-----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, DwcZqHlBjlEupG5JVdXNNRIiz7AzfiVPS9G3+rqo7ZEY6+zpmLLOTQpXgzjSe8sO TNR7PQqs7HQLZ6M4hoSKcg== 0000912057-96-029849.txt : 19961223 0000912057-96-029849.hdr.sgml : 19961223 ACCESSION NUMBER: 0000912057-96-029849 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961220 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: 0930 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-07196 FILM NUMBER: 96683866 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-K405 1 FORM 10-K FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from January 1, 1996 to September 30, 1996 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 executive office) including area code) 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. [X] The aggregate market value of the voting stock held by nonaffiliates of the registrant as of the close of business on November 29, 1996, was $183,295,057 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 10,818,233 as of November 29, 1996 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive proxy statement for its 1997 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 Transition Period Ended September 30, 1996 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 23 Item 9 - Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 45 Part III Item 10 - Directors and Executive Officers of the Registrant 46 Item 11 - Executive Compensation 46 Item 12 - Security Ownership of Certain Beneficial Owners and Management 46 Item 13 - Certain Relationships and Related Transactions 46 Part IV Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K 47 Signatures 48 Index to Exhibits 49 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 17% of its gas distribution revenues are from the state of Oregon. At September 30, 1996, there were 127,794 residential customers, 23,827 commercial customers, 320 firm industrial customers and 23 traditional interruptible customers, all of which are classified as core customers. In addition, there were 152 non-core customers. In the twelve months ended September 30, 1996, core customers provided 71% of the operating margin, while consuming 23% of the total gas deliveries. In the twelve months ended September 30, 1995, core customers accounted for 69% of the operating margin, and 24% of the total gas deliveries. 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 for core customers, 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 recently filed its updated 1996 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 develops updates of the IRP every two years. These updated documents take 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. 3 Until the Company receives final regulatory approval of these decisions in the context of a general rate case, the Company cannot predict with certainty the extent to which the integrated resource planning process will affect its rates. 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. Presently, baseload requirements for Cascade's core market group are provided by six major gas supply contracts with various expiration dates from 1997 through 2008 and totaling 814,830 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), has a primary term ending April 30, 1998, and entitles Cascade to receive up to 150,000 therms per day and a maximum, renewable inventory of 4,800,000 therms. 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. In addition to underground and LNG storage, Cascade has entered into contracts with two of its major industrial customers whereby each 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 on 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 4 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 300,000 therms on peak and renewable inventory of 6,750,000 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 ending February 1998. Cascade maintains a diversified portfolio of natural gas supplies. During 1996, Cascade purchased gas supplies approximately 86.3% from firm gas supply contracts, and 13.7% from 30-day spot market contracts. In addition, 606,743,000 therms of customer purchased supplies were transported across Cascade facilities. WASHINGTON RATE SETTLEMENT For a description of the final settlement, in July 1996, of three rate applications filed by the Company, see "Regulatory Matters" under Item 7. 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 previous order will be overturned, 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 August 1, 1995, Northwest filed a general Section 4 rate case (RP95-409) with interim rates, subject to refund, effective February 1, 1996. This filing asks for a cost of service of $270 million. Hearings have been completed on RP95-409 and the case is awaiting briefing by the involved parties. Northwest has since filed an additional rate case (RP96-367) with a requested cost of service of $299.8 million. Interim rates, subject to refund, will be effective on March 1, 1997. This case is currently in the discovery phase and will likely go to hearing during 1997. 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 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 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 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 total approximately 744,000. 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 1997 to 2065. Management has not incurred significant difficulties in renewing franchises when they expire and does not expect any significant problems in the future. 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 16.5% of Cascade's total operating revenues for the twelve months ended September 30, 1996. Agreements 6 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. For the twelve months ended September 30, 1996, 67% of operating revenues and 105% of earnings from operations were derived from the first two quarters (October 1995 through March 1996). Because of the seasonality of space heating revenues, Cascade believes financial results for interim periods are not 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 the vast majority of its territory. In the remaining areas of its service territory served by public electric utilities with their own hydro power supply, Cascade is almost equal in cost 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 "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. 7 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. During the first quarter of 1995, a claim related to environmental contamination from a former manufactured gas plant site in Oregon previously operated 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. At this date it appears that contamination is present at the site, but there is no estimate of the extent of possible 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 fiscal 1997 are budgeted at $32,000,000. Including the 1997 budget, the Company will have spent over $165,000,000 in new plant in the five 8 years ending in 1997, compared to $157,493,000 in the 12-year period from 1981 through 1992. Construction of the line to serve the 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, only one of which is actively engaged in business at present. This subsidiary is engaged in the financing of Cascade customers' purchases of energy-efficient appliances. 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 September 30, 1996, Cascade had 472 employees. Of the total employees, 220 are represented by the International Chemical Workers Union. The present contract with the union extends to April 1, 1999, and thereafter until terminated by either party on sixty days notice. 9
OPERATING STATISTICS (UNAUDITED) 12 MONTHS ENDED SEPTEMBER 30 1996 1995 1994 1993 1992 GAS DISTRIBUTION REVENUE (THOUSANDS OF DOLLARS) Firm Residential $62,076 $56,816 $47,011 $45,284 $34,940 Commercial 55,971 54,289 46,730 46,057 37,184 Industrial 11,378 13,090 11,716 10,262 8,545 Interruptible Commercial 3,431 3,856 3,386 2,931 2,985 Industrial 1,439 1,867 2,188 1,625 2,049 Non-Core 33,628 47,907 70,858 67,927 56,407 ---------------------------------------------------------------------- Total gas sales revenue 167,923 177,825 181,889 174,086 142,110 Transportation revenue 16,454 10,353 6,884 6,367 5,923 ---------------------------------------------------------------------- Total gas distribution revenue $184,377 $188,178 $188,773 $180,453 $148,033 ---------------------------------------------------------------------- ---------------------------------------------------------------------- GAS DELIVERIES (THOUSANDS OF THERMS) Firm Residential 101,779 93,524 83,912 86,284 66,388 Commercial 103,433 101,145 95,695 101,057 82,000 Industrial 24,210 27,678 27,808 26,635 22,387 Interruptible Commercial 4,888 5,994 5,385 4,651 4,800 Industrial 3,536 4,603 6,440 5,212 6,472 Non-Core 194,986 258,605 297,225 264,658 271,512 ---------------------------------------------------------------------- Total sales therms 432,832 491,549 516,465 488,497 453,559 Transportation deliveries 606,743 471,657 329,840 206,801 142,901 ---------------------------------------------------------------------- Total deliveries 1,039,575 963,206 846,305 695,298 596,460 ---------------------------------------------------------------------- ---------------------------------------------------------------------- CUSTOMERS (MONTHLY AVERAGES) Firm Residential 127,089 119,633 111,055 102,354 94,701 Commercial 23,741 22,755 21,794 20,968 20,019 Industrial 329 332 327 313 309 Interruptible Commercial 11 17 17 17 17 Industrial 14 14 14 14 17 Non-Core 128 99 89 84 79 ---------------------------------------------------------------------- Total 151,312 142,850 133,296 123,750 115,142 ---------------------------------------------------------------------- ---------------------------------------------------------------------- Year-end totals 152,116 143,372 134,823 124,963 116,434 ---------------------------------------------------------------------- ---------------------------------------------------------------------- 10 OPERATING STATISTICS (CONTINUED) (UNAUDITED) 12 MONTHS ENDED SEPTEMBER 30 1996 1995 1994 1993 1992 AVERAGE ANNUAL USE PER CUSTOMER (THERMS) Residential 801 782 756 843 701 Commercial-firm 4,357 4,445 4,391 4,820 4,096 AVERAGE ANNUAL REVENUE PER CUSTOMER Residential $488 $475 $423 $442 $369 Commercial-firm $2,358 $2,386 $2,144 $2,197 $1,857 AVERAGE RATE PER THERM Firm Residential $0.6099 $0.6075 $0.5603 $0.5248 $0.5263 Commercial $0.5411 $0.5367 $0.4883 $0.4558 $0.4535 Industrial $0.4700 $0.4729 $0.4213 $0.3853 $0.3817 Interruptible Commercial (excluding facilities charges) $0.4384 $0.4051 $0.3586 $0.3174 $0.3188 Industrial $0.4070 $0.4056 $0.3398 $0.3118 $0.3166 Non-Core $0.1725 $0.1853 $0.2384 $0.2567 $0.2078 Transportation $0.0271 $0.0220 $0.0209 $0.0308 $0.0414 AVERAGE COST PER THERM FOR GAS PURCHASED $0.2262 $0.2309 $0.2647 $0.2312 $0.1990 HEATING DEGREE DAYS System average (30-year average - 5,675) 5,620 5,607 5,301 6,129 4,894 MAXIMUM DAY SEND OUT (1,000 therms) including transportation 4,863 3,955 3,341 3,134 2,504 AVERAGE DAILY SEND OUT (1,000 therms) including transportation 2,883 2,661 2,327 1,952 1,660 EMPLOYEES AT END OF YEAR 472 471 473 465 463
11 ITEM 2. PROPERTIES. At September 30, 1996, Cascade's utility plant investments included approximately 3,952 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 2,508 miles of service lines. The distribution and transmission 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 at present twenty two buildings used for operations, office space and warehousing in Washington and eight such buildings in Oregon. It occupies an additional five commercial offices and maintains 34 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. 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 December 1, 1996, are as follows: Year Became Name Office Age Officer - -------------------------------------------------------------------------------- W. Brian Matsuyama Chairman of the Board and Chief Executive Officer 50 1987 Ralph E. Boyd President and Chief Operating Officer 59 1988 Jon T. Stoltz Senior Vice President - Planning and Rates 49 1981 Larry E. Anderson Vice President - Operations 48 1995 O. LeRoy Beaudry Vice President - Consumer and Public Affairs 58 1981 King C. Oberg Vice President - Gas Supply 55 1993 Calvin R. Steele Vice President - Information Technology 57 1991 J. D. Wessling Vice President - Finance, and Chief Financial Officer 53 1995 James E. Haug Treasurer and Chief Accounting Officer 47 1981 Larry C. Rosok Corporate Secretary and Personnel Director 40 1995 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 twelve 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. 1996 1995 Quarter High Low High Low First 16-5/8 15 14-7/8 13-1/4 Second 16 13-3/8 15 13-1/2 Third 16-1/2 13-3/4 15-1/2 13-1/2 Fourth 17-3/8 14-5/8 At November 29, 1996, there were approximately 10,836 holders of the Common Stock. The following table shows for the periods indicated the dividends paid per share on the Common Stock. Quarter 1996 1995 First $.24 $.24 Second $.24 $.24 Third $.24 $.24 Fourth $.24 14 ITEM 6. SELECTED FINANCIAL DATA.
(dollars in thousands except per share data) Nine Months Ended Sep 30 Twelve Months Ended December 31 ------------ --------------------------------------------------- 1996 1995 1994 1993 1992 STATEMENTS OF OPERATIONS: Operating Revenues: Gas Sales $ 114,548 $ 171,254 $ 185,341 $ 179,979 $ 145,889 Transportation Revenue 12,973 11,300 6,871 7,087 6,423 Other Operating Income 144 190 198 388 154 ------------- ----------- ----------- ----------- ----------- 127,665 182,744 192,410 187,454 152,466 Less: Gas Purchases 69,679 102,858 118,083 113,500 90,320 Revenue Taxes 8,420 11,480 11,500 11,095 8,997 ------------- ----------- ----------- ----------- ----------- Operating Margin 49,566 68,406 62,827 62,859 53,149 ------------- ----------- ----------- ----------- ----------- Cost of Operations: Operating expenses 25,058 30,818 30,202 27,856 25,576 Depreciation and amortization 9,362 11,733 10,921 9,964 9,175 Property and payroll taxes 3,181 4,051 4,039 3,757 3,516 ------------- ----------- ----------- ----------- ----------- 37,601 46,602 45,162 41,577 38,267 ------------- ----------- ----------- ----------- ----------- Earnings From Operations 11,965 21,804 17,665 21,282 14,882 ------------- ----------- ----------- ----------- ----------- Nonoperating Expense (Income): Interest 7,459 9,938 8,090 7,038 7,478 Interest charged to construction (569) (394) (203) (323) (218) ------------- ----------- ----------- ----------- ----------- 6,890 9,544 7,887 6,715 7,260 Amortization of debt issuance expense 459 606 593 562 402 Other (2) (586) (80) (113) (440) ------------- ----------- ----------- ----------- ----------- 7,347 9,564 8,400 7,164 7,222 ------------- ----------- ----------- ----------- ----------- Earnings Before Income Taxes and Cumulative Effect of change in accounting method 4,618 12,240 9,265 14,118 7,660 Income Taxes 1,606 4,508 3,505 5,224 2,817 ------------- ----------- ----------- ----------- ----------- Earnings Before Cumulative Effect of Change in Accounting Method 3,012 7,732 5,760 8,894 4,843 Cumulative effect of change accounting method - - - 209 - ------------- ----------- ----------- ----------- ----------- Earnings Before Preferred Dividends 3,012 7,732 5,760 9,103 4,843 Preferred Dividends 393 539 558 580 595 ------------- ----------- ----------- ----------- ----------- Net Earnings $ 2,619 $ 7,193 $ 5,202 $ 8,523 $ 4,248 ------------- ----------- ----------- ----------- ----------- ------------- ----------- ----------- ----------- ----------- Common Stock Outstanding (thousands of shares): End of year 10,787 9,144 8,912 8,566 7,614 Average 9,266 8,997 8,707 7,915 6,681 Earnings per Common Share Before cumulative effect of change in accounting method $ 0.28 $ 0.80 $ 0.60 $ 1.05 $ 0.64 Cumulative effect of change in accounting method - - - 0.03 - ------------- ----------- ----------- ----------- ----------- Net Earnings per Common Share $ 0.28 $ 0.80 $ 0.60 $ 1.08 $ 0.64 ------------- ----------- ----------- ----------- ----------- ------------- ----------- ----------- ----------- ----------- 15 ITEM 6. SELECTED FINANCIAL DATA. (CONTINUED) (dollars in thousands except per share data) Sep 30 At December 31 ------------------------------------------------------ 1996 1995 1994 1993 1992 RETAINED EARNINGS: Beginning of the year $ 9,297 $ 10,806 $ 14,076 $ 13,455 $ 15,655 Net earnings after preferred dividends 2,619 7,193 5,202 8,523 4,248 Common dividends (7,015) (8,702) (8,472) (7,902) (6,448) ---------- ---------- ---------- ---------- ---------- End of the year $ 4,901 $ 9,297 $ 10,806 $ 14,076 $ 13,455 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- CAPITAL STRUCTURE: Common shareholders' equity $ 109,126 $ 89,539 $ 87,710 $ 85,702 $ 69,199 Redeemable preferred stocks 6,851 6,851 7,217 7,528 7,951 ---------- ---------- ---------- ---------- ---------- Debt: Long-term debt 101,850 102,100 100,000 87,000 74,677 Notes Payable - 32,000 14,501 13,502 13,000 Current maturities of long-term debt - - 5,000 - - ---------- ---------- ---------- ---------- ---------- 101,850 134,100 119,501 100,502 87,677 ---------- ---------- ---------- ---------- ---------- Total capital $ 217,827 $ 230,490 $ 214,428 $ 193,732 $ 164,827 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- FINANCIAL RATIOS: Return on common shareholders' equity 7.88% 8.12% 6.00% 11.00% 6.72% Common stock dividend payout ratio 257% 120% 161% 87% 146% Dividends paid in cash per common share $ 0.72 $ 0.96 $ 0.96 $ 0.94 $ 0.93 Fixed charge coverage (before income tax deduction): Times interest earned 2.17 2.16 2.07 2.86 1.97 Times interest and preferred dividends earned 2.01 2.00 1.87 2.55 1.76 Book value per year-end share of common stock $ 10.12 $ 9.79 $ 9.84 $ 10.00 $ 9.09 UTILITY PLANT: Utility plant - end of year $ 383,771 $ 362,924 $ 333,863 $ 315,297 $ 283,871 Accumulated depreciation 147,599 138,831 127,806 117,925 109,184 ---------- ---------- ---------- ---------- ---------- Net plant $ 236,172 $ 224,093 $ 206,057 $ 197,372 $ 174,687 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Construction expenditures $ 26,053 $ 37,637 $ 27,251 $ 32,990 $ 35,335 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total assets $ 296,381 $ 296,898 $ 273,090 $ 252,690 $ 224,685 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION. Cascade changed its year end to September 30 this year. The new year end allows reporting of a fall-winter heating season (October through March) in a single fiscal year, which management believes is more meaningful reporting than separating a heating season into two years. 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 12- month periods ended September 30, 1996, 1995, and 1994. EARNINGS AND DIVIDENDS Consolidated company results for the three periods were: 12 MONTHS ENDED SEPTEMBER 30 1996 1995 1994 STATEMENTS OF OPERATIONS (UNAUDITED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) OPERATING REVENUES Gas sales $167,923 $177,825 $181,889 Transportation revenue 16,454 10,353 6,884 Other operating income 195 192 253 ---------------------------------- 184,572 188,370 189,026 Less Gas purchases 101,299 108,600 116,360 Revenue taxes 11,692 11,682 11,226 ---------------------------------- OPERATING MARGIN 71,581 68,088 61,440 ---------------------------------- COST OF OPERATIONS Operating expenses 32,776 30,456 29,661 Depreciation and amortization 12,389 12,141 10,690 Property and payroll taxes 4,115 3,986 3,994 ---------------------------------- 49,280 46,583 44,345 ---------------------------------- Earnings from operations 22,301 21,505 17,095 ---------------------------------- NONOPERATING EXPENSE (INCOME) Interest 10,101 9,632 7,540 Interest charged to construction (753) (292) (178) ---------------------------------- 9,348 9,340 7,362 Amortization of debt issuance expense 612 603 587 Other (142) (115) (657) ---------------------------------- 9,818 9,828 7,292 ---------------------------------- EARNINGS BEFORE INCOME TAXES 12,483 11,677 9,803 INCOME TAXES 4,272 4,590 3,452 ---------------------------------- EARNINGS BEFORE PREFERRED DIVIDENDS 8,211 7,087 6,351 PREFERRED DIVIDENDS 524 544 562 ---------------------------------- NET EARNINGS $7,687 $6,543 $5,789 ---------------------------------- ---------------------------------- COMMON STOCK OUTSTANDING (THOUSANDS OF SHARES) End of year 10,787 9,098 8,851 Average 9,204 8,936 8,624 NET EARNINGS PER COMMON SHARE $0.84 $0.73 $0.67 ---------------------------------- ---------------------------------- 17 Per share results for the twelve months ended September 30, 1996 were 15.1% greater than 1995 because of increased operating margin. Earnings for 1996 were negatively affected $0.10 per share due to a third quarter (ended June 30, 1996) charge against income for unrecovered gas costs and valuation adjustments to non-utility assets. Earnings were also negatively affected $0.02 per share by one time expenses related to the change in year end. Per share net earnings for 1995 were greater than 1994 by 9% due to improved operating margins. RESIDENTIAL AND COMMERCIAL OPERATING MARGIN An 8,442 increase in the number of residential and commercial customers, combined with somewhat colder weather in the twelve months ended September 30, 1996, contributed to a $4.0 million increase in core operating margin. Operating Margins (dollars in thousands) - -------------------------------------------------------------------------------- Twelve Months Ended September 30 --------------------------------- 1996 1995 1994 --------------------------------- Degree Days 5,620 5,607 5,301 - -------------------------------------------------------------------------------- Average Customers Residential 127,089 119,633 111,055 Commercial 23,741 22,755 21,794 - -------------------------------------------------------------------------------- Consumption Per Customer (therms) Residential 801 782 756 Commercial 4,357 4,445 4,391 - -------------------------------------------------------------------------------- Margin Residential $ 26,100 $ 23,586 $ 20,795 Commercial $ 19,794 $ 18,255 $ 16,753 - -------------------------------------------------------------------------------- The twelve month period ending September 30, 1995 was 6% colder than the twelve month period ending September 30, 1994 which, along with an increase of 9,540 residential and commercial customers contributed to increased core margin of $4.3 million. Degree days in the 1995 period were essentially normal. INDUSTRIAL AND NON-CORE OPERATING MARGIN Industrial and non-core operating margin was $25.7 million, $26.2 million, and $23.9 million, in the twelve month periods ended September 30, 1996, 1995, and 1994, respectively. Operating margin was affected by the June 1996 charge of $1.2 million to establish a reserve for unrecovered gas costs. The reserve resulted from management's determination that such costs are appropriately recoverable through non-core gas commodity sales, which are dependent on future competitive conditions for large volume supplies, rather than from the more certain source of recovery through rates charged to core customers. Excluding the effect of the one time charge, industrial and non-core margin increased by 3% from the twelve months ended September 30, 1995. This was primarily due to the addition of a new cogeneration customer in April 1996 and a full year's operating margin from a cogeneration customer that commenced June 1995, as well as increased consumption by refinery customers. Partially offsetting the increases was a margin reduction from cogeneration curtailment due to the significant availability of competing 18 hydropower. There were also decreases in consumption by forest products and agricultural customers and the shift of certain customers to special contracts with lower distribution service rates. In the twelve months ended September 30, 1995, operating margin from the industrial non-core market increased of $2.3 million as the result of a cogeneration customer starting in April 1994 and the above mentioned start up in June 1995 of a new cogeneration plant. OPERATING EXPENSES Operating expenses were $32.8 million, $30.5 million, and $29.7 million for the twelve month periods ended September 30, 1996, 1995, and 1994, respectively. Operating expenses, approximately 70% of which are payroll and benefits costs, increased over the 1995 period by $2.3 million, or 7.6%. Retirement plans expense increased $700,000 due to recognizing Washington retiree medical benefits formerly deferred, and changes in interest rate assumptions that affected actuarial calculations and resulted in higher expense for fiscal 1996. At this time, it appears the interest rate assumption for fiscal year 1997 will be the same as that used in 1996. Salary and wage increases amounted to $700,000, or 3.4%. Almost $300,000 of this increase was due to accruals for vacation earned but not used prior to the new fiscal year end. There were also increases in purchased services for legal, accounting and other consulting, $48,000 of which were one time expenses related to the change in year end. Mitigating the expense increase was a stable number of employees serving an increasing number of customers. Another moderating factor was the increase in payroll capitalized due to increased construction activity. Operating expenses increased 2.7% in the 1995 period compared to 1994. There were no changes in the number of employees and benefits costs were not affected by interest rate changes. DEPRECIATION AND AMORTIZATION, PROPERTY AND PAYROLL TAXES Depreciation and amortization were up 2% in the twelve month period ended September 30, 1996 over the 1995 period. The moderate increase was due to a build up of construction in progress resulting from the facilities for a new cogeneration customer and expansion of facilities in western Washington. Property and payroll taxes increased 3% in 1996 over 1995 consistent with increased plant in service. Taxes in 1995 were essentially unchanged from 1994 due to 1990 voter mandated reductions in property tax rates in Oregon. INTEREST EXPENSE AND OTHER Total interest expense in the twelve months ended September 30, 1996 was virtually unchanged from interest expense incurred in the 1995 period. Average short-term borrowings were higher in 1996 resulting in higher interest expense of $400,000 and interest on deferred gas cost savings increased $576,000 due to increased balances. Offsetting the increases was a reduction of interest attributable to a decrease in long-term debt of $3.1 million reflecting a decrease in appliance loans held by Cascade Land Leasing, a subsidiary. Other expense includes charges of $333,000 in fiscal 1996 and $700,000 in fiscal 1995 for revaluation of certain assets held for sale and a reduction in interest income from appliance loans. Total interest expense and other in the 1995 period increased $2.5 million. The increase is the result of issuing $18 million of additional long-term debt in October 1994 plus accrued interest on 19 deferred gas cost reductions and discontinuance of interest rate swaps amortized over the term of the underlying debt agreement. LIQUIDITY AND CAPITAL RESOURCES In August, 1996, Cascade issued 1,487,700 additional shares of common stock in an underwritten public offering. The offering netted $21.6 million in proceeds which were used to pay down short-term debt of $17.5 million. The remainder was invested in short-term securities. Equity capital of $2.4 million was also raised from issuance of shares to participants in the Company's 401(k) plan and its Dividend Reinvestment Plan. 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 has a five-year credit commitment for $40 million from three banks. The committed lines also support a money market facility of a similar amount and a regional commercial paper program. A subsidiary has a $5 million five-year revolving credit facility used for non-regulated business, and at September 30, 1996, $1.85 million was outstanding. The Company also has $25 million of uncommitted lines from three banks. Longer term financing is provided by a Medium-Term Note program with $100 million outstanding at September 30, 1996, 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 believes it has adequate financial flexibility to meet its anticipated cash needs. CAPITAL EXPENDITURES Twelve Months Ended (dollars in thousands) September 30 ---------------------------------- 1996 1995 1994 ---------------------------------- Capital Expenditures $ 41,106 $ 30,947 $ 27,530 ---------------------------------- Operating Cash Flow $ 45,176 $ 23,883 $ 11,193 Dividends Paid (8,636) (8,176) (8,038) Redemption of Preferred (345) (301) (438) ---------------------------------- Available Cash Flow $ 36,195 $ 15,406 $ 2,717 ---------------------------------- ---------------------------------- Internally Funded Expenditures 88.05% 49.78% 9.87% Primarily because of two large projects, one for facilities for a new cogeneration customer and one for enhancement of facilities in western Washington, capital spending was at a record level in fiscal 1996. Internally generated cash flow increased in 1996 as well in large part due to lower gas costs and an increase in accounts payable and accrued expenses. Accounts payable increased due to timing of gas cost payments. A portion of lower deferred gas costs is being refunded to core customers starting August 1996 which will reduce available cash flow going forward. Budgeted capital expenditures for 1997 will approximate $32 million and are expected to 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 approximately $150 million. 20 REGULATORY MATTERS On July 22, 1996, the WUTC issued its final order reflecting the terms of a negotiated settlement among the Company, the WUTC staff, the Public Counsel for the State of Washington, and the Northwest Industrial Gas Users, of three separate rate applications filed by the Company in 1995 and 1996. The new rates were effective August 1, 1996. The order approves the first general rate increase in the State of Washington by the Company since 1986, estimated to increase revenues by approximately $3.8 million in the first year. Offsetting the general rate increase for the first four years are technical credits for core customers amounting to approximately $263,000 per year. Other elements of the approved settlement include: (i) increases in monthly customer service charges to core customers by $1.00 on August 1 in each of 1997 and 1998, offset by simultaneous decreases in charges to non-core customers; (ii) the refund to core customers of deferred gas cost reductions estimated to be $1.4 million annually for four years, and the refund of an additional $13 million in deferred gas cost savings plus accrued interest beginning in four years, neither of which will have an effect on the Company's earnings; (iii) an agreement by the Company not to apply for another general rate increase for at least three years from August 1, 1996; and (iv) the Company's commitment to prepare a plan to reduce meter reading and billing expense. Concurrent with the August 1, 1996, effective date of new Washington rates, Cascade commenced the amortization of deferred postretirement benefits other than pensions (PBOP). Consistent with the WUTC's policy statement issued in 1992 regarding these costs, PBOP expenses attributable to Washington operations in excess of amounts previously charged on a "pay-as-you-go" basis have been deferred since 1993. The amount of the incremental expense, including amortization, will be approximately $1.5 million per year. Amortization will be completed at December 31, 2002. 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. NINE MONTHS COMPARISON The following nine-month comparison is presented because of the change in 1996 of the Company's fiscal year from a calendar year to a year ending September 30. Nine Months Ended September 30 1996 1995 audited unaudited ------- --------- (dollars in thousands except per share data) Operating Revenue $ 127,665 $ 125,837 Operating Margin 49,566 46,391 Cost of Operations 37,601 34,922 Nonoperating Expense 7,347 7,094 Net Earnings 2,619 2,125 Earnings Per Share $ 0.28 $ 0.24 21 Nine month earnings ended September 30, 1996 were negatively affected by several factors: 1) the after tax charge against income of $753,000 to establish a reserve for unrecovered gas costs; 2) after tax charges of $216,000 for revaluation of non regulated assets; 3) after tax accruals of $215,000 as a result of the change in year end; and 4) an after tax expense increase of $234,000 primarily for actuarial changes in interest rate assumptions for the retirement plans. Additionally, there was $81,000 of after tax expense related to the amortization of Washington deferred postretirement medical cost which commenced with the Washington general rate case order. ------------------------------------------------------------------------------ FORWARD-LOOKING STATEMENTS Statements contained in this report which are not historical in nature are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual future results to differ materially. Such risks and uncertainties with respect to the Company include its ability to successfully implement internal performance goals, competition from alternative forms of energy, the effects of state and federal regulation, performance issues with key natural gas suppliers, the capital-intensive nature of the Company's business, regulatory issues, including rate relief to recover increased capital and operating costs, the weather, competition, exposure to environmental cleanup requirements, general economic conditions and specific economic conditions in the Company's service area. 22 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 September 30, 1996, and December 31, 1995, and the related consolidated statements of net earnings, common shareholders' equity, and cash flows for the nine months ended September 30, 1996, and each of the two 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 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 September 30, 1996, and December 31, 1995, and the results of their operations and their cash flows for the nine months ended September 30, 1996, and each of the two years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP November 1, 1996 23 CASCADE NATURAL GAS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF NET EARNINGS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) NINE MONTHS ENDED YEARS ENDED SEPTEMBER 30 DECEMBER 31 1996 1995 1994 (NOTE 2) OPERATING REVENUES Gas sales $ 114,548 $ 171,254 $ 185,341 Transportation revenue 12,973 11,300 6,871 Other operating income 144 190 198 ----------- ----------- ----------- 127,665 182,744 192,410 Less Gas purchases 69,679 102,858 118,083 Revenue taxes 8,420 11,480 11,500 ----------- ----------- ----------- OPERATING MARGIN 49,566 68,406 62,827 ----------- ----------- ----------- COST OF OPERATIONS Operating expenses 25,058 30,818 30,202 Depreciation and amortization 9,362 11,733 10,921 Property and payroll taxes 3,181 4,051 4,039 ----------- ----------- ----------- 37,601 46,602 45,162 ----------- ----------- ----------- Earnings from operations 11,965 21,804 17,665 ----------- ----------- ----------- NONOPERATING EXPENSE (INCOME) Interest 7,459 9,938 8,090 Interest charged to construction (569) (394) (203) ----------- ----------- ----------- 6,890 9,544 7,887 Amortization of debt issuance expense 459 606 593 Other (2) (586) (80) ----------- ----------- ----------- 7,347 9,564 8,400 ----------- ----------- ----------- EARNINGS BEFORE INCOME TAXES 4,618 12,240 9,265 INCOME TAXES 1,606 4,508 3,505 ----------- ----------- ----------- EARNINGS BEFORE PREFERRED DIVIDENDS 3,012 7,732 5,760 PREFERRED DIVIDENDS 393 539 558 ----------- ----------- ----------- NET EARNINGS $ 2,619 $ 7,193 $ 5,202 ----------- ----------- ----------- NET EARNINGS PER COMMON SHARE $ 0.28 $ 0.80 $ 0.60 ----------- ----------- ----------- AVERAGE SHARES OUTSTANDING 9,266 8,997 8,707 ----------- ----------- -----------
See notes to consolidated financial statements 24 CASCADE NATURAL GAS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) ASSETS SEPTEMBER 30 DECEMBER 31 1996 1995 UTILITY PLANT (Note 3) $ 383,771 $362,924 Less accumulated depreciation 147,599 138,831 ----------- ----------- 236,172 224,093 Construction work in progress 19,497 14,957 ----------- ----------- 255,669 239,050 ----------- ----------- OTHER ASSETS Investments in non utility property 667 919 Notes receivable, less current maturities 1,777 2,426 ----------- ----------- 2,444 3,345 ----------- ----------- CURRENT ASSETS Cash and cash equivalents 543 2,197 Accounts receivable, less allowance of $439 and $425 for doubtful accounts 11,646 26,483 Current maturities of notes receivable 631 809 Materials, supplies, and inventories 6,063 6,047 Prepaid expenses and other assets 5,723 2,353 ----------- ----------- 24,606 37,889 ----------- ----------- DEFERRED CHARGES 13,662 16,614 ----------- ----------- $ 296,381 $ 296,898 ----------- ----------- ----------- ----------- See notes to consolidated financial statements 25 CASCADE NATURAL GAS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) COMMON SHAREHOLDERS' EQUITY, PREFERRED STOCKS, AND LIABILITIES SEPTEMBER 30 DECEMBER 31 1996 1995 COMMON SHAREHOLDERS' EQUITY Common stock, par value $1 per share (Note 5) Authorized, 15,000,000 shares; issued and outstanding, 10,786,585 and 9,144,448 shares $ 10,787 $ 9,144 Additional paid-in capital 93,438 71,098 Retained earnings 4,901 9,297 ----------- ----------- 109,126 89,539 ----------- ----------- REDEEMABLE PREFERRED STOCKS, (Note 4) aggregate redemption amount of $7,097 and $7,103 6,851 6,851 ----------- ----------- LONG-TERM DEBT (Note 7) 101,850 102,100 ----------- ----------- CURRENT LIABILITIES Notes payable (Note 6) -- 32,000 Accounts payable 17,599 16,392 Property, payroll, and excise taxes 3,113 4,578 Dividends and interest payable 6,570 4,365 Other current liabilities 2,931 4,646 ----------- ----------- 30,213 61,981 ----------- ----------- DEFERRED CREDITS Gas cost changes 21,578 10,934 Income taxes (Note 8) 16,184 16,461 Investment tax credits 3,031 3,207 Other 7,548 5,825 ----------- ----------- 48,341 36,427 ----------- ----------- COMMITMENTS AND CONTINGENCIES (Notes 10 and 11) - - ----------- ----------- $ 296,381 $ 296,898 ----------- ----------- ----------- ----------- See notes to consolidated financial statements 26 CASCADE NATURAL GAS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) COMMON STOCK ADDITIONAL RETAINED SHARES PAR VALUE PAID-IN CAPITAL EARNINGS 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 Common stock issued: Public offering 1,487,700 1,488 20,108 Employee savings plan and retirement trust (401(k)) 33,893 34 492 Director stock award plan 1,800 2 26 Dividend reinvestment plan 118,744 119 1,714 Cash dividends: Common stock, $.96 per share (7,015) Preferred stock, senior, $.55 per share (40) 7.85% cumulative preferred stock, $7.85 per share (353) Earnings before preferred dividends 3,012 ---------- ---------- ---------- ---------- BALANCE, SEPTEMBER 30, 1996 10,786,585 $10,787 $ 93,438 $ 4,901 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
See notes to consolidated financial statements 27 CASCADE NATURAL GAS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS) NINE MONTHS ENDED YEARS ENDED SEPTEMBER 30 DECEMBER 31 1996 1995 1994 OPERATING ACTIVITIES Earnings before preferred dividends $ 3,012 $ 7,732 $ 5,760 Adjustments to reconcile earnings before preferred dividends to net cash provided by operating activities: Depreciation 9,362 12,131 11,239 Write-down of assets 154 - 700 Amortization of gas cost changes 1,308 3,508 (3,361) Increase (decrease) in deferred income taxes (276) 1,079 1,674 Decrease in deferred investment tax credits (175) (265) (275) Cash provided (used) by changes in operating assets and liabilities: Accounts receivable 14,835 2,400 (2,346) Income taxes (2,905) 105 (476) Inventories 481 201 34 Gas cost changes 9,336 2,226 4,993 Deferred items 4,345 (4,144) (662) Accounts payable and accrued expenses 281 1,560 (3,661) Prepaid expenses and other assets (512) (1,111) (725) Other (16) (399) (43) ------------ ------------ ------------ Net cash provided by operating activities 39,230 25,023 12,851 ------------ ------------ ------------ INVESTING ACTIVITIES Capital expenditures (26,053) (37,637) (27,251) New consumer loans (666) (1,243) (1,393) Receipts on consumer loans 1,511 2,277 2,580 Purchase of securities available for sale - (4,107) (1,502) Proceeds from securities available for sale - 5,605 752 ------------ ------------ ------------ Net cash used by investing activities (25,208) (35,105) (26,814) ------------ ------------ ------------ FINANCING ACTIVITIES Issuance of common stock 23,155 2,293 4,400 Redemption of preferred stock -- (362) (309) Proceeds from long-term debt, net -- 2,100 17,838 Repayment of long-term debt (250) (5,000) -- Proceeds from (repayment of) notes payable, net (32,000) 17,499 999 Dividends paid (6,581) (8,200) (8,154) ------------ ------------ ------------ Net cash provided (used) by financing activities (15,676) 8,330 14,774 ------------ ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,654) (1,752) 811 CASH AND CASH EQUIVALENTS Beginning of year 2,197 3,949 3,138 ------------ ------------ ------------ End of year $ 543 $ 2,197 $ 3,949 ------------ ------------ ------------ ------------ ------------ ------------ SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the year for: Interest (net of amounts capitalized) $ 6,890 $ 8,597 $ 7,381 Income taxes $ 1,606 $ 2,786 $ 2,567
See notes to consolidated financial statements 28 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 towns in Washington and Oregon, ranging from the Canadian border in northwestern Washington to the Idaho border in eastern Oregon. As of September 30, 1996, the Company had approximately 152,000 core customers and 152 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 21% of gas deliveries and 70% of operating margin. The Company's sales to its core residential and commercial customers are influenced by fluctuations in temperature, particularly during the winter season. A warm winter season will tend to reduce gas consumption. 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 the Company's distribution service. 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. CHANGE IN YEAR END: Beginning in 1996, the Company changed its fiscal year end to September 30 to include the fall-winter heating season within a single financial reporting period. As a result of this change, the reporting period for 1996, unless otherwise noted, is the nine months ended September 30, 1996. The period ended September 30, 1996 is not indicative of a full year. 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%. 29 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%. MATERIALS, SUPPLIES AND INVENTORIES: Materials and supplies for construction and maintenance are recorded at cost. Inventories of natural gas are stated at the lower of average cost or market. DEFERRED CHARGES: Deferred charges consist primarily of debt issuance costs 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 four 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. 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. 30 NOTE 3 - UTILITY PLANT Utility plant consists of the following components: SEPTEMBER 30 DECEMBER 31 (DOLLARS IN THOUSANDS) 1996 1995 - ------------------------------------------------------------- Distribution plant $ 332,094 $ 311,624 Transmission plant 14,086 14,086 Production plant 1,053 1,053 General plant 30,999 30,622 Intangible plant 212 212 Nondepreciable plant 5,327 5,327 ------------ ------------ $ 383,771 $ 362,924 NOTE 4 - REDEEMABLE PREFERRED STOCKS
SEPTEMBER 30, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994 (DOLLARS IN THOUSANDS) SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT - ---------------------------------------------------------------------------------------------------------------------- 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 96,560 851 135,427 1,217 167,676 1,528 Retirements - - 38,867 366 32,249 311 ---------------------------------------------------------------------------- Authorized, issued, and outstanding at end of year 156,560 $ 6,851 156,560 $ 6,851 195,427 $ 7,217
Senior preferred stock is subject to mandatory redemption as follows: (DOLLARS IN THOUSANDS) SHARES AMOUNT - --------------------------------------------------------------------- 1997 24,810 $ 248 1998 25,000 $ 250 1999 25,000 $ 250 2000 14,500 $ 145 2001 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. 31 NOTE 5 - COMMON STOCK At September 30, 1996, shares of common stock are reserved for issuance as follows:
NUMBER OF SHARES PURCHASE OR CONTRIBUTION PRICE PER SHARE - -------------------------------------------------------------------------------------------------------------- Employee Savings Plan and Retirement Trust (401(k) plan) 197,051 Market closing price of common stock immediately prior to purchase by the trustee. Dividend reinvestment plan 228,875 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 7,800 Market closing price of common stock on the day of the Company's annual meeting. --------- 433,726
In August 1996, the Company issued an additional 1,487,700 shares of common stock at a price to the public of $15.25 per share, resulting in net proceeds of $21,596,000. 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. The annual commitment fee is 1/8 of 1% and the committed lines of credit also support a money market facility and 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 September 30, 1996, $1,850,000 was outstanding for a fixed term of five years.
SEPTEMBER 30 DECEMBER 31 DECEMBER 31 (DOLLARS IN THOUSANDS) 1996 1995 1994 - ----------------------------------------------------------------------------------------------------- Amount outstanding $ - $ 32,000 $ 14,501 Average daily balance outstanding 15,664 13,170 15,217 Average interest rate, excluding commitment fee 5.77% 6.29% 4.87% Maximum month end amount outstanding 27,500 32,000 23,941
32 NOTE 7 - LONG-TERM DEBT Long -term debt consists of the following: SEPTEMBER 30 DECEMBER 31 (DOLLARS IN THOUSANDS) 1996 1995 - -------------------------------------------------------------------------------- 6.53% Five Year Term Note 1,850 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 -------- -------- $101,850 $102,100 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 $25,995,000 is available for payment of dividends as of September 30, 1996. Long-term debt matures as follows: $10,000,000 in 1998, none in 1999, $1,850,000 in 2000, none in 2001, and $90,000,000 thereafter. There are no current maturities. NOTE 8 - INCOME TAXES 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: NINE MONTHS ENDED YEAR ENDED SEPTEMBER 30 DECEMBER 31 DECEMBER 31 (DOLLARS IN THOUSANDS) 1996 1995 1994 - -------------------------------------------------------------------------------- Current tax expense $1,108 $2,661 $2,120 Deferred tax expense 673 2,112 1,660 Amortization of deferred investment tax credits (175) (265) (275) ------------------------------------- $1,606 $4,508 $3,505 33 A reconciliation between income taxes calculated at the statutory federal tax rate and income taxes reflected in the financial statements is as follows:
NINE MONTHS ENDED YEAR ENDED SEPTEMBER 30 DECEMBER 31 DECEMBER 31 (DOLLARS IN THOUSANDS) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------ Statutory federal income tax rate 34% 35% 35% Income tax calculated at statutory federal rate $ 1,570 $ 4,284 $ 3,243 Increase (decrease) resulting from: State income tax, net of federal tax benefit 34 86 80 Differences between book and tax depreciation 251 339 468 Amortization of investment tax credits (175) (265) (275) Other (74) 64 (11) ------------------------------------------------- $ 1,606 $ 4,508 $ 3,505
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: SEPTEMBER 30 DECEMBER 31 (DOLLARS IN THOUSANDS) 1996 1995 - -------------------------------------------------------------------------------- Deferred tax liabilities: Differences between book and tax basis of property $ 14,173 $ 13,910 Debt refinancing costs 2,175 2,315 Retirement benefit obligations 1,066 1,359 Other - 1 ------------------------ 17,414 17,585 Deferred tax assets: Valuation reserves 363 313 Retirement benefit obligations 420 434 Provision for doubtful accounts 179 173 Other 268 204 ------------------------ 1,230 1,124 ------------------------ Net deferred tax liability $ 16,184 $ 16,461 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 when the executive reaches age 55 and has completed five years of participation under the plan, upon death, or change of control. 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. 34 The funded status of the defined benefit pension and supplemental retirement plans and amounts recognized in the Company's financial statements are shown as follows:
PENSION PLAN SUPPLEMENTAL RETIREMENT PLAN SEPTEMBER 30 DECEMBER 31 SEPTEMBER 30 DECEMBER 31 (DOLLARS IN THOUSANDS) 1996 1995 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------- Actuarial present value of accumulated benefit obligations: Vested $ 21,960 $ 21,863 $ 2,875 $ 3,141 Nonvested 208 195 219 199 ----------------------------------------------------- $ 22,168 $ 22,058 $ 3,094 $ 3,340 ----------------------------------------------------- Projected benefit obligation for services rendered to date $(25,837) $(26,618) $(3,636) $(3,813) Plan assets, at fair value, primarily common stocks, corporate bonds, and life insurance policies 21,432 19,376 4,131 3,430 ----------------------------------------------------- Projected benefit obligation in excess of plan assets (4,405) (7,242) 495 (383) Unrecognized amounts: Prior service cost 3,464 3,754 (257) (284) Loss (gain) from past experience different from that assumed 871 4,689 704 949 Net transition obligation 18 22 1,028 1,103 Adjustment to recognize minimum liability (684) (3,777) - - ----------------------------------------------------- Prepaid (accrued) pension cost $ (736) $ (2,554) $ 1,970 $ 1,385
Net pension cost for both plans included the following components:
NINE MONTHS ENDED YEAR ENDED SEPTEMBER 30 DECEMBER 31 DECEMBER 31 (DOLLARS IN THOUSANDS) 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------- Service cost of benefits earned during the period $ 1,095 $ 1,171 $ 1,271 Interest cost on projected benefit obligation 1,684 1,936 2,044 Actual return on plan assets (2,274) (4,057) (1,101) Deferral of unrecognized loss (gain) and amortization, net 1,179 2,916 (524) Amount recognized due to settlement - - 16 ------------------------------------------------- $ 1,684 $ 1,966 $ 1,706
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 7.25% to 8.25% in 1996 and from 8.75% to 7.25% in 1995. SUPPLEMENTAL PENSION PLAN RETIREMENT PLAN (DOLLARS IN THOUSANDS) 1996 1995 1996 1995 - --------------------------------------------------------------------------- Effect of change in discount rate $(2,970) $ 4,500 $ (190) $ 700 Effect of admendment to pension plan N/A 1,800 N/A (300) 35 The following assumptions were used to determine the projected benefit obligation and expected return on assets at: SEPTEMBER 30 DECEMBER 31 DECEMBER 31 (DOLLARS IN THOUSANDS) 1996 1995 1994 - -------------------------------------------------------------------------------- Pension plan: Discount rate 8.25% 7.25% 8.75% Long-term rate of return on plan assets 9.00% 9.00% 8.50% Rate of increase in future compensation levels 5.00% 5.00% 5.00% Supplemental retirement plan: Discount rate 8.25% 7.25% 8.75% 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. Beginning January 1, 1997, the matching rate will increase to 75% with the increased contribution in the form of Company stock. The Company recognized costs for contributions to this plan of $377,000, $458,000, and $474,000 for 1996, 1995 and 1994, 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 deferred the portion of the annual PBOP accrual attributable to Washington regulated operations in excess of the cash basis of recording these expenses through July 31, 1996. The amounts so deferred have been $767,000, $1,028,000, and $1,892,000 in 1996, 1995, and 1994 respectively. On August 1, 1996 new customer tariff rates were approved by the WUTC in the general rate case. Accordingly, the PBOP deferrals ceased and the balance is being amortized concurrently with the new rates. Amounts accrued for PBOP, not including the above mentioned deferrals, consist of the following components:
NINE MONTHS ENDED YEAR ENDED SEPTEMBER 30 DECEMBER 31 DECEMBER 31 (DOLLARS IN THOUSANDS) 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------- Service cost $ 326 $ 366 $ 523 Net interest cost 939 1,114 1151 Actual return on plan assets (317) (627) 12 Net amortization and deferral 492 934 551 ------------------------------------------------ $ 1,440 $ 1,787 $ 2,237
36 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. SEPTEMBER 30 DECEMBER 31 (DOLLARS IN THOUSANDS) 1996 1995 - ------------------------------------------------------------------------------ Accumulated postretirement benefit obligation (APBO): Retirees $ 4,811 $ 4,058 Fully eligible active plan participants 5,416 5,948 Other active plan participants 5,796 7,168 ---------------------- 16,023 17,174 Plan assets, at fair value, primarily common stocks and corporate bonds 5,376 4,194 ---------------------- Funded status (10,647) (12,980) Unrecognized transition obligation 10,676 11,169 Unrecognized (gain) loss (1,678) 349 ---------------------- Accrued postretirement benefit cost $ (1,649) $ (1,462) The assumed health care cost trend rate used in measuring the APBO is 9.5% for 1997, trending down to 5.5% at 2005. At January 1, 1996, the census and per capita claims cost assumptions were updated, resulting in a reduction in the APBO of approximately $300,000. The assumed discount rate used in determining the APBO was 8.25% at September 30, 1996, and 7.25% at December 31, 1995. The effect of the increase in the discount rate was a decrease of approximately $2.3 million in the APBO at September 30, 1996. A one percentage point increase in the assumed health care cost trend rate for each year would increase the APBO by approximately 15.6% and the service and interest cost components of net postretirement health care cost by approximately 17.4%. 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 32,850,000 therms annually or the Company will incur a penalty charge on therms not taken below that amount. This contract's primary term ends October 31, 1998. Another contract has a 42% annual take requirement, equaling an obligation of 41,475,315 therms per year through 2004. Among the Company's other multi-year agreements is a 15- year contract for winter-only ( October through March) supply that has a 70% minimum take requirement, which equates to a purchase requirement of 9,841,650 therms per year. 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 4,380,000 therms annually. 37 The Company's minimum obligations under these contracts are set forth in the following table. The amounts are based on current contract price terms and estimated commodity prices, which are subject to change.
INTERSTATE FIRM TRANSPORTATION STORAGE AND TOTAL (DOLLARS IN THOUSANDS) GAS SUPPLY CHARGES PEAKING SERVICE - ----------------------------------------------------------------------------------------------------------------------------- Fiscal Years: 1997 $ 15,805 $ 27,924 $ 5,029 $ 48,758 1998 15,376 28,045 4,897 48,318 1999 13,240 27,862 4,079 45,181 2000 12,801 27,826 3,890 44,517 2001 11,091 27,826 3,890 42,807 Thereafter 40,629 341,350 49,982 431,961 --------------------------------------------------------------------- $ 108,942 $ 480,833 $ 71,767 $ 661,542
Purchases under these contracts for 1994, 1995, and 1996, including commodity purchases, as well as demand charges have been as follows:
INTERSTATE FIRM TRANSPORTATION STORAGE AND TOTAL (DOLLARS IN THOUSANDS) GAS SUPPLY CHARGES PEAKING SERVICE - ----------------------------------------------------------------------------------------------------------------------------- 1994 $ 54,695 $22,751 $ 4,639 $82,085 1995 $ 45,223 $28,548 $ 4,722 $78,493 1996 (nine months) $ 32,075 $19,002 $ 3,718 $54,795
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 $72,000 are adequate to complete the remediation. During the first quarter of 1995, a claim related to environmental contamination from a manufactured gas plant site in Oregon previously operated 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 possible costs 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 1996 and 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. 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 are shown as follows:
SEPTEMBER 30, 1996 DECEMBER 31, 1995 (DOLLARS IN THOUSANDS) CARRYING AMOUNT ESTIMATED FAIR VALUE CARRYING AMOUNT ESTIMATED FAIR VALUE Assets: Cash and cash equivalents $ 543 $ 543 $ 2,197 $ 2,197 Notes receivable, including current maturities 2,406 2,423 3,235 3,234 Accounts receivable 11,645 11,645 26,483 26,483 Redeemable Preferred Stock 6,851 6,757 6,851 7,324 Liabilities: Long-term debt 101,850 103,867 102,100 111,615 Notes Payable - - 32,000 32,000
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. NOTE 14 - INTERIM FINANCIAL INFORMATION (UNAUDITED)
(DOLLARS IN THOUSANDS QUARTER ENDED QUARTER ENDED EXCEPT PER SHARE DATA) 9/30/96 6/30/96 3/31/96 12/31/95 9/30/95 6/30/95 3/31/95 - ----------------------------------------------------------------------------------------------------------------------------- Operating revenues $26,584 $33,461 $67,620 $56,907 $26,512 $34,715 $64,610 Gas costs and revenue taxes 15,082 21,034 41,983 34,892 16,028 21,833 41,585 ------- ------- ------- ------- ------- ------- ------- Operating margin 11,502 12,427 25,637 22,015 10,484 12,882 23,025 Cost of operations 12,635 12,374 12,592 11,680 11,475 11,768 11,679 ------- ------- ------- ------- ------- ------- ------- Earnings from operations (1,133) 53 13,045 10,335 (991) 1,114 11,346 Interest and other, net 2,373 2,524 2,450 2,470 2,425 2,366 2,303 ------- ------- ------- ------- ------- ------- ------- Earnings before income taxes (3,506) (2,471) 10,595 7,865 (3,416) (1,252) 9,043 Income taxes (1,504) (715) 3,825 2,666 (1,099) (369) 3,310 Preferred dividends 131 131 131 131 136 136 136 ------- ------- ------- ------- ------- ------- ------- Net earnings (loss) ($2,133) ($1,887) $6,639 $5,068 ($2,453) ($1,019) $5,597 ------- ------- ------- ------- ------- ------- ------- Earnings (loss) per share ($0.22) ($0.20) $0.72 $0.56 ($0.27) ($0.11) $0.63 ------- ------- ------- ------- ------- ------- -------
39 Note 14 - Interim Financial Information (unaudited) - (continued) CONSOLIDATED CONDENSED STATEMENTS OF NET EARNINGS Nine Months Ended Sep. 30, 1995 ------------- (dollars in thousands except per share data) Operating revenues Gas sales $ 117,879 Transportation revenue 7,819 Other operating income 139 ------------- 125,837 Less: Gas purchases 71,238 Revenue taxes 8,208 ------------- Operating margin 46,391 ------------- Cost of operations Operating expenses 23,470 Depreciation and amortization 8,273 Property and payroll taxes 3,116 ------------- 34,859 ------------- Earnings from operations 11,532 Less interest and other deductions - net 7,157 ------------- Earnings before income taxes 4,375 Income taxes 1,842 ------------- Earnings before preferred dividends 2,533 Preferred dividends 408 ------------- Net earnings $ 2,125 ------------- ------------- Common shares outstanding: Weighted average 8,977 End of period 9,098 ------------- Net earnings per common share $ 0.24 ------------- ------------- 40 Note 14 - Interim Financial Information (unaudited) - (continued) CONSOLIDATED CONDENSED BALANCE SHEETS Sep. 30, 1995 ------------- ------------- (dollars in thousands) ASSETS Utility Plant, net after accumulated depreciation of $136,248 $ 221,222 Construction work in progress 5,896 ------------- 227,118 ------------- Other Assets: Investments 918 Notes receivable, less current maturities 2,335 ------------- 3,253 ------------- Current Assets: Cash and cash equivalents 718 Securities available for sale 2,054 Accounts receivable, less allowance of $409 for doubtful accounts 10,820 Current maturities of notes receivable 868 Materials, supplies and inventories 6,124 Prepaid expenses and other assets 2,689 ------------- 23,273 ------------- Deferred Charges 13,642 ------------- $ 267,286 ------------- ------------- COMMON SHAREHOLDERS' EQUITY, PREFERRED STOCKS AND LIABILITIES Common Shareholders' Equity: Common stock, par value $1 per share, authorized 15,000,000 shares Issued and outstanding 9,098,133 $ 9,098 Additional paid-in capital 70,400 Retained earnings 6,424 ------------- 85,922 ------------- Redeemable Preferred Stocks, aggregate redemption amount of $7,479 7,200 ------------- Long-term Debt 100,000 ------------- Current Liabilities: Notes payable 19,001 Accounts payable 7,513 Property, payroll and excise taxes 3,004 Dividends and interest payable 6,236 Other current liabilities 2,015 Current maturities of long-term debt 5,000 ------------- 42,769 ------------- Deferred Credits: Gas cost changes 5,187 Other 26,208 ------------- 31,395 ------------- Commitments and Contingencies - ------------- $ 267,286 ------------- 41 Note 14 - Interim Financial Information (unaudited) - (continued) CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended (dollars in thousands) Sep. 30, 1995 ------------- Operating Activities: Net earnings before preferred dividends $ 2,533 Adjustments to reconcile net earnings before preferred dividends to net cash provided by operating activities: Depreciation 8,998 Amortization of gas cost changes 2,520 Increase in deferred income taxes 1,506 Decrease in deferred investment tax credits (180) Cash provided (used) by changes in operating assets and liabilities: Accounts receivable 18,063 Income taxes (1,716) Inventories 169 Gas cost changes (1,740) Deferred items (1,793) Accounts payable and accrued expenses (9,587) Prepaid expenses and other assets 310 Other (4) ------------- Net cash provided by operating activities 19,079 ------------- Investing Activities: Capital expenditures (22,586) New consumer loans (793) Receipts on consumer loans 1,492 Purchase of securities available for sale (1,813) Proceeds from securities available for sale 1,230 ------------- Net cash used by investing activities (22,470) ------------- Financing Activities: Issuance of common stock, net 1,821 Redemption of preferred stock (17) Proceeds from notes payable, net 4,500 Dividends paid (6,144) ------------- Net cash provided by financing activities 160 ------------- Net Decrease in Cash and Cash Equivalents (3,231) Cash and Cash Equivalents: Beginning of period 3,949 ------------- End of period $ 718 ------------- 42 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 September 30, 1996, December 31, 1995 and 1994, and for the nine months ended September 30, 1996, and for each of the two years in the period ended December 31, 1995, and have issued our report thereon dated November 1, 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 November 1, 1996 43 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, 1994 $490 340 369 $461 December 31, 1995 $461 330 366 $425 September 30, 1996 $425 440 426 $439 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 September 30, 1996 $1,249 288 $1,537 Valuation Reserve - Investments December 31, 1994 $0 150 $150 December 31, 1995 $150 0 $150 September 30, 1996 $150 154 304 $0
44 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 45 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 1997 Annual Meeting (the 1997 Proxy Statement), which information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. Refer to the information regarding executive compensation set forth in the 1997 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 1997 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 1997 Proxy Statement, which information is incorporated herein by reference. 46 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 Nine Months Ended September 30, 1996, and the Years Ended December 31, 1995, and 1994 Consolidated Balance Sheets, September 30, 1996, and December 31, 1995 Consolidated Statements of Common Shareholders' Equity for the Nine Months Ended September 30, 1996, and Years Ended December 31, 1995, and 1994 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1996, and the Years Ended December 31, 1995, and 1994 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: On July 19, 1996, the registrant filed a report on Form 8-K, dated July 18, 1996, to include as exhibits an updated description of the registrant's common stock and related preferred stock purchase rights and the registrant's restated articles of incorporation and restated bylaws as recently amended. 47 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 December 20, 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 December 20, 1996 - --------------------------- (Principal Executive Officer) ----------------- W. Brian Matsuyama Date President and /s/ Ralph E. Boyd Chief Operating Officer December 20, 1996 - --------------------------- ----------------- Ralph E. Boyd Date Vice President - Finance, /s/ J. D. Wessling Chief Financial Officer December 20, 1996 - --------------------------- (Principal Financial Officer) ----------------- J. D. Wessling Date Treasurer and Chief /s/ James E. Haug Accounting Officer December 20, 1996 - --------------------------- (Principal Accounting Officer) ----------------- James E. Haug Date /s/ Carl Burnham, Jr. Director December 20, 1996 - --------------------------- ----------------- Carl Burnham, Jr. Date /s/ Melvin C. Clapp Director December 20, 1996 - --------------------------- ----------------- Melvin C. Clapp Date /s/ Thomas E. Cronin Director December 20, 1996 - --------------------------- ----------------- Thomas E. Cronin Date /s/ David A. Ederer Director December 20, 1996 - --------------------------- ----------------- David A. Ederer Date /s/ Howard L. Hubbard Director December 20, 1996 - --------------------------- ----------------- Howard L. Hubbard Date /s/ Larry L. Pinnt Director December 20, 1996 - --------------------------- ----------------- Larry L. Pinnt Date /s/ Brooks G. Ragen Director December 20, 1996 - --------------------------- ----------------- Brooks G. Ragen Date /s/ Mary A. Williams Director December 20, 1996 - --------------------------- ----------------- Mary A. Williams Date 48 INDEX TO EXHIBITS EXHIBIT NO. DESCRIPTION - --- ----------- 3.1 Restated Articles of Incorporation of the Registrant as amended through March 28, 1996. Incorporated by reference to Exhibit 3.1 to the Registrant's current report on Form 8-K dated July 18, 1996. 3.2 Restated Bylaws of the Registrant. Incorporated by reference to Exhibit 3.2 to the Registrant's current report on Form 8-K dated July 18, 1996. 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 First 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. Incorporated by reference to Exhibit 10.1 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995. 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 dated October 29, 1996 to Natural Gas Sales Agreement dated November 1, 1990, between Canadian Hydrocarbons Marketing, Inc., and the Registrant. A PORTION OF THIS AGREEMENT IS SUBJECT TO A REQUEST FOR CONFIDENTIAL TREATMENT. 49 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. Incorporated by reference to Exhibit 10.17.1 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995. 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. 50 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. 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. Incorporated by reference to Exhibit 10.28 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995. 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 or compensatory plan or arrangement. 51 EX-10.7 2 EXHIBIT 10.7 EXHIBIT 10.7 October 29, 1996 Cascade Natural Gas Corporation 222 Fairview Avenue North Seattle, Washington U.S.A. 98109 Attention: Ms. Melissa Whitten Dear Madam: Re: Canadian Hydrocarbons Marketing Inc./Cascade Natural Gas Corporation Natural gas Sales Agreement Dated November 1, 1990 As Amended Pursuant to Section 7.09 of the captioned agreement, Westcoast Gas Services, Inc. ("WGSI") and Cascade Natural Gas Corporation ("CASCADE") agree that the following Gas Commodity Price and Reserves Standby Fee shall apply for the contract year November 1, 1996 to October 31, 1997. (A) GAS COMMODITY PRICE The Gas Commodity Price payable by Cascade per MMBtu of gas delivered shall be calculated monthly based upon the following: Sumas Index Plus US$[*]MMBtu. Minus those related Westcoast Energy Inc. Demand Charges paid by Cascade for the applicable contract month converted to US$/MMBtu unit rate assuming a 100% load factor. MINUS a Reserves Standby Charge credit of US$[*]MMBtu. (B) RESERVES STANDBY FEE The Reserves Standby Fee shall be rolled over at the existing fee of US$[*]MMBtu. Please indicate your acceptance of the foregoing by signing both copies of this letter and return one copy to WGSI for our files. Yours truly, WESTCOAST GAS SERVICES, INC. Jeff A. Thompson Director, Supply and Marketing ACCEPTED AND AGREED TO this 31st day of October 1996 CASCADE NATURAL GAS CORPORATION Per: /s/ King Oberg ---------------- King Oberg Title: Vice President, Gas Supply ------------------------------ [*]=CONFIDENTIAL Information omitted and filed separately with the commission 56 EX-12 3 EXHIBIT 12 EXHIBIT 12 CASCADE NATURAL GAS CORPORATION AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDEND REQUIREMENTS
Year Ended ------------------------------------------------------------------------ 9/30/96 12/31/95 12/31/94 12/31/93 12/31/92 ------------ ------------ ------------ ------------ ------------ (dollars in thousands) Fixed charges, as defined: Interest expense $ 10,101 9,938 8,090 7,038 $ 7,478 Amortization of debt issuance expense 612 606 593 562 402 ---------- ---------- ---------- ---------- ---------- Total fixed charges $ 10,713 10,544 8,683 7,600 $ 7,880 ---------- ---------- ---------- ---------- ---------- Earnings, as defined: Earnings before preferred dividends $ 8,211 7,732 5,760 9,103 $ 4,843 Add (deduct): Income taxes 4,272 4,508 3,505 5,224 2,817 Cumulative effect of change in accounting method - - - (209) - Fixed charges 10,713 10,544 8,683 7,600 7,880 ---------- ---------- ---------- ---------- ---------- Total earnings $ 23,196 22,784 17,948 21,718 $ 15,540 ---------- ---------- ---------- ---------- ---------- Ratio of earnings to fixed charges 2.17 2.16 2.07 2.86 1.97 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Fixed charges and preferred dividend requirements: Fixed charges $ 10,713 10,544 8,683 7,600 $ 7,880 Preferred dividend requirements 819 853 898 913 941 ---------- ---------- ---------- ---------- ---------- Total $ 11,532 11,397 9,581 8,513 $ 8,821 ---------- ---------- ---------- ---------- ---------- Ratio of earnings to fixed charges and preferred dividend requirements 2.01 2.00 1.87 2.55 1.76 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
52 EX-23 4 EXHIBIT 23 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 33-71286, No. 33-51377, No. 33-38501, and No. 33-29801 on Forms S-3, and No. 33-61035 and No. 33-39873 on Form S-8 of Cascade Natural Gas Corporation, of our reports dated November 1, 1996, appearing in this Annual Report on Form 10-K of Cascade Natural Gas Corporation for the nine months ended September 30, 1996. DELOITTE & TOUCHE LLP Seattle, Washington December 16, 1996 53 EX-27 5 EXHIBIT 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 TRANSITION PERIOD ENDED SEPTEMBER 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS SEP-30-1996 SEP-30-1996 PER-BOOK 255,669 2,444 24,606 13,662 0 296,381 10,787 93,438 4,901 109,126 6,851 0 101,850 0 0 0 0 0 0 0 78,554 296,381 127,665 1,606 115,700 115,700 11,965 2 11,967 7,349 3,012 393 2,619 7,015 0 39,230 0.28 0.28
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