CE CASECNAN WATER & ENERGY CO INC - FORM 10-Q

Attached files

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EX-31.2 - SECTION 302 CERTIFICATION - CE CASECNAN WATER & ENERGY CO INC	exh31-2.htm
EX-32.2 - SECTION 906 CERTIFICATION - CE CASECNAN WATER & ENERGY CO INC	exh32-2.htm
EX-31.1 - SECTION 302 CERTIFICATION - CE CASECNAN WATER & ENERGY CO INC	exh31-1.htm
EX-32.1 - SECTION 906 CERTIFICATION - CE CASECNAN WATER & ENERGY CO INC	exh32-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2009

[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ________to________

Commission	Exact name of registrant as specified in its charter;	IRS Employer
File Number	State or other jurisdiction of incorporation or organization	Identification No.

001-12995	CE CASECNAN WATER AND ENERGY COMPANY, INC.	Not Applicable

	24th Floor, 6750 Building, Ayala Avenue
	Makati, Metro Manila, Philippines
	011 63 2 892-0276

N/A
(Former name, former address and former fiscal year, if changed since last report)

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 T No 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” ”accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer 

Accelerated filer 

Non-accelerated filer T

Smaller reporting company 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  No T

All of the shares of common equity of CE Casecnan Water and Energy Company, Inc. are privately held by a limited group of investors. As of November 4, 2009, the number of outstanding shares of $0.038 par value common stock was 767,162.

TABLE OF CONTENTS

PART I

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	18

Item 4(T).	Controls and Procedures	19

PART II

Item 1.	Legal Proceedings	20

Item 1A.	Risk Factors	20

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	20

Item 3.	Defaults Upon Senior Securities	20

Item 4.	Submission of Matters to a Vote of Security Holders	20

Item 5.	Other Information	20

Item 6.	Exhibits	20

Signatures		21

Exhibit Index		22

PART I

Item 1.

Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders 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 September 30, 2009, and the related statements of operations for the three-month and nine-month periods ended September 30, 2009 and 2008, and of cash flows and changes in shareholders’ equity for the nine-month periods ended September 30, 2009 and 2008. These interim financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 the standards of the Public Company Accounting Oversight Board (United States), 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 reviews, we are not aware of any material modifications that should be made to such interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheet of CE Casecnan Water and Energy Company, Inc. as of December 31, 2008, and the related statements of operations, changes in shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated February 27, 2009, 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, 2008 is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived.

/s/ Manabat Delgado Amper & Co.

Manabat Delgado Amper & Co.

Member Firm of Deloitte & Touche

Makati City, Philippines

November 5, 2009

CE CASECNAN WATER AND ENERGY COMPANY, INC.

BALANCE SHEETS (Unaudited)

(Amounts in thousands, except share data)

	As of
	September 30,			December 31,
	2009			2008

ASSETS

Current assets:
Cash and cash equivalents	$	87,649		$	49,350
Restricted cash and investments		24,193			22,881
Receivables, net		48,093			20,308
Other current assets		7,170			7,387
Total current assets		167,105			99,926

Property, plant and equipment, net		265,799			281,485
Other investments		18,884			14,096
Deferred income taxes		5,216			6,995
Other		106			222
Total assets	$	457,110		$	402,724

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
Accounts payable and other accrued liabilities	$	843		$	1,748
Dividends payable		12,125			10,825
Accrued interest		1,076			3,067
Accrued property, income and other taxes		31,756			5,817
Payable to affiliates		2,649			2,726
Notes payable		-			7,115
Current portion of long-term debt		15,435			13,720
Total current liabilities		63,884			45,018

Long-term debt		8,575			17,150
Total liabilities		72,459			62,168

Commitments and contingencies (Note 6)

Shareholders’ equity:
Common stock – 2,148,000 shares authorized, 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		262,583			221,839
Accumulated other comprehensive loss, net		(1,768	)		(5,119	)
Total shareholders’ equity		384,651			340,556
Total liabilities and shareholders’ equity	$	457,110		$	402,724

The accompanying notes are an integral part of these financial statements.

CE CASECNAN WATER AND ENERGY COMPANY, INC.

STATEMENTS OF OPERATIONS (Unaudited)

(Amounts in thousands)

	Three-Month Periods						Nine-Month Periods
	Ended September 30,						Ended September 30,
	2009			2008			2009			2008

Revenue - Lease rentals and service contracts	$	50,609		$	38,685		$	106,541		$	96,336
Operating expenses:
Depreciation		5,458			5,660			16,452			16,502
Plant operations and other operating expenses		2,501			2,747			6,979			7,460
Total operating expenses		7,959			8,407			23,431			23,962

Operating income		42,650			30,278			83,110			72,374

Other income (expense):
Interest expense		(756	)		(1,710	)		(2,630	)		(7,213	)
Interest income		193			456			612			1,573
Other, net		923			1,220			2,354			3,437
Total other income (expense)		360			(34	)		336			(2,203	)

Income before income tax expense		43,010			30,244			83,446			70,171

Income tax expense		8,439			10,396			16,702			24,116

Net income	$	34,571		$	19,848		$	66,744		$	46,055

The accompanying notes are an integral part of these financial statements.

CE CASECNAN WATER AND ENERGY COMPANY, INC.

STATEMENTS OF CASH FLOWS (Unaudited)

(Amounts in thousands)

	Nine-Month Periods
	Ended September 30,
	2009			2008

Cash flows from operating activities:
Net income	$	66,744		$	46,055
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation		16,452			16,502
Amortization of bond issue costs		116			238
Provision for deferred income taxes		389			174
Changes in other operating assets and liabilities:
Receivables, net		(27,785	)		2,810
Other current assets		217			328
Accounts payable and other accrued liabilities		(952	)		(740	)
Accrued interest		(1,991	)		(3,080	)
Accrued property, income and other taxes		25,939			6,871
Deferred revenue		-			5,641
Net cash flows from operating activities		79,129			74,799

Cash flows from investing activities:
Capital expenditures		(766	)		(350	)
Increase in restricted cash and investments		(1,312	)		(951	)
Net cash flows from investing activities		(2,078	)		(1,301	)

Cash flows from financing activities:
(Decrease) increase in payable to affiliates		(77	)		138
Repayment of long-term debt		(6,860	)		(18,865	)
Repayment of notes payable		(7,115	)		(32,085	)
Dividends paid		(24,700	)		-
Net cash flows from financing activities		(38,752	)		(50,812	)

Net change in cash and cash equivalents		38,299			22,686
Cash and cash equivalents at beginning of period		49,350			31,083
Cash and cash equivalents at end of period	$	87,649		$	53,769

The accompanying notes are an integral part of these financial statements.

CE CASECNAN WATER AND ENERGY COMPANY, INC.

STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

(Amounts in thousands)

								Accumulated
			Additional					Other
	Common		Paid-in		Retained			Comprehensive
	Stock		Capital		Earnings			Loss, net			Total

Balance, January 1, 2008	$	29	$	123,807	$	148,004		$	-		$	271,840
Net income		-		-		46,055			-			46,055
Other comprehensive loss		-		-		-			(1,840	)		(1,840	)
Balance, September 30, 2008	$	29	$	123,807	$	194,059		$	(1,840	)	$	316,055

Balance, January 1, 2009	$	29	$	123,807	$	221,839		$	(5,119	)	$	340,556
Net income		-		-		66,744			-			66,744
Other comprehensive income		-		-		-			3,351			3,351
Dividends declared		-		-		(26,000	)		-			(26,000	)
Balance, September 30, 2009	$	29	$	123,807	$	262,583		$	(1,768	)	$	384,651

The accompanying notes are an integral part of these financial statements.

CE CASECNAN WATER AND ENERGY COMPANY, INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

(in U.S. dollars, unless indicated otherwise)

(1)

General

CE Casecnan Water and Energy Company, Inc. (the “Company” or “CE Casecnan”) is a privately held Philippine corporation formed indirectly by MidAmerican Energy Holdings Company (“MEHC”) and was registered with the Philippine Securities and Exchange Commission on September 21, 1994. The Company is 70% owned by CE Casecnan II, Inc., 15% owned by CE Casecnan Ltd., a Bermuda-registered corporation, which are both indirect wholly owned subsidiaries of MEHC, and 15% owned by a third party, subject to appeal. MEHC is a consolidated subsidiary of Berkshire Hathaway Inc.

The Company has a contract with the Republic of the Philippines (“ROP”), through the Philippine National Irrigation Administration (“NIA”) (a ROP-owned and controlled corporation), for the development and construction of a hydroelectric power plant and related facilities under a build-own-operate-transfer agreement, as amended by the Supplemental Agreement dated September 29, 2003 (“Project Agreement”), covering a 20-year cooperation period (“Cooperation Period”) ending December 11, 2021, with obligations for the delivery of water and electricity. At the end of the Cooperation Period, the combined irrigation and 150 megawatt hydroelectric power generation project (the “Casecnan Project”) will be transferred to the ROP at no cost on an “as is” basis. NIA’s obligations under the Project Agreement are guaranteed by the full faith and credit of the ROP (the “Performance Undertaking”).

The Casecnan Project is dependent upon sufficient rainfall to generate electricity and deliver water. The seasonality of rainfall patterns and the variability of rainfall from year to year, all of which are outside the control of the Company, have a material impact on the amounts of electricity generated and water delivered by the Casecnan Project. Rainfall has historically been highest from June through December and lowest from January through May. The contractual terms for variable water and energy delivery fees can produce significant variability in revenue between reporting periods.

The unaudited Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the United States Securities and Exchange Commission’s rules and regulations for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the disclosures required by GAAP for annual financial statements. Management believes the unaudited Financial Statements contain all adjustments (consisting only of normal recurring adjustments) considered necessary for the fair presentation of the Financial Statements as of September 30, 2009 and for the three- and nine-month periods ended September 30, 2009 and 2008. The results of operations for the three- and nine-month periods ended September 30, 2009 are not necessarily indicative of the results to be expected for the full year. The Company has evaluated subsequent events through November 5, 2009, which is the date the unaudited Financial Statements were issued.

The preparation of the unaudited Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period. Actual results may differ from the estimates used in preparing the unaudited Financial Statements. Note 2 of Notes to Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 describes the most significant accounting policies used in the preparation of the Financial Statements. There have been no significant changes in the Company’s assumptions regarding significant accounting estimates and policies during the nine-month period ended September 30, 2009.

(2)	New Accounting Pronouncements

In April 2009, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance (included in Accounting Standards Codification (“ASC”) Topic 825, “Financial Instruments”) that requires publicly traded companies to include the annual fair value disclosures required for all financial instruments, as defined by GAAP, in interim financial statements. The Company adopted this guidance on April 1, 2009 and included the required disclosures within Notes to Financial Statements.

In April 2009, the FASB issued authoritative guidance (included in ASC Topic 320, “Investments – Debt and Equity Securities”) that amends current other-than-temporary impairment guidance for debt securities to require a new other-than-temporary impairment model that shifts the focus from an entity’s intent to hold the debt security until recovery to its intent, or expected requirement to sell the debt security. In addition, this guidance expands the already required annual disclosures about other-than-temporary impairment for debt and equity securities, requires companies to include these expanded disclosures in interim financial statements and addresses whether an other-than-temporary impairment should be recognized in earnings, other comprehensive income or some combination thereof. The Company adopted this guidance on April 1, 2009. The adoption did not have a material impact on the Company’s financial results and disclosures included within Notes to Financial Statements.

In April 2009, the FASB issued authoritative guidance (included in ASC Topic 820, “Fair Value Measurements and Disclosures”) that clarifies the determination of fair value when a market is not active and if a transaction is not orderly. In addition, this guidance amends previous GAAP to require disclosures in interim and annual periods of the inputs and valuation techniques used to measure fair value and a discussion of changes in valuation techniques and related inputs, if any, during the period and defines “major categories” consistent with those described in previously existing GAAP. The Company adopted this guidance on April 1, 2009. The adoption did not have a material impact on the Company’s financial results and disclosures included within Notes to Financial Statements.

(3)	Restricted Cash and Investments and Other Investments

Restricted cash and investments consist of the following (in thousands):

	September 30, 2009		December 31, 2008

Dividend set aside account	$	14,581	$	13,279
Debt service reserve fund		9,612		9,602
	$	24,193	$	22,881

Restricted cash and investments are invested in money-market accounts holding U.S. government securities.

Other investments consist of auction rate securities with a carrying value of $18.9 million and $14.1 million at September 30, 2009 and December 31, 2008, respectively. The auction rate investments earned interest at 2.25% and 2.5% at September 30, 2009 and December 31, 2008, respectively. The investments have a remaining weighted average maturity of 21 years and are classified as available-for-sale securities.

With the liquidity issues experienced in global credit and capital markets, the $21.4 million par value of auction rate securities held by the Company at September 30, 2009 have experienced multiple failed auctions as the amount of securities submitted for sale has exceeded the amount of purchase orders. The securities are rated Baa1 by Moody’s Investors Service and AA- and A by Standard & Poor’s at September 30, 2009. Although there is no current liquid market for the auction rate securities, the Company believes the underlying creditworthiness of the repayment sources for these securities’ principal and interest has not materially deteriorated. Further, the Company does not intend to sell, nor is it more-likely-than-not that the Company will be required to sell, the auction rate securities before an orderly market develops and they can be sold at a price that approximates par value. Therefore, the Company considers the auction rate securities to be temporarily impaired. At September 30, 2009, the Company’s pre-tax temporary impairment of the auction rate securities totaled $2.5 million. If the underlying assets and the guarantors of the auction rate securities experience credit deterioration, the Company may not ultimately realize the par value of the investments held at September 30, 2009.

(4)	Income Taxes

A reconciliation of the Philippine statutory income tax rate to the effective income tax rate applicable to income before income tax expense follows:

	Three-Month Periods						Nine-Month Periods
	Ended September 30,						Ended September 30,
	2009			2008			2009			2008

Philippine statutory income tax rate		30	%		35	%		30	%		35	%
Optional standard deduction		(10	)		-			(10	)		-
Other		-			(1	)		-			(1	)
Effective income tax rate		20	%		34	%		20	%		34	%

The Company’s deferred income tax asset of $5.2 million and $7.0 million as of September 30, 2009 and December 31, 2008, respectively, consists mainly of the difference between the financial reporting basis and the tax reporting basis for development and construction costs.

(5)	Related Party Transactions

In the normal course of business, the Company transacts with related parties on commercial terms comparable to transactions with third parties. The payable to affiliates was $2.6 million and $2.7 million at September 30, 2009 and December 31, 2008, respectively. Costs incurred by the Company in transactions with related parties amounted to $0.4 million for each of the three-month periods ended September 30, 2009 and 2008, and $1.1 million and $1.2 million for the nine-month periods ended September 30, 2009 and 2008, respectively, and consist primarily of cost allocations.

As of December 31, 2008, the Company had outstanding $7.1 million of unsecured subordinated notes payable (the “Notes”) to CE Casecnan Ltd., a shareholder. The Notes had a maturity of November 1, 2015, and bore an interest rate consisting of the London Interbank Offer Rate plus 5.25%. The Notes were redeemable at any time prior to maturity upon demand from CE Casecnan Ltd and on February 5, 2009, CE Casecnan repaid the outstanding Notes in full. Interest expense on the Notes was $- million and $0.1 million for the three-month periods ended September 30, 2009 and 2008, respectively, and $0.1 million and $1.7 million for the nine-month periods ended September 30, 2009 and 2008, respectively.

(6)	Commitments and Contingencies

Shareholder Litigation

In February 2002, pursuant to the share ownership adjustment mechanism in the CE Casecnan shareholder agreement, CE Casecnan Ltd. advised the minority shareholder of the Company, LaPrairie Group Contractors (International) Ltd. (“LPG”) that MEHC’s indirect ownership interest in CE Casecnan had increased to 100% effective from commencement of commercial operations. In July 2002, LPG filed a complaint in the Superior Court of the State of California, City and County of San Francisco, against CE Casecnan Ltd. and MEHC. LPG’s complaint, as amended, seeks compensatory and punitive damages arising out of CE Casecnan Ltd.’s and MEHC’s alleged improper calculation of the proforma financial projections and alleged improper settlement of the Philippine National Irrigation Administration arbitration. In January 2006, the Superior Court of the State of California entered a judgment in favor of LPG against CE Casecnan Ltd. Pursuant to the judgment, 15% of the distributions of the Company was deposited into escrow plus interest at 9% per annum. The judgment was appealed, and as a result of the appellate decision, CE Casecnan Ltd. determined that LPG would retain ownership of 10% of the shares of the Company, with the remaining 5% share to be transferred to CE Casecnan Ltd. subject to certain buy-up rights under the shareholder agreement. The issues relating to the exercise of the buy-up right have been decided by the court and in June 2009, LPG exercised its buy-up rights with respect to the remaining 5% ownership interest in a transaction between shareholders that did not have any impact on the Company’s results of operations. In October 2009, the court issued a Final Judgment declaring that LPG was a 15% shareholder, which Final Judgment remains subject to appeal.

In July 2005, MEHC and CE Casecnan Ltd. commenced an action against San Lorenzo Ruiz Builders and Developers Group, Inc. (“San Lorenzo”) in the District Court of Douglas County, Nebraska, seeking a declaratory judgment as to San Lorenzo’s right to repurchase 15% of the shares in the Company. In January 2006, San Lorenzo filed a counterclaim against MEHC and CE Casecnan Ltd. seeking declaratory relief that it has effectively exercised its option to purchase 15% of the shares of the Company, that it is the rightful owner of such shares and that it is due all dividends paid on such shares. Currently, the action is in the discovery phase and a trial has been set to begin in March 2010. The impact, if any, of this litigation on the Company cannot be determined at this time.

Supplemental Real Property Tax

In July 2008, CE Casecnan received a supplemental real property tax assessment totaling $28.6 million from the province of Nueva Ecija and the municipality of Pantabangan for the tax years 2002 through the second quarter of 2008. Subsequent amendments of the supplemental assessment to reflect additional taxable periods in 2008 and 2009 increased the assessment to $32.5 million. CE Casecnan forwarded the assessment to NIA and the Philippine Department of Finance (“DOF”), which must authorize any payment for real property taxes and are obligated to reimburse the Company pursuant to the Project Agreement. In December 2008, pursuant to written authorization from NIA and DOF, CE Casecnan tendered $6.8 million as partial payment of the supplemental assessment and recorded a receivable of an equal amount for the expected full reimbursement to CE Casecnan from NIA. The $6.8 million partial payment was reimbursed by NIA in July 2009. In January 2009, CE Casecnan filed a protest on the supplemental assessment which the provincial treasurer failed to resolve timely and in May 2009, filed an appeal with the Local Board of Assessment Appeals. In October 2009, pursuant to written authorization from NIA and DOF, CE Casecnan paid under protest $5.0 million to the province of Nueva Ecija. The payment was accrued as of September 30, 2009 within accrued property, income and other taxes. A receivable of an equal amount also was accrued as of September 30, 2009 to reflect the expected full reimbursement to CE Casecnan from NIA. Discussions continue among CE Casecnan, NIA, DOF and the province of Nueva Ecija to resolve the supplemental real property tax assessment. No further liability for supplemental real property tax has been recognized as the Company believes that the claim is without merit.

In March 2009, CE Casecnan received a supplemental real property tax assessment totaling $36.5 million from the province of Nueva Vizcaya for the tax years 2002 to 2009. CE Casecnan forwarded the assessment to NIA and the DOF, which must authorize any payment for real property taxes and are obligated to reimburse the Company pursuant to the Project Agreement. In May 2009, upon instructions from NIA, CE Casecnan filed an appeal of the supplemental assessment with the Local Board of Assessment Appeals. CE Casecnan and the province of Nueva Vizcaya negotiated terms of an interim agreement that provides for a payment of $16.1 million by CE Casecnan and a cessation of collection efforts by the province of Nueva Vizcaya until a final determination of taxable value is rendered. The interim agreement is expected to be executed in the fourth quarter. An amount of $16.1 million was accrued as of September 30, 2009 within accrued property, income and other taxes. A receivable of an equal amount also was accrued as of September 30, 2009 to reflect the expected full reimbursement to CE Casecnan from NIA. Discussions continue among CE Casecnan, NIA, DOF and the province of Nueva Vizcaya to resolve the supplemental real property tax assessment. No further liability for supplemental real property tax has been recognized as the Company believes that the claim is without merit.

National Wealth Tax

In July 2008, CE Casecnan received an assessment totaling $4.1 million from the municipality of Alfonso Castaneda for a share of national wealth tax it claims is owed by the Company for the years from 2002 through 2007. CE Casecnan forwarded the assessment to NIA and the DOF, which must authorize any payment for national wealth taxes and are obligated to reimburse the Company pursuant to the Project Agreement. In September 2008, CE Casecnan received a temporary restraining order to enjoin the municipality of Alfonso Castaneda from pursuing its collection efforts until the matter can be decided by the court. A pre-trial hearing was held in December 2008. The proceedings were suspended to allow the municipality of Alfonso Castaneda to provide other local government units the opportunity to intervene in the case. At the June 2009 hearing, the judge summoned all affected local government units to participate in the hearing and file the necessary motions for leave for intervention and third party complaints. No liability for national wealth tax has been recognized as the Company believes that the claim is without merit.

Franchise Tax

In January 2006, CE Casecnan received franchise tax assessments for the years 2001 to 2006 totaling $2.2 million from the province of Nueva Vizcaya. CE Casecnan believes that franchise tax is imposed on companies which have a secondary or special franchise from the government. CE Casecnan is an independent power producer and does not have a government franchise. The Electric Power Industry Reform Act provides that independent power generation is not a public utility operation and does not require a franchise. Therefore, the Company has not recognized a liability relating to these assessments. In June 2006, CE Casecnan filed appeals of the assessments which are currently pending before the Supreme Court Office of the Court Administrator for reassignment to another court to hear and decide the cases.

Concentration of Risk

NIA’s obligations under the Project Agreement are substantially denominated in U.S. Dollars and are the Company’s sole source of operating revenue. 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 shareholders, partners or affiliates of the Company, including MEHC, and no directors, officers or employees of the Company have guaranteed or will 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 revenue from the Company’s business after the payment of operating expenses.

(7)	Fair Value Measurements

The carrying amounts of the Company’s cash, certain cash equivalents, receivables and accounts payable and other accrued liabilities approximate fair value because of the short-term maturity of these instruments. The Company uses a three level hierarchy for determining fair value and a financial asset or liability classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

The Company has investments in money market mutual funds that are accounted for as available-for-sale securities, are stated at fair value and are presented as cash and cash equivalents and restricted cash and investments on the Balance Sheets. The fair value of these securities was $104.6 million and $34.1 million as of September 30, 2009 and December 31, 2008, respectively. The fair value is determined by using the quoted market price or net asset value of the identical security in its principal market. As such, the Company considers these securities to be valued using Level 1 inputs.

Additionally, the Company has auction rate securities that are measured at fair value and are presented as other investments on the Balance Sheets. The fair value of the Company’s investments in auction rate securities, where there is no current liquid market, is determined using internally developed discounted cash flow pricing models based on available observable market data and the Company’s judgment about the assumptions, including liquidity and nonperformance risks, which market participants would use when pricing the asset. As such, the Company considers these securities to be valued using Level 3 inputs. The following table reconciles the beginning and ending balances of the Company’s auction rate securities measured at fair value on a recurring basis using significant Level 3 inputs (in thousands):

	Three-Month Periods					Nine-Month Periods
	Ended September 30,					Ended September 30,
	2009		2008			2009		2008

Beginning balance	$	17,444	$	19,747		$	14,096	$	21,409
Unrealized gains (losses) included in other comprehensive income (loss)		1,440		(1,169	)		4,788		(2,831	)
Ending balance	$	18,884	$	18,578		$	18,884	$	18,578

The Company’s long-term debt is carried at cost in the Financial Statements. The fair value of the Company’s long-term debt has been estimated based upon quoted market prices. The following table presents the carrying amount and estimated fair value of the Company’s long-term debt (in thousands):

	As of September 30, 2009				As of December 31, 2008
	Carrying Amount		Fair Value		Carrying Amount		Fair Value

Long-term debt	$	24,010	$	24,430	$	30,870	$	31,372

(8)	Comprehensive Income and Components of Accumulated Other Comprehensive Loss, Net

Comprehensive income consists of the following components (in thousands):

	Three-Month Periods					Nine-Month Periods
	Ended September 30,					Ended September 30,
	2009		2008			2009		2008

Net income	$	34,578	$	19,848		$	66,751	$	46,055
Other comprehensive income (loss) – unrealized gains (losses) on marketable securities, net of tax of $432, $(410), $1,437, $(991)		1,008		(759	)		3,351		(1,840	)

Comprehensive income	$	35,586	$	19,089		$	70,102	$	44,215

Accumulated other comprehensive loss, net, consists of unrealized losses on marketable securities totaling $1.8 million, net of tax of $0.7 million, and $5.1 million, net of tax of $2.2 million, as of September 30, 2009 and December 31, 2008, respectively.

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 that 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 herein. Explanations include management’s best estimate of the impact of weather and other factors. This discussion should be read in conjunction with the Company’s historical unaudited Financial Statements and Notes to Financial Statements included in Item 1 of this Form 10-Q. The Company’s actual results in the future could differ significantly from the historical results.

Forward-Looking Statements

This report contains statements that do not directly or exclusively relate to historical facts. These statements are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements can typically be identified by the use of forward-looking words, such as “may,” “could,” “project,” “believe,” “anticipate,” “expect,” “estimate,” “continue,” “intend,” “potential,” “plan,” “forecast” and similar terms. These statements are based upon the Company’s current intentions, assumptions, expectations and beliefs and are subject to risks, uncertainties and other important factors. Many of these factors are outside the Company’s control and could cause actual results to differ materially from those expressed or implied by the Company’s forward-looking statements. These factors include, among others:

·	changes in weather conditions that could affect operating revenue;general economic, political and business conditions in the Philippines and throughout the world;

·	changes in governmental, legislative or regulatory requirements affecting the Company or the power generation industry;

·	availability of qualified personnel;

·	the impact of new accounting pronouncements or changes in current accounting estimates and assumptions on financial results; and

·	other business or investment considerations that may be disclosed from time to time in the Company’s filings with the United States Securities and Exchange Commission (the “SEC”) or in other publicly disseminated written documents.

Further details of the potential risks and uncertainties affecting the Company are described in the Company’s filings with the SEC, including Part II, Item 1A and other discussions contained in this Form 10-Q. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The foregoing review of factors should not be construed as exclusive.

Business

The Company has a contract with the Republic of the Philippines (“ROP”), through the Philippine National Irrigation Administration (“NIA”) (a ROP-owned and controlled corporation), for the development and construction of a hydroelectric power plant and related facilities under a build-own-operate-transfer agreement, as amended by the Supplemental Agreement dated September 29, 2003 (the “Project Agreement”), covering a 20-year cooperation period (“Cooperation Period”) ending December 11, 2021, with obligations for the delivery of water and electricity. At the end of the Cooperation Period, the combined irrigation and 150 megawatt hydroelectric power generation project (the “Casecnan Project”) will be transferred to the ROP at no cost on an “as is” basis. NIA’s obligations under the Project Agreement are guaranteed by the full faith and credit of the ROP (the “Performance Undertaking”). The Project Agreement and the Performance Undertaking provide for the resolution of disputes by binding arbitration in Singapore under international arbitration rules.

Results of Operations for the Third Quarter and the First Nine Months of 2009 and 2008

Prior to December 25, 2008, the water delivery fee was a fixed monthly payment based upon an assumed annual water delivery of 801.9 million cubic meters, prorated to 66.8 million cubic meters per month, multiplied by the water delivery fee rate of $0.07381 per cubic meter. For each contract year starting from December 25, 2003 and ending on December 25, 2008, a water delivery fee credit, or deferred revenue, was computed equal to 801.9 million cubic meters minus the greater of actual water deliveries or 700.0 million cubic meters - the annual minimum water delivery threshold. Accordingly, in recognizing revenue, the water delivery fees were recorded each month prorated to 58.3 million cubic meters until the minimum threshold had been reached for the current contract year. The water delivery fee credit at the end of each contract year, if any, was available to be earned in the succeeding contract year through December 25, 2008. All water delivery credits available under the contract were earned by the Company as of December 25, 2008.

For contract years from December 25, 2008 through the end of the Cooperation Period, guaranteed water delivery fees are $51.7 million, calculated as the annual minimum water delivery threshold multiplied by $0.07381.

Variable water delivery fees are earned for all water deliveries within the contract year, if any, exceeding the annual minimum water delivery threshold multiplied by $0.07381, until a cumulative 1.324 billion cubic meters of water subject to variable water delivery fees have been delivered.

Guaranteed energy delivery fees are $36.4 million per year, calculated as the assumed annual delivery of 228.0 Gigawatt-hours (“GWh”), prorated to 19.0 GWh per month and multiplied by $0.1596 per kilowatt-hour (“kWh”).

The Company earns variable energy delivery fees in each contract year based upon actual energy delivered in excess of 228.0 GWh, multiplied by the applicable rate, until cumulative energy of 490.0 GWh per year are delivered. Prior to December 25, 2008, the rate was $0.1509 per kWh. Thereafter, the variable energy delivery rate is $0.1132 per kWh for the contract year ending December 25, 2009, escalating at 1% per annum. Energy deliveries between 490.0 GWh and 550.0 GWh within a contract year earn variable energy delivery fees at a rate of 1.3 Philippine pesos (“pesos”) per kWh prior to December 25, 2008 and 1.0 pesos per kWh thereafter, escalating at 1% per annum. Energy deliveries above 550.0 GWh per year are at no cost to NIA. Within each contract year, no variable energy delivery fees are payable until energy in excess of the cumulative 19.0 GWh per month for the contract year to date has been delivered.

The following table provides certain operating data of the Casecnan Project:

	Third Quarter				First Nine Months
	2009		2008		2009		2008
Electricity produced (GWh)		243.5		177.3		472.8		382.9
Water delivered (million cubic meters)		446.8		315.1		831.3		665.4

The Company’s water and energy fees are as follows (in millions):

	Third Quarter				First Nine Months
	2009		2008		2009		2008
Water delivery fees	$	23.3	$	12.9	$	49.0	$	38.8
Energy delivery fees		27.3		25.8		57.5		57.5
	$	50.6	$	38.7	$	106.5	$	96.3

Revenue in 2009 increased $11.9 million for the third quarter and $10.2 million for the first nine months compared to 2008. The increase in water delivery fees and energy delivery fees for 2009 was due to higher than normal water flow which resulted in water deliveries exceeding the annual minimum threshold and higher electricity production compared to 2008. The higher electricity production in 2009 was partially offset for the third quarter and largely offset for the first nine months by the lower price for variable energy fees.

Plant operations and other operating expenses decreased $0.2 million for the third quarter and $0.5 million for the first nine months of 2009 compared to 2008 primarily due to lower general and administrative costs.

Interest expense decreased $0.9 million for the third quarter and $4.6 million for the first nine months of 2009 compared to 2008 due to lower outstanding debt balances resulting from the scheduled repayment of long-term debt and the repayment of notes payable.

Interest income decreased $0.3 million for the third quarter and $1.0 million for the first nine months of 2009 compared to 2008 as a result of lower interest rates.

Other, net decreased $0.3 million for the third quarter and $1.0 million for the first nine months of 2009 compared to 2008 due to lower allocable output value added tax and the impact of foreign currency exchange rates on peso-denominated transactions.

Income tax expense decreased $2.0 million for the third quarter and $7.4 million for the first nine months of 2009 compared to 2008 due to a reduction in the Philippine statutory income tax rate from 35% to 30% and the adoption of the optional standard deduction method for calculating income tax liabilities, partially offset by higher taxable income.

Liquidity and Capital Resources

NIA’s obligations under the Project Agreement are substantially denominated in U.S. dollars and are the Company’s sole source of operating revenue. 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 shareholders, partners or affiliates of the Company, including MidAmerican Energy Holdings Company, and no directors, officers or employees of the Company have guaranteed or will 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 revenue from the Company’s business after the payment of operating expenses.

The Company’s cash and cash equivalents were $87.6 million as of September 30, 2009, compared to $49.4 million as of December 31, 2008.

Cash Flows from Operating Activities

Net cash flows from operating activities for the nine-month periods ended September 30, 2009 and 2008 were $79.1 million and $74.8 million, respectively. The increase in operating cash flows in 2009 was primarily due to the higher revenue collections resulting from higher water delivery fees and energy delivery fees.

Cash Flows from Investing Activities

Net cash flows from investing activities for the nine-month periods ended September 30, 2009 and 2008 were $(2.1) million and $(1.3) million, respectively. In 2009, the Company deposited $1.3 million of declared but unpaid dividends in the escrow account compared to $0.9 million in 2008. Capital expenditures were $0.4 million higher in 2009 due to improvements to the water catchment structures.

Cash Flows from Financing Activities

Net cash flows from financing activities for the nine-month periods ended September 30, 2009 and 2008 were $(38.8) million and $(50.8) million, respectively. In 2009, the Company repaid the remaining $7.1 million of notes payable to CE Casecnan Ltd., made $6.9 million of project financing debt scheduled payments and paid $24.7 million of dividends on common stock. In 2008, the Company made $18.9 million of project financing debt scheduled payments and repaid $32.1 million of notes payable to CE Casecnan Ltd.

Auction Rate Securities

Supplemental Real Property Tax

National Wealth Tax

Franchise Tax

Contractual Obligations

Subsequent to December 31, 2008, there were no material changes outside the normal course of business in contractual obligations from the information provided in Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

New Accounting Pronouncements

For a discussion of new accounting pronouncements affecting the Company, refer to Note 2 of Notes to Financial Statements included in Item 1 of this Form 10-Q.

Critical Accounting Policies

Certain accounting policies require management to make estimates and judgments concerning transactions that will be settled several years in the future. Amounts recognized in the Financial Statements from such estimates are necessarily based on numerous assumptions involving varying and potentially significant degrees of judgment and uncertainty. Accordingly, the amounts currently reflected in the Financial Statements will likely increase or decrease in the future as additional information becomes available. Estimates are used for, but not limited to, the allowance for doubtful accounts and auction rate securities – measurement principles. For additional discussion of the Company’s critical accounting policies, see Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008. The Company’s critical accounting policies have not changed materially since December 31, 2008.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

For quantitative and qualitative disclosures about market risk affecting the Company, see Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008. The Company’s exposure to market risk and its management of such risk has not changed materially since December 31, 2008.

Item 4(T).

Controls and Procedures

At the end of the period covered by this Quarterly Report on Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the President (principal executive officer) and the Chief Financial Officer (principal financial officer), of 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). Based upon that evaluation, the Company’s management, including the President (principal executive officer) and the Chief Financial Officer (principal financial officer), concluded that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to management, including the Company’s President (principal executive officer) and Chief Financial Officer (principal financial officer), or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. There has been no change in the Company’s internal control over financial reporting during the quarter ended September 30, 2009 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II

Item 1.

Legal Proceedings

None.

Item 1A.

Risk Factors

There has been no material change to the Company’s risk factors from those disclosed in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

Item 2.

Unregistered Sales of Equity 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

The exhibits listed on the accompanying Exhibit Index are filed as part of this Quarterly Report.

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 5, 2009		/s/ Patrick J. Goodman
		Patrick J. Goodman
		Senior Vice President and Chief Financial Officer
		(principal financial and accounting officer)

EXHIBIT INDEX

Exhibit No.		Description

31.1		Principal Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Principal Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Principal Executive Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Principal Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Attached files

CE CASECNAN WATER & ENERGY CO INC Reports

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