses related to development and construction costs -- 3,281 (35,489)
- ---------------------------------------------------------------------------------------------------------
Net cash used in investing activities (11,363) (3,357) (1,886)
- ---------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Increase (decrease) in payable to affiliates (1,165) 15,507 8,976
Payment of long-term debt (35,200) (29,625) (18,750)
Proceeds from notes payable 10,500 40,763 --
- ---------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (25,865) 26,645 (9,774)
- ---------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (373) 375 (1,615)
Cash at beginning of year 1,078 703 2,318
- --------------------------------------------------------------------------------------------------------
Cash at end of year $ 705 $ 1,078 $ 703
========================================================================================================
Supplemental disclosure of cash flow information
Interest paid during the period (net of
amount capitalized) $ 39,949 $ 1,267 $ (1,259)
=========================================================================================================
The accompanying notes are an integral part of these financial statements.
-25-
CE CASECNAN WATER AND ENERGY COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
(Amounts in U.S. Dollars, unless indicated otherwise)
NOTE 1 - ORGANIZATION AND OPERATIONS
- ------------------------------------
CE Casecnan Water and Energy Company, Inc. (the "Company") was registered with
the Philippine Securities and Exchange Commission on September 21, 1994. The
purpose of the Company is to design, develop, construct, erect, assemble,
commission, operate and own a hydroelectric power plant and the related
facilities for conversion into electricity of water provided by and under
contract with the Philippine Government or any government-owned or controlled
corporation.
The Company has a contract with the Philippine Government, through the
Philippine National Irrigation Administration ("NIA") (a government-owned and
controlled corporation), for the development and construction of a hydroelectric
power plant and related facilities under a build-own-operate-transfer agreement
("Project Agreement"), covering a 20-year cooperation period ("Cooperation
Period") with "take-or-pay" obligations for water and electricity. At the end of
the Cooperation Period, the combined irrigation and 150 megawatt hydroelectric
power generation project (the "Casecnan Project") will be transferred to the
Philippine Government at no cost on an "as is" basis. The Philippine Government
also signed a Performance Undertaking, which, among others, affirms and
guarantees the obligations of NIA under the contract. Construction of the
Casecnan Project commenced in 1995.
The Casecnan Project commenced commercial operations on December 11, 2001. Prior
to this date, the Company was considered to be a development stage enterprise.
Pursuant to the share ownership adjustment mechanism in the CE Casecnan
stockholder agreement, which is based upon pro forma financial projections of
the Casecnan Project prepared following commencement of commercial operations,
in February 2002, MidAmerican, through its indirect wholly owned subsidiary CE
Casecnan Ltd., advised the minority stockholder LaPrairie Group Contractors
(International) Ltd., ("LPG"), that its indirect ownership interest in CE
Casecnan had increased to 100% effective from commencement of commercial
operations. On July 8, 2002, LPG filed a complaint in the Superior Court of the
State of California, City and County of San Francisco against, inter alia, CE
Casecnan Ltd. and MidAmerican. In the complaint, LPG seeks compensatory and
punitive damages for alleged breaches of the stockholder agreement and alleged
breaches of fiduciary duties allegedly owed by CE Casecnan Ltd. and MidAmerican
to LPG. The complaint also seeks injunctive relief against all defendants and a
declaratory judgment that LPG is entitled to maintain its 15% interest in CE
Casecnan. The impact, if any, of this litigation on the Company cannot be
determined at this time.
The Company's operations are in one reportable segment, the water and
electricity generation industry.
The Company is registered with the Philippine Board of Investments as a new
operator of hydroelectric power plant with pioneer status under the Omnibus
Investments Code of 1987 (Executive Order No. 226). Under the terms of its
registration, the Company is entitled to certain incentives which include an
income tax holiday for a minimum of six years from the start of commercial
operations; tax and duty-free importation of capital equipment; tax credits on
domestic capital equipment; and, exemption from customs duties and national
internal revenue taxes for the importation and unrestricted use of the consigned
equipment for the development, construction, start-up, testing and operation of
the power plant. The registration also requires, among others, the maintenance
of a debt-to-equity ratio not exceeding 75:25 upon commencement of commercial
operations.
In January 2003, CE Casecnan, Ltd. assigned its 70% stockholding in the Company
to CE Casecnan II, Inc., a Philippine company, in exchange for the latter's
shares of stock. Consequently, the Company became 70% owned by CE Casecnan II,
Inc.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
The financial statements are prepared in accordance with generally accepted
accounting principles in the United States of America. The more significant
accounting policies and practices of the Company are set forth below:
-26-
BASIS OF PRESENTATION. The functional and reporting currency of the Company is
the United States Dollar. Gains or losses resulting from translation of monetary
assets and liabilities in foreign currencies are not material.
RESTRICTED CASH AND INVESTMENTS are composed of debt service funds that are
legally restricted as to their use and require the maintenance of specific
minimum balances. Such cash and investments are primarily in the form of
commercial paper and money market securities.
Since the Company has the positive intent and ability to hold all of its
investments to maturity, these are classified as held to maturity and recorded
at amortized cost. The carrying amount of investments as of December 31, 2002
approximates their fair value, which is based on quoted market prices as
provided by the financial institution holding the investments.
BOND ISSUE COSTS consist of costs incurred in the issuance of senior secured
notes and bonds and are deferred and amortized over the term of the notes and
bonds using the effective interest rate method. Amortization of bond issue costs
is capitalized during the construction period and charged to operations, as an
interest expense, upon commercial operations of the Casecnan Project.
PROPERTY, PLANT AND EQUIPMENT are stated at cost (including capitalized interest
costs) less accumulated depreciation. Depreciation is computed on the
straight-line method based on the Cooperation Period for the hydroelectric power
plant and office and building structure, and on the estimated useful life of
five years for other equipment. Minor expenditures for repairs and maintenance
are charged to operations as incurred; significant renewals and improvements are
capitalized. Liquidated damages relative to the Casecnan Project are recorded as
reduction to the cost of the capital projects. When an asset is sold or
otherwise disposed of, its cost and related accumulated depreciation are removed
from the accounts and the resulting gain or loss is credited or charged to
operations.
INTEREST ON LONG-TERM debt was capitalized as part of the cost of capital
projects during the construction period. During the Cooperation Period interest
on long-term debt is charged to operations.
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.
ALLOWANCE FOR DOUBTFUL ACCOUNTS is based on the Company's assessment of the
collectibility of payments from NIA. This assessment requires judgment regarding
the outcome of pending disputes and the ability of the customer to pay 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.
NET INCOME PER SHARE is based on the weighted average number of common shares
outstanding during the period. As the Company does not have any potential common
shares outstanding such as stock options, warrants or convertible debt, there is
no calculation of diluted earnings per share.
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. An impairment loss would be recognized whenever evidence exists
that the carrying value is not recoverable.
REVENUES from sale of electricity and delivery of water are recognized as income
during the period in which actual capacity is generated and delivered to the
customer. The water delivery fee is a fixed monthly amount, to be received in US
Dollars at the end of each month, based on 801.9 million cubic meters of water
flow past the water delivery point per year, pro-rated to 66.8 million cubic
meters per month. The unit price for water is set at $0.029 per cubic meter
(subject to adjustment as set forth in the Project Agreement) as of January 1,
1994 and escalated at seven and one-half percent (7.5%) per annum, pro-rated on
a monthly basis, through the end of the fifth year of the Cooperation Period and
then kept flat at that level for the last fifteen years of the Cooperation
Period. The unit price for water is to be adjusted by $.00043 for each $1.0
million of certain taxes and fees paid by the Company as specified in the
Project Agreement. The unit price
-27-
of water as of December 31, 2002 is $0.1017. Actual deliveries of water greater
than or less than 66.8 million cubic meters in any month will not result in any
adjustment of the water delivery fee. The guaranteed energy fee is a fixed
monthly amount, to be received in US Dollars at the end of each month, based on
energy deliveries of 228.0 million kilowatt-hour (kWh) per year, pro-rated to
19.0 million kWh per month. Actual deliveries of energy less than 19.0 million
kWh per month will not result in any reduction of the guaranteed energy fee but
will result in an adjustment to the excess energy fee. The unit price for
guaranteed energy is $0.1596 per kWh. The excess energy fee is a variable
amount, to be received in US Dollars at the end of each month, for electrical
energy delivered in excess of 19.0 million kWh. No excess energy delivery fee
will be due until all cumulative electrical energy shortfalls in previous months
have been made up. At December 31, 2002, there was no cumulative electrical
energy shortfall. The unit price of excess energy is $0.1509 per kWh.
Interest and other income are recognized when earned.
TRANSACTIONS IN FOREIGN CURRENCIES (Philippines pesos) are recorded based on the
prevailing rates of exchange at transaction dates. Foreign currency denominated
monetary assets and liabilities are translated at the exchange rate prevailing
at the balance sheet date. The resulting exchange differences from settlements
of foreign currency transactions and translations of monetary assets and
liabilities are credited or charged to operations.
USE OF ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates.
RECLASSIFICATION. Certain accounts in the 2001 and 2000 financial statements
were reclassified to conform to the 2002 financial statement presentation. Such
reclassification did not impact previously reported net income or retained
earnings (deficit).
NOTE 3 - TRADE RECEIVABLE, NET
- ------------------------------
Trade receivable, net pertains to the receivable due from NIA for water
delivered to NIA and the electricity generated and delivered by the Company to
the Philippine National Power Corporation on behalf of NIA. Trade receivable,
net at December 31 consists of the following (in thousands):
- ----------------------------------------------------
2002 2001
- ----------------------------------------------------
Water delivery fee $52,854 $4,474
Guaranteed energy delivery fee 6,709 2,059
Excess energy delivery fee 4,018 2,000
- ----------------------------------------------------
63,581 8,533
Allowance for doubtful accounts 12,066 521
- ----------------------------------------------------
$51,515 $8,012
====================================================
NIA has paid all amounts due for energy delivery fees under the Project
Agreement as of December 31, 2002, and all amounts invoiced for water delivery
fees under the Project Agreement except the tax compensation portion of the
water delivery fees, none of which has been paid.
Under the terms of the Project Agreement, NIA has the option of timely
reimbursing CE Casecnan directly for certain taxes CE Casecnan has paid. If NIA
does not so reimburse CE Casecnan, the taxes paid by CE Casecnan result in an
increase in the Water Delivery Fee. The payment of certain other taxes by CE
Casecnan results automatically in an increase in the Water Delivery Fee. As of
December 31, 2002, CE Casecnan has paid approximately $56.7 million in taxes,
which as a result of the foregoing provisions had resulted in an increase in the
Water Delivery Fee. NIA has failed to pay the portion of
-28-
the Water Delivery Fee each month, which relates to the payment of these taxes
by CE Casecnan. As a result of this non-payment, on August 19, 2002, CE Casecnan
filed a Request for Arbitration against NIA, seeking payment of such portion of
the Water Delivery Fee and enforcement of the relevant provision of the Project
Agreement going forward. The arbitration will be conducted in accordance with
the rules of the International Chamber of Commerce. NIA is expected to file its
answer late in the first quarter or early in the second quarter, 2003. The three
member arbitration panel has been confirmed by the International Chamber of
Commerce and an initial organizational hearing is scheduled for the second
quarter, 2003.
Included in total revenues of $138.3 million and $8.2 million for 2002 and 2001
respectively, are $34.5 million and $1.8 million respectively, of tax
compensation for water delivery fees under the Project Agreement. As of December
31, 2002 and 2001, the cumulative unpaid portion of such fees totaled $36.3
million and $1.8 million, respectively. As mentioned above, NIA has not yet paid
any of this portion of the fees. The allowance for doubtful accounts as of
December 31, 2002 and 2001 represents the Company's current estimate of the
uncollectible portion of the amounts due from NIA. Any change in the Company's
assessment of the potential outcome of such dispute could significantly impact
such allowance and the results of operations.
NOTE 4 - PROPERTY PLANT AND EQUIPMENT, NET
- ------------------------------------------
Property, plant and equipment at December 31 consist of the following (in
thousands):
- ------------------------------------------------------------------------
2002 2001
- ------------------------------------------------------------------------
Hydroelectric power plant $476,786 $467,485
Office and building structures 244 -
Transportation and other equipment 501 44
- ------------------------------------------------------------------------
477,531 467,529
Less - accumulated depreciation 24,460 1,249
- ------------------------------------------------------------------------
453,071 466,280
Construction in progress 436 175
- ------------------------------------------------------------------------
$453,507 $466,455
- ------------------------------------------------------------------------
NOTE 5 - LONG-TERM DEBT
- -----------------------
On November 27, 1995, the Company issued $371.5 million worth of notes and bonds
(the "Securities") to finance the construction of the Casecnan Project. These
debts consisted of $75.0 million Senior Secured Floating Rate Notes ("FRNs")
bearing interest at LIBOR plus 3.00%, which were paid in installments through
November 15, 2002; $125.0 million Senior Secured Series A Notes ("Series A
Notes") with interest at 11.45% payable in semiannual installments up to 2005;
and $171.5 million Senior Secured Series B Bonds ("Series B Bonds") with
interest at 11.95% payable in semiannual installments up to 2010. For the year
ended December 31, 2002, the Series A Notes and Series B Bonds had effective
interest rates of 13.13% and 13.57%, respectively, inclusive of bond issue cost
amortization. The effective interest rate for the FRNs fluctuated between 5.59%
and 10.72% in 2001 and 5.88% and 6.29% prior to being repaid in 2002.
Semi-annual interest payments on Series A Notes and Series B Bonds commenced on
May 15, 1996.
The repayment schedule is as follows (in thousands):
- -------------------------------------------------------------
Series A notes Series B bonds Total
- -------------------------------------------------------------
2003 $33,750 $ 7,718 $41,468
2004 42,500 6,860 49,360
2005 48,750 6,002 54,752
2006 -- 36,015 36,015
2007 -- 37,730 37,730
2008 -- 37,730 37,730
2009 -- 13,720 13,720
2010 -- 17,150 17,150
- -------------------------------------------------------------
$125,000 $162,925 $287,925
=============================================================
-29-
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 schemes
as provided for in the Trust Indenture. On and after the seventh anniversary of
the Closing (as defined in the Trust Indenture) of the Casecnan Project
financing, the Series A Notes are subject to optional redemption by the Company,
in whole and not in part, at par plus accrued interest to the Redemption Date.
The Series B Bonds are subject to optional redemption by the Company, at any
time, in whole or in part, pro rata, at par plus accrued interest to the
redemption date plus a premium, calculated to "make whole" to comparable U.S.
treasury Securities plus 150 basis points. The Company also had the option to
redeem the securities, in whole or in part, at par plus accrued interest at any
time if, as a result of any change in Philippine tax law or in the application
or interpretation of Philippine tax law occurring after the date of issuance of
the Securities, the Company is required to pay certain additional amounts
described in the Trust Indenture. The Securities are subject to mandatory
redemption, pro rata, at par plus accrued interest to the redemption date, (a)
upon the receipt by the Company of loss proceeds that exceed $15 million in
respect of certain events of property or casualty loss or similar events, unless
the funds are to be utilized by the Company for an Approved Restoration Plan; or
(b) upon the receipt by the Company of proceeds realized in connection with a
Project Agreement Buyout.
When a Change in Control occurs, each holder of the Securities ("Holder") will
have the right to require the Company to repurchase all or any part of such
Holder's Securities at a cash purchase price equal to 101% of the principal
amount thereof, plus accrued interest to the date of repurchase in accordance
with the procedures set forth in the Trust Indenture. There is no assurance that
upon a Change in Control the Company will have sufficient funds to repurchase
the Securities.
The debt covenants contain certain restrictions as to incurrence of additional
indebtedness; merger, consolidation, dissolution, or any significant change in
corporate structure; non-arm's length transactions or agreements with
affiliates; material change in the Turnkey Construction Contract; sale, lease,
or transfer of properties material to the Casecnan Project, among others. In
connection with the foregoing secured indebtedness, the Company, on November 27,
1995, entered into a Deposit and Disbursement Agreement with Chemical Trust
Company of California ("Chemical Trust") and Kiewit Diversified Group (a
predecessor stockholder) whereby Chemical Trust acts as a depositary and a
collateral agent. As a depositary agent, it will hold monies, instruments and
Securities pledged by the Company to the collateral agent. The terms of this
agreement require the establishment of several funds, which include a Capital
Contribution Fund. Pursuant to this requirement, the Company's stockholders
deposited an aggregate capital contribution of approximately US$123.3 million to
the fund, which was strictly used to fund the construction of the Casecnan
Project when the proceeds from the Series A Notes and Series B Bonds were fully
utilized. The contributions are included in the "Additional paid-in capital"
account in the balance sheets.
NOTE 6 - INCOME TAXES
- ---------------------
Tax expense in 2002 of $6.1 million consists of a payment to the Philippine BIR
for the settlement of taxes related to interest income for the years 2001, 2000
and 1999. Since commencing commercial operations in December 2001, the Company
has incurred no income tax expense on its results from operations due to the
availment of a six year income tax holiday received from the Philippine Board of
Investments. The Company's deferred income tax asset of $5.4 million as of
December 31, 2002 and 2001(net of a valuation allowance of $2.4 million)
consists mainly of the difference between the financial reporting basis and the
tax reporting basis for development and construction costs, and the allowance
for doubtful accounts. The valuation allowance is recognized for the portion of
the deferred income tax asset for which it is more likely than not that the tax
benefit will not be realized due to the income tax holiday.
NOTE 7 - 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 $33.3 million and $34.5 million at December 31, 2002
and 2001, respectively. Costs incurred by the Company in transactions with
related parties amounted to $1.3 million, $0.5 million and $7.0 million in 2002,
2001 and 2000, respectively.
-30-
As of December 31, 2002, the Company has issued $51.3 million of unsecured
subordinated notes payable (2001 - $40.8 million) to CE Casecnan Ltd., a
stockholder, due November 15, 2005. The unsecured notes bear interest at LIBOR
plus two (2%) percent which is payable every May 15 and November 15. Interest
expense on the unsecured notes was $1.9 million and $0.2 million in 2002 and
2001, respectively. Any overdue payment of principal or interest payable on the
notes shall increase the annual interest by two (2%) percent. At December 31,
2002, the effective interest rate on the notes was 3.4%. The notes may be
prepaid at any time without premium or penalty but with accrued interest, if
any. The unsecured subordinated notes and any and all payments, whether of
principal, interest or otherwise are subject in all respects to the terms of the
Subordination Agreement dated November 15, 2001 between CE Casecnan Ltd. and the
Company in favor of the Trustee, the Collateral Agent, the co-collateral agent,
the Depositary, any party that becomes a Permitted Counterparty under an
Interest Rate/Currency Protection Agreement, any party that becomes a working
capital facility agent and any other Person that becomes a secured party under
the Intercreditor Agreement.
NOTE 8 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
- ----------------------------------------------
Accounts payable and accrued expenses at December 31 consist of the following
(in thousands):
================================================================================
2002 2001
- --------------------------------------------------------------------------------
Accounts payable and accrued expense $ 3,463 $1,223
Accrued contractor's fees 1,902 1,783
Accrued liquidated damages 5,420 1,620
- --------------------------------------------------------------------------------
$10,785 $4,626
================================================================================
NOTE 9 - COMMITMENTS AND CONTINGENCIES
- --------------------------------------
Replacement contract
- --------------------
The Casecnan Project was initially constructed pursuant to a fixed-price,
date-certain, turnkey construction contract (the "Hanbo Contract") on a joint
and several basis by Hanbo Corporation ("Hanbo") and Hanbo Engineering and
Construction Co., Ltd. ("HECC"), both of which are South Korean corporations. On
May 7, 1997, the Company terminated the Hanbo Contract due to defaults by Hanbo
and HECC including the insolvency of both companies. On the same date, the
Company entered into a new fixed-price, date certain, turnkey engineering,
procurement and construction contract to complete the construction of the
Casecnan Project (the "Replacement Contract"). The work under the Replacement
Contract was conducted by a consortium consisting of Cooperativa Muratori
Cementisti CMC di Ravenna and Impresa Pizzarotti & C. Spa., (collectively, the
"Contractor"), working together with Siemens A.G., Sulzer Hydro Ltd., Black &
Veatch and Colenco Power Engineering Ltd.
On November 20, 1999, the Replacement 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.
On February 12, 2001, the Contractor filed a Request for Arbitration with the
International Chamber of Commerce seeking schedule relief of 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
seeks 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 in December 2001 amounted to a repudiation of the Replacement Contract
and has filed a claim for unspecified quantum meruit damages, and has further
alleged that the delay liquidated damages clause which provides for payments of
$125,000 per day for each day of delay in completion of the Project for which
the Contractor is responsible is unenforceable. The arbitration is being
conducted applying New York law and pursuant to the rules of the International
Chamber of Commerce.
Hearings have been held in connection with this arbitration in July 2001,
September 2001, January 2002, March 2002, November 2002 and January 2003. As
part of those hearings, on June 25, 2001, the arbitration tribunal temporarily
-31-
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. As a result of the continuing nature of that injunction, 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. As of December 31, 2002, however, CE Casecnan 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 November 7,
2002, the International Chamber of Commerce issued the arbitration tribunal's
partial award with respect to the Contractor's force majeure and geologic
conditions claims. The arbitration 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. The $3.8 million is shown as part of the accounts payable and accrued
expenses balance at the end of December 31, 2002. All of the Contractor's other
claims with respect to force majeure and geologic conditions were denied.
Further hearings on the Contractor's repudiation and quantum meruit claims, the
alleged unenforceability of the delay liquidated damages clause and certain
other matters had been scheduled for March 24 through March 28, 2003, but were
postponed as a result of the commencement of military action in Iraq. The
arbitral tribunal has requested the parties to indicate the earliest possible
date on which they are available and will then reschedule the hearings.
If the Contractor were to prevail on its claim that the delay liquidated damages
clause is unenforceable, the Company would not be entitled to collect such delay
damages for the period from March 31, 2001 through December 11, 2001. If the
Contractor were to prevail in its repudiation claim and prove quantum meruit
damages in excess of amounts paid to the Contractor, the Company could be liable
to make additional payments to the Contractor. CE Casecnan believes all of such
allegations and claims are without merit and is vigorously contesting the
Contractor's claims.
Casecnan NIA Arbitration
- ------------------------
Under the terms of the Project Agreement, NIA has the option of timely
reimbursing CE Casecnan directly for certain taxes CE Casecnan has paid. If NIA
does not so reimburse CE Casecnan, the taxes paid by CE Casecnan result in an
increase in the Water Delivery Fee. The payment of certain other taxes by CE
Casecnan results automatically in an increase in the Water Delivery Fee. As of
December 31, 2002, CE Casecnan has paid approximately $56.7 million in taxes,
which as a result of the foregoing provisions had resulted in an increase in the
Water Delivery Fee. NIA has failed to pay the portion of the Water Delivery Fee
each month, which relates to the payment of these taxes by CE Casecnan. As a
result of this non-payment, on August 19, 2002, CE Casecnan filed a Request for
Arbitration against NIA, seeking payment of such portion of the Water Delivery
Fee and enforcement of the relevant provision of the Project Agreement going
forward. The arbitration will be conducted in accordance with the rules of the
International Chamber of Commerce. NIA is expected to file its answer late in
the first quarter or early in the second quarter, 2003. The three member
arbitration panel has been confirmed by the International Chamber of Commerce
and an initial organizational hearing is scheduled for the second quarter, 2003.
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 was 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 December 31,
2002, payable to NIA for 120 days of delay and this is shown as part of accounts
payable and accrued expenses in the balance sheets.
Casecnan Stockholder Litigation
- -------------------------------
Pursuant to the share ownership adjustment mechanism in the CE Casecnan
stockholder agreement, which is based upon pro forma financial projections of
the Casecnan Project prepared following commencement of commercial operations,
in February 2002, MidAmerican, through its indirect wholly owned subsidiary CE
Casecnan Ltd., advised the minority stockholder LaPrairie Group Contractors
(International) Ltd., ("LPG"), that MidAmerican's indirect ownership interest in
CE Casecnan had increased to 100% effective from commencement of commercial
operations. On July 8, 2002, LPG filed a complaint in the Superior Court of the
State of California, City and County of San Francisco against, inter
-32-
alia, CE Casecnan Ltd. and MidAmerican. In the complaint, LPG seeks compensatory
and punitive damages for alleged breaches of the stockholder agreement and
alleged breaches of fiduciary duties allegedly owed by CE Casecnan Ltd. and
MidAmerican to LPG. The complaint also seeks injunctive relief against all
defendants and a declaratory judgment that LPG is entitled to maintain its 15%
interest in CE Casecnan. The impact, if any, of this litigation on the Company
cannot be determined at this time.
In February 2003, San Lorenzo Ruiz Builders and Developers Group, Inc. ("San
Lorenzo"), an original shareholder substantially all of whose shares in the
Company MidAmerican purchased in 1998, threatened to initiate legal action in
the Philippines in connection with certain aspects of its option to repurchase
such shares on or prior to commercial operation of the Project. The Company
believes that San Lorenzo has no valid basis for any claim and, if named as a
defendant in any action that may be commenced by San Lorenzo, will vigorously
defend any such action.
Concentration of risk
- ---------------------
NIA's payments of obligations 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
stockholders, partners or affiliates of the Company, including MidAmerican, and
no directors, officers or employees of the Company will guarantee or be in any
way liable for payment of the Company's obligations. As a result, payment of the
Company's obligations depends upon the availability of sufficient revenues from
the Company's business after the payment of operating expenses.
Regulatory environment
- ----------------------
The Philippine Congress has passed the Electric Power Industry Reform Act of
2001 (EPIRA), which is aimed at restructuring the Philippine power industry,
privatization of the NPC and introduction of a competitive electricity market,
among other initiatives. The implementation of EPIRA may have an impact on the
Company's future operations in the Philippines and the Philippines power
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, the Casecnan Project (together with four
other projects) has reportedly been identified as raising legal and financial
questions and, with those projects, 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 during 2002, 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 Senate hearings are scheduled at this time although hearings before a
Philippine House committee are scheduled for the first quarter of 2003.
BIR Audit
- ---------
The Bureau of Internal Revenue ("BIR"), consistent with the Philippine
government's public statements to increase tax revenues, has commenced auditing
the Company for all taxes, including income taxes, for the years 2001, 2000 and
1999. In addition, the BIR has issued letters of authority to audit the tax
years 1998, 1997 and 1996. The only basis on which tax years prior to 1999 can
be audited is if the BIR successfully argues in a Philippine administrative or
court proceeding that the tax returns for those years are false or fraudulent in
some respect. The Company believes that any allegations that such tax years'
filings are false or fraudulent are without merit and accordingly that any audit
of such tax years is improper and without proper legal basis, although the
outcome of any audit by the Philippine tax authorities in light of the
government's public statements to increase tax revenues is uncertain. If the
Company is ultimately held liable the amounts assessed may be material. The
Company further believes that it currently is in compliance with applicable tax
laws and regulations with respect to all of its tax returns and filings.
-33-
NOTE 10 - FAIR VALUE OF FINANCIAL INSTRUMENTS
- ---------------------------------------------
Financial Accounting Standards Board (FASB) Statement No. 107, "Disclosures
About Fair Value of Financial Instruments", defines the fair value of financial
instruments as the amount at which the instruments could be exchanged in a
current transaction between willing parties. Although management uses its best
judgment in estimating the fair value of these financial instruments, there are
inherent limitations in any estimation technique. Therefore, the fair value
estimates presented herein are not necessarily indicative of the amounts that
the Company could realize in a current transaction. The methods and assumptions
used to estimate fair value are as follows:
Cash, trade receivable, accounts payable and accrued expenses
- -------------------------------------------------------------
The carrying amounts reported in the balance sheets for these amounts
approximate fair value due to the liquidity, the short maturity and nature of
such items.
Notes payable
- -------------
The carrying amount reported in the balance sheets approximates fair value in
the absence of quoted market prices.
Long-term debts
- ---------------
The fair value of the Company's long-term debts is estimated based on quoted
market prices of similar types of arrangements. At December 31, 2002, the
Company had fixed-rate long-term debt of $287.9 million in principal amount and
having a fair value of $288.1 million. At December 31, 2001, the Company had
fixed-rate long-term debt of $323.1 million in principal amount and having a
fair value of $294.4 million. These instruments are fixed-rate and therefore do
not expose the Company to the risk of earnings loss due to changes in market
interest rates. However, the fair value of these instruments would decrease by
approximately $12.8 million if interest rates were to increase by 10% from their
levels at December 31, 2002. In general, such a decrease in fair value would
impact earnings and cash flows only if the Company were to reacquire all or a
portion of these instruments prior to their maturity.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
None
-34-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names, ages, and positions of the directors
and executive officers of the Company:
NAME AGE POSITION
David L. Sokol 46 Director and Chairman
Gregory E. Abel 40 Vice Chairman
David A. Baldwin 38 Director and President
James D. Stallmeyer 45 Vice President
Patrick J. Goodman 36 Director, Senior Vice President and Chief
Financial Officer
Douglas L. Anderson 45 Director, Senior Vice President, General
Counsel and Assistant Secretary
Brian K. Hankel 40 Vice President and Treasurer
Jose Sandejas 66 Director and Corporate Secretary
Paul J. Leighton 49 Assistant Corporate Secretary
Jose Jaime Cruz 32 Director and Assistant Corporate Secretary
Marivic Punzalan-Espiritu 35 Director
Scott LaPrairie 45 Director
Linda Castillo 43 Director
Directors of the Company are elected annually and hold office until a successor
is elected. Executive officers are chosen from time to time by vote of the Board
of Directors. Pursuant to the terms of the Stockholders Agreement, CE Casecnan
Ltd. is entitled to elect seven of the directors, and each of the minority
investors is entitled to elect one director.
DAVID L. SOKOL. In addition to serving as a Director and Chairman of the
Company, Mr. Sokol has been Chief Executive Officer of MidAmerican since April
19, 1993 and served as President of MidAmerican from April 19, 1993 until
January 21, 1995. Mr. Sokol has been Chairman of the Board of Directors since
May 1994 and a director of MidAmerican since March 1991. Formerly, among other
positions held in the independent power industry, Mr. Sokol served as the
President and Chief Executive Officer of Kiewit Energy Company, which at that
time was a wholly owned subsidiary of PKS, and Ogden Projects, Inc.
GREGORY E. ABEL. In addition to serving as Vice Chairman and President of the
Company, Mr. Abel is President and Chief Operating Officer of MidAmerican. Mr.
Abel joined MidAmerican in 1992. Mr. Abel is a Chartered Accountant and from
1984 to 1992 employed by Price Waterhouse. As a Manager in the San Francisco
office of Price Waterhouse, he was responsible for clients in the energy
industry.
DAVID A. BALDWIN. In addition to serving as Director, and President for the
Company, Mr. Baldwin is President and General Manager, Philippines for
MidAmerican. From December 1996 to June 1997, Mr. Baldwin served as Vice
President, Project Development for Asia Power Ltd. in Hong Kong. From October
1994 to December 1996, Mr. Baldwin was Project Director at SouthPac Corporation
Ltd. in New Zealand and, prior to that, he held a series of project management
and engineering positions at Shell International in the Netherlands and New
Zealand.
JAMES D. STALLMEYER. In addition to serving as Vice President of the Company,
Mr. Stallmeyer is Commercial Director and General Counsel of Northern Electric.
Mr. Stallmeyer joined the Company in 1993. Mr. Stallmeyer practiced in the
public finance and banking areas at Chapman and Cutler in Chicago from 1984 to
1987 and in the corporate finance department from 1989 to 1993. Prior to that,
Mr. Stallmeyer was an attorney in the public finance department of the Chicago
office of Skadden, Arps, Slate, Meagher & Flom in 1987 and 1988 and was a legal
writing instructor at the University of Illinois College of Law in 1988 and
1989.
PATRICK J. GOODMAN. In addition to serving as Director, Senior Vice President
and Chief Financial Officer for the Company, Mr. Goodman is Senior Vice
President and Chief Financial Officer for MidAmerican. Mr. Goodman joined
MidAmerican in June 1995, and served as in various accounting positions,
including Senior Vice President and Chief Accounting Officer. Prior to joining
MidAmerican, Mr. Goodman was a financial manager for National Indemnity Company
and a senior associate at Coopers & Lybrand.
-35-
DOUGLAS L. ANDERSON. In addition to serving as Director, Senior Vice President,
General Counsel and Assistant Secretary for the Company, Mr. Anderson is Senior
Vice President, General Counsel and Corporate Secretary of MidAmerican. Mr.
Anderson joined MidAmerican in February 1993. Prior to that, Mr. Anderson was in
private practice.
BRIAN K. HANKEL. In addition to serving as Vice President and Treasurer for the
Company, Mr. Hankel is Vice President and Treasurer for MidAmerican. Mr. Hankel
joined MidAmerican in February 1992 as a Treasury Analyst and served in that
position to December 1995. Mr. Hankel was appointed Assistant Treasurer in
January 1996 and was appointed Treasurer in January 1997. Prior to joining the
Company, Mr. Hankel was a Money Position Analyst at FirsTier Bank of Lincoln
from 1988 to 1992.
JOSE SANDEJAS. In addition to serving as a Director and Corporate Secretary of
the Company, Mr. Sandejas is a partner with the law firm of Quisumbing Torres.
PAUL J. LEIGHTON. In addition to serving as Assistant Corporate Secretary, Mr.
Leighton is also Vice President, Corporate Law, Assistant General Counsel and
Assistant Secretary of MidAmerican. Mr. Leighton has served as Corporate
Secretary for MidAmerican and its predecessor companies since 1988 and as an
attorney since 1978.
JOSE JAIME CRUZ. In addition to serving as a Director and Assistant Corporate
Secretary of the Company, Mr. Cruz is an attorney with the law firm of
Quisumbing Torres.
MARIVIC PUNZALAN-ESPIRITU. In addition to serving as a Director of the Company,
Ms. Punzalan-Espiritu is a partner with the law firm of Quisumbing Torres.
SCOTT LAPRAIRIE. In addition to serving as a Director of the Company, Mr.
LaPrairie is President and Chief Executive Officer of the LaPrairie Group of
Companies.
LINDA B. CASTILLO. In addition to serving as a Director of the Company, Ms.
Castillo is corporate counsel for the Company and certain of its affiliates.
ITEM 11. EXECUTIVE COMPENSATION
None of the executive officers or directors of the Company receives compensation
from the Company for services as officers or directors of the Company. All
directors are reimbursed for their expenses in attending board and committee
meetings.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
DESCRIPTION OF CAPITAL STOCK
As of December 31, 2002, the authorized capital stock of the Company consisted
of 2,148,000 shares of common stock, par value 1.00 Philippine peso ($0.038) per
share (the "Common Stock"), of which 767,162 shares were outstanding. There is
no public trading market for the Common Stock. As of December 31, 2002 there
were 11 holders of record of the Common Stock. Holders of Common Stock are
entitled to one vote per share on any matter coming before the stockholders for
a vote.
The Trust Indenture contains certain restrictions on the payment of dividends
with respect to the Common Stock.
-36-
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to all persons who own
beneficially more than 5% of the common stock and by all directors and officers
of the Company as a group.
Number Of % Of Common
Name and Address of Owner Shares Owned* Stock Owned
- ------------------------- ------------- -----------
1. CE Casecnan, Ltd. (1) 652,005 85% (2)(3)
a Bermuda corporation
c/o Conyers Dill & Pearman
Clarendon House
P.O. Box 666 Hamilton, Bermuda HM CX
2. LaPrairie Group Contractors (International), Ltd. ("LPG") 115,074 15% (4)
a Barbados corporation
c/o P.O. Box 690C
Bridgetown, Barbados
*In addition, each director of the Company owns one share in the Company as
required by Philippine law.
(1) MidAmerican indirectly owns CE Casecnan, Ltd., a Bermuda corporation which
is the registered owner of the shares.
(2) Pursuant to the share ownership adjustment mechanism in the Stockholder
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 stockholders 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. In the complaint, LPG seeks compensatory and
punitive damages for alleged breaches of the stockholder agreement and
alleged breaches of fiduciary duties allegedly owed by CE Casecnan Ltd. and
MidAmerican to LPG. The complaint also seeks injunctive relief against all
defendants and a declaratory judgment that LPG is entitled to maintain its
15% interest in CE Casecnan. Number of shares owned subject to upward
adjustment based on the absence of the timely exercise of the option
specified in note (4) below.
(3) Includes 115,000 shares beneficial ownership of which was purchased from
San Lorenzo Ruiz Builders and Developers Group Inc. in 1998, with an option
in favor of San Lorenzo to repurchase those shares at project completion.
(4) Pursuant to the share ownership adjustment mechanism in the Stockholder
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 stockholders that
MidAmerican's ownership interest in the Company has increased 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. In the complaint, LPG seeks compensatory and
punitive damages for alleged breaches of the stockholder agreement and
alleged breaches of fiduciary duties allegedly owed by CE Casecnan Ltd. and
MidAmerican to LPG. The complaint also seeks injunctive relief against all
defendants and a declaratory judgment that LPG is entitled to maintain its
15% interest in CE Casecnan.
-37-
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not Applicable.
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures: Based on our
evaluation as of a date within 90 days of the filing date of this Annual Report
on Form 10-K, our principal executive officer and principal financial officer
have concluded that our disclosure controls and procedures (as defined in Rules
13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the Exchange
Act)) are effective to ensure that information required to be disclosed by us in
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms. It should be noted that the design of any
system of controls is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions,
regardless of how remote.
(b) Changes in internal controls. There were no significant changes in our
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation. There were no significant
deficiencies or material weaknesses, and therefore there were no corrective
actions taken.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K on November 14, 2002 to report
under Item 9 that the Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 2002, filed on November 14, 2002, by CE Casecnan Water and
Energy Company, Inc. was accompanied by certification by the President, David A.
Baldwin and Chief Financial Officer, Patrick J. Goodman, pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 and to file a copy of each of those
certifications as an exhibit.
-38-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Omaha, State of
Nebraska, on March 28, 2003.
CE CASECNAN WATER AND ENERGY COMPANY, INC.
By: /s/ * David A. Baldwin
----------------------
David A. Baldwin
President
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has caused this report to be signed by the following persons in the capacities
and on the dates indicated:
Signature Title Date
- --------- ----- ----
/s/ David L. Sokol* Director and Chairman of the Board March 28, 2003
- -------------------
David L. Sokol
/s/ David A. Baldwin* Director and President March 28, 2003
- ---------------------
David A. Baldwin (Principal Executive Officer)
/s/ Patrick J. Goodman* Director, Senior Vice President March 28, 2003
- ----------------------- and Chief Financial Officer
Patrick J. Goodman (Principal Financial Officer)
/s/ Douglas L. Anderson Director, Senor Vice President, General March 28, 2003
- ----------------------- Counsel and Assistant Secretary
Douglas L. Anderson
/s/ Linda B. Castillo* Director March 28, 2003
- ----------------------
Linda B. Castillo
*By: /s/ Douglas L. Anderson
-----------------------
Douglas L. Anderson
Attorney-in-Fact
-39-
SECTION 302 CERTIFICATION FOR FORM 10-K
CERTIFICATIONS
--------------
I, David A. Baldwin, certify that:
1. I have reviewed this annual report on Form 10-K of CE Casecnan Water and
Energy Company, Inc.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual
report (the "Evaluation Date"); and
c) presented in this annual 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
annual 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: March 28, 2003
/s/ David A. Baldwin
-------------------------
David A. Baldwin
President
(chief executive officer)
-40-
I, Patrick J. Goodman, certify that:
1. I have reviewed this annual report on Form 10-K of CE Casecnan Water and
Energy Company, Inc.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual
report (the "Evaluation Date"); and
c) presented in this annual 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
annual 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: March 28, 2003
/s/ Patrick J. Goodman
-------------------------
Patrick J. Goodman
Senior Vice President and
Chief Financial Officer
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INDEX TO EXHIBITS
Exhibit No. Description of Exhibit
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3.1 Articles of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 the Company's Registration Statement on
Form S-4, as amended, dated January 25, 1996 ("Form S-4")).
3.2 By-laws of the Company (incorporated by reference to Exhibit 3.2
the Company's Form S-4).
4.1(a) Trust Indenture, dated as of November 27, 1995, between
Chemical Trust Company of California and the Company
(incorporated by reference to Exhibit 4.1(a) the Company's Form
S-4).
4.1(b) First Supplemental Indenture, dated as of April 10, 1996,
between Chemical Trust Company of California and the Company
(incorporated by reference to Exhibit 4.1(b) to the Company's
Form S-4).
4.2 Exchange and Registration Rights Agreement, dated as of November
27, 1995, by and among CS First Boston Corporation, Bear Stearns
& Co. Inc., Lehman Brothers Inc. and the Company (incorporated by
reference to Exhibit 4.2 the Company's Form S-4).
4.3 Collateral Agency and Intercreditor Agreement, dated as of
November 27, 1995, by and among Chemical Trust Company of
California, Far East Bank & Trust Company and the Company
(incorporated by reference to Exhibit 4.3 the Company's Form
S-4).
4.4 Mortgage and Security Agreement, dated as of November 10, 1995,
by and among CE Casecnan Ltd., Kiewit Energy International
(Bermuda) Ltd., La Prairie Group Contractors (International)
Ltd., San Lorenzo Ruiz Builders and Developers Group, Inc.,
Chemical Trust Company of California, Far East Bank & Trust
Company and the Company (incorporated by reference to Exhibit 4.4
the Company's Form S-4).
4.6 Deposit and Disbursement Agreement, dated as of November 27,
1995, by and among the Company, Chemical Trust Company of
California, Kiewit Energy Company and the Company (incorporated
by reference to the Company's Form S-4).
4.7 Consent of NIA, dated as of November 10, 1995, to the assignment
of the Amended and Restated Casecnan Project Agreement
(incorporated by reference to Exhibit 4.7 to the Company's Form
S-4).
4.8 Consent of the Republic of Philippines, dated November 10, 1995,
to the assignment of the Performance Undertaking and the Amended
and Restated Casecnan Project Agreement (incorporated by
reference to Exhibit 4.8 to the Company's Form S-4).
4.9 Consent of Hanbo Corporation and You One Engineering and
Construction Company, Ltd., dated as of November 17, 1995, to the
assignment of the Engineering, Procurement and Construction
Contract (incorporated by reference to Exhibit 4.9 to the
Company's Form S-4).
4.10 Consent of Hanbo Steel, dated as of November 17, 1995, to the
assignment of the Guaranty of Engineering, Procurement and
Construction Contract (incorporated by reference to Exhibit 4.10
to the Company's Form S-4).
4.11 Notification, dated as of November 27, 1995, from the Company to
Korea FirstBank, of the assignment of the Irrevocable Letter of
Credit (incorporated by reference to Exhibit 4.11 to the
Company's Form S-4).
10.1 Amended and Restated Casecnan Project Agreement, dated as of June
26, 1995, between the National Irrigation Administration and the
Company (incorporated by reference to Exhibit 10.1 the Company's
Form S-4).
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10.2 Performance Undertaking, dated as of July 20, 1995, executed by
the Secretary of Finance on behalf of the Republic of the
Philippines (incorporated by reference to Exhibit 10.2 to the
Company's Form S-4).
10.3 Engineering, Procurement and Construction Contract, dated as of
October 10, 1995, by and among Hanbo Corporation, You One
Engineering and Construction Company, Ltd. and the Company
(incorporated by reference to Exhibit 10.3 the Company's Form
S-4)
10.4 Master Equipment Lease Agreement, dated as of November 1, 1995,
between You One Engineering and Construction Company, Ltd. and
the Company (incorporated by reference to Exhibit 10.4 the
Company's Form S-4).
10.5 Sublease Agreement No. 1, dated as of November 1, 1995, between
You One Engineering and Construction Company, Ltd. and the
Company (incorporated by reference to Exhibit 10.5 the Company's
Form S-4).
10.6 Guaranty of Engineering, Procurement and Construction Contract,
dated as of November 13, 1995, by Hanbo Steel guaranteeing the
performance of the obligations of Hanbo Corporation and You One
Engineering and Construction Company, Ltd. under the Engineering
Procurement and Construction Contract (incorporated by reference
to Exhibit 10.6 to the Company's Form S-4).
10.7 Korea First Bank Irrevocable Letter of Credit issued to the
Company in the aggregate principal amount of U.S.$117,850,000.00
to support the obligations of Hanbo Corporation and You One
Engineering and Construction Company, Ltd. under the Engineering,
Procurement and Construction Contract (incorporated by reference
to Exhibit 10.7 to the Company's Form S-4).
10.8 Engineering, Procurement and Construction Contract dated May 7,
1997 between the Company and CP Casecnan - Consortium
(incorporated by reference to Exhibit 10.8 to the Company's Form
10-K dated December 31, 1998).
10.9 Amendment Agreement dated November 20, 1999 between the Company
and CP Casecnan - Consortium (incorporated by reference to
Exhibit 10.9 to the Company's Form 10-K dated December 31, 1999).
24 Power of Attorney
99.1 Chief Executive Officer's Certificate Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
99.2 Chief Financial Officer's Certificate Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
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