UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





**FORM
10-K**





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





For the
calendar year ended December 31, 2004


Commission
File No. 001-12995





**CE
CASECNAN WATER AND ENERGY COMPANY, INC.**


(Exact
name of registrant as specified in its charter)





Philippines
    
    Not
      Applicable(State
      or other jurisdiction of
      incorporation
      or organization)
    
    (I.R.S.
      Employer
      Identification
      No.)24thFloor, 6750 Building, Ayala Avenue
      Makati,
      Metro Manila, Philippines
    
    Not
      Applicable(Address
      of principal executive offices)
    
    (Zip
      Code)





011 63
2 892-0276


(Registrant’s
telephone number, including area code)





Securities
registered pursuant to Section 12(b) of the Act: N/A


Securities
registered pursuant to Section 12(g) of the Act: N/A





Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.


Yes [X]
No [ ]





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein and will not be contained, to be the best
of each of the registrants’ knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form


10-K. [X]





Indicate
by check mark whether the registrant is an accelerated filer (as defined by Rule
12b-2 of the Act).


Yes [ ]
No [X]





All of
the shares of CE Casecnan Water and Energy Company, Inc. are held by a limited
group of private investors. As of January 28, 2005, the number of
outstanding shares of common stock was 767,162, $0.038 par value.













**TABLE
OF CONTENTS**











**PART
      I**Item 1.
    Business
    4Item 2.
    Properties
    11Item 3.
    Legal Proceedings
    11Item 4.
    Submission of Matters to a Vote of Security
      Holders
    11**PART
      II**Item 5.
    Market for Registrant’s Common Equity and Related
      Stockholder Matters
    12Item 6.
    Selected Financial Data
    12Item 7.
    Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
    12Item 7A.
    Qualitative and Quantitative Disclosures about Market
      Risk
    18Item 8.
    Financial Statements and Supplementary
      Data
    20Item 9.
    Changes
      in and Disagreements with Accountants on Accountingand
      Financial Disclosures
    36Item 9A.
    Controls and Procedures
    36Item 9B.
    Other Information
    36**PART
      III**Item 10.
    Directors and Executive Officers of the
      Registrant
    37Item 11.
    Executive Compensation
    38Item 12.
    Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters
    39Item 13.
    Certain Relationships and Related
      Transactions
    39Item 14.
    Principal Accountant Fees and Services
    40**PART
      IV**Item 15.
    Exhibits and Financial Statement
      Schedules
    41Signatures
    
    42Exhibit Index
    
    43


2





****


**Disclosure
Regarding Forward-Looking Statements**





This
report contains statements that do not directly or exclusively relate to
historical facts. These statements are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. You can
typically identify forward-looking statements by the use of forward-looking
words, such as "may," "will," "could," "project," "believe," "anticipate,"
"expect," "estimate," "continue," "potential," "plan," "forecast" and similar
terms. These statements represent the Company’s intentions, plans, expectations
and beliefs and are subject to risks, uncertainties and other factors. Many of
these factors are outside the Company’s control and could cause actual results
to differ materially from such forward-looking statements. These factors
include, among others:





·
    general
      economic, political and business conditions in the Philippines;





·
    governmental,
      statutory, regulatory or administrative initiatives affecting the Company
      or the power generation industry;





·
    weather
      effects on sales and revenues;





·
    general
      industry trends;





·
    increased
      competition in the power generation industry;





·
    availability
      of qualified personnel;





·
    financial
      or regulatory accounting principles or policies imposed by the Public
      Company Accounting Oversight Board, the Financial Accounting Standards
      Board, the United States Securities and Exchange Commission (“SEC”) and
      similar entities with regulatory oversight; and





·
    other
      business or investment considerations that may be disclosed from time to
      time in the Company’s SEC filings or in other publicly disseminated
      written documents.





T he
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.




3








**Item 1. Business**


****


**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 (“MidAmerican”) in September of 1994 solely to develop,
construct, own and operate the Casecnan Project (the “Casecnan Project”), a
multi-purpose irrigation and hydroelectric power facility with a rated capacity
of approximately 150 megawatts located on the island of Luzon in the Republic of
the Philippines (the “ROP”). The Casecnan Project commenced commercial
operations on December 11, 2001.





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 (632)
892-0276. The Company’s principal office is located at Pantabangan in the
Province of Nueva Ecija, Philippines.





In this
Annual Report, references to "U.S. dollars," "dollars," or "$" are to the
currency of the United States and references to "pesos" are to the currency of
the Philippines. References to kW means kilowatts, MW means megawatts, GW means
gigawatts, kWh means kilowatt hours, MWh means megawatt hours, and GWh means
gigawatt hours.





**The
Casecnan 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
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. During the water transfer, the elevation
differences between the two watersheds allows electrical energy to be generated
by an approximately 150 MW rated capacity power plant, which is located in an
underground powerhouse cavern at the end of the water tunnel. A tailrace
discharge tunnel then delivers water to the existing underutilized water storage
reservoir at Pantabangan, providing additional water for irrigation and
increasing the potential electrical generation at two downstream existing
hydroelectric facilities of the Philippine National Power Corporation, the
government-owned and controlled corporation that is the primary supplier of
electricity in the Philippines. Once in the reservoir at Pantabangan, the water
is under the control of the Philippine National Irrigation Administration
(“NIA”).





The
Casecnan Project was developed on a build-own-operate-transfer basis, that is,
an arrangement under which the Company agreed to build and thereafter own and
operate the Casecnan Project for a twenty-year cooperation period (the
“Cooperation Period”), after which ownership and operation of the Casecnan
Project will be transferred to NIA at no cost on an “as-is” basis. After
conclusion of a public solicitation for competing proposals, NIA and the Company
entered into a project agreement in June 1995 (the “Project Agreement”) which
set forth the terms of the arrangement. 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. The twenty-year
Cooperation Period under the Project Agreement commenced on December 11,
2001, the start of the Casecnan Project’s commercial operations.





Upon the
occurrence and during the continuance of certain force majeure events, including
those associated with Philippine political action, NIA may be obligated to buy
the Casecnan Project from CE Casecnan at a buyout price expected to be in excess
of the aggregate principal amount of the outstanding CE Casecnan debt
securities, together with accrued but unpaid interest.





The ROP
has provided a Performance Undertaking under which NIA’s obligations under the
Project Agreement are guaranteed by the full faith and credit of the ROP. The
Project Agreement and the Performance Undertaking provide for the resolution of
disputes by binding arbitration in Singapore under international arbitration
rules.




4





NIA’s
payment obligations under the Project Agreement are the Company’s sole source of
operating revenues. Because of the Company’s dependence on NIA, any material
failure of NIA to fulfill its obligations under the Project Agreement and any
material failure of the ROP to fulfill its obligations under the Performance
Undertaking would significantly impair the ability of the Company to meet its
obligations under the debt securities.





CE
Casecnan financed a portion of the costs of the Casecnan Project through the
issuance of $125.0 million of its 11.45% Senior Secured Series A Notes due 2005
(the “Series A Notes”), $171.5 million of its 11.95% Senior Secured Series B
Bonds due 2010 (the “Series B Bonds”) and $75.0 million of its Senior Secured
Floating Rate Notes due 2002 (“FRNs”), pursuant to an indenture dated
November 27, 1995 (as amended to date, the “Trust Indenture”). During 2002,
the Company repaid all amounts due under the FRNs.





**The
Casecnan Project Supplemental Agreement**





On
October 15, 2003, the Company closed a transaction settling an arbitral
proceeding which the Company had initiated against NIA in August 2002. In
connection with the settlement (the “NIA Arbitration Settlement”), the Company
entered into an agreement (the “Supplemental Agreement”) with NIA which, in
addition to providing for the dismissal with prejudice of all claims by CE
Casecnan and counterclaims by NIA in the arbitral proceeding, supplements and
amends the Project Agreement.





Payment
in Cash and Delivery of Note





As part
of the settlement, on October 15, 2003, NIA paid to CE Casecnan the sum of
approximately $18.4 million and delivered to CE Casecnan a ROP $97.0 million
8.375% Note due 2013 (the "ROP Note"). The Company had the option, between
January 14, 2004 and February 14 , 2004 to
put the ROP Note to the ROP, for a price of par plus accrued interest. The ROP
Note was recorded as a note receivable in the accompanying balance sheet as of
December 31, 2003. Also at closing, the Company paid to the Philippine
Bureau of Internal Revenue (“BIR”) approximately $24.4 million in respect of
Philippine income taxes on the foregoing consideration and paid to NIA $1.6
million in respect of alleged late completion of the Casecnan Project.





On
January 14, 2004, CE Casecnan exercised its right to put the ROP Note to
the ROP and, in accordance with the terms of the put, CE Casecnan received $99.2
million (representing $97.0 million par value plus accrued interest) from the
ROP on January 21, 2004.





Modifications
to Water Delivery Fee





Under the
Project Agreement, the Water Delivery Rate increased by $0.00043 per cubic meter
for each $1.0 million of certain taxes paid by CE Casecnan. The Supplemental
Agreement amends the per cubic meter Water Delivery Fee calculation by
eliminating the increase for taxes paid. Instead, the Water Delivery Rate
remains at $0.029 per cubic meter, escalated at 7.5% annually from
January 1, 1994 through the first five years of the Cooperation Period,
extending through December 25, 2006. The Company will be reimbursed for
certain taxes it pays during the remainder of the Cooperation
Period.





Under the
Project Agreement, the Water Delivery Fee payable monthly was a fixed monthly
payment based on an average water delivery of 801.9 million cubic meters per
year, pro-rated to approximately 66.8 million cubic meters per month, multiplied
by the per cubic meter rate as described above. Under the Supplemental Agreement
the Water Delivery Fee is equal to the Guaranteed Water Delivery Fee plus the
Variable Delivered Water Delivery Fee minus the Water Delivery Fee Credit.





*Guaranteed
Water Delivery Fee.* For the
sixty-month period from December 25, 2003 through December 25, 2008,
the Guaranteed Water Delivery Fee shall equal the Water Delivery Rate, as
described above, multiplied by approximately 66.8 million cubic meters
(corresponding to the 801.9 million cubic meters per year). For each month
beginning after December 25, 2008 through the remainder of the Cooperation
Period, the Guaranteed Water Delivery Fee shall equal the Water Delivery Rate
multiplied by approximately 58.3 million cubic meters (corresponding to 700.0
million cubic meters per year).




5





*Variable
Delivered Water Delivery Fee.* Variable
Delivered Water Delivery Fees will be earned for months beginning after
December 25, 2008. For each month beginning after December 25, 2008
through the end of the Cooperation Period, the Variable Delivered Water Delivery
Fee shall be payable only from the date when the cumulative Total Available
Water (total delivered water plus the water volume not delivered to NIA as a
result of NIA’s failure to accept energy deliveries at a capacity up to 150 MW)
for each contract year exceeds 700.0 million cubic meters. Variable Delivered
Water Delivery Fees will be earned up to an aggregate maximum of 1,324.7 million
cubic meters for the period from December 25, 2008 through the end of the
Cooperation Period. No additional Variable Delivered Water Delivery Fees will be
earned over the 1,324.7 million cubic meter threshold.





*Water
Delivery Fee Credit.* The
Water Delivery Fee Credit shall be applicable only for each of the sixty-months
from December 25, 2008 through December 25, 2013 and shall equal the
Water Delivery Rate as of December 25, 2008 multiplied by the sum of each
Annual Water Credit divided by sixty. The Annual Water Credit for each contract
year starting from December 25, 2003 and ending on December 25, 2008
shall equal 801.9 million cubic meters minus the Total Available Water for each
contract year. The Total Available Water in any such year will equal actual
deliveries with a minimum threshold of 700.0 million cubic meters.





Modifications
to Excess Energy Delivery Fee





Under the
Project Agreement, the Excess Energy Delivery Fee was a variable amount based on
actual electrical energy delivered in each month in excess of 19.0 GWh, payable
at a rate of $0.1509 per kWh. Under the Supplemental Agreement, the per kWh rate
for energy deliveries in excess of 19.0 GWh per month has been reduced,
commencing in 2009, to $0.1132 (escalating at 1% per annum thereafter), provided
that any deliveries of energy in excess of 490.0 GWh but less than 550.0 GWh per
year are paid for at a rate of 1.3 pesos per kWh and deliveries in excess of
550.0 GWh per year are at no cost to NIA.





For
periods after September 28, 2003, the Supplemental Agreement provides that
if the Casecnan Project is not dispatched up to 150 MW whenever water is
available, NIA will pay for excess energy that could have been generated but was
not as a result of such dispatch constraint.





Other
Provisions of the Supplemental Agreement





The
Company received an opinion from the Philippine Office of Government Corporate
Counsel that the Supplemental Agreement has due authorization and is
enforceable. The Company also received written confirmation from the Private
Sector Assets and Liabilities Management Corporation that the issues with
respect to the Casecnan Project that had been raised by the interagency review
of independent power producers in the Philippines or that may have existed with
respect to the Casecnan Project under certain provisions of the Electric Power
Industry Reform Act of 2001 (“EPIRA”) calling for renegotiation of contracts
such as the Project Agreement have been satisfactorily addressed by the
Supplemental Agreement.





The
Guaranteed Energy Delivery Fee, Force Majeure, Buyout and Dispute Resolution
provisions of the Project Agreement, as well as the Performance Undertaking
provided by the ROP, remain unaffected by the Supplemental Agreement and in full
force and effect.





**Concentration
of Risk**





NIA’s
payments of obligations under the Project Agreement are substantially
denominated in U.S. Dollars and are the Company’s sole source of operating
revenues. Because of the Company’s dependence on NIA, any material failure of
NIA to fulfill its obligations under the Project Agreement and any material
failure of the ROP to fulfill its obligations under the Performance Undertaking
would significantly impair the ability of the Company to meet its existing and
future obligations. No stockholders, partners or affiliates of the Company,
including MidAmerican, and no directors, officers or employees of the Company
will guarantee or be in any way liable for payment of the Company’s obligations.
As a result, payment of the Company’s obligations depends upon the availability
of sufficient revenues from the Company’s business after the payment of
operating expenses.


6








**Terms
of the Securities**





General





In
November 1995, the Company issued and sold (i) the Series A Notes, (ii) the
Series B Bonds, and (iii) the FRNs (collectively, the “Securities”). During
2002, the Company repaid all amounts due under the FRNs.





Interest
on the Series A Notes and the Series B Bonds is payable semiannually every
May 15 and November 15 (the “Securities Interest Payment Date”), which
commenced on May 15, 1996, to the registered Holders thereof at the close
of business on May 1 and November 1, as the case may be, preceding
each Securities Interest Payment Date. The initial average life of the Series A
Notes was 8.84 years, and the initial average life of the Series B Bonds was
11.57 years.





Priority
of Payments





Except as
otherwise provided for with respect to mandatory redemptions and loss proceeds,
all revenues received by the Company from the Casecnan Project have been and
will continue to be paid to the Revenue Fund maintained by the Depositary (other
than payments required to be used for VAT payments to the ROP). Amounts paid to
the Revenue Fund have been and will continue to be distributed in the following
order of priority: (a) to pay operating and maintenance costs; (b) to pay
certain administrative costs of the agents for the Secured Parties under the
Financing Documents; (c) to pay principal of, premium (if any) and interest on
the Securities (including any increased costs necessary to gross up such
payments for certain withholding taxes and other assessments and charges), and
principal and interest on other senior debt, if any; (d) to cause the Debt
Service Reserve Fund to equal the Debt Service Reserve Fund Required Balance, as
defined below; (e) to pay indemnification expenses and other expenses to the
Secured Parties and certain other costs, and (f) to the Distribution Fund or
Distribution Suspense Fund, as applicable.





Debt
Service Reserve Fund





The
Company established a Debt Service Reserve Fund for the benefit of the Holders
of the Securities, which will be funded in cash from operating revenues, subject
to cash being available, as described under “Priority of Payments” above. Such
amounts will be deposited to the Debt Service Reserve Fund from time to time to
the extent required to cause it to equal the Debt Service Reserve Fund Required
Balance which is intended to approximate the highest amount of the payments of
principal and interest to be made on the Securities during any semiannual period
over the next three years from the last debt service payment.





Optional
Redemption





The
Series A Notes are subject to optional redemption by the Company, in whole and
not in part, at par plus accrued interest to the Redemption Date.





The
Series B Bonds are subject to optional redemption by the Company, at any time,
in whole or in part, pro rata, at par plus accrued interest to the redemption
date plus a premium, calculated to “make whole” to comparable U.S. treasury
securities plus 150 basis points.





The
Company also has the option to redeem the Securities, in whole or in part, at
par plus accrued interest at any time if, as a result of any change in
Philippine tax law or in the application or interpretation of Philippine tax law
occurring after the date of issuance of the Securities, the Company is required
to pay certain additional amounts described in the Trust Indenture.





Mandatory
Redemption





The
Securities are subject to mandatory redemption, pro rata, at par plus accrued
interest to the redemption date; (a) upon the receipt by the Company of loss
proceeds that exceed $15.0 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.





7








Change
in Control Put





When a
Change in Control occurs, each Holder will have the right to require the Company
to repurchase all or any part of such Holder’s Securities at a cash purchase
price equal to 101% of the principal amount thereof, plus accrued interest to
the date of repurchase in accordance with the procedures set forth in the Trust
Indenture. There is no assurance that upon a Change in Control the Company will
have sufficient funds to repurchase the Securities.





Profit
Distributions





Profit
distributions may be made only from and to the extent of amounts on deposit in
the Distribution Fund or Distribution Suspense Fund. Distributions are subject
to the prior satisfaction of the following conditions:





(a)
    The
      amounts contained in the Principal Fund and the Interest Fund will be
      equal to or greater than the aggregate scheduled principal and interest
      payments next due on the Securities;





(b)
    No
      Default or Event of Default under the Trust Indenture shall have occurred
      and be continuing;





(c)
    The Debt Service Coverage
      Ratio for the preceding 12-month period is equal to or greater than 1.35
      to 1 as certified by an officer of the Company;





(d)
    The
      projected Debt Service Coverage Ratio of the Securities for the succeeding
      12-month period is equal to or greater than 1.35 to 1, as certified by an
      officer of the Company; and





(e)
    The
      Debt Service Reserve Fund has a balance equal to or greater than the Debt
      Service Reserve Fund Required Balance.





During
2004, the Company made profit distributions totaling $106.0 million. Due to the
dispute between an initial shareholder as described in Item 7 - Management’s
Discussion and Analysis of Financial Condition and Results of Operations -
Stockholder Litigation, 15% or $15.9 million of the distribution and the
corresponding interest earned is being held in an account of the Company over
which the holders of the Securities do not have a security
interest.





Ranking
and Security for the Securities





The
Securities are senior debt of the Company and are secured by (a) an assignment
of all revenues received by the Company from the Casecnan Project; (b) a
collateral assignment of all material contracts; (c) a lien on any accounts and
funds on deposit under the Depositary Agreement; (d) a pledge of approximately
100% of the capital stock of the Company, subject to release in certain
circumstances relating to accessing political risk insurance for the benefit of
the stockholders; and (e) a lien on all other material assets and property
interests of the Company. The Securities will rank pari passu with and will
share the Collateral on a pro rata basis with certain other senior secured debt,
if any (provided that the Debt Service Reserve Fund shall be held as collateral
solely for the obligations under the Securities). The proceeds of any political
risk insurance covering the capital investment will not be part of the
collateral for the Securities. While under the Trust Indenture the Company may
incur certain permitted debt senior to the Securities, it has no present
intention to do so.





Ratings





At
December 31, 2004, CE Casecnan senior secured notes rating by Standard and
Poors and Moody’s are B+ with positive outlook and B2 with positive outlook,
respectively.





Nature
of Recourse on the Securities





The
Company’s obligations to make payments of principal, premium, if any, and
interest on the Securities are obligations solely of the Company secured solely
by the collateral. Neither the stockholders of the Company nor any affiliates
(including MidAmerican), incorporators, officers, directors or employees thereof
or of the Company, guaranteed the payment of, or have any obligation with
respect to payment of, the Securities, except to the extent that stockholders of
the Company have pledged their stockholdings in the Company as security for the
notes and bonds issued by the Company. As a result, payment of the Company’s
obligations depends upon the availability of sufficient revenues from the
Company’s business after the payment of operating expenses.




8








Incurrence
of Additional Debt





The
Company shall not incur any debt other than “Permitted Debt.” “Permitted Debt”
means:





(a)
    The Securities;





(b)
    Debt
      incurred to finance the construction of capital improvements to the
      Casecnan Project, which are required to ensure compliance with applicable
      law or anticipated changes therein; provided that no such debt may be
      incurred unless at the time of incurrence of such debt, an independent
      engineer confirms the reasonableness of (i) a certification by the Company
      (containing customary assumptions and qualifications) that the proposed
      capital improvements are reasonably expected to enable the Casecnan
      Project to comply with applicable or anticipated legal requirements and
      (ii) the calculations of the Company that demonstrate, after giving effect
      to the incurrence of such debt, that the minimum project Debt Service
      Coverage Ratio (x) for the next four consecutive fiscal quarters,
      commencing with the quarter in which such debt is incurred, taken as one
      annual period, and (y) for each subsequent fiscal year through the final
      maturity date, will not be less than 1.3 to
1;





(c)
    Debt
      incurred to finance the construction of capital improvements to the
      Casecnan Project not required by applicable law, so long as after giving
      effect to the incurrence of such debt (i) no default or event of default
      has occurred and is continuing, and (ii)(A) the independent engineer
      confirms the reasonableness of (I) a certification by the Company
      (containing customary assumptions and qualifications) that the proposed
      capital improvements are technically feasible and prudent and (II) the
      calculations of the Company that demonstrate, after giving effect to the
      incurrence of such debt, (x) the minimum project Debt Service Coverage
      Ratio for the next four consecutive fiscal quarters, commencing with the
      quarter in which such debt is incurred, taken as one annual period, and in
      every fiscal year thereafter, will not be less than 1.4 to 1 and (y) the
      average projected Debt Service Coverage Ratio for all succeeding fiscal
      years until the final maturity date will not be less than 1.7 to 1, or (B)
      the rating agencies confirm that the incurrence of such debt will not
      result in a rating downgrade;





(d)
    Working
      capital debt in an aggregate amount outstanding at any time not to exceed
      $5.0 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 $100.0 million
      which shall be used to finance capital, operating or other costs with
      respect to the Casecnan Project;





(g)
    Debt
      incurred for purposes for which permitted liens may be
  incurred;





(h)
    Debt
      contemplated to be incurred pursuant to the Casecnan Project documents,
      including obligations in connection with any letter of credit in an
      aggregate amount outstanding at any time not to exceed $15.0
      million;





(i)
    Purchase
      money debt and other debts in the ordinary course of business to support
      the operation and maintenance of the Casecnan Project, in an aggregate
      amount not to exceed $35.0 million at any time;
and





(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.




9








Principal
Covenants





Principal
covenants under the Trust Indenture require the Company, subject to certain
exceptions and qualifications, (a) not to incur (i) any debt except Permitted
Debt or (ii) any lien upon any of its assets except permitted liens; (b) not to
enter into any transaction of merger or consolidation, change its form of
organization, liquidate, wind-up or dissolve itself; (c) not to enter into
non-arm’s length transactions or agreements with affiliates; (d) not to engage
in any business other than as contemplated by the Trust Indenture; (e) not to
amend, terminate or otherwise modify any material Project Document to which it
is a party, except as permitted under the Trust Indenture; (f) not to sell,
lease or transfer any property or assets material to the Casecnan Project except
in the ordinary course of business; (g) to operate and maintain the Casecnan
Project in accordance with the Approved Operation and Maintenance Budget; (h) to
maintain insurance as required under the Trust Indenture; and (i) to enter into
an interest rate agreement for the Floating Rate Notes, within 30 days of
Closing, at a LIBOR cap of up to 7.5%.





**Insurance**





The
Company maintains insurance with respect to the Casecnan Project of a type and
in such amounts as are generally carried by companies engaged in similar
businesses and owning similar projects that are financed in a similar manner.
This coverage includes casualty insurance, including flood and earthquake
coverage, business interruption insurance, primary and excess liability
insurance, automobile insurance and workers compensation insurance. However, the
proceeds of such insurance may not be adequate to cover reduced revenues,
increased expenses or other liabilities arising from the occurrence of
catastrophic events. Moreover, there can be no assurance that such insurance
coverage will be available in the future at commercially reasonable rates or
that the amounts for which the Company is insured will cover all losses.
Nevertheless, the Company will not reduce or cancel the coverage if the
Insurance Consultant determines it is not reasonable to do so and insurance is
available on commercially reasonable terms.





**Regulatory
Matters**





The
Philippine Congress has passed EPIRA, which is aimed at restructuring the
Philippine power industry, privatizing the Philippine National Power Corporation
and introducing a competitive electricity market, among other initiatives. The
implementation of EPIRA may have an impact on the Company’s future operations in
the Philippines and the Philippine power industry as a whole, the effect of
which is not yet determinable or estimable.





In June
2004, Philippine President Gloria Macapagal-Arroyo was re-elected for a six-year
term, through June 2010. President Macapagal-Arroyo has announced a plan to
pursue policies targeting balanced economic growth, strong market-based
industry, and poverty alleviation. In connection with these policies, the
Philippine Department of Energy has announced an energy plan focused on
attaining full electrification throughout the Philippines, further developing
and utilizing renewable energy sources for power and electrification, and
enhancing private sector participation in all energy activities. The
implementation of this energy plan may have an impact on the Company’s future
operations in the Philippines and the Philippine power industry as a whole, the
effect of which is not yet determinable or estimable.





On
December 6, 2004, the Municipality of Alfonso Castaneda, Province of Nueva
Vizcaya (the "Municipality") purportedly passed an ordinance which required the
submission of a tax clearance from each of the provincial treasurer
and municipal treasurer as a condition to issuing to CE Casecnan the annual
renewal of its license to operate and business permit. On January 17, 2005,
the Office of the Treasurer of the Municipality provided CE Casecnan a copy
of such ordinance and threatened to close the Casecnan Project pending
submittal by CE Casecnan of the tax clearance certificate. On
January 19, 2005, the Municipality accepted CE Casecnan's payment for
the local business taxes, but the Municipality refused to renew CE Casecnan's
license to operate and business permit, citing the lack of a tax clearance
certificate. CE Casecnan cannot obtain a tax clearance certificate from the
Province of Nueva Vizcaya until real property taxes due to the Province are
paid.  Pursuant to the Supplemental Agreement, CE Casecnan
has withheld payment of real property taxes pending receipt of
authorization from NIA and the Philippine Department of Finance.  Such
withheld amounts have been fully accrued as of December 31, 2004 as part of
accounts payable and trade receivable- water delivery fee.  CE Casecnan
continues to seek such authorization but as of February 11, 2005, it
has not been received.  NIA has filed a protest seeking to nullify the
unwarranted alleged real property tax assessments by the Municipality with the
Local Board of Assessment Appeals and the case has been elevated to the Central
Board of Assessment Appeals on January 12, 2005.  CE Casecnan filed an
action in the Regional Trial Court on January 21, 2005 against the
Municipality and was granted a temporary restraining order barring the
Municipality from closing the Casecnan Project.  On February 7, 2005,
the temporary restraining order was extended pending resolution by the
Court which will not occur until after all pleadings are filed
on March 11, 2005.  CE Casecnan also
has filed an appeal with the Department of Justice challenging the validity
of the municipal ordinance.  CE Casecnan has discussed and intends to
continue discussing this matter with appropriate Philippine government officials
in an effort to resolve the situation, and believes the risk of the Casecnan
Project being closed is remote.




10








**Employees**





At
December 31, 2004, the Company had 44 full-time employees consisting of
operations, maintenance, logistics, compliance, and engineering personnel. At
the powerhouse control room, personnel monitor, direct and control the
operations and maintenance of the whole Casecnan Project. The control room is
staffed 24 hours per day and is the contact point for the Casecnan Project’s
customers and others. At the diversion structures, personnel are responsible to
ensure that the trash racks at the tunnel intakes are kept clean and maintained
and that excessive sediment build-up behind the structure is
prevented.


**Item 2. Properties**





CE
Casecnan’s principal property is the approximately 150 MW hydroelectric power
facility that was completed in December 2001.


Item 3. Legal
Proceedings





None




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





Not
Applicable.





11







**PART
II**




Item 5. Market for
Registrant's Common Equity and Related Stockholder Matters.





Not
Applicable.


Item 6. Selected Financial
Data.

The
following table sets forth selected historical financial data, which should be
read in conjunction with the Company’s financial statements and the related
notes to those statements included in this Annual Report and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere in this Annual Report. The selected data as of and for the
five years ended December 31, 2004, 2003, 2002, 2001 and 2000 have been
derived from the Company’s audited historical financial statements.
****
**Selected
Financial Data**
**(In
thousands, except per share amounts)**
****


**Year
      ended December 31,****2004****(2)**
    
    **2003**
    
    **2002**
    
    **2001****(1)**
    
    **2000**Total
      revenue
    
    $
    106,847
    
    $
    129,921
    
    $
    138,264
    
    $
    8,174
    
    $
    -Operating
      income
    
    
    73,431
    
    
    91,539
    
    
    93,415
    
    
    4,252
    
    
    (451
    )Net
      income to common stockholders
    
    
    45,302
    
    
    59,765
    
    
    44,956
    
    
    2,867
    
    
    4,857Net
      income per common share
    
    
    59.05
    
    
    77.90
    
    
    58.60
    
    
    3.74
    
    
    6.33Dividends
      declared per common share
    
    
    138.17
    
    
    -
    
    
    -
    
    
    -
    
    
    -Total
      assets
    
    
    477,479
    
    
    565,313
    
    
    541,507
    
    
    515,192
    
    
    482,373Notes
      payable
    
    
    51,263
    
    
    51,263
    
    
    51,263
    
    
    40,763
    
    
    -Long-term
      debt, including current portion
    
    
    197,098
    
    
    246,458
    
    
    287,925
    
    
    323,125
    
    
    352,750Stockholders’
      equity
    
    
    150,988
    
    
    211,686
    
    
    151,921
    
    
    106,965
    
    
    104,098




(1)
    Commercial
      operations commenced on December 11,
2001.


(2)
    Revenue
      decreased in 2003 and 2004 due to the NIA Arbitration Settlement in
      October 2003.




Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations.





The
following is management's discussion and analysis of certain significant factors
which have affected the financial condition and results of operations of the
Company during the periods included in the accompanying statements of
operations. This discussion should be read in conjunction with "Selected
Financial Data" in Item 6 and the Company's historical financial statements and
the notes to those statements included elsewhere in this report.





**Factors
Affecting the Results of Operations**





**Seasonality**





The
Casecnan Project is dependant 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 water delivery fees and variable energy fees (described below) can produce
significant variability in revenue between reporting periods.




12





Under the
Supplemental Agreement, the water delivery fee is payable in a fixed monthly
payment based upon an average annual water delivery of 801.9 million cubic
meters, pro-rated to approximately 66.8 million cubic meters per month,
multiplied by the applicable per cubic meter rate through December 25,
2008. For each contract year starting from December 25, 2003 and ending on
December 25, 2008, a water delivery fee credit (deferred revenue) is
computed equal to 801.9 million cubic meters minus the greater of actual water
deliveries or 700.0 million cubic meters - the minimum threshold. The water
delivery fee credit at the end of the contract year is available to be earned in
the succeeding contract years ending December 25, 2008. The cumulative
water delivery fee credit at December 25, 2008, if any, shall be amortized
from December 25, 2008 through December 25, 2013. Accordingly, in
recognizing revenue the water delivery fees are recorded each month pro-rated to
approximately 58.3 million cubic meters per month until the minimum threshold
has been reached for the contract year. Subsequent water delivery fees within
the contract year are based on actual water delivered.





The
Company earns variable energy fees based upon actual energy delivered in each
month in excess of 19.0 GWh, payable at a rate of $0.1509 per kWh. Starting in
2009, the per kWh rate for energy deliveries in excess of 19.0 GWh per month is
reduced to $0.1132 (escalating at 1% per annum thereafter), provided that any
deliveries of energy in excess of 490.0 GWh, but less than 550.0 GWh per year
are paid at a rate of 1.3 pesos per kWh and deliveries in excess of 550.0 GWh
per year are at no cost to NIA. Within each contract year, no variable energy
fees are payable until energy in excess of the cumulative 19.0 GWh per month for
the contract year to date has been delivered.





**Results
of Operations for the Years Ended December 31, 2004 and
2003**





The
following table provides certain operating data of the Casecnan Project for the
years ended December 31, 2004 and 2003:





**2004**
    
    **2003**Electricity
      produced (GWh)
    
    404.5
    
    382.2Water
      delivered (million cubic meters)
    
    719.2
    
    620.6





For
accounting purposes, the Project Agreement with NIA contains both an operating
lease and a service contract, which the Company accounted for pursuant to
provisions of Statement of Financial Accounting Standards, No. 13, "Accounting
for Leases." However, pursuant to the provisions of the Project Agreement, the
Company earned water and energy fees as follows (in millions):




**2004**
    
    **2003**Water
      delivery fees
    
    $
    49.6
    
    $
    71.5Guaranteed
      energy fees
    
    
    36.4
    
    
    36.4Variable
      energy fees
    
    
    26.9
    
    
    22.0Deferred
      water delivery fees
    
    
    (6.1
    )
    
    -Total
      lease rentals and service contracts revenue
    
    $
    106.8
    
    $
    129.9





Revenue
decreased by $23.1 million to $106.8 million for the year ended
December 31, 2004 from $129.9 million for the year ended December 31,
2003. The decrease in water delivery fees was primarily due to the impact of the
elimination of the tax compensation portion of the water delivery fee pursuant
to the Supplemental Agreement, partially offset by a 7.5% increase in the water
delivery rate based on a contractual annual escalation factor. The increase in
variable energy fees was due primarily to increased generation resulting from
higher water flows in 2004. The deferred water delivery fees represent the
difference between the actual water delivery fees earned and water delivery fees
invoiced pursuant to the Supplemental Agreement.





Operating
expenses decreased by $5.0 million to $33.4 million for the year ended
December 31, 2004 from $38.4 million for the year ended December 31,
2003. Depreciation expense decreased by $1.2 million due primarily to the lower
depreciable base resulting from settlement of the construction contract
arbitration in April 2004. Reductions in legal costs and doubtful accounts
expense of $1.1 million and $2.0 million, respectively, were due to the NIA
Arbitration Settlement in October 2003. Finally, the Company had lower property
insurance costs of $0.9 million.




13







Interest
expense decreased to $29.5 million for the year ended December 31, 2004
from $39.8 million for the year ended December 31, 2003 due primarily to
lower outstanding debt resulting from the scheduled repayment of debt and
interest expense incurred in 2003 associated with BIR settlements.





Tax
expense decreased to $0.1 million for the year ended December 31, 2004 from
$25.7 million for the year ended December 31, 2003. In 2003, the Company
paid income taxes of $24.4 million in connection with the NIA Arbitration
Settlement and made tax payments associated with BIR settlements.





**Results
of Operations for the Years Ended December 31, 2003 and
2002**





The
following table provides certain operating data of the Casecnan Project for the
years ended December 31, 2003 and 2002:





**2003**
    
    **2002**Electricity
      produced (GWh)
    
    382.2
    
    360.1Water
      delivered (million cubic meters)
    
    620.6
    
    563.2





Pursuant
to the provisions of the Project Agreement, the Company earned water and energy
fees as follows (in millions):





**2003**
    
    **2002**Water
      delivery fees
    
    $
    71.5
    
    $
    82.6Guaranteed
      energy fees
    
    
    36.4
    
    
    36.4Variable
      energy fees
    
    
    22.0
    
    
    19.3Total
      lease rentals and service contracts revenue
    
    $
    129.9
    
    $
    138.3





Revenue
decreased by $8.4 million to $129.9 million for the year ended December 31,
2003 from $138.3 million for the year ended December 31, 2002. The decrease
in water delivery fees was primarily due to the elimination of the tax
compensation portion of the water delivery fee pursuant to the Supplemental
Agreement, partially offset by a 7.5% increase in the Water Delivery Fee rate as
a result of the contractual annual escalation factor. The increase in
electricity fees was due primarily to increased generation resulting from higher
water flows in 2003.





Operating
expenses decreased $6.4 million to $38.4 million for the year ended
December 31, 2003 from $44.8 million for the year ended December 31,
2002. Doubtful accounts expense decreased by $9.5 million in connection with the
NIA Arbitration Settlement. Plant operations expense increased by $3.1 million
due to higher local business taxes, insurance and legal costs.





Settlement
income of $31.9 million resulted from the NIA Arbitration
Settlement.





Interest
expense decreased to $39.8 million for the year ended December 31, 2003
from $42.5 million for the year ended December 31, 2002. The primary reason
for the decrease was the scheduled repayment of debt.





Interest
income increased to $1.9 million for the year ended December 31, 2003 from
$0.2 million for the year ended December 31, 2002. The primary reason for
the increase was interest earned on the ROP Note issued to the Company in
connection with the NIA Arbitration Settlement.





Tax
expense increased to $25.7 million for the year ended December 31, 2003
from $6.1 million for the year ended December 31, 2002. The increase in
2003 is a result of $24.4 million in taxes paid in connection with the NIA
Arbitration Settlement and amounts paid to the BIR in settlement of audit
assessments for the years 1996 to 1998 and 2000 to 2001. Tax expense in 2002
consisted of a payment to the BIR for the settlement of taxes related to
interest income for the years 2001, 2000 and 1999.




14







**Liquidity
and Capital Resources**





CE
Casecnan constructed and operates the Casecnan Project, which was developed as
an unsolicited proposal under the Philippine build-own-operate-transfer law,
pursuant to the terms of the Project Agreement. CE Casecnan developed, financed
and constructed the Casecnan Project over the construction period, and owns and
operates the Casecnan Project for the term of the Cooperation Period. During the
Cooperation Period, NIA is obligated to accept all deliveries of water and
energy, and so long as the Casecnan Project is physically capable of operating
and delivering in accordance with agreed levels set forth in the Project
Agreement, NIA is obligated to pay CE Casecnan a fixed fee for the delivery of a
threshold volume of water and a fixed fee for the delivery of a threshold amount
of electricity. In addition, NIA is obligated to pay a fee for all electricity
delivered in excess of the threshold amount up to a specified amount and will be
obligated to pay a fee for all water delivered in excess of the threshold amount
up to a specified amount beginning after December 25, 2008.





The ROP
has provided a Performance Undertaking under which NIA’s obligations under the
Project Agreement are guaranteed by the full faith and credit of the ROP. The
Project Agreement and the Performance Undertaking provide for the resolution of
disputes by binding arbitration in Singapore under international arbitration
rules.





NIA’s
obligations under the Project Agreement are substantially denominated in U.S.
Dollars and are the Company’s sole source of operating revenues. Because of the
Company’s dependence on NIA, any material failure of NIA to fulfill its
obligations under the Project Agreement and any material failure of the ROP to
fulfill its obligations under the Performance Undertaking would significantly
impair the ability of the Company to meet its existing and future obligations,
including obligations pertaining to its outstanding debt. No stockholders,
partners or affiliates of the Company, including MidAmerican, and no
directors, officers or employees of the Company
will guarantee or be in any way liable for payment of the
Company’s obligations. As a result, payment of the Company’s obligations
depends upon the availability of sufficient revenues from the Company’s business
after the payment of operating expenses.





The
Company's cash and cash equivalents were $16.7 million and $4.5 million at
December 31, 2004 and 2003, respectively.





The
Company generated cash flows from operations of $76.8 million and $65.2 million
for the years ended December 31, 2004 and 2003, respectively. The increase
from 2003 was primarily due to changes in working capital activities of $26.1
million net of the decrease in net income of $14.5 million.





The
Company received $111.9 million and used $10.3 million for investing activities
for the years ended December 31, 2004 and 2003, respectively. At
December 31, 2003, the Company had an outstanding $97.0 million ROP Note
receivable obtained in connection with the NIA Arbitration Settlement which was
put to the ROP on January 14, 2004. The collection of the $97.0 million ROP note
is included in the cash flow from investing activities. Capital expenditures
were $4.1 million and $4.3 million for the years ended December 31, 2004
and 2003, respectively. Construction of the Casecnan Project was completed in
December 2001 under a fixed-price date certain, turnkey engineering, procurement
and construction contract by a consortium consisting of Cooperativa Muratori
Cementisti CMC di Ravenna and Impresa Pizzarotti & C. Spa. (collectively,
the "Contractor"), working together with Siemens A.G., Sulzer Hydro Ltd., Black
& Veatch and Colenco Power Engineering Ltd. On February 12, 2001, the
Contractor filed a Request for Arbitration with the International Chamber of
Commerce ("ICC") seeking schedule relief from various alleged force majeure
events. On April 7, 2004, the Company entered into an agreement with the
Contractor settling the ICC arbitration. Pursuant to the settlement agreement,
the Contractor paid $18.9 million to CE Casecnan on April 14, 2004, and the
Contractor and CE Casecnan executed mutual releases and agreed to dismiss the
arbitration.





The
Company used $176.4 million and $51.1 million for financing activities for the
years ended December 31, 2004 and 2003, respectively. During 2004, the
Company declared dividends totaling $106.0 million (of which $15.9 million was
set aside in a separate bank account in the name of the Company and shown as
restricted cash and investments and dividends payable in the balance sheet). The
Company also made a $49.4 million principal payment on the balance of the Series
A and B bonds and increased restricted cash related to debt service obligations
by $37.4 million. During 2003, the Company repaid long-term debt of $41.5
million and increased restricted cash related to debt service obligations by
$11.0 million.




15





**NIA
Arbitration Settlement**





On
October 15, 2003, the Company closed a transaction settling an arbitral
proceeding which arose from a statement of claim made on August 19, 2002,
by CE Casecnan against NIA. As a result of the NIA Arbitration Settlement, CE
Casecnan recorded $31.9 million of settlement income and $24.4 million of
associated income taxes in 2003. Under the terms of the settlement, CE Casecnan
entered into the Supplemental Agreement which provided for the dismissal with
prejudice of all claims by CE Casecnan and counterclaims by NIA in the arbitral
proceeding. In connection with the NIA Arbitration Settlement, NIA delivered to
CE Casecnan the ROP Note, which contained a put provision granting CE Casecnan
the right to put the ROP Note to the ROP for a price of par plus accrued
interest for a 30-day period commencing on January 14, 2004. The ROP Note
was recorded as a note receivable in the accompanying balance sheet as of
December 31, 2003. On January 14, 2004, CE Casecnan exercised its
right to put the ROP Note to the ROP and, in accordance with the terms of the
put, CE Casecnan received $99.2 million (representing $97.0 million par value
plus accrued interest) from the ROP on January 21, 2004. In addition to
providing for the dismissal with prejudice of all claims by CE Casecnan and
counterclaims by NIA in the arbitral proceeding, the Supplemental Agreement
supplements and amends the Project Agreement in certain respects as summarized
below:





Modifications
to Water Delivery Fee





Under the
Project Agreement, the Water Delivery Rate increased by $0.00043 per cubic meter
for each $1.0 million of certain taxes paid by CE Casecnan. The Supplemental
Agreement amends the per cubic meter Water Delivery Fee calculation by
eliminating the increase for taxes paid. Instead, the Water Delivery Rate
remains at $0.029 per cubic meter, escalated at 7.5% annually from
January 1, 1994 through the first five years of the Cooperation Period,
extending through December 25, 2006. The Company will be reimbursed for
certain taxes it pays during the remainder of the Cooperation
Period.





Under the
Project Agreement, the Water Delivery Fee payable monthly was a fixed monthly
payment based on an average water delivery of 801.9 million cubic meters per
year, pro-rated to approximately 66.8 million cubic meters per month, multiplied
by the per cubic meter rate as described above. Under the Supplemental Agreement
the Water Delivery Fee is equal to the Guaranteed Water Delivery Fee plus the
Variable Delivered Water Delivery Fee minus the Water Delivery Fee Credit.





*Guaranteed
Water Delivery Fee.* For the
sixty-month period from December 25, 2003 through December 25, 2008,
the Guaranteed Water Delivery Fee shall equal the Water Delivery Rate, as
described above, multiplied by approximately 66.8 million cubic meters
(corresponding to the 801.9 million cubic meters per year). For each month
beginning after December 25, 2008 through the remainder of the Cooperation
Period, the Guaranteed Water Delivery Fee shall equal the Water Delivery Rate
multiplied by approximately 58.3 million cubic meters (corresponding to 700.0
million cubic meters per year).





*Variable
Delivered Water Delivery Fee.* Variable
Delivered Water Delivery Fees will be earned for months beginning after
December 25, 2008. For each month beginning after December 25, 2008
through the end of the Cooperation Period, the Variable Delivered Water Delivery
Fee shall be payable only from the date when the cumulative Total Available
Water (total delivered water plus the water volume not delivered to NIA as a
result of NIA’s failure to accept energy deliveries at a capacity up to 150 MW)
for each contract year exceeds 700.0 million cubic meters. Variable Delivered
Water Delivery Fees will be earned up to an aggregate maximum of 1,324.7 million
cubic meters for the period from December 25, 2008 through the end of the
Cooperation Period. No additional variable water delivery fees will be earned
over the 1,324.7 million cubic meter threshold.





*Water
Delivery Fee Credit.* The
Water Delivery Fee Credit shall be applicable only for each of the sixty-months
from December 25, 2008 through December 25, 2013 and shall equal the
Water Delivery Rate as of December 25, 2008 multiplied by the sum of each
Annual Water Credit divided by sixty. The Annual Water Credit for each contract
year starting from December 25, 2003 and ending on December 25, 2008
shall equal 801.9 million cubic meters minus the Total Available Water for each
contract year. The Total Available Water in any such year will equal actual
deliveries with a minimum threshold of 700.0 million cubic meters.




16





*Deferred
Revenue.* The
Company records deferred revenue on the difference between the actual water
delivery fees earned and water delivery fees invoiced pursuant to the
Supplemental Agreement. As of December 31, 2004, cumulative deferred water
delivery revenue was $6.1 million. The deferred water delivery revenue at the
end of the contract year is available to be earned in the succeeding contract
years ending on December 25, 2008.





Modifications
to Excess Energy Delivery Fee





Under the
Project Agreement, the Excess Energy Delivery Fee was a variable amount based on
actual electrical energy delivered in each month in excess of 19.0 GWh, payable
at a rate of $0.1509 per kWh. Under the Supplemental Agreement, the per kWh rate
for energy deliveries in excess of 19.0 GWh per month has been reduced,
commencing in 2009, to $0.1132 (escalating at 1% per annum thereafter), provided
that any deliveries of energy in excess of 490.0 GWh but less than 550.0 GWh per
year are paid for at a rate of 1.3 pesos per kWh and deliveries in excess of
550.0 GWh per year are at no cost to NIA.





For
periods after September 28, 2003, the Supplemental Agreement provides that
if the Casecnan Project is not dispatched up to 150 MW whenever water is
available, NIA will pay for excess energy that could have been generated but was
not as a result of such dispatch constraint.





Other
Provisions of the Supplemental Agreement





The
Company received an opinion from the Philippine Office of Government Corporate
Counsel that the Supplemental Agreement has due authorization and is
enforceable. The Company also received written confirmation from the Private
Sector Assets and Liabilities Management Corporation that the issues with
respect to the Casecnan Project that had been raised by the interagency review
of independent power producers in the Philippines or that may have existed with
respect to the Project under certain provisions of the EPIRA calling for the
renegotiation of contracts such as the Project Agreement have been
satisfactorily addressed by the Supplemental Agreement.





The
Guaranteed Energy Delivery Fee, Force Majeure, Buyout and Dispute Resolution
provisions of the Project Agreement, as well as the Performance Undertaking
provided by the ROP, remain unaffected by the Supplemental Agreement and in full
force and effect.





**Casecnan
Stockholder Litigation**





Pursuant
to the share ownership adjustment mechanism in the CE Casecnan stockholder
agreement, which is based upon pro forma financial projections of the Casecnan
Project prepared following commencement of commercial operations, in February
2002, MidAmerican’s indirect wholly owned subsidiary CE Casecnan Ltd., advised
the minority stockholder of the Company, LPG, that MidAmerican’s indirect
ownership interest in CE Casecnan had increased to 100% effective from
commencement of commercial operations. On July 8, 2002, LPG filed a
complaint in the Superior Court of the State of California, City and County of
San Francisco against, among others, CE Casecnan Ltd. and MidAmerican. The
Company is not a defendant in the action. On January 21, 2004, CE Casecnan
Ltd., LPG and the Company entered into a status quo agreement pursuant to which
the parties agreed to set aside certain distributions related to the shares
subject to the LPG dispute and CE Casecnan agreed not to take any further
actions with respect to such distributions without at least 15 days’ prior
notice to LPG. Accordingly, 15% of the dividend declarations in 2004, totaling
$15.9 million, was set aside in a separate bank account in the name of the
Company and is shown as restricted cash and investments and dividends payable in
the accompanying balance sheet at December 31, 2004. The court is currently
expected to rule on the first phase of the litigation before the end of the
first quarter of 2005.





17





**Obligations
and Commitments**





The
Company has contractual obligations and commercial commitments that may affect
its financial condition. Contractual obligations to make future payments arise
from long-term debt and notes payable. Material obligations as of
December 31, 2004 are as follows (in thousands):








**Payments
      Due by Period****<
      1**
    
    **2-3**
    
    **4-5**
    
    **>5****Total**
    
    **Year**
    
    **Years**
    
    **Years**
    
    **Years**Contractual
      cash obligations:Long-term
      debt
    
    $
    197,098
    
    $
    54,753
    
    $
    73,745
    
    $
    51,450
    
    $
    17,150Note
      payable
    
    
    51,263
    
    
    -
    
    
    -
    
    
    -
    
    
    51,263Interest
    
    
    108,880
    
    
    23,273
    
    
    29,343
    
    
    10,647
    
    
    45,617Total
      contractual cash obligations
    
    $
    357,241
    
    $
    78,026
    
    $
    103,088
    
    $
    62,097
    
    $
    114,030





**Critical
Accounting Policies**





The
preparation of financial statements and related disclosures in conformity with
accounting principles generally accepted in the United States of America
requires management to make judgments, assumptions and estimates that affect the
amounts reported in the Financial Statements and accompanying notes. Note 2 to
the Financial Statements describes the significant accounting policies and
methods used in the preparation of the financial statements. Estimates are used
for, but not limited to, the accounting for the allowance for doubtful accounts.
Actual results could differ from these estimates. The following critical
accounting policies are impacted significantly by judgments, assumptions and
estimates used in the preparation of the financial statements.





Impairment
of Long-Lived Assets





Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. An
impairment loss would be recognized whenever evidence exists that the carrying
value is not recoverable.





Allowance
for Doubtful Accounts





The
allowance for doubtful accounts is based on the Company’s assessment of the
collectibility of payments from NIA. This assessment requires judgment regarding
the outcome of disputes and the ability of the customer to pay the amounts owed
to the Company. Any change in the Company’s assessment of the collectibility of
accounts receivable that was not previously provided for could significantly
impact the calculation of such allowance and the results of
operations.




**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, 2004, the Company had fixed-rate long-term debt of $197.1
million in principal amount and having a fair value of $220.0 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 $6.5 million if
interest rates were to increase by 10% from their levels at December 31,
2004. 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.




18








Currency
Risk





NIA’s
payments of obligations under the Project Agreement are substantially
denominated in U.S. Dollars and are the Company’s sole source of operating
revenues. NIA must obtain U.S. Dollars to fund its payment obligations. Because
of the Company’s dependence on NIA, any material failure of NIA to obtain U.S.
Dollars and fulfill its obligations under the Project Agreement and any material
failure of the ROP to fulfill its obligations under the Performance Undertaking
would significantly impair the ability of the Company to meet its existing and
future obligations. No stockholders, partners or affiliates of the Company,
including MidAmerican, and no directors, officers or employees of the Company
will guarantee or be in any way liable for payment of the Company’s obligations.
As a result, payment of the Company’s obligations depends upon the availability
of sufficient revenues from the Company’s business after the payment of
operating expenses.





19





Item 8. Financial Statements
and Supplementary Data.




Report of Independent Registered Public Accounting
      Firm
    21Balance Sheets as of December 31, 2004 and
      2003
    22Statements of Operations for the Years Ended
      December 31, 2004, 2003 and 2002
    23Statements of Changes in Stockholders’ Equity for the Years
      Ended December 31, 2004, 2003 and 2002
    24Statements of Cash Flows for the Years Ended
      December 31, 2004, 2003 and 2002
    25Notes to Financial Statements
    26





20


**REPORT OF INDEPENDENT** **REGISTERED
PUBLIC ACCOUNTING FIRM**





To the
Board of Directors and Stockholders of


CE
Casecnan Water and Energy Company, Inc.








We have
audited the accompanying balance sheets of CE Casecnan Water and Energy Company,
Inc. as of December 31, 2004 and 2003, and the related statements of
operations, of changes in stockholders’ equity and of cash flows for each of the
three years in the period ended December 31, 2004. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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, 2004 and 2003, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2004, in conformity with accounting principles generally
accepted in the United States of America.





/s/
Joaquin Cunanan & Co.





JOAQUIN
CUNANAN & CO.


A
PRICEWATERHOUSECOOPERS MEMBER FIRM


Makati
City, Philippines


February
11, 2005





21








**CE
CASECNAN WATER AND ENERGY COMPANY, INC.**


**BALANCE SHEETS**


(Amounts
in thousands of U.S. Dollars, except share data)





**As
      of December 31,****2004**
    
    **2003****ASSETS**Current
      assets:Cash
      and cash equivalents
    
    $
    16,732
    
    $
    4,513Restricted
      cash and investments
    
    
    39,444
    
    
    18,121Trade
      receivable, net
    
    
    25,242
    
    
    16,451Note
      receivable
    
    
    -
    
    
    97,000Accrued
      interest and other receivable
    
    
    1,986
    
    
    8,229Prepaid
      insurance and other current assets
    
    
    4,831
    
    
    4,685Total
      current assets
    
    
    88,235
    
    
    148,999Restricted
      cash and investments
    
    
    16,063
    
    
    -Bond
      issue costs, net
    
    
    2,678
    
    
    3,861Property,
      plant and equipment, net
    
    
    365,132
    
    
    407,082Deferred
      income tax
    
    
    5,371
    
    
    5,371**Total
      assets**
    
    $
    477,479
    
    $
    565,313**LIABILITIES
      AND STOCKHOLDERS’ EQUITY**Current
      liabilities:Accounts
      payable
    
    $
    12,185
    
    $
    7,395Dividends
      payable
    
    
    15,900
    
    
    -Accrued
      interest
    
    
    8,482
    
    
    7,368Accrued
      liquidated damages
    
    
    -
    
    
    3,800Other
      accrued expenses
    
    
    295
    
    
    1,702Payable
      to affiliates
    
    
    35,148
    
    
    34,739Current
      portion of long-term debt
    
    
    54,753
    
    
    49,360Total
      current liabilities
    
    
    126,763
    
    
    104,364Notes
      payable
    
    
    51,263
    
    
    51,263Deferred
      revenue
    
    
    6,120
    
    
    902Long-term
      debt, net of current portion
    
    
    142,345
    
    
    197,098Total
      liabilities
    
    
    326,491
    
    
    353,627Commitments
      and contingencies (Note 9)Stockholders’
      equity:Capital
      stockAuthorized
      - 2,148,000 shares, one Philippine peso ($0.038) par value; 767,162 shares
      issued and outstanding
    
    
    29
    
    
    29Additional
      paid-in capital
    
    
    123,807
    
    
    123,807Retained
      earnings
    
    
    27,152
    
    
    87,850Total
      stockholders’ equity
    
    
    150,988
    
    
    211,686**Total
      liabilities and stockholders’ equity**
    
    $
    477,479
    
    $
    565,313





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





22








**CE
CASECNAN WATER AND ENERGY COMPANY, INC.**


**STATEMENTS
OF OPERATIONS**


(Amounts
in thousands of U.S. Dollars, except share data)





**Year
      Ended December 31,****2004**
    
    **2003**
    
    **2002****Revenue:**Lease
      rentals and service contracts
    
    $
    106,847
    
    $
    129,921
    
    $
    138,264**Operating
      expenses:**Depreciation
    
    
    21,972
    
    
    23,158
    
    
    23,211Plant
      operations and other operating expenses
    
    
    11,444
    
    
    13,180
    
    
    10,093Doubtful
      accounts expense
    
    
    -
    
    
    2,044
    
    
    11,545Total
      operating expenses
    
    
    33,416
    
    
    38,382
    
    
    44,849**Operating
      income**
    
    
    73,431
    
    
    91,539
    
    
    93,415**Other
      income (expenses):**Settlement
      revenue (Note 3)
    
    
    -
    
    
    31,887
    
    
    -Interest
      expense
    
    
    (29,468
    )
    
    (39,835
    )
    
    (42,508
    )Interest
      income
    
    
    1,539
    
    
    1,949
    
    
    236Other
    
    
    (98
    )
    
    (38
    )
    
    (105
    )Total
      other expense, net
    
    
    (28,027
    )
    
    (6,037
    )
    
    (42,377
    )**Income
      before provision for income tax**
    
    
    45,404
    
    
    85,502
    
    
    51,038**Provision
      for income tax**
    
    
    102
    
    
    25,737
    
    
    6,082**Net
      income**
    
    $
    45,302
    
    $
    59,765
    
    $
    44,956**Net
      income per share**
    
    $
    59.05
    
    $
    77.90
    
    $
    58.60**Weighted
      average number of common shares outstanding**
    
    
    767,162
    
    
    767,162
    
    
    767,162





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





23





**CE
CASECNAN WATER AND ENERGY COMPANY, INC.**


**STATEMENTS
OF CHANGES IN STOCKHOLDERS’ EQUITY**


(Amounts
in thousands of U.S. Dollars, except share data)





**Outstanding**
    
    
    
    **Additional****Common**
    
    **Common**
    
    **Paid-in**
    
    **Retained****Shares**
    
    **Stock**
    
    **Capital**
    
    **Earnings**
    
    **Total****Balance,
      January 1, 2002**
    
    
    767,162
    
    $
    29
    
    $
    123,807
    
    $
    (16,871
    )
    $
    106,965Net
      income
    
    
    -
    
    
    -
    
    
    -
    
    
    44,956
    
    
    44,956**Balance,
      December 31, 2002**
    
    
    767,162
    
    
    29
    
    
    123,807
    
    
    28,085
    
    
    151,921Net
      income
    
    
    -
    
    
    -
    
    
    -
    
    
    59,765
    
    
    59,765**Balance,
      December 31, 2003**
    
    
    767,162
    
    
    29
    
    
    123,807
    
    
    87,850
    
    
    211,686Net
      income
    
    
    -
    
    
    -
    
    
    -
    
    
    45,302
    
    
    45,302Dividends
      declared
    
    
    -
    
    
    -
    
    
    -
    
    
    (106,000
    )
    
    (106,000
    )**Balance,
      December 31, 2004**
    
    
    767,162
    
    $
    29
    
    $
    123,807
    
    $
    27,152
    
    $
    150,988





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


24





**CE
CASECNAN WATER AND ENERGY COMPANY, INC.**


**STATEMENTS
OF CASHFLOWS**


(Amounts
in thousands of U.S. Dollars)





**Year
      Ended December 31,****2004**
    
    **2003**
    
    **2002**Cash
      flows from operating activities:Net
      income
    
    $
    45,302
    
    $
    59,765
    
    $
    44,956Adjustments
      to reconcile net income to net cash flows from operating
      activities:Depreciation
    
    
    21,972
    
    
    23,158
    
    
    23,211Amortization
      of bond issue costs
    
    
    1,183
    
    
    1,356
    
    
    1,494Gain
      on settlement of arbitration, net of tax
    
    
    -
    
    
    (7,500
    )
    
    -Changes
      in other items:Trade
      receivable, net
    
    
    (8,791
    )
    
    (20,132
    )
    
    (43,503
    )Accrued
      interest and other receivable
    
    
    6,243
    
    
    (1,534
    )
    
    (408
    )Prepaid
      insurance and other current assets
    
    
    (40
    )
    
    455
    
    
    (2,277
    )Other
      assets
    
    
    -
    
    
    5,542
    
    
    6,158Accounts
      payable
    
    
    9,811
    
    
    3,932
    
    
    2,359Accrued
      interest
    
    
    1,114
    
    
    1,097
    
    
    1,065Accrued
      liquidated damages
    
    
    (3,800
    )
    
    (1,620
    )
    
    3,800Other
      accrued expenses
    
    
    (1,407
    )
    
    (200
    )
    
    -Deferred
      revenue
    
    
    5,218
    
    
    902
    
    
    -Net
      cash flows from operating activities
    
    
    76,805
    
    
    65,221
    
    
    36,855Cash
      flows from investing activities:Additions
      to property, plant and equipment
    
    
    (4,049
    )
    
    (4,335
    )
    
    (10,263
    )Arbitration
      settlement
    
    
    -
    
    
    (5,965
    )
    
    -Liquidated
      damages received, net of amounts accrued
    
    
    18,900
    
    
    -
    
    
    -Collection
      of ROP Note
    
    
    97,000
    
    
    -
    
    
    -Increase
      in restricted cash and investments
    
    
    -
    
    
    -
    
    
    (1,100
    )Net
      cash flows from investing activities
    
    
    111,851
    
    
    (10,300
    )
    
    (11,363
    )Cash
      flows from financing activities:Increase
      (decrease) in payable to affiliates
    
    
    409
    
    
    1,397
    
    
    (1,165
    )Increase
      in restricted cash and investments for debt service obligations and
      dividends payable
    
    
    (37,386
    )
    
    (11,043
    )
    
    -Payment
      of long-term debt
    
    
    (49,360
    )
    
    (41,467
    )
    
    (35,200
    )Cash
      dividends paid
    
    
    (90,100
    )
    
    -
    
    
    -Proceeds
      from notes payable
    
    
    -
    
    
    -
    
    
    10,500Net
      cash flows from financing activities
    
    
    (176,437
    )
    
    (51,113
    )
    
    (25,865
    )**Net
      change in cash and cash equivalents**
    
    
    12,219
    
    
    3,808
    
    
    (373
    )**Cash
      and cash equivalents at beginning of period**
    
    
    4,513
    
    
    705
    
    
    1,078**Cash
      and cash equivalents at end of period**
    
    $
    16,732
    
    $
    4,513
    
    $
    705Supplemental
      Disclosure:Interest
      paid
    
    $
    30,638
    
    $
    36,205
    
    $
    39,949Income
      taxes paid
    
    $
    102
    
    $
    24,387
    
    $
    6,080Non-cash
      transaction - ROP note received under NIA Arbitration
      Settlement
    
    $
    -
    
    $
    97,000
    
    $
    -





In 2004,
the investment in property, plant and equipment was reduced by $23.9 million
involving receipt of cash of $18.9 million and reversal of liabilities of $5.0
million pursuant to settlement of a construction contract arbitration (Note
5).








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




25





**CE
CASECNAN WATER AND ENERGY COMPANY, INC.**


**NOTESTO FINANCIAL STATEMENTS**


(In U.S.
Dollars, unless indicated otherwise)





**1.**
    **Organization
      and Operations**





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 (“MidAmerican”) and was registered with the Philippine
Securities and Exchange Commission on September 21, 1994. The purpose of
the Company is to develop, construct, operate and own a hydroelectric power
plant and the related facilities for conversion into electricity of water
provided by and under contract with the Republic of the Philippines (“ROP”) or
any ROP-owned or controlled corporation.





The
Company has a contract with the 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 (“Project Agreement”),
covering a 20-year cooperation period (“Cooperation Period”) with “take-or-pay”
obligations for water and electricity. At the end of the Cooperation Period, the
combined irrigation and 150 MW hydroelectric power generation project (the
“Casecnan Project”) will be transferred to the ROP at no cost on an “as is”
basis. The ROP also signed a Performance Undertaking, which, among others,
affirms and guarantees the obligations of NIA under the contract.





Construction
of the Casecnan Project commenced in 1995. The Casecnan Project commenced
commercial operations on December 11, 2001. Pursuant to the share ownership
adjustment mechanism in the CE Casecnan stockholder agreement, which is based
upon pro forma financial projections of the Casecnan Project prepared following
commencement of commercial operations, in February 2002, MidAmerican’s indirect
wholly owned subsidiary CE Casecnan Ltd., advised the minority stockholder of
the Company, LaPrairie Group Contractors (International) Ltd. ("LPG"),that
MidAmerican’s indirect ownership interest in CE Casecnan had increased to 100%
effective from commencement of commercial operations. On July 8, 2002, LPG
filed a complaint in the Superior Court of the State of California, City and
County of San Francisco against, among others, CE Casecnan Ltd. and MidAmerican.
The Company is not a defendant in the action. On January 21, 2004, CE
Casecnan Ltd., LPG and the Company entered into a status quo agreement pursuant
to which the parties agreed to set aside certain distributions related to the
shares subject to the LPG dispute and CE Casecnan agreed not to take any further
actions with respect to such distributions without at least 15 days’ prior
notice to LPG. Accordingly, 15% of the dividend declarations in 2004 totaling,
$15.9 million, was set aside in a separate bank account in the name of the
Company and is shown as restricted cash and investments and dividends payable in
the accompanying balance sheet at December 31, 2004. The court is currently
expected to rule on the first phase of the litigation before the end of the
first quarter of 2005.





The
Company is registered with the Philippine Board of Investments as a new operator
of hydroelectric power plant with pioneer status under the Omnibus Investments
Code of 1987 (Executive Order No. 226). Under the terms of its registration, the
Company is entitled to certain incentives which include an income tax holiday
for a minimum of six years from the start of commercial operations, tax and
duty-free importation of capital equipment, tax credits on domestic capital
equipment, and exemption from customs duties and national internal revenue taxes
for the importation and unrestricted use of the consigned equipment for the
development, construction, start-up, testing and operation of the power plant.
The registration also requires, among others, the maintenance of a
debt-to-equity ratio not exceeding 75:25 upon commencement of commercial
operations.





In April
2003, CE Casecnan Ltd. assigned a 70% stockholding in the Company to CE
Casecnan II, Inc., a Philippine company, in exchange for the latter’s shares of
stock. Consequently, the Company became 70% owned by CE Casecnan II,
Inc.





References
to "U.S. dollars," "dollars," or "$" are to the currency of the United States
and references to "pesos" are to the currency of the Philippines. References to
kW means kilowatts, MW means megawatts, GW means gigawatts, kWh means kilowatt
hours, MWh means megawatt hours, and GWh means gigawatt hours.





26








**2.**
    **Summary
      of Significant Accounting Policies**





The
financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America. The more significant
accounting policies and practices of the Company are set forth
below:





Basis
of Presentation





The
functional and reporting currency of the Company is the United States dollar.
Transactions in foreign currencies (Philippines pesos) are recorded based on the
prevailing rates of exchange at transaction dates. Foreign currency denominated
monetary assets and liabilities are translated at the exchange rate prevailing
at the balance sheet date. The resulting exchange differences from settlements
of foreign currency transactions and translations of monetary assets and
liabilities are credited or charged to operations.





The
Company’s operations are in one reportable segment, the water and electricity
generation industry.





Reclassifications





Certain
amounts of restricted cash and investments in the 2003 balance sheet have
been reclassified to current assets to conform with the fiscal 2004
presentation.  Such reclassification did not impact previously reported net
income or retained earnings.





Use of
Estimates





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.





Cash
Equivalents





Cash
equivalents are short-term, highly liquid investments that are readily
convertible to known amounts of cash with original maturities of three months or
less and that are subject to an insignificant risk of change in
value.





Restricted
Cash and Investments





Restricted
cash and investments are composed
of debt service funds and undistributed dividends that are contractually
restricted as to their use and require the maintenance of specific minimum
balances. Such
cash and investments are primarily in the form of commercial paper and money
market securities.





Since the
Company has the positive intent and ability to hold all of its investments to
maturity, these are classified as held to maturity and recorded at amortized
cost. The carrying amount of investments as of December 31, 2004
approximates their fair value, which is based on quoted market prices as
provided by the financial institution holding the investments.





Bond
Issue Costs





Bond
issue costs consist of costs incurred in the issuance of senior secured notes
and bonds and are deferred and amortized over the term of the notes and bonds
using the effective interest rate method. Amortization of bond issue costs is
capitalized during the construction period and charged to operations, as an
interest expense, upon commercial operations of the Casecnan
Project.





27





Property,
Plant and Equipment, Net





Property,
plant and equipment are stated at historical cost (including capitalized
interest costs) less accumulated depreciation. Depreciation is computed on the
straight-line method based on the twenty-year Cooperation Period for the
hydroelectric power plant and office and building structure, and on the
estimated useful life of five years for other equipment. Minor expenditures for
repairs and maintenance are charged to operations as incurred, while significant
renewals and improvements are capitalized. Liquidated damages received relative
to the Casecnan Project construction are recorded as reduction to the cost of
the Project. When an asset is sold or otherwise disposed of, its cost and
related accumulated depreciation are removed from the accounts and the resulting
gain or loss is credited or charged to operations.





Deferred
Income Taxes





Deferred
income tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial reporting bases of assets and
liabilities and their related tax bases. Deferred income tax assets and
liabilities are measured using the tax rate expected to apply to taxable income
in the years in which those temporary differences are expected to be recovered
or settled. A valuation allowance is provided for deferred income tax assets if
it is more likely than not that a tax benefit will not be realized.





Allowance
for Doubtful Accounts





Allowance
for doubtful accounts is based on the Company’s assessment of the collectibility
of payments from NIA. This assessment requires judgment regarding the outcome of
pending disputes and the ability of the customer to pay the amounts owed to the
Company. Any change in the Company’s assessment of the collectibility of
accounts receivable that was not previously provided for could significantly
impact the calculation of such allowance and the results of
operations.





Net
Income per Share





Net
income per share is based on the weighted average number of common shares
outstanding during the period. As the Company does not have any potential common
shares outstanding such as stock options, warrants or convertible debt, there is
no calculation of diluted earnings per share.





Impairment
of Long-Lived Assets





Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. An
impairment loss would be recognized whenever evidence exists that the carrying
value is not recoverable.





Revenue





Pursuant
to the Project Agreement, the Company bills on a monthly basis for the delivery
of water and electricity. However, for accounting purposes the Project Agreement
is treated as an arrangement that contains both an operating lease and a service
contract to operate the plant. Both the lease rentals and service fees are
recognized straight line over the term of the Project Agreement.





The
annual water delivery revenue is recorded on the basis of the contractual
minimum guaranteed water delivery threshold for the respective contract year. If
and when actual cumulative deliveries within a contract year exceed the minimum
threshold, additional revenue is recognized and calculated as the product of the
water deliveries in excess of the minimum threshold and the applicable unit
price up to the maximum contractually allowed water delivery volume. The Company
defers revenue on the difference between the actual water delivery fees earned
and water delivery fees invoiced pursuant to the Supplemental Agreement. As of
December 31, 2004, cumulative deferred water delivery revenue was $6.1 million.
The deferred water delivery revenue at the end of the contract year is available
to be earned in the succeeding contract years ending December 25,
2008.


28








Revenue
from electricity consists of guaranteed energy fees with fixed monthly amounts
and is recognized based on the contractually guaranteed energy deliveries.
Actual deliveries of energy less than the fixed, monthly contractual amounts
will not result in any reduction of the guaranteed energy fee. The variable
energy fee is recognized when deliveries of energy exceed the guaranteed energy
in any contract year. The variable energy fee will not be recognized until all
cumulative electrical energy shortfalls in previous months have been made up. At
December 31, 2004, there was no cumulative electrical energy shortfall.





**3.**
    **NIA
      Settlement Agreement**





On
October 15, 2003, the Company closed a transaction settling an arbitral
proceeding which the Company had initiated against NIA in August 2002. As a
result of the settlement, in 2003 CE Casecnan recorded $31.9 million of
settlement income and $24.4 million of associated income taxes. The settlement
income consisted of $115.4 million of consideration pursuant to the settlement
agreement, less $30.8 million of recoverable taxes previously capitalized during
the construction period, less $8.4 million of taxes paid during operations and
less $44.3 million of net trade receivables and other adjustments pertaining to
the disputed amounts. In
connection with the settlement, the Company entered into an agreement (the
“Supplemental Agreement”) with NIA which, in addition to providing for the
dismissal with prejudice of all claims by CE Casecnan and counterclaims by NIA
in the NIA Arbitration, supplements and amends the Project Agreement in certain
respects as summarized below.





Payment
in Cash and Delivery of Note





As part
of the settlement, on October 15, 2003, NIA paid to CE Casecnan the sum of
approximately $18.4 million and delivered to CE Casecnan a ROP $97.0 million
8.375% Note due 2013 (the "ROP Note"). The Company had the option, between
January 14, 2004 and February 14, 2004 to put the ROP Note to the ROP,
for a price of par plus accrued interest. The ROP Note was recorded as a note
receivable in the accompanying balance sheet as of December 31, 2003. Also
at closing, the Company paid to the Philippine Bureau of Internal Revenue
(“BIR”) approximately $24.4 million in respect of Philippine income taxes on the
foregoing consideration and paid to NIA $1.6 million in respect of alleged late
completion of the Casecnan Project.





On
January 14, 2004, CE Casecnan exercised its right to put the ROP Note to
the ROP and, in accordance with the terms of the put, CE Casecnan received $99.2
million (representing $97.0 million par value plus accrued interest) from the
ROP on January 21, 2004.





Modifications
to Water Delivery Fee





Under the
Project Agreement, the Water Delivery Rate increased by $0.00043 per cubic meter
for each $1.0 million of certain taxes paid by CE Casecnan. The Supplemental
Agreement amends the per cubic meter Water Delivery Fee calculation by
eliminating the increase for taxes paid. Instead, the Water Delivery Rate
remains at $0.029 per cubic meter, escalated at 7.5% annually from
January 1, 1994 through the first five years of the Cooperation Period,
extending through December 25, 2006. The Company will be reimbursed for
certain taxes it pays during the remainder of the Cooperation
Period.





Under the
Project Agreement, the Water Delivery Fee payable monthly was a fixed monthly
payment based on an average water delivery of 801.9 million cubic meters per
year, pro-rated to approximately 66.8 million cubic meters per month, multiplied
by the per cubic meter rate as described above. Under the Supplemental Agreement
the Water Delivery Fee is equal to the Guaranteed Water Delivery Fee plus the
Variable Delivered Water Delivery Fee minus the Water Delivery Fee
Credit.





*Guaranteed
Water Delivery Fee.* For the
sixty-month period from December 25, 2003 through December 25, 2008,
the Guaranteed Water Delivery Fee shall equal the Water Delivery Rate, as
described above, multiplied by approximately 66.8 million cubic meters
(corresponding to the 801.9 million cubic meters per year). For each month
beginning after December 25, 2008 through the remainder of the Cooperation
Period, the Guaranteed Water Delivery Fee shall equal the Water Delivery Rate
multiplied by approximately 58.3 million cubic meters (corresponding to 700.0
million cubic meters per year).





29





*Variable
Delivered Water Delivery Fee.* Variable
Delivered Water Delivery Fees will be earned for months beginning after
December 25, 2008. For each month beginning after December 25, 2008
through the end of the Cooperation Period, the Variable Delivered Water Delivery
Fee shall be payable only from the date when the cumulative Total Available
Water (total delivered water plus the water volume not delivered to NIA as a
result of NIA’s failure to accept energy deliveries at a capacity up to 150 MW)
for each contract year exceeds 700.0 million cubic meters. Variable Delivered
Water Delivery Fees will be earned up to an aggregate maximum of 1,324.7 million
cubic meters for the period from December 25, 2008 through the end of the
Cooperation Period. No additional variable water delivery fees will be earned
over the 1,324.7 million cubic meter threshold.





*Water
Delivery Fee Credit.* The
Water Delivery Fee Credit shall be applicable only for each of the sixty-months
from December 25, 2008 through December 25, 2013 and shall equal the
Water Delivery Rate as of December 25, 2008 multiplied by the sum of each
Annual Water Credit divided by sixty. The Annual Water Credit for each contract
year starting from December 25, 2003 and ending on December 25, 2008 shall
equal 801.9 million cubic meters minus the Total Available Water for each
contract year. The Total Available Water in any such year will equal actual
deliveries with a minimum threshold of 700.0 million cubic meters.





Modifications
to Excess Energy Delivery Fee





Under the
Project Agreement, the Excess Energy Delivery Fee was a variable amount based on
actual electrical energy delivered in each month in excess of 19.0 GWh, payable
at a rate of $0.1509 per kWh. Under the Supplemental Agreement, the per kWh rate
for energy deliveries in excess of 19 GWh per month has been reduced, commencing
in 2009, to $0.1132 (escalating at 1% per annum thereafter), provided that any
deliveries of energy in excess of 490.0 GWh but less than 550.0 GWh per year are
paid for at a rate of 1.3 pesos per kWh and deliveries in excess of 550.0 GWh
per year are at no cost to NIA.





For
periods after September 28, 2003, the Supplemental Agreement provides that
if the Casecnan Project is not dispatched up to 150 MW whenever water is
available, NIA will pay for excess energy that could have been generated but was
not as a result of such dispatch constraint.





Other
Provisions of the Supplemental Agreement





The
Company received an opinion from the Philippine Office of Government Corporate
Counsel that the Supplemental Agreement has due authorization and is
enforceable. The Company also received written confirmation from the Private
Sector Assets and Liabilities Management Corporation that the issues with
respect to the Casecnan Project that had been raised by the interagency review
of independent power producers in the Philippines or that may have existed with
respect to the Casecnan Project under certain provisions of the Electric Power
Industry Reform Act of 2001 (“EPIRA”) calling for the renegotiation of contracts
such as the Project Agreement have been satisfactorily addressed by the
Supplemental Agreement.





The
Guaranteed Energy Delivery Fee, Force Majeure, Buyout and Dispute Resolution
provisions of the Project Agreement, as well as the Performance Undertaking
provided by the ROP, remain unaffected by the Supplemental Agreement and in full
force and effect.





**4.**
    **Trade
      Receivable, Net**





Trade
receivable pertains to the receivable due for lease rentals, service income and
recoverable taxes billed pursuant to the provisions of the Project Agreement
with NIA, as follows (in thousands):





**December 31,****2004**
    
    **2003**Water
      delivery fee
    
    $
    14,406
    
    $
    11,988Guaranteed
      energy delivery fee
    
    
    3,676
    
    
    3,676Variable
      energy delivery fee
    
    
    7,979
    
    
    2,831Total
      trade receivable
    
    
    26,061
    
    
    18,495Allowance
      for doubtful accounts
    
    
    (819
    )
    
    (2,044
    )Trade
      receivable, net
    
    $
    25,242
    
    $
    16,451





30





The water
delivery fee includes claims for tax reimbursement from NIA pursuant to the
Supplemental Agreement amounting to $8.7 million and $4.6 million as of
December 31, 2004 and 2003, respectively. The allowance for doubtful
accounts as of December 31, 2004 and 2003 represents the Company’s estimate
of the uncollectible portion of the receivable balance.





**5.**
    **Property,
      Plant and Equipment, Net**





Property,
plant and equipment, net at December 31 consists of the following (in
thousands):





**December 31,****2004**
    
    
    **2003**Hydroelectric
      power facility
    
    $
    429,805
    
    $
    450,174Office
      and building structures
    
    
    1,149
    
    
    1,090Transportation
      and other equipment
    
    
    990
    
    
    640Total
      operating assets
    
    
    431,944
    
    
    451,904Accumulated
      depreciation
    
    
    (66,812
    )
    
    (44,840
    )Net
      operating assets
    
    
    365,132
    
    
    407,064Construction
      in progress
    
    
    -
    
    
    18Property,
      plant and equipment, net
    
    $
    365,132
    
    $
    407,082





Construction
of the Casecnan Project was completed under a fixed-price, date certain, turnkey
engineering, procurement and construction contract (the "Replacement Contract")
dated May 7, 1997 and amended on November 20, 1999. The work under the
Replacement Contract was conducted by a consortium consisting of Cooperativa
Muratori Cementisti CMC di Ravenna and Impresa Pizzarotti & C. Spa.
(collectively, the "Contractor"), working together with Siemens A.G., Sulzer
Hydro Ltd., Black & Veatch and Colenco Power Engineering Ltd. On
February 12, 2001, the Contractor filed a Request for Arbitration with the
International Chamber of Commerce ("ICC") seeking schedule relief from various
alleged force majeure events. On April 7, 2004, the Company entered into an
agreement with the Contractor settling the ICC arbitration. Pursuant to the
settlement agreement, as amended, the Contractor paid $18.9 million to CE
Casecnan on April 14, 2004, and the Contractor and CE Casecnan executed
mutual releases and agreed to dismiss the arbitration. A total of $23.9 million
(the $18.9 million receipt along with $3.8 million originally recorded for
liquidated damages and $1.2 million accrual for the unpaid portion of the
Replacement Contract) was recorded as a reduction to property, plant and
equipment in 2004.





**6.**
    **Long-Term
      Debt**





On
November 27, 1995, the Company issued $371.5 million of notes and bonds
(the “Securities”) to finance the construction of the Casecnan Project. These
debts consisted of $75.0 million Senior Secured Floating Rate Notes (“FRNs”)
bearing interest at LIBOR plus 3.00%, which were paid in installments through
November 15, 2002; $125.0 million Senior Secured Series A Notes (“Series A
Notes”) with interest at 11.45% payable in semiannual installments up to 2005;
and $171.5 million Senior Secured Series B Bonds (“Series B Bonds”) with
interest at 11.95% payable in semiannual installments up to 2010. For the year
ended December 31, 2004, the Series A Notes and Series B Bonds had
effective interest rates of 13.72% and 13.72%, respectively, inclusive of bond
issue cost amortization.





The
repayment schedule is as follows (in thousands):





**Series
      A Notes**
    
    **Series
      B Notes**
    
    **Total**2005
    $
    48,750
    
    
    6,003
    
    
    54,7532006
    
    -
    
    
    36,015
    
    
    36,0152007
    
    -
    
    
    37,730
    
    
    37,7302008
    
    -
    
    
    37,730
    
    
    37,7302009
    
    -
    
    
    13,720
    
    
    13,7202010
    
    -
    
    
    17,150
    
    
    17,150$
    48,750
    
    $
    148,348
    
    $
    197,098








31








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
Series A Notes are subject to optional redemption by the Company, in whole and
not in part, at par plus accrued interest to the Redemption Date. The Series B
Bonds are subject to optional redemption by the Company, at any time, in whole
or in part, pro rata, at par plus accrued interest to the redemption date plus a
premium, calculated to “make whole” to comparable U.S. Treasury Securities plus
150 basis points. The Company also had the option to redeem the securities, in
whole or in part, at par plus accrued interest at any time if, as a result of
any change in Philippine tax law or in the application or interpretation of
Philippine tax law occurring after the date of issuance of the Securities, the
Company is required to pay certain additional amounts described in the Trust
Indenture. The Securities are subject to mandatory redemption, pro rata, at par
plus accrued interest to the redemption date; (a) upon the receipt by the
Company of loss proceeds that exceed $15.0 million in respect of certain events
of property or casualty loss or similar events, unless the funds are to be
utilized by the Company for an Approved Restoration Plan; or (b) upon the
receipt by the Company of proceeds realized in connection with a Project
Agreement Buyout.





When a
Change in Control occurs, each holder of the Securities (“Holder”) will have the
right to require the Company to repurchase all or any part of such Holder’s
Securities at a cash purchase price equal to 101% of the principal amount
thereof, plus accrued interest to the date of repurchase in accordance with the
procedures set forth in the Trust Indenture. There is no assurance that upon a
Change in Control the Company will have sufficient funds to repurchase the
Securities.





The debt
covenants contain certain restrictions as to incurrence of additional
indebtedness; merger, consolidation, dissolution, or any significant change in
corporate structure; non-arm’s length transactions or agreements with
affiliates; 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 whereby JPMorgan Chase Bank, N.A. (formerly known as Chemical Trust
Company of California) acts as a depositary and a collateral agent. As a
depositary agent, it will hold monies, instruments and Securities pledged by the
Company to the collateral agent. The terms of this agreement require the
establishment of several funds, which include a Capital Contribution Fund.
Pursuant to this requirement, the Company’s stockholders deposited an aggregate
capital contribution of approximately $123.3 million to the fund, which was
strictly used to fund the construction of the Casecnan Project when the proceeds
from the Series A Notes and Series B Bonds were fully utilized. The
contributions are included in the “Additional paid-in capital” account in the
accompanying balance sheets.





**7.**
    **Income
      Taxes**





Tax
expense in 2003 of $25.7 million consists primarily of the $24.4 million of
taxes paid in connection with the NIA Arbitration Settlement and the settlement
of the BIR audits for 1996 to 1998 and 2000 to 2001. Since commencing commercial
operations in December 2001, the Company has incurred no income tax expense on
its results from operations due to a six year income tax holiday received from
the Philippine Board of Investments. The Company’s deferred income tax asset of
$5.4 million as of December 31, 2004 and 2003 (net of a valuation allowance
of $2.4 million) consists mainly of the difference between the financial
reporting basis and the tax reporting basis for development and construction
costs. The valuation allowance is recognized for the portion of the deferred
income tax asset for which the tax benefit will not be realized due to the
income tax holiday.





**8.**
    **Related
      Party Transactions**





In the
normal course of business, the Company transacts with its affiliates in the form
of advances for construction related and operating expenses. The payable to
affiliates was $35.1 million and $34.7 million at December 31, 2004 and
2003, respectively. Costs incurred by the Company in transactions with related
parties amounted to $1.5 million, $2.3 million and $1.3 million in 2004, 2003
and 2002, respectively, and consist primarily of reimbursement for costs paid by
affiliates on behalf of the Company.





32





As of
December 31, 2004 and 2003, the Company had outstanding $51.3 million of
unsecured subordinated notes payable to CE Casecnan Ltd., a stockholder, due
November 15, 2005. The unsecured notes bear interest at LIBOR plus two (2%)
percent which is payable every May 15 and November 15. Interest
expense on the unsecured notes was $1.8 million, $1.7 million and $1.9 million
for the years ended December 31, 2004, 2003 and 2002, respectively. Any
overdue payment of principal or interest payable on the notes shall increase the
annual interest by two (2%) percent. At December 31, 2004, the effective
interest rate on the notes was 4.49%. The notes may be prepaid at any time
without premium or penalty but with accrued interest, if any. The unsecured
subordinated notes and any and all payments, whether of principal, interest or
otherwise are subject in all respects to the terms of the Subordination
Agreement dated November 15, 2001 between CE Casecnan Ltd. and the Company
in favor of the Trustee, the Collateral Agent, the co-collateral agent, the
Depositary, any party that becomes a Permitted Counterparty under an Interest
Rate/Currency Protection Agreement, and any party that becomes a working capital
facility agent and any other Person that becomes a secured party under the
Intercreditor Agreement. The Company intends to extend the term of the notes or
to convert them into some form of capital such that no current assets will be
used or current liabilities created to retire the notes.





**9.**
    **Commitments
      and Contingencies**





Stockholder
Litigation





Pursuant
to the share ownership adjustment mechanism in the CE Casecnan stockholder
agreement, which is based upon pro forma financial projections of the Casecnan
Project prepared following commencement of commercial operations, in February
2002, MidAmerican’s indirect wholly owned subsidiary CE Casecnan Ltd., advised
the minority stockholder of the Company, LPG, that MidAmerican’s indirect
ownership interest in CE Casecnan had increased to 100% effective from
commencement of commercial operations. On July 8, 2002, LPG filed a
complaint in the Superior Court of the State of California, City and County of
San Francisco against, among others, CE Casecnan Ltd. and MidAmerican. The
Company is not a defendant in the action. On January 21, 2004, CE Casecnan
Ltd., LPG and the Company entered into a status quo agreement pursuant to which
the parties agreed to set aside certain distributions related to the shares
subject to the LPG dispute and CE Casecnan agreed not to take any further
actions with respect to such distributions without at least 15 days’ prior
notice to LPG. Accordingly, 15% of the dividend declarations in 2004, totaling
$15.9 million, was set aside in a separate bank account in the name of the
Company and is shown as restricted cash and investments and dividends payable in
the accompanying balance sheet at December 31, 2004. The court is currently
expected to rule on the first phase of the litigation before the end of the
first quarter of 2005.





Concentration
of Risk





NIA’s
payments of obligations under the Project Agreement are substantially
denominated in U.S. Dollars and are the Company’s sole source of operating
revenues. Because of the Company’s dependence on NIA, any material failure of
NIA to fulfill its obligations under the Project Agreement and any material
failure of the ROP to fulfill its obligations under the Performance Undertaking
would significantly impair the ability of the Company to meet its existing and
future obligations. No stockholders, partners or affiliates of the Company,
including MidAmerican, and no directors, officers or employees of the Company
will guarantee or be in any way liable for payment of the Company’s obligations.
As a result, payment of the Company’s obligations depends upon the availability
of sufficient revenues from the Company’s business after the payment of
operating expenses.





Regulatory
Environment





The
Philippine Congress has passed EPIRA which is aimed at restructuring the
Philippine power industry, privatization of the Philippine
National Power Corporation and
introduction of a competitive electricity market, among other initiatives. The
implementation of EPIRA may have an impact on the Company's future operations in
the Philippines and the Philippines power industry as a whole, the effect of
which is not yet determinable and estimable.





In June,
2004, Philippine President Gloria Macapagal-Arroyo was re-elected for a six-year
term, through June 2010. President Macapagal-Arroyo has announced a plan to
pursue policies targeting balanced economic growth, strong market-based
industry, and poverty alleviation. In connection with these policies, the
Philippine Department of Energy has announced an energy plan focused on
attaining full electrification throughout the Philippines, further developing
and utilizing renewable energy sources for power and electrification, and
enhancing private sector participation in all energy activities. The
implementation of this energy plan may have an impact on the Company’s future
operations in the Philippines and the Philippine power industry as a whole, the
effect of which is not yet determinable or estimable.




33





On
December 6, 2004, the Municipality of Alfonso Castaneda, Province of Nueva
Vizcaya (the "Municipality") purportedly passed an ordinance which required the
submission of a tax clearance from each of the provincial treasurer
and municipal treasurer as a condition to issuing to CE Casecnan the annual
renewal of its license to operate and business permit. On January 17, 2005,
the Office of the Treasurer of the Municipality provided CE Casecnan a copy
of such ordinance and threatened to close the Casecnan Project pending
submittal by CE Casecnan of the tax clearance certificate. On
January 19, 2005, the Municipality accepted CE Casecnan's payment for the
local business taxes, but the Municipality refused to renew CE Casecnan's
license to operate and business permit, citing the lack of a tax clearance
certificate. CE Casecnan cannot obtain a tax clearance certificate from the
Province of Nueva Vizcaya until real property taxes due to the Province are
paid.  Pursuant to the Supplemental Agreement, CE Casecnan
has withheld payment of real property taxes pending receipt of
authorization from NIA and the Philippine Department of Finance.  Such
withheld amounts have been fully accrued as of December 31, 2004 as part of
accouts payable and trade receivable- water delivery fee.  CE Casecnan
continues to seek such authorization but as of February 11, 2005, it
has not been received.  NIA has filed a protest seeking to nullify the
unwarranted alleged real property tax assessments by the Municipality with the
Local Board of Assessment Appeals and the case has been elevated to the Central
Board of Assessment Appeals on January 12, 2005.  CE Casecnan filed an
action in the Regional Trial Court on January 21, 2005 against the
Municipality and was granted a temporary restraining order barring the
Municipality from closing the Casecnan Project. On February 7, 2005, the
temporary restraining order was extended pending resolution by the Court which
will not occur until after all pleadings are filed on March 11,
2005.  CE Casecnan also has filed an appeal with the Department of Justice
challenging the validity of the municipal ordinance. CE Casecnan has discussed
and intends to continue discussing this matter with appropriate Philippine
government officials in an effort to resolve the situation, and believes the
risk of the Casecnan Project being closed is remote.





**10.**
    **Fair
      Value of Financial Instruments**





Statement
of Financial Accounting Standards No. 107, "Disclosures About Fair Value of
Financial Instruments,” defines the fair value of financial instruments as the
amount at which the instruments could be exchanged in a current transaction
between willing parties. Although management uses its best judgment in
estimating the fair value of these financial instruments, there are inherent
limitations in any estimation technique. Therefore, the fair value estimates
presented herein are not necessarily indicative of the amounts that the Company
could realize in a current transaction.





The
methods and assumptions used to estimate fair value are as follows:





Cash,
trade receivable, note receivable, accounts payable and accrued
expenses





The
carrying amounts reported in the balance sheets approximate fair value due to
the liquidity, the short maturity and nature of such items.





Notes
payable





The
Company has outstanding $51.3 million of unsecured subordinated notes payable to
CE Casecnan Ltd., an affiliate, due November 15, 2005. The unsecured notes
bear interest at LIBOR plus two (2%) percent which is payable every May 15 and
November 15. Interest expense on the unsecured notes was $1.7 million, $1.9
million and $0.2 million for the years ended December 31, 2003, 2002 and
2001, respectively. At December 31, 2004, the effective interest rate on
the notes was 4.49%. It is not practicable to estimate the fair value of the
notes payable for a variety of reasons, including the absence of quoted market
prices for the notes and their subordination provisions to the existing senior
debt of the Company.





Long-term
debt





The fair
value of the Company’s long-term debt is estimated based on quoted market prices
of similar types of arrangements. At December 31, 2004, the Company had
fixed-rate long-term debt of $197.1 million in principal amount and having a
fair value of $220.0 million. At December 31, 2003, the Company had
fixed-rate long-term debt of $246.5 million in principal amount and having a
fair value of $255.5 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 $6.5 million if interest rates were to increase by 10% from their
levels at December 31, 2004. 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.





34





**11.**
    **Operating
      lease rentals and service income**





The
following is the minimum lease rentals and service income in the next five years
on the noncancelable operating lease as of December 31, 2004:





**Year
      Ended**
      **December 31,**
    
    **Amount**2005
    
    82,1402006
    
    86,1362007
    
    88,0532008
    
    88,0532009
    
    88,053





Variable
lease rentals and service income amounted to $26.9 million in 2004, $22.0
million in 2003 and $19.3 million in 2002.





35







Item 9.    Changes in and
Disagreements with Accountants on Accounting and Financial
Disclosures.





None





Item 9A. Controls and
Procedures.




An
evaluation was performed under the supervision and with the participation of the
Company’s management, including the respective persons acting as chief executive
officer and chief financial officer, regarding the effectiveness of the design
and operation of the Company’s disclosure controls and procedures (as defined in
Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as
amended) as of December 31, 2004. Based on that evaluation, the Company’s
management, including the respective persons acting as chief executive officer
and chief financial officer, concluded that the Company’s disclosure controls
and procedures were effective. There have been no significant changes in the
Company’s internal controls or in other factors that could significantly affect
internal controls.




Item 9B. Other
Information.





None





36





**PART
III**





Item 10. Directors and
Executive Officers of the Registrant.





The
following table sets forth the names, ages, and positions of the directors and
executive officers of the Company:





David
      L. Sokol
    
    48
    
    Director
      and ChairmanGregory
      E. Abel
    
    42
    
    Vice
      ChairmanJoseph
      L. Sullivan
    
    50
    
    Director,
      President and General ManagerJames
      D. Stallmeyer
    
    47
    
    Vice
      PresidentPatrick
      J. Goodman
    
    38
    
    Director,
      Senior Vice President and Chief Financial OfficerDouglas
      L. Anderson
    
    46
    
    Director,
      Senior Vice President, General Counsel and Assistant
    SecretaryBrian
      K. Hankel
    
    42
    
    Vice
      President and TreasurerJose
      R. Sandejas
    
    68
    
    Director
      and Corporate SecretaryJose
      Jaime Cruz
    
    34
    
    Director
      and Assistant Corporate SecretaryDavid
      A. Baldwin
    
    40
    
    DirectorScott
      LaPrairie
    
    47
    
    DirectorLinda
      B. Castillo
    
    45
    
    Director





Directors
of the Company are elected annually and hold office until a successor is
elected. Executive officers are chosen from time to time by vote of the Board of
Directors. Pursuant to the terms of the Stockholders Agreement, CE Casecnan Ltd.
is entitled to elect seven of the directors, and each minority investor 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 Peter Kiewit Sons’, Inc. 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 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.





**Joseph
L. Sullivan.** In
addition to serving as Director, President and General Manager for the Company,
Mr. Sullivan is President and General Manager, Philippines for affiliates of the
Company. From 2002 to 2004, Mr. Sullivan served as Executive Vice President for
Operations of Mirant Philippines. From 2001 to 2002, Mr. Sullivan served as
Station Manager of Mirant Sual Power Corporation. Prior to 2001, he held a
series of management and engineering positions at Cajun Electric Power
Cooperative, Inc. and Alabama Power Company.





**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 affiliates of the Company in 1993. Mr. Stallmeyer practiced in the public
finance and banking areas at Chapman and Cutler LLP in Chicago from 1984 to 1987
and in the corporate finance department from 1989 to 1993. Mr. Stallmeyer was an
attorney in the public finance department of the Chicago office of Skadden,
Arps, Slate, Meagher & Flom LLP in 1987 and 1988 and was a legal writing
instructor at the University of Illinois College of Law in 1988 and
1989.





**Patrick
J. Goodman.** In
addition to serving as Director, Senior Vice President and Chief Financial
Officer for the Company, Mr. Goodman is Senior Vice President and Chief
Financial Officer for MidAmerican. Mr. Goodman joined MidAmerican in June 1995,
and served as in various accounting positions, including Senior Vice President
and Chief Accounting Officer. Prior to joining MidAmerican, Mr. Goodman was a
financial manager for National Indemnity Company and a senior associate at
Coopers & Lybrand LLP.





**Douglas
L. Anderson.** In
addition to serving as Director, Senior Vice President, General Counsel and
Assistant Secretary for the Company, Mr. Anderson is Senior Vice President,
General Counsel and Corporate Secretary of MidAmerican. Mr. Anderson joined
MidAmerican in February 1993. Prior to that, Mr. Anderson was in private
practice.




37





****


**Brian
K. Hankel.** In
addition to serving as Vice President and Treasurer for the Company, Mr. Hankel
is Vice President and Treasurer for MidAmerican. Mr. Hankel joined MidAmerican
in February 1992 as a Treasury Analyst and served in that position to December
1995. Mr. Hankel was appointed Assistant Treasurer in January 1996 and was
appointed Treasurer in January 1997. Prior to joining the Company, Mr. Hankel
was a Money Position Analyst at FirsTier Bank of Lincoln from 1988 to 1992.





**Jose
R. 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.





**Jose
Jaime Cruz.** In
addition to serving as a Director and Assistant Corporate Secretary of the
Company, Mr. Cruz is an attorney with the law firm of Quisumbing
Torres.





**David
A. Baldwin.** In
addition to serving as Director, Mr. Baldwin is Senior Vice President of
Development for MidAmerican. From 1998 to March 2004, Mr. Baldwin served as
President and General Manager of MidAmerican affiliates in the Philippines. 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.





**Marivic
Punzalan-Espiritu.** In
addition to serving as a Director of the Company, Ms. Punzalan-Espiritu is a
partner with the law firm of Quisumbing Torres.





**Scott
LaPrairie.** In
addition to serving as a Director of the Company, Mr. LaPrairie is President and
Chief Executive Officer of the LaPrairie Group of Companies.





**Linda
B. Castillo.** In
addition to serving as a Director of the Company, Ms. Castillo is corporate
counsel for the Company and certain of its affiliates.





**Audit
Committee Matters**





During
the fiscal year ended December 31, 2004 and as of the date of this Report,
the Board of Directors had no committees, including any audit committee. The
Company is not an issuer as defined in the Sarbanes-Oxley Act of 2002, it does
not have a class of securities listed on any securities exchange, and it is not
required to have an audit committee. Patrick J. Goodman qualifies as an "audit
committee financial expert." Mr. Goodman is not independent within the meaning
of Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act.





**Code
of Ethics**





The
Company has adopted a code of ethics that applies to its principal executive
officer, principal financial officer and to its controller. The code of ethics
is filed as an exhibit to this Annual Report on Form 10-K.





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.





38





Item 12. Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder
Matters.


****


**Description
of Capital Stock**





As of
December 31, 2004, the authorized capital stock of the Company consisted of
2,148,000 shares of common stock, par value 1.00 Philippine peso ($0.038) per
share (the “Common Stock”), of which 767,162 shares were outstanding. There is
no public trading market for the Common Stock. As of December 31, 2004
there were 11 holders of record of the Common Stock. Holders of Common Stock are
entitled to one vote per share on any matter coming before the stockholders for
a vote.





The Trust
Indenture contains certain restrictions on the payment of dividends with respect
to the Common Stock.





**Principal
Stockholders**





The
following table sets forth information with respect to all persons who own
beneficially more than 5% of the common stock and by all directors and officers
of the Company as a group.





**Number
      of****Name
      and Address of Owner**
    
    **Shares
      Owned***
    
    **%
      of Common**1.CE
      Casecnan II, Inc.(1)
    
    537,005
    
    70%(1)2.CE
      Casecnan Ltd.
    
    230,148
    
    30%(2)
      (3)





*  In
addition, each director of the Company owns one share in the Company as required
by Philippine law.





(1)
    In
      April 2003, CE Casecnan Ltd., a Bermuda registered corporation assigned
      shares in CE Casecnan to CE Casecnan II, Inc., a Philippine corporation.
      CE Casecnan Ltd and CE Casecnan II, Inc are indirectly owned by
      MidAmerican.





(2)
    Pursuant
      to the share ownership adjustment mechanism in the CE Casecnan stockholder
      agreement, which is based upon pro forma financial projections of the
      Casecnan Project prepared following commencement of commercial operations,
      in February 2002, MidAmerican’s indirect wholly owned subsidiary CE
      Casecnan Ltd., advised the minority stockholder of the Company, LPG, that
      MidAmerican’s indirect ownership interest in CE Casecnan had increased to
      100% effective from commencement of commercial operations. On July 8,
      2002, LPG filed a complaint in the Superior Court of the State of
      California, City and County of San Francisco against, among others, CE
      Casecnan Ltd. and MidAmerican. The Company is not a defendant in the
      action. On January 21, 2004, CE Casecnan Ltd., LPG and the Company
      entered into a status quo agreement pursuant to which the parties agreed
      to set aside certain distributions related to the shares subject to the
      LPG dispute and CE Casecnan agreed not to take any further actions with
      respect to such distributions without at least 15 days’ prior notice to
      LPG. Accordingly, 15% of the dividend declarations for the year ended
      December 31, 2004, totaling $15.9 million, was set aside in a
      separate bank account in the name of the Company and is shown as
      restricted cash and investments and dividends payable in the accompanying
      balance sheet at December 31, 2004. The court is currently expected
      to rule on the first phase of the litigation before the end of the first
      quarter of 2005.





(3)
    Includes
      rights to 115,000 shares, which rights were purchased from San Lorenzo
      Ruiz Builders and Developers Group, Inc. in 1998. The 115,000 shares are
      subject to the ownership adjustment mechanism in the Stockholders
      Agreement discussed in Note (2). San Lorenzo retained an option to
      repurchase the 115,000 shares, if any, remaining after such ownership
      adjustment.







Item 13.   Certain Relationships
and Related Transactions.





Not
Applicable.




39




Item 14.   Principal Accountant
Fees and Services.





Aggregate
fees billed to CE Casecnan as a entity during the fiscal years ending
December 31, 2004 and 2003 by its principal accounting firm, Joaquin
Cunanan & Co. (A PricewaterhouseCoopers Member Firm) and their respective
affiliates (collectively, " Joaquin Cunanan & Co."), are set forth below (in
thousands).





**Year
      Ended December 31,****2004**
    
    **2003**Audit
      Fees(1)
    
    $
    32
    
    $
    222Audit-Related
      Fees(2)
    
    
    3
    
    
    -Tax
      Fees(3)
    
    
    31
    
    
    388All
      Other Fees(4)
    
    
    -
    
    
    -Total
      aggregate fees billed
    
    $
    66
    
    $
    610





(1)
    
    Includes
      the aggregate fees billed for each of the last two fiscal years for
      professional services rendered by Joaquin Cunanan & Co. for the audit
      of the Company’s financial statements and review of financial statements
      included in the Company’s Form 10-K and 10-Q for services that are
      normally provided by Joaquin Cunanan & Co. in connection with
      statutory and regulatory filings or engagements for those fiscal
      years.





(2)
    
    Includes
      the aggregate fees billed in each of the last two fiscal years for
      assurance and related services by Joaquin Cunanan & Co. that are
      reasonably related to the performance of the audit or review of the
      registrant's financial statements. Services included in this category
      include audits of benefit plans, due diligence for possible acquisitions
      and consultation pertaining to new and proposed accounting and regulatory
      rules.





(3)
    
    Includes
      the aggregate fees billed in each of the last two fiscal years for
      professional services rendered by Joaquin Cunanan & Co. for tax
      compliance, tax advice, and tax planning.





(4)
    
    Includes
      the aggregate fees billed in each of the last two fiscal years for
      products and services provided by Joaquin Cunanan & Co., other than
      the services reported as “Audit Fees,” “Audit-Related Fees” or “Tax Fees.”





40








**PART
IV**


Item 15. Exhibits and
Financial Statement Schedules.




(a)
    Financial
      Statements and Schedules(i)
    Financial
      StatementsFinancial
      Statements are included in Part II of this Form 10-K.(ii)
    Financial
      Statement SchedulesSchedules
      have been omitted because they are either not applicable, not required or
      the information required to be set forth therein is included in the
      financial statements or notes thereto.(b)
    ExhibitsThe
      exhibits listed on the accompanying Exhibit Index are filed as part of
      this Annual Report.(c)
    Financial
      statements required by Regulation S-X, which are excluded from the Annual
      Report by Rule 14a-3(b).Not
      applicable.




41







**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 February 11, 2005.








**CE
      CASECNAN WATER AND ENERGY COMPANY, INC.**By:
    /s/
      * Joseph L. SullivanJoseph
      L. SullivanPresident(chief
      executive officer)








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*
    
    Directorand Chairman of the Board
    
    February
      11, 2005David
      L. Sokol/s/
      Joseph L. Sullivan*
    
    Director,President and General Manager
    
    February
      11, 2005Joseph
      L. Sullivan
    
    (Principal
      Executive Officer)/s/
      Patrick J. Goodman*
    
    Director,
      Senior Vice President and Chief Financial Officer
    
    February
      11, 2005Patrick
      J. Goodman
    
    (PrincipalFinancial Officer)/s/
      Douglas L. Anderson
    
    Director,
      Senior Vice President, General Counsel
    
    February
      11, 2005Douglas
      L. Anderson
    
    andAssistant SecretaryDirector
    
    February
      11, 2005Jose
      R. SandejasDirector
    
    February
      11, 2005Jose
      Jaime Cruz/s/
      David A. Baldwin*
    
    Director
    
    February
      11, 2005David
      A. BaldwinDirector
    
    February
      11, 2005Scott
      LaPrairie/s/
      Linda B. Castillo*
    
    Director
    
    February
      11, 2005Linda
      B. Castillo*By:/s/
      Douglas L. AndersonDouglas
      L. AndersonAttorney-in-Fact






42





**EXHIBIT INDEX**





Exhibit
      No.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 the 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).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).10.8
    Supplemental
      Agreement between CE Casecnan Water and Energy Company, Inc. and the
      Philippines National Irrigation Administration dated as of
      September 29, 2003 (incorporated by reference to Exhibit 99.1 to the
      Company’s Form 8-K dated October 15, 2003).14.1
    CE
      Casecnan Water and Energy Company, Inc. Code of Ethics for Chief Executive
      Officer, Chief Financial Officer and Chief Accounting Officer
      (incorporated by reference to Exhibit 14.1 to the Company’s Form 10-K
      dated December 31, 2003).24
    Power
      of Attorney





43











31.1
    Chief
      Executive Officer’s Certificate Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
    Chief
      Financial Officer’s Certificate Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
    Chief
      Executive Officer’s Certificate Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.32.2
    Chief
      Financial Officer’s Certificate Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.




44