---

UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K





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





For the
fiscal year ended December 31, 2009





or





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





For the
transition period from ______ to _______





Commission
            
            Exact
      name of registrant as specified in its charter;
            
            IRS
      EmployerFile
      Number
            
            State
      or other jurisdiction of incorporation or
    organization
            
            Identification No.001-12995
            
            CE
      CASECNAN WATER AND ENERGY COMPANY, INC.
            
            Not
      Applicable24th
      Floor, 6750 Building, Ayala AvenueMakati
      City, Metro Manila, Philippines011
      63 2 892-0276





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





Title
      of each class
            
            Name
      of each exchange on which registered11.95%
      Senior Secured Series B Bonds
      due November 15, 2010
            
            New
      York Stock Exchange





Securities
registered pursuant to Section 12(g) of the Act: None





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes  ̈ No T





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes  ̈ No T





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes   T  No   ̈





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




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s 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. T





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





Large
      accelerated filer *
            Accelerated
      filer *
            Non-accelerated
      filer T
            Smaller reporting company *





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes  ̈ No T





All of
the shares of common equity of CE Casecnan Water and Energy Company, Inc. are
privately held by a limited group of investors. As of January 31, 2010, the
number of outstanding shares of $0.038 par value common stock was
767,162.





TABLE OF
CONTENTS





PART
      IItem 1.
            Business
            4Item 1A.
            Risk Factors
            5Item 1B.
            Unresolved Staff Comments
            6Item 2.
            Properties
            6Item 3.
            Legal Proceedings
            6Item 4.
            Submission of Matters to a Vote of Security
      Holders
            6PART
      IIItem 5.
            Market for Registrant’s Common Equity, Related Stockholder
      Matters and Issuer Purchases of Equity Securities
            7Item 6.
            Selected Financial Data
            7Item 7.
            Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
            7Item 7A.
            Quantitative and Qualitative Disclosures About Market
      Risk
            11Item 8.
            Financial Statements and Supplementary
    Data
            13Item 9.
            Changes in and Disagreements With Accountants on Accounting
      and Financial Disclosure
            29Item 9A(T).
            Controls and Procedures
            29Item 9B.
            Other Information
            29PART
      IIIItem10.
            Directors, Executive Officers and Corporate
      Governance
            30Item 11.
            Executive Compensation
            31Item 12.
            Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters
            31Item 13.
            Certain Relationships and Related Transactions, and
      Director Independence
            32Item 14.
            Principal Accountant Fees and Services
            32PART
      IVItem 15.
            Exhibits and Financial Statement
    Schedules
            34Signatures
            
            35Exhibit Index
            
            36





2




Forward-Looking
Statements





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





·
            changes
      in weather conditions that could affect operating
  revenue;





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





·
            changes
      in governmental, legislative or regulatory requirements in the
      Philippines, including those pertaining to taxes, affecting the Company or
      the power generation industry;





·
            availability
      of qualified personnel;





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





·
            other
      risks or unforeseen events, including litigation, wars, the effects of
      terrorism, embargoes and other catastrophic events;
  and





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





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


3


PART
I





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 (“MEHC”) in September 1994 solely to develop, construct, own
and operate a combined irrigation and hydroelectric power generation facility
with a rated capacity of 150 megawatts (the “Casecnan Project”) located on
the island of Luzon in the Republic of the Philippines (the “ROP”).





CE
Casecnan’s outstanding debt securities are recourse only to the Company. The
Company’s owners have 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, Metro Manila, Philippines, and its telephone number
is 63 2 892-0276. The Company’s principal operations office is located
at Pantabangan in the Province of Nueva Ecija, Philippines.





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 in length. During the water transfer, the
elevation differences between the two watersheds allows electricity to be
generated by a 150 megawatt (“MW”) 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 water storage reservoir at
Pantabangan, providing additional water for irrigation and increasing the
potential electrical generation at two downstream hydroelectric facilities owned
by the Philippine National Power Corporation (“NPC”), 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”), a
ROP-owned and controlled corporation.





The
Company has a contract with the ROP, through NIA, for the development,
construction and operation of a hydroelectric power plant and related facilities
under a build-own-operate-transfer agreement, as amended by the Supplemental
Agreement dated September 29, 2003 (the “Project Agreement”), covering a
20-year cooperation period (“Cooperation Period”) ending December 11, 2021, with
obligations for the delivery of water and electricity. At the end of the
Cooperation Period, the Casecnan Project will be transferred to the ROP at no
cost on an “as is” basis. Under the terms of its registration with the
Philippine Board of Investments, CE Casecnan was entitled to certain
incentives, including an income tax holiday for six years from the start of
commercial operations, which expired on December 11, 2007. The
Company’s taxable income from December 11, 2007 forward is subject to
income tax at the current Philippine statutory rate.





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.





CE
Casecnan financed a portion of the costs of the Casecnan Project through the
issuance of long-term debt. As of January 31, 2010, the outstanding
long-term debt was rated BB- with stable outlook by Standard and Poor’s and Ba3
with stable outlook by Moody’s Investors Service.





Concentration
of Risk





NIA’s
obligations under the Project Agreement are guaranteed by the full faith and
credit of the ROP (the “Performance Undertaking”). The Project Agreement and the
Performance Undertaking provide for the resolution of disputes by binding
arbitration in Singapore under international arbitration rules.




4


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





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. The proceeds
of such insurance may not be adequate to cover reduced revenue, increased
expenses or other liabilities arising from the occurrence of catastrophic
events. 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
and Legislative Matters





The
Philippine Congress has passed the Electric Power Industry Reform Act of 2001
(“EPIRA”), which is aimed at restructuring the Philippine power industry,
privatizing the NPC and introducing a competitive electricity market, among
other initiatives. The implementation of EPIRA may impact the Company’s future
operations in the Philippines and the Philippine power industry as a whole, the
effect of which is not yet known as changes resulting from EPIRA are
ongoing.





Employees





At
December 31, 2009, the Company had 42 full-time employees.





Item
1A.              Risk
Factors





We are
subject to numerous risks, including, but not limited to, those set forth below.
Careful consideration of these risks, together with all of the other information
included in this Form 10-K and the other public information filed by us, should
be made before making an investment decision. Additional risks and uncertainties
not presently known or that are currently deemed immaterial may also impair our
business operations.





We
are dependent upon a single customer for all of our operating
revenue.





NIA’s
obligations under the Project Agreement are our sole source of operating
revenue. Because of our 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
materially adversely affect our financial results.





We
are subject to risk of loss from political and other risks arising from foreign
sovereignty over areas in which we conduct operations.





We are
subject to significant political and other uncertainties, including
expropriation, nationalization, renegotiation or nullification of existing
contracts, imposition of new federal or local taxes or changes in tax rates,
currency availability and exchange restrictions, changing political conditions
and international monetary fluctuations. The government of the Philippines
exercises a significant influence over the Philippine economy. There can be no
assurance that future developments in the Philippines will not impair the
Casecnan Project’s operations or our revenue.




5


Changes
in laws, policies, regulations, environmental standards and other mandates
imposed by Philippine authorities have a significant impact on our
operations.





We are
subject to statutory and regulatory standards, including those related to energy
and environmental laws. Business licenses and permits must be renewed annually
to continue operating the Casecnan Project. Delay in receipt or failure to
obtain these permits or to comply with applicable standards could restrict
operation of the Casecnan Project or result in additional costs or taxes. The
adoption of new laws, policies and regulations, or changes in the interpretation
or application of existing laws, policies and regulations that modify the
present regulatory environment could have a material adverse affect on our
ability to operate the Casecnan Project.





Our
assets are subject to significant operating uncertainties.





The
Casecnan Project is a complex infrastructure project and power plant. Operation
of the Casecnan Project may be adversely affected by a variety of operating
uncertainties. For example, the breakdown or failure of equipment or processes
or the performance of equipment at levels below those originally demonstrated,
whether due to ordinary wear and tear, unexpected degradation or other events
could increase the cost of operating the Casecnan Project or require substantial
capital expenditures, thereby adversely affecting our financial
results.





Variability
in rainfall and water flows has a significant impact on our operating
revenue.





A
significant portion of the Casecnan Project’s revenue is required to be paid by
NIA without regard to actual water flows. However, a significant component of
revenue, approximately 40% in 2009, consists of variable water and energy
delivery fees that are dependent upon water flow volumes. No assurance can be
given that future rainfall and water flows will approach historical
levels.





Our
assets are subject to potentially catastrophic geologic, natural or
weather-related risks.





Earthquakes,
floods, volcanic eruptions, fires or other similar catastrophic events could
cause personal injury, loss of life, damage or destruction to the Casecnan
Project, or suspension of operations. Although we maintain insurance coverage
(including business interruption insurance) to protect against certain of these
risks, the proceeds of such insurance may not be adequate to cover reduced
revenue, increased expenses or other liabilities arising from the occurrence of
any of the events described above. 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 we are insured will cover all
losses.





We
are subject to risk of loss from civil strife, acts of war and terrorist
activities.





The
Casecnan Project is located in a remote region of the Philippines and is
therefore subject to risks of war, civil strife, guerilla activity and
terrorism. Armed groups opposing the Philippine government have attempted to
exert control over the region in the past, and there can be no assurance that
any such attempts in the future will not disrupt our operations or impair our
assets.





Item
1B.              Unresolved
Staff Comments





Not
applicable.





Item
2.                 Properties





CE
Casecnan’s principal property is a 150 MW hydroelectric power facility
located on the island of Luzon in the ROP.





Item
3.                 Legal
Proceedings





None.





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





Not
applicable.


6


PART
II





Item
5.                 Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities





Not
applicable.





Item
6.                 Selected
Financial Data





The
following table sets forth the Company’s selected historical financial data,
which should be read in conjunction with the information included in Item 7 of
this Form 10-K and with the Company’s historical Financial Statements and
the notes thereto included in Item 8 of this Form 10-K. The selected
historical financial data has been derived from the Company’s audited historical
Financial Statements and notes thereto (amounts in thousands).





Years
      ended December 31,2009
            
            
            2008
            
            
            2007
            
            
            2006
            
            
            2005Statement
      of Operations Data:Revenue
      (1)
            
            $
            146,912
            
            
            $
            137,638
            
            
            $
            124,733
            
            
            $
            148,529
            
            
            $
            107,000Operating
      income
            
            
            114,157
            
            
            
            104,202
            
            
            
            93,319
            
            
            
            117,433
            
            
            
            75,674Net
      income (2)
            
            
            93,339
            
            
            
            73,835
            
            
            
            78,539
            
            
            
            100,804
            
            
            
            52,009Electricity
      produced (Gigawatt-hours) (1)
            
            
            606.5
            
            
            
            517.3
            
            
            
            433.6
            
            
            
            538.5
            
            
            
            406.5Water
      delivered (million cubic meters) (1)
            
            
            1,076.5
            
            
            
            909.7
            
            
            
            750.0
            
            
            
            996.0
            
            
            
            723.0As
      of December 31,2009
            
            
            
            2008
            
            
            
            2007
            
            
            
            2006
            
            
            
            2005Balance
      Sheet Data:Total
      assets
            
            $
            385,752
            
            
            $
            402,724
            
            
            $
            410,717
            
            
            $
            444,970
            
            
            $
            470,017Notes
      payable
            
            
            -
            
            
            
            7,115
            
            
            
            39,200
            
            
            
            51,263
            
            
            
            51,263Long-term
      debt, including current portion
            
            
            17,150
            
            
            
            30,870
            
            
            
            68,600
            
            
            
            106,330
            
            
            
            142,345Total
      shareholders’ equity
            
            
            339,001
            
            
            
            340,556
            
            
            
            271,840
            
            
            
            193,301
            
            
            
            191,997





(1)           Revenue
increased in 2009, 2008 and 2006 due to substantially higher water flows and
accompanying water deliveries and electricity generation.


(2)           Net
income decreased in 2008 due to the expiration of the income tax holiday on
December 11, 2007.





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
that have affected the financial condition and results of operations of the
Company during the periods included herein. Explanations include management’s
best estimate of the impact of weather and other factors. This discussion should
be read in conjunction with Item 6 of this Form 10-K and with the Company’s
historical Financial Statements and the notes thereto included in Item 8 of
this Form 10-K. The Company’s actual results in the future could differ
significantly from the historical results.





Results
of Operations





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




7


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





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





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





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





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





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




2009
              
              
              2008
              
              
              2007Electricity
      produced (GWh)
              
              
              606.5
              
              
              
              517.3
              
              
              
              433.6Water
      delivered (million cubic meters)
              
              
              1,076.5
              
              
              
              909.7
              
              
              
              750.0




The
Company's water and energy fees for the years ended December 31 are as
follows (in millions):





2009
            
            
            2008
            
            
            2007Water
      delivery fees
            
            $
            79.6
            
            
            $
            61.0
            
            
            $
            57.4Energy
      delivery fees
            
            
            67.3
            
            
            
            76.6
            
            
            
            67.3Total
      water and energy fees
            
            $
            146.9
            
            
            $
            137.6
            
            
            $
            124.7





Revenue
for 2009 increased $9.3 million to $146.9 million compared to 2008.
The $18.6 million increase in water delivery fees was due to exceptionally
high water flow in 2009 which resulted in higher water deliveries compared to
2008. Despite higher electricity production in 2009 due to the exceptionally
high water flow, energy delivery fees were $9.3 million lower than 2008 due
to lower prices for variable energy and contractual provisions that require
energy deliveries above 550 GWh within a contract year to be at no cost to NIA.
Revenue for 2008 increased $12.9 million to $137.6 million compared to
2007. The increases in water delivery fees and energy delivery fees in 2008 were
due to higher than average water flow which resulted in higher water deliveries
and related energy production compared to 2007.





Plant
operations and other operating expenses for 2009 decreased $0.5 million
compared to 2008 due to lower general and administrative costs. Plant operations
and other operating expenses for 2008 increased $1.7 million compared with
2007, due primarily to the favorable resolution of a vendor disagreement in 2007
and higher general and administrative costs in 2008.





8





Interest
expense for 2009 decreased $5.3 million compared to 2008 and for 2008
decreased $8.2 million compared to 2007, due primarily to lower outstanding
debt balances resulting from the scheduled repayment of long-term debt and the
repayment of notes payable.





Interest
income for 2009 decreased $1.2 million compared to 2008 and for 2008
decreased $0.8 million compared to 2007 as a result of lower interest rates and
lower average cash balances.





Other,
net for 2009 increased $0.6 million compared to 2008 and for 2008 increased
$0.6 million compared to 2007 due to higher allocable output value added
tax and the impact of foreign currency exchange rates on peso-denominated
transactions.





Income
tax expense was $23.3 million, $28.2 million and $4.6 million in
2009, 2008 and 2007, respectively. The decrease in income tax in 2009 was due to
a reduction in the Philippine statutory income tax rate from 35% to 30% and the
Company’s adoption of the optional standard deduction method for calculating
income tax liabilities, partially offset by higher taxable income. The increase
in income tax expense in 2008 was due to the expiration of the income tax
holiday on December 11, 2007. Thereafter, the Company’s taxable income
became subject to income tax at the Philippine statutory rate. Prior to
December 11, 2007, income tax expense was limited to interest income and
other income not subject to the income tax holiday.





Liquidity
and Capital Resources





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





The
Company’s cash and cash equivalents were $20.1 million and
$49.4 million at December 31, 2009 and 2008,
respectively.





Cash Flows from Operating
Activities





Net cash
flows from operating activities for the years ended December 31, 2009 and
2008 were $101.1 million and $88.9 million, respectively. The increase
in 2009 was mainly due to higher revenue collections and lower payments for
income taxes and interest.





Cash Flows from Investing
Activities





Net cash
flows from investing activities for the years ended December 31, 2009 and
2008 were $(15.6) million and $(1.0) million, respectively. In 2009,
the Company deposited $5.0 million of declared and unpaid dividends on common
stock relating to the disputed 5% ownership interest in the Company into a
restricted cash account. Refer to note 9 of Notes to Financial Statements for
information regarding the disputed ownership interest. In 2009, the Company made
additional payments of $9.6 million to the debt service reserve
fund.





Cash Flows from Financing
Activities





Net cash
flows from financing activities for the years ended December 31, 2009 and
2008 were $(114.8) million and $(69.6) million, respectively. In 2009,
the Company paid dividends on common stock of $94.1 million, made
$13.7 million of project financing debt scheduled payments and repaid the
remaining $7.1 million of notes payable to CE Casecnan Ltd. (the “Notes”).
In 2008, the Company made $37.7 million of project financing debt scheduled
payments and repaid $32.1 million of the Notes.




9


Auction
Rate Securities





With the
liquidity issues experienced in global credit and capital markets, the
$21.4 million par value of auction rate securities held by the Company at
December 31, 2009 have experienced multiple failed auctions as the amount
of securities submitted for sale has exceeded the amount of purchase orders. The
securities are rated AA- and A by Standard & Poor’s at December 31,
2009. Although there is no current liquid market for the auction rate
securities, the Company believes the underlying creditworthiness of the
repayment sources for these securities’ principal and interest has not
materially deteriorated. Further, the Company does not intend to sell, nor is it
more-likely-than-not that the Company will be required to sell, the auction rate
securities before an orderly market develops and they can be sold for a price
that approximates par value. Therefore, the Company considers the auction rate
securities to be temporarily impaired. At December 31, 2009, the Company’s
pre-tax temporary impairment of the auction rate securities totaled
$1.8 million. If the underlying assets and the guarantors of the auction
rate securities experience credit deterioration, the Company may not ultimately
realize the par value of the investments held at December 31,
2009.





Supplemental
Real Property Tax





In July
2008, CE Casecnan received a supplemental real property tax assessment
totaling $28.6 million from the province of Nueva Ecija and the
municipality of Pantabangan for the tax years 2002 through the second quarter of
2008. Subsequent amendments of the supplemental assessment to reflect additional
taxable periods in 2008 and 2009 increased the assessment to $32.5 million.
CE Casecnan forwarded the assessment to NIA and the Philippine Department of
Finance (“DOF”), which must authorize any payment for real property taxes and
are obligated to reimburse the Company pursuant to the Project Agreement. In
December 2008, pursuant to written authorization from NIA and DOF, CE
Casecnan tendered $6.8 million as partial payment of the supplemental
assessment and recorded a receivable of an equal amount for the expected full
reimbursement to CE Casecnan from NIA. The $6.8 million partial payment was
reimbursed by NIA in July 2009. In January 2009, CE Casecnan filed a protest on
the supplemental assessment which the provincial treasurer failed to resolve
timely and in May 2009, filed an appeal with the Local Board of Assessment
Appeals. In October 2009, pursuant to written authorization from NIA and DOF, CE
Casecnan paid, under protest, $5.0 million to the province of Nueva Ecija.
A receivable of an equal amount was accrued as of December 31, 2009 to
reflect the expected full reimbursement to CE Casecnan from NIA. The
$5.0 million payment was reimbursed by NIA in January 2010. Discussions
continue among CE Casecnan, NIA, DOF and the province of Nueva Ecija to resolve
the supplemental real property tax assessment. No further liability for
supplemental real property tax has been recognized as the Company believes that
the claim is without merit.





In March
2009, CE Casecnan received a supplemental real property tax assessment totaling
$36.5 million from the province of Nueva Vizcaya for the tax years 2002 to
2009. CE Casecnan forwarded the assessment to NIA and the DOF, which must
authorize any payment for real property taxes and are obligated to reimburse the
Company pursuant to the Project Agreement. In May 2009, upon instructions from
NIA, CE Casecnan filed an appeal of the supplemental assessment with the Local
Board of Assessment Appeals. In November 2009, CE Casecnan paid
$16.1 million to the province of Nueva Vizcaya pursuant to an interim
agreement between CE Casecnan and the province of Nueva Vizcaya which provides
for a cessation of collection efforts by the province of Nueva Vizcaya until a
final determination of taxable value is rendered. A receivable of an equal
amount was accrued as of December 31, 2009 to reflect the expected full
reimbursement to CE Casecnan from NIA. Reimbursement from NIA is due in the
second quarter of 2010. Discussions continue among CE Casecnan, NIA, DOF and the
province of Nueva Vizcaya to resolve the supplemental real property tax
assessment. No further liability for supplemental real property tax has been
recognized as the Company believes that the claim is without merit.





National
Wealth Tax





In July
2008, CE Casecnan received an assessment totaling $4.1 million from the
municipality of Alfonso Castaneda for a share of national wealth tax it claims
is owed by the Company for the years from 2002 through 2007. CE Casecnan
forwarded the assessment to NIA and the DOF, which must authorize any payment
for national wealth taxes and are obligated to reimburse the Company pursuant to
the Project Agreement. In September 2008, CE Casecnan received a temporary
restraining order to enjoin the municipality of Alfonso Castaneda from pursuing
its collection efforts until the matter can be decided by the court. A pre-trial
hearing was held in December 2008. The proceedings were suspended to allow the
municipality of Alfonso Castaneda to provide other local government units the
opportunity to intervene in the case. At the June 2009 hearing, the judge
summoned all affected local government units to participate in the hearing and
file the necessary motions for leave for intervention and third party
complaints. The next hearing date is set for February 24, 2010. No
liability for national wealth tax has been recognized as the Company believes
that the claim is without merit.




10


Franchise
Tax





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





Contractual
Obligations





The
Company has contractual obligations that may affect its financial condition.
Contractual obligations to make future payments arise from long-term debt. The
Company expects to make $18.7 million of scheduled payments on its
long-term debt, which matures in November 2010, including $17.2 million of
principal and $1.5 million of interest.





Critical
Accounting Estimates





Certain
accounting measurements require management to make estimates and judgments
concerning transactions that will be settled several years in the future.
Amounts recognized on the Financial Statements based on such estimates involve
numerous assumptions subject to varying and potentially significant degrees of
judgment and uncertainty. Accordingly, the amounts currently reflected on the
Financial Statements will likely change in the future as additional information
becomes available. The following critical accounting estimates are impacted
significantly by the Company’s methods, judgments and assumptions used in the
preparation of the Financial Statements and should be read in conjunction with
the Company’s Summary of Significant Accounting Policies included in Note 2
of Notes to Financial Statements in Item 8 of this Form 10-K.





Allowance for Doubtful
Accounts





The
allowance for doubtful accounts is based on the Company’s assessment of the
collectability of payments from NIA. This assessment requires judgment regarding
the outcome of disputes, arbitrations and the ability of the customer to pay the
amounts owed to the Company.





Auction Rate Securities -
Measurement Principles





The
Company has investments in auction rate securities that are measured at fair
value on the Financial Statements. With the liquidity issues experienced in
global credit and capital markets, the auction rate securities held by the
Company have experienced multiple failed auctions as the amount of securities
submitted for sale has exceeded the amount of purchase orders. The fair values
of the auction rate securities are determined using internally developed
discounted cash flow models based on available observable market data and the
Company’s judgment about the assumptions, including liquidity and nonperformance
risks, which market participants would use in pricing the asset.





Item
7A.              Quantitative
and Qualitative Disclosures About Market Risk





The
Company’s Balance Sheets include assets and liabilities with fair values that
are subject to market risks. The Company’s significant market risks are
primarily associated with interest rates and credit. The following sections
address the significant market risks associated with the Company’s business
activities.





Interest Rate
Risk





As of
December 31, 2009, the Company had fixed-rate long-term debt totaling
$17.2 million with a total fair value of $17.9 million. Because of
their fixed interest rates, these instruments 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 $0.1 million if interest rates
were to increase by 10% from their levels as of December 31, 2009.
Comparatively, as of December 31, 2008, the Company had fixed-rate
long-term debt totaling $30.9 million with a total fair value of
$31.4 million. The fair value of these instruments would have decreased by
$0.6 million if interest rates had increased by 10% from their levels at
December 31, 2008. 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.





11





Credit
Risk





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





With the
liquidity issues experienced in global credit and capital markets, the
$21.4 million par value of auction rate securities held by the Company at
December 31, 2009, have experienced multiple failed auctions as the amount
of securities submitted for sale has exceeded the amount of purchase orders. The
securities are rated AA- and A by Standard & Poor’s at December 31,
2009. Although there is no current liquid market for the auction rate
securities, the Company believes the underlying creditworthiness of the
repayment sources for these securities’ principal and interest has not
materially deteriorated. Further, the Company does not intend to sell, nor is it
more-likely-than-not that the Company will be required to sell, the auction rate
securities before an orderly market develops and they can be sold at a price
that approximates par value. Therefore, the Company considers the auction rate
securities to be temporarily impaired. At December 31, 2009 the Company’s
pre-tax temporary impairment of the auction rate securities totaled
$1.8 million. If the underlying assets and the guarantors of the auction
rate securities experience credit deterioration, the Company may not ultimately
realize the par value of the investments held at December 31,
2009.


12


Item
8.                 Financial
Statements and Supplementary Data




Report
      of Independent Registered Public Accounting Firm
              14Balance
      Sheets as of December 31, 2009 and 2008
              16Statements
      of Operations for the Years Ended December 31, 2009, 2008 and
      2007
              17Statements
      of Cash Flows for the Years Ended December 31, 2009, 2008 and
      2007
              18Statements
      of Changes In Shareholders’ Equity for the Years Ended December 31, 2009,
      2008 and 2007
              19Notes
      to Financial Statements
              20




13




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM






To the
Board of Directors and Shareholders of


CE
Casecnan Water and Energy Company, Inc.






We have
audited the accompanying balance sheets of CE Casecnan Water and Energy Company,
Inc. (the “Company”) as of December 31, 2009 and 2008, and the related
statements of operations, cash flows, and changes in shareholders’ equity for
the years then ended. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
financial statements based on our 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. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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, such 2009 and 2008 financial statements present fairly, in all material
respects, the financial position of CE Casecnan Water and Energy Company, Inc.
as of December 31, 2009 and 2008, and the results of its operations and its
cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.







/s/
Manabat Delgado Amper & Co.





Manabat
Delgado Amper & Co.


Member of
Deloitte Touche Tohmatsu


Makati
City, Philippines


February
23, 2010


14


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Shareholders of


CE
Casecnan Water and Energy Company, Inc.








We have
audited the accompanying statements of operations, changes in shareholders’
equity and cash flows of CE Casecnan Water and Energy Company, Inc. for the year
ended December 31, 2007. These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on
these financial statements based on our audit.





We
conducted our audit 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 audit provides a
reasonable basis for our opinion.





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the results of operations and cash flows of
CE Casecnan Water and Energy Company, Inc. for the year ended
December 31, 2007, in conformity with accounting principles generally
accepted in the United States of America.





/s/ Isla
Lipana & Co.





ISLA
LIPANA & CO.


A
PricewaterhouseCoopers member firm


Makati
City, Philippines


February
27, 2008




15





CE
CASECNAN WATER AND ENERGY COMPANY, INC.


BALANCE SHEETS


(Amounts
in thousands, except share data)





As
      of December 31,2009
            
            
            2008ASSETSCurrent
      assets:Cash
      and cash equivalents
            
            $
            20,068
            
            
            $
            49,350Restricted
      cash and investments
            
            
            37,447
            
            
            
            22,881Receivables,
      net
            
            
            34,189
            
            
            
            20,308Other
      current assets
            
            
            9,027
            
            
            
            7,387Total
      current assets
            
            
            100,731
            
            
            
            99,926Property,
      plant and equipment, net
            
            
            260,579
            
            
            
            281,485Other
      investments
            
            
            19,572
            
            
            
            14,096Deferred
      income taxes
            
            
            4,802
            
            
            
            6,995Other
            
            
            68
            
            
            
            222Total
      assets
            
            $
            385,752
            
            
            $
            402,724LIABILITIES
      AND SHAREHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable and other accrued liabilities
            
            $
            1,670
            
            
            $
            1,748Dividends
      payable
            
            
            15,775
            
            
            
            10,825Accrued
      interest
            
            
            256
            
            
            
            3,067Accrued
      property, income  and other taxes
            
            
            9,098
            
            
            
            5,817Payable
      to affiliates
            
            
            2,802
            
            
            
            2,726Notes
      payable
            
            
            -
            
            
            
            7,115Current
      portion of long-term debt
            
            
            17,150
            
            
            
            13,720Total
      current liabilities
            
            
            46,751
            
            
            
            45,018Long-term
      debt
            
            
            -
            
            
            
            17,150Total
      liabilities
            
            
            46,751
            
            
            
            62,168Commitments
      and contingencies (Note 9)Shareholders’
      equity:Common
      shares - 2,148,000 shares authorized, one Philippine peso ($0.038) par
      value; 767,162 shares issued and outstanding
            
            
            29
            
            
            
            29Additional
      paid-in capital
            
            
            123,807
            
            
            
            123,807Retained
      earnings
            
            
            216,178
            
            
            
            221,839Accumulated
      other comprehensive loss, net
            
            
            (1,013
            )
            
            
            (5,119
            )Total
      shareholders’ equity
            
            
            339,001
            
            
            
            340,556Total
      liabilities and shareholders’ equity
            
            $
            385,752
            
            
            $
            402,724





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


16





CE
CASECNAN WATER AND ENERGY COMPANY, INC.


STATEMENTS OF OPERATIONS


(Amounts
in thousands)





Years
      Ended December 31,2009
            
            
            2008
            
            
            2007Revenue
      - Lease rentals and service contracts
            
            $
            146,912
            
            
            $
            137,638
            
            
            $
            124,733Operating
      expenses:Depreciation
            
            
            21,942
            
            
            
            22,121
            
            
            
            21,825Plant
      operations and other operating expenses
            
            
            10,813
            
            
            
            11,315
            
            
            
            9,589Total
      operating expenses
            
            
            32,755
            
            
            
            33,436
            
            
            
            31,414Operating
      income
            
            
            114,157
            
            
            
            104,202
            
            
            
            93,319Other
      income (expense):Interest
      expense
            
            
            (3,283
            )
            
            
            (8,639
            )
            
            
            (16,784
            )Interest
      income
            
            
            817
            
            
            
            2,030
            
            
            
            2,810Other,
      net
            
            
            4,960
            
            
            
            4,399
            
            
            
            3,761Total
      other income (expense)
            
            
            2,494
            
            
            
            (2,210
            )
            
            
            (10,213
            )Income
      before income tax expense
            
            
            116,651
            
            
            
            101,992
            
            
            
            83,106Income
      tax expense
            
            
            23,312
            
            
            
            28,157
            
            
            
            4,567Net
      income
            
            $
            93,339
            
            
            $
            73,835
            
            
            $
            78,539





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




17


CE
CASECNAN WATER AND ENERGY COMPANY, INC.


STATEMENTS OF CASH FLOWS


(Amounts
in thousands)





Years
      Ended December 31,2009
            
            
            2008
            
            
            2007Cash
      flows from operating activities:Net
      income
            
            $
            93,339
            
            
            $
            73,835
            
            
            $
            78,539Adjustments
      to reconcile net income to net cash flows from operating
      activities:Depreciation
            
            
            21,942
            
            
            
            22,121
            
            
            
            21,825Amortization
      of bond issue costs
            
            
            154
            
            
            
            317
            
            
            
            518Provision
      for deferred income taxes
            
            
            433
            
            
            
            397
            
            
            
            (103
            )Changes
      in other operating assets and liabilities:Receivables,
      net
            
            
            (13,881
            )
            
            
            57
            
            
            
            (6,363
            )Other
      current assets
            
            
            (1,640
            )
            
            
            (734
            )
            
            
            (645
            )Accounts
      payable and other accrued liabilities
            
            
            312
            
            
            
            (247
            )
            
            
            371Accrued
      interest
            
            
            (2,811
            )
            
            
            (4,734
            )
            
            
            (7,525
            )Accrued
      property, income and other taxes
            
            
            3,281
            
            
            
            (391
            )
            
            
            2,568Deferred
      revenue
            
            
            -
            
            
            
            (1,768
            )
            
            
            1,768Net
      cash flows from operating activities
            
            
            101,129
            
            
            
            88,853
            
            
            
            90,953Cash
      flows from investing activities:Capital
      expenditures
            
            
            (1,036
            )
            
            
            (550
            )
            
            
            (678
            )Purchases
      of available-for-sale securities
            
            
            -
            
            
            
            -
            
            
            
            (71,809
            )Proceeds
      from sale of available-for-sale securities
            
            
            -
            
            
            
            -
            
            
            
            60,500(Increase)
      decrease in restricted cash  and investments
            
            
            (14,566
            )
            
            
            (467
            )
            
            
            30,145Net
      cash flows from investing activities
            
            
            (15,602
            )
            
            
            (1,017
            )
            
            
            18,158Cash
      flows from financing activities:Increase
      (decrease) in payable to affiliates
            
            
            76
            
            
            
            246
            
            
            
            (38,531
            )Repayment
      of long-term debt
            
            
            (13,720
            )
            
            
            (37,730
            )
            
            
            (37,730
            )Repayment
      of notes payable
            
            
            (7,115
            )
            
            
            (32,085
            )
            
            
            (12,063
            )Dividends
      paid
            
            
            (94,050
            )
            
            
            -
            
            
            
            (21,650
            )Net
      cash flows from financing activities
            
            
            (114,809
            )
            
            
            (69,569
            )
            
            
            (109,974
            )Net
      change in cash and cash equivalents
            
            
            (29,282
            )
            
            
            18,267
            
            
            
            (863
            )Cash
      and cash equivalents at beginning of period
            
            
            49,350
            
            
            
            31,083
            
            
            
            31,946Cash
      and cash equivalents at end of period
            
            $
            20,068
            
            
            $
            49,350
            
            
            $
            31,083Supplemental
      disclosure:Interest
      paid
            
            $
            5,940
            
            
            $
            11,865
            
            
            $
            22,602Income
      taxes paid
            
            $
            20,359
            
            
            $
            26,555
            
            
            $
            2,264





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


18





CE
CASECNAN WATER AND ENERGY COMPANY, INC.


STATEMENTS OF CHANGES IN SHAREHOLDERS’
EQUITY


(Amounts
in thousands)





AccumulatedAdditional
            
            
            
            
            
            OtherCommon
            
            
            Paid-in
            
            
            Retained
            
            
            ComprehensiveShares
            
            
            Stock
            
            
            Capital
            
            
            Earnings
            
            
            Loss,
      Net
            
            
            TotalBalance,
      January 1, 2007
            
            
            767
            
            
            $
            29
            
            
            $
            123,807
            
            
            $
            69,465
            
            
            $
            -
            
            
            $
            193,301Net
      income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            78,539
            
            
            
            -
            
            
            
            78,539Balance, December 31,
      2007
            
            
            767
            
            
            
            29
            
            
            
            123,807
            
            
            
            148,004
            
            
            
            -
            
            
            
            271,840Net
      income
            
            
            -
            
            
            
            -
            
            
            
            
            
            
            
            73,835
            
            
            
            -
            
            
            
            73,835Other
      comprehensive loss:Unrealized
      losses on marketable securities, net of tax of $(2,194)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (5,119
            )
            
            
            (5,119
            )Total
      comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            68,716Balance,
      December 31, 2008
            
            
            767
            
            
            
            29
            
            
            
            123,807
            
            
            
            221,839
            
            
            
            (5,119
            )
            
            
            340,556Net
      income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            93,339
            
            
            
            -
            
            
            
            93,339Other
      comprehensive income:Unrealized
      gain on marketable securities, net of tax of $1,643
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            3,833
            
            
            
            3,833Unrecognized
      amounts on retirement benefits, net of tax of $117
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            273
            
            
            
            273Total
      comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            97,445Dividends
      declared
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (99,000
            )
            
            
            -
            
            
            
            (99,000
            )Balance,
      December 31, 2009
            
            
            767
            
            
            $
            29
            
            
            $
            123,807
            
            
            $
            216,178
            
            
            $
            (1,013
            )
            
            $
            339,001





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




19


CE
CASECNAN WATER AND ENERGY COMPANY, INC.


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





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





Under the
terms of its registration with the Philippine Board of Investments, CE Casecnan
was entitled to certain incentives, including an income tax holiday for six
years from the start of commercial operations which expired on December 11,
2007. The Company’s taxable income from December 11, 2007 forward is
subject to income tax at the current Philippine statutory rate. The registration
also requires, among other items, the maintenance of a debt-to-equity ratio not
exceeding 75:25 during commercial operations.





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





2.           Summary
of Significant Accounting Policies





Basis of
Presentation





The
functional and reporting currency of the Company is the U.S. dollar.
Transactions in foreign currencies, principally the Philippine peso, 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 has evaluated subsequent events through February 23, 2010, which is the
date the Financial Statements were issued.





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





Use of Estimates in
Preparation of Financial Statements





The
preparation of the Financial Statements in conformity with accounting principles
generally accepted in the United States of America (“GAAP”) requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the period. These estimates include, but are not
limited to, valuation of certain financial assets and liabilities, long-lived
asset recovery and accounting for contingencies, including tax matters. Actual
results may differ from the estimates used in preparing the Financial
Statements.


20


Fair Value
Measurements





As
defined under GAAP, fair value is the price that would be received to sell an
asset or paid to transfer a liability between market participants in the
principal market or in the most advantageous market when no principal market
exists. Market participants are assumed to be independent, knowledgeable and
able and willing to transact. Nonperformance or credit risk is considered when
determining the fair value of liabilities. Considerable judgment may be required
in interpreting market data used to develop the estimates of fair
value.





Cash
Equivalents





Cash
equivalents consist of funds invested in commercial paper, money market accounts
and in other investments with a maturity of three months or less when purchased.
Cash and cash equivalents exclude amounts where availability is restricted by
legal requirements, loan agreements or other contractual
provisions.





Restricted Cash and
Investments and Other 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. Other investments consist of auction
rate securities. The auction rate securities are classified as
available-for-sale securities and are carried at fair value with realized gains
and losses, as determined on a specific identification basis, recognized in
earnings and unrealized gains and losses recognized in accumulated other
comprehensive loss, net of tax.





If in
management’s judgment a decline in the fair value of an available-for-sale
investment below cost is other than temporary, the cost of the investment is
written down to fair value. Factors considered in judging whether an impairment
is other than temporary include: the financial condition, business prospects and
creditworthiness of the issuer; the length of time that fair value has been less
than cost; the relative amount of the decline; and whether or not the Company
anticipates the fair value of the investment to recover prior to the expected
time of sale. Impairment losses on equity securities are charged to earnings.
With respect to an investment in a debt security, any resulting impairment loss
is recognized in earnings if the Company intends to sell or expects to be
required to sell the debt security before amortized cost is recovered. If the
Company does not expect to ultimately recover the amortized cost basis even if
it does not intend to sell the security, the credit loss component is recognized
in earnings and any difference between fair value and the amortized cost basis,
net of the credit loss, is reflected in other comprehensive income.





Property, Plant and
Equipment, Net





General





Property,
plant and equipment is recorded at historical cost. The Company capitalizes all
construction related material, direct labor and contract services, as well as
indirect construction costs, which include capitalized interest. The cost of
major additions and betterments are capitalized, while costs for replacements,
maintenance and repairs that do not improve or extend the lives of the related
assets are charged to operating expense as incurred. Depreciation is computed by
applying the straight-line method based on the 20-year Cooperation Period for
the hydroelectric power facility and office and building structures, and on the
estimated useful life of five years for transportation and other equipment. When
an asset is sold or otherwise disposed of, its cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
recorded in operating expense.





Impairment





The
Company evaluates long-lived assets for impairment, including property, plant
and equipment, when events or changes in circumstances indicate that the
carrying value of such assets may not be recoverable. Upon the occurrence of a
triggering event, the asset is reviewed to assess whether the estimated
undiscounted cash flows expected from the use of the asset plus the residual
value from the ultimate disposal exceeds the carrying value of the asset. If the
carrying value exceeds the estimated recoverable amounts, the asset is written
down to the estimated discounted present value of the expected future cash flows
from using the asset. Any resulting impairment loss is reflected on the
Statements of Operations.




21


Income
Taxes





Deferred
tax assets and liabilities are based on differences between the financial
statements and tax bases of assets and liabilities using estimated tax rates
expected to be in effect for the year in which the differences are expected to
reverse. Changes in deferred income tax assets and liabilities that are
associated with components of other comprehensive income are charged or credited
directly to other comprehensive income.  Other changes in deferred
income tax assets and liabilities are included as a component of income tax
expense. Valuation allowances are established for certain deferred tax assets
where realization is not likely.





Allowance for Doubtful
Accounts





The
allowance for doubtful accounts is based on the Company’s assessment of the
collectability of payments from NIA. This assessment requires judgment regarding
the ability of NIA to pay the amounts owed to the Company or the outcome of any
pending disputes. The activity in the Company’s allowance for doubtful accounts
for the years ended December 31 was as follows (in thousands):





2009
            
            
            2008
            
            
            2007Balance,
      January 1
            
            $
            -
            
            
            $
            -
            
            
            $
            (637
            )Recoveries
            
            
            -
            
            
            
            -
            
            
            
            637Balance,
      December 31
            
            $
            -
            
            
            $
            -
            
            
            $
            -





Revenue





Pursuant
to the Project Agreement, the Company invoices on a monthly basis for the
delivery of water and electricity. The Project Agreement is treated for
accounting purposes as an arrangement that contains both a service contract to
operate the plant and an operating lease. Minimum lease payments under the
operating lease and service contract are recognized as revenue on a
straight-line basis over the lease term. The Company reduces such minimum lease
revenues by an amount which is not reasonably assured to be collected due to the
uncertain political and economic events in the Philippines. The reduction in the
minimum lease revenues is recovered when its collectability becomes reasonably
assured. Variable lease payments are earned in each contract year for deliveries
of water and electricity which exceed specified minimum thresholds. Water
delivery revenues do not include value added taxes.





New Accounting
Pronouncements





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





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




22


3.           Restricted
Cash and Investments and Other Investments





Restricted
cash and investments consist of the following as of December 31 (in
thousands):





2009
            
            
            2008Current:Dividend
      set aside account
            
            $
            18,235
            
            
            $
            13,279Debt
      service reserve fund
            
            
            19,212
            
            
            
            9,602$
            37,447
            
            
            $
            22,881





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





Other
investments consist of auction rate securities with a carrying value of
$19.6 million and $14.1 million at December 31, 2009 and 2008,
respectively. The auction rate investments earned interest at 2.23% and 2.51% at
December 31, 2009 and 2008, respectively. The investments have a remaining
weighted average maturity of 21 years and are classified as
available-for-sale securities.





With the
liquidity issues experienced in global credit and capital markets, the
$21.4 million par value of auction rate securities held by the Company at
December 31, 2009 have experienced multiple failed auctions as the amount
of securities submitted for sale has exceeded the amount of purchase orders. The
securities are rated AA- and A by Standard & Poor’s at December 31,
2009. Although there is no current liquid market for the auction rate
securities, the Company believes the underlying creditworthiness of the
repayment sources for these securities’ principal and interest has not
materially deteriorated. Further, the Company does not intend to sell, nor is it
more-likely-than-not that the Company will be required to sell, the auction rate
securities before an orderly market develops and they can be sold at a price
that approximates par value. Therefore, the Company considers the auction rate
securities to be temporarily impaired. At December 31, 2009, the Company’s
pre-tax temporary impairment of the auction rate securities totaled
$1.8 million. If the underlying assets and the guarantors of the auction
rate securities experience credit deterioration, the Company may not ultimately
realize the par value of the investments held at December 31,
2009.





4.           Property,
Plant and Equipment, Net





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





2009
            
            
            2008Hydroelectric
      power facility
            
            $
            432,349
            
            
            $
            431,666Office
      and building structures
            
            
            1,229
            
            
            
            1,222Transportation
      and other equipment
            
            
            2,745
            
            
            
            2,511Total
      operating assets
            
            
            436,323
            
            
            
            435,399Accumulated
      depreciation
            
            
            (175,744
            )
            
            
            (153,914
            )Property,
      plant and equipment, net
            
            $
            260,579
            
            
            $
            281,485





5.           Long-Term
Debt





CE
Casecnan financed a portion of the costs of the Casecnan Project through the
issuance of long-term debt. At December 31, 2009 and 2008, long-term debt
outstanding was $17.2 million and $30.9 million, respectively. Final
payment of the Company’s long-term debt is due November 2010. For the year ended
December 31, 2009, the long-term debt had an effective interest rate of
14.8%, inclusive of bond issue cost amortization.





The
long-term debt is secured by an assignment of all revenue that will be received
from the Casecnan Project, a collateral assignment of all material contracts, 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 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; and sale, lease, or transfer of properties material to the Casecnan
Project, among others.




23


6.           Income
Taxes





During
the years ended December 31, 2009, 2008 and 2007, CE Casecnan incurred
$23.3 million, $28.2 million and $4.6 million, respectively, of
income tax expense. Prior to the December 11, 2007, expiration of the
income tax holiday granted to the Company by the Philippine Board of
Investments, income taxes were incurred only on interest income earned outside
the Philippines and on other income not covered by the income tax holiday. The
Company’s taxable income from December 11, 2007 forward is subject to
income tax at the current Philippine statutory rate.





A
reconciliation of the Philippine statutory income tax rate to the effective
income tax rate applicable to income before income tax expense for the years
ended December 31 follows:





2009
            
            
            2008
            
            
            2007Philippine
      statutory income tax rate
            
            
            30
            %
            
            
            35
            %
            
            
            35
            %Income
      tax holiday
            
            
            -
            
            
            
            -
            
            
            
            (30
            )Optional
      standard deduction
            
            
            (10
            )
            
            
            (7
            )
            
            
            -Effective
      income tax rate
            
            
            20
            %
            
            
            28
            %
            
            
            5
            %





The
Company’s deferred income tax asset of $4.8 million and $7.0 million
as of December 31, 2009 and 2008, respectively, consists mainly of the
difference between the financial reporting basis and the income tax reporting
basis for development and construction costs.





7.           Related
Party Transactions





In the
normal course of business, the Company transacts with related parties on
commercial terms comparable to transactions with third parties. The payable to
affiliates was $2.8 million and $2.7 million at December 31, 2009
and 2008, respectively. Costs incurred by the Company in transactions with
related parties amounted to $1.8 million for each of the years ended
December 31, 2009 and 2008 and $1.4 million for the year ended
December 31, 2007, and consist primarily of cost allocations.





As of
December 31, 2008, the Company had outstanding $7.1 million of
unsecured subordinated notes payable (the “Notes”) to CE Casecnan Ltd., a
shareholder. The Notes had a maturity of November 1, 2015, and bore an
interest rate consisting of London Interbank Offer Rate (“LIBOR”) plus 5.25%.
The Notes were redeemable at any time prior to maturity upon demand from CE
Casecnan Ltd. and on February 5, 2009, CE Casecnan repaid the outstanding
Notes in full. Interest expense on the Notes was $0.1 million,
$1.8 million and $5.3 million for the years ended December 31,
2009, 2008 and 2007, respectively.





8.           Employee
Benefit Plan





CE
Casecnan sponsors a defined benefit pension plan that covers all of its
employees. The following table provides certain information relative to CE
Casecnan’s defined benefit pension plan (dollars in thousands).





Number
      of employees covered
            
            
            41Net
      period benefit cost for the year ended December 31, 2009
            
            $
            154Funded
      status at December 31, 2009:Plan
      assets at fair value
            
            $
            624Less
      – Benefit obligation
            
            
            450$
            174




24


9.           Commitments
and Contingencies





Shareholder
Litigation





In
February 2002, pursuant to the share ownership adjustment mechanism in the
CE Casecnan shareholder agreement, MEHC’s indirect wholly owned subsidiary,
CE Casecnan Ltd., advised the minority shareholder of the Company,
LaPrairie Group Contractors (International) Ltd. (“LPG”) that MEHC’s indirect
ownership interest in CE Casecnan had increased to 100% effective from
commencement of commercial operations. In 2002, LPG filed a complaint in the
Superior Court of the State of California, City and County of San Francisco,
against CE Casecnan Ltd. and MEHC. LPG’s complaint, as amended, seeks
compensatory and punitive damages arising out of CE Casecnan Ltd’s and MEHC’s
alleged improper calculation of the proforma financial projections and alleged
improper settlement of the NIA arbitration. In January 2006, the Superior
Court of the State of California entered a judgment in favor of LPG against CE
Casecnan Ltd. Pursuant to the judgment, 15% of the distributions of the Company
was deposited into escrow plus interest at 9% per annum. The judgment was
appealed, and as a result of the appellate decision, CE Casecnan Ltd. determined
that LPG would retain ownership of 10% of the shares of the Company, with the
remaining 5% share to be transferred to CE Casecnan Ltd. subject to certain
buy-up rights under the shareholder agreement. The issues relating to the
exercise of the buy-up right were decided by the court and in June 2009, LPG
exercised its buy-up rights with respect to the remaining 5% ownership interest
in a transaction between shareholders that did not have any impact on the
Company’s results of operations. In October 2009, the court issued a Final
Judgment declaring that after the buy up LPG was a 15% shareholder. The Final
Judgment was appealed on January 13, 2010 in the Superior Court of the State of
California, City and County of San Francisco. On appeal, CE Casecnan, Ltd. will
argue that LPG is only entitled to a 10% interest in the project company, and
will challenge the computation of the buy-up price for the still-disputed 5%
interest.





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





Supplemental Real Property
Tax





In July
2008, CE Casecnan received a supplemental real property tax assessment
totaling $28.6 million from the province of Nueva Ecija and the
municipality of Pantabangan for the tax years 2002 through the second quarter of
2008. Subsequent amendments of the supplemental assessment to reflect additional
taxable periods in 2008 and 2009 increased the assessment to $32.5 million.
CE Casecnan forwarded the assessment to NIA and the Philippine Department of
Finance (“DOF”), which must authorize any payment for real property taxes and
are obligated to reimburse the Company pursuant to the Project Agreement. In
December 2008, pursuant to written authorization from NIA and DOF, CE
Casecnan tendered $6.8 million as partial payment of the supplemental
assessment and recorded a receivable of an equal amount for the expected full
reimbursement to CE Casecnan from NIA. The $6.8 million partial payment was
reimbursed by NIA in July 2009. In January 2009, CE Casecnan filed a protest on
the supplemental assessment which the provincial treasurer failed to resolve
timely and in May 2009, filed an appeal with the Local Board of Assessment
Appeals. In October 2009, pursuant to written authorization from NIA and DOF, CE
Casecnan paid under protest $5.0 million to the province of Nueva Ecija. A
receivable of an equal amount was accrued as of December 31, 2009 to
reflect the expected full reimbursement to CE Casecnan from NIA. The
$5.0 million payment was reimbursed by NIA in January 2010. Discussions
continue among CE Casecnan, NIA, DOF and the province of Nueva Ecija to resolve
the supplemental real property tax assessment. No further liability for
supplemental real property tax has been recognized as the Company believes that
the claim is without merit.




25


In March
2009, CE Casecnan received a supplemental real property tax assessment totaling
$36.5 million from the province of Nueva Vizcaya for the tax years 2002 to
2009. CE Casecnan forwarded the assessment to NIA and the DOF, which must
authorize any payment for real property taxes and are obligated to reimburse the
Company pursuant to the Project Agreement. In May 2009, upon instructions from
NIA, CE Casecnan filed an appeal of the supplemental assessment with the Local
Board of Assessment Appeals. In November 2009, CE Casecnan paid
$16.1 million to the province of Nueva Vizcaya pursuant to an interim
agreement between CE Casecnan and the province of Nueva Vizcaya which provides
for a cessation of collection efforts by the province of Nueva Vizcaya until a
final determination of taxable value is rendered. A receivable of an equal
amount was accrued as of December 31, 2009 to reflect the expected full
reimbursement to CE Casecnan from NIA. Reimbursement from NIA is due in the
second quarter of 2010. Discussions continue among CE Casecnan, NIA, DOF and the
province of Nueva Vizcaya to resolve the supplemental real property tax
assessment. No further liability for supplemental real property tax has been
recognized as the Company believes that the claim is without merit.





National Wealth
Tax





In July
2008, CE Casecnan received an assessment totaling $4.1 million from the
municipality of Alfonso Castaneda for a share of national wealth tax it claims
is owed by the Company for the years from 2002 through 2007. CE Casecnan
forwarded the assessment to NIA and the DOF, which must authorize any payment
for national wealth taxes and are obligated to reimburse the Company pursuant to
the Project Agreement. In September 2008, CE Casecnan received a temporary
restraining order to enjoin the municipality of Alfonso Castaneda from pursuing
its collection efforts until the matter can be decided by the court. A pre-trial
hearing was held in December 2008. The proceedings were suspended to allow the
municipality of Alfonso Castaneda to provide other local government units the
opportunity to intervene in the case. At the June 2009 hearing, the judge
summoned all affected local government units to participate in the hearing and
file the necessary motions for leave for intervention and third party
complaints. The next hearing date is set for February 24, 2010. No
liability for national wealth tax has been recognized as the Company believes
that the claim is without merit.





Franchise
Tax





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





Concentration of
Risk





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





10.           Fair
Value Measurements





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




26


The
Company has investments in money market mutual funds that are accounted for as
available-for-sale securities, are stated at fair value and are presented as
cash and cash equivalents and restricted cash and investments on the Balance
Sheets. The fair value of these securities was $52.0 million and
$34.1 million as of December 31, 2009 and 2008, respectively. The fair
value is determined by using the quoted market price or net asset value of the
identical security in its principal market. As such, the Company considers these
securities to be valued using Level 1 inputs.





Additionally,
the Company has auction rate securities that are measured at fair value and are
presented as other investments on the Balance Sheets. The fair value of the
Company’s investments in auction rate securities, where there is no current
liquid market, is determined using internally developed discounted cash flow
pricing models based on available observable market data and the Company’s
judgment about the assumptions, including liquidity and nonperformance risks,
which market participants would use when pricing the asset. As such, the Company
considers these securities to be valued using Level 3 inputs. The following
table reconciles the beginning and ending balances of the Company’s auction rate
securities measured at fair value on a recurring basis using significant Level 3
inputs for the years ended December 31(in thousands):





2009
            
            
            2008Beginning
      balance
            
            $
            14,096
            
            
            $
            21,409Changes
      in fair value recognized in other comprehensive loss, net
            
            
            5,476
            
            
            
            (7,313
            )Ending
      balance
            
            $
            19,572
            
            
            $
            14,096





The
Company’s long-term debt is carried at cost on the Financial Statements. The
fair value of the Company’s long-term debt has been estimated based upon quoted
market prices. The following table presents the carrying amount and estimated
fair value of the Company’s long-term debt as of December 31 (in
thousands):





2009
            
            
            2008Carrying
      Amount
            
            
            Fair
      Value
            
            
            Carrying
      Amount
            
            
            Fair
      ValueLong-term
      debt
            
            $
            17,150
            
            
            $
            17,893
            
            
            $
            30,870
            
            
            $
            31,372





11.         Components
of Accumulated Other Comprehensive Loss, Net





Accumulated
other comprehensive loss, net consists of the following components as of
December 31 (in thousands):





2009
            
            
            2008Unrecognized
      amounts on retirement  benefits, net of tax of $117 and
      $-
            
            $
            273
            
            
            $
            -Unrealized
      losses on marketable securities, net of tax of $(551) and
      $(2,194)
            
            
            (1,286
            )
            
            
            (5,119
            )Total
      accumulated other comprehensive loss, net
            
            $
            (1,013
            )
            
            $
            (5,119
            )




12.         Operating
Lease Rentals and Service Income





The
following is the minimum lease rentals and service income to be received in the
next five years and thereafter on the noncancelable operating lease as of
December 31, 2009 (in thousands):




Years Ended December 31,
            
            Amount2010
            
            $
            88,0492011
            
            
            88,0492012
            
            
            88,0492013
            
            
            88,0492014
            
            
            88,0492015
      – 2021
            
            
            616,343





Total
lease rentals and service income received was $146.9 million,
$137.6 million and $124.7 million in 2009, 2008 and 2007,
respectively,  including variable lease rentals and service income of
$59.0 million, $49.6 million and $36.7 million,
respectively.




27


13.         Unaudited
Quarterly Operating Results




20091st
      Quarter
                
                
                2nd
      Quarter
                
                
                3rd
      Quarter
                
                
                4th
      Quarter(In
      thousands)Revenue
                
                $
                23,499
                
                
                $
                32,433
                
                
                $
                50,609
                
                
                $
                40,371Operating
      income
                
                
                16,036
                
                
                
                24,424
                
                
                
                42,650
                
                
                
                31,047Net
      income
                
                
                12,606
                
                
                
                19,567
                
                
                
                34,571
                
                
                
                26,595
  20081st
      Quarter
                
                
                2nd
      Quarter
                
                
                3rd
      Quarter
                
                
                4th
      Quarter(In
      thousands)Revenue
                
                $
                28,894
                
                
                $
                28,757
                
                
                $
                38,685
                
                
                $
                41,302Operating
      income
                
                
                21,273
                
                
                
                20,819
                
                
                
                30,278
                
                
                
                31,832Net
      income
                
                
                12,861
                
                
                
                13,346
                
                
                
                19,848
                
                
                
                27,780


Operating
results reflect seasonal variations in rainfall and resulting water delivery and
energy production.


28


Item
9.                 Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure





None.





Item
9A(T).        Controls and
Procedures





Disclosure
Controls and Procedures





At the
end of the period covered by this Annual Report on Form 10-K, the Company
carried out an evaluation, under the supervision and with the participation of
the Company’s management, including the President (principal executive officer)
and the Chief Financial Officer (principal financial officer), of the
effectiveness of the design and operation of the Company’s disclosure controls
and procedures (as defined in Rule 13a-15(e) promulgated under the Securities
and Exchange Act of 1934, as amended). Based upon that evaluation, the Company’s
management, including the President (principal executive officer) and the Chief
Financial Officer (principal financial officer), concluded that the Company’s
disclosure controls and procedures were effective to ensure that information
required to be disclosed by the Company in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the SEC’s rules and forms, and is accumulated and
communicated to management, including the Company’s President (principal
executive officer) and Chief Financial Officer (principal financial officer), or
persons performing similar functions, as appropriate to allow timely decisions
regarding required disclosure. There has been no change in the Company’s
internal control over financial reporting during the quarter ended
December 31, 2009 that has materially affected, or is reasonably likely to
materially affect, the Company’s internal control over financial
reporting.





Management’s
Report on Internal Control over Financial Reporting





Management
of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in the Securities
Exchange Act of 1934 Rule 13a-15(f). Under the supervision and with the
participation of the Company’s management, including the President (principal
executive officer) and the Chief Financial Officer (principal financial
officer), the Company’s management conducted an evaluation of the effectiveness
of the Company’s internal control over financial reporting as of
December 31, 2009 as required by the Securities Exchange Act of 1934
Rule 13a-15(c). In making this assessment, the Company’s management used
the criteria set forth in the framework in “Internal Control - Integrated
Framework” issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on the evaluation conducted under the framework in “Internal
Control - Integrated Framework,” the Company’s management concluded that the
Company’s internal control over financial reporting was effective as of
December 31, 2009.





This
report does not include an attestation report of the Company’s registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the SEC that permit the
Company to provide only management's report in this Annual Report on
Form 10-K.





CE
Casecnan Water and Energy Company, Inc.


February
23, 2010





Item
9B.                 Other
Information





None.




29





PART
III





Item
10.              Directors,
Executive Officers and Corporate Governance





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 shareholder agreement, CE Casecnan Ltd.
is entitled to elect seven of the directors, and each minority investor is
entitled to elect one director. Set forth below is certain information, as of
January 31, 2010, with respect to the current directors and executive officers
of the Company:





Douglas
      L. Anderson
            
            51
            
            Director
      and ChairmanJoseph
      L. Sullivan
            
            55
            
            Director,
      President and General ManagerPatrick
      J. Goodman
            
            43
            
            Director,
      Senior Vice President and Chief Financial OfficerP.
      Eric Connor
            
            61
            
            DirectorBrian
      K. Hankel
            
            47
            
            Vice
      President and TreasurerScott
      LaPrairie
            
            52
            
            DirectorMitchell
      L. Pirnie
            
            51
            
            Vice
      President and General CounselEulogio
      Wilfredo G. Sarmago
            
            48
            
            DirectorTrinity
      S. Gatuz
            
            43
            
            Director
      and Vice PresidentMa.
      Winnie R. Lardizabal
            
            31
            
            Director
      and Head of Legal and ComplianceSuzy
      Lyn A. Bayona-Salova
            
            34
            
            Director
      and Head of AccountingMaria
      Cristina J. Macasaet-Acaban
            
            36
            
            Corporate
      Secretary








Douglas L. Anderson. In
addition to serving as Director and Chairman for the Company, Mr. Anderson has
been Senior Vice President, General Counsel and Corporate Secretary of MEHC
since 2001. Mr. Anderson joined MEHC in 1993. Mr. Anderson is also a director of
PacifiCorp, an affiliate of the Company.





Joseph L. Sullivan.In
addition to serving as Director, President and General Manager for the Company,
Mr. Sullivan is President and General Manager for certain affiliates of the
Company. From 2002 to 2004, Mr. Sullivan served as Executive Vice President for
Operations of Mirant Philippines.





Patrick J. Goodman. In
addition to serving as Director, Senior Vice President and Chief Financial
Officer for the Company, Mr. Goodman has been Senior Vice President and Chief
Financial Officer of MEHC since 1999. Mr. Goodman joined MEHC in 1995. Mr.
Goodman is also a director of PacifiCorp.





P. Eric Connor. In addition to
serving as a Director of the Company, since 2009, Mr. Connor has been the
chairman and chief executive officer of NetJets Transportes Aéreos, SA, an
affiliate of the Company. From 2003 to 2009, Mr. Connor served as Senior Vice
President and Chief Procurement Officer of MEHC. From 1999 to 2003, Mr. Connor
served as President and Chief Operating Officer of Northern Electric, plc, an
affiliate of the Company.





Brian K. Hankel. In addition
to serving as Vice President and Treasurer for the Company, Mr. Hankel has been
Vice President and Treasurer for MEHC since 1997. Mr. Hankel joined MEHC in
1992.





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.





Mitchell L. Pirnie. In
addition to serving as Vice President and General Counsel for the Company, Mr.
Pirnie also serves as Vice President, General Counsel and Director of CE
Generation, LLC, an affiliate of the Company. Mr. Pirnie joined MEHC in
1997.





Eulogio Wilfredo G. Sarmago.
In addition to serving as a Director of the Company, Mr. Sarmago has been Plant
Manager of the Company since September 2005. Prior to his assignment at CE
Casecnan, Mr. Sarmago was plant manager of Visayas Geothermal Power Company, an
affiliated company.





Trinity S. Gatuz. In addition
to serving as a Director of the Company, Ms. Gatuz has been Vice President for
the Company and certain affiliates since 2004. Ms. Gatuz served as Vice
President – Finance and Accounting for the Company and certain affiliates since
2001.




30





Ma. Winnie R. Lardizabal. In
addition to serving as a Director of the Company, Ms. Lardizabal has been Head
of Legal and Compliance for the Company since April 2009. Ms. Lardizabal also
serves as director and legal counsel for certain other affiliates of the
Company. From 2004 to 2009, Ms. Lardizabal worked as Senior Associate of Puno
and Puno Law Offices.





Suzy Lyn A. Bayona-Salova. In
addition to serving as a Director of the Company, Ms. Bayona-Salova has served
as Head of Accounting since 2008 and as Senior Accountant to the Company and
certain affiliates since 2002.





Maria Cristina J.
Macasaet-Acaban. In addition to serving as Corporate Secretary for the
Company, Ms. Macasaet-Acaban is a partner in the Corporate and Commercial
Practice Group of Quisumbing Torres. Ms. Macasaet-Acaban has been with
Quisumbing Torres since 1999.





Audit
Committee Matters





During
the year ended December 31, 2009, and as of the date of this Annual Report
on Form 10-K, the Company’s Board of Directors had no committees, including any
audit committee.





Code
of Ethics





The
Company has adopted a code of ethics that applies to its principal executive
officer, its principal financial and accounting officer, or persons acting in
such capacities, and certain other covered officers. The code of ethics is
incorporated by reference in the exhibits to this Annual Report on Form
10-K.





Item
11.              Executive
Compensation





None of
our executive officers or directors receive compensation from us for services as
officers or directors. All directors are reimbursed for their expenses in
attending board and committee meetings.





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





Description
of Capital Stock





Our
authorized capital stock consists of 2,148,000 shares of common stock, par value
one Philippine peso ($0.038) per share (the “Common Stock”), of which 767,162
shares are outstanding. There is no public trading market for the Common Stock.
As of January 31, 2010, 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 shareholders for a vote. The Trust Indenture contains certain
restrictions on the payment of dividends with respect to the Common
Stock.





31





Principal
Shareholders





The
following table sets forth certain information regarding beneficial ownership of
our shares of Common Stock held by each of our directors, executive officers and
all of our directors and executive officers as a group as of January 31,
2010:





Name
      and Address of Beneficial Owner
            
            Number
      of Shares Beneficially Owned*
            
            Percentage
      of ClassCE
      Casecnan II, Inc.
            
            537,005
            
            70%
      (1)CE
      Casecnan Ltd.
            
            115,074
            
            15% (2)
      (3)LaPrairie
      Group Contractors
            
            115,074
            
            15%
      (2)  *
            In
      addition, each director owns one share of Common Stock 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 indirect, wholly-owned
      subsidiaries of MEHC.(2)
            Refer
      to Note 9 of Notes to Financial Statements included in Item 8 of this
      Form 10-K for additional information regarding shareholder
      litigation.(3)
            Includes
      rights to 115,000 shares, which rights were purchased from San Lorenzo
      Ruiz Builders and Developers Group, Inc. (“San Lorenzo”) in 1998. The
      115,000 shares are subject to the ownership adjustment mechanism in the
      shareholder agreement. San Lorenzo retained an option to repurchase the
      115,000 shares, if any, remaining after such ownership adjustment. Refer
      to Note 9 of Notes to Financial Statements included in Item 8 of
      this Form 10-K for additional information regarding shareholder
      litigation.





Item
13.              Certain
Relationships and Related Transactions, and Director
Independence





Not
applicable.





Item
14.              Principal
Accountant Fees and Services





On
September 12, 2008, Isla Lipana & Co. resigned as the independent
registered public accounting firm of the Company. On October 2, 2008, the
Company’s Board of Directors approved the appointment of Manabat Delgado Amper
& Co. (a Deloitte Touche Tohmatsu member firm) as its new independent
registered public accounting firm.





The
following table shows the Company’s fees paid or accrued for audit and
audit-related services and fees paid for tax and all other services rendered by
Deloitte & Touche, LLP, the member firms of Deloitte Touche Tohmatsu,
including Manabat Delgado Amper & Co., and their respective affiliates
(collectively, the “Deloitte Entities”) for the year ended December 31, 2009 and
for the three-month period ended December 31, 2008, and Isla Lipana &
Co., (a PricewaterhouseCoopers member firm) for the nine-month period ended
September 30, 2008 (in thousands):





Three-Month
            
            
            Nine-MonthYear
      Ended
            
            
            Period
      Ended
            
            
            Period
      EndedDecember 31,
            
            
            December 31,
            
            
            September 30,2009
            
            
            2008
            
            
            2008Audit
      fees (1)
            
            $
            176
            
            
            $
            144
            
            
            $
            23Audit-related
      fees (2)
            
            
            -
            
            
            
            -
            
            
            
            36Tax
      fees (3)
            
            
            -
            
            
            
            -
            
            
            
            -All
      other fees
            
            
            -
            
            
            
            -
            
            
            
            -Total
      aggregate fees billed
            
            $
            176
            
            
            $
            144
            
            
            $
            59





(1)
            Audit
      fees include fees for the audit of the Company’s financial statements and
      interim reviews of the Company’s quarterly financial statements, audit
      services provided in connection with required statutory audits, and
      comfort letters, consents and other services related to SEC
      matters.(2)
            Audit-related
      fees primarily include fees for assurance and related services for any
      other statutory or regulatory requirements, audits of certain employee
      benefit plans and consultation on various accounting and reporting
      matters.(3)
            Tax
      fees include fees for services relating to tax compliance, tax planning
      and tax advice. These services include assistance regarding tax
      compliance, tax return preparation and tax
  audits.




32





The audit
committee of MEHC reviewed and approved the services rendered by the Deloitte
Entities in and for fiscal 2009 as set forth in the above table and concluded
that the non-audit services were compatible with maintaining the principal
accountant’s independence. Under the Sarbanes-Oxley Act of 2002, all audit and
non-audit services performed by the principal accountant require approval in
advance by the audit committee in order to assure that such services do not
impair the principal accountant’s independence from the Company. Accordingly,
the audit committee of MEHC has an Audit and Non-Audit Services Pre-Approval
Policy (the “Policy”) that sets forth the procedures and the conditions pursuant
to which services to be performed by the principal accountant are to be
pre-approved. Pursuant to the Policy, certain services described in detail in
the Policy may be pre-approved on an annual basis together with pre-approved
maximum fee levels for such services. The services eligible for annual
pre-approval consist of services that would be included under the categories of
Audit Fees, Audit-Related Fees and Tax Fees. If not pre-approved on an annual
basis, proposed services must otherwise be separately approved prior to being
performed by the principal accountant. In addition, any services that receive
annual pre-approval but exceed the pre-approved maximum fee level also will
require separate approval by the audit committee of MEHC prior to being
performed. The Policy does not delegate to management the MEHC audit committee’s
responsibilities to pre-approve services performed by the principal
accountant.


33





PART
IV





Item
15.                 Exhibits
and Financial Statement Schedules





(a)
            Financial
      Statements and Schedules(i)
            Financial
      StatementsFinancial
      Statements are included in Item 8.(ii)
            Financial
      Statement SchedulesSchedules
      not listed above 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.




34


SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, on this 23rd day of February,
2010.








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








Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:





Signature
            
            Title
            
            Date/s/  Joseph L.
      Sullivan*
            
            Director,
      President and General Manager
            
            February
      23, 2010Joseph
      L. Sullivan
            
            (principal
      executive officer)/s/  Patrick J.
      Goodman*
            
            Director,
      Senior Vice President and Chief Financial Officer
            
            February
      23, 2010Patrick
      J. Goodman
            
            (principal
      financial and accounting officer)/s/  Douglas L.
      Anderson
            
            Director
      and Chairman
            
            February
      23, 2010Douglas
      L. Anderson/s/  Eulogio Wilfredo G.
      Sarmago*
            
            Director
            
            February
      23, 2010Eulogio
      Wilfredo G. Sarmago/s/  Trinity S.
      Gatuz*
            
            Director
      and Vice President
            
            February
      23, 2010Trinity
      S. Gatuz/s/  Ma. Winnie R.
      Lardizabal*
            
            Director
      and Head of Legal and Compliance
            
            February
      23, 2010Ma.Winnie
      R. Lardizabal/s/  Suzy Lyn A.
      Bayona-Salova*
            
            Director
      and Head of Accounting
            
            February
      23, 2010Suzy
      Lyn A. Bayona-Salova/s/  P. Eric
    Connor*
            
            Director
            
            February
      23, 2010P.
      Eric ConnorScott LaPrairie
            
            Director
            
            February
      23, 2010*By:           /s/  Douglas L.
      Anderson
            
            Attorney-in-Fact
            
            February
      23, 2010Douglas
      L. Anderson




35


EXHIBIT INDEX





Exhibit No.
            Description3.1
            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).4.5
            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).4.6
            Consent
      of National Irrigation Administration, 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).4.7
            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).24.1
            Power
      of Attorney




36





Exhibit No.
            Description31.1
            Principal
      Executive Officer Certification Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
            Principal
      Financial Officer Certification Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
            Principal
      Executive Officer Certification Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.32.2
            Principal
      Financial Officer Certification Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.


37


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