Item 1. Business
General - ------- CE Casecnan Water and Energy Company, Inc. ("Company" or "CE Casecnan") is a privately held Philippine corporation formed in September of 1994 solely to develop, construct, own and operate the Casecnan project, a multi-purpose irrigation and hydroelectric power facility with a rated capacity of approximately 150 Megawatts ("MW") located on the island of Luzon in the Republic of the Philippines (the "Casecnan Project"). After the completion of construction of the Casecnan Project, the Company is expected to be owned at least 70% (subject to upward adjustment based upon the actual economics of the Casecnan Project at commencement of commercial operations and the exercise of certain options by a third party) by MidAmerican Energy Holdings Company ("MidAmerican") through its wholly owned indirect subsidiary CE Casecnan Ltd. The ownership percentage held by the minority shareholders may be reduced in certain circumstances and such reduction would result in a corresponding increase in the ownership percentage of the Company held by affiliates of MidAmerican.
The Securities (described herein) are recourse only to the Company. MidAmerican has not guaranteed directly or indirectly the payment or performance of any Company obligations.
The Company's principal executive office is located at 24th Floor 6750 Building, Ayala Avenue, Makati City, Philippines, and its telephone number is 63 2 892 0276. The Company's principal office will be located in Pantabangan in the Province of Nueva Ecija, Philippines upon commencement of commercial operations.
Project - -------
The Casecnan Project is located in the central part of the island of Luzon. It consists generally of diversion structures in the Casecnan and Taan Rivers that will capture and divert excess water in the Casecnan watershed by means of concrete, in-stream diversion weirs and transfer that water through a transbasin tunnel of approximately 23 kilometers (including the intake adit from the Taan to the Casecnan River), with a diameter of approximately 6.5 meters to an existing underutilized water storage reservoir at Pantabangan. During the water transfer, the elevation differences between the two watersheds will allow electrical energy to be generated at a new 150 net MW rated capacity power plant, which is being constructed in an underground powerhouse cavern located at the end of the water tunnel. A tailrace discharge tunnel of
approximately three kilometers will deliver water from the water tunnel and the new powerhouse to the Pantabangan Reservoir, providing additional water for irrigation and increasing the potential electrical generation at two downstream existing hydroelectric facilities of the Philippine National Power Corporation ("NPC"), the government-owned and controlled corporation that is the primary supplier of electricity in the Philippines. Since the water has been determined to remain suitable for irrigation throughout the Casecnan Project operations of capturing, diverting and transferring the water, other than removing sediments at the diversion structures, no treatment will be required. Once in the reservoir at Pantabangan, the water will be under the control of, and for the use of the Philippine National Irrigation Administration ("NIA").
The Casecnan Project's diversion structures will be capable of storing flows from the Casecnan and Taan Rivers over a number of hours, and then discharging that stored water through the transbasin tunnel and new powerhouse during the 12 hours (8:00 a.m. through 8:00 p.m.) coinciding with peak electrical demand hours. Tunnel flows and water depths behind the diversion structures will be regulated by in-tunnel valves in front of the powerhouse turbines controlled by the operators at the powerhouse control room.
In early 1994, President Fidel Ramos recognized the need for an irrigation and hydroelectric project that would provide increased water flows for irrigation to the rice growing area of Central Luzon, would be environmentally sound, technically feasible and economically viable, and would involve no flooding or relocation of local residents. At that time, he directed the Philippine Department of Agriculture and NPC to work together with other interested agencies to develop a combined irrigation and hydroelectric project. Shortly thereafter, the Philippine government was approached by the Company with a proposal for a project to be developed in the Casecnan area on a build-own-operate-transfer ("BOOT") basis, that is, an arrangement under which the Company as developer would agree to build during the construction period and thereafter own and operate the Casecnan Project for a twenty-year cooperation period, after which ownership and operation of the Project would be transferred to NIA and NPC at no cost on an "as-is" basis. After conclusion of a public solicitation for competing proposals, NIA selected the Company as the BOOT developer and entered into a project agreement with the Company (the "Project Agreement"). The Casecnan Project was subsequently designated a high priority project under Republic Act No. 529 by the National Economic and Development Authority of the Philippines.
CE Casecnan is constructing the Casecnan Project under the terms of the Project Agreement between CE Casecnan and NIA. Under the Project Agreement, CE Casecnan will develop, finance and construct the Casecnan Project over the construction period, and thereafter own and operate 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 will pay CE Casecnan a fixed fee for the delivery of a minimum volume of water and a fixed fee for the delivery of a minimum amount of electricity. In addition, NIA will pay a fee for all electricity delivered in excess of a threshold amount up to a specified amount. NIA will sell the electricity it purchases to NPC, although NIA's obligations to CE Casecnan under the Project Agreement are not dependent on NPC's purchase of the electricity from NIA. All fees to be paid by NIA to CE Casecnan are payable in U.S. dollars. The fixed fees paid for the delivery of water and energy, regardless of the amount of electricity or water actually delivered, are expected to provide approximately 70% of CE Casecnan's revenues. At the end of the Cooperation Period, the Casecnan Project will be transferred to NIA for no additional consideration on an "as is" basis.
The Project Agreement provides for additional compensation to CE Casecnan upon the occurrence of certain events, including increases in Philippine taxes and adverse changes in Philippine law. Upon the occurrence and during the continuance of certain force majeure events, including those associated with Philippine political action, NIA may be obligated to buy the Casecnan Project from CE Casecnan at a buy out price expected to be in excess of the aggregate principal amount of the outstanding CE Casecnan debt securities, together with accrued but unpaid interest.
The Republic of the Philippines has provided a Performance Undertaking under which NIA's obligations under the Project Agreement are guaranteed by the full faith and credit of the Republic of the Philippines. The Project Agreement and the Performance Undertaking provide for the resolution of disputes by binding arbitration in Singapore under international arbitration rules.
NIA's payment obligations under the Project Agreement are expected to be the Company's sole source of operating revenues. Because of the Company's dependence on NIA, any material failure of NIA to fulfill its obligations under the Project Agreement and any material failure of the Republic of the Philippines to fulfill its obligations under the Performance Undertaking would significantly impair the ability of the Company to meet its obligations under the Securities.
CE Casecnan financed a portion of the costs of the Casecnan Project through the issuance of $125,000,000 of its 11.45% Senior Secured Series A Notes due 2005 (the "Series A Notes") and $171,500,000 of its 11.95% Senior Secured Series B Bonds due 2010 (the "Series B Bonds") and $75,000,000 of its Senior Secured Floating Rate Notes due 2002, pursuant to an indenture dated November 27, 1995, as amended to date (the "Casecnan Indenture").
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 each such company. 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 is being conducted by a consortium consisting of Cooperativa Muratori Cementisti CMC di Ravenna and Impresa Pizzarotti & C. Spa., working together with Siemens A.G., Sulzer Hydro Ltd., Black & Veatch and Colenco Power Engineering Ltd. (collectively, the "Contractor").
On November 20, 1999, the 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 lender's independent engineer under the Casecnan Indenture. In January 2001, the Company received a new working schedule from the Contractor that showed a completion date of August 31, 2001. Accordingly, the Casecnan Project is now expected to become operational by the third quarter of 2001. The delay in completion is attributable in part to the collapse in December 2000 of the Project's partially completed vertical surge shaft and the need to drill a replacement surge shaft.
The receipt of the working schedule does not change the Guaranteed Substantial Completion Date under the Replacement Contract, and the Contractor is still contractually obligated either to complete the Project by March 31, 2001 or to pay delay liquidated damages. As a result of receipt of the working schedule, however, the Company has sought and obtained from the lender's independent engineer approval for a revised construction schedule under the Casecnan Indenture. In connection with the revised schedule, the ultimate parent company of CE Casecnan agreed to make available up to $11.6 million of additional funds under certain conditions pursuant to a Shareholder Support Letter dated February 8, 2001 (the "Shareholder Support Letter") to cover additional costs resulting from the Contractor's schedule delay.
On February 12, 2001, the Contractor filed a Request for Arbitration with the International Chamber of Commerce seeking an extension of the Guaranteed Substantial Completion Date by up to 153 days through August 31, 2001 - resulting from various alleged force majeure events. In a March 20, 2001 Supplement to Request for Arbitration, the Contractor also seeks compensation for alleged additional costs it incurred from the claimed force majeure events to the extent it is unable to recover from its insurer. CE Casecnan believes such allegations are without merit and intends to vigorously defend the Contractor's claims.
Under the Project Agreement, if NIA is able to accept delivery of water into the Pantabangan Reservoir and NPC has completed the Project's related transmission line, the Company is liable to pay NIA $5,500 per day for each day of delay in completion of the Casecnan Project beyond July 27, 2000, increasing to $13,500 per day for each day of delay in completion beyond November 27, 2000. Although the transmission line is complete, NIA has not yet installed the Project's metering equipment. Accordingly, no liquidated damages payments to NIA have been made.
The Company's ability to make payments on any of its existing and future obligations is dependent on NIA's and the Republic of the Philippines' performance of their obligations under the Project Agreement and the Performance Undertaking, respectively. Except to the extent expressly provided for in the Shareholder Support Letters, no shareholders, partners or affiliates of the Company, including MidAmerican, and no directors, officers or employees of the Company will guarantee or be in any way liable for payment of the Company's obligations. As a result, payment of the Company's obligations depends upon the availability of sufficient revenues from the Company's business after the payment of operating expenses.
There are pending bills before the Philippine Congress and the Philippine Senate aimed at restructuring the electric industry, privatization of the NPC and introduction of a competitive electricity market, among others. The passage of the bills may have an impact on the Company's future operations and the industry as a whole, the effect of which is not yet determinable and estimable.
Terms of the Securities - -----------------------
General
In November 1995, the Company issued and sold (i) $125,000,000 aggregate principal amount of the 11.45% Senior Secured Series A Notes due November 15, 2005 ("Series A Notes"), (ii) $171,500,000 aggregate principal amount of 11.95% Senior Secured Series B Bonds due November 15, 2010 ("Series B Bonds"), and (iii) $75,000,000 aggregate principal amount of LIBOR Plus 3.00% Senior Secured Floating Rate Notes due November 15, 2002 ("FRNs"), collectively referred to herein as the "Securities". The FRNs rank pari passu with and will share the collateral on a pro rata basis with the Series A Notes and the Series B Bonds and are entitled to the benefits of the Indenture and the Depositary Agreement.
The Securities are direct obligations of the Company, secured solely by the Company collateral.
Payment of Principal and Interest
Interest on the Securities is payable semiannually on each May 15 and November 15 (the "Securities Interest Payment Date"), commencing May 15, 1996, to the registered Holders thereof at the close of business on the May 1 and November 1, as the case may be, preceding each Securities Interest Payment Date. The initial average life of the Series A Notes was 8.84 years, and the initial average life of the Series B Bonds was 11.57 years.
The $125,000,000 principal of the Series A Notes due November 15, 2005 is payable in semiannual installments, commencing May 15, 2003, as follows:
Percentage of Principal Payment Date Amount Payable
May 15, 2003 13.50% November 15, 2003 13.50% May 15, 2004 17.00% November 15, 2004 17.00% May 15, 2005 19.50% November 15, 2005 19.50%
The $171,500,000 principal of the Series B Bonds due November 15, 2010 is payable in semiannual installments, commencing May 15, 2002, as follows:
Percentage of Principal Payment Date Amount Payable
May 15, 2002 2.50% November 15, 2002 2.50% May 15, 2003 2.25% November 15, 2003 2.25% May 15, 2004 2.00% November 15, 2004 2.00% May 15, 2005 1.75% November 15, 2005 1.75% May 15, 2006 10.50% November 15, 2006 10.50% May 15, 2007 11.00% November 15, 2007 11.00% May 15, 2008 11.00% November 15, 2008 11.00% May 15, 2009 4.00% November 15, 2009 4.00% May 15, 2010 5.00% November 15, 2010 5.00%
The $75,000,000 principal of the FRNs due November 15, 2002 is payable in semiannual installments, commencing November 15, 2000, as follows:
Percentage of Principal Payment Date Amount Payable
November 15, 2000 25.00% May 15, 2001 19.50% November 15, 2001 20.00% May 15, 2002 18.00% November 15, 2002 17.50%
The FRNs bear interest at LIBOR plus 3.00% per annum and will be payable quarterly on each February 15, May 15, August 15, and November 15, commencing on February 15, 1996, to the registered Holders thereof at the close of business on the preceding February 1, May 1, August 1, and November 1, as the case may be.
Priority of Payments
Prior to completion of the Casecnan Project pursuant to the Replacement Contract, all net proceeds of the Securities and any liquidated damages proceeds will be deposited in the Construction Fund and disbursed to pay for budgeted construction or restoration costs, including interest and, if applicable, principal on the Securities.
After completion, except as otherwise provided for with respect to mandatory redemptions and loss proceeds, all revenues received by the Company from the Casecnan Project will be paid into the Revenue Fund maintained by the Depositary (other than certain peso payments required to be used for VAT payments to the Republic of the Philippines). Amounts paid into the Revenue Fund shall be distributed in the following order of priority: (a) to pay operating and maintenance costs; (b) to pay certain administrative costs of the agents for the Secured Parties under the Financing Documents; (c) to pay principal of, premium (if any) and interest on the Securities (including any increased costs necessary to gross up such payments for certain withholding taxes and other assessments and charges), and principal and interest on other senior debt, if any; (d) to cause the Debt Service Reserve Fund to equal the Debt Service Reserve Fund Required Balance, as defined below; (e) to pay indemnification expenses and other expenses to the Secured Parties and certain other costs, and (f) to the Distribution Fund or Distribution Suspense Fund, as applicable.
Debt Service Reserve Fund
At completion, the Company will establish a Debt Service Reserve Fund for the benefit of the Holders of the Securities, which will be funded in cash from any remaining shareholder capital contributions in the Capital Contribution Fund or, to the extent required, from operating revenues as described under "Priority of Payments" above. Such amounts will be deposited into the Debt Service Reserve Fund from time to time to the extent required to cause it to equal the Debt Service Reserve Fund Required Balance which is intended to approximate the highest amount of the payments of principal and interest to be made on the Securities during any semiannual period over the subsequent three years.
Optional Redemption
On and after the seventh anniversary of the closing (as defined in the Trust Indenture) of the Casecnan Project financing, the Series A Notes are subject to optional redemption by the Company, in whole and not in part, at par plus accrued interest to the Redemption Date.
The Series B Bonds are subject to optional redemption by the Company, at any time, in whole or in part, pro rata, at par plus accrued interest to the redemption date plus a premium, calculated to "make whole" to comparable U.S. treasury securities plus 150 basis points.
After completion, the FRN's are subject to optional redemption by the Company, in whole or in part, pro rata at par plus accrued interest, on any FRN interest payment date.
The Company also has the option to redeem the Securities, in whole or in part, at par plus accrued interest at any time if, as a result of any change in Philippine tax law or in the application or interpretation of Philippine tax law occurring after the date of issuance of the Securities, the Company is required to pay certain additional amounts described in the Indenture.
Mandatory Redemption
The Securities are subject to mandatory redemption, pro rata, at par plus accrued interest to the redemption date, (a) upon the receipt by the Company of loss proceeds that exceed $15 million in respect of certain events of property or casualty loss or similar events, unless the funds are to be utilized by the Company for an Approved Restoration Plan; or (b) upon the receipt by the Company of proceeds realized in connection with a Project Agreement Buyout.
Change in Control Put
Upon the occurrence of a Change of Control, each Holder will have the right to require the Company to repurchase all or any part of such Holder's Securities at a purchase price in cash equal to 101% of the principal amount thereof, plus accrued interest to the date of repurchase in accordance with the procedures set forth in the Indenture. There is no assurance that upon a Change in Control the Company will have sufficient funds to repurchase the Securities.
Distributions
Prior to completion, there will be no distributions to the Company or its shareholders. After completion, distributions may be made only from and to the extent of monies on deposit in the Distribution Fund or Distribution Suspense Fund. Distributions are subject to the prior satisfaction of the following conditions:
(a) The amounts contained in the Principal Fund and the Interest Fund will be equal to or greater than the aggregate scheduled principal and interest payments next due on the Securities;
(b) No Default or Event of Default under the Indenture shall have occurred and be continuing;
(c) The Debt Service Coverage Ratio for the preceding 12-month period is equal to or greater than 1.35 to 1 as certified by an officer of the Company;
(d) The projected Debt Service Coverage Ratio of the Securities for the succeeding 12-month period is equal to or greater than 1.35 to 1, as certified by an officer of the Company; and,
(e) The Debt Service Reserve Fund has a balance equal to or greater than the Debt Service Reserve Fund Required Balance.
Ranking and Security for the Securities
The Securities are senior debt of the Company and are secured by (a) an assignment of all revenues received by the Company from the Casecnan Project; (b) a collateral assignment of all material contracts; (c) a lien on any accounts and funds on deposit under the Depositary Agreement; (d) a pledge of approximately 100% of the capital stock of the Company, subject to release in certain circumstances relating to accessing political risk insurance for the benefit of the shareholders; and (e) a lien on all other material assets and property interests of the Company. The Securities will rank pari passu with and will share the Collateral on a pro rata basis with certain other senior secured debt, if any (provided that the Debt Service Reserve Fund shall be collateral solely for the obligations under the Securities). The proceeds of any political risk insurance covering the capital investment will not be part of the collateral for the Securities. While under the Indenture the Company may incur certain permitted debt senior to the Securities, it has no present intention to do so.
Ratings
Moody's and Standard & Poor's have assigned the Securities ratings of "Ba2" and "BB+", respectively. There is no assurance that any such credit rating will remain in effect for any given period of time or that such rating will not be lowered, suspended or withdrawn entirely by the applicable rating agency, if, in such rating agency's judgment, circumstances so warrant.
Nature of Recourse on the Securities
The Company's obligations to make payments of principal, premium, if any, and interest on the Securities are obligations solely of the Company secured solely by the collateral. Neither the shareholders of the Company nor any Affiliate, including MidAmerican, incorporator, officer, director or employee thereof or of the Company guaranteed the payment of, nor have any obligation with respect to payment of the Securities, except to the extent that affiliates of MidAmerican who are stockholders of the Company have pledged their capital stock in the Company as security for the notes and bonds issued by the Company. As a result, payment of the Company's obligations depends upon the availability of sufficient revenues from the Company's business after the payment of operating expenses.
Incurrence of Additional Debt
The Company shall not incur any debt other than "Permitted Debt." "Permitted Debt" means:
(a) The Securities;
(b) After completion, debt incurred to finance the making of capital improvements to the Casecnan Project required to maintain compliance with applicable law or anticipated changes therein; provided that no such debt may be incurred unless at the time of incurrence the independent engineer confirms as reasonable (i) a certification by the Company (containing customary assumptions and qualifications) that the proposed capital improvements are reasonably expected to enable the Casecnan Project to comply with applicable or anticipated legal requirements and (ii) the calculations of the Company that demonstrate, after giving effect to the incurrence of such debt, the minimum project Debt Service Coverage Ratio (x) for the next four consecutive fiscal quarters, commencing with the quarter in which such debt is incurred, taken as one annual period, and (y) for each subsequent fiscal year through the final maturity date, will not be less than 1.3 to 1;
(c) After completion, debt incurred to finance the making of capital improvements to the Casecnan Project not required by applicable law, so long as after giving effect to the incurrence of such debt (i) no default or event of default has occurred and is continuing, and (ii)(A) the independent engineer confirms as reasonable (I) a certification by the Company (containing customary assumptions and qualifications) that the proposed capital improvements are technically feasible and prudent and (II) the calculations of the Company that demonstrate, after giving effect to the incurrence of such debt, (x) the minimum project Debt Service Coverage Ratio for the next four consecutive fiscal quarters, commencing with the quarter in which such debt is incurred, taken as one annual period, and in every fiscal year thereafter, will not be less than 1.4 to 1 and (y) the average projected Debt Service Coverage Ratio for all succeeding fiscal years until the final maturity date will not be less than 1.7 to 1, or (B) the rating agencies confirm that the incurrence of such debt will not result in a rating downgrade;
(d) After completion, working capital debt in an aggregate amount outstanding at any time not to exceed $5 million;
(e) Debt incurred in connection with certain permitted interest rate and currency hedging arrangements;
(f) Subordinated debt from affiliates in an aggregate amount not to exceed $150 million prior to completion and $100 million after completion, which shall be used to finance capital, operating or other costs with respect to the Project;
(g) Debt incurred for purposes for which permitted liens may be incurred;
(h) Debt contemplated to be incurred pursuant to the Casecnan Project documents, including obligations in connection with any letter of credit in an aggregate amount outstanding at any time not to exceed $15 million;
(i) Purchase money debt and other ordinary course trade debt to support operation and maintenance of the Casecnan Project, in an aggregate amount at any time not to exceed $35 million;
(j) Permitted refinancing debt, if, as certified by an authorized officer of the Company at the time of incurrence, (A)(i) after giving effect to the incurrence of such debt, (x) the minimum projected Debt Service Coverage Ratio for the next four consecutive fiscal quarters in which such debt is incurred, taken as one annual period, and in every fiscal year thereafter, will not be less than 1.5 to 1, and (y) for each subsequent fiscal year through the final maturity date, the average project Debt Service Coverage Ratio will not be less than 2.0 to 1, and (ii) the final maturity and average life of the debt incurred each exceed those of the debt remaining, (B) each principal payment equals that of each corresponding principal payment of the debt being replaced or (C) the rating agencies confirm that the incurrence of such debt will not result in a rating downgrade; and,
(k) Debt incurred by the Company prior to completion as necessary for financing, engineering, construction, completion, testing and start-up of the Casecnan Project in accordance with an Approved Completion Plan in order to achieve completion ("Pre-Completion Additional Debt"), provided that (i) the rating agencies confirm that the incurrence of such debt will not result in a rating downgrade; or (ii)(A) the independent engineer has confirmed (subject to customary assumptions and qualifications) as reasonable the technical feasibility of the Approved Completion Plan
including a certification that (subject to customary assumptions and qualifications) the net proceeds of such Debt and other funds available to the Company (from Liquidated Damages Proceeds or otherwise) are reasonably expected to be sufficient to fund the costs of reaching completion; and (B) the Company certifies at the time of incurrence (with customary assumptions and qualifications) that (x) the Approved Completion Plan is technically feasible and prudent, (y) after giving effect to the incurrence of such debt, the minimum projected Debt Service Coverage Ratio for the four fiscal quarters commencing with the quarter that commences immediately after the projected date of commercial operation of the Casecnan Project, taken as one annual period, and in every fiscal year thereafter, will not be less than 1.3 to 1, and (z) after giving effect to incurrence of such debt, the average projected Debt Service Coverage Ratio for all succeeding Calendar Years until the final maturity date will not be less than 1.5 to 1.
Principal Covenants
Principal covenants under the Indenture require the Company, subject to certain exceptions and qualifications, (a) not to incur (i) any debt except Permitted Debt or (ii) any lien upon any of its assets except permitted liens; (b) not to enter into any transaction of merger or consolidation, change its form of organization, liquidate, wind-up or dissolve itself; (c) not to enter into non-arm's length transactions or agreements with affiliates; (d) not to engage in any business other than as contemplated by the Indenture; (e) not to enter into certain change orders under the Turnkey Construction Contract or amend the Approved Construction Budget and Schedule (or an Approved Completion Plan), or amend, terminate or otherwise modify any material Project Document to which it is a party, except as permitted under the Indenture; (f) not to sell, lease or transfer any property or assets material to the Casecnan Project except in the ordinary course of business; (g) to construct the Casecnan Project in accordance with the Approved Construction Budget and Schedule; (h) to operate and maintain the Casecnan Project in accordance with the Approved Operation and Maintenance Budget; (i) to maintain insurance as required under the Indenture; and (j) to enter into an interest rate agreement for the FRNs, within 30 days of Closing, at a LIBOR cap of up to 7.5%.
Insurance - ---------
The Company maintains insurance with respect to the Casecnan Project of a type and in such amounts as are generally carried by companies engaged in similar businesses and owning similar projects that are financed in a similar manner. These coverages will include casualty insurance, including flood and earthquake coverage, business interruption insurance, primary and excess liability insurance, automobile insurance and workers compensation insurance. However, the proceeds of such insurance may not be adequate to cover reduced revenues, increased expenses or other liabilities arising from the occurrence of catastrophic events. Moreover, there can be no assurance that such insurance coverage will be available in the future at commercially reasonable rates or that the amounts for which the Company will be insured will cover all losses. Nevertheless, the Company will not reduce or cancel coverages if the Insurance Consultant determines it is not reasonable to do so and insurance is available on commercially reasonable terms.
Regulatory Matters - ------------------
The Company is subject to a number of Philippine statutory and regulatory standards and required and desirable approvals, including those relating to energy and environmental laws. Many permits and regulatory approvals are required and desirable for the construction and operation of the Casecnan Project. A number of these permits and regulatory approvals have not yet been obtained. Some of the permits and regulatory approvals that have been obtained contain conditions, and a number of the permits and approvals not yet obtained may contain conditions when they are issued. Delay in receipt of or failure to obtain these permits or approvals or to satisfy any of these conditions could delay completion of the construction of the Casecnan Project, restrict the operation of the Casecnan Project, or result in additional costs or taxes. The adoption of new laws, policies or regulations, or changes in the interpretation or application of existing laws, policies and regulations, that modify the present regulatory environment could have a material adverse effect on the Company's ability to construct or operate the Casecnan Project and could trigger the Company's right to sell the Casecnan Project to NIA. Upon such sale, the Securities will be subject to mandatory redemption.
Employees - ---------
At December 31, 2000, the Company had 27 employees who are currently overseeing the construction and startup activities. After completion of construction, the Casecnan Project is expected to employ approximately 25 people, consisting of operations, maintenance, logistics, compliance, and engineering personnel. At the powerhouse control room, personnel will monitor, direct and control the operations and maintenance of the whole Casecnan Project. The control room will be staffed 24 hours per day and will be the contact point for the Casecnan Project's customers and others. At the diversion structures, personnel will be responsible to ensure that the trash racks at the tunnel intakes are kept clean and maintained and that excessive sediment build-up behind the structure is prevented.
Item 2.
Item 2. Properties
CE Casecnan does not separately own or lease office space but has arranged for a separate suite at the offices of MidAmerican's affiliate in Manila.
Item 3.
Item 3. Legal Proceedings
On February 12, 2001, the Contractor filed a Request for Arbitration pursuant to the Replacement Contract, seeking up to 153 days of schedule relief related to various alleged force majeure events, including the vertical surge shaft collapse. On March 20, 2001, the Contractor supplemented its Request for Arbitration, seeking up to US $3,853,328 as compensation in connection with the vertical surge shaft replacement work. CE Casecnan believes that the arbitration claims are without merit and intends to defend them vigorously. In accordance with the Replacement Contract, the arbitration will be conducted pursuant to the rules of the International Chamber of Commerce. The parties have agreed that the venue of the arbitration will be London, England.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable.
PART II
Item 5.
Item 5. Market for Company's Equity and Related Stockholder Matters.
Not Applicable.
Item 6.
Item 6. Selected Financial Data
Amounts in Thousands Except Per Share Amounts
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations: - ---------------------
The Company is in the construction stage and has not yet started commercial operations as of December 31, 2000. The quarter and year ended December 31, 2000 revenue of $1.2 million and $7.6 million respectively, consists of interest income on cash and investment balances. The quarter and year ended December 31, 2000 interest expense of $11.4 million and $46.1 million, respectively, less amounts capitalized of $12.5 million and $47.5 million, respectively, and amortization of bond issue costs of $1.2 million and $2.3 million, respectively, are related to the notes and bonds payable issued by the Company in the fourth quarter of 1995.
Liquidity and Capital Resources: - -------------------------------
In November 1995, the Company closed the financing and commenced construction of the Casecnan Project, a combined irrigation and 150 net MW hydroelectric power generation project located in the central part of the island of Luzon in the Republic of the Philippines.
CE Casecnan, which is expected to be indirectly owned at least 70% by MidAmerican, is constructing the Casecnan Project under the terms of the Project Agreement between CE Casecnan and the NIA. Under the Project Agreement, CE Casecnan will develop, finance and construct the Casecnan Project over the construction period, and thereafter own and operate 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 will pay CE Casecnan a fixed fee for the delivery of a minimum volume of water and a fixed fee for the delivery of a minimum amount of electricity. In addition, NIA will pay a fixed fee for all electricity delivered in excess of a threshold amount up to a specified amount. NIA will sell the electricity it purchases to the NPC, although NIA's obligations to CE Casecnan under the Project Agreement are not dependent on the purchase of the electricity from NIA by NPC. All fees to be paid by NIA to CE Casecnan are payable in U.S. dollars. The fixed fees paid for the delivery of water and energy, regardless of the amount of electricity or water actually delivered, are expected to provide approximately 70% of CE Casecnan's revenues. At the end of the Cooperation Period, the Casecnan Project will be transferred to NIA for no additional consideration on an "as is" basis.
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 each such company. 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 is being conducted by a consortium consisting of Cooperativa Muratori Cementisti CMC di Ravenna and Impresa Pizzarotti & C. Spa., working together with Siemens A.G., Sulzer Hydro Ltd., Black & Veatch and Colenco Power Engineering Ltd. (collectively, the "Contractor").
On November 20, 1999, the 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 lender's independent engineer under the Casecnan Indenture. In January 2001, the Company received a new working schedule from the Contractor that showed a completion date of August 31, 2001. Accordingly, the Casecnan Project is now expected to become operational by the third quarter of 2001. The delay in completion is attributable in part to the collapse in December 2000 of the Project's partially completed vertical surge shaft and the need to drill a replacement surge shaft.
The receipt of the working schedule does not change the Guaranteed Substantial Completion Date under the Replacement Contract, and the Contractor is still contractually obligated either to complete the Project by March 31, 2001 or to pay delay liquidated damages. As a result of receipt of the working schedule, however, the Company has sought and obtained from the lender's independent engineer approval for a revised construction schedule under the Casecnan Indenture. In connection with the revised schedule, the ultimate parent company of CE Casecnan agreed to make available up to $11.6 million of additional funds under certain conditions pursuant to a Shareholder Support Letter dated February 8, 2001 (the "Shareholder Support Letter") to cover additional costs resulting from the Contractor's schedule delay. CE Casecnan intends to exercise all contractual rights and remedies, including collection of liquidated damages, in connection with such delay.
CE Casecnan financed a portion of the cost of the Casecnan Project through the issuance of $125 million of its 11.45% Senior Secured Series A Notes due 2005 and $171.5 million of its 11.95% Senior Secured Series B Bonds due 2010 and $75 million of its Secured Floating Rate Notes due 2002, pursuant to an indenture dated November 27, 1995, as amended to date (the "Casecnan Indenture").
The securities are senior debt of the Company and are secured by a collateral assignment of all revenues received from the Project, a collateral assignment of all material contracts, a lien on any accounts and funds on deposit under a Deposit and Disbursement Agreement, a pledge of 100% of the capital stock of the Company and a lien on all other material assets and property. The securities rank pari passu with and will share the collateral on a pro rata basis with other senior secured debt, if any.
The securities are subject to certain optional and mandatory redemption schemes as provided for in the Casecnan Indenture. The debt covenants contain certain restrictions as to incurrence of additional indebtedness; merger, consolidation, dissolution, or any significant change in corporate structure; non-arm's length transactions or agreements with affiliates; material change in the Turnkey Construction Contract; and sale, lease, or transfer of properties material to the Project, among others.
Forward-looking Statements
Certain information included in this report contains forward-looking statements made pursuant to the Private Securities Litigation Reform Act of 1995 ("Reform Act"). Such statements are based on current expectations and involve a number of known and unknown risks and uncertainties that could cause the actual results and performance of the Company to differ materially from any expected future results or performance, expressed or implied, by the forward-looking statements. In connection with the safe harbor provisions of the Reform Act, the Company has identified important factors that could cause actual results to differ materially from such expectations, including development and construction uncertainty, operating uncertainty, uncertainties relating to doing business outside of the United States, uncertainties relating to international economic and political conditions and uncertainties regarding the impact of regulations, changes in government policy, industry deregulation and competition. The Company assumes no responsibility to update forward-looking information contained herein.
Item 7A.
Item 7A. Qualitative and Quantitative Disclosures About Market Risk
The following discussion of the Company's exposure to various market risks contains "forward-looking statements" that involve risks and uncertainties. These projected results have been prepared utilizing certain assumptions considered reasonable in the circumstances and in light of information currently available to the Company. Actual results could differ materially from those projected in the forward-looking information.
Interest Rate Risk
At December 31, 2000, the Company had fixed-rate long-term debt of $296.5 million in principal amount and having a fair value of $271.0 million. These instruments are fixed-rate and therefore do not expose the Company to the risk of earnings loss due to changes in market interest rates. However, the fair value of these instruments would decrease by approximately $5.3 million if interest rates were to increase by 10% from their levels at December 31, 2000. In general, such a decrease in fair value would impact earnings and cash flows only if the Company were to reacquire all or a portion of these instruments prior to their maturity.
At December 31, 2000, the Company had floating-rate obligations of $56.3 million that expose the Company to the risk of increased interest expense in the event of increases in short-term interest rates. If the floating rates were to increase by 10% from December 31, 2000 levels, the Company's consolidated interest expense would increase by approximately $49,000 each month in which such increase continued based upon December 31, 2000 principal balances.
Item 8.
Item 8. Financial Statements and Supplementary Data
Report of Independent Public Accountants....................................23
Report of Independent Public Accountants....................................24
Balance Sheets as of December 31, 2000 and 1999.............................25
Statements of Operations for the Years Ended December 31, 2000, 1999 and 1998 and for the Period from the Date of Inception (September 21, 1994) to December 31, 2000........................................................26
Statements of Changes in Stockholders' Equity for the Period from Inception (September 21, 1994) to December 31, 2000................................27
Statements of Cash Flows for the Years Ended December 31, 2000, 1999, and 1998 and for the Period from the Date of Inception (September 21, 1994) to December 31, 2000........................................................28
Notes to Financial Statements...............................................29
Report of Independent Public Accountants
To the Board of Directors and Stockholders of CE Casecnan Water and Energy Company, Inc.
We have audited the accompanying balance sheet of CE Casecnan Water and Energy Company, Inc. (a company in the development stage) as of December 31, 2000, and the related statements of income, of changes in stockholders' equity and of cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements for the years ended December 31, 1999 and 1998 were audited by other independent accountants, whose report dated January 25, 2000 expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CE Casecnan Water and Energy Company, Inc. as of December 31, 2000, and the results of its operations, and changes in stockholders' equity and its cash flows for the year then ended in conformity with generally accepted accounting principles in the United States of America.
JOAQUIN CUNANAN & CO. A Pricewaterhousecoopers member firm
Makati City, Philippines January 29, 2001, except Note 9 which is as of February 12, 2001 and March 20, 2001
Report of Independent Public Accountants
The Stockholders and the Board of Directors
CE Casecnan Water and Energy Company, Inc.
We have audited the accompanying balance sheets of CE Casecnan Water and Energy Company, Inc. (a company in the development stage) as of December 31, 1999, and the related statements of operations, changes in stockholders' equity and cash flows for each of the two years in the period ended December 31, 1999 and for the period from the date inception (September 21, 1994) to December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CE Casecnan Water and Energy Company, Inc. as of December 31, 1999 and the results of its operations, changes in stockholders' equity, and its cash flows for each of the two years in the period ended December 31, 1999 and for the period from the date of inception (September 21, 1994) to December 31, 1999 in conformity with accounting principles generally accepted in the United States of America.
SyCip Gorres Velayo & Co An Arthur Andersen Member Firm
January 25, 2000
CE CASECNAN WATER AND ENERGY COMPANY, INC.
(A company in the development stage)
BALANCE SHEET
DECEMBER 31, 2000
(With comparative figures as of December 31, 1999) (Amounts in thousands U.S. Dollars, except number of shares and par value)
(The accompanying notes are an integral part of these financial statements.)
CE CASECNAN WATER AND ENERGY COMPANY, INC.
(A company in the development stage)
STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2000 (With comparative figures for the years ended December 31, 1999 and 1998
and for the period from the date of inception (September 21, 1994) to December 31, 2000) (Amounts in thousands U.S. Dollars, except net income (loss) per share and average number of common shares outstanding)
(The accompanying notes are an integral part of these financial statements.)
CE CASECNAN WATER AND ENERGY COMPANY, INC.
(A company in the development stage)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2000 (With comparative figures for the years ended December 31, 1999 and 1998
and for the period from the date of inception (September 21, 1994) to December 31, 2000) (Amounts in thousands U.S. Dollars, except number of shares)
(The accompanying notes are an integral part of these financial statements.)
CE CASECNAN WATER AND ENERGY COMPANY, INC.
(A company in the development stage)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2000 (With comparative figures for the years ended December 31, 1999 and 1998 and for the period from the date of inception (September 21, 1994) to December 31, 2000) (Amounts in thousands U.S. Dollars)
(The accompanying notes are an integral part of these financial statements.)
CE CASECNAN WATER AND ENERGY COMPANY, INC. (A company in the development stage)
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2000 (With comparative figures for the years ended December 31, 1999 and 1998 and for the period from the date of inception (September 21, 1994) to December 31, 2000) (amounts in U.S. Dollars)
Note 1 - Organization - ---------------------
CE Casecnan Water and Energy Company, Inc. (the Company) was registered with the Philippine Securities and Exchange Commission on September 21, 1994 primarily to design, develop, construct, erect, assemble, commission, operate and own a hydroelectric power plant and the related facilities for conversion into electricity of water provided by and under contract with the Philippine Government or any government-owned or controlled corporation.
The Company has a contract with the Philippine Government, through the Philippine National Irrigation Administration (NIA) (a government-owned controlled corporation), for the development and construction of a hydroelectric power plant and related facilities under a build-own-operate-transfer agreement (Project Agreement), covering a 20-year cooperation period with "take-or-pay" obligations for water and electricity. At the end of the 20-year cooperation period, the combined irrigation and 150 net megawatt hydroelectric power generation project (the Casecnan Project) will be transferred to the Philippine Government at no cost. The Philippine Government also signed a Performance Undertaking which, among others, affirms and guarantees the obligations of NIA under the contract. Construction of the Casecnan Project commenced in 1995 and the related costs are included under "Development and construction costs" account in the balance sheet.
The Company is in the development stage and has not yet started commercial operations as of December 31, 2000.
After the completion of the aforementioned project, the Company is expected to be at least 70% owned by MidAmerican Energy Holdings Company (MidAmerican), subject to upward adjustment based upon the actual economics of the Casecnan Project at commencement of commercial operations.
The Company is registered with the BOI of the Philippines as a new operator of hydroelectric power plant with pioneer status under the Omnibus Investments Code of 1987 (Executive
Order No. 226). Under the terms of its registration, the Company is entitled to certain incentives which include an income tax holiday for a minimum of six years from the start of commercial operations; tax and duty-free importation of capital equipment; tax credits on domestic capital equipment; and, exemption from customs duties and national internal revenue taxes for the importation and unrestricted use of the consigned equipment for the development, construction, start-up, testing and operation of the power plant. The registration also requires, among others, the maintenance of a debt-to-equity ratio not exceeding 75:25 upon commencement of commercial operations.
Note 2 - Summary of Significant Accounting Policies - ---------------------------------------------------
The more significant accounting policies and practices of the Company are set forth to facilitate the understanding of data presented in the financial instruments:
Restricted short-term investments other than restricted cash are primarily commercial papers and money market securities. Restricted cash include similar securities and mortgage-backed securities.
Since the Company has the positive intent and ability to hold all of its investments to maturity, these are classified as held to maturity and recorded at amortized cost. The carrying amount of investments as of December 31, 2000 approximates their fair value, which is based on quoted market prices as provided by the financial institution holding the investments.
Bond issue costs consist of costs incurred in the issuance of senior secured notes and bonds and are being amortized over the term of the notes and bonds using the effective interest rate method.
Development and construction costs of the hydroelectric power plant and related facilities are capitalized and will be amortized over a period of 20 years from the start of its commercial operations.
Borrowing costs (interest and other financial charges) are being capitalized as part of the cost of capital projects. Interest is capitalized up to the extent of construction and development costs incurred.
Transactions in foreign currencies (Philippine pesos) are recorded based on the prevailing rates of exchange at transaction dates. Monetary assets and liabilities denominated in foreign currencies are restated in the financial statements at the exchange rates prevailing at the balance sheet date. Gain or losses arising from the restatement are credited or charged to current operations.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial reporting bases of assets and liabilities and their related tax bases. Deferred tax assets and liabilities are measured using the tax rate expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided for deferred tax assets if it is more likely than not that a tax benefit will not be realized.
Net income (loss) per share is based on the weighted average number of common shares outstanding during the period.
Impairment of long-lived assets are reviewed whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized whenever evidence exists that the carrying value is not recoverable.
Use of estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Note 3 - Notes and Bonds Payable - --------------------------------
On November 27, 1995, the Company issued $371.5 million worth of notes and bonds to finance the construction of the Casecnan Project. These consist of $75.0 million Senior Secured Floating Rate Notes (FRNs) due in 2002; $125.0 million Senior Secured Series A Notes (Series A Notes) with interest at 11.45% due in 2005; and $171.5 million Senior Secured Series B Bonds (Series B Bonds) with interest at 11.95% due 2010. For the year ended December 31, 2000, the notes and bonds have effective interest rates of 12.98% and 13.83% for the Series A Notes and Series B Bonds, respectively, inclusive of bond issue cost amortization. The effective interest rate for the FRNs fluctuated between 10.52% and 11.35% in 2000 and was 11.35% at December 31, 2000. Quarterly interest payments for the FRNs commenced on February 15, 1996, and semi-annual interest payments for Series A Notes and Series B Bonds commenced on May 15, 1996.
Semi-annual installments for principal payments for the FRNs have commenced on November 15, 2000 amounting to $18.75 million and will commence on May 15, 2003 and May 15, 2002 for the Series A Notes and Series B Bonds, respectively. The repayment schedule is as follows (in thousands):
The securities are senior debt of the Company and are secured by an assignment of all revenues that will be received from the Casecnan Project, a collateral assignment of all material contracts, a lien on any accounts and funds on deposit under a Deposit and Disbursement Agreement, a pledge of 100% of the capital stock of the Company and a lien on all other material assets and property interests of the Company. The securities rank pari passu with and will share the collateral on a pro rata basis with other senior secured debt, if any. The securities are subject to certain optional and mandatory redemption schemes as provided for in the Trust Indenture.
The debt covenants contain certain restrictions as to incurrence of additional indebtedness; merger, consolidation, dissolution, or any significant change in corporate structure; non-arm's length transactions or agreements with affiliates; material change in the Turnkey Construction Contract (see Note 7); sale, lease, or transfer of properties material to the Casecnan Project, among others.
In connection with the foregoing secured indebtedness, the Company, on November 27, 1995, entered into a Deposit and Disbursement Agreement with Chemical Trust Company of California (Chemical Trust) and Kiewit (a predecessor shareholder) whereby Chemical Trust acts as a depositary and a collateral agent. As a depositary agent, it will hold monies, instruments and securities pledged by the Company to the collateral agent. The terms of this agreement require the establishment of several funds which include a Capital Contribution Fund. The Company's stockholders deposited an aggregate capital contribution of approximately US$123.3 million to the fund which will be strictly used to fund the construction of the Casecnan Project when the proceeds from the Series A Notes and Series B Bonds have been fully utilized. The contributions are included in the "Additional paid-in capital" account in the balance sheet.
As of December 31, 2000, MidAmerican held $6.3 million of the outstanding Casecnan FRNs. The purchase of the FRNs by MidAmerican does not release the Company of its obligations.
Interest capitalized as part of development and construction costs amounted to $47.5 million and $36.5 million in 2000 and 1999, respectively.
Note 4 - Deferred income tax asset - ----------------------------------
The Company's deferred tax asset amounting to $5.7 million and $7.1 million (net of valuation allowance of $2.4 million and $3.0 million) as of December 31, 2000 and 1999, respectively, consists mainly of the difference between the financial reporting basis and the tax reporting basis for development and construction costs.
Effective January 1998, the Philippine statutory income tax rate has been changed from 35% to 34% in 1998, further reduced to 33% in 1999, and to 32% in 2000 and onwards.
Note 5 - Related party transactions - -----------------------------------
The Company has transactions with its affiliates which consist primarily of cash advances for capital requirements related to the construction of the Casecnan Project.
Note 6 - Capital stock - ----------------------
On October 26, 1995, the Company issued 230,148 shares to the current minority stockholders out of the unsubscribed portion of the Company's authorized capital stock.
The minority stockholders initially formed a venture to pursue the opportunity of developing a water and energy project in the Casecnan Basin. After securing preliminary indications of interest from the Philippine Government, the minority stockholders sought out the other shareholders to form a new entity capable of financing and building the Casecnan Project. In consideration of their role in initiating the Casecnan Project, delivering the opportunity to the Company and performing development assistance, the minority stockholders retained an ownership interest in the Company.
Note 7 - Commitments and Contingencies - --------------------------------------
In November 1995, the Company closed the financing and commenced construction of the Casecnan Project, a combined irrigation and 150 MW hydroelectric power generation project located in the central part of the island of Luzon in the Republic of the Philippines.
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 each such company. 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 is being conducted by a consortium consisting of Cooperativa Muratori Cementisti CMC di Ravenna and Impresa Pizzarotti & C. Spa., working together with Siemens A.G., Sulzer Hydro Ltd., Black & Veatch and Colenco Power Engineering Ltd. (collectively, the "Contractor").
After a series of litigations between the contracting parties in connection with the termination of the Hanbo Contract, the Company received $90 million as an out of court settlement. The amount received was shown as accounts payable and accrued expenses in the balance sheet and was being released periodically to offset costs which were incurred over the remainder of the construction period. The amount of settlement that was offset against construction costs for 2000, 1999 and 1998 were $30 million, $44 million and $16 million, respectively.
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 lender's independent engineer under the Casecnan Indenture. In January 2001, the Company received a new working schedule from the Contractor that showed a completion date of August 31, 2001. Accordingly, the Casecnan Project is now expected to become operational by the third quarter of 2001. The delay in completion is attributable in part to the collapse in December 2000 of the Project's partially completed vertical surge shaft and the need to drill a replacement surge shaft.
The receipt of the working schedule does not change the Guaranteed Substantial Completion Date under the Replacement Contract, and the Contractor is still contractually obligated either to complete the Project by March 31, 2001 or to pay delay liquidated damages. As a result of receipt of the working schedule, however, the Company has sought and obtained from the lender's independent engineer approval for a revised construction schedule under the Casecnan Indenture. In connection with the revised schedule, the ultimate parent company of CE Casecnan agreed to make available up to $11.6 million of additional funds under certain conditions pursuant to a Shareholder Support Letter dated February 8, 2001 (the "Shareholder Support Letter").
Under the Project Agreement, if NIA is able to accept delivery of water into the Pantabangan Reservoir and NPC has completed the Project's related transmission line, the Company is liable to pay NIA $5,500 per day for each day of delay in completion of the Casecnan Project beyond July 27, 2000, increasing to $13,500 per day for each day of delay in completion beyond November 27, 2000. Although the transmission line is complete, NIA has not yet installed the Project's metering equipment. Accordingly, no liquidated damages payments to NIA have been made.
The Company's ability to make payments on any of its existing and future obligations is dependent on NIA's and the Republic of the Philippines' performance of their obligations under the Project Agreement and the Performance Undertaking, respectively. Except to the extent expressly provided for in the Shareholder Support Letters, no shareholders, partners or affiliates of the Company, including MidAmerican, and no directors, officers or employees of the Company will guarantee or be in any way liable for payment of the Company's obligations. As a result, payment of the Company's obligations depends upon the availability of sufficient revenues from the Company's business after the payment of operating expenses.
NIA's payments of obligations under the Project Agreement will be substantially denominated in United States dollars and are expected to be the Company's sole source of operating revenues. Because of the Company's dependence on NIA, any material failure of NIA to fulfill its obligations under the Project Agreement and any material failure of the Republic of the Philippines to fulfill its obligations under the Performance Undertaking would significantly impair the ability of the Company to meet its existing and future obligations.
There are pending bills before the Philippine Congress and the Philippine Senate aimed at restructuring the electric industry, privatization of the NPC and introduction of a competitive electricity market, among others. The passage of the bills may have an impact on the Company's future operations and the industry as a whole, the effect of which is not yet determinable and estimable.
Note 8 - Fair Value of Financial Instruments - --------------------------------------------
Financial Accounting Standards Board (FASB) Statement No. 107, "Disclosures About Fair Value of Financial Instruments", defines the fair value of financial instruments as the amount at which the instruments could be exchanged in a current transaction between willing parties. Although management uses its best judgment in estimating the fair value of these financial instruments, there are inherent limitations in any estimation technique. Therefore, the fair value estimates presented herein are not necessarily indicative of the amounts which the Company could realize in a current transaction.
The methods and assumptions used to estimate fair value are as follows:
Notes and Bonds Payable - -----------------------
The fair value of the Company's notes and bonds payable are estimated based on quoted market prices. The carrying amounts in the table below are included under the indicated captions in Note 3 (in thousands):
======================================================================== 2000 1999 - ------------------------------------------------------------------------ Carrying Estimated Carrying Estimated Value fair value value fair value - ------------------------------------------------------------------------ Series B Bonds $171,500 $156,134 $171,500 $166,527 Series A Notes 125,000 114,875 125,000 121,962 FRNs 56,250 53,859 75,000 73,500 - ------------------------------------------------------------------------ $352,750 $324,868 $371,500 $361,989 ========================================================================
Other financial instruments
Financial instruments other than notes and bonds payable of a material nature fall into the definition of short-term and fair value are estimated as the carrying amount.
Note 9 - Subsequent events - --------------------------
On February 12, 2001, the Contractor filed a Request for Arbitration with the International Chamber of Commerce seeking an extension of the Guaranteed Substantial Completion Date by up to 153 days through August 31, 2001 - resulting from various alleged force majeure events. In a March 20, 2001 Supplement to Request for Arbitration, the Contractor also seeks compensation for alleged additional costs it incurred from the claimed force majeure events to the extent it is unable to recover from its insurer. CE Casecnan believes such allegations are without merit and intends to vigorously defend the Contractor's claims.
In connection with the expected extension of the Substantial Completion Date, the ultimate parent of the Company agreed to make up to $11.6 million available under certain condition to fund the costs of reaching completion.
Note 10 - Reclassification - --------------------------
Certain accounts in the 1999 financial statements were reclassified to conform with the 2000 financial statements presentation. Such reclassification did not impact previously reported net income or retained earnings.
Item 9:
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
The Company filed a Current Report on Form 8-K dated September 7, 2000 as amended by Form 8-K dated December 18, 2000 reporting the replacement of Sycip Gorres Velayo and Co., an Arthur Andersen member firm, and the subsequent appointment of Joaquin Cunanan and Co., a PricewaterhouseCoopers member firm, as the independent accountants for the Company for 2000.
In connection with that report, the Company stated that Sycip Gorres Velayo & Co.'s reports on the Company's financial statements for the two most recent fiscal years ended December 31, 1999 and 1998 contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, and there were no disagreements with Sycip Gorres Velayo & Co. on any matter of accounting principles or practices, financial statement disclosures, or auditing scope or procedures, which disagreements, if not resolved to the satisfaction of Sycip Gorees Velayo & Co., would have caused it to make a reference to the subject matter of the disagreements in connection with its audit reports.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Company
The following table sets forth the names, ages, and positions of the directors and executive officers of the Company:
NAME AGE POSITION
David L. Sokol 44 Director and Chairman Gregory E. Abel 38 Vice Chairman Patrick J. Goodman 34 Director, Senior Vice President and Chief Financial Officer Steven A. McArthur 43 Senior Vice President Douglas L. Anderson 43 Vice President, General Counsel and Assistant Secretary David A. Baldwin 36 Director, Vice President and General Manager Jose Sandejas 63 Director and Corporate Secretary Marivic Punzalan-Espiritu 33 Director and Assistant Corporate Secretary Jose Jaime Cruz 30 Director Scott LaPrairie 43 Director Rachel Hernandez 34 Director James D. Stallmeyer 43 Vice President Brian K. Hankel 38 Vice President and Treasurer Paul J.Leighton 47 Assistant Corporate Secretary
Directors of the Company are elected annually and hold office until a successor is elected. Executive officers are chosen from time to time by vote of the Board of Directors. Pursuant to the terms of the Stockholders Agreement, CE Casecnan Ltd. is entitled to elect seven of the directors, and each of the minority investors is entitled to elect one director.
David L. Sokol. In addition to serving as a Director and Chairman of the Company, Mr. Sokol has been Chief Executive Officer of MidAmerican since April 19, 1993 and served as President of MidAmerican from April 19, 1993 until January 21, 1995. Mr. Sokol has been Chairman of the Board of Directors since May 1994 and a director of MidAmerican since March 1991. Formerly, among other positions held in the independent power industry, Mr. Sokol served as the President and Chief Executive Officer of Kiewit Energy Company, which at that time was a wholly owned subsidiary of PKS, and Ogden Projects, Inc.
Gregory E. Abel. In addition to serving as Vice Chairman of the Company, Mr. Abel is President and Chief Operating Officer of MidAmerican. Mr. Abel joined MidAmerican in 1992. Mr. Abel is a Chartered Accountant and from 1984 to 1992 he was employed by Price Waterhouse. As a Manager in the San Francisco office of Price Waterhouse, he was responsible for clients in the energy industry.
Patrick J. Goodman. In addition to serving as Director, Senior Vice President and Chief Financial Officer for the Company, he is Senior Vice President and Chief Financial Officer for MidAmerican. Mr. Goodman joined MidAmerican in June 1995, and served as Manager of Consolidation Accounting until September 1996 when he was promoted to Controller. Prior to joining MidAmerican, Mr. Goodman was a financial manager for National Indemnity Company and a senior associate at Coopers & Lybrand.
Steven A. McArthur. In addition to serving as Senior Vice President for the Company, Mr. McArthur is a Senior Vice President and Secretary of MidAmerican. Mr. McArthur joined MidAmerican in February 1991. From 1988 to 1991 he was an attorney in the Corporate Finance Group at Shearman & Sterling in San Francisco. From 1984 to 1988, he was an attorney in the Corporate Finance Group at Winthrop, Stimson, Putnam & Roberts in New York.
Douglas L. Anderson. In addition to serving as Vice President, General Counsel and Assistant Secretary for the Company, Mr. Anderson is Vice President and Assistant General Counsel of MidAmerican and General Counsel of CalEnergy Generation. Mr. Anderson joined MidAmerican in February 1993. From 1990 to 1993 Mr. Anderson was a business attorney with Fraser, Stryker, Vaughn, Meusey, Olson, Boyer & Bloch, P.C. in Omaha and prior to that Mr. Anderson was a principal in the firm Anderson & Anderson.
David A. Baldwin. In addition to serving as Director, Vice President and General Manager for the Company, he is President and General Manager, Philippines for MidAmerican. From December 1996 to June 1997, Mr. Baldwin served as Vice President, Project Development for Asia Power Ltd. In Hong Kong. From October 1994 to December 1996, Mr. Baldwin was Project Director at SouthPac Corporation Ltd. in New Zealand and, prior to that, he held a series of project management and engineering positions at Shell International in the Netherlands and New Zealand.
Jose Sandejas. In addition to serving as a Director and Corporate Secretary of the Company, Mr. Sandejas is a partner with the law firm of Quisumbing Torres & Evangelista.
Marivic Punzalan-Espiritu. In addition to serving as a Director and Assistant Corporate Secretary of the Company, Ms. Punzalan-Espiritu is a partner with the law firm of Quisumbing Torres & Evangelista.
Jose Jaime Cruz. In addition to serving as a Director of the Company, Mr. Cruz is an attorney with the law firm of Quesumbing Torres & Evangelista.
Scott LaPrairie. In addition to serving as a Director of the Company, Mr. LaPrairie is President and Chief Executive Officer of the LaPrairie Group of Companies.
Rachel Hernandez. In addition to serving as a Director of the Company, Ms. Hernandez is Corporate Counsel for the Company and certain of its affiliates.
James D. Stallmeyer. In addition to serving as Vice President of the Company, Mr. Stallmeyer is Commercial Director and General Counsel of Northern Electric. Mr. Stallmeyer joined the Company in 1993. Mr. Stallmeyer practiced in the public finance and banking areas at Chapman and Cutler in Chicago from 1984 to 1987 and in the corporate finance department from 1989 to 1993. Prior to that, Mr. Stallmeyer was an attorney in the public finance department of the Chicago office of Skadden, Arps, Slate, Meagher & Flom in 1987 and 1988 and was a legal writing instructor at the University of Illinois College of Law in 1988 and 1989.
Brian K. Hankel. In addition to serving as Vice President and Treasurer for the Company, he is Vice President and Treasurer for MidAmerican. Mr. Hankel joined MidAmerican in February 1992 as a Treasury Analyst and served in that position to December 1995. Mr. Hankel was appointed Assistant Treasurer in January 1996 and was appointed Treasurer in January 1997. Prior to joining the Company, Mr. Hankel was a Money Position Analyst at FirsTier Bank of Lincoln from 1988 to 1992.
Paul J. Leighton. In addition to serving as Assistant Corporate Secretary, Mr. Leighton is also Vice President, Corporate Law, Assistant General Counsel and Assistant Secretary of MidAmerican. Mr. Leighton has served as Corporate Secretary for MidAmerican and its predecessor companies since 1988 and as an attorney since 1978.
Item 11.
Item 11. Executive Compensation
None of the executive officers or directors of the Company receives compensation from the Company for services as officers or directors of the Company. All directors are reimbursed for their expenses in attending board and committee meetings.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Description of Capital Stock
As of December 31, 2000, the authorized capital stock of the Company consisted of 2,148,000 shares of common stock, par value 1.00 peso per share (the "Common Stock"), of which 767,162 shares were outstanding. There is no public trading market for the Common Stock. As of December 31, 2000 there were 11 holders of record of the Common Stock. Holders of Common Stock are entitled to one vote per share on any matter coming before the stockholders for a vote.
The Indenture contains certain restrictions on the payment of dividends with respect to the Common Stock.
Principal Holders
The following table sets forth information with respect to the shares of common stock owned of record and beneficially by all persons who own of record or are known by the Company to own beneficially more than 5% of the common stock and by all directors and officers of the Company as a group.
Number Of % Of Common Name and Address of Owner Shares Owned* Stock Owned
1. CE Casecnan, Ltd. (1) 537,005 70% (2) a Bermuda corporation c/o Conyers Dill & Pearman Clarendon House P.O. Box 666 Hamilton, Bermuda HM CX
2. LaPrairie Group Contractors (International), Ltd. 115,074 15% (3) a Barbados corporation c/o P.O. . Box 690C Bridgetown, Barbados
3. San Lorenzo Ruiz Builders and Developers Group, Inc. 115,074 15% (3)(4) a Philippine corporation Violago Compound 222 East Rodriguez Avenue Quezon City, Philippines
*In addition, each director of the Company owns one share in the Company as required by Philippine law.
(1) MidAmerican indirectly owns CE Casecnan, Ltd., a Bermuda corporation which is the registered owner of the shares.
(2) Number of shares owned subject to upward adjustment based on projected level of financial return to MidAmerican from the Project calculated at the time of Completion and the absence of the timely exercise of the option specified in note (4) below.
(3) Number of shares owned and percentages owned subject to downward adjustment based on projected level of financial return to MidAmerican from the Project calculated at the time of Completion. Neither of the minority shareholders will have a major role in the development, construction or operation of the Casecnan project.
(4) During 1998, MidAmerican purchased substantially all of the shares held by San Lorenzo Ruiz Builders and Developers Group Inc.; however, San Lorenzo has an option to repurchase those shares at project completion.
Item 13.
Item 13. Certain Relationships and Related Transactions
Not Applicable.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated September 7, 2000 as amended by Form 8-K dated December 18, 2000 reporting the replacement of Sycip Gorres velayo and Co., an Arthur Andersen member firm, and the subsequent appointment of Joaquin Cunanan and Co., a PricewaterhouseCoopers member firm, as the independent accountants for the Company for 2000.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Omaha, State of Nebraska, on March 29, 2001.
CE CASECNAN WATER AND ENERGY COMPANY, INC.
By: /s/ * Douglas L. Anderson Douglas L. Anderson Vice President & General Counsel
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has caused this report to be signed by the following persons in the capacities and on the dates indicated:
Signature Title Date
/s/ David L. Sokol* Director and Chairman of the Board March 29, 2001 - ------------------- David L. Sokol
/s/ David A. Baldwin* Vice President & General Manager March 29, 2001 - --------------------- David A. Baldwin (Principal Executive Officer)
/s/ Patrick J. Goodman* Director, Senior Vice President and - ----------------------- Chief Financial Officer Patrick J. Goodman (Principal Financial Officer) March 29, 2001
/s/ Rachel Hernandez* Director March 29, 2001 - --------------------- Rachel Hernandez
/s/ Marivic Espiritu * Director March 29, 2001 - ---------------------- Marivic Espiritu
/s/ Jose Jaime Cruz* Director March 29, 2001 - -------------------- Jose Jaime Cruz
/s/ Jose R. Sandejas* Director March 29, 2001 Jose R. Sandejas
*By: /s/ Douglas L. Anderson ------------------------ Douglas L. Anderson Attorney-in-Fact
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit
3.1 Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 the Company's Registration Statement on Form S-4, as amended, dated January 25, 1996 ("Form S-4")).
3.2 By-laws of the Company (incorporated by reference to Exhibit 3.2 the Company's Form S-4).
4.1(a) Trust Indenture, dated as of November 27, 1995, between Chemical Trust Company of California and the Company (incorporated by reference to Exhibit 4.1(a) the Company's Form S-4).
4.1(b) First Supplemental Indenture, dated as of April 10, 1996, between Chemical Trust Company of California and the Company (incorporated by reference to Exhibit 4.1(b) to the Company's Form S-4).
4.2 Exchange and Registration Rights Agreement, dated as of November 27, 1995, by and among CS First Boston Corporation, Bear Stearns & Co. Inc., Lehman Brothers Inc. and the Company (incorporated by reference to Exhibit 4.2 the Company's Form S-4).
4.3 Collateral Agency and Intercreditor Agreement, dated as of November 27, 1995, by and among Chemical Trust Company of California, Far East Bank & Trust Company and the Company (incorporated by reference to Exhibit 4.3 the Company's Form S-4).
4.4 Mortgage and Security Agreement, dated as of November 10, 1995, by and among CE Casecnan Ltd., Kiewit Energy International (Bermuda) Ltd., La Prairie Group Contractors (International) Ltd., San Lorenzo Ruiz Builders and Developers Group, Inc., Chemical Trust Company of California, Far East Bank & Trust Company and the Company (incorporated by reference to Exhibit 4.4 the Company's Form S-4).
4.6 Deposit and Disbursement Agreement, dated as of November 27, 1995, by and among the Company, Chemical Trust Company of California, Kiewit Energy Company and the Company (incorporated by reference to the Company's Form S-4).
4.7 Consent of NIA, dated as of November 10, 1995, to the assignment of the Amended and Restated Casecnan Project Agreement (incorporated by reference to Exhibit 4.7 to the Company's Form S-4).
4.8 Consent of the Republic of Philippines, dated November 10, 1995, to the assignment of the Performance Undertaking and the Amended and Restated Casecnan Project Agreement (incorporated by reference to Exhibit 4.8 to the Company's Form S-4).
4.9 Consent of Hanbo Corporation and You One Engineering and Construction Company, Ltd., dated as of November 17, 1995, to the assignment of the Engineering, Procurement and Construction Contract (incorporated by reference to Exhibit 4.9 to the Company's Form S-4).
4.10 Consent of Hanbo Steel, dated as of November 17, 1995, to the assignment of the Guaranty of Engineering, Procurement and Construction Contract (incorporated by reference to Exhibit 4.10 to the Company's Form S-4).
4.11 Notification, dated as of November 27, 1995, from the Company to Korea First Bank, of the assignment of the Irrevocable Letter of Credit (incorporated by reference to Exhibit 4.11 to the Company's Form S-4).
10.1 Amended and Restated Casecnan Project Agreement, dated as of June 26, 1995, between the National Irrigation Administration and the Company (incorporated by reference to Exhibit 10.1 the Company's Form S-4).
10.2 Performance Undertaking, dated as of July 20, 1995, executed by the Secretary of Finance on behalf of the Republic of the Philippines (incorporated by reference to Exhibit 10.2 to the Company's Form S-4).
10.3 Engineering, Procurement and Construction Contract, dated as of October 10, 1995, by and among Hanbo Corporation, You One Engineering and Construction Company, Ltd. and the Company (incorporated by reference to Exhibit 10.3 the Company's Form S-4)
10.4 Master Equipment Lease Agreement, dated as of November 1, 1995, between You One Engineering and Construction Company, Ltd. and the Company (incorporated by reference to Exhibit 10.4 the Company's Form S-4).
10.5 Sublease Agreement No. 1, dated as of November 1, 1995, between You One Engineering and Construction Company, Ltd. and the Company (incorporated by reference to Exhibit 10.5 the Company's Form S-4).
10.6 Guaranty of Engineering, Procurement and Construction Contract, dated as of November 13, 1995, by Hanbo Steel guaranteeing the performance of the obligations of Hanbo Corporation and You One Engineering and Construction Company, Ltd. under the Engineering Procurement and Construction Contract (incorporated by reference to Exhibit 10.6 to the Company's Form S-4).
10.7 Korea First Bank Irrevocable Letter of Credit issued to the Company in the aggregate principal amount of U.S.$117,850,000.00 to support the obligations of Hanbo Corporation and You One Engineering and Construction Company, Ltd. under the Engineering, Procurement and Construction Contract (incorporated by reference to Exhibit 10.7 to the Company's Form S-4).
10.8 Engineering, Procurement and Construction Contract dated May 7, 1997 between the Company and CP Casecnan - Consortium (incorporated by reference to Exhibit 10.8 to the Company's Form 10-K dated December 31, 1998).
10.9 Amendment Agreement dated November 20, 1999 between the Company and CP Casecnan - Consortium (incorporated by reference to Exhibit 10.9 to the Company's Form 10-K dated December 31, 1999).
24 Power of Attorney