**FORM 10-Q**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C. 20549**

**QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF 1934**

**Forthe quarterly period ended March 31, 2007**

**Commissionfile number: 1-7196**

**CASCADE NATURAL GAS CORPORATION**

(Exact name of Registrantas 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, Seattle, WA**               | ** ** | **98109**            |
| (Address of  principal executive offices)                 |       | (Zip code)           |
|                                                      |       |                 |
| (Registrant’s  telephone number including area code) |       | **(206)  624-3900**  |

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes x   No o

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer o | Accelerated  filer x | Non-accelerated  filer o |
|--------------------------------|---------------------------|-------------------------------|

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).          Yes o  No x

Indicate thenumber of shares outstanding of each of the registrant’s classes of commonstock, as of the latest practicable date.

| Title                                 | Outstanding                     |
|---------------------------------------|---------------------------------|
|                                  |                            |
| Common Stock,  Par Value $1 per Share | 11,513,996 as of April 30, 2007 |

 

 

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**CASCADENATURAL GAS CORPORATION**

Index
|           | ** **            | ** **                                                            |
|-----------|-----------------------|-----------------------------------------------------------------------|
| Part I.   | Financial Information |                                                                  |   |
|      |                  |                                                                  |   |
|      |                  | Item 1.                                                               | Financial Statements |   |   |
|      |                  |                                                                  |   |   |   |
|      |                  | Consolidated Condensed Statements of Income and  Comprehensive Income |   |   |
|      |                  |                                                                  |   |   |
|      |                  | Consolidated Condensed Balance Sheets                                 |   |   |
|      |                  |                                                                  |   |   |
|      |                  | Consolidated Condensed Statements of Cash Flows                       |   |   |
|      |                  |                                                                  |   |   |
|      |                  | Notes to Consolidated Condensed Financial Statements                  |   |   |
|      |                  |                                                                  |   |   |
|      |                  | Item 2.                                                               | Management’s Discussion and Analysis of Financial  Condition and Results of Operations |   |   |
|      |                  |                                                                  |   |   |   |
|      |                  | Item 3.                                                               | Quantitative and Qualitative Disclosures about Market  Risk |   |   |
|      |                  |                                                                  |   |   |   |
|      |                  | Item 4.                                                               | Controls and Procedures |   |   |
|      |                  |                                                                  |   |   |   |
| Part  II. | Other  Information    |                                                                  |   |
|      |                  |                                                                  |   |
|      |                  | Item  1.                                                              | Legal  Proceedings |   |   |
|      |                  |                                                                  |   |   |   |
|      |                  | Item 6.                                                               | Exhibits |   |   |
|      |                  |                                                                  |   |   |   |
| Signature |                  |                                                                  |

 

2

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**PART I.   Financial Information**

**Item 1.  Financial Statements**

 

CASCADE NATURAL GAS CORPORATION

CONSOLIDATED CONDENSEDSTATEMENTS OF INCOME

AND COMPREHENSIVE INCOME

(unaudited)
| ** **                                                  | ** ** | **THREE MONTHS ENDED**                     | ** ** | **SIX MONTHS ENDED** | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                  | ** ** | ** **                                           | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                  | ** ** | **Mar 31, 2007**                           | ** ** | **Mar 31, 2006**     | ** ** | **Mar 31, 2007** | ** ** | **Mar 31, 2006** | ** ** |
| ** **                                                  | ** ** | **(thousands except per-share data)** | ** ** |
|                                                        |       |                                                 |       |                           |       |   |   |   |   |
| Operating revenues                                          |       | $                                                    | 177,909    |                           | $          | 163,018 |   | $ | 335,093 |   | $ | 322,226 |   |
| Less:                                                       |       |                                                 |       |                           |       |   |   |   |   |
| Gas purchases  and other costs of sales                     |       | 129,167                                              |       | 118,232                        |       | 244,168 |   | 236,873 |   |
| Revenue taxes                                               |       | 12,893                                               |       | 11,555                         |       | 22,795 |   | 21,331 |   |
| Operating margin                                            |       | 35,849                                               |       | 33,231                         |       | 68,130 |   | 64,022 |   |
|                                                        |       |                                                 |       |                           |       |   |   |   |   |
| Cost of operations:                                         |       |                                                 |       |                           |       |   |   |   |   |
| Operating  expenses                                         |       | 11,794                                               |       | 10,755                         |       | 23,562 |   | 20,398 |   |
| Depreciation and  amortization                              |       | 4,570                                                |       | 4,435                          |       | 9,112 |   | 8,849 |   |
| Property and  miscellaneous taxes                           |       | 855                                                  |       | 870                            |       | 1,824 |   | 1,856 |   |
|                                                        |       | 17,219                                               |       | 16,060                         |       | 34,498 |   | 31,103 |   |
|                                                        |       |                                                 |       |                           |       |   |   |   |   |
| Income from operations                                      |       | 18,630                                               |       | 17,171                         |       | 33,632 |   | 32,919 |   |
| Less interest and other  deductions — net              |       | 2,903                                                |       | 2,884                          |       | 5,935 |   | 5,855 |   |
| Income before income  taxes                                 |       | 15,727                                               |       | 14,287                         |       | 27,697 |   | 27,064 |   |
|                                                        |       |                                                 |       |                           |       |   |   |   |   |
| Income tax                                                  |       | 5,360                                                |       | 5,301                          |       | 10,541 |   | 10,038 |   |
| Net Income                                                  |       | 10,367                                               |       | 8,986                          |       | 17,156 |   | 17,026 |   |
| Other Comprehensive  Income (Loss)                          |       |                                                 |       |                           |       |   |   |   |   |
| Unrealized gain  (loss) on derivative commodity instruments |       | 1,879                                                |       | (890                           | )          | 2,068 |   | (985 | ) |
| Income tax                                                  |       | (673                                                 | )          | 319                            |       | (741 | ) | 353 |   |
| Other Comprehensive  Income (Loss)                          |       | 1,206                                                |       | (571                           | )          | 1,327 |   | (632 | ) |
|                                                        |       |                                                 |       |                           |       |   |   |   |   |
| Comprehensive Income                                        |       | $                                                    | 11,573     |                           | $          | 8,415 |   | $ | 18,483 |   | $ | 16,394 |   |
| Weighted average  commonshares outstanding                  |       | 11,507                                               |       | 11,455                         |       | 11,507 |   | 11,441 |   |
| Earnings per common  share, basic and diluted               |       | $                                                    | 0.90       |                           | $          | 0.78 |   | $ | 1.49 |   | $ | 1.49 |   |
|                                                        |       |                                                 |       |                           |       |   |   |   |   |
| Cash dividends per share                                    |       | $                                                    | 0.24       |                           | $          | 0.24 |   | $ | 0.48 |   | $ | 0.48 |   |

 

The accompanyingnotes are an integral part of these financial statements.

3

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**CASCADENATURAL GAS CORPORATION**

**CONSOLIDATED CONDENSED BALANCE SHEETS**

(Unaudited)
| ** **                                                                                                                  | ** ** | **Mar 31, 2007**           | ** ** | **Sep 30, 2006** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|----------------------------|------------|
| **ASSETS**                                                                                                                  | ** ** | **(dollars in thousands)** | ** ** |
| Utility Plant, net of  accumulated depreciation of $281,817 and $273,138                                                    |       | $                                    | 339,437    |                       | $          | 341,046 |   |
| Construction work  in progress                                                                                              |       | 1,405                                |       | 380                        |       |
|                                                                                                                        |       | 340,842                              |       | 341,426                    |       |
| Other Assets:                                                                                                               |       |                                 |       |                       |       |
| Investments in  non-utility property                                                                                        |       | 202                                  |       | 202                        |       |
| Notes  receivable, less current maturities                                                                                  |       | 447                                  |       | 488                        |       |
|                                                                                                                        |       | 649                                  |       | 690                        |       |
| Current Assets:                                                                                                             |       |                                 |       |                       |       |
| Cash and cash  equivalents                                                                                                  |       | 26,348                               |       | 8,593                      |       |
| Accounts  receivable and current maturities of notes receivable, less allowance of  $2,751 and $2,143 for doubtful accounts |       | 59,853                               |       | 22,796                     |       |
| Prepaid expenses  and other assets                                                                                          |       | 5,594                                |       | 4,671                      |       |
| Derivative  instrument assets - energy commodity                                                                            |       | 8,819                                |       | 4,135                      |       |
| Materials,  supplies and inventories                                                                                        |       | 11,196                               |       | 17,495                     |       |
| Deferred income  taxes                                                                                                      |       | 1,541                                |       | 1,779                      |       |
| Regulatory  assets                                                                                                          |       | 6,678                                |       | 26,504                     |       |
|                                                                                                                        |       | 120,029                              |       | 85,973                     |       |
| Deferred Charges and  Other                                                                                                 |       |                                 |       |                       |       |
| Derivative  instrument assets - energy commodity                                                                            |       | 2,558                                |       | 3,269                      |       |
| Regulatory  assets                                                                                                          |       | 3,728                                |       | 18,261                     |       |
| Other                                                                                                                       |       | 7,224                                |       | 7,087                      |       |
|                                                                                                                        |       | 13,510                               |       | 28,617                     |       |
|                                                                                                                        |       |                                 |       |                       |       |
|                                                                                                                        |       | $                                    | 475,030    |                       | $          | 456,706 |   |

 

Continued

4

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**CASCADENATURAL GAS CORPORATION**

**CONSOLIDATEDCONDENSED BALANCE SHEETS (Continued)**

(Unaudited)
| ** **                                                                                                                    | ** ** | **Mar 31, 2007**           | ** ** | **Sep 30, 2006** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|----------------------------|------------|
| **COMMON SHAREHOLDERS’ EQUITY AND LIABILITIES**                                                      | ** ** | **(dollars in thousands)** | ** ** |
| Common Shareholders’  Equity:                                                                                            |       |                                 |       |                       |       |
| Common stock,  par value $1 per share, authorized 15,000,000 shares, issued and outstanding  11,506,996 and 11,505,996 shares |       | $                                    | 11,507     |                       | $          | 11,506 |   |
| Additional  paid-in capital                                                                                                   |       | 105,746                              |       | 105,702                    |       |
| Accumulated  other comprehensive loss                                                                                         |       | (11,126                              | )          | (12,453                    | )          |
| Retained  earnings                                                                                                            |       | 29,004                               |       | 17,372                     |       |
|                                                                                                                          |       | 135,131                              |       | 122,127                    |       |
|                                                                                                                          |       |                                 |       |                       |       |
| Long-term Debt                                                                                                                |       | 165,190                              |       | 165,123                    |       |
|                                                                                                                          |       |                                 |       |                       |       |
| Current Liabilities:                                                                                                          |       |                                 |       |                       |       |
| Current  maturities of long-term debt                                                                                         |       | —                               |       | 8,000                      |       |
| Accounts payable                                                                                                              |       | 33,664                               |       | 14,647                     |       |
| Property,  payroll and excise taxes                                                                                           |       | 10,471                               |       | 5,776                      |       |
| Dividends and  interest payable                                                                                               |       | 6,403                                |       | 6,939                      |       |
| Derivative  instrument liability — energy commodity                                                                      |       | 8,319                                |       | 29,496                     |       |
| Regulatory  liabilities                                                                                                       |       | 8,645                                |       | 4,132                      |       |
| Other current  liabilities                                                                                                    |       | 17,554                               |       | 12,888                     |       |
|                                                                                                                          |       | 85,056                               |       | 81,878                     |       |
|                                                                                                                          |       |                                 |       |                       |       |
| Deferred Credits and  Other Non-current Liabilities:                                                                          |       |                                 |       |                       |       |
| Deferred income  taxes and investment tax credits                                                                             |       | 41,702                               |       | 39,381                     |       |
| Retirement plan  obligations                                                                                                  |       | 9,283                                |       | 11,067                     |       |
| Derivative  instrument liability — energy commodity                                                                      |       | 3,922                                |       | 18,939                     |       |
| Regulatory  liabilities                                                                                                       |       | 11,975                               |       | 12,035                     |       |
| Deferred gas  cost credit                                                                                                     |       | 17,494                               |       | 602                        |       |
| Other                                                                                                                         |       | 5,277                                |       | 5,554                      |       |
|                                                                                                                          |       | 89,653                               |       | 87,578                     |       |
|                                                                                                                          |       |                                 |       |                       |       |
| Commitments and  Contingencies (Note 5)                                                                                       |       | —                               |       | —                     |       |
|                                                                                                                          |       | $                                    | 475,030    |                       | $          | 456,706 |   |

 

The accompanying notes are an integral part of these financialstatements. 

 

Concluded

5

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CASCADE NATURAL GAS CORPORATION

CONSOLIDATED CONDENSEDSTATEMENTS OF CASH FLOWS

(Unaudited)
| ** **                                                                         | ** ** | **SIX MONTHS ENDED**       | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                         | ** ** | **(dollars in thousands)** | ** ** |
| ** **                                                                         | ** ** | **Mar 31, 2007**           | ** ** | **Mar 31, 2006** | ** ** |
| Operating Activities:                                                              |       |                                 |       |   |   |
| Net income                                                                         |       | $                                    | 17,156     |   | $ | 17,026 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                 |       |   |   |
| Depreciation and  amortization                                                     |       | 9,112                                |       | 8,849 |   |
| Deferrals of gas  cost changes                                                     |       | 8,649                                |       | 2,232 |   |
| Amortization of  gas cost changes                                                  |       | 8,242                                |       | 7,937 |   |
| Other deferrals  and amortizations                                                 |       | (1,551                               | )          | (951 | ) |
| Deferred income  taxes and tax credits - net                                       |       | 2,559                                |       | (2,305 | ) |
| Change in  current assets and liabilities                                          |       | (4,076                               | )          | (2,180 | ) |
| Net cash  provided by operating activities                                         |       | 40,091                               |       | 30,608 |   |
|                                                                               |       |                                 |       |   |   |
| Investing Activities:                                                              |       |                                 |       |   |   |
| Capital  expenditures                                                              |       | (10,416                              | )          | (9,492 | ) |
| Customer  contributions in aid of construction                                     |       | 1,679                                |       | 1,430 |   |
| Net cash used by  investing activities                                             |       | (8,737                               | )          | (8,062 | ) |
|                                                                               |       |                                 |       |   |   |
| Financing Activities:                                                              |       |                                 |       |   |   |
| Proceeds from  issuance of long-term debt, net                                     |       | 39,812                               |       | — |   |
| Proceeds from  issuance of common stock                                            |       | 45                                   |       | 1,255 |   |
| Repayment of  long-term debt                                                       |       | (47,933                              | )          | (239 | ) |
| Changes in  short-term debt, net                                                   |       | —                               |       | (12,500 | ) |
| Dividends paid                                                                     |       | (5,523                               | )          | (5,501 | ) |
| Other                                                                              |       | —                               |       | (11 | ) |
| Net cash used by  financing activities                                             |       | (13,599                              | )          | (16,996 | ) |
|                                                                               |       |                                 |       |   |   |
| Net Increase in Cash and  Cash Equivalents                                         |       | 17,755                               |       | 5,550 |   |
|                                                                               |       |                                 |       |   |   |
| Cash and Cash  Equivalent:                                                         |       |                                 |       |   |   |
| Beginning of  year                                                                 |       | 8,593                                |       | 1,128 |   |
| End of period                                                                      |       | $                                    | 26,348     |   | $ | 6,678 |   |

 

The accompanyingnotes are an integral part of these financial statements.

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**NOTES TOCONSOLIDATED CONDENSED FINANCIAL STATEMENTS**

**THREE- AND SIX-MONTH PERIODS ENDED MARCH 31**

The preceding statementswere taken from the books and records of the Company and reflect alladjustments that are, in the opinion of management, necessary for a fairstatement of the results for the interim periods.  Because of the highly seasonal nature of thenatural gas distribution business, earnings or loss for any portion of the yearare disproportionate in relation to the full year.

Reference is directed tothe Notes to Consolidated Financial Statements contained in the 2006 AnnualReport on Form 10-K for the fiscal year ended September 30, 2006.

**Note 1.  New Accounting Standards**

**FAS No.154:**  In May 2005, TheFinancial Accounting Standards Board (FASB) issued FAS No. 154, *“Accounting for Changes and Error Corrections”.*  This standard replaces APB Opinion No. 20 andFAS No. 3 and changes the requirements for the accounting for and reporting ofa change in accounting principle. FAS No. 154 requires retrospectiveapplication to prior periods’ financial statements of changes in accountingprinciple. The Company adopted this standard October 1, 2006 but has not hadoccasion to apply its requirements.

**FAS No.155:** In February 2006, FASB issued FAS No 155, *“Accounting for Certain Hybrid Financial Instruments,an amendment of FASB Statements No. 133 and 140.”*This standard iseffective for all financial instruments acquired after the beginning of anentity’s first fiscal year beginning after September 15, 2006. Adoption of thisstandard as of October 1, 2006 has not had a significant impact on the Company’sfinancial statements.

**FAS No. 157:** In September 2006, FASB issued FAS No. 157, *“Fair Value Measurements”*. This standarddefines fair value, establishes a framework for measuring fair value, andexpands disclosures about fair value measurements. This standard is effectivefor financial statements issued for fiscal years beginning after November 15,2007. The Company has not determined the impact this standard will have on itsfinancial statements.

**FAS No.158:** In September 2006, FASB issued FAS No. 158, *“Employers’ Accounting for Defined Benefit Pensionand Other Postretirement Plans — an amendment of FASB Statements No. 87, 88,106, and 132(R)”*.  Thisstandard requires a sponsor of defined benefit retirement plans to: (a)recognize the funded status of a benefit plan in its balance sheet; (b)recognize as a component of other comprehensive income, net of tax, the gainsor losses and prior service costs of credits that arise during the period butare not recognized as components of net periodic benefit cost; (c) measure thedefined benefit plan assets and obligations as of the date of the employer’sfiscal year end; and (d) disclose in the notes to financial statementsadditional information about certain effects on net periodic benefit cost forthe next fiscal year that arise from the delayed recognition of the gains orlosses, prior service costs or credits, and transition asset or obligation. TheCompany will be required to initially recognize the funded status of itsdefined benefit plans and to provide the required disclosures as of the end ofits fiscal year ending September 30, 2007. The Company has not yet determinedthe impact of this standard on its financial statements.

**FAS No.159:** In February 2007, FASB issued FAS No. 159, *“**The Fair Value Option for Financial Assets and FinancialLiabilities—Including an amendment of FASB Statement No. 115**”*.  Thisstandard provides entities with the opportunity to mitigate volatility inreported earnings caused by measuring related assets and liabilitiesdifferently without having to apply complex hedge accounting provisions. This standard is effective forfinancial statements issued for fiscal years beginning after November 15, 2007.The Company has not determined the impact this standard will have on itsfinancial statements.

**FIN 48:**In June 2006, FASB issued FIN 48, *“Accountingfor Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109*”.  This Interpretation clarifies the accountingfor uncertainty in income taxes recognized in an enterprise’s financialstatements in accordance with FASB Statement No. 109, “*Accounting for Income Taxes”.*  This Interpretation prescribes a recognitionthreshold and

7

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measurement attribute forthe financial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. This Interpretation also providesguidance on derecognition, classification, interest and penalties, accountingin interim periods, disclosure, and transition. This interpretation iseffective for fiscal years beginning after December 15, 2006. The Company hasnot determined the impact of this interpretation on its financial statements.

**Note 2.  Earnings Per Share**

The followingtable sets forth the calculation of earnings per share:

|                                                        | ** ** | **Three Months Ended**                             | ** ** | **Six Months Ended**                               | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                             | ** ** | **Mar 31, 2007**                                   | ** ** | **Mar 31, 2006**                                   | ** ** | **Mar 31, 2007** | ** ** | **Mar 31, 2006** | ** ** |
| ** **                                             | ** ** | **(in thousands except per-share data)** | ** ** | **(in thousands except per-share data)** | ** ** |
| Net income                                             |       | $                                                            | 10,367     |                                                         | $          | 8,986 |   | $ | 17,156 |   | $ | 17,026 |   |
|                                                   |       |                                                         |       |                                                         |       |   |   |   |   |
| Weighted average  shares outstanding                   |       | 11,507                                                       |       | 11,455                                                       |       | 11,507 |   | 11,441 |   |
| Basic earnings  per share                              |       | $                                                            | 0.90       |                                                         | $          | 0.78 |   | $ | 1.49 |   | $ | 1.49 |   |
|                                                   |       |                                                         |       |                                                         |       |   |   |   |   |
| Weighted average  shares outstanding                   |       | 11,507                                                       |       | 11,455                                                       |       | 11,507 |   | 11,441 |   |
| Plus: Issued on  assumed exercise of stock options     |       | 5                                                            |       | —                                                       |       | 5 |   | — |   |
| Weighted average  shares outstanding assuming dilution |       | 11,512                                                       |       | 11,455                                                       |       | 11,512 |   | 11,441 |   |
| ** **                                             |       |                                                         |       |                                                         |       |   |   |   |   |
| Diluted earnings per  share                            |       | $                                                            | 0.90       |                                                         | $          | 0.78 |   | $ | 1.49 |   | $ | 1.49 |   |

 

**Note3.  Retirement Plan Information**

The following table sets forth the components of net periodic benefitcosts recognized:

**NetPeriodic Benefits Cost**
|                                                  | ** ** | **Three Months Ended**     | ** ** | **Six Months Ended**       | ** ** |
|--------------------------------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|
| ** **                                       | ** ** | **Mar 31, 2007**           | ** ** | **Mar 31, 2006**           | ** ** | **Mar 31, 2007** | ** ** | **Mar 31, 2006** | ** ** |
| ** **                                       | ** ** | **(Dollars in Thousands)** | ** ** | **(Dollars in Thousands)** | ** ** |
| **DEFINED  BENEFIT PENSION PLANS**               |       |                                 |       |                                 |       |   |   |   |   |
| Service cost                                     |       | $                                    | 242        |                                 | $          | 216 |   | $ | 485 |   | $ | 433 |   |
| Interest cost                                    |       | 964                                  |       | 965                                  |       | 1,928 |   | 1,930 |   |
| Expected return  on plan assets                  |       | (1,231                               | )          | (1,101                               | )          | (2,462 | ) | (2,202 | ) |
| Recognized gains  or losses                      |       | 278                                  |       | 421                                  |       | 555 |   | 842 |   |
| Prior service  cost                              |       | (39                                  | )          | 38                                   |       | (78 | ) | 76 |   |
| Net Periodic  Benefit Cost Recognized            |       | $                                    | 214        |                                 | $          | 539 |   | $ | 428 |   | $ | 1,079 |   |
|                                             |       |                                 |       |                                 |       |   |   |   |   |
| **POSTRETIREMENT  BENEFITS OTHER THAN PENSIONS** |       |                                 |       |                                 |       |   |   |   |   |
| Service cost                                     |       | $                                    | 20         |                                 | $          | 28 |   | $ | 40 |   | $ | 56 |   |
| Interest cost                                    |       | 163                                  |       | 164                                  |       | 327 |   | 329 |   |
| Expected return  on plan assets                  |       | (225                                 | )          | (219                                 | )          | (450 | ) | (439 | ) |
| Recognized gains  or losses                      |       | 195                                  |       | 181                                  |       | 389 |   | 362 |   |
| Prior service  cost                              |       | (673                                 | )          | (615                                 | )          | (1,346 | ) | (1,231 | ) |
| Net Periodic  Benefit Cost Recognized            |       | $                                    | (520       | )                                    | $          | (461 | ) | $ | (1,040 | ) | $ | (923 | ) |
|                                             |       |                                 |       |                                 |       |   |   |   |   |
| **DEFINED  CONTRIBUTION PENSION PLAN**           |       |                                 |       |                                 |       |   |   |   |   |
| Net Periodic Benefit  Cost Recognized            |       | $                                    | 195        |                                 | $          | 203 |   | $ | 381 |   | $ | 408 |   |

 

8

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**Retirement****Plan Funding**

For the six monthsended March 31, 2007, $1,260,000 of contributions were made to the Company’sdefined benefit pension plans.  TheCompany presently anticipates contributing an additional $2,240,000 to fund itspension plans for a total of $3,500,000 in fiscal 2007.

**Note4.  Share-Based Payment**

**DirectorStock Award Plan**

Following approval by theshareholders in February 2006, the annual stock award for each non-employeedirector was increased from 500 to 1,000 shares of the Company’s common stock,under the Company’s 2000 Director Stock Award Plan. During the quarters endedMarch 31, 2007 and 2006, the Company recognized $56,000 and $97,000 as expenseunder this plan. For the respective six-month periods the amounts were $106,000and $119,000.  The value of the stockgranted under this plan is based on the market value on the date of the award.

**StockIncentive Plan**

Under the Company’s 1998Stock Incentive Plan, 24,000 stock options granted in 2002 are exercisable at$20.84.  The 2002 options expire in2012.  All options are fully vested.  When the options were granted and during thevesting periods, the Company applied the intrinsic value method underAccounting Principles Board (APB) Opinion 25, and no expense has beenrecognized.

**Restricted****Stock Grants**

The Company’s employmentcontracts entered in 2005 with its Chief Executive Officer (CEO) and its formerChief Financial Officer (CFO) contained grants of restricted stock.  Under the CEO grant, 5,000 shares wererestricted until the CEO completed one year of employment, and another 5,000shares were restricted until he completed two years of employment on March 31,2007.  During this period, the executivewas restricted from selling his shares. Under the CFO grant, 5,000 shares wererestricted until he completed one year of employment. The value of the sharesgranted was based on the market value as of the grant date. During the quartersended March 31, 2007 and 2006, the Company recognized $13,000 and $62,000 ascompensation expense under this plan. For the respective six-month periods theamounts were $25,000 and $124,000. As of March 31, 2007, there is no remainingexpense to be recognized in future periods for these grants.

**Note 5.  Commitments and Contingencies**

**Environmental****Matters**

There are two claimsagainst the Company for cleanup of alleged environmental contamination relatedto manufactured gas plant sites previously operated by companies that weresubsequently merged into the Company.

The first claim wasreceived in 1995 and relates to a site in Oregon.  An investigation has shown that soil andgroundwater contamination exists at the site. There are parties in addition to the Company that are potentially liablefor cleanup of the contamination.  Someof these other parties have shared in the costs expended to date to investigatethe site, and it is expected that these and potentially other parties willshare in the cleanup costs.  Severalalternatives for remediation of the site have been identified, with preliminaryestimates for cleanup ranging from approximately $500,000 to $11,000,000.  It is not known at this time what share ofthe cleanup costs will actually be borne by the Company.

The second claim wasreceived in 1997 and relates to a site in Washington.  A preliminary investigation has determinedthat there is evidence of contamination at the site, but there is also evidencethat other property owners may have contributed to the contamination.  There is currently not enough informationavailable to estimate the potential liability associated with this claim, but theCompany and other parties may become

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involved in futureinvestigation or remediation of the site as increased interest has beenexpressed concerning its potential for redevelopment. In particular, the Company is aware that thelocal city government has secured federal grants for further investigation ofthe site. At this time, no formal investigation plan has been communicated tothe Company.

Management has completeda review of the Company’s insurance coverage and believes it has adequateinsurance to cover the costs of the above two claims.  In the event the insurance proceeds do notcompletely cover the costs, management intends to seek recovery from itscustomers through increased rates.  Thereis precedent for such recovery through increased rates, as both the WashingtonUtilities and Transportation Commission (WUTC) and the Oregon Public UtilitiesCommission (OPUC) have previously allowed regulated utilities to increasecustomer rates to cover similar costs.

**Litigationand Other Contingencies**

Variouslawsuits, claims, and contingentliabilities may arise from time to time from the conduct of the Company’sbusiness.  No such claims now pending, inthe opinion of management, are expected to have a material effect on theCompany’s financial position, results of operations, cash flows, or liquidity.

# **Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

The following ismanagement’s assessment of the Company’s financial condition and a discussionof the principal factors that affected consolidated results of operations andcash flows for the three-month and six-month periods ended March 31, 2007 and2006.

**OVERVIEW**

The Company is a localdistribution company (LDC) serving approximately 246,000 customers in thestates of Washington and Oregon.  Itsservice area consists primarily of relatively small cities and ruralcommunities rather than larger urban areas. The Company’s primary source of revenue and operating margin is thedistribution of natural gas to end-use residential, commercial, industrial, andinstitutional customers.  Revenues arealso derived from providing gas management and other services to some of itslarge industrial and commercial customers. The Company’s rates and practices are regulated by the WashingtonUtilities and Transportation Commission (WUTC) and the Oregon Public UtilityCommission (OPUC*)*. As previouslyannounced, the Company entered into a definitive merger agreement with MDUResources Group, Inc. (MDU) on July 8, 2006, to be acquired for cashconsideration of $26.50 per share. The following paragraphs contain informationregarding the status of the proposed merger.

Key elements ofthe Company’s strategy are as follows:

·                  Continue to efficiently andeffectively operate the Company to achieve business goals and maintain fullcompliance with the terms of the merger agreement with MDU. Remain focused onthe natural gas distribution business.

·                  Pursue appropriate regulatorytreatment.

·                  Economic expansion of its customerbase by prudently managing capital expenditures and ensuring new customersprovide sufficient margins for an appropriate return on the new investmentrequired.

·                  Continue to seek operationalefficiencies.

·                  Managecash flow to minimize the need for additional external financing.

**Opportunitiesand Challenges**

The Company operates in adiverse service territory over a wide geographic area relative to the Company’soverall size and number of customers.  The economies of various parts ofthe service area are supported by a variety of industries and are affected bythe conditions that impact those industries.  Management believes thereare continued growth opportunities in the Company’s service area, especially inthe residential and commercial segments.  Factors contributing to theseopportunities include general population growth in the service area, includingsome areas of very rapid growth, and to a lesser extent, low market penetrationin

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many of the communitiesserved. Residential and commercial customer count growth has been more thandouble the average of U.S. gas utilities.

Overall revenues andmargins have been historically negatively impacted by higher efficiency in newhome and commercial building construction, higher efficiency in gas-burningequipment, and customers taking additional measures to conserve energy usage. The increasing cost of energy in recent years, including the wholesale cost ofnatural gas, continues to encourage such measures.  However, the Companybelieves that energy efficiency and conservation are the most viable near-termtactics for reducing customer bills and influencing wholesale natural gasprices.  They also form a vital strategy for stabilizing the cost of gasover the long term.  The traditional regulatory establishment of raterecovery tied to volumetric sales no longer seems prudent.  Therefore, the Company’s recent rate case inthe State of Washington included a request to decouple the margin recovery fromvolume. On January 12,2007, the Company received the order from the WUTC on its rate case. The WUTCconditionally accepted the settlement agreement worked out by all partiesrelating to its rate case that will allow the Company to collect an additional$7 million in revenues less $800,000 in Low Income Assistance to be provided bythe Company.  The new rates wereimplemented on January 19, 2007. The WUTC order also requires that prior tofinal implementation of the Company’s Conservation Alliance Plan (decoupling),the Company must file a full conservation plan that includes an earnings capthat will limit the operation of the decoupling mechanism if the Company isalready achieving its newly allowed 8.85% overall rate of return. The Companyhas formed a Conservation Advisory Group that has assisted the Company withfinalizing the conservation plan that will be filed with the Commission on May7, 2007.   An additional provision of therate order is a requirement to defer 50% of Gas Management margins earned inWashington for refund to all customers other than Special Contract customers.

The Company’s OregonConservation Alliance Program, as approved by the OPUC in 2006, effectivelydecouples operating margin from the impacts of conservation and weather on gasusage by Oregon residential and commercial customers. This program provides amechanism where the Company’s earnings reflect full recovery of theCommission-granted level of earnings per customer.  This is done via a deferral mechanism forboth conservation and weather.  In simpleterms, the Company books the actual earnings and a deferral for bothconservation and weather margin variance each month.  The next year, depending on the amount ofconservation and level of weather, the Company will adjust its rates eitherdownward or upward to ensure recovery at the allowed level.  The Company agreed to lower its earningssharing mechanism cap by 125 basis points in exchange for approval of theConservation Alliance Program. The Company expects to share earnings duringthis fiscal year due to this lowering of the cap.

In August 2006 the OPUCopened an investigation into the Company’s level of earnings in Oregonoperations. OPUC staff and various interested parties agreed to a settlement ofthe investigation into the Company’s level of earnings in Oregon in conjunctionwith the settlement of the merger docket with MDU. This settlement is subjectto OPUC approval of the settlement of both the merger and the earningsinvestigation dockets.  If approved, theCompany will decrease Oregon rates by $700,000 under the settlement of theearnings investigation docket.

As indicated above, MDU,the Company, OPUC staff and several interested parties have also agreed to asettlement of the merger docket and filed it with the OPUC.  The parties are in the process of developingjoint testimony supporting both of the settlements.  It is expected that the joint testimony willbe filed for the Commission’s consideration by the third week of May 2007.

MDU, the Company, WUTCstaff, Public Counsel and several other interested parties have also agreed inprinciple to a settlement in the merger docket in the State of Washington.  The parties are in the process of writing astipulation and developing a narrative statement supporting thesettlement.  It is expected that thestipulation and narrative statement will be filed for the Commission’sconsideration by the second week of May 2007.

Revenues and margins fromthe Company’s residential and small commercial customers in Washington arehighly weather-sensitive.  Without weather normalization rate makingprovisions, in a cold year, the Company’s earnings are boosted by the effectsof the weather, and conversely in a warm year, the Company’s earnings suffer.Peak requirements also drive the need to reinforce our systems (i.e., increase

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capacity).  Ouroperations group considers innovative approaches such as temporarily utilizingmobile gas supply rather than making large investments in long-term capacityincreases which may not be fully utilized.

The Company earnsapproximately one third of its operating margin from industrial and electricgeneration customers.  Loss of major industrial customers, or unfavorableconditions affecting an industry segment, would have a detrimental impact onthe Company’s earnings.  Many external factors over which the Company hasno control can significantly impact the amount of gas consumed by industrialand electric generation customers and, consequently, the margins earned by theCompany.  Such factors may includebase-load electricity demand, refinery operations and electricity price in amarket impacted significantly by hydroelectric generation.  Additional electric generation and industrialcustomers may be active if there is peaking demand for electricity.  Other external factors that impact differentsegments of the industrial market include weather, temperature, seasonality ofprocesses, energy commodity pricing, price of natural gas supplies,profitability of industrial segments and regional economic conditions.

In November 2005, ourcustomer service call center organization voted to accept unionrepresentation.  The Company is in the process of negotiating an agreementthat will support our efforts to cost-effectively provide superior customerservice.  The outcome of negotiations is uncertain.

We carefully analyze theeconomics of our capital spending to support growth.  When justified underour tariffs, we work with developers, business owners and residents to sharecertain construction costs that will assure a fair return to the Company. Where possible, we work with developers and customers to utilize sharedtrenches, significantly reducing the cost of main extensions and serviceconnections.  Non-revenue-generatingspending is also managed to assure that we use the most economically attractivesolutions while providing for a safe and reliable gas distribution system.  We also maintain flexibility through variableovertime and the use of outside contractors to adjust our capital constructionlevels to each period’s requirements.

Management continuouslyseeks improvement opportunities in all areas.  Our discussion abovecovering regulatory change, labor relations, operating practices, ourorganization and our investment to maintain and expand our gas delivery systemare examples. Concurrent with supporting the required activities to completethe proposed merger, management will continue these efforts to maintain andcontinuously improve Cascade’s operational performance within the terms of the mergeragreement.

# **RESULTS OF OPERATIONS**

The Company’s net incomewas $10,367,000, or $0.90 per share, basic and diluted, for the fiscal 2007second quarter (quarter ended March 31, 2007), compared to a net income of$8,986,000, or $0.78 per share, basic and diluted, for the quarter ended March31, 2006. For the six-month period, net income was $17,156,000, or $1.49 pershare, compared to $17,026,000, or $1.49 per share for the six months endedMarch 31, 2006. The primary factor affecting the quarterly comparison was a$2.6 million increase in operating margins, partially offset by higheruncollectible accounts expense and other costs of operations. For the six-monthperiod, the improved margins were largely offset by higher costs of operations,including $1.6 million in costs related to the Company’s pending merger.Significant factors are summarized below:

|                                                                      | ** ** | **Earnings per Share Effect** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                           | ** ** | **Quarter**                                  | ** ** | **Year-to-date** | ** ** |
|  Increased margin from residential and  commercial customers    |       | $                                            | 0.24       |   | $ | 0.29 |   |
|  Decreased margin from electric generation  and other customers |       | $                                            | (0.10      | ) | $ | (0.07 | ) |
|  Expenses of pending merger                                     |       | $                                            | —     |   | $ | (0.11 | ) |
|  Change in estimated tax impact of merger  expenses             |       | $                                            | 0.05       |   | $ | 0.02 |   |
|  Increased uncollectible accounts expense                       |       | $                                            | (0.05      | ) | $ | (0.05 | ) |
|  Costs related to fiscal 2007 organizational  changes           |       | $                                            | —     |   | $ | (0.04 | ) |
|  All other                                                      |       | $                                            | (0.02      | ) | $ | (0.04 | ) |

 

These above items arediscussed in more detail in the paragraphs that follow.

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# **OperatingMargin**

Operating margins bycustomer category for the second quarter and year-to-date periods are set forthin the following tables:
| **Residential and Commercial Margin** | ** ** | ** **                              | ** ** | ** **  | ** ** | ** **                           | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------|------------|-------------|------------|--------------------------------------|------------|-------------|------------|------------|------------|------------|------------|
| ** **                                           | ** ** | ** **                              | ** ** | ** **  | ** ** | ** **                           | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                           | ** ** | **Quarter Ended Mar 31** | ** ** | **Percent** | ** ** | **Year-to-Date Mar 31**    | ** ** | **Percent** | ** ** |
| ** **                                           | ** ** | **2007**                                | ** ** | **2006**    | ** ** | **Change**                           | ** ** | **2007**    | ** ** | **2006**   | ** ** | **Change** | ** ** |
| ** **                                           | ** ** | **(dollars in thousands)**    | ** ** | ** **  | ** ** | **(dollars in thousands)** | ** ** | ** **  | ** ** |
| **Degree Days**                                      |       |                                    |       |        |       |                                 |       |        |       |       |       |       |       |
| Actual                                               |       | 2,346                                   |       | 2,269       |       | 3.4                                  | %          | 4,481       |       | 4,520      |       | -0.9       | %          |
| 5-Year Average                                       |       | 2,275                                   |       | 2,299       |       | 4,391                                |       | 4,406       |       |       |       |       |       |
| **Average Number of Customers  Billed**              |       |                                    |       |        |       |                                 |       |        |       |       |       |       |       |
| Residential                                          |       | 213,624                                 |       | 205,537     |       | 3.9                                  | %          | 211,699     |       | 203,371    |       | 4.1        | %          |
| Commercial                                           |       | 31,538                                  |       | 31,150      |       | 1.2                                  | %          | 31,281      |       | 30,867     |       | 1.3        | %          |
| **Average Therm Usage per  Customer**                |       |                                    |       |        |       |                                 |       |        |       |       |       |       |       |
| Residential                                          |       | 286                                     |       | 268         |       | 6.7                                  | %          | 547         |       | 542        |       | 0.9        | %          |
| Commercial                                           |       | 1,470                                   |       | 1,354       |       | 8.6                                  | %          | 2,725       |       | 2,680      |       | 1.7        | %          |
| **Operating Margin**                                 |       |                                    |       |        |       |                                 |       |        |       |       |       |       |       |
| Residential                                          |       | $                                       | 18,676     |        | $          | 16,043                               |       | 16.4        | %          | $          | 34,919     |       | $          | 31,512 |   | 10.8 | % |
| Commercial                                           |       | $                                       | 10,315     |        | $          | 8,602                                |       | 19.9        | %          | $          | 18,436     |       | $          | 16,490 |   | 11.8 | % |

 

**Quarter-to-Quarter**

Residential andcommercial margins increased by $4.3 million for the quarter. Of thisimprovement, approximately $2.0 million resulted from the increase inWashington rates effective January 19, following the settlement of the ratecase previously filed in Washington. $1.1 million of the improvement resultedfrom a 6.6% increase in average gas usage per customer. Weather in the quarterwas 3.4% colder than last year, pushing up the per-customer gas usage. Anadditional $930,000 was provided by a 3.6% increase in the number of customers.

The primary use of gas byresidential customers is for space and water heating; therefore, averageconsumption per customer is very sensitive to weather, particularly during theCompany’s first and second fiscal quarters. Consumption by commercial customers is also sensitive to weather.  The sensitivity is more difficult to isolateand measure than for residential customers because of a variety of uses inaddition to space and water heating.

**Year-to-Date**

For the six months,residential and commercial margins increased $5.4 million over last year. Inaddition to the $2.0 million increased margin from higher rates in Washington,the 3.6% increase in the number of billed customers produced $1.9 million ofincreased margin. Small increases in average gas usage per customer added$764,000 of margin. Gas cost savings related to Oregon regulatory incentivesprovided most of the remaining improvement in margin from residential andcommercial customers.

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| **Industrial and Other Margin** | ** ** | ** **                              | ** ** | ** **  | ** ** | ** **                           | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------------|------------|-----------------------------------------|------------|-------------|------------|--------------------------------------|------------|-------------|------------|------------|------------|------------|------------|
| ** **                                     | ** ** | ** **                              | ** ** | ** **  | ** ** | ** **                           | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **Quarter Ended Mar 31** | ** ** | **Percent** | ** ** | **Year-to-Date Mar 31**    | ** ** | **Percent** | ** ** |
| ** **                                     | ** ** | **2007**                                | ** ** | **2006**    | ** ** | **Change**                           | ** ** | **2007**    | ** ** | **2006**   | ** ** | **Change** | ** ** |
| ** **                                     | ** ** | **(dollars in thousands)**    | ** ** | ** **  | ** ** | **(dollars in thousands)** | ** ** | ** **  | ** ** |
| **Average  Number of Customers**               |       |                                    |       |        |       |                                 |       |        |       |       |       |       |       |
| Electric Generation                            |       | 11                                      |       | 11          |       | 0.0                                  | %          | 10          |       | 12         |       | -16.7      | %          |
| Industrial                                     |       | 680                                     |       | 696         |       | -2.3                                 | %          | 684         |       | 699        |       | -2.1       | %          |
|                                           |       | 691                                     |       | 707         |       | -2.3                                 | %          | 694         |       | 711        |       | -2.4       | %          |
| **Therms  Delivered (thousands)**              |       |                                    |       |        |       |                                 |       |        |       |       |       |       |       |
| Electric Generation                            |       | 97,905                                  |       | 98,118      |       | -0.2                                 | %          | 221,166     |       | 219,308    |       | 0.8        | %          |
| Industrial                                     |       | 112,990                                 |       | 113,756     |       | -0.7                                 | %          | 231,361     |       | 222,962    |       | 3.8        | %          |
|                                           |       | 210,895                                 |       | 211,874     |       | -0.5                                 | %          | 452,527     |       | 442,270    |       | 2.3        | %          |
| **Operating  Margin**                          |       |                                    |       |        |       |                                 |       |        |       |       |       |       |       |
| Electric Generation                            |       | $                                       | 1,916      |        | $          | 2,771                                |       | -30.9       | %          | $          | 4,206      |       | $          | 5,038 |   | -16.5 | % |
| Industrial                                     |       | 4,616                                   |       | 5,048       |       | -8.6                                 | %          | 9,686       |       | 10,182     |       | -4.9       | %          |
| Gas Management Services                        |       | 260                                     |       | 625         |       | -58.4                                | %          | 851         |       | 963        |       | -11.6      | %          |
| Mark-to-Market Valuations                      |       | —                                  |       | —      |       | N/A                                  |       | —      |       | (579       | )          | -100.0     | %          |
| Other                                          |       | 161                                     |       | 142         |       | 13.4                                 | %          | 317         |       | 416        |       | -23.8      | %          |
| Oregon Earnings Sharing                        |       | (95                                     | )          | —      |       | N/A                                  |       | (285        | )          | —     |       | N/A        |       |
|                                           |       | $                                       | 6,858      |        | $          | 8,586                                |       | -20.1       | %          | $          | 14,775     |       | $          | 16,020 |   | -7.8 | % |

 

**Quarter-to-Quarter**

The reduction in marginsfrom electric generation customers is related to $900,000 collected last yearin settlement of a terminated customer contract. The reduction in margins fromindustrial customers is related to lower rates. The settlement of the Company’sWashington rate case included a reduction in rates for non-core customers,partially offsetting the increases in core residential and commercial rates.

**Year-to-Date**

The same factors thataffected the quarterly comparisons also cause the year-to-date comparisons formargins from electric generation and industrial customers. Additionally, thefirst quarter of fiscal 2006 included a $579,000 charge for mark-to-marketvaluations. Subsequent mark-to-market valuations have been recorded in OtherComprehensive Income and have not affected operating margins or earnings.

**Cost ofOperations**

**Quarter-to-Quarter**

Second quarter Cost ofOperations (operating expense, depreciation and amortization, and property andmiscellaneous taxes) increased by $1.2 million compared to the same quarter infiscal year 2006.  Most of the increasewas in uncollectible accounts expense, which increased $936,000. During thefirst winter of consolidated call center operations (2005/2006), the Companyutilized all call center personnel to handle high incoming call volume andtherefore had limited call center collection efforts. This, combined withhigher customer bills contributed to the increase. Since this time, the Companyhas established a dedicated call center collections group as well as hired anoutside vendor to make collections calls. In addition, the quarter includes $394,000 costs of funding publicpurpose and low-income programs, as required under the Oregon decouplingmechanism and the Washington rate case settlement. These increases werepartially offset by a reduction in Employee Benefits of $586,000 based on anincrease in the market value of pension plan assets and a 2006 pension planamendment affecting bargaining-unit employees, as well as lower medical anddental expenses.

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**Year-to-Date**

Year-to-date Costof Operations increased $3.4 million. The increase included $1.5 million ofmerger-related costs and $793,000 of charges relating to first quarterorganizational changes. For the six months, uncollectible accounts increased$876,000. Public purpose and low-income funding accounted for $591,000 of theincrease. These increases were partly offset by $955,000 reduction in employeebenefits expenses.

**IncomeTaxes**

Thechange in the provision for income taxes from 2006 to 2007 is attributable tothe changes in pre-tax earnings, as well as an increase in the effective taxrate. In the second quarter, the Company increased its estimate of the amountof costs incurred in connection with its pending merger that can be deducted onits income tax returns. Certain of those costs are not deductible on theCompany’s tax return, and are permanent differences between book and taxincome. As a result of the revised estimate of deductibility, the Company’sprovision for income taxes was reduced approximately $500,000 in the secondquarter.

**LIQUIDITY AND CAPITAL RESOURCES**

Theseasonal nature of the Company’s business creates short-term cash requirementsto finance customer accounts receivable and construction expenditures.  To provide working capital for theserequirements, the company has a $60,000,000 bank revolving creditcommitment.  This agreement has avariable commitment fee and a term that expires in October 2007. The creditavailable under this credit line is reduced by an outstanding $1.9 millionletter of credit issued to one of the Company’s suppliers to meet their creditrequirements. The company also has a $20,000,000 uncommitted line of credit. Asof March 31, 2007, there were nooutstanding borrowings under these credit lines.

Due to the nature ofCascade’s business, which is characterized by reliable payments from a stablecustomer base and our expectations that capital spending will be primarilyfunded from internal sources, we expect to have limited need to sourceadditional capital during fiscal 2007. For this reason, combined with theavailability of short-term credit and the ability to issue long-term debt andadditional equity, management believes it has adequate financial flexibility tomeet its anticipated cash needs.

### **Operating Activities**

Though year-to-date netincome was comparable to last year, cash provided by operating activitiesimproved $9.5 million over last year. The primary factor was a $17.0 millionchange in deferred gas costs, a $7.0 million improvement over the $10.0 millionfor the same period last year. The Company has been able to purchase gas at alower cost than the current benchmark established in its latest PGA filingswith the WUTC. We expect this advantage to diminish later this year aslong-term hedges entered into in prior years expire. These hedges had theeffect of fixing the cost of a portion of our gas supplies at a lower rate thanin subsequent periods, and as they expire, the result is that our weightedaverage cost of gas purchased is likely to increase. In addition, approximately$4.8 million of this year’s gas cost related cash flow is from normalseasonality, and is expected to reverse later in the year.

##### **Investing Activities**

Year-to-date cash used byinvesting activities is up $675,000 from last year. The increase in capitalspending is primarily a result of increased spending related to systemexpansion and reinforcement. Our current expectation is that we will end theyear within our capital budget of $24.3 million.

#### **Financing Activities**

Other than the payment ofdividends, the Company’s primary financing activities year-to-date were the$8.0 million repayment of 8.50% Medium-Term Notes that matured in October 2006,and the refinancing of the Company’s callable 7.50% Notes Due November 2031,replacing this debt with $40 million 5.79% notes due March 2037. The $8.0million repayment was funded by cash flow from operating activities generatedin 2006.

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## **CRITICALACCOUNTING POLICIES**

The Company’s financialstatements are prepared in accordance with accounting principles generallyaccepted in the United States of America (GAAP).  In following GAAP, management exercisesjudgment in selection and application of accounting principles.  Management considers critical accountingpolicies to be those where different assumptions regarding application couldresult in material differences in financial statements.  The Company’s critical accounting policieswere described in its Annual Report on Form 10-K for the year ended September30, 2006, under Part II, Item 7, and have not changed significantly since thatreport.

**Item 3.  Quantitative and Qualitative DisclosuresAbout Market Risk**

The Company has evaluatedits risk related to financial instruments whose values are subject to marketsensitivity.  The Company has fixed-ratedebt obligations but does not currently have derivative financial instrumentssubject to interest rate risk.  Cascademakes interest and principal payments on these obligations in the normal courseof its business and may redeem these obligations prior to normal maturities ifwarranted by market conditions.

The Company’s natural gaspurchase commodity prices are subject to fluctuations resulting from weather,congestion on interstate pipelines, and other unpredictable factors.  The Company’s Purchased Gas Cost Adjustment(PGA) mechanisms assure the recovery in customer rates of prudently incurredwholesale cost of natural gas purchased for the core market.  The Company primarily utilizes financialderivatives, and to a lesser extent, fixed price physical supply contracts tomanage risk associated with wholesale costs of natural gas purchased forcustomers. The fair value of these derivatives as of March 31, 2007 is a netliability of $864,000. We monitor the liquidity of our financial derivativecontracts.  Based on the existing openinterest in the contracts held, we believe existing contracts to be liquid. Allof our financial derivative contracts settle within the next four years, withthe following estimated future cash receipts (payments): $501,000 by March 31,2008, ($727,000) by March 31, 2009, and ($638,000) by March 31, 2010. Theseamounts will change based on market prices at the time contract settlements arefixed.

With respect toderivative arrangements covering natural gas supplies for core customers,periodic changes in fair market value are recorded in regulatory asset orregulatory liability accounts, pursuant to authority granted by the WUTC andOPUC, recognizing that settlements of these arrangements will be recoveredthrough the PGA mechanism.

For derivativearrangements related to supplies for non-core customers, which are not coveredby a PGA mechanism, periodic changes in fair market value are recognized inearnings or in Other Comprehensive Income.

**Item 4.  Controls and Procedures**

The Company maintainscontrols and procedures designed to provide reasonable assurance that requireddisclosure information in the reports the Company files or submits under theSecurities Exchange Act of 1934, as amended, is recorded, processed, summarizedand reported within the time period specified in the rules and forms of theSecurities and Exchange Commission. Based upon their evaluation of those controls and procedures as of theend of the quarter covered by this report, the Chief Executive Officer andChief Accounting Officer of the Company concluded that the Company’s disclosurecontrols and procedures were effective. There were no changes in internalcontrol over financial reporting that occurred during the quarter covered bythis report that have materially affected, or are reasonably likely to affect,the Company’s internal controls over financial reporting.

# **FORWARD-LOOKING STATEMENTS**

The Company’s discussionin this report, or in any information incorporated herein by reference, maycontain forward-looking statements within the meaning of the Private SecuritiesLitigation Reform Act of 1995.  All statements, other than statements ofhistorical facts, are forward-looking statements, including

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statements concerningplans, objectives, goals, strategies, and future events or performance. When used in Company documents or oral presentations, the words “anticipate”, “believe”,“estimate”, “expect”, “objective”, “projection”, “forecast”, “goal”, “intend”, “plan”,“may”, or similar words are intended to identify forward-looking statements.

These forward-lookingstatements reflect the Company’s current expectations, beliefs and projectionsabout future events that we believe may affect the Company’s business,financial condition and results of operations, and are expressed in good faithand are believed to have a reasonable basis.  However, each suchforward-looking statement involves risks, uncertainties and assumptions, and isqualified in its entirety by reference to the following important factors,among others, that could cause the Company’s actual results to differmaterially from those projected in such forward-looking statements:

·                  factorsaffecting regulatory approvals of the Company’s proposed merger with MDU

·                  prevailingstate and federal governmental policies and regulatory actions, including thoseof the Washington Utilities and Transportation Commission, the Oregon PublicUtility Commission, and the U.S. Department of Transportation’s Office ofPipeline Safety, with respect to allowed rates of return, industry and ratestructure, purchased gas cost and investment recovery, acquisitions anddispositions of assets and facilities, operation and construction of plantfacilities, the maintenance of pipeline integrity, and present or prospectivewholesale and retail competition;

·                  weatherconditions and other natural phenomena;

·                  unanticipatedpopulation growth or decline, and changes in market demand caused by changes indemographic or customer consumption patterns;

·                  changesin and compliance with environmental and safety laws, regulations and policies,including environmental cleanup requirements;

·                  competitionfrom alternative forms of energy and other sellers of energy;

·                  increasingcompetition brought on by deregulation initiatives at the federal and stateregulatory levels, as well as consolidation in the energy industry;

·                  thepotential loss of large volume industrial customers due to “bypass” or theshift by such customers to special competitive contracts at lower per-unitmargins;

·                  risks,including creditworthiness, relating to performance issues with customers andsuppliers;

·                  risksresulting from uninsured damage to the Company’s property, intentional orotherwise, or from acts of terrorism;

·                  unanticipatedchanges that may affect the Company’s liquidity or access to capital markets;

·                  unanticipatedchanges in interest rates or in rates of inflation;

·                  economicfactors that could cause a severe downturn in certain key industries, thusaffecting demand for natural gas;

·                  unanticipatedchanges in operating expenses and capital expenditures;

·                  unanticipatedchanges in capital market conditions, including their impact on future expensesand liabilities relating to employee benefit plans;

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·                  potentialinability to obtain permits, rights of way, easements, leases, or otherinterests or necessary authority to construct pipelines, or complete othersystem expansions;

·                  changesin the availability and price of natural gas; and

·                  legaland administrative proceedings and settlements.

In light of these risks,uncertainties and assumptions, the forward-looking events and circumstancesdiscussed in this report, or in any information incorporated herein by reference,may not occur and actual results could differ materially from those anticipatedor implied in the forward-looking statements.

Any forward-lookingstatement by the Company is made only as of the date on which such statement ismade.  The Company undertakes no obligation to update any forward-lookingstatement to reflect events or circumstances after the date on which thestatement is made or to reflect the occurrence of any unanticipatedevents.  New factors emerge from time to time, and the Company is not ableto predict all such factors, nor can it assess the impact of each such factoror the extent to which such factors may cause results to differ materially fromthose contained in any forward-looking statement. You are also advised toconsult the other reports we file with the Securities and Exchange Commissionas well as the disclosure under “Risk Factors” in Part I, Item 1A of theCompany’s Annual Report on Form 10-K for the Year Ended September 30, 2006.

# **PART II. Other Information**

**Item 1.Legal Proceedings**

On January 12, 2007, the Company received an orderfrom the WUTC resolving the parties’ motions for summary determination inthe complaint proceeding commenced on July 31, 2006 by Cost ManagementServices, Inc. (CMS) relating to the Company’s gas management services, DocketNo. UG-061256.  The WUTC ’ s order allows the Company tocontinue to make gas supply sales to non-core customers even thoughthe Company will be required to file with the Commission its tariffs andcontracts for these sales.  The Order also instructed Commissionstaff to investigate the Company’s current contracts to ensure that the Companyis in compliance with state laws and regulations governing specialcontracts.  The Order reserved for hearing the issue of whether the Company’scontracts provided an undue preference or advantage after finding that thefacts presented were not sufficient to grant summary determination.

The parties have filed a series of motions forclarification of the order and answering briefs and the partiesare currently awaiting an official response from the Commission.

# **Item 6. Exhibits**

|        | ** ** | **No.** | ** ** | **Description**                                                                                                                       |
|--------|------------|---------|------------|---------------------------------------------------------------------------------------------------------------------------------------|
|   |       |    |       |                                                                                                                                  |
|   |       | 12      |       | Computation of Ratio of Earnings to Fixed Charges                                                                                     |
|   |       |    |       |                                                                                                                                  |
|   |       | 31.1    |       | Certification of Principal Executive Officer Accompanying  Periodic Report Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002  |
|   |       |    |       |                                                                                                                                  |
|   |       | 31.2    |       | Certification of Principal Financial Officer  Accompanying Periodic Report Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002 |
|   |       |    |       |                                                                                                                                  |
|   |       | 32      |       | Certification Pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002               |

 

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**SIGNATURE**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

# **CASCADE NATURAL GAS CORPORATION**

| By:    |   | /s/ James E.  Haug             |   |   |
|--------|--------|--------------------------------|--------|--------|
|   |   |                           |   |   |
|   |   |                           |   |   |
|   |   | James E. Haug                  |   |   |
|   |   | Chief Accounting  Officer      |   |   |
|   |   | (Principal  Financial Officer) |   |   |
|   |   |                           |   |   |
|   |   |                           |   |   |
| Date:  |   | May 8, 2007                    |   |   |

 

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