UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
Commission File No. 001-12995
CE CASECNAN WATER AND ENERGY COMPANY, INC.
------------------------------------------
(Exact name of registrant as specified in its charter)
Philippines Not Applicable
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
24th Floor, 6750 Building, Ayala Avenue
Makati, Metro Manila, Philippines Not Applicable
--------------------------------- --------------
(Address of principal executive offices) (Zip Code)
(632) 892-0276
--------------
(Registrant's telephone number, including area code)
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [x]
As of October 31, 2003, 767,162 shares of common stock were outstanding.
TABLE OF CONTENTS
-----------------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements................................................. 3
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................14
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........22
Item 4. Controls and Procedures..............................................22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings....................................................23
Item 2. Changes in Securities and Use of Proceeds............................23
Item 3. Defaults Upon Senior Securities......................................23
Item 4. Submission of Matters to a Vote of Security Holders..................23
Item 5. Other Information....................................................23
Item 6. Exhibits and Reports on Form 8-K.....................................23
SIGNATURES....................................................................24
EXHIBIT INDEX.................................................................25
-2-
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders of CE Casecnan Water and Energy
Company, Inc.
We have reviewed the accompanying balance sheets of CE Casecnan Water and Energy
Company, Inc. (the "Company") as of September 30, 2003, and the related
statements of operations for each of the three-month and nine-month periods
ended September 30, 2003 and 2002, and the statements of cash flows for the
nine-month periods ended September 30, 2003 and 2002. These interim financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical review procedures and
making inquiries of persons responsible for financial and accounting matters. It
is substantially less in scope than an audit conducted in accordance with
generally accepted auditing standards, the objective of which is the expression
of an opinion regarding the financial statements taken as a whole. Accordingly,
we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying interim financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We previously audited in accordance with auditing standards generally accepted
in the United States of America, the balance sheet as of December 31, 2002, and
the related statements of operations, changes in stockholders' equity and of
cash flows for the year then ended (not presented herein), and in our report
dated January 24, 2003, we expressed an unqualified opinion on those financial
statements. In our opinion, the information set forth in the accompanying
balance sheet information as of December 31, 2002, is fairly stated in all
material respects in relation to the balance sheet from which it has been
derived.
/s/ Joaquin Cunanan & Co.
JOAQUIN CUNANAN & CO.
A PRICEWATERHOUSECOOPERS MEMBER FIRM
Makati City, Philippines
October 31, 2003
-3-
CE CASECNAN WATER AND ENERGY COMPANY, INC.
BALANCE SHEETS
(In thousands of U.S. Dollars, except share data)
AS OF
-----------------------------
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ....................................... $ 3,394 $ 705
Trade receivable, net ........................................... 72,984 51,515
Accrued interest and other receivable, net ...................... 7,766 7,009
Prepaid insurance and other current assets ...................... 3,229 5,562
-------- --------
Total current assets ............................................ 87,373 64,791
-------- --------
Restricted cash and investments ................................... 39,223 7,078
Bond issue costs, net ............................................. 4,200 5,218
Property, plant and equipment, net ................................ 439,727 453,507
Deferred income tax ............................................... 5,371 5,371
Other assets ...................................................... - 5,542
-------- --------
TOTAL ASSETS ...................................................... $575,894 $541,507
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ........................... $ 10,986 $ 10,785
Accrued interest on notes payable ............................... 3,322 2,048
Accrued interest on long-term debts ............................. 11,771 4,223
Payable to affiliates ........................................... 34,660 33,342
Current portion of long-term debt ............................... 45,414 41,468
-------- --------
Total current liabilities ..................................... 106,153 91,866
-------- --------
Notes payable to affiliates ....................................... 51,263 51,263
Long-term debts, net of current portion ........................... 221,778 246,457
-------- --------
Total liabilities ............................................... 379,194 389,586
-------- --------
Commitments and contingencies (Notes 2, 3 and 5)
Stockholders' equity:
Capital stock - authorized 2,148,000 shares, one Philippine peso
($0.038) par value; 767,162 shares issued and outstanding ....... 29 29
Additional paid-in capital ........................................ 123,807 123,807
Retained earnings ................................................. 72,864 28,085
-------- --------
Total stockholders' equity ...................................... 196,700 151,921
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........................ $575,894 $541,507
======== ========
The accompanying notes are an integral part of these financial statements.
-4-
CE CASECNAN WATER AND ENERGY COMPANY, INC.
STATEMENTS OF OPERATIONS
(In thousands of U.S. Dollars, except share data)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------- -----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
(UNAUDITED)
REVENUE:
Delivery of water .............................. $ 22,439 $ 20,480 $ 66,924 $ 60,262
Sale of electricity ............................ 25,737 18,660 45,970 36,849
--------- --------- --------- ---------
Total revenue ................................ 48,176 39,140 112,894 97,111
--------- --------- --------- ---------
OPERATING EXPENSES:
Depreciation ................................... 6,059 5,844 17,477 17,583
Plant operations ............................... 4,598 2,638 11,947 6,705
Doubtful accounts .............................. 1,366 3,177 7,778 8,062
--------- --------- --------- ---------
Total operating expenses ..................... 12,023 11,659 37,202 32,350
--------- --------- --------- ---------
OPERATING INCOME ................................. 36,153 27,481 75,692 64,761
OTHER INCOME (EXPENSE):
Interest expense, net .......................... (10,215) (10,540) (31,146) (31,948)
Other, net ..................................... 95 (22) 233 (29)
--------- --------- --------- ---------
Total other expense, net ..................... (10,120) (10,562) (30,913) (31,977)
--------- --------- --------- ---------
NET INCOME ....................................... $ 26,033 $ 16,919 $ 44,779 $ 32,784
========= ========= ========= =========
NET INCOME PER SHARE ............................. $ 33.93 $ 22.05 $ 58.37 $ 42.73
========= ========= ========= =========
Average number of common shares outstanding ...... 767,162 767,162 767,162 767,162
========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
-5-
CE CASECNAN WATER AND ENERGY COMPANY, INC.
STATEMENTS OF CASH FLOWS
(In thousands of U.S. Dollars)
NINE MONTHS
ENDED SEPTEMBER 30,
---------------------
2003 2002
-------- --------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ......................................................... $ 44,779 $ 32,784
Adjustments to reconcile net cash flows from operating activities:
Depreciation ..................................................... 17,477 17,583
Amortization of bond issue costs ................................. 1,018 1,121
Changes in other items:
Trade receivable, net .......................................... (21,469) (33,353)
Accrued interest and other receivable, net ..................... (757) (90)
Prepaid insurance and other current assets ..................... 2,333 (1,068)
Accounts payable and accrued expenses .......................... 201 881
Accrued interest ............................................... 8,822 7,925
Payable to affiliates related to operations .................... 1,318 (83)
-------- --------
Net cash flows from operating activities ..................... 53,722 25,700
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment ......................... (3,697) (2,669)
Other assets ....................................................... 5,542 4,582
-------- --------
Net cash flows from investing activities ......................... 1,845 1,913
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in restricted cash and investments ........................ (32,145) (15,957)
Repayment of bonds payable ......................................... (20,733) (17,788)
Increase in notes payable to affiliates ............................ - 10,500
-------- --------
Net cash flows from financing activities ......................... (52,878) (23,245)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS ............................ 2,689 4,368
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ..................... 705 1,078
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ........................... $ 3,394 $ 5,446
======== ========
The accompanying notes are an integral part of these financial statements.
-6-
CE CASECNAN WATER AND ENERGY COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
The accompanying unaudited interim financial statements have been prepared by CE
Casecnan Water and Energy Company, Inc. ("CE Casecnan" or the "Company"),
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission for interim financial reporting. In the opinion of the
management of the Company, the accompanying unaudited financial statements
contain all adjustments (consisting of normal recurring accruals) necessary to
present fairly the financial position as of September 30, 2003, and the results
of operations for the three-month and nine-month periods ended September 30,
2003 and 2002, and of cash flows for the nine-month periods ended September 30,
2003 and 2002. The results of operations for the three-month and nine-month
periods ended September 30, 2003 are not necessarily indicative of the results
to be expected for the full year.
The unaudited financial statements should be read in conjunction with the
financial statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2002. In particular, the Company's significant
accounting policies and practices are presented in Note 2 to the financial
statements included therein.
The Company's operations consist of one reportable segment, the domestic water
delivery and electricity generation industry.
2. SUBSEQUENT EVENT - NIA ARBITRATION SETTLEMENT
The Philippine National Irrigation Administration ("NIA") has paid all amounts
due for energy delivery fees and Water Delivery Fees under the terms of the
Casecnan Project Agreement (the "Project Agreement") as of September 30, 2003,
except for the tax compensation portion of the Water Delivery Fees, none of
which had been paid since commercial operations began on December 11, 2001.
Under the terms of the Project Agreement, NIA had the option of timely
reimbursing CE Casecnan directly for certain taxes CE Casecnan paid. If NIA did
not so reimburse CE Casecnan, certain taxes paid by CE Casecnan would result in
an increase in the Water Delivery Fee. The payment of certain other taxes by CE
Casecnan would have resulted automatically in an increase in the Water Delivery
Fee. As of September 30, 2003, CE Casecnan had paid approximately $59.1 million
in taxes, which pursuant to the foregoing provisions resulted in an increase in
the Water Delivery Fee. NIA failed to pay the portion of the Water Delivery Fee
each month related to the payment of these taxes by CE Casecnan. As a result of
the non-payment of the tax compensation portion of the Water Delivery Fees, on
August 19, 2002, CE Casecnan filed a Statement of Claim against NIA pursuant to
the Rules of Arbitration of the International Chamber of Commerce (the "NIA
Arbitration"), seeking payment of such portion of the Water Delivery Fee and
enforcement of the relevant provision of the Project Agreement going forward.
The NIA Arbitration was conducted in accordance with the rules of the
International Chamber of Commerce.
NIA filed its Answer and Counterclaim on March 31, 2003. In its Answer, NIA
asserted, among other things, that most of the taxes which CE Casecnan had
factored into the Water Delivery Fee compensation formula did not fall within
the scope of the relevant section of the Project Agreement, that the
compensation mechanism itself was invalid and unenforceable under Philippine law
and that the Project Agreement was inconsistent with the Philippine
build-operate-transfer law. As such, NIA sought dismissal of CE Casecnan's
claims and a declaration from the arbitral tribunal that the taxes which have
been taken into account in the Water Delivery Fee compensation mechanism were
not recoverable thereunder and that, at most, certain taxes may be directly
reimbursed (rather than compensated for through the Water Delivery Fee) by NIA.
NIA also counterclaimed for approximately $7 million which it alleges is due to
it as a result of the delayed completion of the Casecnan Project. On April 23,
2003, NIA filed a Supplemental Counterclaim in which it asserted that the
Project Agreement was contrary to Philippine law and public policy and by way of
relief sought a declaration that the Project Agreement was void from the
beginning or should be cancelled, or alternatively, an order for reformation
-7-
of the Project Agreement or any portions or sections thereof which may be
determined to be contrary to such law and or public policy. On May 23, 2003 CE
Casecnan filed its reply to NIA's counterclaims.
On October 15, 2003, the Company closed a transaction settling the NIA
Arbitration. In connection with the settlement, the Company entered into an
agreement (the "Supplemental Agreement") with NIA which, in addition to
providing for the dismissal with prejudice of all claims by CE Casecnan and
counterclaims by NIA in the NIA Arbitration, supplements and amends the Project
Agreement in certain respects as summarized below:
Payment in Cash and Delivery of Note
- ------------------------------------
As part of the settlement, on October 15, 2003, NIA paid to CE Casecnan the sum
of $17.7 million plus Philippine pesos 39.9 million (approximately $0.7 million)
and delivered to CE Casecnan the Republic of the Philippines ("ROP") $97.0
million 8.375% Note due 2013 (the "ROP Note"). Also at closing, the Company paid
to the Philippine Bureau of Internal Revenue ("BIR") approximately $24.4 million
in respect of Philippine income taxes on the foregoing consideration.
The ROP Note is governed by New York law and constitutes a direct,
unconditional, unsecured and general obligation of the ROP. The ROP Note is
non-transferable until January 15, 2004, but may be exchanged, at the option of
the ROP, for a new note forming part of a series of direct, unconditional,
unsecured and general debt obligations of the Philippines with a yield of 8.375%
or lower. If the Philippines issues a series of direct, unconditional, unsecured
and general debt obligations having a yield in excess of 8.375%, the Company has
agreed to accept a series of such new debt with a yield no greater than 8.375%.
If not exchanged prior to January 15, 2004, the Company has the option, between
January 15, 2004 and February 15, 2004, to put the ROP Note to the ROP for a
price of par plus accrued interest. The ROP Note has default provisions
substantially identical to those set forth in other recent issuances of direct,
unconditional, unsecured and general obligation of the ROP.
Modifications to Water Delivery Fee
- -----------------------------------
Under the Project Agreement, the Water Delivery Rate increased by $0.00043 per
cubic meter for each $1,000,000 of certain taxes paid by CE Casecnan. The
Supplemental Agreement amends the per cubic meter Water Delivery Fee calculation
by eliminating this increase, such that the per cubic meter Water Delivery Rate
remains at $0.029 per cubic meter, escalated at 7.5% annually from January 1,
1994 through the first five years of the Cooperation Period, extending through
December 25, 2006. In lieu of such increase, the Company will be reimbursed for
certain taxes it pays during the remainder of the Cooperation Period.
Under the Project Agreement, the Water Delivery Fee payable monthly was a fixed
monthly payment based on an average water delivery of 801.9 million cubic meters
per year, pro-rated to approximately 66.8 million cubic meters per month,
multiplied by the per cubic meter rate as described above. Under the
Supplemental Agreement the Water Delivery Fee is equal to the Guaranteed Water
Delivery Fee plus the Variable Delivered Water Delivery Fee minus the Water
Delivery Fee Credit.
Guaranteed Water Delivery Fee. For the sixty-month period from December 25, 2003
through December 25, 2008, the Guaranteed Water Delivery Fee shall equal the
Water Delivery Rate, as described above, multiplied by approximately 66.8
million cubic meters (corresponding to the 801.9 million cubic meters per year).
For each month beginning after December 25, 2008 through the remainder of the
Cooperation Period, the Guaranteed Water Delivery Fee shall equal the Water
Delivery Rate multiplied by approximately 58.3 million cubic meters
(corresponding to 700.0 million cubic meters per year).
Variable Delivered Water Delivery Fee. Variable Delivered Water Delivery Fees
will be earned for months beginning after December 25, 2008. For each month
beginning after December 25, 2008 through the end of the Cooperation Period, the
Variable Delivered Water Delivery Fee shall be payable only from the date when
the cumulative Total Available Water (total delivered water plus the water
volume not delivered to NIA as a result of
-8-
NIA's failure to accept energy deliveries at a capacity up to 150 MW) for each
contract year exceeds 700.0 million cubic meters. Variable Delivered Water
Delivery Fees will be earned up to an aggregate maximum of 1,324.7 million cubic
meters for the period from December 25, 2008 through the end of the Cooperation
Period. No additional variable water delivery fees will be earned over the
1,324.7 million cubic meter threshold.
Water Delivery Credit. The Water Delivery Credit shall be applicable only for
each of the sixty-months from December 25, 2008 through December 25, 2013 and
shall equal the Water Delivery Rate as of December 25, 2008 multiplied by the
sum of each Annual Water Credit divided by sixty. The Annual Water Credit for
each contract year starting from December 25, 2003 and ending on December 25,
2008 shall equal 801.9 million cubic meters minus the Total Available Water for
each contract year. The Total Available Water in any such year will equal actual
deliveries with a minimum threshold of 700.0 million cubic meters.
Modifications to Excess Energy Delivery Fee
- -------------------------------------------
Under the Project Agreement, the Excess Energy Delivery Fee was a variable
amount based on actual electrical energy delivered in each month in excess of 19
gigawatt-hour ("GWh"), payable at a rate of $0.1509 per kWh. Under the
Supplemental Agreement, the per kWh rate for energy deliveries in excess of 19
GWh per month has been reduced, commencing in 2009, to $0.1132 (escalating at 1%
per annum thereafter), provided that any deliveries of energy in excess of 490
GWh but less than 550 GWh per year are paid for at a rate of 1.3 Philippine
pesos per kWh and deliveries in excess of 550 GWh per year are at no cost to
NIA.
The Supplemental Agreement provides that NIA would not make further payments on
the unpaid portion of the excess energy available for generation, but not
generated from the commencement of commercial operations through September 28,
2003. For periods after September 28, 2003, the Supplemental Agreement provides
that if the Casecnan project is not dispatched up to 150 MW whenever water is
available, NIA will pay for excess energy that could have been generated but was
not as a result of such dispatch constraint.
Other Provisions of the Supplemental Agreement
- ----------------------------------------------
In connection with the settlement of the NIA Arbitration and as part of the
Supplemental Agreement transaction, the Company paid to NIA $1.6 million in
respect of alleged late completion of the Project. This amount had been accrued
as of September 30, 2003 and December 31, 2002. In addition, the Company
received opinions from the Philippine Office of Government Corporate Counsel as
to the due authorization and enforceability of Supplemental Agreement and
received confirmation from the Philippine Department of Finance that the ROP
Note had been duly and validly issued and was enforceable in accordance with its
terms. The Company also received an opinion from Allen & Overy, counsel to the
Republic of the Philippines, as to the enforceability of the ROP Note under New
York law. The Company also received written confirmation from the Private Sector
Assets and Liabilities Management Corporation that the issues with respect to
the Casecnan Project that had been raised by the interagency review of
independent power producers in the Philippines or that may have existed with
respect to the Project under the Electric Power Industry Reform Act of 2001 have
been satisfactorily addressed by the Supplemental Agreement.
The Guaranteed Energy Delivery Fee, Force Majeure, Buyout and Dispute Resolution
provisions of the Project Agreement, as well as the Performance Undertaking
provided by the ROP, remain unaffected by the Supplemental Agreement and in full
force and effect.
-9-
3. TRADE RECEIVABLE, NET
Trade receivable, net pertains to the receivable due under the terms of the
Project Agreement from NIA for water delivered to NIA and the electricity
generated and delivered by the Company to NPC on behalf of NIA. Trade
receivable, net at September 30, 2003 and December 31, 2002 consists of the
following (in thousands):
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
Water delivery fee ................ $ 83,436 $ 52,854
Guaranteed energy delivery fee .... 3,676 6,709
Excess energy delivery fee ........ 5,715 4,018
-------- --------
Trade receivable ................ 92,827 63,581
Allowance for doubtful accounts ... (19,843) (12,066)
-------- --------
Trade receivable, net ........... $ 72,984 $ 51,515
======== ========
NIA has paid all amounts due for energy delivery fees and all amounts due for
Water Delivery Fees under the Project Agreement as of September 30, 2003, except
the tax compensation portion of the Water Delivery Fees, none of which has been
paid since commercial operations began on December 11, 2001. Under the terms of
the Project Agreement, NIA had the option of timely reimbursing CE Casecnan
directly for certain taxes CE Casecnan paid. If NIA did not so reimburse CE
Casecnan, certain taxes paid by CE Casecnan would result in an increase in the
Water Delivery Fee. The payment of certain other taxes by CE Casecnan would have
resulted automatically in an increase in the Water Delivery Fee. As of September
30, 2003, CE Casecnan had paid approximately $59.1 million in taxes, which
pursuant to the foregoing provisions resulted in an increase in the Water
Delivery Fee.
Total revenue was $48.2 million and $39.1 million for the three-month periods
ended September 30, 2003 and 2002, respectively, and $112.9 million and $97.1
million for the nine-month periods ended September 30, 2003 and 2002,
respectively. Included in these amounts was $10.2 million and $8.8 million for
the three-month periods ended September 30, 2003 and 2002, respectively, and
$27.9 million and $25.3 million for the nine-month periods ended September 30,
2003 and 2002, respectively, of tax compensation for Water Delivery Fees under
the Project Agreement, none of which has been paid. The Company estimates the
uncollectible portion of the Water Delivery Fee to be $19.8 million and $12.1
million as of September 30, 2003 and December 31, 2002, respectively. As of
September 30, 2003 and December 31, 2002, the cumulative unpaid portion of the
tax compensation portion of the Water Delivery Fees invoiced since the start of
commercial operations totaled $64.2 million and $36.3 million, respectively.
The Supplemental Agreement provides that NIA would not make further payments on
the unpaid portion of the excess energy available for generation, but not
generated from the commencement of commercial operations through September 28,
2003. Based on this provision, the Company did not record revenues relating to
excess energy of $9.7 million that could have been generated as of September 30,
2003.
The allowance for doubtful accounts as of September 30, 2003 and December 31,
2002 represents the Company's current estimate of the uncollectible portion of
such unpaid Water Delivery Fees as of the respective balance sheet date and does
not reflect any projections related to future billings and their collections.
The Company's accounting for such events is prescribed by Statement of Financial
Accounting Standards No. 5, "Accounting for Contingencies" and the accrual for
contingency involved considerable judgment on the part of management and was
based upon existing conditions as to possible gain or loss to the Company when
one or more future events occurred or failed to occur.
-10-
On October 15, 2003, the Company closed a transaction settling the NIA
Arbitration described in Note 2 above and revised the allowance for doubtful
accounts as of September 30, 2003 to reflect the net collectible amounts based
upon the settlement agreement.
4. RELATED PARTY TRANSACTIONS
In the normal course of business, the Company transacts with its affiliates in
the form of advances for construction related and operating expenses. The
payable to affiliates was $34.7 million and $33.3 million at September 30, 2003
and December 31, 2002, respectively. Costs incurred by the Company in
transactions with related parties amounted to $0.5 million and $2.2 million for
the three-month periods ended September 30, 2003 and 2002, respectively, and
$2.0 million and $3.1 million for the nine-month periods ended September 30,
2003 and 2002, respectively.
As of September 30, 2003 and December 31, 2002, the Company has outstanding
$51.3 million of unsecured subordinated notes payable to CE Casecnan Ltd., a
stockholder, due November 15, 2005. The unsecured notes bear interest at LIBOR
plus two percent (2%). Interest expense on the unsecured notes was $0.4 million
and $0.5 million during the three-month periods ended September 30, 2003 and
2002 and $1.3 million and $1.4 million during the nine-month periods ended
September 30, 2003 and 2002. At September 30, 2003, the effective interest rate
on the notes was 3.25%. 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 Depository, 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.
5. COMMITMENTS AND CONTINGENCIES
CONSTRUCTION CONTRACT ARBITRATION
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
ICC 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
-11-
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 Casecnan
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 ICC.
Hearings have been held in connection with this arbitration in July 2001,
September 2001, January 2002, March 2002, November 2002, January 2003 and July
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 September 30, 2003, 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. The
$6.0 million was recorded as a reduction in construction costs. On November 7,
2002, the ICC issued the arbitration tribunal's partial award with respect to
the Contractor's force majeure and geologic conditions claims. The 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 September 30, 2003 and
December 31, 2002. All of the Contractor's other claims with respect to force
majeure and geologic conditions were denied.
If the Contractor were to prevail on its claim that the delay liquidated damages
clause is unenforceable, CE Casecnan 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, CE Casecnan 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.
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 Casecnan 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 Casecnan Project transmission line was completed on August 13, 2001 and NIA
has completed the installation and testing of the Casecnan Project's metering
equipment. Accordingly, the Company has recorded a total of $1.6 million for
liquidated damages as of September 30, 2003 and December 31, 2002, payable to
NIA for 120 days of delay. This is recorded as part of accounts payable and
accrued expenses in the balance sheets and was paid to NIA on October 15, 2003
as described in Note 2.
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 Energy Holdings Company ("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, among others, 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.
-12-
In February 2003, San Lorenzo Ruiz Builders and Developers Group, Inc. ("San
Lorenzo"), an original shareholder substantially all of whose shares in the
Company were purchased by MidAmerican in 1998, threatened to initiate legal
action in the Philippines in connection with certain aspects of its option to
repurchase such shares on or prior to commercial operation of the Casecnan
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 such action.
BIR AUDIT
The 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 2000 and 2001. In addition, the BIR issued
letters of authority to audit the tax years 1996 through 1998. In May 2003, the
Company paid $1.0 million of final taxes related to interest expense paid from
1996 through 1998. On June 10, 2003, the BIR issued a notice stating that the
tax investigation for the Company for all internal revenue taxes for the years
1996 through 1998 is closed and terminated. On September 26, 2003, the Company
reached a settlement with the BIR in relation to the BIR's assessment of
deficiency taxes for the years 2000 and 2001. The settlement comprised a payment
of taxes amounting to $2.0 million in full and final termination of the BIR's
assessment of taxes. The Company believes that it currently is in compliance
with applicable tax laws and regulations with respect to all of its tax returns
and filings.
CONCENTRATION OF RISK
NIA's payments of obligations under the Project Agreement are substantially
denominated in United States Dollars and are the Company's sole source of
operating revenues. Because of the Company's dependence on NIA, any material
failure of NIA to fulfill its obligations under the Project Agreement and any
material failure of the ROP to fulfill its obligations under the Performance
Undertaking would significantly impair the ability of the Company to meet its
existing and future obligations. 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.
On April 24, 2003, Standard & Poor's Ratings Services ("S&P") lowered its rating
of CE Casecnan to BB from BB+ as a result of S&P's downgrade of debt securities
issued by the ROP. The downgrade of the ROP debt securities by S&P reflected the
country's growing debt burden and fiscal rigidity. On June 13, 2003, S&P
downgraded CE Casecnan's senior secured notes rating to B+ from BB and stated
that the outlook for the rating was negative.
On May 8, 2003, Moody's Investors Service ("Moody's") placed the Ba2 senior
secured notes rating of CE Casecnan on review for possible downgrade, noting
NIA's supplemental counterclaim seeking to have the Project Agreement declared
void. Moody's noted that actions by government related agencies and the
resulting instability of contractual arrangements was becoming inconsistent with
their rating approach that attaches significant benefit to offtake arrangements
with those government supported entities. On June 6, 2003, Moody's downgraded CE
Casecnan's senior secured notes rating to B2 from Ba2.
-13-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following is management's discussion and analysis of certain significant
factors which have affected the financial condition and results of operations of
CE Casecnan Water and Energy Company, Inc. ("CE Casecnan" or the "Company"),
during the periods included in the accompanying statements of operations. This
discussion should be read in conjunction with the Company's historical financial
statements and the notes to those statements. The Company's actual results in
the future could differ significantly from the historical results.
FORWARD-LOOKING STATEMENTS
From time to time, CE Casecnan may make forward-looking statements within the
meaning of the federal securities laws that involve judgments, assumptions and
other uncertainties beyond the control of the Company or any of its subsidiaries
individually. These forward-looking statements may include, among others,
statements concerning revenue and cost trends, cost recovery, cost reduction
strategies and anticipated outcomes, pricing strategies, changes in the utility
industry, planned capital expenditures, financing needs and availability,
statements of CE Casecnan's expectations, beliefs, future plans and strategies,
anticipated events or trends and similar comments concerning matters that are
not historical facts. These types of forward-looking statements are based on
current expectations and involve a number of known and unknown risks and
uncertainties that could cause the actual results and performance of the Company
to differ materially from any expected future results or performance, expressed
or implied, by the forward-looking statements. In connection with the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995, CE
Casecnan has identified important factors that could cause actual results to
differ materially from those expectations, including weather effects on revenues
and other operating uncertainties, uncertainties relating to economic and
political conditions and uncertainties regarding the impact of regulations,
changes in government policy and competition. The Company does not assume any
responsibility to update forward-looking information contained herein.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States of America
requires management to make judgments, assumptions and estimates that affect the
amounts reported in the Financial Statements and accompanying notes. Note 2 to
the Company's Financial Statements included in its Annual Report on form 10-K
for the year ended December 31, 2002 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.
For additional discussion of the Company's critical accounting policies, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2002.
RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND
2002
Total revenue increased $9.1 million, or 23.3%, to $48.2 million for the
three-month period ended September 30, 2003 from $39.1 million for the
three-month period ended September 30, 2002. Water delivery revenue increased to
$22.4 million for the three-month period ended September 30, 2003 from $20.5
million for the three-month period ended September 30, 2002 due to a 7.5%
increase in the Water Delivery Fee rate as a result of the contractual annual
escalation factor and the accrual of the revenue related to the additional taxes
recoverable during operations pursuant to the contract. Electricity sales
revenue was $25.7 million for the three-month period ended September 30, 2003
and $18.7 million for the three-month period ended September 30, 2002. The $7.0
million increase was due primarily to increased generation resulting from higher
water flows in 2003. Revenues from water delivery, guaranteed energy and excess
energy are 47%, 19% and 34%, respectively, of the total
-14-
revenue for the three-month period ended September 30, 2003 while 52%, 24% and
24%, respectively for the three-month period ended September 30, 2002.
The Supplemental Agreement provides that NIA would not make further payments on
the unpaid portion of the excess energy available for generation, but not
generated from the commencement of commercial operations through September 28,
2003. Based on this provision, the Company did not record revenues relating to
excess energy of $9.7 million that could have been generated as of September 30,
2003.
Operating expenses increased $0.3 million to $12.0 million for the three-month
period ended September 30, 2003 from $11.7 million for the three-month period
ended September 30, 2002. Included within operating expenses for the three-month
period ended September 30, 2003 are depreciation, plant operations and doubtful
accounts expense of $6.1 million, $4.6 million and $1.4 million, respectively.
Depreciation and plant operations expense increased by $0.3 million and $2.0
million, respectively, while doubtful accounts expense decreased $1.8 million.
The increase in plant operations expense was caused by higher local business
taxes and legal costs. The decrease in doubtful accounts expense is primarily
attributable to a reduction for amounts reserved on the tax compensation portion
of the Water Delivery Fees for the three-month period ended September 30, 2003.
The allowance for doubtful accounts was adjusted to reflect the net collectible
amounts based upon the settlement agreement (See "Liquidity and Capital
Resources - NIA Arbitration Settlement").
Interest expense decreased slightly by $0.3 million to $10.2 million for the
three-month period ended September 30, 2003 from $10.5 million for the
three-month period ended September 30, 2002. The primary reason for the decrease
was the scheduled payment of debt.
RESULTS OF OPERATIONS FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND
2002
Total revenue increased $15.8 million or 16.3% to $112.9 million for the
nine-month period ended September 30, 2003 from $97.1 million for the nine-month
period ended September 30, 2002. Water delivery revenue increased to $66.9
million for the nine-month period ended September 30, 2003 from $60.3 million
for the nine-month period ended September 30, 2002 due to a 7.5% increase in the
Water Delivery Fee rate as a result of the contractual annual escalation factor
and the accrual of the revenue related to the additional taxes recoverable
during operations pursuant to the contract. Electricity sales revenue was $46.0
million for the nine-month period ended September 30, 2003 and $36.8 million for
the nine-month period ended September 30, 2002. The $9.2 million increase was
due primarily to increased generation resulting from higher water flows in 2003.
Revenues from water delivery, guaranteed energy and excess energy are 59%, 24%
and 17%, respectively, of the total revenue for the nine-month period ended
September 30, 2003 while 62%, 28% and 10%, respectively for the nine-month
period ended September 30, 2002.
The Supplemental Agreement provides that NIA would not make further payments on
the unpaid portion of the excess energy available for generation, but not
generated from the commencement of commercial operations through September 28,
2003. Based on this provision, the Company did not record revenues relating to
excess energy of $9.7 million that could have been generated as of September 30,
2003.
Operating expenses increased $4.8 million or 14.8% to $37.2 million for the
nine-month period ended September 30, 2003 from $32.4 million for the nine-month
period ended September 30, 2002. Included within operating expenses for the
nine-month period ended September 30, 2003 are depreciation, plant operations
and doubtful accounts expense of $17.5 million, $11.9 million and $7.8 million,
respectively. Depreciation expense decreased by $0.1 million, plant operations
expense increased by $5.2 million and doubtful accounts expense decreased by
$0.3 million. The increase in plant operations expense was caused by higher
local business taxes, insurance and legal costs. The decrease in doubtful
accounts is primarily attributable to a reduction for amounts reserved on the
tax compensation portion of the Water Delivery Fees for the three-month period
ended September 30, 2003. The
-15-
allowance for doubtful accounts was adjusted to reflect the net collectible
amounts based upon the settlement agreement (See "Liquidity and Capital
Resources - NIA Arbitration Settlement").
Interest expense decreased $0.8 million to $31.1 million for the nine-month
period ended September 30, 2003 from $31.9 million for the nine-month period
ended September 30, 2002. The primary reason for the decrease was the scheduled
payment of debt partially offset by the payment of final taxes related to the
interest expense paid in 1996 to 1998 to Philippine bondholders.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents were $3.4 million and $0.7 million at
September 30, 2003 and December 31, 2002, respectively.
The Company generated cash flows from operations of $53.7 million for the
nine-month period ended September 30, 2003, compared with $25.7 million for the
same period in 2002. The increase from 2002 was primarily due to the collection
of November 2002 revenues in February 2003 instead of December 2002 and
generally higher energy and water delivery revenues.
The Company provided $1.8 million from investing activities for the nine-month
period ended September 30, 2003, compared to $1.9 million for the same period in
2002.
The Company used $52.9 million in financing activities for the nine-month period
ended September 30, 2003, compared to $23.2 million for the same period in 2002.
The increase is due mainly to $2.9 million of additional payments on bonds and
an increase of $16.1 million in the restricted cash balance during 2003,
partially offset by $10.5 million of note borrowings from an affiliate in 2002.
CE Casecnan constructed and operates the Casecnan Project, which was developed
as an unsolicited proposal under the Philippine build-operate-transfer ("BOT")
law, under the terms of the Casecnan Project Agreement (the "Project Agreement")
between CE Casecnan and the Philippine National Irrigation Administration
("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 and will be
obligated to pay a fee for all water delivered in excess of the threshold amount
up to a specified amount beginning after December 25, 2008.
The Republic of the Philippines ("ROP") has provided a Performance Undertaking
under which NIA's obligations under the Project Agreement are guaranteed by the
full faith and credit of the ROP. 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 ROP to fulfill its obligations under the
Performance Undertaking would significantly impair the ability of the Company to
meet its obligations pertaining to its outstanding debt.
-16-
NIA ARBITRATION SETTLEMENT
Under the terms of the Project Agreement, NIA had the option of timely
reimbursing CE Casecnan directly for certain taxes CE Casecnan paid. If NIA did
not so reimburse CE Casecnan, certain taxes paid by CE Casecnan would result in
an increase in the Water Delivery Fee. The payment of certain other taxes by CE
Casecnan would have resulted automatically in an increase in the Water Delivery
Fee. As of September 30, 2003, CE Casecnan had paid approximately $59.1 million
in taxes, which pursuant to the foregoing provisions resulted in an increase in
the Water Delivery Fee. NIA failed to pay the portion of the Water Delivery Fee
each month related to the payment of these taxes by CE Casecnan. As a result of
the non-payment of the tax compensation portion of the Water Delivery Fees, on
August 19, 2002, CE Casecnan filed a Statement of Claim against NIA pursuant to
the Rules of Arbitration of the International Chamber of Commerce (the "NIA
Arbitration"), seeking payment of such portion of the Water Delivery Fee and
enforcement of the relevant provision of the Project Agreement going forward.
The NIA Arbitration was conducted in accordance with the rules of the
International Chamber of Commerce.
NIA filed its Answer and Counterclaim on March 31, 2003. In its Answer, NIA
asserted, among other things, that most of the taxes which CE Casecnan had
factored into the Water Delivery Fee compensation formula did not fall within
the scope of the relevant section of the Project Agreement, that the
compensation mechanism itself was invalid and unenforceable under Philippine law
and that the Project Agreement was inconsistent with the Philippine
build-operate-transfer law. As such, NIA sought dismissal of CE Casecnan's
claims and a declaration from the arbitral tribunal that the taxes which have
been taken into account in the Water Delivery Fee compensation mechanism were
not recoverable thereunder and that, at most, certain taxes may be directly
reimbursed (rather than compensated for through the Water Delivery Fee) by NIA.
NIA also counterclaimed for approximately $7 million which it alleges is due to
it as a result of the delayed completion of the Casecnan Project. On April 23,
2003, NIA filed a Supplemental Counterclaim in which it asserted that the
Project Agreement was contrary to Philippine law and public policy and by way of
relief sought a declaration that the Project Agreement was void from the
beginning or should be cancelled, or alternatively, an order for reformation of
the Project Agreement or any portions or sections thereof which may be
determined to be contrary to such law and or public policy. On May 23, 2003 CE
Casecnan filed its reply to NIA's counterclaims.
On October 15, 2003, the Company closed a transaction settling the NIA
Arbitration. In connection with the settlement, the Company entered into an
agreement (the "Supplemental Agreement") with NIA which, in addition to
providing for the dismissal with prejudice of all claims by CE Casecnan and
counterclaims by NIA in the NIA Arbitration, supplements and amends the Project
Agreement in certain respects as summarized below:
Payment in Cash and Delivery of Note
- ------------------------------------
As part of the settlement, on October 15, 2003, NIA paid to CE Casecnan the sum
of $17.7 million plus Philippine pesos 39.9 million (approximately $0.7 million)
and delivered to CE Casecnan the ROP $97.0 million 8.375% Note due 2013 (the
"ROP Note"). Also at closing, the Company paid to the Philippine Bureau of
Internal Revenue ("BIR") approximately $24.4 million in respect of Philippine
income taxes on the foregoing consideration.
The ROP Note is governed by New York law and constitutes a direct,
unconditional, unsecured and general obligation of the ROP. The ROP Note is
non-transferable until January 15, 2004, but may be exchanged, at the option of
the ROP, for a new note forming part of a series of direct, unconditional,
unsecured and general debt obligations of the Philippines with a yield of 8.375%
or lower. If the Philippines issues a series of direct, unconditional, unsecured
and general debt obligations having a yield in excess of 8.375%, the Company has
agreed to accept a series of such new debt with a yield no greater than 8.375%.
If not exchanged prior to January 15, 2004, the Company has the option, between
January 15, 2004 and February 15, 2004, to put the ROP Note to the ROP, for a
price of par plus accrued interest. The ROP Note has default provisions
substantially identical to those set forth in other recent issuances of direct,
unconditional, unsecured and general obligation of the ROP.
-17-
Modifications to Water Delivery Fee
- -----------------------------------
Under the Project Agreement, the Water Delivery Rate increased by $0.00043 per
cubic meter for each $1,000,000 of certain taxes paid by CE Casecnan. The
Supplemental Agreement amends the per cubic meter Water Delivery Fee calculation
by eliminating this increase, such that the per cubic meter Water Delivery Rate
remains at $0.029 per cubic meter, escalated at 7.5% annually from January 1,
1994 through the first five years of the Cooperation Period, extending through
December 25, 2006. In lieu of such increase, the Company will be reimbursed for
certain taxes it pays during the remainder of the Cooperation Period.
Under the Project Agreement, the Water Delivery Fee payable monthly was a fixed
monthly payment based on an average water delivery of 801.9 million cubic meters
per year, pro-rated to approximately 66.8 million cubic meters per month,
multiplied by the per cubic meter rate as described above. Under the
Supplemental Agreement the Water Delivery Fee is equal to the Guaranteed Water
Delivery Fee plus the Variable Delivered Water Delivery Fee minus the Water
Delivery Fee Credit.
Guaranteed Water Delivery Fee. For the sixty-month period from December 25, 2003
through December 25, 2008, the Guaranteed Water Delivery Fee shall equal the
Water Delivery Rate, as described above, multiplied by approximately 66.8
million cubic meters (corresponding to the 801.9 million cubic meters per year).
For each month beginning after December 25, 2008 through the remainder of the
Cooperation Period, the Guaranteed Water Delivery Fee shall equal the Water
Delivery Rate multiplied by approximately 58.3 million cubic meters
(corresponding to 700.0 million cubic meters per year).
Variable Delivered Water Delivery Fee. Variable Delivered Water Delivery Fees
will be earned for months beginning after December 25, 2008. For each month
beginning after December 25, 2008 through the end of the Cooperation Period, the
Variable Delivered Water Delivery Fee shall be payable only from the date when
the cumulative Total Available Water (total delivered water plus the water
volume not delivered to NIA as a result of NIA's failure to accept energy
deliveries at a capacity up to 150 MW) for each contract year exceeds 700.0
million cubic meters. Variable Delivered Water Delivery Fees will be earned up
to an aggregate maximum of 1,324.7 million cubic meters for the period from
December 25, 2008 through the end of the Cooperation Period. No additional
variable water delivery fees will be earned over the 1,324.7 million cubic meter
threshold.
Water Delivery Credit. The Water Delivery Credit shall be applicable only for
each of the sixty-months from December 25, 2008 through December 25, 2013 and
shall equal the Water Delivery Rate as of December 25, 2008 multiplied by the
sum of each Annual Water Credit divided by sixty. The Annual Water Credit for
each contract year starting from December 25, 2003 and ending on December 25,
2008 shall equal 801.9 million cubic meters minus the Total Available Water for
each contract year. The Total Available Water in any such year will equal actual
deliveries with a minimum threshold of 700.0 million cubic meters.
Modifications to Excess Energy Delivery Fee
- -------------------------------------------
Under the Project Agreement, the Excess Energy Delivery Fee was a variable
amount based on actual electrical energy delivered in each month in excess of 19
gigawatt-hour ("GWh"), payable at a rate of $0.1509 per kWh. Under the
Supplemental Agreement, the per kWh rate for energy deliveries in excess of 19
GWh per month has been reduced, commencing in 2009, to $0.1132 (escalating at 1%
per annum thereafter), provided that any deliveries of energy in excess of 490
GWh but less than 550 GWh per year are paid for at a rate of 1.3 Philippine
pesos per kWh and deliveries in excess of 550 GWh per year are at no cost to
NIA.
The Supplemental Agreement provides that NIA would not make further payments on
the unpaid portion of the excess energy available for generation, but not
generated from the commencement of commercial operations through September 28,
2003. For periods after September 28, 2003, the Supplemental Agreement provides
that if
-18-
the Casecnan project is not dispatched up to 150 MW whenever water is
available, NIA will pay for excess energy that could have been generated but was
not as a result of such dispatch constraint.
Other Provisions of the Supplemental Agreement
- ----------------------------------------------
In connection with the settlement of the NIA Arbitration and as part of the
Supplemental Agreement transaction, the Company paid to NIA $1.6 million in
respect of alleged late completion of the Project. This amount had been accrued
as of September 30, 2003 and December 31, 2002. In addition, the Company
received opinions from the Philippine Office of Government Corporate Counsel as
to the due authorization and enforceability of Supplemental Agreement and
received confirmation from the Philippine Department of Finance that the ROP
Note had been duly and validly issued and was enforceable in accordance with its
terms. The Company also received an opinion from Allen & Overy, counsel to the
Republic of the Philippines, as to the enforceability of the ROP Note under New
York law. The Company also received written confirmation from the Private Sector
Assets and Liabilities Management Corporation that the issues with respect to
the Casecnan Project that had been raised by the interagency review of
independent power producers in the Philippines or that may have existed with
respect to the Project under the Electric Power Industry Reform Act of 2001 have
been satisfactorily addressed by the Supplemental Agreement.
The Guaranteed Energy Delivery Fee, Force Majeure, Buyout and Dispute Resolution
provisions of the Project Agreement, as well as the Performance Undertaking
provided by the ROP, remain unaffected by the Supplemental Agreement and in full
force and effect.
CONSTRUCTION CONTRACT ARBITRATION
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
ICC 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 Casecnan 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 ICC.
-19-
Hearings have been held in connection with this arbitration in July 2001,
September 2001, January 2002, March 2002, November 2002, January 2003 and July
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 September 30, 2003, 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. The
$6.0 million was recorded as a reduction in construction costs. On November 7,
2002, the ICC issued the arbitration tribunal's partial award with respect to
the Contractor's force majeure and geologic conditions claims. The 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 September 30, 2003 and
December 31, 2002. All of the Contractor's other claims with respect to force
majeure and geologic conditions were denied.
If the Contractor were to prevail on its claim that the delay liquidated damages
clause is unenforceable, CE Casecnan 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, CE Casecnan 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.
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 Casecnan 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 Casecnan Project transmission line was completed on August 13, 2001 and NIA
has completed the installation and testing of the Casecnan Project's metering
equipment. Accordingly, the Company has accrued $1.6 million for liquidated
damages as of September 30, 2003 and December 31, 2002, payable to NIA for 120
days of delay. This is recorded as part of accounts payable and accrued expenses
in the balance sheets and was paid to NIA on October 15, 2003 pursuant to
settling the NIA Arbitration.
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 Energy Holdings Company ("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, among others, 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 were purchased by MidAmerican 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 Casecnan
Project. MidAmerican believes that San
-20-
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 such action.
BIR AUDIT
The 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 2000 and 2001. In addition, the BIR issued
letters of authority to audit the tax years 1996 through 1998. In May 2003, the
Company paid $1.0 million of final taxes related to interest expense paid from
1996 through 1998. On June 10, 2003, the BIR issued a notice stating that the
tax investigation for the Company for all internal revenue taxes for the years
1996 through 1998 is closed and terminated. On September 26, 2003, the Company
reached a settlement with the BIR in relation to the BIR's assessment of
deficiency taxes for the years 2000 and 2001. The settlement comprised a payment
of taxes amounting to $2.0 million in full and final termination of the BIR's
assessment of taxes. The Company believes that it currently is in compliance
with applicable tax laws and regulations with respect to all of its tax returns
and filings.
CONCENTRATION OF RISK
NIA's payments of obligations under the Project Agreement are substantially
denominated in United States Dollars and are the Company's sole source of
operating revenues. Because of the Company's dependence on NIA, any material
failure of NIA to fulfill its obligations under the Project Agreement and any
material failure of the ROP to fulfill its obligations under the Performance
Undertaking would significantly impair the ability of the Company to meet its
existing and future obligations. 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.
On April 24, 2003, Standard & Poor's Ratings Services ("S&P") lowered its rating
of CE Casecnan to BB from BB+ as a result of S&P's downgrade of debt securities
issued by the Republic of the Philippines ("ROP"). The downgrade of the ROP debt
securities by S&P reflected the country's growing debt burden and fiscal
rigidity. On June 13, 2003, S&P downgraded CE Casecnan's senior secured notes
rating to B+ from BB and stated that the outlook for the rating was negative.
On May 8, 2003, Moody's Investors Service ("Moody's") placed the Ba2 senior
secured notes rating of CE Casecnan on review for possible downgrade, noting
NIA's supplemental counterclaim seeking to have the Project Agreement declared
void. Moody's noted that actions by government related agencies and the
resulting instability of contractual arrangements was becoming inconsistent with
their rating approach that attaches significant benefit to offtake arrangements
with those government supported entities. On June 6, 2003, Moody's downgraded CE
Casecnan's senior secured notes rating to B2 from Ba2.
-21-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
For quantitative and qualitative disclosures about market risk affecting CE
Casecnan, see Item 7A "Qualitative and Quantitative Disclosures About Market
Risk" of CE Casecnan's Annual Report on Form 10-K for the year ended December
31, 2002. CE Casecnan's exposure to market risk has not changed materially since
December 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES.
An evaluation was performed under the supervision and with the participation of
the Company's management, including the respective persons acting as chief
executive officer and chief financial officer, regarding the effectiveness of
the design and operation of the Company's disclosure controls and procedures (as
defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of
1934, as amended) as of September 30, 2003. Based on that evaluation, the
Company's management, including the respective persons acting as chief executive
officer and chief financial officer, concluded that the Company's disclosure
controls and procedures were effective. There have been no significant changes
in the Company's internal controls or in other factors that could significantly
affect internal controls.
-22-
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
See Notes 2, 3 and 5 to the financial statements and discussion in management's
discussion and analysis.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS:
The exhibits listed on the accompanying Exhibit Index are filed as part
of this Quarterly Report.
(b) REPORTS ON FORM 8-K:
None.
-23-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CE CASECNAN WATER AND ENERGY COMPANY, INC.
------------------------------------------
(Registrant)
Date: November 7, 2003 /s/ Patrick J. Goodman
-------------------------------------------------
Patrick J. Goodman
Senior Vice President and Chief Financial Officer
-24-
EXHIBIT INDEX
Exhibit No.
- -----------
31.1 Chief Executive Officer's Certificate Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Chief Financial Officer's Certificate Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Chief Executive Officer's Certificate Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Chief Financial Officer's Certificate Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
-25-