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, 2008





or





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





For the
transition period fromto





Commission
File No. 001-12995





CE
CASECNAN WATER AND ENERGY COMPANY, INC.


(Exact
name of registrant as specified in its charter)





Philippines
              
              Not
      Applicable(State
      or other jurisdiction of
              
              (I.R.S.
      Employerincorporation
      or organization)
              
              Identification
      No.)24th
      Floor, 6750 Building, Ayala AvenueMakati
      City, Metro Manila, Philippines
              
              Not
      Applicable(Address
      of principal executive offices)
              
              (Zip
      Code)011
      63 2 892-0276(Registrant’s
      telephone number, including area
code)





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


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 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, 2009, 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
                  28Item 9A(T).
                  Controls and Procedures
                  28Item 9B.
                  Other Information
                  28PART
      IIIItem 10.
                  Directors, Executive Officers and Corporate
      Governance
                  29Item 11.
                  Executive Compensation
                  30Item 12.
                  Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder 
      Matters
                  30Item 13.
                  Certain Relationships and Related Transactions, and
      Director Independence
                  31Item 14.
                  Principal Accountant Fees and
    Services
                  31PART
      IVItem 15.
                  Exhibits and Financial Statement
      Schedules
                  33Signatures
                  
                  34Exhibit Index
                  35











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 the Private Securities Litigation Reform Act of 1995. Forward-looking
statements can typically be identified by the use of forward-looking words, such
as “may,” “could,” “project,” “believe,” “anticipate,” “expect,” “estimate,”
“continue,” “intend,” “potential,” “plan,” “forecast” and similar terms. These
statements are based upon the Company’s current intentions, assumptions,
expectations and beliefs and are subject to risks, uncertainties and other
important factors. Many of these factors are outside the Company’s control and
could cause actual results to differ materially from those expressed or implied
by the Company’s forward-looking statements. These factors include, among
others:









·
            changes
      in weather conditions that could affect operating
  revenue;·
            general
      economic, political and business conditions in the Philippines and
      throughout the world;·
            changes
      in governmental, legislative or regulatory requirements affecting the
      Company or the power generation industry;·
            availability
      of qualified personnel;·
            the
      impact of new accounting pronouncements or changes in current accounting
      estimates and assumptions on financial results; and·
            other
      business or investment considerations that may be disclosed from time to
      time in the Company’s filings with the United States Securities and
      Exchange Commission (“SEC”) or in other publicly disseminated written
      documents.




Further
details of the potential risks and uncertainties affecting the Company are
described in the Company’s filings with the SEC, including 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
(the “Casecnan Project”) with a rated capacity of 150 megawatts (“MW”)
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 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”) with “take-or-pay” obligations
for water and electricity. At the end of the Cooperation Period, the Casecnan
Project will be transferred to NIA 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. Thereafter, the Company’s taxable income became
subject to income tax at the 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, 2009, the outstanding long-term
debt was rated BB- with stable outlook by Standard and Poor’s and B1 with stable
outlook by Moody’s Investor 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
payment 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 the 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 the EPIRA
are ongoing.
 
 Employees
 
 At
December 31, 2008, the Company had 43 full-time employees.
 
 Item 1A.
                  Risk
      Factors
 
 The
Company is subject to certain risks in its business operations which are
described below. Careful consideration of these risks, together with all of the
other information included in this annual report and the other public
information filed by the Company, should be made before making an investment
decision. The risks and uncertainties described below are not the only ones
facing the Company. Additional risks and uncertainties not presently known or
that are currently deemed immaterial may also impair the Company’s business
operations.
 
 The
Company is dependent upon a single customer for all of its operating
revenue.
 
 NIA’s
payment obligations under the Project Agreement 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 materially adversely affect the Company’s financial
results.
 
 The
Company’s 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 the Company’s financial
results.
  5
  Variability
in rainfall and water flows have a significant impact on the Company’s 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 29% in 2008, consists of variable 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.
 
 The
Company’s 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 the Company maintains 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 the Company is
insured will cover all losses.
 
 The
Company is 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 the Company’s operations or
impair the Company’s assets.
 
 The
Company is subject to risk of loss from political and other risks arising from
foreign sovereignty over areas in which the Company conducts
operations.
 
 The
Company is subject to significant political and other uncertainties, including
expropriation, nationalization, renegotiation or nullification of existing
contracts, imposition of new 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 the Company’s revenue.
 
 Changes
in laws, policies, regulations, environmental standards and other mandates
imposed by Philippine authorities have a significant impact on the Company’s
operations.
 
 The
Company is 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 the Company’s ability to operate the Casecnan Project.
 
 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’sCommon 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
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 31,2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004Statement
      of Operations Data:Revenue
      (1)
                
                $
                137,638
                
                
                $
                124,733
                
                
                $
                148,529
                
                
                $
                107,000
                
                
                $
                106,847Operating
      income
                
                
                104,202
                
                
                
                93,319
                
                
                
                117,433
                
                
                
                75,674
                
                
                
                73,431Net
      income(2)
                
                
                73,835
                
                
                
                78,539
                
                
                
                100,804
                
                
                
                52,009
                
                
                
                45,302Electricity
      produced (Gigawatt-hours) (1)
                
                
                517.3
                
                
                
                433.6
                
                
                
                538.5
                
                
                
                406.5
                
                
                
                404.5Water
      delivered (million cubic meters) (1)
                
                
                909.7
                
                
                
                750.0
                
                
                
                996.0
                
                
                
                723.0
                
                
                
                719.2As
      of December 31,2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004Balance
      Sheet Data:Total
      assets
                
                $
                402,724
                
                
                $
                410,717
                
                
                $
                444,970
                
                
                $
                470,017
                
                
                $
                477,996Notes
      payable
                
                
                7,115
                
                
                
                39,200
                
                
                
                51,263
                
                
                
                51,263
                
                
                
                51,263Long-term
      debt, including current portion
                
                
                30,870
                
                
                
                68,600
                
                
                
                106,330
                
                
                
                142,345
                
                
                
                197,098Total
      shareholders’ equity
                
                
                340,556
                
                
                
                271,840
                
                
                
                193,301
                
                
                
                191,997
                
                
                
                150,988
 
 (1)
                  Revenue
      increased in 2008 and 2006 due to substantially higher water flows and
      accompanying electricity
generation.
 (2)
                  Net
      income decreased in 2008 due to the expiration of the income tax holiday
      on December 11, 2007.
 
 Item 7.
                Management’sDiscussion and Analysis of Financial
      Condition and Results of
Operations
 
 The
following is management’s discussion and analysis of certain significant factors
which have affected the financial condition and results of operations of the
Company during the periods included 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 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.
 
 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 will be recorded each month pro
rated to 58.3 million cubic meters until the minimum threshold has 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.
  7
  For
contract years from December 25, 2008 through the end of the Cooperation
Period, December 11, 2021, 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:
 
 2008
                
                
                2007
                
                
                2006Electricity
      produced (GWh)
                
                
                517.3
                
                
                
                433.6
                
                
                
                538.5Water
      delivered (million cubic meters)
                
                
                909.7
                
                
                
                750.0
                
                
                
                996.0
 
 The
Company’s water and energy delivery fees for the years ended December 31
are as follows (in millions):
 
 2008
                
                
                2007
                
                
                2006Water
      delivery fees
                
                $
                59.2
                
                
                $
                59.2
                
                
                $
                57.3Guaranteed
      energy delivery fees
                
                
                36.4
                
                
                
                36.4
                
                
                
                36.4Variable
      energy delivery fees
                
                
                40.2
                
                
                
                30.9
                
                
                
                41.0Deferred
      water delivery fees
                
                
                1.8
                
                
                
                (1.8
                )
                
                
                13.8Total
      lease rentals and service contracts revenue
                
                $
                137.6
                
                
                $
                124.7
                
                
                $
                148.5
 
 
 Revenue
for 2008 increased $12.9 million to $137.6 million compared with 2007.
The increase in variable energy delivery fees and recognition of deferred water
delivery fees in 2008 were due to exceptionally high rainfall that resulted in
higher water deliveries and related energy production when compared to the water
flows in 2007. Revenue for 2007 decreased $23.8 million to
$124.7 million compared with 2006. The increase in water delivery fees in
2007 was primarily due to a contractual escalation factor. The decrease in
variable energy delivery fees in 2007 was due to lower rainfall and related
energy production compared with 2006. Deferred water delivery fees represent the
difference between the actual water delivery fees earned and water delivery fees
invoiced pursuant to the Project Agreement. Water delivery fees were deferred in
2007 due to lower water flows that did not reach the contractual threshold.
Accumulated deferred water delivery fees in prior years were fully earned in
2006 due to high water deliveries that exceeded the contractual
threshold.
 
 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. Plant
operations and other operating expenses for 2007 were relatively flat compared
with 2006.
 
 8
  Interest
expense decreased in 2008 $8.2 million to $8.6 million compared with
2007 and decreased in 2007 $4.6 million to $16.8 million compared with
2006, due primarily to lower outstanding debt balances resulting from the
scheduled repayment of long-term debt and the repayment of notes
payable.
 
 Income
tax expense was $28.2 million, $4.6 million and $2.3 million in
2008, 2007 and 2006, respectively. The increase in income tax expense in 2008
and 2007 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
 
 The ROP
has provided a Performance Undertaking under which NIA’s obligations under the
Project Agreement are guaranteed by the full faith and credit of the ROP. The
Project Agreement and the Performance Undertaking provide for the resolution of
disputes by binding arbitration in Singapore under international arbitration
rules.
 
 NIA’s
obligations under the Project Agreement are substantially denominated in U.S.
dollars and are the Company’s sole source of operating 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 $49.4 million and
$31.1 million at December 31, 2008 and 2007,
respectively.
 
 The
Company generated cash flows from operations of $88.9 million and
$91.0 million for the years ended December 31, 2008 and 2007,
respectively. The lower cash generated in 2008 was due primarily to higher
income taxes paid of $24.3 million, partially offset by lower interest
payments of $10.7 million and higher variable energy delivery fees of
$9.3 million.
 
 The
Company used $1.0 million and received $18.2 million for investing
activities for the years ended December 31, 2008 and 2007, respectively.
Restricted cash for debt service obligations and dividends payable decreased by
$30.1 million in 2007, primarily as a result of the payment of
$25.5 million of dividends and accrued interest previously held in escrow.
Net purchases of available-for-sale securities were $11.3 million in
2007.
 
 The
Company used $69.6 million and $110.0 million for financing activities
for the years ended December 31, 2008 and 2007, respectively. The Company
repaid $37.7 million on the balance of its outstanding project financing
debt in both 2008 and 2007. In 2008 and 2007, CE Casecnan repaid
$32.1 million and $12.1 million, respectively, on the balance of notes
payable to CE Casecnan Ltd. (the “Notes”). On February 5, 2009, CE Casecnan
repaid the remaining $7.1 million balance of the Notes. In 2007, the
Company repaid $38.5 million of advances received from its affiliates and
released $21.7 million of dividends held in escrow.
 
 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, 2008, have experienced multiple failed auctions as the amount
of securities submitted for sale has exceeded the amount of purchase orders. The
securities are rated Baa1 by Moody’s Investors Service and AA by Standard &
Poor’s at December 31, 2008. 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 has the intent
and ability to hold the auction rate securities for a period of time sufficient
to allow for any anticipated recovery in the credit and capital markets that
would facilitate the periodic auction and sale of these securities. At
December 31, 2008, the Company’s pre-tax temporary impairment of the
auction rate securities totaled $7.3 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, 2008.
  9
  Supplemental
Real Property Tax
 
 On
July 1, 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 years 2002 through the second quarter of
2008. CE Casecnan forwarded the assessment to NIA and the Philippine Department
of Finance (“DOF”), who must authorize any payment for real property taxes and
are obligated to reimburse the Company pursuant to the Project Agreement. On
December 19, 2008, pursuant to written authorization from NIA and the 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. On January 16, 2009, CE Casecnan
filed a protest on the supplemental assessment. No liability for supplemental
real property tax has been recognized as the Company believes that the claim is
without merit.
 
 National
Wealth Tax
 
 On
July 17, 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, who must
authorize any payment for national wealth taxes and are obligated to reimburse
the Company pursuant to the Project Agreement. On September 24, 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 on December 11, 2008.
The proceedings were suspended indefinitely to allow the municipality of Alfonso
Castaneda to provide other local government units the opportunity to intervene
in the case. No liability for national wealth tax has been recognized as the
Company believes that the claim is without merit.
 
 Franchise
Tax
 
 In 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 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 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 these
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 and
notes payable. Material obligations as of December 31, 2008 are as follows
(in thousands):
 
 Payments
      Due by PeriodsTotal
                
                
                2009
                
                
                2010-2011
                
                
                2012-2013
                
                
                2014
      andAfterContractual
      Cash Obligations:Long-term
      debt
                
                $
                30,870
                
                
                $
                13,720
                
                
                $
                17,150
                
                
                $
                -
                
                
                $
                -Notes
      payable (1)
                
                
                7,115
                
                
                
                7,115
                
                
                
                -
                
                
                
                -
                
                
                
                -Interest
                
                
                7,477
                
                
                
                5,940
                
                
                
                1,537
                
                
                
                -
                
                
                
                -Total
      contractual cash obligations
                
                $
                45,462
                
                
                $
                26,775
                
                
                $
                18,687
                
                
                $
                -
                
                
                $
                -
 
 (1)
                On
      February 5, 2009, CE Casecnan repaid in full the outstanding
      principal amount of the Notes and related accrued
  interest.
 
  10
  Critical
Accounting Policies
 
 Certain
accounting policies require management to make estimates and judgments
concerning transactions that will be settled several years in the future.
Amounts recognized in the Financial Statements from such estimates are
necessarily based on numerous assumptions involving varying and potentially
significant degrees of judgment and uncertainty. Accordingly, the amounts
currently reflected in the Financial Statements will likely increase or decrease
in the future as additional information becomes available. The following
critical accounting policies are impacted significantly by judgments,
assumptions and estimates used in the preparation of the Financial
Statements.
 
 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 in 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 whose fair values 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, 2008, the Company had fixed-rate long-term debt totaling
$30.9 million with a total fair value of $31.4 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 approximately $0.6 million if
interest rates were to increase by 10% from their levels as of December 31,
2008. Comparatively, as of December 31, 2007, the Company had fixed-rate
long-term debt totaling $68.6 million with a total fair value of
$73.8 million. The fair value of these instruments would have decreased by
approximately $0.4 million if interest rates had increased by 10% from
their levels at December 31, 2007. 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.
 
 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.
  11
  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, 2008, have experienced multiple failed auctions as the amount
of securities submitted for sale has exceeded the amount of purchase orders. The
securities are rated Baa1 by Moody’s Investors Service and AA by Standard &
Poor’s at December 31, 2008. 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 has the intent
and ability to hold the auction rate securities for a period of time sufficient
to allow for any anticipated recovery in the credit and capital markets that
would facilitate the periodic auction and sale of these securities. At
December 31, 2008, the Company’s pre-tax temporary impairment of the
auction rate securities totaled $7.3 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, 2008. The investments are classified as available-for-sale
securities and are recorded in other investments and long-term restricted cash
and investments on the Balance Sheets.
  12
  Item 8.
                Financial Statements and Supplementary
    Data
 
 Report of Independent Registered Public Accounting
      Firms
                  14Balance Sheets as of December 31, 2008 and
    2007
                  16Statements of Operationsfor the Years
      Ended December 31, 2008, 2007 and 2006
                  17Statements of Changes in Shareholders’ Equityfor the Years
      Ended December 31, 2008, 2007 and 2006
                  18Statements of Cash Flowsfor the Years
      Ended December 31, 2008, 2007 and 2006
                  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.
 Makati
City, Philippines
   We have
audited the accompanying balance sheet of CE Casecnan Water and Energy Company,
Inc. (the “Company”) as of December 31, 2008, and the related statements of
operations, changes in shareholders’ equity, and cash flows for the year ended
December 31, 2008.  These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on the
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. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting.  Our audit 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 audit provides a
reasonable basis for our opinion.
  In our
opinion, such 2008 financial statements present fairly, in all material
respects, the financial position of CE Casecnan Water and Energy Company, Inc.
as of December 31, 2008, and the results of its operations and its cash
flows for the year ended December 31, 2008, in conformity with accounting
principles generally accepted in the United States of America.
  /s/
Manabat Delgado Amper & Co.
  Manabat,
Delgado, Amper & Co.
 Deloitte
& Touche
 Makati
City, Philippines
 February
27, 2009
 
  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 balance sheet of CE Casecnan Water and Energy Company,
Inc. as of December 31, 2007 and the related statements of operations, of
changes in shareholders’ equity and of cash flows for each of the two years in
the period 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 audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
 
 In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of CE Casecnan Water and
Energy Company, Inc. as of December 31, 2007 and the results of its
operations and its cash flows for each of the two years in the period 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 31,2008
                
                
                2007ASSETSCurrent
      assets:Cash
      and cash equivalents
                
                $
                49,350
                
                
                $
                31,083Restricted
      cash and investments
                
                
                22,881
                
                
                
                22,414Trade
      receivable, net
                
                
                20,308
                
                
                
                20,365Other
      current assets
                
                
                7,387
                
                
                
                6,653Total
      current assets
                
                
                99,926
                
                
                
                80,515Property,
      plant and equipment, net
                
                
                281,485
                
                
                
                303,056Other
      investments
                
                
                14,096
                
                
                
                7,503Long-term
      restricted cash and investments
                
                
                -
                
                
                
                13,906Deferred
      income taxes
                
                
                6,995
                
                
                
                5,198Other
                
                
                222
                
                
                
                539Total
      assets
                
                $
                402,724
                
                
                $
                410,717LIABILITIES
      AND SHAREHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable and other accrued liabilities
                
                $
                1,748
                
                
                $
                1,995Dividends
      payable
                
                
                10,825
                
                
                
                10,825Accrued
      interest
                
                
                3,067
                
                
                
                7,801Accrued
      income, property and other taxes
                
                
                5,817
                
                
                
                6,208Payable
      to affiliates
                
                
                2,726
                
                
                
                2,480Notes
      payable
                
                
                7,115
                
                
                
                39,200Current
      portion of long-term debt
                
                
                13,720
                
                
                
                37,730Total
      current liabilities
                
                
                45,018
                
                
                
                106,239Deferred
      revenue
                
                
                -
                
                
                
                1,768Long-term
      debt
                
                
                17,150
                
                
                
                30,870Total
      liabilities
                
                
                62,168
                
                
                
                138,877Commitments
      and contingencies (Note 9)Shareholders’
      equity:Common
      shares - 2,148,000 shares authorized, one Philippine peso ($0.038)
      parvalue; 767,162 shares issued and outstanding
                
                
                29
                
                
                
                29Additional
      paid-in capital
                
                
                123,807
                
                
                
                123,807Retained
      earnings
                
                
                221,839
                
                
                
                148,004Accumulated
      other comprehensive loss, net
                
                
                (5,119
                )
                
                
                -Total
      shareholders’ equity
                
                
                340,556
                
                
                
                271,840Total
      liabilities and shareholders’ equity
                
                $
                402,724
                
                
                $
                410,717
 
 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 31,2008
                
                
                2007
                
                
                2006Revenue:Lease
      rentals and service contracts
                
                $
                137,638
                
                
                $
                124,733
                
                
                $
                148,529Operating
      expenses:Depreciation
                
                
                22,121
                
                
                
                21,825
                
                
                
                21,728Plant
      operations and other operating expenses
                
                
                11,315
                
                
                
                9,589
                
                
                
                9,368Total
      operating expenses
                
                
                33,436
                
                
                
                31,414
                
                
                
                31,096Operating
      income
                
                
                104,202
                
                
                
                93,319
                
                
                
                117,433Other
      income (expense):Interest
      expense
                
                
                (8,639
                )
                
                
                (16,784
                )
                
                
                (21,355
                )Interest
      income
                
                
                2,030
                
                
                
                2,810
                
                
                
                3,010Other,
      net
                
                
                4,399
                
                
                
                3,761
                
                
                
                3,978Total
      other income (expense)
                
                
                (2,210
                )
                
                
                (10,213
                )
                
                
                (14,367
                )Income
      before income tax expense
                
                
                101,992
                
                
                
                83,106
                
                
                
                103,066Income
      tax expense
                
                
                28,157
                
                
                
                4,567
                
                
                
                2,262Net
      income
                
                $
                73,835
                
                
                $
                78,539
                
                
                $
                100,804
 
 The
accompanying notes are an integral part of these financial
statements.
 
  17
  
 CE
CASECNAN WATER AND ENERGY COMPANY, INC.
 STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
 (Amounts
in thousands, except shares)
 
 AccumulatedAdditional
                  
                  
                  
                  
                  
                  OtherCommon
                  
                  
                  Paid-in
                  
                  
                  Retained
                  
                  
                  ComprehensiveStock
                  
                  
                  Capital
                  
                  
                  Earnings
                  
                  
                  Loss,
      net
                  
                  
                  TotalBalance,
      January 1, 2006
                  
                  $
                  29
                  
                  
                  $
                  123,807
                  
                  
                  $
                  68,161
                  
                  
                  $
                  -
                  
                  
                  $
                  191,997Net
      income
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  100,804
                  
                  
                  
                  -
                  
                  
                  
                  100,804Dividends
      declared
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (99,500
                  )
                  
                  
                  -
                  
                  
                  
                  (99,500
                  )Balance,
      December 31, 2006
                  
                  
                  29
                  
                  
                  
                  123,807
                  
                  
                  
                  69,465
                  
                  
                  
                  -
                  
                  
                  
                  193,301Net
      income
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  78,539
                  
                  
                  
                  -
                  
                  
                  
                  78,539Balance,
      December 31, 2007
                  
                  
                  29
                  
                  
                  
                  123,807
                  
                  
                  
                  148,004
                  
                  
                  
                  -
                  
                  
                  
                  271,840Net
      income
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  73,835
                  
                  
                  
                  -
                  
                  
                  
                  73,835Other
      comprehensive loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (5,119
                  )
                  
                  
                  (5,119
                  )Balance,
      December 31, 2008
                  
                  $
                  29
                  
                  
                  $
                  123,807
                  
                  
                  $
                  221,839
                  
                  
                  $
                  (5,119
                  )
                  
                  $
                  340,556
 
 The
accompanying notes are an integral part of these financial
statements.
 
  18
  CE
CASECNAN WATER AND ENERGY COMPANY, INC.
 STATEMENTS OF CASH FLOWS
 (Amounts
in thousands)
 
 Years
      Ended December 31,2008
                
                
                2007
                
                
                2006Cash
      flows from operating activities:Net
      income
                
                $
                73,835
                
                
                $
                78,539
                
                
                $
                100,804Adjustments
      to reconcile net income to cash flows from operations:Depreciation
                
                
                22,121
                
                
                
                21,825
                
                
                
                21,728Amortization
      of bond issue costs
                
                
                317
                
                
                
                518
                
                
                
                688Provision
      for deferred income taxes
                
                
                397
                
                
                
                (103
                )
                
                
                -Changes
      in other items:Trade
      receivable, net
                
                
                57
                
                
                
                (6,363
                )
                
                
                12,636Other
      current assets
                
                
                (734
                )
                
                
                (645
                )
                
                
                (792
                )Accounts
      payable and other accrued liabilities
                
                
                (247
                )
                
                
                371
                
                
                
                (1,414
                )Accrued
      interest
                
                
                (4,734
                )
                
                
                (7,525
                )
                
                
                4,733Accrued
      income, property and other taxes
                
                
                (391
                )
                
                
                2,568
                
                
                
                210Deferred
      revenue
                
                
                (1,768
                )
                
                
                1,768
                
                
                
                (13,756
                )Net
      cash flows from operating activities
                
                
                88,853
                
                
                
                90,953
                
                
                
                124,837Cash
      flows from investing activities:Capital
      expenditures
                
                
                (550
                )
                
                
                (678
                )
                
                
                (1,880
                )Purchases
      of available-for-sale securities
                
                
                -
                
                
                
                (71,809
                )
                
                
                (169,905
                )Proceeds
      from sale of available-for-sale securities
                
                
                -
                
                
                
                60,500
                
                
                
                159,805(Increase)
      decrease in restricted cash  and investments
                
                
                (467
                )
                
                
                30,145
                
                
                
                (7,603
                )Net
      cash flows from investing activities
                
                
                (1,017
                )
                
                
                18,158
                
                
                
                (19,583
                )Cash
      flows from financing activities:(Decrease)
      increase in payable to affiliates
                
                
                246
                
                
                
                (38,531
                )
                
                
                4,965Repayment
      of long-term debt
                
                
                (37,730
                )
                
                
                (37,730
                )
                
                
                (36,015
                )Repayment
      of notes payable
                
                
                (32,085
                )
                
                
                (12,063
                )
                
                
                -Dividends
      paid
                
                
                -
                
                
                
                (21,650
                )
                
                
                (84,575
                )Net
      cash flows from financing activities
                
                
                (69,569
                )
                
                
                (109,974
                )
                
                
                (115,625
                )Net
      change in cash and cash equivalents
                
                
                18,267
                
                
                
                (863
                )
                
                
                (10,371
                )Cash
      and cash equivalents at beginning of period
                
                
                31,083
                
                
                
                31,946
                
                
                
                42,317Cash
      and cash equivalents at end of period
                
                $
                49,350
                
                
                $
                31,083
                
                
                $
                31,946Supplemental
      disclosure:Interest
      paid
                
                $
                11,865
                
                
                $
                22,602
                
                
                $
                17,704Income
      taxes paid
                
                $
                26,555
                
                
                $
                2,264
                
                
                $
                2,440
 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., 20% owned by CE Casecnan Ltd., a
Bermuda-registered corporation, which are both indirectly wholly owned
subsidiaries of MEHC, and 10% owned by a third party. MEHC is a consolidated
subsidiary of Berkshire Hathaway Inc.
 
 The
Company has a contract with the Republic of the Philippines (“ROP”), through the
Philippine National Irrigation Administration (“NIA”) (a ROP-owned and
controlled corporation), for the development and construction of a hydroelectric
power plant and related facilities under a build-own-operate-transfer agreement,
as amended by the Supplemental Agreement dated September 29, 2003 (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, the Company
was entitled to certain incentives which include an income tax holiday for six
years from the start of commercial operations. The income tax holiday expired on
December 11, 2007.  The Company’s taxable income from
December 11, 2007, forward is subject to income tax at the 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 Philippine pesos (“pesos”), are
recorded based on the prevailing rates of exchange at transaction dates. Foreign
currency denominated monetary assets and liabilities are translated at the
exchange rate prevailing at the balance sheet date. The resulting exchange
differences from settlements of foreign currency transactions and translations
of monetary assets and liabilities are credited or charged to
operations.
 
 The
Company’s operations are in one reportable segment, the water delivery and
electricity generation business.
 
 Use of Estimates in
Preparation of Financial Statements
 
 The
preparation of the Financial Statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities 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 environmental, regulatory and income tax matters.
Actual results may differ from the estimates used in preparing the Financial
Statements.
 
  20
  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. The undistributed dividends and the
debt service funds are invested in money-market instruments. Other investments
consist of auction rate securities. The auction rate securities are measured at
fair value, and classified as available-for-sale securities, with unrealized
gains and losses reported as a component of accumulated other comprehensive loss
in shareholders’ equity. Realized gains and losses and other-than-temporary
impairments are included in other income (expense).
 
 Property, Plant and
Equipment, Net
 
 Property,
plant and equipment is recorded at historical cost (including capitalized
interest costs) less accumulated depreciation. Depreciation is computed on the
straight-line method based on the 20-year Cooperation Period for the
hydroelectric power plant and office and building structure, and on the
estimated useful life of five years for other equipment. 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
respective assets are charged to operations. When an asset is sold or otherwise
disposed of, its cost and related accumulated depreciation are removed from the
accounts and the resulting gain or loss is credited or charged to
operations.
 
 Impairment of Long-Lived
Assets
 
 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 these 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 in the
Statements of Operations.
 
 Income
Taxes
 
 Deferred
tax assets and liabilities are based on differences between the financial
statements and tax bases of assets and liabilities using the estimated tax rates
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 income tax assets where
management has judged that 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 and the outcome of
pending disputes and arbitrations. Based on the Company’s assessment, no
provision was required as of December 31, 2008 and 2007. The activity in
the Company’s allowance for doubtful accounts for the years ended
December 31 was as follows (in thousands):
 
 2008
                
                
                2007
                
                
                2006Balance,
      January 1
                
                $
                -
                
                
                $
                (637
                )
                
                $
                (654
                )Recoveries
                
                
                -
                
                
                
                637
                
                
                
                17Balance,
      December 31
                
                $
                -
                
                
                $
                -
                
                
                $
                (637
                )
 
  21
  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.
 
 3.           New
Accounting Pronouncements
 
 In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 157, “Fair Value
Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements. SFAS No. 157 does not impose fair value
measurements on items not already accounted for at fair value; rather it
applies, with certain exceptions, to other accounting pronouncements that either
require or permit fair value measurements. Under SFAS No. 157, fair value
refers to the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants in the
principal or most advantageous market. The standard clarifies that fair value
should be based on the assumptions market participants would use when pricing
the asset or liability. In February 2008, the FASB issued Staff Position
(“FSP”) No. 157-2, “Effective Date of FASB Statement No. 157”, which
delays the effective date of SFAS No. 157 for all non-financial assets and
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis, until fiscal years beginning after
November 15, 2008. In October 2008, the FASB issued FSP
No. 157-3, “Determining the Fair Value of a Financial Asset When the Market
for That Asset Is Not Active” (“FSP FAS 157-3”), which clarifies the
application of SFAS No. 157 in a market that is not active and provides an
example to illustrate key considerations in determining the fair value of a
financial asset when the market for that financial asset is not active. FSP
FAS 157-3 was effective upon issuance, including prior periods for which
financial statements had not been issued. The Company applied the guidance of
FSP FAS 157-3 when determining the fair value of its auction rate
securities. The Company adopted the provisions of SFAS No. 157 for assets
and liabilities recognized at fair value on a recurring basis effective
January 1, 2008. The partial adoption of SFAS No. 157 did not have a
material impact on the Company’s Financial Statements. Refer to Note 10 for
additional discussion.
 
 4.           Restricted
Cash and Investments and Other Investments
 
 Restricted
cash and investments consist of the following as of December 31 (in
thousands):
 
 2008
                
                
                2007Current:Dividend
      set aside account
                
                $
                13,279
                
                
                $
                13,054Debt
      service reserve fund
                
                
                9,602
                
                
                
                9,360$
                22,881
                
                
                $
                22,414Noncurrent
      - Debt service reserve fund
                
                $
                -
                
                
                $
                13,906
 
 
 The
dividend set aside account and the current debt service reserve fund are
invested in U.S. government money-market accounts. The non-current debt service
reserve fund was invested in auction rate securities that had a remaining
weighted average maturity of 26 years and earned interest at 6.1% at December
31, 2007. In 2008, these auction rate securities were transferred from the
non-current debt service reserve fund, found in long-term restricted cash and
investments on the Balance Sheets, to other investments.
 
 Other
investments consist of auction rate securities with a carrying value of
$14.1 million and $7.5 million at December 31, 2008 and 2007,
respectively. The investments earned interest at 2.51% and 6.1% at
December 31, 2008 and 2007, respectively. The investments had remaining
weighted average maturities of 22 and 17 years at December 31, 2008 and
2007, respectively. The investments are classified as available-for-sale
securities.
  22
  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, 2008, have experienced multiple failed auctions as the amount
of securities submitted for sale has exceeded the amount of purchase orders. The
securities are rated Baa1 by Moody’s Investors Service and AA by Standard &
Poor’s at December 31, 2008. 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 has the intent
and ability to hold the auction rate securities for a period of time sufficient
to allow for any anticipated recovery in the credit and capital markets that
would facilitate the periodic auction and sale of these securities. Therefore,
the Company considers the auction rate securities to be temporarily impaired. At
December 31, 2008, the Company’s pre-tax temporary impairment of the
auction rate securities totaled $7.3 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, 2008. Given the failed auctions, it is uncertain if the
auction rate securities will be sold within the next twelve months. Accordingly,
the Company’s investments in auction rate securities are classified as
non-current on the Balance Sheets.
 
 5.           Property,
Plant and Equipment, Net
 
 Property,
plant and equipment, net at December 31 consists of the following (in
thousands):
 
 2008
                
                
                2007Hydroelectric
      power facility
                
                $
                431,666
                
                
                $
                431,382Office
      and building structures
                
                
                1,222
                
                
                
                1,199Transportation
      and other equipment
                
                
                2,511
                
                
                
                2,350Total
      operating assets
                
                
                435,399
                
                
                
                434,931Accumulated
      depreciation
                
                
                (153,914
                )
                
                
                (131,875
                )Property,
      plant and equipment, net
                
                $
                281,485
                
                
                $
                303,056
 
 6.           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, 2008 and 2007, long-term debt
outstanding was $30.9 million and $68.6 million, respectively. The annual
maturities of the Company’s long-term debt are $13.7 million in 2009, $17.2
million in 2010 and $- thereafter. For the year ended December 31, 2008,
the long-term debt had an effective interest rate of 14.3%, 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; sale, lease, or transfer of properties material to the
Casecnan Project, among others.
 
 7.           Income
Taxes
 
 During
the years ended December 31, 2008, 2007 and 2006, CE Casecnan incurred
$28.2 million, $4.6 million and $2.3 million, respectively, of
income taxes. 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. After December 31,
2007, the Company’s taxable income is subject to income tax at the Philippine
statutory rate of 35% in 2008 and 30% thereafter. The following table reconciles
the Philippine statutory tax rate to the effective tax rate applicable to income
before income tax expense for the years ended December 31:
 
 2008
                
                
                2007
                
                
                2006Philippine
      statutory rate
                
                
                35
                %
                
                
                35
                %
                
                
                35
                %Income
      tax holiday
                
                
                -
                
                
                
                (30
                )
                
                
                (33
                )Optional
      standard deduction
                
                
                (7
                )
                
                
                -
                
                
                
                -Effective
      tax rate
                
                
                28
                %
                
                
                5
                %
                
                
                2
                %
   23
   The
Company’s deferred income tax asset of $7.0 million and $5.2 million
as of December 31, 2008 and 2007, respectively, consists mainly of the
difference between the financial reporting basis and the tax reporting basis for
development and construction costs.
 
 8.           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 $2.7 million and $2.5 million at December 31, 2008
and 2007, respectively. Costs incurred by the Company in transactions with
related parties amounted to $1.8 million, $1.4 million and
$3.3 million for the years ended December 31, 2008, 2007 and 2006,
respectively, and consist primarily of cost allocations.
 
 As of
December 31, 2008 and 2007, the Company had outstanding
$7.1 million and $39.2 million, respectively, 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 plus 5.25%. However, the
Notes were redeemable at any time prior to maturity upon demand from CE Casecnan
Ltd. Interest expense on the Notes was $1.8 million, $5.3 million and
$5.3 million for the years ended December 31, 2008, 2007 and 2006,
respectively. As of December 31, 2008, the effective interest rate on the
Notes was 7.85%.
 
 On
May 15, 2007, CE Casecnan Ltd. demanded payment of the Notes. To
the extent that the Company does not have available cash from distributions to
pay such amount in full, the Company shall be deemed to have satisfied this
demand by paying, to the extent of such available cash, first accrued but unpaid
interest on the outstanding principal amount of the Notes, and then the
outstanding principal amount of the Notes. To the extent that such available
cash is insufficient to pay any accrued interest and/or outstanding principal,
the Company shall not be deemed in default and such amounts shall remain
outstanding and payable pursuant to the terms of the Notes.On February 5,
2009, CE Casecnan repaid the outstanding Notes.
 
 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. On July 8, 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. On
January 3, 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,
which are also being litigated. The remaining issues are fully briefed and
pending before the court. Exercise of the buy-up rights is a transaction between
shareholders and is not expected to have any impact on the Company’s results of
operations.
 
 On
July 1, 2005, MEHC and CE Casecnan Ltd. commenced an action
against San Lorenzo Ruiz Builders and Developers Group, Inc. (“San
Lorenzo”) in the District Court of Douglas County, Nebraska, seeking a
declaratory judgment as to San Lorenzo’s right to repurchase 15% of the
shares in the Company. On January 30, 2006, San Lorenzo filed a
counterclaim against MEHC and CE Casecnan Ltd. seeking declaratory
relief that it has effectively exercised its option to purchase 15% of the
shares of the Company, that it is the rightful owner of such shares and that it
is due all dividends paid on such shares. Currently, the action is in the
discovery phase, and a trial has been set to begin in October 2009. The impact,
if any, of this litigation on the Company cannot be determined at this
time.
 
  24
  Supplemental Real Property
Tax
 
 On
July 1, 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 years 2002 through the second quarter of
2008. CE Casecnan forwarded the assessment to NIA and the Philippine Department
of Finance (“DOF”), who must authorize any payment for real property taxes and
are obligated to reimburse the Company pursuant to the Project Agreement. On
December 19, 2008, pursuant to written authorization from NIA and the 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. On January 16, 2009, CE Casecnan
filed a protest on the supplemental assessment. No liability for supplemental
real property tax has been recognized as the Company believes that the claim is
without merit.
 
 National Wealth
Tax
 
 On
July 17, 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, who must
authorize any payment for national wealth taxes and are obligated to reimburse
the Company pursuant to the Project Agreement. On September 24, 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 on December 11, 2008.
The proceedings were suspended indefinitely to allow the municipality of Alfonso
Castaneda to provide other local government units the opportunity to intervene
in the case. No liability for national wealth tax has been recognized as the
Company believes that the claim is without merit.
 
 Franchise
Tax
 
 In 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 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 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.
 
  25
  10.         Fair
Value Measurements
 
 The
carrying amounts of cash and cash equivalents, trade receivables and accounts
payable and other accrued liabilities approximate fair value because of the
short-term maturity of these instruments. The Company has auction rate
securities that are measured at fair value in the Financial Statements. The
Company uses a three level hierarchy for determining fair value and a financial
asset or liability classification within the hierarchy is determined based on
the lowest level input that is significant to the fair value measurement. The
auction rate securities were valued 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. As such, the Company
considers these securities to be valued using Level 3 inputs. The following
table reconciles the beginning and ending balance of the Company’s auction rate
securities measured at fair value on a recurring basis for the year ended
December 31, 2008 (in thousands):
 
 Beginning
      balance
                        
                        $
                        21,409Unrealized
      losses included in other comprehensive loss, net
                        
                        
                        (7,313
                        )Ending
      balance
                        
                        $
                        14,096
 
 The fair
value of the Company’s long-term debt has been estimated based upon quoted
market prices of similar types of arrangements as supplied by third-party broker
dealers. The following table presents the carrying amount and estimated fair
value of the Company’s long-term debt, including the current portion, as of
December 31 (in thousands):
 
 2008
                
                
                2007CarryingAmount
                
                
                Fair
      Value
                
                
                CarryingAmount
                
                
                Fair
      ValueLong-term
      debt
                
                $
                30,870
                
                
                $
                31,372
                
                
                $
                68,600
                
                
                $
                73,814
 
 11.         Comprehensive
Income and Components of Accumulated Other Comprehensive Loss, Net
 
 The
components of comprehensive income are as follows for the years ended December
31 (in thousands):
 
 2008
                
                
                2007
                
                
                2006Net
      income
                
                $
                73,835
                
                
                $
                78,539
                
                
                $
                100,804Other
      comprehensive loss – unrealized losses on marketable securities, net of
      tax of $(2,194); $-; and $-
                
                
                (5,119
                )
                
                
                -
                
                
                
                -Comprehensive
      income
                
                $
                68,716
                
                
                $
                78,539
                
                
                $
                100,804
 
 Accumulated
other comprehensive loss, net is included in the Balance Sheets in the
shareholders’ equity section, and consists of unrealized losses on marketable
securities totaling $5.1 million, net of tax of $2.2 million, as of
December 31, 2008.
 
  26
  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, 2008 (in thousands):
 
 Years
      Ended
                          December 31,
                      
                      Amount2009
                      
                      $
                      88,0492010
                      
                      
                      88,0492011
                      
                      
                      88,0492012
                      
                      
                      88,0492013
                      
                      
                      88,0492014
      - 2021
                      
                      
                      704,392
 
 Total
lease rentals and service income received was $137.6 million, $124.7 million and
$148.5 million in 2008, 2007 and 2006, respectively,  including
variable lease rentals and service income of $49.6 million, $36.7 million and
$62.1 million, respectively.
 
 13.         Unaudited
Quarterly Operating Results
 
 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
                
                
                
                27,78020071st
      Quarter
                
                
                2nd
      Quarter
                
                
                3rd
      Quarter
                
                
                4th
      Quarter(In
      thousands)Revenue
                
                $
                24,338
                
                
                $
                22,014
                
                
                $
                27,501
                
                
                $
                50,880Operating
      income
                
                
                17,109
                
                
                
                14,510
                
                
                
                19,468
                
                
                
                42,232Net
      income
                
                
                13,674
                
                
                
                11,142
                
                
                
                16,291
                
                
                
                37,432
 
 Operating
results reflect seasonal variations in rainfall and resulting water delivery and
energy production.
   27
    Item 9.
                Changes inand 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 are effective in timely alerting them to
material information relating to the Company required to be included in the
Company’s periodic SEC filings. There has been no change in the Company’s
internal control over financial reporting during the quarter ended
December 31, 2008, 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, 2008, 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, 2008.
 
 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 25,
2009
 
 Item 9B.
                OtherInformation
 
 None.
 
  28
  
 PART
III
 
 Item 10.
                Directors, Executive Officers and Corporate
      Governance
 
 The
following table sets forth the names, ages, and positions of the directors and
executive officers of the Company as of December 31, 2008:
 
 Douglas
      L. Anderson
              
              50
              
              Director
      and ChairmanJoseph
      L. Sullivan
              
              54
              
              Director,
      President and General ManagerPatrick
      J. Goodman
              
              42
              
              Director,
      Senior Vice President and Chief Financial OfficerP.
      Eric Connor
              
              60
              
              DirectorBrian
      K. Hankel
              
              46
              
              Vice
      President and TreasurerScott
      LaPrairie
              
              51
              
              DirectorMitchell
      L. Pirnie
              
              50
              
              Vice
      President and General CounselEulogio
      Wilfredo G. Sarmago
              
              47
              
              DirectorTrinity
      S. Gatuz
              
              42
              
              Director
      and Vice PresidentBelinda
      E. Dugan
              
              40
              
              Director
      and Corporate CounselSuzy
      Lyn A. Bayona-Salova
              
              33
              
              Director
      and Head of AccountingPearl
      T. Liu
              
              53
              
              Corporate
      Secretary
 
 Directors
of the Company are elected annually and hold office until a successor is
elected. Executive officers are chosen from time to time by vote of the Board of
Directors. Pursuant to the terms of the Shareholders Agreement, CE Casecnan Ltd.
is entitled to elect seven of the directors, and each minority investor is
entitled to elect one director.
 
 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, Mr. Connor has been Senior Vice President
and Chief Procurement Officer of MEHC since 2003. From 1999 to 2003, Mr. Connor
served as President and Chief Operating Officer of Northern Electric, plc, an
affiliate of the Company. Mr. Connor joined MEHC in 1992.
 
 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.
 
 29
  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.
 
 Belinda E. Dugan. In addition
to serving as a Director of the Company, Ms. Dugan has been Corporate Counsel
for the Company since January 1, 2008. Ms. Dugan served as Legal Counsel
for the Company and certain affiliates since 2003.
 
 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.
 
 Pearl T. Liu. In addition to
serving as Corporate Secretary for the Company since May 13, 2005, Ms. Liu
heads the Corporate and Commercial Practice Group of Quisumbing
Torres.
 
 Audit
Committee Matters
 
 During
the year ended December 31, 2008, 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
the executive officers or directors of the Company receives compensation from
the Company for services as officers or directors of the Company. All directors
are reimbursed for their expenses in attending board and committee
meetings.
 
 Item 12.
                Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder
Matters
 
 Description
of Capital Stock
 
 As of
December 31, 2008, the authorized capital stock of the Company consisted 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 were outstanding. There is
no public trading market for the Common Stock. As of December 31, 2008,
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.
 
 Principal
Shareholders
 
 The
following table sets forth certain information regarding beneficial ownership of
the Company’s shares of common stock held by each of the Company’s directors,
executive officers and all directors and executive officers of the Company as a
group as of January 31, 2009:
 
 Name
      and Address of Beneficial Owner
              
              Number
      of Shares Beneficially Owned*
              
              Percentage
      of ClassCE
      Casecnan II, Inc.
              
              537,005
              
              70%
      (1)CE
      Casecnan Ltd.
              
              153,432
              
              20% (2)
      (3)LaPrairie
      Group Contractors
              
              76,716
              
              10%
      (2)
 
 *
                In
      addition, each director of the Company owns one share in the Company as
      required by Philippine law.(1)
                In
      April 2003, CE Casecnan Ltd., a Bermuda registered corporation assigned
      shares in CE Casecnan to CE Casecnan II, Inc., a Philippine corporation.
      CE Casecnan Ltd. and CE Casecnan II, Inc. are 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.    30
  (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
      Shareholders 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.
                CertainRelationships 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 for the year ended December 31,
2008.
 
 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 three-month period ended
December 31, 2008, and Isla Lipana & Co., (a PricewaterhouseCoopers
member firm) for the nine-month period ended September 30, 2008 and the
year ended December 31, 2007 (in thousands):
 
 Three-Month
                    
                    
                    Nine-MonthPeriod
      Ended
                    
                    
                    Period
      Ended
                    
                    
                    Year
      EndedDecember 31,
                    
                    
                    September 30,
                    
                    
                    December 31,2008
                    
                    
                    2008
                    
                    
                    2007Audit
      fees (1)
                    
                    $
                    144
                    
                    
                    $
                    23
                    
                    
                    $
                    252Audit-related
      fees (2)
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Tax
      fees (3)
                    
                    
                    -
                    
                    
                    
                    36
                    
                    
                    
                    19All
      other fees
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Total
      aggregate fees billed
                    
                    $
                    144
                    
                    
                    $
                    59
                    
                    
                    $
                    271
 
 (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.
 
 The audit
committee of MEHC reviewed and approved the services rendered by Isla Lipana
& Co. in and for the period of their engagement in 2008 and for fiscal 2007
as set forth in the table above and concluded that the non-audit services were
compatible with maintaining the principal accountant’s
independence.
  31
  
 The audit
committee of MEHC reviewed and approved the services rendered by the Deloitte
Entities in and for the period of their engagement in 2008 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 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 prior to
being performed. The Policy does not delegate to management the audit
committee’s responsibilities to pre-approve services performed by the principal
accountant.
  32
  PART
IV
 
 Item 15.
                Exhibits and Financial Statement
    Schedules
 
 (a)
              Financial
      Statements and Schedules(i)
              Financial
      StatementsFinancial
      Statements are included in Item 8 of this Form 10-K.(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.
 
  33
  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 13th day of
February, 2009.
 
 
 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
      27, 2009Joseph
      L. Sullivan
              
              (principal
      executive officer)/s/  Patrick J.
      Goodman*
              
              Director,
      Senior Vice President and Chief Financial Officer
              
              February
      27, 2009Patrick
      J. Goodman
              
              (principal
      financial and accounting officer)/s/  Douglas L.
      Anderson
              
              Director
      and Chairman
              
              February
      27, 2009Douglas
      L. Anderson/s/  Eulogio Wilfredo G. Sarmago
      *
              
              Director
              
              February
      27, 2009Eulogio
      Wilfredo G. Sarmago/s/  Trinity S.
      Gatuz*
              
              Director
      and Vice President
              
              February
      27, 2009Trinity
      S. Gatuz/s/  Belinda E.
      Dugan*
              
              Director
      and Corporate Counsel
              
              February
      27, 2009Belinda
      E. Dugan/s/  Suzy Lyn A.
      Bayona-Salova*
              
              Director
      and Head of Accounting
              
              February
      27, 2009Suzy
      Lyn A. Bayona-Salova/s/  P. Eric
    Connor*
              
              Director
              
              February
      27, 2009P.
      Eric ConnorScott LaPrairie
              
              Director
              
              February
      27, 2009*By:  /s/  Douglas L.
      AndersonDouglas
      L. AndersonAttorney-in-Fact
 
 
  34
  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).4.6
                  Deposit
      and Disbursement Agreement, dated as of November 27, 1995, by and
      among the Company, Chemical Trust Company of California, Kiewit Energy
      Company and the Company (incorporated by reference to the Company’s Form
      S-4).4.7
                  Consent
      of 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).4.8
                  Consent
      of the Republic of the Philippines, dated November 10, 1995, to the
      assignment of the Performance Undertaking and the Amended and Restated
      Casecnan Project Agreement (incorporated by reference to Exhibit 4.8 to
      the Company’s Form S-4).10.1
                  Amended
      and Restated Casecnan Project Agreement, dated as of June 26, 1995,
      between the National Irrigation Administration and the Company
      (incorporated by reference to Exhibit 10.1 the Company’s Form
      S-4).10.2
                  Performance
      Undertaking, dated as of July 20, 1995, executed by the Secretary of
      Finance on behalf of the Republic of the Philippines (incorporated by
      reference to Exhibit 10.2 to the Company’s Form S-4).10.8
                  Supplemental
      Agreement between CE Casecnan Water and Energy Company, Inc. and the
      Philippines National Irrigation Administration dated as of
      September 29, 2003 (incorporated by reference to Exhibit 99.1 to the
      Company’s Form 8-K dated October 15, 2003).14.1
                  CE
      Casecnan Water and Energy Company, Inc. Code of Ethics for Chief Executive
      Officer, Chief Financial Officer and Chief Accounting Officer
      (incorporated by reference to Exhibit 14.1 to the Company’s Form 10-K
      dated December 31, 2003).24
                  Power
      of Attorney
 
  35
  
 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.
 
  36