**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 the quarterly period ended March31, 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 |   | 11,077,749 as of  April 30, 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 4. Submission of Matters to a Vote of  Security Holders. |
|           |
|           |                  | Item 5. Other Information |
|           |
|           |                  | Item 6. Exhibits and Reports on Form 8-K |
|           |
| Signature      |
|           |
| Certifications |

 

2

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# **PART I. ** Financial Information

 

**Item 1.  Financial Statements**

 

**CASCADENATURAL GAS CORPORATION**

**CONSOLIDATED CONDENSED STATEMENTS OF INCOME**

(unaudited)

 
|                                        |   | **THREE MONTHS ENDED**                |    | **SIX MONTHS ENDED** |   |
|---------------------------------------------|--------|---------------------------------------|---------|----------------------|--------|
|                                        |   | **Mar 31, 2003**                      |    | **Mar 31, 2002**     |   | **Mar 31, 2003** |   | **Mar 31, 2002** |   |
|                                        |   | **(thousands except per share data)** |    |
|                                        |   |                                  |    |
| Operating revenues                          |   | $                                     | 109,286 |                 | $      | 122,361 |   | $ | 209,782 |   | $ | 225,122 |   |
|                                        |   |                                  |    |                 |   |   |   |   |   |
| Less: Gas purchases                         |   | 72,126                                |    | 80,462               |   | 136,829 |   | 148,283 |   |
| Revenue taxes                               |   | 7,513                                 |    | 8,443                |   | 13,797 |   | 14,740 |   |
| Operating margin                            |   | 29,647                                |    | 33,456               |   | 59,156 |   | 62,099 |   |
|                                        |   |                                  |    |                 |   |   |   |   |   |
| Cost of operations:                         |   |                                  |    |                 |   |   |   |   |   |
| Operating expenses                          |   | 10,398                                |    | 10,148               |   | 21,110 |   | 21,177 |   |
| Depreciation and  amortization              |   | 3,842                                 |    | 3,702                |   | 7,620 |   | 7,398 |   |
| Property and payroll  taxes                 |   | 1,509                                 |    | 1,432                |   | 2,808 |   | 2,617 |   |
|                                        |   | 15,749                                |    | 15,282               |   | 31,538 |   | 31,192 |   |
|                                        |   |                                  |    |                 |   |   |   |   |   |
| Income from operations                      |   | 13,898                                |    | 18,174               |   | 27,618 |   | 30,907 |   |
| Less interest and other  deductions - net   |   | 3,112                                 |    | 3,247                |   | 6,311 |   | 6,148 |   |
| Income before income  taxes                 |   | 10,786                                |    | 14,927               |   | 21,307 |   | 24,759 |   |
|                                        |   |                                  |    |                 |   |   |   |   |   |
| Income taxes                                |   | 3,937                                 |    | 5,448                |   | 7,777 |   | 9,037 |   |
| Net Income                                  |   | 6,849                                 |    | 9,479                |   | 13,530 |   | 15,722 |   |
|                                        |   |                                  |    |                 |   |   |   |   |   |
| Weighted average common  shares outstanding |   | 11,057                                |    | 11,045               |   | 11,051 |   | 11,045 |   |
|                                        |   |                                  |    |                 |   |   |   |   |   |
| Net earnings per common  share,             |   |                                  |    |                 |   |   |   |   |   |
| Basic                                       |   | $                                     | 0.62    |                 | $      | 0.86 |   | $ | 1.22 |   | $ | 1.42 |   |
| Diluted                                     |   | $                                     | 0.62    |                 | $      | 0.86 |   | $ | 1.22 |   | $ | 1.42 |   |
|                                        |   |                                  |    |                 |   |   |   |   |   |
| Cash dividends per  share                   |   | $                                     | 0.24    |                 | $      | 0.24 |   | $ | 0.48 |   | $ | 0.48 |   |

 

The accompanying notesare an integral part of these financial statements

 

3

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**CASCADE NATURAL GAS CORPORATION**

**CONSOLIDATEDCONDENSED BALANCE SHEETS**

(Dollars in Thousands)

 
|                                                                                                                               |   | **Mar 31, 2003** |    | **Sep 30, 2002** |   |
|------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|---------|------------------|--------|
|                                                                                                                               |   | **(Unaudited)**  |    |             |   |
| **ASSETS**                                                                                                                         |   |             |    |             |   |
| Utility  Plant, net of accumulated depreciation of $221,024 and $213,476                                                           |   | $                | 295,419 |             | $      | 291,650 |   |
| Construction  work in progress                                                                                                     |   | 7,305            |    | 7,974            |   |
|                                                                                                                               |   | 302,724          |    | 299,624          |   |
| Other  Assets:                                                                                                                     |   |             |    |             |   |
| Investments  in non-utility property                                                                                               |   | 202              |    | 202              |   |
| Notes  receivable, less current maturities                                                                                         |   | 121              |    | 127              |   |
|                                                                                                                               |   | 323              |    | 329              |   |
| Current  Assets:                                                                                                                   |   |             |    |             |   |
| Cash  and cash equivalents                                                                                                         |   | 22,230           |    | 3,688            |   |
| Accounts  receivable and current maturities of notes receivable, less allowance of  $1,156 and $1,126  for doubtful  accounts |   | 40,038           |    | 14,547           |   |
| Materials,  supplies and inventories                                                                                               |   | 5,476            |    | 14,556           |   |
| Prepaid  expenses and other assets                                                                                                 |   | 4,213            |    | 6,515            |   |
| Deferred  income taxes                                                                                                             |   | 1,661            |    | 1,648            |   |
|                                                                                                                               |   | 73,618           |    | 40,954           |   |
| Deferred  Charges                                                                                                                  |   |             |    |             |   |
| Gas  cost changes                                                                                                                  |   | 11,026           |    | 18,788           |   |
| Other                                                                                                                              |   | 7,591            |    | 7,968            |   |
|                                                                                                                               |   | 18,617           |    | 26,756           |   |
|                                                                                                                               |   |             |    |             |   |
|                                                                                                                               |   | $                | 395,282 |             | $      | 367,663 |   |

 

Theaccompanying notes are an integral part of these financial statements

 

4

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|                                                      |   | **Mar 31, 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 11,070,705, and 11,045,095 shares |   | $                | 11,071  |             | $      | 11,045 |   |
| Additional  paid-in capital                               |   | 97,815           |    | 97,360           |   |
| Accumulated  other comprehensive income (loss)            |   | (11,748          | )       | (11,748          | )      |
| Retained  earnings                                        |   | 25,746           |    | 17,524           |   |
|                                                      |   | 122,884          |    | 114,181          |   |
|                                                      |   |             |    |             |   |
| Long-term  Debt                                           |   | 164,930          |    | 164,930          |   |
|                                                      |   |             |    |             |   |
| Current  Liabilities:                                     |   |             |    |             |   |
| Accounts  payable                                         |   | 21,800           |    | 12,597           |   |
| Property,  payroll and excise taxes                       |   | 8,264            |    | 5,777            |   |
| Dividends  and interest payable                           |   | 7,894            |    | 7,872            |   |
| Other  current liabilities                                |   | 12,753           |    | 9,466            |   |
|                                                      |   | 50,711           |    | 35,712           |   |
|                                                      |   |             |    |             |   |
| Deferred  Credits and Other                               |   | 56,757           |    | 52,840           |   |
|                                                      |   |             |    |             |   |
| Commitments  and Contingencies                            |   | —           |    | —           |   |
|                                                      |   | $                | 395,282 |             | $      | 367,663 |   |

 

Theaccompanying notes are an integral part of these financial statements

 

5

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CASCADE NATURALGAS CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 
|                                                                               |   | **SIX MONTHS ENDED**       |   |
|------------------------------------------------------------------------------------|--------|----------------------------|--------|
|                                                                               |   | **(dollars in thousands)** |   |
|                                                                               |   | **Mar 31, 2003**           |   | **Mar 31, 2002** |   |
| Operating Activities                                                               |   |                       |   |   |   |
| Net income                                                                         |   | $                          | 13,530 |   | $ | 15,722 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |   |                       |   |   |   |
| Depreciation and  amortization                                                     |   | 7,620                      |   | 7,398 |   |
| Deferrals of gas cost  changes                                                     |   | 3,727                      |   | 8,636 |   |
| Amortization of gas  cost changes                                                  |   | 4,035                      |   | 5,328 |   |
| Other deferrals and  amortizations                                                 |   | 2,488                      |   | 891 |   |
| Deferred income taxes  and tax credits - net                                       |   | 1,850                      |   | 614 |   |
| Change in current  assets and liabilities                                          |   | 890                        |   | (11,955 | ) |
| Net cash provided by  operating activities                                         |   | 34,140                     |   | 26,634 |   |
|                                                                               |   |                       |   |   |   |
| Investing Activities                                                               |   |                       |   |   |   |
| Capital expenditures                                                               |   | (10,808                    | )      | (10,390 | ) |
| Customer contributions  in aid of construction                                     |   | 30                         |   | 592 |   |
| Other                                                                              |   | 7                          |   | 39 |   |
| Net cash used by  investing activities                                             |   | (10,771                    | )      | (9,759 | ) |
|                                                                               |   |                       |   |   |   |
| Financing Activities                                                               |   |                       |   |   |   |
| Proceeds from long-term  debt, net                                                 |   | —                     |   | 38,740 |   |
| Proceeds from issuance  of stock, net                                              |   | 481                        |   | — |   |
| Changes in notes  payable and commercial paper, net                                |   | —                     |   | (40,000 | ) |
| Dividends paid                                                                     |   | (5,308                     | )      | (5,302 | ) |
| Net cash used by  financing activities                                             |   | (4,827                     | )      | (6,562 | ) |
|                                                                               |   |                       |   |   |   |
| Net Increase in Cash  and Cash Equivalents                                         |   | 18,542                     |   | 10,313 |   |
|                                                                               |   |                       |   |   |   |
| Cash and Cash  Equivalents                                                         |   |                       |   |   |   |
| Beginning of year                                                                  |   | 3,688                      |   | 422 |   |
| End of period                                                                      |   | $                          | 22,230 |   | $ | 10,735 |   |

 

The accompanying  notes are an integral part of thesefinancial statements

 

6

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**CASCADENATURAL GAS CORPORATION**

**NOTES TOCONSOLIDATED CONDENSED FINANCIAL STATEMENTS**

## **THREEAND SIX MONTHS ENDED MARCH 31, 2003**

 

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

 

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

 

**Earnings Per Share.**

 

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

 
|                                                     |   | **Quarter Ended March 31**                |   | **Six Months Ended March 31** |   |
|----------------------------------------------------------|--------|-------------------------------------------|--------|-------------------------------|--------|
|                                                     |   | **2003**                                  |   | **2002**                      |   | **2003** |   | **2002** |   |
|                                                     |   | **(in thousands except per-share  data)** |   |
|                                                     |   |                                      |   |
| Net  Income                                              |   | $                                         | 6,849  |                          | $      | 9,479 |   | $ | 13,530 |   | $ | 15,722 |   |
|                                                     |   |                                      |   |                          |   |   |   |   |   |
| Weighted  average shares outstanding                     |   | 11,057                                    |   | 11,045                        |   | 11,051 |   | 11,045 |   |
| Basic  earnings per share                                |   | $                                         | 0.62   |                          | $      | 0.86 |   | $ | 1.22 |   | $ | 1.42 |   |
|                                                     |   |                                      |   |                          |   |   |   |   |   |
| Weighted  average shares outstanding                     |   | 11,057                                    |   | 11,045                        |   | 11,051 |   | 11,045 |   |
| Plus:  Issued on assumed exercise of stock  options |   | 19                                        |   | 24                            |   | 18 |   | 24 |   |
| Weighted  average shares outstanding assuming dilution   |   | 11,076                                    |   | 11,069                        |   | 11,069 |   | 11,069 |   |
|                                                     |   |                                      |   |                          |   |   |   |   |   |
| Diluted  earnings per share                              |   | $                                         | 0.62   |                          | $      | 0.86 |   | $ | 1.22 |   | $ | 1.42 |   |

### ** **

### **Stock-Based Compensation**

### ** **

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

 

7

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|                                                                                                                          |   | **Quarter Ended March 31**                |       | **Six Months Ended March 31** |       |
|-------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------|------------|-------------------------------|------------|
|                                                                                                                          |   | **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                                                                                                                    |   | $                                         | 6,849      |                          | $          | 9,479 |   | $ | 13,530 |   | $ | 15,722 |   |
| Basic earnings per  share                                                                                                     |   | $                                         | 0.62       |                          | $          | 0.86 |   | $ | 1.22 |   | $ | 1.42 |   |
| Diluted earnings per  share                                                                                                   |   | $                                         | 0.62       |                          | $          | 0.86 |   | $ | 1.22 |   | $ | 1.42 |   |
|                                                                                                                          |   |                                      |       |                          |       |   |   |   |   |
| **Proforma  amounts, reflecting stock-based employee compensation cost as if determined under  fair value (FAS 123) method:** |   |                                      | ** ** |                          | ** ** |   | ** ** |   | ** ** |
|                                                                                                                          |   |                                      |       |                          |       |   |   |   |   |
| Stock-based employee  compensation cost, net of tax effect                                                                    |   | $                                         | 27         |                          | $          | 26 |   | $ | 55 |   | $ | 51 |   |
| Net income                                                                                                                    |   | $                                         | 6,822      |                          | $          | 9,453 |   | $ | 13,475 |   | $ | 15,671 |   |
| Basic earnings per  share                                                                                                     |   | $                                         | 0.62       |                          | $          | 0.86 |   | $ | 1.22 |   | $ | 1.42 |   |
| Diluted earnings per  share                                                                                                   |   | $                                         | 0.62       |                          | $          | 0.85 |   | $ | 1.22 |   | $ | 1.42 |   |

 

 

### **Commitments and Contingencies**

# ** **

**Enron Contract Termination**

 

During fiscal 2002, Cascade terminated two contractsfor the purchase of gas from Enron based upon Enron’s insolvency and concernsabout its ability to perform.   EnronCanada, the supplier for one of the contracts, disputed the Company’s positionand claimed $3.4 million 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 asserted aclaim 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$865,000 in fiscal 2003 second quarter. After the end of the second quarter,the Company settled the Enron North America claim, by paying $1,050,000.Management believes the remaining reserves are adequate.

 

# **EnvironmentalMatters**

 

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

 

The first claim was received in 1995, and relates to asite in Oregon. An investigation has shown that contamination does exist, but thereis currently not enough information available to estimate the potentialliability associated with this claim. It is expected that other parties willparticipate in the clean up costs. Through the end of the fiscal year theamounts spent, primarily on investigation and containment, have beenimmaterial.

 

8

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

 

Management intends to pursue reimbursement from itsinsurance carriers, and recovery from its customers through increased rates,for any remediation costs for which the Company is determined to be liable.There is precedent for such recovery through increased rates, as both theWashington Utilities and Transportation Commission (WUTC) and the Oregon PublicUtilities Commission (OPUC) have previously allowed regulated utilities toincrease customer rates to recover similar costs.

 

# **Litigationand Other Contingencies**

 

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

 

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

 

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

 

# **NewAccounting Standards**

 

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

 

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

 

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

 

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

 

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

 

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

 

9

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

 

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

 

In November 2002, the FASB issued Interpretation 45, “*Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of Others”.*The Interpretation elaborates on the existing disclosure requirements for mostguarantees, including loan guarantees such as standby letters of credit. Italso clarifies that at the time a company issues a guarantee, the company mustrecognize an initial liability for the fair value, or market value, of theobligations it assumes under the guarantee and must disclose that informationin its interim and annual financial statements. The provisions related torecognizing a liability at inception of the guarantee for the fair value of theguarantor’s obligations does not apply to product warranties or to guaranteesaccounted for as derivatives. The initial recognition and initial measurementprovisions apply on a prospective basis to guarantees issued or modified afterDecember 31, 2002. Adoption of this standard as of January 1, 2003 did not havean impact on the Company’s financial statements.

 

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

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

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

a.               The direct orindirect ability to make decisions about the entity’s activities through votingrights or similar rights

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

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

 

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

 

10

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**Item 2.**** Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

The following is management’s assessment of theCompany’s financial condition and a discussion of the principal factors thataffected consolidated results of operations and cash flows for the three-monthand six-month periods ended March 31, 2003 and March 31, 2002.

 

## **CRITICAL ACCOUNTING POLICIES**

 

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

 

## **Revenue Recognition**

 

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

 

## **Regulatory Accounting**

 

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

 

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

 

•                  An independent regulator approves the Company’scustomer rates.

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

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

 

The Company periodicallyassesses whether conditions merit the continued applicability of FAS No. 71. Inthe event the Company should determine in the future that all or a portion ofits regulatory assets and liabilities no longer meet the above criteria, itwould be required to write off the related balances of its regulatory assetsand liabilities, and reflect the write off in its income statement. At March 31,2003 there were $15,418,000 of regulatory assets and $5,991,000  of regulatory liabilities.

 

## **Use of Estimates**

 

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

 

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

 

## **Derivatives**

 

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

 

The Company did not enter into derivative transactionsduring the first two quarters of fiscal 2003, and as of March 31, 2003, doesnot have any derivative assets or liabilities. The Company’s contracts forpurchase of natural gas are not derivative instruments because they areconsidered normal purchases under the provisions of FAS Nos. 133 and 138.

 

# **NEWACCOUNTING STANDARDS**

 

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

 

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

 

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

 

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

 

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

 

The Company has subsequentlyadopted FAS Nos. 146 and 148, and FASB Interpretation Nos. 45 and 46, asfollows:

 

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

 

On December 31, 2002, theFASB issued FAS No. 148, *“Accounting forStock-Based Compensation—Transition and Disclosure”* This Statementamends FASB Statement No. 123, *Accounting*

 

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* *

*forStock-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 statement footnotesunder “**Stock-Based Compensation**”.

 

In November 2002, the FASB issued Interpretation 45, “*Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of Others”.*The Interpretation elaborates on the existing disclosure requirements for mostguarantees, including loan guarantees such as standby letters of credit. Italso clarifies that at the time a company issues a guarantee, the company mustrecognize an initial liability for the fair value, or market value, of theobligations it assumes under the guarantee and must disclose that informationin its interim and annual financial statements. The provisions related torecognizing a liability at inception of the guarantee for the fair value of theguarantor’s obligations does not apply to product warranties or to guaranteesaccounted for as derivatives. The initial recognition and initial measurementprovisions apply on a prospective basis to guarantees issued or modified afterDecember 31, 2002. Adoption of this standard as of January 1, 2003 did not havean impact on the Company’s financial statements.

 

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

 

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

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

a.               The direct or indirectability to make decisions about the entity’s activities through voting rightsor similar rights

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

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

 

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

 

**RESULTS OF OPERATIONS**

 

Net income for the second quarter of fiscal 2003(quarter ended March 31, 2003) was $6,849,000, or $0.62 per share, basic anddiluted, compared to $9,479,000, or $0.86 per share, basic and diluted, for thequarter ended March 31, 2002. This represents a 28% decline in second quarterearnings per share from second quarter 2002 results.  For the six month period ended March 31, 2003, net income was$13,530,000, or $1.22 per share, basic and diluted, compared to $15,722,000, or$1.42 per share, basic and diluted, for the six months ended March 31, 2002.The reduction in net income for the quarter and year-to-date periods isprimarily from lower operating margins (revenue minus gas cost and revenuetaxes).

 

**Operating Margin**

 

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

 

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|                                 |   | **Second Quarter of Fiscal** |   | **Percent   Change** |   | **Year to Date March 31**  |     | **Percent   Change** |     |
|--------------------------------------|--------|------------------------------|--------|----------------------|--------|----------------------------|----------|----------------------|----------|
|                                 |   | **2003**                     |   | **2002**             |   |                       | **2003** |                 | **2002** |   |   |
|                                 |   | **(dollars in thousands)**   |   |                 |   | **(dollars in thousands)** |     |                 |     |
| **Degree Days**                      |   | 2,049                        |   | 2,351                |   | -12.8                      | %        | 4,076                |     | 4,389 |   | -7.1 | % |
| **Average Number of Customers**      |   |                         |   |                 |   |                       |     |                 |     |   |   |   |   |
| Residential                          |   | 178,586                      |   | 171,041              |   | 4.4                        | %        | 176,881              |     | 169,377 |   | 4.4 | % |
| Commercial                           |   | 29,108                       |   | 28,530               |   | 2.0                        | %        | 28,863               |     | 28,266 |   | 2.1 | % |
| **Average Therm Usage per Customer** |   |                         |   |                 |   |                       |     |                 |     |   |   |   |   |
| Residential                          |   | 267                          |   | 320                  |   | -16.6                      | %        | 525                  |     | 589 |   | -10.9 | % |
| Commercial                           |   | 1,280                        |   | 1,539                |   | -16.8                      | %        | 2,489                |     | 2,774 |   | -10.3 | % |
| **Operating Margin**                 |   |                         |   |                 |   |                       |     |                 |     |   |   |   |   |
| Residential                          |   | $                            | 13,548 |                 | $      | 15,290                     |     | -11.4                | %        | $ | 26,540 |   | $ | 27,919 |   | -4.9 | % |
| Commercial                           |   | 7,601                        |   | 8,950                |   | -15.1                      | %        | 14,875               |     | 15,900 |   | -6.4 | % |
|                                      |        |                              |        |                      |        |                            |          |                      |          |  |  |  |  |  |  |  |  |

 

For the quarter ended March 31, 2003, operating marginfrom sales to residential and commercial customers decreased $3,091,000 fromthe same period last year. The addition of 8,122 new residential and commercialcustomers, a 4.1% growth rate, contributed $969,000 of margin, but decreasedconsumption per customer resulted in a margin reduction of $4,060,000. Warmweather, a slow economy, and conservation were factors contributing to theconsumption decline.

 

For the six-month period, similar factors affectedconsumption, resulting in a $4,194,000 decline in margin, partially offset by$1,790,000 from the addition of new customers.

 

Electric GenerationMargin. Margin derived from electric generation customersdeclined $462,000 for the quarter and $547,000 year to date. The decline can beattributed to the effects of the slow economy and weather conditions on thedemand for electricity, as well as on increased availability of hydroelectricresources in recent weeks.

 

Industrial and OtherMargin. Total Industrial and Other Margin, excluding electricgeneration margin, increased slightly compared to the second quarter of fiscal2002 ($6,202,000 compared to $6,153,000). Operating margin from distributionand related services for industrial customers other than electric generatorsimproved by $478,000 reflecting the operational startup of a new customer.  Margin from gas management services alsoimproved, up by $437,000 due primarily to an increase in the number ofcustomers served. A significant portion of gas management service margins isderived from arranging gas supplies for these customers. As these arrangementsexpire and new ones are entered into, margins will fluctuate. These gains wereoffset by a charge related to the cancellation of contracts for gas supplies toserve certain industrial customers. During fiscal 2002, Cascade terminated twocontracts for the purchase of gas from Enron based upon Enron’s insolvency andconcerns about its ability to perform.  Enron Canada, the supplier for one of the contracts, disputed theCompany’s position and claimed $3.4 million in termination charges.  Recognizing the complexity of the issues andthe uncertainties of potential litigation,

 

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 the Company recorded a chargeto earnings of $2.8 million in fiscal 2002. In December 2002, the bankruptcyestate of Enron asserted a claim of $1.4 million as a termination payment forthe second contract, 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.After the end of the second quarter, the Company settled the Enron NorthAmerica claim by paying $1,050,000. Management believes the remaining reservesare adequate.

 

On a year-to-date basis, total Industrial and OtherMargin, excluding electric generation margin, increased $550,000, including$387,000 from distribution and related services, and $1,027,000 from higher gasmanagement service revenue, offset by the $865,000 contract termination charge.

 

**Cost of Operations**

 

Cost of operations for the quarter ended March 31,2003, which consists of operating expenses, depreciation and amortization, andproperty and payroll taxes, increased $467,000 (3.1%) for the quarter and $345,000(1.1%) year to date, compared to the prior year.

 

Operating Expenses,which are primarily labor and benefits expenses, increased $250,000 for thequarter. Labor increased $208,000 (3.4%) and employee benefits increased$238,000 (9.2%). Other expense categories, in the aggregate decreased $196,000.

 

On a year-to-date basis, total operating expensesdecreased $67,000, in spite of an 11% benefits cost increase and a charge of$375,000 for settling a personal injury claim. Expense increases were offset bylower costs in several other categories. More effective use of internalresources for capital projects versus activities such as maintenance and salesfurther reduced operating expenses for the quarter and year-to-date periods. A$250,000 personal injury settlement paid in fiscal 2002 also affected theyear-to-date comparisons.

 

Depreciation andAmortization increased $140,000 for the quarter and $222,000year to date, over the 2002 periods, primarily as a result of increases indepreciable gas distribution system assets.

 

Property and PayrollTaxes increased $77,000 for the quarter and $191,000 year todate due primarily to higher property taxes reflecting higher assessmentsassociated with increases in gas distribution system assets.

 

# **Interestand Other Deductions – Net**

 

Interest and other deductions – net, for the quarterwas $135,000 lower for the quarter due to improved cash flow and lowershort-term borrowing. Year-to-date non-operating expense was up $163,000 due toissuing $40 million 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 theCompany’s business creates short-term cash requirements to finance customeraccounts receivable and construction expenditures. To provide working capitalfor these requirements, the Company has a $50,000,000 bank revolving creditcommitment. This agreement has an annual 0.16% commitment fee, and a term thatexpires in 2004. The Company also has a $10,000,000 uncommitted bank creditline. As of March 31, 2003, there was no outstanding debt under these creditlines.

 

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

 

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securities. On November 26, 2001, the Company issued $40,000,000 of7.5% 30-year debt under the omnibus registration statement, leaving$110,000,000 available under that registration statement.

 

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

 

###### **RetirementPlan Funding**

 

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

 

# **OperatingActivities**

 

Net cash provided by operating activities for the sixmonths ended March 31, 2003 was $34,140,000 compared to $26,634,000 for thecomparable period last year. Though net income was lower in 2003, reduction ininventories of natural gas during the winter heating season was the primaryreason for the improvement. Inventories had been built up during fiscal 2002,and were withdrawn from storage for normal sales to customers during the firsttwo quarters of fiscal 2003.

 

**Investing Activities**

 

Cash used by investing activities for the six monthsended March 31, 2003 was $10,771,000, compared to $9,759,000 for the prioryear’s period. The increase is primarily related to higher expenditures forexpansion of the gas distribution system.

 

A project to install automated meter reading wasapproved in the third quarter, and will increase expected capital expendituresfor fiscal 2003 to approximately $30,000,000. These expenditures are notexpected to significantly affect long-term financing needs of the Company.

 

**Financing Activities**

 

Net financing activities for the six months endedMarch 31, 2003 used $4,827,000, compared to $6,562,000 for the prior year. Theprimary financing activity during 2003 was the payment of dividends on commonstock.

 

**EMPLOYEE BENEFITS PLAN CHANGES**

 

The Company has conducted acomprehensive review of its employee benefits plans, and in the third quarterof fiscal 2003 is beginning to implement significant changes to its employeeretirement plan, executive retirement plan and healthcare plans for both activeemployees 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 expected to be offset by costsof implementing the changes, including the charge described below.

 

Some of the changes involvethe Company’s employee retirement plan and executive supplemental retirementplan.  As of September 30, 2003 thesedefined benefit plans will stop accruing additional benefits.  Instead, defined contribution plans will beused for benefits earned in the future. The revisions to the defined benefitplans constitute plan curtailments under FAS Statement No. 88, *Employers’ Accounting*

 

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* *

*forSettlements and Curtailments of Defined Benefit Pension Plans and forTermination Benefits.*Therefore,the company will record a charge to operating expense of approximately $1.5million in the third quarter of fiscal 2003, as a curtailment loss associatedwith unrecognized prior service cost.

 

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

 

Cascade has evaluated its risk related to financialinstruments whose values are subject to market sensitivity. The Company hasfixed-rate debt obligations, but does not have derivative financial instrumentssubject to interest rate risk. Cascade makes interest and principal payments onthese obligations in the normal course of its business, and does not plan toredeem these obligations prior to normal maturities, except to the extentrequired under the terms of the Company’s $40 million note offering in the caseof the death of individual owners of the notes.

 

The Company’s natural gas purchase commodity pricesare subject to fluctuations over time resulting from weather, congestion oninterstate pipelines, and other unpredictable factors. The Company hasfixed-price contracts covering a substantial portion of natural gas supplyrequirements of its core customers through September 2004. This strategy isfollowed to assure availability of adequate supplies to meet customer needs andto shield the Company and its core customers from price volatility. There isrisk that market prices may fall below the price levels established in thecontracts. However the WUTC and the OPUC support the Company’s strategy, andhave approved rates that reflect the recovery of the contracted prices. Thusthe Company believes that regulatory policy, including Purchased Gas Adjustmentmechanisms, assure the recovery of prudently incurred wholesale gas cost, andthat the Company’s commodity price risk is immaterial. Further, the Companydoes not engage in significant energy trading activities.

 

**Item 4****: Controlsand Procedures**

 

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

 

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

 

**FORWARD LOOKING STATEMENTS**

 

Statements contained in this report that are nothistorical in nature are forward-looking statements within the meaning of thePrivate Securities Litigation Reform Act of 1995. Forward-looking statements aresubject to risks and uncertainties that may cause actual future results todiffer materially. Such risks and uncertainties with respect to the Companyinclude, among others, its ability to successfully implement internalperformance goals, competition from alternative forms of energy, consolidationin the energy industry, the failure or inability of key natural gas suppliersto honor their commitments, the capital-intensive nature of the Company’sbusiness, regulatory issues, including the need for adequate and timely raterelief to recover increased capital and operating costs resulting from customergrowth and to sustain dividend levels, the weather, increasing competitionbrought on by deregulation initiatives at the federal and state regulatory levels,the potential loss of large volume industrial customers due to “bypass” or theshift by such customers to special competitive contracts at lower per unitmargins, exposure to environmental cleanup requirements, and economicconditions, particularly in the Company’s service area.

 

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

 

**Item 1.  Legal Proceedings**

 

**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 thecomplexity of the issues and the uncertainties of potential litigation, theCompany recorded a charge to earnings of $2.8 million in fiscal 2002. InDecember 2002, the bankruptcy estate of Enron asserted a claim of $1.4 millionas a termination payment for the second contract, of which Enron North Americawas 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 thefiscal 2003 second quarter. After the end of the second quarter, the Companysettled the Enron North America claim by paying $1,050,000. Management believesthe remaining reserves are adequate.

 

**Settlement in Fatality Case:**

 

In the fourth quarter of fiscal 2002 a fatal accidentoccurred involving facilities owned by the Company, located on the property ofone of the Company’s commercial customers. In December 2002 a settlement of allplaintiffs’ claims was agreed to in consideration of a $750,000 payment. TheCompany and its co-defendant have each paid $375,000, and have agreed toresolve the allocation of the total settlement payment between them in futurenegotiations or proceedings.

 

**Item 2.  Changes in Securities**

 

Under the terms of its bank credit agreement, theCompany is required to maintain a minimum tangible net worth of $105,935,000 asof March 31, 2003. Under this agreement, approximately $21,154,000 wasavailable for payment of dividends at March 31, 2003.

 

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# **Item4.  Submission ofMatters to a Vote of Security Holders**

 

The annual meeting ofshareholders was held on January 29, 2003. The vote with respect to election ofdirectors was reported by the Registrant in its Quarterly Report on Form 10-Qfor the quarter ended December 31, 2002.

 

**Item 5.  Other Information**

 

Ratio of Earnings toFixed Charges:

 
| **Twelve Months Ended** |   |
|-------------------------|--------|
| **3/31/2003**           |   | **9/30/2002** |   | **9/30/2001** |   | **9/30/2000** |   | **9/30/1999** |   | **9/30/1998** |   |
|                    |   |   |   |   |   |   |   |   |   |   |   |
| 1.99                    |   | 2.27 |   | 3.39 |   | 3.12 |   | 3.00 |   | 2.42 |   |

 

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

 

**Item 6.  Exhibits and Reports on Form 8-K**

 

a. Exhibits:

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

 

b. Reports on Form 8-K:

 

On January 15, 2003, the Company filed a Report onForm 8-K Dated December 31, 2002, to report the appointment of Larry L.Pinnt, an outside director on the Board of Directors of the Registrant since 1995,as non-management Chairman of the Board effective January 1, 2003, and toreport amendments to its bylaws to reflect the new roles of the Chairman of theBoard and other officers, and to make certain housekeeping changes.

 

On April 24, 2003, the Company furnished a Report onForm 8-K dated April 17, 2003, to provide the information contained in itsApril 17 release of second 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:                               |   | May 12, 2003 |   |   |

 

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**CERTIFICATION****ACCOMPANYING PERIODIC REPORT**

**PURSUANT TO SECTION 302**

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

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

 

I, W. Brian Matsuyama, certify that:

 

1.               I have reviewedthis quarterly report on Form 10-Q of Cascade Natural Gas Corporation;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

6.  The registrant’s other certifying officersand I have indicated in this quarterly report whether there were significantchanges in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

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

 

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I, J. D. Wessling, certify that:

 

1.               I have reviewedthis quarterly report on Form 10-Q of Cascade Natural Gas Corporation;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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

 

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