**FORM 10-Q**

** **

**SECURITIES AND EXCHANGE COMMISSION**

 

**Washington,D.C. 20549**

 

**QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thequarterly period ended June 30, 2005**

 

**Commissionfile number: 1-7196**

 

**CASCADE NATURAL GAS CORPORATION**

(Exact name ofRegistrant as specified in its charter)

 
| **Washington**                                                   |   | **91-0599090**                        |
|------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  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**                   |

 

Indicate by checkmark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes  ý       No o

 

Indicate by checkmarkwhether the registrant is an accelerated filer (as defined in Rule 23b-2 of theExchange Act).Yes ý       No o

 

Indicate the number ofshares outstanding of each of the registrant’s classes of common stock, as ofthe latest practicable date.

 

| **Title**                            | ** ** | **Outstanding**                 |
|--------------------------------------|------------|---------------------------------|
|                                 |       |                            |
| Common Stock, Par Value $1 per Share |       | 11,387,034  as of July 29, 2005 |

 

 

----

 

**CASCADENATURAL GAS CORPORATION**

 

Index

 
| Part I. Financial Information |                                                                                                |
|-------------------------------|-----------------------------------------------------------------------------------------------------|
|                          |                                                                                                |   |
|                          | Item 1. Financial Statements                                                                        |   |
|                          |                                                                                                |   |
|                          | Consolidated Condensed  Statements of 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 2. Unregistered Sales  of Equity Securities and Use of Proceeds                                |   |
|                          |                                                                                                |   |
|                          | Item 5. Other Information                                                                           |   |
|                          |                                                                                                |   |
|                          | Item 6. Exhibits                                                                                    |   |
|                          |                                                                                                |   |
| Signature                     |                                                                                                |   |

 

2

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**PART I.   Financial Information**

 

**Item 1.** Financial Statements

 

CASCADE NATURAL GAS CORPORATION

CONSOLIDATEDCONDENSED STATEMENTS OF INCOME

(unaudited)

 
| ** **                                  | ** ** | **THREE MONTHS ENDED**                | ** ** | **NINE MONTHS ENDED** | ** ** |
|---------------------------------------------|------------|---------------------------------------|------------|-----------------------|------------|
| ** **                                  | ** ** | **Jun 30, 2005**                      | ** ** | **Jun 30, 2004**      | ** ** | **Jun 30, 2005** | ** ** | **Jun 30, 2004** | ** ** |
| ** **                                  | ** ** | **(thousands except per share data)** | ** ** |
|                                        |       |                                  |       |                  |       |   |   |   |   |
| Operating  revenues                         |       | $                                     | 56,315     |                  | $          | 52,077 |   | $ | 278,638 |   | $ | 276,416 |   |
|                                        |       |                                  |       |                  |       |   |   |   |   |
| Less: Gas  purchases                        |       | 34,646                                |       | 31,896                |       | 182,098 |   | 178,019 |   |
|  Revenue  taxes                        |       | 3,995                                 |       | 3,544                 |       | 19,103 |   | 18,924 |   |
| Operating margin                            |       | 17,674                                |       | 16,637                |       | 77,437 |   | 79,473 |   |
|                                        |       |                                  |       |                  |       |   |   |   |   |
| Cost of  operations:                        |       |                                  |       |                  |       |   |   |   |   |
| Operating  expenses                         |       | 10,977                                |       | 9,729                 |       | 32,418 |   | 30,656 |   |
| Depreciation and  amortization              |       | 4,326                                 |       | 4,026                 |       | 12,811 |   | 11,882 |   |
| Property and  miscellaneous taxes           |       | 1,109                                 |       | 941                   |       | 3,011 |   | 2,748 |   |
|                                        |       | 16,412                                |       | 14,696                |       | 48,240 |   | 45,286 |   |
|                                        |       |                                  |       |                  |       |   |   |   |   |
| Income from  operations                     |       | 1,262                                 |       | 1,941                 |       | 29,197 |   | 34,187 |   |
| Less interest  and other deductions - net   |       | 2,891                                 |       | 3,099                 |       | 8,761 |   | 9,337 |   |
| Income (loss)  before income taxes          |       | (1,629                                | )          | (1,158                | )          | 20,436 |   | 24,850 |   |
|                                        |       |                                  |       |                  |       |   |   |   |   |
| Income taxes                                |       | (502                                  | )          | (492                  | )          | 7,579 |   | 8,943 |   |
| Net Income  (loss)                          |       | $                                     | (1,127     | )                     | $          | (666 | ) | $ | 12,857 |   | $ | 15,907 |   |
|                                        |       |                                  |       |                  |       |   |   |   |   |
| Weighted average  common shares outstanding |       | 11,367                                |       | 11,227                |       | 11,319 |   | 11,193 |   |
|                                        |       |                                  |       |                  |       |   |   |   |   |
| Net earnings  (loss) per common share       |       |                                  |       |                  |       |   |   |   |   |
| Basic                                       |       | $                                     | (0.10      | )                     | $          | (0.06 | ) | $ | 1.14 |   | $ | 1.42 |   |
| Diluted                                     |       | $                                     | (0.10      | )                     | $          | (0.06 | ) | $ | 1.14 |   | $ | 1.42 |   |
|                                        |       |                                  |       |                  |       |   |   |   |   |
| Cash dividends  per share                   |       | $                                     | 0.24       |                  | $          | 0.24 |   | $ | 0.72 |   | $ | 0.72 |   |

 

The accompanyingnotes are an integral part of these financial statements.

 

3

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**CASCADE NATURAL GAS CORPORATION**

**CONSOLIDATED CONDENSED BALANCE SHEETS**

(unaudited)

 
| ** **                                                                                                                  | ** ** | **Jun 30, 2005**           | ** ** | **Sep 30, 2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|------------------|------------|
| ** **                                                                                                                  | ** ** | **(dollars in thousands)** | ** ** |
| **ASSETS**                                                                                                                  | ** ** | ** **                 | ** ** | ** **       | ** ** |
| Utility Plant,  net of accumulated depreciation of $254,899 and $242,691                                                    |       | $                          | 338,654    |             | $          | 327,345 |   |
| Construction  work in progress                                                                                              |       | 4,168                      |       | 7,229            |       |
|                                                                                                                        |       | 342,822                    |       | 334,574          |       |
| Other Assets:                                                                                                               |       |                       |       |             |       |
| Investments in  non-utility property                                                                                        |       | 202                        |       | 202              |       |
| Notes  receivable, less current maturities                                                                                  |       | 47                         |       | 43               |       |
|                                                                                                                        |       | 249                        |       | 245              |       |
| Current Assets:                                                                                                             |       |                       |       |             |       |
| Cash and cash  equivalents                                                                                                  |       | 728                        |       | 499              |       |
| Accounts  receivable and current maturities of notes receivable, less allowance of  $1,316 and $1,028 for doubtful accounts |       | 23,611                     |       | 15,001           |       |
| Prepaid expenses  and other assets                                                                                          |       | 6,350                      |       | 18,674           |       |
| Derivative  instrument assets - energy commodity                                                                            |       | 20,749                     |       | 17,983           |       |
| Materials,  supplies and inventories                                                                                        |       | 13,015                     |       | 13,268           |       |
| Deferred income  taxes                                                                                                      |       | 1,052                      |       | 955              |       |
|                                                                                                                        |       | 65,505                     |       | 66,380           |       |
| Deferred Charges  and Other                                                                                                 |       |                       |       |             |       |
| Gas cost changes                                                                                                            |       | 13,172                     |       | 12,288           |       |
| Derivative  instrument assets - energy commodity                                                                            |       | 16,226                     |       | 3,952            |       |
| Other                                                                                                                       |       | 6,735                      |       | 5,183            |       |
|                                                                                                                        |       | 36,133                     |       | 21,423           |       |
|                                                                                                                        |       |                       |       |             |       |
|                                                                                                                        |       | $                          | 444,709    |             | $          | 422,622 |   |

 

4

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| ** **                                                                                                                    | ** ** | **Jun 30, 2005**            | ** ** | **Sep 30, 2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|------------------|------------|
| ** **                                                                                                                    | ** ** | **(dollars in thousands )** | ** ** |
| **COMMON SHAREHOLDERS’ EQUITY AND LIABILITIES**                                                                          |       |                        |       |
| Common  Shareholders’ Equity:                                                                                            |       |                        |       |             |       |
| Common stock,  par value $1 per share, authorized 15,000,000 shares, issued and outstanding  11,384,119 and 11,268,069 shares |       | $                           | 11,384     |             | $          | 11,268 |   |
| Additional  paid-in capital                                                                                                   |       | 103,175                     |       | 101,354          |       |
| Accumulated  other comprehensive income (loss)                                                                                |       | (12,608                     | )          | (12,608          | )          |
| Retained earnings                                                                                                             |       | 23,188                      |       | 18,500           |       |
|                                                                                                                          |       | 125,139                     |       | 118,514          |       |
|                                                                                                                          |       |                        |       |             |       |
| Long-term Debt                                                                                                                |       | 158,900                     |       | 128,900          |       |
|                                                                                                                          |       |                        |       |             |       |
| Current  Liabilities:                                                                                                         |       |                        |       |             |       |
| Short-term debt                                                                                                               |       | 17,000                      |       | 33,500           |       |
| Current  maturities of long-term debt                                                                                         |       | 5,000                       |       | 14,000           |       |
| Accounts payable                                                                                                              |       | 10,958                      |       | 12,923           |       |
| Property,  payroll and excise taxes                                                                                           |       | 5,013                       |       | 5,287            |       |
| Dividends and  interest payable                                                                                               |       | 5,233                       |       | 7,125            |       |
| Regulatory  liabilities                                                                                                       |       | 20,453                      |       | 17,209           |       |
| Other current  liabilities                                                                                                    |       | 8,139                       |       | 8,972            |       |
|                                                                                                                          |       | 71,796                      |       | 99,016           |       |
|                                                                                                                          |       |                        |       |             |       |
| Deferred Credits  and Other Non-current Liabilities                                                                           |       |                        |       |             |       |
| Deferred income  taxes and investment tax credits                                                                             |       | 41,217                      |       | 38,392           |       |
| Retirement plan  obligations                                                                                                  |       | 19,523                      |       | 20,780           |       |
| Regulatory  liabilities                                                                                                       |       | 22,188                      |       | 10,515           |       |
| Other                                                                                                                         |       | 5,946                       |       | 6,505            |       |
|                                                                                                                          |       | 88,874                      |       | 76,192           |       |
|                                                                                                                          |       |                        |       |             |       |
| Commitments and  Contingencies                                                                                                |       | —                      |       | —           |       |
|                                                                                                                          |       | $                           | 444,709    |             | $          | 422,622 |   |

 

The accompanyingnotes are an integral part of these financial statements.

 

5

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CASCADENATURAL GAS CORPORATION

CONSOLIDATEDCONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 
| ** **                                                                         | ** ** | **NINE MONTHS ENDED**      | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                         | ** ** | **(dollars in thousands)** | ** ** |
| ** **                                                                         | ** ** | **Jun 30, 2005**           | ** ** | **Jun 30, 2004** | ** ** |
| Operating  Activities                                                              |       |                       |       |   |   |
| Net income                                                                         |       | $                          | 12,857     |   | $ | 15,907 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                       |       |   |   |
| Depreciation and  amortization                                                     |       | 12,811                     |       | 11,882 |   |
| Deferrals of gas  cost changes                                                     |       | (5,445                     | )          | (3,378 | ) |
| Amortization of  gas cost changes                                                  |       | 4,561                      |       | 5,674 |   |
| Other deferrals  and amortizations                                                 |       | (1,581                     | )          | (453 | ) |
| Deferred income  taxes and tax credits - net                                       |       | 2,728                      |       | 3,982 |   |
| Change in  current assets and liabilities                                          |       | (524                       | )          | (2,252 | ) |
| Net cash  provided by operating activities                                         |       | 25,407                     |       | 31,362 |   |
|                                                                               |       |                       |       |   |   |
| Investing  Activities                                                              |       |                       |       |   |   |
| Capital  expenditures                                                              |       | (22,417                    | )          | (29,762 | ) |
| Customer  contributions in aid of construction                                     |       | 850                        |       | 318 |   |
| Net cash used by  investing activities                                             |       | (21,567                    | )          | (29,444 | ) |
|                                                                               |       |                       |       |   |   |
| Financing  Activities                                                              |       |                       |       |   |   |
| Proceeds from  issuance of long-term debt, net                                     |       | 28,121                     |       | — |   |
| Proceeds from  issuance of common stock                                            |       | 1,937                      |       | 2,070 |   |
| Repayment of  long-term debt                                                       |       | (9,000                     | )          | — |   |
| Changes in  short-term debt, net                                                   |       | (16,500                    | )          | (2,800 | ) |
| Dividends paid                                                                     |       | (8,169                     | )          | (8,078 | ) |
| Net cash used by  financing activities                                             |       | (3,611                     | )          | (8,808 | ) |
|                                                                               |       |                       |       |   |   |
| Net Increase in  Cash and Cash Equivalents                                         |       | 229                        |       | (6,890 | ) |
|                                                                               |       |                       |       |   |   |
| Cash and Cash  Equivalents                                                         |       |                       |       |   |   |
| Beginning of  year                                                                 |       | 499                        |       | 7,452 |   |
| End of period                                                                      |       | $                          | 728        |   | $ | 562 |   |

 

The accompanyingnotes are an integral part of these financial statements.

 

6

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**CASCADENATURAL GAS CORPORATION**

**NOTES TOCONSOLIDATED CONDENSED FINANCIAL STATEMENTS**

## **THREE-ANDNINE-MONTH PERIODS ENDED JUNE 30**

## ** **

The preceding statements were taken from the books andrecords of the Company and reflect all adjustments that are, in the opinion ofmanagement, necessary for a fair statement of the results for the interimperiods. Because of the highly seasonal nature of the natural gas distributionbusiness, with revenues and operating margins concentrated in the first twofiscal quarters, earnings or loss for any portion of the year are disproportionatein relation to the full year.

 

Referenceis directed to the Notes to Consolidated Financial Statements contained in the2004 Annual Report on Form 10-K for the fiscal year ended September 30, 2004,and comments included therein under “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations”.

 

#### **Note 1.****Restatement**

####  

As disclosed in the Quarterly Report on Form 10-Q for thequarter ended June 30, 2004, the Company restated its earnings for the quarterended March 31, 2004. This restatement was a result of the remeasurement ofretiree medical expense, with a remeasurement date of December 31, 2003. Thisremeasurement reduced operating expenses by $158,000 for the three- andsix-month periods ended March 31, 2004.

 

Fiscal year 2004 amounts reported in this quarterly report,including amounts in the following footnotes, reflect the restated amountsthrough June 30, 2004.

 

**Note 2.** New AccountingStandards

 

**FIN47: **In March 2005, theFASB issued Interpretation No. 47, “Accounting for Conditional Asset RetirementObligations, an interpretation of FASB Statement No. 143” (FIN 47). FIN47 clarifies that the term “conditional asset retirement obligation” refers toa legal obligation to perform an asset retirement activity in which the timingand/or method of settlement are conditional on a future event that may or maynot be within the control of the Company. The Company will be required torecognize a liability for the fair value of a conditional asset retirementobligation if the fair value of the liability can be reasonably estimated. Thisinterpretation also clarifies when the Company would have sufficientinformation to reasonably estimate the fair value of an asset retirementobligation.  The Company will be requiredto adopt this interpretation by the end of fiscal year 2005.  The Company is evaluating the impact thisstatement will have on its financial condition and results of operations.

 

7

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**Note 3.****Earnings Per Share**

 

The following table sets forth the calculation ofearnings per share.

 
| ** **                                             | ** ** | **Three Months Ended**                   | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------|------------|-----------------------|------------|
| ** **                                             | ** ** | **Jun 30, 2005**                         | ** ** | **Jun 30, 2004**      | ** ** | **Jun 30, 2005** | ** ** | **Jun 30, 2004** | ** ** |
| ** **                                             | ** ** | **(in thousands except per-share data)** | ** ** |
| Net income  (loss)                                     |       | $                                        | (1,127     | )                     | $          | (666 | ) | $ | 12,857 |   | $ | 15,907 |   |
|                                                   |       |                                     |       |                  |       |   |   |   |   |
| Weighted average  shares outstanding                   |       | 11,367                                   |       | 11,227                |       | 11,319 |   | 11,193 |   |
| Basic earnings  (loss) per share                       |       | $                                        | (0.10      | )                     | $          | (0.06 | ) | $ | 1.14 |   | $ | 1.42 |   |
|                                                   |       |                                     |       |                  |       |   |   |   |   |
| Weighted average  shares outstanding                   |       | 11,367                                   |       | 11,227                |       | 11,319 |   | 11,193 |   |
| Plus: Issued on  assumed exercise of stock options     |       | 2                                        |       | 13                    |       | 3 |   | 14 |   |
| Weighted average  shares outstanding assuming dilution |       | 11,369                                   |       | 11,240                |       | 11,322 |   | 11,207 |   |
|                                                   |       |                                     |       |                  |       |   |   |   |   |
| Diluted earnings  (loss) per share                     |       | $                                        | (0.10      | )                     | $          | (0.06 | ) | $ | 1.14 |   | $ | 1.42 |   |

 

**Note4.****RetirementPlan Information**

 

The following table setsforth the components of net periodic benefit costs recognized.

 

**NetPeriodic Benefits Cost**

 
| ** **                                       | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                       | ** ** | **Jun 30, 2005**       | ** ** | **Jun 30, 2004**      | ** ** | **Jun 30, 2005** | ** ** | **Jun 30, 2004** | ** ** |
| ** **                                       | ** ** | **(in thousands)**     | ** ** |
| **DEFINED  BENEFIT PENSION PLANS**               |       |                   |       |                  |       |   |   |   |   |
| Service cost                                     |       | $                      | 197        |                  | $          | 192 |   | $ | 591 |   | $ | 576 |   |
| Interest cost                                    |       | 961                    |       | 932                   |       | 2,882 |   | 2,796 |   |
| Expected return  on plan assets                  |       | (1,041                 | )          | (978                  | )          | (3,122 | ) | (2,935 | ) |
| Recognized gains  or losses                      |       | 386                    |       | 349                   |       | 1,158 |   | 1,048 |   |
| Prior service  cost                              |       | 46                     |       | 57                    |       | 137 |   | 172 |   |
| Net Periodic  Benefit Cost Recognized            |       | $                      | 549        |                  | $          | 552 |   | $ | 1,646 |   | $ | 1,657 |   |
|                                             |       |                   |       |                  |       |   |   |   |   |
| **POSTRETIREMENT  BENEFITS OTHER THAN PENSIONS** |       |                   |       |                  |       |   |   |   |   |
| Service cost                                     |       | $                      | 35         |                  | $          | 38 |   | $ | 105 |   | $ | 121 |   |
| Interest cost                                    |       | 275                    |       | 308                   |       | 826 |   | 963 |   |
| Expected return  on plan assets                  |       | (211                   | )          | (213                  | )          | (634 | ) | (639 | ) |
| Recognized gains  or losses                      |       | 187                    |       | 218                   |       | 560 |   | 744 |   |
| Prior service  cost                              |       | (330                   | )          | (330                  | )          | (990 | ) | (990 | ) |
| Net Periodic  Benefit Cost Recognized            |       | $                      | (44        | )                     | $          | 21 |   | $ | (133 | ) | $ | 199 |   |
|                                             |       |                   |       |                  |       |   |   |   |   |
| **DEFINED  CONTRIBUTION PENSION PLAN**           |       |                   |       |                  |       |   |   |   |   |
| Net Periodic  Benefit Cost Recognized            |       | $                      | 229        |                  | $          | 242 |   | $ | 721 |   | $ | 729 |   |

 

**RetirementPlan Funding**

** **

For the nine months ended June 30, 2005, $2,735,000 ofcontributions were made to the Company’s definedbenefit pension plans. The Company presently anticipates contributing anadditional $630,000 to fund its pension plans for a total of $3,365,000 infiscal 2005.

 

8

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### **Note 5.** Stock-Based Compensation

 

**TheCompany follows the disclosure-only provisions of Statement of FinancialAccounting Standards (FAS) No. 123, “Accounting for Stock-Based Compensation”.  Accordingly, employee stock options areaccounted for under Accounting Principle Board Opinion (APB) No. 25, “Accountingfor Stock Issued to Employees”.  Stockoptions are granted at exercise prices not less than the fair value of commonstock on the date of grant. Under APB No. 25, no compensation expense isrecognized related to the Company’s stock option plans. If compensation expensefor the Company’s stock option plans was determined consistent with FAS No.123, net income and earnings per common share would have been the following proforma amounts for the three- and nine-month periods ended June 30:**

 
| ** **                                                                                                | ** ** | **Three Months Ended**                   | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                | ** ** | **Jun 30, 2005**                         | ** ** | **Jun 30, 2004**      | ** ** | **Jun 30, 2005** | ** ** | **Jun 30, 2004** | ** ** |
| ** **                                                                                                | ** ** | **(in thousands except per-share data)** | ** ** |
| Net income  (loss)                                                                                        |       |                                     |       |                  |       |   |   |   |   |
| As reported                                                                                               |       | $                                        | (1,127     | )                     | $          | (666 | ) | $ | 12,857 |   | $ | 15,907 |   |
| Less total  stock-based employee compensation expense determined under the fair value  method, net of tax |       | $                                        | —     |                  | 13         |   | $ | 26 |   | 40 |   |
| Pro forma net  income                                                                                     |       | $                                        | (1,127     | )                     | $          | (679 | ) | $ | 12,831 |   | $ | 15,867 |   |
|                                                                                                      |       |                                     |       |                  |       |   |   |   |   |
| Earnings (loss)  per share, basic and diluted                                                             |       |                                     |       |                  |       |   |   |   |   |
| As reported                                                                                               |       | $                                        | (0.10      | )                     | $          | (0.06 | ) | $ | 1.14 |   | $ | 1.42 |   |
| Pro forma                                                                                                 |       | $                                        | (0.10      | )                     | $          | (0.06 | ) | $ | 1.13 |   | $ | 1.42 |   |

 

**Note 6.****Commitments and Contingencies**

 

**Unregistered Shares of CommonStock Under DRIP**

 

In connection with modifyingadministrative procedures and updating the prospectus for the Company’sAutomatic Dividend Reinvestment Plan (the DRIP), the Company determined inApril 2005 that the number of shares of its common stock issued pursuant to theDRIP had exceeded the number of shares previously registered for such purposeunder the Securities Act of 1933, as amended (the Securities Act). As a result,the Company may have failed to comply with the registration or qualificationrequirements of federal and applicable state securities laws with respect tosuch shares.  In May 2005 the Companyregistered 500,000 additional shares of common stock for future issuance underthe DRIP.

 

Based upon the Company’s ongoinginvestigation, it appears that 121,458 shares of its common stock were issuedto approximately 3,500 DRIP participants between August 2003 and April 2005 inexcess of the number of shares registered specifically for such purpose.  Such shares were issued at the followingprices:

 

| **Purchase Price** | ** ** | **Number of Shares** | ** ** |
|--------------------|------------|----------------------|------------|
|               |       |                 |       |
| $18.18             | –     | $18.99               |       | 7,734 |   |
| $19.00             | –     | $19.99               |       | 21,877 |   |
| $20.00             | –     | $20.99               |       | 56,430 |   |
| $21.00             | –     | $21.99               |       | 21,556 |   |
| $22.00             | –     | $22.95               |       | 13,861 |   |

 

The closing market price for theCompany’s common stock on August 1, 2005, was $21.10.

 

The Company is continuing to evaluate the impact ofthe issuance of unregistered shares on the DRIP participants affected and isconsidering appropriate actions to be taken, if any, to rectify thisoversight.  Should the Company repurchaseall of the unregistered shares at the purchase prices for which

 

9

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they were issued, cash ofapproximately $2,493,000 would be used to retire 121,458 outstandingshares.  Should the Company repurchaseonly the unregistered shares sold since August 1, 2004 (approximately theperiod covered by the one-year statute of limitations applicable to sales ofunregistered shares under the Securities Act), cash of approximately $1,106,000would be used to retire approximately 53,495 outstanding shares.  Current estimates of the costs of conductinga rescission offer as compared to the potential for financial benefit toparticipants in the DRIP indicate that a rescission offer may not be in thebest interests of the Company or its shareholders, including the participantsin the DRIP.

 

# **Environmental Matters**

 

There are two claims against the Company for cleanupof alleged environmental contamination related to manufactured gas plant sitespreviously operated by companies that were subsequently merged into theCompany.

 

The first claim was received in 1995and relates to a site in Oregon.  Aninvestigation has shown that soil and groundwater contamination exists at thesite.  There are parties in addition tothe Company that are potentially liable for cleanup of the contamination.  Some of these other parties have shared inthe costs expended to date to investigate the site and it is expected thatthese and other parties will share in the cleanup costs.  Several alternatives for remediation of thesite have been identified, with preliminary estimates for cleanup ranging fromapproximately $500,000 to $11,000,000. It is not known at this time what share of the cleanup costs willactually be borne by Cascade. The second claim was received in 1997 and relatesto a site in Washington.  Aninvestigation has determined that there is evidence of contamination at thesite, but there is also evidence that other property owners may havecontributed to the contamination.  Thereis currently not enough information available to estimate the potentialliability associated with this claim, but the Company and other parties maybecome more involved in investigations of the nature and extent ofcontamination and possible remediation of the site as increased interest hasbeen expressed concerning its potential for redevelopment.

 

Management first intendsto pursue reimbursement from its insurance carriers.  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.

 

# **Litigation and Other Contingencies**

# ** **

Various lawsuits, claims,and contingent liabilities may arise from time-to-time from the conduct of theCompany’s business. No other claims now pending, in the opinion of management,are expected to have a material effect on the Company’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 is management’s assessment of theCompany’s financial condition and a discussion of the principal factors thataffected consolidated results of operations and cash flows for the three- andnine-month periods ended June 30, 2005 and 2004.

 

**OVERVIEW**

 

The Company is a local distribution company (LDC)serving approximately 228,000 customers in the States of Washington and Oregon.The Company’s service area consists primarily of relatively small cities andrural communities rather than larger urban areas. The Company’s primary sourceof revenue and operating margin is the distribution of natural gas to end-useresidential, commercial, industrial, and institutional customers. Revenues arealso derived from providing gas management and other services to some of itslarge industrial and commercial customers. The Company’s rates and practicesare regulated by the Washington Utilities and Transportation Commission (WUTC)and the Oregon Public Utility Commission (OPUC).

 

10

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Key elements of theCompany’s strategy include:

 

•                  Remainfocused on delivering natural gas to a growing residential, commercial, andindustrial customer base in Washington and Oregon.

•                  Providegas management, engineering, construction andmaintenance services for customer-owned natural gas facilities when the risk /reward ratio is appropriate.

•                  Pursueadditional opportunities closely aligned with the Company’s core business bybuilding on its existing resources and customers.

•                  Continuouslyevaluate the most effective utilization of corporate resources.

 

**Opportunitiesand Challenges**

 

The Company operates in a diverse service territoryover a wide geographic area relative to its overall size and number ofcustomers. The economies of various parts of the service area are supported bya variety of industries, and are affected by the conditions that impact thoseindustries.

 

Rates charged by the Company for its utility servicesare regulated by the WUTC and the OPUC. The Company’s basic business strategyis to minimize reliance on rate increases for earnings growth. However,realization of risks affecting earnings could require the Company to seekapproval of higher rates. The results of such rate requests are subject touncertainties associated with the regulatory process.

 

The Company earns morethan one third of its operating margin from industrial and electric generationcustomers. Loss of major industrial customers, or unfavorable conditionsaffecting an industry segment, could have a detrimental impact on the Company’searnings. Many external factors over which the Company has no control cansignificantly impact the amount of natural gas consumed by industrial andelectric generation customers, and consequently the margins earned by theCompany.

 

Revenuesand margins from the Company’s residential and small commercial customers arehighly weather sensitive. In a cold year, the Company’s earnings are boosted bythe effects of the weather, and conversely in a warm year, the Company’searnings suffer. Overall revenues and margins are also impacted negatively bycustomers taking measures to reduce energy usage. The increasing cost of energyin recent years, including the wholesale cost of natural gas, continues toencourage such measures.

 

The Company continues to explorealternative rate structures such as decoupling mechanisms that utilityregulators in many jurisdictions have approved. The WUTC has opened aRulemaking Docket to investigate decoupling and held a workshop under thisdocket on May 12.  The Company presentedits proposed mechanism at this workshop.****Interestedparties, including the Company, have filed additional written comments.  The Company continues to work with the WUTCon its proposed decoupling mechanism and hopes to have resolution by the fall.

 

Prospects for continuingstrong residential and commercial customer growth are excellent. The pace ofnew home and commercial construction remains steady in the Company’scommunities. Good potential also exists for converting to natural gas fromelectricity or other fuels, homes and businesses located on or near the Company’scurrent lines, as well as for expanding the system into adjacent areas.

 

# **RESULTSOF OPERATIONS**

# ** **

Net loss for the thirdquarter of fiscal 2005 (quarter ended June 30, 2005) was $1,127,000, or $0.10per share, basic and diluted, compared to a net loss of $666,000, or $0.06 pershare, basic and diluted, for the quarter ended June 30, 2004. Primary factorsnegatively impacting the quarterly comparisons were:

 

•                  Lower2005 distribution and gas management margins from industrial customers

•                  Executivetransition costs in 2005

•                  Increaseduncollectible accounts expense in 2005

•                  Increasedpurchased service costs in 2005 related to governance costs, legal, and otherconsulting

 

11

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Partiallyoffsetting the above factors were improved operating margins from residentialand commercial customers resulting from new customer additions and increasednatural gas usage per customer during the quarter compared to third quarterlast year.

 

For the nine months endedJune 30, 2005, net income was $12,857,000, or $1.14 per share, compared to$15,907,000, or $1.42 per share for the same period last year. Primary factorsnegatively impacting the year-to-date comparisons were:

 

•                  Lower2005 distribution and gas management margins from industrial customers

•                  Executiveand other transition costs in 2005

•                  Increaseduncollectible accounts expense in 2005

•                  Higherdepreciation expense in 2005

•                  Lowernatural gas usage per residential and commercial customer

 

Partially offsetting theabove factors were:

 

•                  Favorablecomparisons of Oregon earnings sharing adjustments

•                  Loweremployee benefits expenses

•                  Growthin the number of residential and commercial customers

 

# **Operating Margin**

# ** **

Operating margins bycustomer category are set forth in the following tables:

 

**Residential and Commercial Margin**

 
| ** **                              | ** ** | **Third Quarter of Fiscal** | ** ** | **Percent** | ** ** | **Fiscal Year to Date** | ** ** | **Percent** | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|-------------|------------|-------------------------|------------|-------------|------------|
| ** **                              | ** ** | **2005**                    | ** ** | **2004**    | ** ** | **Change**              | ** ** | **2005**    | ** ** | **2004** | ** ** | **Change** | ** ** |
| ** **                              | ** ** | **(dollars in thousands)**  | ** ** |
| **Degree  Days**                        |       |                        |       |        |       |                    |       |        |       |   |   |   |   |
| Actual                                  |       | 769                         |       | 661         |       | 16.3                    | %          | 4,944       |       | 5,016 |   | -1.4 | % |
| 5-Year Average                          |       | 806                         |       | 874         |       |                    |       | 5,168       |       | 5,193 |   |   |   |
| **Average  Number of Customers Billed** |       |                        |       |        |       |                    |       |        |       |   |   |   |   |
| Residential                             |       | 195,561                     |       | 185,584     |       | 5.4                     | %          | 194,252     |       | 185,114 |   | 4.9 | % |
| Commercial                              |       | 30,256                      |       | 29,471      |       | 2.7                     | %          | 30,191      |       | 29,422 |   | 2.6 | % |
| **Average  Therm Usage per Customer**   |       |                        |       |        |       |                    |       |        |       |   |   |   |   |
| Residential                             |       | 111                         |       | 97          |       | 14.4                    | %          | 628         |       | 654 |   | -4.0 | % |
| Commercial                              |       | 590                         |       | 536         |       | 10.1                    | %          | 3,079       |       | 3,223 |   | -4.5 | % |
| **Operating  Margin**                   |       |                        |       |        |       |                    |       |        |       |   |   |   |   |
| Residential                             |       | $                           | 7,623      |        | $          | 6,299                   |       | 21.0        | %          | $ | 36,079 |   | $ | 35,533 |   | 1.5 | % |
| Commercial                              |       | $                           | 4,015      |        | $          | 3,414                   |       | 17.6        | %          | $ | 19,200 |   | $ | 19,602 |   | -2.1 | % |

 

For the quarter, margins from sales to residential andcommercial customers increased $1,925,000 over last year. Ofthis increase, assuming the same average natural gas usage per customer as lastyear, approximately $504,000 results from the increase in the number ofcustomers. The remaining $1,421,000 of the increase is primarilyattributable to higher usage of natural gas on a per-customer basis.

 

Helped by third quarterimprovements, year-to-date margin from residential and commercial customersincreased $144,000 over last year. The increase in the number of customersbilled added approximately $2,621,000 in margin, but lower average natural gasusage per customer in the first and second quarters resulted in a year-to-datedecline in margin of approximately $2,477,000.

 

12

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The primary use of natural gas by residentialcustomers is for space and water heating; therefore, average consumption percustomer is very sensitive to weather, particularly during the Company’s firstand second fiscal quarters, and to a somewhat lesser extent in the thirdquarter. Consumption by commercial customers is also sensitive to weather. Thesensitivity is more difficult to isolate and measure than for residentialcustomers because of a variety of uses in addition to space and water heating.Other factors also have a negative impact on gas usage, including conservationefforts spurred by higher natural gas prices and higher energy efficiency inbuildings and appliances.

 

**Industrial and Other Margin**

 
| ** **                               | ** ** | **Third Quarter of Fiscal** | ** ** | **Percent** | ** ** | **Fiscal Year to Date** | ** ** | **Percent** | ** ** |
|------------------------------------------|------------|-----------------------------|------------|-------------|------------|-------------------------|------------|-------------|------------|
| ** **                               | ** ** | **2005**                    | ** ** | **2004**    | ** ** | **Change**              | ** ** | **2005**    | ** ** | **2004** | ** ** | **Change** | ** ** |
|                                     |       |                        |       |        |       |                    |       |        |       |   |   |   |   |
| **Average  Number of Customers**         |       |                        |       |        |       |                    |       |        |       |   |   |   |   |
| Electric  Generation Customers           |       | 13                          |       | 14          |       | -7.1                    | %          | 13          |       | 14 |   | -7.1 | % |
| Industrial  Customers                    |       | 705                         |       | 736         |       | -4.2                    | %          | 722         |       | 740 |   | -2.4 | % |
|                                     |       | 718                         |       | 750         |       | -4.3                    | %          | 735         |       | 754 |   | -2.5 | % |
| **Therms  Delivered (thousands)**        |       |                        |       |        |       |                    |       |        |       |   |   |   |   |
| Electric  Generation Customers           |       | 83,392                      |       | 88,586      |       | -5.9                    | %          | 314,734     |       | 342,404 |   | -8.1 | % |
| Industrial  Customers                    |       | 92,786                      |       | 93,801      |       | -1.1                    | %          | 318,112     |       | 324,764 |   | -2.0 | % |
|                                     |       | 176,178                     |       | 182,387     |       | -3.4                    | %          | 632,846     |       | 667,168 |   | -5.1 | % |
| **Operating  Margin ($ thousands)** |       |                        |       |        |       |                    |       |        |       |   |   |   |   |
| Natural Gas  Distribution Service        |       |                        |       |        |       |                    |       |        |       |   |   |   |   |
| Electric  Generation Customers           |       | $                           | 1,591      |        | $          | 1,667                   |       | -4.6        | %          | $ | 5,625 |   | $ | 5,803 |   | -3.1 | % |
| Industrial  Customers                    |       | 4,198                       |       | 4,243       |       | -1.1                    | %          | 14,688      |       | 15,361 |   | -4.4 | % |
| Gas Management  Services                 |       | 39                          |       | 733         |       | -94.7                   | %          | 753         |       | 2,690 |   | -72.0 | % |
| Mark-to-Market  Valuations               |       | (232                        | )          | (117        | )          | 98.3                    | %          | (351        | )          | 358 |   | -198.0 | % |
| Other                                    |       | 440                         |       | 395         |       | 11.4                    | %          | 919         |       | 651 |   | 41.2 | % |
|                                     |       | $                           | 6,036      |        | $          | 6,921                   |       | -12.8       | %          | $ | 21,634 |   | $ | 24,863 |   | -13.0 | % |
|                                          |            |                             |            |             |            |                         |            |             |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

**DistributionService Margin:**Thedecline in margin from distribution services to industrial and electricgeneration customers is primarily attributable to reduced usage and fewercustomers.

 

**GasManagement Services:** The decline in margin from gasmanagement services is attributed to fewer gas management customers and lowerper-therm margin on natural gas supply sales compared to last year. Onecustomer in 2004 provided $336,000 gas management margin in third quarter and$1,050,000 year-to-date, but this year the Company does not have a gas managementcontract with that customer. The re-emergence of energy marketers, an industrysegment that all but disappeared in the wake of the Enron failure, has resultedin stiff competition for natural gas supply sales to larger natural gascustomers. The Company has lost some customers to such marketers, and marginsthat are available for any sales are smaller than in the past. The Company willcontinue to provide natural gas supply services to customers to facilitatetheir use of gas, but expects margins from this activity to remain atapproximately the current level.

 

**Mark-to-MarketValuations:** These valuations result from periodic changes inthe fair value of the derivative instruments used to hedge the cost of suppliesfor gas management customers. The hedging instruments are in place toeffectively fix the price of those supplies. As market prices of natural gasforward contracts increase, the value of the instruments increases. Conversely,when market prices decrease, the value of the instruments also decreases.During the fiscal 2005 third quarter, forward natural gas prices decreased fromthe beginning of the quarter to the end of the quarter, hence the $232,000charge to operating margin for the quarter. During the quarter last year, theseprices decreased less dramatically, resulting in the smaller $117,000 charge.These hedging instruments are for fixed periods that correspond to the periodsof the physical supply contracts to serve these customers. The hedged volumesalso correspond to the volumes expected to be purchased under these contracts.At the end of the life of the hedging instruments, the cumulative incomestatement effects of the mark-to-market valuations will net to zero. But marketfluctuations in interim periods do result in mark-to-market valuation effectsin those periods’ income statements.

 

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**OregonEarnings Sharing:** In addition to the above described margindifferences, the comparison of year-to-date 2005 versus 2004 is affected byaccruals of estimated liability for Oregon Earnings Sharing. Over the first twoquarters of fiscal 2004 the Company accrued a total liability of $525,000 as anestimate of earnings that would be required to be shared with Oregon customers.However, based on an analysis of the results for the entire year, managementconcluded in 2005 that 2004 earnings in Oregon were not sufficient as totrigger a sharing with customers. As a result, in the second quarter of 2005the Company recorded a reversal of the estimate accrued in 2004. On April 20,2005, Cascade submitted its 2004 Earnings Report to the OPUC for fiscal 2004.At a Public Meeting held on July 12, the Commission accepted Cascade’s analysisthat concluded there were no earnings to be shared from fiscal 2004.

 

**Cost ofOperations**

 

Compared to last year, overall Cost of Operations was$1,716,000 higher for the quarter. Year-to-date, the increase was $2,955,000.Following are descriptions of the major factors causing the increases.

 

**OperatingExpenses:**Operating expense increases, partially offset byemployee benefits decreases, were the primary factors contributing to thesecomparisons, as shown in the following table:

 
| ** **                                                | ** ** | **Third Quarter of Fiscal** | ** ** | **Percent** | ** ** | **Year to Date** | ** ** | **Percent** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------|------------|-------------|------------|------------------|------------|-------------|------------|
| ** **                                                | ** ** | **2005**                    | ** ** | **2004**    | ** ** | **Change**       | ** ** | **2005**    | ** ** | **2004** | ** ** | **Change** | ** ** |
|                                                      |       |                        |       |        |       |             |       |        |       |   |   |   |   |
| Employee  benefits                                        |       | $                           | 2,349      |        | $          | 2,519            |       | -7          | %          | $ | 6,948 |   | $ | 7,874 |   | -12 | % |
| Executive  transition                                     |       | 434                         |       | —      |       |             |       | 1,059       |       | — |   |   |   |
| Call center and  automated meter reading (AMR) transition |       | —                      |       | 81          |       | -100             | %          | 313         |       | 88 |   | 256 | % |
| Uncollectible accounts                                    |       | 524                         |       | 207         |       | 153              | %          | 1,212       |       | 770 |   | 57 | % |
| Purchased  services                                       |       | 1,051                       |       | 590         |       | 78               | %          | 2,292       |       | 1,903 |   | 20 | % |
| All other  operating expenses                             |       | 6,619                       |       | 6,332       |       | 5                | %          | 20,594      |       | 20,021 |   | 3 | % |
|                                                      |       | $                           | 10,977     |        | $          | 9,729            |       | 13          | %          | $ | 32,418 |   | $ | 30,656 |   | 6 | % |

 

The reductions in employee benefits expense reflectthe full impact of benefit plan changes initiated in 2003. Executive transitioncosts are primarily severance costs related to early retirements,and hiring and relocation costs for the new Chief Executive Officer and Chief FinancialOfficer. Call center transition costs are primarily severance and employeerelocation compensation related to consolidating the customer service functionin a single call center. Contributing to the increases in uncollectibleaccounts expense is higher write-off experience. Management believes theseincreases are at least partly related to a temporary disruption of collectionefforts during the transition to the call center. Collection activities havesubsequently increased. Of the increase in purchased services expense,approximately $200,000 is related to increased governance costs, and additionalamounts related to legal and consulting expenses. Various smaller increases anddecreases in other categories of expense, in the aggregate, accounted for theremainder of the change in operating expenses for the quarter and year-to-dateperiods.

 

**Depreciationand Property & Miscellaneous Taxes**: The increases indepreciation and amortization, and in property and miscellaneous taxes, arerelated to ongoing investments in new utility plant, related primarily toexpanding the Company’s distribution system to serve new customers, as well asinvestments related to automated meter reading.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

The seasonal nature ofthe Company’s business creates short-term cash requirements to finance customeraccounts receivable and construction expenditures. To provide working capitalfor these requirements, the Company has a $60,000,000 bank revolving creditcommitment. This agreement has a variable commitment fee, and a term thatexpires in October 2007. The Company also has a $10,000,000 uncommitted line ofcredit. As of June 30, 2005, there was $17,000,000 outstanding under thesecredit lines.

 

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To provide longer-term financing the Company filed anomnibus registration statement in 2001, under the Securities Act of 1933, whichprovided the ability to issue up to $150,000,000 of new debt and equitysecurities. In the second quarter of fiscal 2005, the Company issued$30,000,000 of 30-year 5.25% Insured Quarterly Notes under this registrationstatement, leaving $80,000,000 available for future issuance of securities,subject to market conditions and other factors. The proceeds of the $30,000,000issue were used to pay down debt under the revolving credit line. In July 2005,the Company repaid $5,000,000 in current maturities of long-term debt. TheCompany funded this repayment through use of its bank credit lines.

 

Because of the availability of short-term credit andthe ability to issue long-term debt and additional equity, management believesit has adequate financial flexibility to meet its anticipated cash needs.

 

### **OperatingActivities**

### ** **

Cash provided byoperating activities for the first nine months of fiscal 2005 declined$5,955,000 compared to last year. Other than lower net income, significantcontributing factors were deferrals and amortizations of gas cost changes.Deferrals of gas cost changes represent higher costs paid for natural gas comparedto the amounts included in revenues representing recovery of natural gas costs.Amortization of gas cost changes represent amounts included in revenue fromtemporary rate increases to recover higher natural gas costs paid in earlierperiods. On a combined basis, these two items resulted in a use of $884,000this year compared to providing $2,296,000 last year.

 

**Investing Activities**

 

Net capital expendituresof $21,567,000 for the first nine months of fiscal 2005 were approximately 27%less than the first nine months of last year. Capital expenditures are lowerdue to the completion in 2004 of the Automated Meter Reading Project describedin prior reports. Expenditures on the Automated Meter Reading project for thefirst nine months of fiscal 2004 were $9,192,000.

 

#### **Financing Activities**

####  

Other than the payment ofdividends, the Company’s primary financing activities during the first ninemonths of fiscal 2005 were the issuance of $30,000,000 in new long-term debt asdescribed in the preceding paragraphs under “Liquidity and Capital Resources”,repayment of $9,000,000 in current maturities of long-term debt and paying downborrowing under the bank credit lines by $16,500,000.

 

## **EFFICIENCY INITIATIVE – CUSTOMER SERVICE CALL CENTER**

 

In January 2005, the Company began operation of acustomer-service call center at its existing district office in Bellingham,Washington. Activation of the call center was phased in, and it became fullyoperational in March 2005. This call center consolidated in one location theCompany’s customer service function, which had been spread through 15 localoffices. To implement the call center, the Company incurred $855,000 capitalexpenditures and $313,000 transitional expenses. In the call center’s firstfull quarter of operation, ongoing customer service expenses were lower byapproximately $216,000 compared to the same quarter last year due to (currentquarter) reductions generated through the elimination of sixteen full timeequivalent positions, more specialization and increased efficiency.

 

## **CRITICAL ACCOUNTING POLICIES**

 

TheCompany’s financial statements are prepared in accordance with accountingprinciples generally accepted in the United States of America (GAAP). Infollowing GAAP, management exercises judgment in selection and application ofaccounting principles. Management considers critical accounting policies to bethose where different assumptions regarding application could result inmaterial differences in financial statements. The Company’s critical accountingpolicies were described in its Annual Report on Form 10-K for the year endedSeptember 30, 2004, under Part II, Item 7, and have not changed significantlysince that report.

 

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**Forward-Looking Statements**

 

The Company’s discussion in this report, or in anyinformation incorporated herein by reference, may contain forward-lookingstatements within the meaning of the Private Securities Litigation Reform Actof 1995.  All statements, other thanstatements of historical facts, are forward-looking statements, includingstatements concerning plans, objectives, goals, strategies, and future eventsor performance.  When used in Companydocuments or oral presentations, the words “anticipate,” “believe,” “estimate,”“expect,” “objective,” “projection,” “forecast,” “goal”, or similar words areintended to identify forward-looking statements.

 

These forward-lookingstatements reflect the Company’s current expectations,beliefs and projections about future events that we believe may affect theCompany’s business, financial condition and results of operations, and areexpressed in good faith and are believed to have a reasonable basis.  However, each such forward-looking statementinvolves risks, uncertainties and assumptions, and is qualified in its entiretyby reference to the following important factors, among others, that could causethe Company’s actual results to differ materially from those projected in suchforward-looking statements:

 

•                  prevailing state and federal governmental policies and regulatoryactions, including those of the Washington Utilities and TransportationCommission, the Oregon Public Utility Commission, and the U.S. Department ofTransportation’s Office of Pipeline Safety, with respect to allowed rates ofreturn, industry and rate structure, purchased gas cost and investmentrecovery, acquisitions and dispositions of assets and facilities, operation andconstruction of plant facilities, the maintenance of pipeline integrity, andpresent or prospective wholesale and retail competition;

 

•                  weather conditions and other natural phenomena;

 

•                  unanticipated population growth or decline, and changes in marketdemand caused by changes in demographic or customer consumption patterns;

 

•                  changes in and compliance with environmental and safety laws,regulations and policies, including environmental cleanup requirements;

 

•                  competition from alternative forms of energy and other sellers ofenergy;

 

•                  increasing competition brought on by deregulation initiatives at thefederal and state regulatory levels, as well as consolidation in the energyindustry;

 

•                  the potential loss of large volume industrial customersdue to “bypass” or the shift by such customers to special competitive contractsat lower per-unit margins;

 

•                  risks, includingcreditworthiness, relating to performance issues with customers and suppliers;

 

•                  risks resulting fromuninsured damage to the Company’s property, intentional or otherwise, or fromacts of terrorism;

 

•                  unanticipated changes thatmay affect the Company’s liquidity or access to capital markets;

 

•                  the Company’sability to complete its assessment and, if necessary, remediation of internalcontrols over financial reporting in compliance with Section 404 of theSarbanes-Oxley Act of 2002;

 

•                  unanticipated changes ininterest rates or in rates of inflation;

 

•                  economic factors thatcould cause a severe downturn in certain key industries, thus affecting demandfor natural gas;

 

•                  unanticipated changes inoperating expenses and capital expenditures;

 

•                  unanticipated changes incapital market conditions, including their impact on future expenses andliabilities relating to employee benefit plans;

 

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

 

16

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•                  changes in theavailability and price of natural gas; and

 

•                  legal andadministrative 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 byreference, may not occur andactual results could differ materially from those anticipated or implied in theforward-looking statements.  Allsubsequent forward-looking statements, whether written or oral and whether madeby or on behalf of the Company, also are expressly qualified by thesecautionary statements.

 

Anyforward-looking statement by the Company is made only as of the date on whichsuch statement is made.  The Companyundertakes no obligation to update any forward-looking statement to reflectevents or circumstances after the date on which the statement is made or toreflect the occurrence of any unanticipated events.  New factors emerge from time-to-time, and theCompany is not able to predict all such factors, nor can it assess the impactof each such factor or the extent to which such factors may cause results todiffer materially from those contained in any forward-looking statement.

 

**Item 3.** Quantitative and Qualitative Disclosures AboutMarket Risk

** **

Cascade has evaluated its risk related to financialinstruments whose values are subject to market sensitivity. The Company hasfixed-rate debt obligations, but does not currently have derivative financialinstruments subject to interest rate risk. Cascade makes interest and principalpayments on these obligations in the normal course of its business, and mayredeem these obligations prior to normal maturities if warranted by marketconditions.

 

The Company’s natural gaspurchase commodity prices are subject to fluctuations resulting from weather,congestion on interstate pipelines, and other unpredictable factors. TheCompany’s Purchased Gas Cost Adjustment (PGA) mechanisms assure the recovery incustomer rates of prudently incurred wholesale cost of natural gas purchasedfor the core market. The Company primarily utilizes financial derivatives, andto a lesser extent, fixed price physical supply contracts to manage riskassociated with wholesale costs of natural gas purchased for customers.

 

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 derivative arrangements related to supplies fornon-core customers, which are not covered by a PGAmechanism, periodic changes in fair market value are recognized in earnings.

 

**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.  Basedupon their evaluation of those controls and procedures as of the end of thequarter covered by this report, the Chief Executive Officer and Chief FinancialOfficer of the Company concluded that the Company’s disclosure controls andprocedures were effective.

 

**PART II.****  Other Information**

 

**Item 2.****Unregistered Sales of Equity Securities and Use of Proceeds**

 

On April 24, 2005, theCompany issued a total of 3,500 shares of unregistered common stock to sevennon-employee directors under its 2000 Director Stock Award Plan (thePlan).    Under the terms of the Plan,each non-employee director of the Company is entitled to receive an award of500 shares of common stock in April of each year as part of thecompensation paid to directors.  TheCompany received

 

17

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no proceeds for theseshares.  Since shares issued under thePlan may only be issued to non-employee directors, the Company takes theposition that such issuances are exempt from registration requirements underSection 4(2) of the Securities Act of 1933, as transactions not involving apublic offering.

 

**Item 5.****  Other Information**

 

a) None

 

b)There have been no changes in the Company’s procedures by which securityholders may recommend nominees to the Company’s Board of Directors.

 

# **Item6.**  Exhibits

 
| **No.** | ** ** | **Description**                                                                                                          |
|---------|------------|--------------------------------------------------------------------------------------------------------------------------|
|    |       |                                                                                                                     |
| 12      |       | Computation of Ratio of  Earnings to Fixed Charges                                                                       |
|    |       |                                                                                                                     |
| 31      |       | Certification  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 |

 

18

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**SIGNATURE**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 
| **CASCADE  NATURAL GAS CORPORATION** | ** **        |
|--------------------------------------|-------------------|
| ** **                           | ** **        |
| By:                                  | /s/ Rick A. Davis |   |   |
|                                 |              |   |
| Rick A. Davis                        |              |   |
| Chief Financial  Officer             |              |   |
| (Principal  Financial Officer)       |              |   |
|                                 |              |
| Date:                                | August 5, 2005    |   |   |
|                                      |                   |  |  |  |  |

 

19

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