**FORM 10-Q**

 

**SECURITIESAND EXCHANGE COMMISSION**

 

**Washington, D.C. 20549**

 

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

 

**For the quarterly period endedJune 30, 2003**

 

**Commission file number: 1-7196**

 

**CASCADENATURAL GAS CORPORATION**

(Exact name ofRegistrant as specified in its charter)

 

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

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days. Yes  ý  No  o

 

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

 

| **Title**                             |   | **Outstanding**                     |
|---------------------------------------|--------|-------------------------------------|
|                                  |   |                                |
| Common Stock,  Par Value $1 per Share |   | 11,105,778 as of July 31, 2003 |

 

 

----

 

**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 5. Other Information                                                                                  |   |
|      |   |                                                                                                       |   |
|      |   | Item 6.  Exhibits and Reports on Form 8-K                                                                  |   |
|      |   |                                                                                                       |   |
| Signature |   |
|           |        |                                                                                                            |        |  |

 

2

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# **PART I.   Financial Information**

 

**Item1.  Financial Statements**

 

**CASCADE NATURAL GAS CORPORATION**

**CONSOLIDATED CONDENSED STATEMENTS OFINCOME**

(unaudited)

 
|                                        |           | **THREE  MONTHS ENDED**               |   | **NINE  MONTHS ENDED** |   |
|---------------------------------------------|----------------|---------------------------------------|--------|------------------------|--------|
|                                        |           | **Jun 30,  2003**                     |   | **Jun 30,  2002**      |   | **Jun 30,  2003** |   | **Jun 30,  2002** |   |
|                                        |           | **(thousands except per share data)** |   |
|                                        |           |                                  |   |                   |   |   |   |   |   |
| Operating  revenues                         |           | $                                     | 53,793 |                   | $      | 56,815 |   | $ | 263,575 |   | $ | 281,938 |   |
|                                        |           |                                  |   |                   |   |   |   |   |   |
| Less:                                       | Gas  purchases |                                  | 32,652 |                   | 38,509 |   | 169,481 |   | 186,792 |   |
|                                        | Revenue taxes  |                                  | 3,813  |                   | 4,053  |   | 17,610 |   | 18,794 |   |
| Operating  margin                           |           | 17,328                                |   | 14,253                 |   | 76,484 |   | 76,352 |   |
|                                        |           |                                  |   |                   |   |   |   |   |   |
| Cost  of operations:                        |           |                                  |   |                   |   |   |   |   |   |
| Operating  expenses                         |           | 11,953                                |   | 9,854                  |   | 33,063 |   | 30,815 |   |
| Depreciation  and amortization              |           | 3,846                                 |   | 3,746                  |   | 11,466 |   | 11,144 |   |
| Property  and payroll taxes                 |           | 1,450                                 |   | 1,290                  |   | 4,258 |   | 4,123 |   |
|                                        |           | 17,249                                |   | 14,890                 |   | 48,787 |   | 46,082 |   |
|                                        |           |                                  |   |                   |   |   |   |   |   |
| Income  (loss) from operations              |           | 79                                    |   | (637                   | )      | 27,697 |   | 30,270 |   |
| Less  interest and other deductions - net   |           | 3,197                                 |   | 3,224                  |   | 9,508 |   | 9,372 |   |
| Income  (loss) before income taxes          |           | (3,118                                | )      | (3,861                 | )      | 18,189 |   | 20,898 |   |
|                                        |           |                                  |   |                   |   |   |   |   |   |
| Income  taxes                               |           | (1,138                                | )      | (1,409                 | )      | 6,639 |   | 7,628 |   |
| Net  income (loss)                          |           | (1,980                                | )      | (2,452                 | )      | 11,550 |   | 13,270 |   |
|                                        |           |                                  |   |                   |   |   |   |   |   |
| Weighted  average common shares outstanding |           | 11,086                                |   | 11,045                 |   | 11,063 |   | 11,045 |   |
|                                        |           |                                  |   |                   |   |   |   |   |   |
| Net  earnings (loss) per common share,      |           |                                  |   |                   |   |   |   |   |   |
| Basic                                       |           | $                                     | (0.18  | )                      | $      | (0.22 | ) | $ | 1.04 |   | $ | 1.20 |   |
| Diluted                                     |           | $                                     | (0.18  | )                      | $      | (0.22 | ) | $ | 1.04 |   | $ | 1.20 |   |
|                                        |           |                                  |   |                   |   |   |   |   |   |
| Cash  dividends per share                   |           | $                                     | 0.24   |                   | $      | 0.24 |   | $ | 0.72 |   | $ | 0.72 |   |

 

The accompanying notesare an integral part of these financial statements

 

3

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**CASCADENATURAL GAS CORPORATION**

**CONSOLIDATEDCONDENSED BALANCE SHEETS**

(Dollars in Thousands)

 
|                                                                                                                        |   | **Jun 30,  2003** |       | **Sep 30,  2002** |       |
|-----------------------------------------------------------------------------------------------------------------------------|--------|-------------------|------------|-------------------|------------|
|                                                                                                                        |   | **(Unaudited)**   | ** ** |              | ** ** |
| **ASSETS**                                                                                                                  |   |              |       |              |       |
| Utility Plant, net of accumulated  depreciation of $224,757 and $213,476                                                    |   | $                 | 296,655    |              | $          | 291,650 |   |
| Construction work in progress                                                                                               |   | 8,567             |       | 7,974             |       |
|                                                                                                                        |   | 305,222           |       | 299,624           |       |
| Other Assets:                                                                                                               |   |              |       |              |       |
| Investments in non-utility property                                                                                         |   | 202               |       | 202               |       |
| Notes receivable, less current maturities                                                                                   |   | 117               |       | 127               |       |
|                                                                                                                        |   | 319               |       | 329               |       |
| Current Assets:                                                                                                             |   |              |       |              |       |
| Cash and cash equivalents                                                                                                   |   | 18,879            |       | 3,688             |       |
| Accounts receivable and current maturities  of notes receivable, less allowance of $1,012  and $1,126 for doubtful accounts |   | 16,329            |       | 14,547            |       |
| Materials, supplies and inventories                                                                                         |   | 7,375             |       | 14,556            |       |
| Prepaid expenses and other assets                                                                                           |   | 3,599             |       | 6,515             |       |
| Deferred income taxes                                                                                                       |   | 1,634             |       | 1,648             |       |
|                                                                                                                        |   | 47,816            |       | 40,954            |       |
| Deferred Charges                                                                                                            |   |              |       |              |       |
| Gas cost changes                                                                                                            |   | 10,129            |       | 18,788            |       |
| Other                                                                                                                       |   | 7,480             |       | 7,968             |       |
|                                                                                                                        |   | 17,609            |       | 26,756            |       |
|                                                                                                                        |   |              |       |              |       |
|                                                                                                                        |   | $                 | 370,966    |              | $          | 367,663 |   |

 

Theaccompanying notes are an integral part of these financial statements 

 

4

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**CASCADENATURAL GAS CORPORATION**

**CONSOLIDATEDCONDENSED BALANCE SHEETS**

(Dollars in Thousands)

 
|                                                                                                                         |   | **Jun 30,  2003** |    | **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 11,100,766, and 11,045,095 shares |   | $                 | 11,101  |              | $          | 11,045 |   |
| Additional paid-in capital                                                                                                   |   | 98,345            |    | 97,360            |       |
| Accumulated other comprehensive income (loss)                                                                                |   | (11,748           | )       | (11,748           | )          |
| Retained earnings                                                                                                            |   | 21,100            |    | 17,524            |       |
|                                                                                                                         |   | 118,798           |    | 114,181           |       |
|                                                                                                                         |   |              |    |              |       |
| Long-term Debt                                                                                                               |   | 164,930           |    | 164,930           |       |
|                                                                                                                         |   |              |    |              |       |
| Current Liabilities:                                                                                                         |   |              |    |              |       |
| Accounts payable                                                                                                             |   | 12,178            |    | 12,597            |       |
| Property, payroll and excise taxes                                                                                           |   | 4,659             |    | 5,777             |       |
| Dividends and interest payable                                                                                               |   | 5,481             |    | 7,872             |       |
| Other current liabilities                                                                                                    |   | 7,674             |    | 9,466             |       |
|                                                                                                                         |   | 29,992            |    | 35,712            |       |
|                                                                                                                         |   |              |    |              |       |
| Deferred Credits and Other                                                                                                   |   | 57,246            |    | 52,840            |       |
|                                                                                                                         |   |              |    |              |       |
| Commitments and Contingencies                                                                                                |   | —            |    | —            |       |
|                                                                                                                         |   | $                 | 370,966 |              | $          | 367,663 |   |

 

Theaccompanying notes are an integral part of these financial statements

 

5

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**CASCADENATURAL GAS CORPORATION**

**CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
|                                                                               |   | **NINE  MONTHS ENDED**      | ** ** |
|------------------------------------------------------------------------------------|--------|-----------------------------|------------|
|                                                                               |   | **(dollars  in thousands)** | ** ** |
|                                                                               |   | **Jun 30,  2003**           |       | **Jun 30,  2002** | ** ** |
| Operating  Activities                                                              |   |                        |       |   |   |
| Net  income                                                                        |   | $                           | 11,550     |   | $ | 13,270 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |   |                        |       |   |   |
| Depreciation  and amortization                                                     |   | 11,466                      |       | 11,144 |   |
| Deferrals  of gas cost changes                                                     |   | 3,391                       |       | 7,832 |   |
| Amortization  of gas cost changes                                                  |   | 5,268                       |       | 7,365 |   |
| Other  deferrals and amortizations                                                 |   | 2,692                       |       | (1,638 | ) |
| Deferred  income taxes and tax credits - net                                       |   | 1,992                       |       | 931 |   |
| Change  in current assets and liabilities                                          |   | 2,595                       |       | 1,070 |   |
| Net  cash provided by operating activities                                         |   | 38,954                      |       | 39,974 |   |
|                                                                               |   |                        |       |   |   |
| Investing  Activities                                                              |   |                        |       |   |   |
| Capital  expenditures                                                              |   | (17,553                     | )          | (14,353 | ) |
| Customer  contributions in aid of construction                                     |   | 713                         |       | 134 |   |
| Other                                                                              |   | 10                          |       | 55 |   |
| Net  cash used by investing activities                                             |   | (16,830                     | )          | (14,164 | ) |
|                                                                               |   |                        |       |   |   |
| Financing  Activities                                                              |   |                        |       |   |   |
| Proceeds  from long-term debt, net                                                 |   | —                      |       | 38,740 |   |
| Repayment  of long-term debt                                                       |   | —                      |       | (30 | ) |
| Proceeds  from issuance of stock, net                                              |   | 1,041                       |       | — |   |
| Changes  in notes payable and commercial paper, net                                |   | —                      |       | (40,000 | ) |
| Dividends  paid                                                                    |   | (7,974                      | )          | (7,953 | ) |
| Net  cash used by financing activities                                             |   | (6,933                      | )          | (9,243 | ) |
|                                                                               |   |                        |       |   |   |
| Net  Increase in Cash and Cash Equivalents                                         |   | 15,191                      |       | 16,567 |   |
|                                                                               |   |                        |       |   |   |
| Cash  and Cash Equivalents                                                         |   |                        |       |   |   |
| Beginning  of year                                                                 |   | 3,688                       |       | 422 |   |
| End  of period                                                                     |   | $                           | 18,879     |   | $ | 16,989 |   |

 

The accompanying notesare an integral part of these financial statements

 

6

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**CASCADENATURAL GAS CORPORATION**

**NOTES TO CONSOLIDATED CONDENSEDFINANCIAL STATEMENTS**

## **THREEAND NINE MONTHS ENDED JUNE 30, 2003**

## ** **

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

 

Reference is directed tothe Notes to Consolidated Financial Statements contained in the 2002 Annual Reporton Form 10-K for the fiscal year ended September 30, 2002, and commentsincluded therein under “Management’s Discussion and Analysis of FinancialCondition and Results of Operations”.

 

**Earnings Per Share.**

 

The following table setsforth the calculation of earnings per share as prescribed in Statement ofFinancial Accounting Standards (FAS) No. 128.

 
|                                                   |   | **Quarter  Ended June 30**           |       | **Nine  Months Ended June 30** |       |
|--------------------------------------------------------|--------|-------------------------------------------|------------|-------------------------------------|------------|
|                                                   |   | **2003**                                  |       | **2002**                            | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                   |   | **(in  thousands except per-share data)** | ** ** |
|                                                   |   |                                      |       |                                |       |   |   |   |   |
| Net income (loss)                                      |   | $                                         | (1,980     | )                                   | $          | (2,452 | ) | $ | 11,550 |   | $ | 13,270 |   |
|                                                   |   |                                      |       |                                |       |   |   |   |   |
| Weighted average shares outstanding                    |   | 11,086                                    |       | 11,045                              |       | 11,063 |   | 11,045 |   |
| Basic earnings per share                               |   | $                                         | (0.18      | )                                   | $          | (0.22 | ) | $ | 1.04 |   | $ | 1.20 |   |
|                                                   |   |                                      |       |                                |       |   |   |   |   |
| Weighted average shares outstanding                    |   | 11,086                                    |       | 11,045                              |       | 11,063 |   | 11,045 |   |
| Plus: Issued on assumed exercise of stock options      |   | 16                                        |       | 26                                  |       | 17 |   | 25 |   |
| Weighted average shares outstanding assuming  dilution |   | 11,102                                    |       | 11,071                              |       | 11,080 |   | 11,070 |   |
|                                                   |   |                                      |       |                                |       |   |   |   |   |
| Diluted earnings per share                             |   | $                                         | (0.18      | )                                   | $          | (0.22 | ) | $ | 1.04 |   | $ | 1.20 |   |

 

### **Stock-Based Compensation**

 

The Company accounts forstock-based compensation using Accounting Principles Board (APB) Opinion No.25, “Accounting for Stock Issued to Employees”. Under this method, compensationcost is recognized on the excess, if any, of the market price of the stock atgrant date over the exercise price of the option. The exercise price of eachgrant issued by the Company was equal to the market price at the respectivegrant date, therefore no compensation expense has been recorded in connectionwith  stock option grants. Under FAS 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 and earnings per share would have been asfollows:

 

7

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|                                                                                                                          |   | **Quarter  Ended June 30**           |       | **Nine  Months Ended June 30** |       |
|-------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------|------------|-------------------------------------|------------|
|                                                                                                                          |   | **2003**                                  |       | **2002**                            | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                                                                                          |   | **(in  thousands except per-share data)** | ** ** |
| **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 (loss)                                                                                                            |   | $                                         | (1,980     | )                                   | $          | (2,452 | ) | $ | 11,550 |   | $ | 13,270 |   |
| Basic  earnings (loss) per share                                                                                              |   | $                                         | (0.18      | )                                   | $          | (0.22 | ) | $ | 1.04 |   | $ | 1.20 |   |
| Diluted  earnings (loss) per share                                                                                            |   | $                                         | (0.18      | )                                   | $          | (0.22 | ) | $ | 1.04 |   | $ | 1.20 |   |
|                                                                                                                          |   |                                      |       |                                |       |   |   |   |   |
| **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         |                                | $          | 32 |   | $ | 82 |   | $ | 83 |   |
| Net  income (loss)                                                                                                            |   | $                                         | (2,007     | )                                   | $          | (2,484 | ) | $ | 11,468 |   | $ | 13,187 |   |
| Basic  earnings (loss) per share                                                                                              |   | $                                         | (0.18      | )                                   | $          | (0.22 | ) | $ | 1.04 |   | $ | 1.19 |   |
| Diluted  earnings (loss) per share                                                                                            |   | $                                         | (0.18      | )                                   | $          | (0.22 | ) | $ | 1.03 |   | $ | 1.19 |   |

 

### **Commitments and Contingencies**

### ** **

# **EnvironmentalMatters**

# ** **

There are two claimsagainst the Company for as yet unknown costs for clean up of allegedenvironmental contamination related to manufactured gas plant sites that werepreviously operated by companies, which were subsequently merged into Cascade.

 

The first claim wasreceived in 1995, and relates to a site in Oregon. An investigation has shownthat contamination does exist, but there is currently not enough informationavailable to estimate the potential liability associated with this claim. It isexpected that other parties will participate in the clean up costs. Through theend of the fiscal year the amounts spent, primarily on investigation andcontainment, have been immaterial.

 

The second claim wasreceived in 1997, and relates to a site in Washington. An investigation hasdetermined there is evidence of contamination at the site, but there is alsoevidence of an oil line crossing the property, operated by an unrelated party,which may have also contributed to the contamination. There is currently notenough information available to estimate the potential liability associatedwith this claim. The party who originally made this claim has not been activelypursuing it.

 

Management intends topursue reimbursement from its insurance carriers, and recovery from itscustomers through increased rates, for any remediation costs for which theCompany is determined to be liable. There is precedent for such recoverythrough increased rates, as both the Washington Utilities and TransportationCommission (WUTC) and the Oregon Public Utilities Commission (OPUC) have previouslyallowed regulated utilities to increase customer rates to recover similarcosts.

 

# **Litigationand Other Contingencies**

# ** **

Various lawsuits, claims,and contingent liabilities may arise from time to time from the conduct of theCompany’s business.

 

8

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Settlementin Fatality Case:****In the fourth quarter of fiscal 2002 afatal accident occurred involving facilities owned by the Company, located onthe property of one of the Company’s commercial customers. InDecember 2002 a settlement of all plaintiffs’ claims was agreed to inconsideration of a $750,000 payment. The Company and its co-defendant have eachpaid $375,000, and have agreed to resolve the allocation of the totalsettlement payment between them in future negotiations or proceedings.

 

No claims now pending,including those mentioned in preceding paragraphs, in the opinion ofmanagement, are expected to have a material effect on the Company’s financialposition, results of operations, or liquidity.

 

# **NewAccounting Standards**

# ** **

EffectiveOctober 1, 2002, the Company adopted accounting standards prescribed underFAS Nos. 142, 143, 144, and 145, the effects of which are described in thefollowing 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.

 

***FAS No. 143****,**“Accountingfor Asset Retirement Obligations.”*This standard requires companiesto record a liability to recognize future obligations to remove assets. TheCompany has reviewed its franchises and significant easements and otherdocuments to determine whether any include provisions requiring removal ofassets. No significant obligations have been identified, and adoption of thisstandard did not have a significant impact on the Company’s financialstatements.

 

***FAS No. 144****,**“Accountingfor the Impairment or Disposal of Long-Lived Assets.”* This standardprovides for the recognition and measurement of an impairment loss if it isdetermined the carrying amount of a long-lived asset is not recoverable, andexceeds its fair value. It also identifies events or changes in circumstancesthat would require a test for recoverability. Adoption of this standard did nothave a significant impact on the Company’s financial statements.

 

***FAS No. 145****,* *“Rescission of FASB Statements No. 4, 44, and 64,Amendment of FASB Statement No. 13, and Technical Corrections.”*Adoption of this standard did not have an impact on the Company’s financialstatements.

 

TheCompany has subsequently adopted FAS Nos. 146 and 148, and FASB InterpretationNos. 45 and 46, as follows:

 

*The*FASB hasissued FAS No. 146, titled *“Accounting for Costs Associated with Exit orDisposal Activities.”* This standard is effective for exit ordisposal activities initiated after December 31, 2002, and has beenadopted by the Company effective January 1, 2003. Adoption of thisstandard did not have an impact on the Company’s financial statements.

 

On December 31,2002, the Financial Accounting Standards Board (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 voluntarychange to the fair-value-based method of accounting for stock-based employeecompensation. In addition, this Statement amends the disclosure requirements ofStatement 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 aboveunder “**Stock-Based Compensation**”.

 

9

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In November 2002,the FASB issued Interpretation 45, “*Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others”.* The Interpretation elaborateson the existing disclosure requirements for most guarantees, including loanguarantees such as standby letters of credit. It also clarifies that at thetime a company issues a guarantee, the company must recognize an initialliability for the fair value, or market value, of the obligations it assumesunder the guarantee and must disclose that information in its interim andannual financial statements. The provisions related to recognizing a liabilityat inception of the guarantee for the fair value of the guarantor’s obligationsdoes not apply to product warranties or to guarantees accounted for asderivatives. The initial recognition and initial measurement provisions apply ona prospective basis to guarantees issued or modified after December 31,2002. Adoption of this standard as of January 1, 2003 did not have animpact on the Company’s financial statements.

 

In January 2003, theFASB issued Interpretation 46, “*Consolidationof Variable Interest Entities.”*The Interpretation addressesconsolidation by business enterprises of variable interest entities which haveone or both of the following characteristics:

 

1)              Theequity investment 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)              Theequity investors lack one or more of the following essential characteristics ofa controlling financial interest:

 

a.               The direct or indirect ability tomake decisions about the entity’s activities through voting rights or similarrights

 

b.              Theobligation to absorb the expected losses of the entity if they occur, whichmakes it possible for the entity to finance its activities

 

c.               Theright to receive the expected residual returns of the entity if they occur,which is the compensation for the risk of absorbing the expected losses.

 

Adoption of Interpretation46 as of February 1, 2003 did not have an impact on the Company’sfinancial statements.

 

***FAS No. 149.***In April 2003 theFASB issued FAS No. 149, entitled *“Amendmentof Statement 133 on Derivative Instruments and Hedging Activities”*This Statement amends and clarifies financial accounting and reporting forderivative instruments, including certain derivative instruments embedded inother contracts (collectively referred to as derivatives) and for hedgingactivities under FAS No. 133, *Accounting forDerivative Instruments and Hedging Activities,* and is effective forcontracts entered into or modified after June 30, 2003. The Company hasnot completed its evaluation of the impact of FAS No. 149, but because theCompany’s financial statements do not include any derivative assets orliabilities, it does not believe adoption of the standard will have an impacton its financial statements.

 

***FAS No. 150.*** In May 2003, theFASB issued FAS No. 150, entitled *“Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity”*. This statement is effective for financial instrumentsentered into or modified after May 31, 2003, and is otherwise effective atthe beginning of the first interim period beginning after June 15, 2003.The Company has no financial instruments affected by FAS No. 150, thereforeadoption by the Company as of July 1, 2003 will not impact the Company’sfinancial statements.

 

**Enron Contract Termination**

 

During fiscal 2002,Cascade terminated two contracts for the purchase of gas from Enron based uponEnron’s insolvency and concerns about its ability to perform.   Enron Canada, the supplier for one of thecontracts, disputed the Company’s position and claimed $3.4 million intermination charges.  Recognizing the complexityof the issues and the uncertainties of potential litigation, the Companyrecorded a charge to earnings of $2.8 million in fiscal 2002. InDecember 2002, the bankruptcy estate of Enron asserted a claim of $1.4million as a termination payment for the second contract, of which Enron NorthAmerica was the supplier.  Based upon anassessment of both Enron claims made after investigation of the Enron NorthAmerica demands, Cascade recorded an additional charge of $865,000 in fiscal2003 second quarter. In the third quarter, Cascade reached a settlement withEnron that fully resolved all claims. The settlement had no impact on thirdquarter earnings.

 

10

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# **RetirementPlan Changes**

# ** **

Aspart of a comprehensive review of its employee benefits costs, in the thirdquarter of fiscal 2003 the Company announced changes in its retirement plansfor non-bargaining-unit employees. Effective October 1, 2003, employeeswill no longer accrue benefits under the defined benefit pension and executivesupplemental retirement plans. Benefits accrued as of that point will be frozenfor employees. Subsequent benefits will be in the form of contributions to theexisting Employee Savings Plan and Retirement Trust (401(k) Plan). In additionto the existing match for employee contributions the Company will contribute 4%of eligible salaries, and a 1% to 4% transition contribution, to employeeretirement accounts. Additionally, there will be annually determined“profit-sharing” contributions based on achieving established targets. The defined benefit retirement plan remainsunchanged for bargaining-unit employees. The Company’s retiree medical plan hasalso changed, with the addition of participant contributions beginningJanuary 1, 2004.

 

Therevisions to the defined benefit plans constitute plan curtailments under FASNo. 88, *Employers’ Accounting forSettlements and Curtailments of Defined Benefit Pension Plans and forTermination Benefits.*Therefore, the company recorded a charge to operatingexpense of $1,451,000 in the third quarter as a curtailment loss associatedwith unrecognized prior service cost and transition obligation.

 

Withthe announcement of these plan changes, the Company’s fiscal 2003 expense underthese plans was re-measured as of May 1, 2003. Re-measured benefitsexpense for fiscal 2003, excluding the above mentioned curtailment loss,decreased $898,000 compared to previously measured 2003 expense. Of thisreduction, $359,000 was realized in the third quarter. Reflected in there-measured expense is a reduction in the discount rate assumption, from 6.75%at October 1, 2002, to 6.25% at May 1, 2003.

 

11

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

 

The following ismanagement’s assessment of the Company’s financial condition and a discussionof the principal factors that affected consolidated results of operations andcash flows for the three-month and nine-month periods ended June 30, 2003and June 30, 2002.

 

## **CRITICAL ACCOUNTING POLICIES**

## ** **

TheCompany’s financial statements are prepared in accordance with accountingprinciples generally accepted in the United States of America (GAAP). Infollowing GAAP, management exercises judgment in selection and application ofaccounting principles. Management considers Critical Accounting Policies to bethose where different assumptions regarding application could result inmaterial differences in financial statements.

 

## **Revenue Recognition**

## ** **

The Company recognizesoperating revenues based on deliveries of gas and other services to customers.This includes estimated revenues for gas delivered but not billed toresidential and commercial customers from the latest meter reading date to theend of the accounting period.

 

## **Regulatory Accounting**

## ** **

TheCompany’s accounting policies and practices are generally the same as used byunregulated companies for financial reporting under GAAP. However, Statement ofFinancial Accounting Standards (FAS) No. 71, “*Accountingfor the Effects 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 are recoveredfrom customers, the Company then amortizes these costs as expense in the incomestatement, in an amount equivalent to the amounts recovered. Similarly, certainrevenue items, or cost reductions may be deferred as regulatory liabilities,which are later amortized to the income statement as customer rates arereduced.

 

Inorder to apply the provisions of FAS No. 71, the following conditions mustapply:

 

•                  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.

 

TheCompany periodically assesses whether conditions merit the continuedapplicability of FAS No. 71. In the event the Company should determine in thefuture that all or a portion of its regulatory assets and liabilities no longermeet the above criteria, it would be required to write off the related balancesof its regulatory assets and liabilities, and reflect the write off in itsincome statement. At June 30, 2003 there were $14,465,000 of regulatoryassets included in Deferred Charges, and $6,137,000  of regulatory liabilities included in Deferred Credits and Other.

 

## **Use of Estimates**

## ** **

Thepreparation of financial statements in conformity with GAAP requires managementto make estimates and assumptions that affect the reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities at the dateof the financial statements, and the reported amounts of revenues and expensesduring the reporting period. The Company has used estimates in measuringcertain deferred charges and deferred credits related to items subject toapproval of the WUTC and the OPUC. Estimates are

 

12

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also used in the development of discount ratesand trend rates related to the measurement of retirement benefit obligationsand accrual amounts, allowances for doubtful accounts, estimates of unbilledrevenue, accruals necessary for contingencies, and in the determination ofdepreciable lives of utility plant. On an ongoing basis, management evaluatesthe estimates used, based on historical experience, current conditions and onvarious other assumptions believed to be reasonable under the circumstances.Actual results may differ from these estimates under different assumptions orconditions.

 

## **Derivatives**

## ** **

The company recordsderivative transactions according to the provisions of FAS No. 133, *“Accountingfor Derivative Instruments and Hedging Activities”*, as amended byFAS No. 138, *“Accounting for Certain Derivative Instruments and Certain HedgingActivities”.*These standards require that the fair value of allderivative financial instruments be recognized as either assets or liabilitieson the Company’s balance sheet.  Changesduring a period in the fair value of a derivative instrument would be includedin earnings or other comprehensive income for the period.

 

TheCompany did not enter into derivative transactions during the first threequarters of fiscal 2003, and as of June 30, 2003, does not have anyderivative assets or liabilities. The Company’s contracts for purchase ofnatural gas are not derivative instruments because they are considered normalpurchases under the provisions of FAS Nos. 133 and 138.

 

# **NEWACCOUNTING STANDARDS**

# ** **

EffectiveOctober 1, 2002, the Company adopted accounting standards prescribed underFAS Nos. 142, 143, 144, and 145, the effects of which are described in thefollowing 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’s financialstatements.

 

***FAS No. 143,**“Accountingfor Asset Retirement Obligations.”*****This standard requirescompanies to record a liability to recognize future obligations to removeassets. The Company has reviewed its franchises and significant easements and otherdocuments to determine whether any include provisions requiring removal ofassets. No significant obligations have been identified, and adoption of thisstandard did not have a significant impact on the Company’s financialstatements.

 

***FAS No. 144,**“Accountingfor the Impairment or Disposal of Long-Lived Assets.”*** Thisstandard provides for the recognition and measurement of an impairment loss ifit is determined the carrying amount of a long-lived asset is not recoverable,and exceeds its fair value. It also identifies events or changes incircumstances that would require a test for recoverability. Adoption of thisstandard did not have a significant impact on the Company’s financialstatements.

 

***FAS No. 145,* *“Rescission of FASB Statements No. 4, 44, and 64,Amendment of FASB Statement No. 13, and Technical Corrections.”***Adoption of this standard did not have an impact on the Company’s financialstatements.

 

TheCompany has subsequently adopted FAS Nos. 146 and 148, and FASB InterpretationNos. 45 and 46, as follows:

 

*The*FASB hasissued FAS No. 146, titled *“Accounting for Costs Associated with Exit orDisposal Activities.”* This standard is effective for exit ordisposal activities initiated after December 31, 2002, and has beenadopted by the Company effective January 1, 2003. Adoption of thisstandard did not have an impact on the Company’s financial statements.

 

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On December 31,2002, the 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 in the financial statementfootnotes under “**Stock-Based Compensation**”.

 

In November 2002,the FASB issued Interpretation 45, “*Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others”.* The Interpretation elaborateson the existing disclosure requirements for most guarantees, including loanguarantees such as standby letters of credit. It also clarifies that at thetime a company issues a guarantee, the company must recognize an initialliability for the fair value, or market value, of the obligations it assumesunder the guarantee and must disclose that information in its interim andannual financial statements. The provisions related to recognizing a liabilityat inception of the guarantee for the fair value of the guarantor’s obligationsdoes not apply to product warranties or to guarantees accounted for asderivatives. The initial recognition and initial measurement provisions applyon a prospective basis to guarantees issued or modified after December 31,2002. Adoption of this standard as of January 1, 2003 did not have animpact on the Company’s financial statements.

 

In January 2003, theFASB issued Interpretation 46, “*Consolidationof Variable Interest Entities.”*The Interpretation addressesconsolidation by business enterprises of variable interest entities which haveone or both of the following characteristics:

 

1)              Theequity investment 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)              Theequity investors lack one or more of the following essential characteristics ofa controlling financial interest:

 

a.               The direct or indirect ability tomake decisions about the entity’s activities through voting rights or similarrights

b.              Theobligation to absorb the expected losses of the entity if they occur, whichmakes it possible for the entity to finance its activities

c.               Theright to receive the expected residual returns of the entity if they occur,which is the compensation for the risk of absorbing the expected losses.

 

Adoption ofInterpretation 46 as of February 1, 2003 did not have an impact on theCompany’s financial statements.

 

***FAS No. 149.***In April 2003 theFASB issued FAS No. 149, entitled *“Amendmentof Statement 133 on Derivative Instruments and Hedging Activities”*This Statement amends and clarifies financial accounting and reporting forderivative instruments, including certain derivative instruments embedded inother contracts (collectively referred to as derivatives) and for hedgingactivities under FAS No. 133, *Accounting forDerivative Instruments and Hedging Activities,* and is effective forcontracts entered into or modified after June 30, 2003. The Company hasnot completed its evaluation of the impact of FAS No. 149, but because theCompany’s financial statements do not include any derivative assets orliabilities, it does not believe adoption of the standard will have an impacton its financial statements.

 

***FAS No. 150.*** In May 2003, theFASB issued FAS No. 150, entitled *“Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity”*. This statement is effective for financial instrumentsentered into or modified after May 31, 2003, and is otherwise effective atthe beginning of the first interim period beginning after June 15, 2003.The Company has no financial instruments affected by FAS No. 150, thereforeadoption by the Company as of July 1, 2003 will not impact the Company’sfinancial statements.

 

14

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**RESULTS OF OPERATIONS**

 

Net loss for the thirdquarter of fiscal 2003 (quarter ended June 30, 2003) was $1,980,000, or$0.18 per share, basic and diluted, compared to a net loss of $2,452,000, or$0.22 per share, basic and diluted, for the quarter ended June 30,2002.  For the nine-month period endedJune 30, 2003, net income was $11,550,000, or $1.04 per share, basic anddiluted, compared to $13,270,000, or $1.20 per share, basic and diluted, forthe nine months ended June 30, 2002. Primary factors influencing both thequarter and year-to-date comparisons include contract termination charges aswell as charges associated with changes in employee benefit plans, as furtherexplained in the following paragraphs.

 

# **OperatingMargin**

# ** **

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

 
|                                 |   | **Third  Quarter of Fiscal** |       | **Percent  Change** |       | **Year to  Date June 30** |       | **Percent  Change** |       |
|--------------------------------------|--------|------------------------------|------------|---------------------|------------|--------------------------------|------------|---------------------|------------|
| **2003**                             |   | **2002**                     | **2003**   |                | **2002**   |
|                                 |   | **(dollars in thousands)**   | ** ** |                | ** ** | **(dollars in thousands****)** | ** ** |                | ** ** |
| **Degree Days**                      |   | 826                          |       | 840                 |       | -1.7                           | %          | 4,902               |       | 5,229 |   | -6.3 | % |
| **Average Number of Customers**      |   |                         |       |                |       |                           |       |                |       |   |   |   |   |
| Residential                          |   | 177,978                      |       | 170,289             |       | 4.5                            | %          | 177,246             |       | 169,681 |   | 4.5 | % |
| Commercial                           |   | 28,984                       |       | 28,329              |       | 2.3                            | %          | 28,904              |       | 28,287 |   | 2.2 | % |
| **Average Therm Usage per Customer** |   |                         |       |                |       |                           |       |                |       |   |   |   |   |
| Residential                          |   | 114                          |       | 114                 |       | 0.0                            | %          | 638                 |       | 702 |   | -9.1 | % |
| Commercial                           |   | 591                          |       | 608                 |       | -2.8                           | %          | 3,078               |       | 3,381 |   | -9.0 | % |
| **Operating Margin**                 |   |                         |       |                |       |                           |       |                |       |   |   |   |   |
| Residential                          |   | $                            | 6,945      |                | $          | 6,399                          |       | 8.5                 | %          | $ | 33,485 |   | $ | 34,317 |   | -2.4 | % |
| Commercial                           |   | 3,786                        |       | 3,786               |       | 0.0                            | %          | 18,661              |       | 19,687 |   | -5.2 | % |
|                                      |        |                              |            |                     |            |                                |            |                     |            |  |  |  |  |  |  |  |  |

 

For the quarter endedJune 30, 2003, operating margin from sales to residential and commercialcustomers increased $546,000 from the same period last year. The addition of8,344 new residential and commercial customers, a 4.2% growth rate, was theprimary factor in the increase in margin.

 

For the nine-monthperiod, the warm winter weather in fiscal 2003 affected consumption, resultingin a $3,968,000 decline in margin, partially offset by $2,232,000 from theaddition of new customers.

 

ElectricGeneration Margin. Margin derived from electric generationcustomers declined $59,000 for the quarter and $819,000 year to date. The declinecan be attributed to the effects of the slow economy and weather conditions onthe demand for electricity, as well as on increased availability ofhydroelectric resources in 2003.

 

Industrial andOther Margin. Total Industrial and Other Margin, excludingelectric generation margin, was $5,296,000 for the third quarter of fiscal2003, compared to $2,113,000 for the comparable 2002 period. Margin in thethird quarter of 2002 included a charge of $2,800,000 in connection withterminating a gas supply contract with Enron. Excluding that charge, marginfrom these customers increased $383,000 over the third quarter of fiscal 2002,including $124,000 from distribution and related services, and $259,000 fromhigher gas management service revenue. A significant portion of gas managementservice margins is derived from arranging gas supplies for these customers. Asthese arrangements expire and new ones are entered into, margins willfluctuate.

 

On a year-to-date basis,total Industrial and Other Margin, excluding electric generation margin,increased $3,732,000. Affecting the comparison were charges in connection withterminating gas supply contracts with Enron, including $2,800,000 in thirdquarter of 2002, and $865,000 in second quarter of

 

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2003. Excluding those charges, the margin increase was $1,797,000,including $511,000 from distribution and related services, and $1,286,000 fromhigher gas management service revenue.

 

Enron Settlement.During fiscal 2002, Cascade terminated two contracts for the purchase of gasfrom Enron based upon Enron’s insolvency and concerns about its ability toperform.   Enron Canada, the supplierfor one of the contracts, disputed the Company’s position and claimed $3.4million in termination charges. Recognizing the complexity of the issues and the uncertainties ofpotential litigation, the Company recorded a charge to earnings of $2.8 millionin fiscal 2002. In December 2002, the bankruptcy estate of Enron asserteda claim of $1.4 million as a termination payment for the second contract, ofwhich Enron North America was the supplier. Based upon an assessment of both Enron claims made after investigationof the Enron North America demands, Cascade recorded an additional charge of $865,000in the fiscal 2003 second quarter. During the third quarter of fiscal 2003, theCompany reached settlements that fully resolved all Enron claims. Thesettlement had no impact on third quarter earnings.

 

**Cost of Operations**

 

Cost of operations for thequarter ended June 30, 2003, which consists of operating expenses,depreciation and amortization, and property and payroll taxes, increased$2,359,000 (15.8%) for the quarter and $2,705,000 (5.9%) year to date, comparedto the prior year.

 

Operating Expenses,which are primarily labor and benefits expenses, increased $2,099,000 for thequarter. The primary factor contributing to this increase was a charge of$1,451,000 related to changes in the Company’s employee pension and executivesupplemental retirement plans. This charge was required under FAS No. 88, *Employers’Accounting for Settlements and Curtailments of Defined Benefit Pension Plansand for Termination Benefits.*Also contributing to the increase inoperating expenses is a $647,000 increase in purchased services, stemmingprimarily from consulting charges related to two projects, the Company’s reviewof its benefit plans, and to prepare the Company for the compliancerequirements of the Sarbanes-Oxley Act.

 

On a year-to-date basis,total operating expenses increased $2,248,000, with the primary factors beingthe same as for the quarterly comparisons, as well as a charge of $375,000 forsettling a personal injury claim. A $250,000 personal injury settlement paid infiscal 2002 also affected the year-to-date comparisons.

 

Depreciation andAmortization increased $100,000 for the quarter and $322,000year to date, over the 2002 periods, primarily as a result of increases indepreciable gas distribution system assets.

 

Property andPayroll Taxes increased $160,000 for the quarter and $135,000year to date due primarily to higher property taxes reflecting higherassessments associated with increases in gas distribution system assets.

 

# **Interestand Other Deductions – Net**

# ** **

Interest and otherdeductions – net, for the quarter was $27,000 lower for the quarter.Year-to-date non-operating expense was up $136,000 due primarily to issuing $40million of 7.50% 30-year debt in November 2001. The long-term debtreplaced lower interest short-term debt.

 

# **LIQUIDITYAND CAPITAL RESOURCES**

# ** **

The seasonal nature of the Company’s business createsshort-term cash requirements to finance customer accounts receivable andconstruction expenditures. To provide working capital for these requirements,the Company has a $50,000,000 bank revolving credit commitment. This agreementhas an annual 0.16% commitment fee, and a term that expires in 2004. TheCompany also has a $10,000,000 uncommitted bank credit line. As ofJune 30, 2003, there was no outstanding debt under these credit lines.

 

To provide longer-termfinancing, the Company in 2001 filed an omnibus registration statement underthe Securities Act of 1933 providing the ability to issue up to $150,000,000 ofnew debt and equity

 

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securities. On November 26, 2001, the Company issued $40,000,000of 7.5% 30-year debt under the omnibus registration statement, leaving$110,000,000 available under that registration statement.

 

Because of theavailability of short-term credit and the ability to issue long-term debt andadditional equity, management believes it has adequate financial flexibility tomeet its anticipated cash needs.

 

###### **Retirement Plan Funding**

###### ** **

Management, in consultation with its actuaries, hasexamined its retirement plan funding requirements and has concluded that basedon existing actuarial assumptions, funding to the defined benefit plan isexpected to be at $3,500,000 per year for the next three years. By comparison,funding in fiscal year 2002 was $4,024,000.

 

# **OperatingActivities**

# ** **

Net cash provided byoperating activities for the nine months ended June 30, 2003 was$38,954,000 compared to $39,974,000 for the comparable period last year,consistent with the decrease in net income from 2002.

 

**Investing Activities**

 

Cash used by investingactivities for the nine months ended June 30, 2003 was $16,830,000,compared to $14,164,000 for the prior year’s period. The increase is primarilyrelated to higher expenditures for expansion of the gas distribution system andexpenditures to remodel and upgrade two of the Company’s district officebuildings.

 

A project to install automated meter reading was approved inthe third quarter, with a total cost of approximately $15,000,000 over 18months. This project is expected to increase fiscal 2003 capital expendituresto approximately $30,000,000. These expenditures are not expected to requireusage of the Company’s $50 million credit line or to significantly affectlong-term financing needs of the Company.

 

**Financing Activities**

 

Net financing activitiesfor the nine months ended June 30, 2003 used $6,933,000, compared to$9,243,000 for the prior year. The primary financing activity during 2003 wasthe payment of dividends on common stock.

 

**EMPLOYEEBENEFITS PLAN CHANGES**

** **

TheCompany has conducted a comprehensive review of its employee benefits plans,and in the third quarter of fiscal 2003 began to implement significant changesto its employee retirement plan, executive retirement plan and healthcare plansfor both active employees and retirees. The changes will apply to the Company’snon-bargaining-unit employees, and are designed to reduce benefits costs by anestimated $3.0 to $3.5 million per year, beginning in fiscal 2004. The changesare also designed to reduce future volatility in benefits expenses andfacilitate management control over future cost increases, while retaining abenefits package management believes is competitive. Some cost reductions willoccur in fiscal 2003, but these reductions are being offset by costs ofimplementing the changes, including the charge described below.

 

Someof the changes involve the Company’s employee retirement plan and executivesupplemental retirement plan.  As ofSeptember 30, 2003 these defined benefit plans will stop accruingadditional benefits.  Instead, definedcontribution plans will be used for benefits earned in the future. Therevisions to the defined benefit plans constitute plan curtailments under FASNo. 88, *Employers’ Accounting forSettlements and Curtailments of Defined Benefit Pension Plans and forTermination Benefits.*Therefore, the company recorded a charge tooperating expense of approximately $1,451,000 in the third quarter of fiscal2003, as a curtailment loss associated with unrecognized prior service cost andtransition obligation.

 

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

 

Cascade has evaluated itsrisk related to financial instruments whose values are subject to marketsensitivity. The Company has fixed-rate debt obligations, but does not havederivative financial instruments subject to interest rate risk. Cascade makesinterest and principal payments on these obligations in the normal course ofits business, and does not plan to redeem these obligations prior to normalmaturities, except to the extent required under the terms of the Company’s $40million note offering in the case of the death of individual owners of thenotes.

 

TheCompany’s natural gas purchase commodity prices are subject to fluctuationsover time resulting from weather, congestion on interstate pipelines, and otherunpredictable factors. The Company has fixed-price contracts covering asubstantial portion of natural gas supply requirements of its core customersthrough September 2004. This strategy is followed to assure availabilityof adequate supplies to meet customer needs and to shield the Company and itscore customers from price volatility. There is risk that market prices may fallbelow the price levels established in the contracts. However the WUTC and theOPUC support the Company’s strategy, and have approved rates that reflect therecovery of the contracted prices. Thus the Company believes that regulatorypolicy, including Purchased Gas Adjustment mechanisms, assure the recovery ofprudently incurred wholesale gas cost, and that the Company’s commodity pricerisk is immaterial. Further, the Company does not engage in significant energytrading activities.

 

**Item 4: Controls and Procedures**

** **

The Company maintainscontrols and procedures designed to ensure that required disclosure informationin the reports the Company files or submits under the Securities Exchange Actof 1934, as amended, is recorded, processed, summarized and reported within thetime period specified 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 were effective.

 

The Company made nosignificant changes in its internal controls or in other factors that couldsignificantly affect those controls during the quarter covered by this reportor subsequent to the date of the evaluation of those controls by the ChiefExecutive Officer and Chief Financial Officer.

 

**FORWARD LOOKING STATEMENTS**

 

Statementscontained in this report that are not historical in nature are forward-lookingstatements within the meaning of the Private Securities Litigation Reform Actof 1995. Forward-looking statements are subject to risks and uncertainties thatmay cause actual future results to differ materially. Such risks anduncertainties with respect to the Company include, among others, its ability tosuccessfully implement internal performance goals, competition from alternativeforms of energy, consolidation in the energy industry, the failure or inabilityof key natural gas suppliers to honor their commitments, the capital-intensivenature of the Company’s business, regulatory issues, including the need foradequate and timely rate relief to recover increased capital and operatingcosts resulting from customer growth and to sustain dividend levels, theweather, increasing competition brought on by deregulation initiatives at thefederal and state regulatory levels, the potential loss of large volumeindustrial customers due to “bypass” or the shift by such customers to specialcompetitive contracts at lower per unit margins, exposure to environmentalcleanup requirements, and economic conditions, particularly in the Company’sservice area.

 

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**PARTII.  Other Information**

 

**Item1.  Legal Proceedings**

 

**Enron Contract Termination**:

 

During fiscal2002, Cascade terminated two contracts for the purchase of gas from Enron basedupon Enron’s insolvency and concerns about its ability to perform.   Enron Canada, the supplier for one of thecontracts, disputed the Company’s position and claimed $3.4 million intermination charges. Recognizing the complexity of the issues and theuncertainties of potential litigation, the Company recorded a charge of $2.8million in fiscal 2002. In December 2002, the bankruptcy estate of Enronasserted a claim of $1.4 million as a termination payment for the secondcontract, of which Enron North America was the supplier.  Based upon an assessment of both Enronclaims made after investigation of the Enron North America demands, Cascaderecorded an additional charge of $865,000 in the fiscal 2003 second quarter.During the third quarter of fiscal 2003, the Company reached settlements thatfully resolved all Enron claims.

 

**Item2.  Changes in Securities**

 

Under the terms of itsbank credit agreement, the Company is required to maintain a minimum tangiblenet worth of $106,215,000 as of June 30, 2003. Under this agreement,approximately $16,988,000 was available for payment of dividends atJune 30, 2003.

 

**Item5.  Other Information**

 

Ratio of Earnings toFixed Charges:

 
| **Twelve  Months Ended** |   |
|--------------------------|--------|
| **6/30/2003**            |   | **9/30/2002** |   | **9/30/2001** |   | **9/30/2000** |   | **9/30/1999** |   | **9/30/1998** |   |
|                     |   |   |   |   |   |   |   |   |   |   |   |
| 2.05                     |   | 2.27 |   | 3.39 |   | 3.12 |   | 3.00 |   | 2.42 |   |

 

For purposes of thiscalculation, earnings include income before income taxes, plus fixed charges.Fixed charges include interest expense and the amortization of debt issuanceexpenses. Refer to Exhibit 12 for the calculation of these ratios, as well asthe ratio of earnings to fixed charges including preferred dividends.

 

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

 

a. Exhibits:

 
| **No.** |   | **Description**                                                                                                          |
|---------|--------|--------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                     |
| 12      |   | Computation of Ratio of  Earnings to Fixed Charges                                                                       |
|    |   |                                                                                                                     |
| 31      |   | Certification  Accompanying Periodic Report Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002 (18 U.S.C. 1350)  |
|    |   |                                                                                                                     |
| 32      |   | 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 July 25, 2003, the Company furnished a Report on Form8-K dated July 18, 2003, to provide the information contained in itsJuly 18 release of third quarter fiscal 2003 earnings.

 

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**SIGNATURE**

 

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

 

 
| **CASCADE NATURAL GAS CORPORATION** |
|-------------------------------------|
|                                |
|                                |   |
| By:                                 |   | /s/  J. D.   Wessling | . |   |
|                                |   |   |
|                                | J. D. Wessling |   |
|                                | Sr. Vice  President Finance and Chief Financial Officer |   |
|                                | (Principal  Financial Officer) |   |
|                                |   |   |
|                                |   |   |
| Date:                               |   | August 12,  2003 | . |   |

 

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