-----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, MhtYJG8xFd84go55mXwR+SDkbaGCVNRDjesjzmqAjHh8jd8S22Fuo9MWe32/9R6e JrdYOd5gxECijWkSaa9qig== 0001047469-98-045033.txt : 19981228 0001047469-98-045033.hdr.sgml : 19981228 ACCESSION NUMBER: 0001047469-98-045033 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981224 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: SEC FILE NUMBER: 001-07196 FILM NUMBER: 98775327 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 10-K405 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 /x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 1998 Commission file number: 1-7196 CASCADE NATURAL GAS CORPORATION (Exact name of Registrant as specified in its charter) 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 offices) 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 and non-voting common equity held by non-affiliates of the registrant as of the close of business on November 30, 1998, was $200,092,850 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 11,045,095 as of November 30, 1998 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive proxy statement for its 1999 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 Fiscal Year Ended September 30, 1998 Table of Contents
Page Number ----------- Part I Item 1 - Business 3 Item 2 - Properties 9 Item 3 - Legal Proceedings 10 Item 4 - Submission of Matters to a Vote of Security Holders 10 Executive Officers of the Registrant 11 Part II Item 5 - Market for Registrant's Common Equity and Related Stockholder Matters 12 Item 6 - Selected Financial Data 13 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 7a- Quantitative and Qualitative Disclosures about Market Risk 23 Item 8 - Financial Statements and Supplementary Data 24 Item 9 - Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 44 Part III Item 10 - Directors and Executive Officers of the Registrant 44 Item 11 - Executive Compensation 44 Item 12 - Security Ownership of Certain Beneficial Owners and Management 44 Item 13 - Certain Relationships and Related Transactions 44 Part IV Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K 45 Signatures 46 Index to Exhibits 47
2 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 18% of its gas distribution revenues are from the state of Oregon. At September 30, 1998, the Company had 142,645 residential customers, 25,415 commercial customers, 436 firm industrial customers and 20 traditional interruptible customers, all of which are classified as core customers. In addition, there were 177 non-core customers. In the twelve month periods ended September 30, 1998 and September 30, 1997, residential and commercial customers accounted for 62% and 64% of the operating margin, and 15% and 20% of the total gas deliveries respectively. The non-core customers (including transportation service) provided the remaining operating margin and throughput. STATE REGULATION The Company's rates and practices are regulated by the Washington Utilities and Transportation Commission (WUTC) and the Oregon Public Utility Commission (OPUC). 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. Effective December 1998, with respect to such gas supplies delivered to Oregon customers, 67% of the cost changes between PGA effective dates are so deferred. The remaining 33% (increase or decrease) is absorbed by the Company. The Company is also subject to state regulation with respect to integrated resource planning, and its most recent update of its Integrated Resource Plan (IRP) was filed in 1997 with both the WUTC and the 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 possible growth scenarios for core customers and 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 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. Until the Company receives final regulatory approval of these decisions in the context of the rate making process, the Company cannot predict with certainty the extent to which the integrated resource planning process will affect its rates. 3 NATURAL GAS SUPPLY The majority of Cascade's supply of natural gas is transported via Williams Gas Pipelines - West (Williams), formerly Northwest Pipeline Corporation. Williams 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 and Electric Gas Transmission Northwest (PG&E GT NW) system. PG&E GT NW owns and operates a gas transmission line that connects with the facilities of the Alberta Natural Gas Company, Ltd. at the international border near Kingsgate, British Columbia 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 1999 through 2008 and totaling 714,830 therms per day. Approximately 93% 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. One with Williams 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, 2001 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, also with Williams for liquefied natural gas (LNG) storage is effective through October 31, 2014. Under this LNG agreement, Cascade is entitled to receive up to 600,000 therms per day to a maximum inventory of 5,622,000 therms. In addition to withdrawal and inventory capacity, Cascade 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. Cascade then takes the end-user's firm gas supply and pipeline capacity to serve its core markets. In return, Cascade reimburses the end-user for the cost of its alternate fuel and pipeline capacity. Since the end-user is also a distribution customer of Cascade, the supply is already being delivered to Cascade's system and is merely diverted to core customers, allowing for even greater accommodation of late day demand spikes. Because the end-user's response is dictated by contract and firm gas supply and firm pipeline capacity is involved, this type of resource is highly flexible and reliable. These peak shaving agreements which expire in 2014, entitle Cascade to call on 650,000 therms per day up to a seasonal total of 6,000,000 therms. However, Cascade may explore opportunities to market one of these agreements to potential third parties during the upcoming year. During 1998, Cascade purchased approximately 79% of its gas supplies from firm gas supply contracts and 21% from 30-day spot market contracts. In addition, 908.3 million therms of customer purchased supplies were transported through Cascade facilities. 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. Currently core gas is purchased primarily on fixed contracts. Management believes that this, together with use of storage volumes at a value determined at the time of injection, provides Cascade with the ability to mitigate the effects of short term, unexpected spikes in the market price of natural gas. 4 OREGON GAS COST ADJUSTMENTS Prior to December 1998, in Oregon Cascade was subject to an 80/20% sharing mechanism for changes in the commodity cost of gas supplies. If actual commodity gas prices were higher or lower than predicted in the PGA filing, 80% of the incremental change was passed through to core customers in rates while Cascade kept or absorbed the remaining 20%. Coupled with the 80/20 sharing was an Earnings Review Test. Cascade's ability to adjust rates to recover higher than predicted gas costs was limited to the extent that adjusted operating results during the relevant period exceeded rate of return ceilings calculated by the staff of the OPUC. For purposes of the test, adjustments, such as one to impute normal rather than actual weather, were made to operating results, consequently limitations on gas cost recovery could be imposed even when actual earnings were lower than staff's ceiling. Effective December 1st, the Company and OPUC staff agreed to drop the Earnings Review Test and modify the sharing mechanism for commodity gas cost changes to a 67/33% split. Most of Cascade's current gas supply portfolio for Oregon core customers is comprised of gas supplies that have a fixed commodity price, therefore management believes that there will be little risk or opportunity for the Company under the 67/33% sharing arrangement during the coming year. For a description of the customer rate reduction settlement effective September 1, 1997, see "Regulatory Matters" under Item 7. FEDERAL ENERGY REGULATORY COMMISSION (FERC) MATTERS Cascade is not subject to regulation by the FERC, however FERC actions can affect the amounts Cascade pays to interstate pipeline companies for interstate deliveries of natural gas supplies. Several FERC issues are pending before FERC, or are on appeal before the U.S. Court of Appeals, that may affect the prices Cascade pays. Since the policies of the WUTC and OPUC provide for 100% pass through of costs subject to FERC regulation, the Company expects that the final resolution of pending issues will not affect its net earnings. CURTAILMENT PROCEDURES In previous heating seasons, cold weather has required Cascade to significantly curtail deliveries to 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 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 charges to firm customers curtailed by reason of an insufficient supply of gas. TERRITORY SERVED AND FRANCHISES The population of communities served by Cascade totals approximately 780,000. 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 5 conduct of Cascade's present business. Franchises expire on various dates from 1999 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. Agreements with Cascade's 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 at least 30-days' notice. 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, producing 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, and electric power generation. Electric generation customers represent a significant portion of industrial revenues. The demand for gas fired generation is driven in part by the availability of hydroelectric generation. SEASONALITY Weather is an important factor affecting gas revenues because of the large number of customers using gas for space heating. For the fiscal year ended September 30, 1998, 67% of operating revenues and 97% of earnings from operations were derived from the first two quarters (October 1997 through March 1998). Because of the seasonality of space heating revenues, Cascade believes financial results for interim periods are not indicative of results to be expected for an entire year. To mitigate the seasonality of space heating revenues, the Company pursues a marketing strategy of encouraging the installation of gas water heaters by customers, since they are not as affected by weather conditions. 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. In addition, gas enjoys the advantage of being the preferred energy choice by builders for new construction. 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 have 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. 6 In addition to multiple alternative 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 who 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. 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. For detailed descriptions of specific environmental issues, see "Environmental Matters" under Item 7. CAPITAL EXPENDITURES Capital expenditures for fiscal 1999 are budgeted at $23.5 million. Including the 1999 budget, the Company will have spent over $150,000,000 in new plant in the five years ending in 1999, which is roughly equal to the amount expended during the nine year period from 1985 through 1993. Capital expenditures are primarily used to expand the Company's distribution system to serve its expanding customer base, as well as to increase deliverability on its existing system to accommodate increased customer utilization. The Company is currently forecasting that capital expenditures will total approximately $122,000,000 over the next five years, reflecting expectations that growth in the number of customers will continue at a pace similar to recent experience but lower spending on system reinforcement. Management performs quantitative and qualitative analyses to assure that the Company's goals and strategies are met. The overall objective is to invest limited capital to generate the highest possible returns within the shortest possible time, while assuming prudent risk, anticipating customer needs and complying with the requirements of regulators. NON-UTILITY SUBSIDIARIES Cascade has four non-utility subsidiaries, only two of which are actively engaged in business at present. Cascade Land Leasing is engaged in the servicing of loans, that were made to Cascade's gas customers to finance their purchases of energy-efficient appliances. As of September 1997, the subsidiary no longer makes new loans. Beginning in November 1998, CGC Resources began serving as an entity engaged in pipeline capacity management, with the objective of mitigating gas costs for Cascade. The subsidiaries, which in the aggregate account for less than 1% of the consolidated assets of the Company, do not currently have a significant impact on Cascade's financial statements. 7 PERSONNEL At September 30, 1998, Cascade had 481 employees. Of the total employees, 218 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. As of September 30, 1998, three Company executives including the president accepted an early retirement offer. The Company does not intend to replace these positions, but has instead restructured management to cover the vacated areas of responsibilities. 8 Historical Summary of Operating Statistics Fiscal Years Ended September 30
1998 1997 1996 1995 1994 Natural Gas Deliveries to Customers (thousands of therms) Residential 106,454 110,137 101,779 93,524 83,912 Commercial 99,879 107,310 103,433 101,145 95,695 Industrial and other 1,124,127 851,357 834,363 768,537 666,698 ------------ ------------ ------------ ------------ ---------- 1,330,460 1,068,804 1,039,575 963,206 846,305 ------------ ------------ ------------ ------------ ---------- Average Number of Customers Residential 142,537 134,857 127,089 119,633 111,055 Commercial 25,409 24,682 23,741 22,755 21,794 Industrial and other 597 500 482 462 447 ------------ ------------ ------------ ------------ ---------- 168,543 160,039 151,312 142,850 133,296 ------------ ------------ ------------ ------------ ---------- Total Customers at End of Year 168,693 160,247 152,116 143,372 134,823 Average Annual Therm Usage per Customer Residential 747 817 801 782 756 Commercial 3,931 4,348 4,357 4,445 4,391 Industrial and other 1,882,960 1,702,714 1,731,044 1,663,500 1,491,494 Heating Degree Days (normal is 5,669) 5,031 5,525 5,620 5,607 5,301 Daily Sendout (thousands of therms) Peak day for the year 5,802 4,832 4,863 3,955 3,341 Average day for the year 3,645 2,928 2,840 2,639 2,319 Employees at End of Year 481 484 478 479 473 Customers Per Employee at End of Year 351 331 318 299 285
ITEM 2. PROPERTIES. At September 30, 1998, Cascade's utility plant investments included approximately 4,250 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 2,741 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 leases an additional five commercial offices. 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. 9 ITEM 3. LEGAL PROCEEDINGS The information under "Environmental Matters" in Item 7 is incorporated herein by reference. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 10 EXECUTIVE OFFICERS OF THE REGISTRANT The Executive Officers of the Company, as of December 1, 1998, are as follows:
Year Became Name Office Age Officer - -------------------------------------------------------------------------------------------------------- W. Brian Matsuyama Chairman of the Board, President and Chief Executive Officer 52 1987 Jon T. Stoltz Senior Vice President - Planning, Regulatory & Consumer Affairs 51 1981 J. D. Wessling Senior Vice President - Finance and Chief Financial Officer 55 1995 Larry E. Anderson Vice President - Operations 50 1995 King C. Oberg Vice President - Gas Supply 57 1993 James E. Haug Controller and Chief Accounting Officer 49 1981 Larry C. Rosok Vice President - Human Resources and Corporate Secretary 42 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. 11 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.
Fiscal 1998 Fiscal 1997 ----------- ----------- Quarter High Low High Low ------- ---- --- ---- --- December 31 19 16-1/2 17-3/8 15-5/8 March 31 18-9/16 15-1/2 17-1/8 15-1/2 June 30 17-3/16 15-5/16 17 15-1/4 September 30 16-1/2 14-5/8 17-11/16 15-7/8
At November 30, 1998, there were approximately 7,930 holders of the Common Stock. The following table shows for the periods indicated the dividends paid per share on the Common Stock.
Fiscal Fiscal Quarter 1998 1997 ------- ---- ---- December 31 $ 0.24 $ 0.24 March 31 $ 0.24 $ 0.24 June 30 $ 0.24 $ 0.24 September 30 $ 0.24 $ 0.24
12 ITEM 6. SELECTED FINANCIAL DATA.
(dollars in thousands except per share data) Year Ended Year Ended Nine Months Twelve Months Sep 30 Sep 30 Ended Sep 30 Ended December 31 ------ ------ ------------ ----------------- 1998 1997 1996 1995 1994 STATEMENTS OF OPERATIONS: Operating Revenues 189,656 195,786 127,665 182,744 192,410 Less: Gas Purchases 97,382 104,342 69,679 102,858 118,083 Revenue Taxes 12,037 12,430 8,420 11,480 11,500 ---------- ----------- --------- --------- ---------- Operating Margin 80,237 79,014 49,566 68,406 62,827 ---------- ----------- --------- --------- ---------- Cost of Operations: Operating expenses 37,310 35,670 25,058 30,818 30,202 Depreciation and amortization 13,470 13,416 9,362 11,733 10,921 Property and payroll taxes 4,420 3,989 3,181 4,051 4,039 ---------- ----------- --------- --------- ---------- 55,200 53,075 37,601 46,602 45,162 ---------- ----------- --------- --------- ---------- Earnings From Operations 25,037 25,939 11,965 21,804 17,665 ---------- ----------- --------- --------- ---------- Nonoperating Expense (Income): Interest 10,132 9,436 7,459 9,938 8,090 Interest charged to construction (550) (532) (569) (394) (203) ---------- ----------- --------- --------- ---------- 9,582 8,904 6,890 9,544 7,887 Amortization of debt issuance expense 605 612 459 606 593 Other (388) (467) (2) (586) (80) ---------- ----------- --------- --------- ---------- 9,799 9,049 7,347 9,564 8,400 ---------- ----------- --------- --------- ---------- Earnings Before Income Taxes 15,238 16,890 4,618 12,240 9,265 Income Taxes 5,694 6,263 1,606 4,508 3,505 ---------- ----------- --------- --------- ---------- Net Earnings 9,544 10,627 3,012 7,732 5,760 Preferred Dividends 497 510 393 539 558 ---------- ----------- --------- --------- ---------- Net Earnings Available to Common Shareholders $ 9,047 $ 10,117 $ 2,619 $ 7,193 $ 5,202 ---------- ----------- --------- --------- ---------- ---------- ----------- --------- --------- ---------- Common Stock Outstanding (thousands of shares): End of year 11,045 10,967 10,787 9,144 8,912 Weighted Average (as restated) 11,000 10,842 9,249 8,997 8,716 Net Earnings per Common Share ---------- ----------- --------- --------- ---------- (Basic and diluted) $ 0.82 $ 0.93 $ 0.28 $ 0.80 $ 0.60 ---------- ----------- --------- --------- ----------
13 Item 6. Selected Financial Data. (continued)
(dollars in thousands except per share data) At September 30 At December 31 ------------------------------------------------------- ------------------------------ 1998 1997 1996 1995 1994 RETAINED EARNINGS: Beginning of the year $ 4,553 $ 4,901 $ 9,297 $ 10,806 $ 14,076 Net earnings available to common shareholders 9,047 10,117 2,619 7,193 5,202 Common dividends (10,597) (10,465) (7,015) (8,702) (8,472) -------------------------------- --------------------- ------------------------------ End of the year $ 3,003 $ 4,553 $ 4,901 $ 9,297 $ 10,806 -------------------------------- --------------------- ------------------------------ -------------------------------- --------------------- ------------------------------ CAPITAL STRUCTURE: Common shareholders' equity $ 111,428 $ 111,662 $ 109,126 $ 89,539 $ 87,710 Redeemable preferred stocks 6,408 6,630 6,851 6,851 7,217 -------------------------------- --------------------- ------------------------------ Debt: Long-term debt 110,650 121,150 101,850 102,100 100,000 Notes Payable and Commercial Paper 6,929 12,900 - 32,000 14,501 Current maturities of long-term debt 10,000 - - - 5,000 -------------------------------- --------------------- ------------------------------ 127,579 134,050 101,850 134,100 119,501 -------------------------------- --------------------- ------------------------------ Total capital $ 245,415 $ 252,342 $ 217,827 $ 230,490 $ 214,428 -------------------------------- --------------------- ------------------------------ -------------------------------- --------------------- ------------------------------ FINANCIAL RATIOS: Return on common shareholders' equity 8.11% 9.16% 7.88% 8.12% 6.00% Common stock dividend payout ratio 117% 103% 257% 120% 161% Dividends declared per common share $ 0.96 $ 0.96 $ 0.72 $ 0.96 $ 0.96 Fixed charge coverage (before income tax deduction): Times interest earned 2.42 2.68 2.17 2.16 2.07 Times interest and preferred dividends earned 2.26 2.48 2.01 2.00 1.87 Book value per year-end share of common stock $ 10.09 $ 10.18 $ 10.12 $ 9.79 $ 9.84 Capitalization Ratios at End of Year Common shareholders' equity 45.40% 44.30% 50.10% 39.60% 42.70% Preferred stock 2.60% 2.60% 3.10% 3.30% 3.80% Long-term debt (incl. current) 49.20% 48.00% 46.80% 48.40% 41.40% Short-term debt 2.80% 5.10% 0.00% 8.70% 12.10% -------------------------------------------------------------------------------------- 100.00% 100.00% 100.00% 100.00% 100.00% -------------------------------------------------------------------------------------- UTILITY PLANT: Utility plant - end of year $ 433,568 $ 416,365 $ 383,771 $ 362,924 $ 333,863 Accumulated depreciation 167,356 160,332 147,599 138,831 127,806 -------------------------------------------------------------------------------------- Net plant $ 266,212 $ 256,033 $ 236,172 $ 224,093 $ 206,057 -------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------- Capital expenditures, net of contributions in aid $ 23,780 $ 21,626 $ 26,053 $ 37,637 $ 27,251 -------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------- Total assets $ 311,511 $ 307,703 $ 296,381 $ 296,898 $ 273,090 -------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------
14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The following is management's assessment of the Company's financial condition and a discussion of the principal factors that affect consolidated results of operations for the 12-month periods ended September 30, 1998 and 1997, and the unaudited 12 month period ended September 30, 1996, and cash flows for the 12-month periods ended September 30, 1998 and 1997, and the nine-month transition period ended September 30, 1996. As of September 30, 1996, the Company adopted a fiscal year ending September 30. Previously, the fiscal year coincided with the calendar year. The September year end is more compatible with the Company's business cycle, and provides for reporting of a heating season (October through March) in a single fiscal year. RESULTS OF OPERATIONS Results of operations for the three fiscal periods were as follows:
12 months ended September 30 (THOUSANDS EXCEPT PER SHARE DATA) 1998 1997 1996* ----------- ----------- ----------- Operating Revenues $ 189,656 $ 195,786 $ 184,572 Less: Gas purchases 97,382 104,342 101,299 Revenue taxes 12,037 12,430 11,692 ----------- ----------- ----------- Operating Margin 80,237 79,014 71,581 ----------- ----------- ----------- Cost of Operations Operating expenses 37,310 35,670 32,776 Depreciation and amortization 13,470 13,416 12,389 Property and payroll taxes 4,420 3,989 4,115 ----------- ----------- ----------- 55,200 53,075 49,280 ----------- ----------- ----------- Earnings from operations 25,037 25,939 22,301 Nonoperating Expense (Income) Interest 10,132 9,436 10,101 Interest charged to construction (550) (532) (753) ----------- ----------- ----------- 9,582 8,904 9,348 Amortization of debt issuance expense 605 612 612 Other (388) (467) (142) ----------- ----------- ----------- 9,799 9,049 9,818 ----------- ----------- ----------- Earnings Before Income Taxes 15,238 16,890 12,483 Income Taxes 5,694 6,263 4,272 ----------- ----------- ----------- Net Earnings 9,544 10,627 8,211 Preferred Dividends 497 510 524 ----------- ----------- ----------- Net Earnings Available to Common Shareholders $ 9,047 $ 10,117 $ 7,687 ----------- ----------- ----------- ----------- ----------- ----------- Weighted Average Shares Outstanding (as restated) 11,000 10,842 9,192 Net Earnings per Common Share - Basic and Diluted $ 0.82 $ 0.93 $ 0.84 *unaudited
15 EARNINGS PER SHARE Net earnings of $0.82 per common share for fiscal 1998 were 11.8% less than the $0.93 per common share reported for fiscal 1997. The decline in earnings occurred primarily due to lower residential and commercial consumption per customer. Consumption was primarily affected by warm weather as evidenced by the 9% fewer degree days in 1998 vs. 1997. OPERATING MARGIN RESIDENTIAL AND COMMERCIAL MARGIN for the fiscal years ended September 30, 1998, 1997, and 1996 were as set forth in the following table: Residential and Commercial Operating Margins dollars in thousands)
(12 months ended September 30) 1998 1997 1996 - -------------------------------------------------------------------------------- Degree Days 5,031 5,525 5,620 Average Number of Customers Residential 142,537 134,857 127,089 Commercial 25,409 24,682 23,741 Average Therm Usage Per Customer Residential 747 817 801 Commercial 3,931 4,348 4,357 Operating Margin Residential $ 30,436 $ 29,725 $ 26,100 Commercial $ 19,648 $ 20,523 $ 19,794
Fiscal 1998 operating margins from sales to residential and commercial customers were down $164,000, or 0.3% compared to fiscal 1997. Several factors contributed to this decrease, but most significant was the decline in gas consumption resulting from warm weather during the 1997 - 1998 winter heating season. Weather in fiscal 1998, as measured by heating degree days, was approximately 11% warmer than normal, and 9% warmer than the prior year. The lower gas consumption depressed margins by an estimated $4 million compared to 1997. This represents approximately $0.23 per share. Also reducing margins by approximately $700,000 was a September 1, 1997 reduction in rates which passed on to Oregon customers a part of the benefit of efficiencies and lower capital costs since Cascade's last general rate case in that state. Other factors substantially mitigated these decreases. The 5.3% growth in the number of customers contributed approximately $2.4 million of margin. Monthly service charges collected from customers in Washington increased $1.00 on August 1, 1997, and again on August 1, 1998. These service charge increases contributed approximately $1.4 million of margin. Offsetting the higher service charges was a reduction in rates charged to industrial and other customers, as described in subsequent paragraphs. Also affecting the comparison were more stable wholesale prices of natural gas in fiscal 1998. During the fiscal 1997 heating season, gas supply prices spiked to abnormally high levels. Regulatory provisions in Oregon require that the Company absorb a portion of such price variances. During fiscal 1998, more stable prices prevailed, and the Company was able to earn a small profit from favorable prices. The resulting difference was an approximate $900,000 margin improvement. 16 Fiscal 1997 margins from residential and commercial customers increased by $4.4 million over the twelve months ended September 30, 1996 (fiscal 1996), primarily due to 8,709 new customers, new state of Washington tariff rates effective August 1, 1996, and a moderate increase in the average gas usage per residential customer. These increases were partially offset by purchased gas cost increases absorbed in Oregon, and by a rate reduction in Oregon to offset the effect of lower property tax expense. INDUSTRIAL AND OTHER MARGIN in fiscal 1998 increased $1.4 million or 4.8% over fiscal 1997. This improvement is primarily due to greater deliveries to the Company's electric generation customers. The demand for gas fired generation is driven in part by the diminished availability of hydroelectric generation, resulting from last winter's low snowfall in the northwest. The addition of several smaller industrial customers also contributed to the improvement in operating margins. The comparison of fiscal 1997 to fiscal 1996 operating margin from industrial and other customers is affected by the charge of $1.3 million, related to unrecovered gas cost, recorded in the June 1996 quarter. Other than the effect of this charge, margins increased by $1.8 million, or 6.8%, for fiscal 1997. These increases are primarily due to the addition of 20 new customers, including service to a new cogeneration customer that began commercial operation in June 1996. Partially offsetting the margin improvements from industrial customers for each of the above mentioned years were rate reductions equivalent to the amount derived from the higher monthly service charges to residential and commercial customers (see "Residential and Commercial Margin"). This shift in rate responsibility was allowed in the 1996 agreement with the WUTC in settlement of the rate case effective August 1, 1996. The settlement provided for a phased in shift of rate responsibility in three annual increments, on August 1, 1996, 1997, and 1998. COST OF OPERATIONS Cost of operations, which consists of operating expenses, depreciation and amortization, and property and payroll taxes, was $55.2 million, $53.1 million, and $49.3 million for the twelve-month periods ended September 30, 1998, 1997, and 1996, respectively. OPERATING EXPENSES for fiscal 1998, which are primarily labor and benefits expenses, increased by $1.7 million, or 4.7%, over fiscal 1997. Labor expense was higher by $560,000, or 2.4%. Lower credits for labor and other expenses charged to construction resulted in higher operating expense of $504,000. Also included in operating expenses was a one-time charge of $369,000, recorded in the fourth quarter, for the cost of an early retirement opportunity that was accepted by three of the Company's executives, who retired as of September 30, 1998. Management restructuring associated with these retirements is expected to reduce ongoing annual salary and benefits expense by an amount that will more than offset the one-time charge beginning in fiscal 1999. Fiscal 1997 operating expenses increased by $2.9 million, or 8.8%, over fiscal 1996. Of this increase, $1.3 million is attributable to deferred recognition of Postretirement Benefits Other than Pensions (PBOP). From January 1993 through July 1996, a portion of PBOP expenses was deferred, in accordance with a policy statement issued by the WUTC in 1992. Concurrent with the settlement of the Washington rate case, effective August 1, 1996, ongoing PBOP expenses are no longer deferred, and amortization of the previously deferred amounts is also included in operating expenses, resulting in the expense increase. The new customer rates included recognition of this higher level of PBOP expenses. In addition, labor costs increased by $990,000, or 4.5%, related to normal wage and salary rate adjustments, as well as higher compensation levels commensurate with a more highly skilled work force. 17 DEPRECIATION AND AMORTIZATION for fiscal 1998 increased by $54,000 or 0.4% over fiscal 1997. Based on the results of a depreciation study conducted during 1998, the Company implemented lower depreciation rates effective July 1, 1998. As a result, depreciation expense decreased approximately $500,000, offsetting the effect of additions to depreciable utility plant to serve a growing customer base. The new depreciation rates will reduce ongoing annual depreciation expense by approximately $2 million. Depreciation and Amortization for fiscal 1997 increased $1.0 million or 8.3% over fiscal 1996 because of increases in utility plant. PROPERTY AND PAYROLL TAXES for fiscal 1998 were higher by $430,000, or 10.8%, compared to fiscal 1997. The increase is primarily related to the timing of recognition of property tax reductions in Oregon. Beginning in 1991, and resulting from a voter mandate in 1990 (Ballot Measure 5), Oregon property tax rates decreased each year for a five year period. For each of those five years, the Oregon Public Utility Commission required regulated energy utilities to measure and defer in a regulatory liability account, the effect of the resulting property tax reductions. Each year from 1994 to 1997, the Company reduced its customer rates to reflect the lower tax expense incurred, and to refund the deferred amounts to its customers. Concurrent with the rate reductions, the Company recorded credits to property tax expense, which amortized the deferrals in amounts equivalent to the reduced revenue. Accordingly, there was no net effect on earnings. The amortization was substantially completed in November 1997. Property and Payroll Taxes for fiscal 1997 decreased $126,000, or 3.1%, compared to fiscal 1996. Higher property taxes resulting from increases in assets were more than offset by reductions in Oregon tax rates mandated by Ballot Measure 5. NONOPERATING EXPENSE (INCOME) Interest expense for 1998 increased by $696,000 or 7.4% from fiscal 1997. The increase is due primarily to additional amounts of outstanding long-term debt, partially offset by lower short-term debt and lower interest accrued on deferred gas cost balances. The comparison of other non-operating income was affected by the inclusion in 1997 of a $140,000 gain on the sale of a parcel of land. Additionally, there was less interest income in fiscal 1998 because of lower outstanding appliance loan amounts. For fiscal 1997, interest expense decreased $665,000 or 6.6% from 1996. This is due to lower average amounts of short-term debt outstanding and lower interest accrual on deferred gas cost balances. Other non-operating income increased by $325,000 to $467,000. The primary factors resulting in this increase were a 1997 gain of $140,000 on the sale of a parcel of land, compared to a 1996 charge of $311,000 relating to valuation reserves against other assets. INCOME TAXES The decrease in the provision for federal and state income taxes is primarily attributable to lower pre-tax earnings. 18 LIQUIDITY AND CAPITAL RESOURCES The seasonal nature of the Company's business creates short-term cash requirements to finance customer accounts receivable and construction expenditures. To provide working capital for these requirements, the Company has a credit commitment of $40 million from three banks, which expires in September 2000. The committed lines also support a money market facility of a similar amount and a regional commercial paper program. A subsidiary company has a $1.5 million five-year revolving credit facility, that expires in December 2000, used for non-regulated business, and at September 30, 1998, $650,000 was outstanding. The Company also has $30 million of uncommitted lines from three banks. The balance of Medium-Term Notes at September 30, 1998 was $120 million, including $10 million in current maturities. There is remaining $30 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. OPERATING ACTIVITIES Operating activities resulted in positive net cash flow of $38.6 million for fiscal 1998, compared to $46,000 for fiscal 1997. The comparison is affected primarily by two unusual factors in fiscal 1997. First, cash flow from operations was significantly depressed during fiscal 1997 due to higher prices paid for gas during the 1996 - 1997 heating seasons. Gas prices during fiscal 1998 did not experience significant abnormalities. Also affecting operating cash flow for fiscal 1997 was the negative effect from changes in current assets and liabilities. This was primarily attributable to payment during the first quarter of fiscal 1997 of accounts payable as of September 30, 1996. This accounts payable balance included amounts from August 1996 business, which were not settled until after the end of September. Those amounts would normally have been settled in less than 30 days. INVESTING ACTIVITIES Cash used by investing activities in fiscal 1998 was $22.9 million, compared to $21.2 million for fiscal 1997. Capital expenditures in 1998 were lower than in 1997 primarily due to reduced expenditures on major system reinforcement projects. The year to year comparison of cash used by investing activities is also affected by an unusually high amount of customer contributions in aid of construction in 1997, primarily related to expenditures on a project completed in fiscal 1996. Budgeted capital expenditures for fiscal 1999 are approximately $23.5 million, which is expected to be financed approximately 65% from operating activities, and 35% from debt financing. FINANCING ACTIVITIES Cash used by financing activities in fiscal 1998 was $16.5 million, while 1997 financing activities provided net cash of $23.7 million. The adverse operating cash flow in 1997 described under "Operating Activities" contributed to the need for external financing. The principal financing activity in 1997 was the issuance of $20 million of new Medium-Term Notes, completed in September. No external financing was done in fiscal 1998. As of the third quarter of fiscal 1998, the Company is no longer issuing new common stock to its dividend reinvestment plan or 401(k) plan. Those plans now purchase shares on the open market. 19 REGULATORY MATTERS For the past eight years, the Company has been able to achieve normalized results in Oregon greater than its allowed rate of return. Recognizing that the limitations inherent in traditional utility regulation could, at some point, inhibit further productivity improvements in that state, the Company, through a series of discussions with the staff of the OPUC, has been cooperatively exploring alternatives. Ideally, both shareholders and customers should be able to benefit fairly from efficiency gains. In September 1997, the Company decreased Oregon rates by $800,000 annually. The lower rates share with customers some of the benefits of increased productivity and lower capital costs since the Company's last general rate case in 1990, and can better serve as a starting point for new methods that it may develop for sharing future improvements. The new rates are expected to reduce net income by $556,800 annually and to produce an implied return on equity of 11.8% in Oregon. Currently, Cascade is awaiting Oregon Commission approval of a stipulation that has been signed by the Company and OPUC staff that will establish an Earnings Sharing Mechanism. If the mechanism is approved, Cascade will share with its Oregon customers one third of earning that exceed an ROE ceiling. The ROE ceiling would be adjusted over time based upon the change in the average US Treasury 5,7, & 10 year bond rates. Based upon current bond rates, the ROE ceiling before any sharing would occur is 12.60%. ENVIRONMENTAL MATTERS In 1995, the Company received a claim from a property owner in Eugene, Oregon requesting that the Company assume responsibility for investigation and possible clean up of alleged contamination on property previously owned by a predecessor of Cascade. The predecessor company conducted a manufactured gas business on the property from approximately 1929 to 1948. Manufactured gas operations apparently were conducted on the site by several operators beginning about 1907. The site was used for other purposes beginning in 1949. The present owner has retained an environmental consultant, which is investigating possible contamination on the property. To date the consultant has reported that it believes contamination is present, which contamination is consistent with that which might originate from a manufactured gas operation. There have been no estimates as to possible clean up costs. The consultant's report has been furnished to the Oregon Department of Environmental Quality (DEQ). The owner has reached agreement with the DEQ for an intergovernmental agreement with respect to further investigation and possible remediation of contamination on the property in the voluntary cleanup program. Another northwest utility, which purchased the property from Cascade in 1958, has declined to participate in the site investigation, although it may, as a onetime owner of the property, bear some share of the responsibility as well. The Company has notified its insurance carriers of the claim and is keeping them advised as to the investigation. On one occasion in the past when hazardous materials on property formerly owned by a predecessor of the Company required clean up, the OPUC allowed the clean up costs to be passed on to customers. In the event the Company is responsible for clean up costs not covered by insurance, management anticipates asking for reimbursement through rates for such costs. In 1997, a property owner in Washington notified the Company that there is contamination on his property, and that he believes it comes from a former manufactured gas site, owned at one time by a predecessor company, which was merged with Cascade in 1953. The State of Washington Department of Ecology has categorized this site as a "listed site" ranked in its most hazardous category. As a former owner of the site, the Company may be strictly liable to the State of 20 Washington for investigation and remediation of the contamination of the site, but may share that cost or allocate all the cost to others who actually caused or contributed to the contamination. The Company has retained an environmental consultant, which is investigating possible contamination at the site. There is evidence of contamination at the site, and there is also evidence of an oil line across the site property owned and operated by others, which may be a contributor to the contamination. There have been no estimates as to possible clean up costs. The Company is presently investigating title and other government records to identify other potentially liable parties. The Company is notifying the other identified parties of the contamination claims, and requesting cooperation and financial contribution. In the event the Company is responsible for clean up costs not covered by insurance, management anticipates asking the WUTC for reimbursement for such costs, through rates charged to customers. YEAR 2000 ISSUES The Company has in place an ongoing program to assess and mitigate risks associated with technology that may not be year 2000 compliant. The program encompasses the Company's computer-based and non computer-based resources, as well as obtaining assurance of compliance from key suppliers and customers with which it has business relationships. Risks The Company has contacted suppliers and customers with whom it has significant business relationships regarding year 2000 compliance. Although response to these notifications are not yet complete, the company has not received indication that any major third party will have significant year 2000 compliance problems that would adversely affect its ability to conduct business with Cascade. The Company has not yet received assurance from interstate pipeline companies that adequate backup measures are in place in the event of a failure of computer systems, but management does not believe that a significant risk exists. In the event that internal computer systems fail due to year 2000 compliance problems, business processes that may be interrupted include: monitoring of gas flow and pressure; measurement of gas receipts from suppliers and deliveries to customers; processing customer invoices; payments to suppliers; financial measurement and reporting; internal and external communications; payroll processing; and various other administrative functions. Management has not developed estimates of losses that may be incurred in the event of a failure of one or more of these systems. Cascade presently does not anticipate the occurrence of major interruptions in its business as a result of year 2000 issues. However, it is possible that disruptions in such services as telecommunications, banking, or transportation may occur and may have a negative effect on the Company's operations, business and financial condition. State of Readiness In 1996 the Company began identifying which of its computer systems required modification or replacement to achieve year 2000 compliance. Management believes that substantially all mission critical systems have been identified. Approximately 95% of the Company's personal computers, and embedded building and office systems have been modified as necessary, tested, and verified to be compliant. Various vendor based software has been or will be upgraded or replaced, including financial, meter reading, and SCADA (the system that monitors natural gas flow through the 21 distribution system) systems. This work is approximately 30% complete. Critical internally developed software, including billing, cash receipts processing, and payroll, are expected to be completed and tested by June 1999. All internal systems are targeted to be fully compliant by August 1999. Costs of Year 2000 Compliance The Company has been using a combination of internal and external resources to make necessary modifications to existing internally developed systems. To date, external spending has been less than $100,000, and the Company intends to complete this process with internal resources. Such costs are charged to expense as incurred. The cost associated with using internal resources is viewed primarily as an opportunity cost, resulting in a delay of other planned system enhancements and replacements intended to enhance operating efficiencies. In addition, the Company's capital expenditures to replace non-compliant vendor based systems sooner than otherwise necessary is expected to total approximately $1.9 million. Of this amount, approximately $500,000 has been spent to date. Although year 2000 compliance is the primary motivating factor for the current schedule for these system replacements, management anticipates other significant improvements in these systems compared to the old systems. Although the costs and completion dates discussed above are based on management's best estimates, actual results may differ from expectations. Contingency Plan The Company has developed, and continues to update, a year 2000 contingency plan. The plan addresses backup and recovery procedures and business processes that are critical to operations. The plan also covers contingency trigger points, and identifies roles of key individuals in the event of system failure. Management believes the most likely worst case scenario to be the possibility that necessary program code modifications of legacy computer systems may have been overlooked, resulting in system failure. The response to such an event is the dedication of available programming staff to correct the problem. FORWARD-LOOKING STATEMENTS Statements contained in this report that 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, among others, its ability to successfully implement internal performance goals, misjudgments in assessing the Company's year 2000 compliance requirements and risks, competition from alternative forms of energy, consolidation in the energy industry, performance issues with key natural gas suppliers, the capital-intensive nature of the Company's business, regulatory issues, including the need for adequate and timely rate relief to recover increased capital and operating costs resulting from customer growth and to sustain dividend levels, the weather, increasing competition brought on by deregulation initiatives at the federal and state regulatory levels, the potential loss of large volume industrial customers due to "bypass" or the shift by such customers to special competitive contracts at lower per unit margins, exposure to environmental cleanup requirements, and economic conditions, particularly in the Company's service area. 22 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Cascade has evaluated its risk related to financial instruments whose values are subject to market sensitivity. The only such instruments are Company issued fixed-rate debt obligations. Cascade makes interest and principal payments on these obligations in the normal course of its business, and does not plan to redeem these obligations prior to normal maturities. Accordingly, management believes the Company is not subject to market risk as defined in Item 305 of Regulation S-K. 23 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, 1998 and 1997, and the related consolidated statements of net earnings available to common shareholders, common shareholders' equity, and cash flows for the years ended September 30, 1998 and 1997, and the nine months ended September 30, 1996. 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, 1998 and 1997, and the results of their operations and their cash flows for the years ended September 30, 1998 and 1997, and the nine months ended September 30, 1996, in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Seattle, Washington November 6, 1998 24 CASCADE NATURAL GAS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF NET EARNINGS AVAILABLE TO COMMON SHAREHOLDERS
(Dollars in thousands except per share data) Year Ended Year Ended Nine Months Ended September 30 September 30 September 30 1998 1997 1996 (Note 2) Operating Revenues $ 189,656 $ 195,786 $ 127,665 Less Gas purchases 97,382 104,342 69,679 Revenue taxes 12,037 12,430 8,420 ----------- ------------ ------------ Operating Margin 80,237 79,014 49,566 ----------- ------------ ------------ Cost of Operations Operating expenses 37,310 35,670 25,058 Depreciation and amortization 13,470 13,416 9,362 Property and payroll taxes 4,420 3,989 3,181 ----------- ------------ ------------ 55,200 53,075 37,601 ----------- ------------ ------------ Earnings from operations 25,037 25,939 11,965 ----------- ------------ ------------ Nonoperating Expense (Income) Interest 10,132 9,436 7,459 Interest charged to construction (550) (532) (569) ----------- ------------ ------------ 9,582 8,904 6,890 Amortization of debt issuance expense 605 612 459 Other (388) (467) (2) ----------- ------------ ------------ 9,799 9,049 7,347 ----------- ------------ ------------ Earnings Before Income Taxes 15,238 16,890 4,618 Income Taxes 5,694 6,263 1,606 ----------- ------------ ------------ Net Earnings 9,544 10,627 3,012 Preferred Dividends 497 510 393 ----------- ------------ ------------ Net Earnings Available to Common Shareholders $ 9,047 $ 10,117 $ 2,619 ----------- ------------ ------------ ----------- ------------ ------------ Net Earnings Per Common Share(basic & diluted) $ 0.82 $ 0.93 $ 0.28 ----------- ------------ ------------ ----------- ------------ ------------ Weighted Average Shares Outstanding ( as restated) 11,000 10,842 9,249 ----------- ------------ ------------ ----------- ------------ ------------
The accompanying notes are an integral part of these financial statements 25 CASCADE NATURAL GAS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
1998 1997 (Dollars in thousands) ASSETS Utility Plant (Note 3) $433,568 $416,365 Less accumulated depreciation 167,356 160,332 -------------- -------------- 266,212 256,033 Construction work in progress 10,394 9,192 -------------- -------------- 276,606 265,225 -------------- -------------- Other Assets Investments in non utility property 667 668 Notes receivable, less current maturities 1,006 1,493 -------------- -------------- 1,673 2,161 -------------- -------------- Current Assets Cash and cash equivalents 2,338 3,162 Accounts receivable, less allowance of $645 and $529 for doubtful accounts 9,271 11,865 Current maturities of notes receivable 329 536 Materials, supplies, and inventories 6,213 5,886 Prepaid expenses and other assets 5,122 7,382 -------------- -------------- 23,273 28,831 -------------- -------------- Deferred Charges 9,959 11,486 -------------- -------------- $311,511 $307,703 -------------- -------------- -------------- -------------- COMMON SHAREHOLDERS' EQUITY, PREFERRED STOCKS, AND LIABILITIES Common Shareholders' Equity Common stock, par value $1 per share (Note 4) Authorized, 15,000,000 shares; issued and outstanding, 11,045,095 and 10,966,732 shares $ 11,045 $ 10,967 Additional paid-in capital 97,380 96,142 Retained earnings 3,003 4,553 -------------- -------------- 111,428 111,662 -------------- -------------- Redeemable Preferred Stocks, aggregate redemption amount of $6,592 and $6,845 (Note 5) 6,408 6,630 -------------- -------------- Long-Term Debt (Note 7) 110,650 121,150 -------------- -------------- Current Liabilities Notes payable and commercial paper (Note 6) 6,929 12,900 Current maturities of long-term debt 10,000 - Accounts payable 10,206 7,753 Property, payroll, and excise taxes 4,570 3,958 Dividends and interest payable 7,407 6,691 Other current liabilities 3,681 3,680 -------------- -------------- 42,793 34,982 -------------- -------------- Deferred Credits and Other Gas cost changes 10,330 6,290 Income taxes (Note 8) 17,598 16,080 Investment tax credits 2,523 2,764 Other 9,781 8,145 -------------- -------------- 40,232 33,279 -------------- -------------- Commitments and Contingencies (Note 10) - - -------------- -------------- $311,511 $307,703 -------------- -------------- -------------- --------------
The accompanying notes are an integral part of these financial statements 26 CASCADE NATURAL GAS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
(Dollars in thousands except per share data) Common Stock ------------ Paid-In Retained Shares Par Value Capital Earnings ------ --------- ------- -------- 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) Net earnings 3,012 --------------- ------------ --------- ---------- Balance, December 31, 1996 10,786,585 10,787 93,438 4,901 Common stock issued: Additional costs of 1996 public offering (34) Employee savings plan and retirement trust (401(k)) 51,834 52 794 Director stock award plan 3,688 4 54 Dividend reinvestment plan 124,625 124 1,887 Redemption of preferred stock 3 Cash dividends: Common stock, $.96 per share (10,465) Preferred stock, senior, $.55 per share (39) 7.85% cumulative preferred stock, $7.85 per share (471) Net earnings 10,627 --------------- ------------ --------- ---------- Balance, September 30, 1997 10,966,732 10,967 96,142 4,553 Common stock issued: Employee savings plan and retirement trust (401(k)) 25,446 25 404 Dividend reinvestment plan 52,917 53 834 Cash dividends: Common stock, $.96 per share (10,597) Preferred stock, senior, $.55 per share (26) 7.85% cumulative preferred stock, $7.85 per share (471) Net earnings 9,544 --------------- ------------ --------- ---------- Balance, September 30, 1998 11,045,095 $11,045 $97,380 $3,003 --------------- ------------ --------- ---------- --------------- ------------ --------- ----------
The accompanying notes are an integral part of these financial statements 27 CASCADE NATURAL GAS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended Year Ended Nine Months Ended September 30 September 30 September 30 1998 1997 1996 Operating Activities Net earnings $ 9,544 $ 10,627 $ 3,012 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 13,470 13,416 9,362 Write-down of assets - - 154 Amortization of gas cost changes (424) (2,473) 1,308 Increase (decrease) in deferred income taxes 1,519 (105) (276) Decrease in deferred investment tax credits (241) (267) (175) Cash provided (used) by changes in operating assets and liabilities: Accounts receivable 2,596 (221) 14,835 Income taxes 2,261 1,183 (2,905) Inventories (326) 45 481 Gas cost changes 4,463 (12,815) 9,336 Deferred items 2,092 1,710 4,345 Accounts payable and accrued expenses 3,782 (8,115) 281 Prepaid expenses and other assets (4) (2,858) (512) Other (168) (81) (16) ---------- ----------- ----------- Net cash provided by operating activities 38,564 46 39,230 ---------- ----------- ----------- Investing Activities Capital expenditures (25,611) (29,166) (26,458) Customer contributions in aid of construction 1,831 7,540 405 New consumer loans (337) (968) (666) Receipts on consumer loans 1,199 1,428 1,511 ---------- ----------- ----------- Net cash used by investing activities (22,918) (21,166) (25,208) ---------- ----------- ----------- Financing Activities Issuance of common stock 754 1,747 23,155 Redemption of preferred stock (222) (216) - Proceeds from long-term debt, net - 19,850 - Repayment of long-term debt (500) (700) (250) Changes in notes payable and commercial paper, net (5,971) 12,900 (32,000) Dividends paid (10,531) (9,842) (6,581) ---------- ----------- ----------- Net cash provided (used) by financing activities (16,470) 23,739 (15,676) ---------- ----------- ----------- Net Increase (Decrease) in Cash and Cash Equivalents (824) 2,619 (1,654) Cash and Cash Equivalents Beginning of year 3,162 543 2,197 ---------- ----------- ----------- End of year $ 2,338 $ 3,162 $ 543 ---------- ----------- ----------- ---------- ----------- ----------- Supplemental Cash Flow Information Cash paid during the year for: Interest (net of amounts capitalized) $ 8,303 $ 7,938 $ 6,890 Income taxes $ 1,876 $ 5,606 $ 1,606
The accompanying notes are an integral part of these 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, 1998, the Company had approximately 168,516 core customers and 177 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 17% of gas deliveries and 67% 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 generally 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-month transition period ended September 30, 1996. Because of the seasonal nature of the business, the nine-month period ended September 30, 1996 is not indicative of a full year with respect to operations and cash flow. 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 or purchase. 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 non-depreciable property 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. During 1998, the Company conducted a depreciation study resulting in a change in depreciation lives effective July 1, 1998. The new asset lives used for computing depreciation range from six to seventy years, and the weighted average 29 annual depreciation rate decreased from approximately 3.5% to 2.9%. The effect of this change on fiscal 1998 depreciation expense is a decrease of approximately $500,000, resulting in a positive earnings effect of $0.03 per share. Investments: Investments consist primarily of real estate, classified as non-utility property carried at the lower of cost or estimated net realizable value. Notes receivable: Notes receivable includes loans made to customers for the purchase of energy efficient appliances, which are generally the security for the loan. Loans are made for terms ranging from one to ten 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. Regulatory accounts: The Company's financial statements are prepared in accordance with Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation". This statement provides for the deferral of certain costs and benefits that would otherwise be recognized in revenue or expense, if it is probable that future rates will result in recovery from customers or refund to customers of such amounts. A regulated enterprise may prepare its financial statements according to the provisions of SFAS No. 71 only as long as: (i) the enterprise's rates for regulated services are established by or are subject to approval by an independent third party regulator; (ii) the regulated rates are designed to recover the enterprise's cost of providing the regulated services, and (iii) in view of demand for the regulated services and the level of competition, it is reasonable to assume that rates set at levels to recover the enterprise's costs can be charged to and collected from customers. If at some point in the future, the Company determines that all or a portion of the utility operations no longer meets the criteria for continued application of SFAS No. 71, the Company would be required to adopt the provisions of SFAS No. 101, "Regulated Enterprises-Accounting for the Discontinuation of Application of FASB Statement No. 71". Adoption of SFAS No. 101 would require the Company to write off the regulatory assets and liabilities related to those operations not meeting the criteria of SFAS No. 71. Regulatory assets (liabilities) at September 30, 1998 and 1997 include the following:
(dollars in thousands) 1998 1997 - ----------------------------------------------------------- Unamortized loss on reacquired debt $ 5,027 $ 5,556 Gas cost changes (10,330) (6,290) Deferred income taxes (3,377) (3,128) Postretirement benefits other than pensions 3,186 3,936 Other, net 852 1,007 -------- -------- Net $ (4,642) $ 1,081 -------- --------
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. Leases: The Company leases mainframe computer equipment and a majority of its vehicle fleet. These leases are classified as operating leases. The Company's primary obligation under these leases is for a twelve-month period, with options to extend the lease thereafter. Commitments beyond one year are not material. The Company has no capital leases. 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 30 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. Cash and cash equivalents: For purposes of reporting cash flows, the Company accounts for all liquid investments, with a purchased maturity of three months or less, as 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 estimates in measuring certain deferred charges and deferred credits related to items subject to approval of the WUTC and the OPUC. 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. New Accounting Standards: FAS NO. 128. As of the first quarter of fiscal 1997, the Company adopted Statement of Financial Accounting Standards (FAS) No. 128, "EARNINGS PER SHARE." This statement prescribes the method of calculating and reporting earnings per share (EPS) amounts. It replaces the presentation of primary EPS with a presentation of basic EPS. For entities with other than a simple capital structure, it requires the dual presentation of basic and diluted EPS on the face of the income statement. Under the Company's capital structure there is no dilution. As a result the reported EPS represents both basic as well as diluted EPS. Under the statement, the weighted average number of shares outstanding for the years ended September 30, 1997 and 1996 have been restated from 10,843,000 to 10,842,000 shares and from 9,266,000 to 9,249,000 shares, respectively. These restatements did not result in a change in reported EPS. FAS NO. 129. As of the first quarter of fiscal 1997, the Company adopted FAS No. 129, " DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE." This statement establishes standards for disclosing information about an entity's capital structure, including dividend and liquidation preferences, participation rights, call prices and disclosure of the dates and number of shares issued upon conversion, exercise, or satisfaction of required conditions during at least the most recent annual fiscal period and any subsequent interim period presented. Application of this statement did not require any additional disclosure by the Company. FAS NO. 130. In June 1997, the Financial Accounting Standards Board (FASB) issued FAS No. 130, entitled "REPORTING COMPREHENSIVE INCOME." This standard is effective for fiscal years beginning after December 15, 1997, and requires companies to (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in-capital in the equity section of a statement of financial position. The Company does not expect implementation of this standard to have a material effect on the reporting of its financial information. FAS NO. 131. In June 1997, the FASB issued FAS No. 131, entitled "DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION." This standard is effective for fiscal years beginning after December 15, 1997, and requires public enterprises to report financial and descriptive information on the basis that is used internally for evaluating segment performance and deciding how to allocate resources to segments. Management views the Company as operating as a single segment, that of an LDC in the Pacific Northwest. Accordingly, implementation of this standard will not have a significant impact on reporting by the Company. 31 FAS NO. 132. In February 1998, the FASB issued FAS No. 132, entitled "EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS." This standard is effective for fiscal years beginning after December 15, 1997. It standardizes disclosure requirements for pensions and other postretirement benefits. The Company does not expect this standard to have a material effect on the reporting of financial information. FAS NO. 133. In June 1998, the FASB issued FAS No. 133, entitled "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES." This standard will be effective for fiscal years beginning after June 15, 1999. It requires that all derivative financial instruments be recognized as either assets or liabilities on the Company's balance sheets. The Company has not determined the effects of this standard on its financial reporting. SOP 98-1. In March 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position (SOP) 98-1, "ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE". Application of this SOP is required for financial statements for fiscal years beginning after December 15, 1998. The SOP establishes criteria for accounting for costs as operating expense when incurred, or as a capital expenditure. It provides that internal and external cost incurred to develop or obtain new software during the "application development stage" should be capitalized. Other costs, including preliminary project costs, training, data conversion, and upgrades and enhancements would be expensed under the provisions of SOP 98-1. The Company's current practice is to capitalize certain costs that under the provisions of SOP 98-1 would be expensed. Therefore, when the Company adopts the SOP, the Company will capitalize less of the cost of projects to develop or acquire software, and charge more cost to operating expense than is currently done. The materiality of this change is dependent upon the magnitude of the costs of specific software development or acquisition projects incurred in any period. NOTE 3 - UTILITY PLANT Utility plant at September 30, 1998 and 1997 consists of the following components:
Utility plant at September 30, 1998 and 1997 consists of the following components: (dollars in thousands) 1998 1997 - ----------------------------------------------------------------------------- Distribution plant $ 381,524 $ 363,275 Transmission plant 14,086 14,086 Production plant 1,053 1,053 General plant 32,863 32,414 Intangible plant 212 212 Nondepreciable plant 3,830 5,325 ------------ ------------ $ 433,568 $ 416,365 ------------ ------------
32 NOTE 4 - COMMON STOCK At September 30, 1998, shares of common stock are reserved for issuance as follows:
Number of shares - -------------------------------------------------------- Employee Savings Plan and Retirement Trust (401(k) plan) 119,765 Dividend Reinvestment Plan 51,338 Director Stock Award Plan 4,112 ------------- 175,215 -------------
The price of shares issued to the above plans is determined by the market price of shares on the day of, or immediately preceding the issuance date. As of the third quarter of fiscal 1998, the Company's practice is to purchase shares on the open market for these plans rather than issue new shares. Holders of Common Stock have rights ("Rights") to purchase shares of Series Z Preferred Stock on the basis of one Right for each share of Common Stock. The Rights may not be exercised and will be attached to and trade with shares of Common Stock until the Distribution Date, which will occur on the earlier of (i) the tenth day following a public announcement that there has been a "Share Acquisition", i.e., that a person or group (other than the Company and certain other persons) has acquired or obtained the right to acquire 20% or more of the outstanding Common Stock and (ii) the tenth business day following the commencement or announcement of certain offers to acquire beneficial ownership of 30% or more of the outstanding Common Stock. Subject to restrictions on exercisability while the Rights are redeemable, each Right entitles the holder to buy from the Company one one-hundredth of a share of Series Z Preferred Stock at a price of $85, subject to adjustment. Upon the occurrence of a Share Acquisition, and provided that all necessary regulatory approvals have been obtained, each Right will thereafter entitle the holder (other than the acquiring person or group and transferees) to buy from the Company for $85, shares of Common Stock having a market value of $170, subject to adjustment. NOTE 5 - REDEEMABLE PREFERRED STOCKS Redeemable preferred stock at September 30, 1998 and 1997 consists of the following:
(dollars in thousands) 1998 1997 - ------------------------------------------------------------------------------------------------------------------ Shares Amount Shares Amount 7.85% cumulative, $1.00 par value 60,000 $ 6,000 60,000 $ 6,000 $.55 cumulative senior, series B and C, without par value 46,750 408 71,750 630 ----------------------------- ---------------------------- 106,750 $ 6,408 131,750 $ 6,630 ----------------------------- ----------------------------
The 7.85% cumulative preferred stock is subject to redemption in November 1999 The $.55 cumulative senior preferred stock is subject to minimum annual redemption requirements, with Series B being fully redeemed in fiscal 1999, and Series C in 2001. The Series B and C 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 aggregate annual preferred stock redemption requirements are $250,000 in fiscal 1999, $6,145,000 in fiscal 2000, $73,000 in fiscal 2001, and none thereafter. NOTE 6 - NOTES PAYABLE AND COMMERCIAL PAPER The Company's short-term borrowing needs are met with a $40,000,000 revolving credit agreement with three of its banks. This agreement expires in September 2000. 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 $30,000,000 of uncommitted lines from three banks. A non- 33 regulated subsidiary has a $1,500,000 revolving credit facility that expires in December 2000. At September 30, 1998, $650,000 was outstanding.
September 30 (dollars in thousands) 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------- Amount outstanding $ 6,929 $ 12,900 $ - Average daily balance outstanding 6,201 13,666 15,664 Average interest rate, excluding commitment fee 5.83% 5.94% 5.77% Maximum month end amount outstanding 13,260 21,650 27,500
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 $23,910,000 is available for payment of dividends as of September 30, 1998. NOTE 7 - LONG-TERM DEBT Long -term debt at September 30, 1998 and 1997 consists of the following:
(dollars in thousands) 1998 1997 - ---------------------------------------------------------------------------------------------- 6.53% Five Year Term Note due Dec. 2000 $ 650 $ 1,150 Medium-term notes: 5.77% due Dec. 1998 - 5,000 5.78% due Dec. 1998 - 5,000 7.18% due Oct. 2004 4,000 4,000 7.32% due Aug. 2004 22,000 22,000 8.38% due Jan. 2005 5,000 5,000 8.35% due Jul. 2005 5,000 5,000 8.50% due Oct. 2006 8,000 8,000 8.06% due Sep. 2012 14,000 14,000 8.10% due Oct. 2012 5,000 5,000 8.11% due Oct. 2012 3,000 3,000 7.95% due Feb. 2013 4,000 4,000 8.01% due Feb. 2013 10,000 10,000 7.95% due Feb. 2013 10,000 10,000 7.48% due Sep. 2027 20,000 20,000 ------------ -------------- Total long-term debt $ 110,650 $ 121,150 ------------ -------------- Current maturities of medium-term notes: 5.77% due Dec. 1998 $ 5,000 - 5.78% due Dec. 1998 5,000 - ------------ -------------- $ 10,000 $ - ------------ --------------
None of the long-term debt includes sinking fund requirements. Annual obligations for redemption of long-term debt are as follows: $10,000,000 in fiscal year 1999, none in fiscal year 2000, $650,000 in fiscal year 2001, none in fiscal years 2002 and 2003, and $110,000,000 thereafter. 34 NOTE 8 - INCOME TAXES Pursuant to the provisions of SFAS No. 109, the Company has recorded 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 has adjusted 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 have had no effect on net earnings. The provision for income tax expense consists of the following:
(dollars in thousands) 1998 1997 1996 - --------------------------------------------------------------------------- Current tax expense $ 4,126 $ 6,785 $ 1,108 Deferred tax expense 1,809 (256) 673 Amortization of deferred investment tax credits (241) (266) (175) ----------- ---------- ----------- $ 5,694 $ 6,263 $ 1,606 ----------- ---------- -----------
A reconciliation between income taxes calculated at the statutory federal tax rate and income taxes reflected in the financial statements is as follows:
(dollars in thousands) 1998 1997 1996 - --------------------------------------------------------------------------------------------------- Statutory federal income tax rate 35% 35% 35% Income tax calculated at statutory federal rate $ 5,333 $ 5,911 $ 1,616 Increase (decrease) resulting from: State income tax, net of federal tax benefit 117 122 34 Non-normalized depreciation differences 345 380 251 Amortization of investment tax credits (241) (266) (175) Other 140 116 (120) ----------- ---------- ----------- $ 5,694 $ 6,263 $ 1,606 ----------- ---------- -----------
35 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 at September 30, 1998 and 1997 are as follows:
(dollars in thousands) 1998 1997 - ------------------------------------------------------------------------ Deferred tax liabilities: Basis differences on net fixed assets $ 16,096 $ 14,230 Debt refinancing costs 1,797 1,985 Retirement benefit obligations 1,005 986 ---------- ---------- 18,898 17,201 ---------- ---------- Deferred tax assets: Valuation reserves 470 458 Retirement benefit obligations 531 406 Provision for doubtful accounts 255 213 Other 44 44 ---------- ---------- 1,300 1,121 ---------- ---------- Net deferred tax liability $ 17,598 $ 16,080 ---------- ----------
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 to fund the plan by contributing an amount equal to the actuarially determined normal cost plus ten-year amortization payments towards the unfunded actuarial liability, subject to the limits on deductible contributions. The Company also provides executive officers with supplemental retirement, death, and disability benefits. Under the plan, vesting occurs on a stepped basis, with full vesting upon the executive reaching age 55 and completing either five years of participation under the plan or seventeen years of employment with the company, upon death, or upon a change in control. The plan supplements the benefit received through Social Security and the defined benefit pension plan so that the total retirement benefits are equal to 70% of the executive's highest salary during any of the five years preceding retirement. The plan also provides a death benefit equivalent to ten years of vested benefits. The Company funds the plan by making contributions to the Trust sufficient to assure assets held by the Trust always exceed the accumulated benefit obligation for benefits payable by the plan. The funded status of the defined benefit pension and supplemental retirement plans and amounts recognized in the Company's financial statements at September 30, 1998 and 1997 are set forth in the following table: 36
Supplemental Pension Plan Retirement Plan (dollars in thousands) 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------------------------- Actuarial present value of accumulated benefit obligations: Vested $ 29,707 $ 25,130 $ 3,970 $ 3,692 Nonvested 808 767 525 465 ----------------------- ----------------------- $ 30,515 $ 25,897 $ 4,495 $ 4,157 ----------------------- ----------------------- ----------------------- ----------------------- Projected benefit obligation for services rendered to date $ 34,904 $ 29,767 $ 4,841 $ 4,445 Plan assets, at fair value, primarily common stocks, corporate bonds, and life insurance policies 30,768 29,158 5,486 4,888 ----------------------- ----------------------- Projected benefit obligation (in excess of) less than plan assets (4,136) (609) 645 443 Unrecognized amounts: Prior service cost 2,986 3,399 (188) (223) Loss (gain) from past experience different from that assumed 3,034 (2,167) 862 1,082 Net transition obligation 7 13 827 927 ----------------------- ----------------------- Prepaid pension cost $ 1,891 $ 636 $ 2,146 $ 2,229 ----------------------- -----------------------
Net pension cost for both plans included the following components:
(dollars in thousands) 1998 1997 1996 - ------------------------------------------------------------------------------------ Service cost of benefits earned during the period $ 1,584 $ 1,367 $ 1,095 Interest cost on projected benefit obligation 2,617 2,398 1,684 Actual return on plan assets (24) (6,771) (2,274) Deferral of unrecognized loss (gain) and amortization, net (2,278) 4,975 1,179 Special termination benefit 369 -- -- ---------- --------- ---------- $ 2,268 $ 1,969 $ 1,684 ---------- --------- ----------
The special termination benefit represents the recognition of the increase in the projected benefit obligation for three executives who elected to accept early retirement benefits effective September 30, 1998. The following assumptions were used to determine the projected benefit obligation and expected return on assets at September 30, 1998, 1997 and 1996: Pension plan: Discount rate 7.25% 7.75% 8.25% Long-term rate of return on plan assets 9.00% 9.00% 9.00% Rate of increase in future compensation levels 5.00% 5.00% 5.00% Supplemental retirement plan: Discount rate 7.25% 7.75% 8.25% 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%
401(K) PLAN. 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 plan. Under the 37 terms of the plan, the Company will match each employee's contribution at a rate of 75% of the employee's contribution up to 6% of the employee's compensation, as defined. Prior to January 1, 1997, the matching rate was 50%. The increased contribution is in the form of Company stock. The Company recognized costs for contributions to this plan of $769,000, $703,000, and $377,000, for 1998, 1997 and 1996, respectively. RETIREE MEDICAL PLAN. 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, in a regulatory asset account, 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 amount so deferred was $767,000 in 1996. 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. The annual amortization amount is $750,000. Amounts accrued for PBOP, not including the above mentioned deferrals and amortization, consist of the following components:
(dollars in thousands) 1998 1997 1996 - --------------------------------------------------------------- Service cost $ 394 $ 369 $ 326 Net interest cost 1,201 1,211 939 Actual return on plan assets 5 (1,417) (317) Net amortization and deferral (410) 1,480 492 ------- $ 1,190 $ 1,643 $ 1,440 ------- ------- -------
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 at September 30, 1998 and 1997:
(dollars in thousands) 1998 1997 - ------------------------------------------------------------------------------- Accumulated postretirement benefit obligation (APBO): Retirees $ 5,949 $ 5,814 Fully eligible active plan participants 5,699 5,389 Other active plan participants 6,436 6,292 ---------- ----------- 18,084 17,495 Plan assets, at fair value, primarily common stocks and corporate bonds 7,966 7,741 ---------- ----------- Funded status (10,118) (9,754) Unrecognized transition obligation 9,362 10,019 Unrecognized (gain) loss (1,282) (1,976) ---------- ----------- Accrued postretirement benefit cost $ (2,038) $ (1,711) ---------- ----------- ---------- -----------
At October 1, 1997, the per capita claims cost assumption was updated, resulting in a 9.7% decrease in the APBO. For the valuation at September 30, 1998, the discount rate was decreased from 7.75% to 7.25% and the census data was updated. These, together with the passage of time, resulted in a 14.5% increase in the APBO. The assumed health care cost trend rate used in measuring the APBO is 8.5% for 1999, trending down to 5.5% at 2005. A one percentage point increase in the assumed health care cost trend rate for each year would increase the APBO by approximately 15.7% and the service and interest cost components of net postretirement health care cost by approximately 17.9%. 38 NOTE 10- COMMITMENTS AND CONTINGENCIES Gas Service Contracts The Company has entered into various long-term contracts for natural gas supply, transportation, storage, and peaking services. These contracts assure that adequate supplies of gas will be available to provide firm service to core customers and to meet obligations under long-term non-core customer agreements, and to assure that adequate capacity is available on interstate pipelines for the delivery of these supplies. These contracts have maturities ranging from one to 26 years, and generally provide for monthly and annual fixed demand charges and minimum purchase obligations. 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 Storage Firm Gas Pipeline and Peaking Supply Transportation Service Total - --------------------------------------------------------------------------------------- (dollars in thousands) 1999 $ 30,401 $ 26,335 $ 3,910 $ 60,646 2000 19,399 26,437 3,910 49,746 2001 18,367 26,437 3,910 48,714 2002 15,345 26,300 3,522 45,167 2003 15,064 26,300 3,522 44,886 Thereafter 25,599 283,961 38,737 348,297 ----------- ----------- ------------ ----------- $ 124,175 $ 415,770 $ 57,511 $ 597,456 ----------- ----------- ------------ -----------
Purchases under these contracts for fiscal 1998, 1997, and 1996, including commodity purchases, as well as demand charges have been as follows:
Interstate Storage Firm Gas Pipeline and Peaking (dollars in thousands) Supply Transportation Service Total - ----------------------------------------------------------------------------------- 1998 $ 47,102 $ 28,901 $ 4,830 $ 80,833 1997 $ 67,329 $ 30,547 $ 4,626 $102,502 1996 (nine months) $ 32,075 $ 19,002 $ 3,718 $ 54,795
Environmental Matters There are two claims against the Company for as yet unknown costs for clean up of alleged environmental contamination related to manufactured gas plant sites that were previously operated by companies, which were subsequently merged into Cascade. The first claim was received in 1995, and relates to a site in Oregon. An investigation has shown that contamination does exist, but there has been no estimate of clean up costs. It is expected that other parties will participate in the clean up costs, and negotiations are ongoing as to the sharing arrangement. The second claim was received in 1997, and relates to a site in Washington. An investigation has determined there is evidence of contamination at the site, but there is also evidence of an oil line, operated by an unrelated party, crossing the property, which may have also contributed to the contamination. There has been no estimate of possible clean up costs. Management intends to pursue reimbursement from its insurance carriers, and recovery from its customers through increased rates, for any remediation costs for which the Company is determined to be liable. There 39 is precedent for such recovery through increased rates, as both the WUTC and OPUC have previously allowed regulated utilities to increase customer rates to recover similar costs. Litigation Various lawsuits, claims, and contingent liabilities may arise from time to time from the conduct of the Company's business. In 1998 the Company was served with a lawsuit by six plaintiffs, claiming unspecified damages for personal injuries in connection with carbon monoxide exposure. The plaintiffs were residents of a house served by the Company at the time of the incident. The Company denies any responsibility for these injuries, and the parties are engaged in discovery. There is no estimate of the Company's potential liability for this claim, and its self-insured retainage with respect to such claims is $1 million. No other claim 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. Technology Risk Like most entities that are heavily reliant on business application computer software, the Company is affected by the fact that some of its computer systems are not year 2000 compliant. The Company has identified and is in the process of correcting and replacing such non-compliant systems. Costs of modifying existing programs are charged to expense as incurred. Several vendor-based systems are being replaced or upgraded. Such replacements and upgrades also provide significant improvements in efficiency and functionality, in addition to being year 2000 compliant. Costs of such replacements and upgrades are capitalized. Capital expenditures to date for such replacements and upgrades have been approximately $500,000. There is a potential risk of loss associated with customers and suppliers being non-compliant with respect to their systems. The Company has not developed an estimate of the potential cost associated with failures on the part of suppliers and customers. Though monitoring and measurement may be affected, delivery of natural gas is not dependent on computer systems, so management anticipates that any such losses would be minimal. Another risk factor is failure of customer systems, affecting their financial viability or their systems that are used to pay their obligations to Cascade for gas service. 40 NOTE 11 - 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 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 or estimation methodologies may have a material effect on the estimated fair value amounts. The estimated fair values have been determined by using interest rates that are currently available to the Company for issuance of instruments with similar terms and remaining maturities. The estimated fair value amounts, at September 30, 1998 and 1997, of financial instruments whose values are sensitive to market conditions are set forth in the following table:
1998 1997 Carrying Estimated Carrying Estimated (dollars in thousands) Amount Fair Value Amount Fair Value - ----------------------------------------------------------------------------------------- Redeemable Preferred Stock $ 6,408 $ 6,525 $ 6,630 $ 6,815 Long-term Debt $ 120,650 $ 142,517 $ 121,150 $ 127,983
NOTE 12 - INTERIM RESULTS OF OPERATIONS (UNAUDITED)
(thousands except Quarter Ended Quarter Ended per share data) 9/30/98 6/30/98 3/31/98 12/31/97 9/30/97 6/30/97 3/31/97 12/31/96 - ---------------------------------------------------------------------------------------------------------------------------------- Operating revenues $ 26,129 $ 36,995 $ 65,548 $ 60,984 $ 25,911 $ 33,730 $ 71,174 $ 64,971 Gas costs and revenue taxes 13,850 21,527 38,601 35,441 14,547 19,317 43,548 39,360 -------- -------- -------- -------- -------- -------- -------- -------- Operating margin 12,279 15,468 26,947 25,543 11,364 14,413 27,626 25,611 Cost of operations 12,781 14,101 14,346 13,972 12,943 13,455 13,441 13,236 -------- -------- -------- -------- -------- -------- -------- -------- Earnings (loss) from operations (502) 1,367 12,601 11,571 (1,579) 958 14,185 12,375 Interest and other, net 2,500 2,400 2,415 2,484 2,229 2,241 2,249 2,330 -------- -------- -------- -------- -------- -------- -------- -------- Earnings (loss) before income taxes (3,002) (1,033) 10,186 9,087 (3,808) (1,283) 11,936 10,045 Income taxes (1,158) (370) 3,817 3,405 (1,396) (274) 4,336 3,597 -------- -------- -------- -------- -------- -------- -------- -------- Net earnings (loss) (1,844) (663) 6,369 5,682 (2,412) (1,009) 7,600 6,448 Preferred dividends 124 124 124 125 126 128 128 128 -------- -------- -------- -------- -------- -------- -------- -------- Net earnings (loss) available to Common Shareholders ($1,968) ($787) $ 6,245 $ 5,557 ($2,538) ($1,137) $ 7,472 $ 6,320 -------- -------- -------- -------- -------- -------- -------- -------- Weighted average shares outstanding (as restated) 11,045 11,045 11,018 10,980 10,933 10,880 10,837 10,799 -------- -------- -------- -------- -------- -------- -------- -------- Net earnings (loss) per common share - basic and diluted ($0.18) ($0.07) $ 0.57 $ 0.51 ($0.23) ($0.10) $ 0.69 $ 0.59 -------- -------- -------- -------- -------- -------- -------- --------
41 INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES Cascade Natural Gas Corporation and Subsidiaries We have audited the consolidated financial statements of Cascade natural Gas Corporation and subsidiaries as of September 30, 1998 and 1997, and for the years ended September 30, 1998 and 1997, and the nine months ended September 30, 1996, and have issued our report thereon dated November 6, 1998; such consolidated financial statements and report are included in Part II of this Annual Report on Form 10-K. Our audits also included the consolidated financial statement schedule of Cascade Natural Gas Corporation, listed in Item 14(a)2. This consolidated 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 consolidated 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 6, 1998 42 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: September 30, 1996 $425 440 426 $439 September 30, 1997 $439 507 417 $529 September 30, 1998 $529 585 469 $645 Note: Accounts receivable written off, net of recoveries Valuation Reserve - Notes Receivable September 30, 1996 $1,249 288 $1,537 September 30, 1997 $1,537 183 $1,720 September 30, 1998 $1,720 118 $1,838 Valuation Reserve - Investments September 30, 1996 $150 154 304 $0 September 30, 1997 $0 0 0 $0 September 30, 1998 $0 $0
43 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Reference is made to the information regarding directors under the caption "Election of Directors" on pages 1 through 3 and the caption "Section 16(a) Beneficial Ownership Reporting Compliance" on page 7 of the Proxy Statement issued to Shareholders for the 1999 Annual Meeting (the 1999 Proxy Statement), which information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Reference is made to the information regarding executive compensation set forth in the 1999 Proxy Statement, under "Executive Compensation" on pages 10, 11, and 12, and under "Compensation Committee Interlocks and Insider Participation" on page 13, 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. Reference is made 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 7 of the 1999 Proxy Statement (excluding the information under the subheading "Section 16(a) Beneficial Ownership Reporting Compliance"), which information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Reference is made to the information regarding certain relationships and transactions under the caption "Compensation Committee Interlocks and Insider Participation" on page 13 of the 1999 Proxy Statement, which information is incorporated herein by reference 44 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) 1. Financial Statements (Included in Part II of this report): Independent Auditors' Report Consolidated Statements of Net Earnings Available to Common Shareholders for the Years Ended September 30, 1998, September 30, 1997, and the Nine Months Ended September 30, 1996 Consolidated Balance Sheets, September 30, 1998, and September 30, 1997 Consolidated Statements of Common Shareholders' Equity for the Years Ended September 30, 1998, September 30, 1997, and the Nine Months Ended September 30, 1996 Consolidated Statements of Cash Flows for the Years Ended September 30, 1998, September 30, 1997, and the nine Months Ended September 30, 1996 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: Reference is directed 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: None. 45 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CASCADE NATURAL GAS CORPORATION December 21, 1998 By /s/ J. D. Wessling ----------------- ------------------- Date J. D. Wessling Sr. 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, President and Chief Executive Officer /s/ W. Brian Matsuyama and Director December 21, 1998 - -------------------------------- (Principal Executive Officer) ----------------- W. Brian Matsuyama Date Sr. Vice President - Finance, /s/ J. D. Wessling Chief Financial Officer December 21, 1998 - -------------------------------- (Principal Financial Officer) ----------------- J. D. Wessling Date Controller and Chief /s/ James E. Haug Accounting Officer December 21, 1998 - -------------------------------- (Principal Accounting Officer) ----------------- James E. Haug Date /s/ Melvin C. Clapp Director December 21, 1998 - -------------------------------- ----------------- Melvin C. Clapp Date /s/ Thomas E. Cronin Director December 21, 1998 - -------------------------------- ----------------- Thomas E. Cronin Date /s/ David A. Ederer Director December 21, 1998 - -------------------------------- ----------------- David A. Ederer Date /s/ Howard L. Hubbard Director December 21, 1998 - -------------------------------- ----------------- Howard L. Hubbard Date /s/ Larry L. Pinnt Director December 21, 1998 - -------------------------------- ----------------- Larry L. Pinnt Date /s/ Brooks G. Ragen Director December 21, 1998 - -------------------------------- ----------------- Brooks G. Ragen Date /s/ Mary A. Williams Director December 21, 1998 - -------------------------------- ----------------- Mary A. Williams Date
46 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 1998 Stock Incentive Plan of the Registrant. 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 Consent to Assignments, Dated June 1, 1997, which assigns from Westcoast Gas Services Inc. (WGSI), to Engage Energy Canada, L.P. (Engage) all the rights and obligations as specified in the contracts contained herein as Exhibit Nos. 10.7, 10.9, and 10.22. Incorporated by reference to Exhibit 10.6 to the Registrant's Annual Report on Form 10-K for the year ended December 31,1997 (1997 Form 10-K) 10.7 Amendment dated October 9, 1997 to Natural Gas Sales Agreement dated November 1, 1990, between Canadian Hydrocarbons Marketing, Inc., and the Registrant, as amended by the Consent to Assignments dated June 1, 1997. Incorporated by reference to Exhibit 10.7 to the Registrant's 1997 Form 10-K. A PORTION OF THIS AGREEMENT IS SUBJECT TO A REQUEST FOR CONFIDENTIAL TREATMENT. 10.9 Long Term Gas Sales Agreement dated August 26, 1993, between Canadian Hydrocarbons Marketing Inc., and the Registrant, as amended by the Consent to Assignments dated June 1, 1997. 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. 47 10.11 Gas transportation agreement between Pacific Gas Transmission Company and the Registrant dated as of April 30, 1997. Incorporated by reference to Exhibit 10.11 to the Registrant's 1997 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 Second amendment to the agreement for the release of Jackson Prairie Storage Capacity dated as of July 30, 1997, 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 1997 Form 10-K. 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, as amended by Amended Exhibit A, effective October 1, 1997. Incorporated by reference to Exhibit 10.21 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 10.21.1 Amended Exhibit A, effective October 1, 1997, to Gas Purchase Contract dated October 1, 1994, between IGI Resources, Inc. and the Registrant. Incorporated by reference to Exhibit 10.21.1 to the Registrant's 1997 Form 10-K. A PORTION OF THIS AGREEMENT IS SUBJECT TO A REQUEST FOR CONFIDENTIAL TREATMENT 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, as amended by the Consent to Assignments dated June 1, 1997, and the letter amendment dated October 8, 1997. Incorporated by reference to Exhibit 10.22 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 10.22.1 Letter amendment dated October 8, 1997, to Amended and restated Natural Gas Sales Agreement dated August 17, 1994, between Westcoast Gas Services, Inc. and Registrant which replaces and substitutes 48 for the Kingsgate Gas Sales Agreement dated September 23, 1960. Incorporated by reference to Exhibit 10.22.1 to the Registrant's 1997 Form 10-K. A PORTION OF THIS AGREEMENT IS SUBJECT TO A REQUEST FOR CONFIDENTIAL TREATMENT 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, as amended by the Amendment No. 3 to Agreement for Peaking Gas Service, dated as of October 2, 1997. Incorporated by reference to Exhibit 10.27 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 10.27.1 Amendment No. 3 to Agreement for Peaking Gas Service, dated as of October 2, 1997. Incorporated by reference to Exhibit 10.27.1 to the Registrant's 1997 Form 10-K. 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 Form of employment agreement between the Registrant and W. Brian Matsuyama, and each other executive officers of the registrant * Incorporated by reference to Exhibit 10(p) 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. 49 EX-10.1 2 EXHIBIT 10.1 CASCADE NATURAL GAS CORPORATION 1998 STOCK INCENTIVE PLAN Exhibit 10.1 Effective November 9, 1998 TABLE OF CONTENTS
PAGE ARTICLE 1 ESTABLISHMENT AND PURPOSE . . . . . . . . . . . . . . . 1 1.1 Establishment. . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 Purpose. . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE 2 DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . 1 2.1 Defined Terms. . . . . . . . . . . . . . . . . . . . . . . . 1 2.2 Gender and Number. . . . . . . . . . . . . . . . . . . . . . 4 ARTICLE 3 ADMINISTRATION. . . . . . . . . . . . . . . . . . . . . 4 3.1 General. . . . . . . . . . . . . . . . . . . . . . . . . . . 4 3.2 Authority of the Committee . . . . . . . . . . . . . . . . . 4 3.3 Action by the Committee. . . . . . . . . . . . . . . . . . . 5 3.4 Delegation . . . . . . . . . . . . . . . . . . . . . . . . . 5 3.5 Liability of Board and Committee Members . . . . . . . . . . 5 3.6 Costs of Plan. . . . . . . . . . . . . . . . . . . . . . . . 5 ARTICLE 4 DURATION OF THE PLAN AND SHARES SUBJECT TO THE PLAN . . 5 4.1 Duration of the Plan . . . . . . . . . . . . . . . . . . . . 5 4.2 Shares Subject to the Plan . . . . . . . . . . . . . . . . . 5 ARTICLE 5 ELIGIBILITY . . . . . . . . . . . . . . . . . . . . . . 5 ARTICLE 6 AWARDS. . . . . . . . . . . . . . . . . . . . . . . . . 6 6.1 Types of Awards. . . . . . . . . . . . . . . . . . . . . . . 6 6.2 General. . . . . . . . . . . . . . . . . . . . . . . . . . . 6 6.3 Nonuniform Determinations. . . . . . . . . . . . . . . . . . 6 6.4 Award Agreements . . . . . . . . . . . . . . . . . . . . . . 6 6.5 Provisions Governing All Awards. . . . . . . . . . . . . . . 6 6.6 Tax Withholding. . . . . . . . . . . . . . . . . . . . . . . 10 6.7 Annulment of Awards. . . . . . . . . . . . . . . . . . . . . 10 6.8 Engaging in Competition With the Corporation . . . . . . . . 10 -i- TABLE OF CONTENTS (CONTINUED) PAGE ARTICLE 7 DEFERRAL ELECTIONS. . . . . . . . . . . . . . . . . . . 10 ARTICLE 8 DIVIDEND EQUIVALENTS. . . . . . . . . . . . . . . . . . 11 ARTICLE 9 ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, ETC.. . . . 11 9.1 Plan Does Not Restrict Corporation . . . . . . . . . . . . . 11 9.2 Adjustments by the Committee . . . . . . . . . . . . . . . . 11 ARTICLE 10 AMENDMENT AND TERMINATION . . . . . . . . . . . . . . . 11 ARTICLE 11 MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . 12 11.1 Unfunded Plan. . . . . . . . . . . . . . . . . . . . . . . . 12 11.2 Payments to Trust. . . . . . . . . . . . . . . . . . . . . . 12 11.3 Other Corporation Benefit and Compensation Programs. . . . . 12 11.4 Securities Law Restrictions. . . . . . . . . . . . . . . . . 12 11.5 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . 12 ARTICLE 12 SHAREHOLDER APPROVAL. . . . . . . . . . . . . . . . . . 12 EXHIBIT A OPTIONS . . . . . . . . . . . . . . . . . . . . . . . . 1 13.1 Types of Options . . . . . . . . . . . . . . . . . . . . . . 1 13.2 General. . . . . . . . . . . . . . . . . . . . . . . . . . . 1 13.3 Option Price . . . . . . . . . . . . . . . . . . . . . . . . 1 13.4 Option Term. . . . . . . . . . . . . . . . . . . . . . . . . 1 13.5 Time of Exercise . . . . . . . . . . . . . . . . . . . . . . 1 13.6 Special Rules for Incentive Stock Options. . . . . . . . . . 2 13.7 Restricted Shares. . . . . . . . . . . . . . . . . . . . . . 2 13.8 Deferred Compensation Options. . . . . . . . . . . . . . . . 2 13.9 Reload Options . . . . . . . . . . . . . . . . . . . . . . . 2 EXHIBIT B STOCK APPRECIATION RIGHTS . . . . . . . . . . . . . . . 1 14.1 General. . . . . . . . . . . . . . . . . . . . . . . . . . . 1 14.2 Nature of Stock Appreciation Right . . . . . . . . . . . . . 1 14.3 Exercise . . . . . . . . . . . . . . . . . . . . . . . . . . 1 EXHIBIT C RESTRICTED AWARDS . . . . . . . . . . . . . . . . . . . 1 15.1 Types of Restricted Awards . . . . . . . . . . . . . . . . . 1 15.2 General. . . . . . . . . . . . . . . . . . . . . . . . . . . 1 -ii- TABLE OF CONTENTS (CONTINUED) PAGE 15.3 Restriction Period . . . . . . . . . . . . . . . . . . . . . 1 15.4 Forfeiture . . . . . . . . . . . . . . . . . . . . . . . . . 2 15.5 Settlement of Restricted Awards. . . . . . . . . . . . . . . 2 15.6 Rights as a Shareholder. . . . . . . . . . . . . . . . . . . 2 EXHIBIT D PERFORMANCE AWARDS. . . . . . . . . . . . . . . . . . . 1 16.1 General. . . . . . . . . . . . . . . . . . . . . . . . . . . 1 16.2 Nature of Performance Awards . . . . . . . . . . . . . . . . 1 16.3 Performance Cycles . . . . . . . . . . . . . . . . . . . . . 1 16.4 Performance Goals. . . . . . . . . . . . . . . . . . . . . . 1 16.5 Determination of Awards. . . . . . . . . . . . . . . . . . . 1 16.6 Performance Goals for Executive Officers . . . . . . . . . . 1 EXHIBIT E OTHER STOCK BASED AND COMBINATION AWARDS. . . . . . . . 1 17.1 Other Stock-Based Awards . . . . . . . . . . . . . . . . . . 1 17.2 Combination Awards . . . . . . . . . . . . . . . . . . . . . 1
-iii- CASCADE NATURAL GAS CORPORATION 1998 STOCK INCENTIVE PLAN ARTICLE 1 ESTABLISHMENT AND PURPOSE 1.1 ESTABLISHMENT. CASCADE NATURAL GAS CORPORATION ("Corporation") hereby establishes the Cascade Natural Gas Corporation 1998 Stock Incentive Plan (the "Plan") effective November 9, 1998, subject to shareholder approval as provided in Article 12. 1.2 PURPOSE. The purpose of the Plan is to promote and advance the interests of shareholders by enabling Corporation to attract, retain, and reward key employees of Corporation and its subsidiaries. It is also intended to strengthen the mutuality of interests between employees and Corporation's shareholders. The Plan is designed to serve these purposes by offering stock options and other equity-based incentive awards, thereby providing a proprietary interest in pursuing the long-term growth, profitability, and financial success of Corporation and increasing shareholder value. ARTICLE 2 DEFINITIONS 2.1 DEFINED TERMS. For purposes of the Plan, the following terms will have the meanings set forth below: "AWARD" means an award or grant made to a Participant of Options, Stock Appreciation Rights, Restricted Awards, Performance Awards, or Other Stock-Based Awards pursuant to the Plan. "AWARD AGREEMENT" means an agreement as described in Section 6.4. "BOARD" means the Board of Directors of Corporation. "CODE" means the Internal Revenue Code of 1986, as amended and in effect from time to time, or any successor thereto, together with rules, regulations, and interpretations promulgated thereunder. Where the context so requires, any reference to a particular Code section will be construed to refer to the successor provision to such Code section. "COMMITTEE" means the Nominating and Compensation Committee of the Board. "COMMON STOCK" means the $1.00 par value common stock of Corporation or any security of Corporation issued in substitution, exchange, or lieu of such common stock. "CONTINUING RESTRICTION" means a Restriction contained in Sections 6.5(h), 6.8, and 11.4 of the Plan and any other Restrictions expressly designated by the Committee in an Award Agreement as a Continuing Restriction. -1- "CORPORATION" means Cascade Natural Gas Corporation, a Washington corporation, or any successor corporation. "DEFERRED COMPENSATION OPTION" means a Nonqualified Option granted in lieu of a specified amount of other compensation pursuant to Section 13.8 in Exhibit A of the Plan. "DISABILITY" means the condition of being permanently "disabled" within the meaning of Section 22(e)(3) of the Code, namely being unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months. However, the Committee may change the foregoing definition of "Disability" or may adopt a different definition for purposes of specific Awards. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended and in effect from time to time, or any successor statute. Where the context so requires, any reference to a particular section of the Exchange Act, or to any rule promulgated under the Exchange Act, will be construed to refer to successor provisions to such section or rule. "FAIR MARKET VALUE" means on any given date, the fair market value per share of the Common Stock determined as follows: (a) If the Common Stock is traded on an established securities exchange, the mean between the reported high and low sale prices of Common Stock as reported for such day by the principal exchange on which Common Stock is traded (as determined by the Committee) or, if Common Stock was not traded on such date, on the next preceding day on which Common Stock was traded; (b) If there is no market for Common Stock or if trading activities for Common Stock are not reported in the manner described above, the fair market value will be as determined by the Committee. "INCENTIVE STOCK OPTION" or "ISO" means any Option granted pursuant to the Plan that is intended to be and is specifically designated in its Award Agreement as an "incentive stock option" within the meaning of Section 422 of the Code. "NONQUALIFIED OPTION" or "NQO" means any Option, including a Deferred Compensation Option, granted pursuant to the Plan that is not an Incentive Stock Option. "OPTION" means an ISO or an NQO (including a Deferred Compensation Option). "OTHER STOCK-BASED AWARD" means an Award as defined in Section 17.1 in Exhibit E. -2- "PARTICIPANT" means an employee of Corporation or a Subsidiary, who is granted an Award under the Plan. "PERFORMANCE AWARD" means an Award granted pursuant to the provisions of Exhibit D of the Plan, the Vesting of which is contingent on performance attainment. "PERFORMANCE CYCLE" means a designated performance period pursuant to the provisions of Section 16.3 in Exhibit D of the Plan. "PERFORMANCE GOAL" means a designated performance objective pursuant to the provisions of Section 16.4 in Exhibit D of the Plan. "PLAN" means this Cascade Natural Gas Corporation 1998 Stock Incentive Plan, as set forth in this Plan document and as it may be amended and from time to time. "REPORTING PERSON" means a Participant who is subject to the reporting requirements of Section 16(a) of the Exchange Act. "RESTRICTED AWARD" means a Restricted Share or a Restricted Unit granted pursuant to Exhibit C of the Plan. "RESTRICTED SHARE" means an Award described in Section 15.1(a) in Exhibit C of the Plan. "RESTRICTED UNIT" means an Award of units representing Shares described in Section 15.1(b) in Exhibit C of the Plan. "RESTRICTION" means a provision in the Plan or in an Award Agreement which limits the exercisability or transferability, or which governs the forfeiture, of an Award or the Shares, cash, or other property payable pursuant to an Award. "RETIREMENT" means retirement from active employment with Corporation and its Subsidiaries on or after age 65, or such earlier retirement date as approved by the Committee for purposes of the Plan. However, the Committee may change the foregoing definition of "Retirement" or may adopt a different definition for purposes of specific Awards. "SHARE" means a share of Common Stock. "STOCK APPRECIATION RIGHT" or "SAR" means an Award to benefit from the appreciation of Common Stock granted pursuant to the provisions of Exhibit B of the Plan. "SUBSIDIARY" means a "subsidiary corporation" of Corporation, within the meaning of Section 425 of the Code, namely any corporation in which Corporation directly or indirectly controls 50 percent or more of the total combined voting power of all classes of stock having voting power. -3- "VEST" or "VESTED" means: (a) In the case of an Award that requires exercise, to be or to become immediately and fully exercisable and free of all Restrictions (other than Continuing Restrictions); (b) In the case of an Award that is subject to forfeiture, to be or to become nonforfeitable, freely transferable, and free of all Restrictions (other than Continuing Restrictions); (c) In the case of an Award that is required to be earned by attaining specified Performance Goals, to be or to become earned and nonforfeitable, freely transferable, and free of all Restrictions (other than Continuing Restrictions); or (d) In the case of any other Award as to which payment is not dependent solely upon the exercise of a right, election, exercise, or option, to be or to become immediately payable and free of all Restrictions (except Continuing Restrictions). 2.2 GENDER AND NUMBER. Except where otherwise indicated by the context, any masculine or feminine terminology used in the Plan will also include the opposite gender; and the definition of any term in Section 2.1 in the singular will also include the plural, and vice versa. ARTICLE 3 ADMINISTRATION 3.1 GENERAL. The Plan will be administered by the Committee. 3.2 AUTHORITY OF THE COMMITTEE. The Committee has full power and authority (subject to such orders or resolutions as may be issued or adopted from time to time by the Board) to administer the Plan in its sole discretion, including the authority to: (a) Construe and interpret the Plan and any Award Agreement; (b) Promulgate, amend, and rescind rules and procedures relating to the implementation of the Plan; (c) Select the Participants who will be granted Awards; (d) Determine the number and types of Awards to be granted to each such Participant; (e) Determine the number of Shares, or Share equivalents, to be subject to each Award; (f) Determine the option price, purchase price, base price, or similar feature for any Award; and -4- (g) Determine all the terms and conditions of all Award Agreements, consistent with the requirements of the Plan. Decisions of the Committee, or any delegate as permitted by the Plan, will be final, conclusive, and binding on all Participants. 3.3 ACTION BY THE COMMITTEE. A majority of the members of the Committee will constitute a quorum for the transaction of business. Action approved by a majority of the members present at any meeting at which a quorum is present, or action in writing by a majority of the members of the Committee, will be the valid acts of the Committee. 3.4 DELEGATION. Notwithstanding the foregoing, the Committee may delegate to one or more officers of Corporation the authority to determine the recipients, types, amounts, and terms of Awards granted to Participants who are not Reporting Persons. 3.5 LIABILITY OF BOARD AND COMMITTEE MEMBERS. No member either of the Board or the Committee will be liable for any action or determination made in good faith with respect to the Plan, any Award, or any Participant. 3.6 COSTS OF PLAN. The costs and expenses of administering the Plan will be borne by Corporation. ARTICLE 4 DURATION OF THE PLAN AND SHARES SUBJECT TO THE PLAN 4.1 DURATION OF THE PLAN. The Plan is effective November 9, 1998, subject to approval by Corporation's shareholders as provided in Article 12. The Plan will remain in effect until Awards have been granted covering all the available Shares or the Plan is otherwise terminated by the Board. Termination of the Plan will not affect outstanding Awards. 4.2 SHARES SUBJECT TO THE PLAN. The shares which may be made subject to Awards under the Plan are Shares of Common Stock, which may be either authorized and unissued Shares or reacquired Shares. No fractional Shares may be issued under the Plan. Subject to adjustment pursuant to Article 9, the maximum number of Shares for which Awards may be granted under the Plan is 150,000. If an Award under the Plan is canceled or expires for any reason prior to having been fully Vested or exercised by a Participant or is settled in cash in lieu of Shares or is exchanged for other Awards, all Shares covered by such Awards will be made available for future Awards under the Plan. ARTICLE 5 ELIGIBILITY Officers and other key employees of Corporation and its Subsidiaries (including employees who may also be directors of Corporation or a Subsidiary) who, in the Committee's judgment, are or will be contributors to the long-term success of Corporation will be eligible to receive Awards under the Plan. -5- ARTICLE 6 AWARDS 6.1 TYPES OF AWARDS. The types of Awards that may be granted under the Plan are: (a) Options governed by Exhibit A of the Plan; (b) Stock Appreciation Rights governed by Exhibit B of the Plan; (c) Restricted Awards governed by Exhibit C of the Plan; (d) Performance Awards governed by Exhibit D of the Plan; and (e) Other Stock-Based Awards or combination awards governed by Exhibit E of the Plan. In the discretion of the Committee, any Award may be granted alone, in addition to, or in tandem with other Awards under the Plan. 6.2 GENERAL. Subject to the limitations of the Plan, the Committee may cause Corporation to grant Awards to such Participants, at such times, of such types, in such amounts, for such periods, with such option prices, purchase prices, or base prices, and subject to such terms, conditions, limitations, and restrictions as the Committee, in its discretion, deems appropriate. Awards may be granted as additional compensation to a Participant or in lieu of other compensation to such Participant. A Participant may receive more than one Award and more than one type of Award under the Plan. 6.3 NONUNIFORM DETERMINATIONS. The Committee's determinations under the Plan or under one or more Award Agreements, including without limitation, (a) the selection of Participants to receive Awards, (b) the type, form, amount, and timing of Awards, (c) the terms of specific Award Agreements, and (d) elections and determinations made by the Committee with respect to exercise or payments of Awards, need not be uniform and may be made by the Committee selectively among Participants and Awards, whether or not Participants are similarly situated. 6.4 AWARD AGREEMENTS. Each Award will be evidenced by a written Award Agreement between Corporation and the Participant. Award Agreements may, subject to the provisions of the Plan, contain any provision approved by the Committee. 6.5 PROVISIONS GOVERNING ALL AWARDS. All Awards will be subject to the following provisions: (a) ALTERNATIVE AWARDS. If any Awards are designated in their Award Agreements as alternative to each other, the exercise of all or part of one Award automatically will cause an immediate equal (or pro rata) corresponding termination of the alternative Award or Awards. -6- (b) RIGHTS AS SHAREHOLDERS. No Participant will have any rights of a shareholder with respect to Shares subject to an Award until such Shares are issued in the name of the Participant. (c) EMPLOYMENT RIGHTS. Neither the adoption of the Plan, the granting of any Award, nor the entering into any Award Agreement will confer on any person the right to continued employment with Corporation or any Subsidiary, as the case may be, nor will it interfere in any way with the right of Corporation or a Subsidiary to terminate such person's employment at any time for any reason, with or without cause. (d) RESTRICTION ON TRANSFER. Unless otherwise expressly provided in an individual Award Agreement, each Award (other than Restricted Shares after they Vest) will not be transferable otherwise than by will or the laws of descent and distribution and will be exercisable (if exercise is required), during the lifetime of the Participant, only by the Participant or, in the event the Participant becomes legally incompetent, by the Participant's guardian or legal representative. Notwithstanding the foregoing, the Committee, in its discretion, may provide in any Award Agreement that the Award: - May be fully transferred; - May be freely transferred to a class of transferees specified in the Award Agreement; or - May be transferred, but only subject to any terms and conditions specified in the Award Agreement (including, without limitation, a condition that an Award may only be transferred without payment of consideration). Furthermore, notwithstanding the foregoing, any Award may be surrendered to Corporation pursuant to Section 6.5(h) in connection with the payment of the purchase or option price of another Award or the payment of the Participant's federal, state, or local tax, or tax withholding obligation with respect to the exercise or payment of another Award. (e) TERMINATION OF EMPLOYMENT. The terms and conditions under which an Award may be exercised, if at all, after a Participant's termination of employment will be determined by the Committee and specified in the applicable Award Agreement. (f) CHANGE IN CONTROL. The Committee, in its discretion, may provide in any Award Agreement that in the event of a change in control of Corporation (as the Committee may define such term in the Award Agreement), as of the date of such change in control (or as of a specified event following a change in control): (i) All, or a specified portion of, Awards requiring exercise will become fully and immediately exercisable, notwithstanding any other limitations on exercise; -7- (ii) All, or a specified portion of, Awards subject to Restrictions will become fully Vested; and (iii) All, or a specified portion of, Awards subject to Performance Goals will be deemed to have been fully earned. Unless the Committee specifically provides otherwise in the change in control provision for a specific Award Agreement, Awards will become exercisable, become Vested, or become earned as of a change in control date (or as of a specified event following a change in control) only if, or to the extent, such acceleration in the exercisability, Vesting, or becoming earned of the Awards does not result in an "excess parachute payment" within the meaning of Section 280G(b) of the Code. The Committee, in its discretion, may include change in control provisions in some Award Agreements and not in others, may include different change in control provisions in different Award Agreements, and may include change in control provisions for some Awards or some Participants and not for others. (g) CONDITIONING OR ACCELERATING BENEFITS. The Committee, in its discretion, may include in any Award Agreement a provision conditioning or accelerating the Vesting of an Award or the receipt of benefits pursuant to an Award, either automatically or in the discretion of the Committee, upon the occurrence of specified events including, without limitation, a change in control of Corporation (subject to the foregoing paragraph (f)), a sale of all or substantially all the property and assets of Corporation, or an event of the type described in Article 9 of this Plan. Furthermore, whether or not specified in any Award Agreement (unless an Award Agreement expressly provides otherwise), the Committee may at any time, in its discretion, accelerate the Vesting of any or all Awards. (h) PAYMENT OF PURCHASE PRICE AND WITHHOLDING. The Committee, in its discretion, may include in any Award Agreement a provision permitting the Participant to pay the purchase or option price, if any, for the Shares or other property issuable pursuant to the Award, the Participant's federal, state, or local tax, or tax withholding, obligation with respect to such issuance, or both, in whole or in part by any one or more of the following: (i) By delivering previously owned Shares (including Restricted Shares, whether or not vested); (ii) By surrendering outstanding other Vested Awards under the Plan denominated in Shares or in Share equivalent units; (iii) By reducing the number of Shares or other property otherwise Vested and issuable pursuant to the Award; (iv) By delivering to Corporation a promissory note payable on such terms and over such period as the Committee will determine; By delivery (in a form approved by the Committee) of an irrevocable direction to a securities broker acceptable to the Committee: -8- (A) To sell Shares subject to the Option and to deliver all or a part of the sales proceeds to Corporation in payment of all or a part of the option price and taxes or withholding taxes attributable to the issuance; or (B) To pledge Shares subject to the Option to the broker as security for a loan and to deliver all or a part of the loan proceeds to Corporation in payment of all or a part of the option price and taxes or withholding taxes attributable to the issuance; or (v) In any combination of the foregoing or in any other form approved by the Committee. If Restricted Shares are surrendered in full or partial payment of the purchase or option price of Shares issuable under an Award, a corresponding number of the Shares issued upon exercise of the Award will be Restricted Shares subject to the same Restrictions as the surrendered Restricted Shares. Shares withheld or surrendered as described above will be valued based on their Fair Market Value on the date of the transaction. Any Shares withheld or surrendered with respect to a Reporting Person will be subject to such additional conditions and limitations as the Committee may impose to comply with the requirements of the Exchange Act. (i) REPORTING PERSONS. With respect to all Awards granted to Reporting Persons: (i) Awards requiring exercise will not be exercisable until at least six months after the date the Award was granted, except in the case of the death or Disability of the Participant; and (ii) Shares issued pursuant to any other Award may not be sold by the Participant for at least six months after acquisition, except in the case of the death or Disability of the Participant; provided, however, that (unless an Award Agreement provides otherwise) the limitation of this Section 6.5(i) will apply only if or to the extent required by Rule 16b-3 under the Exchange Act. Award Agreements for Awards to Reporting Persons will also comply with any future restrictions imposed by such Rule 16b-3. (j) SERVICE PERIODS. At the time of granting Awards, the Committee may specify, by resolution or in the Award Agreement, the period or periods of service performed or to be performed by the Participant in connection with the grant of the Award. (k) FORM OF PAYMENT UPON SETTLEMENT OF AWARDS. Payment to a Participant upon settlement of an Award may be in Shares, cash (either in a lump sum or in installment payments, with or without interest, over a period specified in the Award Agreement), by issuance of a Deferred Compensation Option, or in any combination of the above, or in any other form the Committee determines. -9- 6.6 TAX WITHHOLDING. Corporation will have the right to deduct from any settlement of any Award under the Plan, including the delivery or vesting of Shares, any federal, state, or local taxes of any kind required by law to be withheld with respect to such payments or to take such other action as may be necessary in the opinion of Corporation to satisfy all obligations for the payment of such taxes. The recipient of any payment or distribution under the Plan must make arrangements satisfactory to Corporation for the satisfaction of any such withholding tax obligations. Corporation will not be required to make any such payment or distribution under the Plan until such obligations are satisfied. 6.7 ANNULMENT OF AWARDS. Any Award Agreement may, in the Committee's discretion, provide that the grant of an Award payable in cash is revocable until cash is paid in settlement of the Award or that grant of an Award payable in Shares is revocable until the Participant becomes entitled to the certificate in settlement of the Award. In the event the employment of a Participant is terminated for cause (as defined below), any Award which is revocable will be annulled as of the date of such termination for cause. For the purpose of this Section 6.7, the term "for cause" will have the meaning set forth in the Participant's employment agreement, if any, or otherwise means any discharge (or removal) for material or flagrant violation of the policies and procedures of Corporation or for other job performance or conduct which is detrimental to the best interests of Corporation, as determined by the Committee. 6.8 ENGAGING IN COMPETITION WITH THE CORPORATION. Any Award Agreement may, in the Committee's discretion, provide that if a Participant terminates employment with Corporation or a Subsidiary for any reason whatsoever, and within a period of time (as specified in the Award Agreement) after the date of such termination accepts employment with any competitor of (or otherwise engages in competition with) Corporation, the Committee, in its sole discretion, may require such Participant to return to Corporation the economic value of any Award that was realized or obtained (measured at the date of exercise, Vesting, or payment) by such Participant at any time during the period beginning on the date that is six months prior to the date of such Participant's termination of employment with Corporation. ARTICLE 7 DEFERRAL ELECTIONS The Committee may permit a Participant to elect to defer receipt of the payment of cash or the delivery of Shares that would otherwise be due to such Participant by virtue of the exercise, earn out, or Vesting of an Award made under the Plan. If any such election is permitted, the Committee will establish rules and procedures for such payment deferrals, including, but not limited to: (a) payment or crediting of reasonable interest or other growth or earnings factor on such deferred amounts credited in cash, (b) the payment or crediting of dividend equivalents in respect of deferrals credited in Share equivalent units, or (c) granting of Deferred Compensation Options. -10- ARTICLE 8 DIVIDEND EQUIVALENTS Any Awards may, at the discretion of the Committee, earn dividend equivalents. In respect of any such Award which is outstanding on a dividend record date for Common Stock, the Participant may be credited with an amount equal to the amount of cash or stock dividends that would have been paid on the Shares covered by such Award, had such covered Shares been issued and outstanding on such dividend record date. The Committee will establish such rules and procedures governing the crediting of dividend equivalents, including the timing, form of payment, and payment contingencies of such dividend equivalents, as it deems appropriate or necessary. ARTICLE 9 ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, ETC. 9.1 PLAN DOES NOT RESTRICT CORPORATION. The existence of the Plan and the Awards granted under the Plan do not affect or restrict in any way the right or power of the Board or the shareholders of Corporation to make or authorize any adjustment, recapitalization, reorganization, or other change in Corporation's capital structure or its business, any merger or consolidation of the Corporation, any issue of bonds, debentures, preferred or prior preference stocks ahead of or affecting Corporation's capital stock or the rights thereof, the dissolution or liquidation of Corporation or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding. 9.2 ADJUSTMENTS BY THE COMMITTEE. In the event of any change in capitalization affecting the Common Stock of Corporation, such as a stock dividend, stock split, recapitalization, merger, consolidation, split-up, combination or exchange of shares or other form of reorganization, or any other change affecting the Common Stock, such proportionate adjustments, if any, as the Committee, in its sole discretion, may deem appropriate to reflect such change, will be made with respect to the aggregate number of Shares for which Awards may be granted under the Plan, the maximum number of Shares which may be sold or awarded to any Participant, the number of Shares covered by each outstanding Award, and the base price or purchase price per Share in respect of outstanding Awards. The Committee may also make such adjustments in the number of Shares covered by, and price or other value of any outstanding Awards in the event of a spin-off or other distribution (other than normal cash dividends), of Corporation assets to shareholders. ARTICLE 10 AMENDMENT AND TERMINATION The Board may amend, suspend, or terminate the Plan or any portion of the Plan at any time, provided no amendment may be made without shareholder approval if such approval is required by applicable law or the requirements of an applicable stock exchange or over the counter stock trading system. -11- ARTICLE 11 MISCELLANEOUS 11.1 UNFUNDED PLAN. The Plan is unfunded and Corporation will not be required to segregate any assets that may at any time be represented by Awards under the Plan. Any liability of Corporation to any person with respect to any Award under the Plan will be based solely upon any contractual obligations that may be effected pursuant to the Plan. No such obligation of Corporation will be deemed to be secured by any pledge of or other encumbrance on any property of Corporation. 11.2 PAYMENTS TO TRUST. The Committee is authorized (but not obligated) to cause to be established a trust agreement or several trust agreements whereunder the Committee may make payments of amounts due or to become due to Participants in the Plan. 11.3 OTHER CORPORATION BENEFIT AND COMPENSATION PROGRAMS. Payments and other benefits received by a Participant under an Award made pursuant to the Plan will not be deemed a part of a Participant's regular, recurring compensation for purposes of the termination indemnity or severance pay law of any state or country and will not be included in, nor have any effect on, the determination of benefits under any other employee benefit plan or similar arrangement provided by Corporation or a Subsidiary unless expressly so provided by such other plan or arrangements, or except where the Committee expressly determines that an Award or portion of an Award should be included to accurately reflect competitive compensation practices or to recognize that an Award has been made in lieu of a portion of cash compensation. Awards under the Plan may be made in combination with or in tandem with, or as alternatives to, grants, awards, or payments under any other Corporation or Subsidiary plans, arrangements, or programs. The Plan notwithstanding, Corporation or any Subsidiary may adopt such other compensation programs and additional compensation arrangements as it deems necessary to attract, retain, and reward employees for their service with Corporation and its Subsidiaries. 11.4 SECURITIES LAW RESTRICTIONS. No Shares may be issued under the Plan unless counsel for Corporation is satisfied that such issuance will be in compliance with applicable federal and state securities laws. Certificates for Shares delivered under the Plan may be subject to such stop-transfer orders and other restrictions as the Committee deems advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Common Stock is then listed, and any applicable federal or state securities law. The Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. 11.5 GOVERNING LAW. Except with respect to references to the Code or federal securities laws, the Plan and all actions taken thereunder will be governed by and construed in accordance with the laws of the state of Washington. ARTICLE 12 SHAREHOLDER APPROVAL The adoption of the Plan and the grant of Awards under the Plan are expressly subject to the approval of the Plan by the affirmative vote of at least a majority of Corporation's shareholders present in person or represented by proxy and entitled to vote at Corporation's 1999 annual meeting of shareholder. -13- EXHIBIT A OPTIONS 13.1 TYPES OF OPTIONS. Options granted under the Plan may be in the form of Incentive Stock Options or Nonqualified Options (including Deferred Compensation Options). The grant of each Option and the Award Agreement governing each Option will identify the Option as an ISO or an NQO. In the event the Code is amended to provide for tax-favored forms of stock options other than or in addition to Incentive Stock Options, the Committee may grant Options under the Plan meeting the requirements of such forms of options. 13.2 GENERAL. Options will be subject to the terms and conditions set forth in Article 6 and this Exhibit A and Award Agreements governing Options may contain such additional terms and conditions, not inconsistent with the express provisions of the Plan, as the Committee will deem desirable. 13.3 OPTION PRICE. Each Award Agreement for Options will state the option exercise price per Share of Common Stock purchasable under the Option, which may not be less than: (a) $1.00 per share in the case of a Deferred Compensation Option; (b) 100 percent of the Fair Market Value of a Share on the date of grant for all other Nonqualified Options; or (c) 100 percent of the Fair Market Value of a Share on the date of grant for all Incentive Stock Options. 13.4 OPTION TERM. The Award Agreement for each Option will specify the term of each Option, which may be unlimited or may have a specified period during which the Option may be exercised, as determined by the Committee. 13.5 TIME OF EXERCISE. The Award Agreement for each Option will specify, as determined by the Committee: (a) The time or times when the Option becomes exercisable and whether the Option becomes exercisable in full or in graduated amounts based on: (i) continuation of employment over a period specified in the Award Agreement, (ii) satisfaction of performance goals or criteria specified in the Award Agreement, or (iii) a combination of continuation of employment and satisfaction of performance goals or criteria; (b) Such other terms, conditions, and restrictions as to when the Option may be exercised as determined by the Committee; and (c) The extent, if any, that the Option will remain exercisable after the Participant ceases to be an employee of Corporation or a Subsidiary. An Award Agreement for an Option may, in the discretion of the Committee, provide whether, and to what extent, the time when an Option becomes exercisable will be accelerated or otherwise modified (i) in the event of the death, Disability, or Retirement of the Participant, or -1- (ii) upon the occurrence of a change in control of Corporation. The Committee may, at any time in its discretion, accelerate the time when all or any portion of an outstanding Option becomes exercisable. 13.6 SPECIAL RULES FOR INCENTIVE STOCK OPTIONS. In the case of an Option designated as an Incentive Stock Option, the terms of the Option and the Award Agreement will conform with the statutory and regulatory requirements specified pursuant to Section 422 of the Code, as in effect on the date such ISO is granted. ISOs may be granted only to employees of Corporation or a Subsidiary. ISOs may not be granted under the Plan after ten years following the date specified in Section 4.1, unless the ten-year limitation of Section 422(b)(2) of the Code is removed or extended. 13.7 RESTRICTED SHARES. In the discretion of the Committee, the Shares issuable upon exercise of an Option may be Restricted Shares if so provided in the Award Agreement for the Option. 13.8 DEFERRED COMPENSATION OPTIONS. The Committee may, in its discretion, grant Deferred Compensation Options with an option price less than Fair Market Value to provide a means for deferral to future dates of compensation otherwise payable to a Participant. The option price will be determined by the Committee subject to Section 13.3(a) in this Exhibit A of the Plan. The number of Shares subject to a Deferred Compensation Option will be determined by the Committee, in its discretion, by dividing the amount of compensation to be deferred by the difference between the Fair Market Value of a Share on the date of grant and the option price of the Deferred Compensation Option. Amounts of compensation deferred with Deferred Compensation Options may include amounts payable under Awards granted under the Plan or under any other compensation program or arrangement of Corporation as permitted by the Committee. The Committee may grant Deferred Compensation Options only if it reasonably determines that the recipient of such an Option is not likely to be deemed to be in constructive receipt for income tax purposes of the income being deferred. 13.9 RELOAD OPTIONS. The Committee, in its discretion, may provide in an Award Agreement for an Option that in the event all or a portion of the Option is exercised by the Participant using previously acquired Shares, the Participant will automatically be granted (subject to the available pool of Shares subject to grants of Awards as specified in Section 4.2 of the Plan) a replacement Option (with an option price equal to the Fair Market Value of a Share on the date of such exercise) for a number of Shares equal to (or equal to a portion specified in the original Award Agreement of) the number of shares surrendered upon exercise of the Option. Such reload Option features may be subject to such terms and conditions as the Committee determines, including without limitation, a condition that the Participant retain the Shares issued upon exercise of the Option for a specified period of time. -2- EXHIBIT B STOCK APPRECIATION RIGHTS 14.1 GENERAL. Stock Appreciation Rights will be subject to the terms and conditions set forth in Article 6 and this Exhibit B and Award Agreements governing Stock Appreciation Rights may contain such additional terms and conditions, not inconsistent with the express terms of the Plan, as the Committee deems desirable. 14.2 NATURE OF STOCK APPRECIATION RIGHT. A Stock Appreciation Right is an Award entitling a Participant to receive an amount equal to the excess (or, if the Committee so specifies in the Award Agreement, a portion of the excess) of the Fair Market Value of a Share of Common Stock on the date of exercise of the SAR over the base price, as described below, on the date of grant of the SAR, multiplied by the number of Shares with respect to which the SAR will have been exercised. The base price will be designated by the Committee in the Award Agreement for the SAR and may be the Fair Market Value of a Share on the grant date of the SAR or such other higher or lower price as the Committee determines. 14.3 EXERCISE. A Stock Appreciation Right may be exercised by a Participant in accordance with procedures established by the Committee. The Committee may also provide that a SAR will be automatically exercised on one or more specified dates or upon the satisfaction of one or more specified conditions. In the case of SARs granted to Reporting Persons, exercise of the SAR will be limited by the Committee to the extent required to comply with the applicable requirements of Rule 16b-3 under the Exchange Act. -1- EXHIBIT C RESTRICTED AWARDS 15.1 TYPES OF RESTRICTED AWARDS. Restricted Awards granted under the Plan may be in the form of either Restricted Shares or Restricted Units. (a) NATURE OF RESTRICTED SHARES. A Restricted Share is an Award of Shares transferred to a Participant subject to such terms and conditions as the Committee deems appropriate, including, without limitation, restrictions on the sale, assignment, transfer, or other disposition of such Restricted Shares and may include a requirement that the Participant forfeit such Restricted Shares back to Corporation upon termination of Participant's employment for specified reasons within a specified period of time or upon other conditions, as set forth in the Award Agreement for such Restricted Shares. Each Participant receiving a Restricted Share will be issued a stock certificate in respect of such Shares, registered in the name of such Participant, and will be required to execute a stock power in blank with respect to the Shares evidenced by such certificate. The certificate evidencing such Restricted Shares and the stock power will be held in custody by Corporation until the Restrictions on those Shares have lapsed. (b) NATURE OF RESTRICTED UNITS. A Restricted Unit is an Award of units (with each unit having a value equivalent to one Share) granted to a Participant subject to such terms and conditions as the Committee deems appropriate, and may include a requirement that the Participant forfeit such Restricted Units upon termination of Participant's employment for specified reasons within a specified period of time or upon other conditions, as set forth in the Award Agreement for such Restricted Units. 15.2 GENERAL. Restricted Awards will be subject to the terms and conditions of Article 6 and this Exhibit C and Award Agreements governing Restricted Awards may contain such additional terms and conditions, not inconsistent with the express provisions of the Plan, as the Committee deems desirable. 15.3 RESTRICTION PERIOD. Award Agreements for Restricted Awards will provide that Restricted Awards, and the Shares subject to Restricted Awards, may not be transferred, and may provide that, in order for a Participant to Vest in such Restricted Awards, the Participant must remain in the employment of Corporation or its Subsidiaries, subject to relief for reasons specified in the Award Agreement, for a period commencing on the grant date of the Award and ending on such later date or dates as the Committee designates in the Award Agreement (the "Restriction Period"). During the Restriction Period, a Participant may not sell, assign, transfer, pledge, encumber, or otherwise dispose of Shares received under or governed by a Restricted Award grant. The Committee, in its sole discretion, may provide for the lapse of restrictions in installments during the Restriction Period. Upon expiration of the applicable Restriction Period (or lapse of Restrictions during the Restriction Period where the Restrictions lapse in installments) the Participant will be entitled to settlement of the Restricted Award or portion thereof, as the case may be. Although Restricted Awards will usually Vest based on continued employment and Performance Awards under Exhibit D will usually Vest based on attainment of Performance Goals, the Committee, in its discretion, may condition Vesting of Restricted Awards on attainment of Performance Goals as well as continued employment. In such case, the -1- Restriction Period for such a Restricted Award will include the period prior to satisfaction of the Performance Goals. 15.4 FORFEITURE. If a Participant ceases to be an employee of Corporation or a Subsidiary during the Restriction Period for any reason other than reasons which may be specified in an Award Agreement (such as death, Disability, or Retirement) the Award Agreement may require that all non-Vested Restricted Awards previously granted to the Participant be forfeited and returned to Corporation. 15.5 SETTLEMENT OF RESTRICTED AWARDS. (a) RESTRICTED SHARES. Upon Vesting of a Restricted Share Award, the legend on such Shares will be removed and the Participant's stock power will be returned and the Shares will no longer be Restricted Shares. The Committee may also, in its discretion, permit a Participant to receive, in lieu of unrestricted Shares at the conclusion of the Restriction Period, payment in any form described in Section 6.5(k). (b) RESTRICTED UNITS. Upon Vesting of a Restricted Unit Award, a Participant will be entitled to receive payment for Restricted Units in an amount equal to the aggregate Fair Market Value of the Shares covered by such Restricted Units at the expiration of the Applicable Restriction Period. Payment in settlement of a Restricted Unit in any form described in Section 6.5(k) will be made as soon as practicable following the conclusion of the applicable Restriction Period. 15.6 RIGHTS AS A SHAREHOLDER. A Participant will have, with respect to unforfeited Shares received under a grant of Restricted Shares, all the rights of a shareholder of Corporation, including the right to vote the shares, and the right to receive any cash dividends. Stock dividends issued with respect to Restricted Shares will be treated as additional Shares covered by the grant of Restricted Shares and will be subject to the same Restrictions. -2- EXHIBIT D PERFORMANCE AWARDS 16.1 GENERAL. Performance Awards will be subject to the terms and conditions set forth in Article 6 and this Exhibit D and Award Agreements governing Performance Awards may contain such other terms and conditions not inconsistent with the express provisions of the Plan, as the Committee deems desirable. 16.2 NATURE OF PERFORMANCE AWARDS. A Performance Award is an Award of units (with each unit having a value equivalent to one Share) granted to a Participant subject to such terms and conditions as the Committee deems appropriate, including, without limitation, the requirement that the Participant forfeit all or a portion of such Performance Award in the event specified performance criteria are not met within a designated period of time. 16.3 PERFORMANCE CYCLES. For each Performance Award, the Committee will designate a performance period (the "Performance Cycle") with a duration to be determined by the Committee in its discretion within which specified Performance Goals are to be attained. There may be several Performance Cycles in existence at any one time and the duration of Performance Cycles may differ from each other. 16.4 PERFORMANCE GOALS. The Committee will establish Performance Goals for each Performance Cycle on the basis of such criteria and to accomplish such objectives as the Committee may from time to time select. Performance Goals may be based on (i) performance criteria for Corporation, a Subsidiary, or an operating group, (ii) a Participant's individual performance, or (iii) a combination of both. Performance Goals may include objective and subjective criteria. 16.5 DETERMINATION OF AWARDS. As soon as practicable after the end of a Performance Cycle, the Committee will determine the extent to which Performance Awards have been earned on the basis of performance in relation to the established Performance Goals. Settlement of earned Performance Awards will be made to the Participant as soon as practicable after the expiration of the Performance Cycle and the Committee's determination under Section 16.5 in this Exhibit D, in any form described in Section 6.5(k). 16.6 PERFORMANCE GOALS FOR EXECUTIVE OFFICERS. The performance goals for Performance Awards granted to executive officers of Corporation may relate to corporate performance, business unit performance, or a combination of both. - Corporate performance goals will be based on financial performance goals related to the performance of Corporation as a whole and may include one or more measures related to earnings, profitability, efficiency, or return to stockholders such as earnings per share, operating profit, stock price, costs of production, or other measures. - Business unit performance goals will be based on a combination of financial goals and strategic goals related to the performance of an identified business unit for which a Participant has responsibility. Strategic goals for a business unit may include one or a combination of objective factors relating to success in implementing strategic -1- plans or initiatives, introductory products, constructing facilities, or other identifiable objectives. Financial goals for a business unit may include the degree to which the business unit achieves one or more objective measures related to its revenues, earnings, profitability, efficiency, operating profit, costs of production, or other measures. - Any corporate or business unit goals may be expressed as absolute amounts or as ratios or percentages. Success may be measured against various standards, including budget targets, improvement over prior periods, and performance relative to other companies, business units, or industry groups. -2- EXHIBIT E OTHER STOCK BASED AND COMBINATION AWARDS 17.1 OTHER STOCK-BASED AWARDS. The Committee may grant other Awards under the Plan pursuant to which Shares are or may in the future be acquired, or Awards denominated in or measured by Share equivalent units, including Awards valued using measures other than the market value of Shares. Other Stock-Based Awards are not restricted to any specified form or structure and may include, without limitation, Share purchase warrants, other rights to acquire Shares, and securities convertible into or redeemable for Shares. Such Other Stock-Based Awards may be granted either alone, in addition to, or in tandem with, any other type of Award granted under the Plan. 17.2 COMBINATION AWARDS. The Committee may also grant Awards under the Plan in tandem or combination with other Awards or in exchange of Awards, or in tandem or combination with, or as alternatives to, grants or rights under any other employee plan of Corporation, including the plan of any acquired entity. No action authorized by this Section will reduce the amount of any existing benefits or change the terms and conditions thereof without the Participant's consent. -1- 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
Twelve Months Ended ------------------------------------------------------------------- 9/30/98 9/30/97 9/30/96 12/31/95 12/31/94 ------- ------- ------- -------- -------- (dollars in thousands) Fixed charges, as defined: Interest expense $10,132 9,436 10,101 9,938 8,090 Amortization of debt issuance expense 605 612 612 606 593 ------- ------- ------- ------- ------- Total fixed charges $10,737 10,048 10,713 10,544 8,683 ------- ------- ------- ------- ------- Earnings, as defined: Net earnings $ 9,544 10,627 8,211 7,732 5,760 Add (deduct): Income taxes 5,694 6,263 4,272 4,508 3,505 Fixed charges 10,737 10,048 10,713 10,544 8,683 ------- ------- ------- ------- ------- Total earnings $25,975 26,938 23,196 22,784 17,948 ------- ------- ------- ------- ------- Ratio of earnings to fixed charges 2.42 2.68 2.17 2.16 2.07 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Fixed charges and preferred dividend requirements: Fixed charges $10,737 10,048 10,713 10,544 8,683 Preferred dividend requirements 778 811 819 853 898 ------- ------- ------- ------- ------- Total $11,515 10,859 11,532 11,397 9,581 ------- ------- ------- ------- ------- Ratio of earnings to fixed charges and preferred dividend requirements 2.26 2.48 2.01 2.00 1.87 ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
EX-23 4 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT EXHIBIT 23 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 6, 1998, appearing in this Annual Report on Form 10-K of Cascade Natural Gas Corporation for the year ended September 30, 1998. DELOITTE & TOUCHE LLP Seattle, Washington December 24, 1998 EX-27 5 EXHIBIT 27
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF CASCADE NATURAL GAS CORPORATION INCLUDED IN THE ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR SEP-30-1998 OCT-01-1997 SEP-30-1998 PER-BOOK 276,606 1,673 23,273 9,959 0 311,511 11,045 97,380 3,003 111,428 6,408 0 110,650 0 0 0 10,000 0 0 0 73,025 311,511 189,656 5,694 164,619 164,619 25,037 (388) 19,731 10,187 9,544 497 9,047 10,596 0 38,564 .82 .82
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