**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-K**

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

**Forthe fiscal year ended September 30, 2006**

**Commissionfile number: 1-7196**

**CASCADE NATURAL GAS CORPORATION**

(Exact name of Registrantas specified in its charter)

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

 

Securities registeredpursuant to Section 12(b) of the Act:

| Title of Each Class                   | ** ** | **Name of Each Exchange on which Registered** |
|---------------------------------------|------------|-----------------------------------------------|
| Common Stock, Par  Value $1 per Share |       | New York Stock  Exchange                      |

 

Securities registeredpursuant to section 12(g) of the Act: **None**

Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes  o    No  x

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) ofthe Act.   Yes   o    No  x

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) ofthe Securities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.   Yes  x    No  o

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K.  o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the ExchangeAct. (Check one):

Large accelerated filer  o           Acceleratedfiler  x           Non-acceleratedfiler  o

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

As of March 31, 2006, the registrant had11,471,273 shares of its Common Stock, $1 par value, outstanding. The aggregatemarket value of these shares of Common Stock (based upon the closing price ofthese shares on the New York Stock Exchange on that date) held bynon-affiliates was $223,778,604.

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

Title:Common Stock, Par Value $1 per Share         Outstanding 11,506,996 as of November 30, 2006

 

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**CASCADE NATURAL GAS CORPORATIONAnnual Report to the Securities and Exchange Commission on Form 10-KFor the Fiscal Year Ended September 30, 2006**

**Tableof Contents**

|                   | ** **                                                                                                                      | **Page  Number** |
|-------------------|---------------------------------------------------------------------------------------------------------------------------------|------------------|
| Part I       |                                                                                                                            |             |   |
|              | Item 1—Business                                                                                                            |             | 3 |   |
|              | Item 1A—Risk Factors                                                                                                       |             | 9 |   |
|              | Item 1B—Unresolved Staff  Comments                                                                                         |             | 13 |   |
|              | Item 2—Properties                                                                                                          |             | 13 |   |
|              | Item 3—Legal Proceedings                                                                                                   |             | 13 |   |
|              | Item 4—Submission of Matters  to a Vote of Security Holders                                                                |             | 14 |   |
| Part II      |                                                                                                                            |             |   |   |
|              | Item 5—Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities |             | 15 |   |
|              | Item 6—Selected Financial Data                                                                                             |             | 16 |   |
|              | Item 7—Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         |             | 18 |   |
|              | Item 7A—Quantitative and  Qualitative Disclosures about Market Risk                                                        |             | 28 |   |
|              | Item 8—Financial Statements  and Supplementary Data                                                                        |             | 30 |   |
|              | Item 9—Changes in and  Disagreements With Accountants on Accounting and Financial Disclosure                               |             | 56 |   |
|              | Item 9A—Controls and Procedures                                                                                            |             | 57 |   |
|              | Item 9B—Other Information                                                                                                  |             | 61 |   |
| Part III     |                                                                                                                            |             |   |   |
|              | Item 10—Directors and  Executive Officers of the Registrant                                                                |             | 61 |   |
|              | Item 11—Executive Compensation                                                                                             |             | 65 |   |
|              | Item 12—Security Ownership  of Certain Beneficial Owners and Management and Related Stockholder Matters                    |             | 77 |   |
|              | Item 13—Certain  Relationships and Related Transactions                                                                    |             | 78 |   |
|              | Item 14—Principal Accountant  Fees and Services                                                                            |             | 79 |   |
| Part IV      |                                                                                                                            |             |   |   |
|              | Item 15—Exhibits, Financial  Statement Schedules                                                                           |             | 80 |   |
| Signatures        |                                                                                                                            | 81               |   |
| Index to Exhibits |                                                                                                                            | 82               |   |

 

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**PART I**

**Item 1.**                        Business

*General*

Cascade Natural Gas Corporation (Cascade or theCompany) was incorporated under the laws of the state of Washington on January 2,1953. Its principal business is the distribution of natural gas to customers inthe states of Washington and Oregon. Approximately 70% of its residential andcommercial gas distribution margins are from customers in the state ofWashington.

The Company entered into a definitive merger agreementwith MDU Resources Group, Inc. on July 8, 2006 to be acquired forcash consideration of $26.50 per share. The total value of the transaction,including the assumption of certain indebtedness, is approximately $475million. The completion of the acquisition is subject to the approval ofvarious regulatory authorities and the satisfaction of other customary closingconditions. The regulatory approvals include those from the WashingtonUtilities and Transportation Commission, the Oregon Public Utility Commissionand certain jurisdictions under which MDU Resources’ utility divisions operate.Regulatory approvals are anticipated to be obtained by mid-year 2007. Pendingthe merger, Cascade must comply with the covenants contained in the mergeragreement, but is generally continuing to operate in the ordinary course ofbusiness.

As of September 30, 2006, the Company hadapproximately 204,000 residential customers, 31,000 commercial customers,and 700 industrial and other larger customers. Residential, commercial, andmost small industrial customers are generally core customers who taketraditional “bundled” natural gas service, which includes supply, peakingservice, and upstream interstate pipeline transportation. Sales to corecustomers in fiscal 2006 accounted for approximately 26% of gas deliveries and73% of operating margin. The Company’s sales to its core residential andcommercial customers are influenced by fluctuations in temperature,particularly during the winter season. A warmer than normal winter season willtend to reduce gas consumption while a colder than normal winter season willhave the opposite impact. Also affecting sales to core customers is theaddition of more energy-efficient homes and facilities, consumer behaviordriven by increases in natural gas pricing and a desire to conserve, and arecent trend to warmer winters in the Company’s service areas. Together, theseforces have resulted in reductions in average gas usage per customer. TheCompany has received approval for decoupling its margins from weather andconservation in the state of Oregon allowing for the recovery of margins basedupon the authorized level. The Company has filed for a similar decouplingmechanism in conjunction with a rate case that it filed in the state ofWashington in February 2006, and is awaiting the decision of the WashingtonUtilities and Transportation Commission.

Non-core customers aregenerally large industrial and institutional customers who have chosen “unbundled”service, meaning that they select from among several upstream supply, pipelinetransportation, and gas management service options independent of the Company’sdistribution service. The Company’s margin from non-core customers is derivedprimarily from distribution service and to a lesser extent from gas managementservice revenue. Gas management service revenue primarily includes fees chargedto non-core customers in consideration of securing gas supplies and pipelinecapacity for the customers.

*Natural Gas Supply*

The majority of Cascade’s supply of natural gas istransported via Williams Gas Pipelines—West (Williams). Williams owns andoperates a transmission system extending from points of interconnection with ElPaso Natural Gas Company and Transwestern Pipeline Company near Blanco, NewMexico through the states of New Mexico, Colorado, Utah, Wyoming, Idaho, Oregonand Washington to the Canadian border near Sumas, Washington. Natural gas istransported north from the Colorado and 

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New Mexico area, andsouth from British Columbia, Canada. The Company is also a shipper on thetransmission system of Gas Transmission Northwest Corporation (GTN), owned byTransCanada Pipeline (TCPL). GTN connects with the facilities of the TCPL atthe international border near Kingsgate, British Columbia and extends throughWashington and central Oregon into California. In addition, Cascade receivesnatural gas directly from Duke Energy Gas Transmission  (DEGT) at the Canadian border near Sumas,Washington and also intra British Columbia at a receipt point known as Station2 on DEGT.

Presently, baseload requirements for Cascade’s coremarket are provided by eight major gas supply contracts with various expirationdates ranging from 2007 through 2010 and averaging 590,000 therms per day ofCanadian supply and 191,000 therms per day of domestic supply. These contractsare supplemented by various service agreements to cover periods of peak demand,including three storage agreements. One such agreement, with Williams, extendsto October 31, 2014 and provides for 167,890 therms per day and a maximum,renewable inventory of 6,043,510 therms. The second storage agreement withAvista Corporation, which is scheduled to terminate on April 30, 2007,entitles Cascade to receive up to 150,000 therms per day and a maximum,renewable inventory of 4,800,000 therms. A third contract, also with Williamsfor liquefied natural gas (LNG) storage, is effective through October 31,2014. Under this LNG agreement, Cascade is entitled to inject or withdraw up to600,000 therms per day to a maximum inventory of 5,622,000 therms. In additionto withdrawal and inventory capacity, Cascade maintains a corresponding amountof firm transportation from the storage facility to the city gate for each ofthese agreements. During 2006, Cascade also entered into a long-term storageagreement with Williams for service from Jackson Prairie to commence in 2010primarily to replace the storage capability from the expiring contract withAvista Corporation. In November 2006, the Company entered into aMemorandum of Understanding with Williams (Northwest Pipeline) for a prearrangeddiscounted transportation agreement for the transportation of Jackson Prairiestored gas to certain Cascade delivery points to start on November 1,2009. In exchange for the discounted rate, the Company agreed to extend theprimary terms of its existing transportation agreements with Northwest Pipelineby five years.

Cascade has several options available for the 2007-08and 2008-09 winter periods to replace the 15,000 dekatherms per dayof withdrawal capability at Jackson Prairie resulting from the expiring AvistaCorporation storage contract. A complete analysis of these options will beconducted in the upcoming months in order to determine the best alternative(s) forthe Company to pursue until the Jackson Prairie expansion is completed for the2009-10 winter.

The Company enters into various seasonal and annualgas supply contracts designed to match the load requirements of its customers. Interstatepipelines provide natural gas to the Company from production areas in the RockyMountain States and from western Canada. Management believes gas supplyresources in those areas are adequate to serve the Company’s current needs andto support future growth. The wholesale price of gas in the region hasincreased in recent years, paralleling national trends. Additionally, afavorable differential that has historically existed between Pacific Northwestgas prices and national prices has narrowed as new pipelines have increasedaccess to Rocky Mountain and Canadian supplies by California and mid-westmarkets.

To mitigate pricevolatility, the Company employs a gas procurement strategy for supplies forsale to core customers that involves entering into physical gas supplycontracts with suppliers at published first-of-the-month index prices for up tofive-year terms. To further mitigate the price volatility, these index-relatedsupplies are hedged through the use of derivatives, primarily swaps, withfinancial institutions. Approximately 90% of the core market’s requirement forfiscal 2007, 60% of fiscal 2008, and 30% of fiscal 2009 are secured with fixedprices as of the end of fiscal 2006.

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*State Regulation*

The Company’s rates and practices are regulated by theWashington Utilities and Transportation Commission (WUTC) and the Oregon PublicUtility Commission (OPUC).

Cascade’s gas supply contracts contain pricingprovisions based on market prices, and as a matter of practice, the Companygenerally enters into derivatives, generally swaps, to fix the price of futuresupplies. To the extent that overall demand is different from the amount of gassupply under contract and hedged, the net effective price paid by Cascade maychange with respect to supplies purchased for core customers. The Company isable to pass the effect of such changes, subject to regulatory review, to itscustomers by means of a periodic purchased gas cost adjustment (PGA) in eachstate. Gas price changes occurring between times when PGA rate changes becomeeffective are deferred for pass-through in the next PGA. These PGA’s includeinterest compensation on any deferred collections financed by Cascade.

With respect to such gas supplies delivered to Oregoncustomers, 67% of the incremental change in the actual cost of gas supplies, ascompared to the forecasted cost reflected in the PGA, is deferred. The remaining33% (increase or decrease) is absorbed by the Company. Cascade’s gas supplyportfolio for Oregon core customers is comprised mostly of gas supplies withcommodity prices that have been fixed through derivative arrangements;therefore, management believes the risk or opportunity for the Company is notsignificant under the 67% / 33% sharing arrangement.

Cascade has an earnings sharing mechanism with respectto its Oregon jurisdictional operations as required by the OPUC. The mechanismwas designed as an incentive to pursue operational efficiencies and new revenueopportunities, and to share the success of such pursuits with ratepayers if theCompany’s earnings exceed a calculated ceiling. Under that arrangement, asmodified in the Company’s decoupling proceeding, the Company is authorized toretain all of its earnings attributable to its Oregon operations up to athreshold level equal to 175 basis points above a 10.25% return on equity (ROE).Subsequent years’ base ROE is adjusted by 20% of the movement in the average ofthe annual yields, reported monthly, for five-, seven-, and ten-yearUS Treasury debt securities for the calendar year. It is anticipated thatcalendar year 2006 interest rates will result in a sharing threshold of a ROEof approximately 12.2%. If the adjusted Oregon earnings are below thethreshold, there is no rate adjustment. If the adjusted earnings are above thethreshold, one-third of the earnings exceeding the threshold will be refundedto customers through future rate reductions.

Despite the fact that the Company has an earningssharing mechanism in Oregon, the OPUC Staff has initiated an investigation intothe Company’s level of earnings in Oregon. In what is commonly referred to as a“Show Cause” proceeding, the OPUC Staff will have the burden of proof that theCompany’s rates are too high. The OPUC Staff will file its direct case on February 15,2007, and the Company will file its answering case on April 16, 2007.Unlike general rate cases initiated by utility companies, there is no statutorytime limit associated with this type of proceeding.

The Company is also subject to state regulation withrespect to integrated resource planning, and its most recent update of itsIntegrated Resource Plan (IRP) was filed in 2004 with both the WUTC and theOPUC. The IRP shows the Company’s optimum set of supply and demand sideresources that minimizes costs and risk over the 20-year planning horizon.The IRP also sets forth possible core customer growth scenarios for a 20-yearperiod. In addition, the IRP sets forth the Company’s demand side managementgoals of achieving certain conservation levels in customer usage.

The IRP also includes the Company’s supply sidemanagement plans regarding transportation capacity and gas supply acquisitionover a 20-year period. The Company develops updates of the IRP every twoyears. Due to the large amount of regulatory activity this past year, the WUTChas granted the Company an extension to April 15, 2007 for filing the 2006IRP update. The Oregon IRP update is due in August 2007. Theseupdated documents take into account input solicited from the public, the WUTC,and 

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OPUC staffs. While thefiling of the IRP with both commissions gives the Company no advance assurancethat its acquisitions of pipeline transportation capacity and gas supplies willbe recognized in rates, management believes that the integrated resourceplanning process benefits the Company by giving it the opportunity to obtaininput from regulators and the public concurrently with making these importantstrategic decisions. Until the Company receives final regulatory approval ofthese decisions in the context of the ratemaking process, the Company cannotpredict with certainty the extent to which the integrated resource planningprocess will affect its rates.

Like virtually all U.S.gas utilities, Cascade has experienced a declining trend in per-customerconsumption over the last several years. Given the drivers, this trend isunlikely to reverse itself. To date, growth in the number of residential andcommercial customers and earnings from other services contributed to offsettingthis reduction. The Company has received approval of its Conservation AlliancePlan in the state of Oregon providing both conservation and weathernormalization of margins. The Company filed for a similar plan with the stateof Washington in conjunction with its February 2006 rate case filing. TheCompany remains optimistic that a similar plan will be approved by the WUTC inits final rate order due no later than mid-January 2007.

*Pipeline Safety*

Cascade is subject to bothstate and federal pipeline safety rules. In both Washington and Oregon, thestate commissions enforce the federal rules. Both the federal and state rules areupdated and amended periodically. Both state commissions routinely audit theCompany. Based on recent safety audit findings, the Company believes it is ingood standing with safety staff in both states and is not subject to anyon-going enforcement proceedings. The Pipeline Safety Act of 2002 requiresoperators of gas transmission pipelines to identify lines located in HighConsequence Areas (HCA’s) and develop Integrity Management Programs (IMP’s) toperiodically inspect the integrity of the pipelines and make repairs orreplacements as necessary to ensure the ongoing safety of the pipelines. Thelegislation requires Cascade to complete inspection of 50% of the highest riskpipelines located in its HCA’s within the first five years, and the remainingcovered pipelines within 10 years of the date of enactment. The Pipeline SafetyAct also requires re-inspections of the covered pipelines every seven yearsfrom the date of the previous inspection for the life of the pipelines. Cascadehas met all interim deadlines in The Act and is on schedule to meet remainingdeadlines.

*Federal EnergyRegulatory Commission (FERC) Matters*

Cascade is not subject toregulation by the FERC; however, FERC actions can affect the amounts Cascadepays to interstate pipeline companies for interstate deliveries of natural gassupplies. Several issues are pending before FERC, or are on appeal before theU.S. Court of Appeals, including substantial general rate increase requests byboth Williams and GTN. The final outcome may affect prices Cascade pays;however, none would have a significant impact. Since the Company’s currenttariffs with the WUTC and OPUC provide for 100% pass-through of costs subjectto FERC regulation, the Company expects that the final resolution of pendingissues should not affect net income.

*Curtailment Procedures*

In some previous heatingseasons, cold weather has required Cascade to curtail deliveries to itsinterruptible customers. Cascade has not curtailed any supply to firmcustomers, except under rarely occurring force majeure conditions. Cascade’stariffs effective in Washington and Oregon allow for curtailment ofinterruptible services, which are provided at rates lower than for firmservices. In the event of curtailment by Cascade of firm service due to forcemajeure, Cascade’s tariffs provide that it will not be liable for damages toany customer for failure to deliver gas curtailed in accordance with theprovisions of 

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thetariffs. The tariffs provide for appropriate adjustment of the monthly chargesto firm customers curtailed by reason of an insufficient supply of gas.

*Territory Servedand Franchises*

The population of communities served by Cascade totalsapproximately 1,080,000. At the end of September 2006, Cascade held thefranchises necessary for the distribution of natural gas in all of the communitiesit serves in Washington and Oregon. Under the laws of those states,incorporated municipalities and counties may grant non-exclusive franchisesconferring upon the grantee certain rights with respect to public streets andhighways in the location, construction, operation, maintenance and removal ofgas distribution facilities.

In the opinion of Cascade’smanagement, none of its franchises contain any restrictions or requirementsthat are of a materially burdensome nature, and such franchises are adequatefor the conduct of Cascade’s present business. Franchises expire on variousdates from fiscal 2008 to 2065. Management has not incurred significantdifficulties in renewing franchises when they expire and does not expect anysignificant problems in the future.

*Customers*

Residential and commercial customers principally usenatural gas for space heating and water heating. Once connected, thesecustomers rarely change from gas service. This category is our fastest growingwith customer count increases of 3-5% during each of the last severalyears. The residential and commercial market is very weather-sensitive. See “Seasonality”below. In addition to the seasonal nature of usage, average consumption percustomer has declined since the beginning of this decade. As mentioned earlier,the addition of more efficient homes and other buildings, replacing oldappliances with more efficient units, and consumer behaviors drive this trend. Reductionsare most pronounced following significant gas cost increases. Cascade’s growthhas contributed to offsetting these declines. As discussed under “StateRegulation,” the Company has received approval of its Conservation AlliancePlan in the state of Oregon providing both conservation and weathernormalization of margins. The Company filed for a similar plan with the stateof Washington in conjunction with its February 2006 rate case filing. TheCompany remains optimistic that a similar plan will be approved by the WUTC inits final rate order due no later than mid-January 2007.

Agreements with Cascade’sprincipal industrial customers are for fixed terms of not less than one yearand provide for automatic extension from year to year unless terminated byeither party on at least 120-days’ notice. The principal industrialactivities in Cascade’s service area include the production of pulp, paper andconverted paper products, plywood, industrial chemicals; refining of crude oil;the processing, flash-freezing and canning of many types of vegetable, fruitand fish products; processing of milk products; meat processing; drying andcuring of wood and agricultural products; and electric power generation. Electricgeneration customers represent a significant portion of industrial revenues. Thedemand for gas-fired generation tends to vary with the availability ofhydroelectric power and the relative price of gas.

*Seasonality*

Weather is an importantfactor affecting gas revenues because of the large number of customers usinggas for space heating. For the fiscal year ended September 30, 2006, 71%of operating revenues and 104% of income from operations were derived from thefirst two quarters (October 2005 through March 2006). Because of theseasonality of space-heating reve­nues, financial results for interim periodsare not indicative of results to be expected for an entire year. To mitigatethe seasonality of space-heating 

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revenues,the Company pursues a marketing strategy of encouraging the installation ofappliances that utilize natural gas more consistently year-round since they arenot as influenced by weather conditions.

*CompetitiveConditions*

Cascade operates in acompetitive market for natural gas service. Cascade competes with residual fueloil and other alternative energy sources for industrial boiler uses, and oil,propane, and electricity for residential and commercial space heating, andelectricity for water heating.

Competition is primarily basedon price. Though wholesale natural gas prices increased significantly during2005, they have somewhat abated toward the end of 2006. Cascade’s residentialand commercial rate schedules continue to maintain a price advantage over oilin its entire service territory and have an advantage over electricity in muchof its territory. In addition, natural gas enjoys the advantage of being the preferredenergy choice by builders for new home construction.

The large volume industrialmarket has always been very sensitive to price fluctuations between thecomparable cost of natural gas and alternate fuels, principally residual fueloil used in boiler applications. However, the advent of open accesstransportation in the late 1980’s and early 1990’s and the subsequentrestructuring of gas supply and contractual provisions with these customershave improved the Company’s competitive position. With the escalation ofwholesale natural gas prices that began in the 2000 - 2001 heating season, andagain in 2005, the Company has experienced some movement of its gas load toalternative fuels and some plant curtailments by industrial customers.

In addition to multiplealternative fuels, the Company is subject to bypass. Bypass refers to actual orprospective customers who install their own facilities and connect directly toan upstream pipeline and thereby “bypass” the Company’s distribution service. TheCompany has in the past experienced bypass, but has also experienced success inoffering competitive rates to reduce economic incentives to bypass.

The Company competes with othersin acquiring gas supplies for resale to governmental and industrial customers. Furtheropportunities in this area will be dependent upon market conditions thatcan change over time, credit worthiness of customers, and the increase ordecrease in the number of competing providers that are available.

TheBonneville Power Administration (BPA) is a major supplier of hydroelectricpower in the Pacific Northwest including Cascade’s service area. BPAsignificantly influences the electric rates of all classes of customersincluding those applications in direct competition with natural gas marketed byCascade.

*Environmental*

The Company is subject tofederal and state environmental regulation of its operations and propertiesthrough the United States Environmental Protection Agency, the WashingtonDepartment of Ecology and the Oregon Department of Environmental Quality. Suchregulation may, at times, result in the imposition of liability orresponsibility for the cleanup or treatment of existing environmental problemsor for the prevention of future environmental problems. For detaileddescriptions of specific environmental issues, see “Environmental Matters”under Item 7.

*CapitalExpenditures*

Driven by Cascade’s highgrowth rate, capital expenditures are primarily used to expand the Company’sdistribution system to serve new customers. Investments to expand capacity andto assure a safe and reliable system require a relatively smaller portion ofour overall capital spending. A one-time project, the installation of automatedmeter-reading capabilities system-wide, represented $16 million of our capitalspending during fiscal years 2003 and 2004. Total capital expenditures for thethree fiscal years ended September 30, 2006 averaged approximately $27.7million. Capital expenditures during fiscal 2006 

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wereapproximately $16 million. Capital spending for fiscal 2007 is expected to behigher than fiscal 2006 and more in the range of $22-24 million.

*Non-UtilitySubsidiaries*

Cascade has fournon-utility subsidiaries, only two of which are actively engaged in business atpresent. The first active subsidiary, Cascade Land Leasing, is engaged in theservicing of loans that were made to Cascade’s gas customers to finance theirpurchases of energy-efficient appliances. The subsidiary ceased making newloans in September 1997. In addition, Cascade Land Leasing receives asmall amount of annual royalty on gas production in Colorado. These mineralrights were a result of historical operations the Company had in Colorado untilthe mid-1970’s. The second active subsidiary, CGC Resources, is engagedin pipeline capacity management, with the objective of mitigating gas costs forCascade. The subsidiaries, which in the aggregate account for less than 1% ofthe consolidated assets of the Company, do not currently have a significantimpact on Cascade’s financial statements.

*Personnel*

At September 30, 2006, Cascade had 374 employees.Of the total employees, 207 are represented by the International ChemicalWorkers’ Union (ICWU). The present contract for the field operations bargainingunit negotiated last fiscal year with the union extends to April 1, 2009and remains in force thereafter from year to year unless terminated by eitherparty by written notice sixty days prior to the expiration date. The fieldoperations bargaining unit has 174 of the 207 employees represented by theICWU. Historically, the Company and the union have negotiated a new agreementto become effective as of the earliest expiration date rather than allowing theexisting agreement to remain in force.

On November 23, 2005,29 customer service representatives in the Company’s Bellingham and Sunnysidecall centers elected to be represented by the ICWU. The Company and the ICWUcontinue to negotiate toward an agreement at this time.

*AvailableInformation*

The Company makes available free of charge, on orthrough its website, http://www.cngc.com, its annual, quarterly and currentreports, and any amendments to those reports, as soon as reasonably practicableafter electronically filing such reports with the Securities and ExchangeCommission. In addition, copies of these documents may be requested, at nocost, from the Company’s corporate headquarters. Requests should be directed toShareholder Relations, Cascade Natural Gas Corporation, 222 Fairview AvenueNorth, Seattle, WA 98109, or by phone at 1-800-786-2528.

To contact any independentboard member, you may write to Larry L. Pinnt, Board of Directors Chair, P.O. Box87, Redmond, WA 98073-0087, fax to 425-895-1349, or e-mail tolpinnt@cngc.com.

*NYSE Certification*

On March 15, 2006,the Chief Executive Officer of Cascade filed a 303A.12(a) CEOCertification with the New York Stock Exchange. The CEO Certification atteststhat the Chief Executive Officer is not aware of any violations by the Companyof NYSE Corporate Governance Listing Standards.

**Item 1A.**                RiskFactors

Cascade’s business andfinancial results are subject to a number of risks and uncertainties, includingthose set forth below and in other documents we file with the Securities andExchange Commission. Investors should carefully consider these risk factors andshould also be aware that this list is not all 

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inclusiveof existing risks. In addition, new risks may emerge at any time, and Cascadecannot predict those risks or the extent to which they may affect the Company’sbusiness or financial performance.

**The rates we charge customers for gas distributionservices are established by the OPUC and the WUTC. Their failure to approverates, which provide for recovery of our costs and an adequate return oninvested capital, may adversely impact our financial condition and results ofoperations.**

The rates and terms atwhich we resell gas to our customers or transport gas owned by large customersfrom the interstate pipeline connection to our customers’ facilities must beapproved by the WUTC or the OPUC. The rates are designed to allow us to recovercosts of providing such services and to earn an adequate return on our capitalinvestment. We expect to continue to make significant capital expenditures toexpand and improve our distribution system. The failure of the WUTC or the OPUCto approve on a timely basis requested rate increases to recover increasedcosts or to allow an adequate return could adversely impact our financialcondition and results of operations.

**Higher natural gas commodity prices and fluctuationsin the price of gas may adversely affect our earnings.**

In recent years, natural gas commodity prices haveincreased dramatically due to growing demand, especially for power generation,and stagnant North American gas production. In Oregon, we have a Purchased GasAdjustment (PGA) tariff, which provides for annual revisions in rates resultingfrom changes in the cost of purchased gas. The PGA tariff provides that 33percent of any difference between actual purchased gas costs and estimated purchasedgas costs incorporated into rates will be recognized as current income orexpense. Accordingly, higher gas costs than those assumed in setting rates canadversely affect our results of operations.

Notwithstanding ourcurrent rate structure, higher gas costs could also result in increasedpressure on the WUTC or the OPUC to seek other means to reduce rates to a levelthat could adversely affect our results of operations and financial condition.

**Our risk management policies and hedging activitiescannot eliminate the risk of commodity price movements and may exposeus to additional liabilities for which rate recovery may be disallowed.**

Our gas purchasingrequirements expose us to risks of commodity price movements. We attempt tomanage our exposure through enforcement of established risk limits and riskmanagement procedures, including hedging activities. These risk limits and riskmanagement procedures may not always work as planned and cannot eliminate therisks associated with gas purchasing and hedging. These practices are subjectto regulatory review in setting our PGA tariffs and, if found to be imprudent,could be disallowed.

**Our results ofoperations may be negatively affected by warmer than average weather.**

A large portion of ourmargin is derived from sales to space heating residential and commercialcustomers between November 15 and May 15, otherwise known as thewinter heating season. Current rates are based on an assumption of averageweather. Although we have a weather normalization mechanism in effect inOregon, approximately 76 percent of our residential and commercial customersare in Washington, where a similar mechanism is not in effect. Therefore theOregon mechanism does not fully insulate us from utility earnings volatilitydue to weather. As a result, we are not fully protected against warmer thanaverage weather, which may have an adverse affect on our results of operations.

**Customers’conservation efforts may have a negative impact on our revenues.**

Higher gas costs and ratesmay result in increased conservation by customers, which can decrease sales andadversely affect results of operations. The OPUC authorized our conservationtariff, which is designed 

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torecover lost margin due to changes in residential and commercial customers’ consumptionpatterns. The conservation tariff is intended to adjust for increases ordecreases in consumption attributable to annual changes in commodity costs orperiodic changes in general rates and for deviations between actual andexpected usage. The failure of the OPUC to extend the conservation tariff inthe future could adversely affect our financial condition and results ofoperations. In addition, the Company filed for a similar plan with the state ofWashington in conjunction with its February 2006 rate case filing. TheCompany remains optimistic that a similar plan will be approved by the WUTC inits final rate order due no later than mid-January 2007. However, there isno certainty of outcome at this time.

**Certain of our properties and facilities may poseenvironmental risks requiring remediation, the cost of which could adverselyaffect our results of operations and financial condition.**

We own, or previously owned, properties that mayrequire environmental remediation or other action. Management has determinedthat there is no need to accrue any costs relating to environmental remediation.The Company’s results of operations may be adversely affected to the extentthat estimates of environmental remediation costs increase.

There are no assurancesthat existing environmental regulations will not be revised or that newregulations seeking to protect the environment will not be adopted or becomeapplicable to us. Revised or additional regulations which result in increasedcompliance costs or additional operating restrictions, particularly if thosecosts are not fully recoverable from insurance or customers, could have amaterial effect on our results of operations.

**Our gasdistribution business is subject to increased competition and eroding price advantage.**

To the extent that competition increases, our profitmargins may be negatively affected. In the residential market, we compete withsuppliers of electricity, fuel oil, propane and, to a lesser extent, wood. Wealso compete with electricity and fuel oil for commercial applications. In theindustrial market, we compete with all forms of energy. Competition among theseforms of energy is based on price, reliability, efficiency and performance.

Higher natural gas priceshave eroded or, in some cases, eliminated the competitive price advantage ofnatural gas over alternative energy sources. If the higher gas priceenvironment is sustained, our ability to attract new customers could besignificantly affected, which could have a negative impact on our customer growth rate and results ofoperations.

**Volatility in the price of natural gas could result inlarge industrial customers switching to alternative energy sources and reducedrevenues, earnings and cash flow.**

The market price ofalternative energy sources such as coal, electricity, oil and steam is theprimary competitive factor affecting the demand for the Company’s gastransportation services. Certain large industrial customers have, or mayacquire, the capacity to be able to use one or more alternative energy sourcesor shift production to facilities outside the Company’s service area if theprice of natural gas and delivery services increases significantly. Natural gashas typically been less expensive than these alternative energy sources. However,generally over the past four years, natural gas prices have been higher andmore volatile, making some of these alternative energy sources more economicalor, for other reasons, more attractive than natural gas. The Company cannotpredict the future stability of natural gas prices. Should these customersconvert their requirements to another form of energy, the Company’s revenues,earnings and cash flow would be adversely affected.

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**Earnings and cashflow may be adversely affected by downturns in the economy.**

The Company’s operationsare affected by the conditions and overall strength of the national, regionaland local economies, which impact the amount of residential, industrial andcommercial growth and actual gas consumption in the Company’s service territories.Many of the Company’s commercial and industrial customers use natural gas inthe production of their products. During economic downturns, these customersmay see a decrease in demand for their products, which in turn may lead to adecrease in the amount of natural gas they require for production. In addition,during periods of slow or little economic growth, energy conservation effortsoften increase and the amount of uncollectible customer accounts oftenincreases. These factors couldadversely affect our financial condition.

**The cost of providing pension and post-retirementbenefit plans is subject to changes in pension assumptions, fluctuationsin the market value of plan assets and changing demographics, and may have amaterial effect on our financial results.**

The Company maintains aqualified medical contributory defined benefit pension plan, a non-qualifiedsupplemental pension plan and a post-retirement benefit plan. We may berequired to recognize a material increase or decrease in annual pension orpost-retirement benefit expense based on changes in assumed interest rates,market returns, and other factors, and we may be required to record a charge toour balance sheet to the extent that benefit obligations exceed the fair valueof the plan assets.

**The Company’sbusiness is dependent on its ability to successfully access capital markets.**

The Company relieson access to both short-term money markets as a source of liquidity andlonger-term capital markets to fund at least a portion of its utilityconstruction program and other capital expenditure requirements not satisfiedby cash flow from its operations. If the Company is unable to access capital atcompetitive rates, its ability to pursue growth, replacements, and improvementscould be adversely affected. Certain market disruptions or a downgrade of theCompany’s credit rating may increase the Company’s cost of borrowing oradversely affect the ability to access one or more financial markets. Inaddition to further economic downturns and the overall health of the utilityindustry, such disruptions could include:

·       thebankruptcy of an unrelated energy company;

·       capitalmarket conditions generally;

·       marketprices for natural gas; or

·       terrorist attacks orthreatened attacks.

**A downgrade in theCompany’s credit rating could negatively affect its ability to access capital.**

Standard and Poor’s andMoody’s Investor Services rate Cascade’s debt at “BBB+” with a stable outlookand “Baa1” with a stable outlook, respectively. Although the Company is not awareof any current plans of S&P or Moody’s to lower their respective ratings onCascade’s debt, the Company cannot be assured that such credit ratings will notbe downgraded. Although Cascade does not have any rating downgrade triggersthat would accelerate the maturity dates of outstanding debt, a downgrade inthe Company’s credit ratings could adversely affect its ability to renewexisting, or obtain access to new credit facilities and could increase the costof such facilities.

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**Transporting natural gas involves numerous risks thatmay result in accidents and other operating risks and costs.**

Our gas distributionactivities involve a variety of inherent hazards and operating risks, such asleaks, accidents and mechanical problems, which could cause substantialfinancial losses. In addition, these risks could result in loss of human life,significant damage to property, environmental pollution and disruption of ouroperations, which in turn could lead to substantial losses. The occurrence ofany of these events may not be covered by our insurance policies or recoverablethrough rates, which could adversely affect our financial condition and resultsof operations.

**Failure to complete the planned merger with MDUResources Group, Inc. could have a negative impact on the Company’s share price.**

The completion of ourpending merger with MDU Resources Group, Inc. is subject to the approvalby various regulatory authorities and the satisfaction of other customaryclosing conditions. The merger may not occur if that Company is unable toobtain necessary regulatory approvals in a timely manner, or satisfy otherclosing conditions. Therefore, if the merger is not concluded, Cascade’s shareprice may be impacted.

**In anticipation of the planned merger with MDUResources Group, Inc., personnel may decide to leave the Company.**

Individual employees mayexperience uncertainty about their post-merger roles with MDU Resources. Issuesrelating to the uncertainty and difficulty of integration or a desire not toremain with MDU Resources after the merger may cause them to voluntarily leavethe Company for other career opportunities. Loss of significant numbers ofemployees, or employees in key positions, could have a detrimental impact onthe Company’s ability to carry on certain routine business activities. Tomitigate this risk, the Company has provided “Change-in-Control” incentives toemployees in key roles to encourage them to stay with the Company at leastthrough the completion of the merger. However, there can be no assurance thatsuch employees will not leave the Company, or that we will be able to findadequate replacements if they do depart.

**Item 1B.**               UnresolvedStaff Comments

As of the filing date ofthis report, the Company does not have any unresolved comments from theSecurities and Exchange Commission staff.

**Item 2.**                        Properties

At September 30, 2006, Cascade’s utility plantinvestments included approximately 5,408 miles of distribution mains rang­ingin diameter from two inches to sixteen inches, 214 miles of transmission mainsranging in diameter from two inches to twenty inches, and 3,681 miles ofservice lines.

The distribution and transmission mains are locatedunder public property such as streets and highways or on private property withthe permission or consent of the individual owner.

Cascade owns 21 buildingsused for operations, office space and warehousing in Washington and six suchbuildings in Oregon. It leases two commercial offices and warehouse buildings. Cascadeconsiders its properties well maintained and in good operating condition, andadequate for Cascade’s present and anticipated needs. All facilities aresubstantially utilized.

**Item 3.**                        LegalProceedings

On July 31, 2006, a complaint was filed with theWashington Utilities and Transportation Commission (WUTC) by Cost ManagementServices, Inc. against the Company. The complaint contends the 

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Company’s sales tocustomers under its gas management program are not allowed. The complainant isin the gas management business and is a competitor of the Company for thisbusiness with the same customers. The complaint requests that the Company bedirected to cease and desist from making such sales. It further requests theWUTC determine whether the Company’s contracts with its gas managementcustomers are void or voidable under Washington statutes and to provide otherrelief or penalties as the WUTC may consider appropriate under the circumstances.The Company believes that its gas management business is in compliance withapplicable laws.

The parties to the Complaint Docket have filed aStipulation of Facts and have agreed to file simultaneous motions and briefs onthe same dates reserved for briefs in the Washington general rate case docket. TheWUTC has indicated that it will issue an order in the Complaint Docket prior to, or at the same time as, thefinal order in the general rate case docket.

Incorporated herein byreference is the information under “Environmental Matters” in Item 7.

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

No matters were submitted during the fourth quarter offiscal year 2006.

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**PART II**

**Item 5.**                        Marketfor Registrant’s Common Equity, Related Stockholder Matters, and IssuerPurchases of EquitySecurities

TheCommon Stock is traded on the New York Stock Exchange under the symbol CGC. Thefollowing table states the per-share high and low sales prices of the CommonStock:

| ** **        | ** ** | **Fiscal 2006** | ** ** | **Fiscal 2005** | ** ** |
|-------------------|------------|----------------------|------------|----------------------|------------|
| **Quarter**       | ** ** | ** **           | ** ** | **High**             | ** ** | **Low** | ** ** | **High** | ** ** | **Low** | ** ** |
| December 31  |       | $                    | 22.00      |                 | $          | 19.50 |   | $ | 21.80 |   | $ | 20.00 |   |
| March 31     |       | $                    | 20.30      |                 | $          | 18.95 |   | $ | 21.48 |   | $ | 19.68 |   |
| June 30      |       | $                    | 21.30      |                 | $          | 19.26 |   | $ | 20.59 |   | $ | 18.05 |   |
| September 30 |       | $                    | 26.30      |                 | $          | 20.84 |   | $ | 22.80 |   | $ | 20.01 |   |
|                   |            |                      |            |                      |            |  |  |  |  |  |  |  |  |  |  |

 

At September 30,2006, there were 5,148 registered holders of the Common Stock. The followingtable shows for the periods indicated the dividends paid per share on theCommon Stock:

| ** **        | ** ** | **Fiscal** | ** ** | **Fiscal** | ** ** |
|-------------------|------------|------------|------------|------------|------------|
| **Quarter**       | ** ** | ** ** | ** ** | **2006**   | ** ** | **2005** | ** ** |
| December 31  |       | $          | 0.24       |       | $          | 0.24 |   |
| March 31     |       | $          | 0.24       |       | $          | 0.24 |   |
| June 30      |       | $          | 0.24       |       | $          | 0.24 |   |
| September 30 |       | $          | 0.24       |       | $          | 0.24 |   |
|                   |            |            |            |            |            |  |  |  |  |

 

While the Company’s debtagreements do contain restrictions on the Company’s ability to pay dividends incertain circumstances, at September 30, 2006, the Company was incompliance with all indebtedness covenants and was not restricted with respectto dividend payments.

**EquityCompensation Plan Information**

| **Plan Category**                                      | ** ** | ** ** | ** ** | **Number of  securities to be  issued upon  exercise of  outstanding  options, warrants  and rights  (a)** | ** ** | **Weighted-average  exercise price of  outstanding  options, warrants  and rights  (b)** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation  plans (excluding  securities reflected in  column (a))  (c)** | ** ** |
|-------------------------------------------------------------|------------|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity  compensation plans approved by security holders     |       |       | 25,000     |                                                                                                                                          |       |                                                                                                         | $          | 20.84                                                                                                                                                                                                             |       |   |   | 316,842 |   |   |
| Equity  compensation plans not approved by security holders |       |       | None       |                                                                                                                                          |       |                                                                                                         | None       |                                                                                                                                                                                                              |       |   | None |   |   |
| Total                                                       |       |       | 25,000     |                                                                                                                                          |       |                                                                                                         | $          | 20.84                                                                                                                                                                                                             |       |   |   | 316,842 |   |   |

 

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**Item 6.**                        SelectedFinancial Data

Thefollowing selected financial data are derived from the consolidated financialstatements of the Company.

**Consolidated Statements of Income and ComprehensiveIncome:**

| ** **                                    | ** ** | **Year Ended September 30**                                | ** ** |
|-----------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                                    | ** ** | **2006**                                                                  | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                    | ** ** | **(dollars in thousands except per-share data)** | ** ** |
| Operating  Revenues                           |       | $                                                                         | 455,964    |   | $ | 326,500 |   | $ | 318,078 |   | $ | 302,755 |   | $ | 320,978 |   |
| Less: Gas  Purchases                          |       | 327,570                                                                   |       | 212,958 |   | 202,759 |   | 191,887 |   | 209,225 |   |
| Revenue taxes                                 |       | 30,335                                                                    |       | 21,827 |   | 21,511 |   | 20,193 |   | 21,251 |   |
| Operating Margin                              |       | 98,059                                                                    |       | 91,715 |   | 93,808 |   | 90,675 |   | 90,502 |   |
| Cost of Operations:                           |       |                                                                      |       |   |   |   |   |   |   |   |   |
| Operating expenses                            |       | 44,454                                                                    |       | 44,223 |   | 40,540 |   | 45,514 |   | 43,052 |   |
| Depreciation and amortization                 |       | 17,861                                                                    |       | 17,274 |   | 16,325 |   | 15,338 |   | 14,926 |   |
| Property and payroll taxes                    |       | 3,748                                                                     |       | 3,786 |   | 3,696 |   | 3,532 |   | 3,361 |   |
|                                          |       | 66,063                                                                    |       | 65,283 |   | 60,561 |   | 64,384 |   | 61,339 |   |
| Income From  Operations                       |       | 31,996                                                                    |       | 26,432 |   | 33,247 |   | 26,291 |   | 29,163 |   |
| Nonoperating Expense  (Income):               |       |                                                                      |       |   |   |   |   |   |   |   |   |
| Interest                                      |       | 11,951                                                                    |       | 11,744 |   | 12,375 |   | 12,363 |   | 12,384 |   |
| Interest charged to construction              |       | (50                                                                       | )          | (187 | ) | (445 | ) | (378 | ) | (219 | ) |
|                                          |       | 11,901                                                                    |       | 11,557 |   | 11,930 |   | 11,985 |   | 12,165 |   |
| Amortization of debt issuance expense         |       | 396                                                                       |       | 372 |   | 618 |   | 696 |   | 652 |   |
| Other                                         |       | (1,545                                                                    | )          | (376 | ) | (162 | ) | (227 | ) | (197 | ) |
|                                          |       | 10,752                                                                    |       | 11,553 |   | 12,386 |   | 12,454 |   | 12,620 |   |
| Income Before Income Taxes                    |       | 21,244                                                                    |       | 14,879 |   | 20,861 |   | 13,837 |   | 16,543 |   |
| Income Taxes                                  |       | 8,755                                                                     |       | 5,632 |   | 7,559 |   | 5,117 |   | 6,085 |   |
| Net Income                                    |       | 12,489                                                                    |       | 9,247 |   | 13,302 |   | 8,720 |   | 10,458 |   |
| Earnings Per  Common Share, Basic and Diluted |       | $                                                                         | 1.09       |   | $ | 0.82 |   | $ | 1.19 |   | $ | 0.79 |   | $ | 0.95 |   |

 

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| ** **                                                 | ** ** | **At September 30**                                             | ** ** |
|------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                                                 | ** ** | **2006**                                                                  | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                 | ** ** | **(dollars in thousands except per-share data)** | ** ** |
| **Retained Earnings:**                                     | ** ** | ** **                                                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Beginning of the year                                      |       | $                                                                         | 15,908     |   | $ | 17,570 |   | $ | 15,051 |   | $ | 16,978 |   | $ | 17,127 |   |
| Net income                                                 |       | 12,489                                                                    |       | 9,247 |   | 13,302 |   | 8,720 |   | 10,458 |   |
| Exercise of stock options                                  |       | —                                                                    |       | — |   | — |   | — |   | (4 | ) |
| Common dividends                                           |       | (11,025                                                                   | )          | (10,909 | ) | (10,783 | ) | (10,647 | ) | (10,603 | ) |
| End of the year                                            |       | $                                                                         | 17,372     |   | $ | 15,908 |   | $ | 17,570 |   | $ | 15,051 |   | $ | 16,978 |   |
| **Capital  Structure:**                                    | ** ** | ** **                                                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Common shareholders’ equity                           |       | $                                                                         | 122,127    |   | $ | 118,615 |   | $ | 117,584 |   | $ | 111,630 |   | $ | 113,635 |   |
| Debt:                                                      |       |                                                                      |       |   |   |   |   |   |   |   |   |
| Long-term debt                                             |       | 165,123                                                                   |       | 173,840 |   | 128,900 |   | 142,930 |   | 164,930 |   |
| Short-term debt                                            |       | —                                                                    |       | 12,500 |   | 33,500 |   | 3,800 |   | — |   |
| Current maturities of long-term debt                       |       | 8,000                                                                     |       | — |   | 14,000 |   | 22,000 |   | — |   |
|                                                       |       | 173,123                                                                   |       | 186,340 |   | 176,400 |   | 168,730 |   | 164,930 |   |
| Total capital                                              |       | $                                                                         | 295,250    |   | $ | 304,955 |   | $ | 293,984 |   | $ | 280,360 |   | $ | 278,565 |   |
| **Financial  Ratios:**                                     | ** ** | ** **                                                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Return on common shareholders’ equity                 |       | 9.86                                                                      | %          | 7.46 | % | 11.03 | % | 7.33 | % | 8.27 | % |
| Common stock dividend payout ratio                         |       | 88                                                                        | %          | 117 | % | 81 | % | 122 | % | 101 | % |
| Cash dividends per common share                            |       | $                                                                         | 0.96       |   | $ | 0.96 |   | $ | 0.96 |   | $ | 0.96 |   | $ | 0.96 |   |
| Fixed charge  coverage (before income tax deduction): |       |                                                                      |       |   |   |   |   |   |   |   |   |
| Times interest earned                                      |       | 2.72                                                                      |       | 2.23 |   | 2.61 |   | 2.06 |   | 2.27 |   |
| Book value per year-end share of common stock              |       | $                                                                         | 10.61      |   | $ | 10.39 |   | $ | 10.44 |   | $ | 10.03 |   | $ | 10.29 |   |
| Capitalization  Ratios at End of Year                      |       |                                                                      |       |   |   |   |   |   |   |   |   |
| Common shareholders’ equity                           |       | 41.4                                                                      | %          | 38.9 | % | 40.0 | % | 39.8 | % | 40.8 | % |
| Long-term debt (incl. current maturities)                  |       | 58.6                                                                      | %          | 57.0 | % | 48.6 | % | 58.8 | % | 59.2 | % |
| Short-term debt                                            |       | 0.0                                                                       | %          | 4.1 | % | 11.4 | % | 1.4 | % | 0.0 | % |
|                                                       |       | 100.0                                                                     | %          | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
| **Utility  Plant:**                                        | ** ** | ** **                                                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Utility plant—end of year                             |       | $                                                                         | 614,184    |   | $ | 597,469 |   | $ | 570,036 |   | $ | 529,807 |   | $ | 505,126 |   |
| Accumulated depreciation                                   |       | 273,138                                                                   |       | 257,008 |   | 242,691 |   | 227,582 |   | 213,476 |   |
| Net plant                                                  |       | $                                                                         | 341,046    |   | $ | 340,461 |   | $ | 327,345 |   | $ | 302,225 |   | $ | 291,650 |   |
| Capital expenditures, net of contributions in  aid    |       | $                                                                         | 16,018     |   | $ | 28,011 |   | $ | 39,019 |   | $ | 27,693 |   | $ | 20,734 |   |
| Total assets                                               |       | $                                                                         | 456,706    |   | $ | 552,905 |   | $ | 422,622 |   | $ | 371,456 |   | $ | 367,663 |   |
| **Number  of Employees at End of Year**                    |       | 374                                                                       |       | 375 |   | 428 |   | 437 |   | 444 |   |

 

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**Item 7.**                        Management’sDiscussion and Analysis of Financial Condition and Results of Operations

*Overview*

The Company is a local distribution company (LDC)serving approximately 236,000 customers in the states of Washington and Oregon.Its service area consists primarily of relatively small cities and ruralcommunities rather than larger urban areas. The Company’s primary source ofrevenue and operating margin is the distribution of natural gas to end-useresidential, commercial, industrial, and institutional customers. Revenues arealso derived from providing gas management and other services to some of itslarge industrial and commercial customers. The Company’s rates and practicesare regulated by the Washington Utilities and Transportation Commission (WUTC)and the Oregon Public Utility Commission (OPUC).

Key elements of theCompany’s strategy are as follows:

·       Continueto efficiently and effectively operate the Company to achieve business goalsand maintain full compliance with the terms of the merger agreement with MDUResources Group, Inc.

·       Remainfocused on the natural gas distribution business.

·       Pursueappropriate regulatory treatment, including initiatives to decouple the Company’searnings from changing customer consumption patterns, and remove otherregulatory impediments to effective management of the business.

·       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.

·       Manage cash flow tominimize the need for additional debt financing.

**Opportunities andChallenges**

The Company operates in a diverse service territoryover a wide geographic area relative to the Company’s overall size and numberof customers. The economies of various parts of the service area are supportedby a variety of industries and are affected by the conditions that impact thoseindustries. Management believes there are continued growth opportunities in theCompany’s service area, especially in the residential and commercial segments. Factorscontributing to these opportunities include general population growth in theservice area, including some areas of very rapid growth, and to a lesserextent, low market penetration in many of the communities served.

Overall revenues and margins are negatively impactedby higher efficiency in new home and commercial building construction, higherefficiency in gas-burning equipment, and customers taking additional measuresto reduce energy usage. The increasing cost of energy in recent years,including the wholesale cost of natural gas, continues to encourage suchmeasures. However, the Company continues to believe that energy efficiency andconservation are the most viable near-term tactics for reducing customer billsand influencing wholesale natural gas prices. They also form a vital strategyfor stabilizing the cost of gas over the long term. The traditional regulatoryestablishment of rate recovery tied to volumetric sales no longer seemsprudent. This traditional rate design creates a financial disincentive forutilities to promote conservation. The Company has filed a rate case in theState of Washington along with a request to decouple the margin recovery fromvolume. The Company worked with the regulatory staff and other stakeholders inthis 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 

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endorsed by a variety oforganizations, including the National Association of Regulatory UtilityCommissions. The results of such rate requests and other initiatives forregulatory relief are subject to significant uncertainties.

In April 2006, the OPUC approved the Company’srequest to implement its Conservation Alliance Program, which effectivelydecouples operating margin from the impacts of conservation and weather on gasusage by residential and commercial customers in its Oregon service area. Thefiling provides a mechanism where the Company will adjust its earnings recoveryto fully recover the Commission-granted level of earnings per customer. This isdone via a deferral mechanism for both 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 theamount of conservation and level of weather, the Company will adjust its rateseither downward or upward to ensure recovery at the allowed level. The Companyagreed to lower its sharing mechanism cap by 125 basis points in exchange forapproval of the Conservation Alliance Program. The Company expects to shareearnings during this fiscal year due to this lowering of the cap.

Revenues and margins from the Company’s residentialand small commercial customers in Washington are highly weather-sensitive. In acold year, the Company’s earnings are boosted by the effects of the weather,and conversely in a warm year, the Company’s earnings suffer. Peak requirementsalso drive the need to reinforce our systems (i.e., increase capacity). Ouroperations group considers innovative approaches such as temporarily utilizingmobile gas supply rather than making large investments in long-term capacityincreases which may not be fully utilized.

Management believes that prospects for continuingstrong residential and commercial customer growth are excellent. The pace ofnew home and commercial construction remains steady in communities served bythe Company. In addition, management believes that potential for growth alsoexists for converting homes and businesses located on or near the Company’scurrent lines to gas from other fuels, as well as for expanding the system intoadjacent areas. Customer count growth in this sector has been more than doublethe average of U.S. gas utilities.

The Company earns approximately one third of itsoperating margin from industrial and electric generation customers. Loss ofmajor industrial customers, or unfavorable conditions affecting an industrysegment, would have a detrimental impact on the Company’s earnings. Manyexternal factors over which the Company has no control can significantly impactthe amount of gas consumed by industrial and electric generation customers and,consequently, the margins earned by the Company. Such factors may includebase-load electricity demand, refinery operations and electricity price in amarket impacted significantly by hydroelectric generation. Additional electricgeneration and industrial customers may be active if there is peaking demandfor electricity. Other external factors that impact different segments of theindustrial market include weather, temperature, seasonality of processes,energy commodity pricing, price of natural gas supplies, profitability ofindustrial segments and regional economic conditions.

In November 2005, our customer service callcenter organization voted to accept union representation. The Company isattempting to negotiate an agreement that will support our efforts tocost-effectively provide superior customer service. The results of negotiationsare uncertain.

We carefully analyze the economics of our capitalspending to support growth. When justified under our tariffs, we work withdevelopers, business owners and residents to share certain construction coststo assure a fair return to the Company. Non-revenue-generating spending is alsomanaged to assure that we use the most economically attractive solutions whileproviding for a safe and reliable system. Where possible, we work withdevelopers and customers to utilize shared trenches, significantly reducing thecost of main extensions and service connections. We also maintain theflexibility through variable overtime and the use of outside contractors toadjust our capital construction levels to each period’s requirements.

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Management continuouslyseeks improvement opportunities in all areas. Our discussion above coveringregulatory change, labor relations, operating practices, our organization andour investment to maintain and expand our gas delivery system are examples.Concurrent with supporting the required activities to complete the proposedmerger, management will continue these efforts to maintain and continuouslyimprove Cascade’s operational performance within the terms of the merger agreement.

**RESULTS OFOPERATIONS**

*2006 Versus 2005*

The Company reported net incomefor 2006 of $12,489,000, or $1.09 per share, compared to $9,247,000 or $0.82per share for 2005. References herein to per-share earnings refer to both basicand diluted, unless otherwise indicated. Primary factors resulting in theincrease in earnings per share include:

Operating Margin Factors:

·       Increase in the number of residential and commercial customers—$0.16 pershare

·       Increased natural gas usage per residential and commercial customer—$0.10per share

·       Increased margin from electric generation customers—$0.07 per share

·       Improvements in incentive cost sharing related to gas purchases forOregon customers—$0.04 per share

·       Increased miscellaneous service revenues—$0.04 per share

Partially offset by:

·       Unfavorable comparison of Oregon earnings sharing—($0.06) per share

Cost of Operations Factors:

·       Executive and other transition costs recorded in 2005—$0.13 per share

·       Reduction in 2006 employee benefits expenses—$0.11 per share

·       Reduction in 2006 in spending in various expense categories—$0.02 pershare

Offset by:

·       2006 Expenses related to pending merger—($0.15)

·       Reduction in capitalization of operating expenses—($0.08) per share

·       Increased bad debts expense—($0.04) per share

·       Increased depreciation and amortization expense—($0.03) per share

Non-operating Expense (Income)improved—$0.04 per share

Increasedeffective income tax rate—($0.06) per share

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*2005 Versus 2004*

The Company reported net incomefor 2005 of $9,247,000, or $0.82 per share, compared to $13,302,000 or $1.19per share for 2004. References herein to per-share earnings refer to both basicand diluted, unless otherwise indicated. Primary factors resulting in thedecrease in earnings per share include:

Operating Margin Factors:

·       Reduced natural gas usage per residential and commercial customer—$0.15per share

·       Lower margin from gas management services—$0.11 per share

·       Unfavorable comparison of mark-to-market valuations versus 2004—$0.06 pershare

·       Lower margins from deliveries to industrial customers—$0.04 per share

Cost of Operations Factors:

·       Executive transition costs associated with changes in the Chief ExecutiveOfficer and Chief Financial Officer—$0.07 per share

·       Severance compensation associated with staffing reductions—$0.06 pershare

·       Increased depreciation expenses—$0.05 per share

·       Write-offs of cancelled projects—$0.03 per share

·       Increased purchased services expenses—$0.03 per share

·       Increased uncollectible accounts expenses—$0.02 per share

The above were partially offset by the following factors:

·       Increase in the number of residential and commercial customers—$0.18 pershare

·       Revision of estimated liability for Oregon Earnings sharing—$0.05 pershare

·       Loweremployee benefits expense—$0.04 per share

***OPERATINGMARGIN***

Operating margins (revenue minus gas cost and revenuetaxes) by customer category for the fiscal years ended September 30, 2006,2005 and 2004 are set forth in the tables below:

***Residential andCommercial Operating Margin***

| ** **                              | ** ** | **2006**                             | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|------------|------------|------------|------------|
| ** **                              | ** ** | **(dollars in thousands)** | ** ** |
| **Degree  Days**                        |       | 5,688                                |       | 5,170      |       | 5,212      |       |
| **Average  Number of Customers Billed** | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Residential                             |       | 203,881                              |       | 194,469    |       | 184,845    |       |
| Commercial                              |       | 30,843                               |       | 30,183     |       | 29,320     |       |
| **Average  Therm Usage Per Customer**   | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Residential                             |       | 703                                  |       | 683        |       | 710        |       |
| Commercial                              |       | 3,661                                |       | 3,474      |       | 3,628      |       |
| **Operating  Margin**                   |       |                                 |       |       |       |       |       |
| Residential                             |       | $                                    | 45,168     |       | $          | 40,642     |       | $ | 39,691 |   |
| Commercial                              |       | $                                    | 23,835     |       | $          | 21,672     |       | $ | 22,014 |   |

 

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***Industrialand Other Operating Margin***

| ** **                              | ** ** | **2006**                              | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|-----------------------------------------|------------|---------------------------------------|------------|------------|------------|------------|------------|
| ** **                              | ** ** | **(dollars and therms in thousands)** | ** ** |
| **Average  Number of Customers Billed** | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Electric Generation                     |       | 11                                    |       | 13         |       | 14         |       |
| Industrial                              |       | 693                                   |       | 718        |       | 737        |       |
| **Therms  Delivered**                   | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Electric Generation                     |       | 404,437                               |       | 437,934    |       | 480,859    |       |
| Industrial                              |       | 414,363                               |       | 406,218    |       | 415,740    |       |
| **Operating  Margin**                   |       |                                  |       |       |       |       |       |
| Electric Generation                     |       | $                                     | 9,043      |       | $          | 7,663      |       | $ | 8,013 |   |
| Industrial                              |       | $                                     | 18,741     |       | $          | 18,672     |       | $ | 19,389 |   |
| Gas Management Services                 |       | $                                     | 1,593      |       | $          | 1,432      |       | $ | 3,309 |   |
| Mark-to-Market Valuations               |       | $                                     | (579       | )          | $          | (181       | )          | $ | 836 |   |
| Other Service Revenue                   |       | $                                     | 806        |       | $          | 1,290      |       | $ | 882 |   |
| Oregon Earnings  Sharing estimates      |       | $                                     | (548       | )          | $          | 525        |       | $ | (326 | ) |

 

*2006 Versus 2005*

*Residential *and Commercial—***Operating*margin****(revenue minus gas costs and revenuetaxes) is primarily a function of customer growth and gas usage per customer. Residential and commercial margins increasedby $6.6 million for the year. Customer growth at 4.5%, with the net addition ofover 10,000 new customers, contributed $2.9 million to margins, while higheraverage consumption improved margins by $1.7 million.  With cooler weather, average residential andcommercial consumption increased by 2.9% and 5.4%, respectively. When measuredin degree-days, this fiscal year was 10% cooler than the prior year. Thedifference between the consumption rates and the weather is attributed toweatherization efforts and consumer behavior encouraged by significant gas costincreases occurring nationwide early in the fiscal year. Miscellaneous servicesprovided $796,000, and revenues recognized relating to the May 2006implementation of weather and conservation decoupling in Oregon added $289,000.Changes relating to the treatment of Oregon gas cost differentials increasedthe reported margin by $879,000 when compared to fiscal 2005.

*Electric *Generation—***Margins*from sales toelectric generation plants increased by $1.4 million over 2005, primarily dueto two contract settlements totaling $1 million.

*Oregon *EarningsSharing—***Operating*margins in 2006 reflect$548,000 in accrued Oregon Earnings Sharing reported for the fiscal year,compared to last year’s reversal of $525,000 in accrued sharing.  An April agreement to institute weatherand conservation decoupling reduced the target rate of return for when sharingis required with our Oregon customers. Together, these adversely impacted theyear-to-year comparison by $1.1 million.

*2005 Versus 2004*

*Residential *and Commercial—***The*net addition ofapproximately 10,500 billed residential and commercial customers in 2005contributed approximately $3,160,000 of additional margin compared to fiscal2004. This was mostly offset by reductions in gas usage per residential andcommercial customer of 3.8% and 4.4%, respectively, which reduced margins by$2,550,000. The addition of more efficient homes and businesses, reducedconsumption per consumer, and slightly warmer weather compared to 2004 drovethe lower consumption rates. Weather statistics indicate that fiscal 2005 was1% warmer than fiscal 2004 and 4% warmer than the average of the previous fiveyears.

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*Industrial—**Margin*from naturalgas deliveries to industrial customers decreased by $717,000 year to year. Thisreduction is due to a variety of reasons including contract changes reducingminimum requirements, a decline in the number of customers and reduced usage byseveral sectors including chemical and paper manufacturing.

*Electric *Generation—***Margin*from naturalgas deliveries to electric generation customers decreased  $350,000 for the year with the declineattributable to lower-cost hydroelectric supplies and the increased wholesaleprice of natural gas. Looking ahead, gas usage by generation customers willcontinue to depend on the variables of regional demand for power, availabilityof hydro resources, and the relationship between the market price ofelectricity and the cost of gas.

*Gas *Management—***Gas*managementservices margin was down $1,877,000 from 2004. The Company has lost sales andmargin as a result of increased competition for the sale of gas supplies tolarge-volume customers.

*Oregon *EarningsSharing—***The*change in Oregon EarningsSharing amounts are the result of revised estimates of liability for refunds toOregon customers related to OPUC requirements. As of the end of 2004, theCompany estimated its liability to be $525,000. Based on a final analysisapproved by the OPUC, 2004 and 2005 earnings were not sufficient to trigger asharing with customers, and in 2005 the $525,000 2004 estimate was reversed.

***COST OFOPERATIONS***

*2006 Versus 2005*

Full year cost ofoperations (operating expense, depreciation and amortization, and property andmiscellaneous taxes) increased by $780,000 compared to 2005. Net of mergerrelated costs of $2.7 million, full year cost of operations was $1.9 millionlower. Favorable items include $2.4 million in transition costs recognized infiscal 2005, a $2.0 million reduction in employee benefits costs, and another$309,000 in reduced spending across a broad range of operating costs. Offsettingthese savings was a $1.5 million reduction in capitalized expenses related tomanagement initiatives to reduce spending on capital projects. Bad debtsexpense increased $741,000 due to higher revenues and customer bills.Depreciation increased $587,000 reflecting higher depreciable assets resultingfrom capital spending.

*2005 Versus 2004*

The primary drivers of the $3,683,000 (9.1%) increasein operating expenses are organizational changes in 2005. Costs of $1,234,000were recognized related to the replacements of the Company’s Chief Executiveand Chief Financial Officers. The expenses were primarily made up of severancecompensation for the retiring executives, hiring expenses, and signing bonusesfor the new executives. In the fourth quarter of 2005, the Company eliminated22 employee positions resulting in $1,121,000 in severance expenses.

Operating expenses in 2005 included the write-off of$596,000 in capital projects determined to no longer be viable. The projectswere primarily related to development of computer software applications.

Purchased services expenses in 2005 were higher by$532,000 compared to 2004. The primary driver of this increase is the costsrelated to the Company’s Sarbanes-Oxley compliance work, with increased costsof $337,000 over 2004. Bad debts expense increased $325,000 over 2004. Drivingthis increase are higher gas costs resulting in higher customer bills. Managementbelieves the increase also stems in part from the transition of customer serviceand collections activities from 15 offices to a single consolidated customerservice call center. Employee benefits expense decreased $625,000. The primarydrivers of the decrease were reductions in medical and dental expenses, foractive employees, and in retiree medical expense.

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Depreciation andamortization expense increased $949,000 reflecting higher depreciable assetsresulting from capital spending.

***NONOPERATINGEXPENSE (INCOME)***

An $801,000 reduction innet Nonoperating expense (income) in 2006 is primarily the result of interestincome recognized with the receipt of two income tax refunds.

***INCOMETAXES***

The changes in the provision for income taxes from2005 to 2006 and from 2004 to 2005 are attributable to the changes in pre-taxearnings, as well as an increase in the effective tax rate. The Company hasincurred costs in connection with its pending merger. Certain of those costsare not deductible on the Company’s tax return, and are permanent differencesbetween book and tax income. The resulting increase in income taxes from thenon-deductibility of these expenses was $596,000.

The changes in theprovision for income taxes from 2004 to 2005 are primarily attributable to thechanges in pre-tax earnings.

**LIQUIDITY ANDCAPITAL RESOURCES**

The seasonal nature of the Company’s business createsshort-term cash requirements to finance customer accounts receivable andconstruction expenditures. To provide working capital for these requirements,the Company has a $60,000,000 bank revolving credit commitment. This agreementhas a variable commitment fee and a term that expires in October 2007. TheCompany also has a $10,000,000 uncommitted line of credit. As of September 30,2006, there were no outstanding borrowings under these credit lines.

Due to the nature of Cascade’s business, which ischaracterized by reliable payments from a stable customer base and ourexpectations that capital spending will be primarily funded from internalsources, we expect to have limited need to source additional capital during fiscalyear 2007. For this reason, combined withthe availability of short-term credit and the ability to issue long-term debtand additional equity, management believes it has adequate financialflexibility to meet its anticipated cash needs.

Thetable below shows the Company’s future commitments under contractualobligations as of September 30, 2006:

| ** **                  | ** ** | **Amounts Due by Fiscal Year** | ** ** |
|-----------------------------|------------|----------------------------------------------------|------------|
| **Contract Category**  | ** ** | ** **                                         | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **Beyond 2011** | ** ** | **Total** | ** ** |
| ** **                  | ** ** | **(dollars in thousands)**               | ** ** |
| Long-term Debt              |       | $                                                  | 8,000      |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |   | $ | 165,123 |   |   | $ | 173,123 |   |
| Interest on Debt            |       | 11,652                                             |       | 11,567 |   | 11,567 |   | 11,567 |   | 11,567 |   |   | 149,830 |   |   | 207,750 |   |
| Operating Leases            |       | 307                                                |       | 49 |   | 34 |   | 15 |   | 7 |   |   | 7 |   |   | 419 |   |
| Gas Supply                  |       | 269,757                                            |       | 226,038 |   | 144,696 |   | 77,738 |   | 40,219 |   |   | 3,240 |   |   | 761,688 |   |
| Interstate Pipeline         |       |                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Transportation              |       | 33,415                                             |       | 50,689 |   | 50,503 |   | 47,438 |   | 45,435 |   |   | 234,193 |   |   | 461,673 |   |
| Gas Storage and Peaking     |       |                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Services                    |       | 2,605                                              |       | 2,720 |   | 3,094 |   | 3,094 |   | 3,094 |   |   | 53,584 |   |   | 68,191 |   |
| Other Purchase  Obligations |       | 458                                                |       | 279 |   | 92 |   | 36 |   | 37 |   |   | 37 |   |   | 939 |   |
| Total                       |       | $                                                  | 326,194    |   | $ | 291,342 |   | $ | 209,986 |   | $ | 139,888 |   | $ | 100,359 |   |   | $ | 606,014 |   |   | $ | 1,673,783 |   |
|                             |            |                                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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***OPERATINGACTIVITIES***

Cash provided by operatingactivities in 2006 improved $16.7 million over last year. In addition toimproved net income, the primary factor was the net reduction in deferred gascost funded by the Company, contributing $21.9 million. This improvement waspartially offset by $6.5 million from the reversal of temporary differencesbetween book and tax income related to deferred gas costs.

***INVESTINGACTIVITIES***

Cash used by investingactivities was down $11.8 million compared to 2005. Part of the differencewas due to $2.2 million of one-time specific system reinforcement expendituresand $1.0 million relating to the completed AMR and call center centralizationprojects in the first three quarters of fiscal year 2005. The remainderreflects the Company’s new investment evaluation process implemented in thefirst quarter to assure that all capital spending provides an adequate returnor is required for safety or regulatory compliance.

***FINANCINGACTIVITIES***

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

**ENVIRONMENTALMATTERS**

There are two claimsagainst the Company for cleanup of alleged environmental contamination relatedto manufactured gas plant sites previously operated by companies that weresubsequently merged into the Company.

The first claim wasreceived in 1995 and relates to a site in Oregon. An investigation has shownthat soil and groundwater contamination exists at the site. There are partiesin addition to the Company that are potentially liable for cleanup of thecontamination. Some of these other parties have shared in the costs expended todate to investigate the site, and it is expected that these and potentiallyother parties will share in the cleanup costs. Several alternatives forremediation of the site have been identified, with preliminary estimates forcleanup ranging from approximately $500,000 to $11,000,000. It is not known atthis time what share, if any, of the cleanup costs will actually be borne bythe Company. The Oregon Department of Environmental Quality (DEQ) is currentlyreviewing a Focused Feasibility Study prepared for the site and is expected toselect a preferred alternative from that report. It is not known when thedecision will be made by DEQ.

The second claim wasreceived in 1997 and relates to a site in Washington. A preliminaryinvestigation has determined that there is evidence of contamination at thesite, but there is also evidence that other property owners may havecontributed 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 is aware that the local city government hassecured federal grants for further investigation of the site. At this time, noformal investigation plan has been communicated to the Company.

Management believes it hasadequate insurance to cover the costs of the above two claims. In the event theinsurance proceeds do not completely cover the costs, management intends toseek recovery from its customers through increased rates. There is precedentfor such recovery through increased rates, as both the Washington Utilities andTransportation Commission (WUTC) and the Oregon Public Utilities Commission(OPUC) have previously allowed regulated utilities to increase customer rates tocover similar costs.

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**CRITICAL ACCOUNTINGPOLICIES**

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

***USE OFESTIMATES***

Thepreparation of financial statements in conformity with GAAP requires managementto make estimates and assumptions that affect the reported amounts of assetsand liabilities, and disclosure of contingent assets and liabilities, at thedate of the financial statements, and the reported amounts of revenues andexpenses during the reporting period. The Company has used estimates inmeasuring certain deferred charges and deferred credits related to itemssubject to approval of the WUTC and the OPUC. Estimates are also used in thedevelopment of discount rates and trend rates related to the measurement ofretirement benefit obligations and accrual amounts, allowances for doubtfulaccounts, unbilled revenue, valuation of derivative instruments, and in thedetermination of depreciable lives of utility plant. On an ongoing basis,management evaluates the estimates used based on historical experience, currentconditions, and on various other assumptions believed to be reasonable underthe circumstances. Actual results may differ from these estimates underdifferent assumptions or conditions.

***REVENUERECOGNITION***

***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.***

***REGULATORYACCOUNTING***

The Company’s accounting policies and practices are generally the same asused by unregulated companies for financial reporting under GAAP. However,Statement of Financial Accounting Standards (FAS) No. 71, “Accounting forthe Effects of Certain Types of Regulation”, requires regulated companies toapply accounting treatment intended to reflect the financial impact ofregulation. For example, in establishing the rates to be charged to the Company’sretail customers, the WUTC and the OPUC may not allow the Company to charge itscustomers for recovery of certain expenses in the same period they are incurred.Instead, rates are expected to be established to recover costs that wereincurred in a prior period. In this situation, following FAS No. 71requires the Company to defer these costs and include them as regulatory assetson the balance sheet. In the subsequent period when these costs are recoveredfrom customers, the Company then amortizes these costs as expense in the incomestatement in an amount equivalent to the amounts recovered. Similarly, certainrevenue items, or cost reductions, may be deferred as regulatory liabilities, whichare later amortized to the income statement as customer rates are reduced. Inorder to apply the provisions of FAS No. 71, the following conditions mustapply:

·       An independent regulator approves the company’s customer rates.

·       The rates are designed to recover the company’s costs of providing theregulated services or products.

·       There is sufficient demand for the regulated service to reasonably assurethat rates can be set at a level to recover the costs.

TheCompany periodically assesses whether conditions merit the continuedapplicability of FAS No. 71. In the event the Company shoulddetermine in the future that all or a portion of its regulatory 

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assets and liabilities no longer meet the abovecriteria, it would be required to write off the related balances of itsregulatory assets and liabilities and reflect the write-off in its incomestatement.

***PENSIONPLANS***

The Company has a defined benefit pension plansubstantially covering all union employees and salaried employees hired before September 30,2003. The Company also provides executive officers with supplementalretirement, death and disability benefits. These plans are described in thefootnotes to the financial statements in Part II, Item 8 of this report.

The Company’s pension costs for these plans areaffected by the amount of cash contributions to the plans, the return on planassets, and by employee demographics including age, compensation, and length ofservice. Actuarial formulas are used in the determination of pension costs andare affected by actual plan experience and assumptions of future experience. Keyactuarial assumptions include the expected return on plan assets, the discountrate used in determining the projected benefit obligation and pension costs,and the assumed rate of increase in employee compensation. Changes in theseassumptions may significantly affect pension costs. Changes to the provisionsof the plans may also impact current and future pension costs. Changes inpension plan obligations resulting from these factors may not be immediatelyrecognized as pension costs, but generally are recognized in future years overthe remaining average service period of pension plan participants.

The Company’s funding policy is to contribute amountsequal to or greater than the minimum amounts required to be funded under theEmployee Retirement Income Security Act, and not more than the maximum amountscurrently deductible for income tax purposes. The Company contributed$3,940,000 in 2006 and $3,365,000 in 2005 to the pension and supplementalexecutive retirement plans, and expects to contribute approximately $3,500,000in 2007.

The discount rate the Company selects for measuringits benefit obligation at September 30, 2006, is based on the CitigroupPension Discount Curve, updated for yields through September 30, 2006.

In selecting an assumedlong-term rate of return on plan assets, the Company considers past performanceand economic forecasts for the types of investments held by the plan. In 2006and 2005, the Company’s assumed rate of return on plan assets was 7.75% and8.25%, respectively. A reduction in the assumed rate of return would result inincreases in pension liability and pension costs.

***DERIVATIVES***

The Company accounts for derivative transactionsaccording to the provisions of FAS No. 133, “Accounting for DerivativeInstruments and Hedging Activities”, as amended. This standard requires thatthe fair value of all derivative financial instruments be recognized as eitherassets or liabilities on the Company’s balance sheet.  The Company applies FAS No. 71 toperiodic changes in fair market value of derivatives associated with suppliesfor core customers and records an offset in regulatory asset and regulatoryliability accounts.

Most of the Company’s contracts for purchase and saleof natural gas qualify for the normal purchase and normal sales exception underFAS No. 133, and are not required to be recorded as derivative assets andliabilities. Accordingly, for these contracts the Company recognizes revenuesand expenses on an accrual basis, based on physical delivery of natural gas. TheCompany applies mark-to-market accounting to financial derivative contracts. Periodicchanges in fair market value of derivatives associated with supplies fornon-core customers are recognized in earnings or, if hedge accounting isapplied, in Other Comprehensive Income.

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**New Accounting Standards**

Information on newaccounting standards is included in the Notes to the Consolidated FinancialStatements contained in Part II, Item 8, of this report.

**Item7A.**                Quantitative andQualitative Disclosures About Market Risk

The Company has evaluatedits risk related to financial instruments whose values are subject to marketsensitivity. The Company has fixed-rate debt obligations but does not currentlyhave derivative financial instruments subject to interest rate risk. Cascademakes interest and principal payments on these obligations in the normal courseof its business and may redeem these obligations prior to normal maturities ifwarranted 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. TheCompany’s Purchased Gas Cost Adjustment (PGA) mechanisms assure the recovery incustomer rates of prudently incurred wholesale cost of natural gas purchasedfor the core market. The Company primarily utilizes financial derivatives, andto a lesser extent, fixed price physical supply contracts to manage riskassociated with wholesale costs of natural gas purchased for customers. Thefair value of these derivatives as of September 30, 2006 is a netliability of $41 million. We monitor the liquidity of our financial derivativecontracts. Based on the existing open interest in the contracts held, webelieve existing contracts to be liquid. All of our financial derivativecontracts settle within the next four years, with the following estimatedfuture cash payments: $25.3 million in 2007, $8.6 million in 2008, $6.8 millionin 2009 and $0.3 million in 2010. These amounts will change based onmarket prices at the time contract settlements are fixed.

With respect to derivativearrangements covering natural gas supplies for core customers, periodic changesin fair market value are recorded in regulatory asset or regulatory liabilityaccounts, pursuant to authority granted by the WUTC and OPUC, recognizing thatsettlements of these arrangements will be recovered through the PGA mechanism.

For derivativearrangements related to supplies for non-core customers, which are not coveredby a PGA mechanism, periodic changes in fair market value are recognized inearnings or in Other Comprehensive Income.

**FORWARD-LOOKINGSTATEMENTS**

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”, “intend”, “plan”,“may”, or similar words are intended to identify forward-looking statements.

Theseforward-looking statements reflect the Company’s current expectations, beliefsand projections about future events that we believe may affect the Company’sbusiness, financial condition and results of operations, and are expressed ingood faith and are believed to have a reasonable basis. However, each suchforward-looking statement involves risks, uncertainties and assumptions, and isqualified in its entirety by reference to the following important factors,among others, that could cause the Company’s actual results to differmaterially from those projected in such forward-looking statements:

·       factorsaffecting regulatory approvals of the Company’s proposed merger with MDUResources Group, Inc.

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·       prevailingstate and federal governmental policies and regulatory actions, including thoseof the Washington Utilities and Transportation Commission, the Oregon PublicUtility Commission, and the U.S. Department of Transportation’s Office ofPipeline Safety, with respect to allowed rates of return, industry and ratestructure, purchased gas cost and investment recovery, acquisitions anddispositions of assets and facilities, operation and construction of plantfacilities, the maintenance of pipeline integrity, and present or prospectivewholesale and retail competition;

·       weather conditions and other natural phenomena;

·       unanticipated population growth or decline, andchanges in market demand caused by changes in demographic or customerconsumption patterns;

·       changes in and compliance with environmental andsafety laws, regulations and policies, including environmental cleanuprequirements;

·       competition from alternative forms of energy andother sellers of energy;

·       increasing competition brought on byderegulation initiatives at the federal and state regulatory levels, as well asconsolidation in the energy industry;

·       the potential loss of large volume industrialcustomers due to “bypass” or the shift by such customers to special competitivecontracts at lower per-unit margins;

·       risks, including creditworthiness, relating toperformance issues with customers and suppliers;

·       risks resulting from uninsured damage to theCompany’s property, intentional or otherwise, or from acts of terrorism;

·       unanticipated changes that may affect theCompany’s liquidity or access to capital markets;

·       unanticipated changes in interest rates or inrates of inflation;

·       economic factors that could cause a severedownturn in certain key industries, thus affecting demand for natural gas;

·       unanticipated changes in operating expenses andcapital expenditures;

·       unanticipated changes in capital marketconditions, including their impact on future expenses and liabilities relatingto employee benefit plans;

·       potential inability to obtain permits, rights ofway, easements, leases, or other interests or necessary authority to constructpipelines, or complete other system expansions;

·       changes in the availability and price of naturalgas; and

·       legal and administrative proceedings andsettlements.

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.

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 unanticipated events. Newfactors emerge from time to time, and the Company is not able to predict allsuch factors, nor can it assess the impact of each such factor or the extent towhich such factors may cause results to differ materially from those containedin any forward-looking statement. You are also advised to consult the otherreports we file with the Securities and Exchange Commission as well as thedisclosure under “Risk Factors” in Part I, Item 1A.

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**Item8.**                        FinancialStatements and Supplementary Data

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directors and Stockholders ofCascade Natural Gas CorporationSeattle, Washington

We have audited the accompanying consolidated balancesheets of Cascade Natural Gas Corporation and subsidiaries (the “Company”) asof September 30, 2006 and 2005, and the related consolidated statements ofincome and comprehensive income, common shareholders’ equity, and cash flowsfor each of the three years in the period ended September 30, 2006. Ouraudits also included the financial statement schedule listed in the Index underItem 15. These financial statements and financial statement schedule arethe responsibility of the Company’s management. Our responsibility is toexpress an opinion on the financial statements and financial statement schedulebased on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statementspresent fairly, in all material respects, the financial position of CascadeNatural Gas Corporation and subsidiaries as of September 30, 2006 and2005, and the results of their operations and their cash flows for each of thethree years in the period ended September 30, 2006, in conformity withaccounting principles generally accepted in the United States of America.Also, in our opinion, such financial statement schedule, when considered inrelation to the basic consolidated financial statements taken as a whole, presentsfairly, in all material respects, the information set forth therein.

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of the Company’s internal control overfinancial reporting as of September 30, 2006, based on the criteriaestablished in *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commissionand our report dated December 6, 2006, expressed an unqualified opinion onmanagement’s assessment of the effectiveness of the Company’s internal controlover financial reporting and an unqualified opinion on the effectiveness of theCompany’s internal control over financial reporting.

| /s/ DELOITTE & TOUCHE  LLP |   |
|--------------------------------|--------|
| Seattle, Washington            |
| December 6, 2006          |

 

30

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**CASCADE NATURAL GAS CORPORATIONCONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME**

| ** **                                             | ** ** | **Year Ended September 30,**                                                  | ** ** |
|--------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **                                             | ** ** | **       2006       ** | ** ** | **       2005       ** | ** ** | **       2004       ** | ** ** |
| ** **                                             | ** ** | **(Dollars in thousands except per-share data)**                    | ** ** |
| Operating  Revenues                                    |       |                                                                                         | $          | 455,964 |   |   |   | $ | 326,500 |   |   |   | $ | 318,078 |   |   |
| Less                                                   |       |                                                                                         |       |   |   |   |   |   |   |   |   |   |   |
| Gas purchases and  other costs of sales                |       |                                                                                         | 327,570    |   |   |   | 212,958 |   |   |   | 202,759 |   |   |
| Revenue taxes                                          |       |                                                                                         | 30,335     |   |   |   | 21,827 |   |   |   | 21,511 |   |   |
| Operating Margin                                       |       |                                                                                         | 98,059     |   |   |   | 91,715 |   |   |   | 93,808 |   |   |
| Cost of  Operations                                    |       |                                                                                         |       |   |   |   |   |   |   |   |   |   |   |
| Operating  expenses                                    |       |                                                                                         | 44,454     |   |   |   | 44,223 |   |   |   | 40,540 |   |   |
| Depreciation and  amortization                         |       |                                                                                         | 17,861     |   |   |   | 17,274 |   |   |   | 16,325 |   |   |
| Property and  miscellaneous taxes                      |       |                                                                                         | 3,748      |   |   |   | 3,786 |   |   |   | 3,696 |   |   |
|                                                   |       |                                                                                         | 66,063     |   |   |   | 65,283 |   |   |   | 60,561 |   |   |
| Income from  operations                                |       |                                                                                         | 31,996     |   |   |   | 26,432 |   |   |   | 33,247 |   |   |
| Nonoperating  Expense (Income)                         |       |                                                                                         |       |   |   |   |   |   |   |   |   |   |   |
| Interest                                               |       |                                                                                         | 11,951     |   |   |   | 11,744 |   |   |   | 12,375 |   |   |
| Interest charged  to construction                      |       |                                                                                         | (50        | ) |   |   | (187 | ) |   |   | (445 | ) |   |
|                                                   |       |                                                                                         | 11,901     |   |   |   | 11,557 |   |   |   | 11,930 |   |   |
| Amortization of  debt issuance expense                 |       |                                                                                         | 396        |   |   |   | 372 |   |   |   | 618 |   |   |
| Other                                                  |       |                                                                                         | (1,545     | ) |   |   | (376 | ) |   |   | (162 | ) |   |
|                                                   |       |                                                                                         | 10,752     |   |   |   | 11,553 |   |   |   | 12,386 |   |   |
| Income Before Income Taxes                             |       |                                                                                         | 21,244     |   |   |   | 14,879 |   |   |   | 20,861 |   |   |
| Income Taxes                                           |       |                                                                                         | 8,755      |   |   |   | 5,632 |   |   |   | 7,559 |   |   |
| Net Income                                             |       |                                                                                         | 12,489     |   |   |   | 9,247 |   |   |   | 13,302 |   |   |
| Other Comprehensive Income (Loss):                     |       |                                                                                         |       |   |   |   |   |   |   |   |   |   |   |
| Minimum pension  liability adjustment                  |       |                                                                                         | 3,624      |   |   |   | 177 |   |   |   | 1,270 |   |   |
| Unrealized losses  on derivative commodity instruments |       |                                                                                         | (3,558     | ) |   |   | — |   |   |   | — |   |   |
| Income tax                                             |       |                                                                                         | (32        | ) |   |   | (56 | ) |   |   | (448 | ) |   |
| Other  Comprehensive Income                            |       |                                                                                         | 34         |   |   |   | 121 |   |   |   | 822 |   |   |
| Comprehensive Income                                   |       |                                                                                         | $          | 12,523 |   |   |   | $ | 9,368 |   |   |   | $ | 14,124 |   |   |
| Earnings Per Common Share, Basic and Diluted           |       |                                                                                         | $          | 1.09 |   |   |   | $ | 0.82 |   |   |   | $ | 1.19 |   |   |
| Dividends Paid  Per Common Share                       |       |                                                                                         | $          | 0.96 |   |   |   | $ | 0.96 |   |   |   | $ | 0.96 |   |   |

 

The accompanying notes are an integral part of these consolidated financial statements.

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**CASCADE NATURAL GAS CORPORATIONCONSOLIDATED BALANCE SHEETS**

| ** **                                                                                                                 | ** ** | **September 30,**               | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                                 | ** ** | **2006**                             | ** ** | **2005** | ** ** |
| ** **                                                                                                                 | ** ** | **(Dollars in thousands)** | ** ** |
| ASSETS                                                                                                                     |       |                                 |       |   |   |
| Utility Plant                                                                                                              |       | $                                    | 614,184    |   | $ | 597,469 |   |
| Less accumulated depreciation                                                                                              |       | 273,138                              |       | 257,008 |   |
|                                                                                                                       |       | 341,046                              |       | 340,461 |   |
| Construction work in progress                                                                                              |       | 380                                  |       | 2,021 |   |
|                                                                                                                       |       | 341,426                              |       | 342,482 |   |
| Other Assets                                                                                                               |       |                                 |       |   |   |
| Investments in non utility property                                                                                        |       | 202                                  |       | 202 |   |
| Notes receivable, less current maturities                                                                                  |       | 488                                  |       | 46 |   |
|                                                                                                                       |       | 690                                  |       | 248 |   |
| Current Assets                                                                                                             |       |                                 |       |   |   |
| Cash and cash equivalents                                                                                                  |       | 8,593                                |       | 1,128 |   |
| Accounts receivable and current maturities of notes  receivable, less allowance of $2,143 and $1,319 for doubtful accounts |       | 22,796                               |       | 23,163 |   |
| Prepaid expenses and other assets                                                                                          |       | 4,671                                |       | 9,463 |   |
| Derivative instrument asset—energy commodity                                                                          |       | 4,135                                |       | 91,957 |   |
| Materials, supplies, and inventories                                                                                       |       | 17,495                               |       | 14,142 |   |
| Deferred income taxes                                                                                                      |       | 1,779                                |       | 2,292 |   |
| Regulatory assets                                                                                                          |       | 26,504                               |       | — |   |
|                                                                                                                       |       | 85,973                               |       | 142,145 |   |
| Deferred Charges and  Other                                                                                                |       |                                 |       |   |   |
| Gas cost changes                                                                                                           |       | —                               |       | 16,630 |   |
| Derivative instrument asset—energy commodity                                                                          |       | 3,269                                |       | 43,440 |   |
| Regulatory assets                                                                                                          |       | 18,261                               |       | 1,185 |   |
| Other                                                                                                                      |       | 7,087                                |       | 6,775 |   |
|                                                                                                                       |       | 28,617                               |       | 68,030 |   |
|                                                                                                                       |       | $                                    | 456,706    |   | $ | 552,905 |   |

 

The accompanying notes are an integral part of these consolidated financial statements.

32

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**CASCADE NATURAL GAS CORPORATION CONSOLIDATED BALANCE SHEETS (Continued)**

| ** **                                                                                                                     | ** ** | **September 30,**               | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                                     | ** ** | **2006**                             | ** ** | **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, 11,505,996 and 11,413,019 shares |       | $                                    | 11,506     |   | $ | 11,413 |   |
| Additional paid-in capital                                                                                                     |       | 105,702                              |       | 103,781 |   |
| Accumulated other comprehensive loss                                                                                           |       | (12,453                              | )          | (12,487 | ) |
| Retained earnings                                                                                                              |       | 17,372                               |       | 15,908 |   |
|                                                                                                                           |       | 122,127                              |       | 118,615 |   |
| Long-Term Debt                                                                                                                 |       | 165,123                              |       | 173,840 |   |
| Current  Liabilities                                                                                                           |       |                                 |       |   |   |
| Short-term debt                                                                                                                |       | —                               |       | 12,500 |   |
| Current maturities of long-term debt                                                                                           |       | 8,000                                |       | — |   |
| Accounts payable                                                                                                               |       | 14,647                               |       | 17,841 |   |
| Property, payroll, and excise taxes                                                                                            |       | 5,776                                |       | 5,520 |   |
| Dividends and interest payable                                                                                                 |       | 6,939                                |       | 6,920 |   |
| Derivative instrument liability—energy commodity                                                                          |       | 29,496                               |       | 132 |   |
| Regulatory liabilities                                                                                                         |       | 4,132                                |       | 91,217 |   |
| Other current liabilities                                                                                                      |       | 12,888                               |       | 8,077 |   |
|                                                                                                                           |       | 81,878                               |       | 142,207 |   |
| Deferred Credits and  Other Non-current Liabilities                                                                            |       |                                 |       |   |   |
| Income taxes                                                                                                                   |       | 38,326                               |       | 42,273 |   |
| Investment tax credits                                                                                                         |       | 1,055                                |       | 1,156 |   |
| Retirement plan obligations                                                                                                    |       | 11,067                               |       | 19,042 |   |
| Derivative instrument liability—energy commodity                                                                          |       | 18,939                               |       | 1,326 |   |
| Regulatory liabilities                                                                                                         |       | 12,035                               |       | 50,584 |   |
| Deferred gas cost credit                                                                                                       |       | 602                                  |       | — |   |
| Other                                                                                                                          |       | 5,554                                |       | 3,862 |   |
|                                                                                                                           |       | 87,578                               |       | 118,243 |   |
| Commitments and  Contingencies (Note 12)                                                                                       |       | —                               |       | — |   |
|                                                                                                                           |       | $                                    | 456,706    |   | $ | 552,905 |   |

 

The accompanying notes are an integral part of these consolidated financial statements.

33

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**CASCADE NATURAL GAS CORPORATIONCONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS’ EQUITY**

| ** **                        | ** ** | ** **                                        | ** ** | ** **         | ** ** | ** **        | ** ** | **Accumulated**        | ** ** | ** **   | ** ** |
|-----------------------------------|------------|---------------------------------------------------|------------|--------------------|------------|-------------------|------------|------------------------|------------|--------------|------------|
| ** **                        | ** ** | ** **                                        | ** ** | ** **         | ** ** | **Additional**    | ** ** | **Other**              | ** ** | ** **   | ** ** |
| ** **                        | ** ** | **Common Stock**                             | ** ** | **Paid-In**        | ** ** | **Comprehensive** | ** ** | **Retained**           | ** ** |
| ** **                        | ** ** | **Shares**                                        | ** ** | **Par Value** | ** ** | **Capital**       | ** ** | **Income (Loss)** | ** ** | **Earnings** | ** ** |
| ** **                        | ** ** | **(Dollars in thousands except per-share  data)** | ** ** |
| Balance,  September 30, 2003 |       | 11,131,860                                        |       |               | $          | 11,132            |       |                   | $          | 98,877       |       |   | $ | (13,430 | ) |   | $ | 15,051 |   |
| Cash dividends:                   |       |                                              |       |               |       |              |       |                   |       |         |       |   |   |   |   |
| Common stock, $.96 per share      |       |                                              |       |               |       |              |       |                   |       |         |       |   |   | (10,783 | ) |
| Other comprehensive income        |       |                                              |       |               |       |              |       |                   |       |         | 822        |   |   |   |   |
| Issuance of common stock          |       | 136,209                                           |       |               | 136        |              |       | 2,477                  |       |         |       |   |   |   |   |
| Net Income                        |       |                                              |       |               |       |              |       |                   |       |         |       |   |   | 13,302 |   |
| Balance,  September 30, 2004 |       | 11,268,069                                        |       |               | 11,268     |              |       | 101,354                |       |         | (12,608    | ) |   | 17,570 |   |
| Cash dividends:                   |       |                                              |       |               |       |              |       |                   |       |         |       |   |   |   |   |
| Common stock, $.96 per share      |       |                                              |       |               |       |              |       |                   |       |         |       |   |   | (10,909 | ) |
| Other comprehensive income        |       |                                              |       |               |       |              |       |                   |       |         | 121        |   |   |   |   |
| Issuance of common stock          |       | 144,950                                           |       |               | 145        |              |       | 2,427                  |       |         |       |   |   |   |   |
| Net Income                        |       |                                              |       |               |       |              |       |                   |       |         |       |   |   | 9,247 |   |
| Balance,  September 30, 2005 |       | 11,413,019                                        |       |               | 11,413     |              |       | 103,781                |       |         | (12,487    | ) |   | 15,908 |   |
| Cash dividends:                   |       |                                              |       |               |       |              |       |                   |       |         |       |   |   |   |   |
| Common stock, $.96 per share      |       |                                              |       |               |       |              |       |                   |       |         |       |   |   | (11,025 | ) |
| Other comprehensive income        |       |                                              |       |               |       |              |       |                   |       |         | 34         |   |   |   |   |
| Issuance of common stock          |       | 92,977                                            |       |               | 93         |              |       | 1,921                  |       |         |       |   |   |   |   |
| Net Income                        |       |                                              |       |               |       |              |       |                   |       |         |       |   |   | 12,489 |   |
| Balance,  September 30, 2006 |       | 11,505,996                                        |       |               | $          | 11,506            |       |                   | $          | 105,702      |       |   | $ | (12,453 | ) |   | $ | 17,372 |   |

 

The accompanying notes are an integral part of these consolidated financial statements.

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**CASCADE NATURAL GAS CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS**

| ** **                                                                         | ** ** | **Year Ended September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                         | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                         | ** ** | **(Dollars in thousands)**        | ** ** |
| Operating Activities                                                               |       |                                        |       |   |   |   |   |
| Net Income                                                                         |       | $                                           | 12,489     |   | $ | 9,247 |   | $ | 13,302 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                        |       |   |   |   |   |
| Depreciation and amortization                                                      |       | 17,861                                      |       | 17,274 |   | 16,325 |   |
| Deferrals of gas cost changes                                                      |       | 6,464                                       |       | (9,440 | ) | (7,001 | ) |
| Amortization of gas cost changes                                                   |       | 10,768                                      |       | 5,098 |   | 6,296 |   |
| Other deferrals and amortizations                                                  |       | (3,409                                      | )          | 76 |   | 1,099 |   |
| Deferred income taxes and tax credits—net                                     |       | (3,535                                      | )          | 2,771 |   | 12,972 |   |
| Change in current assets and liabilities                                           |       | 5,084                                       |       | 4,125 |   | (10,427 | ) |
| Net cash provided by operating activities                                          |       | 45,722                                      |       | 29,151 |   | 32,566 |   |
| Investing  Activities                                                              |       |                                        |       |   |   |   |   |
| Construction expenditures                                                          |       | (20,464                                     | )          | (28,893 | ) | (39,465 | ) |
| Customer contributions in aid of construction                                      |       | 4,446                                       |       | 882 |   | 446 |   |
| Net cash used by investing activities                                              |       | (16,018                                     | )          | (28,011 | ) | (39,019 | ) |
| Financing  Activities                                                              |       |                                        |       |   |   |   |   |
| Proceeds from long-term debt, net                                                  |       | —                                      |       | 42,886 |   | — |   |
| Repayment of long-term debt                                                        |       | (717                                        | )          | (14,060 | ) | (22,030 | ) |
| Changes in short-term debt                                                         |       | (12,500                                     | )          | (21,000 | ) | 29,700 |   |
| Proceeds from issuance of common stock                                             |       | 2,014                                       |       | 2,572 |   | 2,613 |   |
| Dividends paid                                                                     |       | (11,025                                     | )          | (10,909 | ) | (10,783 | ) |
| Other                                                                              |       | (11                                         | )          | — |   | — |   |
| Net cash used by financing activities                                              |       | (22,239                                     | )          | (511 | ) | (500 | ) |
| Net Increase (Decrease) in Cash and Cash Equivalents                               |       | 7,465                                       |       | 629 |   | (6,953 | ) |
| Cash and Cash  Equivalents                                                         |       |                                        |       |   |   |   |   |
| Beginning of year                                                                  |       | 1,128                                       |       | 499 |   | 7,452 |   |
| End of year                                                                        |       | $                                           | 8,593      |   | $ | 1,128 |   | $ | 499 |   |

 

The accompanying notes are an integral part of these consolidated financial statements.

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**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**Note 1—Nature ofBusiness**

Cascade Natural Gas Corporation (the Company) is alocal distribution company (LDC) engaged in the distribution of natural gas. TheCompany’s service territory consists of towns in Washington and Oregon, rangingfrom the Canadian border in northwestern Washington to the Idaho border ineastern Oregon.

As of September 30, 2006, the Company hadapproximately 204,000 residential customers, 31,000 commercial customers, and700 industrial and other larger customers. Approximately 200 of the largerindustrial customers are non-core customers.

Residential, commercial, and smaller industrialcustomers are core customers who take traditional “bundled” natural gasservice, which includes supply, peaking service, and upstream interstatepipeline transportation. Sales to core customers account for approximately 26%of gas deliveries and 73% of operating margin. The Company’s sales to its coreresidential and commercial customers are influenced by fluctuations intemperature, particularly during the winter season. A warm winter season willtend to reduce gas consumption. Over the longer term, these fluctuations tendto offset each other, as rates charged to customers are developed based on theassumption of normal weather. However, consumption is also influenced by energyefficiency of customers’ appliances as well as consumer decisions to reducenatural gas usage in response to higher prices.

Non-core customers are generally large industrial,electric generation, and institutional customers who have chosen “unbundled”service, meaning that they select from among several supply and upstreampipeline transportation options, independent of the Company’s distributionservice. The Company’s margin from non-core customers is derived primarily fromthis distribution service, as well as gas management services. The principalindustrial activities of its customers include the generation of electricity,processing of food, processing of forest products, production of chemicals, andrefining of crude oil.

The Company is subject toregulation of most aspects of its operations by the Washington Utilities andTransportation Commission (WUTC) and the Oregon Public Utility Commission(OPUC). It is subject to regulatory risk primarily with respect to recovery ofcosts incurred. Various deferred charges and deferred credits reflectassumptions regarding recovery of certain costs through temporary customer rateadjustments during future periods.

**Note 2—Summary ofSignificant Accounting Policies**

The Company’s accounting records and practices conformto the requirements of the uniform system of accounts prescribed by the WUTCand the OPUC.

**Principlesof consolidation:**   The consolidated financialstatements include the accounts of Cascade Natural Gas Corporation and itswholly-owned subsidiaries: Cascade Land Leasing Co.; CGC Properties, Inc.;CGC Energy, Inc.; and CGC Resources, Inc. All inter-companytransactions are eliminated in consolidation.

**Reclassifications:**   Certainreclassifications have been made in the 2005 Consolidated Balance Sheet toconform to the classifications used in 2006 as follows:

·       InDeferred Charges and Other, Regulatory assets of $1,185,000 had previously beenincluded in Other at September 30, 2005.

36

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·       InCurrent Liabilities, Derivative instrument liability-energy commodity of$132,000 had previously been included in Other current liabilities at September 30,2005.

·       InDeferred Credits and Other Non-current Liabilities, Derivative instrumentliability-energy commodity of $1,326,000 had previously been included in Otherat September 30, 2005.

**Utilityplant:**   Utility plant is stated at the historicalcost of construction or purchase. These costs include payroll-related costssuch as taxes and other employee benefits, supervisory costs, general andadministrative costs, and the cost of funds used during construction. Maintenanceand repairs of property, and replacements and renewals of items deemed to beless than units of property, are charged to operations. Units of utility plant,retired or replaced, are credited to property accounts at cost. Such amountsplus removal cost, less salvage, are charged to accumulated depreciation. Inthe case of a sale of non-depreciable property or major operating units, theresulting gain or loss on the sale is included in earnings.

Depreciation of utility plant is computed using thestraight-line method. The Company periodically conducts depreciation studies toestablish and update asset depreciation lives. Asset lives used for computingdepreciation range from six to seventy years, and the weighted average annualdepreciation rate is approximately 2.9%. The Company periodically reviews thecarrying amount of its utility plant and other long-lived assets for impairment.An asset is considered impaired when estimated future cash flows are less thanthe carrying amount of the asset. In the event the carrying amount of suchasset is deemed not recoverable, the asset is adjusted to its fair value. Fairvalue is determined based on discounted future cash flow.

The Company periodically reviews items, such as itsfranchises and easements, environmental, and other legal requirements, whichmay give rise to asset retirement obligations (ARO), and records such ARO’spursuant to the requirements of Statement of Financial Accounting Standards(FAS) 143, “Accounting for Asset Retirement Obligations” and FASBInterpretation (FIN) No. 47, “Accounting for Conditional Asset RetirementObligations an Interpretation of FASB Statement No. 143”.

**Investmentsin non-utility property:**   Real estate, carried atthe lower of cost or estimated net realizable value, is the primary investment.

**Cash and cash equivalents:**   Forpurposes of reporting cash flows, the Company accounts for all liquidinvestments with a purchased maturity of three months or less as cashequivalents. The following provides additional information to the ConsolidatedStatements of Cash Flows:

| ** **                                           | ** ** | **2006**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------|------------|--------------------------------------|------------|----------|------------|----------|------------|
| ** **                                           | ** ** | **(dollars in thousands)** | ** ** |
| Changes in current  assets and current liabilities:  |       |                                 |       |     |       |     |       |
| Accounts and notes receivable                        |       | $                                    | (75        | )        | $          | (872     | )          | $ | (2,696 | ) |
| Income taxes                                         |       | 6,043                                |       | 2,062    |       | (12,026  | )          |
| Inventories                                          |       | (3,352                               | )          | (875     | )          | 1,468    |       |
| Prepaid expenses and other assets                    |       | (185                                 | )          | (144     | )          | (504     | )          |
| Accounts payable and accrued expenses                |       | 1,319                                |       | 3,925    |       | 3,967    |       |
| Other                                                |       | 1,334                                |       | 29       |       | (636     | )          |
| Net change in current assets and current liabilities |       | $                                    | 5,084      |     | $          | 4,125    |       | $ | (10,427 | ) |
| Cash payments:                                       |       |                                 |       |     |       |     |       |
| Interest (net of amounts capitalized)                |       | $                                    | 11,896     |     | $          | 11,637   |       | $ | 12,839 |   |
| Income taxes                                         |       | $                                    | 10,052     |     | $          | —   |       | $ | 4,610 |   |

 

**Materials,supplies and inventories:**   Materials and suppliesfor construction, operations, and maintenance are recorded at cost. Inventoriesof natural gas are recorded at lower of cost or market.

37

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**Regulatoryaccounts:**   The Company follows Statement of FAS No. 71,“*Accounting for the Effects of Certain Typesof Regulation*”. This statement provides for the deferral of certaincosts and benefits that would otherwise be recognized in revenue or expense, ifit is probable that future rates will result in recovery from customers orrefund to customers of such amounts.

Regulatoryassets (liabilities) at September 30, 2006 and 2005 include the following:

| ** **                          | ** ** | **2006**                             | ** ** | **2005** | ** ** |
|-------------------------------------|------------|--------------------------------------|------------|----------|------------|
| ** **                          | ** ** | **(dollars in thousands)** | ** ** |
| Current Assets                      |       |                                 |       |     |       |
| Gas supply hedging                  |       | $                                    | 26,504     |     | $          | — |   |
| Non-current Assets                  |       |                                 |       |     |       |
| Gas cost changes                    |       | —                               |       | 16,630   |       |
| Unamortized loss on reacquired debt |       | 1,431                                |       | 1,659    |       |
| Gas supply hedging                  |       | 18,261                               |       | 1,185    |       |
| Other                               |       | 1,944                                |       | 544      |       |
| Current Liabilities                 |       |                                 |       |     |       |
| Gas supply hedging                  |       | (4,132                               | )          | (91,217  | )          |
| Non-current Liabilities             |       |                                 |       |     |       |
| Deferred income taxes               |       | (7,999                               | )          | (7,044   | )          |
| Gas supply hedging                  |       | (3,222                               | )          | (43,440  | )          |
| Gas cost changes                    |       | (602                                 | )          |     |       |
| Other, net                          |       | (814                                 | )          | (100     | )          |
| Net                                 |       | $                                    | 31,371     |     | $          | (121,783 | ) |

 

Under Non-current Assets, regulatory assets related toUnamortized loss on reacquired debt, Gas supply hedging, and Other are includedon the Consolidated Balance Sheets in “Other Deferred Charges”.

**Revenuerecognition:**   The Company recognizes operatingrevenues based on deliveries of gas 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.

**Allowancefor doubtful accounts:**   With respect to itsresidential and commercial customer accounts, the Company establishes anallowance for doubtful accounts based on its assessment of aged accountsreceivable and on historical trends and ratios of write-offs to revenues. Withrespect to industrial customer accounts, which are generally significantlylarger than residential and commercial, a specific allowance is established foraccounts determined to be at risk of collection.

**Leases:**   TheCompany leases a portion of its vehicle fleet. These leases are classified asoperating leases. The Company’s primary obligation under these leases is for atwelve-month period, with options to extend the lease thereafter. Commitmentsbeyond one year are not material. Rent expense under operating leases totaled$628,000, $641,000, and $776,000, for fiscal years ended September 30,2006, 2005, and 2004, respectively.

**Federalincome taxes:**   Deferred income taxes aredetermined using the asset and liability method, under which deferred taxassets and liabilities are measured based upon the temporary differencesbetween the financial statement and income tax bases of assets and liabilities,using currently enacted tax rates. The Company normalizes temporary differencesbetween book income and taxable income, with the exception of depreciationdifferences on assets placed in service prior to 1981, consistent with thepolicies of the WUTC and OPUC. With respect to utility plant placed in serviceafter 1980, the Company calculates its deferred income tax provision to conformto the Federal normalization requirements, as approved by the WUTC and OPUC.

38

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**Investmenttax credits:**   Investment tax credits weredeferred and are amortized over the remaining life of the properties that gaverise to the credits.

**Useof estimates:**   The preparation of financialstatements, in conformity with accounting principles generally accepted in theUnited States of America, requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities, and disclosure ofcontingent assets and liabilities, at the date of the financial statements, andthe reported amounts of revenues and expenses during the reporting period. Actualresults could differ from these estimates. The Company has used estimates inmeasuring certain regulatory assets and regulatory liabilities related to itemssubject to approval of the WUTC and the OPUC. Estimates are also used in thedevelopment of discount rates and trend rates related to the measurement ofretirement benefit obligations and accrual amounts, allowances for doubtfulaccounts, values of derivative instruments, unbilled revenue, in thedetermination of depreciable lives of utility plant, and in the measurement ofasset retirement obligations.

**Stock-based compensation:**   TheCompany applies FAS No. 123 (revised 2004), “*Share-Based Payment*”.Under this standard, the Company records the cost of employee services receivedin exchange for an award of its stock based on the fair value of the award asof the grant date. The cost is recognized over the period during which theemployee is required to provide service in exchange for the award. Prior tofiscal 2006, the Company accounted for its stock-based compensation using theintrinsic value method prescribed in Accounting Principles Board Opinion No. 25,“*Accounting for Stock Issued to Employees*”rather than using the fair-value-based method prescribed under FAS No. 123,“*Accounting for Stock-Based Compensation*.”See Note 7 for more information about the Company’s stock-based compensationplan. Had compensation expense been determined in accordance with FAS No. 123,the Company’s net income and earnings per share for 2005 and 2004 would havebeen as follows:

| ** **                                                                                                    | ** ** | **2005**                                                 | ** ** | **2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|----------|------------|
| ** **                                                                                                    | ** ** | **(in thousands except  per-share data)** | ** ** |
| Net Income                                                                                                    |       |                                                     |       |     |       |
| As reported                                                                                                   |       | $                                                        | 9,247      |     | $          | 13,302 |   |
| Less total stock-based employee compensation expense  determined under the fair value method, net of tax |       | 26                                                       |       | 53       |       |
| Pro forma net income                                                                                          |       | $                                                        | 9,221      |     | $          | 13,249 |   |
| Earnings per share, basic and diluted                                                                         |       |                                                     |       |     |       |
| As reported                                                                                                   |       | $                                                        | 0.82       |     | $          | 1.19 |   |
| Pro forma                                                                                                     |       | $                                                        | 0.81       |     | $          | 1.18 |   |

 

See also the discussion of **“FAS No. 123(revised 2004)”** under **“NewAccounting Standards”** below.

**Comprehensiveincome (loss):**   Comprehensive income for thefiscal years ended September 30, 2006, 2005 and 2004, included OtherComprehensive Income of $34,000, $121,000, and $822,000, net of income tax. Thecharges are related to minimum pension liability adjustments and unrealizedlosses on energy commodity derivatives. See Note 11 for more information on theCompany’s minimum pension liability adjustments.

**Segmentreporting:**   Management views the Company asoperating as a single segment, that of a local distribution company in thePacific Northwest.

**Derivatives:****  **The Company records derivative transactions accordingto the provisions of FAS No. 133, “*Accounting for Derivative Instruments andHedging Activities*”,as amended. This standard requires that the fair value of all derivativefinancial instruments be recognized as either assets or liabilities on theCompany’s balance sheet. With respect to derivative arrangements covering gassupplies for core customers, periodic changes in fair market value are recordedin regulatory asset or regulatory liability 

39

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accounts, pursuant toauthority granted by the WUTC and OPUC, recognizing that settlements of thesearrangements will be recovered through the Purchased Gas Cost Adjustment (PGA)mechanism.

The Company’s contracts for purchase and sale ofnatural gas generally qualify for the normal purchase and normal salesexceptions under FAS No. 133. Accordingly, the Company recognizes revenuesand expenses on an accrual basis, based on physical delivery of natural gas.The Company applies mark-to-market accounting to financial derivativearrangements.

For derivativearrangements related to supplies for non-core customers, which are not coveredby a PGA mechanism, the Company elects whether to apply hedge accounting to thederivative. If hedge accounting is applied, periodic changes in the fair marketvalue are recorded in Other Comprehensive Income (OCI). Under hedge accounting,amounts recorded in OCI are reclassified into earnings in the period the hedgedtransaction affects earnings. If hedge accounting is not applied, periodicchanges in fair market value are recognized in earnings.

**NEW ACCOUNTINGSTANDARDS**

**FAS No. 151:**   In November 2004, the Financial Accounting StandardsBoard (FASB) issued FAS No. 151, *“InventoryCosts”*. This standard is an amendment of Accounting ResearchBulletin (ARB) No. 43, clarifying the requirement that abnormal amounts ofidle facility expense, freight, handling costs, and spoilage be recognized ascurrent period costs. The Company’s adoption of this standard on October 1,2005 did not have a significant impact on the Company’s financial statements.

**FAS No.123 R:  ****In December 2004, FASB issued FAS No. 123(revised 2004), *“Share-Based Payment”*. Thisstatement is a revision of FAS No. 123, *“Accountingfor Stock-Based Compensation”*, and supersedes Accounting PrinciplesBoard (APB) Opinion No. 25, *“Accounting for StockIssued to Employees”*. The Company adopted this standard effective October 1,2005. Under FAS No. 123R, the Company is required to recognize as expensethe fair value of equity instruments, including stock options, to be issued inexchange for goods or services. Adoption of this standard did not have asignificant impact on the Company’s financial statements. Disclosures requiredunder this standard are included in Note 7 to the financial statements.**

**FIN47:****  **InMarch 2005, the FASB issued FIN No. 47, *“Accounting for Conditional Asset Retirement Obligation, anInterpretation of FASB Statement No. 143”*. FIN 47 clarifiesthat the term “conditional asset retirement obligation” refers to a legalobligation to perform an asset retirement activity in which the timing and/ormethod of settlement are conditional on a future event that may or may not bewithin the control of the Company. Under FIN 47, the Company is required torecognize a liability for the fair value of a conditional asset retirementobligation if the fair value of the liability can be reasonably estimated. FIN47 also clarifies when the Company would have sufficient information toreasonably estimate the fair value of an asset retirement obligation. TheCompany adopted FIN 47 as of September 30, 2006. Disclosures under thisstandard are included in Note 5 to the financial statements.

**FAS No. 154:**   InMay 2005, FASB issued FAS No. 154, *“Accountingfor Changes and Error Corrections”.*This standard replaces APBOpinion No. 20 and FAS No. 3. The Company will be required to adoptthis standard October 1, 2006. FAS No 154 changes the requirements for theaccounting for and reporting of a change in accounting principle. FAS No. 154,requires retrospective application to prior periods’ financial statements ofchanges in accounting principle.

**FAS No. 155:**   InFebruary 2006, FASB issued FAS No 155, *“Accountingfor Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133and 140.”*This standard is effective for all financial instrumentsacquired after the beginning of an entity’s first fiscal year beginning after September 15,2006. The Company does not expect this standard to have a significant impact onits financial statements.

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**FAS No. 157:  ****In September 2006, FASB issuedFAS No. 157, *“Fair Value Measurements”*. Thisstandard defines fair value, establishes a framework for measuring fair value,and expands disclosures about fair value measurements. This standard iseffective for financial statements issued for fiscal years beginning after November 15,2007. The Company has not determined the impact this standard will have on itsfinancial statements.**

**FAS No. 158:**   InSeptember 2006, FASB issued FAS No. 158, *“Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans—anamendment of FASB Statements No. 87, 88, 106, and 132(R)”*This standard requires a sponsor of defined benefit retirement plans to: (a) Recognizethe funded status of a benefit plan in its balance sheet; (b) Recognize asa component of other comprehensive income, net of tax, the gains or losses andprior service costs of credits that arise during the period but are notrecognized as components of net periodic benefit cost; (c) Measure thedefined benefit plan assets and obligations as of the date of the employer’sfiscal year end; and (d) Disclose in the notes to financial statementsadditional information about certain effects on net periodic benefit cost forthe next fiscal year that arise from the delayed recognition of the gains orlosses, prior service costs or credits, and transition asset or obligation. TheCompany will be required to initially recognize the funded status of itsdefined benefit plans and to provide the required disclosures as of the end of itsfiscal year ending September 30, 2007. The Company has not yet determinedthe impact of this standard on its financial statements.

**FIN****48:**   InJune 2006, FASB issued FIN 48, *“Accountingfor Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109**”*. This Interpretation clarifies the accounting foruncertainty in income taxes recognized in an enterprise’s financial statementsin accordance with FASB Statement No. 109, *Accounting for Income Taxes.* This Interpretation prescribesa recognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return. This Interpretation also provides guidance on derecognition,classification, interest and penalties, accounting in interim periods,disclosure, and transition. This interpretation is effective for fiscal yearsbeginning after December 15, 2006. The Company has not determined theimpact of this interpretation on its financial statements.

**SAB****108:**   InAugust 2006, the Staff of the Securities and Exchange Commission issuedStaff Accounting Bulletin (SAB) 108. SAB 108 provides that registrants shoulduse both a balance sheet approach and an income statement approach whenquantifying and evaluating the materiality of a misstatement. SAB 108 iseffective for annual financial statements covering the first fiscal year endingafter November 15, 2006. Early adoption of SAB 108 in 2006 did not have asignificant impact on the Company’s financial statements.

**Note 3—Earnings PerShare**

Thefollowing table sets forth the calculation of earnings per share:

| ** **                                             | ** ** | **2006**                                                     | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                                             | ** ** | **(in thousands except per-share data)** | ** ** |
| Net Income                                             |       | $                                                            | 12,489     |     | $          | 9,247    |       | $ | 13,302 |   |
| Weighted average  shares outstanding                   |       | 11,468                                                       |       | 11,339   |       | 11,209   |       |
| Plus: Issued on  assumed exercise of stock options     |       | 1                                                            |       | 3        |       | 13       |       |
| Weighted average  shares outstanding assuming dilution |       | 11,469                                                       |       | 11,342   |       | 11,222   |       |
| Earnings per common share, basic                       |       | $                                                            | 1.09       |     | $          | 0.82     |       | $ | 1.19 |   |
| Earnings per common  share, diluted                    |       | $                                                            | 1.09       |     | $          | 0.82     |       | $ | 1.19 |   |

 

The only dilutivesecurities are the stock options described in Note 7.

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**Note 4—UtilityPlant**

Utilityplant at September 30, 2006 and 2005 consists of the following components:

| ** **            | ** ** | **2006**                             | ** ** | **2005** | ** ** |
|-----------------------|------------|--------------------------------------|------------|----------|------------|
| ** **            | ** ** | **(dollars in thousands)** | ** ** |
| Distribution  plant   |       | $                                    | 548,453    |     | $          | 531,497 |   |
| Transmission  plant   |       | 14,675                               |       | 14,693   |       |
| General plant         |       | 46,942                               |       | 47,165   |       |
| Intangible plant      |       | 212                                  |       | 212      |       |
| Nondepreciable  plant |       | 3,902                                |       | 3,902    |       |
|                  |       | $                                    | 614,184    |     | $          | 597,469 |   |

 

**Note 5—AssetRetirement Obligations**

The Company follows FAS No. 143, “Accounting forAsset Retirement Obligations” which requires the recording of the fair marketvalue of a liability for an asset retirement obligation in the period in whichit is incurred. When the liability is initially recorded, the associated costsof the asset retirement obligation are capitalized as part of the carryingamount of the related long-lived asset. The liability is accreted to itspresent value each period and the related capitalized costs are depreciatedover the useful life of the related asset. Upon retirement of the asset, theCompany either settles the retirement obligation for its recorded amount orincurs a gain or loss. As asset retirement costs are recovered through ratescharged to customers, the Company records regulatory assets and liabilities forthe difference between asset retirement costs currently recovered in rates andasset retirement obligations recorded under SFAS 143. The regulatory assets donot earn a return. The adoption of SFAS No. 143 on October 1, 2002did not have a material effect on the Company’s financial condition, results ofoperations or cash flows.

As described in Note 2, the Company adopted FIN 47 asof September 30, 2006, which has resulted in the recording of additionalasset retirement obligations under FAS No. 143. Specifically, the Companyhas recorded liabilities for future asset retirement obligations to removecertain pipe and storage tanks. With the adoption of FIN 47, the Companyrecorded an asset retirement obligation of $389,000**,**a regulatory asset of $352,000**,**capitalized asset retirement costs of $45,000, and relatedaccumulated depreciation of $8,000. Due to an inability to estimate a range ofsettlement dates, the Company cannot estimate a liability for removal anddisposal of certain transmission and distribution assets, as well as abatementof asbestos for certain buildings.

Thefollowing table documents the changes in the Company’s asset retirementobligation during the year ended September 30, 2006 (dollars inthousands):

| Asset retirement  obligation at beginning of year       |   | $   | — |   |
|---------------------------------------------------------|--------|-----|--------|--------|
| Asset retirement  obligation recognized during the year |   | 389 |   |
| Asset retirement  obligation at end of year             |   | $   | 389    |   |

 

Thepro forma asset retirement obligation liability balances as if FIN 47 had beenadopted on October 1, 2004 (rather than September 30, 2006) are asfollows (dollars in thousands):

| Pro forma asset  retirement obligation as of October 1, 2004    |   | $ | 344 |   |
|----------------------------------------------------------------------|--------|---|-----|--------|
| Pro forma asset  retirement obligation as of September 30, 2005 |   | $ | 366 |   |

 

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**Note 6—Common Stock**

At September 30,2006, shares of common stock are reserved for issuance as follows:

| ** **                                                     | ** ** | **Number**         | ** ** |
|----------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                     | ** ** | **of shares** | ** ** |
| Employee Savings  Plan and Retirement Trust (401(k) plan) |       | 169,640            |       |
| Dividend  Reinvestment Plan                                    |       | 113,882            |       |
| Director Stock  Award Plan                                     |       | 22,112             |       |
| Stock Incentive  Plan (Note 7)                                 |       | 319,730            |       |
|                                                           |       | 625,364            |       |

 

The price of shares issuedin connection with the above plans is determined by the market price of shareson the day of, or immediately preceding the issuance date.

**Note 7—Share-BasedPayment**

As of September 30,2006, the company has three share-based compensation plans which are describedbelow. Compensation cost recorded for those plans was $400,000, $259,000 and$51,000 for 2006, 2005, and 2004, respectively. None of this cost wascapitalized as part of inventory or fixed assets. Total income tax benefitrecognized in the income statement for share-based compensation arrangementswas $154,000, $98,000, and $18,000 for 2006, 2005, and 2004, respectively.

**1998 StockIncentive Plan**

Underthe Company’s 1998 Stock Incentive Plan (the Plan), officers and other keymanagement employees may be granted options to purchase stock or otherequity-based incentives. The grants vest 1¤3 per yearover three years. Options granted in 2001 that were not exercised expired in2006. Options granted in 2002 fully vested in 2005 and expire ten years fromthe grant date. The intrinsic value method was used to account for theseoptions and no compensation expense was recognized. No options were granted in2004, 2005, or 2006. A summary of option activity under the Plan as of September 30,2006, and changes during the year is presented below:

| ** **                           | ** ** | **2006**           | ** ** |
|--------------------------------------|------------|--------------------|------------|
| ** **                           | ** ** | **Wtd. Avg.** | ** ** | **No. Shares** | ** ** |
| ** **                           | ** ** | **Exercise**       | ** ** | **Under** | ** ** |
| **Options**                          | ** ** | ** **         | ** ** | **Price** | ** ** | **Option** | ** ** |
| Outstanding at  October 1, 2005 |       |               | $          | 19.95 |   |   |   | 73,899 |   |   |
| Granted                              |       |               | N/A        |   |   |   | — |   |   |
| Exercised                            |       |               | $          | 19.23 |   |   |   | (23,899 | ) |   |
| Forfeited or  expired                |       |               | $          | 19.75 |   |   |   | (25,000 | ) |   |
| Balance at  September 30        |       |               | $          | 20.84 |   |   |   | 25,000 |   |   |
| Exercisable at  September 30    |       |               | $          | 20.84 |   |   |   | 25,000 |   |   |
|                                      |            |                    |            |  |  |  |  |  |  |  |  |  |

 

Theremaining average weighted life of options outstanding at September 30,2006 is 5.5 years.

| ** **                            | ** ** | **2006**                | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                            | ** ** | **(in thousands)** | ** ** |
| Intrinsic value  of options exercised |       |                    | $          | 54       |       |     | $          | 201 |   | $ | 222 |   |
| Fair value of options  vested         |       |                    | $          | —   |       |     | $          | 26 |   | $ | 53 |   |

 

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**Restricted StockGrants**

The Company’s employmentcontracts entered in 2005 with its Chief Executive Officer (CEO) and its formerChief Financial Officer (CFO) contain grants of restricted stock. Under the CEOgrant, 5,000 shares were restricted until the CEO completed one year ofemployment, and another 5,000 shares are restricted until he completes twoyears of employment. Under the CFO grant, 5,000 shares were restricted until hecompleted one year of employment. During this period, each executive isrestricted from selling his shares. The value of the shares granted is based onthe market value as of the grant date. During 2006 and 2005, the Companyrecognized $175,000 and $197,000 as compensation expense under this plan. As ofSeptember 30, 2006, $25,000 remains to be recognized as expense over thefirst two quarters of fiscal 2007.

**2000 Director StockAward Plan**

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 the February 2006annual meeting. Prior to 2006, the annual awards were 500 shares to eachnon-employee director. The Company recognized $225,000, $62,000, and $51,000 asexpense under this plan in 2006, 2005, and 2004 respectively.

**Note 8—Short-TermDebt**

TheCompany’s short-term borrowing needs are met with a three-year, $60,000,000revolving credit agreement with one of its banks. This agreement has a variable commitment fee and a term that expires inOctober 2007. The Company also has a $10,000,000 uncommitted lineof credit. The following table sets forth information on the two credit lines:

| ** **                                       | ** ** | **2006**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------|------------|--------------------------------------|------------|----------|------------|----------|------------|
| ** **                                       | ** ** | **(dollars in thousands)** | ** ** |
| Amount  outstanding at September 30         |       | $                                    | —     |     | $          | 12,500   |       | $ | 33,500 |   |
| Average daily  balance outstanding               |       | $                                    | 4,110      |     | $          | 19,204   |       | $ | 4,511 |   |
| Average interest  rate, excluding commitment fee |       | 4.08                                 | %          | 3.35     | %          | 2.29     | %          |
| Maximum month-end amount  outstanding            |       | $                                    | 18,900     |     | $          | 45,000   |       | $ | 33,500 |   |

 

Various debt and creditagreements restrict the Company and its subsidiaries as to indebtedness,payment of cash dividends on common stock, and other matters. As of September 30,2006, the Company is in compliance with all restrictive covenants of its debtagreements.

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**Note 9—Long-TermDebt**

Long-termdebt and current maturities of long-term debt at September 30, 2006 and2005 consist of the following:

| ** **                                            | ** ** | **2006**                             | ** ** | **2005** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------|------------|----------|------------|
| ** **                                            | ** ** | **(dollars in thousands)** | ** ** |
| Medium-term Notes:                                    |       |                                 |       |     |       |
| 8.50% due Oct. 2006                              |       | $                                    | —     |     | $          | 8,000 |   |
| 8.06% due Sep. 2012                              |       | 14,000                               |       | 14,000   |       |
| 8.10% due Oct. 2012                              |       | 5,000                                |       | 5,000    |       |
| 8.11% due Oct. 2012                              |       | 3,000                                |       | 3,000    |       |
| 7.95% due Feb. 2013                              |       | 4,000                                |       | 4,000    |       |
| 8.01% due Feb. 2013                              |       | 10,000                               |       | 10,000   |       |
| 7.95% due Feb. 2013                              |       | 10,000                               |       | 10,000   |       |
| 7.48% due Sep. 2027                              |       | 20,000                               |       | 20,000   |       |
| 7.098% due Mar. 2029                             |       | 15,000                               |       | 15,000   |       |
| 5.21% Notes due  September 2020                  |       | 15,000                               |       | 15,000   |       |
| 7.50% Notes due  November 2031                   |       | 39,831                               |       | 39,840   |       |
| 5.25% Insured  Quarterly Notes due February 2035 |       | 29,292                               |       | 30,000   |       |
| Total long-term debt                                  |       | $                                    | 165,123    |     | $          | 173,840 |   |
| Current Maturities                                    |       |                                 |       |     |       |
| Medium-term Notes:                                    |       |                                 |       |     |       |
| 8.50% due  Oct. 2006                             |       | $                                    | 8,000      |     | $          | — |   |

 

None of the long-term debt includes sinking fundrequirements.

The 5.21% Notes due September 2020 are redeemableat the option of the Company, in whole or in part, at a redemption pricedetermined under “make-whole” provisions described in the prospectussupplement.

The 7.50% Notes due November 2031 are redeemableat the option of the Company, in whole or in part, on or after November 15,2006. The 7.50% Notes due November 2031 are subject to redemption at theoption of the representative of a deceased beneficial owner. The maximum annualrequired redemption per deceased beneficial owner is $25,000, principal amount,and $1,200,000 for all deceased beneficial owners of the Notes.

The 5.25% Insured Quarterly Notes due February 2035are redeemable at the option of the Company, in whole or in part, on or after February 1,2010. The 5.25% Insured Quarterly Notes due February 2035 are subject toredemption at the option of the representative of a deceased beneficial owner. Themaximum required redemption per deceased beneficial owner is $25,000, principalamount, and $600,000 for all deceased beneficial owners of the Notes.

Annual obligations for redemption of long-term debtand current maturities are as follows: $8,000,000 in fiscal year 2007, none infiscal years 2008, 2009, 2010 and 2011, and $165,123,000 thereafter.

There are $89 million,including $8 million current maturities, Medium-Term Notes (MTN’s) outstandingas of September 30, 2006. The 5.21% Notes due September 2020, the7.50% Notes due November 2031, and the 5.25% Insured Quarterly Notes due February 2035were issued under a 2001 shelf registration providing ability to issue upto $150 million long-term debt and equity securities. As of September 30,2006, that registration statement has $65 million available for issuance.

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**Note 10—IncomeTaxes**

Theprovision for income tax expense consists of the following:

| ** **                                       | ** ** | **2006**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------|------------|--------------------------------------|------------|----------|------------|----------|------------|
| ** **                                       | ** ** | **(dollars in thousands)** | ** ** |
| Current tax  expense                             |       | $                                    | 11,734     |     | $          | 1,844    |       | $ | (7,416 | ) |
| Deferred tax  expense                            |       | (2,878                               | )          | 3,934    |       | 15,151   |       |
| Amortization of  deferred investment tax credits |       | (101                                 | )          | (146     | )          | (176     | )          |
| Total income tax expense                         |       | $                                    | 8,755      |     | $          | 5,632    |       | $ | 7,559 |   |

 

A deferred income tax charge associated with accrualsof minimum pension liability is included in Other Comprehensive Income (OCI)for each year ended September 30 as follows: $1,327,000 in 2006, $56,000in 2005, and $448,000 in 2004. Also included in 2006 was a deferred income taxbenefit of $1,295,000, related to unrealized gains / losses on energy commodityderivatives.

Areconciliation between income taxes calculated at the statutory federal taxrate and income taxes reflected in the financial statements is as follows:

| ** **                                                       | ** ** | **2006**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------------------|------------|--------------------------------------|------------|----------|------------|----------|------------|
| ** **                                                       | ** ** | **(dollars in thousands)** | ** ** |
| Statutory federal  income tax rate                               |       | 35                                   | %          | 35       | %          | 35       | %          |
| Income tax  calculated at statutory federal rate                 |       | $                                    | 7,435      |     | $          | 5,208    |       | $ | 7,301 |   |
| Increase (decrease)  resulting from:                             |       |                                 |       |     |       |     |       |
| State income tax, net of federal tax benefit                     |       | 62                                   |       | 225      |       | 60       |       |
| Non-normalized depreciation differences                          |       | 697                                  |       | 327      |       | 364      |       |
| Permanent difference for non-deductible merger-related  expenses |       | 596                                  |       | —   |       | —   |       |
| Amortization of investment tax credits                           |       | (101                                 | )          | (146     | )          | (176     | )          |
| Other                                                            |       | 66                                   |       | 18       |       | 10       |       |
|                                                             |       | $                                    | 8,755      |     | $          | 5,632    |       | $ | 7,559 |   |
| Effective tax  rate                                              |       | 41.2                                 | %          | 37.9     | %          | 36.2     | %          |

 

Deferred income taxes reflect the net tax effects oftemporary differences between the carrying amounts of assets and liabilitiesfor financial reporting purposes and the amounts used for income tax purposes. Thereis no deferred tax provision for temporary differences related to depreciationof pre-1981 assets because, with respect to those assets, there is noregulatory recognition of deferred tax accounting.

Deferred tax assets and liabilities are calculatedunder FAS No. 109, “Accounting for Income Taxes”. FAS No. 109requires recording deferred tax balances, at the currently-enacted tax rate,for all temporary differences between the book and tax bases of assets and liabilities,including temporary differences for which no deferred taxes had been previouslyprovided because of use of flow-through tax accounting for rate-making purposes.Because of prior and expected future rate-making treatment of temporarydifferences for which flow-through accounting has been utilized, a regulatoryliability for income taxes payable through future rates related to thosetemporary differences has been established. At September 30, 2006, thebalance of the net regulatory liability is $7,632,000.

46

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Thetax effects of significant items comprising the Company’s deferred income taxaccounts at September 30, 2006 and 2005 are as follows:

| ** **                              | ** ** | **2006**                             | ** ** | **2005** | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|----------|------------|
| ** **                              | ** ** | **(dollars in thousands)** | ** ** |
| Current Amount:                         |       |                                 |       |     |       |
| Deferred assets:                        |       |                                 |       |     |       |
| Allowance for doubtful accounts         |       | $                                    | 836        |     | $          | 527 |   |
| Accrued liabilities                     |       | 543                                  |       | 542      |       |
| Alternative minimum tax credit          |       | —                               |       | 1,136    |       |
| Other                                   |       | 400                                  |       | 87       |       |
|                                    |       | $                                    | 1,779      |     | $          | 2,292 |   |
| Non-current  Amounts:                   |       |                                 |       |     |       |
| Deferred tax  liabilities:              |       |                                 |       |     |       |
| Basis differences on net fixed assets   |       | $                                    | 42,861     |     | $          | 41,276 |   |
| Deferred gas costs                      |       | —                               |       | 6,503    |       |
| Debt refinancing costs                  |       | 512                                  |       | 595      |       |
| Retirement benefit obligations          |       | 3,636                                |       | 3,135    |       |
| Other                                   |       | —                               |       | 168      |       |
|                                    |       | 47,009                               |       | 51,677   |       |
| Deferred tax  assets:                   |       |                                 |       |     |       |
| Retirement benefit obligations          |       | 1,532                                |       | 2,282    |       |
| Other comprehensive income              |       | 6,948                                |       | 6,979    |       |
| Other                                   |       | 203                                  |       | 143      |       |
|                                    |       | 8,683                                |       | 9,404    |       |
| Net non-current  deferred tax liability |       | $                                    | 38,326     |     | $          | 42,273 |   |

 

**Note 11—RetirementPlans**

The Company has a noncontributory defined benefitpension plan that covers substantially all employees over 21 years of age withone year of service. Under a plan amendment effective October 1, 2003,non-bargaining-unit employees no longer accrue benefits under the plan. Benefitsaccrued as of that point were frozen for those employees. Employees covered bya bargaining agreement accrue benefits based on a formula that includescredited years of service and the employee’s annual compensation. Effective January 1,2007 for field operations bargaining unit employees hired before that date,pension benefits will accrue a benefit of $107 per month for each full year ofservice. They will no longer accrue benefits based on compensation.

The Company has also provided executive officers withsupplemental retirement, death, and disability benefits. This plan was alsofrozen September 30, 2003 for further accruals and for new participants. Underthe plan, vesting occurred on a stepped basis with full vesting at age 55 andcompleting either five years of participation under the plan or seventeen yearsof employment with the Company, upon death, or upon a change in control. Theplan supplemented the benefit received through Social Security and the definedbenefit pension plan so that the total retirement benefits would be equal to70% of the executive’s highest salary during any of the five years precedingretirement. The plan also provides a death benefit equivalent to ten years ofvested benefits. The employment contract for the Chief Executive Officerprovides for a supplemental defined-contribution retirement plan that isdesigned to provide for a retirement income target of 55% of final pay aftertaking into consideration benefits earned from other retirement plans andSocial Security.

47

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The Company has an Employee Savings Plan andRetirement Trust (401(k) plan). All employees 21 years of age orolder with one full year of service are eligible to enroll in the plan. Underthe terms of the plan, the Company matches contributions based on a percentageof each employee’s contribution up to 6% of the employee’s compensation, asdefined. Effective July 1, 2006, the Company’s matching contributionpercentage was increased from 50% to 75% with respect to non-bargaining-unitemployees. Effective January 1, 2007, the matching contribution for fieldoperations bargaining unit employees hired before that date will be reduced to25% from 75%. Field operations bargaining unit employees hired after January 1,2007 will receive a matching contribution of 50%. The Company recognized costsfor matching contributions of $747,000, $621,000, and $728,000, for 2006, 2005,and 2004, respectively.

In addition to the existing match ofnon-bargaining-unit and customer service representative employee contributions,the Company contributes 4% of eligible salaries, and a 1% to 4% transitioncontribution, to employee retirement accounts. For field operations bargainingunit employees hired after January 1, 2007, the Company will contribute 4%of eligible pay. The Company recognized $926,000, $956,000 and $973,000 for2006, 2005, and 2004, respectively, under this plan. Additionally, there areannually determined “profit-sharing” contributions based on the Companyachieving established targets. Under this profit-sharing plan, the Companyrecognized $890,000 for 2006, and none for 2005 or 2004. The Company’s healthcare plan provides Postretirement Benefits Other than Pensions (PBOP),consisting of medical and prescription drug benefits, to its retired employeeshired prior to June 1, 1992, and their eligible dependents. Changes tothis plan, announced in 2003, provide for the addition of participantcontributions that began January 1, 2004. Beginning in 2006, with respectto plan participants over age 65, the Company provides these benefits throughinsurance coverage.

The following tables setforth the pension and health care plan disclosures. The amounts shown in thetables under Pension Benefits represent the aggregate amounts of the employeepension and the executive supplemental retirement defined benefit plans. Amountsshown under Other Benefits represent the retiree medical plan. The measurementdate of plan assets and obligations is as of September 30 for each yearpresented:

**Components of net periodic benefit cost**

| ** **                              | ** ** | **Pension Benefits**            | ** ** | **Other Benefits** | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|-------------------------|------------|
| ** **                              | ** ** | **2006**                             | ** ** | **2005**                | ** ** | **2004** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                              | ** ** | **(dollars in thousands)** | ** ** |
| Service cost                            |       | $                                    | 866        |                    | $          | 788 |   | $ | 768 |   | $ | 113 |   | $ | 140 |   | $ | 160 |   |
| Interest cost                           |       | 3,860                                |       | 3,843                   |       | 3,728 |   | 658 |   | 1,101 |   | 1,270 |   |
| Expected return  on plan assets         |       | (4,405                               | )          | (4,162                  | )          | (3,913 | ) | (877 | ) | (846 | ) | (853 | ) |
| Amortization of  prior service cost     |       | 152                                  |       | 182                     |       | 229 |   | (2,463 | ) | (1,320 | ) | (1,319 | ) |
| Recognized net  actuarial loss / (gain) |       | 1,685                                |       | 1,544                   |       | 1,397 |   | 723 |   | 747 |   | 961 |   |
| Net periodic benefit  cost              |       | 2,158                                |       | 2,195                   |       | 2,209 |   | (1,846 | ) | (178 | ) | 219 |   |
|                                         |            |                                      |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

48

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| ** **                                           | ** ** | **Pension Benefits**            | ** ** | **Other Benefits** | ** ** |
|------------------------------------------------------|------------|--------------------------------------|------------|-------------------------|------------|
| ** **                                           | ** ** | **2006**                             | ** ** | **2005**                | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                           | ** ** | **(dollars in thousands)** | ** ** |
| **Change in benefit obligations**                    |       |                                 |       |                    |       |   |   |   |   |
| Projected benefit  obligation at beginning of year   |       | $                                    | 71,729     |                    | $          | 65,523 |   | $ | 12,418 |   | $ | 18,960 |   |
| Service Cost                                         |       | 866                                  |       | 788                     |       | 113 |   | 140 |   |
| Interest Cost                                        |       | 3,860                                |       | 3,843                   |       | 658 |   | 1,101 |   |
| Plan  participants’ contributions               |       | —                               |       | —                  |       | 284 |   | 67 |   |
| Amendments                                           |       | (2,452                               | )          | —                  |       | (1,429 | ) | (7,393 | ) |
| Benefits paid                                        |       | (3,163                               | )          | (2,880                  | )          | (1,359 | ) | (870 | ) |
| Changes in  assumptions                              |       | (2,245                               | )          | 4,388                   |       | — |   | — |   |
| Actuarial  (gain)/loss                               |       | 160                                  |       | 67                      |       | 1,199 |   | 413 |   |
| Projected benefit  obligation at end of year         |       | 68,755                               |       | 71,729                  |       | 11,884 |   | 12,418 |   |
| **Change  in plan assets**                           |       |                                 |       |                    |       |   |   |   |   |
| Fair value of  plan assets at beginning of year      |       | 58,501                               |       | 51,332                  |       | 11,513 |   | 10,935 |   |
| Actual return on  plan assets                        |       | 5,434                                |       | 6,684                   |       | 1,675 |   | 1,188 |   |
| Employer  contributions                              |       | 3,940                                |       | 3,365                   |       | 161 |   | 193 |   |
| Plan participants’  contributions               |       | —                               |       | —                  |       | 284 |   | 67 |   |
| Benefits Paid                                        |       | (3,163                               | )          | (2,880                  | )          | (1,359 | ) | (870 | ) |
| Fair value of  plan assets at end of year            |       | 64,712                               |       | 58,501                  |       | 12,274 |   | 11,513 |   |
| Funded Status                                        |       | (4,043                               | )          | (13,228                 | )          | 390 |   | (905 | ) |
| Unrecognized  prior service cost                     |       | (1,959                               | )          | 645                     |       | (13,980 | ) | (15,013 | ) |
| Unrecognized net  (gain)/loss                        |       | 18,935                               |       | 23,734                  |       | 9,189 |   | 9,511 |   |
| Net amount  recognized                               |       | $                                    | 12,933     |                    | $          | 11,151 |   | $ | (4,401 | ) | $ | (6,407 | ) |
| Amounts  recognized in the balance sheet consist of: |       |                                 |       |                    |       |   |   |   |   |
| Prepaid pension cost                                 |       | $                                    | 3,751      |                    | $          | 3,669 |   | $ | — |   | $ | — |   |
| Accrued pension (liability)                          |       | (6,661                               | )          | (12,630                 | )          | (4,401 | ) | (6,407 | ) |
| Intangible asset                                     |       | —                               |       | 645                     |       |   |   | — |   |
| Accumulated other comprehensive (income) loss        |       | 15,843                               |       | 19,467                  |       |   |   | — |   |
| Net amount recognized                                |       | $                                    | 12,933     |                    | $          | 11,151 |   | $ | (4,401 | ) | $ | (6,407 | ) |
| Accumulated  Benefit Obligation                      |       | $                                    | 68,756     |                    | $          | 69,161 |   |   |   |   |   |

 

Forthe fiscal year ending September 30, 2007, the Company expects tocontribute approximately $3,500,000 to the employee pension plan and none tothe supplemental executive retirement plan. The 2007 funding levels for theretiree medical plan have not been determined.

**ExpectedFuture Benefit Payments**

| ** **                       | ** ** | ** **                           | ** ** | **Other**          | ** ** |
|----------------------------------|------------|--------------------------------------|------------|--------------------|------------|
| **Fiscal year ending** | ** ** | **Pension**                          | ** ** | **Postretirement** | ** ** |
| **September 30**            | ** ** | ** **                           | ** ** | **Benefits**       | ** ** | **Benefits** | ** ** |
| ** **                       | ** ** | **(dollars in thousands)** | ** ** |
| 2007                             |       | $                                    | 3,037      |               |       | $ | 828 |   |   |
| 2008                             |       | $                                    | 3,205      |               |       | $ | 850 |   |   |
| 2009                             |       | $                                    | 3,409      |               |       | $ | 887 |   |   |
| 2010                             |       | $                                    | 3,589      |               |       | $ | 913 |   |   |
| 2011                             |       | $                                    | 3,733      |               |       | $ | 923 |   |   |
| Next five years                  |       | $                                    | 21,355     |               |       | $ | 4,643 |   |   |
|                                  |            |                                      |            |                    |            |  |  |  |  |  |  |

 

49

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| ** **                             | ** ** | **Discount Rate**           | ** ** | **Average**                            | ** ** | ** **                                               | ** ** | ** **                                               | ** ** |
|----------------------------------------|------------|----------------------------------|------------|----------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                             | ** ** | **For Benefit  Obligation** | ** ** | **For Annual Benefit  Cost** | ** ** | **Compensation  Increase**                               | ** ** | **Expected Return on  Plan Assets**       | ** ** |
| ** **                             | ** ** | **2006**                         | ** ** | **2005**                               | ** ** | **    2006    ** | ** ** | **    2005    ** | ** ** | **2006** | ** ** | **2005** | ** ** | **    2006   ** | ** ** | **   2005   ** | ** ** |
| **Weighted  Average Assumptions**      | ** ** | ** **                       | ** ** | ** **                             | ** ** |                                                     | ** ** | ** **                                               |       |   | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Pension plan                           |       | 5.75                             | %          | 5.50                                   | %          |                                                     | 5.50       | %                                                        |       |   | 6.00 | % |   | 3.50 | % | 3.50 | % |   | 7.75 | % |   |   | 8.25 | % |   |
| Supplemental executive retirement plan |       | 5.75                             | %          | 5.50                                   | %          |                                                     | 5.50       | %                                                        |       |   | 6.00 | % |   | N/A |   | N/A |   |   | 7.75 | % |   |   | 8.25 | % |   |
| Postretirement  medical benefit  plan  |       | 5.70                             | %          | 5.50                                   | %          |                                                     | 5.50       | %                                                        |       |   | 6.00 | % |   | N/A |   | N/A |   |   | 7.75 | % |   |   | 8.25 | % |   |

 

**Assumed Health Care Cost Trend Rates**

| ** **                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------|------------|----------|------------|----------|------------|
| Medical before Age 65                               |       |     |       |     |       |
| Initial rate                                        |       | 8.0      | %          | 8.5      | %          |
| Trends down to 5.5% ultimate rate by 2012           |       |     |       |     |       |
| Prescription Drugs  Before Age 65                   |       |     |       |     |       |
| Initial rate                                        |       | 12.0     | %          | 13.0     | %          |
| Trends down to 5.5% ultimate rate by 2015           |       |     |       |     |       |
| Medical and Prescription  Drugs for Age 65 and Over |       |     |       |     |       |
| Initial rate                                        |       | 8.0      | %          | 10.0     | %          |
| Trends down to  5.5% ultimate rate by 2012          |       |     |       |     |       |

 

Aone-percent change in the assumed health care cost trend rate would have thefollowing effects as of September 30, 2006:

| ** **                                                                             | ** ** | **One Percentage Point**   | ** ** |
|----------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                             | ** ** | ** Increase **             | ** ** | ** Decrease ** | ** ** |
| ** **                                                                             | ** ** | **(dollars in thousands)** | ** ** |
| Effect on service  and interest cost for year ended September 30, 2006            |       |                                 | $          | 57 |   |   |   | $ | (50 | ) |   |
| Effect on accumulated  postretirement benefit obligation as of September 30, 2006 |       |                                 | $          | 843 |   |   |   | $ | (747 | ) |   |

 

The following informationregarding asset allocation, development of expected rate of return on planassets, and investment strategy is presented separately for each of the threeplans.

**Employee PensionPlan**

**Investment PolicySummary**

The fundamental investment objective of the EmployeePension Plan (the Plan) is to provide a rate of return sufficient to fund theretirement benefits under the Plan at a reasonable cost to the plan sponsor,Cascade Natural Gas Corporation, and commensurate with an appropriate amount ofrisk pursuant to the Plan obligations. At a minimum, the rate of return shouldequal or exceed the discount rate assumed by the Plan’s actuaries in projectingthe funding cost of the Plan under applicable ERISA standards. To do so, theCompany’s Pension Committee (the Committee) may appoint one or more investmentmanagers to invest all or portions of the assets of the Plan (collectivelyreferred to as the “Fund”) in accordance with specific investment guidelines,objectives, standards, and benchmarks.

Because the Committee expects the Fund’s investmentincome, when combined with anticipated contributions by the Company, to exceedthe sum of benefit payments and expenses over the next several years, theCommittee intends that the Fund be managed to achieve long-term returns, withonly a small percentage of the Fund invested in cash.

50

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TheFund is divided into the following segments based on the guidelines below:

| ** **                        | ** ** | **Target** | ** ** | **Minimum** | ** ** | **Maximum** | ** ** |
|-----------------------------------|------------|------------|------------|-------------|------------|-------------|------------|
| Cash &  Cash Equivalents |       |       | 0          | %           |       |        | 0          | % |   |   | 20 | % |   |
| Equity Securities                 |       |       | 50         | %           |       |        | 40         | % |   |   | 60 | % |   |
| Fixed Income  Securities          |       |       | 40         | %           |       |        | 30         | % |   |   | 50 | % |   |
| Real Estate                       |       |       | 10         | %           |       |        | 5          | % |   |   | 15 | % |   |

 

**Asset Allocation**

Theasset allocation at September 30, 2006, and 2005, by major asset categoryis as follows:

| ** **                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|
| Cash &  Cash Equivalents |       |     | 2          | %        |       |   | 6 | % |   |
| Equity Securities                 |       |     | 50         | %        |       |   | 46 | % |   |
| Fixed Income  Securities          |       |     | 38         | %        |       |   | 39 | % |   |
| Real Estate                       |       |     | 10         | %        |       |   | 9 | % |   |

 

**Discount Rate**

The discount rate for measurement of the benefitobligation was developed using the Citigroup Pension Discount Curve, updatedfor yields through September 30, 2006.

The discount rate for theannual benefit cost was based on the Moody’s Aa Corporate Bond Index measuredas of September 30, 2005.

**Expected Long-termRate of Return on Plan Assets**

The expected long-termrate of return on assets assumption is based on historical experience andconsultation with the Company’s actuarial consultants. Factors consideredinclude asset allocation and expected returns attributable to each category ofassets over a 20-year time horizon.

**Additional Year-endInformation (for plans with accumulated benefit obligation in excess of planassets)**

Theamounts listed in the following table apply only to the employee retirementplan. This plan has an accumulated benefit obligation in excess of plan assets,resulting in the amounts shown in the table:

| ** **                                           | ** ** | **Employee Pension Plan**                                  | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **     2006     ** | ** ** | **     2005     ** | ** ** |
| ** **                                           | ** ** | **(dollars in thousands)**                                 | ** ** |
| Projected benefit  obligation                        |       |                                                                 | $          | 62,464 |   |   |   | $ | 65,418 |   |   |
| Accumulated  benefit obligation                      |       |                                                                 | $          | 62,464 |   |   |   | $ | 62,850 |   |   |
| Fair value of  assets                                |       |                                                                 | $          | 55,803 |   |   |   | $ | 50,220 |   |   |
| Other comprehensive (income) loss                    |       |                                                                 | $          | 15,843 |   |   |   | $ | 19,467 |   |   |
| (Increase) /  decrease in intangible asset           |       |                                                                 | $          | 644 |   |   |   | $ | 182 |   |   |
| Increase (decrease) in  additional minimum liability |       |                                                                 | $          | (4,268 | ) |   |   | $ | (360 | ) |   |

 

51

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**SupplementalExecutive Retirement Plan (SERP)**

**Investment PolicySummary**

SERPassets are in insurance policies and managed investments. The value ofinsurance policies at September 30, 2006 was $5,995,000, and at September 30,2005 was $5,435,000. The managed assets are divided into the following segmentswith the following weightings:

| ** **               | ** ** | **Target** | ** ** | **Minimum** | ** ** | **Maximum** | ** ** |
|--------------------------|------------|------------|------------|-------------|------------|-------------|------------|
| Equity Securities        |       |       | 65         | %           |       |        | 50         | % |   |   | 80 | % |   |
| Fixed Income  Securities |       |       | 25         | %           |       |        | 15         | % |   |   | 40 | % |   |
| Other                    |       |       | 10         | %           |       |        | 0          | % |   |   | 30 | % |   |

 

**Asset Allocation**

Theallocation of assets at September 30, 2006, and 2005, by major assetcategory including life insurance policies, is as follows:

| ** **                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|
| Cash &  Cash Equivalents |       |     | 1          | %        |       |   | 2 | % |   |
| Equity Securities                 |       |     | 24         | %        |       |   | 23 | % |   |
| Fixed Income  Securities          |       |     | 8          | %        |       |   | 8 | % |   |
| Life Insurance  Cash Value        |       |     | 67         | %        |       |   | 65 | % |   |
| Real Estate                       |       |     | 0          | %        |       |   | 2 | % |   |

 

**Discount Rate**

The discount rate for measurement of the benefitobligation was developed using the Citigroup Pension Discount Curve, updatedfor yields through September 30, 2006.

The discount rate for theannual benefit cost was based on the Moody’s Aa Corporate Bond Index measuredas of September 30, 2005.

**Expected Long-termRate of Return on Plan Assets**

The expected long-termrate of return on assets assumption is based on historic experience with theinvestment manager and consultation with the Company’s actuarial consultants. Factorsconsidered include asset allocation and expected returns attributable to eachcategory of assets over a 20-year time horizon.

**Retiree MedicalPlans**

**Investment PolicySummary**

The fundamental investment objective of the Trusts(voluntary employee benefit associations within the meaning of Section 501(c)(9) ofthe Internal Revenue Code) is to provide a rate of return sufficient to fundmedical benefits under the Company’s medical plan at a reasonable cost to theplan sponsor, Cascade Natural Gas Corporation, and commensurate with anappropriate amount of risk pursuant to the Trusts obligations. The Company hasappointed a qualified actuary to determine the benefit obligation under themedical plan (including post-retirement benefits) and the necessary funding tomeet those obligations. In performing this analysis, the actuary has usedappropriate actuarial methods for medical benefits and complies with existingfinancial accounting standards.

52

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The Fundis divided into the following segments with the following weightings:

| ** **              | ** ** | **Target** | ** ** | **Minimum** | ** ** | **Maximum** | ** ** |
|-------------------------|------------|------------|------------|-------------|------------|-------------|------------|
| Cash                    |       |       | 10         | %           |       |        | 0          | % |   |   | 30 | % |   |
| Equity Securities       |       |       | 65         | %           |       |        | 25         | % |   |   | 90 | % |   |
| Fixed Income Securities |       |       | 25         | %           |       |        | 10         | % |   |   | 40 | % |   |

 

**Asset Allocation**

Theasset allocation at September 30, 2006, and 2005, by major asset category,is as follows:

| ** **               | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|
| Cash                     |       |     | 3          | %        |       |   | 3 | % |   |
| Equity Securities        |       |     | 68         | %        |       |   | 82 | % |   |
| Fixed Income  Securities |       |     | 26         | %        |       |   | 12 | % |   |
| Other                    |       |     | 3          | %        |       |   | 3 | % |   |

 

**Discount Rate**

The discount rate for measurement of the benefitobligation was developed using the Citigroup Pension Discount Curve, updatedfor yields through September 30, 2006. In developing the rate, cash flowswere used to reflect plan amendments effective January 1, 2007.

The discount rate for theannual benefit cost was based on the Moody’s Aa Corporate Bond Index measuredas of September 30, 2005.

**Expected Long-termRate of Return on Plan Assets**

The expected long-termrate of return on assets assumption is based on historical experience and consultationwith the Company’s actuarial consultants. Factors considered include assetallocation and expected returns attributable to each category of assets over a20-year time horizon.

**Note 12—Commitmentsand Contingencies**

**Gas ServiceContracts**

The Company has entered into various long-termcontracts for natural gas supply, transportation, storage, and peaking services.These contracts are intended to provide adequate supplies of gas for service tocore customers and to meet obligations under long-term, non-core customeragreements, and to provide that adequate capacity is available on interstatepipelines for the delivery of these supplies. These contracts have maturitiesranging up to 25 years, and generally provide for monthly and annual fixeddemand charges, and minimum purchase obligations.

53

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TheCompany’s minimum obligations under these contracts are set forth in thefollowing table. The amounts are based on hedged prices, as applicable, currentcontract price terms and estimated commodity prices on un-hedged supplies,which are subject to market fluctuations:

| ** **                       | ** ** | ** **                           | ** ** | **Interstate** | ** ** | **Storage**          | ** ** | ** **  | ** ** |
|----------------------------------|------------|--------------------------------------|------------|----------------|------------|----------------------|------------|-------------|------------|
| **Fiscal Year Ending** | ** ** | **Firm Gas**                    | ** ** | **Pipeline**   | ** ** | **and Peaking** | ** ** | ** **  | ** ** |
| **September 30**            | ** ** | ** **                           | ** ** | **Supply**     | ** ** | **Transportation**   | ** ** | **Service** | ** ** | **Total** | ** ** |
| ** **                       | ** ** | **(dollars in thousands)** | ** ** |
| 2007                             |       | $                                    | 269,757    |           |       | $                    | 33,415     |        |       |   | $ | 2,605 |   |   | $ | 305,777 |   |
| 2008                             |       | 226,038                              |       |           | 50,689     |                 |       |        | 2,720      |   |   | 279,447 |   |
| 2009                             |       | 144,696                              |       |           | 50,503     |                 |       |        | 3,094      |   |   | 198,293 |   |
| 2010                             |       | 77,738                               |       |           | 47,438     |                 |       |        | 3,094      |   |   | 128,270 |   |
| 2011                             |       | 40,219                               |       |           | 45,435     |                 |       |        | 3,094      |   |   | 88,748 |   |
| Thereafter                       |       | 3,240                                |       |           | 234,193    |                 |       |        | 53,584     |   |   | 291,017 |   |
|                             |       | $                                    | 761,688    |           |       | $                    | 461,673    |        |       |   | $ | 68,191 |   |   | $ | 1,291,552 |   |
|                                  |            |                                      |            |                |            |                      |            |             |            |  |  |  |  |  |  |  |  |  |  |

 

Purchasesunder these contracts for fiscal 2006, 2005, and 2004 were as follows:

| ** ** | ** ** | ** **                           | ** ** | **Interstate**     | ** ** | **Storage**          | ** ** | ** ** | ** ** |
|------------|------------|--------------------------------------|------------|--------------------|------------|----------------------|------------|------------|------------|
| ** ** | ** ** | **Firm Gas**                    | ** ** | **Pipeline**       | ** ** | **and Peaking** | ** ** | ** ** | ** ** |
| ** ** | ** ** | **Supply**                           | ** ** | **Transportation** | ** ** | **Service**          | ** ** | **Total**  | ** ** |
| ** ** | ** ** | **(dollars in thousands)** | ** ** |
| 2006       |       | $                                    | 275,182    |               |       | $                    | 31,601     |       |       |   | $ | 2,631 |   |   | $ | 309,414 |   |
| 2005       |       | $                                    | 191,596    |               |       | $                    | 30,861     |       |       |   | $ | 2,616 |   |   | $ | 225,073 |   |
| 2004       |       | $                                    | 195,445    |               |       | $                    | 32,114     |       |       |   | $ | 2,609 |   |   | $ | 230,168 |   |

 

**FinancialDerivatives**

Tomitigate market risk and provide assurance of stable prices for its customers,the Company has entered into a number of hedging arrangements related to itsgas supply contracts. The hedging arrangements are primarily in the form offinancial swaps to fix the price of supplies. Under the terms of the swaparrangements, the Company will either pay or receive settlement payments basedon the difference between a fixed strike price and the monthly index priceapplicable to each contract. The total quantities subject to hedgingarrangements are 25,294,000 MMBTU’s in 2007, 17,408,000 MMBTU’s in 2008,8,860,000 MMBTU’s in 2009, and 592,000 MMBTU’s in 2010. The mark-to-marketvalue of these hedges as of September 30, 2006 and 2005 are included inthe balance sheet as follows:

| ** **                                                           | ** ** | **2006**                             | ** ** | **2005** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------------|------------|----------|------------|
| ** **                                                           | ** ** | **(dollars in thousands)** | ** ** |
| Derivative instrument  asset—energy commodity (current)         |       | $                                    | 4,135      |     | $          | 91,957 |   |
| Derivative  instrument asset—energy commodity (non-current)     |       | 3,269                                |       | 43,440   |       |
| Derivative  instrument liability—energy commodity (current)     |       | (29,496                              | )          | (132     | )          |
| Derivative  instrument liability—energy commodity (non-current) |       | (18,939                              | )          | (1,326   | )          |
| Net                                                                  |       | $                                    | (41,031    | )        | $          | 133,939 |   |

 

**EnvironmentalMatters**

There are two claims against the Company for cleanupof alleged environmental contamination related to manufactured gas plant sitespreviously operated by companies that were subsequently merged into theCompany.

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The first claim was received in 1995 and relates to asite in Oregon. An investigation has shown that soil and groundwatercontamination exists at the site. There are parties in addition to the Companythat are potentially liable for cleanup of the contamination. Some of theseother parties have shared in the costs expended to date to investigate thesite, and it is expected that these and potentially other parties will share inthe cleanup costs. Several alternatives for remediation of the site have been identified,with preliminary estimates for cleanup ranging from approximately $500,000 to$11,000,000. It is not known at this time what share of the cleanup costs willactually be borne by the Company. The Oregon Department of EnvironmentalQuality (DEQ) is currently reviewing a Focused Feasibility Study prepared forthe site and is expected to select a preferred alternative from that report. Itis not known when the decision will be made by DEQ.

The second claim was received in 1997 and relates to asite in Washington. A preliminary investigation has determined that there isevidence of contamination at the site, but there is also evidence that otherproperty owners may have contributed to the contamination. There is currentlynot enough information available to estimate the potential liability associatedwith this claim, but the Company and other parties may become involved infuture investigation or remediation of the site as increased interest has beenexpressed concerning its potential for redevelopment. In particular, the Company is aware that thelocal city government has secured federal grants for further investigation ofthe site. At this time, no formal investigation plan has been communicated tothe Company.

Management believes it hasadequate insurance to cover the costs of the above two claims. In the event theinsurance proceeds do not completely cover the costs, management intends toseek recovery from its customers through increased rates. There is precedentfor such recovery through increased rates, as both the WUTC and the OPUC havepreviously allowed regulated utilities to increase customer rates to coversimilar costs.

**Litigation andOther Contingencies**

On July 31, 2006, a complaint was filed with theWUTC 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 believes that its gasmanagement business is in compliance with applicable laws.

The Parties to the Complaint Docket have filed aStipulation of Facts and have agreed to file simultaneous motions and briefs onthe same dates reserved for briefs in the Washington general rate case docket.The WUTC has indicated that it will issue an order in the Complaint Docket prior to, or at the same time as, thefinal order in the general rate case docket.

Various lawsuits, claims,and contingent liabilities may arise from time-to-time from the conduct of theCompany’s business. No other claims now pending, in the opinion of management,are expected to have a material effect on the Company’s financial position,results of operations, cash flows, or liquidity.

**Note 13—Fair Valueof Financial Instruments**

Thefollowing estimated fair value amounts have been determined by the Companyusing available market information and appropriate valuation methodologies. However,considerable judgment is required in interpreting market data to develop theestimates of fair value. Accordingly, these estimates are not necessarilyindicative of the amounts that the Company could realize in a current marketexchange. Thus, the use of different market assumptions or estimationmethodologies may have a material effect on 

55

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the estimated fair value amounts. The estimated fairvalues have been determined by using interest rates that are currently availableto the Company for issuance of instruments with similar terms and remainingmaturities. The estimated fair value amounts, at September 30, 2006 and2005, are set forth in the following table:

| ** **                            | ** ** | **2006**                             | ** ** | **2005**            | ** ** |
|---------------------------------------|------------|--------------------------------------|------------|---------------------|------------|
| ** **                            | ** ** | **Carrying**                         | ** ** | **Estimated**       | ** ** | **Carrying** | ** ** | **Estimated** | ** ** |
| ** **                            | ** ** | **Amount**                           | ** ** | **Fair Value** | ** ** | **Amount** | ** ** | **Fair Value** | ** ** |
| ** **                            | ** ** | **(dollars in thousands)** | ** ** |
| Long-term debt                        |       | $                                    | 165,123    |                | $          | 180,270 |   | $ | 173,840 |   | $ | 188,630 |   |
| Current maturities of  long-term debt |       | $                                    | 8,000      |                | $          | 8,000 |   | $ | — |   | $ | — |   |

 

**Note 14—Interim Results of Operations (unaudited)**

| ** **                                         | ** ** | **Quarter Ended**                               | ** ** |
|----------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                         | ** ** | **Sep 30**                                      | ** ** | **Jun 30** | ** ** | **Mar 31** | ** ** | **Dec 31** | ** ** |
| ** **                                         | ** ** | **2006**                                             | ** ** | **2006** | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                         | ** ** | **(thousands except per-share data)** | ** ** |
| Operating  revenues                                |       | $                                                    | 57,144     |   | $ | 76,594 |   | $ | 163,018 |   | $ | 159,208 |   |
| Gas costs, other  costs of sales and revenue taxes |       | 41,505                                               |       | 58,196 |   | 129,787 |   | 128,417 |   |
| Operating margin                                   |       | 15,639                                               |       | 18,398 |   | 33,231 |   | 30,791 |   |
| Cost of  operations                                |       | 18,091                                               |       | 16,870 |   | 16,060 |   | 15,042 |   |
| Income (loss)  from operations                     |       | (2,452                                               | )          | 1,528 |   | 17,171 |   | 15,749 |   |
| Interest and  other, net                           |       | 2,754                                                |       | 2,142 |   | 2,884 |   | 2,972 |   |
| Income (loss) before  income taxes                 |       | (5,206                                               | )          | (614 | ) | 14,287 |   | 12,777 |   |
| Income taxes                                       |       | (1,196                                               | )          | (87 | ) | 5,301 |   | 4,737 |   |
| Net income (loss)                                  |       | $                                                    | (4,010     | ) | $ | (527 | ) | $ | 8,986 |   | $ | 8,040 |   |
| Earnings (loss) per  common share                  |       |                                                 |       |   |   |   |   |   |   |
| Basic and diluted                                  |       | $                                                    | (0.35      | ) | $ | (0.05 | ) | $ | 0.78 |   | $ | 0.70 |   |

 

| ** **                         | ** ** | **Quarter Ended**                               | ** ** |
|------------------------------------|------------|------------------------------------------------------|------------|
| ** **                         | ** ** | **Sep 30**                                      | ** ** | **Jun 30** | ** ** | **Mar 31** | ** ** | **Dec 31** | ** ** |
| ** **                         | ** ** | **2005**                                             | ** ** | **2005** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                         | ** ** | **(thousands except per-share data)** | ** ** |
| Operating  revenues                |       | $                                                    | 47,861     |   | $ | 56,315 |   | $ | 117,711 |   | $ | 104,613 |   |
| Gas costs and  revenue taxes       |       | 33,584                                               |       | 38,641 |   | 86,869 |   | 75,691 |   |
| Operating margin                   |       | 14,277                                               |       | 17,674 |   | 30,842 |   | 28,922 |   |
| Cost of  operations                |       | 17,042                                               |       | 16,412 |   | 16,245 |   | 15,584 |   |
| Income (loss)  from operations     |       | (2,765                                               | )          | 1,262 |   | 14,597 |   | 13,338 |   |
| Interest and  other, net           |       | 2,792                                                |       | 2,891 |   | 2,976 |   | 2,894 |   |
| Income (loss)  before income taxes |       | (5,557                                               | )          | (1,629 | ) | 11,621 |   | 10,444 |   |
| Income taxes                       |       | (1,947                                               | )          | (502 | ) | 4,269 |   | 3,812 |   |
| Net income (loss)                  |       | $                                                    | (3,610     | ) | $ | (1,127 | ) | $ | 7,352 |   | $ | 6,632 |   |
| Earnings (loss) per  common share  |       |                                                 |       |   |   |   |   |   |   |
| Basic and diluted                  |       | $                                                    | (0.32      | ) | $ | (0.10 | ) | $ | 0.65 |   | $ | 0.59 |   |

 

**Item 9.**                        Changesin and Disagreements With Accountants on Accounting and Financial Disclosure

None.

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**Item 9A.**                Controlsand Procedures

(a)   Evaluationof Disclosure Controls and Procedures

The Company maintainsdisclosure controls and procedures designed to ensure that it is able tocollect the information it is required to disclose in the reports it files withthe Securities and Exchange Commission, and to process, summarize and disclosethis information within the time period specified in the Securities andExchange Commission’s rules. The Company’s management, including the chiefexecutive officer and chief financial officer, evaluated disclosure controlsand procedures as of the end of the period covered by this report. Based onthat evaluation, the Company concluded that, as of September 30, 2006 theCompany’s disclosure controls and procedures are functioning effectively toalert management on a timely basis to material information relating to theCompany required to be included in the Company’s periodic filings with the Securitiesand Exchange Commission.

(b)   Changes in Internal Controls over Financial Reporting

Nochange in the Company’s internal controls over financial reporting occurredduring the fourth fiscal quarter that has materially affected, or is reasonablylikely to materially affect, the Company’s internal control over financialreporting.

(c)   Management’sReport on Internal Controls over Financial Reporting

*Management’s Reporton Internal Controls over Financial Reporting*

Management isresponsible for establishing and maintaining adequate internal control overfinancial reporting for the Company. Internal control over financial reportingis defined in Rule 13a-15(f) and 15d-15(f) promulgatedunder the Securities Exchange Act of 1934 as a process designed by, or underthe supervision of, a company’s principal executive and principal financialofficers and effected by the company’s board of directors, management and otherpersonnel, to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with accounting principles generally accepted in theUnited States of America. Internal control includes those policies andprocedures that:

·       pertainto the maintenance of records that in reasonable detail accurately and fairlyreflect the transactions and dispositions of the assets of the Company;

·       providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the Company; and

·       providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use or disposition of the Company’s assets that could have amaterial effect on the financial statements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Projectionsof any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate.

The Company’s management assessed the effectiveness ofthe Company’s internal control over financial reporting as of September 30,2006. In making this assessment, the Company’s management used the criteria setforth by the Committee of Sponsoring Organizations (“COSO”) of the TreadwayCommission’s Internal Control-Integrated Framework.

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Based on their assessment, management has concludedthat, as of September 30, 2006, the Company’s internal control overfinancial reporting is effective based on those criteria.

Ourmanagement’s assessment of the effectiveness of the Company’s internal controlover financial reporting as of September 30, 2006 has been audited byDeloitte and Touche, LLP, an independent, registered public accounting firm, asstated in their report which is included herein.
| /s/ DAVID W. STEVENS                     |   |
|------------------------------------------|--------|
| David W. Stevens                         |
| *President  and Chief Executive Officer* |
| /s/ JAMES E. HAUG                        |   |
| James E. Haug                            |
| *Chief  Accounting Officer*              |

 

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(d)   Independent Registered Public AccountingFirm’s Report on Internal Controls over Financial Reporting

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directors and Stockholders ofCascade Natural Gas CorporationSeattle, Washington

We have audited management’s assessment, included inthe accompanying Management’s Report on Internal Controls Over FinancialReporting, that Cascade Natural Gas Corporation and subsidiaries (the“Company”) maintained effective internal control over financial reporting as ofSeptember 30, 2006, based on criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission. The Company’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting. Our responsibility is to express an opinion on management’sassessment and an opinion on the effectiveness of the Company’s internalcontrol over financial reporting based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinions.

A company’s internal control over financial reportingis a process designed by, or under the supervision of, the company’s principalexecutive and principal financial officers, or persons performing similarfunctions, and effected by the company’s board of directors, management, andother personnel to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internalcontrol over financial reporting, including the possibility of collusion orimproper management override of controls, material misstatements due to erroror fraud may not be prevented or detected on a timely basis. Also, projectionsof any evaluation of the effectiveness of the internal control over financialreporting to future periods are subject to the risk that the controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that theCompany maintained effective internal control over financial reporting as of September 30,2006, is fairly stated, in all material respects, based on the criteriaestablished in *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission.Also in our opinion, the Company maintained, in all material respects,effective internal control over financial reporting as of September 30,2006, based on the criteria 

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established in *Internal Control—Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission.

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated financial statements and financial statementschedule as of and for the year ended September 30, 2006, of the Companyand our report dated December 6, 2006, expressed an unqualified opinion onthose financial statements and financial statement schedule.
| /s/ DELOITTE & TOUCHE LLP |   |
|-------------------------------|--------|
| Seattle,  Washington          |
| December 6,  2006        |

 

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**Item 9B.**               OtherInformation

None

**PART III**

**Item 10.**                 Directorsand Executive Officers of the Registrant

The Board of Directors andtheir age, principal occupation, and business experience are listed below.

SCOTT M. BOGGS, Director since 2004Former Vice President, Corporate ControllerMicrosoft Corporation

Mr. Boggs, 51, wasVice President, Corporate Controller at Microsoft Corporation from December 1997to May 2003. From 1993 to 1997, Mr. Boggs held other managementpositions in accounting at Microsoft Corporation. Mr. Boggs serves as ViceChairman and Treasurer of the Financial Executives Research Foundation, anaffiliate of Financial Executives International. Also, Mr. Boggs is amember of the King County Strategic Technology Advisory Council and is an adjunctprofessor at Seattle University where he teaches financial and managementaccounting at the Albers School of Business.

PIRKKO H. BORLAND, Director since 2003Retired

Ms. Borland, 62,retired from US WEST Communications, Inc. in 1995 as Executive Director—FinancialAccounting. Her previous positions in US WEST Communications, and itspredecessor company Pacific Northwest Bell, include Director of InternalAuditing and Director of Regulatory Matters. Her expertise is in accounting andfinance, especially financial reporting and regulatory accounting. She serveson the board of the Nordic Heritage Museum and the Advisory Board of theScandinavian Department at the University of Washington. Ms. Borland is alicensed CPA in the State of Washington.

CARL BURNHAM, JR., Director since 1990Attorney at LawYturri Rose LLP

Mr. Burnham, 67, is asenior partner of Yturri Rose LLP, a regional law firm with its principaloffice in Ontario, Oregon. Yturri Rose LLP represents public and privatecorporations, including utilities. Prior to Mr. Burnham becoming a memberof the Board, his firm was Oregon Counsel for Cascade Natural Gas Corporation.Mr. Burnham has been a partner of Yturri Rose LLP since 1967.

THOMAS E. CRONIN, Director since 1996Retired

Mr. Cronin, 66, retired in 2005 from WhitmanCollege in Walla Walla, Washington where he served as President since 1993. Aformer White House Fellow, Mr. Cronin has been a scholar-in-residence atthe Brookings Institution in Washington D.C., and the Hoover Institution atStanford University. He has been President of CRC, Inc., a research andconsulting company since 1981, specializing in public policy and leadershipissues. He is an award-winning scholar and author or co-author of severalbooks on American government and public policy. He has been in recent years adirector of the Blue Mountain Land Trust, the Downtown Walla WallaFoundation, and the National Association of Independent Colleges and Universities.

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DAVID A. EDERER, Director since 1991Chairman of the BoardEderer Investment Company

Mr. Ederer, 63, isChairman of the Board of Ederer Investment Company in Seattle, Washington, aprivate investment company overseeing various personal holdings located inWashington, Oregon, and Utah. Since 1974, Mr. Ederer has been involved inthe acquisition and ownership of companies which have included companies in themanufacturing, brokering, distribution, service, and retail industries. Inaddition to serving on the Board of Cascade Natural Gas Corporation, hecurrently serves on the boards of HomeStreet Bank, Survival, Inc.,Prostate Cancer Foundation (formerly known as CapCURE), Colvos Industries, JodyCoyote, Inc., and PONCHO.

LARRY L. PINNT, Chairman since 2003 and Director since1995Retired

Mr. Pinnt, 72, wasChief Financial Officer of US WEST Communications, Inc., and one of itspredecessor companies, Pacific Northwest Bell, from 1979 until he retired in September 1989.His responsibilities included all aspects of corporate financial management,including shareholder matters. Mr. Pinnt has served on the boards of anumber of public and private companies, including Seattle Trust and SavingsBank and later Key Bank of Washington. He also served as Chairman on the boardsof Blue Cross of Washington and Alaska, and University of WashingtonMedicine.

BROOKS G. RAGEN, Director since 1984President and Chief Executive OfficerManzanita Capital, Inc., Parent ofMcAdams, Wright, Ragen, Inc.

Mr. Ragen, 73, isPresident and CEO of Manzanita Capital, Inc., a financial services firm. Hewas a director of Ragen MacKenzie Incorporated, an investment banking firm,from 1986 to 1998. From 1988 until 1996, he served as Chairman and ChiefExecutive Officer of Ragen MacKenzie Incorporated. Mr. Ragen’s entirebusiness career has been involved in investments and investment banking. Afterworking as a research analyst in New York for several years, he served as thePacific Northwest branch manager for two New York-based investment firms andlater worked as an investment banker providing a wide range of corporatefinance services to Pacific Northwest-based corporations. Mr. Ragenhas started and managed two regional investment banking firms and for manyyears has provided investment advice to a broad group of individuals andinstitutions.

DAVID W. STEVENS, Director since April 2005President and Chief Executive OfficerCascade Natural Gas Corporation

Mr. Stevens, 47, was elected as President and CEOand to the Board of Directors of Cascade Natural Gas Corporation effective April 1,2005. From July 2003 to December 2004, Mr. Stevens was Presidentand COO for Panhandle Energy, a Southern Union Company subsidiary. From September 1997to January 2003, he was President of the Southern Union Gas Company. Priorto that, Mr. Stevens served in other executive capacities within theSouthern Union Company, including Senior Vice President—Sales and Operations,Regional Vice President, Group Vice President and Vice President—Operations. Mr. Stevensjoined the Southern Union Company in 1984. He has served on the board of directorsfor the Southern Gas Association and the Intrastate Natural Gas Association ofAmerica, and was a member of the Presidents’ Council of the American GasAssociation.

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DOUGLAS G. THOMAS, Director since 2002President and Chief Executive OfficerBellingham Cold Storage Company

Mr. Thomas, 43, isPresident and CEO and serves on the board of directors of Bellingham ColdStorage, a public cold storage and food processing firm located in Bellingham,Washington. Mr. Thomas became President and CEO of Bellingham Cold Storagein January 1999, and from January 1996 to January 1999, he wasVice President & Chief Operating Officer. Bellingham Cold Storage is asignificant consumer of energy and Mr. Thomas has extensive experiencewith both the electrical and gas utility side of its business through thedevelopment and implementation of on-site natural gas electric generation systems.

**The Audit Committee**

The Audit Committee isresponsible for the appointment, retention, compensation and oversight of theCompany’s independent auditors. Audit Committee members are Pirkko H. Borland—Chair,Scott M. Boggs, David A. Ederer, and Larry L. Pinnt. The Board hasreviewed the qualifications of Audit Committee members and determined thatLarry L. Pinnt, Scott M. Boggs and Pirkko H. Borland are financial experts asdefined in rules of the Securities and Exchange Commission. Also, theBoard has considered the qualifications of members of the Audit Committee anddetermined that all members of the Audit Committee are independent andfinancially literate under applicable rules of the Securities and ExchangeCommission and listing standards of the New York Stock Exchange. The Board hasadopted a written charter for the Audit Committee which is available on theCompany’s website at *www.cngc.com*.

**Section 16(a) BeneficialOwnership Reporting Compliance**

Under Section 16(a) ofthe Securities Exchange Act of 1934, holders of more than 10 percent ofthe Common Stock and directors and certain officers of the Company are requiredto file reports of beneficial ownership of Common Stock and changes in suchownership with the Securities and Exchange Commission (“Section 16(a) Statements”).The Company is required to identify those persons who, to the Company’sknowledge, were required to file Section 16(a) Statements and did notdo so on a timely basis. Based solely on a review of copies of Section 16(a) Statementsfurnished to the Company during and regarding its most recent fiscal year andon written representations from reporting persons, the Company believes thateach person who at any time during the most recent fiscal year was a reportingperson filed all required Section 16(a) Statements on a timely basisexcept for the following corrections that were made after an extensive reviewand reconciliation process in fiscal 2006: (1) amended Form 4’s werefiled for Doug Thomas, Brooks Ragen (two filings), Larry Pinnt and Scott Boggsto correct previous filings due to minor errors, including not adjustingreported amounts for reinvested dividends and math errors; (2) amended Form 4’swere filed for Rick Davis and David Stevens to include a stock price; (3) amendedForm 3’s were filed for Julie Marshall and Michael Gardner to reflectstock grants when they became executive officers; and (4) amended Form 4’swere filed for Jim Haug, Larry Rosok (two filings), Jon Stoltz, JulieMarshall and Michael Gardner (two filings) to accurately reflect stock optionexercises.

**Code of Ethics**

The Company has adoptedcodes of ethics for directors, officers (including the principal executiveofficer, principal financial officer and principal accounting officer), andemployees. These codes of ethics are available on the Registrant’s website at www.cngc.com.Any changes to or waivers from the codes of ethics will be posted to theRegistrant’s website as well.

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*Executive Officersof the Registrant*

Theexecutive officers of the Company, as of November 30, 2006, are asfollows:

|                    | ** ** | ** **                             | ** ** | ** ** | ** ** | **Year**   |
|--------------------|------------|----------------------------------------|------------|------------|------------|------------|
| ** **         | ** ** | ** **                             | ** ** | ** ** | ** ** | **Became** |
| **Name**           | ** ** | ** **                             | ** ** | **Office** | ** ** | **Age**    | ** ** | ** ** | **Officer** |
| David W. Stevens   |       | President and Chief Executive  Officer |       | 47         |       |       | 2005 |
| Jon T. Stoltz      |       | Senior Vice  President—Gas Supply |       | 59         |       |       | 1981 |
|               |       | and Regulatory Affairs                 |       |       |       |       |   |
| Larry C. Rosok     |       | Vice President—Human  Resources   |       | 50         |       |       | 1995 |
|                    |       | and Corporate Secretary                |       |       |       |       |   |
| Michael J. Gardner |       | Vice  President—Operations        |       | 37         |       |       | 2005 |
| Julie A. Marshall  |       | Vice  President—Customer Service  |       | 53         |       |       | 2005 |
| James E. Haug      |       | Chief Accounting Officer               |       | 57         |       |       | 1981 |
|                    |            |                                        |            |            |            |            |  |  |  |  |

 

None of the above officersis related by blood, marriage or adoption to any other of the above-named officers.With the exception of David W. Stevens, each of the other above-named officershas been employed by the Company in a management capacity for at least thepast five years. None of the above officers holds directorships in other publiccorporations. All officers serve at the pleasure of the Board of Directors.

MICHAEL J. GARDNERVice President—Operations

Mr. Gardner waselected to Vice President Operations August 1, 2005. Prior to that he wasExecutive Director—District Operations since September 2003. Prior to thathe was Senior Director—Operations Support since May 2002. Prior to that hewas Director, District Processes since April 2000. Prior to that he held variouspositions in Operations, Safety and Training, and Engineering since 1991.

JAMES E. HAUGChief Accounting Officer

Mr. Haug was electedto Chief Accounting Officer October 27, 2006. He was Controller since December 2002.Prior to that he was Controller and Chief Accounting Officer since January 1997.His title changed to Controller in May 2002. Prior to that he waselected Treasurer and Chief Accounting Officer in 1988. Previously, he wasTreasurer of the Corporation since December 1, 1981. Prior to that time heserved as Controller since 1979, and previous to that as Manager, GeneralAccounting.

JULIE A. MARSHALLVice President—Customer Service

Ms. Marshall waselected to Vice President Customer Service August 1, 2005. Prior to thatshe was Director, Customer Service since June 1, 2000. Prior to that shewas Director, Customer Account Services since February 1998. Prior to thatshe was in various positions in Customer Accounting and Auditing since 1974.

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LARRY C. ROSOKVice President—Human Resources & Corporate Secretary

Mr. Rosok was electedto Vice President Human Resources & Corporate SecretaryNovember 1, 1997. Prior to that he was Personnel Director sinceJanuary 1, 1994 and was elected Corporate Secretary in July 1995.Prior to that time he was Assistant Personnel Director since January 1991.Prior to that he was in various positions in Customer Accounting and Auditingsince 1979.

JON T. STOLTZSenior Vice President—Regulatory & Gas Supply

Mr. Stoltz wasappointed Senior Vice President Regulatory & Gas Supply inDecember 2002. Prior to that he was Senior Vice President,Planning/Regulatory & Consumer Affairs since November, 1998, SeniorVice President—Planning & Rates since April 1991, Senior VicePresident—Gas Supply & Rates since April 1990, Vice President—GasSupply, Rates & Special Studies since August 1981, Director ofGas Supply, Rates & Special Studies since 1980, and Director of Ratessince 1977.

**Item 11.**                 ExecutiveCompensation

**EXECUTIVE COMPENSATION**

**Summary Compensation Table.  **The following table shows compensation paid to thecurrent Chief Executive Officer, the former Chief Executive Officer, and eachof the other four most highly compensated executive officers of the Company forthe years indicated.

|                                            | ** ** | **Annual Compensation** | ** ** | **Long-Term  Compensation Awards** | ** ** |
|--------------------------------------------|------------|------------------------------|------------|-----------------------------------------|------------|
| **Name and  Principal Position** | ** ** | ** **                   | ** ** | **Years  of  Service**                  | ** ** | **Fiscal  Year** | ** ** | **Salary ($)** | ** ** | **Bonus ($)(6)** | ** ** | **Restricted  Stock  Awards ($)** | ** ** | **All Other  Compensation ($)(7)** | ** ** |
| David W. Stevens                           |       |                         | 1          |                                    |       |   | 2006 |   |   |   | 410,000 |   |   |   | 442,800 |   |   |   | 98,500 |   |   |   | 137,350 |   |   |
| President and Chief                        |       |                         |       |                                    |       |   | 2005 |   |   |   | 200,000 |   |   |   | 0 |   |   |   | 197,700 |   |   |   | 190,932 |   |   |
| Executive Officer(1)                       |       |                         |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Rick Davis                                 |       |                         | 1          |                                    |       |   | 2006 |   |   |   | 253,440 |   |   |   | 0 |   |   |   | 0 |   |   |   | 111,147 |   |   |
| Chief Financial  Officer(2)                |       |                         |       |                                    |       |   | 2005 |   |   |   | 70,000 |   |   |   | 0 |   |   |   | 100,900 |   |   |   | 7,200 |   |   |
| Jon T. Stoltz                              |       |                         | 32         |                                    |       |   | 2006 |   |   |   | 173,877 |   |   |   | 107,131 |   |   |   | 0 |   |   |   | 29,549 |   |   |
| Senior Vice President                      |       |                         |       |                                    |       |   | 2005 |   |   |   | 169,942 |   |   |   | 2,000 |   |   |   | 0 |   |   |   | 18,867 |   |   |
| Regulatory & Gas Supply(3)        |       |                         |       |                                    |       |   | 2004 |   |   |   | 164,448 |   |   |   | 0 |   |   |   | 0 |   |   |   | 18,263 |   |   |
| Larry C. Rosok                             |       |                         | 27         |                                    |       |   | 2006 |   |   |   | 150,790 |   |   |   | 83,314 |   |   |   | 0 |   |   |   | 29,890 |   |   |
| Vice President  Human                      |       |                         |       |                                    |       |   | 2005 |   |   |   | 145,928 |   |   |   | 1,000 |   |   |   | 0 |   |   |   | 16,052 |   |   |
| Resources &  Corporate            |       |                         |       |                                    |       |   | 2004 |   |   |   | 142,943 |   |   |   | 0 |   |   |   | 0 |   |   |   | 15,724 |   |   |
| Secretary(4)                               |       |                         |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Michael J. Gardner                         |       |                         | 15         |                                    |       |   | 2006 |   |   |   | 141,567 |   |   |   | 77,580 |   |   |   | 0 |   |   |   | 30,097 |   |   |
| Vice President Operations(5)               |       |                         |       |                                    |       |   | 2005 |   |   |   | 125,862 |   |   |   | 0 |   |   |   | 0 |   |   |   | 10,693 |   |   |
|                                            |       |                         |       |                                    |       |   | 2004 |   |   |   | 115,975 |   |   |   | 0 |   |   |   | 0 |   |   |   | 11,735 |   |   |
|                                            |            |                              |            |                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          The amount in the bonuscolumn includes Mr. Stevens’ payout from the Cascade Incentive Plan and anamount from the 401(k) profit sharing plan, both of which paid out at themaximum due to the strong performance of the Company. Payouts in the 401(k) profitsharing plan, which exceed the maximum eligible deferral to the 401(k) planare paid as a cash bonus under the short-term incentive plan. Of Mr. Stevens’bonus, $410,000 was a payout from the Cascade Incentive Plan and $32,800 willbe a cash bonus per the 401(k) profit sharing plan to be paid in earlycalendar 2007.

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Mr. Stevens’employment with the Company commenced on April 1, 2005. 2005 Compensationfor Mr. Stevens reflects the period from April 1, 2005 through September 30,2005. Mr. Stevens received an initial stock grant of 15,000 shares ofCommon Stock on the effective date of his employment. Of the initial stockgrant, 5,000 shares are restricted and subject to forfeiture if Mr. Stevensleaves the Company before the shares vest. These 5,000 shares are reflected inthe “Restricted Stock Awards” column and are valued on the basis of the CommonStock price on the date of grant. These remaining 5,000 shares will vest as of April 1,2007. Of the initial stock grant, 5,000 shares were fully vested at the time ofgrant and are reflected in the “All Other Compensation” column for 2005 and arevalued on the basis of the Common Stock price on the date of grant. Another5,000 shares of the initial stock grant vested on April 1, 2006 and arereflected in the “All Other Compensation” for 2006 and are valued on the basisof the Common stock price on the date of the grant. Other compensationreflected in the “All Other Compensation” column are $9,600 for payment ofdividends on the restricted portion of his initial stock grant, a one-timeperformance award of $6,045 and $29,250 for a miscellaneous allowance. Allcompensation is per his employment contract as approved by the Board ofDirectors prior to his employment. A more detailed description of Mr. Stevens’employment agreement is provided below in the section entitled “EmploymentAgreements.”

(2)          Mr. Davis’employment with the Company began on June 16, 2005. 2005 Compensation for Mr. Davisreflects the period from June 16, 2005 through September 30, 2005.Mr. Davis received an initial stock grant of 5,000 shares of Common Stockon the effective date of his employment, all of which shares were restrictedand subject to forfeiture if Mr. Davis left the Company before the sharesvest. These 5,000 shares vested as of June 16, 2006 and are reflected inthe “All Other Compensation” column for 2006. This stock grant is valued on thebasis of the Common Stock price on the date of the grant. Other paymentsreflected in the “All Other Compensation” column are: $4,800 for amiscellaneous allowance and $5,446.80 for Company contributions to the 401(k) plan.Mr. Davis’ employment with the Company ended on November 26, 2006,prior to payouts under the Cascade Incentive Plan and 401(k) ProfitSharing Plan, so he was ineligible for payouts under those plans. A moredetailed description of Mr. Davis’ employment agreement is provided belowin the section entitled “Employment Agreements.” Upon his departure, Mr. Davisexecuted a release, consistent with the process set forth in his employmentagreement, pursuant to which Mr. Davis will receive a separation paymentand, assuming compliance with his non-compete covenants, non-compete payments.The total amount of all payments will ultimately aggregate to $715,000 assumingfull compliance.

(3)          The amount in the bonuscolumn for Jon T. Stoltz includes $86,938 as a payout from the CascadeIncentive Plan, $1,500 as a one-time performance bonus, $13,991 as a cash bonusper the 401(k) profit sharing plan and $4,702 as a cash bonus in lieu ofexercising stock options per the 1998 Stock Incentive Plan.

(4)          The amount in the bonuscolumn for Larry C. Rosok includes $75,396 as a payout from the CascadeIncentive Plan, $4,918 as a cash bonus per the 401(k) profit sharing plan,and a $3,000 one-time performance award.

(5)          The amount in the bonuscolumn for Michael J. Gardner includes $70,784 as a payout for the CascadeIncentive Plan, $751 as a cash bonus per the 401(k) profit sharing plan, a$5,000 one-time performance award and $1,045 as a cash bonus in lieu ofexercising stock options per the 1998 Stock Incentive Plan. Mr. Gardnerwas promoted to Vice President—Operations effective August 1, 2005, andwas designated as an executive officer of the Company by the Board on December 8,2005. Mr. Gardner began employment with the Company in 1991. Amounts inthe table reflect amounts paid after and before his election to Vice President.

(6)          For 2006, the Companyestablished the Cascade Incentive Plan which provides for cash payments toofficers and other salaried employees if the Company is cash-flow neutral asdefined in the plan, and if 

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other operational andearnings targets are achieved. Under the plan, the CEO could earn an additional50% of base salary if his targets were reached and up to 100% of base salary ifthe maximum achievement was reached. For other officers, target achievementlevels would result in awards of 20% to 49% of base pay with a maximum rangefor officers from 40% to 98% of base pay. In addition, the Company has a 401(k) profitsharing plan which provides for payouts, for salaried employees, from 0 to 8%of eligible income. In fiscal 2006, the Company achieved maximum targets,resulting in maximum payouts under each plan.

Prior to 2006, earnings levels required for paymentsunder the short-term incentive plans were not achieved, so there were nopayments under these plans.

Bonuses in 2005 forMessrs. Stoltz and Rosok represent spot bonuses for successful projectachievement.

(7)          Amountsin this column, other than as described above for Messrs. Stevens andDavis, represent the Company’s contribution to the 401(k) Plan. In fiscal2004, accruals under the Company’s Retirement Plan and the ExecutiveSupplemental Retirement Income Plan (each as described below) were frozen. Nofurther benefits will accrue in these plans. To partially offset this reductionin benefits, a non-elective contribution of 4% of eligible pay, a transitioncontribution of 1% to 4% and a profit sharing plan was established for thesalaried employees’ 401(k) Plan.

**Long-Term IncentivePlan Awards in 2006**

Thefollowing table provides information regarding restricted stock grants in thelast fiscal year under the Company’s Long-Term Incentive Plan. There were noother restricted stock or stock option grants in fiscal 2006.

|                 | ** ** | ** ** | ** ** | ** **                  | ** ** | **Period until**     | ** ** | **Estimated Future Payments # of Shares** | ** ** |
|-----------------|------------|------------|------------|-----------------------------|------------|---------------------------|------------|----------------------------------------------------------|------------|
| **Name**        | ** ** | ** ** | ** ** | **Date of Grant** | ** ** | **# of Shares** | ** ** | **Payout**                                               | ** ** | **Threshold** | ** ** | **Target** | ** ** | **Maximum** | ** ** |
| David W Stevens |       |       | 1/11/2006  |                        |       |                      | 9,100      |                                                     |       |   | 3 years |   |   |   | 0 |   |   |   | 3,640 |   |   |   | 9,100 |   |   |
|                 |       |       | 9/14/2006  |                        |       |                      | 6,820      |                                                     |       |   | 3 years |   |   |   | 0 |   |   |   | 2,260 |   |   |   | 6,820 |   |   |
| Rick Davis      |       |       | 1/11/2006  |                        |       |                      | 5,650      |                                                     |       |   | 3 years |   |   |   | 0 |   |   |   | 3,751 |   |   |   | 5,650 |   |   |
|            |       |       | 9/14/2006  |                        |       |                      | 4,075      |                                                     |       |   | 3 years |   |   |   | 0 |   |   |   | 2,241 |   |   |   | 4,075 |   |   |
|                 |            |            |            |                             |            |                           |            |                                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          On January 11,2006, the Company entered into Long-Term Incentive Award Agreements with David W.Stevens and Rick Davis, in which Messrs. Stevens and Davis may receive upto 9,100 and 5,650 shares respectively, after the three year period ending June 30,2008, depending on the Company’s performance in terms of return on equitycompared to a peer group during the period. Target performance is based onbeing ranked fifth in terms of return on equity compared to a peer group ofnine companies.

(2)          On September 14,2006, the Company entered into Long-Term Incentive Award Agreements with DavidW. Stevens and Rick Davis, in which Messrs. Stevens and Davis may receiveup to 6,820 and 4,075 shares respectively, after the three year period ending June 30,2009, depending on the Company’s performance in terms of return on equitycompared to a peer group during the period. Target performance is based onbeing ranked fourth in terms of return on equity compared to a peer group ofnine companies.

(3)          Inthe event of a change in control of the Company during the period, as definedin the agreement, Mr. Stevens will be entitled to receive the cash valueof the total number of shares that may be awarded. Mr. Davis departed theCompany as of November 26, 2006; therefore, he is no longer eligible for apayout under the Long-Term Incentive Plan.

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**Aggregated Option Exercises In Last Fiscal Year AndFiscal Year-End Option Values**

| ** **          | ** ** | **Shares** | ** ** | ** **                              | ** ** | **Number of Shares  Underlying Unexercised  Options at Fiscal Year-End (#)** | ** ** | **Value of Unexercised  In-The-Money Options  at Fiscal Year-End ($)(1)** | ** ** |
|---------------------|------------|------------|------------|-----------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|------------|
| **Name**            | ** ** | ** ** | ** ** | **Acquired on  Exercise (#)** | ** ** | **Value  Realized $)**                                                                                     | ** ** | **Exercisable/Unexercisable**                                                                           | ** ** | **Exercisable/  Unexercisable** | ** ** |
| Michael J.  Gardner |       |       |       |                                    |       |                                                                                                            |       |                                                                                                    |       |   | 1,000  0 |   |   |   | 5,660  0 |   |   |
| Larry C. Rosok      |       |       | 4,000      |                                    |       |                                                                                                            | 5,420      |                                                                                                    |       |   | 4,000  0 |   |   |   | 22,640  0 |   |   |
| Jon T. Stoltz       |       |       | 0          |                                    |       |                                                                                                            | 0          |                                                                                                    |       |   | 6,000  0 |   |   |   | 33,960  0 |   |   |
|                     |            |            |            |                                         |            |                                                                                                                 |            |                                                                                                         |            |  |  |  |  |  |  |  |  |  |  |

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(1)          Amountswere calculated based on the difference between the closing sale price of theCommon Stock reported on the New York Stock Exchange on September 30, 2006,which was $26.09, and the aggregate exercise price of the unexercised options.

**RETIREMENT PLANS**

The Company has a noncontributory defined benefitretirement plan for its employees (“Retirement Plan”). Effective October 1,2003, the plan was amended so that no new salaried participants will be addedto the plan and no additional benefits will accrue for existing participantswho are salaried employees. To be eligible for participation in the plan, anemployee must have completed one year of service, per plan definition, as of October 1,2003, and have been at least 21 years of age at that time. Eachparticipant’s benefits are fully vested after 5 years of employment. Thelevel of benefits is determined by a formula, described below, related to yearsof service and average monthly earnings over certain time periods. Coveredearnings include straight salary or hourly compensation, 75% of commissionsand, for hourly employees, 30% of overtime pay. Effective January 1, 2007,no new field operations bargaining unit employees will be added to the plan andfor field operations bargaining unit employees hired before that date, pensionbenefits will accrue a benefit of $107 per month for each full year of servicerather than the prior formula that was based on years of service and averagemonthly earnings.

Covered compensation levels for executive officers arelimited to $200,000 for calendar year 2003 when benefit accruals were frozenfor salaried employees. Benefits are not subject to reduction for SocialSecurity or any other benefits. The net periodic pension cost for the plan iscomputed on an actuarial basis and aggregated $2,158,000 for all participantsfor the fiscal year ended September 30, 2006.

The amount of the monthly past service benefit underthe Retirement Plan is equal to 1.5% of the participant’s average monthlyearnings for the five-year period ended December 31, 1998, multiplied bythe participant’s years of service before 1999. The benefit for each year ofservice after 1998 is 2% of monthly compensation in lieu of the previous 1.5%.

The Company also has adefined-contribution 401(k) plan for its employees (“401(k) Plan”).For salaried employees, the Company provides a match of $.50 per $1.00 investedup to 6% of eligible pay. Effective July 1, 2006, the matchingcontribution for salaried non-bargaining unit employees was increased to $.75per $1.00 invested up to 6% of eligible pay. Also, salaried employees receive anon-elective contribution of 4% of eligible pay. In addition, salariedemployees who were employed as of June 30, 2003 when the Retirement Planwas amended receive a transition contribution to the 401(k) Plan of 1% to4% depending on their age and length of service. Field operations bargainingunit employees currently receive a match of $.75 per $1.00 invested up to 6% ofeligible pay. Effective January 1, 2007, the matching contributionfor field operations bargaining unit employees hired before that date, will be 

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reducedto $.25 per $1.00 invested. Field operations bargaining unit employees hiredafter January 1, 2007 will receive $.50 per $1.00 invested and anon-elective contribution of 4% of eligible pay.

**EXECUTIVESUPPLEMENTAL RETIREMENT INCOME**

Officers who became executive officers prior to September 30,2003, including Messrs. Stoltz and Rosok listed in the summarycompensation table above, are participants in an executive supplementalretirement income plan (“Executive Supplemental Retirement Income Plan”) thatprovides retirement, death and disability benefits supplementing the coveragepayable under the Retirement Plan. Effective October 1, 2003, theExecutive Supplemental Retirement Income Plan was amended so that no newparticipants will be added to the plan and no additional benefits will accruefor existing participants. The plan was designed for each participant toreceive retirement plan payments, primary Social Security benefits andsupplemental plan payments each year after retirement age 65 equal, in theaggregate, to 70% of the participant’s highest annual salary during any of thefive years preceding September 30, 2003. The net periodic pension cost forthe plan is computed on an actuarial basis and totaled ($82,000) for the 2005fiscal year. The plan also includes provisions for early retirement andpermanent disability. The Board of Directors may approve early retirement underthe plan without the normally required reduction in the amount of thesupplemental benefit. Participants whose age and number of years of service,when added together, equal at least 90 are automatically eligible for earlyretirement benefits without reduction.

If a participant dies before receiving120 monthly payments under the Executive Supplemental Retirement IncomePlan, the participant’s designated beneficiaries will receive the remainingbalance of the 120 payments. The amount of each monthly payment will be equalto the amount the participant was receiving or was entitled to receive beforedeath, or, if the participant was employed by the Company at death and theresulting payment amount would be larger, the monthly amount will range from$4,000 to $12,000, depending on the officer. This monthly death benefit will bereduced by any monthly benefit payable to the participant’s surviving spouse.The surviving spouse is entitled to a monthly benefit for life equal toone-half of the benefit the participant was entitled to before death.

Vesting under the Executive Supplemental RetirementIncome Plan is determined by years of participation in the plan, beginning withthe date an employee becomes a participant. The plan also provides for partialvesting on a stepped basis, with full vesting based on age and years ofemployment. An executive officer becomes fully vested when one of the followingoccurs: the executive officer reaches age 55 and, if employment endsbefore October 1, 2004, has completed five years of participation underthe plan; or the executive officer dies while employed; or a change in controlof the Company (as defined in the plan).

Thefollowing table shows the estimated combined annual benefits that the executiveofficers named in the summary compensation table above would receive under theRetirement Plan and the Executive Supplemental Retirement Income Plan, assumingthat they retire at age 65. Amounts shown have been reduced by the estimatedamount of Social Security benefits.

| **Name**       | ** ** | ** ** | ** ** | **Present  Age** | ** ** | **Estimated Combined  Annual Benefit** | ** ** |
|----------------|------------|------------|------------|------------------|------------|--------------------------------------------------|------------|
| Jon T. Stoltz  |       |       | 59         |             |       |                                             | $          | 93,000 |   |   |
| Larry C. Rosok |       |       | 50         |             |       |                                             | $          | 78,000 |   |   |

 

The Company has developedthe Executive Deferred Compensation Plan that is designed, using reasonableassumptions, to provide at retirement, at the normal retirement age 65 with 15years of service, replacement pay equal to 55% of his average base salaryduring the three consecutive fiscal years of the Company during which his basesalary was highest, after taking into account benefits under any retirementbenefits payable to him under any qualified or nonqualified retirement plansponsored by the Company or 

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hisprior employer and Social Security benefits. In fiscal 2006, the onlyparticipants were David W. Stevens and Rick Davis. In accordance with the Plan,accounts for Messrs. Stevens and Davis were credited with a netcontribution amount of $21,000 and $33,600 respectively in fiscal 2006. Mr. Davisdeparted the Company as of November 26, 2006, therefore he is no longereligible for a payout under the Executive Deferred Compensation Plan.

**EMPLOYMENTAGREEMENTS**

The Company has employmentagreements with three of the Company’s executive officers, Messrs. Stevens,Davis and Rosok, who are named in the summary compensation table above.

**David W. Stevens**

On March 3,2005, the Company entered into an employment agreement with David W. Stevens,pursuant to which Mr. Stevens became employed as the Company’s Presidentand Chief Executive Officer. A copy of Mr. Stevens’ employment agreementwas filed as Exhibit 10.1 to the Company’s Current Report on Form 8-Kfiled on March 9, 2005. Under the terms of the agreement, Mr. Stevenswill receive an annual base salary of not less than $400,000. Other benefitsunder the employment agreement include the following:

·       15,000shares of the Company’s Common Stock awarded to him under the Company’s 1998Stock Incentive Plan, 5,000 of which will be fully vested upon his first dateof employment, 5,000 of which will vest one year after his date of firstemployment, and 5,000 of which will vest two years after his date of firstemployment.

·       Annualcash incentive compensation ranging from 0% to 108% of Mr. Stevens’ basesalary.

·       Long-termincentive awards no less favorable than that provided to other senior executiveofficers of the Company under any long-term incentive plan adopted by theCompany. Mr. Stevens’ anticipated target award is 20% of his base salary.

·       Supplementalretirement benefits, as described in further detail in the section aboveentitled “Executive Supplemental Retirement Income”.

·       Relocationallowance that includes reasonable closing costs in connection with the sale ofMr. Stevens’ current residence as well as other expenses involved in therelocation of his residence. Expenses incurred due to relocation were primarilyincurred in fiscal 2005.

·       Amonthly allowance of $1,500 to provide for the lease or purchase of a car andthe payment of club dues and other such expenses.

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Theemployment agreement, and Mr. Stevens’ employment, will terminate uponMr. Stevens’ death and may be terminated by the Company in the event ofMr. Stevens’ disability. In addition, the Company may terminateMr. Stevens’ employment at any time for Cause (as defined in theemployment agreement) or for any other reason upon thirty days prior writtennotice. Mr. Stevens may terminate the employment agreement at any time andfor any reason upon thirty days prior written notice. In the event that the employmentof Mr. Stevens is terminated, the employment agreement provides that he(or his estate, as the case may be) will be entitled to the following, as morefully described in the employment agreement:

·       Inthe event that the employment of Mr. Stevens is terminated upon his deathor by the Company due to his disability: (i) his accrued but unpaid basesalary and vacation through his termination date; (ii) any unpaid annualincentive compensation earned but not paid in the previous year; (iii) anyamounts otherwise payable to Mr. Stevens under the Company’s benefit plansand programs; and (iv) an amount in lieu of any annual incentivecompensation for the current year.

·       Inthe event Mr. Stevens terminates his employment other than for Good Reason(as defined in the employment agreement): the amounts payable due to death ordisability under (i) through (iii) above. In addition, any shares inthe Company that have not vested will be forfeited.

·       Inthe event that the employment of Mr. Stevens is terminated by the Companywithout Cause, or Mr. Stevens elects to terminate his employment for GoodReason or within one year following a Change of Control (as defined in theemployment agreement), Mr. Stevens will not be entitled to benefits underthe Company’s severance plan but will be entitled to the following:(A) the amounts payable due to death or disability under (i) through(iii) above; (B) a separation payment in the amount of 0.75 timesMr. Stevens’ annualized base salary plus the average of the annualincentive compensation paid in the two fiscal years prior to the year in whichhis termination occurs; and (C) a non-compete payment in the amount of1.25 times Mr. Stevens’ annualized base salary plus the average of theannual incentive compensation paid in the two fiscal years prior to the year inwhich his termination occurs. In the event that two fiscal years have not beencompleted, the annual incentive compensation shall be deemed to be the entirepotential cash incentive compensation. Mr. Stevens and his immediatefamily also will be entitled to life and welfare benefits substantially similarto those provided to the Company’s senior executive officers for a period of 18months after Mr. Stevens’ termination. Upon approval of the Governance,Nominating and Compensation Committee, any unvested stock options held byMr. Stevens will be deemed fully vested and exercisable for a period ofone year after his termination.

·       Inthe event that the employment of Mr. Stevens is terminated by the Companyfor Cause, he will be entitled to receive his accrued but unpaid base salaryand any amounts otherwise payable to him under the Company’s benefit plans andprograms.

As a condition of hisemployment, Mr. Stevens has agreed not to compete with the Company orsolicit customers or employees of the Company for a period of two yearsfollowing termination of his employment with the Company. These non-compete andnon-solicitation agreements, however, may not be enforceable in somejurisdictions or may be enforceable only in part. Under Mr. Stevens’employment agreement, the Company also has agreed to indemnify and holdharmless Mr. Stevens against damages or other losses resulting from hisgood faith performance of his duties and obligations under the employmentagreement. This right of indemnification shall be in addition to any rights ofindemnification provided in the Company’s Articles of Incorporation and Bylawsor under applicable law.

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**Rick Davis**

On June 16, 2005, theCompany entered into an employment agreement with Rick Davis, when Mr. Davisbecame employed as the Company’s Chief Financial Officer. However, Mr. Davishas departed the Company as of November 26, 2006. A copy of Mr. Davis’ employment agreement was filed as Exhibit 10.1to the Company’s Current Report on Form 8-K filed on June 17,2005. As disclosed in the summary of Executive Compensation, Mr. Davisexecuted a release, consistent with the process set forth in his employmentagreement, pursuant to which Mr. Davis will receive a separation paymentand, assuming compliance with his non-compete covenants, non-compete payments.The total amount of all payments will ultimately aggregate to $715,000 assumingfull compliance. 

**Larry C. Rosok**

On July 19, 1995, theCompany entered into an employment agreement with Larry C. Rosok. Mr. Rosok’semployment agreement is designed to assure that he will continue to functioneffectively and without distraction if uncertainties regarding the futurecontrol of the Company should arise. Upon a change in control of the Company orduring the pendency of certain offers for a change in control, as these termsare defined in the employment agreement, he is entitled to receive theseverance benefits described below if the Company terminates his employmentother than for cause as defined in the employment agreement. In addition, Mr. Rosokis entitled to receive severance benefits for three years after a change incontrol of the Company if the Company terminates his employment other than forcause or if he terminates his employment for good reason. Under the terms of Mr. Rosok’semployment agreement, the severance payments are equal to three times his basesalary and incentive compensation at the time the change in control occurs, butare reduced to the extent required to avoid subjecting the payments to penaltytaxes on excess parachute payments. In addition, under the employmentagreement, Mr. Rosok is entitled to continue to participate in health,life, and disability plans for which he is eligible at the time of terminationof his employment. Severance payments will terminate when his benefits arevested under the Executive Supplemental Retirement Income Plan. Mr. Rosok’semployment agreement is automatically extended on December 31 of each yearfor a period of one year unless either the Company or Mr. Rosok elects notto extend the term by giving the other party 30 days’ notice prior to yearend. The term of the employment agreement is extended automatically for aperiod of three years upon a change in control of the Company. Mr. Rosok’semployment agreement terminates if his employment under the agreement isterminated before a change in control occurs and while there is no offerpending for a change in control, except as noted above.

**Michael J. Gardner**

On January 11, 2006, theCompany entered into an employment agreement with Michael J. Gardner. Mr.Gardner’s employment agreement is designed to assure that he will continue tofunction effectively and without distraction if uncertainties regarding thefuture control of the Company should arise. Upon a change in control of theCompany or during the pendency of certain offers for a change in control, asthese terms are defined in the employment agreement, he is entitled to receivethe severance benefits described below if the Company terminates his employmentother than for cause as defined in the employment agreement. In addition, Mr.Gardner is entitled to receive severance benefits after a change in control ofthe Company if the Company terminates his employment other than for cause or ifhe terminates his employment for good reason. Under the terms of Mr. Gardner’semployment agreement, the severance payment is equal to two times his basesalary and incentive compensation at the time the change in control occurs, butis reduced to the extent required to avoid subjecting the payments to penaltytaxes on excess parachute payments. In addition, under the employmentagreement, Mr. Gardner is entitled to continue to participate in health, life,and disability plans for which he is eligible at the time of termination of hisemployment. Mr. Gardner’s employment agreement is automatically extended onDecember 31 of each 

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year fora period of one year unless either the Company or Mr. Gardner elects not toextend the term by giving the other party 30 days’ notice prior to year end.The term of the employment agreement is extended automatically for a period ofthree years upon a change in control of the Company. Mr. Gardner’semployment agreement terminates if his employment under the agreement isterminated before a change in control occurs and while there is no offerpending for a change in control, except as noted above.

**DIRECTORCOMPENSATION**

For the fiscal year ended September 30,2006, the Company paid each non-employee director an annual stipend of $5,000 aswell as a fee of $500 for each Board or committee meeting attended or acommittee fee of $250 if the committee meeting was held on the same day as aBoard meeting. Mr. Pinnt receives an additional stipend of $2,500 permonth for his service as Chairman of the Board. The Chairs of the PensionCommittee and the Governance, Nominating and Compensation Committee eachreceives an additional annual stipend of $5,000. The Chair of the AuditCommittee receives an additional annual stipend of $7,500. Directors named as “financialexperts” receive an additional annual stipend of $3,000 as long as they are notalready being compensated for being the Chair of the Audit Committee or theChairman of the Board. Ms. Borland and Mr. Pinnt are designated asfinancial experts, but serve as the Chair of the Audit Committee and Chairmanof the Board, respectively, so they receive no additional compensation forbeing designated as financial experts. Employee directors receive no additionalcompensation for serving as Directors. Mr. Stevens currently is the onlyemployee director.

External continuingeducation for directors, including expenses for materials and travel, obtainedthrough board education programs at universities and elsewhere will be paid bythe Company at up to $1,000 per fiscal year. The Chair of the Governance,Nominating and Compensation Committee may approve reimbursement greater than$1,000 per year. Internal continuing education through Company meetings ororientations shall be compensated at the same rate as attendance at a Boardmeeting.

Each non-employee directorwas also entitled to receive 1000 shares of the Company’s Common Stock forservice in fiscal 2006 pursuant to the 2000 Director Stock Award Plan asamended in 2006 and approved at the annual meeting of Shareholders on February 17,2006. Pursuant to the plan, each non-employee director may elect to deferreceipt of his or her shares until he or she is no longer a member of theBoard. Mr. Ederer elected to defer receipt of his shares for fiscal 2006. 

**COMPENSATIONCOMMITTEE INTERLOCKS AND INSIDER PARTICIPATION**

During fiscal 2006, Messrs. Burnham,Ederer, Thomas and Cronin served on the Governance, Nominating and CompensationCommittee. Members of the Governance, Nominating and Compensation Committee receiveno compensation from the Company other than Board-approved fees forservice on this or other committees or on the Board. During fiscal year 2006,none of our executive officers served on the compensation committee (or itsequivalent) or board of directors of another entity whose executive officer(s) servedon our Governance, Nominating and Compensation Committee.

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**REPORTOF THE GOVERNANCE, NOMINATING AND COMPENSATION COMMITTEE TO SHAREHOLDERS**

The Governance, Nominatingand Compensation Committee of the Board of Directors assists the Board infulfilling its responsibility to shareholders, potential shareholders, and theinvestment community relating to oversight of corporate governance issues,executive and board succession, and executive and board compensation. TheCommittee is composed of four independent non-employee directors.

**Report on Executive Compensation**

TheCommittee is responsible for reviewing the compensation levels for allexecutive officers of the Company and making recommendations to the Boardconcerning officer salary levels. The Committee’s review includes an assessmentof the overall management of the Company and the officers’ ability to achieve areasonable growth of shareholder value under a variety of conditions. TheCommittee uses both qualitative and quantitative measures when performing itsduties of recommending officer compensation levels to the Board of Directors,which may be summarized as follows: 

·       Officercompensation should be comparable with compensation paid to officers of similarcompanies, particularly those the Company must compete with in attracting andretaining skilled and competent individuals. 

·       Anofficer should also be compensated for his or her contributions to theperformance of the Company. In evaluating performance, the Committee considersthe Company’s return on shareholder’s equity, in relation to a peer group ofcompanies and factors affecting net income. 

·       Anofficer’s progress toward achieving corporate goals should be considered.

In 2006, the Committeerecommended and the Board approved a short-term incentive program, the “CascadeIncentive Plan.” The Cascade Incentive Plan provides for cash payments toofficers and other salaried employees if the Company is cash-flow neutral asdefined in the plan, if operational targets relating to safety and customerservice are attained and if earnings targets are achieved. In 2006, the CEOcould earn an additional 50% of base salary if his targets are reached and upto 100% of base salary if the maximum achievement is reached. For otherofficers, target achievement levels would result in awards of 24% to 49% ofbase pay with a maximum range for officers from 48% to 98% of base pay. Inaddition, the Committee recommended and the Board approved a 401(k) ProfitSharing Plan which provides for payouts if the Company is cash flow neutral andif earnings targets are achieved. The midpoint payout under the 401(k) ProfitSharing Plan is 4% and the range of payouts varies from 0 to 8%.

In 2006 the Committee alsorecommended and the Board approved a long-term incentive plan that grantsrestricted stock to selected executive officers based on performance andretention. Under the plan, the participants may receive shares of Common Stockof the Company after a three-year period, depending on the Company’sperformance in terms of return on equity compared to a peer group during theperiod. At present, the only participant is David W. Stevens.

In addition, the Board hasadopted a non-qualified executive supplemental retirement plan. The Board willdesignate participants from time-to-time. At present, the only participant isDavid W. Stevens. The plan is a defined contribution plan that provides for aretirement income target of 55% of final pay after taking into considerationbenefits earned from other retirement plans and Social Security.

**Summary of Executive Compensation Changes for 2007**

The Committee and the Board have made several changesin executive compensation for fiscal 2007. The Committee recommended and theBoard approved a short-term incentive program, the “Cascade Incentive Plan,”with some modifications from 2006. The Cascade Incentive Plan provides for cashpayments to officers and other salaried employees if the Company comes in belowits capital budget target, 

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ifoperational targets relating to safety and customer satisfaction are attained,and if earnings targets are achieved. Under the Cascade Incentive Plan, the CEOcould earn an additional 50% of base salary if his targets are reached and upto 100% of base salary if the maximum achievement is reached. For otherofficers, target achievement levels would result in awards of 25% of base paywith a maximum range for officers of 50% of base pay. In addition, theCommittee recommended and the Board approved a 401(k) Profit SharingPlan which provides for payouts if the Company is cash flow neutral and ifearnings targets are achieved. The midpoint payout under the 401(k) ProfitSharing Plan is 4% and the range of payouts varies from 0 to 8%.

**Compensation for David W. Stevens**

Mr. David W. Stevensis President and Chief Executive Officer of Cascade Natural Gas Corporation. Mr. Stevenswas recruited to this position and began on April 1, 2005. In order torecruit and retain Mr. Stevens, the Company considered market-based total compensationas well as Mr. Stevens’ knowledge and achievements in executive levelpositions in the natural gas industry. Going forward, the Committee willconsider the following contributions in establishing his salary, short-termincentive, and long-term incentives: impact on enhancing shareholder value, andinfluence on the direction and performance of the Company consistent with theCompany’s core values including safety, customer service and the attainment ofother corporate goals. 

For 2006, Mr. Stevensgrant of restricted stock in the Long Term Incentive Plan was based onreasonable expectations with regard to how the Company would perform relativeto its peers, as well as providing an incentive to create long-term value forthe Company and in compliance with his employment agreement. Mr. Stevensbase salary for 2006 and salary increase for 2006 was based on achieving goalsincluding positive results in improving the financial performance of theCompany while controlling capital spending and performing consistently with theCompany’s core values.

**Applicable Tax Code Provision**

Due to the Company’scompensation structure, the Committee has not deemed it necessary thus far toadopt a policy regarding the deductibility of certain executive compensationunder federal tax laws.

**Governance, Nominating and Compensation CommitteeMembers**

| Douglas G. Thomas, Chair |   | David A. Ederer        |
|--------------------------|--------|------------------------|
| Thomas E. Cronin         |   | Carl Burnham, Jr. |

 

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**STOCK PERFORMANCEGRAPH**

Thefollowing graph compares the total cumulative returns to an investor in (i) theCompany’s Common Stock, (ii) the Standard & Poor’s UtilitiesIndex and (iii) the Standard & Poor’s 500 Index, each for theperiod from October 1, 2001 through September 30, 2006. The graphassumes that $1,000 was invested on September 30, 2001 in the Common Stockand in each of the above-mentioned indices and that all dividends werereinvested. The S&P Utilities Index encompasses companies consideredelectric, gas or water utilities, or companies that operate as independentproducers and/or distributors of power.

| ** ** | ** ** | **CGC** | ** ** | **S&P Utilities** | ** ** | **S&P 500** | ** ** |
|------------|------------|---------|------------|----------------------------|------------|----------------------|------------|
| 9/30/01    |       | $       | 1,000      |                       |       | $                    | 1,000      |   |   |   | $ | 1,000 |   |   |
| 9/30/02    |       | $       | 956        |                       |       | $                    | 647        |   |   |   | $ | 796 |   |   |
| 9/30/03    |       | $       | 1,000      |                       |       | $                    | 792        |   |   |   | $ | 990 |   |   |
| 9/30/04    |       | $       | 1,135      |                       |       | $                    | 946        |   |   |   | $ | 1,126 |   |   |
| 9/30/05    |       | $       | 1,220      |                       |       | $                    | 1,310      |   |   |   | $ | 1,264 |   |   |
| 9/30/06    |       | $       | 1,529      |                       |       | $                    | 1,372      |   |   |   | $ | 1,400 |   |   |

 

**ComparativeMarket Peformance**

**TotalReturns**

**PeriodsEnded September 30, 2006**

| ** **  | ** ** | **CGC** | ** ** | **S&P Utilities** | ** ** | **S&P 500** | ** ** |
|-------------|------------|---------|------------|----------------------------|------------|----------------------|------------|
| Quarter     |       | 24.86   | %          |                       | 6.10       | %                    |       |   | 5.65 | % |   |
| One Year    |       | 25.30   | %          |                       | 4.76       | %                    |       |   | 10.76 | % |   |
| Two Years   |       | 16.04   | %          |                       | 20.45      | %                    |       |   | 11.51 | % |   |
| Three Years |       | 15.20   | %          |                       | 20.11      | %                    |       |   | 12.26 | % |   |
| Five Years  |       | 8.86    | %          |                       | 6.53       | %                    |       |   | 6.96 | % |   |

 

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**Item 12.**                 SecurityOwnership of Certain Beneficial Owners and Management and Related Stockholder Matters

**SECURITY OWNERSHIPOF CERTAIN BENEFICIALOWNERS AND MANAGEMENT**

Thefollowing table shows certain information regarding the beneficial ownership,as of September 30, 2006 of the Company’s Common Stock by (a) eachdirector, the Chief Executive Officer, and the other four most highly paidexecutive officers of the Company and (b) all current directors andexecutive officers as a group. The Company is not aware of any beneficial ownerof 5% or more of the Common Stock. Except as otherwise indicated in the table,the Company believes the beneficial owners of the shares listed below have soleinvestment and voting power with respect to the shares.

| **Directors and  Executive Officers**               | ** ** | ** ** | ** ** | **Current Beneficial  Holdings(1)** | ** ** | **Shares Subject to  Exercisable Options** | ** ** | **Total** | ** ** | **Percentage of  Common Stock** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|------------------------------------------|------------|-----------------------------------------------------------|------------|-----------|------------|-------------------------------------------|------------|
| Scott M. Boggs                                                |       |       | 6,681      |                                     |       |                                                      | 0          |      |       | 6,681                                     |       |   | * |   |   |
| Pirkko H. Borland                                             |       |       | 5,500      |                                     |       |                                                      | 0          |      |       | 5,500                                     |       |   | * |   |   |
| Carl  Burnham, Jr.(3).                                   |       |       | 18,288     | (2)                                      |       |                                                      | 0          |      |       | 18,288                                    | (2)        |   | * |   |   |
| Thomas E. Cronin                                              |       |       | 9,612      |                                     |       |                                                      | 0          |      |       | 9,612                                     |       |   | * |   |   |
| Rick Davis                                                    |       |       | 5,000      |                                     |       |                                                      | 0          |      |       | 5,000                                     |       |   | * |   |   |
| David A. Ederer                                               |       |       | 8,932      | (2)                                      |       |                                                      | 0          |      |       | 8,932                                     | (2)        |   | * |   |   |
| Michael J.  Gardner(4)                                        |       |       | 2,790      |                                     |       |                                                      | 1,000      |      |       | 3,790                                     |       |   | * |   |   |
| Larry L. Pinnt                                                |       |       | 14,438     |                                     |       |                                                      | 0          |      |       | 14,438                                    |       |   | * |   |   |
| Brooks G. Ragen                                               |       |       | 27,200     | (2)                                      |       |                                                      | 0          |      |       | 27,200                                    | (2)        |   | * |   |   |
| Larry C. Rosok                                                |       |       | 7, 628     |                                     |       |                                                      | 4,000      |      |       | 11, 628                                   |       |   | * |   |   |
| David W. Stevens                                              |       |       | 17,500     |                                     |       |                                                      | 0          |      |       | 17,500                                    |       |   | * |   |   |
| Jon T. Stoltz                                                 |       |       | 9,183      |                                     |       |                                                      | 6,000      |      |       | 15,183                                    |       |   | * |   |   |
| Douglas G. Thomas                                             |       |       | 5,188      |                                     |       |                                                      | 0          |      |       | 5,188                                     |       |   | * |   |   |
| All directors and  executive officers as a group (15 persons) |       |       | 143,824    |                                     |       |                                                      | 15,000     |      |       | 158, 824                                  |       |   | 1.38 |   |   |

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*                    Less than onepercent.

(1)          Includesshares held in the Company’s Employee Retirement Savings Plan and Trust (the “401(k) Plan”)in the following amounts:

| **Name**            | ** ** | ** ** | ** ** | **Shares Held  in  401(k) Plan** | ** ** |
|---------------------|------------|------------|------------|--------------------------------------------|------------|
| Michael J.  Gardner |       |       | 2,790      |                                       |       |
| Larry C. Rosok      |       |       | 2,525      |                                       |       |
| Jon T. Stoltz       |       |       | 6,365      |                                       |       |

 

(2)          Includes shares awardedunder the 1991 and 2000 Director Stock Award Plans to Messrs. Ederer,Ragen and Burnham of 8,914, 1,308 and 581 shares, respectively, includingreinvested dividends, as to which receipt has been deferred until they are nolonger directors.

(3)          Mr. Burnham’sshares include 2,250 shares held in The Margaret Burnham Trust, a revocabletrust of which Mr. Burnham is the sole trustee and a potential beneficiary.Mr. Burnham disclaims beneficial ownership of these shares except to theextent of his pecuniary interest therein.

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**Change of Control**

The Company entered into adefinitive merger agreement with MDU Resources Group, Inc. on July 8,2006 to be acquired for cash consideration of $26.50 per share. The merger isexpected to be completed after the receipt of regulatory approvals andsatisfaction of other closing conditions, currently anticipated to occur bymid-year 2007. See Part I, Item 1—Business for additional information. 

**Item 13.**                 CertainRelationships and Related Transactions 

We have not engaged in any related party transactionsin 2006 which require disclosure under Item 404 of Regulation S-K, and nosuch transactions are currently proposed.

The Board has adopted standards to determine theindependence of its members under the applicable requirements of the Securitiesand Exchange Commission and the New York Stock Exchange, and has determinedthat all directors are independent under such standards, except for David W.Stevens, President and CEO. Mr. Stevens’ lack of independence relatesentirely to his service as an executive officer of the Company and not from anyother transaction or relationship. The independence standards are listed belowand are available on the Company’s website at *www.cngc.com*.

Standards ofIndependence for Directors:

1.      Independentdirectors shall not have relationships with the Corporation or others thatimpair their exercise of independent judgment in carrying out theirresponsibilities. 

2.      Relationshipsthat might impair independence include material commercial, industrial,banking, consulting, legal, accounting, charitable, and family relationships.

3.      Adirector will not be considered independent if s/he is an employee of theCorporation or receives direct compensation from the Corporation other thandirector and committee fees. 

4.      Adirector will not be considered independent if s/he has an immediate familymember who is an executive officer of the Corporation or who receives more than$100,000 per year in direct compensation from the Corporation. 

5.      Adirector will not be considered independent who is affiliated with or employedby, or whose immediate family member is affiliated with or employed by, in aprofessional capacity, a present or former internal or external auditor of theCorporation. 

6.      Adirector will not be considered independent who is employed, or whose immediatefamily member is employed, as an executive officer of another company if any ofthe Corporation’s present executive officers serve on that company’scompensation committee. 

7.      Adirector will not be considered independent who is an executive officer oremployee, or whose immediate family member is an executive officer, of acompany that makes payments to or receives payments from the Corporation forproperty or services in an amount which in any single fiscal year exceeds thegreater of $1 million or two percent (2%) of such other company’sconsolidated gross revenues.

8.      All directors shall complete, at least annually, and have aduty to update as necessary, written representations as to their relationships,to identify those which might cause them not to be independent as defined bythe Securities and Exchange Commission, the New York Stock Exchange, or thesestandards. 

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**Item 14.**                 PrincipalAccountant Fees and Services 

**INDEPENDENT PUBLICAUDITORS**

Aggregatefees billed to the Company for the fiscal years ended September 30, 2006and 2005 by the Company’s principal accounting firm, Deloitte & ToucheLLP, the member firms of Deloitte Touche Tohmatsu, and their respectiveaffiliates (collectively, “Deloitte & Touche”) were as follows:

| ** **                          | ** ** | **Fiscal Year Ended  September 30,** | ** ** |
|-------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                          | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| Audit Fees(a)                       |       | $                                                   | 469,326    |   | $ | 609,475 |   |
| Audit-Related  Fees(b)              |       | 80,029                                              |       | 56,543 |   |
| Total Audit and  Audit-Related Fees |       | 549,355                                             |       | 640,235 |   |
| Tax Fees(c)                         |       | 0                                                   |       | 10,360 |   |
| All other Fees                      |       | 0                                                   |       | 0 |   |
| Total Fees                          |       | $                                                   | 549,355    |   | $ | 650,595 |   |

----

(a)           Includes $232,741 feesin 2006 and $294,878 in 2005 for the review of the Company’s internal controlsover financial reporting in compliance with the Sarbanes-Oxley Act of 2002.

(b)          Includes fees in 2005and 2006 for benefit plan audits.

(c)           Includes fees in 2005for preparation of amended tax returns for the Company.

All such fees wereapproved by the Audit Committee in accordance with the policies set forthbelow.

**Pre-Approval ofServices**

All audit and audit-relatedservices and tax services provided by the independent auditor must be pre-approvedby the Audit Committee. The independent auditor will submit an engagement planannually which may propose:

·       auditservices for the Company and subsidiaries;

·       reviewof annual reports on Form 10-K and issuance of audit report on financialstatements;

·       consents,comfort letters, reviews of registration statements and similar services thatincorporate or include the audited financial statements of the Company;

·       employeebenefit plan audits;

·       accountingconsultations and support related to GAAP;

·       attendanceat annual shareholders’ meeting, Audit Committee meetings, and phoneconferences;

·       recommendationsissued to management;

·       reviewof interim financial information on Form 10-Q.

Other audit-relatedwork must be approved by the Audit Committee on a case-by-case basis. All otherfees, including tax fees, are also pre-approved by the Audit Committee.

The Audit Committee may pre-approve an audit or audit-relatedservice at any time in advance of the activity unless the SEC or the AccountingOversight Board specifies a period of time in advance of which an approval mustbe granted. The Audit Committee may delegate to one or more designated membersof the Audit Committee the authority to grant required pre-approvals. Thedecisions of any member to whom authority is delegated to pre-approve an audit-relatedactivity will be reported to the full Audit Committee at each of its scheduledmeetings.

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On a quarterly basis theAudit Committee will review services provided and fees of the independentauditor. This quarterly review will include all services provided by theindependent auditor whether approved in the annual engagement plan orotherwise.

**PART IV**

**Item 15.**                 Exhibits,Financial Statement Schedules

| (a)    |   | 1.     | Consolidated Financial Statements:                           |
|--------|--------|--------|--------------------------------------------------------------|
|   |   |   | Consolidated  Statements of Income and Comprehensive Income  |   | 31 |
|   |   |   | Consolidated  Balance Sheets                                 |   | 32 |
|   |   |   | Consolidated  Statements of Common Shareholders’ Equity |   | 34 |
|   |   |   | Consolidated  Statements of Cash Flows                       |   | 35 |
|   |   |   | Notes  to Consolidated Financial Statements                  |   | 36 |
|   |   | 2.     | Consolidated Financial  Statement Schedule:                  |

 

**SCHEDULE II**

**CASCADE NATURAL GAS CORPORATIONVALUATION AND QUALIFYING ACCOUNTS**

| ** **                        | **Column A** | ** **                    | ** ** | **Column B**                    | ** ** | **Column C**   | ** ** | **Column D**      | ** ** | **Column E**       | ** ** |
|-----------------------------------|-------------------|-------------------------------|------------|--------------------------------------|------------|---------------------|------------|------------------------|------------|-------------------------|------------|
| ** **                        | ** **        | ** **                    | ** ** | **Additions**                        | ** ** | ** **          | ** ** | ** **             | ** ** |
| ** **                        | ** **        | **Balance at**           | ** ** | **Charged to**                  | ** ** | **Charged to** | ** ** | ** **             | ** ** | **Balance at**     | ** ** |
| **Description**                   | ** **        | **Beginning  of Period** | ** ** | **Costs and  Expenses**         | ** ** | **Other  Accounts** | ** ** | **Deductions  (Note)** | ** ** | **End of  Period** | ** ** |
| ** **                        | ** **        | ** **                    | ** ** | **(dollars in thousands)** | ** ** | ** **          | ** ** | ** **             | ** ** |
| Allowance for Doubtful  Accounts: |              |                          |       |                                 |       |                |       |                   |       |                    |       |   |   |   |   |   |   |   |   |
| Year ended:                       |              |                          |       |                                 |       |                |       |                   |       |                    |       |   |   |   |   |   |   |   |   |
| September 30, 2004           |              |                          | $          | 877                                  |       |                |       | 970                    |       |                    |       |   |   | 819 |   |   |   | $ | 1,028 |   |   |
| September 30, 2005           |              |                          | $          | 1,028                                |       |                |       | 1,297                  |       |                    |       |   |   | 1,006 |   |   |   | $ | 1,319 |   |   |
| September 30, 2006           |              |                          | $          | 1,319                                |       |                |       | 2,000                  |       |                    |       |   |   | 1,176 |   |   |   | $ | 2,143 |   |   |
| Reserve—Notes  Receivable:   |              |                          |       |                                 |       |                |       |                   |       |                    |       |   |   |   |   |   |   |   |   |
| September 30, 2004           |              |                          | $          | 143                                  |       |                |       | 5                      |       |                    |       |   |   | — |   |   |   | $ | 148 |   |   |
| September 30, 2005           |              |                          | $          | 148                                  |       |                |       | 3                      |       |                    |       |   |   | — |   |   |   | $ | 151 |   |   |
| September 30, 2006           |              |                          | $          | 151                                  |       |                |       | 41                     |       |                    |       |   |   | — |   |   |   | $ | 192 |   |   |

 

Note: Accounts written off, net of recoveries

|  |   | 3. | Exhibits:   Reference is made to the index to exhibits following the signature  page of this report. Each management contract or compensatory plan or  arrangement required to be filed as an exhibit to this report is identified  in the list. |
|--|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.
|                       | CASCADE  NATURAL GAS CORPORATION |
|-----------------------|----------------------------------|
| December 7, 2006 |                             | By | /s/ DAVID W. STEVENS |
| Date                  |                             |   |   | David W. Stevens |
|                  |                             | * * | *President and Chief Executive Officer* |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the Registrant and inthe capacities and on the dates indicated:

| /s/ DAVID W. STEVENS   |   | President, and Chief Executive Officer |   | December 7,  2006 |
|------------------------|--------|----------------------------------------|--------|------------------------|
| David W. Stevens       |   | (Principal Executive Officer)          |   | Date                   |
| /s/ JAMES  E. HAUG     |   | Chief Accounting Officer               |   | December 7,  2006 |
| James E. Haug          |   | (Principal Financial Officer and       |   | Date                   |
|                   |   | Principal Accounting Officer)          |   |                   |
| /s/ LARRY  L. PINNT    |   | Chairman of the Board of  Directors    |   | December 7,  2006 |
| Larry L. Pinnt         |   |                                   |   | Date                   |
| /s/ SCOTT  M. BOGGS    |   | Director                               |   | December 7,  2006 |
| Scott M. Boggs         |   |                                   |   | Date                   |
| /s/ PIRKKO  H. BORLAND |   | Director                               |   | December 7,  2006 |
| Pirkko H. Borland      |   |                                   |   | Date                   |
| /s/ CARL  BURNHAM, JR  |   | Director                               |   | December 7,  2006 |
| Carl Burnham, Jr. |   |                                   |   | Date                   |
| /s/ THOMAS  E. CRONIN  |   | Director                               |   | December 7,  2006 |
| Thomas E. Cronin       |   |                                   |   | Date                   |
| /s/ DAVID  A. EDERER   |   | Director                               |   | December 7,  2006 |
| David A. Ederer        |   |                                   |   | Date                   |
| /s/ BROOKS  G. RAGEN   |   | Director                               |   | December 7,  2006 |
| Brooks G. Ragen        |   |                                   |   | Date                   |
| /s/ DOUGLAS  G. THOMAS |   | Director                               |   | December 7,  2006 |
| Douglas G. Thomas      |   |                                   |   | Date                   |

 

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**INDEXTO EXHIBITS**

| Exhibit No | ** ** | ** **                                                                                                                                                                                                                                                                                                                                          | ** ** | **Description** |
|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
| 2          |       | Agreement and Plan of  Merger by and among MDU Resources Group, Inc., Firemoon  Acquisition, Inc., and Cascade Natural Gas Corporation dated as of  July 8, 2006. Incorporated by reference to Exhibit 2.1 to the  Registrant’s Current Report on Form 8-K dated July 8, 2006.                                   |
| 3.1        |       | Restated Articles  of Incorporation of the Registrant as amended through March 28, 1996.  Incorporated by reference to Exhibit 3.1 to the Registrant’s current  report on Form 8-K filed July 19, 1996.                                                                                                                    |
| 3.2        |       | Amended and  Restated Bylaws of the Registrant. Incorporated by reference to the  Registrant’s Current Report on Form 8-K dated October 27,  2006.                                                                                                                                                                                   |
| 4.1        |       | Indenture dated  as of August 1, 1992, between the Registrant and The Bank of New York  relating to Medium-Term Notes. Incorporated by reference to Exhibit 4 to  the Registrant’s current report on Form 8-K dated August 12,  1992.                                                                                      |
| 4.2        |       | First  Supplemental Indenture dated as of October 25, 1993, between the  Registrant and The Bank of New York relating to Medium-Term Notes and the  7.5% Notes due November 15, 2031. Incorporated by reference to  Exhibit 4 to the Registrant’s quarterly report on Form 10-Q  for the quarter ended June 30, 1993. |
| 4.3        |       | Second  Supplemental Indenture, dated January 25, 2005, between the Company and  The Bank of New York, as trustee. Incorporated by reference to  Exhibit 4.1 to the Registrant’s current report on Form 8-K  dated January 25, 2005.                                                                                       |
| 10.1       |       | 1998 Stock  Incentive Plan of the Registrant.* Incorporated by reference to  Exhibit 10.1 to the Registrant’s Annual Report on Form 10-K  for the year ended September 30, 1998.                                                                                                                                                |
| 10.1.1     |       | First Amendment  to the Cascade Natural Gas Corporation 1998 Stock Incentive Plan dated  January 24, 2002.* Incorporated by reference to Exhibit 99 to the  Registrant’s 2002 Registration Statement on Form S-8 for the 1998  Stock Incentive Plan.                                                                            |
| 10.1.2     |       | Second Amendment  to Cascade Natural Gas Corporation 1998 Stock Incentive Plan dated  February 16, 2006.* Incorporated by reference to Exhibit 10.1 to  the Registrant’s Current Report on Form 8-K dated  February 17, 2006.                                                                                              |
| 10.1.3     |       | Third Amendment  to Cascade Natural Gas Corporation 1998 Stock Incentive Plan and Second  Amendment to Cascade Natural Gas Corporation 2000 Director Stock Award Plan.*  Incorporated by reference to Exhibit 10.3 to the Registrant’s Current  Report on Form 8-K dated September14, 2006.                                          |
| 10.2       |       | Service Agreement  (Storage Gas Service under Rate Schedule SGS-1) dated January 12,  1994, between Northwest Pipeline Corporation and the Registrant. Incorporated  by reference to Exhibit 10.2 to the Registrant’s Annual Report on  Form 10-K for the year ended December 31, 1993 (1993  Form 10-K).             |
| 10.3       |       | Service agreement  (assigned Storage Gas Service under Rate Schedule SGS-1) dated  January 12, 1994, between Northwest Pipeline Corporation and the  Registrant. Incorporated by reference to Exhibit 10.3 to the  Registrant’s 1993 Form 10-K.                                                                                 |
| 10.4       |       | Service Agreement  (Liquefaction—Storage Gas Service under Rate Schedule LS-1) dated  January 12, 1994, between Northwest Pipeline Corporation and the  Registrant. Incorporated by reference to Exhibit 10.4 to the  Registrant’s 1993 Form 10-K.                                                                         |

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| 10.5    |   | Transaction  Confirmation, dated May 18, 2004, between Enserco Energy Inc., and the  Registrant, to the Base Contract for Sale and Purchase of Natural Gas dated  September 12, 2002 between Enserco and the Registrant. A PORTION OF THIS  AGREEMENT IS SUBJECT TO A REQUEST FOR CONFIDENTIAL TREATMENT. Incorporated by  reference to Exhibit 10.5 to the Registrant’s 2004 Form 10-K.                                                                  |
|---------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.6    |   | Intentionally  omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.7    |   | Intentionally  omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.8    |   | Natural Gas  Transaction Confirmation (GTC) dated November 21, 2001, and executed on  April 3, 2002, between Engage Energy Canada, L.P., and the Registrant,  covering the period November 1, 2003 to November 1, 2008.  Incorporated by reference to Exhibit 10.8 to the Registrant’s Annual  Report on Form 10-K for the year ended September 30, 2002. A  PORTION OF THIS AGREEMENT IS SUBJECT TO A REQUEST FOR CONFIDENTIAL TREATMENT. |
| 10.8.1  |   | Assignment and Novation  Agreement dated June 24, 2004, between Engage Energy Canada L.P., Nexen  Marketing and the Registrant. This Assignment and Novation Agreement applies  to the contract identified as Exhibit 10.8. Incorporated by reference to  Exhibit 10.8.1 to the Registrant’s 2004 Form 10-K.                                                                                                                                              |
| 10.9    |   | Service Agreement  dated and executed on September 11, 2001, between TransCanada Pipelines  Limited and the Registrant, covering the period November 1, 2003 to  October 31, 2028. Incorporated by reference to Exhibit 10.9 to the Registrant’s  2004 Form 10-K.                                                                                                                                                                                    |
| 10.10   |   | Intentionally  omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.11   |   | Gas  transportation agreement between Pacific Gas Transmission Company and the  Registrant dated as of April 30, 1997. Incorporated by reference to  Exhibit 10.11 to the Registrant’s 1997 10-K.                                                                                                                                                                                                                                                              |
| 10.12   |   | Restated Firm  Transportation Agreement dated May 16, 2006, between Northwest Pipeline  Corporation and the Registrant. (Supersedes Replacement Firm Transportation  Agreement dated July 31, 1991 and all amendments.)                                                                                                                                                                                                                                                  |
| 10.13   |   | Firm  Transportation Service Agreement dated April 25, 1991, between Pacific  Gas Transmission Company and the Registrant (1993 expansion). Incorporated by  reference to Exhibit 10(m) to the 1992 Form S-2.                                                                                                                                                                                                                                                  |
| 10.14   |   | Firm  Transportation Service Agreement dated October 27, 1993, between Pacific  Gas Transmission Company and the Registrant. Incorporated by reference to  Exhibit 10.14 to the Registrant’s 1993 Form 10-K.                                                                                                                                                                                                                                                   |
| 10.15   |   | Intentionally  omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.16   |   | Intentionally  omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.17   |   | Storage Agreement  dated July 23, 1990, between Washington Water Power Company and the  Registrant. Incorporated by reference to Exhibit 10(v) to the 1992  Form S-2.                                                                                                                                                                                                                                                                                          |
| 10.17.1 |   | Second amendment  to the agreement for the release of Jackson Prairie Storage Capacity dated as  of July 30, 1997, amending the Storage Agreement dated July 23,  1990, between Washington Water Power Company and the Registrant. Incorporated  by reference to Exhibit 10.17.1 to the Registrant’s 1997 Form 10-K.                                                                                                                                      |

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| 10.18   |   | Service Agreement (Firm  Redelivery Transportation Agreement under Rate Schedule TF-2 for  Cascade’s SGS-1) dated January 12, 1994, between Northwest  Pipeline Corporation and the Registrant. Incorporated by Reference to  Exhibit 10.18 to the Registrant’s Annual Report on Form 10-K  for the year ended December 31, 1994 (1994 Form 10-K). |
|---------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.19   |   | Service Agreement  (Firm Redelivery Transportation Agreement under Rate Schedule TF-2 for  Cascade’s assignment of SGS-1 from WWP) dated January 12, 1994,  between Northwest Pipeline Corporation and the Registrant. Incorporated by  reference to Exhibit 10.19 to the Registrant’s 1994 Form 10-K.                                                       |
| 10.20   |   | Service Agreement  (Firm Redelivery Transportation Agreement under rate Schedule TF-2 for  Cascade’s LS-1) dated January 12, 1994, between Northwest Pipeline  Corporation and the Registrant. Incorporated by reference to  Exhibit 10.20 to the Registrant’s 1994 Form 10-K.                                                                               |
| 10.21   |   | Intentionally  omitted.                                                                                                                                                                                                                                                                                                                                                               |
| 10.22   |   | Intentionally  omitted.                                                                                                                                                                                                                                                                                                                                                               |
| 10.23   |   | Firm  Transportation Service Agreement dated November 4, 1994, between Pacific  Gas Transmission and the Registrant, effective November 1, 1995.  Incorporated by reference to Exhibit 10.23 to the Registrant’s 1994  Form 10-K.                                                                                                                            |
| 10.24   |   | Firm  Transportation Agreement dated August 1, 1994, between Northwest  Pipeline Corporation and the Registrant. Incorporated by reference to  Exhibit 10.24 to the Registrant’s 1994 Form 10-K.                                                                                                                                                                  |
| 10.25   |   | Prearranged  Permanent Capacity Release of Firm Natural Gas Transportation Agreements  dated November 30, 1993 between Tenaska Gas Co., Tenaska Washington  Partners, L.P., and the Registrant. Incorporated by reference to  Exhibit 10.25 to the Registrant’s 1994 Form 10-K.                                                                                   |
| 10.26   |   | Intentionally  omitted.                                                                                                                                                                                                                                                                                                                                                               |
| 10.27   |   | Intentionally  omitted.                                                                                                                                                                                                                                                                                                                                                               |
| 10.28   |   | Reimbursement and  Indemnity Agreement, dated January 25, 2005, between the Company and  MBIA Insurance Corporation. Incorporated by reference to Exhibit 10.1 to  the Registrant’s Current Report on Form 8-K dated January 25,  2005.                                                                                                                      |
| 10.29   |   | 2000 Director  Stock Award Plan of the Registrant.* Incorporated by reference to  Exhibit 10.29 to the Registrant’s 2003 Form 10-K.                                                                                                                                                                                                                                    |
| 10.29.1 |   | First Amendment  to the Cascade Natural Gas Corporation 2000 Director Stock Award Plan dated  February 16, 2006.* Incorporated by reference to Exhibit 10.2 to  the Registrant’s Current Report on Form 8-K dated  February 17, 2006.                                                                                                                        |
| 10.30   |   | Executive  Supplemental Retirement Income Plan of the Registrant and Supplemental  Benefit Trust as amended and restated as of October 1, 2003.*  Incorporated by reference to Exhibit 10.30 to the Registrant’s 2003  Form 10-K.                                                                                                                                 |
| 10.31   |   | Form of  employment agreement between the Registrant and certain executive officers of  the Registrant. Incorporated by reference to Exhibit 10.31 to the  Registrant’s 2003 Form 10-K.                                                                                                                                                                           |
| 10.32   |   | Cascade Natural  Gas Corporation Officer Severance Pay Plan, dated October 1, 2004.*  Incorporated by reference to Exhibit 10.01 to the Registrant’s Current  Report on Form 8-K dated October 8, 2004.                                                                                                                                                      |
| 10.33   |   | Cascade Natural  Gas Corporation—Cascade Incentive Plan and 401(k) Profit Sharing Plan*. Incorporated  by reference to Exhibit 10.33 to the Registrant’s 2005 Form 10-K.                                                                                                                                                                                     |

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| 10.34   |   | Standards of  Independence for Directors. Incorporated by reference to Exhibit 99.1 to  the Registrant’s Current Report on Form 8-K dated April 11,  2006.                                                                                                                                                                             |
|---------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.35   |   | Amended and  Restated Loan Agreement, dated as of September 30, 2004, between U.S.  Bank National Association and the Registrant. Incorporated by reference to  Exhibit 10.1 to the Registrant’s Current Report on Form 8-K  dated May 11, 2005. A portion of this agreement is subject to a request  for confidential treatment. |
| 10.36   |   | Cascade Natural  Gas Corporation Employee Retirement Savings Plan 2002 Restatement  January 1, 2002 (As Amended Through Amendment No. 3).* Incorporated  by reference to Exhibit 10.36 to the Registrant’s 2004 Form 10-K.                                                                                                        |
| 10.37   |   | Employment Agreement, dated March 3, 2005, between the Company and  David W. Stevens. Incorporated by reference to Exhibit 10.1 to  the Registrant’s Current Report on Form 8-K dated March 3,  2005.*                                                                                                                            |
| 10.38   |   | Employment Agreement, dated June 16, 2005, between the Company and  Rick Davis. Incorporated by reference to Exhibit 10.1 to the  Registrant’s Current Report on Form 8-K dated June 16, 2005.*                                                                                                                                   |
| 10.39   |   | Board Compensation Arrangements, dated September 29, 2004. Incorporated  by reference to Exhibit 10.01to the Registrant’s Current Report on  Form 8-K dated September 29, 2005.*                                                                                                                                                  |
| 10.40   |   | Cascade Natural  Gas Corporation Severance Pay Plan. Incorporated by reference to  Exhibit 10.2 to the Registrant’s Current Report on Form 8-K  dated July 26, 2005.*                                                                                                                                                                  |
| 10.40.1 |   | Amendment Two to  the Cascade Natural Gas Corporation Severance Pay Plan.* Incorporated by  reference to Exhibit 10.4 to the Registrant’s Current Report on  Form 8-K dated September 14, 2006.                                                                                                                                        |
| 10.41   |   | Cascade Natural  Gas Corporation Board of Directors Orientation and Continuing Education  Policy. Incorporated by reference to Exhibit 10.01 to the Registrant’s  Current Report on Form 8-K dated September 13, 2005.*                                                                                                                |
| 10.42   |   | Long-Term  Incentive Award Agreement dated January 11, 2006, between the Company  and David W. Stevens.* Incorporated by reference to Exhibit 10.1 to the  Registrant’s Current Report on Form 8-K dated January 11,  2006.                                                                                                       |
| 10.43   |   | Long-Term  Incentive Award Plan Description.* Incorporated by reference to  Exhibit 10.2 to the Registrant’s Current Report on Form 8-K  dated January 11, 2006.                                                                                                                                                                       |
| 10.44   |   | Long-Term  Incentive Award Agreement dated January 11, 2006, between the Company  and Rick Davis.* Incorporated by reference to Exhibit 10.3 to the  Registrant’s Current Report on Form 8-K dated January 11,  2006.                                                                                                             |
| 10.45   |   | Executive  Deferred Compensation Plan.* Incorporated by reference to Exhibit 10.4  to the Registrant’s Current Report on Form 8-K dated  January 11, 2006.                                                                                                                                                                             |
| 10.46   |   | Agreement  Regarding Supplemental Retirement Benefits dated January 11, 2006,  between the Company and David W. Stevens.* Incorporated by reference to  Exhibit 10.5 to the Registrant’s Current Report on Form 8-K  dated January 11, 2006.                                                                                      |
| 10.47   |   | Agreement  Regarding Supplemental Retirement Benefits dated January 11, 2006,  between the Company and Rick Davis.* Incorporated by reference to  Exhibit 10.6 to the Registrant’s Current Report on Form 8-K  dated January 11, 2006.                                                                                            |
| 10.48   |   | Form of  Employment Agreement with Executive Officers Julie A. Marshall and Michael J.  Gardner.* Incorporated by reference to Exhibit 10.7 to the Registrant’s  Current Report on Form 8-K dated January 11, 2006.                                                                                                               |

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| 10.49 |   | Long-Term Incentive  Award Agreement dated September 14, 2006, between the Company and David  W. Stevens.* Incorporated by reference to Exhibit 10.1 to the  Registrant’s Current Report on Form 8-K dated September 14,  2006. |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.50 |   | Long-Term  Incentive Award Agreement dated September 14, 2006, between the Company  and Rick Davis.* Incorporated by reference to Exhibit 10.2 to the  Registrant’s Current Report on Form 8-K dated September 14,  2006.       |
| 10.51 |   | Cascade Natural  Gas Corporation 2007 Incentive Plan and 401(k) Profit Sharing Plan.*  Incorporated by Reference to the Registrant’s Current Report on Form 8-K  dated October 27, 2006.                                             |
| 12.   |   | Statement  regarding computation of ratio of earnings to fixed charges and preferred  dividend requirements.                                                                                                                                             |
| 14.   |   | Employee Ethics  Policy. Incorporated by reference to Exhibit 14.1 to the Registrant’s  Current Report on Form 8-K dated September 29, 2004.                                                                                         |
| 21.   |   | A list of the  Registrant’s subsidiaries is omitted because the subsidiaries considered in  the aggregate as a single subsidiary do not constitute a significant  subsidiary.                                                                       |
| 23.   |   | Consent of  Deloitte & Touche, LLP to the incorporation of their report in the  Registrant’s registration statements.                                                                                                                      |
| 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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*                    Managementcontract or compensatory plan or arrangement

86

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