**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 December 31, 2002**

 

**Commissionfile number: 1-7196**

 

**CASCADE NATURAL GAS CORPORATION**

(Exact name of Registrantas specified in its charter)

 

| **Washington**                                            |   | **91-0599090**      |
|-----------------------------------------------------------|--------|---------------------|
| (State or other  jurisdiction of                          |   | (I.R.S. Employer    |
| incorporation or  organization)                           |   | Identification No.) |
|                                                      |   |                |
| **222  Fairview Avenue North,  Seattle, WA**         |   | **98109**           |
| (Address of principal  executive offices)                 |   | (Zip code)          |
|                                                      |   |                |
| (Registrant’s telephone  number including area code) |   | **(206)  624-3900** |

 

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 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 |   | 11,047,928 as of  January 31, 2003 |

 

 

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**CASCADE NATURAL 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 1. Legal Proceedings |
|           |                   |   |   |   |
|           |                   | Item 2. Changes in  Securities |
|           |                   |   |   |   |
|           |                   | Item  4. Submission of Matters to a Vote of Security Holders. |
|           |
|           |                   | Item 5. Other Information |
|           |
|           |                   | Item 6.  Exhibits and Reports on Form 8-K |
|           |
| Signature      |
|           |
| Certifications |
|                |                        |  |  |  |  |  |

 

2

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**PART I****.   FinancialInformation**

 

**Item1.  Financial Statements**

 

CASCADE NATURAL GASCORPORATION

CONSOLIDATED CONDENSEDSTATEMENTS OF INCOME

(unaudited)

 
|                                        |   | **THREE  MONTHS ENDED**                |    |
|---------------------------------------------|--------|----------------------------------------|---------|
|                                        |   | **Dec 31,  2002**                      |    | **Dec 31,  2001** |   |
|                                        |   | **(thousands  except per share data)** |    |
|                                        |   |                                   |    |   |   |
| Operating  revenues                         |   | $                                      | 100,496 |   | $ | 102,761 |   |
|                                        |   |                                   |    |   |   |
| Less: Gas  purchases                        |   | 64,703                                 |    | 67,821 |   |
| Revenue taxes                               |   | 6,284                                  |    | 6,297 |   |
| Operating margin                            |   | 29,509                                 |    | 28,643 |   |
|                                        |   |                                   |    |   |   |
| Cost of  operations:                        |   |                                   |    |   |   |
| Operating  expenses                         |   | 10,712                                 |    | 10,920 |   |
| Depreciation and  amortization              |   | 3,778                                  |    | 3,696 |   |
| Property and  payroll taxes                 |   | 1,299                                  |    | 1,295 |   |
|                                        |   | 15,789                                 |    | 15,911 |   |
|                                        |   |                                   |    |   |   |
| Income from  operations                     |   | 13,720                                 |    | 12,732 |   |
| Less interest  and other deductions - net   |   | 3,199                                  |    | 2,901 |   |
| Income before  income taxes                 |   | 10,521                                 |    | 9,831 |   |
|                                        |   |                                   |    |   |   |
| Income taxes                                |   | 3,840                                  |    | 3,588 |   |
| Net Income                                  |   | $                                      | 6,681   |   | $ | 6,243 |   |
|                                        |   |                                   |    |   |   |
| Weighted average  common shares outstanding |   | 11,045                                 |    | 11,045 |   |
|                                        |   |                                   |    |   |   |
| Net earnings per  common share              |   |                                   |    |   |   |
| Basic                                       |   | $                                      | 0.61    |   | $ | 0.57 |   |
| Diluted                                     |   | $                                      | 0.60    |   | $ | 0.56 |   |
|                                        |   |                                   |    |   |   |
| Cash dividends  per share                   |   | $                                      | 0.24    |   | $ | 0.24 |   |

 

The accompanyingnotes are an integral part of these financial statements

 

3

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**CASCADE NATURAL GAS CORPORATION**

**CONSOLIDATED CONDENSED BALANCE SHEETS**

(Dollars in Thousands)

 
|                                                                                                                              |   | **Dec 31,  2002** |    | **Sep 30,  2002** |   |
|-----------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|---------|-------------------|--------|
|                                                                                                                              |   | **(Unaudited)**   |    |              |   |
| **ASSETS**                                                                                                                        |   |              |    |              |   |
| Utility Plant, net of accumulated depreciation of $217,229 and  $213,476                                                          |   | $                 | 294,646 |              | $      | 291,650 |   |
| Construction work in progress                                                                                                     |   | 6,713             |    | 7,974             |   |
|                                                                                                                              |   | 301,359           |    | 299,624           |   |
| Other Assets:                                                                                                                     |   |              |    |              |   |
| Investments in non-utility property                                                                                               |   | 202               |    | 202               |   |
| Notes receivable, less current maturities                                                                                         |   | 119               |    | 127               |   |
|                                                                                                                              |   | 321               |    | 329               |   |
| Current Assets:                                                                                                                   |   |              |    |              |   |
| Cash and cash equivalents                                                                                                         |   | 2,379             |    | 3,688             |   |
| Accounts receivable and current maturities of notes receivable, less  allowance of $1,092 and $1,126  for  doubtful accounts |   | 43,955            |    | 14,547            |   |
| Materials, supplies and inventories                                                                                               |   | 10,100            |    | 14,556            |   |
| Prepaid expenses and other assets                                                                                                 |   | 4,016             |    | 6,515             |   |
| Deferred income taxes                                                                                                             |   | 1,636             |    | 1,648             |   |
|                                                                                                                              |   | 62,086            |    | 40,954            |   |
| Deferred Charges                                                                                                                  |   |              |    |              |   |
| Gas cost changes                                                                                                                  |   | 16,143            |    | 18,788            |   |
| Other                                                                                                                             |   | 7,652             |    | 7,968             |   |
|                                                                                                                              |   | 23,795            |    | 26,756            |   |
|                                                                                                                              |   |              |    |              |   |
|                                                                                                                              |   | $                 | 387,561 |              | $      | 367,663 |   |
|                                                                                                                              |   |
| The accompanying notes are an integral part of these financial  statements                                                        |   |

 

4

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|                                                                                                          |   | **Dec 31,  2002** |    | **Sep 30,  2002** |   |
|---------------------------------------------------------------------------------------------------------------|--------|-------------------|---------|-------------------|--------|
|                                                                                                          |   | **(Unaudited)**   |    |              |   |
| **COMMON  SHAREHOLDERS’ EQUITY AND LIABILITIES**                                                         |   |              |    |              |   |
| Common Shareholders’ Equity:                                                                             |   |              |    |              |   |
| Common stock, par value $1 per share, authorized 15,000,000 shares,  issued and outstanding 11,045,095 shares |   | $                 | 11,045  |              | $      | 11,045 |   |
| Additional paid-in capital                                                                                    |   | 97,360            |    | 97,360            |   |
| Accumulated other comprehensive income (loss)                                                                 |   | (11,748           | )       | (11,748           | )      |
| Retained earnings                                                                                             |   | 21,554            |    | 17,524            |   |
|                                                                                                          |   | 118,211           |    | 114,181           |   |
|                                                                                                          |   |              |    |              |   |
| Long-term Debt                                                                                                |   | 164,930           |    | 164,930           |   |
|                                                                                                          |   |              |    |              |   |
| Current Liabilities:                                                                                          |   |              |    |              |   |
| Accounts payable                                                                                              |   | 26,253            |    | 12,597            |   |
| Property, payroll and excise taxes                                                                            |   | 7,667             |    | 5,777             |   |
| Dividends and interest payable                                                                                |   | 5,471             |    | 7,872             |   |
| Other current liabilities                                                                                     |   | 10,552            |    | 9,466             |   |
|                                                                                                          |   | 49,943            |    | 35,712            |   |
|                                                                                                          |   |              |    |              |   |
| Deferred Credits and Other                                                                                    |   | 54,477            |    | 52,840            |   |
|                                                                                                          |   |              |    |              |   |
| Commitments and Contingencies                                                                                 |   | —            |    | —            |   |
|                                                                                                          |   | $                 | 387,561 |              | $      | 367,663 |   |
|                                                                                                          |
| The accompanying notes are an integral part of these financial  statements                                    |

 

5

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CASCADE NATURALGAS CORPORATION

CONSOLIDATEDCONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 
|                                                                               |   | **THREE  MONTHS ENDED**     |   |
|------------------------------------------------------------------------------------|--------|-----------------------------|--------|
|                                                                               |   | **Dec 31,  2002**           |   | **Dec 31,  2001** |   |
|                                                                               |   | **(dollars  in thousands)** |   |
| Operating  Activities                                                              |   |                        |   |   |   |
| Net income                                                                         |   | $                           | 6,681  |   | $ | 6,243 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |   |                        |   |   |   |
| Depreciation and  amortization                                                     |   | 3,778                       |   | 3,696 |   |
| Deferrals of gas  cost changes                                                     |   | 1,164                       |   | 2,809 |   |
| Amortization of  gas cost changes                                                  |   | 1,481                       |   | 1,334 |   |
| Other deferrals  and amortizations                                                 |   | 1,025                       |   | 690 |   |
| Deferred income  taxes and tax credits - net                                       |   | 951                         |   | 296 |   |
| Change in  current assets and liabilities                                          |   | (8,222                      | )      | (12,529 | ) |
| Net cash  provided by operating activities                                         |   | 6,858                       |   | 2,539 |   |
|                                                                               |   |                        |   |   |   |
| Investing  Activities                                                              |   |                        |   |   |   |
| Capital  expenditures                                                              |   | (5,585                      | )      | (4,867 | ) |
| Customer  contributions in aid of construction                                     |   | 61                          |   | 310 |   |
| Other                                                                              |   | 8                           |   | 23 |   |
| Net cash used by  investing activities                                             |   | (5,516                      | )      | (4,534 | ) |
|                                                                               |   |                        |   |   |   |
| Financing  Activities                                                              |   |                        |   |   |   |
| Proceeds from  long-term debt, net                                                 |   | —                      |   | 38,740 |   |
| Changes in notes  payable and commercial paper, net                                |   | —                      |   | (30,500 | ) |
| Dividends paid                                                                     |   | (2,651                      | )      | (2,651 | ) |
| Net cash  provided (used) by financing activities                                  |   | (2,651                      | )      | 5,589 |   |
|                                                                               |   |                        |   |   |   |
| Net Increase  (Decrease) in Cash and Cash Equivalents                              |   | (1,309                      | )      | 3,594 |   |
|                                                                               |   |                        |   |   |   |
| Cash and Cash  Equivalents                                                         |   |                        |   |   |   |
| Beginning of  year                                                                 |   | 3,688                       |   | 422 |   |
| End of period                                                                      |   | $                           | 2,379  |   | $ | 4,016 |   |

 

The accompanying  notes are an integral part of thesefinancial statements

 

6

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**CASCADE NATURAL GASCORPORATION**

**NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS**

**THREEMONTHS ENDED DECEMBER 31, 2002**

 

The preceding statements were taken from the books andrecords of the Company and reflect all adjustments which are, in the opinion ofmanagement, necessary for a fair statement of the results for the interimperiods. All adjustments were of a normal and recurring nature. Because of thehighly seasonal nature of the natural gas distribution business, earnings orloss for any portion of the year are disproportionate in relation to the fullyear.

 

Reference is directed to the Notes to ConsolidatedFinancial Statements contained in the 2002 Annual Report on Form 10-K for thefiscal year ended September 30, 2002, and comments included therein under“Management’s Discussion and Analysis of Financial Condition and Results ofOperations”.

 

**EarningsPer Share.**

 

The following table sets forth the calculation ofearnings per share as prescribed in Statement of Financial Accounting Standards(FAS) No. 128.

 
|                                                     |   | **Quarter  Ended December 31**            |   |
|----------------------------------------------------------|--------|-------------------------------------------|--------|
|                                                     |   | **2002**                                  |   | **2001** |   |
|                                                     |   | **(in  thousands except per share data)** |   |
| Net Income                                               |   | $                                         | 6,681  |   | $ | 6,243 |   |
|                                                     |   |                                      |   |   |   |
| Weighted average shares outstanding                      |   | 11,045                                    |   | 11,045 |   |
| Basic earnings per share                                 |   | $                                         | 0.61   |   | $ | 0.57 |   |
|                                                     |   |                                      |   |   |   |
| Weighted average shares outstanding                      |   | 11,045                                    |   | 11,045 |   |
| Plus:  Issued on assumed  exercise of stock options |   | 19                                        |   | 22 |   |
| Weighted average shares outstanding assuming dilution    |   | 11,064                                    |   | 11,067 |   |
|                                                     |   |                                      |   |   |   |
| Diluted earnings per share                               |   | $                                         | 0.60   |   | $ | 0.56 |   |

 

**Stock-Based Compensation**

 

The Company accounts for stock-based compensationusing Accounting Principles Board (APB) Opinion No. 25, “Accounting for StockIssued to Employees”. Under this method, compensation cost is recognized on theexcess, if any, of the market price of the stock at grant date over theexercise price of the option. The exercise price of each grant issued by theCompany was equal to the market price at the respective grant date, thereforeno compensation expense has been recorded in connection with the Plan. UnderFAS No. 123, “Accounting for Stock-Based Compensation,” compensation expense isdetermined based on the fair value of the award and is recognized over thevesting period. Had compensation expense been measured in accordance with FAS123, the Company’s net income would have been as follows:

 

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|                                                                                                                         |   | **Quarter  Ended December 31**                          |   |
|------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------|--------|
|                                                                                                                         |   | **2002**                                                |   | **2001** |   |
|                                                                                                                         |   | **(dollars  in thousands, except   per share amounts)** |   |
| **Amounts  as reported, reflecting stock-based employee compensation cost determined  under APB No. 25:**                    |   |                                                    |   |   |   |
| Stock-based  employee compensation cost, net of tax effect                                                                   |   | $                                                       | — |   | $ | — |   |
| Net income                                                                                                                   |   | $                                                       | 6,681  |   | $ | 6,243 |   |
| Basic earnings  per share                                                                                                    |   | $                                                       | 0.61   |   | $ | 0.57 |   |
| Diluted earnings  per share                                                                                                  |   | $                                                       | 0.60   |   | $ | 0.56 |   |
|                                                                                                                         |   |                                                    |   |   |   |
| **Proforma  amounts, reflecting stock-based employee compensation cost as if determined  under fair value (FAS 123) method** |   |                                                    |   |   |   |
| Stock-based  employee compensation cost, net of tax effect                                                                   |   | $                                                       | 27     |   | $ | 26 |   |
| Net income                                                                                                                   |   | $                                                       | 6,654  |   | $ | 6,217 |   |
| Basic earnings  per share                                                                                                    |   | $                                                       | 0.60   |   | $ | 0.56 |   |
| Diluted earnings  per share                                                                                                  |   | $                                                       | 0.60   |   | $ | 0.56 |   |

 

**Commitments and Contingencies**

 

**EnronContract Termination**

 

During fiscal 2002, the Companyexercised its right to terminate its gas supply contracts with Enron based onEnron’s insolvency and other reasons, including concerns about its ability toperform. These contracts supplied part of the natural gas portfolio used toserve certain non-core customers. The supply has been replaced with contractswith another supplier. Enron Canada Corp., a Canadian entity, is disputingCascade’s right to terminate one of the Enron gas supply contracts.  On January 21, 2003, Enron Canada servednotice of a lawsuit against the Company in Calgary, Alberta, claiming that theCompany owes it a termination payment in the amount of $3.4 million. Managementbelieves the termination was fully justified and has contested anypayment.  However, the circumstancessurrounding the termination are complex, and the ultimate result is uncertain.  Based on management’s analysis of availableinformation, the Company recorded a fiscal 2002 charge to earnings in theamount of $2.8 million with respect to Enron Canada’s claim.

 

On December 2, 2002, a representative of the Enronbankruptcy estate, although not contesting Cascade’s right to terminate itscontract with Enron North America, asserted a claim for a termination paymentunder that contract in the amount of $1,400,000. The Enron Canada and the EnronNorth America claims are separate, and while they involve some similar issues,there are also differences significant enough to require an independentassessment of the Enron North America claim. Management has not received full details of the claim, but is currentlyin the process of conducting an investigation. Based on the current assessment,management has concluded that no accrual is warranted. Enron North America hasnot commenced any arbitration or court proceedings.

 

**Environmental Matters**

 

There are two claims against the Company for as yetunknown costs for clean up of alleged environmental contamination related tomanufactured gas plant sites that were previously operated by companies, whichwere subsequently merged into Cascade.

 

The first claim was received in 1995, and relates to asite in Oregon. An investigation has shown that contamination does exist, butthere is currently not enough information available to estimate the potentialliability associated with this claim. It is expected that other parties willparticipate in the clean up

 

8

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costs. Through the end of the fiscal year the amounts spent, primarilyon investigation and containment, have been immaterial.

 

The second claim was received in 1997, and relates toa site in Washington. An investigation has determined there is evidence ofcontamination at the site, but there is also evidence of an oil line crossingthe property, operated by an unrelated party, which may have also contributedto the contamination. There is currently not enough information available toestimate the potential liability associated with this claim. The party whooriginally made this claim has not been actively pursuing it.

 

Management intends to pursue reimbursement from itsinsurance carriers, and recovery from its customers through increased rates,for any remediation costs for which the Company is determined to be liable.There is precedent for such recovery through increased rates, as both the WUTCand OPUC have previously allowed regulated utilities to increase customer ratesto recover similar costs.

 

**Litigation and Other Contingencies**

 

Various lawsuits, claims, and contingent liabilitiesmay arise from time to time from the conduct of the Company’s business.

 

Settlement in Fatality Case:****Inthe fourth quarter of fiscal 2002 a child suffered a fatal injury while playingon a meter barrier owned by the Company, located on the property of one of theCompany’s commercial customers. In December 2002 a settlement of allplaintiffs’ claims was agreed to in consideration of a $750,000 payment. TheCompany and its co-defendant have agreed to each pay $375,000 currently, and toresolve the allocation of the total settlement payment between them in futurenegotiations or proceedings.

 

No claims now pending, other than those mentioned inpreceding paragraphs, in the opinion of management, are expected to have amaterial effect on the Company’s financial position, results of operations, orliquidity.

 

**New Accounting Standards**

 

Effective October 1, 2002,the Company adopted accounting standards prescribed under FAS Nos. 142, 143,144, and 145, the effects of which are described in the following paragraphs.

 

***FAS No. 142,****“Goodwilland Other Intangible Assets.”* This standard addresses how intangibleassets that are acquired individually or with a group of other assets should beaccounted for in financial statements upon their acquisition. This Statementalso addresses how goodwill and other intangible assets should be accounted forafter they have been initially recognized in the financial statements. Adoptionof this standard did not have an impact on the Company’s financial statements.

 

*FASNo. 143,**“Accounting for Asset Retirement Obligations.”*Thisstandard requires companies to record a liability to recognize futureobligations to remove assets. The Company has reviewed its franchises and significanteasements and other documents to determine whether any include provisionsrequiring removal of assets. No significant obligations have been identified,and adoption of this standard did not have a significant impact on theCompany’s financial statements.

 

*FASNo. 144,**“Accounting for the Impairment or Disposal ofLong-Lived Assets.”* This standard provides for the recognition andmeasurement of an impairment loss if it is determined the carrying amount of along-lived asset is not recoverable, and exceeds its fair value. It alsoidentifies events or changes in circumstances that would require a test forrecoverability. Adoption of this standard did not have a significant impact onthe Company’s financial statements.

 

*FASNo. 145,* *“Rescissionof FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, andTechnical Corrections.”* Adoption of this standard did not have animpact on the Company’s financial statements.

 

9

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The Company has subsequentlyadopted FAS Nos. 146 and 148 as follows:

 

*The*FASB has issued FAS No. 146, titled *“Accounting for Costs Associated withExit or Disposal Activities.”* This standard is effective for exit ordisposal activities initiated after December 31, 2002, and has been adopted bythe Company effective January 1, 2003. Adoption of this standard did not havean impact on the Company’s financial statements.

 

On December 31, 2002, the Financial AccountingStandards Board (FASB) issued FAS No. 148, *“Accountingfor Stock-Based Compensation—Transition and Disclosure”* ThisStatement amends FASB Statement No. 123, *Accountingfor Stock-Based Compensation,* to provide alternative methods oftransition for companies that voluntary change to the fair-value-based methodof accounting for stock-based employee compensation. In addition, thisStatement amends the disclosure requirements of Statement 123 to requireprominent disclosures in both annual and interim financial statements about themethod of accounting for stock-based employee compensation and the effect ofthe method used on reported results. The Company has adopted the quarterlydisclosures under this standard, as reflected above under “**Stock-Based Compensation**”.

 

In November 2002, the FASB issued Interpretation 45, “*Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of Others”.*The Interpretation elaborates on the existing disclosure requirements for mostguarantees, including loan guarantees such as standby letters of credit. Italso clarifies that at the time a company issues a guarantee, the company mustrecognize an initial liability for the fair value, or market value, of theobligations it assumes under the guarantee and must disclose that information inits interim and annual financial statements. The provisions related torecognizing a liability at inception of the guarantee for the fair value of theguarantor’s obligations does not apply to product warranties or to guaranteesaccounted for as derivatives. The initial recognition and initial measurementprovisions apply on a prospective basis to guarantees issued or modified afterDecember 31, 2002. The Company believes that adoption of Interpretation 45 willnot have an impact on its financial statements.

 

In January 2003, the FASB issued Interpretation 46, “*Consolidation of Variable Interest Entities.”*TheInterpretation addresses consolidation by business enterprises of variableinterest entities which have one or both of the following characteristics:

 

1)              The equityinvestment at risk is not sufficient to permit the entity to finance itsactivities without additional subordinated financial support from otherparties, which is provided through other interests that will absorb some or allof the expected losses of the entity.

 

2)              The equity investorslack one or more of the following essential characteristics of a controllingfinancial interest:

 

a.               The direct or indirect ability to make decisions aboutthe entity’s activities through voting rights or similar rights

 

b.              The obligation toabsorb the expected losses of the entity if they occur, which makes it possiblefor the entity to finance its activities

 

c.               The right toreceive the expected residual returns of the entity if they occur, which is thecompensation for the risk of absorbing the expected losses.

 

The Company believes that adoption of Interpretation 46 will not havean impact on its financial statements.

 

10

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**Item 2.  Management’s Discussion and Analysis of Financial Condition andResults 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-monthperiods ended December 31, 2002 and December 31, 2001.

 

**CRITICAL ACCOUNTING POLICIES**

 

The Company’s financialstatements are prepared in accordance with accounting principles generallyaccepted in the United States of America (GAAP). In following GAAP, managementexercises judgment in selection and application of accounting principles.Management considers Critical Accounting Policies to be those where differentassumptions regarding application could result in material differences infinancial statements.

 

**Revenue Recognition**

 

The Company recognizes operating revenues based ondeliveries of gas and other services to customers. This includes estimatedrevenues for gas delivered but not billed to residential and commercialcustomers from the latest meter reading date to the end of the accountingperiod.

 

**Regulatory Accounting**

 

The Company’s accountingpolicies and practices are generally the same as used by unregulated companiesfor financial reporting under GAAP. However, Statement of Financial AccountingStandards (FAS) No. 71, “*Accounting for theEffects of Certain Types of Regulation*”, requires regulatedcompanies to apply accounting treatment to reflect the financial impact ofregulation. For example, in establishing the rates to be charged to theCompany’s retail customers, the Washington Utilities and TransportationCommission (WUTC) and the Oregon Public Utility Commission (OPUC) may not allowthe Company to charge its customers for recovery of certain expenses in thesame period they are incurred. Instead, rates are established in the future torecover costs that were incurred in a prior period. In this situation, FAS No.71 requires the Company to defer these costs and include them as regulatoryassets on the balance sheet. In the subsequent period when these costs arerecovered from customers, the Company then amortizes these costs as expense inthe income statement, in an amount equivalent to the amounts recovered.Similarly, certain revenue items, or cost reductions may be deferred as regulatoryliabilities, which are later amortized to the income statement as customerrates are reduced.

 

In order to apply the provisionsof FAS No. 71, the following conditions must apply:

 

•        An independent regulator approves the company’scustomer rates.

•        The rates are designed to recover the company’scosts of providing the regulated services or products.

•        There is sufficient demand for the regulatedservice to reasonably assure that rates can be set at a level to recover thecosts.

 

The Company periodicallyassesses whether conditions merit the continued applicability of FAS No. 71. Inthe event the Company should determine in the future that all or a portion ofits regulatory assets and liabilities no longer meet the above criteria, itwould be required to write off the related balances of its regulatory assetsand liabilities, and reflect the write off in its income statement. At December31, 2002 there were $20,559,000 of regulatory assets and $5,790,000 ofregulatory liabilities.

 

**Use of Estimates**

 

The preparation of financialstatements in conformity with GAAP requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financial statements,and the reported amounts of revenues and expenses during the reporting period.The Company has used estimates in measuring certain deferred charges anddeferred credits related to items subject to approval of the WUTC and the OPUC.Estimates are also used in the development of discount rates and trend ratesrelated to the measurement of retirement

 

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benefit obligations and accrual amounts,allowances for doubtful accounts, estimates of unbilled revenue, accrualsnecessary for contingencies, and in the determination of depreciable lives ofutility plant. On an ongoing basis, management evaluates the estimates used,based on historical experience, current conditions and on various otherassumptions believed to be reasonable under the circumstances. Actual resultsmay differ from these estimates under different assumptions or conditions.

 

**Derivatives**

 

The company records derivative transactions accordingto the provisions of FAS No. 133, *“Accounting for Derivative Instruments and HedgingActivities”*, as amended by FAS No. 138, *“Accounting for Certain DerivativeInstruments and Certain Hedging Activities”.*These standards requirethat the fair value of all derivative financial instruments be recognized aseither assets or liabilities on the Company’s balance sheet.  Changes during a period in the fair value ofa derivative instrument would be included in earnings or other comprehensiveincome for the period.

 

The Company did not enter into derivative transactionsduring the first quarter of fiscal 2003, and as of December 31, 2002, does nothave any derivative assets or liabilities. The Company’s contracts for purchaseof natural gas are not derivative instruments because they are considerednormal purchases under the provisions of FAS Nos. 133 and 138.

 

**NEW ACCOUNTING STANDARDS**

 

Effective October 1, 2002,the Company adopted accounting standards prescribed under FAS Nos. 142, 143,144, and 145, the effects of which are described in the following paragraphs.

 

***FAS No. 142,**“Goodwilland Other Intangible Assets.”*** This standard addresses howintangible assets that are acquired individually or with a group of otherassets should be accounted for in financial statements upon their acquisition.This Statement also addresses how goodwill and other intangible assets shouldbe accounted for after they have been initially recognized in the financialstatements. Adoption of this standard did not have an impact on the Company’sfinancial statements.

 

*FASNo. 143,**“Accounting for Asset Retirement Obligations.”*Thisstandard requires companies to record a liability to recognize futureobligations to remove assets. The Company has reviewed its franchises andsignificant easements and other documents to determine whether any includeprovisions requiring removal of assets. No significant obligations have beenidentified, and adoption of this standard did not have a significant impact onthe Company’s financial statements.

 

*FASNo. 144,**“Accounting for the Impairment or Disposal ofLong-Lived Assets.”* This standard provides for the recognition andmeasurement of an impairment loss if it is determined the carrying amount of along-lived asset is not recoverable, and exceeds its fair value. It alsoidentifies events or changes in circumstances that would require a test forrecoverability. Adoption of this standard did not have a significant impact onthe Company’s financial statements.

 

*FASNo. 145,* *“Rescissionof FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, andTechnical Corrections.”* Adoption of this standard did not have animpact on the Company’s financial statements.

 

The Company hassubsequently adopted FAS Nos. 146 and 148 as follows:

 

*The*FASB has issued FAS No. 146, titled *“Accounting for Costs Associated withExit or Disposal Activities.”* This standard is effective for exit ordisposal activities initiated after December 31, 2002, and has been adopted bythe Company effective January 1, 2003. Adoption of this standard did not havean impact on the Company’s financial statements.

 

On December 31, 2002, the FASB issued FAS No. 148, *“Accounting for Stock-Based Compensation–Transitionand Disclosure”* This Statement amends FASB Statement No. 123, *Accounting for Stock-Based Compensation,*to provide alternative methods of transition for companies that voluntary

 

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change to the fair-value-based method of accounting for stock-basedemployee compensation. In addition, this Statement amends the disclosure requirementsof Statement 123 to require prominent disclosures in both annual and interimfinancial statements about the method of accounting for stock-based employeecompensation and the effect of the method used on reported results. The Companyhas adopted the quarterly disclosures under this standard, as reflected in thefinancial statement footnotes under “**Stock-BasedCompensation**”.

 

In November 2002, the FASB issued Interpretation 45, “*Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of Others”.*The Interpretation elaborates on the existing disclosure requirements for mostguarantees, including loan guarantees such as standby letters of credit. Italso clarifies that at the time a company issues a guarantee, the company mustrecognize an initial liability for the fair value, or market value, of theobligations it assumes under the guarantee and must disclose that informationin its interim and annual financial statements. The provisions related torecognizing a liability at inception of the guarantee for the fair value of theguarantor’s obligations does not apply to product warranties or to guaranteesaccounted for as derivatives. The initial recognition and initial measurementprovisions apply on a prospective basis to guarantees issued or modified afterDecember 31, 2002. The Company believes that adoption of Interpretation 45 willnot have an impact on its financial statements.

 

In January 2003, the FASB issued Interpretation 46, “*Consolidation of Variable Interest Entities.”*TheInterpretation addresses consolidation by business enterprises of variableinterest entities which have one or both of the following characteristics:

 

 

1)              The equityinvestment at risk is not sufficient to permit the entity to finance itsactivities without additional subordinated financial support from otherparties, which is provided through other interests that will absorb some or allof the expected losses of the entity.

 

2)              The equity investorslack one or more of the following essential characteristics of a controllingfinancial interest:

 

a.               The direct or indirect ability to make decisions aboutthe entity’s activities through voting rights or similar rights

 

b.              The obligation toabsorb the expected losses of the entity if they occur, which makes it possiblefor the entity to finance its activities

 

c.               The right toreceive the expected residual returns of the entity if they occur, which is thecompensation for the risk of absorbing the expected losses.

 

The Company believes that adoption of Interpretation46 will not have an impact on its financial statements.

 

**RESULTSOF OPERATIONS**

 

Net income for the first quarter of fiscal 2003(quarter ended December 31, 2002) was $6,681,000, or $0.61 basic earnings pershare ($0.60 diluted), compared to $6,243,000, or $0.57 basic earnings pershare ($0.56 diluted), for the quarter ended December 31, 2001. This representsa 7% improvement in first quarter basic earnings per share from first quarter2002 results.  The improvement inresults for the quarter is primarily from increased operating margins (revenueminus gas cost and revenue taxes).

 

**OperatingMargin**

 

Residential andCommercial Margin. Operating margins derived from sales toresidential and commercial customers were as set forth in the following table:

 

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|                            |   | **First  Quarter of Fiscal** |   | **Percent** |   |
|---------------------------------|--------|------------------------------|--------|-------------|--------|
|                            |   | **2003**                     |   | **2002**    |   | **Change** |   |
|                            |   | **(dollars  in thousands)**  |   |        |   |
| Degree Days                     |   | 2,027                        |   | 2,038       |   | -0.5 | % |
| Average Number  of Customers    |   |                         |   |        |   |   |   |
| Residential                     |   | 175,176                      |   | 167,713     |   | 4.4 | % |
| Commercial                      |   | 28,619                       |   | 28,001      |   | 2.2 | % |
| Average Therm  Use per Customer |   |                         |   |        |   |   |   |
| Residential                     |   | 257                          |   | 268         |   | -4.1 | % |
| Commercial                      |   | 1,208                        |   | 1,232       |   | -1.9 | % |
| Operating Margin                |   |                         |   |        |   |   |   |
| Residential                     |   | $                            | 12,992 |        | $      | 12,629 |   | 2.9 | % |
| Commercial                      |   | $                            | 7,275  |        | $      | 6,950 |   | 4.7 | % |
|                            |   |                         |   |        |   |   |   |

 

For the quarter ended December 31, 2002, operatingmargin from sales to residential and commercial customers increased $688,000from the same period last year. The addition of 8,081 new residential and commercialcustomers, a 4.1% growth rate, contributed $838,000 to the improvement with areduction of $150,000 due to a 3.7% decline in per customer consumption. Warmweather, a slow economy, and conservation were factors contributing to theconsumption decline.

 

Industrial and OtherMargin. Operating margin from industrial and other customersincreased $179,000 for the quarter. Operating margin improvements werenegatively affected $410,000, in the quarterly comparison, from lower electricgeneration, industrial, and off-system pipeline capacity revenue recorded inthe prior year. The off-system pipeline capacity transaction of $235,000recognized in the prior year was not part of normal, recurring operations.Operating margin from gas management services was higher by $591,000. Thestrong performance of this relatively new service offering during fiscal 2002and first quarter of fiscal 2003 is primarily due to revenues associated withassisting customers in obtaining gas supplies with stable prices. Those arrangementsare in place through October 2003.

 

**Cost ofOperations**

 

Cost of operations for the quarter ended December 31,2002, which consists of operating expenses, depreciation and amortization, andproperty and payroll taxes, decreased $122,000 from the quarter ended December31, 2001.

 

Operating Expenses,which are primarily labor and benefits expenses, decreased $208,000, or 2%, forthe quarter. The reduction is in spite of an 18% benefits cost increase and acharge of $375,000 for settling a personal injury claim. Expense increases wereoffset by lower labor cost, lower bad debt expense, and lower amounts for otherexpenses. More effective use of internal resources for capital projects versusactivities such as maintenance and sales further reduced operating expenses forthe quarter. A $250,000 personal injury settlement paid in fiscal 2002 alsoaffected the quarter-to-quarter comparisons.

 

Depreciation andAmortization increased $82,000, or 2%, for the quarter endedDecember 31, 2002 compared to the same period a year earlier, primarily as aresult of increases in depreciable gas distribution system assets.

 

**Interest and Other Deductions – Net**

 

Interest and other deductions – net, for the quarterwas $3,199,000, a $298,000 (10%) increase from the December 2001 quarter. Theincrease is primarily due to issuing $40 million of 7.50% 30-year debt inNovember 2001. The long-term debt replaced lower interest short-term debt.

 

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**LIQUIDITY AND CAPITAL RESOURCES**

 

The seasonal nature of the Company’s business creates short-term cashrequirements to finance customer accounts receivable and constructionexpenditures. To provide working capital for these requirements, the Companyhas a $50,000,000 bank revolving credit commitment. This agreement has anannual 0.16% commitment fee, and a term that expires in 2004. The Company alsohas a $10,000,000 uncommitted bank credit line. As of December 31, 2002, therewas no outstanding debt under these credit lines.

 

To provide longer-term financing, the Company in 2001filed an omnibus registration statement under the Securities Act of 1933providing the ability to issue up to $150,000,000 of new debt and equitysecurities. On November 26, 2001, the Company issued $40,000,000 of 7.5%30-year debt under the omnibus registration statement, leaving $110,000,000available under that registration statement.

 

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

 

**Retirement Plan Funding**

 

Management, in consultation withits actuaries, has examined its retirement plan funding requirements and hasconcluded that based on existing actuarial assumptions, funding to the definedbenefit plan is expected to be at $3,500,000 per year for the next three years.By comparison, funding in fiscal year 2002 was $4,024,000.

 

**Operating Activities**

 

Net cash provided by operating activities during thequarter was $6,858,000 compared to $2,539,000 for the December 2001 quarter.Reduction in inventories of natural gas during the quarter was the primaryreason for the improvement. Inventories were withdrawn from storage for normalsales to customers.

 

**InvestingActivities**

 

Cash used by investing activities for the quarterended December 31, 2002 was $5,516,000, compared to $4,534,000 for the prioryear’s quarter. The increase is primarily related to higher expenditures forexpansion of the gas distribution system where the number of new customersconnected was up 9%.

 

Budgetedcapital expenditures for fiscal 2003 are approximately $24,500,000. This budgetincludes $16,100,000 for new customer connections and $2,400,000 fordistribution system reinforcement and replacement projects. The remainder isfor equipment, facilities upgrades, and various technology projects

 

**FinancingActivities**

 

Net financing activities for the quarter endedDecember 31, 2002 used $2,651,000, compared to the prior year when financingactivities provided $5,589,000. The only financing activity during the firstquarter 2002 was the payment of dividends on common stock.

 

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**Item3.  Quantitative and QualitativeDisclosures About Market 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 have derivative financial instrumentssubject to interest rate risk. Cascade makes interest and principal payments onthese obligations in the normal course of its business, and does not plan toredeem these obligations prior to normal maturities, except to the extentrequired under the terms of the Company’s $40 million note offering in the caseof the death of individual owners of the notes.

 

The Company’s natural gas purchasecommodity prices are subject to fluctuations over time resulting from weather,congestion on interstate pipelines, and other unpredictable factors. TheCompany has fixed-price contracts covering a substantial portion of natural gassupply requirements of its core customers through September 2004. This strategyis followed to assure availability of adequate supplies to meet customer needsand to shield the Company and its core customers from price volatility. Thereis risk that market prices may fall below the price levels established in thecontracts. However the WUTC and the OPUC support the Company’s strategy, andhave approved rates that reflect the recovery of the contracted prices. Thusthe Company believes that regulatory policy, including Purchased Gas Adjustmentmechanisms, assure the recovery of prudently incurred wholesale gas cost, andthat the Company’s commodity price risk is immaterial. Further, the Company doesnot engage in significant energy trading activities.

 

**Item4: Controls and Procedures**

 

The Company maintains controls and procedures designedto ensure that required disclosure information in the reports the Company filesor submits under the Securities Exchange Act of 1934, as amended, is recorded,processed, summarized and reported within the time period specified in therules and forms of the Securities and Exchange Commission.  Based upon their evaluation of thosecontrols and procedures performed within 90 days of the filing date of thisreport, the Chief Executive Officer and Chief Financial Officer of the Companyconcluded that the Company’s disclosure controls and procedures were effective.

 

The Company made no significant changes in itsinternal controls or in other factors that could significantly affect thosecontrols subsequent to the date of the evaluation of those controls by theChief Executive Officer and Chief Financial Officer.

 

**FORWARDLOOKING STATEMENTS**

 

Statements contained inthis report that are not historical in nature are forward-looking statementswithin the meaning of the Private Securities Litigation Reform Act of 1995.Forward-looking statements are subject to risks and uncertainties that maycause actual future results to differ materially. Such risks and uncertaintieswith respect to the Company include, among others, its ability to successfullyimplement internal performance goals, competition from alternative forms ofenergy, consolidation in the energy industry, the failure or inability of keynatural gas suppliers to honor their commitments, the capital-intensive natureof the Company’s business, regulatory issues, including the need for adequateand timely rate relief to recover increased capital and operating costs resultingfrom customer growth and to sustain dividend levels, the weather, increasingcompetition brought on by deregulation initiatives at the federal and stateregulatory levels, the potential loss of large volume industrial customers dueto “bypass” or the shift by such customers to special competitive contracts atlower per unit margins, exposure to environmental cleanup requirements, andeconomic conditions, particularly in the Company’s service area.

 

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**PART II.  Other Information**

 

**Item 1.  Legal Proceedings**

 

**EnronContract Termination**:

 

During fiscal 2002, the Companyexercised its right to terminate its gas supply contracts with Enron based onEnron’s insolvency and other reasons, including concerns about its ability toperform. These contracts supplied part of the natural gas portfolio used toserve certain non-core customers. The supply has been replaced with contractswith another supplier. Enron Canada Corp., a Canadian entity, is disputingCascade’s right to terminate one of the Enron gas supply contracts.  On January 21, 2003, Enron Canada servednotice of a lawsuit against the Company in Calgary, Alberta, claiming that theCompany owes it a termination payment in the amount of $3.4 million. Managementbelieves the termination was fully justified and has contested anypayment.  However, the circumstancessurrounding the termination are complex, and the ultimate result is uncertain.  Based on management’s analysis of availableinformation, the Company recorded a fiscal 2002 charge to earnings in theamount of $2.8 million with respect to Enron Canada’s claim.

 

On December 2, 2002, a representative of the Enronbankruptcy estate, although not contesting Cascade’s right to terminate itscontract with Enron North America, asserted a claim for a termination paymentunder that contract in the amount of $1,400,000. The Enron Canada and the EnronNorth America claims are separate, and while they involve some similar issues,there are also differences significant enough to require an independentassessment of the Enron North America claim. Management has not received full details of the claim, but is currentlyin the process of conducting an investigation. Based on the current assessment,management has concluded that no accrual is warranted. Enron North America hasnot commenced any arbitration or court proceedings.

 

**Settlementin Fatality Case:**

 

In the fourth quarter of fiscal 2002 a child suffereda fatal injury while playing on a meter barrier owned by the Company, locatedon the property of one of the Company’s commercial customers. In December 2002a settlement of all plaintiffs’ claims was agreed to in consideration of a$750,000 payment. The Company and its co-defendant have agreed to each pay$375,000 currently, and to resolve the allocation of the total settlementpayment between them in future negotiations or proceedings.

 

**Item2.  Changes in Securities**

 

Under the terms of its bank credit agreement, theCompany is required to maintain a minimum tangible net worth of $105,694,000 asof December 31, 2002. Under this agreement, approximately $16,560,000 wasavailable for payment of dividends at December 31, 2002.

 

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**Item 4.  Submission of Matters to a Vote of Security Holders**

 

At the annual meeting of shareholders on January 29,2003, the following directors were elected by the vote indicated for terms ofoffice expiring in 2004:

 
|                |   | **For**   |   | **Withheld** |   |
|---------------------|--------|-----------|--------|--------------|--------|
| Carl Burnham,  Jr.  |   | 8,926,971 |   | 217,631      |   |
| Douglas G.  Thomas  |   | 8,901,645 |   | 242,957      |   |
| Thomas E. Cronin    |   | 8,720,141 |   | 424,461      |   |
| David A. Ederer     |   | 8,726,546 |   | 418,056      |   |
| Howard L.  Hubbard  |   | 8,890,823 |   | 253,779      |   |
| W. Brian  Matsuyama |   | 8,927,537 |   | 217,065      |   |
| Larry L. Pinnt      |   | 8,450,957 |   | 693,645      |   |
| Brooks G. Ragen     |   | 8,717,376 |   | 427,226      |   |
| Mary Pugh           |   | 8,918,527 |   | 226,075      |   |

 

**Item 5.  Other Information**

 

Ratio of Earnings to Fixed Charges:

 
| **Twelve  Months Ended** |   |
|--------------------------|--------|
| **12/31/2002**           |   | **9/30/2002** |   | **9/30/2001** |   | **9/30/2000** |   | **9/30/1999** |   | **9/30/1998** |   |
|                     |   |   |   |   |   |   |   |   |   |   |   |
| 2.29                     |   | 2.27 |   | 3.39 |   | 3.12 |   | 3.00 |   | 2.42 |   |

 

For purposes of this calculation, earnings includeincome before income taxes, plus fixed charges. Fixed charges include interestexpense and the amortization of debt issuance expenses. Refer to Exhibit 12 forthe calculation of these ratios, as well as the ratio of earnings to fixedcharges including preferred dividends.

 

**Item6.  Exhibits and Reports on Form 8-K**

 

a. Exhibits:

 
| **No.** |   | **Description**                                                                                                         |
|---------|--------|-------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                    |
| 12      |   | Computation of Ratio of Earnings to Fixed Charges                                                                       |
|    |   |                                                                                                                    |
| 99.1    |   | Certification Pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |

 

b. Reports on Form 8-K:

 

On January 15, 2003, the Company filed a Report onForm 8-K Dated December 31, 2002, to report the appointment of Larry L.Pinnt, an outside director on the Board of Directors of the Registrant since1995, as non-management Chairman of the Board effective January 1, 2003,and to report amendments to its bylaws to reflect the new roles of the Chairmanof the Board and other officers, and to make certain housekeeping changes. 

 

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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/  J. D.   Wessling |   |   |
|                                 |   |   |
|                                 | J. D. Wessling |   |
|                                 | Sr. Vice President  Finance and Chief Financial Officer |   |
|                                 | (Principal Financial  Officer) |   |
|                                 |   |   |
| Date:                                | February 12, 2003 |   |

 

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**CERTIFICATION ACCOMPANYING PERIODIC REPORT**

**PURSUANT TO SECTION 302**

**OF THE SARBANES-OXLEY ACT OF 2002**

**(18 U.S.C. 1350)**

 

I, W. Brian Matsuyama, certify that:

 

1.  I have reviewed this quarterly report onForm 10–Q of Cascade Natural Gas Corporation;

 

2.  Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.  Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operation and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.  Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a–14 and 15d–14) for the registrant and have:

 

a)  Designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)  Evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)  Presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.  Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

a)  Allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)  Any fraud,whether or not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.  Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether there were significant changes in internal controls or in otherfactors that could significantly affect internal controls subsequent to thedate of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date:  | February 12, 2003                     |
|--------|---------------------------------------|
|   |                                  |
| By:    | /s/ W. Brian Matsuyama                |   |
|   | W. Brian Matsuyama                    |
|   | President and Chief Executive Officer |
|   | (Principal Executive Officer)         |

 

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I, J. D. Wessling, certify that:

 

1.  I have reviewed this quarterly report onForm 10–Q of Cascade Natural Gas Corporation;

 

2.  Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.  Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operation and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.  Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a–14 and 15d–14) for the registrant and have:

 

a)  Designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)  Evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)  Presentedin this quarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.  Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

a)  Allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)  Any fraud,whether or not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.  Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether there were significant changes in internal controls or in otherfactors that could significantly affect internal controls subsequent to the dateof our most recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 
| Date:  | February 12, 2003                                            |
|--------|--------------------------------------------------------------|
|   |                                                         |
| By:    | /s/ J. D. Wessling                                           |   |
|   | J. D. Wessling                                               |
|   | Senior Vice President - Finance and Chief Financial  Officer |
|   | (Principal Financial Officer)                                |

 

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