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 March 31, 2004
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 Not Applicable
--------------------------------- --------------
Makati, Metro Manila, Philippines (Zip Code)
(Address of principal executive offices)
011 63 2 892-0276
-----------------
(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 March 31, 2004, 767,162 shares of common stock were outstanding.
TABLE OF CONTENTS
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
Item 4. Controls and Procedures 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities 14
Item 3 Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
EXHIBIT INDEX 16
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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 sheet of CE Casecnan Water and Energy
Company, Inc. (the "Company") as of March 31, 2004, and the related statements
of operations and of cash flows for each of the three-month periods ended March
31, 2004 and 2003. 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, 2003, 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 February 9, 2004, we expressed an unqualified opinion on those financial
statements. In our opinion, the information set forth in the accompanying
balance sheet as of December 31, 2003, 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
April 28, 2004
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CE CASECNAN WATER AND ENERGY COMPANY, INC.
BALANCE SHEETS
(Amounts in thousands of U.S. Dollars, except share data)
AS OF
--------------------------
MARCH 31, DECEMBER 31,
2004 2003
------------ ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ................................................... $ 2,335 $ 4,513
Trade receivable, net ....................................................... 17,337 16,451
Note receivable (Note 2) .................................................... - 97,000
Accrued interest and other receivables ...................................... 5,458 8,229
Prepaid insurance and other current assets .................................. 4,863 4,685
-------- --------
Total current assets ...................................................... 29,993 130,878
-------- --------
Restricted cash and investments ............................................... 93,790 18,121
Bond issue costs, net ......................................................... 3,566 3,861
Property, plant and equipment, net ............................................ 401,791 407,082
Deferred income tax ........................................................... 5,371 5,371
-------- --------
TOTAL ASSETS .................................................................. $534,511 $565,313
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................ $ 7,741 $ 7,395
Accrued interest ............................................................ 15,035 7,368
Dividends payable ........................................................... 7,950 -
Accrued liquidated damages .................................................. 3,800 3,800
Other accrued expenses ...................................................... 1,702 1,702
Payable to affiliates ....................................................... 34,619 34,739
Current portion of long-term debt ........................................... 49,360 49,360
-------- --------
Total current liabilities ................................................. 120,207 104,364
-------- --------
Notes payable ................................................................. 51,263 51,263
Deferred revenue .............................................................. 2,066 902
Long-term debt, net of current portion ........................................ 197,098 197,098
-------- --------
Total liabilities ........................................................... 370,634 353,627
-------- --------
Commitments and contingencies (Note 4)
Stockholders' equity:
Capital stock - authorized 2,148,000 common 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 (Note 5) .................................................... 40,041 87,850
-------- --------
Total stockholders' equity .................................................. 163,877 211,686
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .................................... $534,511 $565,313
======== ========
The accompanying notes are an integral part of these financial statements.
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CE CASECNAN WATER AND ENERGY COMPANY, INC.
STATEMENTS OF OPERATIONS
(Amounts in thousands of U.S. Dollars)
THREE MONTHS
ENDED MARCH 31,
----------------------
2004 2003
-------- ---------
(UNAUDITED)
REVENUE:
Lease rental and service contract ......... $ 19,915 $ 31,499
-------- --------
OPERATING EXPENSES:
Depreciation .............................. 5,713 5,673
Plant operations .......................... 1,981 3,176
Doubtful accounts expense ................. - 4,067
-------- --------
Total operating expenses ................ 7,694 12,916
-------- --------
OPERATING INCOME ............................ 12,221 18,583
-------- --------
OTHER INCOME (EXPENSE):
Interest expense .......................... (7,560) (10,153)
Interest income ........................... 650 63
Other ..................................... (120) 15
-------- --------
Total other expense, net ................ (7,030) (10,075)
-------- --------
NET INCOME .................................. $ 5,191 $ 8,508
======== ========
The accompanying notes are an integral part of these financial statements.
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CE CASECNAN WATER AND ENERGY COMPANY, INC.
STATEMENTS OF CASH FLOWS
(Amounts in thousands of U.S. Dollars)
THREE MONTHS
ENDED MARCH 31,
----------------------
2004 2003
--------- --------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................................. $ 5,191 $ 8,508
Adjustments to reconcile net income to cash flows from operating activities:
Depreciation ............................................................. 5,713 5,673
Amortization of bond issue costs ......................................... 295 339
Changes in other items:
Trade receivable, net .................................................. (886) 3,278
Accrued interest and other receivables ................................. 2,771 (1,505)
Prepaid insurance and other current assets ............................. (178) 532
Accounts payable ....................................................... 346 451
Accrued interest ....................................................... 7,667 8,875
Deferred revenue ....................................................... 1,164 -
--------- --------
Net cash flows from operating activities ............................. 22,083 26,151
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment ................................. (422) (1,587)
Collection of ROP note (Note 2) ............................................ 97,000 -
Other assets ............................................................... - 3,070
--------- --------
Net cash flows from investing activities ................................. 96,578 1,483
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in restricted cash and investments ................................ (75,669) (24,980)
Increase (decrease) in payable to affiliates ............................... (120) 681
Dividend distributions ..................................................... (45,050) -
--------- --------
Net cash flows from financing activities ................................. (120,839) (24,299)
--------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ......................... (2,178) 3,335
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ............................. 4,513 705
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................... $ 2,335 $ 4,040
========= ========
SUPPLEMENTAL DISCLOSURE:
Interest paid .............................................................. $ 403 $ -
========= ========
Dividends declared but not paid ............................................ $ 7,950 $ -
========= ========
The accompanying notes are an integral part of these financial statements.
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CE CASECNAN WATER AND ENERGY COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
The accompanying unaudited interim financial statements have been prepared by CE
Casecnan Water and Energy Company, Inc. ("CE Casecnan" or the "Company"),
without audit, pursuant to the rules and regulations of the United States
Securities and Exchange Commission for interim financial reporting. In the
opinion of the management of the Company, the accompanying unaudited financial
statements contain all adjustments (consisting of normal recurring accruals)
necessary to present fairly the financial position as of March 31, 2004, and the
results of operations and of cash flows for the three-month periods ended March
31, 2004 and 2003. The results of operations for the three-month period ended
March 31, 2004 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, 2003. 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 water delivery
and electricity generation industry.
2. NIA ARBITRATION SETTLEMENT
On October 15, 2003, CE Casecnan Water and Energy Company, Inc. ("CE Casecnan")
closed a transaction settling the CE Casecnan NIA Arbitration, which arose from
a Statement of Claim made by CE Casecnan, on August 19, 2002, against the
Republic of the Philippines ("ROP") National Irrigation Administration ("NIA").
As a result of the agreement, CE Casecnan recorded $31.9 million of other income
and $24.4 million of associated income taxes in 2003. Under the terms of the
settlement, CE Casecnan entered into an agreement with NIA which provided for
the dismissal with prejudice of all claims by CE Casecnan and counterclaims by
NIA in the NIA Arbitration. In connection with the settlement, NIA delivered to
CE Casecnan a ROP $97.0 million 8.375% Note due 2013 (the "ROP Note"), which
contained a put provision granting CE Casecnan the right to put the ROP Note to
the ROP for a price of par plus accrued interest for a 30-day period commencing
on January 14, 2004. The ROP Note is included in the other current assets on the
December 31, 2003 consolidated balance sheet.
On January 14, 2004, CE Casecnan exercised its right to put the ROP Note to the
ROP and, in accordance with the terms of the put, CE Casecnan received $99.2
million (representing $97.0 million par value plus accrued interest) from the
ROP on January 21, 2004.
3. RELATED PARTY TRANSACTIONS
In the normal course of business, the Company transacts with its affiliates in
the form of advances for construction related and operating expenses. The
payable to affiliates was $34.6 million and $34.7 million at March 31, 2004 and
December 31, 2003, respectively. Costs incurred by the Company in transactions
with related parties amounted to $0.3 million and $0.6 million for the
three-month periods ended March 31, 2004 and 2003, respectively.
As of March 31, 2004 and December 31, 2003, the Company has outstanding $51.3
million of unsecured subordinated notes payable to CE Casecnan Ltd., an
affiliate, due November 15, 2005. The unsecured notes bear interest at LIBOR
plus two percent (2%) which is payable every March 15 and November 15. Interest
expense on the unsecured notes was $0.4 million and $0.4 million during the
three-month periods ended March 31, 2004 and 2003, respectively. Any overdue
payment of principal or interest payable in the notes shall increase the annual
interest by two percent (2%). At March 31, 2004, the effective interest rate on
the notes was 3.27%. 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
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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.
4. 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
International Chamber of Commerce ("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 sought compensation for alleged additional costs of
approximately $4 million it incurred from the claimed force majeure events. 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 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 filed a claim for unspecified
quantum meruit damages, and further alleged that the delay liquidated damages
clause which provided for payments of $125,000 per day for each day of delay in
completion of the Casecnan Project for which the Contractor was responsible was
unenforceable.
Hearings were 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 guarantee 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. In November 2002, CE Casecnan 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 in 2002. 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 accrued
liquidated damages balance at March 31, 2004 and December 31, 2003. All of the
Contractor's other claims with respect to force majeure and geologic conditions
were denied.
On April 7, 2004, the Company entered into an agreement with the Contractor
settling the ICC arbitration. Pursuant to the settlement agreement, the
Contractor paid $19.1 million to CE Casecnan on April 14, 2004 (which payment
was in addition to the approximately $6.0 million received in November 2002 by
CE Casecnan from demands made on the demand guarantees posted by Commerzbank),
and the Contractor and CE Casecnan executed mutual releases and agreed to
dismiss the arbitration. Also pursuant to the terms of the settlement agreement,
CE Casecnan was required to, and has, deposited $0.2 million into a third-party
escrow pursuant to which the amount so deposited will be released either to CE
Casecnan, if certain issues relating to alleged outstanding Philippine taxes on
construction equipment are resolved with the relevant Philippine governmental
authorities by September 6, 2004, or to the Contractor, if such issues are not
resolved by such date. A total of $24.4 million (the $19.1 million receipt, net
of $0.2 million placed in escrow, along with the $3.8
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million amount originally recorded for liquidated damages and $1.7 million
accrual for the unpaid portion of the EPC contract) will be recorded as a
reduction of construction costs in the second quarter of 2004.
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's ("MidAmerican") indirect
wholly owned subsidiary CE Casecnan Ltd., advised the minority stockholder of
the Company, LaPrairie Group Contractors (International) Ltd. ("LPG"), that
MidAmerican's indirect ownership interest in CE Casecnan had increased to 100%
effective from commencement of commercial operations. In April 2002, CE Casecnan
Ltd. and LPG entered into a status quo agreement pursuant to which CE Casecnan
Ltd. agreed not to take any action to exercise control over or transfer LPG's
shares in the Company. 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. On January 21, 2004, CE Casecnan Ltd., LPG and the
Company entered into a second status quo agreement pursuant to which the parties
agreed to set aside certain distributions related to the shares subject to the
LPG dispute and CE Casecnan agreed not to take any further actions with respect
to such distributions without at least 15 days' prior notice to LPG.
Accordingly, 15% of the dividend distributions on January 21, 2004, February 18,
2004, and March 15, 2004 amounting in total to $8.0 million, was set aside in an
unsecured account of the Company and is shown as dividends payable in the
balance sheet. The initial phase in the case has been set for trial in May,
2004.
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. The Company believes that San Lorenzo has no valid basis
for any claim and, if named as a defendant in any action that may be commenced
by San Lorenzo, the Company will vigorously defend such action.
Concentration of Risk
- ---------------------
NIA's payments of obligations under the Project Agreement are substantially
denominated in U.S. Dollars and are the Company's sole source of operating
revenues. Because of the Company's dependence on NIA, any material failure of
NIA to fulfill its obligations under the Project Agreement and any material
failure of the ROP to fulfill its obligations under the Performance Undertaking
would significantly impair the ability of the Company to meet its existing and
future obligations. 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.
5. STOCKHOLDERS' EQUITY AND RETAINED EARNINGS
The movement in stockholders' equity and retained earnings represents the net
income for the period and dividend distributions in January, February and March
2004 totaling $53.0 million.
6. SUBSEQUENT EVENT
On April 19, 2004, the Company declared a dividend distribution of $24.0
million. Pursuant to the second status quo agreement between CE Casecnan Ltd.
and LPG, 15% of the distribution amounting to $3.6 million was set aside in an
unsecured account of the Company.
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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.
RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2004 AND 2003
The following table provides certain operating data of the Casecnan Project for
the three-month periods ended March 31, 2004 and 2003:
2004 2003
---- ----
Electricity produced (GWh) .............. 41.0 35.5
Water delivered (million cubic meters) .. 72.0 56.5
For accounting purposes, the Project Agreement with NIA contains both an
operating lease and a service contract, which the Company accounted for pursuant
to provisions of Statement of Financial Accounting Standards, No. 13,
"Accounting for Leases". However, pursuant to the provisions of the Project
Agreement, the Company billed to NIA water and energy delivery fees as follows
(in millions):
2004 2003
------- -------
Water delivery fees .............................. $ 10.9 $ 22.4
Electricity fees ................................. 9.0 9.1
------- -------
Total lease rentals and service contracts revenue. $ 19.9 $ 31.5
======= =======
Revenue decreased by $11.6 million to $19.9 million for the three-month period
ended March 31, 2004 from $31.5 million for the three-month period ended March
31, 2003. The decrease in water delivery fees was primarily due to the
elimination of the tax compensation portion of the water delivery fee pursuant
to the NIA settlement (the "NIA Arbitration Settlement") on October 15, 2003,
partially offset by a 7.5% increase in the water delivery fee rate as a result
of the contractual annual escalation factor. Revenues from water delivery,
guaranteed energy and excess energy are 55%, 45% and 0%, respectively, of the
total revenue for the three-month period ended March 31, 2004, and 71%, 29% and
0%, respectively, for the three-month period ended March 31, 2003.
Operating expenses decreased to $7.7 million for the three-month period ended
March 31, 2004 from $12.9 million for the three-month period ended March 31,
2003. The three-month period ended March 31, 2003 included charges for doubtful
accounts and higher legal bills associated with the NIA Arbitration Settlement.
The decrease in plant operations expense
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was caused by lower property tax expense and legal expense in 2004 as a result
of the NIA Arbitration Settlement on October 15, 2003. The decrease in doubtful
accounts is primarily attributable to the NIA Arbitration Settlement.
Interest expense decreased to $7.6 million for the three-month period ended
March 31, 2004 from $10.2 million for the three-month period ended March 31,
2003 due to lower outstanding debt resulting from the scheduled repayment of
debt during the period.
LIQUIDITY AND CAPITAL RESOURCES
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 payments of obligations under the Project Agreement are substantially
denominated in U.S. Dollars and are the Company's sole source of operating
revenues. Because of the Company's dependence on NIA, any material failure of
NIA to fulfill its obligations under the Project Agreement and any material
failure of the ROP to fulfill its obligations under the Performance Undertaking
would significantly impair the ability of the Company to meet its existing and
future obligations, including obligations pertaining to its outstanding debt. No
stockholders, partners or affiliates of the Company, including MidAmerican
Energy Holdings Company ("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.
The Company's cash and cash equivalents were $2.3 million and $4.5 million at
March 31, 2004 and December 31, 2003, respectively. At December 31, 2003, the
Company has an outstanding $97.0 million ROP note receivable obtained in
connection with the NIA Arbitration Settlement which was put to the ROP on
January 14, 2004.
The Company generated cash flows from operations of $22.1 million and $26.2
million for the three-month periods ended March 31, 2004 and 2003, respectively.
The decrease from 2003 was primarily due to changes in working capital.
The Company generated cash flows of $96.6 million and $1.5 million from
investing activities for the three-month periods ended March 31, 2004 and 2003,
respectively. The increase in cash flow from investing activities was primarily
attributable to the receipt on January 21, 2004 of cash from the put of the ROP
note received in connection with the NIA Arbitration Settlement.
The Company used $120.8 million and $24.3 million for financing activities for
the three-month periods ended March 31, 2004 and 2003, respectively. During the
first quarter of 2004, the Company increased its restricted cash related to
obligations for debt service and unpaid dividends declared obligations by $75.7
million and distributed dividends out of its cash funds amounting to $53.0
million, $8.0 million of which was set aside in an unsecured account of the
Company and shown as dividends payable in the balance sheet.
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Construction Contract Arbitration
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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. S.p.A. (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 ("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 sought compensation for alleged additional costs of
approximately $4 million it incurred from the claimed force majeure events. 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 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 filed a claim for unspecified
quantum meruit damages, and further alleged that the delay liquidated damages
clause which provided for payments of $125,000 per day for each day of delay in
completion of the Casecnan Project for which the Contractor was responsible was
unenforceable.
Hearings were 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 guarantee 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. In November 2002, CE Casecnan 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 in 2002. 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 accrued
liquidated damages balance at March 31, 2004 and December 31, 2003. All of the
Contractor's other claims with respect to force majeure and geologic conditions
were denied.
On April 7, 2004, the Company entered into an agreement with the Contractor
settling the ICC arbitration. Pursuant to the settlement agreement, the
Contractor paid $19.1 million to CE Casecnan on April 14, 2004 (which payment
was in addition to the approximately $6.0 million received in November 2002 by
CE Casecnan from demands made on the demand guarantees posted by Commerzbank),
and the Contractor and CE Casecnan executed mutual releases and agreed to
dismiss the arbitration. Also pursuant to the terms of the settlement agreement,
CE Casecnan was required to, and has, deposited $0.2 million into a third-party
escrow pursuant to which the amount so deposited will be released either to CE
Casecnan, if certain issues relating to alleged outstanding Philippine taxes on
construction equipment are resolved with the relevant Philippine governmental
authorities by September 6, 2004, or to the Contractor, if such issues are not
resolved by such date. A total of $24.4 million (the $19.1 million receipt, net
of $0.2 million placed in escrow, along with the $3.8 million amount originally
recorded for liquidated damages and $1.7 million accrual for the unpaid portion
of the EPC contract) will be recorded as a reduction of construction costs in
the second quarter of 2004.
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Stockholder Litigation
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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's ("MidAmerican") indirect
wholly owned subsidiary CE Casecnan Ltd., advised the minority stockholder of
the Company, LaPrairie Group Contractors (International) Ltd. ("LPG"), that
MidAmerican's indirect ownership interest in CE Casecnan had increased to 100%
effective from commencement of commercial operations. In April 2002, CE Casecnan
Ltd. and LPG entered into a status quo agreement pursuant to which CE Casecnan
Ltd. agreed not to take any action to exercise control over or transfer LPG's
shares in the Company. 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. On January 21, 2004, CE Casecnan Ltd., LPG and the
Company entered into a second status quo agreement pursuant to which the parties
agreed to set aside certain distributions related to the shares subject to the
LPG dispute and CE Casecnan agreed not to take any further actions with respect
to such distributions without at least 15 days' prior notice to LPG.
Accordingly, 15% of the dividend distribution on January 21, 2004, February 18,
2004, and March 15, 2004, amounting in total to $8.0 million, was set aside in
an unsecured account of the Company and is shown as dividends payable in the
balance sheet. The threshold issues in the case have been set for trial in
mid-May, 2004.
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. 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.
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, 2003 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, 2003.
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, 2003. CE Casecnan's exposure to market risk has not changed materially since
December 31, 2003.
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 March 31, 2004. 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.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
See Note 4 to the financial statements and discussion in management's discussion
and analysis.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES.
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:
On January 21, 2004, CE Casecnan filed a Current Report on Form 8-K
disclosing the timely receipt of payment of the ROP Note which was put to
the ROP on January 14, 2004.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CE CASECNAN WATER AND ENERGY COMPANY, INC.
------------------------------------------
(Registrant)
Date: April 28, 2004 /s/ Patrick J. Goodman
----------------------
Patrick J. Goodman
Senior Vice President and Chief Financial Officer
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EXHIBIT INDEX
Exhibit No.
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31.1 Chief Executive Officer's Certificate Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Chief Financial Officer's Certificate Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Chief Executive Officer's Certificate Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Chief Financial Officer's Certificate Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
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