**FORM 10-Q**

 

**SECURITIES AND EXCHANGECOMMISSION**

 

**Washington, D.C. 20549**

 

**QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For the quarterly period endedMarch 31, 2006**

 

**Commission file number: 1-7196**

 

**CASCADE NATURAL GAS CORPORATION**

(Exact name of Registrantas 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 check mark 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 check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Exchange Act. (Check one):

 
| Large accelerated  filer  o | Accelerated  filer  ý | Non-accelerated  filer  o |
|---------------------------------------|--------------------------------------|-------------------------------------|

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of theExchange Act).   Yes  o    No  ý

 

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

 

| **Title**                            | ** ** | **Outstanding**                  |
|--------------------------------------|------------|----------------------------------|
|                                 |       |                             |
| Common Stock, Par Value $1 per Share |       | 11,481,486  as of April 28, 2006 |

 

 

----

 

**CASCADE NATURAL 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  4. Submission of Mattes to a Vote of Security Holders                                          |                                                                  |
|      |                                                                                                 |                                                                  |
|      | Item 6. Exhibits                                                                                     |                                                                  |
|      |                                                                                                 |                                                                  |
| Signature |                                                                                                 |
|           |                                                                                                      |                                                                       |  |  |

 

2

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# **PART I.  Financial Information**

 

**Item1.  Financial Statements**

 

**CASCADE NATURAL GAS CORPORATIONCONSOLIDATED CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME**(unaudited)

 
| ** **                                             | ** **    | **THREE MONTHS ENDED**                | ** ** | **SIX MONTHS ENDED** | ** ** |
|--------------------------------------------------------|---------------|---------------------------------------|------------|----------------------|------------|
| ** **                                             | ** **    | **Mar 31, 2006**                      | ** ** | **Mar 31, 2005**     | ** ** | **Mar 31, 2006** | ** ** | **Mar 31, 2005** | ** ** |
| ** **                                             | ** **    | **(thousands except per-share data)** |
|                                                   |          |                                  |       |                 |       |   |   |   |   |
| Operating revenues                                     |          | $                                     | 162,796    |                 | $          | 117,711 |   | $ | 321,428 |   | $ | 222,324 |   |
|                                                   |          |                                  |       |                 |       |   |   |   |   |
| Less:                                                  | Gas purchases |                                  | 118,010    |                 | 78,331     |   | 236,075 |   | 147,452 |   |
|                                                   | Revenue taxes |                                  | 11,555     |                 | 8,538      |   | 21,331 |   | 15,108 |   |
| Operating margin                                       |          | 33,231                                |       | 30,842               |       | 64,022 |   | 59,764 |   |
|                                                   |          |                                  |       |                 |       |   |   |   |   |
| Cost of operations:                                    |          |                                  |       |                 |       |   |   |   |   |
| Operating  expenses                                    |          | 10,755                                |       | 11,021               |       | 20,398 |   | 21,441 |   |
| Depreciation and  amortization                         |          | 4,435                                 |       | 4,280                |       | 8,849 |   | 8,485 |   |
| Property and  miscellaneous taxes                      |          | 870                                   |       | 944                  |       | 1,856 |   | 1,903 |   |
|                                                   |          | 16,060                                |       | 16,245               |       | 31,103 |   | 31,829 |   |
|                                                   |          |                                  |       |                 |       |   |   |   |   |
| Income from operations                                 |          | 17,171                                |       | 14,597               |       | 32,919 |   | 27,935 |   |
| Less interest and other deductions - net               |          | 2,884                                 |       | 2,976                |       | 5,855 |   | 5,870 |   |
| Income before income taxes                             |          | 14,287                                |       | 11,621               |       | 27,064 |   | 22,065 |   |
|                                                   |          |                                  |       |                 |       |   |   |   |   |
| Income taxes                                           |          | 5,301                                 |       | 4,269                |       | 10,038 |   | 8,081 |   |
| Net Income                                             |          | 8,986                                 |       | 7,352                |       | 17,026 |   | 13,984 |   |
| Other Comprehensive Income (Loss)                      |          |                                  |       |                 |       |   |   |   |   |
| Unrealized  losses on derivative commodity instruments |          | (890                                  | )          | —               |       | (985 | ) | — |   |
| Income tax  benefit                                    |          | 319                                   |       | —               |       | 353 |   | — |   |
| Other Comprehensive Income (Loss)                      |          | (571                                  | )          | —               |       | (632 | ) | — |   |
|                                                   |          |                                  |       |                 |       |   |   |   |   |
| Comprehensive Income                                   |          | $                                     | 8,415      |                 | $          | 7,352 |   | $ | 16,394 |   | $ | 13,984 |   |
|                                                   |          |                                  |       |                 |       |   |   |   |   |
| Weighted average common shares outstanding             |          | 11,455                                |       | 11,312               |       | 11,441 |   | 11,296 |   |
|                                                   |          |                                  |       |                 |       |   |   |   |   |
| Earnings per common share, basic and diluted           |          | $                                     | 0.78       |                 | $          | 0.65 |   | $ | 1.49 |   | $ | 1.24 |   |
|                                                   |          |                                  |       |                 |       |   |   |   |   |
| Cash dividends per share                               |          | $                                     | 0.24       |                 | $          | 0.24 |   | $ | 0.48 |   | $ | 0.48 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

3

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**CASCADE NATURAL GAS CORPORATIONCONSOLIDATED CONDENSED BALANCE SHEETS**(Unaudited) 

 
| ** **                                                                                                                  | ** ** | **Mar 31, 2006**                     | ** ** | **Sep 30, 2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------|------------|
| ** **                                                                                                                  | ** ** | **(dollars in thousands)** | ** ** |
| **ASSETS**                                                                                                                  |       |                                 |       |             |       |
| Utility Plant,  net of accumulated depreciation of $265,393 and $257,008                                                    |       | $                                    | 340,712    |             | $          | 340,461 |   |
| Construction  work in progress                                                                                              |       | 1,078                                |       | 2,021            |       |
|                                                                                                                        |       | 341,790                              |       | 342,482          |       |
| Other Assets:                                                                                                               |       |                                 |       |             |       |
| Investments in  non-utility property                                                                                        |       | 202                                  |       | 202              |       |
| Notes  receivable, less current maturities                                                                                  |       | 3                                    |       | 46               |       |
|                                                                                                                        |       | 205                                  |       | 248              |       |
| Current Assets:                                                                                                             |       |                                 |       |             |       |
| Cash and cash  equivalents                                                                                                  |       | 6,678                                |       | 1,128            |       |
| Accounts  receivable and current maturities of notes receivable, less allowance of  $1,347 and $1,319 for doubtful accounts |       | 75,714                               |       | 23,163           |       |
| Prepaid expenses  and other assets                                                                                          |       | 7,152                                |       | 9,463            |       |
| Derivative  instrument assets - energy commodity                                                                            |       | 16,663                               |       | 91,957           |       |
| Materials,  supplies and inventories                                                                                        |       | 6,289                                |       | 14,142           |       |
| Deferred income  taxes                                                                                                      |       | 2,233                                |       | 2,292            |       |
|                                                                                                                        |       | 114,729                              |       | 142,145          |       |
| Deferred Charges and Other                                                                                                  |       |                                 |       |             |       |
| Gas cost changes                                                                                                            |       | 6,461                                |       | 16,630           |       |
| Derivative  instrument assets - energy commodity                                                                            |       | 13,841                               |       | 43,440           |       |
| Other                                                                                                                       |       | 8,335                                |       | 7,960            |       |
|                                                                                                                        |       | 28,637                               |       | 68,030           |       |
|                                                                                                                        |       |                                 |       |             |       |
|                                                                                                                        |       | $                                    | 485,361    |             | $          | 552,905 |   |

 

4

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**CASCADENATURAL GAS CORPORATIONCONSOLIDATED CONDENSED BALANCE SHEETS (Continued)**(Unaudited) 

 
| ** **                                                                                                                    | ** ** | **Mar 31, 2006**                     | ** ** | **Sep 30, 2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------|------------|
| ** **                                                                                                                    | ** ** | **(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  11,471,273 and 11,413,019 shares |       | $                                    | 11,471     |             | $          | 11,413 |   |
| Additional  paid-in capital                                                                                                   |       | 104,978                              |       | 103,781          |       |
| Accumulated  other comprehensive income (loss)                                                                                |       | (13,120                              | )          | (12,487          | )          |
| Retained  earnings                                                                                                            |       | 27,434                               |       | 15,908           |       |
|                                                                                                                          |       | 130,763                              |       | 118,615          |       |
|                                                                                                                          |       |                                 |       |             |       |
| Long-term Debt                                                                                                                |       | 165,601                              |       | 173,840          |       |
|                                                                                                                          |       |                                 |       |             |       |
| Current Liabilities:                                                                                                          |       |                                 |       |             |       |
| Short-term debt                                                                                                               |       | —                               |       | 12,500           |       |
| Current  maturities of long-term debt                                                                                         |       | 8,000                                |       | —           |       |
| Accounts payable                                                                                                              |       | 35,894                               |       | 17,841           |       |
| Property,  payroll and excise taxes                                                                                           |       | 10,321                               |       | 5,520            |       |
| Dividends and  interest payable                                                                                               |       | 6,947                                |       | 6,920            |       |
| Regulatory  liabilities                                                                                                       |       | 16,663                               |       | 91,217           |       |
| Other current  liabilities                                                                                                    |       | 24,551                               |       | 8,209            |       |
|                                                                                                                          |       | 102,376                              |       | 142,207          |       |
|                                                                                                                          |       |                                 |       |             |       |
| Deferred Credits and Other Non-current Liabilities:                                                                           |       |                                 |       |             |       |
| Deferred income  taxes and investment tax credits                                                                             |       | 41,065                               |       | 43,429           |       |
| Retirement plan  obligations                                                                                                  |       | 17,869                               |       | 19,042           |       |
| Regulatory  liabilities                                                                                                       |       | 20,934                               |       | 50,584           |       |
| Other                                                                                                                         |       | 6,753                                |       | 5,188            |       |
|                                                                                                                          |       | 86,621                               |       | 118,243          |       |
|                                                                                                                          |       |                                 |       |             |       |
| Commitments and Contingencies                                                                                                 |       | —                               |       | —           |       |
|                                                                                                                          |       | $                                    | 485,361    |             | $          | 552,905 |   |

 

The accompanying notes are anintegral part of these financial statements.

 

5

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CASCADE NATURAL GASCORPORATIONCONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS(Unaudited)

 
| ** **                                                                         | ** ** | **SIX MONTHS ENDED**       | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                         | ** ** | **(dollars in thousands)** | ** ** |
| ** **                                                                         | ** ** | **Mar 31, 2006**           | ** ** | **Mar 31, 2005** | ** ** |
| Operating Activities:                                                              |       |                       |       |   |   |
| Net income                                                                         |       | $                          | 17,026     |   | $ | 13,984 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                       |       |   |   |
| Depreciation and  amortization                                                     |       | 8,849                      |       | 8,485 |   |
| Deferrals of gas  cost changes                                                     |       | 2,232                      |       | (2,266 | ) |
| Amortization of  gas cost changes                                                  |       | 7,937                      |       | 3,750 |   |
| Other deferrals  and amortizations                                                 |       | (951                       | )          | (491 | ) |
| Deferred income  taxes and tax credits - net                                       |       | (2,305                     | )          | 835 |   |
| Change in  current assets and liabilities                                          |       | (2,180                     | )          | 1,860 |   |
| Net cash  provided by operating activities                                         |       | 30,608                     |       | 26,157 |   |
|                                                                               |       |                       |       |   |   |
| Investing Activities:                                                              |       |                       |       |   |   |
| Capital  expenditures                                                              |       | (9,492                     | )          | (16,130 | ) |
| Customer  contributions in aid of construction                                     |       | 1,430                      |       | 601 |   |
| Net cash used by  investing activities                                             |       | (8,062                     | )          | (15,529 | ) |
|                                                                               |       |                       |       |   |   |
| Financing Activities:                                                              |       |                       |       |   |   |
| Proceeds from  issuance of long-term debt, net                                     |       | —                     |       | 28,119 |   |
| Proceeds from  issuance of common stock                                            |       | 1,255                      |       | 1,290 |   |
| Repayment of  long-term debt                                                       |       | (239                       | )          | (9,000 | ) |
| Changes in  short-term debt, net                                                   |       | (12,500                    | )          | (20,000 | ) |
| Dividends paid                                                                     |       | (5,501                     | )          | (5,431 | ) |
| Other                                                                              |       | (11                        | )          | — |   |
| Net cash  provided by financing activities                                         |       | (16,996                    | )          | (5,022 | ) |
|                                                                               |       |                       |       |   |   |
| Net Increase in Cash and Cash Equivalents                                          |       | 5,550                      |       | 5,606 |   |
|                                                                               |       |                       |       |   |   |
| Cash and Cash Equivalent:                                                          |       |                       |       |   |   |
| Beginning of  year                                                                 |       | 1,128                      |       | 499 |   |
| End of period                                                                      |       | $                          | 6,678      |   | $ | 6,105 |   |

 

The accompanying notes are an integral part of thesefinancial statements.

 

6

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** **

**NOTES TOCONSOLIDATED CONDENSED FINANCIAL STATEMENTSTHREE-AND SIX-MONTH PERIODS ENDED MARCH 31**

 

The preceding statements were taken from the books and records of theCompany and reflect all adjustments which are, in the opinion of management,necessary for a fair statement 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 to the Notes toConsolidated Financial Statements contained in the 2005 Annual Report on Form10-K for the fiscal year ended September 30, 2005.

 

**Note 1.  NewAccounting Standards**

 

**FAS No. 151:**  As of October 1, 2005, the Company adoptedStatement of Financial Accounting Standards (FAS) No. 151, *“Inventory Costs”*.  This standard is an amendment of AccountingResearch Bulletin (ARB) No. 43, clarifying the requirement that abnormalamounts of idle facility expense, freight, handling costs, and spoilage berecognized as current period costs. Adoption of this standard did not have a significant impact on theCompany’s financial statements.

 

**FAS No. 123 (revised 2004): **As of October 1, 2005, theCompany adopted FAS No. 123 (revised 2004), *“Share-BasedPayment*” {FAS No. 123(R)}. This statement is a revision of FAS No.123, *“Accounting for Stock-BasedCompensation”*, and supersedes Accounting Principles Board (APB)Opinion No. 25, *“Accounting for Stock Issuedto Employees”*.  Under FAS No.123(R) the Company is required to recognize as expense the fair value of equityinstruments, including stock options, to be issued in exchange for goods orservices.  Adoption of this standard didnot have a significant impact on the Company’s financial statements, butadditional footnote disclosure is required and is included in Note 4 below.

 

**Note 2. Earnings Per Share**

 

The following table sets forth the calculation of earnings per share:

 
| ** **                                             | ** ** | **Three Months Ended**                   | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------|------------|----------------------|------------|
| ** **                                             | ** ** | **Mar 31 2006**                          | ** ** | **Mar 31 2005**      | ** ** | **Mar 31 2006** | ** ** | **Mar 31 2005** | ** ** |
| ** **                                             | ** ** | **(in thousands except per-share data)** | ** ** |
| Net income                                             |       | $                                        | 8,986      |                 | $          | 7,352 |   | $ | 17,026 |   | $ | 13,984 |   |
|                                                   |       |                                     |       |                 |       |   |   |   |   |
| Weighted average shares outstanding                    |       | 11,455                                   |       | 11,312               |       | 11,441 |   | 11,296 |   |
| Basic earnings per share                               |       | $                                        | 0.78       |                 | $          | 0.65 |   | $ | 1.49 |   | $ | 1.24 |   |
|                                                   |       |                                     |       |                 |       |   |   |   |   |
| Weighted average shares outstanding                    |       | 11,455                                   |       | 11,312               |       | 11,441 |   | 11,296 |   |
|                                                   |       |                                     |       |                 |       |   |   |   |   |
| Plus: Issued on assumed exercise of stock options      |       | —                                   |       | 3                    |       | — |   | 4 |   |
|                                                   |       |                                     |       |                 |       |   |   |   |   |
| Weighted average  shares outstanding assuming dilution |       | 11,455                                   |       | 11,315               |       | 11,441 |   | 11,300 |   |
| ** **                                             | ** ** | ** **                               | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Diluted earnings per share                             |       | $                                        | 0.78       |                 | $          | 0.65 |   | $ | 1.49 |   | $ | 1.24 |   |
|                                                        |            |                                          |            |                      |            |  |  |  |  |  |  |  |  |  |  |

 

7

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**Note 3.  Retirement Plan Information**

 

The following table setsforth the components of net periodic benefit costs recognized in the three- andsix-month periods ended March 31, 2006 and 2005:

 

**NetPeriodic Benefits Cost**

 
| ** **                                      | ** ** | **Three Months Ended**     | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------|------------|----------------------------|------------|----------------------|------------|
| ** **                                      | ** ** | **Mar 31 2006**            | ** ** | **Mar 31 2005**      | ** ** | **Mar 31 2006** | ** ** | **Mar 31 2005** | ** ** |
| ** **                                      | ** ** | **(Dollars in Thousands)** | ** ** |
| **DEFINED BENEFIT PENSION PLANS**               | ** ** | ** **                 | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                                    |       | $                          | 216        |                 | $          | 197 |   | $ | 433 |   | $ | 394 |   |
| Interest cost                                   |       | 965                        |       | 961                  |       | 1,761 |   | 1,922 |   |
| Expected return on plan assets                  |       | (1,101                     | )          | (1,041               | )          | (1,888 | ) | (2,081 | ) |
| Recognized gains or losses                      |       | 421                        |       | 386                  |       | 738 |   | 772 |   |
| Prior service cost                              |       | 38                         |       | 46                   |       | 76 |   | 91 |   |
| Net Periodic Benefit Cost Recognized            |       | $                          | 539        |                 | $          | 549 |   | $ | 1,120 |   | $ | 1,098 |   |
|                                            |       |                       |       |                 |       |   |   |   |   |
| **POSTRETIREMENT BENEFITS OTHER THAN PENSIONS** | ** ** |
| Service cost                                    |       | $                          | 28         |                 | $          | 35 |   | $ | 56 |   | $ | 70 |   |
| Interest cost                                   |       | 164                        |       | 275                  |       | 329 |   | 550 |   |
| Expected return on plan assets                  |       | (219                       | )          | (211                 | )          | (439 | ) | (423 | ) |
| Recognized gains or losses                      |       | 181                        |       | 187                  |       | 362 |   | 374 |   |
| Prior service cost                              |       | (615                       | )          | (330                 | )          | (1,231 | ) | (660 | ) |
| Net Periodic Benefit Cost Recognized            |       | $                          | (461       | )                    | $          | (44 | ) | $ | (923 | ) | $ | (89 | ) |
|                                            |       |                       |       |                 |       |   |   |   |   |
| **DEFINED CONTRIBUTION PENSION PLAN**           | ** ** | ** **                 | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net Periodic Benefit Cost Recognized            |       | $                          | 203        |                 | $          | 250 |   | $ | 408 |   | $ | 492 |   |

 

**Retirement Plan Funding**

 

For the three monthsended March 31, 2006, $630,000 of contributions were made to the Company’sdefined benefit pension plans, and the six-month total is $1,260,000.  The Company presently anticipatescontributing an additional $2,680,000 to fund its pension plans for a total of$3,940,000 in fiscal 2006.

 

**Note 4.  Share-Based Payment**

 

In the first quarter of fiscal 2006, the Company adopted Statement ofFinancial Accounting Standards No. 123 (revised 2004), (FAS 123(R)), *Share-Based Payment*. See Note 1 above.  During thefiscal year-to-date, the Company did not have any share-based paymenttransactions.  Following are disclosuresunder FAS 123(R) for share-based payment arrangements that were in effectduring the three- and six-month periods ended March 31, 2006 and 2005.

 

Under the Company’s 2000 Director Stock Award Plan, each non-employeedirector is awarded 1,000 shares of the Company’s common stock annuallyfollowing shareholder approval from this year’s annual meeting.  During the quarters ended March 31, 2006 andMarch 31, 2005, the Company recognized $97,000 and $15,000 as expense underthis plan. For the respective six-month periods, the Company recognized$119,000 and $37,000.  The value of thestock granted under this plan is based on the market value on the date of theaward.

 

8

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Under the Company’s 1998 Stock Incentive Plan, 44,000 stock optionsgranted in 2002 are exercisable at $20.84. The 2002 options expire in 2012. All options are fully vested. When the options were granted and during the vesting periods, theCompany applied the intrinsic value method under Accounting Principles Board(APB) Opinion 25, and no expense has been recognized.

 

The Company’s employment contracts with its Chief Executive Officer(CEO) and its Chief Financial Officer (CFO) contain grants of restrictedstock.  Under the CEO grant, 5,000 sharesare restricted until the CEO completes one year of employment, and another 5,000shares are restricted until he completes two years of employment. Under the CFOgrant, 5,000 shares are restricted until he completes one year ofemployment.  During this period, eachexecutive is restricted from selling his shares. The value of the sharesgranted was based on the market value as of the grant date. During the quartersended March 31, 2006, the Company recognized $62,000 as compensation expenseunder this plan. For the six-month period, the Company recognized $124,000. Noexpense was recognized in the first two quarters of fiscal 2005.

 

**Note 5. Commitments and Contingencies**

 

# **EnvironmentalMatters**

 

There are two claims against theCompany for cleanup of alleged environmental contamination related tomanufactured gas plant sites previously operated by companies that weresubsequently merged into the Company.

 

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 1997and relates to 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 has recently completed a review of the Company’s insurancecoverage and believes it has adequate insurance to cover costs of the above twoclaims.  In the event the insuranceproceeds do not completely cover the costs, management intends to seek recoveryfrom its customers through increased rates. There is precedent for such recovery through increased rates, as boththe Washington Utilities and Transportation Commission (WUTC) and the OregonPublic Utilities Commission (OPUC) have previously allowed regulated utilitiesto increase customer rates to cover similar costs.

 

# **Litigation andOther Contingencies**

 

# **Variouslawsuits, claims, and contingent liabilities may arise from time to time fromthe conduct of the Company’s business. No other claims now pending, in the opinion of management, are expectedto have a material effect on the Company’s financial position, results ofoperations, cash flows, or liquidity.**

 

9

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# **Item 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

 

The following is management’s assessment of the Company’s financialcondition and a discussion of the principal factors that affected consolidatedresults of operations and cash flows for the three- and six-month periods endedMarch 31, 2006 and 2005.

 

**OVERVIEW**

 

The Company is a local distribution company (LDC) serving approximately237,000 customers in the States of Washington and Oregon.  Its servicearea consists primarily of relatively small cities and rural communities ratherthan larger urban areas.  The Company’s primary source of revenue andoperating margin is the distribution of natural gas to end-use residential,commercial, industrial, and institutional customers.  Revenues are alsoderived from providing gas management and other services to some of its largeindustrial 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).

 

Key elements of the Company’s operating strategy:

 

•                  Remain focusedon the natural gas distribution business.

•                  Pursueappropriate regulatory treatment, including initiatives to decouple the Company’searnings from weather fluctuations and changing customer consumption patterns,and remove other regulatory impediments to effective management of thebusiness.

•                  Economicexpansion of its customer base by prudently managing capital expenditures andensuring new customers provide sufficient margins for an appropriate return onthe new investment required to acquire the customers.

•                  Continueto focus on operational efficiencies.

•                  Generate earnings and manage cash flowto maintain and strengthen the Company’s ability to attract the funding neededto reliably serve new and existing customers.

 

**Opportunities and Challenges**

 

The Company operates in a diverse service territory over a widegeographic area relative to the Company’s overall size and number ofcustomers.  The economies of various parts of the service area aresupported by a variety of industries and are affected by the conditions thatimpact those industries.  Management believes there are growth opportunitiesin the Company’s service area, especially in the residential and commercialsegments.  Factors contributing to these opportunities include generalpopulation growth in the service area, including some areas of rapid growth,and to a lesser extent, low market penetration in many of the towns served.

 

Overall revenues and margins are negatively impacted by higherefficiency in new home and commercial building construction, higher efficiencyin gas-burning equipment, and customers taking additional measures to reduce energyusage.  The increasing cost of energy in recent years, including thewholesale cost of natural gas, continues to encourage such measures. However, the Company continues to believe that energy efficiency andconservation are the most viable near-term tactics for reducing customer billsand influencing wholesale natural gas prices.  They also form a vitalstrategy for stabilizing the cost of gas over the long term.  Thetraditional regulatory establishment of rates ties the recovery of cost tovolumetric sales. This traditional rate design creates a financial disincentivefor utilities to promote conservation.  The Company has filed a rate casein the State of Washington along with a request to decouple the margin recoveryfrom volume. The Company continues to work with the regulatory staff and otherstakeholders in this case to develop an acceptable decoupling mechanism thatwill enable the Company to promote conservation while still recovering itsoperating costs and earning a fair return on its invested capital. Similar approaches have been implemented in many states, including Oregon (seebelow), and are endorsed by a variety of organizations, including the recentendorsement by the National Association of Regulatory Utility Commissions. The results of such rate requests and other initiatives for regulatory reliefare subject to significant uncertainties.

 

10

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In April 2006, the OPUC approved the Company’s request to implement itsConservation Alliance Program, which effectively decouples operating marginfrom the impacts of conservation and weather on gas usage by residential andcommercial customers in its Oregon service area.  The filing provides a mechanism where theCompany will adjust its earnings recovery to fully recover theCommission-granted level of earnings per customer.  This is done via a deferral mechanism forboth conservation and weather.  In simpleterms, the Company will book the actual earnings and a deferral for bothconservation and normal weather each month. The next year, depending on the amount of conservation and level ofweather, the Company will adjust its rate either downward or upward to ensurerecovery at the allowed level.

 

Revenues and margins from the Company’s residential and smallcommercial customers in Washington are highly weather-sensitive.  In acold year, the Company’s earnings are boosted by the effects of the weather,and conversely in a warm year, the Company’s earnings suffer.  Peakrequirements also drive the need to reinforce our systems (i.e., increasecapacity).  Our operations group considers innovative approaches such astemporarily utilizing mobile gas supply rather than making large investments inlong-term capacity increases which may not be fully utilized.

 

Prospects for continuing strong residential and commercial customergrowth are excellent.  The pace of new home and commercial constructionremains steady in communities served by the Company.  Good potential alsoexists for converting homes and businesses located on or near the Company’scurrent lines to gas from other fuels, as well as for expanding the system intoadjacent areas.  Customer count growth in this sector has been aboutdouble the average of U.S. gas utilities.

 

The Company earns approximately one third of its operating margin fromindustrial and electric generation customers.  Loss of major industrialcustomers, or unfavorable conditions affecting an industry segment, would havea detrimental impact on the Company’s earnings.  Many external factorsover which the Company has no control can significantly impact the amount ofgas consumed by industrial and electric generation customers and, consequently,the margins earned by the Company.

 

Our customer service call center organization recently voted to acceptunion representation.  The Company is attempting to negotiate an agreementthat will support our effort to cost-effectively provide superior customerservice.  The timing and results of negotiations are uncertain.

 

During April, the company entered into a three-year agreement,commencing April 1, with the union representing its field operations personnel.The highlights of our agreement with the International Chemical Workers Union(ICWU) that represent our field employees are: a) a 3 year agreement, b) reduced medical benefits consistent with ournon-bargaining unit employees, c) modifications to the pension plan includingthat employees hired into the Union after January 1, 2007 will not be eligiblefor the pension plan, but will be under the Company’s defined contribution planvia its 401(k), and d) annualized wage increases of 2.5%, 2% and 2%.

 

We continue to pursue operating efficiencies and cost reductions. During fiscal 2004, we completed the implementation of automated meter readingcapability covering our entire service area.  This reduced our staffingneeds by 27 full-time equivalent positions.  During fiscal 2005, thecentralization of our customer service activities and other organizationchanges, enabled by a variety of other improvements, reduced our staffing from428 to 375, more than a 12% reduction.  Our current organization is ableto service more customers at a lower cost than in prior years.  Changescompleted during fiscal 2005 alone resulted in improving our customer-per-employeeratio from 500 to 600.  We continue to look for additional operatingimprovements.

 

We carefully analyze the economics of our spending to supportgrowth.  When justified under our tariffs, we work with developers,business owners and residents to share certain construction costs to assure afair return to the Company.  Non-revenue-generating spending is alsomanaged to assure that we use the most economically attractive solutions whileproviding for a safe and reliable system. Improvements implemented during the current year have contributed to anaverage cost per service line reduction of at least 12%, while the number ofnew meters installed remained about level.  These changes, combined with a

 

11

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reduction in non-revenue-generating initiatives as compared to a yearago, are expected to result in a significant reduction in capital spending overthe current fiscal year.

 

Management continuously seeks improvement opportunities in allareas.  Our discussion above covering regulatory change, labor relations,operating practices, our organization and our investment to maintain and expandour gas delivery system are examples. To assist the Company in evaluating allavailable options to maximize shareholder value, the Company has retained J.P.Morgan Securities, Inc., to provide strategic and financial advice as well asregulatory support. In addition, the Company is considering otherstrategic alternatives, including a possible business combination.

 

# **RESULTS OF OPERATIONS**

 

The Company’s net income was$8,986,000, or $0.78 per share, basic and diluted, for the fiscal 2006 secondquarter (quarter ended March 31, 2006), compared to $7,352,000, or $0.65 pershare, basic and diluted, for the quarter ended March 31, 2005. Year-to-datenet income was $17,026,000, or $1.49 per share, basic and diluted, compared to$13,984,000, or $1.24 per share, basic and diluted, for the same period lastyear. The largest factors influencing the quarterly comparisons were:

 
| ** **                                | ** ** | **Earnings per Share  Effect** | ** ** |
|-------------------------------------------|------------|--------------------------------|------------|
| ** **                                | ** ** | **Quarter**                    | ** ** | **Year-to-  date** | ** ** |
| Operating Margin Increases (Decreases):   |       |                           |       |   |   |
| Residential  & commercial customers   |       | $                              | 0.15       |   | $ | 0.24 |   |
| Electric  generation customers            |       | $                              | 0.04       |   | $ | 0.06 |   |
| Mark-to-market  valuations                |       | $                              | (0.03      | ) | $ | (0.03 | ) |
| 2005 reversal of  Oregon earnings sharing |       | $                              | (0.03      | ) | $ | (0.03 | ) |
|                                      |       |                           |       |   |   |
| Cost of Operations Decreases (Increases)  |       |                           |       |   |   |
| Cost-savings  initiatives                 |       | $                              | 0.10       |   | $ | 0.20 |   |
| Reduction in  capitalization of expenses  |       | $                              | (0.03      | ) | $ | (0.04 | ) |
| Accrual of  incentive compensation        |       | $                              | (0.08      | ) | $ | (0.11 | ) |

 

These above items are discussed in more detail in the paragraphs thatfollow.

 

# **Operating Margin**

 

Operating margins by customer category for the second quarter andyear-to-date for fiscal years 2006 and 2005 are set forth in the followingtables:

 

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**Residential and Commercial Margin**

 
| ** **                             | ** ** | **Quarter Ended Mar 31**   | ** ** | **Percent** | ** ** | **Year-to-Date** | ** ** | **Percent** | ** ** |
|----------------------------------------|------------|----------------------------|------------|-------------|------------|------------------|------------|-------------|------------|
| ** **                             | ** ** | **2006**                   | ** ** | **2005**    | ** ** | **Change**       | ** ** | **2006**    | ** ** | **2005** | ** ** | **Change** | ** ** |
| ** **                             | ** ** | **(dollars in thousands)** | ** ** |
| **Degree Days**                        | ** ** | ** **                 | ** ** | ** **  | ** ** | ** **       | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Actual                                 |       | 2,269                      |       | 2,230       |       | 1.7              | %          | 4,520       |       | 4,175 |   | 8.3 | % |
| 5-Year Average                         |       | 2,299                      |       | 2,271       |       |             |       | 4,406       |       | 4,362 |   |   |   |
| **Average Number of Customers Billed** |
| Residential                            |       | 205,537                    |       | 196,094     |       | 4.8              | %          | 203,371     |       | 193,597 |   | 5.0 | % |
| Commercial                             |       | 31,149                     |       | 30,475      |       | 2.2              | %          | 30,868      |       | 30,157 |   | 2.4 | % |
| **Average Therm Usage per Customer**   |
| Residential                            |       | 268                        |       | 266         |       | 0.8              | %          | 542         |       | 517 |   | 4.8 | % |
| Commercial                             |       | 1,354                      |       | 1,328       |       | 2.0              | %          | 2,680       |       | 2,491 |   | 7.6 | % |
| **Operating Margin**                   | ** ** | ** **                 | ** ** | ** **  | ** ** | ** **       | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Residential                            |       | $                          | 16,043     |        | $          | 14,231           |       | 12.7        | %          | $ | 31,512 |   | $ | 28,455 |   | 10.7 | % |
| Commercial                             |       | $                          | 8,602      |        | $          | 7,724            |       | 11.4        | %          | $ | 16,490 |   | $ | 15,185 |   | 8.6 | % |

 

**Quarter-to-Quarter**

 

Residential and commercial margins increased by $2.7 million for thequarter. Customer growth at 4.5% contributed $1.1 million to margins and higheraverage consumption contributed $544,000. Slightly colder weather drove the increased consumption. Reductions inincurred gas costs absorbed under our Oregon tariff contributed another $1.6million and miscellaneous services added $221,000. These benefits to marginwere partially offset by changes to the Company’s Oregon purchased gasadjustment filing (PGA) last fall, which has the effect of reallocating certaindemand charge recoveries within each fiscal year. For the second quarter, thischange reduced the reported margin by $696,000 when compared to the samequarter in fiscal 2005, but it is not expected to impact full year earnings.

 

The primary use of gas by residential customers is for space and waterheating; therefore, average consumption per customer is very sensitive toweather, particularly during the Company’s first and second fiscalquarters.  Consumption by commercialcustomers is also sensitive to weather. The sensitivity is more difficult to isolate and measure than forresidential customers because of a variety of uses in addition to space andwater heating.

 

**Year-to-Date**

 

Residential and commercial margins increased by $4.4 million for theyear-to-date period.  Primarycontributors were customer growth adding $2.1 million and higher consumptionper customer adding another $2.1 million. Average consumption was 5.1% higher for the period primarily due tocolder weather than last year. Reductions in incurred Oregon Gas cost of $948,000, and $374,000 ofincreased services revenue further contributed to the improvement.  Partially offsetting these items were $1.2million resulting from the Oregon PGA changes.

 

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**Industrial and Other Margin**

 
| ** **                        | ** ** | **Quarter Ended Mar 31**   | ** ** | **Percent** | ** ** | **Year-to-Date** | ** ** | **Percent** | ** ** |
|-----------------------------------|------------|----------------------------|------------|-------------|------------|------------------|------------|-------------|------------|
| ** **                        | ** ** | **2006**                   | ** ** | **2005**    | ** ** | **Change**       | ** ** | **2006**    | ** ** | **2005** | ** ** | **Change** | ** ** |
| ** **                        | ** ** | **(dollars in thousands)** |
| **Average Number of Customers**   | ** ** | ** **                 | ** ** | ** **  | ** ** | ** **       | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Electric  Generation              |       | 11                         |       | 13          |       | -15.4            | %          | 12          |       | 13 |   | -7.7 | % |
| Industrial                        |       | 696                        |       | 724         |       | -3.9             | %          | 699         |       | 730 |   | -4.2 | % |
|                              |       | 707                        |       | 737         |       | -4.1             | %          | 711         |       | 743 |   | -4.3 | % |
| **Therms Delivered (thousands)**  | ** ** | ** **                 | ** ** | ** **  | ** ** | ** **       | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Electric  Generation              |       | 98,115                     |       | 113,977     |       | -13.9            | %          | 219,308     |       | 231,342 |   | -5.2 | % |
| Industrial                        |       | 113,756                    |       | 114,913     |       | -1.0             | %          | 222,962     |       | 225,327 |   | -1.0 | % |
|                              |       | 211,871                    |       | 228,890     |       | -7.4             | %          | 442,270     |       | 456,669 |   | -3.2 | % |
| **Operating Margin ($thousands)** | ** ** | ** **                 | ** ** | ** **  | ** ** | ** **       | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Electric  Generation              |       | $                          | 2,771      |        | $          | 2,027            |       | 36.7        | %          | $ | 5,038 |   | $ | 4,034 |   | 24.9 | % |
| Industrial                        |       | 5,048                      |       | 5,190       |       | -2.7             | %          | 10,182      |       | 10,497 |   | -3.0 | % |
| Gas Management  Services          |       | 625                        |       | 324         |       | 92.9             | %          | 963         |       | 714 |   | 34.9 | % |
| Mark-to-Market  Valuations        |       | —                     |       | 549         |       | -100.0           | %          | (579        | )          | (119 | ) | 386.6 | % |
| Other                             |       | 142                        |       | 272         |       | -47.8            | %          | 416         |       | 473 |   | -12.1 | % |
| Oregon Earnings  Sharing          |       | —                     |       | 525         |       | -100.0           | %          | —      |       | 525 |   | -100.0 | % |
|                              |       | $                          | 8,586      |        | $          | 8,887            |       | -3.4        | %          | $ | 16,020 |   | $ | 16,124 |   | -0.6 | % |

 

**Quarter-to-Quarter**

 

Margins from sales to electric generation plants were $745,000 higherfor the quarter as the result of a settlement for early termination of a salesagreement.  No Mark-to-Market adjustmentwas recorded in the second quarter of fiscal 2006 as compared to a positiveadjustment of $549,000 in the same period in the prior year.  Prior year second fiscal quarter operatingmargins benefited from a $525,000 accrual reversal in connection withmanagement’s assessment that no earnings sharing would be required in Oregonrelated to fiscal 2004.

 

The primary driver over the rest ofthe fiscal year for changes in gas usage by generation customers will beSouthwest power demands due to air-conditioner usage.

 

**Year-to-Date**

 

Margins from sales to electricgeneration plants were $1.0 million higher year-to-date as the result ofsettlements for early termination of sales agreements with two customers.Offsetting these items were year-to-year changes in Mark-to-Market valuationsof $460,000 and the $525,000 Oregon earnings sharing accrual reversal in fiscal2005.

 

**Cost of Operations**

 

**Quarter-to-Quarter**

 

Cost of operations****(operating expense, depreciation andamortization, and property and miscellaneous taxes) is down by $185,000,compared to the second quarter of fiscal year 2005.  Management initiatives resulted in $1.8million in reduced quarterly operating costs. Last fall’s reduction in force, combined with other reductionopportunities, a continued focus on managing overtime and last year’s one-timeexecutive transition costs resulted in reduced direct labor spending of $1.1million. Outsourcing our retiree medical obligations to an insurance companycontributed toward the $462,000 million in reduced benefit costs.  Another $206,000 in year-to-year costreductions was achieved in various corporate and administrative areas. These cost savings are offset by a $518,000reduction in capitalized costs, incentive compensation accruals of $1.4 millionand $155,000 of increased depreciation and amortization.  Bad debt expense was $327,000 lower,primarily due to unusual commercial account bad debt experience last year.

 

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**Year-to-Date**

 

Year-to-date cost of operations was down $725,000 reflecting managementinitiatives delivering $3.6 million in direct labor, benefits and otheroverhead spending reductions. Reductions in bad debt expense of $147,000 weredue to unusual prior year experience. Incentive compensation accruals of $2.1million, reflecting the 22% earnings improvement; reduced capitalized operatingcosts of $735,000 and increased depreciation of $364,000 partially offset thesesavings.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

The seasonal nature of the Company’s businesscreates short-term cash requirements to finance customer receivables, deferredgas costs and other business needs.  Toprovide working capital for these requirements, the Company has a $60 millionbank revolving credit commitment.  This agreementhas a variable commitment fee and a term that expires in October 2007.  The Company also has a $10 millionuncommitted line of credit.  As of March31, 2006, there was no outstandingdebt under these credit lines.

 

Due to the nature of the Company’s business, which is characterized bypredictable payments from a growing customer base, and our expectations thatcapital spending will be reduced from the last few years, we expect to havelimited need for additional capital during fiscal year 2006.  For this reason, management believes it has adequate liquidity and borrowing linesto meet our anticipated needs and estimates that cash flow will be sufficientto support operations, fund capital spending, and pay dividends at theircurrent level.

 

### **Operating Activities**

 

For the six-month period, cashprovided by operating activities improved $4.5 million over last year.  In addition to improved net income, theprimary factor was the net result of purchasing natural gas at lower cost thanthe corresponding amounts paid by customers, thus reducing our net deferred gascost asset.  These improvements werepartially offset by the funding of working capital requirements, and highercurrent year income tax payments.  Theworking capital requirement was primarily driven by growth in accountsreceivable, reflecting higher gas costs.

 

##### **Investing Activities**

 

Year-to-date capital spending is down to $7.5 million from $15.5million when compared to fiscal year 2005. Part of the difference was due to $2.0 million of one-time specificsystem reinforcement expenditures and $1.0 million relating to the completedAMR and call center centralization projects in the first half of fiscal year2005. The remainder reflects the Company’s new investment evaluation processimplemented in the first quarter to assure that all capital spending providesan adequate return or is required for safety or regulatory compliance.  Our current expectation is that we will endthe year below our fiscal 2006 capital budget of $22.0 million.

 

#### **FinancingActivities**

 

Other than the payment of dividends, the Company’s primary financingactivity year-to-date in fiscal 2006 was the $12.5 million net reduction inshort-term debt. This reduction in debt was facilitated by favorable operatingcash flow and reduced capital spending.

 

## **CRITICALACCOUNTING POLICIES**

 

The Company’s financial statements are prepared in accordance withaccounting principles generally accepted in the United States of America(GAAP).  In following GAAP, managementexercises judgment 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

 

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for the year ended September 30, 2005, under Part II, Item 7, and havenot changed significantly since that report.

** **

**Item3.  Quantitative and QualitativeDisclosures About Market Risk**

 

The Company has evaluated its risk related to financial instrumentswhose values are subject to market sensitivity. The Company has fixed-rate debt obligations but does not currently havederivative financial instruments subject to interest rate risk.  The Company makes interest and principalpayments on these obligations in the normal course of its business and mayredeem its debt obligations prior to normal maturities if warranted by marketconditions.

 

The Company’s natural gas purchase commodity prices are subject tofluctuations resulting from weather, congestion on interstate pipelines, andother unpredictable factors.  The Company’sPurchased Gas Cost Adjustment (PGA) mechanisms generally result in the recoveryin customer rates of prudently incurred wholesale cost of natural gas purchasedfor the core market.  The Companyprimarily utilizes financial derivatives, and to a lesser extent, fixed pricephysical supply contracts to manage risk associated with wholesale costs ofnatural gas purchased for customers.

 

With respect to derivative arrangements covering natural gas suppliesfor core customers, periodic changes in fair market value are recorded inregulatory asset or regulatory liability accounts, pursuant to authoritygranted by the WUTC and OPUC, recognizing that settlements of thesearrangements will be recovered through the PGA mechanism.

 

For derivative arrangements related to supplies for non-core customers,which are not covered by a PGA mechanism, periodic changes in fair market valueare recognized in earnings or in Other Comprehensive Income.

 

**Item 4. Controls and Procedures**

 

The Company maintains controls and procedures designed to providereasonable assurance that required disclosure information in the reports theCompany files or submits under the Securities Exchange Act of 1934, as amended,is recorded, processed, summarized and reported within the time periodspecified in the rules and forms of the Securities and ExchangeCommission.  Based upon their evaluationof those controls and procedures as of the end of the quarter covered by thisreport, the Chief Executive Officer and Chief Financial Officer of the Companyconcluded that the Company’s disclosure controls and procedures wereeffective.  There were no changes ininternal control over financial reporting that occurred during the quartercovered by this report that have materially affected, or are reasonably likelyto affect, the Company’s internal controls over financial reporting.

# ** **

# **FORWARD-LOOKING STATEMENTS**

 

The Company’s discussion in this report, or in any informationincorporated herein by reference, may contain forward-looking statements withinthe meaning of the Private Securities Litigation Reform Act of 1995.  Allstatements, other than statements of historical facts, are forward-lookingstatements, including statements concerning plans, objectives, goals,strategies, and future events or 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-looking statements reflect the Company’s currentexpectations, beliefs and projections about future events that we believe mayaffect the Company’s business, financial condition and results of operations,and are expressed in good faith and are believed to have a reasonablebasis.  However, each such forward-looking statement involves risks,uncertainties and assumptions, and is qualified in its entirety by reference tothe following important factors, among others, that could cause the Company’sactual results to differ materially from those projected in suchforward-looking statements:

 

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•                  prevailing stateand federal governmental policies and regulatory actions, including those ofthe 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 prospective wholesaleand retail competition;

 

•     weather conditions 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;

 

•     competition from alternative forms of energy andother 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 toperformance issues with customers and suppliers;

 

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

 

•     unanticipated changes that may affect the Company’sliquidity or access to capital markets;

 

•      unanticipated changes in interestrates or in rates of inflation;

 

•                  economic factorsthat could cause a severe downturn in certain key industries, thus affectingdemand for natural gas;

 

•      unanticipated changes in operatingexpenses and capital expenditures;

 

•                  unanticipatedchanges in capital market conditions, including their impact on future expensesand liabilities 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;

 

•      changes in the availability and price ofnatural gas; and

 

•      legal and administrativeproceedings and settlements.

 

In light of these risks, uncertainties and assumptions, theforward-looking events and circumstances discussed in this report, or in anyinformation incorporated herein by reference, may not occur and actual resultscould differ materially from those anticipated or implied in theforward-looking statements.  All subsequent forward-looking statements,whether written or oral and whether made by or on behalf of the Company, alsoare expressly qualified by these cautionary statements.

 

17

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Any forward-looking statement by the Company is made only as of thedate on which such statement is made.  The Company undertakes noobligation to update any forward-looking statement to reflect events orcircumstances after the date on which the statement is made or to reflect theoccurrence of any unanticipated events.  New factors emerge from time totime, and the Company is not able to predict all such factors, nor can itassess the impact of each such factor or the extent to which such factors maycause results to differ materially from those contained in any forward-lookingstatement.

 

# **PART II.  OtherInformation**

 

**Item4.  Submission of Matters to a Vote ofSecurity Holders**

 

At the annual meeting of shareholders on February 17, 2006, thefollowing items were submitted to a vote of security holders:

 

Proposal No. 1: Election of Directors

The following directors were elected by the vote indicated for terms ofoffice expiring in 2007:

 
| ** **        | ** ** | **For**   | ** ** | **Withheld** | ** ** |
|-------------------|------------|-----------|------------|--------------|------------|
|              |       |      |       |         |       |
| Scott M. Boggs    |       | 9,260,384 |       | 514,740      |       |
| Pirkko H. Borland |       | 9,085,838 |       | 689,286      |       |
| Carl Burnham, Jr. |       | 9,244,308 |       | 530,816      |       |
| Thomas E. Cronin  |       | 9,465,459 |       | 309,665      |       |
| David E. Ederer   |       | 9,248,053 |       | 527,071      |       |
| Larry L. Pinnt    |       | 9,225,099 |       | 550,025      |       |
| Brooks G. Ragen   |       | 9,263,882 |       | 511,242      |       |
| David W. Stevens  |       | 9,290,016 |       | 485,108      |       |
| Douglas G. Thomas |       | 9,479,521 |       | 295,603      |       |

 

Proposal No. 2: Approval of Shareholder Proposal to Combine theDirector Stock Award Plan with the Stock Incentive Plan

Votes for 5,581,783; withheld or against 948,138; exception or abstain220,978

 

Proposal No. 3: Approval of Shareholder Proposal to Increase AnnualDirector Stock Award to 1,000 shares from 500 shares

Votes for 5,251,993; withheld or against 1,332,342; exception orabstain 166,564

# ** **

# **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               |

 

18

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**SIGNATURE**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

 
| **CASCADE NATURAL GAS CORPORATION** | ** **                                             |
|-------------------------------------|--------------------------------------------------------|
| ** **                          | ** **                                             |
| ** **                          | ** **                                             |
| By:                                 | /s/ Rick A. Davis                                      |   |
|                                |                                                   |   |
|                                | Rick A. Davis                                          |   |
|                                | Chief Financial Officer  (Principal Financial Officer) |   |
|                                |                                                   |   |
|                                |                                                   |   |
| Date:                               | May 9, 2006                                            |   |   |
|                                     |                                                        |  |  |

 

19

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