UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10-Q
 
 [x]
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
 
 For the
quarterly period ended March 31, 2008
 
 or
 
 [  ]
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
 
 For the
transition period from ________to_______
 
 Commission
File No. 001-12995
 
 CE CASECNAN WATER AND ENERGY
COMPANY, INC.
 (Exact
name of registrant as specified in its charter)
 
 Philippines
                    
                    Not
      Applicable(State
      or other jurisdiction of
                      incorporation
      or organization)
                    
                    (I.R.S.
      Employer
                      Identification
      No.)24th
      Floor, 6750 Building, Ayala Avenue
                        Makati,
      Metro Manila, Philippines
                    
                    Not
      Applicable(Address
      of principal executive offices)
                    
                    (Zip
      Code)011
      63 2 892-0276(Registrant’s
      telephone number, including area code)N/A(Former
      name, former address and former fiscal year, if changed since last
      report)
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
 Yes o
No   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 o
                    Accelerated
      filer o
                    Non-accelerated
      filer T
                    Smaller
      reporting company  o
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
 Yes  o  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 April 29, 2008, the number
of outstanding shares of $0.038 par value common stock was 767,162.
 
  
  
 TABLE OF
CONTENTS
 
 PART
I – FINANCIAL INFORMATION
 
 Item 1.
                    Financial Statements
                    3Item 2.
                    Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
                    14Item 3.
                    Quantitative and Qualitative Disclosures About Market
      Risk
                    19Item 4.
                    Controls and Procedures
                    19PART II – OTHER
      INFORMATIONItem 1.
                    Legal Proceedings
                    20Item 1A.
                    Risk Factors
                    20Item 2.
                    Unregistered Sales of Equity Securities and Use of
      Proceeds
                    20Item 3.
                    Defaults Upon Senior Securities
                    20Item 4.
                    Submission of Matters to a Vote of Security
      Holders
                    20Item 5.
                    Other Information
                    20Item 6.
                    Exhibits
                    20Signatures
                    
                    21Exhibit Index
                    
                    22
 
 
 
 
 
  2
  
 PART
I – FINANCIAL INFORMATION
 
 
 Item 1.
                    Financial
      Statements
 
 
 Report
of
Independent Registered Public Accounting Firm
 
 
 To the
Board of Directors and Shareholders of
 CE
Casecnan Water and Energy Company, Inc.
 
 We have
reviewed the accompanying balance sheet of CE Casecnan Water and Energy Company,
Inc. (the “Company”) as of March 31, 2008, and the related statements
of operations, of changes in shareholders’ equity and of cash flows for each of
the three-month periods ended March 31, 2008 and 2007. These interim
financial statements are the responsibility of the Company’s
management.
 
 We
conducted our review in accordance with standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical review procedures and
making inquiries of persons responsible for financial and accounting matters. It
is substantially less in scope than an audit conducted in accordance with
standards of the Public Company Accounting Oversight Board, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
 
 Based on
our review, we are not aware of any material modifications that should be made
to the accompanying interim financial statements for them to be in conformity
with accounting principles generally accepted in the United States of
America.
 
 We
previously audited in accordance with standards of the Public Company Accounting
Oversight Board (United States), the balance sheet as of
December 31, 2007, and the related statements of operations, of
changes in shareholders’ equity and of cash flows for the year then ended (not
presented herein), and in our report dated February 27, 2008, we
expressed an unqualified opinion on those financial statements. In our opinion,
the information set forth in the accompanying balance sheet as of
December 31, 2007, is fairly stated in all material respects in
relation to the balance sheet from which it has been derived.
 
 /s/ Isla
Lipana & Co.
 
 ISLA
LIPANA & CO.
 A
PricewaterhouseCoopers Member Firm
 Makati
City, Philippines
 April
29, 2008
  3
  
 CE
CASECNAN WATER AND ENERGY COMPANY, INC.
 BALANCE
SHEETS (Unaudited)
 (Amounts
in thousands, except share data)
 
 As
      ofMarch 31,
                    
                    
                    December 31,2008
                    
                    
                    2007ASSETSCurrent
      assets:Cash
      and cash equivalents
                    
                    $
                    64,052
                    
                    
                    $
                    31,083Restricted
      cash and investments
                    
                    
                    22,816
                    
                    
                    
                    22,414Trade
      receivable, net
                    
                    
                    15,290
                    
                    
                    
                    20,365Prepaid
      insurance and other current assets
                    
                    
                    7,148
                    
                    
                    
                    6,653Total
      current assets
                    
                    
                    109,306
                    
                    
                    
                    80,515Property,
      plant and equipment, net
                    
                    
                    297,656
                    
                    
                    
                    303,056Other
      investments
                    
                    
                    6,900
                    
                    
                    
                    7,503Long-term
      restricted cash and investments
                    
                    
                    12,692
                    
                    
                    
                    13,906Deferred
      income taxes
                    
                    
                    5,639
                    
                    
                    
                    5,198Bond
      issue costs, net
                    
                    
                    460
                    
                    
                    
                    539Total
      assets
                    
                    $
                    432,653
                    
                    
                    $
                    410,717LIABILITIES
      AND SHAREHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable and other accrued liabilities
                    
                    $
                    4,026
                    
                    
                    $
                    5,171Dividends
      payable
                    
                    
                    10,825
                    
                    
                    
                    10,825Accrued
      interest
                    
                    
                    10,629
                    
                    
                    
                    7,801Income
      tax payable
                    
                    
                    9,742
                    
                    
                    
                    3,032Payable
      to affiliates
                    
                    
                    2,463
                    
                    
                    
                    2,480Notes
      payable
                    
                    
                    39,200
                    
                    
                    
                    39,200Current
      portion of long-term debt
                    
                    
                    37,730
                    
                    
                    
                    37,730Total
      current liabilities
                    
                    
                    114,615
                    
                    
                    
                    106,239Deferred
      revenue
                    
                    
                    3,648
                    
                    
                    
                    1,768Long-term
      debt, net of current portion
                    
                    
                    30,870
                    
                    
                    
                    30,870Total
      liabilities
                    
                    
                    149,133
                    
                    
                    
                    138,877Commitments
      and contingencies (Note 6)Shareholders’
      equity:Common
      stock – 2,148,000 shares authorized, one Philippine peso ($0.038) par
      value; 767,162 shares issued and outstanding
                    
                    
                    29
                    
                    
                    
                    29Additional
      paid-in capital
                    
                    
                    123,807
                    
                    
                    
                    123,807Retained
      earnings
                    
                    
                    160,865
                    
                    
                    
                    148,004Accumulated
      other comprehensive loss, net
                    
                    
                    (1,181
                    )
                    
                    
                    -Total
      shareholders’ equity
                    
                    
                    283,520
                    
                    
                    
                    271,840Total
      liabilities and shareholders’ equity
                    
                    $
                    432,653
                    
                    
                    $
                    410,717
 
 The
accompanying notes are an integral part of these financial
statements.
  4
  
 CE
CASECNAN WATER AND ENERGY COMPANY, INC.
 STATEMENTS
OF OPERATIONS (Unaudited)
 (Amounts
in thousands)
 
 Three-Month
      PeriodsEnded
      March 31,2008
                    
                    
                    2007Revenue:Lease
      rentals and service contracts
                    
                    $
                    28,894
                    
                    
                    $
                    24,338Operating
      expenses:Depreciation
                    
                    
                    5,402
                    
                    
                    
                    5,406Plant
      operations and other operating expenses
                    
                    
                    2,219
                    
                    
                    
                    1,823Total
      operating expenses
                    
                    
                    7,621
                    
                    
                    
                    7,229Operating
      income
                    
                    
                    21,273
                    
                    
                    
                    17,109Other
      income (expense):Interest
      expense
                    
                    
                    (3,102
                    )
                    
                    
                    (4,650
                    )Interest
      income
                    
                    
                    662
                    
                    
                    
                    861Other,
      net
                    
                    
                    937
                    
                    
                    
                    980Total
      other income (expense)
                    
                    
                    (1,503
                    )
                    
                    
                    (2,809
                    )Income
      before income tax expense
                    
                    
                    19,770
                    
                    
                    
                    14,300Income
      tax expense
                    
                    
                    6,909
                    
                    
                    
                    626Net
      income
                    
                    $
                    12,861
                    
                    
                    $
                    13,674
 
 The
accompanying notes are an integral part of these financial
statements.
  5
  
 CE
CASECNAN WATER AND ENERGY COMPANY, INC.
 STATEMENTS
OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
 FOR
THE THREE-MONTH PERIODS ENDED MARCH 31, 2008 AND 2007
 (Amounts
in thousands of U.S. Dollars)
 
 AccumulatedAdditional
                    
                    
                    
                    
                    
                    OtherCommon
                    
                    
                    Paid-in
                    
                    
                    Retained
                    
                    
                    ComprehensiveStock
                    
                    
                    Capital
                    
                    
                    Earnings
                    
                    
                    Loss, net
                    
                    
                    TotalBalance,
      January 1, 2007
                    
                    $
                    29
                    
                    
                    $
                    123,807
                    
                    
                    $
                    69,465
                    
                    
                    $
                    -
                    
                    
                    $
                    193,301Net
      income
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    13,674
                    
                    
                    
                    -
                    
                    
                    
                    13,674Balance,
      March 31, 2007
                    
                    $
                    29
                    
                    
                    $
                    123,807
                    
                    
                    $
                    83,139
                    
                    
                    $
                    -
                    
                    
                    $
                    206,975Balance,
      January 1, 2008
                    
                    $
                    29
                    
                    
                    $
                    123,807
                    
                    
                    $
                    148,004
                    
                    
                    $
                    -
                    
                    
                    $
                    271,840Net
      income
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    12,861
                    
                    
                    
                    -
                    
                    
                    
                    12,861Other
      comprehensive loss
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,181
                    )
                    
                    
                    (1,181
                    )Balance,
      March 31, 2008
                    
                    $
                    29
                    
                    
                    $
                    123,807
                    
                    
                    $
                    160,865
                    
                    
                    $
                    (1,181
                    )
                    
                    $
                    283,520
 
 The
accompanying notes are an integral part of these financial
statements.
 
  6
  
 CE
CASECNAN WATER AND ENERGY COMPANY, INC.
 STATEMENTS
OF CASH FLOWS (Unaudited)
 (Amounts
in thousands of U.S. Dollars)
 
 Three-Month
      PeriodsEnded
      March 31,2008
                    
                    
                    2007Cash
      flows from operating activities:Net
      income
                    
                    $
                    12,861
                    
                    
                    $
                    13,674Adjustments
      to reconcile net income to cash flows from operating
      activities:Depreciation
                    
                    
                    5,402
                    
                    
                    
                    5,406Amortization
      of bond issue costs
                    
                    
                    79
                    
                    
                    
                    130Provision
      for deferred income taxes
                    
                    
                    195
                    
                    
                    
                    -Changes
      in other items:Trade
      receivable, net
                    
                    
                    5,075
                    
                    
                    
                    (270
                    )Prepaid
      insurance and other current assets
                    
                    
                    (495
                    )
                    
                    
                    (205
                    )Accounts
      payable and other accrued liabilities
                    
                    
                    (1,145
                    )
                    
                    
                    (346
                    )Accrued
      interest
                    
                    
                    2,828
                    
                    
                    
                    4,520Income
      tax payable
                    
                    
                    6,710
                    
                    
                    
                    626Deferred
      revenue
                    
                    
                    1,880
                    
                    
                    
                    1,880Net
      cash flows from operating activities
                    
                    
                    33,390
                    
                    
                    
                    25,415Cash
      flows from investing activities:(Additions
      to) disposals of property, plant and equipment
                    
                    
                    (2
                    )
                    
                    
                    4Purchases of
      available-for-sale securities
                    
                    
                    -
                    
                    
                    
                    (30,000
                    )Proceeds from sale
      of available-for-sale securities
                    
                    
                    -
                    
                    
                    
                    15,000Increase in
      restricted cash and investments for debt service obligations and dividends
      payable
                    
                    
                    (402
                    )
                    
                    
                    (886
                    )Net
      cash flows from investing activities
                    
                    
                    (404
                    )
                    
                    
                    (15,882
                    )Cash
      flows from financing activities:Decrease
      (increase) in payable to affiliates
                    
                    
                    (17
                    )
                    
                    
                    580Net
      cash flows from financing activities
                    
                    
                    (17
                    )
                    
                    
                    580Net
      change in cash and cash equivalents
                    
                    
                    32,969
                    
                    
                    
                    10,113Cash
      and cash equivalents at beginning of period
                    
                    
                    31,083
                    
                    
                    
                    31,946Cash
      and cash equivalents at end of period
                    
                    $
                    64,052
                    
                    
                    $
                    42,059
 The
accompanying notes are an integral part of these financial
statements.
 
  7
  
 CE
CASECNAN WATER AND ENERGY COMPANY, INC.
 NOTES
TO FINANCIAL STATEMENTS
 (Unaudited)
 
 (1)
                    General
 
 CE
Casecnan Water and Energy Company, Inc. (“CE Casecnan” or the “Company”) has a
contract with the Republic of the Philippines (“ROP”), through the Philippine
National Irrigation Administration (“NIA”) (a ROP-owned and controlled
corporation), for the development and construction of a hydroelectric power
plant and related facilities under a build-own-operate-transfer agreement, as
amended by the Supplemental Agreement dated September 29, 2003 (“Project
Agreement”), covering a 20-year cooperation period (“Cooperation Period”)
commencing December 11, 2001, with “take-or-pay” obligations for 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. The ROP also
signed a Performance Undertaking, which, among others, affirms and guarantees
the obligations of NIA under the Project Agreement.
 
 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 registration also requires,
among others, the maintenance of a debt-to-equity ratio not exceeding 75:25
during 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 current Philippine statutory
rate.
 
 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 water delivery fees and variable energy fees can produce significant
variability in revenue between reporting periods.
 
 The
Company’s operations are in one reportable segment, the water delivery and
electricity generation industry.
 
 The
unaudited Financial Statements have been prepared in accordance with accounting
principles generally accepted in the United States of America (“GAAP”) for
interim financial information and the U.S. Securities and Exchange Commission’s
rules and regulations for Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the disclosures required by GAAP for
annual financial statements. Management believes the unaudited Financial
Statements contain all adjustments (consisting only of normal recurring
adjustments) considered necessary for the fair presentation of the Financial
Statements as of March 31, 2008 and for the three-month periods ended
March 31, 2008 and 2007. Gross purchases and sales of available-for-sale
securities were presented in the Statement of Cash Flows under investing
activities in 2007 to conform to the 2008 presentation. Such revisions in
presentation did not impact previously reported net cash flows from investing
activities, operating income, net income or retained earnings. The results of
operations for the three-month period ended March 31, 2008 are not
necessarily indicative of the results to be expected for the full
year.
 
 The
preparation of the unaudited Financial Statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the period. Actual results
may differ from the estimates used in preparing the unaudited Financial
Statements. Management’s Discussion and Analysis and Note 2 of Notes to
Financial Statements included in the Company’s Annual Report on Form 10-K for
the year ended December 31, 2007 describe the most significant accounting
estimates and policies used in the preparation of the Financial Statements.
There have been no significant changes in the Company’s assumptions regarding
significant accounting policies during the first three months of
2008.
 
  8
  (2)
                    New
      Accounting Pronouncements
 
 In
February 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities - including an amendment of FASB
Statement No. 115” (“SFAS No. 159”). SFAS No. 159 permits entities to elect to
measure many financial instruments and certain other items at fair value. Upon
adoption of SFAS No. 159, an entity may elect the fair value option for eligible
items that exist at the adoption date. Subsequent to the initial adoption, the
election of the fair value option may only be made at initial recognition of the
asset or liability or upon a remeasurement event that gives rise to new-basis
accounting. The decision about whether to elect the fair value option is applied
on an instrument-by-instrument basis, is irrevocable and is applied only to an
entire instrument and not only to specified risks, cash flows or portions of
that instrument. SFAS No. 159 does not affect any existing accounting literature
that requires certain assets and liabilities to be carried at fair value nor
does it eliminate disclosure requirements included in other accounting
standards. The Company adopted SFAS No. 159 effective January 1, 2008,
and did not elect the fair value option for any existing eligible
items.
 
 In
September 2006, the FASB issued SFAS 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
No. 157-2, “Effective Date of FASB Statement No. 157” (FSP FAS
157-2”), 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. 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 7 for additional discussion.
 
 (3)           Restricted
Cash and Investments and Other Investments
 
 Restricted
cash and investments consist of the following (in thousands):
 
 March 31,
      2008
                    
                    
                    December 31,
      2007Current:Debt
      service reserve fund
                    
                    $
                    9,667
                    
                    
                    $
                    9,360Dividend
      set aside account
                    
                    
                    13,149
                    
                    
                    
                    13,054$
                    22,816
                    
                    
                    $
                    22,414Noncurrent
      - Debt service reserve fund
                    
                    $
                    12,692
                    
                    
                    $
                    13,906
 
 
 Restricted
cash and investments represent various U.S. dollar money market investments and
auction rate securities. The debt service reserve fund is invested in U.S.
dollar money-market instruments and auction rate securities. The dividend set
aside account is composed entirely of U.S. dollar money-market instruments.
Auction rate securities included in long-term restricted cash and investments at
March 31, 2008 and December 31, 2007, had a carrying value of
$12.7 million and $13.9 million, respectively, and had a remaining
maturity of 26 years.
 
 Other
investments consist of auction rate securities with a carrying value of
$6.9 million and $7.5 million at March 31, 2008 and
December 31, 2007, respectively, and had a remaining maturity of
17 years.
  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
March 31, 2008 have experienced multiple failed auctions as the amount of
securities submitted for sale has exceeded the amount of purchase orders.
However, all these securities retain Moody’s Investors Service and Standard
& Poor’s highest credit ratings at March 31, 2008.
  9
 
 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. At March 31,
2008, the Company recorded a pre-tax temporary impairment of the auction rate
securities amounting to $1.8 million. If the underlying assets or
guarantors experience further credit deterioration on the auction rate
securities, the Company may not ultimately realize the par value of the
investment at March 31, 2008.
 
 Given the
failed auctions, it is uncertain if the Company's auction rate securities will
be sold within the next twelve months. Accordingly, the entire amount of such
remaining balance has been classified as non-current assets on the Company's
March 31, 2008 and December 31, 2007 Balance Sheets.
 
 (4)
                    Income
      Taxes
 
 During
the three-month periods ended March 31, 2008 and 2007, CE Casecnan incurred
$6.9 million and $0.6 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. The Company’s taxable income from
December 11, 2007 forward is subject to income tax at the current
Philippine statutory rate. The Company’s deferred income tax asset of
$5.6 million and $5.1 million as of March 31, 2008 and
December 31, 2007, respectively, consists mainly of the difference between
the financial reporting basis and the tax reporting basis for development and
construction costs.
 
 (5)
                    Related
      Party Transactions
 
 In the
normal course of business, the Company transacts with its affiliates in the form
of advances for operating expenses. The payable to affiliates was
$2.5 million at March 31, 2008 and December 31, 2007. Costs
incurred by the Company in transactions with related parties amounted to
$0.4 million and $0.9 million for the three-month periods March
31, 2008 and 2007, respectively, and consist primarily of cost
allocations.
  As of
March 31, 2008 and December 31, 2007, the Company had
outstanding $39.2 million of unsecured subordinated notes payable to
CE Casecnan Ltd., a shareholder. The notes mature on November 1, 2015,
and bear an interest rate consisting of the London Interbank Offer Rate plus
5.25%; however, CE Casecnan Ltd. can demand payment of the outstanding
principal amount at any time prior to the maturity date. The interest is payable
each May 15 and November 15. Interest expense on the notes was
$1.0 million and $1.3 million for the three-month periods ended
March 31, 2008 and 2007, respectively. Any overdue payment of principal or
interest payable on the notes shall increase the annual interest rate by two
percentage points. At March 31, 2008, the effective interest rate on the
notes was 9.99%. The notes may be prepaid at any time without premium or penalty
but with accrued interest, if any. The notes and any and all payments, whether
of principal, interest or otherwise are subject in all respects to the terms of
the Subordination Agreement dated November 15, 2001, and as amended on
November 1, 2005, between CE Casecnan Ltd. and the Company in favor of
the Trustee, the Collateral Agent, the co-collateral agent, the Depositary, any
party that becomes a Permitted Counterparty under an Interest Rate/Currency
Protection Agreement, and any party that becomes a working capital facility
agent and any other Person that becomes a secured party under the Intercreditor
Agreement.
  On
May 15, 2007, CE Casecnan Ltd. demanded payment in full of the
outstanding principal amount of the notes and accrued interest. To the extent
that the Company does not have available cash from distributions from the
Distribution Fund under the Depositary Agreement (each, as defined in the
Subordination Agreement) 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 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
and the Subordination Agreement. CE Casecnan intends to repay the notes and
accrued interest within the next nine months. The Company expects to generate
sufficient cash from operations, after considering income taxes, to pay the
notes and other short-term obligations.
  10
 
 (6)
                    Commitments
      and Contingencies
 
 Shareholder
Litigation
 
 Pursuant
to the share ownership adjustment mechanism in the CE Casecnan shareholder
agreement, which is based upon proforma financial projections of the Casecnan
Project prepared following commencement of commercial operations, in
February 2002, MidAmerican Energy Holdings Company’s (“MEHC”) 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. LPG’s complaint, as amended, seeks compensatory and punitive damages
arising out of CE Casecnan Ltd.’s and MEHC’s alleged improper calculation
of the proforma financial projections and alleged improper settlement of the NIA
arbitration. The Company is not a defendant in the action. On January 3,
2006, the court 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. On February 21, 2007, the
appellate court issued a decision, and as a result of the decision,
CE Casecnan Ltd. determined that LPG would retain ownership of 10% of the
shares of the Company, with the remaining 5% ownership being transferred to
CE Casecnan Ltd. subject to certain buy-up rights under the shareholder
agreement. Pursuant to the appellate court decision, on May 7, 2007, the
Company released $21.7 million of dividends and $3.8 million of
accrued interest from the dividend set aside account representing the 10% share
to LPG while the remaining 5% share is still held in escrow. The parties have
agreed to stipulate that the final calculation of the internal rate of return is
24.06%. At a hearing on October 10, 2007, the court determined that
LPG was ready, willing and able to exercise its buy-up rights in 2007.
Additional hearings were held on October 23 and 24, 2007, regarding the
issue of the buy-up price calculation and a written decision was issued on
February 4, 2008 specifying the method for determining LPG’s buy-up price.
The court has scheduled a hearing for May 9, 2008, regarding the inclusion
of certain tax considerations in the calculation of the buy-up price. Exercise
of the buy-up rights under the shareholder agreement is a transaction between
shareholders of the Company and is not expected to have any impact on the
Company’s financial position or results of operations. LPG waived its request
for a jury trial for the breach of fiduciary duty claim and the parties have
entered into a stipulation which provides for a trial of such claim by the court
based on the existing record of the case. The trial was held on April 23,
2008. The court took the matter under advisement and requested further briefs
from the parties on the burden of proof to be applied. MEHC intends to
vigorously defend and pursue the remaining claims.
 
 In
February 2003, San Lorenzo Ruiz Builders and Developers Group, Inc. (“San
Lorenzo”), an original shareholder substantially all of whose shares in the
Company were purchased by MEHC in 1998, threatened to initiate legal action
against the Company in the Philippines in connection with certain aspects of its
option to repurchase such shares. The Company believes that San Lorenzo has no
valid basis for any claim and, if named as a defendant in any action that may be
commenced by San Lorenzo, the Company will vigorously defend such action. On
July 1, 2005, MEHC and CE Casecnan Ltd. commenced an action against
San Lorenzo in the District Court of Douglas County, Nebraska, seeking a
declaratory judgment as to MEHC’s and CE Casecnan Ltd.’s rights vis-à-vis
San Lorenzo in respect of such shares. San Lorenzo filed a motion to dismiss on
September 19, 2005. Subsequently, San Lorenzo purported to exercise its
option to repurchase such shares. 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. On March 9, 2006, the court granted San
Lorenzo’s motion to dismiss, but has since permitted MEHC and CE Casecnan
Ltd. to file an amended complaint incorporating the purported exercise of the
option. The complaint has been amended and the action is proceeding. Currently,
the action is in the discovery phase and a one-week trial has been set to begin
on November 3, 2008. The impact, if any, of San Lorenzo’s purported
exercise of its option and the Nebraska litigation on the Company cannot be
determined at this time.
  11
  
 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.
 
 Franchise
Tax
 
 CE Casecnan
received franchise tax assessments for the years 2001 to 2006 totaling
$2.2 million from the Province of Nueva Vizcaya. CE Casecnan believes
that franchise tax is imposed on companies which have a secondary or special
franchise from the government. CE Casecnan is an independent power producer
and does not have a government franchise. The Electric Power Industry Reform Act
of 2001 provides that independent power generation is not a public utility
operation and does not require a franchise. Therefore, the Company has not
recognized a liability relating to these assessments. CE Casecnan filed
appeals of the assessments with the Regional Trial Court of Nueva Vizcaya. The
appeals were referred to the Supreme Court Office of the Court Administrator and
are currently pending.
 
 (7)           Fair
Value Measurements
 
 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 Level
3 inputs that reflect the Company’s judgment about the assumptions market
participants would use in pricing the asset. The fair value of these securities
was determined using broker quotes, which the Company considers to be Level 3
inputs due to the limited market data that exists. The following table
reconciles the beginning and ending balance of the Company’s auction rate
securities measured at fair value on a recurring basis during the three-month
period ended March 31, 2008 (in thousands):
 
 Available-for-sale
      SecuritiesBalance,
      January 1, 2008
                    
                    $
                    21,409Unrealized
      losses included in other comprehensive loss
                    
                    
                    (1,817
                    )Balance,
      March 31, 2008
                    
                    $
                    19,592
 
  12
  (8)
                    Comprehensive
      Income and Components of Accumulated Other Comprehensive Loss,
      Net
 
 The
components of comprehensive income are as follows (in thousands):
 
 Three-Month
      PeriodsEnded
      March 31,2008
                    
                    
                    2007Net
      income
                    
                    $
                    12,861
                    
                    
                    $
                    13,674Other
      comprehensive loss – unrealized losses on marketable
      securities,net
      of tax of $(636) and $-
                    
                    
                    (1,181
                    )
                    
                    
                    -Comprehensive
      income
                    
                    $
                    11,680
                    
                    
                    $
                    13,674
 
 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 $1.2 million, net of tax of $0.6 million, as of
March 31, 2008.
  13
  Item 2.
                    Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
 
 The
following is management’s discussion and analysis of certain significant factors
that have affected the financial condition and results of operations of CE
Casecnan Water and Energy Company, Inc. (“CE Casecnan” or the “Company”) during
the periods included herein. Explanations include management’s best estimate of
the impact of weather and other factors. This discussion should be read in
conjunction with the Company’s historical Financial Statements and the related
notes thereto included in Item 1 of this Form 10-Q. The Company’s actual results
in the future could differ significantly from the historical
results.
 
 Forward-Looking
Statements
 
 This
report contains statements that do not directly or exclusively relate to
historical facts. These statements are “forward-looking statements” within the
meaning of the Private Securities Litigation Reform Act of 1995. You can
typically identify forward-looking statements by the use of forward-looking
words, such as “may,” “could,” “project,” “believe,” “anticipate,” “expect,”
“estimate,” “continue,” “intend,” “potential,” “plan,” “forecast” and similar
terms. These statements are based on 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;
  ·
                    changes
      in governmental, legislative or regulatory requirements affecting the
      Company or the power generation
industry;
  ·
                    availability
      of qualified personnel;
  ·
                    changes
      in financial or regulatory accounting principles or policies imposed by
      the Public Company Accounting Oversight Board (United States), the
      Financial Accounting Standards Board, the United States Securities and
      Exchange Commission (“SEC”) and similar entities with regulatory
      oversight; and
  ·
                    other
      business or investment considerations that may be disclosed from time to
      time in filings with the SEC or in other publicly disseminated written
      documents.
  Further
details of the potential risks and uncertainties affecting the Company are
described in the Company’s filings with the SEC contained in this Form 10-Q. The
Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. The foregoing review of factors should not be construed as
exclusive.
 
 Business
 
 The
Company has a contract with the Republic of the Philippines (“ROP”), through the
Philippine National Irrigation Administration (“NIA”) (a ROP-owned and
controlled corporation), for the development and construction of a hydroelectric
power plant and related facilities under a build-own-operate-transfer agreement,
as amended by the Supplemental Agreement dated September 29, 2003 (the
“Project Agreement”), covering a 20-year cooperation period (“Cooperation
Period”) commencing December 11, 2001, with “take-or-pay” obligations for
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. The ROP also signed a Performance Undertaking, which, among others,
affirms and guarantees the obligations of NIA under the Project Agreement. Under
the terms of its registration with the Philippine Board of Investments,
CE Casecnan is entitled to certain incentives which include an income tax
holiday for six years from the start of commercial operations. The Casecnan
Project Cooperation Period began upon commencement of commercial operations on
December 11, 2001. 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 current Philippine statutory rate.
  14
 
 Seasonality
 
 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 water delivery fees and variable energy fees (described below) can produce
significant variability in revenue between reporting periods.
 
 Under the
Project Agreement, the water delivery fee is a fixed monthly payment based upon
an assumed annual water delivery of 801.9 million cubic meters, pro-rated
to approximately 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 (deferred revenue) is computed equal to
801.9 million cubic meters minus the greater of actual water deliveries or
700.0 million cubic meters - the minimum threshold. The water delivery fee
credit at the end of each contract year is available to be earned in the
succeeding contract year through December 25, 2008. The cumulative water
delivery fee credit at December 25, 2008, if any, shall be amortized on a
straight-line basis from December 25, 2008 through December 25, 2013,
as a reduction from billings to NIA. Accordingly, in recognizing revenue, the
water delivery fees are recorded each month pro-rated to approximately
58.3 million cubic meters per month until the minimum threshold has been
reached for the current contract year. Subsequent water delivery fees within the
contract year are based on actual water delivered. For contract years starting
from December 25, 2008 through the end of the Cooperation Period,
guaranteed water delivery fees will be $51.7 million (the
700.0 million cubic meter minimum threshold multiplied by the water
delivery fee rate of $0.07381).
 
 For
contract years starting from December 25, 2008 through the end of the
Cooperation Period, variable water delivery fees will be earned for all water
deliveries, if any, exceeding the 700.0 million cubic meter annual minimum
threshold until a cumulative 1.324 billion cubic meters of water subject to
variable water delivery fees have been delivered.
 
 The
Company earns guaranteed energy fees based upon an assumed delivery of 19.0
gigawatt hours (“GWh”) per month, at a rate of $0.1596 per kilowatt hour
(“kWh”).
 
 The
Company earns variable energy fees based upon actual energy delivered in each
month in excess of 19.0 GWh, currently payable at a rate of $0.1509 per
kWh. On December 25, 2008, the kWh rate for energy deliveries in excess of
19.0 GWh per month is reduced to $0.1132, escalating at 1% per annum
thereafter. Any deliveries of energy in excess of 490.0 GWh, but less than
550.0 GWh per year are paid at a rate of 1.3 pesos per kWh, reduced to
0.98 pesos starting in 2009 and escalated at 1% per annum thereafter.
Deliveries in excess of 550.0 GWh per year are at no cost to NIA. Within
each contract year, no variable energy fees are payable until energy in excess
of the cumulative 19.0 GWh per month for the contract year to date has been
delivered.
 
 Results
of Operations for the Three-Month Periods Ended March 31, 2008 and
2007
 
 The
following table provides certain operating data of the Casecnan Project for the
three-month periods ended March 31:
 2008
                    
                    2007Electricity
      produced (GWh)
                    99.4
                    
                    59.0Water
      delivered (million cubic meters)
                    172.3
                    
                    102.5
  15
 
 For
accounting purposes, the Project Agreement with NIA contains both an operating
lease and a service contract, which the Company accounted for pursuant to the
provisions of Statement of Financial Accounting Standards No. 13,
“Accounting for Leases.” Minimum lease payments under the operating lease 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 and past actions by NIA with regard to claims against the Company.
The reduction in the minimum lease revenues is recovered when its collectibility
becomes reasonably assured. During the three-month periods ended March 31,
2008 and 2007, revenues were increased by the shortfall of such straight-line
revenues over the amounts that were currently billable at the end of each period
on such basis. The Company's water and energy fees for the three-month periods
ended March 31 are as follows (in millions):
 
 2008
                    
                    
                    2007Water
      delivery fees
                    
                    $
                    14.8
                    
                    
                    $
                    14.8Guaranteed
      energy fees
                    
                    
                    9.1
                    
                    
                    
                    9.1Variable
      energy fees
                    
                    
                    6.9
                    
                    
                    
                    2.3Deferred
      water delivery fees
                    
                    
                    (1.9
                    )
                    
                    
                    (1.9
                    )Total
      lease rentals and service contracts revenue
                    
                    $
                    28.9
                    
                    
                    $
                    24.3
 
 Revenue
increased by $4.6 million to $28.9 million for the three-month period
ended March 31, 2008 from $24.3 million for the same period in
2007. The increase in variable energy fees was due to the higher rainfall which
resulted in higher electricity production in the first quarter of 2008 as
compared to 2007. The deferred water delivery fees represent the difference
between the actual water delivery fees earned and water delivery fees invoiced
pursuant to the Project Agreement.
 
 Plant
operations and other operating expenses increased by $0.4 million to
$2.2 million for the three-month period ended March 31, 2008 from
$1.8 million for the same period in 2007, due to higher general and
administrative cost allocations in 2008.
 
 Interest
expense decreased by $1.6 million to $3.1 million for the three-month
period ended March 31, 2008 from $4.7 million for the same period
in 2007, due to lower outstanding debt balances resulting from the scheduled
repayment of Series B bonds and payment of $12.1 million of subordinated
debt.
 
 Income
tax expense increased by $6.3 million to $6.9 million for the
three-month period ended March 31, 2008 from $0.6 million for the
same period in 2007, due to the expiration of the income tax holiday on
December 11, 2007. From December 11, 2007 forward, the Company’s taxable
income is subject to income tax at the Philippine statutory rate.
 
 Liquidity
and Capital Resources
 
 CE
Casecnan developed, financed, constructed and owns and operates the Casecnan
Project for the term of the Cooperation Period, which commenced on
December 11, 2001. During the Cooperation Period, NIA is obligated to
accept all deliveries of water and energy, and so long as the Casecnan Project
is physically capable of operating and delivering in accordance with agreed
levels set forth in the Project Agreement, NIA is obligated to pay CE Casecnan a
fixed fee for the delivery of a threshold volume of water and a fixed fee for
the delivery of a threshold amount of electricity. In addition, NIA is obligated
to pay a fee for all electricity delivered in excess of the threshold amount up
to a specified amount and will be obligated to pay a fee for all water delivered
in excess of the threshold amount up to a specified amount beginning after
December 25, 2008.
 
 The ROP
has provided a Performance Undertaking under which NIA’s obligations under the
Project Agreement are guaranteed by the full faith and credit of the ROP. The
Project Agreement and the Performance Undertaking provide for the resolution of
disputes by binding arbitration in Singapore under international arbitration
rules.
  16
 
 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 or
affiliates of the Company, including MidAmerican, 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 $64.1 million and
$31.1 million at March 31, 2008 and December 31, 2007,
respectively.
 
 Cash
flows from operations were $33.4 million and $25.4 million for the
three-month periods ended March 31, 2008 and 2007, respectively. The
increase in cash from operations in 2008 was primarily due to collection of
higher variable energy revenue resulting from higher water flow and related
energy generation in 2008.
 
 Cash
flows used in investing activities were $0.4 million and $15.9 million
for the three-month periods ended March 31, 2008 and 2007,
respectively. The Company made net purchases of $15.0 million of
available-for-sale securities during the three-month period ended March 31,
2007.
 
 Cash
flows from financing activities were $- million and $0.6 million for
the three-month periods ended March 31, 2008 and 2007. The Company
accrued an additional $0.6 million payable to the minority shareholder in
2007.
 
 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
March 31, 2008 have experienced multiple failed auctions as the amount of
securities submitted for sale has exceeded the amount of purchase orders.
However, all these securities retain Moody’s Investors Service and Standard
& Poor’s highest credit ratings at March 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. At
March 31, 2008, the Company recorded a pre-tax temporary impairment of the
auction rate securities amounting to $1.8 million. If the underlying assets
or guarantors experience further credit deterioration on the auction rate
securities, the Company may not ultimately realize the par value of the
investment at March 31, 2008.
 
 Given the
failed auctions, it is uncertain if the Company's auction rate securities will
be sold within the next twelve months. Accordingly, the entire amount of such
remaining balance has been classified as non-current assets on the Company's
March 31, 2008 and December 31, 2007 Balance Sheets.
 
 17
  Shareholder
Litigation
 
 Pursuant
to the share ownership adjustment mechanism in the CE Casecnan shareholder
agreement, which is based upon proforma financial projections of the Casecnan
Project prepared following commencement of commercial operations, in
February 2002, 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. LPG’s complaint, as
amended, seeks compensatory and punitive damages arising out of CE Casecnan
Ltd.’s and MEHC’s alleged improper calculation of the proforma financial
projections and alleged improper settlement of the NIA arbitration. The Company
is not a defendant in the action. On January 3, 2006, the court 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. On February 21, 2007, the appellate court issued a
decision, and as a result of the decision, CE Casecnan Ltd. determined that
LPG would retain ownership of 10% of the shares of the Company, with the
remaining 5% ownership being transferred to CE Casecnan Ltd. subject to
certain buy-up rights under the shareholder agreement. Pursuant to the appellate
court decision, on May 7, 2007, the Company released $21.7 million of
dividends and $3.8 million of accrued interest from the dividend set aside
account representing the 10% share to LPG while the remaining 5% share is still
held in escrow. The parties have agreed to stipulate that the final calculation
of the internal rate of return is 24.06%. At a hearing on
October 10, 2007, the court determined that LPG was ready, willing and
able to exercise its buy-up rights in 2007. Additional hearings were held on
October 23 and 24, 2007, regarding the issue of the buy-up price
calculation and a written decision was issued on February 4, 2008 specifying the
method for determining LPG’s buy-up price. The court has scheduled a hearing for
May 9, 2008, regarding the inclusion of certain tax considerations in the
calculation of the buy-up price. Exercise of the buy-up rights under the
shareholder agreement is a transaction between shareholders of the Company and
is not expected to have any impact on the Company’s financial position or
results of operations. LPG waived its request for a jury trial for the breach of
fiduciary duty claim and the parties have entered into a stipulation which
provides for a trial of such claim by the court based on the existing record of
the case. The trial was held on April 23, 2008. The court took the matter
under advisement and requested further briefs from the parties on the burden of
proof to be applied. MEHC intends to vigorously defend and pursue the remaining
claims.
 
 In
February 2003, San Lorenzo Ruiz Builders and Developers Group, Inc. (“San
Lorenzo”), an original shareholder substantially all of whose shares in the
Company were purchased by MEHC in 1998, threatened to initiate legal action
against the Company in the Philippines in connection with certain aspects of its
option to repurchase such shares. The Company believes that San Lorenzo has no
valid basis for any claim and, if named as a defendant in any action that may be
commenced by San Lorenzo, the Company will vigorously defend such action. On
July 1, 2005, MEHC and CE Casecnan Ltd. commenced an action against
San Lorenzo in the District Court of Douglas County, Nebraska, seeking a
declaratory judgment as to MEHC’s and CE Casecnan Ltd.’s rights vis-à-vis
San Lorenzo in respect of such shares. San Lorenzo filed a motion to dismiss on
September 19, 2005. Subsequently, San Lorenzo purported to exercise its
option to repurchase such shares. 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. On March 9, 2006, the court granted San
Lorenzo’s motion to dismiss, but has since permitted MEHC and CE Casecnan
Ltd. to file an amended complaint incorporating the purported exercise of the
option. The complaint has been amended and the action is proceeding. Currently,
the action is in the discovery phase and a one-week trial has been set to begin
on November 3, 2008. The impact, if any, of San Lorenzo’s purported
exercise of its option and the Nebraska litigation on the Company cannot be
determined at this time.
 
 Franchise
Tax
 
 CE Casecnan
received franchise tax assessments for the years 2001 to 2006 totaling
$2.2 million from the Province of Nueva Vizcaya. CE Casecnan believes
that franchise tax is imposed on companies which have a secondary or special
franchise from the government. CE Casecnan is an independent power producer
and does not have a government franchise. The Electric Power Industry Reform Act
of 2001 provides that independent power generation is not a public utility
operation and does not require a franchise. Therefore, the Company has not
recognized a liability relating to these assessments. CE Casecnan filed
appeals of the assessments with the Regional Trial Court of Nueva Vizcaya. The
appeals were referred to the Supreme Court Office of the Court Administrator and
are currently pending.
 
 Contractual
Obligations and Commercial Commitments
 
 Subsequent
to December 31, 2007, there were no material changes outside the normal
course of business in the contractual obligations and commercial commitments
from the information provided in Item 7 of the Company’s Annual Report on
Form 10-K for the year ended December 31, 2007.
 
 New
Accounting Pronouncements
 
 For a
discussion of new accounting pronouncements affecting the Company, refer to Note
2 of Notes to Financial Statements included in Item 1 of this Form
10-Q.
 
 18
  Critical
Accounting Policies
 
 Certain
accounting policies require management to make estimates and judgments
concerning transactions that will be settled in the future. Amounts recognized
in the financial statements from such estimates are necessarily based on
numerous assumptions involving varying and potentially significant degrees of
judgment and uncertainty. Accordingly, the amounts currently reflected in the
financial statements will likely increase or decrease in the future as
additional information becomes available. Estimates are used for, but not
limited to, the allowance for doubtful accounts and revenue. For additional
discussion of the Company’s critical accounting policies, see Item 7 of the
Company’s Annual Report on Form 10-K for the year ended December 31, 2007.
The Company’s critical accounting policies have not changed materially since
December 31, 2007.
 
 Item 3.
                    Quantitative
      and Qualitative Disclosures About Market
Risk
  For
quantitative and qualitative disclosures about market risk affecting
CE Casecnan, see Item 7A of CE Casecnan’s Annual Report on Form 10-K
for the year ended December 31, 2007. CE Casecnan’s exposure to
market risk and its management of such risk has not changed materially since
December 31, 2007.
 
 Item 4.
                    Controls
      and Procedures
 
 At the
end of the period covered by this Quarterly Report on Form 10-Q, the Company
carried out an evaluation, under the supervision and with the participation of
the Company’s management, including the Chief Executive Officer (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 Chief Executive Officer
(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 March 31, 2008 that has
materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting.
 
  19
  PART
II – OTHER INFORMATION
 
 Item 1.
                    Legal
      Proceedings
 
 For a
description of certain legal proceedings affecting the Company, refer to Item 3
of the Company’s Annual Report on Form 10-K for the year ended December 31,
2007. Material developments to these proceedings during the three-month period
ended March 31, 2008 are included in Note 6 of Notes to Financial
Statements included in Item 1 of this Form 10-Q.
 
 Item 1A.
                    Risk
      Factors
 
 There has
been no material change to the Company’s risk factors from those disclosed in
Item 1A of the Company’s Annual Report on Form 10-K for the year ended
December 31, 2007.
 
 Item 2.
                    Unregistered
      Sales of Equity Securities and Use of
Proceeds
 
 Not
applicable.
 
 Item 3.
                    Defaults
      Upon Senior Securities
 
 Not
applicable.
 
 Item 4.
                    Submission
      of Matters to a Vote of Security
Holders
 
 Not
applicable.
 
 Item 5.
                    Other
      Information
 
 Not
applicable.
 
 Item 6.
                    Exhibits
 
 The
exhibits listed on the accompanying Exhibit Index are filed as part of this
Quarterly Report.
  20
  
 SIGNATURES
 
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
 
 
 
 CE CASECNAN WATER AND
      ENERGY COMPANY, INC.(Registrant)Date:
      April 29, 2008
                    
                    /s/ Patrick J.
      GoodmanPatrick
      J. GoodmanSenior
      Vice President and Chief Financial Officer(principal
      financial and accounting
officer)
  21
   EXHIBIT INDEX
 
 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.
  22