-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HPhRFhs+rKKeAJ8t/iHajjmEA+fZcitiKtcpNad7e2ZSoBrwfUhd6PwHvaXpiA8e KIr+2vpPTHpH2y4PH4DrOw== 0000912057-96-005584.txt : 19960401 0000912057-96-005584.hdr.sgml : 19960401 ACCESSION NUMBER: 0000912057-96-005584 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960329 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CASCADE NATURAL GAS CORP CENTRAL INDEX KEY: 0000018072 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS DISTRIBUTION [4924] IRS NUMBER: 910599090 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-07196 FILM NUMBER: 96541453 BUSINESS ADDRESS: STREET 1: 222 FAIRVIEW AVE N CITY: SEATTLE STATE: WA ZIP: 98109 BUSINESS PHONE: 2066243900 MAIL ADDRESS: STREET 1: 222 FAIRVIEW AVENUE N CITY: SEATTLE STATE: WA ZIP: 98109 10-K 1 10-K FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1995 Commission file number: 1-7196 CASCADE NATURAL GAS CORPORATION Washington 91-0599090 - ---------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 222 Fairview Avenue North (206) 624-3900 --------------- Seattle, WA 98109 (Registrant's telephone number, - ----------------- (Address of principal including area code) executive office) Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of each Exchange on which Registered - -------------------- ----------------------------------------- Common Stock, Par Value $1 per Share New York Stock Exchange Preferred Stock Purchase Rights New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to 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. [ ] The aggregate market value of the voting stock held by nonaffiliates of the registrant as of the close of business on February 29, 1996, was $141,782,141. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Title Outstanding Common Stock, Par Value $1 per Share 9,184,992 as of February 29, 1996 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive proxy statement for its 1996 Annual Meeting of Shareholders are incorporated by reference into Part III, Items 10, 11, 12, and 13. CASCADE NATURAL GAS CORPORATION ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION ON FORM 10-K For the Year Ended December 31, 1995 Table of Contents Page Number ----------- Part I Item 1 - Business 3 Item 2 - Properties 12 Item 3 - Legal Proceedings 12 Item 4 - Submission of Matters to a Vote of Security Holders 12 Executive Officers of the Registrant 13 Part II Item 5 - Market for Registrant's Common Equity and Related Stockholder Matters 14 Item 6 - Selected Financial Data 15 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations 17 Item 8 - Financial Statements and Supplementary Data 21 Item 9 - Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 43 Part III Item 10 - Directors and Executive Officers of the Registrant 44 Item 11 - Executive Compensation 44 Item 12 - Security Ownership of Certain Beneficial Owners and Management 44 Item 13 - Certain Relationships and Related Transactions 44 Part IV Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K 45 Signatures 46 Index to Exhibits 47 2 PART I ITEM 1. BUSINESS. GENERAL Cascade Natural Gas Corporation (Cascade or the Company) was incorporated under the laws of the state of Washington on January 2, 1953. Its principal business is the distribution of natural gas to customers in the states of Washington and Oregon. Approximately 19% of its gas distribution revenues are from the state of Oregon. At December 31, 1995, there were 126,886 residential customers, 23,641 commercial customers, 337 firm industrial customers and 25 traditional interruptible customers, all of which are classified as core customers. In addition, there were 116 non-core customers. In 1995, the core customers provided 69% of the operating margin, the same ratio as in 1994, while consuming 24% of the total gas deliveries, down from 25% in 1994. The non-core customers (including transportation service) provided the remaining operating margin and throughput. Cascade's gas supply contracts provide for annual review of gas prices for possible adjustment. To the extent that prices are changed, Cascade is able to pass the effect of such changes subject to regulatory review to its customers by means of a periodic purchased gas cost adjustment (PGA) in each state. Gas price changes occurring between times when PGA rate changes become effective are deferred for pass through in the next PGA. The Company is also subject to state regulation with respect to integrated resource planning and has filed its Integrated Resource Plan (IRP) with both the Washington Utilities and Transportation Commission (WUTC) and the Oregon Public Utility Commission (OPUC). The IRP shows the Company's plan for the best set of supply and demand side resources that minimizes costs and has acceptable levels of deliverability risk over the twenty-year planning horizon. The IRP also sets forth the Company's forecast of growth in customers and volume throughput for a twenty-year period. In addition, the IRP sets forth the Company's demand side management goals of achieving certain conservation levels in customer usage. The Company's investments in cost-effective demand side resources are recoverable in rates in both Washington and Oregon. The IRP also sets forth the Company's supply side management plans regarding transportation capacity and gas supply acquisition over a twenty-year period. The Company developed the IRP over a two-year period and took into account input solicited from the public and the WUTC and OPUC staffs. While the filing of the IRP with both commissions gives the Company no advance assurance that its acquisitions of pipeline transportation capacity and gas supplies will be recognized in rates, management believes that the integrated resource planning process benefits the Company by giving it the opportunity to obtain input from regulators and the public concurrently with making these important strategic decisions. Until the Company receives final regulatory approval of these decisions in the context of a rate case, the Company cannot predict with certainty the extent to which the integrated resource planning process will affect its rates. 3 The principal industrial activities in Cascade's service area include the production of pulp, paper and converted paper products, plywood, chemical fertilizers, industrial chemicals, cement, clay and ceramic products, textiles, refining of crude oil, smelting and forming of aluminum, the processing and canning of many types of vegetable, fruit and fish products, processing of milk products, meat processing and the drying and curing of wood and agricultural products. NATURAL GAS SUPPLY The majority of Cascade's supply of natural gas is transported via Northwest Pipeline Corporation (Northwest). Northwest owns and operates a transmission system extending from points of interconnection with El Paso Natural Gas Company and Transwestern Pipeline Company near Blanco, New Mexico through the states of New Mexico, Colorado, Utah, Wyoming, Idaho, Oregon and Washington to the Canadian border near Sumas, Washington. Natural Gas is transported north from the Colorado and New Mexico area, and south from British Columbia, Canada. The Company is also a shipper on the Pacific Gas Transmission Company (PGT) system. PGT owns and operates a gas transmission line that connects with the gas fields in Alberta, Canada at the international border and extends through Washington and central Oregon into California. On November 1, 1993, Northwest completed the process, begun in 1988, of converting its sales function to firm transportation service. Along with the sales conversion of its remaining sales service from Northwest, the Company accepted assignment of a pro-rata share of Northwest's remaining Canadian gas supply arrangements, an equivalent share of PGT firm pipeline transportation and a portion of Northwest's natural gas inventory at the Clay Basin Storage Facility. (The Clay Basin inventory was completely withdrawn by March 31, 1995 according to a schedule dictated by the assignment agreement.) Presently, baseload requirements for Cascade's core market group are provided by seven major gas supply contracts with various expiration dates from 1996 through 2008 and totaling 865,010 therms per day. Approximately 82% of the gas supplied pursuant to the contracts is from Canadian sources. The remainder is domestic. These contracts are supplemented by various service agreements to cover periods of peak demand including three storage agreements with Northwest. One extends to October 31, 2014 and provides for 165,950 therms per day and a maximum, renewable inventory of 5,973,780 therms. The second, with The Washington Water Power Company (WWP), had a primary term extending to April 30, 1995 and entitles Cascade to receive up to 150,000 therms per day and a maximum, renewal inventory of 4,800,000 therms. Earlier in 1995 Cascade accepted an offer from WWP to extend the primary term of the agreement by three years through April 1998. A third contract for liquefied natural gas ("LNG") storage is available through October 31, 2014. Under this LNG agreement, Cascade is entitled to receive up to 600,000 therms per day to a maximum, renewable inventory of 5,622,000 therms. In addition to withdrawal and inventory capacity, Cascade also maintains a corresponding amount of firm transportation from the storage facility to the city gate for each of these agreements. Cascade also owns a propane air peak shaving plant with revised daily capacity of 30,000 therms. 4 In addition to underground and LNG storage, Cascade has entered into contracts with two of its major industrial customers whereby the customer agrees to switch to alternate fuel allowing Cascade to reduce firm deliveries to that customer. One such peak shaving agreement entitles Cascade to call upon 150,000 therms per day up to a seasonal total of 3,000,000 therms. This contract expires on September 30, 2015. The second peak shaving agreement, which expires on September 30, 2014, entitles Cascade to call on a maximum of up to 500,000 therms per day and up to a seasonal total of 3,000,000 therms. Commencing December 1995 Cascade entered into two peaking service agreements with Canadian gas suppliers. These agreements provide for a maximum daily quantity of 250,000 therms on peak and renewable inventory of 5,500,000 therms. Cascade can call upon these two service agreements any day during the peak winter months of December, January and February. These service agreements, while less reliable than firm storage service, are more flexible than baseload gas supply contracts: both agreements allow for same day nomination, and city gate delivery at a competitive cost. Each agreement has a primary term of three years. Cascade maintains a diversified portfolio of natural gas supplies. During 1995, Cascade purchased gas supplies approximately 69.9% from firm gas supply contracts, 28.7% from 30-day spot market contracts and 1.4% from customer assigned gas purchase contracts. In addition, 416,225,000 therms of customer purchased supplies were transported across Cascade facilities. CURRENT FEDERAL ENERGY REGULATORY COMMISSION (FERC) MATTERS The FERC issued an order on December 20, 1994 confirming an earlier order reallocating the direct billed gas supply take or pay contract restructuring costs among Northwest Pipeline Corporation's (Northwest) customers. The FERC order gave Cascade an obligation of $4.8 million, approximately $1.8 million above the allocation method favored by the Company. Cascade joined with others and appealed the order to the D. C. Circuit Court. It does not appear that the Court will overturn the FERC order and Cascade is no longer taking an active part in appealing the order. To the extent Cascade's final allocation differs from the original, it will seek to pass on the difference to its customers. On May 3, 1994, Northwest filed a general Section 4 rate case (RP94-220) seeking additional revenues of $22.5 million. The filing reflected a cost of service of $240 million. Settlement discussions between the various shippers and Northwest concluded in early October 1995, with a negotiated cost of service of $222 million. The settlement was filed on November 14, 1995, with rates effective on November 1, 1995. Northwest preceded the RP94-220 settlement with another general Section 4 rate case (RP95-409) on August 1, 1995, with interim rates subject to refund, and effective February 1, 1996. The new filing asks for a cost of service of $270 million. Settlement discussions are currently being scheduled. On May 31, 1995 the FERC issued a Statement of Policy (PL94-4) for the rate treatment of new and existing facilities constructed by interstate natural gas pipelines. The policy concerns the 5 question of whether to utilize a rolled in methodology or an incremental rate design. According to the Statement of Policy, the FERC will apply a presumption in favor of rolled in rates when the increase to existing customers is 5% or less, and the pipeline makes a showing of system-wide benefits. Pipelines not meeting the 5% test must show benefits proportionate to the rate impact for the presumption of rolled in rates. Although not final, this ruling will have a major influence in the rate methodology utilized in the current and future Northwest Pipeline Corporation and Pacific Gas Transmission Company rate cases COST OF PURCHASED GAS Following the implementation of Order 636, Cascade's cost of gas depends primarily on the prices negotiated with producers and brokers, coupled with the cost of interstate and Canadian pipeline transportation service. CURTAILMENT PROCEDURES In previous heating seasons, cold weather has required Cascade to significantly curtail its interruptible customers. Cascade has not curtailed any firm customers, except under force majeure provisions. Cascade's tariffs effective in Washington and Oregon, allow for curtailment of interruptible services, which are provided at rates lower than for firm services. In the event of curtailment by Cascade of firm service due to force majeure, Cascade's tariffs provide that it shall not be liable for damages or otherwise to any customer for failure to deliver gas curtailed in accordance with the provisions of the tariffs. The tariffs provide for appropriate adjustment of the monthly bill of firm customers curtailed by reason of an insufficient supply of gas. TERRITORY SERVED AND FRANCHISES The population of communities served by Cascade totaled approximately 744,000 at the end of 1995 compared to 724,000 at the end of 1994, a 2.8% increase. Cascade has all the franchises necessary for the distribution of natural gas in the communities it serves in Washington and Oregon. Under the laws of those states, incorporated municipalities and counties may grant non-exclusive franchises for a fixed term of years conferring upon the grantee certain rights with respect to public streets and highways in the location, construction, operation, maintenance and removal of gas distribution facilities. In the opinion of Cascade's management, none of its franchises contain any restrictions or requirements which are of a materially burdensome nature, and such franchises are adequate for the conduct of Cascade's present business. Franchises expire on various dates from 1996 to 2065. Management has not incurred significant difficulties in renewing franchises when they expire and does not expect any significant problems in the future. 6 CUSTOMERS Residential and commercial customers principally use natural gas for space heating and water heating. This market is very weather-sensitive. See "Seasonality," below. Of its non-core customers, 15 accounted for approximately 18% of Cascade's total 1995 gas and transportation revenues. Agreements with its principal industrial customers are for fixed terms of not less than one year and provide for automatic extension from year to year unless terminated by either party on 30-days' notice. See Note 12 under Notes to Consolidated Financial Statements, for information regarding revenues from a major customer. SEASONALITY Weather is an important factor affecting gas revenues because of the large number of customers using gas for space heating. In 1995, 66.5% of operating revenues and 99.4% of earnings from operations were derived from the first and last quarters. Because of the seasonality of space heating revenues, Cascade believes financial results for interim periods are not necessarily indicative of results to be expected for the year. COMPETITIVE CONDITIONS Cascade operates in a competitive market for natural gas service. Cascade competes with residual fuel oil and other alternative energy sources for industrial boiler uses, and oil and electricity for residential and commercial space heating, and electricity for water heating. Competition is primarily based on price. For residential and commercial space heating use, Cascade continues to maintain a price advantage over oil in its entire service territory and has an advantage over electricity in over 96% (by population) of its territory. In the remaining areas of its service territory served by public electric utilities with their own substantial hydro power supply, Cascade is near parity with respect to electricity furnished by those utilities for space heating and water heating uses. Through its wholly-owned subsidiary, Cascade Land Leasing Co., the Company provides loans to customers to finance the purchase and installation of energy efficient gas appliances. Historically, the large volume industrial market was very sensitive to price fluctuations between the comparable cost of natural gas and alternate fuels, principally residual fuel oil used in boiler applications. However, the advent of open access transportation and the restructuring of gas supply and contractual provisions with these customers has improved the Company's competitive position. From December 1991 through January 1992 and again from December 1992 through May 1994, except for a brief period in June 1993, residual fuel oil prices were lower than natural gas, but Cascade did not experience any significant loss of sales to alternate fuels during those periods. In addition to multiple alternate fuels, the Company competes with other sellers of natural gas because of the potential for bypass of the Company's facilities. Bypass refers to actual or prospective customers which install their own facilities and connect directly to an upstream pipeline and thereby 7 "bypass" the distribution company's service. The Company has experienced bypass but has also experienced success in offering competitive rates to reduce economic incentives to bypass. The Bonneville Power Administration ( BPA ) is a major supplier of hydro-electric power in the Pacific Northwest including Cascade's service area. BPA significantly influences the electric rates of all classes of customers including those applications in direct competition with natural gas marketed by Cascade. ENVIRONMENTAL The Company is subject to federal and state environmental regulation of its operations and properties through the United States Environmental Protection Agency, the Washington Department of Ecology and the Oregon Department of Environmental Quality. Such regulation may, at times, result in the imposition of liability or responsibility for the clean-up or treatment of existing environmental problems or for the prevention of future environmental problems. In the early 1950's, the Company purchased several of the gas distribution facilities that it operates today. Among the acquired facilities, the Company has identified to date twelve small manufactured gas plants which had used oil or coal as feedstock to produce manufactured gas. Some of the waste byproducts of the manufacturing process contain hazardous substances which, if found in sufficient concentrations, could pose environmental problems. Almost all of these plants were either dismantled or converted to propane air prior to 1956. In 1956, when natural gas became available, the remaining plants were dismantled. The plant sites were cleaned up when the plants were dismantled and the sites are currently being used for other purposes. Environmental agencies have monitored three of the plant sites and have found no hazardous substances at levels requiring remediation. The Company has been notified of a claim regarding contamination of a former manufactured gas site in Oregon once operated by a predecessor company. At this date it appears that contamination is present at the site, but there is no estimate of the extent of clean-up costs. To the extent the Company may be responsible for any portion of such costs, it will seek contribution from other responsible parties, recovery from its insurers and appropriate rate relief. See Note 11 under Notes to Consolidated Financial Statements. Based on information received to date, it is not aware of hazardous substances present at any of the other plant sites at levels that would require remediation. The Company is in the process of remediating an area that was contaminated by underground diesel and gasoline storage tanks. See Note 11 under Notes to Consolidated Financial Statements. CAPITAL EXPENDITURES Capital expenditures for 1996 are budgeted at $35,147,000 including $2,300,000 of projects originally budgeted for 1995 but not completed and carried over to 1996. Including the 1996 budget, the Company will have spent over $168,000,000 in new plant in the five years ending in 1996 compared to $133,252,000 in the 12-year period from 1980 through 1991. Construction of the line to serve the 8 fifth cogeneration customer on Cascade's system was completed in February 1996. The contracts for service to the five cogeneration customers are expected to yield relatively level payments over the 15 to 25 year contract lives. The contracts provide for demand charges as well as distribution charges which should recover the capital investment in the facilities and provide a return to shareholders over their term. With level payments, projected annual rates of return are low in the early years and increase significantly over time as the Company's investment is depreciated. The Company is currently forecasting that capital expenditures will total approximately $150,000,000 over the next five years. NON-UTILITY SUBSIDIARIES Cascade has four non-utility subsidiaries. These subsidiaries are engaged in the following businesses: financing Cascade customers' purchases of energy-efficient appliances; exploring for natural gas (two subsidiaries); and ownership of certain real property in Oregon. The subsidiaries, which in the aggregate account for less than 5% of the consolidated assets of the Company, do not currently have a significant impact on Cascade's financial condition or the results of its operations. PERSONNEL At December 31, 1995, Cascade had 475 employees. Of the total employees, 214 are represented by the International Chemical Workers Union. The present contract with the union extends to April 1, 1996. As of March 22, 1996, a tentative agreement has been reached for a new contract extending to April 1, 1999. The agreement is subject to ratification by members of Local 121 of the International Chemical Workers Union. 9
OPERATING STATISTICS 1995 1994 1993 1992 1991 Gas Distribution Revenue (thousands of dollars): Firm: Residential $ 56,609 $ 51,354 $ 46,456 $37,424 $37,260 Commercial 53,531 49,718 46,870 38,797 40,092 Industrial 13,320 11,959 10,931 8,715 8,343 Interruptible: Commercial 3,589 3,705 2,954 2,927 3,068 Industrial 1,678 2,008 1,845 1,877 2,212 Non-Core 42,527 66,597 70,923 56,149 58,535 ---------- ----------- ----------- ----------- ---------- Total gas sales revenue 171,254 185,341 179,979 145,889 149,510 Transportation revenue 11,300 6,871 7,087 6,423 4,658 ---------- ----------- ----------- ----------- ---------- Total gas distribution revenue $182,554 $192,212 $187,066 $152,312 $154,168 ---------- ----------- ----------- ----------- ---------- Gas Deliveries (thousands of therms): Firm Residential 91,719 88,342 87,812 71,211 71,661 Commercial 97,913 97,750 102,256 85,303 89,873 Industrial 27,726 27,214 28,208 22,585 21,984 Interruptible Commercial 5,259 5,950 4,730 4,608 5,319 Industrial 4,000 5,459 5,925 5,944 7,350 Non-core 303,006 303,569 269,483 255,707 277,716 ---------- ----------- ----------- ----------- ---------- Total Sales therms 529,623 528,284 498,414 445,358 473,903 Transportation Deliveries 424,270 377,435 240,448 159,779 84,918 ---------- ----------- ----------- ----------- ---------- Total deliveries 953,893 905,719 738,862 605,137 558,821 ---------- ----------- ----------- ----------- ---------- Number of Customers (average): Firm Residential 121,503 113,398 104,334 96,621 89,306 Commercial 22,989 22,035 21,166 20,266 19,316 Industrial 336 327 318 308 308 Interruptible Commercial 16 18 17 17 18 Industrial 13 14 13 16 18 Non-core (including transportation) 104 91 86 80 77 ---------- ----------- ----------- ----------- ---------- Total 144,961 135,883 125,934 117,308 109,043 ---------- ----------- ----------- ----------- ---------- Year-end totals 151,005 142,839 132,668 123,356 114,734 ---------- ----------- ----------- ----------- ---------- 10 OPERATING STATISTICS (CONTINUED) 1995 1994 1993 1992 1991 Average Annual Use per Customer (therms): Residential 755 779 842 737 802 Commercial-firm 4,259 4,436 4,831 4,209 4,653 Average Annual Revenue per Customer: Residential $ 467 $ 453 $ 445 $ 387 $ 417 Commercial-firm $ 2,329 $ 2,256 $ 2,214 $ 1,914 $ 2,076 Average Rate per Therm: Firm Residential $0.6193 $0.5813 $0.5290 $0.5255 $0.5199 Commercial $0.5467 $0.5086 $0.4584 $0.4548 $0.4461 Industrial $0.4804 $0.4394 $0.3875 $0.3859 $0.3795 Interruptible Commercial (excluding facilities charges) $0.4183 $0.3782 $0.3169 $0.3194 $0.3166 Industrial $0.4194 $0.3678 $0.3114 $0.3158 $0.3010 Non-core $0.1404 $0.2194 $0.2632 $0.2196 $0.2108 Transportation $0.0266 $0.0182 $0.0295 $0.0402 $0.0549 Average Cost per Therm of Gas Purchased $0.2246 $0.2526 $0.2434 $0.2055 $0.1958 Heating Degree Days System average (30-year average - 5,675) 5,238 5,463 6,136 5,073 5,392 Maximum Day Send Out (1,000 therms) including transportation 4,224 3,936 3,485 2,687 2,567 Average Daily Send Out (1,000 therms) including transportation 2,613 2,481 2,024 1,653 1,531 Employees at End of Year 475 476 467 466 460
11 ITEM 2. PROPERTIES. At December 31, 1995, Cascade's utility plant investments included approximately 3,810 miles of distribution mains ranging in diameter from two inches to sixteen inches, 240 miles of transmission mains ranging in diameter from two inches to sixteen inches and 2,412 miles of service lines. The lateral lines and distribution mains are located under public property such as streets and highways or on private property with the permission or consent of the individual owner. Cascade owns sixteen buildings used for operations, office space and warehousing in Washington and five such buildings in Oregon. It occupies an additional five commercial offices and maintains 35 pay stations in communities throughout its operating territory. Cascade considers its properties well maintained and in good operating condition, and adequate for Cascade's present and anticipated needs. All facilities are substantially utilized. The Company also owns a propane air plant in Yakima, Washington, with a capacity of 30,000 therms per day used for peak load shaving. ITEM 3. LEGAL PROCEEDINGS. See Item 1, Business, under "Environmental". ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None 12 EXECUTIVE OFFICERS OF THE REGISTRANT The Executive Officers of the Company, as of March 1, 1996, are as follows:
Year Became Name Office Age Officer - ------------------------------------------------------------------------------- W. Brian Matsuyama Chairman of the Board and 49 1987 Chief Executive Officer Ralph E. Boyd President and Chief 59 1988 Operating Officer Jon T. Stoltz Senior Vice President - 49 1981 Planning and Rates Larry E. Anderson Vice President - 47 1995 Operations O. LeRoy Beaudry Vice President - 57 1981 Consumer and Public Affairs King C. Oberg Vice President - 55 1993 Gas Supply Calvin R. Steele Vice President - 56 1991 Information Technology J. D. Wessling Vice President - Finance, and 52 1995 Chief Financial Officer James E. Haug Treasurer and Chief 47 1981 Accounting Officer Larry C. Rosok Corporate Secretary and 39 1995 Personnel Director
None of the above officers is related by blood, marriage or adoption to any other of the above named officers. Except as discussed below, each of the above named officers has been employed by the Company in a management capacity for at least the past five years. None of the above officers hold directorships in other public corporations. All officers serve at the pleasure of the Board of Directors. J. D. Wessling was employed by the Company on January 6, 1994 as Director-Finance. From 1989 through 1993, he was chief financial officer for a retail drug chain based in Phoenix, Arizona. From 1986 to 1989, he was chief financial officer of a computer distribution company. Prior to that, Mr. Wessling spent 12 years in the oil and gas industry, seven of which were with Atlantic Richfield Company where he held various financial positions. 13 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Common Stock is traded on the New York Stock Exchange under the symbol CGC. The following table states the per share high and low sales prices of the Common Stock.
1995 1994 Quarter High Low High Low First 14-7/8 13-1/4 18-1/8 15-7/8 Second 15 13-1/2 16-3/4 14 Third 15-1/2 13-1/2 15-13/16 13-1/4 Fourth 17-3/8 14-5/8 15-1/2 12-3/4
At February 29, 1996, there were approximately 9,215 holders of the Common Stock. The following table shows for the periods indicated the dividends paid per share on the Common Stock.
Quarter 1995 1994 First $.24 $.23-2/3 Second $.24 $.24 Third $.24 $.24 Fourth $.24 $.24
The Company's practice has been to declare dividends on its common shares quarterly, payable on the 15th day of February, May, August, and November. The most recent quarterly dividend on the common shares was $.24 per share and was paid on February 15, 1996, to holders of record on January 15, 1996. Future dividend action will depend on the earnings and financial condition of the Company and other relevant factors. 14 ITEM 6. SELECTED FINANCIAL DATA. (dollars in thousands except per share data)
1995 1994 1993 1992 1991 STATEMENTS OF OPERATIONS: Operating Revenues: Gas Sales $171,254 $185,341 $179,979 $145,889 $149,510 Transportation Revenue 11,300 6,871 7,087 6,423 4,658 Other Operating Income 190 198 388 154 144 ---------- ----------- ----------- ----------- ---------- 182,744 192,410 187,454 152,466 154,312 Less: Gas Purchases 102,858 118,083 113,500 90,320 90,903 Revenue Taxes 11,480 11,500 11,095 8,997 9,362 ---------- ----------- ----------- ----------- ---------- Operating Margin 68,406 62,827 62,859 53,149 54,047 ---------- ----------- ----------- ----------- ---------- Cost of Operations: Operating expenses 30,818 30,202 27,856 25,576 24,053 Depreciation and amortization 11,733 10,921 9,964 9,175 8,426 Property and payroll taxes 4,051 4,039 3,757 3,516 3,361 ---------- ----------- ----------- ----------- ---------- 46,602 45,162 41,577 38,267 35,840 ---------- ----------- ----------- ----------- ---------- Overrun Penalty Income - - - - 1,305 ---------- ----------- ----------- ----------- ---------- Earnings From Operations 21,804 17,665 21,282 14,882 19,512 ---------- ----------- ----------- ----------- ---------- Nonoperating Expense (Income): Interest 9,938 8,090 7,038 7,478 7,793 Interest charged to construction (394) (203) (323) (218) (156) ---------- ----------- ----------- ----------- ---------- 9,544 7,887 6,715 7,260 7,637 Amortization of debt issuance expense 606 593 562 402 362 Other (586) (80) (113) (440) (344) ---------- ----------- ----------- ----------- ---------- 9,564 8,400 7,164 7,222 7,655 ---------- ----------- ----------- ----------- ---------- Earnings Before Income Taxes and Cumulative Effect of change in accounting method 12,240 9,265 14,118 7,660 11,857 Income Taxes 4,508 3,505 5,224 2,817 4,206 ---------- ----------- ----------- ----------- ---------- Earnings Before Cumulative Effect of Change in Accounting Method 7,732 5,760 8,894 4,843 7,651 Cumulative effect of change in accounting method - - 209 - - ---------- ----------- ----------- ----------- ---------- Earnings Before Preferred Dividends 7,732 5,760 9,103 4,843 7,651 Preferred Dividends 539 558 580 595 148 ---------- ----------- ----------- ----------- ---------- Net Earnings $ 7,193 $ 5,202 $ 8,523 $ 4,248 $ 7,503 ---------- ----------- ----------- ----------- ---------- ---------- ----------- ----------- ----------- ---------- Common Stock Outstanding (thousands of shares): End of year 9,144 8,912 8,566 7,614 6,631 Average 8,997 8,707 7,915 6,681 6,587 Earnings per Common Share Before cumulative effect of change in accounting method $ 0.80 $ 0.60 $ 1.05 $ 0.64 $1.14 Cumulative effect of change in accounting method - - 0.03 - - ---------- ----------- ----------- ----------- ---------- Net Earnings per Common Share $ 0.80 $ 0.60 $ 1.08 $ 0.64 $1.14 ---------- ----------- ----------- ----------- ---------- ---------- ----------- ----------- ----------- ---------- 15 ITEM 6. SELECTED FINANCIAL DATA (CONTINUED) (dollars in thousands except per share data) 1995 1994 1993 1992 1991 RETAINED EARNINGS: Beginning of the year $ 10,806 $ 14,076 $ 13,455 $ 15,655 $ 14,142 Net earnings after preferred dividends 7,193 5,202 8,523 4,248 7,503 Common dividends (8,702) (8,472) (7,902) (6,448) (5,990) ---------- ----------- ----------- ----------- ---------- End of the year $ 9,297 $ 10,806 $ 14,076 $ 13,455 $ 15,655 ---------- ----------- ----------- ----------- ---------- ---------- ----------- ----------- ----------- ---------- CAPITAL STRUCTURES: Common shareholders' equity $ 89,539 $ 87,710 $ 85,702 $ 69,199 $ 57,225 ---------- ----------- ----------- ----------- ---------- ---------- ----------- ----------- ----------- ---------- Redeemable preferred stocks $ 6,851 $ 7,217 $ 7,528 $ 7,951 $ 8,254 ---------- ----------- ----------- ----------- ---------- ---------- ----------- ----------- ----------- ---------- Debt: Long-term debt $102,100 $100,000 $ 87,000 $ 74,677 $ 57,060 Notes Payable 32,000 14,501 13,502 13,000 8,500 Current maturities of long-term debt - 5,000 - - 3,500 ---------- ----------- ----------- ----------- ---------- $134,100 $119,501 $100,502 $ 87,677 $ 69,060 ---------- ----------- ----------- ----------- ---------- Total capital $230,490 $214,428 $193,732 $164,827 $134,539 ---------- ----------- ----------- ----------- ---------- ---------- ----------- ----------- ----------- ---------- FINANCIAL RATIOS: Return on common shareholders' equity 8.12% 6.00% 11.00% 6.72% 13.38% Common stock dividend payout ratio 120% 161% 87% 146% 79% Dividends paid in cash per common share $ 0.96 $ 0.96 $ 0.94 $ 0.93 $ 0.90 Fixed charge coverage (before income tax deduction): Times interest earned 2.16 2.07 2.86 1.97 2.45 Times interest and preferred dividends earned 2.00 1.87 2.55 1.76 2.39 Book value per year-end share of common stock $ 9.79 $ 9.84 $ 10.00 $ 9.09 $ 8.63 UTILITY PLANT: Utility plant - end of year $362,924 $333,863 $315,297 $283,871 $249,027 Accumulated depreciation 138,831 127,806 117,925 109,184 100,927 ---------- ----------- ----------- ----------- ---------- Net plant $224,093 $206,057 $197,372 $174,687 $148,100 ---------- ----------- ----------- ----------- ---------- ---------- ----------- ----------- ----------- ---------- Construction expenditures $ 37,637 $ 27,251 $ 32,990 $ 35,335 $ 19,669 ---------- ----------- ----------- ----------- ---------- ---------- ----------- ----------- ----------- ---------- Total assets $296,898 $273,090 $252,690 $224,685 $191,471 ---------- ----------- ----------- ----------- ---------- ---------- ----------- ----------- ----------- ----------
16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION. The following is management's assessment of the Company's financial condition and a discussion of the principal factors that affect consolidated results of operations for the years 1995, 1994 and 1993. EARNINGS AND DIVIDENDS Per share results for 1995 were up 33% over 1994, despite the negative impact of warm weather on residential and commercial consumption. Warm weather during the heating season negatively impacted net earnings by an estimated $0.21 per share.
EARNINGS AND DIVIDENDS (in thousands except per share data) - ------------------------------------------------------------------ 1995 1994 1993 Net Income $7,193 $5,202 $8,523 Net Income per Share 0.80 $ 0.60 $ 1.08 Dividends per Share 0.96 $ 0.96 $ 0.94 Average Shares Outstanding 8,997 8,707 7,915 - ------------------------------------------------------------------
Per share net earnings for 1994 were reduced by non-recurring costs of $0.13 for interstate pipeline capacity to serve Oregon customers and $0.05 for revaluation of certain non-operating assets. Warmer than normal temperatures also affected the comparison to 1993, when temperatures were colder than normal. The warmer than normal temperatures impacted per share net earnings by an estimated $0.15. RESIDENTIAL AND COMMERCIAL OPERATING MARGIN
RESIDENTIAL AND COMMERCIAL OPERATING MARGIN (dollars in thousands) - ------------------------------------------------------------------------- 1995 1994 1993 Degree Days 5,238 5,463 6,136 Average Customers Residential 121,503 113,398 104,334 Commercial 22,989 22,035 21,166 Consumption per Customer Residential 755 779 842 Commercial 4,259 4,436 4,831 Margin Residential $23,422 $21,730 $22,056 Commercial $18,162 $16,795 $18,437 - -------------------------------------------------------------------------
The average number of residential and commercial customers increased by 9,059 in 1995 which contributed approximately $2 million of additional operating margin. The rate of customer growth is down from the 1994 increase of 9,933, due primarily to a general slow down of economic activity in much of the service area. Consumption per customer for 1995 was down 3% for residential and 4% for commercial from 1994. The reductions were directly attributable to weather, 15% warmer than normal in November, and 4% warmer than normal in December. The weather resulted in declines of 11% for residential consumption and 17 13% for commercial consumption in the key fourth quarter heating months. Eliminating the effects of weather, estimated consumption per customer for the year would have been approximately 810 therms for residential and 4,500 therms for commercial. Normalized residential consumption levels remain consistent over the last three years because additional natural gas equipment, such as water heaters converted from electricity are offsetting the effects of more energy efficient buildings and appliances. NON-CORE INDUSTRIAL Non-core industrial operating margin was $21.5 million in 1995, an increase of $2.0 million, or 10%. The 1995 increase is attributable to the start up in June 1995 of a new cogeneration plant at an existing customer site and increased throughput to a broad spectrum of industrial customers. Operating margins in 1994 increased $2.4 million over 1993 primarily as a result of service to a new cogeneration customer beginning in April 1994. A fifth cogeneration plant is expected to begin receiving distribution service from Cascade in the first quarter of 1996. OPERATING EXPENSES Operating expenses, almost 70% of which are payroll and benefits costs, increased over 1994 by $616,000, or 2%. The increase is due primarily to a December 31, 1994 enhancement in retirement plan benefits to bring benefits up to industry norm. There was also an increase in lease expense reflecting the use of operating leases beginning in 1995 for certain vehicles formerly purchased. Mitigating the expense increase was the Company's ability to maintain a stable number of employees in the face of strong, continuing customer growth. Another moderating factor was the increase in payroll capitalized due to increased capital expenditures. Operating expenses in 1994 were up over 1993 by 8.4%. Payroll and benefits costs account for 65% of this increase, with the largest factor being additional payroll cost of $912,000. This upward movement is the result of general salary and wage increases, the addition of 9 employees as of the end of the year, and a reduction in payroll expense capitalized resulting from lower capital expenditures in 1994. Employee medical benefits expense increased 26.1% over 1993 due to adverse claims experience. DEPRECIATION AND AMORTIZATION, PROPERTY AND PAYROLL TAXES Depreciation and amortization were up 7.4% in 1995 over 1994. The increase is due to higher depreciable plant consistent with an 8.7% increase in utility plant. Property and payroll taxes were essentially unchanged from 1994 due to a reduction in property tax rates stemming from a voter mandated 1990 reduction in Oregon. This reduction in property taxes is reflected in Oregon rates. Depreciation and amortization expense in 1994, along with property and payroll taxes, were up over 1993 a total of $1.2 million, or 9.0%, primarily because of increases in plant and equipment. INTEREST EXPENSE AND OTHER Interest expense in 1995 was $1.8 million, or 22.8% higher than 1994. Of this increase, $1.1 million is due to $18 million of additional long-term debt issued in October 1994. The remainder of the increase is due to interest on credits for lower gas costs deferred for pass-back to customers, discontinuance of interest rate swaps amortized over the term of the underlying debt agreement, and interest on customer deposits. Interest expense for 1994 increased $1.2 million over 1993 due to an increase of $16.7 million in the amount of debt outstanding. Other expense for 1994 includes charges of $700,000 for revaluation of certain non operating assets. 18 LIQUIDITY AND CAPITAL RESOURCES The seasonal nature of the Company's business creates short-term cash requirements to finance customer accounts receivable and construction expenditures. To provide working capital for these requirements, the Company entered into a new 5 year credit agreement on September 22, 1995, for a commitment of $40 million from three banks which replaces two separate commitments that totaled $25 million. The committed lines also support a money market facility of a similar amount. A subsidiary has a $5 million revolving credit facility used for non regulated business, which expires in 2000, and at December 31, 1995, $2.1 million was outstanding under the facility. The Company also has $25 million of uncommitted lines from three banks. The Company has a Medium-Term Note program used for long-term financing with $100 million outstanding at December 31, 1995, and $50 million registered under the Securities Act of 1933 and available for issuance. Because of the availability of short-term credit and the ability to issue long-term debt and additional equity, management is of the opinion it has adequate financial flexibility to meet its anticipated cash needs. CAPITAL EXPENDITURES
Capital Expenditures - --------------------- (dollars in thousands) - ----------------------------------------------------------- - ----------------------------------------------------------- 1995 1994 1993 Capital Expenditures $37,637 $27,251 $32,990 ------- ------- ------- Operating Cash Flow $25,023 $12,851 $13,960 Dividends Paid (8,200) (8,154) (7,506) Redemption of Preferred (362) (309) (455) ------- ------- ------- Available Cash Flow $16,461 $ 4,388 $ 5,999 ------- ------- ------- Internally Funded Expenditures 43.74% 16.10% 18.18% - ----------------------------------------------------------- - -----------------------------------------------------------
Available cash flow increased in 1995, primarily due to increased net earnings, lower gas costs and a reduction in accounts receivable to a level approximating 1993. These lower gas costs will be refunded to customers beginning in 1996. Budgeted expenditures for 1996 will approximate $35.2 million and will be financed 30% to 40% from operating cash flow net of common and preferred dividends. Over the next five years it is expected that capital expenditures will be close to $150 million. In addition to internally generated cash, the Company's cash flow is enhanced from monthly sales of Common stock to participants of the Dividend Reinvestment Plan and employees in the Company's 401(k) Plan. Cash in-flow from these sources was $2.3 million in 1995, $4.4 million in 1994 and $589,000 in 1993. The significant increase from 1993 to 1994 reflects opening the Dividend Reinvestment Plan in 1994 to customers wishing to invest in Cascade stock. Financing plans for 1996 include the possible private placement of $7.5 million of preferred stock in the first half of the year and issuance of 1 to 1.5 million common shares later in the year. Proceeds from these financings will be used to retire short-term debt and for other general corporate purposes. The method, timing and amount of these and any future financings by the Company will depend on a variety of factors, including capitalization ratios, coverage ratios, interest costs, the state of the capital markets and general economic conditions. EFFECTS OF INFLATION Changing prices have had minimal impact on the Company's operating margins in the last three years. The effects of price changes in purchased gas costs and the cost of transporting gas to the Company's system are, for the most part, passed on to customers in accordance with regulatory policy. Inflationary increases in wages and other operating expenses are generally recognized by the regulatory agencies in their rate decisions in general rate filings. 19 REGULATORY MATTERS Since June 1995, the Company has engaged in a negotiation process with the staff of the WUTC and other interested parties, to establish new rates for Washington customers. On December 11, 1995 Cascade filed a formal request for a general rate increase, incorporating the results of agreements reached to date with the staff. Negotiations continue regarding remaining revenue level, rate spread and rate design issues. Under normal weather conditions, the annual revenue increase from the requested rates, if granted in full, would be $5.7 million, a 3.45% increase. Also included in the filing proposal are changes to the design of residential and commercial rates which would increase monthly service charges and per therm commodity rates for the first fifty therms of gas used each month, and decrease commodity rates for use in excess of fifty therms. The higher monthly service charge would be applied to residential customers during winter months only. Commercial customers would experience a higher service charge throughout the year. This rate structure would, if approved by the WUTC, minimize the impact of cyclical weather on bills, and would reduce financial hardship experienced by residential and commercial customers as the result of extremely cold weather. On December 29, 1995 Cascade filed two additional applications with the WUTC to lower rates to customers. The first request, which passes through to customers reductions in the Company's costs of purchased gas, is estimated to reduce annual revenues by $5.9 million or 3.8%. The second application requests a pass through to customers, over a two year period, of $6.6 million in gas cost savings and other deferred balances. It is estimated that this application will reduce annual revenues by $3.4 million, or 2.2%. On January 26, 1996, the Company withdrew both applications in order to allow time to work with the WUTC staff on its review of the filings. It is the Company's intent to re-file the applications after any questions raised by the staff are satisfied, with a desire to have these filings go into effect at the same time as the general rate increase. It is not known when the rate changes will be approved by the WUTC. Effective December 1, 1995, the OPUC approved an order allowing Cascade to decrease rates approximately $1.6 million or 5%. About $1.2 million of this decrease is associated with current purchased gas costs applicable to Oregon. The remainder of the decrease relates to the amortization of conventional deferred revenue and gas cost amounts. ENVIRONMENTAL The Company has provided approximately $500,000 for cleanup costs associated with contamination in the area of the Company's underground storage tanks at its Sunnyside, Washington office. It is expected that any additional costs will not be significant. The Company has been notified of a claim regarding contamination of a former manufactured gas site in Oregon once operated by a predecessor company. At this date it appears that contamination is present at the site, but there is no estimate of the extent of clean-up costs. To the extent the Company may be responsible for any portion of such costs, it will seek contribution from other responsible parties, recovery from its insurers and appropriate rate relief. See Note 11 under Notes to Consolidated Financial Statements. 20 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEPENDENT AUDITORS REPORT Board of Directors Cascade Natural Gas Corporation Seattle, Washington We have audited the accompanying consolidated balance sheets of Cascade Natural Gas Corporation and subsidiaries (the Corporation) as of December 31, 1995 and 1994, and the related consolidated statements of net earnings, common shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly in all material respects, the financial position of Cascade Natural Gas Corporation and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. Deloitte & Touche LLP Seattle, Washington February 5, 1996 21 CASCADE NATURAL GAS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF NET EARNINGS
YEARS ENDED DECEMBER 31 1995 1994 1993 (THOUSANDS EXCEPT PER SHARE DATA) OPERATING REVENUES: Gas sales $171,254 $185,341 $179,979 Transportation revenue 11,300 6,871 7,087 Other operating income 190 198 388 -------- -------- -------- 182,744 192,410 187,454 Less: Gas purchases 102,858 118,083 113,500 Revenue taxes 11,480 11,500 11,095 -------- -------- -------- OPERATING MARGIN 68,406 62,827 62,859 -------- -------- -------- COST OF OPERATIONS: Operating expenses 30,818 30,202 27,856 Depreciation and amortization 11,733 10,921 9,964 Property and payroll taxes 4,051 4,039 3,757 -------- -------- -------- 46,602 45,162 41,577 -------- -------- -------- Earnings from operations 21,804 17,665 21,282 -------- -------- -------- NONOPERATING EXPENSE (INCOME): Interest 9,938 8,090 7,038 Interest charged to construction (394) (203) (323) -------- -------- -------- 9,544 7,887 6,715 Amortization of debt issuance expense 606 593 562 Other (586) (80) (113) -------- -------- -------- 9,564 8,400 7,164 -------- -------- -------- EARNINGS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING METHOD 12,240 9,265 14,118 INCOME TAXES 4,508 3,505 5,224 -------- -------- -------- EARNINGS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING METHOD 7,732 5,760 8,894 Cumulative effect of change in accounting method (Note 8) - - 209 -------- -------- -------- EARNINGS BEFORE PREFERRED DIVIDENDS 7,732 5,760 9,103 PREFERRED DIVIDENDS 539 558 580 -------- -------- -------- NET EARNINGS $7,193 $5,202 $8,523 -------- -------- -------- -------- -------- -------- EARNINGS PER COMMON SHARE: Before cumulative effect of change in accounting method $0.80 $0.60 $1.05 Cumulative effect of change in accounting method - - 0.03 -------- -------- -------- NET EARNINGS PER COMMON SHARE $0.80 $0.60 $1.08 -------- -------- -------- -------- -------- -------- AVERAGE SHARES OUTSTANDING (NOTE 5) 8,997 8,707 7,915 -------- -------- -------- -------- -------- --------
See notes to consolidated financial statements 22 CASCADE NATURAL GAS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
ASSETS DECEMBER 31 1995 1994 (DOLLARS IN THOUSANDS) UTILITY PLANT (Note 3) $362,924 $333,863 Less Accumulated depreciation 138,831 127,806 --------- --------- 224,093 206,057 Construction work in progress 14,957 7,872 --------- --------- 239,050 213,929 --------- --------- OTHER ASSETS: Investments 919 919 Notes receivable, less current maturities 2,426 2,915 --------- --------- 3,345 3,834 --------- --------- CURRENT ASSETS: Cash and cash equivalents 2,197 3,949 Securities available for sale - 1,466 Accounts receivable, less allowance of $425 and $461 for doubtful accounts 26,483 28,885 Current maturities of notes receivable 809 988 Materials, supplies, and inventories 6,047 5,583 Prepaid expenses and other assets 2,353 1,653 --------- --------- 37,889 42,524 --------- --------- DEFERRED CHARGES 16,614 12,803 --------- --------- $296,898 $273,090 --------- --------- --------- ---------
See notes to consolidated financial statements 23 CASCADE NATURAL GAS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
COMMON SHAREHOLDERS' EQUITY, PREFERRED STOCKS AND LIABILITIES DECEMBER 31 1995 1994 (DOLLARS IN THOUSANDS) COMMON SHAREHOLDERS' EQUITY Common stock, par value $1 per share (Note 5) Authorized, 15,000,000 shares; issued and outstanding, 9,144,448 and 8,911,661 shares $ 9,144 $ 8,912 Additional paid-in capital 71,098 67,992 Retained earnings (Note 7) 9,297 10,806 --------- --------- 89,539 87,710 --------- --------- REDEEMABLE PREFERRED STOCKS, aggregate redemption amount of $7,103 and $7,499 (Note 4) 6,851 7,217 --------- --------- LONG-TERM DEBT (Note 7) 102,100 100,000 --------- --------- CURRENT LIABILITIES: Notes Payable (Note 6) 32,000 14,501 Accounts payable 16,392 18,366 Property, payroll, and excise taxes 4,578 4,541 Dividends and interest payable 4,365 4,202 Other current liabilities 4,646 1,620 Current maturities of long-term debt (Note 7) - 5,000 --------- --------- 61,981 48,230 --------- --------- DEFERRED CREDITS: Gas cost changes 10,934 5,200 Income taxes (Note 8) 16,461 15,382 Investment tax credits 3,207 3,472 Other 5,825 5,879 --------- --------- 36,427 29,933 --------- --------- COMMITMENTS & CONTINGENCIES (Note 10 and 11) - - --------- --------- $296,898 $273,090 --------- --------- --------- ---------
See notes to consolidated financial statements 24 CASCADE NATURAL GAS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
COMMON STOCK PAR ADDITIONAL PAID RETAINED SHARES VALUE IN CAPITAL EARNINGS (DOLLARS IN THOUSANDS) BALANCE, JANUARY 1, 1993 5,075,726 $ 5,076 $50,668 $ 13,455 Common stock issued: Public offering 575,000 575 13,773 Employee savings plan and retirement trust (401(k)) 22,200 22 558 Director stock award plan 800 1 19 Dividend reinvestment plan 37,992 38 939 Three-for-two stock split 2,854,656 2,854 (2,865) Redemption of preferred stock (32) Cash dividends: Common stock, $.94 per share (7,902) Preferred stock, senior, $.55 per share (109) 7.85% cumulative preferred stock $7.85 per share (471) Earnings before preferred dividends 9,103 --------- ------- ------- -------- BALANCE, DECEMBER 31, 1993 8,566,374 8,566 63,060 14,076 Common stock issued: Employee savings plan and retirement trust (401(k)) 48,959 49 690 Director stock award plan 1,200 1 18 Dividend reinvestment plan 295,128 296 4,222 Redemption of preferred stock 2 Cash dividends: Common stock, $.96 per share (8,472) Preferred stock, senior, $.55 per share (87) 7.85% cumulative preferred stock, $7.85 per share (471) Earnings before preferred dividends 5,760 --------- ------- ------- -------- BALANCE, DECEMBER 31, 1994 8,911,661 $ 8,912 $67,992 $ 10,806 Common stock issued: Employee savings plan and retirement trust (401(k)) 50,373 50 677 Director stock award plan 1,200 1 15 Dividend reinvestment plan 181,214 181 2,409 Redemption of preferred stock 5 Cash dividends: Common stock, $.96 per share (8,702) Preferred stock, senior, $.55 per share (68) 7.85% cumulative preferred stock, $7.85 per share (471) Earnings before preferred dividends 7,732 --------- ------- ------- -------- BALANCE, DECEMBER 31, 1995 9,144,448 $ 9,144 $71,098 $ 9,297 --------- ------- ------- -------- --------- ------- ------- --------
See notes to consolidated financial statements 25 CASCADE NATURAL GAS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31 1995 1994 1993 (DOLLARS IN THOUSANDS) OPERATING ACTIVITIES: Earnings before preferred dividends $ 7,732 $ 5,760 $ 9,103 Adjustments to reconcile earnings before preferred dividends to net cash provided by operating activities: Depreciation 12,131 11,239 10,268 Write-down of assets - 700 349 Amortization of gas cost changes 3,508 (3,361) (10,119) Increase in deferred income taxes 1,079 1,674 758 Cumulative effect of change in accounting method - (209) Decrease in deferred investment tax credits (265) (275) (266) Cash provided (used) by changes in operating assets and liabilities: Accounts receivable 2,400 (2,346) (2,099) Income taxes 105 (476) 98 Inventories 201 34 (601) Gas cost changes 2,226 4,993 (482) Deferred items (4,144) (662) 490 Accounts payable and accrued expenses 1,560 (3,661) 6,563 Prepaid expenses and other assets (1,111) (725) 138 Other (399) (43) (31) ------- -------- ------- Net cash provided by operating activities 25,023 12,851 13,960 ------- -------- ------- INVESTING ACTIVITIES: Capital expenditures (37,637) (27,251) (32,990) New consumer loans (1,243) (1,393) (2,352) Receipts on consumer loans 2,277 2,580 3,533 Purchase of securities available for sale (4,107) (1,502) (747) Proceeds from securities available for sale 5,605 752 - ------- -------- ------- Net cash used by investing activities (35,105) (26,814) (32,556) ------- -------- ------- FINANCING ACTIVITIES: Issuance of common stock 2,293 4,400 14,937 Redemption of preferred stock (362) (309) (455) Proceeds from long-term debt 2,100 17,838 33,686 Repayment of long-term debt (5,000) - (22,761) Proceeds from notes payable, net 17,499 999 501 Dividends paid (8,200) (8,154) (7,506) ------- -------- ------- Net cash provided by financing activities 8,330 14,774 18,402 ------- -------- ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,752) 811 (194) CASH AND CASH EQUIVALENTS: Beginning of year 3,949 3,138 3,332 ------- -------- ------- End of year $ 2,197 $ 3,949 $ 3,138 ------- -------- ------- SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the year for: Interest (net of amounts capitalized) $ 8,597 $ 7,381 $ 6,744 Income taxes $ 2,786 $ 2,567 $ 2,598 SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES: In July, 1994 the Company sold all of the capital stock of Metrology One, Inc. and Fibre Graphics, Inc. A note receivable valued at $825,000 was acquired in exchange for the assets sold. As of December 31, 1995, the note is included in Notes Receivable at a net value of $269,000.
See notes to consolidated financial statements 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - NATURE OF BUSINESS Cascade Natural Gas Corporation (the Company) is a local distribution company (LDC) engaged in the distribution of natural gas. The Company's service territory consists primarily of small towns in Washington and Oregon, ranging from the Canadian border in northwestern Washington to the Idaho border in eastern Oregon. The Company also has four immaterial subsidiaries. As of December 31, 1995, the Company had approximately 151,000 core customers and 116 non-core customers. Core customers are principally residential and small commercial and industrial customers who take traditional "bundled" natural gas service which includes supply, peaking service, and upstream interstate pipeline transportation. Sales to core customers account for approximately 24% of gas deliveries and 69% of operating margin. The Company's sales to its core residential and commercial customers are vulnerable to weather fluctuations. The results of operations for any one year may be significantly affected by variations in the weather. Over the longer term, these fluctuations tend to offset each other, as rates charged to customers are developed based on the assumption of normal weather. Non-core customers are generally large industrial and institutional customers who have chosen "unbundled" service, meaning that they select from among several supply and upstream pipeline transportation options, independent of distribution service on the Company's system. The Company's margin from non-core customers is derived only from this distribution service. The principal industrial activities of its customers include the processing of forest products, production of chemicals, refining of crude oil, production of aluminum, generation of electricity, and processing of food. The Company is subject to regulation of most aspects of its operations by the Washington Utilities and Transportation Commission (WUTC) and the Oregon Public Utility Commission (OPUC). It is subject to regulatory risk primarily with respect to recovery of costs incurred. Various deferred charges and deferred credits reflect assumptions regarding recovery of certain costs through amortization during future periods. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company's accounting records and practices conform to the requirements and uniform system of accounts prescribed by the WUTC and the OPUC. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of Cascade Natural Gas Corporation and its wholly owned subsidiaries: Cascade Land Leasing Co.; CGC Properties, Inc.; CGC Energy, Inc.; and CGC Resources, Inc. All intercompany transactions have been eliminated in consolidation. UTILITY PLANT: Utility plant is stated at the historical cost of construction. These costs include payroll-related costs such as taxes and other employee benefits, general and administrative costs, and the estimated cost of funds used during construction. Maintenance and repairs of property, and replacements and renewals of items deemed to be less than units of property, are charged to operations. Units of utility plant retired or replaced are credited to property accounts at cost. Such amounts plus removal expense, less salvage, are charged to accumulated depreciation. In the case of a sale of land or major operating units, the resulting gain or loss on the sale is included in other income or expense. Depreciation of utility plant is computed using the straight-line method. The asset lives used for computing depreciation range from five to forty years, and the weighted average annual depreciation rate is approximately 3.5%. INVESTMENTS: Investments consist primarily of real estate, classified as nonutility property carried at estimated net realizable value. NOTES RECEIVABLE: Notes receivable include loans made to customers for the purchase of energy efficient appliances, which are generally the security for the loan. Loans are made for a term of five years at interest rates varying from 6.5% to 12%. SECURITIES AVAILABLE FOR SALE: Securities available for sale consist of municipal bonds, at market value, which approximates cost. MATERIALS, SUPPLIES AND INVENTORIES: Materials and supplies for construction and maintenance are recorded at cost. Inventories of gas are stated at the lower of average cost or market. DEFERRED CHARGES: Deferred charges consist primarily of debt issuance costs, intangible assets related to minimum liability accruals on pension obligations (Note 9), and deferrals of postretirement health care expenses (Note 9). Debt issuance costs are amortized over the lives of the related issues. Redemption costs relating to refinanced debt are amortized over the life of the new debt issuance. REVENUE RECOGNITION: The Company accrues estimated revenues for gas delivered but not billed to residential and commercial customers from the meter reading dates to month end. GAS COST CHANGES: Gas cost changes consist primarily of the effects of net decreases in purchased gas costs which have not yet been reflected in rates charged to customers. The effects of changes that are not tracked on a concurrent basis are deferred and amortized over a future period through a temporary rate change schedule. Amortization is subject to approval by the regulatory agencies, and amortization periods are generally one to two years. FEDERAL INCOME TAXES: The Company deducts depreciation computed on an accelerated basis for federal income tax purposes, and as a result, deductions exceed the amounts included in the financial statements. In 1981, the Company elected to record depreciation on 1981 and subsequent utility plant additions under the Accelerated Cost Recovery System. This election required the Company to provide deferred income taxes on the difference between depreciation computed for financial statement and tax reporting purposes beginning in 1981 (Note 8). This procedure has been accepted by the WUTC and the OPUC. It is expected that any future increases in federal income taxes resulting from the reversal of accelerated depreciation on additions to utility plant in 1980 and prior will be allowed in future rate determinations. INVESTMENT TAX CREDITS: Investment tax credits were deferred and are amortized over the life of the property giving rise to the credit. STATEMENTS OF CASH FLOWS: For purposes of the statements of cash flows, the Company considers all liquid investments with a purchased maturity of approximately three months or less to be cash equivalents. RECLASSIFICATIONS: Certain reclassifications have been made in the 1994 and 1993 financial statements to conform to the classifications used in 1995. USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. The Company has used significant estimates in measuring certain deferred charges and deferred credits related to items subject to approval of the WUTC and the OPUC. Significant estimates are also used in the development of discount rates and trend rates related to the measurement of retirement benefit obligations and accrual amounts, and in the determination of depreciable lives of utility plant. NOTE 3 - UTILITY PLANT Utility plant consists of the following components at December 31:
1995 1994 (dollars in thousands) Distribution plant $ 311,624 $ 284,305 Transmission plant 14,086 14,086 Production plant 1,053 1,053 General plant 30,622 28,994 Intangible plant 212 212 Nondepreciable plant 5,327 5,213 ----------- ---------- $ 362,924 $ 333,863 ----------- ---------- ----------- ----------
Note 4 - Redeemable Preferred Stocks
1995 1994 1993 Shares Amount Shares Amount Shares Amount (dollars in thousands) 7.85% cumulative, $1.00 par value 60,000 $ 6,000 60,000 $ 6,000 60,000 $ 6,000 $.55 cumulative senior, series A,B, and C, without par value: Beginning of year 135,427 1,217 167,676 1,528 213,157 1,951 Retirements 38,867 366 32,249 311 45,481 423 ------- ------ ------- ------- ------- ------- Authorized, issued, and outstanding at end of year 156,560 $ 6,851 195,427 $ 7,217 227,676 $ 7,528 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Senior preferred stock is subject to mandatory redemption as follows:
Shares Amount (dollars in thousands) 1996 24,810 $ 248 1997 25,000 $ 250 1998 25,000 $ 250 1999 14,500 $ 145 2000 7,250 $ 73
The shares may be purchased on the open market, or redeemed at $10 per share plus accrued dividends. Redemption in excess of the required number of shares of preferred stock can be made only if all cumulative dividends on preferred stock have been paid. The 7.85% cumulative preferred stock may not be redeemed until maturity on November 1, 1999. Note 5 - Common Stock At December 31, 1995, shares of common stock are reserved for issuance as follows:
Number Purchase or Contribution Price of shares Per Share Employee Savings Plan and Retirement Trust (401(k) plan) 230,944 Market closing price of common stock immediately prior to purchase by the trustee. Divident reinvestment plan 347,619 Average of high and low sales prices on the closest business day immediately preceding the investment date, which is the 15th day of each month. Director stock award plan 9,600 Market closing price of common stock on the day of the Company's annual meeteing. ------- 588,163 ------- -------
Effective December 20, 1993, the Company issued 2,854,656 shares of common stock in a three-for-two stock split. For the calculations of earnings per share of common stock, the average number of shares outstanding has been recalculated to reflect the effect of this split. Note 6 - Notes Payable The Company's short-term borrowing needs are met with a $40,000,000 five year revolving credit agreement with three of its banks for an annual commitment fee of 1/8 of 1%. The committed lines of credit also support a commercial paper facility of a similar amount. The Company also has $25,000,000 of uncommitted lines from three banks. A subsidiary company has a $5,000,000 revolving credit facility used for non-regulated business, and at December 31, 1995, $2,100,000 was outstanding for a fixed term of five years. Of the $32,000,000 in short term borrowing outstanding at December 31, $27,000,000 was from committed lines, and $5,000,000 was from uncommitted lines.
1995 1994 1993 (dollars in thousands) Amount outstanding at December 31 $32,000 $ 14,501 $ 13,502 Average daily balance outstanding 13,170 15,217 11,696 Average interest rate, excluding commitment fee 6.29% 4.87% 3.66% Maximum month end amount outstanding 32,000 23,941 22,752
Note 7 - Long-term Debt Long-term debt consists of the following:
1995 1994 (dollars in thousands) 9.46% Promissory note due 1995 $ - $ 5,000 6.53% Five Year Term Note 2,100 - due 2000 Medium-term notes: 5.77% due 1998 5,000 5,000 5.78% due 1998 5,000 5,000 7.18% due 2004 4,000 4,000 7.32% due 2004 22,000 22,000 8.38% due 2005 5,000 5,000 8.35% due 2005 5,000 5,000 8.50% due 2006 8,000 8,000 8.06% due 2012 14,000 14,000 8.10% due 2012 5,000 5,000 8.11% due 2012 3,000 3,000 7.95% due 2013 4,000 4,000 8.01% due 2013 10,000 10,000 7.95% due 2013 10,000 10,000 --------- --------- 102,100 105,000 Less current maturities - 5,000 --------- --------- $ 102,100 $ 100,000 --------- --------- --------- ---------
None of the long-term debt includes sinking fund requirements. Various debt and credit agreements restrict the Company and its subsidiaries as to indebtedness, payment of cash dividends on common stock, and other matters. Under these restrictions, approximately $18,385,000 is available for payment of dividends as of December 31, 1995. During 1992 and 1994, the Company entered into three interest rate swap arrangements, with scheduled expiration dates in 1994, 1995 and 1996. These arrangements effectively converted $25,000,000 of fixed rate debt instruments into variable rate obligations. Under the terms of these arrangements, the Company made payments at a LIBOR-based floating rate, and received payments at a fixed rate. The net interest paid or received is included in interest expense. During 1994, these arrangements were terminated. The settlement amount, which was not material, was charged to prepaid expenses, and is being amortized to interest expense over the original terms of the swap arrangements. Note 8 - Income Taxes The Company adopted Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes", effective January 1, 1993. This statement supersedes Accounting Principles Board (APB) Opinion No. 11 and SFAS No. 96, the latter of which was never adopted by the Company. The cumulative effect of adopting SFAS No. 109 on the Company's financial statements was to increase net earnings by $209,000 ($.03 per share) in the first quarter of 1993. Under the provisions of SFAS No. 109, the Company was required to record a deferred tax liability for the cumulative tax effect of basis differences on utility plant placed in service prior to 1981. Flow through accounting had previously been recorded with respect to these temporary differences. In addition, the Company was required to adjust previously recorded deferred tax liabilities related to plant placed in service after 1980, due to reductions in tax rates. Due to regulatory policies regarding recovery of deferred taxes charged to customers through rates, a regulatory liability was recorded which offsets the effect of these adjustments to the deferred tax balances. Therefore these adjustments had no effect on net earnings. The provision for income tax expense consists of the following:
1995 1994 1993 (dollars in thousands) Current tax expense $ 2,661 $ 2,120 $ 3,443 Alternative minimum tax (credit carryforward) - - (665) Deferred tax expense 2,112 1,660 2,668 Change in tax rates - - 44 Amortization of deferred investment tax credits (265) (275) (266) -------- --------- --------- $ 4,508 $ 3,505 $ 5,224 -------- --------- --------- -------- --------- ---------
During the third quarter of 1993, the Revenue Reconciliation Act of 1993 was enacted. This act increased the maximum federal income tax rate applicable to corporations from 34% to 35%. The provision for deferred income taxes included a charge of $44,000 ($.01 per share) in 1993 as a result of recalculating certain deferred tax balances at the new tax rate. A reconciliation between income taxes calculated at the statutory federal tax rate and income taxes reflected in the financial statements is as follows:
1995 1994 1993 (dollars in thousands) Statutory federal income tax rate 35% 35% 35% Income tax calculated at statutory federal rate $ 4,284 $ 3,243 $ 4,941 Increase (decrease) resulting from: State income tax, net of federal tax benefit 86 80 106 Differences between book and tax depreciation 339 468 441 Amortization of investment tax credits (265) (275) (266) Other 64 (11) 2 -------- --------- -------- $ 4,508 $ 3,505 $ 5,224 -------- -------- -------- -------- -------- --------
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects of significant items comprising the Company's net deferred tax liability are as follows:
1995 1994 (dollars in thousands) Deferred tax liabilities: Differences between book and tax basis of property $ 13,910 $ 13,082 Debt refinancing costs 2,315 2,505 Retirement benefit obligations 1,359 829 Other 1 77 --------- --------- 17,585 16,493 --------- --------- --------- --------- Deferred tax assets: Valuation reserves 313 264 Retirement benefit obligations 434 477 Provision for doubtful accounts 173 172 Other 204 198 --------- --------- 1,124 1,111 --------- --------- Net deferred tax liability $ 16,461 $ 15,382 --------- --------- --------- ---------
Note 9 - Retirement Plans The Company's noncontributory defined benefit pension plan covers substantially all employees over 21 years of age with one year of service. The benefits are based on a formula which includes credited years of service and the employee's annual compensation. The Company's policy is generally to fund the plan to the extent allowable under Internal Revenue Service rules. The Company provides executive officers with supplemental retirement, death, and disability benefits. Under the plan, vesting occurs on the first day of the year after the executive has reached age 55 and has completed five years of participation under the plan, or upon death. The plan supplements the benefit received through Social Security and the defined benefit pension plan so that the total retirement benefits equal 70% of the executive's highest salary during any of the five years preceding retirement. The plan also provides a death benefit equivalent to ten years of vested benefits. The Company funds the plan by making contributions to the Trust sufficient to assure assets held by the Trust always exceed the accumulated benefit obligation for benefits payable by the plan. The funded status of the defined benefit pension and supplemental retirement plans and amounts recognized in the Company's financial statements are shown below:
Supplemental Retirement Pension Plan Plan 1995 1994 1995 1994 (dollars in thousands) Actuarial present value of accumulated benefit obligations: Vested $ 21,863 $ 12,666 $ 3,141 $ 2,310 Nonvested 195 137 199 144 --------- --------- -------- -------- $ 22,058 $ 12,803 $ 3,340 $ 2,454 --------- --------- -------- -------- --------- --------- -------- -------- Projected benefit obligation for services rendered to date $ (26,618) $ (15,590) $ (3,813) $ (3,327) Plan assets, at fair value, primarily common stocks, corporate bonds, and life insurance policies 19,376 13,842 3,430 2,387 --------- --------- -------- -------- Projected benefit obligation in excess of plan assets (7,242) (1,748) (383) (940) Unrecognized amounts: Prior service cost 3,754 2,316 (284) - Loss (gain) from past experience different from that assumed 4,689 28 949 582 Net transition obligation 22 27 1,103 1,203 Adjustment to recognize minimum liability (3,777) - - (912) --------- --------- -------- -------- Prepaid (accrued) pension cost $ (2,554) $ 623 $ 1,385 $ (67) --------- --------- -------- -------- --------- --------- -------- --------
Net pension cost for both plans included the following components:
1995 1994 1993 (dollars in thousands) Service cost of benefits earned during the period $ 1,171 $ 1,271 $ 1,113 Interest cost on projected benefit obligation 1,936 2,044 1,900 Actual return on plan assets (4,057) (1,101) (1,485) Deferral of unrecognized loss (gain) and amortization, net 2,916 (524) 82 Amount recognized due to settlement - 16 - -------- ------- -------- $ 1,966 $ 1,706 $ 1,610 -------- ------- -------- -------- ------- --------
The following table sets forth the approximate effects on the projected benefit obligations resulting from amendments to the pension plan and from the change in the discount rate from 8.75% to 7.25%:
Supplemental Pension Retirement Plan Plan ------- ------------ (dollars in thousands) Effect of change in discount rate $ 4,500 $ 700 Effect of amendment to pension plan $ 1,800 $ (300)
The following assumptions were used to determine the projected benefit obligation and expected return on assets at December 31:
1995 1994 1993 Pension plan: Discount rate: Nonretired lives 7.25% 8.75% 7.50% Retired lives 7.25% 8.75% 6.00% Long-term rate of return on plan assets 9.00% 8.50% 8.50% Rate of increase in future compensation levels 5.00% 5.00% 5.00% Supplemental retirement plan: Discount rate 7.25% 8.75% 7.50% Long-term rate of return on plan assets 8.50% 8.50% 8.50% Rate of increase in future compensation levels 5.00% 5.00% 5.00%
The Company has an Employee Savings Plan and Retirement Trust (401(k) plan). All employees 21 years of age or older with one full year of service are eligible to enroll in the 401(k) plan. Under the terms of the 401(k) plan, the Company will match each employee's contribution to the 401(k) plan at a rate of 50% of the employee's contribution up to 6% of the employee's compensation, as defined. The Company recognized costs for contributions to this plan of $458,000, $474,000, and $370,000 for 1995, 1994, and 1993, respectively. The Company's health care plan provides Postretirement Benefits Other than Pensions (PBOP), consisting of medical and prescription drug benefits, to its retired employees hired prior to June 1, 1992, and their eligible dependents. The Company has been recording PBOP expense, as provided in SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions", since January 1, 1993. The Company defers the portion of the annual PBOP accrual attributable to Washington regulated operations in excess of the cash basis of recording these expenses. This approach is consistent with WUTC policy. The amounts so deferred have been $1,028,000, $1,892,000, and $1,938,000 in 1995, 1994, and 1993 respectively. The Company has filed a general rate case in the State of Washington, requesting recovery of these deferred amounts. Management believes that the rates to be granted in this rate case will include recognition of these amounts, as well as recognition of on going PBOP expenses, as measured under SFAS No. 106. An adverse decision by the WUTC could result in a material difference in the reported amounts. Amounts accrued for PBOP, not including the above mentioned deferrals, consist of the following components:
1995 1994 1993 (dollars in thousands) Service cost $ 366 $ 523 $ 510 Net interest cost 1,114 1,151 1,105 Actual return on plan assets (627) 12 -- Net amortization and deferral 934 551 657 ------- ------- ------- $ 1,787 $ 2,237 $ 2,272 ------- ------- ------- ------- ------- -------
The Company's policy is generally to fund the plan to the extent allowable under Internal Revenue Service rules. The following table sets forth the health care plan's funded status.
1995 1994 (dollars in thousands) Accumulated postretirement benefit obligation (APBO): Retirees $ 4,058 $ 3,814 Fully eligible active plan participants 5,948 4,797 Other active plan participants 7,168 5,571 -------- --------- 17,174 14,182 Plan assets, at fair value, primarily common stocks and corporate bonds 4,194 2,498 -------- --------- Funded status (12,980) (11,684) Unrecognized transition obligation 11,169 11,826 Unrecognized (gain) loss 349 (1,462) -------- --------- Accrued postretirement benefit cost $ (1,462) $ (1,320) -------- --------- -------- ---------
The assumed health care cost trend rate used in measuring the APBO is 10% for 1996, trending down to 5.5% at 2005. At January 1, 1995, the census and per capita claims cost assumptions were updated, resulting in a reduction in the APBO of approximately $1.2 million. The assumed discount rate used in determining the APBO was 7.25% at December 31, 1995, and 8.75% at December 31, 1994. The effect of the decrease in the discount rate was an increase of approximately $2.6 million in the APBO at December 31, 1995. A one percentage point increase in the assumed health care cost trend rate for each year would increase the APBO by approximately 16.6% and the service and interest cost components of net postretirement health care cost by approximately 16.9%. NOTE 10 - GAS SERVICE CONTRACTS The Company has entered into various transportation, supply, storage, and peaking service contracts to assure that adequate supplies of gas will be available to provide firm service to its core customers and to meet its obligations under long-term non-core customer agreements. These contracts, which have maturities ranging from one to 30 years, provide that the Company must pay a fixed demand charge each month. One gas supply contract requires the Company to take 10,037,500 therms annually or the seller can reduce its commitment to provide that minimum amount. Two other gas supply contracts require that the Company take 100% of all tendered gas volumes up to the maximum daily limit each day during the remaining life of the agreements. The total 36 contract quantity for these two agreements is 76,000,000 therms. All three of these contracts have primary terms that end on November 1, 1996. Another contract has a 42% take requirement, equaling an obligation of 41,475,315 therms per year through 2004. Among the Company's multi-year agreements, a 15-year contract for winter-only ( October through March) supply has a 70% minimum take requirement, which equates to a purchase requirement of 9,841,650 therms per year. Finally, the Company has entered into various agreements for the winter of 1995-96 whose minimum take requirements total 49,370,000 therms. The remaining gas supply contracts do not require the Company to take any gas, but the various suppliers are obligated to provide up to a maximum of 80,300,000 therms annually. The Company's minimum obligations under these contracts are set forth in the following table. The amounts are based on current contract prices, which are subject to change.
STORAGE AND FIRM GAS PEAKING SUPPLY TRANSPORTATION SERVICE TOTAL (dollars in thousands) 1996 $ 38,280 $ 27,310 $6,210 $ 71,800 1997 19,597 26,998 5,190 51,785 1998 18,511 26,998 5,059 50,568 1999 13,096 26,816 4,241 44,153 2000 12,693 26,780 4,052 43,525 Thereafter 51,892 363,979 56,107 $471,978 -------- -------- ------ -------- $154,069 $498,881 $80,859 $733,809 -------- -------- ------ -------- -------- -------- ------ --------
Purchases under these contracts for 1993, 1994, and 1995, including commodity purchases, as well as demand charges have been as follows:
STORAGE AND FIRM GAS PEAKING SUPPLY TRANSPORTATION SERVICE TOTAL (dollars in thousands) 1993 $50,036 $18,691 $4,179 $72,906 1994 $54,695 $22,751 $4,639 $82,085 1995 $45,223 $28,548 $4,722 $78,493
37 NOTE 11- CONTINGENCIES The Company was notified by the Department of Ecology of the State of Washington that it is a "potentially liable person" as a result of contamination in the area of the Company's underground storage tanks at its Sunnyside, Washington office. The Company has provided $455,000 to date for the estimated costs of the cleanup. The Company believes that the remaining reserves of $89,000 are adequate to complete the remediation. During the first quarter of 1995, a claim related to environmental contamination from a manufactured gas plant previously owned by a predecessor corporation of the Company was filed by the present property owner. The claim requested that the Company assume responsibility for investigation and possible cleanup of alleged contamination on the property. A consultant has been retained by the property owner to evaluate the nature and extent of any contamination. To date the consultant has reported that contamination consistent with manufactured gas operations is present, but there is no estimate of the cost of remediation. To the extent the Company may be responsible for all or part of such cost, it expects to seek contribution from other site owners and its insurers, and would seek appropriate rate relief to the extent of any remaining expense incurred. Various lawsuits, claims, and contingent liabilities may arise from time to time from the conduct of the Company's business. None of those now pending, in the opinion of management, is expected to have a material effect on the Company's financial position, results of operations, or liquidity. NOTE 12 - REVENUES FROM MAJOR CUSTOMER In 1995, no one customer accounted for more than 10% of gas revenues. In 1994, one customer accounted for approximately $20,215,000 in gas revenues. This represents 10.5% of total 1994 revenues; however, margins derived from this customer were less than 3% of total margin. Outstanding accounts receivable from this customer at December 31, 1994, totaled $2,144,000, which represents December 1994 consumption. In 1993 no one customer accounted for more than 10% of gas revenues. 38 NOTE 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS The following estimated fair value amounts have been determined by the Company, using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required in interpreting market data to develop the estimates of fair value. Accordingly, these estimates are not necessarily indicative of the amounts that the Company could realize in a current market exchange. Thus, the use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The estimated fair value amounts of financial instruments at December 31 are shown as follows:
1995 1994 CARRYING ESTIMATED CARRYING ESTIMATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE (dollars in thousands) Assets: Cash and cash equivalents $ 2,197 $ 2,197 $ 3,949 $ 3,949 Notes receivable, including current maturities 3,235 3,234 3,903 3,955 Accounts receivable 26,483 26,483 28,885 28,885 Securities available for sale -- -- 1,466 1,466 Redeemable preferred stock 6,851 7,324 7,217 6,924 Liabilities: Long-term debt 102,100 111,615 100,000 93,187 Notes payable 32,000 32,000 14,501 14,501 Current maturities of long-term debt -- -- 5,000 5,096
CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE, AND NOTES PAYABLE: The carrying amounts of these items are a reasonable estimate of their fair value. NOTES RECEIVABLE, REDEEMABLE PREFERRED STOCK, AND LONG-TERM DEBT: Interest rates that are currently available to the Company for issuance of instruments with similar terms and remaining maturities are used to estimate fair value. SECURITIES AVAILABLE FOR SALE: Fair values are based on quoted market prices. 39 NOTE 14 - INTERIM RESULTS OF OPERATIONS (UNAUDITED)
QUARTER ENDED DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, 1995 1995 1995 1995 (thousands except per share data) Operating revenues $ 56,907 $ 26,512 $ 34,715 $ 64,610 Gas costs and revenue taxes 34,892 16,028 21,833 41,585 -------- -------- -------- -------- Operating margin 22,015 10,484 12,882 23,025 Cost of operations 11,680 11,475 11,768 11,679 -------- -------- -------- -------- Earnings from operations 10,335 (991) 1,114 11,346 Interest and other, net 2,470 2,425 2,366 2,303 -------- -------- -------- -------- Earnings before income taxes 7,865 (3,416) (1,252) 9,043 Income taxes 2,666 (1,099) (369) 3,310 Preferred dividends 131 136 136 136 -------- -------- -------- -------- Net earnings (loss) $ 5,068 $ (2,453) $ (1,019) $ 5,597 -------- -------- -------- -------- -------- -------- -------- -------- Earnings (loss) per share $ 0.56 $ (0.27) $ (0.11) $ 0.63 -------- -------- -------- -------- -------- -------- -------- --------
QUARTER ENDED DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, 1994 1994 1994 1994 (thousands except per share data) Operating revenues $ 62,533 $ 28,867 $ 36,264 $ 64,746 Gas costs and revenue taxes 40,836 19,705 24,863 44,179 -------- -------- -------- -------- Operating margin 21,697 9,162 11,401 20,567 Cost of operations 11,551 10,950 11,431 11,230 -------- -------- -------- -------- Earnings from operations 10,146 (1,788) (30) 9,337 Interest and other, net 2,844 1,939 1,835 1,782 -------- -------- -------- -------- Earnings before income taxes 7,302 (3,727) (1,865) 7,555 Income taxes 2,748 (1,397) (590) 2,744 Preferred dividends 136 141 140 141 -------- -------- -------- -------- Net earnings (loss) $ 4,418 $ (2,471) $ (1,415) $ 4,670 -------- -------- -------- -------- -------- -------- -------- -------- Earnings (loss) per share $ 0.50 $ (0.28) $ (0.16) $ 0.54 -------- -------- -------- -------- -------- -------- -------- --------
40 INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE Cascade Natural Gas Corporation and Subsidiaries We have audited the consolidated financial statements of Cascade Natural Gas Corporation and subsidiaries as of December 31, 1995 and 1994, and for each of the three years in the period ended December 31, 1995, and have issued our report thereon dated February 5, 1996; such consolidated financial statements and report are included in Part II of this Annual Report on Form 10-K. Our audits also included the financial statement schedule of Cascade Natural Gas Corporation, listed in Item 14(a)2. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information shown therein. DELOITTE & TOUCHE LLP Seattle, Washington February 5, 1996 41 SCHEDULE II CASCADE NATURAL GAS CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (Thousands of Dollars)
Column A Column B Column C Column D Column E -------- --------- ---------------------- ----------- ---------- Additions ---------------------- Balance at Charged to Charged to Balance at Beginning Costs and Other Deductions End of Description of Period Expenses Accounts (Note) Period - -------------------------- ----------- ---------- ----------- ----------- ---------- Allowance for Doubtful Accounts: Year ended: December 31, 1993 $ 399 279 188 $490 December 31, 1994 $ 490 340 369 $461 December 31, 1995 $ 461 330 366 $425 Note: Accounts receivable written off, net of recoveries Valuation Reserve - Notes Receivable December 31, 1994 $ 0 550 577 $1,127 December 31, 1995 $1,127 122 $1,249 Valuation Reserve - Investments December 31, 1994 $ 0 150 $150 December 31, 1995 $ 150 0 $150
42 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None 43 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Refer to the information regarding directors under the caption "Election of Directors" on pages 1 through 3 of the Proxy Statement issued to Shareholders for the 1996 Annual Meeting (the 1996 Proxy Statement), which information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. Refer to the information regarding executive compensation set forth in the 1996 Proxy Statement, under "Executive Compensation" on pages 7, 8, and 9, and under "Compensation Committee Interlocks and Insider Participation" on page 9, which information is incorporated herein by reference. Certain information concerning the executive officers of the Company is set forth in Part I, under the caption "Executive Officers of the Registrant." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Refer to the information regarding security ownership of certain beneficial owners and management under the caption "Security Ownership of Certain Beneficial Owners and Management" on page 4 of the 1996 Proxy Statement, which information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Refer to the information regarding certain relationships and transactions under the caption "Compensation Committee Interlocks and Insider Participation" on page 9 of the 1996 Proxy Statement, which information is incorporated herein by reference. 44 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) 1. Financial Statements (Included in Part II of this report): Independent Auditors' Report Consolidated Statements of Net Earnings for the Years Ended December 31, 1995, 1994, and 1993 Consolidated Balance Sheets, December 31, 1995 and 1994 Consolidated Statements of Common Shareholders' Equity for the Years Ended December 31, 1995, 1994, and 1993 Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994, and 1993 Notes to Consolidated Financial Statements (a) 2. Financial Statement Schedules (Included in Part II of this report): Independent Auditors' Report on Financial Statement Schedule Schedule II - Valuation and Qualifying Accounts (a) 3. Exhibits: Refer to the index to exhibits following the signature page of this report. Each management contract or compensatory plan or arrangement required to be filed as an exhibit to this report is identified in the list. (b) Reports on Form 8-K: No reports on Form 8-K were filed for the quarter ended December 31, 1995. On February 21, 1996, the Registrant filed a report on Form 8-K, dated February 7, 1996, to report the change in its fiscal year to a fiscal year ending September 30. The Registrant will file a transition report on Form 10-K covering the period commencing on January 1, 1996, and ending on September 30, 1996. 45 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. CASCADE NATURAL GAS CORPORATION March 27, 1996 By /s/ J. D. Wessling - -------------------- -------------------- Date J. D. Wessling Vice President - Finance, Chief Financial 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. Chairman of the Board, Chief Executive Officer /s/ W. Brian Matsuyama and Director March 27, 1996 - ------------------------- (Principal Executive Officer) --------------- W. Brian Matsuyama Date President and /s/ Ralph E. Boyd Chief Operating Officer March 27, 1996 - ------------------------- --------------- Ralph E. Boyd Date /s/ J. D. Wessling Vice President - Finance, March 27, 1996 - ------------------------ Chief Financial Officer --------------- J. D. Wessling (Principal Financial Officer) Date /s/ James E. Haug Treasurer and Chief March 27, 1996 - ------------------------- Accounting Officer --------------- James E. Haug (Principal Accounting Officer) Date /s/ Carl Burnham, Jr. Director March 27, 1996 - ------------------------- --------------- Carl Burnham, Jr. Date /s/ Melvin C. Clapp Director March 27, 1996 - ------------------------- --------------- Melvin C. Clapp Date /s/ David A. Ederer Director March 27, 1996 - ------------------------- --------------- David A. Ederer Date /s/ Howard L. Hubbard Director March 27, 1996 - ------------------------- --------------- Howard L. Hubbard Date /s/ Larry L. Pinnt Director March 27, 1996 - ------------------------- --------------- Larry L. Pinnt Date /s/ Brooks G. Ragen Director March 27, 1996 - ------------------------- --------------- Brooks G. Ragen Date /s/ Andrew V. Smith Director March 27, 1996 - ------------------------- --------------- Andrew V. Smith Date /s/ Mary A. Williams Director March 27, 1996 - ------------------------- --------------- Mary A. Williams Date
46 INDEX TO EXHIBITS
Exhibit No. Description - ---- ----------- 3.1 Restated Articles of Incorporation of the Registrant as amended through March 25, 1996. 3.2 Restated Bylaws of the Registrant. Incorporated by reference to Exhibit 3-(2) to the Registrant's annual report on Form 10-K for the year ended December 31, 1990. 4.1 Indenture dated as of August 1, 1992, between the Registrant and The Bank of New York relating to Medium-Term Notes. Incorporated by reference to Exhibit 4 to the Registrant's current report on Form 8-K dated August 12, 1992. 4.2 First Supplemental Indenture dated as of October 25, 1993, between the Registrant and The Bank of New York relating to Medium-Term Notes. Incorporated by reference to Exhibit 4 to the Registrant's quarterly report on Form 10-Q for the quarter ended June 30, 1993. 4.3 Rights Agreement dated as of March 19, 1993, between the Registrant and Harris Trust and Savings Bank. Incorporated by reference to Exhibit 2 to the Registrant's registration statement on Form 8-A dated April 21, 1993. 4.4 Amendment to Rights Agreement dated June 15, 1993, between the Registrant and The Bank of New York. Incorporated by reference to Exhibit 4 to the Registrant's quarterly report on Form 10-Q for the quarter ended June 30, 1993. 10.1 Letter Agreement dated April 28, 1995 between CanWest Gas Supply U.S.A., Inc. and the Registrant for Winter Peaking Supply - 1995 through 1998. A PORTION OF THIS AGREEMENT IS SUBJECT TO A REQUEST FOR CONFIDENTIAL TREATMENT. 10.2 Service Agreement (Storage Gas Service under Rate Schedule SGS-1) dated January 12, 1994, between Northwest Pipeline Corporation and the Registrant. Incorporated by reference to Exhibit 10.2 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 (1993 Form 10-K). 10.3 Service agreement (assigned Storage Gas Service under Rate Schedule SGS-1) dated January 12, 1994, between Northwest Pipeline Corporation and the Registrant. Incorporated by reference to Exhibit 10.3 to the Registrant's 1993 Form 10-K. 10.4 Service Agreement (Liquefaction -- Storage Gas Service under Rate Schedule SGS-1) dated January 12,1994, between Northwest Pipeline Corporation and the Registrant. Incorporated by reference to Exhibit 10.4 to the Registrant's 1993 Form 10-K. 10.5 Gas Purchase Agreement dated November 1, 1990, between Mobil Oil Canada and the Registrant. Incorporated by reference to Exhibit 10-6 to the 1991 Form 10-K. 10.6 Amendment to Gas Purchase Agreement dated August 30, 1991, between Mobil Oil Canada and the Registrant. Incorporated by reference to Exhibit 10(h)(2) to the Registrant's registration statement on Form S-2, No. 33-52672 (the 1992 Form S-2). 10.7 Amendment to Natural Gas Purchase Agreement dated September 1, 1993, between Canadian Hydrocarbons Marketing, Inc., and the Registrant. Incorporated by reference to Exhibit 10.1 to amendment no. 1 to the Registrant's quarterly report on Form 10-Q/A for the quarter ended September 30, 1993. 47 10.9 Long Term Gas Sales Agreement dated August 26, 1993, between Canadian Hydrocarbons Marketing Inc., and the Registrant. Incorporated by reference to Exhibit 10.2 to amendment no. 1 to the Registrant's quarterly report on Form 10-Q/A for the quarter ended September 30, 1993. 10.10 Gas Sale Agreement dated November 1, 1993, between Mobil Natural Gas Inc. and the Registrant. Incorporated by reference to Exhibit 10.10 to the Registrant's 1993 Form 10-K. 10.11 Agreement for Sale and Purchase of Gas dated November 1, 1993, as amended by Letter Amendment dated December 8, 1993, between Mobil Natural Gas, Inc., and the Registrant. Incorporated by reference to Exhibit 10.11 to the Registrant's 1993 Form 10-K. 10.12 Replacement Firm Transportation Agreement dated July 31, 1991, between Northwest Pipeline Corporation and the Registrant. Incorporated by reference to Exhibit 10(1) to the 1992 Form S-2. 10.12.1 Amendments dated August 20, 1992, November 1, 1992, October 20, 1993, and December 17, 1993, to Replacement Firm Transportation Agreement dated July 31, 1991, between Northwest Pipeline Corporation and the Registrant. Incorporated by reference to Exhibit 10.12.1 to the Registrant's 1993 Form 10-K. 10.13 Firm Transportation Service Agreement dated April 25, 1991, between Pacific Gas Transmission Company and the Registrant (1993 expansion). Incorporated by reference to Exhibit 10(m) to the 1992 Form S-2. 10.14 Firm Transportation Service Agreement dated October 27, 1993, between Pacific Gas Transmission Company and the Registrant. Incorporated by reference to Exhibit 10.14 to the Registrant's 1993 Form 10-K. 10.17 Storage Agreement dated July 23, 1990, between Washington Water Power Company and the Registrant. Incorporated by reference to Exhibit 10(v) to the 1992 Form S-2. 10.17.1 Letter agreement dated May 26, 1995, amending the Storage Agreement dated July 23, 1990, between Washington Water Power Company and the Registrant. 10.18 Service Agreement (Firm Redelivery Transportation Agreement under Rate Schedule TF-2 for Cascade's SGS-1) dated January 12, 1994, between Northwest Pipeline Corporation and the Registrant. Incorporated by reference to Exhibit 10.18 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 10.19 Service Agreement (Firm Redelivery Transportation Agreement under Rate Schedule TF-2 for Cascade's assignment of SGS-1 from WWP) dated January 12, 1994, between Northwest Pipeline Corporation and the Registrant. Incorporated by reference to Exhibit 10.19 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 10.20 Service Agreement (Firm Redelivery Transportation Agreement under rate Schedule TF-2 for Cascade's LS-1) dated January 12, 1994, between Northwest Pipeline Corporation and the Registrant. Incorporated by reference to Exhibit 10.20 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 10.21 Gas Purchase Contract dated October 1, 1994, between IGI Resources, Inc. and the Registrant. Incorporated by reference to Exhibit 10.21 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 10.22 Amended and restated Natural Gas Sales Agreement dated August 17, 1994, between Westcoast Gas Services, Inc. and Registrant which replaces and substitutes for the Kingsgate Gas Sales Agreement dated September 23, 1960. Incorporated by reference to Exhibit 10.22 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 48 10.23 Firm Transportation Service Agreement dated November 4, 1994, between Pacific Gas Transmission and the Registrant, effective November 1, 1995. Incorporated by reference to Exhibit 10.23 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 10.24 Firm Transportation Agreement dated August 1, 1994, between Northwest Pipeline Corporation and Registrant. Incorporated by reference to Exhibit 10.24 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 10.25 Prearranged Permanent Capacity Release of Firm Natural Gas Transportation Agreements dated November 30, 1993 between Tenaska Gas Co., Tenaska Washington Partners, L.P. and Registrant. Incorporated by reference to Exhibit 10.25 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 10.26 Agreement for Peak Gas Supply Service dated August 1, 1992, between Tenaska Gas Co., Tenaska Washington Partners, L.P., and Registrant. Incorporated by reference to Exhibit 10.26 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 10.27 Agreement for Peaking Gas Supply Service dated November 22, 1991, between Longview Fibre Company and Registrant. Incorporated by reference to Exhibit 10.27 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 10.28 Letter Agreement dated October 24, 1995 between Westcoast Gas Services, Inc. and the Registrant for Winter Peaking Supply - 1995 through 1998. A PORTION OF THIS AGREEMENT IS SUBJECT TO A REQUEST FOR CONFIDENTIAL TREATMENT. 10.29 1991 Director Stock Award Plan of the Registrant.* Incorporated by reference to Exhibit 10(n) to the 1992 Form S-2. 10.30 Executive Supplemental Income Retirement Plan of the Registrant and Supplemental Benefit Trust as amended and restated as of May 1, 1989, as amended by Amendment No. 1 dated July 1, 1991.* Incorporated by reference to Exhibit 10(o) to the 1992 Form S-2. 10.31 Employment agreement between the Registrant and W. Brian Matsuyama.* Incorporated by reference to Exhibit 10(p) to the 1992 Form S-2. 10.32 Employment agreement between the Registrant and Jon T. Stoltz.* Incorporated by reference to Exhibit 10(q) to the 1992 Form S-2. 12. Statement regarding computation of ratio of earnings to fixed charges and preferred dividend requirements. 21. A list of the Registrant's subsidiaries is omitted because the subsidiaries considered in the aggregate as a single subsidiary do not constitute a significant subsidiary. 23. Consent of Deloitte & Touche LLP to the incorporation of their report in the Registrant's registration statements. 27. Financial Data Schedule.
- --------------- * Management contract of compensatory plan or arrangement. 49 EX-3.1 2 EX-3.1 Exhibit 3.1 March 25, 1996 Restated Articles of Incorporation of Cascade Natural Gas Corporation We, the undersigned, RALPH E. BOYD and LARRY C. ROSOK, President and Secretary respectively, of Cascade Natural Gas Corporation do hereby on behalf of said Corporation restate in a single document the entire text of its Articles of Incorporation, as previously amended, supplemented or restated to the date hereof: ARTICLE I The name of this Corporation shall be Cascade Natural Gas Corporation. ARTICLE II The objects and purposes for which this Corporation is formed are and shall be as follows: 1. To manufacture, produce, buy, sell, transport and in all other respects dispose of and deal in all forms and types of natural and/or manufactured gas, oil, petroleum and all forms and types of residual products thereof; to supply natural and/or manufactured gas and/or related petroleum products for lights, heating, power and all other domestic and industrial uses, and to furnish the same to public or private consumers both within and without the State of Washington; to construct pipelines for the transportation of natural and/or manufactured gas and other petroleum products and to buy, operate, lease and sell the same; to acquire, construct, erect, lay down, maintain, enlarge, alter, work and use all lands, buildings, easements, pipelines, machinery, plants, stocks, motors, fittings, meters, other apparatus materials and things and to supply all materials, products and things that may be necessary, incident or convenient in connection with the production, transportation, use, storage, regulation, measurement, supply and distribution of any of the products of the Company; to engage in the transportation of natural and/or manufactured gas, oil, petroleum and related products, either produced by this Corporation or other persons or corporations by means of pipelines, railroads, boats, barges, or other conveyances and to lease or sublease all or any part thereof to or from other persons or corporations for the like purpose; to acquire by purchase or otherwise, or by the right of exercise of eminent domain, rights-of-way for natural and/or manufactured gas or other petroleum products pipelines and to construct and maintain such pipelines for the carriage and transportation of such products on its own behalf and hire; to buy, acquire, sell, retain, deal in or otherwise dispose of, natural gas and other petroleum properties and interest and any right, title or interest therein; to carry on such other business pertaining to natural and manufactured gas, oil, petroleum and similar products as may be found necessary or desirable or such as is generally engaged in by a corporation of this kind and to do all other acts and things required to be done in connection therewith, either within or without the State of Washington, U.S.A. 2. To manufacture, purchase or otherwise acquire, own, mortgage, pledge, sell, assign and transfer, or otherwise dispose of, to invest, trade, deal in and deal with, goods, wares and merchandise and real and personal property of every class and description. 3. To acquire by purchase, assignment or otherwise, letters patent of the United States and the Territorial and other rights and licenses which may be of value or advantage in the carrying out of the above mentioned objects, and to dispose of the same by sale, license, assignment or otherwise. 4. To acquire, and pay for in cash, stock or bonds of this Corporation, or otherwise, the good will, rights, assets and property, and to undertake or assume the whole or any part of the obligations or liabilities of any person, firm, association or corporation. 5. To guarantee, purchase, hold, sell, assign, transfer, mortgage, pledge or otherwise dispose of shares of the capital stock of, or any bonds, securities or evidence of indebtedness created by any other corporation or corporations organized under the laws of this State, or any other state, country, nation or government, and while the owner thereof to exercise all rights, powers and privileges of ownership. 6. To issue bonds, debentures, or obligations of this Corporation from time to time, for any of the objects or purposes of the Corporation, and to secure the same by mortgage, pledge, deed of trust, or otherwise. 7. To have one or more officers; to carry on all or any of its operations and business and without restriction or limit as to amount, to purchase or otherwise acquire, own, hold, mortgage, sell, convey or otherwise dispose of real and personal property of every class and description, in any of the states, districts, territories or colonies of the United States, and in any and all foreign countries, subject to the laws of such states, district, territory, colony or country. 8. To carry on in general any other business in connection with the foregoing, whether manufacturing or otherwise, and to have and exercise all the powers conferred by the laws of Washington upon corporations and to do any or all of the things thereinbefore set forth to the same extent as natural persons might or could do. 9. The foregoing clauses shall be construed both as objects and powers, and it is specifically provided that the foregoing enumeration of specific powers shall not be held to limit or restrict in any manner the powers of this Corporation. ARTICLE III The time of the existence of this Corporation shall be perpetual. ARTICLE IV The office and principal place of business of this Corporation shall be 222 Fairview Avenue North, Seattle, King County, Washington 98109. ARTICLE V The capital of this Corporation shall consist of a total of sixteen million ninety-six thousand five hundred sixty, (16,096,560) shares, divided into ninety six thousand five hundred sixty (96,560) shares of 55CENTS Cumulative Preferred Stock, without nominal or par value (hereinafter referred to as "Preferred Stock"), one million (1,000,000) shares of Preferred Stock, with a par value of $1.00 per share (hereinafter referred to as the "$1.00 Preferred Stock"), and fifteen million (15,000,000) shares of Common Voting Stock with a par value of $1.00 per share (hereinafter referred to as "Common Stock"). The designations, preferences, privileges, voting power, restrictions, and qualifications of shares of each class of stock are as follows: 1. The 55CENTS Preferred Stock consists of - 0 -shares of Series A,31,500 shares of Series B and 65,060 shares of Series C. All shares of all series of 55CENTS Preferred Stock are alike in every particular, except as to the dates from which dividends commenced to accrue and the commencement of the period for establishment of sinking funds for redemption of shares, and all shares of 55CENTS Preferred Stock are of equal rank and have the same powers, preferences and rights, and are subject to the same qualifications, limitations, and restrictions, without distinction between the shares of different series thereof. 2. The holders of the 55CENTS Preferred Stock shall be entitled to receive, when and as declared by the Board of Directors, dividends from the surplus or net profits of the Corporation at the rate of 55CENTS per annum and no more, payable quarterly on the first days of February, May, August, and November. Such dividends shall be paid to or set apart for the holders of 55CENTS Preferred Stock before any Common Stock of the Corporation or any other class of securities of the Corporation junior to the 55CENTS Preferred Stock as to dividends or assets ("Other Securities") shall be purchased, retired, or otherwise acquired for valuable consideration by the Corporation or any dividends shall be paid upon, or set apart for any of the Common Stock or Other Securities of the Corporation, and shall be cumulative, so that if in any quarterly dividend period, the dividend installment computed at the rate of 55CENTS per share per annum shall not have been paid upon or set apart for the 55CENTS Preferred Stock, the deficiency (without interest) shall be fully paid or set apart for payment before any Common Stock or Other Securities of the Corporation shall be purchased, retired, or otherwise acquired for valuable consideration by the Corporation or any dividends shall be paid upon, or set apart for the Common Stock or Other Securities. 3. In the event of voluntary liquidation, dissolution, or winding up of the Corporation, the holders of the 55CENTS Preferred Stock shall be entitled, after the debts of the Corporation shall have been paid, to receive out of the assets remaining, the then current redemption or call price per share thereof, determined in accordance with the provisions hereinbelow concerning optional redemption of 55CENTS Preferred Stock, together with all dividends thereon accrued or in arrears, whether or not earned or declared, before any payment is made or assets set apart for the payment to the holders of the Common Stock or Other Securities, and shall be entitled to no further payments or distribution. In the event of the involuntary liquidation, dissolution, or winding up of the Corporation, the holders of the 55CENTS Preferred Stock shall be entitled, after the debts of the Corporation shall have been paid, to receive out of the assets remaining, $10.00 per share, together with all dividends thereon accrued or in arrears, whether or not earned or declared, before any payment is made or assets set apart for payment to the holders of the Common Stock or Other Securities, and shall be entitled to no further payments or distribution. If the assets remaining after payment of the corporate debts be insufficient to pay the full amounts as hereinabove provided, such assets as remain shall be divided among the holders of 55CENTS Preferred Stock in proportion to the number of shares of 55CENTS Preferred Stock held. 4. The Corporation may, at any time and from time to time, at the option of the Board of Directors, unless prevented from doing so by law or by applicable restrictive provisions herein, or in any mortgage or deed of trust or loan agreement of the Corporation, redeem the whole or any part of the outstanding 55CENTS Preferred Stock on any dividend payment date after the issuance thereof, upon not less than 30 days' previous notice to the holders of record of the 55CENTS Preferred Stock to be redeemed, at a redemption or call price for each share thereof equal to the sum of Ten Dollars ($10.00) plus all dividends accrued or in arrears thereon, plus a premium of Ten Cents (10CENTS) per share as to shares of Series C. No premium shall be payable on redemption with respect to redemption of shares of Series A or shares of Series B, at any time, or with respect to shares of Series C redeemed after June 25, 1994; provided, however, that if such redemption is effected with funds set apart for the 55CENTS Preferred Stock redemption sinking fund as provided herein, then the same may be effected at a price per share equal to the sum of Ten Dollars ($10.00) plus all dividends accrued or in arrears thereon and without the payment of any premium. If less than all the shares of 55CENTS Preferred Stock are to be redeemed, the shares to be redeemed shall be selected in such manner as the Board of Directors may determine. No shares of 55CENTS Preferred Stock shall be purchased, redeemed, or otherwise acquired for a valuable consideration unless full cumulative dividends on the 55CENTS Preferred Stock for all past quarterly dividend periods shall have been paid, or declared and a sum sufficient for the payment thereof set apart. The holders of shares of 55CENTS Preferred Stock called for redemption shall not, from and after the date fixed in such notice for the redemption of such stock, possess or exercise any rights as stockholders of the Corporation except the right to receive from the Corporation the redemption price of such shares together with all unpaid accrued dividends thereon, without interest, upon the surrender thereof, unless default shall be made by the Corporation in providing funds at the time and place specified in such notice for payment of the redemption price. 5. While any shares of 55CENTS Preferred Stock remain outstanding, within each twelve (12) month period ending November 1, the Corporation, unless prevented from doing so by law or by applicable restrictive provisions herein or in any mortgage or deed of trust or loan agreement of the Corporation, shall establish a sinking fund out of surplus or may establish a sinking fund out of capital, and shall acquire therewith, either by the redemption thereof or by the purchase thereof in such manner as the Board of Directors may determine from time to time at not exceeding the sinking fund redemption price thereof, and shall retire not less than the lesser of 17,948 shares of Series A, 10,500 shares of Series B, and 14,500 shares of Series C or all remaining shares of each series, respectively, of 55CENTS Preferred Stock. Provided, however, that if the Corporation shall be prevented by law or by applicable restrictive provisions herein, or in any mortgage or deed of trust or loan agreement of the Corporation, or for any other reason, from acquiring during any twelve (12) month period the number of shares of 55CENTS Preferred Stock which, in the absence of such restriction it would be required to acquire during such period, the aggregate deficit shall be made good in the first succeeding twelve (12) month period in which the Corporation shall not be prevented by such restrictions from retiring shares of 55CENTS Preferred Stock. Any shares of 55CENTS Preferred Stock which in any such twelve (12) month period are redeemed by the Corporation at the optional redemption price hereinabove set forth, or are purchased by the Corporation but not applied to meet the Corporation's sinking fund obligation for such twelve month periods may be credited on the amount required to be acquired in any one or more of the next following twelve (12) month periods which the Corporation may designate. Shares of 55CENTS Preferred Stock of the Corporation redeemed or purchased shall not be reissued. So long as any share of 55CENTS Preferred Stock shall remain outstanding, no dividends, whether in cash, stock, or otherwise, shall be paid or declared or any distribution be made with respect to the Common Stock or Other Securities, nor shall any Common Stock or Other Securities be purchased, retired or otherwise acquired for a valuable consideration by the Corporation unless on or before the preceding November 1, the Corporation shall have acquired the number of shares of 55CENTS Preferred Stock required to have been acquired by such date. 6. Except as otherwise provided herein or as otherwise made mandatory by law, the holders of the 55CENTS Preferred Stock shall have no right to vote for the election of directors or for any other purpose and shall not be entitled receive notice of any meeting of stockholders and all voting rights shall be vested exclusively in the holders of the Common Stock and, to the extent applicable, holders of Other Securities. If and whenever six full quarterly dividends on 55CENTS Preferred Stock shall be unpaid, then the holders of the 55CENTS Preferred Stock shall be entitled, voting separately as a class and to the exclusion of the holders of the Common Stock and Other Securities, to vote for the election of three of the directors of the Corporation until all arrears and dividends on the 55CENTS Preferred Stock shall have been paid in full, and thereupon the voting right for the election of three directors shall be divested from the holders of the 55CENTS Preferred Stock and revested in the holders of the Common Stock and, to the extent applicable, holders of Other Securities, subject to revesting in the event of each and every other subsequent such default. While any 55CENTS Preferred Stock is outstanding, the Corporation, without first obtaining the consent, by the affirmative vote at a meeting called for that purpose, of the holders of at least two thirds of the total number of shares of 55CENTS Preferred Stock then outstanding, shall not: a. Increase the authorized number of shares of 55CENTS Preferred Stock or authorize or issue any stock having priority or preference over, or ranking on a parity with, the 55CENTS Preferred Stock as to dividends or assets; or b. Amend the provisions hereof so as to affect adversely any of the preferences or other rights hereby given to the 55CENTS Preferred Stock; or c. Merge or consolidate with or into any other corporation or corporations or sell or transfer all or substantially all of its assets as an entity. 7. After full cumulative dividends have been paid or declared and set apart for payment upon issued and outstanding 55CENTS Preferred Stock, as hereinabove provided, and after the provisions herein or as established by the Board of Directors with respect to any sinking fund for redemption of 55CENTS Preferred Stock have been complied with, holders of the Common Stock or Other Securities shall be entitled to receive such further dividends as may from time to time be declared by the Board of Directors of the Corporation out of any remaining surplus or net profits. The term "full cumulative dividend" whenever used in this article with reference to the 55CENTS Preferred Stock of any series shall be deemed to mean (whether or not in any dividend period or any part thereof in respect of which such term is used there shall have been surplus or net profits of the Corporation legally available for the payment of such dividends) that amount which shall be equal to cumulative dividends at the prescribed rate to date from the date of cumulation for such series (including an amount equal to a dividend at such rate for the elapsed portion of the current dividend period) less, in each case, the amount of all cumulative dividends paid or deemed paid, upon the 55CENTS Preferred Stock. The term "date of cumulation" as used in this article with respect to 55CENTS Preferred Stock of any series means the date on which the dividend period during which shares of 55CENTS Preferred Stock of such series are first issued shall begin or the date on which such shares are first issued when such issue is made on a date on which a dividend period begins. 8. A consolidation, reorganization, or merger of the Corporation with any other corporation or corporations shall not be considered a dissolution, liquidation, or winding up of the Corporation within the meaning of such terms as used herein. 9. The $1.00 Preferred Stock may be issued from time to time in one or more series in any manner permitted by law and the provisions of these Restated Articles of Incorporation of the Corporation, as determined from time to time by the Board of Directors and stated in the resolution or resolutions providing for the issuance thereof, prior to the issuance of any shares thereof. The Board of Directors shall have the authority to fix and determine, subject to the provisions of this Article V, the rights and preferences of the shares of any series so established. Unless otherwise provided in the resolution or resolutions establishing a series of shares of $1.00 Preferred Stock, prior to the issue of any shares of a series so established or to be established, the Board of Directors may, by resolution, amend the relative rights and preferences of the shares of such series, and, after the issue of shares of a series whose number has been designated by the Board of Directors, the resolution or resolutions establishing the series may be amended by the Board of Directors to decrease (but not below the number of shares of such series then outstanding) the number of shares of that series. The 7.85% Preferred Stock, $1.00 par value was authorized by the Board of Directors on December 20,1991. The rights and preferences of the 7.85% Preferred Stock are attached as Exhibit A. The Series Z Junior Participating Preferred Stock, $1.00 par value, was authorized by the Board of Directors on March 19, 1993. The rights and preferences of the Series Z Preferred Stock are attached as Exhibit B. ARTICLE VI The amount of paid-in capital with which this Corporation shall begin to do business shall be Five Hundred Dollars ($500.00) payable in cash or other property taken at a fair valuation. ARTICLE VII The directors shall be nine (9) in number, but the number of directors may be increased to any number not exceeding eleven (11) or decreased to any number not less than three (3) at any annual meeting of the shareholders, or at any special meeting of the shareholders called for that purpose, or by a two-thirds vote of the then directors of the Corporation at any regular meeting of the directors, or at any special meeting of the directors called for that purpose. The names and post office addresses of the directors of the Corporation in office at the time of the adoption of these Restated Articles and on the date hereof, who shall serve until the 1992 Annual Meeting of Shareholders, and until their successors are elected and qualify are as follows: Donald E. Bennett 222 Fairview Avenue No. Seattle, Washington 98109 Melvin C. Clapp 222 Fairview Avenue No. Seattle, Washington 98109 Brooks G. Ragen Suite 4300 999 Third Avenue Seattle, Washington 98104 Howard L. Hubbard 5320 N.W. Edgebrook Place Portland, Oregon 97229-1974 W. Brian Matsuyama 222 Fairview Avenue No. Seattle, Washington 98109 Andrew V. Smith 1600 Bell Plaza, Room 1802 Seattle, Washington 98191 Mary A. Williams 1234 McGilvra Boulevard E. Seattle, Washington 98112 David A. Ederer 4919 N.E. Laurel Crest Lane Seattle, Washington 98105 Carl Burnham, Jr. P. O. Box S Ontario, Oregon 97914 ARTICLE VIII The Board of Directors of this Corporation shall have the authority to make and alter By-Laws not inconsistent with the law or with the Articles of Incorporation and subject to the power of the shareholders to change or repeal such By-Laws. ARTICLE IX Except as may be otherwise provided by law, or by applicable restrictive provisions of Article V hereof, as amended, or any mortgage, deed of trust or loan agreement of the Corporation, the shares of stock of this Corporation, whether Preferred or Common, may be issued by it from time to time without the consent of any holder of any share thereof, in such manner, or amount of shares of each said class of stock, and for such consideration in labor, services, money or property, as from time to time may be fixed and determined by the Board of Directors of this Corporation, and, except as so restricted, the right, power and authority of said Board of Directors from time to time so to authorize and order the issuance by this Corporation of the said shares of each class of said stock and such number or amount of shares and for such consideration in labor, services, money or property as from time to time said Board of Directors may fix and determine, is hereby absolutely reserved to said Board of Directors. No holder of shares of the capital stock of any class of this Corporation shall have any preemptive or preferential right of subscription to any shares of any class of stock of this Corporation, whether now or hereafter authorized, or to any obligations convertible into stock of this Corporation, which may be issued or sold, nor any right of subscription other than such, if any, as the Board of Directors in its discretion may from time to time determine and at such price as the Board of Directors from time to time may fix. Payment or delivery to, or receipt by this Corporation of such consideration as may be fixed and determined by the Board of Directors for the issuance of any share or shares of its capital stock, as hereinbefore provided, shall operate and be construed, deemed and held: (a) to discharge, release and satisfy fully and absolutely all liability to the Corporation and/or to its creditors now or at any time hereafter existing, of any subscriber for and/or holder of any such share or shares so authorized to be issued in any way on account of, founded upon, or arising out of any subscription for and/or purchase of, and/or issuance of such share or shares, and (b) to constitute such share or shares fully paid stock of the Corporation. ARTICLE X LIMITATION ON DIRECTOR LIABILITY To the fullest extent permitted by Washington law at the time this Article becomes effective or as may thereafter be in effect, a director of this Corporation shall not be liable to this Corporation or its shareholders for the monetary damages for his or her conduct as a director. Any amendment to or repeal of this Article X shall not adversely affect any right of a director of this Corporation hereunder with respect to any acts or omissions of such director occurring prior to such amendment or repeal. ARTICLE XI INDEMNIFICATION OF DIRECTORS To the fullest extent permitted by Washington law at the time this Article becomes effective or as may be thereafter in effect, this Corporation is authorized to indemnify any director of this Corporation. The Board of Directors shall be entitled to determine the terms of such indemnification, including advance of expenses, and to give effect thereto through the adoption of By-Laws, approval of agreements, or by any other manner approved by the Board of Directors. Any amendment to or repeal of this Article XI shall not adversely affect any right of a director of this Corporation hereunder with respect to any right to indemnification that arises prior to such amendment or repeal. ARTICLE XII BUSINESS COMBINATIONS / FAIR PRICE PROVISIONS A. The following definitions shall apply for purposes of this Article XII: 1. The terms "Affiliate"and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 under the Securities Exchange Act of 1934 and the rules and regulations thereunder (the"Act") (or any subsequent provisions replacing such Act, rules, or regulations) as in effect on March 24, 1992 (the term "registrant" in said Rule 12b-2 meaning in this case the Corporation). 2. The term "Beneficially Own," when used with respect to a person's interest in shares of capital stock, shall mean that said person has or shares (or has the right to acquire under any option, warrant, conversion right or other right), directly or indirectly, the power to vote, the power to dispose of, the power to direct the voting or disposition of, or the right to enjoy the economic benefits of such shares. 3. The term "Business Combination" shall mean (a) any merger or consolidation of the Corporation or a Subsidiary of the Corporation with or into an Interested Shareholder (or an Affiliate or Associate of an Interested Shareholder) or any merger of an Interested Shareholder (or an Affiliate or Associate of an Interested Shareholder) into the Corporation or a Subsidiary of the Corporation, (b) any sale, lease, exchange, transfer, encumbrance or other disposition of Substantial Assets either of the Corporation (including without limitation any securities of a Subsidiary) or of a Subsidiary of the Corporation, to an Interested Shareholder (or an Affiliate or Associate of an Interested Shareholder), (c) the issuance of any securities of the Corporation or a Subsidiary of the Corporation to an Interested Shareholder (or an Affiliate or Associate of an Interested Shareholder), (d) any reclassification, exchange of shares or other recapitalization that would have the effect of increasing the proportion of shares of Common Stock or other capital stock of the Corporation or a Subsidiary of the Corporation Beneficially Owned by an Interested Shareholder, or (e) any agreement, contract, or other arrangement providing for any of the foregoing transactions. 4. The term "Continuing Director" shall mean a director who was a member of the Board of Directors of the Corporation immediately prior to the time that the Interested Shareholder involved in a Business Combination became an Interested Shareholder and who is not the Interested Shareholder or an Affiliate or Associate of the Interested Shareholder. 5. "Fair Market Value" means (a) in the case of cash, the amount of such cash; (b) in the case of stock, the highest closing sale price during the 30-day period immediately preceding the date in question of a share of such stock on the composite tape for New York Stock Exchange Listed Stocks, or, if such stock is not quoted on the composite tape, on the New York Stock Exchange, or, if such stock is not listed on such Exchange, on the principal United States securities exchange registered under the Act on which such stock is listed, or, if such stock is not listed on any such exchange, the highest closing bid quotation with respect to a share of such stock during the 30-day period preceding the date in question on the National Association of Securities Dealers, Inc. Automated Quotations System or any similar system then in use, or if no quotations are available, the fair market value on the date in question of a share of such stock as determined by a majority of the Continuing Directors in good faith; and (c) in the case of property other than cash or stock, the fair market value of such property on the date in question as determined in good faith by a majority of the Continuing Directors. 6. The term "Interested Shareholder" shall mean any person (other than the Corporation or any Subsidiary and other than any profit-sharing, employee stock ownership or other employee benefit plan of the Corporation or any Subsidiary or any trustee of or fiduciary with respect to any such plan when acting in such capacity) who is or has announced or publicly disclosed a plan or intention to become the beneficial owner of Common Stock representing ten percent (10%) or more of the votes entitled to be cast by the holders of all then outstanding shares of Common Stock. 7. The term "person" shall mean any individual, firm, company, or other entity and shall include any group comprised of any person and any other person with whom such person or any Affiliate or Associate of such person has any agreement, arrangement, or understanding, directly or indirectly, for the purpose of acquiring, holding, voting, or disposing of Common Stock. 8. The term "Subsidiary" means any company of which a majority of any class of equity security is Beneficially Owned by the Corporation; provided, however, that for the purposes of the definition of Interested Shareholder set forth in paragraph 6 of this section A, the term "Subsidiary" shall mean only a company of which a majority of each class of equity security is Beneficially Owned by the Corporation. 9. The term "Substantial Assets" shall mean assets with a Fair Market Value in excess of five percent (5%) of the total assets of the Corporation as reported in the consolidated financial statements of the Corporation as of the end of its most recent fiscal year ending prior to the time the determination is made. B. In addition to any vote or approval required by law, any Business Combination shall require the affirmative vote of the holders of not less than eighty percent (80%) of the outstanding shares of capital stock of the Corporation which are not Beneficially Owned by the Interested Shareholder and its Affiliates or Associates involved in the Business Combination; provided, however, that such eighty percent (80%) voting requirement shall not apply if: 1. The Business Combination is a merger, consolidation or exchange of shares involving the Corporation which provides for the conversion of the shares of Common Stock of the Corporation into cash, securities or other property with a Fair Market Value per share of Common Stock not less than the highest per share consideration (appropriately adjusted for stock splits, stock dividends and other like charges) paid or given by the Interested Shareholder and any of its Affiliates or Associates for any of their shares of Common Stock; or 2. The Business Combination was approved by the Board of Directors of the Corporation; provided that a majority of the Board of Directors consisted of Continuing Directors and at least two-thirds of the Continuing Directors voted to approve the Business Combination. C. The provisions set forth in this Article XII may not be repealed or amended in any respect unless such repeal or amendment is approved by the affirmative vote of the holders of not less than eighty percent (80%) of the outstanding shares of capital stock of the Corporation which are not Beneficially Owned by an Interested Shareholder. Restated Articles of Incorporation of Cascade Natural Gas Corporation, are herein executed in duplicate by said Corporation, pursuant to the provisions of RCW 23B.10.070, and correctly set forth without change the corresponding provisions of the Articles of Incorporation as previously stated and amended and supersede the original Articles of Incorporation and all amendments to said Articles of Incorporation of Cascade Natural Gas Corporation. IN WITNESS WHEREOF, the undersigned officers of Cascade Natural Gas Corporation have hereby executed in duplicate these Restated Articles of Incorporation, and have hereunto set their hands this 25th day of March, 1996. CASCADE NATURAL GAS CORPORATION By Ralph E. Boyd, President By Larry C. Rosok, Secretary Exhibit A CASCADE NATURAL GAS CORPORATION STATEMENT OF RIGHTS AND PREFERENCES OF THE 7.85% CUMULATIVE PREFERRED STOCK 1. Preference. The preferences of each share of 7.85% Preferred with respect to dividend payments and distributions of the Corporation's assets upon voluntary or involuntary liquidation, dissolution or winding up of the Corporation shall be equal to the preferences of every other share of 7.85% Preferred from time to time outstanding in every respect and, except for Priority Stock and Parity Stock, prior in right to such preferences of all other equity Securities of the Corporation, whether now or hereafter authorized. 2. Voting Rights. The Holders of 7.85% Preferred shall not, by virtue of their ownership thereof, be entitled to vote upon any matter except as otherwise provided herein or by law. 3. Liquidation Rights. If the Corporation shall be voluntarily or involuntarily liquidated, dissolved or wound up, at any time when any 7.85% Preferred shall be outstanding, each then outstanding share of 7.85% Preferred shall entitle the Holder thereof to a preference against the Property of the Corporation available for distribution to the Holders of the Corporation's equity Securities equal to the sum of $100 plus an amount equal to all unpaid dividends accrued on such share to the date of payment of such preference, whether or not earned, whether or not funds of the Corporation are legally available for the payment of dividends and whether or not such dividends have been declared by the Board (the "Liquidation Amount"); provided, however, that if liquidation, dissolution or winding up occurs within 120 days subsequent to an issuance of Excess Preferred, the Liquidation Amount, in lieu of the amount set forth above, shall instead be the amount that would be payable pursuant to Section 6.A(ii) hereof if the 7.85% Preferred were redeemed pursuant to that Section. All of the preferential amounts to be paid to the Holders of 7.85% Preferred in connection with the liquidation, dissolution or winding up of the Corporation as provided in this Section 3 shall be paid or set apart for payment in cash (a) after the payment or setting apart for payment of all preferential amounts to be paid or set apart for payment with respect to Priority Stock, whether now or hereafter authorized, (b) simultaneously with preferential amounts to be paid or set apart for payment with respect to Parity Stock, whether now or hereafter authorized, and (c) before the payment or setting apart for payment of any amount with respect to Junior Stock, whether now or hereafter authorized, or the distribution of any Property of the Corporation other than cash with respect to such Junior Stock. A consolidation, reorganization or merger of the Corporation with any other corporation or corporations shall not be considered a dissolution, liquidation or winding up of the Corporation within the meaning of such terms as used herein. 4. Dividends. Commencing on the date of issuance, so long as any 7.85% Preferred shall be outstanding, each Holder of outstanding 7.85% Preferred shall be entitled to receive dividends in cash at the rate of $7.85 per annum per share thereof, out of any funds legally available therefor, payable on the first day of February, May, August and November of each year as and when declared by the Board. Such dividends shall be cumulative on each such share from the date of issuance thereof, whether or not earned, whether or not funds of the Corporation are legally available for the payment of dividends, and whether or not declared by the Board, so that if the full dividends in respect of any previous quarterly dividend period shall not have been paid on the 7.85% Preferred at the time outstanding, whether or not earned, whether or not funds of the Corporation are legally available for the payment of dividends, and whether or not declared by the Board, the deficiency shall be fully paid on or declared and set apart for such shares (without interest) before any dividend or other distribution shall be paid on or declared or set apart for any other equity Securities of the Corporation, whether now or hereafter authorized, other than dividends on Parity Stock paid, declared or set apart in the manner permitted by Section 12(E) hereof, or dividends on Priority Stock, and before any redemption, retirement, purchase or other acquisition of any other equity Securities of the Corporation, whether now or hereafter authorized, other than a redemption, retirement, purchase or other acquisition of Parity Stock made in the manner permitted by Section 12(E) hereof or a redemption, retirement, purchase or other acquisition of Priority Stock. 5. Mandatory Redemption. The Corporation shall make a mandatory redemption in cash of all outstanding shares of the 7.85% Preferred on November 1, 1999, in accordance with the procedures set forth in this Section 5 and in Section 7 hereof, at a redemption price equal to the Liquidation Amount. The Corporation shall mail a notice ("Mandatory Redemption Notice") not later than September 15, 1999 of a redemption pursuant to this Section 5 to each Holder of 7.85% Preferred by registered or certified mail, postage prepaid, to such Holder's address as shown on the books and records of the Corporation. The Notice shall state (i) the Redemption Date, which is November 1, 1999, and (ii) the redemption price, accompanied by the calculation of such price set out in reasonable detail. 6. Redemption at the Option of the Holder. A. Optional Redemption. Notwithstanding any other provision contained herein, after the occurrence of a Redemption Event, each Holder of outstanding 7.85% Preferred shall have the right, in accordance with the procedures set forth in this Section 6 and in Section 7 hereof, to require the Corporation to redeem all shares of 7.85% Preferred held by such Holder for the following price: (i) if the Redemption Event is a Ratings Downgrade, Dividend or Redemption Shortfall or Restrictive Arrangement, at a price per share equal to the Liquidation Amount; (ii) if the Redemption Event is Excess Preferred, at a price per share as set forth below, together with an amount equal to dividends accrued and unpaid thereon to the date of payment, whether or not earned, whether or not funds of the Corporation are legally available for the payment of dividends, and whether or not declared by the Board: If the Redemption Event Occurs Price During the Twelve Months Ended Per Share December 31, 1992 $107.85 December 31, 1993 $106.73 December 31, 1994 $105.61 December 31, 1995 $104.49 December 31, 1996 $103.36 December 31, 1997 $102.24 December 31, 1998 $101.12 December 31, 1999 $100.00 B. Form of Optional Redemption Notice. Within 7 days after the occurrence of a Redemption Event, the Corporation shall mail a notice ("Optional Redemption Notice") to each Holder of 7.85% Preferred by registered or certified mail, postage prepaid, to such Holder's address as shown on the books and records of the Corporation. The Notice shall state that a Redemption Event has occurred, describe the Redemption Event in reasonable detail, and offer to redeem all shares of 7.85% Preferred owned by such Holder at the appropriate price, as set forth in Section 6.A hereof. The Notice shall also state (i) the Redemption Date, which shall be a date not less than 30 nor more than 90 days after the date of the Optional Redemption Notice, and (ii) the redemption price, accompanied by the calculation of such price set out in reasonable detail. The Notice shall request that such Holder notify the Corporation in writing not more than 20 days after such Holder receives the Notice whether or not such Holder elects to have the Corporation redeem all of the shares of 7.85% Preferred held by such Holder at the redemption price. The Notice shall also inform such Holder that failure to respond to the redemption offer within such 20 day period shall be deemed to be a rejection of the offer. Redemptions made pursuant to Section 6 hereof shall be of all and not a part of the shares of 7.85% Preferred held by a Holder, and no Holder shall be entitled to cause such Holder's shares of 7.85% Preferred to be redeemed unless all nominees and Affiliates of such Holder, if any, which are Holders of shares of 7.85% Preferred have elected to have the Corporation redeem all shares of 7.85% Preferred held by them. 7. Provisions Applicable to All Redemptions. A. Manner of Redemption. On the Redemption Date, the Corporation shall pay in cash to each Holder of 7.85% Preferred with respect to each share of 7.85% Preferred held by such Holder an amount equal to the redemption price in effect on the Redemption Date, such payment to be made by Fedwire transfer of immediately available funds or by certified or official bank check transmitted to such Holder by registered or certified mail, postage prepaid, to such Holder's address as shown on the books and records of the Corporation. B. Effect of Payment. If on the Redemption Date funds necessary for the redemption of all the 7.85% Preferred then outstanding, if the redemption occurs pursuant to Section 5 hereof, or funds necessary for the redemption of the 7.85% Preferred then held by Holders electing to have such shares redeemed, if the redemption occurs pursuant to Section 6 hereof, shall have been paid as provided for in Section 7.A hereof, then from and after the Redemption Date, the shares of 7.85% Preferred with respect to which such payment has been made shall be deemed to be redeemed, and the Holders of such shares of 7.85% Preferred shall cease to be Stockholders of the Corporation with respect to such shares of 7.85% Preferred, and shall have no rights with respect thereto from and after the Redemption Date. Surrender of the certificate or certificates evidencing 7.85% Preferred shall not be required in connection with the redemption thereof. C. No Reissuance of 7.85% Preferred. All shares of 7.85% Preferred redeemed as hereinabove required shall be retired and cancelled and shall not be reissued; provided, however, that each such share, after being retired and cancelled, shall be restored to the status of an authorized but unissued share of Preferred Stock without designation as to series and may thereafter be issued as a share of Preferred Stock not designated 7.85% Preferred. 8. Limitation on Additional Issuance of Preference Stock. Subject to the terms and conditions of this Statement of Rights and Preferences the Corporation may from time to time authorize and issue additional shares of Preference Stock unless Earnings Available for Payment of Interest Charges and Dividends for the twelve consecutive calendar months immediately preceding the calendar month in which such Stock is issued is less than 150% of the aggregate of (i) all interest paid or accrued on Indebtedness of the Corporation during the twelve consecutive calendar months immediately preceding the calendar month in which such Stock is issued, plus (ii) the dividends paid or accrued on all shares of all classes and series of Preference Stock during the twelve consecutive calendar months immediately preceding the calendar month in which such Stock is issued, for such purpose treating such Stock as having been outstanding throughout such twelve-month period (the "Dividend Coverage Test"). Prior to authorizing or issuing any additional shares of Preference Stock, the Chief Financial Officer or Treasurer of the Corporation shall certify that the Dividend Coverage Test has been met as of the date of issuance of the additional shares of Preference Stock, and such certification shall be sent to each Holder of 7.85% Preferred, by registered or certified mail, postage prepaid, to such Holder's address as shown on the books and records of the Corporation. 9. Contingent Voting Rights. If at any time any Voting Right Event shall occur, each outstanding share of 7.85% Preferred shall entitle the Holder thereof to one vote and each outstanding share, if any, of Parity Stock then entitled to vote for the election of directors shall entitle the Holder thereof to that number of votes per such share as is calculated by dividing the original issue price of such share by 100, and the Holders of 7.85% Preferred and the Holders of such Parity Stock shall as a class be entitled to elect three directors of the Corporation, and the Holders of other equity Securities of the Corporation then entitled to vote for the election of directors shall be entitled to elect the remaining members of the Board. At such time as the Voting Right Event which gave rise to the exercise of the voting rights provided for in this Section 9 has been cured by waiver, payment or otherwise, and all other events creating a Voting Right Event, if any, shall have been cured by waiver, payment or otherwise, the right of the Holders of 7.85% Preferred and such Parity Stock so to vote as provided in this Section 9 shall cease, subject to renewal from time to time upon the same terms and conditions. Notwithstanding anything herein to the contrary, the Holders of 7.85% Preferred and Parity Stock shall not have the aforesaid voting rights at any time that the Holders of Senior Preferred have elected three directors to the Board pursuant to Article V, Section 6 of the Restated Articles of Incorporation; provided, however, that at such time as either the right to elect directors by the Holders of Senior Preferred ceases or the Holders of Senior Preferred shall decline to elect three directors to the Board, if a Voting Right Event is then in existence the Holders of 7.85% Preferred and Parity Stock shall be entitled to exercise the rights contained in this Section 9, and provided, further, that if at any time that a Voting Right Event is in existence the Holders of Senior Preferred have elected one or two directors to the Board pursuant to such Article V, Section 6, the Holders of 7.85% Preferred and Parity Stock shall be entitled to elect a number of directors to the Board equal to the difference between three and the number of directors elected by the Holders of Senior Preferred, subject to removal if the Holders of Senior Preferred thereafter seek to fully exercise their right to elect directors. At any time after the voting power to elect members of the Board shall have become vested in the Holders of 7.85% Preferred as provided in this Section 9, either alone or as a class with the Holders of Parity Stock then entitled to vote for the election of directors, if any, the Secretary of the Corporation may, and, upon the written request of the record Holders of that number of outstanding shares of 7.85% Preferred which equal, in the aggregate, to at least twenty percent of the number of shares of 7.85% Preferred then outstanding, addressed to him at the principal office of the Corporation shall, call a special meeting of the Holders of 7.85% Preferred and the Holders of such Parity Stock, to be held at the principal office of the Corporation and upon not more than fifteen days notice. If such meeting shall not be so called within five days after personal service of the request, or within ten days after mailing of the same by registered or certified mail, postage prepaid, within the United States of America, then the record Holders of that number of outstanding shares of 7.85% Preferred which equal, in the aggregate, at least ten percent of the number of shares of 7.85% Preferred then outstanding may designate in writing one of their number to call such meeting, and the Person so designated may call such meeting at the place above provided and upon not less than ten days notice and for that purpose shall have access to the stock books of the Corporation. The Persons elected as directors by the Holders of 7.85% Preferred and the Holders of such Parity Stock at such meeting and the Persons so elected as directors at each subsequent annual meeting of the Corporation's stockholders, together with such individuals, if any, as may from time to time be elected as directors by the Holders of the other equity Securities of the Corporation then entitled to vote for the election of directors, shall constitute the duly elected directors of the Corporation. Any vacancy which shall arise for any reason with respect to a director elected by the Holders of such Parity Stock and the Holders of 7.85% Preferred shall be filled by action of the remaining directors so elected, or if there be none, by the Holders of Parity Stock entitled to vote for the election of directors at the time that such vacancy arises, if any, and the Holders of 7.85% Preferred at a meeting called in the manner set forth hereinabove and voting in the manner set forth hereinabove. Whenever the voting power of the Holders of 7.85% Preferred has ceased as hereinabove in this Section 9 is provided, the term of office of the Persons, if any, who are at the time directors of the Corporation who were elected by the Holders of 7.85% Preferred and the Holders of Parity Stock in accordance with the preceding provisions of this Section 9 shall terminate. 10. Restricted Payment Limitation. If at any time any Restricting Event shall occur, the Corporation shall not declare or make any Restricted Payments. At the time such Restricting Event has been cured by waiver, payment or otherwise, and all other events creating a Restricting Event, if any, shall have been cured by waiver, payment or otherwise, the prohibition provided for in this Section 10 shall cease, subject to renewal from time to time upon the same terms and conditions. 11. Pre-emptive Rights. The Holders of 7.85% Preferred shall not have any pre-emptive rights upon the issuance or sale of shares of Stock of the Corporation of any class or series, whether now or hereafter authorized, or any Securities exchangeable for or convertible into such Stock. 12. Protective Provisions. As long as any shares of 7.85% Preferred are outstanding, the Corporation shall not, without the approval by the vote or written consent of the Holders of not less than 66-2/3% (or more if required by law or such other amount as is stated herein) of the outstanding shares of 7.85% Preferred: (A) Amend or repeal any provision of, or add any provision to, the Restated Articles of Incorporation or By-Laws if such action would alter or change the 7.85% Preferred or the powers, preferences, rights, qualifications, limitations and/or restrictions of the 7.85% Preferred; (B) Amend or repeal any provision of, or add any provision to, this Statement of Rights and Preferences (except that the approval of the Holders of not less than 100% of the outstanding shares of 7.85% Preferred shall be required for amendments, repeals or additions affecting the dividend rate of the 7.85% Preferred, cumulation of the dividend of the 7.85% Preferred, the mandatory redemption of all then outstanding shares of 7.85% Preferred on November 1, 1999 at the redemption price stated in Section 5 hereof, or the redemption of 7.85% Preferred at the option of a Holder due to a Redemption Event at the redemption prices set forth in Section 6.A hereof): (C) Issue any shares of Senior Preferred or reclassify any shares of any Security into shares of Senior Preferred; (D) Issue any shares of Priority Stock other than Senior Preferred or reclassify any shares of any Security into shares of Priority Stock other than Senior Preferred if the effect of such issuance or reclassification would be to increase the stated value, as reflected in the Corporation's capital account, of all outstanding Priority Stock, or the aggregate preference payable upon the voluntary or involuntary liquidation, dissolution or winding up of the Corporation with respect to all outstanding Priority Stock, to an amount in excess of $2,400,000 (including issuances or reclassifications of any shares of Priority Stock pursuant to a consolidation or merger of the Corporation with any Person, calculated on a pro forma basis combining the consolidated or merged entities (other than a merger with another corporation in which the Corporation is the surviving corporation which does not result in any reclassification or change -- other than a change in par value, or from par value to no par value, or from no par value to par value -- of outstanding shares of the Corporation's Stock of any class or series, whether now or hereafter authorized)); provided, however, that if the Corporation proposes to issue any shares of Stock that the Board deems to be Preference Stock but that the Holders of not less than a majority of the outstanding shares of 7.85% Preferred deem to be Priority Stock, then such Holders shall notify the Corporation of their determination, specifying the particular terms of such shares they believe cause such shares to be Priority Stock, pursuant to the procedures set forth in Section 13 hereof, and if the Corporation, by action of the Board, amends this Statement of Rights and Preferences to incorporate such particular terms then, subject to the approval of the Holders of not less than a majority of the outstanding shares of 7.85% Preferred of the text of such amendment to this Statement of Rights and Preferences, which shall not be unreasonably withheld, the proposed issue of Stock may be issued, except that, unless approved by the Holders of not less than 100% of the outstanding shares of 7.85% Preferred, no substitution shall be made with respect to the dividend rate of the 7.85% Preferred, cumulation of the dividend of the 7.85% Preferred, the mandatory redemption of all then outstanding shares of 7.85% Preferred on November 1, 1999 at the redemption price stated in Section 5 hereof, or the redemption of 7.85% Preferred at the option of a Holder due to a Redemption Event at the redemption prices set forth in Section 6.A hereof; (E) Make any payments to the Holders of, or with respect to any, Parity Stock, by means of dividends or mandatory redemption payments, (1) unless all such payments and all payments in connection with optional redemptions pursuant to Section 6 hereof then due on the 7.85% Preferred have been made in full, or (2) if any such payment or any payment in connection with optional redemptions pursuant to Section 6 hereof is then due on the 7.85% Preferred but has not been made in full, or if any such payment is then due on Parity Stock but has not been made in full, unless partial payments are made on the 7.85% Preferred and on Parity Stock so that, with respect to each of the 7.85% Preferred and Parity Stock, such partial payments are identical fractions of the amounts then due; (F) Make any optional redemptions of any Parity Stock, unless, in each such case, (1) all redemptions of 7.85% Preferred required to be made pursuant to Section 5 or 6 hereof to the date of such optional redemption of Parity Stock have been made, and (2) all dividends accrued on the 7.85% Preferred payable thereon to the date of such optional redemption of Parity Stock, whether or not earned or declared, whether or not funds are legally available for the payment of dividends, and whether or not declared by the Board, have been paid in full; or (G) Consolidate or merge with any other Person unless immediately following the consummation of such consolidation or merger the Corporation, on a pro forma basis combining the consolidated or merged entities, would be able to issue at least one share of Preference Stock in addition to all then outstanding Preference Stock without violation of the Dividend Coverage Test. 13. Substitution Procedures Pursuant to Section 12.D hereof. In the event the Corporation proposes to issue any additional shares of Preference Stock, the Corporation shall send a written notice to each Holder of 7.85% Preferred by certified or registered mail, postage prepaid, to such Holder's address as shown on the books and records of the Corporation, at least 30 days prior to the proposed issuance of the additional shares of Preference Stock. The notice shall set forth in reasonable detail the powers, preferences, rights, qualifications, limitations and/or restrictions of the Preference Stock proposed to be issued. If the Holders of not less than a majority of the outstanding shares of 7.85% Preferred deem such shares to be Priority Stock they shall so notify the Corporation in written notices sent to the Corporation at its principal office, or such other place as may be designated in the notice sent by the Corporation pursuant to this Section 13, by certified or registered mail, postage prepaid, within 20 days after transmittal by the Corporation of its notice, such notices sent by such Holders to specify which particular terms of such shares they believe cause such shares to be Priority Stock, and the Corporation thereupon shall either (i) by action of the Board amend this Statement of Rights and Preferences (subject to the provisions of Section 12.D hereof and to the approval of the Holders of not less than a majority of the outstanding shares of 7.85% Preferred of the text of such amendment, which shall not be unreasonably withheld) to incorporate such particular terms and, within 10 days after notice of such approval is received at the place specified above, to file an amendment to the Statement of Rights and Preferences pertaining to the 7.85% Preferred setting forth such amendment of this Statement of Rights and Preferences with the Secretary of State of Washington, or (ii) not so amend this Statement of Rights and Preferences and not issue the proposed additional shares of Stock. Within 45 days after transmittal by the Corporation of its notice, the Corporation shall notify all Holders of outstanding shares of 7.85% Preferred of the action taken by a notice sent to each such Holder by certified or registered mail, postage prepaid, to such Holder's address as shown on the books and records of the Corporation, and if such action is as set forth in clause (i), such notice shall be accompanied by a copy of the amendment to the Statement of Rights and Preferences of the 7.85% Preferred certified by the Secretary of State of Washington as having been filed. 14. Covenant Regarding Redemption. Following the issuance of the first share of 7.85% Preferred pursuant to this Statement of Rights and Preferences, the Corporation will not, and will not permit any Subsidiary to, become a party to or bound by any indenture, agreement, instrument, Indebtedness, charter provision or security, under the terms of or pursuant to which the Corporation's obligation to redeem any of the 7.85% Preferred pursuant to Sections 5 or 6 hereof will in any way be restricted or eliminated, nor will the Corporation modify or amend or permit any Subsidiary to modify or amend any such indenture, agreement, instrument, Indebtedness, charter provision or security existing at the time of such issuance to add any provision restricting or eliminating such obligation or to make any such provision contained therein more restrictive. 15. Definitions. The following definitions shall apply for the purposes of this Statement of Rights and Preferences: "Affiliate" shall mean as to any Person, any other Person directly or indirectly controlling, controlled by, or under common control with such Person. For purposes of this definition, "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of any Person, whether through the ownership of voting securities or by contract or otherwise. "Board" shall mean the Board of Directors of the Corporation. "By-Laws" shall mean the By-Laws of the Corporation, as amended. "Common" shall mean the Corporation's Common Stock, par value $1.00 per share, and any Stock into which such Common Stock may hereafter be changed. "Corporation" shall mean Cascade Natural Gas Corporation. "Dividend Coverage Test" is defined in Section 7 hereof. "Dividend or Redemption Shortfall" shall mean that the funds available to the Corporation as of the close of business on each December 31 on which any shares of 7.85% Preferred are outstanding for the payment of dividends on and the redemption of all then outstanding shares of 7.85% Preferred, Priority Stock and Parity Stock under the terms of any then outstanding indenture, agreement, instrument, security or Indebtedness of or binding upon the Corporation or any Subsidiary are less than the aggregate of (i) the amount of all dividends that, by the respective terms of such Stock, will be payable or will accrue on such Stock as dividends between such date and November 1, 1999, plus (ii) the greatest amount (whether due to premiums payable upon redemption or otherwise) that, by the respective terms of such Stock, may be payable to redeem such Stock on or prior to November 1, 1999 (other than redemptions at the option of the Corporation). The computation of the amount of funds so available shall be made by the Chief Financial Officer or Treasurer of the Corporation, and a written statement setting forth such computation in reasonable detail shall be sent by April 10 of the immediately succeeding year to each Holder of 7.85% Preferred by certified or registered mail, postage prepaid, at the Holder's address as shown on the books and records of the Corporation. "Earnings Available for Payment of Interest Charges and Dividends" for any period shall mean the lesser of (i) the maximum amount available for the payment of dividends on and the redemption of Preference Stock imposed by the terms of any indenture, agreement, instrument, security or Indebtedness of or binding upon the Corporation or any Subsidiary, or (ii) the income before interest charges and income taxes of the Corporation, determined in accordance with generally accepted accounting principles. In calculating the amount described in clause (ii), no adjustment shall be made for (a) profits or losses from sales of Property carried in plant or investment accounts of the Corporation or any Subsidiary, or from the reacquisition of any Securities, or taxes on, in respect of, or measured by such profits or losses, (b) charges for the elimination, retirement or amortization of utility plant adjustment or acquisition accounts or other intangibles, (c) gains from non-utility operations, (d) the write-up of assets, (e) extraordinary gains or (f) adjustments to earned surplus (including tax adjustments required by generally accepted accounting principles) applicable to any prior period. "Excess Preferred" means that the Corporation has issued shares of Priority Stock or Parity Stock following the issuance of the first share of 7.85% Preferred pursuant to this Statement of Rights and Preferences, and, by virtue of any indenture, agreement, instrument, security or Indebtedness of or binding upon the Corporation or any Subsidiary in existence or outstanding as of the date of the issuance of such Priority Stock or Parity Stock, the funds available to the Corporation as of the date of issuance of such shares of Priority Stock or Parity Stock for the payment of dividends on and the redemption of all then outstanding shares of Preference Stock, including, without limitation, the 7.85% Preferred, are less than the aggregate of (i) the amount of all dividends that, by the respective terms of such Preference Stock, will be payable or will accrue on such Preference Stock as dividends between such date of issuance and November 1, 1999, plus (ii) the greatest amount (whether due to premiums payable upon redemption or otherwise) that, by the respective terms of such Stock, may be payable to redeem such Stock on or prior to November 1, 1999 (other than redemptions at the option of the Corporation). The computation of the amount of funds so available shall be made by the Chief Financial Officer or Treasurer of the Corporation as of the date of each issuance of Priority Stock or Parity Stock following the issuance of the first share of 7.85% Preferred pursuant to this Statement of Rights and Preferences, and a written statement setting forth such computation in reasonable detail shall be sent within ten days after the date of each such issuance by certified or registered mail, postage prepaid, at the Holder's address as shown on the books and records of the Corporation. "Holders" shall mean the Persons who shall, from time to time, own, of record or beneficially, any Security. The term "Holder" shall mean one of the Holders. "Indebtedness" of any corporation, shall mean the principal of (and premium, if any) and unpaid interest on: (i) indebtedness which is for money borrowed from others; (ii) indebtedness guaranteed, directly or indirectly, in any manner by such corporation, or in effect guaranteed, directly or indirectly, by such corporation through an agreement, contingent or otherwise, to supply funds to or in any other manner invest in the debtor or to purchase indebtedness, or to purchase Property or services primarily for the purpose of enabling the debtor to make payment of the indebtedness or of assuring the owner of the indebtedness against loss; (iii) all indebtedness secured by any mortgage, lien, pledge, charge or other encumbrance upon Property owned by such corporation, even if such corporation does not in any manner become liable for the payment of such indebtedness; (iv) all indebtedness of such corporation created or arising under any conditional sale, lease or other title retention agreement with respect to Property acquired by such corporation even though the rights and remedies of the seller, lessor or lender under such agreement or lease in the event of default are limited to repossession or sale of such Property; and (v) renewals, extensions and refundings of any such indebtedness. "Junior Stock" shall mean any shares of any class of Stock of the Corporation having preference or priority as to dividends or Property junior to any such preference or priority of the 7.85% Preferred, or any voting right with respect to the election of directors which, if exercised, would not restrict or eliminate any such voting right of the 7.85% Preferred, and any instrument or Security convertible into or exchangeable for Junior Stock. "Liquidation Amount" is defined in Section 3 hereof. "Mandatory Redemption Notice" is defined in Section 5 hereof. "Optional Redemption Notice" is defined in Section 6.B hereof. "Parity Stock" shall mean any shares of any class of Stock of the Corporation having any preference or priority as to dividends or Property on a parity with any such preference or priority of the 7.85% Preferred, or any voting right with respect to the election of directors which, if exercised, would be on a parity with any such voting right of the 7.85% Preferred, and any instrument or Security convertible into or exchangeable for Parity Stock. "Person" shall mean any individual, partnership, corporation, trust, unincorporated organization or governmental organization or any agency or political subdivision thereof. "Preference Stock" shall mean any class or series of Stock of the Corporation having any preference or priority as to dividends or Property senior to any such preference or priority of the Common and any instrument or Security convertible into or exchangeable for Preference Stock. "Preferred Stock" is defined in the recitals hereof. "Priority Stock" shall mean any shares of any class of Stock of the Corporation having any preference or priority as to dividends or Property senior to any such preference or priority of the 7.85% Preferred, or any voting right with respect to the election of directors which, if exercised, would restrict or eliminate any such voting right of the 7.85% Preferred, and any instrument or Security convertible into or exchangeable for Parity Stock. Priority Stock includes but is not limited to Senior Preferred. "Property" shall mean any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. "Ratings Downgrade" shall mean that as a result of any exchange of Stock, consolidation or merger of the Corporation (other than a merger with another corporation in which the Corporation is the surviving corporation and which does not result in any reclassification or change -- other than a change in par value, or from par value to no par value, or from no par value to par value -- of outstanding shares of the Corporation's Stock of any class or series, whether now or hereafter authorized), the rating on any debenture, note or bond of the Corporation outstanding immediately following the consummation of such exchange of Stock, consolidation or merger is reduced to below Baa3 by Moody's Investors Service Inc. or below BBB- by Standard and Poor's Corporation. A Ratings Downgrade shall be deemed to occur on the day either of the two rating agencies notifies the Corporation of the aforementioned reduction. "Redemption Date" shall mean November 1, 1999, in the case of mandatory redemption pursuant to Section 5 hereof, or a date which is not less than 30 nor more than 90 days after the date of the Optional Redemption Notice, in the case of redemption at the option of a Holder pursuant to Section 6 hereof. "Redemption Event" means either a Ratings Downgrade, a Dividend or Redemption Shortfall, Excess Preferred, or a Restrictive Arrangement. "Redemption Notice" shall mean either the Mandatory Redemption Notice, the Optional Redemption Notice, or both. "Restated Articles of Incorporation" shall mean the restated articles of incorporation of the Corporation, as amended. "Restricted Payment" shall mean: (i) any payment of cash dividends on any of the Corporation's Stock other than the 7.85% Preferred, Priority Stock or Parity Stock; (ii) any purchase, redemption or retirement of any of the Corporation's Stock other than the 7.85% Preferred, Priority Stock or Parity Stock made directly or indirectly by the Corporation or through any Subsidiary; and (iii) any other cash distribution made directly or indirectly by the Corporation or through any Subsidiary in respect of the Corporation's Stock other than 7.85% Preferred, Priority Stock or Parity Stock. "Restricting Event" shall mean the following: (i) failure to set aside and pay in full, on any date specified in Section 4 hereof, the amount therein specified to the Holders of the 7.85% Preferred; (ii) failure to set aside and pay in full, on any Redemption Date, the amount required to be paid on that date, pursuant to Section 5 or Section 6 hereof, to redeem shares of 7.85% Preferred in accordance with the provisions of such Sections; or (iii) violation by the Corporation of any provision of Sections 8, 12 or 14 hereof. "Restrictive Arrangements" shall mean that the Corporation or any Subsidiary, following the issuance of the first share of 7.85% Preferred pursuant to this Statement of Rights and Preferences, becomes a party to, bound by or issues any indenture, agreement, instrument, security or Indebtedness, or modifies or amends any indenture, agreement, instrument, security or Indebtedness of or binding upon the Corporation or any Subsidiary existing at the time of the issuance of the first share of 7.85% Preferred pursuant to this Statement of Rights and Preferences and, as of the date of any such action following such issuance, by virtue of any such indenture, agreement, instrument, security and Indebtedness then in existence or outstanding, the funds available to the Corporation for the payment of dividends on and the redemption of all shares of Preference Stock, including, without limitation, the 7.85% Preferred outstanding on the date of any such action, are less than the aggregate of (i) the amount of all dividends that, by the respective terms of such Stock, will be payable or will accrue on such Stock as dividends between such date and November 1, 1999, plus (ii) the greatest amount (whether due to premiums payable upon redemption or otherwise) that, by the respective terms of such Stock, may be payable to redeem such Stock on or prior to November 1, 1999 (other than redemptions at the option of the Corporation). The computation of the amount of funds so available shall be made by the Chief Financial Officer or Treasurer of the Corporation, and a written statement setting forth such computation in reasonable detail shall be sent within ten days after such effective date to each Holder of 7.85% Preferred by certified or registered mail, postage prepaid, at the Holder's address as shown on the books and records of the Corporation. "Securities" shall mean any debt or equity securities of the Corporation, whether now or hereafter authorized, and any instrument convertible into or exchangeable for Securities or a Security. "Security" shall mean one of the Securities. "Senior Preferred" shall mean the Corporation's 55CENTS Cumulative Preferred Stock, without nominal or par value, Series A, B and C. "7.85% Preferred" shall mean 60,000 shares of $1.00 Preferred Stock designated as 7.85% Cumulative Preferred Stock. "Stock" shall include any and all shares, interests or other equivalents (however designated) of, or participations in, corporate stock. "Subsidiary" shall mean any corporation at least 50% of whose outstanding voting stock shall at the time be owned by the Corporation or by one or more Subsidiaries of the Corporation or by the Corporation and one or more Subsidiaries of the Corporation. "Voting Right Event" shall mean failure to set aside and pay in full on six or more of the dates specified in Section 4 hereof, consecutively, the amounts therein specified to the Holders of the 7.85% Preferred, until such date as all accrued unpaid dividends on the outstanding 7.85% Preferred have been paid in full. Exhibit B CASCADE NATURAL GAS CORPORATION STATEMENT OF RIGHTS AND PREFERENCES OF THE SERIES Z JUNIOR PARTICIPATING PREFERRED STOCK, $1.00 PAR VALUE Section 1. Designation and Amount. There shall be a series of Preferred Stock of the Corporation which shall be designated as "Series Z Junior Participating Preferred Stock, $1.00 par value" (the "Series Z Preferred Stock"), and the number of shares constituting such series shall be 110,000. Such number of shares may be increased or decreased by Articles of Amendment adopted by the Board of Directors without shareholder action; provided, however, that no decrease shall reduce the number of shares of Series Z Preferred Stock to a number less than the shares outstanding plus the number of shares issuable upon exercise of outstanding rights, options or warrants or upon conversion of outstanding securities issued by the Corporation. Section 2. Dividends and Distributions. (A) Subject to the prior and superior rights of the holders of any shares of any series of Preferred Stock ranking prior and superior to the Series Z Preferred Stock with respect to dividends, the holders of shares of Series Z Preferred Stock, in preference to the holders of shares of Common Stock, $1.00 par value ("Common Stock") of the Corporation and of any other junior stock which may be outstanding, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, (i) quarterly dividends payable in cash on the last day of March, June, September and December in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series Z Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $1.00 per share ($.01 per one one-hundredth of a share), or (b) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series Z Preferred Stock, and (ii) subject to the provision for adjustment hereinafter set forth, quarterly distributions (payable in kind) on each Quarterly Dividend Payment Date in an amount per share equal to 100 times the aggregate per share amount of all noncash dividends or other distributions (other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock, by reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date, or with respect to the first Quarterly Dividend Payment Date since the first issuance of any share or fraction of a share of Series Z Preferred Stock. In the event the Corporation shall at any time after March 19, 1993 (the "Rights Declaration Date"), declare or pay any dividend on Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise) into a greater or lesser number of shares of Common Stock, then in each such case the amount to which holders of shares of Series Z Preferred Stock are entitled under clauses (i)(b) or (ii) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) The Corporation shall declare a dividend or distribution on the Series Z Preferred Stock as provided in Section 2(A) immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $1.00 per share ($.01 per one one-hundredth of a share) on the Series Z Preferred Stock shall nevertheless be payable, out of funds legally available for such purpose, on such subsequent Quarterly Dividend Payment Date. (C) Dividends shall begin to accrue and be cumulative on outstanding shares of Series Z Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Series Z Preferred Stock, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue and be cumulative from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series Z Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall cumulate but shall not bear interest. Dividends paid on the shares of Series Z Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series Z Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be not more than 30 days prior to the date fixed for the payment thereof. Section 3. Voting Rights. The holders of shares of Series Z Preferred Stock shall have the following voting rights: (A) Subject to the provision for adjustment hereinafter set forth, each share of Series Z Preferred Stock shall entitle the holder thereof to 100 votes (and each one one-hundredth of a share of Series Z Preferred Stock shall entitle the holder thereof to one vote) on all matters submitted to a vote of the shareholders of the Corporation. In the event the Corporation shall at any time after the Rights Declaration Date declare or pay any dividend on Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise) into a greater or lesser number of shares of Common Stock, then in each such case the number of votes per share to which holders of shares of Series Z Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) Except as otherwise provided in the Articles of Incorporation or in this amendment thereof or by law, the holders of shares of Series Z Preferred Stock and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of the shareholders of the Corporation. (C) Except as otherwise provided in the Articles of Incorporation or in this amendment thereof or by law, holders of Series Z Preferred Stock shall have no special voting rights and their consent shall not be required for taking any corporate action. Section 4. Certain Restrictions. (A) Whenever quarterly dividends or other dividends or distributions payable on the Series Z Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series Z Preferred Stock outstanding shall have been paid in full, the Corporation shall not: (i) declare or pay dividends on, make any other distributions on any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series Z Preferred Stock; (ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series Z Preferred Stock, except dividends paid ratably on the Series Z Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) with the Series Z Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series Z Preferred Stock; or (iv) purchase or otherwise acquire for consideration any shares of Series Z Preferred Stock, or any share of stock ranking on a parity with the Series Z Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (B) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under Section 4(A), purchase or otherwise acquire such shares at such time and in such manner. Section 5. Reacquired Shares. Any shares of Series Z Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. The Corporation shall take all such action as is necessary so that all such shares shall after their cancellation become authorized but unissued shares of Preferred Stock, without designation as to series, and may be reissued as part of a new series of Preferred Stock to be created by Articles of Amendment adopted by the Board of Directors without shareholder action, subject to the conditions and restrictions on issuance set forth herein. Section 6. Liquidation, Dissolution or Winding Up. Upon any liquidation, dissolution or winding up of the Corporation, no distribution shall be made (A) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series Z Preferred Stock, unless, prior thereto, the holders of shares of Series Z Preferred Stock shall have received the higher of (i) $1.00 per share ($.01 per one one-hundredth of a share), plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, or (ii) an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount to be distributed per share to holders of Common Stock; nor shall any distribution be made (B) to the holders of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series Z Preferred Stock, except distributions made ratably on the Series Z Preferred Stock and all other such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. In the event the Corporation shall at any time after the Rights Declaration Date declare or pay any dividend on Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise) into a greater or lesser number of shares of Common Stock, then in each such case the aggregate amount to which holders of shares of Series Z Preferred Stock are entitled under clause (A)(ii) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 7. Consolidation, Merger, etc. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, or otherwise changed, then in any such case the shares of Series Z Preferred Stock shall at the same time be similarly exchanged or changed in an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time after the Rights Declaration Date declare or pay any dividend on Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise) into a greater or lesser number of shares of Common Stock, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series Z Preferred Stock shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 8. No Redemption. The shares of Series Z Preferred Stock shall not be redeemable. Notwithstanding the foregoing, the Corporation may acquire shares of Series Z Preferred Stock in any other manner permitted by law, the Articles of Incorporation or this amendment thereof. Section 9. Rank. Unless otherwise provided in the Articles of Incorporation or an amendment thereof relating to a subsequent series of Preferred Stock of the Corporation, the Series Z Preferred Stock shall rank junior to all other series of the Corporation's Preferred Stock, including, without limitation, the Corporation's 55CENTS Preferred Stock and 7.85% Preferred Stock referred to in Article V of the Articles of Incorporation, as to the payment of dividends and the distribution of assets on liquidation, dissolution or winding up, and senior to the Common Stock of the Corporation. Section 10. Amendment. The Articles of Incorporation shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series Z Preferred Stock so as to affect them adversely without the affirmative vote of the holders of at least a majority of the outstanding shares of Series Z Preferred Stock, voting separately as a class. Section 11. Fractional Shares. Series Z Preferred Stock may be issued in one-hundredths of a share or other fractions of a share which shall entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series Z Preferred Stock. EX-10.1 3 EX-10.1 EXHIBIT 10.1 April 28, 1995 CASCADE NATURAL GAS CORPORATION 222 FAIRVIEW AVENUE NORTH SEATTLE, WASHINGTON 98109 ATTENTION: MS. MELISSA WHITTEN DIRECTOR, GAS SUPPLY RE: WINTER PEAKING SUPPLY - 1995 THROUGH 1998 Dear Melissa: Further to our telephone conversation of 24 April 1995, the following are the terms which CanWest Gas Supply U.S.A. Inc. ("CanWest") would be prepared to offer to Cascade Natural Gas Corporation ("Cascade") for peaking volumes commencing December 1, 1995: SELLER: CanWest Gas Supply U.S.A. Inc. BUYER: Cascade Natural Gas Corporation TERM: Sales and deliveries of natural gas may commence December 1, 1995, and shall terminate February 28, 1998. PERIOD: The Period in which the deliveries may take place and Demand Charges will be calculated over, will begin on the 1st day of December and end on the last day of February, during each year of the contract Term. POINT OF DELIVERY: The Point of Delivery shall be the point at which the facilities of Northwest Pipeline interconnect with the facilities of Cascade Natural Gas at Cascade's citygate(s). Cascade Natural Gas April 28, 1995 Page 2 VOLUME: The Daily Contracted Quantity (DCQ) over the term of the agreement shall be 15,000 MMBtu/day. Volumes will be available up to 30 days each year during the Term of the contract. PRICE: CanWest is prepared to offer the either of the following pricing alternatives. The Buyer will be responsible for the Demand Charges described under each pricing option, on the full DCQ on a monthly basis. OPTION #1 FIXED COMMODITY PRICE The Gas price for each Period under this alternative shall consist of two components, a Commodity Charge Portion (CCP) for all gas volumes delivered and a Demand Charge Portion (DCP) to apply to the DCQ volume specified at the Point of Delivery. Dec 1995 - Feb 1996 CCP = $[*]/MMBtu DCP = $[*]/MMBtu Dec 1996 - Feb 1997 CCP = $[*]/MMBtu DCP = $[*]/MMBtu Dec 1997 - Feb 1998 CCP = $[*]/MMBtu DCP = $[*]/MMBtu OPTION #2 MARKET BASED COMMODITY PRICE The Gas price for each Period over the Term of the contract under this alternative shall consist of two components, a Commodity Charge Portion (CCP) for all gas volumes delivered and a Demand Charge Portion (DCP) to apply to the DCQ volume specified at the Point of Delivery. CCP = either (i) [*]% of the average first of the month "Inside FERC" Index at the Cdn. Border and Rocky Mountain for delivery into Northwest Pipeline at Sumas, WA "lnside FERC" @ Sumas for the month in which gas is sold and delivered. or (ii) Average of the posted daily price survey range as reported by "Gas Daily" for delivery @ NW Sumas & Northwest Rockies for the day in which gas is sold and delivered, plus US $[*]/MMBtu. DCP = $[*]/MMBtu [*]= CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE COMMISSION Cascade Natural Gas April 28, 1995 Page 3 GAS NOMINATIONS: Buyer shall provide to Seller a nomination for any specific gas day by 0830 hours Pacific time, the day of the gas day. This notice shall be sent via facsimile to CanWest's Operations Department at (604) 681- 6890. TRANSPORTATION: Seller will deliver all volumes under its firm transportation to the Point(s) of Delivery. Buyer shall be responsible for all transportation arrangements downstream of the Points of Delivery. SUBSTITUTE SUPPLIES: If for any reason on any day during the term of this Agreement, other than a day wholly or partially covered by Force Majeure, Seller fails or is unable to deliver to Buyer a volume of gas up to the MDQ which is nominated by Buyer, Buyer shall be entitled to acquire the deficient volumes from alternative sources of supply. Seller agrees to reimburse Buyer for any additional cost incurred by Buyer to secure the supply from an alternate source, provided the Buyer uses best efforts to mitigate any costs in securing the alternate supply which shall include utilizing Seller's transportation capacity in the event Buyer is able to do so. PAYMENT TERMS: For all deliveries of natural gas payment must be made by wire transfer on or before the 25th of the month following deliveries CONDITIONS PRECEDENT: A. Buyer obtaining by (Date to be scheduled) the necessary regulatory authorizations. B. Seller obtaining by (Date to be scheduled) the necessary regulatory authorizations, including CanWest Management and Producer approval. C. The executed gas sales agreement will be the only binding commitment of the parties hereunder. Should the Buyer fail to execute such a gas sales agreement, CanWest may terminate the sale and delivery of gas contemplated herein. Cascade Natural Gas April 28, 1995 Page 4 TERM OPTION: In the event a Producer vote on the three year agreement outlined above is unsuccessful, CanWest is prepared to offer the following: ONE YEAR EVERGREEN AGREEMENT CanWest is prepared to offer the all the conditions of the agreement defined above for the same three year term provided a clause is incorporated into the contract which allows either Buyer or Seller an annual option to discontinue the contract. Such an option will eliminate the need to obtain CanWest producer approval. CanWest is prepared to complete these negotiations in order that we can initiate the necessary producer mail ballot. If the foregoing reflects Buyer's intentions concerning this proposal, please so indicate by signing and returning one copy of this letter by MAY 15, 1995. This offer may be extended if mutually agreed upon by both CanWest and Cascade. If you have any further questions pertaining to this proposal please do not hesitate to contact me at (604) 661-3305. Yours very truly, CANWEST GAS SUPPLY INC. Rick J. Kunz Pacific Northwest Term Marketing The above is hereby understood and agreed to this ___________ day of ___________, 1995. CASCADE NATURAL GAS CORPORATION cc. C.Coe EX-10.17-1 4 EX-10.17-1 Exhibit 10.17.1 May 26, 1995 Mr. King Oberg Vice President - Gas Supply Cascade Natural Gas Corporation PO Box 24464 Seattle, WA 98124 RE: Continuation of Water Power's Jackson Prairie Storage Release to Cascade Dear King: In anticipation of FERC's approval of the certificated release of Jackson Prairie storage capacity to Cascade later this fall, I would propose the following procedures with respect to the ongoing payment of charges: (1) As for the monthly payments identified in Section 3.1 of the Storage Release Agreement, I propose that Cascade would continue to remit payment to Water Power; (2) If FERC does not grant certificate authority to continue the release or does so upon terms which are unacceptable to the parties, or if FERC does not otherwise finally act on the application by November 1, 1995, then Water Power will take title to Cascade's working natural gas inventory presently in storage at Jackson Prairie (480,000 Dth) and would provide "peaking gas supplies" to Cascade of up to 15,000 Dth per day of firm deliverability and 5,533 Dth per day of best-efforts deliverability for the period May 1, 1995 through April 30, 1996, subject to the terms and conditions of the Gas Storage Project Agreement dated September 25, 1989, and such regulatory approvals as may be required. As additional compensation for making these peaking gas supplies available, Water Power shall charge, and Cascade shall pay, $54,120.50 per calendar month for the one year term of this arrangement, and any payments previously received in accordance with paragraph 1 above shall be credited against Cascade's monthly payment obligation. It is also understood and agreed that Cascade will purchase 480,000 Dth of peaking gas supplies from Water Power prior to May 1, 1996, under this agreement. Mr. King Oberg Page - 2 If the foregoing terms and conditions are acceptable to you, please sign where indicated and return a copy of this letter to me at your earliest convenience. Very truly yours, /s/ Patricia A. Grable Manager, Pipeline & Regulatory Affairs The Washington Water Power Company ACKNOWLEDGED AND AGREED TO THIS 28 OF May , 1995 ------ ------- /s/ - ---- King Oberg Vice President - Gas Supply Cascade Natural Gas Corporation FIRST AMENDMENT TO THE AGREEMENT FOR THE RELEASE OF JACKSON PRAIRIE STORAGE CAPACITY On this 28th day of April , 1995, The Washington Water Power Company ------ ------- ("Water Power") and Cascade Natural Gas Corporation ("Cascade") (hereinafter collectively referred to as the "Parties") have entered into this Agreement ("First Amendment") for the purpose of amending the Agreement for the Release of Jackson Prairie Storage Capacity ("Release Agreement") previously executed by the Parties on July 23, 1990. WITNESSETH: WHEREAS, Water Power and Cascade are parties to a Release Agreement, whereby Water Power will release a portion of its capacity and deliverability in the Jackson Prairie Storage Project to Cascade, for a primary term ending April 30, 1995; and WHEREAS, Water Power and Cascade desire to extend the primary term of the aforementioned Release Agreement to April 30, 1998, subject to the receipt of necessary regulatory approvals; NOW, THEREFORE, in consideration of their mutual covenants, the Parties hereby agree to amend the Release Agreement in the following respects: 1. Section 4.1 of the Release Agreement is hereby deleted and replaced with a new Section 4.1 which reads, in its entirety, as follows: 4.1 Subject to the satisfaction of all conditions precedent, including the receipt of necessary regulatory approvals, the primary term of this Agreement shall continue until April 30, 1998, and thereafter, on a year-to-year basis unless terminated by either Party upon twelve (12) months' written notice of termination received prior to April 30, 1998, or any anniversary thereafter. 2. Section 5.3 of the Release Agreement is hereby deleted and replaced with a new Section 5.3 which reads, in its entirety, as follows: 5.3 If all conditions precedent are not satisfied in time to allow for Cascade's use of the released Deliverability and Capacity by November 1, 1995, either Party may, upon fifteen (15) day's written notice, cancel this Agreement. 3. The Parties agree to substitute revised versions of the following Exhibits, which were previously attached to the Release Agreement: Exhibit A: Substitution of First Revised Appendix A to Jackson Prairie Storage Project Agreement, as amended and currently in effect. Exhibit B: consent of Northwest Pipeline and Washington Natural Gas Company to the Release. Exhibit C: Transportation Service Agreement entered into between Cascade and Northwest Pipeline is deleted in its entirety.] IN WITNESS WHEREOF each Party has caused this First Amendment to be executed under the hands of its duly authorized representative. THE WASHINGTON WATER POWER CASCADE NATURAL GAS COMPANY CORPORATION By: /s/ Gary G. Ely By: /s/ King Oberg ------------------------ ----------------------- Gary G. Ely King Oberg Vice President, Natural Gas Vice President, Gas Supply Exhibit A Revised Appendix to Gas Storage Project Agreement FIRST REVISED APPENDIX A TO GAS STORAGE PROJECT AGREEMENT A. Characteristics and Capabilities of the Jackson Prairie Storage Project for the 1989/1990 Storage Cycle and thereafter: Cushion Gas: Zone 2 Sot less than 16.8 Bcf Zone 9 Not less than 2.0 Bcf Working Gas Capacity Not more than 15.1 Bcf Zone 2 Storage Gas Not more than 34.4 Bcf Deliverability: Firm Not more than 450,000 Mcf Daily Best Efforts Up to 71,800 Mcf daily B. Unless the Management Committee approves an alternate method, the Seasonal Working Gas Quantity available for withdrawal during any Storage Cycle is determined by the lessor of; (1) The quantity of Working Gas in storage at the beginning of the Storage Cycle; or (2) The least quantity of Working Gas in storage at any time between August 31st and September 30th of the preceding Storage Cycle divided by 0.80; or (3) The least quantity of Working Gas in storage at any time between June 30th and September 30th of the preceding Storage Cycle divided by 0.35. The maximum amount of Seasonal Working Gas Quantity is equivalent to the Working Gas Capacity and shall not exceed 15.l Bcf, as stated above in Section A. C. During any Storage Cycle, the project Operator shall be required to withdraw from the Storage Project, upon demand by Northwest Pipeline Corporation pursuant to Section 6.3 of ARTICLE VI of the Gas Storage Project Agreement, a daily quantity of natural gas determined as follows: (1) Subject to the limitations on the replacement of Working Gas as stated in Paragraph D of this Appendix, when the Working Gas in the Storage Reservoir exceeds 45 percent of the Working Gas Capacity, the dally withdrawal quantity shall be 100 percent of the Firm Deliverability (defined above as not more than: 450,000 Mcf). For withdrawals below 45 percent of the working Gas Capacity, the daily withdrawal quantity shall be reduced one percent of Firm Deliverability for each additional one percent of the working Gas withdrawn below 45 percent of the Working Gas Capacity. For calculation purposes, this percent of Working Gas withdrawn shall be based on the percent withdrawn at the beginning of the given day; and (2) The dally Best Efforts Deliverability quantity as that quantity is stated in Section A above. D. After the commencement of an annual Storage Cycle, withdrawals from the Seasonal Working Gas Quantity may be replaced both to maintain the Deliverability of the Storage Project and to restore the quantity available for withdrawal; provided, however, that Working Gas injected above the level of the Seasonal Working Gas Quantity established at the beginning of an annual Storage Cycle shall be considered as applicable to the Seasonal Working Gas Quantity of the next succeeding Storage Cycle and shall not increase the Seasonal Working Gas Quantity of the current Storage Cycle. The Project Operator shall transfer up to 500,000 Mcf of Cushion Gas from Zone 9 to Zone 2 of the Storage Project during the period from October 1 through April 30 of any Storage Cycle to maintain the Deliverability as stated above and shall replace said Cushion Gas prior to the commencement of this next storage Cycle by retransfer from Zone 2 to Zone 9. This Appendix A shall become effective on the date designated by the Federal Energy Regulatory Commission and on such date shall supersede any previously effective Appendix A establishing the Characteristics and Capabilities of the Jackson Prairie Storage project. Attest: THE WASHINGTON WATER POWER COMPANY /s/ Merilee Fulton By: /s/ Gary E. Ely Vice President Attest: WASHINGTON NATURAL GAS COMPANY In Its Individual Capacity and as Project Operator /s/ Paul A. Hoglund By /s/ Robert R. Golliver President Attest: NORTHWEST PIPELINE CORPORATION /s/ Karen B. Martinez By /s/ Tim J. Hausler Vice President Exhibit B Consent to Release February 2, 1995 Mr. James Gustafson Senior Vice President Washington Natural Gas Corporation 815 Mercer Street Seattle, WA 98111 Mr. Matt J. Gillis Vice President of Operations Northwest Pipeline Corporation 295 Chipeta Way PO Box 58900 Salt Lake City, UT 84158-0900 RE: Waiver/Consent of Jackson Prairie Management Committee Concerning Release of Capacity and Deliverability by Washington Water Power to Cascade Gentlemen: The Washington Water Power Company (WWP) and Cascade Natural Gas (Cascade) intend to amend their existing agreement (hereinafter "Release Agreement"), whereby WWP would continue to release a share of its capacity and deliverability in the Jackson Prairie Storage Project (Project) to Cascade. In order to effectuate this continued release, the following waivers and consents must be obtained from the Management Committee of the Project. In accordance with Article 5.3 of the Gas Storage Project Agreement, dated September 25, 1989, the Management Committee, comprised of the undersigned, hereby consents to the release by WWP to Cascade of 150,000 therms of firm deliverability, 55,328 therms of best efforts deliverability, and 4,800,000 therms of seasonal capacity in the Project, for an additional period extending from May 1, 1995 to April 30, 1998. Moreover, to the extent that this release is, or may be, construed as an assignment of a portion of WWP's interest in the Project, the undersigned, as representative of each owner of the Project, expressly waive any rights of first refusal arising under Article 13.1 of the Gas Storage Project Agreement. If you are in agreement with the foregoing, please sign in the space provided below and return the original to my office. An original signed by all parties will be returned to you. Thank you for your attention to this matter. Very truly yours, THE WASHINGTON WATER POWER COMPANY /s/ Gary G. Ely Gary G. Ely ACKNOWLEDGED AND AGREED TO THIS 27th DAY OF FEBRUARY, 1995. ------ /s/ James Gustafson Mr. James Gustafson ON BEHALF OF WASHINGTON NATURAL GAS COMPANY ACKNOWLEDGED AND AGREED TO THIS 12th DAY OF MARCH, 1995. ------ /s/ Matt J. Gillis By Mr. Matt J. Gillis ON BEHALF OF NORTHWEST PIPELINE CORPORATION EX-10.28 5 EX-10.28 EXHIBIT 10.28 October 24, 1995 Via Telecopy Ms. Melissa Whitten Director, Gas Supply Cascade Natural Gas Corporation 222 Fairview Avenue North Seattle, Washington, U.S.A. 98109 Re: Winter Peaking Supply - 1995 through 1998 - --------------------------------------------- Dear Madam: As per our conversation, enclosed are the terms which Westcoast Gas Services (America) Inc. (Seller) would be prepared to offer to Cascade Natural Gas Corporation (Buyer) for three years of peaking volumes commencing December 1, 1995. Should Cascade require a one-year term only, Westcoast would be prepared to offer a similar package, based on the first year numbers quoted below. THREE MONTH PEAKING SUPPLY - SAME DAY NOMINATIONS TERM: Deliveries and sales of natural gas may commence December 1, 1995, and shall terminate February 28, 1998. The period in which deliveries may take place and demand charges will be calculated over will be December 1st through February 28th VOLUME: The Daily Contracted Quantity (DCQ) over the term of the agreement shall be 10,000 MMBtu day. Volumes will be available up to 10 days each year during the heating season. PRICE: The price to be paid by Buyer to Seller for gas sold and delivered at the Point of Delivery shall one of the following: Dec 1995 - Feb 1996 Demand = $[*]MMBtu; Commodity = highpoint of Sumas daily price from "Gas Daily" plus $[*]/MMBtu Dec 1996 - Feb 1997 Demand = $[*]/MMBtu; Commodity = highpoint of Sumas daily price from "Gas Daily" plus $[*]/MMBtu Dec 1997 - Feb 1998 Demand = $/[*]MMBtu; Commodity = highpoint of Sumas daily price from "Gas Daily" plus $[*]/MMBtu [*]=CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE COMMISSION Cascade Natural Gas October 24, 1995 Page 2 ----------------- GAS NOMINATIONS: Buyer shall provide to Westcoast a nomination for any specific gas day by 0830 hours Pacific time the day of the gas day. This notice shall be sent via facsimile to Westcoast's Operations Department at (403) 221-8643. POINT OF DELIVERY: The Point of Delivery shall be the point at which the facilities of Northwest Pipeline interconnect with the facilities of Cascade Natural Gas at Cascade's citygate(s). TRANSPORTATION: Seller will deliver all volumes under its firm transportation to the Points of Delivery. Buyer shall be responsible for all transportation arrangements downstream of the Points of Delivery. SUBSTITUTE SUPPLIES: If for any reason on any day during the term of this Agreement, other than a day wholly or partially covered by Force Majeure, Seller fails or is unable to deliver to Buyer a volume of gas up to the MDQ which is nominated by Buyer, Buyer shall be entitled to acquire the deficient volumes from alternative sources of supply. Seller agrees to reimburse Buyer for any additional cost incurred by Buyer to secure the supply from an alternate source, provided the Buyer uses reasonable commercial efforts to mitigate any costs in securing the alternate supply which shall include utilizing Sellers transportation capacity in the event Buyer is able to do so. PAYMENT TERMS: For all deliveries of natural gas payment must be made by wire transfer on or before the 25th of the month following deliveries. It is hoped that the proposals contained herein meet with your approval. Please respond to not later than October 25, 1995. Following, this date, the contents of these proposals will be deemed to be expired. Yours truly, WESTCOAST GAS SERVICES (AMERICA) INC. Fred M. Scott, P.Eng. Manager, Market Development FMS/ EX-12. 6 EX-12. EXHIBIT 12 CASCADE NATURAL GAS CORPORATION AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDEND REQUIREMENTS
Year Ended December 31 1995 1994 1993 1992 1991 ---------- ------- ------- ------ ------- (dollars in thousands) Fixed charges, as defined: Interest expense $ 9,938 8,090 7,038 7,478 $ 7,793 Amortization of debt issuance expense 606 593 562 402 362 ---------- ------- ------- ------ ------- Total fixed charges $ 10,544 8,683 7,600 7,880 $ 8,155 ---------- ------- ------- ------ ------- Earnings, as defined: Net earnings $ 7,732 5,760 9,103 4,843 $ 7,651 Add (deduct): Income taxes 4,508 3,505 5,224 2,817 4,206 Cumulative effect of change in accounting method - - (209) - - Fixed charges 10,544 8,683 7,600 7,880 8,155 ---------- ------- ------- ------ ------- Total earnings $ 22,784 17,948 21,718 15,540 $20,012 ---------- ------- ------- ------ ------- Ratio of earnings to fixed charges 2.16 2.07 2.86 1.97 2.45 ---------- ------- ------- ------ ------- ---------- ------- ------- ------ ------- Fixed charges and preferred dividend requirements: Fixed charges $ 10,544 8,683 7,600 7,880 $ 8,155 Preferred dividend requirements 853 898 913 941 229 ---------- ------- ------- ------ ------- Total $ 11,397 9,581 8,513 8,821 $ 8,384 ---------- ------- ------- ------ ------- Ratio of earnings to fixed charges and preferred dividend requirements 2.00 1.87 2.55 1.76 2.39 ---------- ------- ------- ------ ------- ---------- ------- ------- ------ -------
50 EX-23. 7 EX-23. INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 33- 71286, No. 33-51377, and No. 33-29801 on Forms S-3 and No. 33-39873 and No. 33- 61035 on Forms S-8 of Cascade Natural Gas Corporation, of our reports dated February 5, 1996, appearing in this Annual Report on Form 10-K of Cascade Natural Gas Corporation for the year ended December 31, 1995. DELOITTE & TOUCHE LLP Seattle, Washington March 26, 1996 51 EX-27. 8 EX-27.
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF CASCADE NATURAL GAS CORPORATION, INCLUDED IN THE ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1995 DEC-31-1995 PER-BOOK 239,050 3,345 37,889 16,614 0 296,898 9,144 71,098 9,297 89,539 6,851 0 102,100 32,000 0 0 0 0 0 0 66,408 296,898 182,744 4,508 160,940 160,940 21,804 586 22,390 10,150 7,732 539 7,193 8,702 0 25,023 0.80 0.80
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