**FORM 10-Q**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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

**For thequarterly period ended June 30, 2006**

**Commissionfile number: 1-7196**

**CASCADENATURAL GAS CORPORATION**(Exact name of Registrant as 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 telephonenumber including area code)  **(206) 624-3900**

Indicate by checkmark whether 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  x       No  o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large acceleratedfiler  o                Accelerated filer  x                    Non-accelerated filer  o

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

Indicate thenumber of shares outstanding of each of the registrant’s classes of commonstock, as of the latest practicable date.
| Title                                 | ** ** | **Outstanding**                 |
|---------------------------------------|------------|---------------------------------|
| Common Stock,  Par Value $1 per Share |       | 11,505,996 as of  July 31, 2006 |

 

 

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**CASCADENATURAL GAS CORPORATION**

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

 

2

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**PARTI.   Financial Information**

**Item 1.  Financial Statements**

CASCADE NATURAL GAS CORPORATION

CONSOLIDATED CONDENSEDSTATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(unaudited)
| ** **                                              | ** **    | **THREE MONTHS ENDED**                     | ** ** | **NINE MONTHS ENDED** | ** ** |
|---------------------------------------------------------|---------------|------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                              | ** **    | **Jun 30, 2006**                           | ** ** | **Jun 30, 2005**      | ** ** | **Jun 30, 2006** | ** ** | **Jun 30, 2005** | ** ** |
| ** **                                              | ** **    | **(thousands except per-share data)** | ** ** |
| ** **                                              | ** **    | ** **                                           | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operating revenues                                      |          | $                                                    | 76,400     |                            | $          | 56,315 |   | $ | 397,828 |   | $ | 278,638 |   |
|                                                    |          |                                                 |       |                            |       |   |   |   |   |
| Less:       Gas purchases |          | 52,488                                               |       | 34,646                          |       | 288,562 |   | 182,098 |   |
|                                                    | Revenue taxes |                                                 | 5,514      |                            | 3,995      |   | 26,845 |   | 19,103 |   |
| Operating margin                                        |          | 18,398                                               |       | 17,674                          |       | 82,421 |   | 77,437 |   |
|                                                    |          |                                                 |       |                            |       |   |   |   |   |
| Cost of operations:                                     |          |                                                 |       |                            |       |   |   |   |   |
| Operating  expenses                                     |          | 11,378                                               |       | 10,977                          |       | 31,776 |   | 32,418 |   |
| Depreciation and  amortization                          |          | 4,489                                                |       | 4,326                           |       | 13,338 |   | 12,811 |   |
| Property and  miscellaneous taxes                       |          | 1,003                                                |       | 1,109                           |       | 2,859 |   | 3,011 |   |
|                                                    |          | 16,870                                               |       | 16,412                          |       | 47,973 |   | 48,240 |   |
|                                                    |          |                                                 |       |                            |       |   |   |   |   |
| Income from operations                                  |          | 1,528                                                |       | 1,262                           |       | 34,448 |   | 29,197 |   |
| Less interest and other  deductions - net               |          | 2,142                                                |       | 2,891                           |       | 7,997 |   | 8,761 |   |
| Income (loss) before  income taxes                      |          | (614                                                 | )          | (1,629                          | )          | 26,451 |   | 20,436 |   |
|                                                    |          |                                                 |       |                            |       |   |   |   |   |
| Income tax (benefit)                                    |          | (87                                                  | )          | (502                            | )          | 9,951 |   | 7,579 |   |
| Net Income (Loss)                                       |          | (527                                                 | )          | (1,127                          | )          | 16,500 |   | 12,857 |   |
| Other Comprehensive Income  (Loss)                      |          |                                                 |       |                            |       |   |   |   |   |
| Unrealized  losses on derivative commodity instruments  |          | (2                                                   | )          | —                          |       | (987 | ) | — |   |
| Income tax  benefit                                     |          | 18                                                   |       | —                          |       | 370 |   | — |   |
| Other Comprehensive  Income (Loss)                      |          | 16                                                   |       | —                          |       | (617 | ) | — |   |
|                                                    |          |                                                 |       |                            |       |   |   |   |   |
| Comprehensive Income  (Loss)                            |          | $                                                    | (511       | )                               | $          | (1,127 | ) | $ | 15,883 |   | $ | 12,857 |   |
| Weighted average common  shares outstanding             |          | 11,487                                               |       | 11,367                          |       | 11,456 |   | 11,319 |   |
| Earnings (loss) per  common share, basic and diluted    |          | $                                                    | (0.05      | )                               | $          | (0.10 | ) | $ | 1.44 |   | $ | 1.14 |   |
|                                                    |          |                                                 |       |                            |       |   |   |   |   |
| Cash dividends per share                                |          | $                                                    | 0.24       |                            | $          | 0.24 |   | $ | 0.72 |   | $ | 0.72 |   |
|                                                         |               |                                                      |            |                                 |            |  |  |  |  |  |  |  |  |  |

 

The accompanyingnotes are an integral part of these financial statements.

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**CASCADENATURAL GAS CORPORATION**

**CONSOLIDATED CONDENSED BALANCE SHEETS**

(Unaudited)
| ** **                                                                                                                  | ** ** | **Jun 30, 2006**           | ** ** | **Sep 30, 2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|----------------------------|------------|
| ** **                                                                                                                  | ** ** | **(dollars in thousands)** | ** ** |
| **ASSETS**                                                                                                                  | ** ** | ** **                           | ** ** | ** **                 | ** ** |
| Utility Plant, net of  accumulated depreciation of $269,579 and $257,008                                                    |       | $                                    | 340,966    |                       | $          | 340,461 |   |
| Construction  work in progress                                                                                              |       | 960                                  |       | 2,021                      |       |
|                                                                                                                        |       | 341,926                              |       | 342,482                    |       |
| Other Assets:                                                                                                               |       |                                 |       |                       |       |
| Investments in  non-utility property                                                                                        |       | 202                                  |       | 202                        |       |
| Notes  receivable, less current maturities                                                                                  |       | 2                                    |       | 46                         |       |
|                                                                                                                        |       | 204                                  |       | 248                        |       |
| Current Assets:                                                                                                             |       |                                 |       |                       |       |
| Cash and cash  equivalents                                                                                                  |       | 22,364                               |       | 1,128                      |       |
| Accounts  receivable and current maturities of notes receivable, less allowance of  $1,691 and $1,319 for doubtful accounts |       | 26,298                               |       | 23,163                     |       |
| Prepaid expenses  and other assets                                                                                          |       | 7,606                                |       | 9,463                      |       |
| Derivative  instrument assets - energy commodity                                                                            |       | 13,171                               |       | 91,957                     |       |
| Materials,  supplies and inventories                                                                                        |       | 8,638                                |       | 14,142                     |       |
| Deferred income  taxes                                                                                                      |       | 2,271                                |       | 2,292                      |       |
|                                                                                                                        |       | 80,348                               |       | 142,145                    |       |
| Deferred Charges and  Other                                                                                                 |       |                                 |       |                       |       |
| Gas cost changes                                                                                                            |       | 527                                  |       | 16,630                     |       |
| Derivative instrument  assets - energy commodity                                                                            |       | 9,698                                |       | 43,440                     |       |
| Other                                                                                                                       |       | 9,240                                |       | 7,960                      |       |
|                                                                                                                        |       | 19,465                               |       | 68,030                     |       |
|                                                                                                                        |       |                                 |       |                       |       |
|                                                                                                                        |       | $                                    | 441,943    |                       | $          | 552,905 |   |

 

4

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| ** **                                                                                                                    | ** ** | **Jun 30, 2006**           | ** ** | **Sep 30, 2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|----------------------------|------------|
| ** **                                                                                                                    | ** ** | **(dollars in thousands)** | ** ** |
| **COMMON  SHAREHOLDERS’ EQUITY AND LIABILITIES**                                                                         | ** ** | ** **                           | ** ** | ** **                 | ** ** |
| Common Shareholders’ Equity:                                                                                             |       |                                 |       |                       |       |
| Common stock,  par value $1 per share, authorized 15,000,000 shares, issued and outstanding  11,498,523 and 11,413,019 shares |       | $                                    | 11,499     |                       | $          | 11,413 |   |
| Additional  paid-in capital                                                                                                   |       | 105,540                              |       | 103,781                    |       |
| Accumulated  other comprehensive loss                                                                                         |       | (13,103                              | )          | (12,487                    | )          |
| Retained  earnings                                                                                                            |       | 24,145                               |       | 15,908                     |       |
|                                                                                                                          |       | 128,081                              |       | 118,615                    |       |
|                                                                                                                          |       |                                 |       |                       |       |
| Long-term Debt                                                                                                                |       | 165,333                              |       | 173,840                    |       |
|                                                                                                                          |       |                                 |       |                       |       |
| Current Liabilities:                                                                                                          |       |                                 |       |                       |       |
| Short-term debt                                                                                                               |       | —                               |       | 12,500                     |       |
| Current  maturities of long-term debt                                                                                         |       | 8,000                                |       | —                     |       |
| Accounts payable                                                                                                              |       | 15,178                               |       | 17,841                     |       |
| Property,  payroll and excise taxes                                                                                           |       | 5,243                                |       | 5,520                      |       |
| Dividends and  interest payable                                                                                               |       | 5,421                                |       | 6,920                      |       |
| Regulatory  liabilities                                                                                                       |       | 13,171                               |       | 91,217                     |       |
| Other current  liabilities                                                                                                    |       | 19,961                               |       | 8,209                      |       |
|                                                                                                                          |       | 66,974                               |       | 142,207                    |       |
|                                                                                                                          |       |                                 |       |                       |       |
| Deferred Credits and  Other Non-current Liabilities:                                                                          |       |                                 |       |                       |       |
| Deferred income  taxes and investment tax credits                                                                             |       | 40,675                               |       | 43,429                     |       |
| Retirement plan  obligations                                                                                                  |       | 15,909                               |       | 19,042                     |       |
| Regulatory  liabilities                                                                                                       |       | 17,250                               |       | 50,584                     |       |
| Other                                                                                                                         |       | 7,721                                |       | 5,188                      |       |
|                                                                                                                          |       | 81,555                               |       | 118,243                    |       |
|                                                                                                                          |       |                                 |       |                       |       |
| Commitments and  Contingencies                                                                                                |       | —                               |       | —                     |       |
|                                                                                                                          |       | $                                    | 441,943    |                       | $          | 552,905 |   |

 

Theaccompanying notes are an integral part of these financial statements.

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CASCADE NATURAL GASCORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)
| ** **                                                                         | ** ** | **NINE MONTHS ENDED**      | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                         | ** ** | **(dollars in thousands)** | ** ** |
| ** **                                                                         | ** ** | **Jun 30, 2006**           | ** ** | **Jun 30, 2005** | ** ** |
| Operating Activities:                                                              |       |                                 |       |   |   |
| Net income                                                                         |       | $                                    | 16,500     |   | $ | 12,857 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                 |       |   |   |
| Depreciation and  amortization                                                     |       | 13,338                               |       | 12,811 |   |
| Deferrals of gas  cost changes                                                     |       | 6,388                                |       | (5,445 | ) |
| Amortization of  gas cost changes                                                  |       | 9,715                                |       | 4,561 |   |
| Other deferrals  and amortizations                                                 |       | (2,577                               | )          | (1,581 | ) |
| Deferred income  taxes and tax credits - net                                       |       | (2,733                               | )          | 2,728 |   |
| Change in  current assets and liabilities                                          |       | 12,524                               |       | (524 | ) |
| Net cash  provided by operating activities                                         |       | 53,155                               |       | 25,407 |   |
|                                                                               |       |                                 |       |   |   |
| Investing Activities:                                                              |       |                                 |       |   |   |
| Capital  expenditures                                                              |       | (15,457                              | )          | (22,417 | ) |
| Customer  contributions in aid of construction                                     |       | 2,974                                |       | 850 |   |
| Net cash used by  investing activities                                             |       | (12,483                              | )          | (21,567 | ) |
|                                                                               |       |                                 |       |   |   |
| Financing Activities:                                                              |       |                                 |       |   |   |
| Proceeds from  issuance of long-term debt, net                                     |       | —                               |       | 28,121 |   |
| Proceeds from  issuance of common stock                                            |       | 1,845                                |       | 1,937 |   |
| Repayment of  long-term debt                                                       |       | (507                                 | )          | (9,000 | ) |
| Changes in  short-term debt, net                                                   |       | (12,500                              | )          | (16,500 | ) |
| Dividends paid                                                                     |       | (8,262                               | )          | (8,169 | ) |
| Other                                                                              |       | (12                                  | )          | — |   |
| Net cash used by  financing activities                                             |       | (19,436                              | )          | (3,611 | ) |
|                                                                               |       |                                 |       |   |   |
| Net Increase in Cash  and Cash Equivalents                                         |       | 21,236                               |       | 229 |   |
|                                                                               |       |                                 |       |   |   |
| Cash and Cash  Equivalent:                                                         |       |                                 |       |   |   |
| Beginning of  year                                                                 |       | 1,128                                |       | 499 |   |
| End of period                                                                      |       | $                                    | 22,364     |   | $ | 728 |   |

 

The accompanyingnotes are an integral part of these financial statements.

6

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**NOTES TO CONSOLIDATED CONDENSED FINANCIALSTATEMENTSTHREE-AND NINE-MONTH PERIODS ENDED JUNE 30**

The preceding statementswere taken from the books and records of the Company and reflect all adjustmentsthat are, in the opinion of management, necessary for a fair statement of theresults for the interim periods.  Becauseof the highly seasonal nature of the natural gas distribution business,earnings or loss for any portion of the year are disproportionate in relationto the full year.

Referenceis directed to the Notes to Consolidated Financial Statements contained in the2005 Annual Report on Form 10-K for the fiscal year ended September 30, 2005.

**Note 1.  New Accounting Standards**

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

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

**Note 2.  Earnings Per Share**

The following table setsforth the calculation of earnings per share:
| ** **                                             | ** ** | **Three Months Ended**                             | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                             | ** ** | **Jun 30, 2006**                                   | ** ** | **Jun 30, 2005**      | ** ** | **Jun 30, 2006** | ** ** | **Jun 30, 2005** | ** ** |
| ** **                                             | ** ** | **(in thousands except per-share data)** | ** ** |
| Net income (loss)                                      |       | $                                                            | (527       | )                               | $          | (1,127 | ) | $ | 16,500 |   | $ | 12,857 |   |
|                                                   |       |                                                         |       |                            |       |   |   |   |   |
| Weighted average shares  outstanding                   |       | 11,487                                                       |       | 11,367                          |       | 11,456 |   | 11,319 |   |
| Basic earnings (loss)  per share                       |       | $                                                            | (0.05      | )                               | $          | (0.10 | ) | $ | 1.44 |   | $ | 1.14 |   |
|                                                   |       |                                                         |       |                            |       |   |   |   |   |
| Weighted average shares  outstanding                   |       | 11,487                                                       |       | 11,367                          |       | 11,456 |   | 11,319 |   |
| Plus: Issued on assumed  exercise of stock options     |       | —                                                       |       | 2                               |       | — |   | 3 |   |
| Weighted average shares  outstanding assuming dilution |       | 11,487                                                       |       | 11,369                          |       | 11,456 |   | 11,322 |   |
| ** **                                             |       |                                                         |       |                            |       |   |   |   |   |
| Diluted earnings (loss) per share                      |       | $                                                            | (0.05      | )                               | $          | (0.10 | ) | $ | 1.44 |   | $ | 1.14 |   |

 

7

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**Note3.  Retirement Plan Information**

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

**NetPeriodic Benefits Cost**
| ** **                                       | ** ** | **Three Months Ended**     | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                                       | ** ** | **Jun 30 2006**            | ** ** | **Jun 30 2005**       | ** ** | **Jun 30 2006** | ** ** | **Jun 30 2005** | ** ** |
| ** **                                       | ** ** | **(Dollars in Thousands)** | ** ** |
| **DEFINED BENEFIT PENSION PLANS**                | ** ** | ** **                           | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                                     |       | $                                    | 216        |                            | $          | 197 |   | $ | 649 |   | $ | 591 |   |
| Interest cost                                    |       | 965                                  |       | 961                             |       | 2,895 |   | 2,882 |   |
| Expected return on plan  assets                  |       | (1,101                               | )          | (1,041                          | )          | (3,304 | ) | (3,122 | ) |
| Recognized gains or  losses                      |       | 421                                  |       | 386                             |       | 1,264 |   | 1,158 |   |
| Prior service cost                               |       | 38                                   |       | 46                              |       | 114 |   | 137 |   |
| Net Periodic Benefit  Cost Recognized            |       | $                                    | 539        |                            | $          | 549 |   | $ | 1,618 |   | $ | 1,646 |   |
|                                             |       |                                 |       |                            |       |   |   |   |   |
| **POSTRETIREMENT BENEFITS OTHER  THAN PENSIONS** | ** ** | ** **                           | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                                     |       | $                                    | 28         |                            | $          | 35 |   | $ | 85 |   | $ | 105 |   |
| Interest cost                                    |       | 164                                  |       | 275                             |       | 493 |   | 826 |   |
| Expected return on plan  assets                  |       | (219                                 | )          | (211                            | )          | (658 | ) | (634 | ) |
| Recognized gains or  losses                      |       | 181                                  |       | 187                             |       | 543 |   | 560 |   |
| Prior service cost                               |       | (615                                 | )          | (330                            | )          | (1,847 | ) | (990 | ) |
| Net Periodic Benefit  Cost Recognized            |       | $                                    | (461       | )                               | $          | (44 | ) | $ | (1,384 | ) | $ | (133 | ) |
|                                             |       |                                 |       |                            |       |   |   |   |   |
| **DEFINED CONTRIBUTION PENSION  PLAN**           | ** ** | ** **                           | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net Periodic Benefit Cost Recognized             |       | $                                    | 213        |                            | $          | 229 |   | $ | 621 |   | $ | 721 |   |

 

**RetirementPlan Funding**

For the threemonths ended June 30, 2006, $2,050,000 of contributions were made to theCompany’s defined benefit pension plans, and the nine-month total is$3,310,000.  The Company presentlyanticipates contributing an additional $630,000 to fund its pension plans for atotal of $3,940,000 in fiscal 2006.

**Note4.  Share-Based Payment**

In the first quarter offiscal 2006, the Company adopted Statement of Financial Accounting StandardsNo. 123 (revised 2004), (FAS 123(R)), *Share-Based Payment*.  See Note 1 above. Following are disclosuresunder FAS 123(R) for share-based payment arrangements that were in effectduring the three- and nine-month periods ended June 30, 2006 and 2005.

Under the Company’s 2000Director Stock Award Plan, each non-employee director is awarded 1,000 sharesof the Company’s common stock annually following shareholder approval at theFebruary 2006 annual meeting.  During thequarters ended June 30, 2006 and June 30, 2005, the Company recognized $42,000and $0 as expense under this plan. For the respective nine-month periods, theCompany recognized $161,000 and $37,000. The value of the stock granted under this plan is based on the marketvalue on the date of the award.

Under the Company’s 1998Stock Incentive Plan, 33,000 stock options granted in 2002 are exercisable at$20.84.  The 2002 options expire in2012.  All options are fully vested.  When the options were granted and

8

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during the vestingperiods, the Company applied the intrinsic value method under AccountingPrinciples Board (APB) Opinion 25, and no expense has been recognized.

The Company’s employmentcontracts with its Chief Executive Officer (CEO) and its Chief FinancialOfficer (CFO) contain grants of restricted stock.  Under the CEO grant, 5,000 shares wererestricted until the CEO completed one year of employment, and another 5,000shares are restricted until he completes two years of employment. Under the CFOgrant, 5,000 shares were restricted until he completed one year ofemployment.  During this period, eachexecutive is restricted from selling his shares. The value of the sharesgranted was based on the market value as of the grant date. During the quarterended June 30, 2006, the Company recognized $38,000 as compensation expenseunder this plan. For the nine-month period, the Company recognized $162,000. Infiscal 2005, $135,000 was recognized in the third quarter.

**Note 5.  Commitments and Contingencies**

# **EnvironmentalMatters**

Thereare two claims against the Company for cleanup of alleged environmentalcontamination related to manufactured gas plant sites previously operated bycompanies that were subsequently merged into the Company.

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

Thesecond claim was received in 1997 and relates to a site in Washington.  A preliminary investigation has determinedthat there is evidence of contamination at the site, but there is also evidencethat other property owners may have contributed to the contamination.  There is currently not enough informationavailable to estimate the potential liability associated with this claim, butthe Company and other parties may become involved in future investigation orremediation of the site as increased interest has been expressed concerning itspotential for redevelopment. In particular, the Company isaware that the local city government has secured federal grants for furtherinvestigation of the site. At this time, no formal investigation plan has beencommunicated to the Company.

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

# **Litigationand Other Contingencies**

On July 31, 2006, acomplaint was filed with the Washington Utilities and Transportation Commission(WUTC) by Cost Management Services, Inc., against the Company. The complaintcontends the Company’s sales to customers under its gas management program arenot allowed. The complainant is in the gas management business and is acompetitor of the Company for this business with the same customers. Thecomplaint requests that the Company be directed to cease and desist from makingsuch sales. It further requests the WUTC determine whether the Company’scontracts with its gas management customers are void or voidable underWashington statutes and to provide other relief or penalties as the WUTC mayconsider appropriate under the circumstances. The Company is currentlyassessing how to respond to the complaint, but believes that its gas managementbusiness is in compliance with applicable laws.

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# Various lawsuits, claims,and contingent liabilities may arise from time to time from the conduct of theCompany’s business.  No such claims nowpending, in the opinion of management, are expected to have a material effecton the Company’s financial position, results of operations, cash flows, orliquidity.

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

The following is management’sassessment of the Company’s financial condition and a discussion of theprincipal factors that affected consolidated results of operations and cashflows for the three- and nine-month periods ended June 30, 2006 and 2005.

**OVERVIEW**

The Company is a localdistribution company (LDC) serving approximately 237,000 customers in theStates of Washington and Oregon.  Its service area consists primarily ofrelatively small cities and rural communities rather than larger urbanareas.  The Company’s primary source of revenue and operating margin isthe distribution of natural gas to end-use residential, commercial, industrial,and institutional customers.  Revenues are also derived from providing gasmanagement and other services to some of its large industrial and commercialcustomers.  The Company’s rates and practices are regulated by theWashington Utilities and Transportation Commission (WUTC) and the Oregon PublicUtility Commission (OPUC).

As reported in theCompany’s Current Report on Form 8-K filed July 10, 2006, the Company hasentered into a definitive merger agreement with MDU Resources Group, Inc.  Under terms of the agreement, MDU Resourceswill acquire the Company for $26.50 per share in cash.  The completion of the acquisition is subjectto the approval of the Company’s shareholders and various regulatoryauthorities.  The required approvals areanticipated to be obtained by mid-year 2007.

Until the completion ofthe proposed merger, the Company continues to operate, focusing on the sameinitiatives and targets as before the merger agreement, subject to limitationsset forth in the merger agreement.

Key elements of theCompany’s operating strategy:

·                  Remainfocused on the natural gas distribution business.

·                  Pursueappropriate regulatory treatment, including initiatives to decouple the Company’searnings from weather fluctuations and changing customer consumption patterns.

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

·                  Continueto focus on operational efficiencies.

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

**Opportunitiesand Challenges**

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

Overall revenues and marginsare negatively impacted by higher efficiency in new home and commercialbuilding construction, higher efficiency in gas-burning equipment, andcustomers taking additional measures to reduce energy usage.  Theincreasing cost of energy in recent years, including the wholesale 

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cost of natural gas,continues to encourage such measures.  However, the Company continues tobelieve that energy efficiency and conservation are the most viable near-termtactics for reducing customer bills and influencing wholesale natural gasprices.  They also form a vital strategy for stabilizing the cost of gasover the long term.  The traditional regulatory establishment of raterecovery tied to volumetric sales no longer seems prudent. This traditionalrate design creates a financial disincentive for utilities to promoteconservation.  The Company has filed a rate case in the State ofWashington along with a request to decouple the margin recovery from volume.The Company continues to work with the regulatory staff and other stakeholdersin this case to develop an acceptable decoupling mechanism that will enable theCompany to promote conservation while still recovering its operating costs andearning a fair return on its invested capital.  Similar approaches have beenimplemented in many states, including Oregon (see below), and are endorsed by avariety of organizations, including the recent endorsement by the NationalAssociation of Regulatory Utility Commissions.  The results of such raterequests and other initiatives for regulatory relief are subject to significantuncertainties.

In April 2006, the OPUCapproved the Company’s request to implement its Conservation Alliance Program,which effectively decouples operating margin from the impacts of conservationand weather on gas usage by residential and commercial customers in its Oregonservice area.  The filing provides amechanism where the Company will adjust its earnings recovery to fully recoverthe Commission-granted level of earnings per customer.  This is done via a deferral mechanism forboth conservation and weather.  In simpleterms, the Company will book the actual earnings and a deferral for bothconservation and normal weather each month. The next year, depending on the amount of conservation and level of weather,the Company will adjust its rate either downward or upward to ensure recoveryat the allowed level.  The Company agreedto lower its sharing mechanism cap by 125 basis points in exchange for approvalof the Conservation Alliance Program. The Company expects to share earningsduring this fiscal year due to this lowering of the cap.

Revenues and margins fromthe Company’s residential and small commercial customers in Washington arehighly weather-sensitive.  In a cold year, the Company’s earnings are boostedby the effects of the weather, and conversely in a warm year, the Company’searnings suffer.  Peak requirements also drive the need to reinforce oursystems (i.e., increase capacity).  Our operations group considersinnovative approaches such as temporarily utilizing mobile gas supply ratherthan making large investments in long-term capacity increases which may not befully utilized.

Prospects for continuingstrong residential and commercial customer growth are excellent.  The paceof new home and commercial construction remains steady in communities served bythe Company.  Good potential also exists for converting homes andbusinesses located on or near the Company’s current lines to gas from otherfuels, as well as for expanding the system into adjacent areas.  Customercount growth in this sector has been more than double the average of U.S. gasutilities.

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

In November 2005, ourcustomer service call center organization voted to accept unionrepresentation.  The Company is attempting to negotiate an agreement thatwill support our efforts to cost-effectively provide superior customerservice.  The timing and results of negotiations are uncertain.

We carefully analyze theeconomics of our spending to support growth.  When justified under ourtariffs, we work with developers, business owners and residents to sharecertain construction costs to assure a fair return to the Company. Non-revenue-generating spending is also managed to assure that we use the most 

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economically attractivesolutions while providing for a safe and reliable system.  Where possible, we work with developers andcustomers to utilize shared trenches, significantly reducing the cost of mainextensions and service connections.  Wealso maintain the flexibility through variable overtime and the use of outsidecontractors to adjust our capital construction levels to each period’srequirements. These changes, combined with a reduction innon-revenue-generating initiatives as compared to a year ago, are expected toresult in a significant reduction in capital spending during the current fiscalyear.

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

# **RESULTS OF OPERATIONS**

TheCompany’s net loss was $527,000, or $0.05 per share, basic and diluted, for thefiscal 2006 third quarter (quarter ended June 30, 2006), compared to a net lossof $1,127,000, or $0.10 per share, basic and diluted, for the quarter endedJune 30, 2005. Year-to-date net income was $16,500,000, or $1.44 per share,basic and diluted, compared to $12,857,000, or $1.14 per share, basic anddiluted, for the same period last year. The largest factors influencing the quarterly comparisons were:

|                                                             | ** ** | **Earnings per Share   Effect** | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                  | ** ** | **Quarter**                                    | ** ** | **Year-to-  date** | ** ** |
|                                                        |       |                                           |       |   |   |
| Increased margin  from residential and commercial customers |       | $                                              | 0.06       |   | $ | 0.29 |   |
| Contract  settlements - electric generation customers       |       | $                                              | —     |   | $ | 0.05 |   |
| Oregon earnings  sharing                                    |       | $                                              | (0.03      | ) | $ | (0.05 | ) |
| Compensation  cost decreases (increases)                    |       | $                                              | (0.01      | ) | $ | 0.04 |   |
| Reduction in  capitalized expenses                          |       | $                                              | (0.01      | ) | $ | (0.05 | ) |
| Interest received on  income tax refund                     |       | $                                              | 0.04       |   | $ | 0.04 |   |

 

Theseabove items are discussed in more detail in the paragraphs that follow.

# **OperatingMargin**

Operating margins bycustomer category for the third quarter and year-to-date for fiscal years 2006and 2005 are set forth in the following tables:

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**Residential and Commercial Margin**
| ** **                              | ** ** | **Quarter Ended Jun 30** | ** ** | **Percent** | ** ** | **Year-to-Date** | ** ** | **Percent** | ** ** |
|-----------------------------------------|------------|-----------------------------------------|------------|-------------|------------|------------------|------------|-------------|------------|
| ** **                              | ** ** | **2006**                                | ** ** | **2005**    | ** ** | **Change**       | ** ** | **2006**    | ** ** | **2005** | ** ** | **Change** | ** ** |
| ** **                              | ** ** | **(dollars in thousands)**    | ** ** |
| **Degree Days**                         | ** ** | ** **                              | ** ** | ** **  | ** ** | ** **       | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Actual                                  |       | 900                                     |       | 769         |       | 17.0             | %          | 5,419       |       | 4,944 |   | 9.6 | % |
| 5-Year Average                          |       | 925                                     |       | 806         |       |             |       | 5,330       |       | 5,168 |   |   |   |
| **Average Number of Customers  Billed** | ** ** | ** **                              | ** ** | ** **  | ** ** | ** **       | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Residential                             |       | 204,771                                 |       | 195,561     |       | 4.7              | %          | 203,838     |       | 194,252 |   | 4.9 | % |
| Commercial                              |       | 30,964                                  |       | 30,256      |       | 2.3              | %          | 30,899      |       | 30,191 |   | 2.3 | % |
| **Average Therm Usage per  Customer**   | ** ** | ** **                              | ** ** | ** **  | ** ** | ** **       | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Residential                             |       | 107                                     |       | 111         |       | -3.6             | %          | 649         |       | 628 |   | 3.3 | % |
| Commercial                              |       | 592                                     |       | 590         |       | 0.3              | %          | 3,270       |       | 3,079 |   | 6.2 | % |
| **Operating Margin**                    | ** ** | ** **                              | ** ** | ** **  | ** ** | ** **       | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Residential                             |       | $                                       | 8,314      |        | $          | 7,623            |       | 9.1         | %          | $ | 39,826 |   | $ | 36,079 |   | 10.4 | % |
| Commercial                              |       | $                                       | 4,341      |        | $          | 4,015            |       | 8.1         | %          | $ | 20,831 |   | $ | 19,200 |   | 8.5 | % |

 

**Quarter-to-Quarter**

Residential andcommercial margins increased by $1.0 million for the quarter. Customer growthat 4.4% contributed $529,000 million to margins while lower average consumptionreduced margins $208,000.  Miscellaneousservices and other revenues added $359,000. Also contributing to the favorablecomparison was the impact of changes to the Company’s Oregon purchased gasadjustment filing (PGA) last fall. This change has the effect of reallocatingthe recognition of certain demand charge recoveries within each fiscal year.For the third quarter, this change increased the reported margin by $409,000when compared to the same quarter in fiscal 2005, but it is not expected toimpact the full year earnings comparison.

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

**Year-to-Date**

Residentialand commercial margins increased by $5.4 million for the year-to-dateperiod.  Primary contributors werecustomer growth adding $2.7 million and higher consumption per customer addinganother $1.9 million.  Averageconsumption was 3.8% higher for the period primarily due to colder weather thanlast year.  Reductions in incurred OregonGas cost and increased miscellaneous services revenue contributed $1.6 millionto the improvement.  Partially offsettingthese items was an $824,000 reduction resulting from the Oregon PGA changes.

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**Industrial and Other Margin**
| ** **                               | ** ** | **Quarter Ended Jun 30** | ** ** | **Percent** | ** ** | **Year-to-Date** | ** ** | **Percent** | ** ** |
|------------------------------------------|------------|-----------------------------------------|------------|-------------|------------|------------------|------------|-------------|------------|
| ** **                               | ** ** | **2006**                                | ** ** | **2005**    | ** ** | **Change**       | ** ** | **2006**    | ** ** | **2005** | ** ** | **Change** | ** ** |
| ** **                               | ** ** | **(dollars in thousands)**    | ** ** |
| **Average  Number of Customers**         | ** ** | ** **                              | ** ** | ** **  | ** ** | ** **       | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Electric Generation                      |       | 11                                      |       | 13          |       | -15.4            | %          | 11          |       | 13 |   | -15.4 | % |
| Industrial                               |       | 690                                     |       | 705         |       | -2.1             | %          | 696         |       | 722 |   | -3.6 | % |
|                                     |       | 701                                     |       | 718         |       | -2.4             | %          | 707         |       | 735 |   | -3.8 | % |
| **Therms  Delivered (thousands)**        | ** ** | ** **                              | ** ** | ** **  | ** ** | ** **       | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Electric Generation                      |       | 33,877                                  |       | 83,392      |       | -59.4            | %          | 253,185     |       | 314,734 |   | -19.6 | % |
| Industrial                               |       | 96,090                                  |       | 92,786      |       | 3.6              | %          | 319,052     |       | 318,112 |   | 0.3 | % |
|                                     |       | 129,967                                 |       | 176,178     |       | -26.2            | %          | 572,237     |       | 632,846 |   | -9.6 | % |
| **Operating  Margin ($ thousands)** | ** ** | ** **                              | ** ** | ** **  | ** ** | ** **       | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Electric Generation                      |       | $                                       | 1,500      |        | $          | 1,591            |       | -5.7        | %          | $ | 6,538 |   | $ | 5,625 |   | 16.2 | % |
| Industrial                               |       | 4,340                                   |       | 4,198       |       | 3.4              | %          | 14,521      |       | 14,688 |   | -1.1 | % |
| Gas Management Services                  |       | 273                                     |       | 39          |       | 600.0            | %          | 1,236       |       | 753 |   | 64.1 | % |
| Mark-to-Market Valuations                |       | —                                  |       | (232        | )          | -100.0           | %          | (579        | )          | (351 | ) | 65.0 | % |
| Other                                    |       | 115                                     |       | 440         |       | -73.9            | %          | 533         |       | 918 |   | -41.9 | % |
| Oregon Earnings Sharing                  |       | (485                                    | )          | —      |       | N/A              |       | (485        | )          | 525 |   | -192.4 | % |
|                                     |       | $                                       | 5,743      |        | $          | 6,036            |       | -4.9        | %          | $ | 21,764 |   | $ | 22,158 |   | -1.8 | % |

 

**Quarter-to-Quarter**

Marginsfrom sales to industrial customers and electric generation plants wererelatively flat compared to last year. The primary driver over the rest of thefiscal year for changes in gas usage by generation customers will be powerdemands in the Southwest United States due to air-conditioner usage.

NoMark-to-Market adjustment was recorded in the third quarter of fiscal 2006 ascompared to a negative adjustment of $232,000 in the same period in the prioryear.

In an April agreementwith the OPUC in connection with the Company’s filing for a decouplingmechanism, the Company agreed to lower its threshold for earnings sharing withits Oregon customers. As a result, in the third quarter $485,000 was recordedas an estimate of fiscal 2006 earnings to be shared with Oregon customers.

**Year-to-Date**

Marginsfrom sales to electric generation plants were $913,000 million higheryear-to-date as the result of settlements for early termination of salesagreements with two customers. The comparison of the Oregon earnings sharingamounts was affected by the $485,000 recorded in the third quarter of 2006 andthe 2005 reversal of a $525,000 estimate recorded in 2004. In 2005 it wasdetermined that no sharing of 2004 earnings would be required.

**Cost ofOperations**

**Quarter-to-Quarter**

Cost of operations(operating expense, depreciation and amortization, and property andmiscellaneous taxes) increased by $458,000 compared to the third quarter offiscal year 2005. Primary contributors to the higher cost included $317,000 inincreased bad debt expensereflecting increased residential and commercial accounts receivabledelinquencies partially stemming from higher natural gas prices, reduced capitalization of operating costs of$261,000 due to lower capital expenditures, and $226,000 increase incompensation costs.

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**Year-to-Date**

Year-to-datecost of operations was down $268,000 reflecting $808,000 in compensation costreductions and savings of $991,000 in various corporate and administrativeareas. These savings were mostly offset by reductions in capitalized operatingcosts of $1.0 million and $527,000 in increased depreciation. Affecting theyear-to-year comparison in compensation costs were $1.1 million in executivetransition costs incurred in 2005.

**Interestand Other Deductions – Net**

Improvements stemmedprimarily from $ 716,000 interest received on a refund of income taxes relatedto amended prior year federal income tax returns.

**LIQUIDITY AND CAPITAL RESOURCES**

Theseasonal nature of the Company’s business creates short-term cash requirementsto finance customer receivables, deferred gas costs and other business needs.To provide working capital for these requirements, the Company has a $60million bank revolving credit commitment. This agreement has a variable commitment fee and a term that expires inOctober 2007.  The Company also has a $10million uncommitted line of credit.  Asof June 30, 2006, there was nooutstanding debt under these credit lines. The Company anticipates that use ofthese short-term facilities will be limited in the near future.

Due to the nature of theCompany’s business, which is characterized by predictable payments from agrowing customer base, and our expectations that capital spending will bereduced from the last few years, we expect to have limited need for additionalcapital during fiscal year 2006.  Forthis reason, management believes it has adequateliquidity to meet our anticipated needs and estimates that cash flow will besufficient to support operations, fund capital spending, and pay dividends attheir current level.

### **Operating Activities**

For thenine-month period, cash provided by operating activities improved $27.7 millionover last year.  In addition to improvednet income, the primary factor was the net reduction in deferred gas costfunded by the Company, contributing to $17.0 million of the improvement.  Additionally, changes in current assets andliabilities contributed $13.0 million improvements, of which the largest itemwas the receipt of an income tax refund of $7.2 million.

##### **Investing Activities**

Year-to-datecash used by investing activities is down $9.1 million from $21.6 million whencompared to fiscal year 2005.  Part ofthe difference was due to $2.2 million of one-time specific systemreinforcement expenditures and $1.0 million relating to the completed AMR andcall center centralization projects in the first three quarters of fiscal year2005. The remainder reflects the Company’s new investment evaluation processimplemented in the first quarter to assure that all capital spending providesan adequate return or is required for safety or regulatory compliance.  Our current expectation is that we will endthe year below our fiscal 2006 capital budget of $22.0 million.

#### **Financing Activities**

Other than the payment ofdividends, the Company’s primary financing activity year-to-date in fiscal 2006was the $12.5 million net reduction in short-term debt. This reduction in debtwas facilitated by favorable operating cash flow and reduced capital spending.

## **CRITICALACCOUNTING POLICIES**

The Company’s financialstatements are prepared in accordance with accounting principles generallyaccepted in the United States of America (GAAP).  In following GAAP, management exercisesjudgment in 

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selection and applicationof accounting principles.  Managementconsiders critical accounting policies to be those where different assumptionsregarding application could result in material differences in financialstatements.  The Company’s criticalaccounting policies were described in its Annual Report on Form 10-K for theyear ended September 30, 2005, under Part II, Item 7, and have not changedsignificantly since that report.

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

The Company has evaluatedits risk related to financial instruments whose values are subject to marketsensitivity.  The Company has fixed-ratedebt obligations but does not currently have derivative financial instrumentssubject to interest rate risk.  TheCompany makes interest and principal payments on these obligations in thenormal course of its business and may redeem its debt obligations prior tonormal maturities if warranted by market conditions.

The Company’s natural gaspurchase commodity prices are subject to fluctuations resulting from weather,congestion on interstate pipelines, and other unpredictable factors.  The Company’s Purchased Gas Cost Adjustment(PGA) mechanisms generally result in the recovery in customer rates ofprudently incurred wholesale cost of natural gas purchased for the coremarket.  The Company primarily utilizes financialderivatives, and to a lesser extent, fixed price physical supply contracts tomanage risk associated with wholesale costs of natural gas purchased forcustomers.

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

For derivative arrangementsrelated to supplies for non-core customers, which are not covered by a PGAmechanism, periodic changes in fair market value are recognized in earnings orin Other Comprehensive Income.

**Item 4.  Controls and Procedures**

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

# **FORWARD-LOOKING STATEMENTS**

The Company’s discussionin this report, or in any information incorporated herein by reference, maycontain forward-looking statements within the meaning of the Private SecuritiesLitigation Reform Act of 1995.  All statements, other than statements ofhistorical facts, are forward-looking statements, including statementsconcerning plans, objectives, goals, strategies, and future events or performance. When used in Company documents or oral presentations, the words “anticipate”, “believe”,“estimate”, “expect”, “objective”, “projection”, “forecast”, “goal”, or similarwords are intended to identify forward-looking statements.

These forward-lookingstatements reflect the Company’s current expectations, beliefs and projectionsabout future events that we believe may affect the Company’s business,financial condition and results of operations, and are expressed in good faithand are believed to have a reasonable basis.  However, each suchforward-looking statement involves risks, uncertainties and assumptions, and isqualified in its entirety 

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by reference to thefollowing important factors, among others, that could cause the Company’sactual results to differ materially from those projected in suchforward-looking statements:

·                  prevailing stateand federal governmental policies and regulatory actions, including those ofthe Washington Utilities and Transportation Commission, the Oregon Public UtilityCommission, and the U.S. Department of Transportation’s Office of PipelineSafety, with respect to allowed rates of return, industry and rate structure,purchased gas cost and investment recovery, acquisitions and dispositions ofassets and facilities, operation and construction of plant facilities, themaintenance of pipeline integrity, and present or prospective wholesale andretail competition;

·                  weatherconditions and other natural phenomena;

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

·                  changes in andcompliance with environmental and safety laws, regulations and policies,including environmental cleanup requirements;

·                  competition fromalternative forms of energy and other sellers of energy;

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

·                  the potentialloss of large volume industrial customers due to “bypass” or the shift by suchcustomers to special competitive contracts at lower per-unit margins;

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

·                  risks resultingfrom uninsured damage to the Company’s property, intentional or otherwise, orfrom acts of terrorism;

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

·                  unanticipatedchanges in interest rates or in rates of inflation;

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

·                  unanticipatedchanges in operating expenses and capital expenditures;

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

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

·                  changes in theavailability and price of natural gas; and

·                  legal andadministrative proceedings and settlements.

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

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subsequentforward-looking statements, whether written or oral and whether made by or onbehalf of the Company, also are expressly qualified by these cautionarystatements.

Any forward-lookingstatement by the Company is made only as of the date on which such statement ismade.  The Company undertakes no obligation to update any forward-lookingstatement to reflect events or circumstances after the date on which thestatement is made or to reflect the occurrence of any unanticipatedevents.  New factors emerge from time to time, and the Company is not ableto predict all such factors, nor can it assess the impact of each such factoror the extent to which such factors may cause results to differ materially fromthose contained in any forward-looking statement.

# **PART II. Other Information**

**Item 1.Legal Proceedings**

On July 31, 2006, acomplaint was filed with the Washington Utilities and Transportation Commission(WUTC) by Cost Management Services, Inc., against the Company. The complaintcontends the Company’s sales to customers under its gas management program arenot allowed. The complainant is in the gas management business and is acompetitor of the Company for this business with the same customers. Thecomplaint requests that the Company be directed to cease and desist from makingsuch sales. It further requests the WUTC determine whether the Company’scontracts with its gas management customers are void or voidable underWashington statutes and to provide other relief or penalties as the WUTC mayconsider appropriate under the circumstances. The Company is currentlyassessing how to respond to the complaint, but believes that its gas managementbusiness is in compliance with applicable laws.

# **Item 6. Exhibits**

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

 

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**SIGNATURE**

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

# **CASCADE NATURAL GAS CORPORATION**

| By:    | /s/ Rick A.  Davis             |   |
|--------|--------------------------------|--------|
|   |                           |   |
|   |                           |   |
|   | Rick A. Davis                  |   |
|   | Chief Financial  Officer       |   |
|   | (Principal  Financial Officer) |   |
|   |                           |   |
|   |                           |   |
| Date:  | August 7, 2006                 |   |
|        |                                |        |  |

 

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