**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 

**ý****   ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

**For the fiscal year ended September 30, 2005****                                                                                           Commissionfile number:  1-7196**

 

**CASCADE NATURAL GAS CORPORATION**

(Exact name of Registrant as specified in its charter)

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

 

Securities registered pursuant 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 markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.      Yes  ý    No  o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).      Yes  ý    No  o

 

Indicate by check markwhether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).      Yes  o    No  ý

 

The aggregate marketvalue of the voting and non-voting common equity held by non-affiliates of theregistrant as of the close of business on September 30, 2005, was$245,876,677.

 

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

 
| **Title**                            | ** ** | **Outstanding**                         |
|--------------------------------------|------------|-----------------------------------------|
| Common Stock, Par Value $1 per Share |       | 11,435,593 as of November 30, 2005 |

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of theRegistrant’s definitive proxy statement for its 2006 Annual Meeting ofShareholders are incorporated by reference into Part III.

 

 

----

 

**CASCADE NATURAL GAS CORPORATION**

**Annual Report to the Securities and ExchangeCommission on Form 10-K**

For the Fiscal Year Ended September 30, 2005

 

Table of Contents

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

 

2

----

 

**PART I**

 

**Item 1. Business**

 

##### General

 

Cascade Natural GasCorporation (Cascade or the Company) was incorporated under the laws of thestate of Washington on January 2, 1953. Its principal business is the distribution of natural gas to customersin the states of Washington and Oregon. Approximately 72% of its residential and commercial gas distributionmargins are from customers in the state of Washington.

 

As of September 30,2005, the Company had approximately 196,000 residential customers, 30,000commercial customers, and 719 industrial and other larger customers.  Residential, commercial, and most smallindustrial customers are generally core customers who take traditional “bundled”natural gas service, which includes supply, peaking service, and upstreaminterstate pipeline transportation. Sales to core customers in fiscal 2005 accounted for approximately 24%of gas deliveries and 71% of operating margin. The Company’s sales to its core residential and commercial customers areinfluenced by fluctuations in temperature, particularly during the winterseason.  A warm winter season will tendto reduce gas consumption.  Alsoaffecting sales to core customers is the addition of more energy-efficienthomes and facilities, consumer behavior driven by cost increases and a desireto conserve, and a recent trend to warmer winters in the Company’s serviceareas.  Together, these forces haveresulted in reductions in average gas usage per customer.  The company is actively working withregulators within both states served to develop restructured rates to offsetthis trend.

 

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’smargin from non-core customers is derived primarily from distribution serviceand to a lesser extent from gas management service revenue.  Gas management service revenue primarilyincludes operating margin from delivery of gas supplies and fees charged tonon-core customers in consideration of securing gas supplies and pipelinecapacity for the customers.

 

Natural Gas Supply

 

The majority of Cascade’ssupply of natural gas is transported via Williams Gas Pipelines - West(Williams).  Williams owns and operates atransmission system extending from points of interconnection with El PasoNatural Gas Company and Transwestern Pipeline Company near Blanco, New Mexicothrough the states of New Mexico, Colorado, Utah, Wyoming, Idaho, Oregon andWashington to the Canadian border near Sumas, Washington.  Natural gas is transported north from theColorado and New Mexico area, and south 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 Canadianborder near Sumas, Washington and also intra British Columbia at a receiptpoint known as Station 2 on DEGT.

 

Presently, baseloadrequirements for Cascade’s core market are provided by eight major gas supplycontracts with various expiration dates ranging from 2006 through 2009 andaveraging 460,000 therms per day of Canadian supply and 106,500 therms per dayof domestic supply.  These contracts aresupplemented by various service agreements to cover periods of peak demandincluding three storage agreements.  Onesuch agreement, with Williams, extends to October 31, 2014 and providesfor 167,890 therms per day and a maximum, renewable inventory of 6,043,510therms.  The second storage agreement iswith Avista Energy, and has a primary term ending April 30, 2006 andentitles 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 Williams for liquefied natural gas (LNG)storage, is effective through October 31, 2014.  Under this LNG agreement, Cascade is entitledto receive up to 600,000 therms per day to a maximum inventory of 5,622,000therms.  In addition to withdrawal andinventory capacity, Cascade maintains a corresponding amount of firmtransportation from the storage facility to the city gate for each of theseagreements.

 

The Company enters into various seasonal and annual gas supply contractsdesigned to match the load requirements of its customers.  Interstate pipelines provide natural gas tothe Company from production areas in the Rocky Mountain states and from westernCanada. Management believes gas supply resources in those areas are adequate toserve the Company’s current needs and to support future growth.  The

 

3

----

 

wholesale price of gas in the region has increased in recent years,paralleling national trends. Additionally, a favorable differential that has historically existedbetween Pacific Northwest gas prices and national prices has narrowed as newpipelines have increased access to Rocky Mountain and Canadian supplies byCalifornia and mid-west markets.

 

To mitigate price volatility,the Company employs a gas procurement strategy for supplies for sale to corecustomers that involves entering into physical gas supply contracts withsuppliers at published first-of-the-month index prices for up to five-yearterms.  To mitigate the price volatility,these index related supplies are hedged through the use of derivatives,primarily swaps, with financial institutions. Approximately 90% of the core market’s requirement for fiscal 2006, 60%of fiscal 2007, and 30% of fiscal 2008 are secured with fixed prices as of theend of fiscal 2005.

 

##### State Regulation

 

The Company’s rates andpractices are regulated by the Washington Utilities and TransportationCommission (WUTC) and the Oregon Public Utility Commission (OPUC).

 

Cascade’s gas supply contractscontain pricing provisions based on market prices, and as a matter of practice,the Company generally enters into derivatives, generally swaps, to fix theprice of future supplies.  To the extentthat overall demand is different from the amount of gas supply under contractand hedged, the net effective price paid by Cascade may change with respect tosupplies purchased for core customers. The Company is able to pass the effect of such changes, subject to regulatoryreview, to its customers by means of a periodic purchased gas cost adjustment(PGA) in each state.  Gas price changesoccurring between times when PGA rate changes become effective are deferred forpass through in the next PGA.  These PGA’sinclude interest compensation on any deferred collections financed by Cascade.

 

With respect to such gassupplies delivered to Oregon customers, 67% of the incremental change in theactual cost of gas supplies, as compared to the forecasted cost reflected inthe PGA, is deferred.  The remaining 33%(increase or decrease) is absorbed by the Company. This mechanism is intendedto encourage the Company to seek opportunities to lower its cost of suppliesand to be innovative in its management of the supply portfolio to avoid pricespikes.  Cascade’s gas supply portfoliofor Oregon core customers is comprised mostly of gas supplies with commodityprices that have been fixed through derivative arrangements; therefore,management believes the risk or opportunity for the Company is not significantunder the 67% / 33% sharing arrangement.

 

Cascade has an earningssharing mechanism with respect to its Oregon jurisdictional operations asrequired by the Oregon Public Utilities Commission.  The mechanism was designed as an incentive topursue operational efficiencies and new revenue opportunities, and to share thesuccess of such pursuits with ratepayers if the Company’s earnings exceed acalculated ceiling.  Under thatarrangement, the Company is authorized to retain all of its earningsattributable to its Oregon operations up to a threshold level equal to 300basis points above a 10.25% return on equity (ROE).  Subsequent years’ base ROE is adjusted by 20%of the movement in the average of the annual yields, reported monthly, forfive-, seven-, and ten-year US Treasury debt securities for the testperiod.  If the adjusted Oregon earningsare below the threshold, 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.

 

The Company is alsosubject to state regulation with respect to integrated resource planning, andits most recent update of its Integrated Resource Plan (IRP) was filed in 2004with both the WUTC and the OPUC.  The IRPshows the Company’s optimum set of supply and demand side resources thatminimizes costs and risk over the 20-year planning horizon.  The IRP also sets forth possible corecustomer growth scenarios for a 20-year period. In addition, the IRP sets forth the Company’s demand side managementgoals of achieving certain conservation levels in customer usage.

 

The IRP also includes theCompany’s supply side management plans regarding transportation capacity andgas supply acquisition over a 20-year period. The Company develops updates of the IRP every two years.  These updated documents take into accountinput solicited from the public and the WUTC and OPUC staffs.  While the filing of the IRP with bothcommissions gives the Company no advance assurance that its acquisitions ofpipeline transportation capacity and gas supplies will be recognized in rates,management believes that the integrated resource planning process benefits theCompany by giving it the opportunity to obtain input from regulators and thepublic concurrently with making these important strategic decisions.  Until the Company receives final regulatoryapproval of these decisions in the context of the ratemaking process, theCompany cannot predict with certainty the extent to which the integrated resourceplanning process will affect its rates.

 

4

----

 

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 is unlikely to reverse itself.  To date, growth in the number of residentialand commercial customers and earnings from other services contributed tooffsetting this reduction.  The companyis working with regulators in each state served to develop decouplingapproaches which enable gas utilities to promote conservation while stillearning an adequate return on its invested capital and operating costs.   Similar approaches have been implemented inOregon and many other states.

 

# **Pipeline Safety**

 

Cascadeis subject to both state and federal pipeline safety rules.  In both Washington and Oregon, the federal rules areenforced by the state commissions.  Boththe federal and state rules are updated and amended periodically.  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.  The legislation requires Cascade to completeinspection of 50% of the highest risk pipelines located in its HCA’s within thefirst five years, and the remaining covered pipelines within 10 years of thedate 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.  Cascade has met all interim deadlines in TheAct and is on schedule to meet remaining deadlines.

 

Federal EnergyRegulatory Commission (FERC) Matters 

 

Cascade is not subject to regulation by the FERC; however,FERC actions can affect the amounts Cascade pays to interstate pipelinecompanies for interstate deliveries of natural gas supplies.  Several issues are pending before FERC, orare on appeal before the U.S. Court of Appeals. The final outcome may affect prices Cascade pays; however, none wouldhave a significant impact.  Since theCompany’s current tariffs with the WUTC and OPUC provide for 100% pass throughof costs subject to FERC regulation, the Company expects that the finalresolution of pending issues will not significantly affect net income.

 

CurtailmentProcedures

 

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 byCascade of firm service due to force majeure, Cascade’s tariffs provide that itwill not be liable for damages to any customer for failure to deliver gascurtailed in accordance with the provisions of the tariffs.  The tariffs provide for appropriateadjustment of the monthly charges to firm customers curtailed by reason of aninsufficient supply of gas.

 

##### Territory Servedand Franchises

 

Thepopulation of communities served by Cascade totals approximately 1,045,000. Atthe end of September 2005, Cascade held the franchises necessary for thedistribution of natural gas in all of the communities it serves in Washingtonand Oregon. Under the laws of those states, incorporated municipalities andcounties may grant non-exclusive franchises for a fixed term of yearsconferring upon the grantee certain rights with respect to public streets andhighways in the location, construction, operation, maintenance and removal ofgas distribution facilities.

 

Inthe opinion of Cascade’s management, none of its franchises contain anyrestrictions or requirements that are of a materially burdensome nature, andsuch franchises are adequate for the conduct of Cascade’s present business.Franchises expire on various dates from fiscal 2006 to 2065. Management has notincurred significant difficulties in renewing franchises when they expire anddoes not expect any significant problems in the future.

 

##### Customers

 

Residentialand commercial customers principally use natural gas for space heating andwater heating.  Once connected, thesecustomers rarely change from gas service. This category is our fastest growing with customer count increases of 3-5%during each of the last several years. The residential and commercial

 

5

----

 

marketis very weather-sensitive.  See “Seasonality”below.  In addition to the seasonalnature of usage, average consumption per customer has declined since thebeginning of this decade.  As mentionedearlier, the addition of more efficient homes and other buildings, replacingold appliances with more efficient units, and consumer behaviors drive this trend.  Reductions are most pronounced followingsignificant gas cost increases.  Cascade’sgrowth has contributed to offsetting these declines.  As discussed under State Regulation, theCompany is working with regulators in both states served to restructure ratesto recognize this trend.

 

Agreementswith Cascade’s principal industrial customers are for fixed terms of not lessthan one year and provide for automatic extension from year to year unlessterminated by either party on at least 120-days’ notice.  The principal industrial activities in Cascade’sservice area include the production of pulp, paper and converted paperproducts, plywood, industrial chemicals; refining of crude oil; the processing,flash freezing and canning of many types of vegetable, fruit and fish products;processing of milk products; meat processing; drying and curing of wood andagricultural products; and electric power generation.  Electric generation customers represent asignificant portion of industrial revenues. The demand for gas-fired generation tends to vary with the availabilityof hydroelectric 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 fiscalyear ended September 30, 2005, 68% of operating revenues and 106% ofincome from operations were derived from the first two quarters (October 2004through March 2005). Because of the seasonality of space heating revenues,financial results for interim periods are not indicative of results to beexpected for an entire year. To mitigate the seasonality of space heatingrevenues, the Company pursues a marketing strategy of encouraging theinstallation of appliances that utilize natural gas more consistentlyyear-round since they are not as influenced by weather conditions.

 

CompetitiveConditions

 

Cascadeoperates in a competitive market for natural gas service.  Cascade competes with residual fuel oil andother alternative energy sources for industrial boiler uses, and oil, propane,and electricity for residential and commercial space heating, and electricityfor water heating.

 

Competitionis primarily based on price.  Thoughwholesale natural gas prices have increased significantly during 2005, Cascade’sresidential and commercial rate schedules continue to maintain a priceadvantage over oil in its entire service territory and have an advantage overelectricity in much of its territory.  Inaddition, natural gas enjoys the advantage of being the preferred energy choiceby builders for new home construction.

 

Thelarge volume industrial market has always been very sensitive to pricefluctuations between the comparable cost of natural gas and alternate fuels,principally residual fuel oil 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.

 

Inaddition to multiple alternative fuels, the Company is subject to bypass.  Bypass refers to actual or prospectivecustomers who install their own facilities and connect directly to an upstreampipeline and thereby “bypass” the Company’s distribution service.  The Company has in the past experiencedbypass, but has also experienced success in offering competitive rates toreduce economic incentives to bypass.

 

TheCompany competes with others in acquiring gas supplies for resale togovernmental and industrial customers. Further opportunities in this area will be dependent upon marketconditions that can change over time, credit worthiness of customers and theincrease or decrease 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.  BPA significantly influences the electricrates of all classes of customers including those applications in directcompetition with natural gas marketed by Cascade.

 

6

----

 

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.  Such regulation may, at times, result in theimposition of liability or responsibility for the clean up or treatment ofexisting environmental problems or for the prevention of future environmentalproblems.  For detailed descriptions ofspecific 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-timeproject, the installation of automated meter-reading capabilities system-wide,represented $16 million of our capital spending during fiscal years 2003 and2004.  Total capital expenditures for thethree fiscal years ended September 30, 2005 averaged approximately $31.5million.  Capital spending for fiscal2006 is expected to be significantly lower, likely within or slightly higherthan the range Cascade spent during fiscal years 1999 to 2002.

 

Cascade has no currentplans for major one-time capital projects. Also supporting the reduced need to invest capital is the Company’spractice of assuring that its spending generates the highest possible returnswithin the shortest possible time, while assuming prudent risk, and complyingwith the requirements of regulators.  Anexample is our practice of working with developers and new customers to sharethe cost of marginal expansions and service connections when projected returnsare insufficient for the Company to fund the entire investment.   Other practices include consideringinnovative solutions to specific needs, such as utilizing temporary supplementalcapacity rather than investing in expensive pipe expansions to cover peakrequirements.

 

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 new loans 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 engaged inpipeline capacity management, with the objective of mitigating gas costs forCascade.  The subsidiaries, which in theaggregate account for less than 1% of the consolidated assets of the Company,do not currently have a significant impact on Cascade’s financial statements.

 

Personnel

 

At September 30,2005, Cascade had 375 employees.  Of thetotal employees, 177 are represented by the International Chemical Workers’Union.  The present contract with theunion extends to April 1, 2006 and remains in force thereafter from yearto year unless terminated by either party by written notice sixty days prior tothe expiration date.  Historically, theCompany and the union have negotiated a new agreement to become effective as ofthe earliest expiration date rather than allowing the existing agreement toremain in force.

 

On November 23,2005, 29 customer service representatives in the Company’s Bellingham andSunnyside call centers elected to be represented by the International ChemicalWorkers’ Union.

 

##### AvailableInformation

 

The Company makesavailable free of charge, on or through its website, http://www.cngc.com, itsannual, quarterly and current reports, and any amendments to those reports, assoon as reasonably practicable after electronically filing such reports withthe Securities and Exchange Commission. In addition, copies of these documentsmay be requested, at no cost, from the Company’s corporate headquarters.Requests should be directed to Shareholder Relations, Cascade Natural GasCorporation, 222 Fairview Avenue North, Seattle, WA 98109, or by phone at 206-624-3900.

 

7

----

 

To contact anyindependent board member, you may write to Larry L. Pinnt, Board of DirectorsChair, P.O. Box 87, Redmond, WA 98073-0087, fax to 425-895-1349, or e-mailto lpinnt@cngc.com.

 

**Item 2.  Properties**

 

AtSeptember 30, 2005, Cascade’s utility plant investments includedapproximately 5,244 miles of distribution mains ranging in diameter from twoinches to sixteen inches, 215 miles of transmission mains ranging in diameterfrom two inches to twenty inches, and 3,593 miles of service lines.

 

Thedistribution and transmission mains are located under public property such asstreets and highways or on private property with the permission or consent ofthe individual owner.

 

Cascadeowns 21 buildings used for operations, office space and warehousing inWashington and six such buildings in Oregon. It leases two commercial officesand 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.  Legal Proceedings**

 

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

 

**Item4.  Submission of Matters to a Vote ofSecurity Holders**

 

No matters were submittedduring the fourth quarter of fiscal year 2005.

 

**Executive Officers of the Registrant**

 

Theexecutive officers of the Company, as of December 8, 2005, are as follows:

 
| ** **         | ** ** | ** **                             | ** ** | ** ** | ** ** | **Year**    |
|--------------------|------------|----------------------------------------|------------|------------|------------|-------------|
| ** **         | ** ** | ** **                             | ** ** | ** ** | ** ** | **Became**  |
| **Name**           | ** ** | **Office**                             | ** ** | **Age**    | ** ** | **Officer** |
|               |       |                                   |       |       |       |        |
| David W. Stevens   |       | President and Chief                    |       |       |       |        |
|               |       | Executive Officer                      |       | 46         |       | 2005        |
|               |       |                                   |       |       |       |        |
| Rick A. Davis      |       | Chief Financial Officer                |       | 53         |       | 2005        |
|               |       |                                   |       |       |       |        |
| Jon T. Stoltz      |       | Senior Vice President -                |       |       |       |        |
|               |       | Gas Supply and Regulatory              |       |       |       |        |
|               |       | Affairs                                |       | 58         |       | 1981        |
|               |       |                                   |       |       |       |        |
| Larry C. Rosok     |       | Vice President - Human Resources       |       |       |       |        |
|               |       | and Corporate Secretary                |       | 49         |       | 1995        |
|               |       |                                   |       |       |       |        |
| Michael J. Gardner |       | Vice President – Operations       |       | 36         |       | 2005        |
|               |       |                                   |       |       |       |        |
| Julie A. Marshall  |       | Vice President – Customer Service |       | 52         |       | 2005        |
|               |       |                                   |       |       |       |        |
| James E. Haug      |       | Controller                             |       | 56         |       | 1981        |

 

Noneof the above officers is related by blood, marriage or adoption to any other ofthe above-named officers.  With theexception of David W. Stevens and Rick A. Davis, each of the other above-namedofficers has been employed by the Company in a management capacity for at leastthe past five years.  None of the aboveofficers holds directorships in other public corporations.  All officers serve at the pleasure of theBoard of Directors.

 

Mr. Stevens, 46, was elected toPresident and Chief Executive Officer and to the Board of Directors of CascadeNatural Gas Corporation effective April 1, 2005.  From July 2003 to December 2004, Mr. Stevenswas President and COO for Panhandle Energy, a Southern Union Companysubsidiary.  From September 1997 to January 2003,he was President of the Southern Union Gas Company.  Prior to that, Mr. Stevens served inother executive capacities within the Southern Union Company, including SeniorVice President – Sales and Operations, Regional Vice President, Group VicePresident and Vice President – Operations.

 

8

----

 

Mr. Stevens joined the SouthernUnion Company in 1984.  He has served onthe Board of Directors for the Southern Gas Association and the IntrastateNatural Gas Association of America, and was a member of the president’s counselof the American Gas Association.

 

Mr. Davis, 53, waselected to Chief Financial Officer effective June 27, 2005.  From September 2003 to June 2005, Mr. Davisprovided strategic planning and compliance consulting services through his ownfirm, Advisory Services and Jefferson-Wells, a global provider of accountingand finance-related services.  From January 2003to August 2003, Mr. Davis was Chief Financial Officer at PACWorldwide, a privately held manufacturer and distributor of packagingproducts.  From 1984 to 2002, Mr. Davisheld executive-level positions at Weyerhaeuser Company and one of itssubsidiaries serving at various times as Controller, Director Finance, VicePresident-Finance and Vice President-Marketing. He has served on various professional and non-profit boards and is amember of Financial Executives International and the AICPA.

 

9

----

 

**PART II**

 

###### **Item5.  Market for Registrant’s CommonEquity, Related Stockholder Matters, and Issuer Purchases of Equity Securities**

###### ** **

The Common Stock istraded on the New York Stock Exchange under the symbol CGC.  The following table states the per-share highand low sales prices of the Common Stock:

 

| ** **        | ** ** | **Fiscal 2005** | ** ** | **Fiscal 2004** | ** ** |
|-------------------|------------|-----------------|------------|-----------------|------------|
| **Quarter**       | ** ** | **High**        | ** ** | **Low**         | ** ** | **High** | ** ** | **Low** | ** ** |
| December 31  |       | $               | 21.80      |            | $          | 20.00 |   | $ | 21.99 |   | $ | 19.41 |   |
| March 31     |       | $               | 21.48      |            | $          | 19.68 |   | $ | 23.05 |   | $ | 20.76 |   |
| June 30      |       | $               | 20.59      |            | $          | 18.05 |   | $ | 22.52 |   | $ | 19.10 |   |
| September 30 |       | $               | 22.80      |            | $          | 20.01 |   | $ | 22.20 |   | $ | 19.35 |   |

 

At September 30,2005, there were 5,350 registered holders of the Common Stock.  The following table shows for the periodsindicated the dividends paid per share on the Common Stock:

 

| ** **        | ** ** | **Fiscal** | ** ** | **Fiscal** | ** ** |
|-------------------|------------|------------|------------|------------|------------|
| **Quarter**       | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|              |       |       |       |       |       |
| December 31  |       | $          | 0.24       |       | $          | 0.24 |   |
| March 31     |       | $          | 0.24       |       | $          | 0.24 |   |
| June 30      |       | $          | 0.24       |       | $          | 0.24 |   |
| September 30 |       | $          | 0.24       |       | $          | 0.24 |   |

 

At September 30,2005, the Company was in compliance with all indebtedness covenants and was notrestricted on dividend payments.

 

10

----

 

**Item 6.Selected Financial Data**

 

The following selectedfinancial data are derived from the consolidated financial statements of theCompany and have been restated to reflect adjustments that are furtherdiscussed in Note 3: “Restatement of Financial Statements” under Notes toConsolidated Financial Statements included in Item 8, “Financial Statements andSupplementary Data” of this Form 10-K.

 

**ConsolidatedStatements of Income and Comprehensive Income:**

 
| ** **                                    | ** ** | **Year Ended September 30**                 | ** ** |
|-----------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                    | ** ** | **2005**                                         | ** ** | **2004** | ** ** | **2003*** | ** ** | **2002*** | ** ** | **2001*** | ** ** |
| ** **                                    | ** ** | **(dollars in thousands except per share data)** | ** ** |
|                                          |       |                                             |       |   |   |   |   |   |   |   |   |
| Operating Revenues                            |       | $                                                | 326,500    |   | $ | 318,078 |   | $ | 302,755 |   | $ | 320,978 |   | $ | 335,814 |   |
| Less: Gas Purchases                           |       | 212,958                                          |       | 202,759 |   | 191,887 |   | 209,225 |   | 219,795 |   |
| Revenue  taxes                                |       | 21,827                                           |       | 21,511 |   | 20,193 |   | 21,251 |   | 20,987 |   |
| Operating Margin                              |       | 91,715                                           |       | 93,808 |   | 90,675 |   | 90,502 |   | 95,032 |   |
| Cost of Operations:                           |       |                                             |       |   |   |   |   |   |   |   |   |
| Operating  expenses                           |       | 44,223                                           |       | 40,540 |   | 45,514 |   | 43,052 |   | 41,027 |   |
| Depreciation  and amortization                |       | 17,274                                           |       | 16,325 |   | 15,338 |   | 14,926 |   | 13,839 |   |
| Property  and payroll taxes                   |       | 3,786                                            |       | 3,696 |   | 3,532 |   | 3,361 |   | 3,182 |   |
|                                          |       | 65,283                                           |       | 60,561 |   | 64,384 |   | 61,339 |   | 58,048 |   |
| Income From Operations                        |       | 26,432                                           |       | 33,247 |   | 26,291 |   | 29,163 |   | 36,984 |   |
| Nonoperating Expense  (Income):               |       |                                             |       |   |   |   |   |   |   |   |   |
| Interest                                      |       | 11,744                                           |       | 12,375 |   | 12,363 |   | 12,384 |   | 10,509 |   |
| Interest  charged to construction             |       | (187                                             | )          | (445 | ) | (378 | ) | (219 | ) | (333 | ) |
|                                          |       | 11,557                                           |       | 11,930 |   | 11,985 |   | 12,165 |   | 10,176 |   |
| Amortization  of debt issuance expense        |       | 372                                              |       | 618 |   | 696 |   | 652 |   | 607 |   |
| Other                                         |       | (376                                             | )          | (162 | ) | (227 | ) | (197 | ) | (313 | ) |
|                                          |       | 11,553                                           |       | 12,386 |   | 12,454 |   | 12,620 |   | 10,470 |   |
|                                          |       |                                             |       |   |   |   |   |   |   |   |   |
| Income Before Income  Taxes                   |       | 14,879                                           |       | 20,861 |   | 13,837 |   | 16,543 |   | 26,514 |   |
| Income Taxes                                  |       | 5,632                                            |       | 7,559 |   | 5,117 |   | 6,085 |   | 9,520 |   |
|                                          |       |                                             |       |   |   |   |   |   |   |   |   |
| Net Income                                    |       | 9,247                                            |       | 13,302 |   | 8,720 |   | 10,458 |   | 16,994 |   |
|                                          |       |                                             |       |   |   |   |   |   |   |   |   |
| Other Comprehensive  Income (Loss)            |       |                                             |       |   |   |   |   |   |   |   |   |
| Minimum  pension liability adjustment         |       | 177                                              |       | 1,270 |   | (2,619 | ) | (11,792 | ) | (6,502 | ) |
| Income  tax benefit                           |       | (56                                              | )          | (448 | ) | 937 |   | 4,205 |   | 2,341 |   |
| Other Comprehensive  Income (Loss)            |       | 121                                              |       | 822 |   | (1,682 | ) | (7,587 | ) | (4,161 | ) |
|                                          |       |                                             |       |   |   |   |   |   |   |   |   |
| Comprehensive Income                          |       | $                                                | 9,368      |   | $ | 14,124 |   | $ | 7,038 |   | $ | 2,871 |   | $ | 12,833 |   |
|                                          |       |                                             |       |   |   |   |   |   |   |   |   |
| Earnings  Per Common Share, Basic and Diluted |       | $                                                | 0.82       |   | $ | 1.19 |   | $ | 0.79 |   | $ | 0.95 |   | $ | 1.54 |   |

 

----

* Data for 2001,2002, and 2003 are restated as discussed in the Notes to Consolidated FinancialStatements in Item 8 of this report.

 

11

----

 
| ** **                                            | ** ** | **At September 30**                         | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                            | ** ** | **2005**                                         | ** ** | **2004*** | ** ** | **2003*** | ** ** | **2002*** | ** ** | **2001*** | ** ** |
| ** **                                            | ** ** | **(dollars in thousands except per share data)** | ** ** |
| **Retained Earnings:**                                |       |                                             |       |   |   |   |   |   |   |   |   |
| Beginning  of the year                                |       | $                                                | 17,570     |   | $ | 15,051 |   | $ | 16,978 |   | $ | 17,127 |   | $ | 10,736 |   |
| Net  income                                           |       | 9,247                                            |       | 13,302 |   | 8,720 |   | 10,458 |   | 16,994 |   |
| Exercise  of stock options                            |       | —                                           |       | — |   | — |   | (4 | ) | — |   |
| Common  dividends                                     |       | (10,909                                          | )          | (10,783 | ) | (10,647 | ) | (10,603 | ) | (10,603 | ) |
| End  of the year                                      |       | $                                                | 15,908     |   | $ | 17,570 |   | $ | 15,051 |   | $ | 16,978 |   | $ | 17,127 |   |
|                                                  |       |                                             |       |   |   |   |   |   |   |   |   |
| **Capital Structure:**                                |       |                                             |       |   |   |   |   |   |   |   |   |
| Common  shareholders’ equity                     |       | $                                                | 118,615    |   | $ | 117,584 |   | $ | 111,630 |   | $ | 113,635 |   | $ | 121,391 |   |
| Debt:                                                 |       |                                             |       |   |   |   |   |   |   |   |   |
| Long-term  debt                                       |       | 173,840                                          |       | 128,900 |   | 142,930 |   | 164,930 |   | 125,000 |   |
| Short-term  debt                                      |       | 12,500                                           |       | 33,500 |   | 3,800 |   | — |   | 40,000 |   |
| Current  maturities of long-term debt                 |       | —                                           |       | 14,000 |   | 22,000 |   | — |   | — |   |
|                                                  |       | 186,340                                          |       | 176,400 |   | 168,730 |   | 164,930 |   | 165,000 |   |
| Total  capital                                        |       | $                                                | 304,955    |   | $ | 293,984 |   | $ | 280,360 |   | $ | 278,565 |   | $ | 286,391 |   |
|                                                  |       |                                             |       |   |   |   |   |   |   |   |   |
| **Financial Ratios:**                                 |       |                                             |       |   |   |   |   |   |   |   |   |
| Return  on common shareholders’ equity           |       | 7.46                                             | %          | 11.03 | % | 7.33 | % | 8.27 | % | 13.26 | % |
| Common  stock dividend payout ratio                   |       | 117                                              | %          | 81 | % | 122 | % | 101 | % | 62 | % |
| 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                                |       | 2.23                                             |       | 2.61 |   | 2.06 |   | 2.27 |   | 3.39 |   |
|                                                  |       |                                             |       |   |   |   |   |   |   |   |   |
| Book  value per year-end share of common stock        |       | $                                                | 10.39      |   | $ | 10.44 |   | $ | 10.03 |   | $ | 10.29 |   | $ | 10.99 |   |
|                                                  |       |                                             |       |   |   |   |   |   |   |   |   |
| Capitalization  Ratios at End of Year                 |       |                                             |       |   |   |   |   |   |   |   |   |
| Common  shareholders’ equity                     |       | 38.9                                             | %          | 40.0 | % | 39.8 | % | 40.8 | % | 42.4 | % |
| Long-term  debt (incl. current maturities)            |       | 57.0                                             | %          | 48.6 | % | 58.8 | % | 59.2 | % | 43.6 | % |
| Short-term  debt                                      |       | 4.1                                              | %          | 11.4 | % | 1.4 | % | 0.0 | % | 14.0 | % |
|                                                  |       | 100.0                                            | %          | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
|                                                  |       |                                             |       |   |   |   |   |   |   |   |   |
| **Utility Plant:**                                    |       |                                             |       |   |   |   |   |   |   |   |   |
| Utility  plant - end of year                          |       | $                                                | 597,469    |   | $ | 570,036 |   | $ | 529,807 |   | $ | 505,126 |   | $ | 488,231 |   |
| Accumulated  depreciation                             |       | 257,008                                          |       | 242,691 |   | 227,582 |   | 213,476 |   | 201,530 |   |
| Net  plant                                            |       | $                                                | 340,461    |   | $ | 327,345 |   | $ | 302,225 |   | $ | 291,650 |   | $ | 286,701 |   |
|                                                  |       |                                             |       |   |   |   |   |   |   |   |   |
| Capital  expenditures, net of contributions in aid    |       | $                                                | 28,011     |   | $ | 39,019 |   | $ | 27,693 |   | $ | 20,734 |   | $ | 21,649 |   |
| Total  assets                                         |       | $                                                | 552,905    |   | $ | 422,622 |   | $ | 371,456 |   | $ | 367,663 |   | $ | 364,253 |   |
|                                                  |       |                                             |       |   |   |   |   |   |   |   |   |
| **Number of Employees at End of  Year**               |       | 375                                              |       | 428 |   | 437 |   | 444 |   | 442 |   |

 

----

* Data arerestated as discussed in the Notes to Consolidated Financial Statements in Item8 of this report.

 

12

----

 

**Item7.  Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

Restatement of Financial Statements

 

Subsequent to theissuance of the financial statements for the year ended September 30,2004, management determined that the Company’s deferred income tax liabilitieswere not correctly stated as of September 30, 2004, 2003, 2002, and2001.  Further, the Company’s provisionfor deferred income taxes was not correctly stated for the years ended September 30,2003, 2002, and 2001 under accounting principles generally accepted in theUnited States of America (“GAAP”).  As aresult, beginning retained earnings, financial position, results of operations,and cash flows have been restated.

 

See Note 3 to the consolidated financialstatements of this Report for a summary of the effects of these changes on theCompany’s consolidated balance sheet as of September 30, 2004, as well ason the Company’s consolidated statements of income and comprehensive income, shareholders’equity and cash flows for fiscal year 2003. The accompanying Management’s Discussion and Analysis gives effect tothese corrections.

 

The following is management’s assessment of theCompany’s financial condition and a discussion of the principal factors thataffect consolidated results of operations and cash flows for the fiscal yearsended September 30, 2005, 2004, and 2003. References herein to 2005, 2004, and 2003 refer to these fiscal years.

 

###### **Overview**

 

The Company is a localdistribution company (LDC) serving approximately 227,000 customers in theStates of Washington and Oregon.  Itsservice area consists primarily of relatively small cities and ruralcommunities rather than larger urban areas. The Company’s primary source of revenue and operating margin is thedistribution of natural gas to end-use residential, commercial, industrial, andinstitutional customers.  Revenues arealso derived from providing gas management and other services to some of itslarge industrial and commercial customers. The Company’s rates and practices are regulated by the WashingtonUtilities and Transportation Commission (WUTC) and the Oregon Public UtilityCommission (OPUC).

 

Keyelements of the Company’s strategy:

 

•                  Remain focused on the natural gasdistribution business.

•                  Pursue appropriate regulatorytreatment, including initiatives to decouple the Company’s earnings fromchanging customer consumption patterns, and remove other regulatory impedimentsto effective management of the business.

•                  Economic expansion of its customerbase by prudently managing capital expenditures and ensuring new customersprovide sufficient margins for an appropriate return on the new investmentrequired to acquire the customers.

•                  Continue to focus on operationalefficiencies.

•                  Manage cash flow to avoid therequirement of additional debt financing.

 

## **Opportunities andChallenges**

## ** **

The Company operates in adiverse service territory over a wide geographic area relative to the Company’soverall size and number of customers. The economies of various parts of the service area are supported by avariety of industries and are affected by the conditions that impact thoseindustries.  Management believes thereare growth opportunities in the Company’s service area, especially in the residentialand commercial segments.  Factorscontributing to these opportunities include low market penetration in many ofthe towns served, and general population growth in the service area, includingsome areas of rapid growth.

 

Overallrevenues and margins are also negatively impacted by higher efficiency in newhome and commercial building construction, higher efficiency in gas-burningequipment, and customers taking additional measures to reduce energyusage.  The increasing cost of energy inrecent years, including the wholesale cost of natural gas, continues toencourage such measures.  The Companycontinues to believe that energy efficiency and conservation are the mostviable near-term tactics for influencing the wholesale natural gas prices.  It’s also a vital strategy for stabilizingthe cost of gas over the long term.  Thetraditional

 

13

----

 

regulatoryestablishment of rates ties the recovery of cost to volumetric sales.  This traditional rate design creates afinancial disincentive for utilities to promote conservation.  The Company is working with regulators andother stakeholders in each state to develop an acceptable decoupling mechanismthat will enable the Company to promote conservation while still earning anadequate return on its invested capital and operating costs.  Similar approaches have been implemented inmany states and are endorsed by a variety of organizations, including therecent endorsement by the National Association of Regulated UtilityCommissions.  The results of such raterequests and other initiatives for regulatory relief are subject to significantuncertainties.

 

The Company earnsapproximately one third of its operating margin from industrial and electricgeneration customers.  Loss of majorindustrial customers, or unfavorable conditions affecting an industry segment,could have a detrimental impact on the Company’s earnings.  Many external factors over which the Companyhas no control can significantly impact the amount of gas consumed byindustrial and electric generation customers and, consequently, the marginsearned by the Company.

 

Revenues and margins fromthe Company’s residential and small commercial customers are highlyweather-sensitive.  In a cold year, theCompany’s earnings are boosted by the effects of the weather, and conversely ina warm year, the Company’s earnings suffer.  Peak requirements also drive the need toreinforce our systems (i.e., increase capacity).  Our operations group considers innovativeapproaches such as temporarily utilizing mobile gas supply rather than makinglarge investments in long-term capacity increases, which may not be fullyutilized.

 

Prospects for continuingstrong residential and commercial customer growth are excellent.  The pace of new home and commercialconstruction remains steady in communities served by the Company.  Good potential also exists for convertinghomes and businesses located on or near the Company’s current lines to gas fromother fuels, as well as for expanding the system into adjacent areas.  Customer count growth in this sector has beenabout double the average of U.S. gas utilities.

 

Our customer service callcenter organization recently voted to accept union representation.  The company plans to negotiate an agreementthat will support our effort to cost-effectively provide superior customerservice.  The timing and results ofnegotiations are uncertain.

 

The contract with theunion representing our service mechanics and construction staff expires on April 1,2006.  Again, we plan to negotiate anagreement that supports superior and cost-effective customer service.  The results and timing of negotiations areuncertain.

 

We continue to pursueoperating efficiencies and cost reductions. During fiscal 2004, we completed the implementation of automated meterreading capability covering our entire service area.  This reduced our staffing needs by 27full-time equivalent positions.  Duringfiscal 2005, the centralization of our customer service activities andorganization reductions, enabled by a variety of other improvements, reducedour staffing by over 9%.  Our currentorganization is able to service more customers at a lower cost than in prioryears.  Changes completed during fiscal2005 alone resulted in improving our customer-per-employee ratio from 500 to600.  We continue to look for additionaloperating improvements.

 

As discussed in Item 1(our description of the business), we carefully analyze the economics of ourspending to support growth.  Whenjustified under our tariffs, we work with developers, business owners andresidents to share certain construction costs to assure a fair return toCascade.  Non-revenue-generating spendingis also managed to assure that we use the most economically attractivesolutions while providing for a safe and reliable system.

 

Managementcontinuously seeks improvement opportunities in all areas.  Our discussion above covering regulatorychange, labor relations, operating practices, our organization and ourinvestment to maintain and expand our gas delivery system are examples.  We will continue to evaluate these and otheraspects of our business to improve our customer service and the returns to ourshareholders.

 

**RESULTS OF OPERATIONS**

 

2005 versus 2004

 

TheCompany reported net income for 2005 of $9,247,000, or $0.82 per share,compared to $13,302,000 or $1.19 per share for 2004.  References herein to per-share earnings referto both basic and diluted, unless otherwise indicated.  Primary factors resulting in the decrease inearnings per share include:

 

14

----

 

OperatingMargin Factors:

 

•                  Reduced natural gas usage per residential andcommercial customer – $0.15 per share

•                  Lower margin from gas management services – $0.11per share

•                  Unfavorable comparison of mark-to-marketvaluations versus 2004 – $0.06 per share

•                  Lower margins from deliveries to industrialcustomers – $0.04 per share

 

Costof Operations Factors:

 

•                  Executive transition costs associated withchanges in the Chief Executive Officer and Chief Financial Officer – $0.07 pershare

•                  Severance compensation associated with staffingreductions – $0.06 per share

•                  Increased depreciation expenses – $0.05 per share

•                  Write-offs of cancelled projects – $0.03 pershare

•                  Increased purchased services expenses – $0.03 pershare

•                  Increased uncollectible accounts expenses – $0.02per share

 

Theabove unfavorable comparisons were partially offset by the following factors:

 

•                  Increase in the number of residential andcommercial customers – $0.18 per share

•                  Revision of estimated liability for OregonEarnings sharing – $0.05 per share

•                  Lower employee benefits expense – $0.04 per share

 

2004 versus 2003

 

TheCompany reported net income for 2004 of $13,302,000, or $1.19 per share,compared to $8,720,000, or $0.79 per share for 2003.  Primary factors and the resulting increase(decrease) in earnings per share affecting this comparison include:

 

•                  Improved margins from residential and commercialcustomers related to increased per-customer consumption and growth in thenumber of customers – $0.18 per share

•                  Reduction in employee benefit expenses resultingfrom the successful 2003 implementation of plan changes designed to reducecosts – $0.17 per share

•                  Recognition in 2003 of retirement plan curtailmentlosses in connection with above-mentioned plan changes – $0.08 per share

•                  Favorable mark-to-market valuations in 2004 andnegative valuations in 2003 – $0.07 per share

•                  Contract termination charge in 2003 – $0.05 pershare

 

Thefavorable comparisons listed above were partially offset by the followingfactors:

 

•                  Increase in depreciation and amortization –($0.06) per share

•                  Decreased margin from electric generationcustomers – ($0.06) per share

•                  Decreased margin from gas management services –($0.08) per share

 

## **OPERATING MARGIN**

 

Operatingmargins (revenue minus gas cost and revenue taxes) by customer category for thefiscal years ended September 30, 2005, 2004 and 2003 are set forth in thetables below:

 

15

----

 

**Residential and Commercial Operating Margin**

 
| ** **                              | ** ** | **2005**                   | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|-----------------------------------------|------------|----------------------------|------------|------------|------------|------------|------------|
| ** **                              | ** ** | **(dollars in thousands)** | ** ** |
| **Degree Days**                         |       | 5,170                      |       | 5,212      |       | 5,042      |       |
| **Average Number of Customers  Billed** |       |                       |       |       |       |       |       |
| Residential                             |       | 194,469                    |       | 184,845    |       | 177,300    |       |
| Commercial                              |       | 30,183                     |       | 29,320     |       | 28,851     |       |
| **Average Therm Usage Per  Customer**   | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Residential                             |       | 683                        |       | 710        |       | 692        |       |
| Commercial                              |       | 3,474                      |       | 3,628      |       | 3,473      |       |
| **Operating Margin**                    |       |                       |       |       |       |       |       |
| Residential                             |       | $                          | 40,642     |       | $          | 39,691     |       | $ | 37,483 |   |
| Commercial                              |       | $                          | 21,672     |       | $          | 22,014     |       | $ | 21,014 |   |

 

**Industrial and Other OperatingMargin**

 
| ** **                              | ** ** | **2005**                              | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|-----------------------------------------|------------|---------------------------------------|------------|------------|------------|------------|------------|
| ** **                              | ** ** | **(dollars and therms in thousands)** | ** ** |
| **Average Number of Customers  Billed** |       |                                  |       |       |       |       |       |
| Electric  Generation                    |       | 13                                    |       | 14         |       | 14         |       |
| Industrial                              |       | 718                                   |       | 737        |       | 741        |       |
| **Therms Delivered**                    | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Electric  Generation                    |       | 437,934                               |       | 480,859    |       | 543,621    |       |
| Industrial                              |       | 406,218                               |       | 415,740    |       | 395,480    |       |
| **Operating Margin**                    |       |                                  |       |       |       |       |       |
| Electric  Generation                    |       | $                                     | 7,663      |       | $          | 8,013      |       | $ | 9,032 |   |
| Industrial                              |       | $                                     | 18,672     |       | $          | 19,389     |       | $ | 19,394 |   |
| Gas  Management Services                |       | $                                     | 1,432      |       | $          | 3,309      |       | $ | 3,824 |   |
| Mark-to-Market  Valuations              |       | $                                     | (181       | )          | $          | 836        |       | $ | (315 | ) |
| Other  Service Revenue                  |       | $                                     | 1,290      |       | $          | 882        |       | $ | 593 |   |
| Oregon  Earnings Sharing estimates      |       | $                                     | 525        |       | $          | (326       | )          | $ | (350 | ) |

 

2005 Versus2004

 

Residential and Commercial – Operating margin****(revenueminus gas costs and revenue taxes) is primarily a function of customer growthand gas usage per customer.  The netaddition of approximately 10,500 billed residential and commercial customers in2005 contributed approximately $3,160,000 of additional margin compared to fiscal2004.  This was mostly offset byreductions in gas usage per residential and commercial customer of 3.8% and4.4%, respectively, which reduced margins by $2,550,000.  The addition of more efficient homes andbusinesses, reduced consumption per consumer, and slightly warmer weathercompared to last year drove the lower consumption rates.  Weather statistics indicate that fiscal 2005was 1% warmer than fiscal 2004 and 4% warmer than the average of the past fiveyears.

 

Industrial– Margin from natural gas deliveries to industrial customers decreased by$717,000 year to year.  This reduction isdue to a variety of reasons including contract changes reducing minimumrequirements, a decline in the number of customers and reduced usage by severalsectors including chemical and paper manufacturing.

 

Electric Generation– Margin from natural gas deliveries to electric generation customersdecreased $350,000 for the year with the decline attributable to lower-costhydroelectric supplies and the increased wholesale price of natural gas.  Looking ahead, gas usage by generationcustomers will continue to depend on the variables of regional demand forpower, availability of hydro resources, and the relationship between the marketprice of electricity and the cost of gas.

 

16

----

 

Gas Management –Gas management services margin was down $1,877,000 from last year.  The Company has lost sales and margin as aresult of increased competition for the sale of gas supplies to large-volumecustomers.

 

Oregon EarningsSharing – The change in Oregon Earnings Sharing amounts arethe result of revised estimates of liability for refunds to Oregon customersrelated to OPUC requirements.  As of theend of 2004, the Company estimated its liability to be $525,000.  Based on a final analysis approved by theOPUC, 2004 earnings were not sufficient to trigger a sharing with customers,and in 2005 this $525,000 was reversed. Management also estimates that there will be no liability for 2005.

 

2004 Versus2003

 

Residential andCommercial – Margins from residential andcommercial customers increased $3,208,000. Of this increase, approximately $2,200,000 resulted from the increase of8,013 in the average number of customers billed.  The remaining increase stemmed primarily fromincreased gas usage per customer, related to somewhat cooler weather.

 

Industrial– For the year, gas distribution margins from industrial customers wereessentially the same as 2003.  In thefirst half of the year, industrial distribution margin showed signs of recoveryfrom the stagnation that followed the 2000 energy crisis and a prolongedrecession.  However, the upward trendstalled in the third quarter, and in the fourth quarter, margins declinedcompared to 2003. The primary reason for the reversal of the positive trend isbelieved to be the higher wholesale prices of natural gas.

 

Electric Generation– Margins from electric generation customers were down $1,019,000 in2004 compared to 2003.  Much of thedecline was due to an abundance of cheap hydroelectricity and moderate regionaldemands for power during the first part of the year.

 

Gas Management – Margins from providing gas management services decreased $515,000 in2004 from 2003.  Margins in 2003 were negativelyimpacted by an $865,000 contract termination charge.  Absent this factor, gas management marginwould have decreased by $1,380,000 in 2004. The re-emergence of energy marketers, an industry segmentthat all but disappeared in the wake of the Enron failure, resulted in stiffcompetition for gas supply sales to larger gas customers.  Cascade has lost customers to such marketers,and margins that are available for any sales are smaller than in the past.

 

#### **COST OF OPERATIONS**

 

2005 versus 2004

 

The primary drivers of the $3,683,000(9.1%) increase in operating expenses are organizational changes in 2005.  Costs of $1,234,000 were recognized relatedto the replacements of the Company’s Chief Executive and Chief FinancialOfficers.  The expenses were primarilymade up of severance compensation for the retiring executives, hiring expenses,and signing bonuses for the new executives. In the fourth quarter of 2005, the Company eliminated 22 employeepositions resulting in $1,121,000 in severance expenses.

 

Operating expenses in 2005 includedthe write off of $596,000 in capital projects determined to no longer beviable. The projects were primarily related to development of computer softwareapplications.

 

Purchased services expenses in 2005were higher by $532,000 compared to 2004. The primary driver of this increaseis the costs related to the Company’s Sarbanes-Oxley compliance work, withincreased costs of $337,000 over 2004.

 

Bad debts expense increased $325,000over 2004.  Driving this increase arehigher gas costs resulting in higher customer bills.  Management believes the increase also stemsin part from the transition of customer service and collections activities from15 offices to a single consolidated customer service call center.

 

Employee benefits expense decreased$625,000.  The primary drivers of thedecrease were reductions in medical and dental expenses, for active employees,and in retiree medical expense.

 

Depreciation and amortization expenseincreased $949,000 reflecting higher depreciable assets resulting from capitalspending.

 

17

----

 

2004 versus 2003

 

Compared to 2003, overall Cost ofOperations was $3,823,000 lower for the year. Within Cost of Operations, notable changes in Operating Expensesincluded the reduction in employee benefits expenses of $4,448,000.  The comparison is affected by retirement plancurtailment charges of $1,451,000 in 2003. The remaining decrease is primarily attributed to changes in benefitplans initiated in 2003, designed to reduce costs.  Benefits expense in 2004 was also favorablyimpacted by recognition of $315,000 for the Medicare prescription drug subsidy,reflected as a reduction in retiree medical expense. In addition, 2003 expensesincluded a $524,000 severance cost.

 

The $987,000 increase in depreciationand amortization is primarily related to increases in depreciable gasdistribution system assets.

 

**INCOMETAXES**

 

The changes in theprovision for income taxes from 2004 to 2005, and from 2003 to 2004 areprimarily attributable to the changes in pre-tax earnings.

 

# **OTHERCOMPREHENSIVE INCOME (LOSS)**

# ** **

Thecomparisons of Other Comprehensive Income (loss) from 2005 to 2004, and from2004 to 2003 are related to minimum pension liability adjustments. In 2005 and2004, the value of pension plan assets continued a modest recovery from thedeclines experienced in 2001 and 2002. As a result of this recovery, theCompany has reduced its accrual related to its unfunded accumulated benefitobligation by $177,000 and $1,270,000 for 2005 and 2004.

 

###### **LIQUIDITY AND CAPITALRESOURCES**

###### ** **

The seasonal nature ofthe company’s business creates short-term cash requirements to finance customeraccounts receivable and construction expenditures.  To provide working capital for theserequirements, the company has a $60,000,000 bank revolving creditcommitment.  This agreement has avariable commitment fee and a term that expires in October 2007.  The company also has a $10,000,000uncommitted line of credit. As of September 30, 2005, there was$12,500,000 outstanding under these credit lines.

 

Due to the nature ofCascade’s business, which is characterized by reliable payments from a stablecustomer base and our expectations that capital spending will be reduced fromthe last few years, we expect to have limited need to source additional capitalduring fiscal year 2006.  For thisreason, combined with the availability of short-term credit and the ability toissue long-term debt and additional equity, management believes it has adequatefinancial flexibility to meet its anticipated cash needs.

 

The table below shows theCompany’s future commitments under contractual obligations as of September 30,2005:

 
| ** **                          | ** ** | **Amounts Due by Fiscal Year** | ** ** |
|-------------------------------------|------------|--------------------------------|------------|
| **Contract  Category**              | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **Beyond  2010** | ** ** | **Total** | ** ** |
| ** **                          | ** ** | **(dollars in thousands)**     | ** ** |
| Short-term Debt                     |       | $                              | 12,500     |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 12,500 |   |
| Long-term Debt                      |       | —                         |       | 8,000 |   | — |   | — |   | — |   | 165,840 |   | 173,840 |   |
| Interest on Debt                    |       | 12,363                         |       | 11,686 |   | 11,601 |   | 11,601 |   | 11,601 |   | 162,236 |   | 221,088 |   |
| Operating Leases                    |       | 537                            |       | 304 |   | 49 |   | 33 |   | 15 |   | — |   | 938 |   |
| Gas Supply                          |       | 245,968                        |       | 196,349 |   | 246,884 |   | 120,390 |   | 5,165 |   | — |   | 814,756 |   |
| Interstate  Pipeline Transportation |       | 36,645                         |       | 36,645 |   | 36,645 |   | 36,535 |   | 34,408 |   | 257,444 |   | 438,322 |   |
| Gas  Storage and Peaking Services   |       | 1,738                          |       | 1,520 |   | 1,520 |   | 1,520 |   | 1,520 |   | 6,078 |   | 13,896 |   |
| Other                               |       | 417                            |       | 226 |   | 111 |   | 114 |   | 54 |   | 55 |   | 977 |   |
| Total                               |       | $                              | 310,168    |   | $ | 254,730 |   | $ | 296,810 |   | $ | 170,193 |   | $ | 52,763 |   | $ | 591,653 |   | $ | 1,676,317 |   |

 

### **OPERATING ACTIVITIES**

 

The 2005 decline in net incomecontributed to lower net cash provided by operating activities.  A significant factor is reflected inDeferrals of gas cost changes, resulting from higher wholesale gas costs

 

18

----

 

paid this year relative to the amountbuilt in to customer rates.  Thisoutpaced the amount of $5,098,000 from Amortization of gas cost changes.  In October and November 2005, theCompany implemented new rates designed to collect from customers the amount offiscal 2006 gas costs, plus a temporary component designed to recoverapproximately $12 million of previously deferred gas costs.

 

Significantfactors affecting non-cash components of net income are prepaid income taxesand deferred income taxes.  In the fourthquarter of 2004, the Company received Internal Revenue Service approval of anapplication to change the method of accounting for deferred gas costs forpurposes of calculating current federal income taxes.  As a result, the Company is able to deduct onits federal tax returns amounts included in deferred gas cost charges.  This change is effective retroactive to thetax return for fiscal year 2001, and in 2005, the Company filed amended taxreturns for its fiscal years 2001 and 2002. Accordingly, the Company has accrued an estimated refund of federal andstate income taxes for those years of $7.5 million. These refunds representtemporary differences between book and taxable income, and deferred incometaxes have been accrued so that there is no impact on net income resulting fromthis change.  As deferred gas costcharges are amortized in future years, the Company’s income tax liability andcash payments for income taxes will increase accordingly.

 

**INVESTING ACTIVITIES**

 

Netcapital expenditures for 2005 were approximately 28% lower than last year.  The decrease is primarily attributable to$12,515,000 expended in 2004 on a project to install electronic devices on allthe Company’s customer meters to allow for automated meter reading (AMR.).  The AMR project was begun in 2003 andcompleted in 2004 with total expenditures on the project of approximately$16,198,000.

 

#### **FINANCING ACTIVITIES**

 

The Company retired $14million in current maturities of long-term debt during 2005 and $22 millionduring 2004.  These retirements werefunded with two debt issues totaling $45 million during 2005.  None of the outstanding long-term debtmatures during fiscal 2006. Additionally, during 2005, the Company reduced its short-term debt by$21 million.

 

Proceedsfrom issuance of common stock are primarily issuance of new stock through thedividend reinvestment plan, 401(k) plan, and on exercise of stock options.

 

###### **ENVIRONMENTAL MATTERS**

###### ** **

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 shown that soil andgroundwater contamination exists at the site. There are parties in addition to the Company that are potentially liablefor cleanup of the contamination.  Someof these other parties have shared in the costs expended to date to investigatethe site, and it is expected that these and other parties will share in the cleanupcosts.  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 at this time what share ofthe cleanup costs will actually be borne by the Company.

 

The second claim wasreceived in 1997 and relates to a site in Washington.  An 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 currently not enough informationavailable to estimate the potential liability associated with this claim, butthe Company and other parties may become more involved in investigations of thenature and extent of contamination, and possible remediation of the site, asincreased interest has been expressed concerning its potential forredevelopment.

 

Managementfirst intends to pursue reimbursement from its insurance carriers.  In the event the insurance proceeds do notcompletely cover the costs, management intends to seek recovery from itscustomers through increased rates.  Thereis precedent for such recovery through increased rates, as both the WUTC andthe OPUC have previously allowed regulated utilities to increase customer ratesto cover similar costs.

 

19

----

 

## **EFFICIENCYINITIATIVE – CUSTOMER SERVICE CALL CENTER**

## ** **

In January 2005, theCompany began operation of a customer-service call center at its existingdistrict office in Bellingham, Washington. Activation of the call center was phased in, and it became fullyoperational in March 2005.  Thiscall center consolidated, in one location, the Company’s customer servicefunction, which had been spread through 15 offices.  To implement the call center, the Companyincurred $855,000 capital expenditures and $313,000 transitional expenses.  After factoring in the transitional expense,there was a small net decrease in expense compared to 2004.  Management expects fiscal 2006 to benefitfrom a full year of approximately $750,000 in reduced costs, in addition toimproved customer service.

 

## **CRITICALACCOUNTING POLICIES**

## ** **

TheCompany’s financial statements are prepared in accordance with accountingprinciples generally accepted in the United States of America (GAAP).  In following GAAP, management exercisesjudgment in selection and application of accounting principles.  Management considers Critical Accounting Policiesto be those where different assumptions regarding application could result inmaterial differences in financial statements.

 

## **USE OF ESTIMATES**

 

The preparation of financial statements inconformity with GAAP requires management to make estimates and assumptions thataffect 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.  The Company has used estimates in measuringcertain deferred charges and deferred credits related to items subject toapproval of the WUTC and the OPUC. Estimates are also used in the development of discount rates and trendrates related to the measurement of retirement benefit obligations and accrualamounts, allowances for doubtful accounts, unbilled revenue, valuation ofderivative instruments, and in the determination of depreciable lives ofutility 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 maydiffer from these estimates under different assumptions or conditions.

 

## **REVENUE RECOGNITION**

 

## **The Company recognizes operating revenues based ondeliveries of gas and other services to customers.  This includes estimated revenues for gasdelivered but not billed to residential and commercial customers from thelatest meter reading date to the end of the accounting period.**

## ** **

## **REGULATORY ACCOUNTING**

 

The Company’s accounting policies and practices aregenerally the same as used by unregulated companies for financial reportingunder GAAP.  However, Statement ofFinancial Accounting Standards (FAS) No. 71, “Accounting for the Effectsof Certain Types of Regulation”, requires regulated companies to applyaccounting treatment intended to reflect the financial impact ofregulation.  For example, in establishingthe rates to be charged to the Company’s retail customers, the WUTC and theOPUC may not allow the Company to charge its customers for recovery of certainexpenses in the same period they are incurred. Instead, rates are expected to be established to recover costs that wereincurred in a prior period.  In thissituation, following FAS No. 71 requires the Company to defer these costsand include them as regulatory assets on the balance sheet.  In the subsequent period when these costs arerecovered from customers, the Company then amortizes these costs as expense inthe income statement in an amount equivalent to the amounts recovered.  Similarly, certain revenue items, or costreductions, may be deferred as regulatory liabilities, which are lateramortized to the income statement as customer rates are reduced.  In order to apply the provisions of FAS No. 71,the following conditions must apply:

 

•                  An independent regulator approves the company’scustomer rates.

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

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

 

The Company periodically assesses whetherconditions merit the continued applicability of FAS No. 71.  In the event the Company should determine inthe future that all or a portion of its regulatory assets and

 

20

----

 

liabilities no longer meet the above criteria, itwould be required to write off the related balances of its regulatory assetsand liabilities and reflect the write-off in its income statement.

 

## **PENSION PLANS**

 

The Company has a defined benefitpension plan substantially covering all union employees and salaried employeeshired before September 30, 2003. The Company also provides executive officers with supplementalretirement, death and disability benefits. These plans were amended in fiscal 2003 so that, subsequent to September 30,2003, benefits under these plans no longer accrue to non-bargaining-unitemployees and officers.  The pension planremains substantially unchanged for bargaining-unit employees at this time.

 

The Company’s pensioncosts for these plans are affected by the amount of cash contributions to theplans, the return on plan assets, and by employee demographics including age,compensation, and length of service. Actuarial formulas are used in the determination of pension costs andare affected by actual plan experience and assumptions of futureexperience.  Key actuarial assumptionsinclude the expected return on plan assets, the discount rate used indetermining the projected benefit obligation and pension costs, and the assumedrate of increase in employee compensation. Changes in these assumptions may significantly affect pensioncosts.  Changes to the provisions of theplans may also impact current and future pension costs.  Changes in pension plan obligations resultingfrom these factors may not be immediately recognized as pension costs, butgenerally are recognized in future years over the remaining average serviceperiod of pension plan participants.

 

The Company’s fundingpolicy is to contribute amounts equal to or greater than the minimum amountsrequired to be funded under the Employee Retirement Income Security Act, andnot more than the maximum amounts currently deductible for income tax purposes.  The Company contributed $3,365,000 in 2005and $3,843,000 in 2004 to the pension and supplemental executive retirementplans, and expects to contribute approximately $3,320,000 in 2006.

 

The discount rate theCompany selects is based on the average of the 20-year and above Aa debt yieldspublished by Moody’s.  These are yieldsconsidered to be consistent with the expected term of pension benefits.  At September 30, 2005, the Company useda discount rate of 5.50%, down from the 6.00% rate used at September 30,2004.  A reduction in the discount rateresults in increases in projected benefit obligation, pension liability, andpension costs.

 

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 2005 and 2004, the Company’s assumed rateof return on plan assets was 8.25%.  Areduction in the assumed rate of return would result in increases in pensionliability and pension costs.

 

## **DERIVATIVES**

 

The Company accounts forderivative transactions according to the provisions of Statement of FinancialAccounting Standards (FAS) No. 133, “Accounting for Derivative Instrumentsand Hedging Activities”, as amended. These standards require that the fair value of all derivative financialinstruments be recognized as either assets or liabilities on the Company’sbalance sheet and the recognition of unrealized gains and losses in OtherComprehensive Income or in the calculation of Net Income, depending on thenature of the hedge.

 

Mostof the Company’s contracts for purchase and sale of natural gas qualify for thenormal purchase and normal sales exception under FAS No. 133, and are notrequired to be recorded as derivative assets and liabilities.  Accordingly, the Company recognizes revenuesand expenses on an accrual basis, based on physical delivery of naturalgas.  The Company applies mark-to-marketaccounting to financial derivative contracts. Periodic changes in fair market value of derivatives associated with suppliesfor non-core customers are recognized in earnings or, if hedge accounting isapplied, in Other Comprehensive Income. The Company applies FAS No. 71 to periodic changes in fair marketvalue of derivatives associated with supplies for core customers and records anoffset in regulatory asset and regulatory liability accounts.

 

**NewAccounting Standards**

 

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

 

21

----

 

**Item7A.  Quantitative and QualitativeDisclosures About Market Risk**

 

The Company has evaluatedits risk related to financial instruments whose values are subject to marketsensitivity.  The Company has fixed-ratedebt obligations but does not currently have derivative financial instrumentssubject to interest rate risk.  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.  The Company’s Purchased Gas Cost Adjustment(PGA) mechanisms assure the recovery in customer rates of prudently incurredwholesale cost of natural gas purchased for the core market.  The Company primarily utilizes financialderivatives, and to a lesser extent, fixed price physical supply contracts tomanage risk associated with wholesale costs of natural gas purchased forcustomers.

 

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

 

For 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-LOOKING STATEMENTS**

 

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

 

These forward-looking statements reflect theCompany’s current expectations, beliefs and projections about future eventsthat we believe may affect the Company’s business, financial condition and resultsof operations, and are expressed in good faith and are believed to have areasonable 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:

 

•                  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;

 

•                  weatherconditions and other natural phenomena;

 

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

 

•                  changes in andcompliance with environmental and safety laws, regulations and policies, includingenvironmental cleanup requirements;

 

•                  competitionfrom alternative forms of energy and other sellers of energy;

 

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

 

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

 

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

 

22

----

 

•                  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 expensesand capital expenditures;

 

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

 

•                  potential inability to obtain permits, rightsof way, easements, leases, or other interests or necessary authority toconstruct pipelines, or complete other system expansions;

 

•                  changes in the availability and price ofnatural gas; 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.  All subsequent forward-looking statements,whether written or oral and whether made by or on behalf of the Company, alsoare expressly qualified by these cautionary statements.

 

Any forward-looking statement by the Company is made only as of thedate on which such statement is made. The Company undertakes no obligation to update any forward-lookingstatement to reflect events or circumstances after the date on which thestatement is made or to reflect the occurrence of any unanticipatedevents.  New factors emerge from time totime, and the Company is not able to predict all such factors, nor can itassess the impact of each such factor or the extent to which such factors maycause results to differ materially from those contained in any forward-lookingstatement.

 

23

----

 

**Item 8.  Financial Statements and Supplementary Data**

 

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Board of Directorsand Stockholders ofCascade Natural Gas CorporationSeattle, Washington

 

We have audited theaccompanying consolidated balance sheets of Cascade Natural Gas Corporation andsubsidiaries (the ”Company”) as of September 30, 2005 and 2004, andthe related consolidated statements of income and comprehensive income, commonshareholders’ equity, and cash flows for each of the three years in the periodended September 30, 2005. Our audits also included the consolidatedfinancial statement schedule listed in the Index as Item 15. Theseconsolidated financial statements and the consolidated financial statement schedule arethe responsibility of the Company’s management. Our responsibility is toexpress an opinion on the consolidated financial statements and theconsolidated financial statement schedule based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

In our opinion, suchconsolidated financial statements present fairly, in all material respects, thefinancial position of Cascade Natural Gas Corporation and subsidiaries as of September 30,2005 and 2004, and the results of their operations and their cash flows foreach of the three years in the period ended September 30, 2005, inconformity with accounting principles generally accepted in the United Statesof America. Also, in our opinion, such consolidated financial statementschedule, when considered in relation to the basic consolidated financialstatements taken as a whole, presents fairly, in all material respects, theinformation set forth therein.

 

As discussed inNote 3, the accompanying 2004 and 2003 consolidated financial statementshave been restated.

 

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, 2005, based on the criteriaestablished in *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commissionand our report dated December 9, 2005, 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 WashingtonDecember 9, 2005

 

24

----

 

CASCADE NATURAL GAS CORPORATION

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVEINCOME

 

(Dollars in thousands exceptper-share data)

 
| ** **                                    | ** ** | **Year Ended September 30,** | ** ** |
|-----------------------------------------------|------------|-----------------------------------|------------|
| ** **                                    | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                    | ** ** | ** **                        | ** ** | ** ** | ** ** | **(restated,  see Note 3)** | ** ** |
| Operating Revenues                            |       | $                                 | 326,500    |   | $ | 318,078 |   | $ | 302,755 |   |
| Less                                          |       |                              |       |   |   |   |   |
| Gas purchases                                 |       | 212,958                           |       | 202,759 |   | 191,887 |   |
| Revenue  taxes                                |       | 21,827                            |       | 21,511 |   | 20,193 |   |
| Operating Margin                              |       | 91,715                            |       | 93,808 |   | 90,675 |   |
|                                          |       |                              |       |   |   |   |   |
| Cost of Operations                            |       |                              |       |   |   |   |   |
| Operating  expenses                           |       | 44,223                            |       | 40,540 |   | 45,514 |   |
| Depreciation  and amortization                |       | 17,274                            |       | 16,325 |   | 15,338 |   |
| Property  and miscellaneous taxes             |       | 3,786                             |       | 3,696 |   | 3,532 |   |
|                                          |       | 65,283                            |       | 60,561 |   | 64,384 |   |
|                                          |       |                              |       |   |   |   |   |
| Income  from operations                       |       | 26,432                            |       | 33,247 |   | 26,291 |   |
|                                          |       |                              |       |   |   |   |   |
| Nonoperating Expense  (Income)                |       |                              |       |   |   |   |   |
| Interest                                      |       | 11,744                            |       | 12,375 |   | 12,363 |   |
| Interest  charged to construction             |       | (187                              | )          | (445 | ) | (378 | ) |
|                                          |       | 11,557                            |       | 11,930 |   | 11,985 |   |
| Amortization  of debt issuance expense        |       | 372                               |       | 618 |   | 696 |   |
| Other                                         |       | (376                              | )          | (162 | ) | (227 | ) |
|                                          |       | 11,553                            |       | 12,386 |   | 12,454 |   |
|                                          |       |                              |       |   |   |   |   |
| Income Before Income  Taxes                   |       | 14,879                            |       | 20,861 |   | 13,837 |   |
|                                          |       |                              |       |   |   |   |   |
| Income Taxes                                  |       | 5,632                             |       | 7,559 |   | 5,117 |   |
|                                          |       |                              |       |   |   |   |   |
| Net Income                                    |       | 9,247                             |       | 13,302 |   | 8,720 |   |
|                                          |       |                              |       |   |   |   |   |
| Other Comprehensive  Income (Loss):           |       |                              |       |   |   |   |   |
| Minimum  pension liability adjustment         |       | 177                               |       | 1,270 |   | (2,619 | ) |
| Income  tax benefit                           |       | (56                               | )          | (448 | ) | 937 |   |
| Other Comprehensive  Income (Loss)            |       | 121                               |       | 822 |   | (1,682 | ) |
|                                          |       |                              |       |   |   |   |   |
| Comprehensive Income                          |       | $                                 | 9,368      |   | $ | 14,124 |   | $ | 7,038 |   |
|                                          |       |                              |       |   |   |   |   |
| Earnings Per Common  Share, Basic and Diluted |       | $                                 | 0.82       |   | $ | 1.19 |   | $ | 0.79 |   |
|                                          |       |                              |       |   |   |   |   |
| Dividends Paid Per  Common Share              |       | $                                 | 0.96       |   | $ | 0.96 |   | $ | 0.96 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

25

----

 

CASCADE NATURAL GAS CORPORATION

CONSOLIDATED BALANCE SHEETS

 
| ** **                                                                                                                  | ** ** | **September 30,**     | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                                                                  | ** ** | **2005**                   | ** ** | **2004** | ** ** |
| ** **                                                                                                                  | ** ** | **(Dollars in thousands)** | ** ** |
| ASSETS                                                                                                                      | ** ** | ** **                 | ** ** |
| Utility Plant                                                                                                               |       | $                          | 597,469    |   | $ | 570,036 |   |
| Less  accumulated depreciation                                                                                              |       | 257,008                    |       | 242,691 |   |
|                                                                                                                        |       | 340,461                    |       | 327,345 |   |
| Construction  work in progress                                                                                              |       | 2,021                      |       | 7,229 |   |
|                                                                                                                        |       | 342,482                    |       | 334,574 |   |
| Other Assets                                                                                                                |       |                       |       |   |   |
| Investments  in non utility property                                                                                        |       | 202                        |       | 202 |   |
| Notes  receivable, less current maturities                                                                                  |       | 46                         |       | 43 |   |
|                                                                                                                        |       | 248                        |       | 245 |   |
| Current Assets                                                                                                              |       |                       |       |   |   |
| Cash  and cash equivalents                                                                                                  |       | 1,128                      |       | 499 |   |
| Accounts  receivable and current maturities of notes receivable, less allowance of  $1,319 and $1,028 for doubtful accounts |       | 23,163                     |       | 15,001 |   |
| Prepaid  expenses and other assets                                                                                          |       | 9,463                      |       | 18,674 |   |
| Derivative  instrument asset - energy commodity                                                                             |       | 91,957                     |       | 17,983 |   |
| Materials,  supplies, and inventories                                                                                       |       | 14,142                     |       | 13,268 |   |
| Deferred  income taxes                                                                                                      |       | 2,292                      |       | 955 |   |
|                                                                                                                        |       | 142,145                    |       | 66,380 |   |
| Deferred Charges and  Other                                                                                                 |       |                       |       |   |   |
| Gas  cost changes                                                                                                           |       | 16,630                     |       | 12,288 |   |
| Derivative  instrument asset - energy commodity                                                                             |       | 43,440                     |       | 3,952 |   |
| Other                                                                                                                       |       | 7,960                      |       | 5,183 |   |
|                                                                                                                        |       | 68,030                     |       | 21,423 |   |
|                                                                                                                        |       | $                          | 552,905    |   | $ | 422,622 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

26

----

 
| ** **                                                                                                                     | ** ** | **September 30,**     | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                                                                     | ** ** | **2005**                   | ** ** | **2004** | ** ** |
| ** **                                                                                                                     | ** ** | ** **                 | ** ** | **(restated,  see Note 3)** | ** ** |
| ** **                                                                                                                     | ** ** | **(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, 11,413,019 and 11,268,069 shares |       | $                          | 11,413     |   | $ | 11,268 |   |
| Additional  paid-in capital                                                                                                    |       | 103,781                    |       | 101,354 |   |
| Accumulated  other comprehensive loss                                                                                          |       | (12,487                    | )          | (12,608 | ) |
| Retained  earnings                                                                                                             |       | 15,908                     |       | 17,570 |   |
|                                                                                                                           |       | 118,615                    |       | 117,584 |   |
|                                                                                                                           |       |                       |       |   |   |
| Long-Term Debt                                                                                                                 |       | 173,840                    |       | 128,900 |   |
| Current Liabilities                                                                                                            |       |                       |       |   |   |
| Short-term  debt                                                                                                               |       | 12,500                     |       | 33,500 |   |
| Current  maturities of long-term debt                                                                                          |       | —                     |       | 14,000 |   |
| Accounts  payable                                                                                                              |       | 17,841                     |       | 12,923 |   |
| Property,  payroll, and excise taxes                                                                                           |       | 5,520                      |       | 5,287 |   |
| Dividends  and interest payable                                                                                                |       | 6,920                      |       | 7,125 |   |
| Regulatory  liabilities                                                                                                        |       | 91,217                     |       | 17,209 |   |
| Other  current liabilities                                                                                                     |       | 8,209                      |       | 8,972 |   |
|                                                                                                                           |       | 142,207                    |       | 99,016 |   |
| Deferred Credits and  Other Non-current Liabilities                                                                            |       |                       |       |   |   |
| Income  taxes                                                                                                                  |       | 42,273                     |       | 38,019 |   |
| Investment  tax credits                                                                                                        |       | 1,156                      |       | 1,303 |   |
| Retirement  plan obligations                                                                                                   |       | 19,042                     |       | 20,780 |   |
| Regulatory  liabilities                                                                                                        |       | 50,584                     |       | 10,515 |   |
| Other                                                                                                                          |       | 5,188                      |       | 6,505 |   |
|                                                                                                                           |       | 118,243                    |       | 77,122 |   |
| Commitments and  Contingencies (Note 12)                                                                                       |       | —                     |       | — |   |
|                                                                                                                           |       | $                          | 552,905    |   | $ | 422,622 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

27

----

 

CASCADE NATURAL GAS CORPORATION

CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS’ EQUITY

 

(Dollarsin thousands except per-share data)

 
| ** **                                      | ** ** | ** **       | ** ** | ** **    | ** ** | ** **        | ** ** | **Accumulated**   | ** ** | ** **   | ** ** |
|-------------------------------------------------|------------|------------------|------------|---------------|------------|-------------------|------------|-------------------|------------|--------------|------------|
| ** **                                      | ** ** | ** **       | ** ** | ** **    | ** ** | **Additional**    | ** ** | **Other**         | ** ** | ** **   | ** ** |
| ** **                                      | ** ** | **Common Stock** | ** ** | **Paid-In**   | ** ** | **Comprehensive** | ** ** | **Retained**      | ** ** |
| ** **                                      | ** ** | **Shares**       | ** ** | **Par Value** | ** ** | **Capital**       | ** ** | **Income (Loss)** | ** ** | **Earnings** | ** ** |
| Balance October 1,  2002                   |       |             |       |          |       |              |       |              |       |         |       |
| As  previously reported                         |       | 11,045,095       |       | $             | 11,045     |              | $          | 97,360            |       | $            | (11,748    | ) | $ | 17,524 |   |
| Cumulative  correction (see Note 3)             |       |             |       |          |       |              |       |              |       | (546         | )          |
| Balance October 1,  2002 (as restated)     |       | 11,045,095       |       | 11,045        |       | 97,360            |       | (11,748           | )          | 16,978       |       |
| Cash  dividends:                                |       |             |       |          |       |              |       |              |       |         |       |
| Common  stock, $.96 per share                   |       |             |       |          |       |              |       |              |       | (10,647      | )          |
| Other  comprehensive income (loss)              |       |             |       |          |       |              |       | (1,682            | )          |         |       |
| Issuance  of common stock                       |       | 86,765           |       | 87            |       | 1,517             |       |              |       |         |       |
| Net  Income (as restated)                       |       |             |       |          |       |              |       |              |       | 8,720        |       |
| Balance,  September 30, 2003 (as restated) |       | 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 (as restated) |       | 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 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

28

----

 

CASCADENATURAL GAS CORPORATION

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

 

(Dollarsin thousands)

 
| ** **                                                                         | ** ** | **Year Ended September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                         | ** ** | ** **                        | ** ** | ** ** | ** ** | **(restated, see  Note 3)** | ** ** |
| Operating Activities                                                               |       |                              |       |   |   |   |   |
| Net  Income                                                                        |       | $                                 | 9,247      |   | $ | 13,302 |   | $ | 8,720 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |                              |       |   |   |   |   |
| Depreciation  and amortization                                                     |       | 17,274                            |       | 16,325 |   | 15,338 |   |
| Deferrals  of gas cost changes                                                     |       | (9,440                            | )          | (7,001 | ) | 1,336 |   |
| Amortization  of gas cost changes                                                  |       | 5,098                             |       | 6,296 |   | 5,868 |   |
| Other  deferrals and amortizations                                                 |       | 76                                |       | 1,099 |   | 6,032 |   |
| Deferred  income taxes and tax credits - net                                       |       | 2,771                             |       | 12,972 |   | 3,188 |   |
| Change  in current assets and liabilities                                          |       | 4,125                             |       | (10,427 | ) | (3,782 | ) |
| Net  cash provided by operating activities                                         |       | 29,151                            |       | 32,566 |   | 36,700 |   |
|                                                                               |       |                              |       |   |   |   |   |
| Investing Activities                                                               |       |                              |       |   |   |   |   |
| Construction  expenditures                                                         |       | (28,893                           | )          | (39,465 | ) | (28,551 | ) |
| Customer  contributions in aid of construction                                     |       | 882                               |       | 446 |   | 858 |   |
| Net  cash used by investing activities                                             |       | (28,011                           | )          | (39,019 | ) | (27,693 | ) |
|                                                                               |       |                              |       |   |   |   |   |
| Financing Activities                                                               |       |                              |       |   |   |   |   |
| Proceeds  from long-term debt, net                                                 |       | 42,886                            |       | — |   | — |   |
| Repayment  of long-term debt                                                       |       | (14,060                           | )          | (22,030 | ) | — |   |
| Changes  in short-term debt                                                        |       | (21,000                           | )          | 29,700 |   | 3,800 |   |
| Proceeds  from issuance of common stock                                            |       | 2,572                             |       | 2,613 |   | 1,604 |   |
| Dividends  paid                                                                    |       | (10,909                           | )          | (10,783 | ) | (10,647 | ) |
| Net  cash used by financing activities                                             |       | (511                              | )          | (500 | ) | (5,243 | ) |
|                                                                               |       |                              |       |   |   |   |   |
| Net Increase (Decrease)  in Cash and Cash Equivalents                              |       | 629                               |       | (6,953 | ) | 3,764 |   |
|                                                                               |       |                              |       |   |   |   |   |
| Cash and Cash  Equivalents                                                         |       |                              |       |   |   |   |   |
| Beginning  of year                                                                 |       | 499                               |       | 7,452 |   | 3,688 |   |
| End  of year                                                                       |       | $                                 | 1,128      |   | $ | 499 |   | $ | 7,452 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

29

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

## **Note 1 - Nature of Business**

 

Cascade Natural GasCorporation (the Company) is a local distribution company (LDC) engaged in thedistribution of natural gas.  The Company’sservice territory consists of towns in Washington and Oregon, ranging from theCanadian border in northwestern Washington to the Idaho border in easternOregon.

 

As of September 30,2005, the Company had approximately 196,000 residential customers, 30,000commercial customers, and 719 industrial and other larger customers.  Approximately 200 of the larger industrialcustomers are non-core customers.

 

Residential, commercial,and smaller industrial customers are core customers who take traditional “bundled”natural gas service, which includes supply, peaking service, and upstreaminterstate pipeline transportation. Sales to core customers account for approximately 24% of gas deliveriesand 71% of operating margin.  The Company’ssales to its core residential and commercial customers are influenced byfluctuations in temperature, particularly during the winter season.  A warm winter season will tend to reduce gasconsumption.  Over the longer term, thesefluctuations tend to offset each other, as rates charged to customers aredeveloped based on the assumption of normal weather.  However, consumption is also influenced byenergy efficiency of customers’ appliances as well as consumer decisions toreduce natural gas usage in response to higher prices.

 

Non-core customers aregenerally large industrial, electric generation, and institutional customerswho have chosen “unbundled” service, meaning that they select from amongseveral supply and upstream pipeline transportation options, independent of theCompany’s distribution service.  TheCompany’s margin from non-core customers is derived primarily from thisdistribution service, as well as gas management services.  The principal industrial activities of itscustomers include the generation of electricity, processing of food, processingof forest products, production of chemicals, and refining 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 riskprimarily with respect to recovery of costs incurred.  Various deferred charges and deferred creditsreflect assumptions regarding recovery of certain costs through temporarycustomer rate adjustments during future periods.

 

### **Note 2 - Summary of Significant Accounting Policies**

 

TheCompany’s accounting records and practices conform to the requirements of theuniform system of accounts prescribed by the WUTC and the OPUC.

 

**Principlesof consolidation:**  Theconsolidated financial statements include the accounts of Cascade Natural GasCorporation and its wholly-owned subsidiaries: Cascade Land Leasing Co.; CGC Properties, Inc.; CGC Energy, Inc.;and CGC Resources, Inc.  Allinter-company transactions are eliminated in consolidation.

 

**Utilityplant:**  Utility plantis stated at the historical cost 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.  Maintenance and repairs of property, andreplacements and renewals of items deemed to be less than units of property,are charged to operations.  Units ofutility plant, retired or replaced, are credited to property accounts atcost.  Such amounts plus removal cost,less salvage, are charged to accumulated depreciation.  In the case of a sale of non-depreciableproperty or major operating units, the resulting gain or loss on the sale isincluded in earnings.

 

Depreciationof utility plant is computed using the straight-line method.  The Company periodically conductsdepreciation studies to establish and update asset depreciation lives.  Asset lives used for computing depreciationrange from six to seventy years, and the weighted average annual depreciationrate is approximately 3.0%.  The Companyperiodically reviews the carrying amount of its utility plant and otherlong-lived assets for impairment.  Anasset is considered impaired when estimated future cash flows are less than thecarrying amount of the asset.  In theevent the carrying amount of such asset is deemed not recoverable, the asset isadjusted to its fair value.  Fair valueis determined based on discounted future cash flow.

 

The Company periodicallyreviews items, such as its franchises and easements, which may give rise toasset retirement obligations (ARO).

 

30

----

 

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

 

**Cash andcash 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 providesadditional information to the Consolidated Statements of Cash Flows:

 
| ** **                                            | ** ** | **2005**                   | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------------|------------|----------------------------|------------|----------|------------|----------|------------|
| ** **                                            | ** ** | **(dollars in thousands)** | ** ** |
| Changes  in current assets and current liabilities:   |       |                       |       |     |       |     |       |
| Accounts  and notes receivable                        |       | $                          | (872       | )        | $          | (2,696   | )          | $ | 2,327 |   |
| Income  taxes                                         |       | 2,062                      |       | (12,026  | )          | 1,156    |       |
| Inventories                                           |       | (875                       | )          | 1,468    |       | (180     | )          |
| Prepaid  expenses and other assets                    |       | (144                       | )          | (504     | )          | 108      |       |
| Accounts  payable and accrued expenses                |       | 3,925                      |       | 3,967    |       | (7,192   | )          |
| Other                                                 |       | 29                         |       | (636     | )          | (1       | )          |
| Net  change in current assets and current liabilities |       | $                          | 4,125      |     | $          | (10,427  | )          | $ | (3,782 | ) |
| Cash  payments:                                       |       |                       |       |     |       |     |       |
| Interest  (net of amounts capitalized)                |       | $                          | 11,637     |     | $          | 12,839   |       | $ | 12,288 |   |
| Income  taxes                                         |       | $                          | —     |     | $          | 4,610    |       | $ | — |   |
|                                                       |            |                            |            |          |            |          |            |  |  |  |  |

 

**Materials,supplies and inventories:** Materials and supplies for construction, operations, and maintenance arerecorded at cost.  Inventories of naturalgas are recorded at lower of cost or market.

 

**Regulatoryaccounts:**  The Companyfollows Statement of Financial Accounting Standards (FAS) No. 71, “Accountingfor the Effects of Certain Types of Regulation”.  This statement provides for the deferral ofcertain costs and benefits that would otherwise be recognized in revenue orexpense, if it is probable that future rates will result in recovery fromcustomers or refund to customers of such amounts.

 

Regulatory assets(liabilities) at September 30, 2005 and 2004 include the following:

 
| ** **                           | ** ** | **2005**                   | ** ** | **2004** | ** ** |
|--------------------------------------|------------|----------------------------|------------|----------|------------|
| ** **                           | ** ** | **(dollars in thousands)** | ** ** |
| Non-current  Assets                  |       |                       |       |     |       |
| Gas  cost changes                    |       | $                          | 16,630     |     | $          | 12,288 |   |
| Unamortized  loss on reacquired debt |       | 1,659                      |       | 1,887    |       |
| Gas  supply hedging                  |       | 1,185                      |       | 40       |       |
| Other                                |       | 544                        |       | 501      |       |
| Current  Liabilities                 |       |                       |       |     |       |
| Gas  supply hedging                  |       | (91,217                    | )          | (17,209  | )          |
| Non-current  Liabilities             |       |                       |       |     |       |
| Deferred  income taxes               |       | (7,044                     | )          | (5,971   | )          |
| Gas  supply hedging                  |       | (43,440                    | )          | (3,941   | )          |
| Other,  net                          |       | (100                       | )          | (603     | )          |
|   Net                      |       | $                          | (121,783   | )        | $          | (13,008 | ) |

 

Under Non-current Assets,regulatory assets related to Unamortized loss on reacquired debt, Gas supplyhedging, and Other are included on the Consolidated Balance Sheets in “OtherDeferred Charges”.

 

**Revenuerecognition:**  TheCompany recognizes operating revenues based on deliveries of gas tocustomers.  This includes estimatedrevenues for gas delivered but not billed to residential and commercialcustomers from the latest meter-reading date to the end of the accounting period.

 

**Allowancefor doubtful accounts:** With respect to its residential and commercial customer accounts, theCompany establishes an allowance for doubtful accounts based on historicaltrends and ratios of write-offs to revenues. With respect to industrial customer accounts, which are generallysignificantly larger than

 

31

----

 

residential andcommercial, a specific allowance is established for accounts determined to beat risk of collection.

 

**Leases:**  The Company leases a portion of its vehiclefleet.  These leases are classified asoperating leases.  The Company’s primary obligationunder these leases is for a twelve-month period, with options to extend thelease thereafter.  Commitments beyond oneyear are not material.  Rent expenseunder operating leases totaled $641,000, $776,000, and $835,000 for fiscalyears ended September 30, 2005, 2004, and 2003, respectively.

 

**Federalincome taxes:**  Deferredincome taxes are determined using the asset and liability method, under whichdeferred tax assets and liabilities are measured based upon the temporarydifferences between the financial statement and income tax bases of assets andliabilities, using currently enacted tax rates. The Company normalizes temporary differences between book income andtaxable income, with the exception of depreciation differences on assets placedin service prior to 1981, consistent with the policies of the WUTC andOPUC.  With respect to utility plantplaced in service after 1980, the Company calculates its deferred income taxprovision to conform to the Federal normalization requirements, as approved bythe WUTC and OPUC.

 

**Investmenttax credits:** Investment tax credits were deferred and are amortized over theremaining life of the properties that gave rise to the credits.

 

**Use ofestimates:**  Thepreparation of financial statements, in conformity with accounting principlesgenerally accepted in the United States of America, requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities, and disclosure of contingent assets and liabilities, at the dateof the financial statements, and the reported amounts of revenues and expensesduring the reporting period.  Actualresults could differ from these estimates. The Company has used estimates in measuring certain deferred charges anddeferred credits related to items subject to approval of the WUTC and theOPUC.  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, and in thedetermination of depreciable lives of utility plant.

 

**Stock-basedcompensation:**  Compensationcost for stock options is measured as the excess of the market price of theCompany’s stock at the date of the grant over the price the employee must payto acquire the stock.  The Company hasaccounted for its stock-based compensation using the intrinsic value methodprescribed in Accounting Principles Board Opinion No. 25, “Accounting forStock Issued to Employees” rather than using the fair-value-based methodprescribed under FAS No. 123, “Accounting for Stock-Based Compensation.”  The Company has adopted the disclosurerequirements of FAS No. 123.  SeeNote 7 for more information about the Company’s stock-based compensationplan.  Had compensation expense beendetermined in accordance with FAS No. 123, the Company’s net income andearnings per share would have been as follows:

 
| ** **                                                                                                | ** ** | **2005**                                 | ** ** | **2004**   | ** ** | **2003**       | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|------------|------------|----------------|------------|
| ** **                                                                                                | ** ** | ** **                               | ** ** | ** ** | ** ** | **(restated)** | ** ** |
| ** **                                                                                                | ** ** | **(in thousands except per-share data)** | ** ** |
| Net  Income                                                                                               |       |                                     |       |       |       |           |       |
| As  reported                                                                                              |       | $                                        | 9,247      |       | $          | 13,302         |       | $ | 8,720 |   |
| Less  total stock-based employee compensation expense determined under the fair  value method, net of tax |       | 26                                       |       | 53         |       | 110            |       |
| Pro  forma net income                                                                                     |       | $                                        | 9,221      |       | $          | 13,249         |       | $ | 8,610 |   |
|                                                                                                      |       |                                     |       |       |       |           |       |
| Earnings  per share, basic and diluted                                                                    |       |                                     |       |       |       |           |       |
| As  reported                                                                                              |       | $                                        | 0.82       |       | $          | 1.19           |       | $ | 0.79 |   |
| Pro  forma                                                                                                |       | $                                        | 0.81       |       | $          | 1.18           |       | $ | 0.78 |   |

 

See also the discussionof “**FAS No. 123 (revised 2004)”** under **“New Accounting Standards”** below.

 

**Comprehensiveincome (loss):** Comprehensive income for the fiscal years ended September 30, 2005,2004 and 2003, included Other Comprehensive Income (Loss) of $121,000, $822,000,and ($1,682,000),

 

32

----

 

net of income tax.  The charges are related to minimum pensionliability adjustments.  See Note 11 formore information.

 

**Segmentreporting:**  Managementviews the Company as operating as a single segment, that of a localdistribution company in the Pacific Northwest. Therefore, the financial statements do not include disclosure of segmentinformation.

 

**Derivatives: **The Company recordsderivative transactions according to the provisions of FAS No. 133, *“Accounting for Derivative Instruments and Hedging Activities”*,as amended by FAS No. 138, *“Accounting for CertainDerivative Instruments and Certain Hedging Activities”,*and by**FAS No. 149, *“Amendment of Statement 133 on Derivative Instruments and HedgingActivities”**. *These standards require that thefair value of all derivative financial instruments be recognized as eitherassets or liabilities on the Company’s balance sheet.  Changes during a period in the fair value ofa derivative instrument are required to be included in earnings or othercomprehensive income for the period.

 

The Company’s contractsfor purchase and sale of natural gas generally qualify for the normal purchaseand normal sales exceptions 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.

 

With respect toderivative arrangements covering gas supplies for core customers, periodicchanges in fair market value are recorded in regulatory asset or regulatoryliability accounts, pursuant to authority granted by the WUTC and OPUC,recognizing that settlements of these arrangements will be recovered throughthe Purchased Gas Cost Adjustment (PGA) mechanism.

 

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 isapplied, periodic changes in the fair market value are recorded in OtherComprehensive Income (OCI).  Under hedgeaccounting, amounts recorded in OCI are reclassified into earnings in theperiod the hedged transaction affects earnings. If hedge accounting is not applied, periodic changes in fair marketvalue are recognized in earnings.

 

**NEWACCOUNTING STANDARDS**

 

**FASNo. 151:**  In November 2004,the Financial Accounting Standards Board (FASB) issued FAS No. 151, *“Inventory Costs”*.  This standard is an amendment of AccountingResearch Bulletin (ARB) No. 43, clarifying the requirement that abnormalamounts of idle facility expense, freight, handling costs, and spoilage berecognized as current period costs.  TheCompany does not expect the adoption of this standard on October 1, 2005to have a significant impact on the Company’s financial statements.

 

**FAS No. 123(revised 2004): **In December 2004,FASB issued FAS No. 123 (revised 2004), *“Share-BasedPayment*”.  This statement is arevision of FAS No. 123, *“Accountingfor Stock-Based Compensation”*, and supersedes Accounting PrinciplesBoard (APB) Opinion No. 25, *“Accountingfor Stock Issued to Employees”*. The Company will adopt this standard effective October 1,2005.  Under FAS No. 123 (revised 2004),the Company will be required to recognize as expense the fair value of equityinstruments, including stock options, to be issued in exchange for goods orservices.  Adoption of this standard isnot expected to have a significant impact on the Company’s financialstatements.

 

**FASNo. 153:**  In December 2004,FASB issued FAS No 153, *“Exchanges ofNonmonetary Assets”. *Thisstandard is an amendment of APB Opinion No. 29 and eliminates certainexceptions to the requirement of measuring exchanges of nonmonetary assetsbased on the fair value of assets exchanged. Adoption of this standard on July 1, 2005 did not have an impact onthe Company’s financial statements.

 

**FIN47: **In March 2005,the FASB issued FASB Interpretation (FIN) No. 47, *“Accounting for Conditional Asset RetirementObligations”*.  This standardis an interpretation of FAS No. 143 and was issued to clarify requirementsunder FAS 143 regarding the recognition and measurement of asset retirementobligations.  The Company is evaluatingthe impact of FIN 47 and is required to apply the standard no later than September 30,2006.

 

**FASNo. 154:**  In May 2005,FASB issued FAS No 154, *“Accounting forChanges and Error Corrections”.* This standard replaces APB Opinion No. 20 and FAS No. 3.  The Company will be required to adopt thisstandard October 1, 2006.  TheCompany is evaluating the impact of this standard.

 

33

----

 

# **Note3 – Restatement of Prior Years**

# ** **

Subsequent to theissuance of its financial statements for the year ended September 30,2004, the Company determined that its deferred income tax liability wasunderstated by $930,000 as a result of errors in the calculation of deferredincome taxes associated with the Company's pension plan assets and liabilities,which caused an understatement of the provision for deferred taxes for each ofthe years ended September 30, 2001, 2002, and 2003, of $242,000, $304,000,and $384,000, respectively.  As a result,the accompanying 2004 and 2003 consolidated financial statements have beenrestated from the amounts previously reported.

 

The following table setsforth the changes to the amounts reported resulting from the restatement of theCompany's Consolidated Financial Statements:

 

| ** **                             | ** ** | **Consolidated Statements of Income and  Comprehensive Income** | ** ** |
|----------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                             | ** ** | **As Previously  Reported**                                     | ** ** | **Adjustments** | ** ** | **As Restated** | ** ** |
| ** **                             | ** ** | **(dollars in thousands except per-share data)**                | ** ** |
| Year ended  September 30, 2003    |       |                                                            |       |   |   |   |   |
| Income  Taxes                          |       | $                                                               | 4,733      |   | $ | 384 |   | $ | 5,117 |   |
| Net  Income                            |       | $                                                               | 9,104      |   | $ | (384 | ) | $ | 8,720 |   |
| Comprehensive  Income                  |       | $                                                               | 7,422      |   | $ | (384 | ) | $ | 7,038 |   |
| Earnings  per Share, Basic and Diluted |       | $                                                               | 0.82       |   | $ | (0.03 | ) | $ | 0.79 |   |
|                                   |       |                                                            |       |   |   |   |   |
| ** **                             | ** ** | **Consolidated Balance Sheets**                                 | ** ** |
| ** **                             | ** ** | **As Previously  Reported**                                     | ** ** | **Adjustments** | ** ** | **As Restated** | ** ** |
| ** **                             | ** ** | **(dollars in thousands)**                                      | ** ** |
| September 30, 2004                |       |                                                            |       |   |   |   |   |
| Deferred  Income Taxes (liability)     |       | $                                                               | 37,089     |   | $ | 930 |   | $ | 38,019 |   |
| Retained  Earnings                     |       | $                                                               | 18,500     |   | $ | (930 | ) | $ | 17,570 |   |
| Total  Common Shareholders' Equity     |       | $                                                               | 118,514    |   | $ | (930 | ) | $ | 117,584 |   |
|                                        |            |                                                                 |            |  |  |  |  |  |  |  |  |

 

The restatement alsoresulted in a decrease in retained earnings of $546,000 as of October 1,2002.

 

34

----

 

# **Note4 – Earnings Per Share**

 

The following table setsforth the calculation of earnings per share as prescribed in FAS No. 128:

 

| ** **                                             | ** ** | **2005**                                 | ** ** | **2004**   | ** ** | **2003**                    | ** ** |
|--------------------------------------------------------|------------|------------------------------------------|------------|------------|------------|-----------------------------|------------|
| ** **                                             | ** ** | ** **                               | ** ** | ** ** | ** ** | **(restated,  see Note 3)** | ** ** |
| ** **                                             | ** ** | **(in thousands except per-share data)** | ** ** |
|                                                   |       |                                     |       |       |       |                        |       |
| Net Income                                             |       | $                                        | 9,247      |       | $          | 13,302                      |       | $ | 8,720 |   |
|                                                   |       |                                     |       |       |       |                        |       |
| Weighted  average shares outstanding                   |       | 11,339                                   |       | 11,209     |       | 11,075                      |       |
| Plus:  Issued on assumed exercise of stock options     |       | 3                                        |       | 13         |       | 16                          |       |
| Weighted  average shares outstanding assuming dilution |       | 11,342                                   |       | 11,222     |       | 11,091                      |       |
|                                                   |       |                                     |       |       |       |                        |       |
| Earnings  per common share, basic                      |       | $                                        | 0.82       |       | $          | 1.19                        |       | $ | 0.79 |   |
| Earnings  per common share, diluted                    |       | $                                        | 0.82       |       | $          | 1.19                        |       | $ | 0.79 |   |
|                                                        |            |                                          |            |            |            |                             |            |  |  |  |  |

 

The only dilutive securitiesare the stock options described in Note 7.

 

# **Note5 - Utility Plant**

# ** **

Utility plant at September 30,2005 and 2004 consists of the following components:

 

| ** **           | ** ** | **2005**                   | ** ** | **2004** | ** ** |
|----------------------|------------|----------------------------|------------|----------|------------|
| ** **           | ** ** | **(dollars in thousands)** | ** ** |
| Distribution plant   |       | $                          | 531,497    |     | $          | 505,232 |   |
| Transmission plant   |       | 14,693                     |       | 14,693   |       |
| General plant        |       | 47,165                     |       | 45,840   |       |
| Intangible plant     |       | 212                        |       | 212      |       |
| Nondepreciable plant |       | 3,902                      |       | 4,059    |       |
|                 |       | $                          | 597,469    |     | $          | 570,036 |   |

 

# **Note6 - Common Stock**

 

At September 30,2005, shares of common stock are reserved for issuance as follows:

 

| ** **                                                      | ** ** | **Number**    | ** ** |
|-----------------------------------------------------------------|------------|---------------|------------|
| ** **                                                      | ** ** | **of shares** | ** ** |
| Employee  Savings Plan and Retirement Trust  (401(k) plan) |       | 180,529       |       |
| Dividend  Reinvestment Plan                                     |       | 164,621       |       |
| Director  Stock Award Plan                                      |       | 29,112        |       |
| Stock  Incentive Plan (Note 7)                                  |       | 344,079       |       |
|                                                            |       | 718,341       |       |

 

The price of sharesissued in connection with the above plans is determined by the market price ofshares on the day of, or immediately preceding the issuance date.

 

# **Note7 – Stock-Based Compensation**

# ** **

Under the Company’s stockincentive plan, officers and other key management employees may be grantedoptions to purchase stock or other equity-based incentives.  The grants vest 1/3 per year over threeyears.  Options granted in 2001 expirefive years after the grant date.  Optionsgranted in 2002 expire ten years from the grant date.  No options were granted in 2003, 2004, or2005.  The weighted average remaininglife of options outstanding at September 30, 2005 is 4.1 years.

 

35

----

 

The following tablesummarizes the grants under option at September 30:

 
| ** **                        | ** ** | **2005**      | ** ** | **2004**            | ** ** | **2003**      | ** ** |
|-----------------------------------|------------|---------------|------------|---------------------|------------|---------------|------------|
| ** **                        | ** ** | **Wtd. Avg.** | ** ** | **No. Shares** | ** ** | **Wtd. Avg.** | ** ** | **No. Shares** | ** ** | **Wtd. Avg.** | ** ** | **No. Shares** | ** ** |
| ** **                        | ** ** | **Exercise**  | ** ** | **Under**           | ** ** | **Exercise**  | ** ** | **Under** | ** ** | **Exercise** | ** ** | **Under** | ** ** |
| ** **                        | ** ** | **Price**     | ** ** | **Option**          | ** ** | **Price**     | ** ** | **Option** | ** ** | **Price** | ** ** | **Option** | ** ** |
| Balance at  October 1        |       | $             | 18.69      |                | 124,398    |          | $          | 18.15 |   | 182,030 |   | $ | 18.04 |   | 192,430 |   |
| Options granted                   |       | N/A           |       | —              |       | N/A           |       | — |   | N/A |   | — |   |
| Options cancelled                 |       |          |       | (4,067              | )          |          |       | (7,999 | ) |   |   | (3,600 | ) |
| Options exercised                 |       |          |       | (46,432             | )          |          |       | (49,633 | ) |   |   | (6,800 | ) |
| Balance at  September 30     |       | $             | 19.95      |                | 73,899     |          | $          | 18.69 |   | 124,398 |   | $ | 18.15 |   | 182,030 |   |
| Exercisable at  September 30 |       | $             | 19.95      |                | 73,899     |          | $          | 18.34 |   | 107,405 |   | $ | 17.24 |   | 124,753 |   |

 

**Note 8 - Short-Term Debt**

 

The Company’s short-termborrowing needs are met with a three-year, $60,000,000 revolving creditagreement with one of its banks.  Thisagreement has a variable commitment fee and a term that expires in October 2007.  The Company also has a $10,000,000uncommitted line of credit.  Thefollowing table sets forth information on the two credit lines:

 
| ** **                                       | ** ** | **2005**                   | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------------------|------------|----------------------------|------------|----------|------------|----------|------------|
| ** **                                       | ** ** | **(dollars in thousands)** | ** ** |
| Amount outstanding at  September 30         |       | $                          | 12,500     |     | $          | 33,500   |       | $ | 3,800 |   |
| Average daily balance  outstanding               |       | $                          | 19,204     |     | $          | 4,511    |       | $ | 449 |   |
| Average interest rate,  excluding commitment fee |       | 3.35                       | %          | 2.29     | %          | 2.54     | %          |
| Maximum month-end  amount outstanding            |       | $                          | 45,000     |     | $          | 33,500   |       | $ | 6,250 |   |

 

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, 2005, the Company isin compliance with all restrictive covenants of its debt agreements.

 

36

----

 

# **Note9 - Long-Term Debt**

 

Long-term debt andcurrent maturities of long-term debt at September 30, 2005 and 2004consist of the following:

 
| ** **                                            | ** ** | **2005**                   | ** ** | **2004** | ** ** |
|-------------------------------------------------------|------------|----------------------------|------------|----------|------------|
| ** **                                            | ** ** | **(dollars in thousands)** | ** ** |
| Medium-term  Notes:                                   |       |                       |       |     |       |
| 8.50%  due Oct. 2006                             |       | $                          | 8,000      |     | $          | 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                     |       | —   |       |
| 7.50%  Notes due November 2031                   |       | 39,840                     |       | 39,900   |       |
| 5.25%  Insured Quarterly Notes due February 2035 |       | 30,000                     |       | —   |       |
| Total  long-term debt                                 |       | $                          | 173,840    |     | $          | 128,900 |   |
|                                                  |       |                       |       |     |       |
| Current Maturities                                    |       |                       |       |     |       |
| Medium-term  Notes:                                   |       |                       |       |     |       |
| 7.18%  due Oct. 2004                             |       | $                          | —     |     | $          | 4,000 |   |
| 8.38%  due Jan. 2005                             |       | —                     |       | 5,000    |       |
| 8.35%  due Jul. 2005                             |       | —                     |       | 5,000    |       |
| Total  current maturities                             |       | $                          | —     |     | $          | 14,000 |   |

 

None of the long-termdebt includes sinking fund requirements.

 

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

 

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

 

The 5.25% InsuredQuarterly Notes due February 2035 are redeemable at the option of theCompany, in whole or in part, on or after February 1, 2010.

 

Annual obligations forredemption of long-term debt and current maturities are as follows:  none in fiscal year 2006, $8,000,000 infiscal year 2007, none in fiscal years 2008, 2009, and 2010, and $165,840,000thereafter.

 

There are $89 millionMedium-Term Notes (MTN’s) outstanding as of September 30, 2005.  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 up to$150 million long-term debt and equity securities.  As of September 30, 2005, thatregistration statement has $65 million available for issuance.

 

37

----

 

# **Note10 - Income Taxes**

 

The provision for incometax expense consists of the following:

 
| ** **                                       | ** ** | **2005**                   | ** ** | **2004**   | ** ** | **2003**                    | ** ** |
|--------------------------------------------------|------------|----------------------------|------------|------------|------------|-----------------------------|------------|
| ** **                                       | ** ** | ** **                 | ** ** | ** ** | ** ** | **(restated, see  Note 3)** | ** ** |
| ** **                                       | ** ** | **(dollars in thousands)** | ** ** |
| Current  tax expense                             |       | $                          | 1,844      |       | $          | (7,416                      | )          | $ | 270 |   |
| Deferred  tax expense                            |       | 3,934                      |       | 15,151     |       | 5,036                       |       |
| Amortization  of deferred investment tax credits |       | (146                       | )          | (176       | )          | (189                        | )          |
| Total  income tax expense                        |       | $                          | 5,632      |       | $          | 7,559                       |       | $ | 5,117 |   |

 

A deferred income taxcharge (benefit) associated with accruals of minimum pension liability isincluded in Other Comprehensive Income (OCI) for each year ended September 30as follows:  $56,000 in 2005, $448,000 in2004, and ($937,000) in 2003.  See Note11 for more information on OCI.

 

A reconciliation betweenincome taxes calculated at the statutory federal tax rate and income taxesreflected in the financial statements is as follows:

 
| ** **                                       | ** ** | **2005**                   | ** ** | **2004**   | ** ** | **2003**                    | ** ** |
|--------------------------------------------------|------------|----------------------------|------------|------------|------------|-----------------------------|------------|
| ** **                                       | ** ** | ** **                 | ** ** | ** ** | ** ** | **(restated, see  Note 3)** | ** ** |
| ** **                                       | ** ** | **(dollars in thousands)** | ** ** |
| Statutory federal  income tax rate               |       | 35                         | %          | 35         | %          | 35                          | %          |
| Income tax calculated  at statutory federal rate |       | $                          | 5,208      |       | $          | 7,301                       |       | $ | 4,843 |   |
| Increase (decrease)  resulting from:             |       |                       |       |       |       |                        |       |
| State  income tax, net of federal tax benefit    |       | 225                        |       | 60         |       | 109                         |       |
| Non-normalized  depreciation differences         |       | 327                        |       | 364        |       | 305                         |       |
| Amortization  of investment tax credits          |       | (146                       | )          | (176       | )          | (189                        | )          |
| Other                                            |       | 18                         |       | 10         |       | 49                          |       |
|                                             |       | $                          | 5,632      |       | $          | 7,559                       |       | $ | 5,117 |   |
|                                             |       |                       |       |       |       |                        |       |
| Effective tax rate                               |       | 37.9                       | %          | 36.2       | %          | 37.0                        | %          |

 

Deferred income taxesreflect the net tax effects of temporary differences between the carryingamounts of assets and liabilities for financial reporting purposes and theamounts used for income tax purposes. There is no deferred tax provision for temporary differences related todepreciation of pre-1981 assets because, with respect to those assets, there isno regulatory recognition of deferred tax accounting.

 

Deferred tax assets and liabilities are calculated under 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 andliabilities, including temporary differences for which no deferred taxes hadbeen previously provided because of use of flow-through tax accounting forrate-making purposes.  Because of priorand expected future rate-making treatment of temporary differences for whichflow-through accounting has been utilized, a regulatory liability for income taxespayable through future rates related to those temporary differences has beenestablished.  At September 30, 2005,the balance of this regulatory liability is $7,044,000.

 

38

----

 

Thetax effects of significant items comprising the Company’s deferred income taxaccounts at September 30, 2005 and 2004 are as follows:

 
| ** **                              | ** ** | **2005**                   | ** ** | **2004**                    | ** ** |
|-----------------------------------------|------------|----------------------------|------------|-----------------------------|------------|
| ** **                              | ** ** | ** **                 | ** ** | **(restated, see  Note 3)** | ** ** |
| ** **                              | ** ** | **(dollars in thousands)** | ** ** |
| Current  Amount:                        |       |                       |       |                        |       |
| Deferred  assets:                       |       |                       |       |                        |       |
| Allowance  for doubtful accounts        |       | $                          | 527        |                        | $          | 421 |   |
| Accrued  liabilities                    |       | 542                        |       | 520                         |       |
| Alternative  minimum tax credit         |       | 1,136                      |       | —                      |       |
| Other                                   |       | 86                         |       | 14                          |       |
|                                    |       | $                          | 2,291      |                        | $          | 955 |   |
|                                    |       |                       |       |                        |       |
| Non-current  Amounts:                   |       |                       |       |                        |       |
| Deferred  tax liabilities:              |       |                       |       |                        |       |
| Basis  differences on net fixed assets  |       | $                          | 41,276     |                        | $          | 39,395 |   |
| Deferred  gas costs                     |       | 6,503                      |       | 5,190                       |       |
| Debt  refinancing costs                 |       | 595                        |       | 676                         |       |
| Retirement  benefit obligations         |       | 3,135                      |       | 2,318                       |       |
| Other                                   |       | 168                        |       | 235                         |       |
|                                    |       | 51,677                     |       | 47,814                      |       |
| Deferred  tax assets:                   |       |                       |       |                        |       |
| Retirement  benefit obligations         |       | 2,282                      |       | 2,582                       |       |
| Other  comprehensive income             |       | 6,979                      |       | 7,036                       |       |
| Other                                   |       | 143                        |       | 177                         |       |
|                                    |       | 9,404                      |       | 9,795                       |       |
| Net  non-current deferred tax liability |       | $                          | 42,273     |                        | $          | 38,019 |   |

 

## **Note 11 - RetirementPlans**

 

The Company has a noncontributory defined benefit pensionplan that covers substantially all employees over 21 years of age with one yearof service.  Under a plan amendmenteffective October 1, 2003, non-bargaining-unit employees no longer accruebenefits under the plan.  Benefitsaccrued as of that point were frozen for those employees.  Employees covered by a bargaining agreementaccrue benefits based on a formula that includes credited years of service andthe employee’s annual compensation.

 

The Company has alsoprovided executive officers with supplemental retirement, death, and disabilitybenefits.  This plan was also frozen September 30,2003 for further accruals and for new participants.  Under the plan, vesting occurred on a steppedbasis with full vesting at age 55 and completing either five years ofparticipation under the plan or seventeen years of employment with the Company,upon death, or upon a change in control. The plan supplemented the benefit received through Social Security andthe defined benefit pension plan so that the total retirement benefits would beequal to 70% of the executive’s highest salary during any of the five yearspreceding retirement.  The plan alsoprovides a death benefit equivalent to ten years of vested benefits.   The employment contracts for the recentlyhired Chief Executive Officer and Chief Financial Officer provide for a supplementaldefined-contribution retirement plan which is being established that providesfor a retirement income target of 55% of final pay after taking intoconsideration benefits earned from other retirement plans and Social Security.

 

The Company has an EmployeeSavings Plan and Retirement Trust (401(k) plan).  All employees 21 years of age or older withone full year of service are eligible to enroll in the plan.  Under the terms of the plan, the Companymatches contributions based on a percentage of each employee’s contribution upto 6% of the employee’s compensation, as defined.  Effective July 1, 2003, the Company’smatching contribution percentage was reduced from 75% to 50% with respect tonon-bargaining-unit employees.  The rateremains at 75% for bargaining-unit employees for the duration of the currentcontract with the union.  The Companyrecognized costs for matching contributions of $621,000, $728,000, and$782,000, for 2005, 2004, and 2003, respectively.

 

In addition to theexisting match of non-bargaining-unit employee contributions, the Companycontributes 4% of eligible salaries, and a 1% to 4% transition contribution, toemployee retirement accounts.  TheCompany recognized $956,000 and $973,000 for 2005 and 2004, respectively, underthis plan.  Additionally, there will beannually determined “profit-sharing” contributions based on the Company

 

39

----

 

achieving establishedtargets.  There was no profit-sharingcontribution for 2005 or 2004.  The retirementplans remain unchanged for bargaining-unit employees until the existingagreement expires in 2006.

 

TheCompany’s health care plan provides Postretirement Benefits Other than Pensions(PBOP), consisting of medical and prescription drug benefits, to its retiredemployees hired prior to June 1, 1992, and their eligible dependents.  Changes to this plan, announced in 2003,provide for the addition of participant contributions that beganJanuary 1, 2004.

 

Thefollowing tables set forth the pension and health care plan disclosures.  The amounts shown in the tables under PensionBenefits represent the aggregate amounts of the employee pension plan and theexecutive supplemental retirement plan. Amounts shown under Other Benefits represent the retiree medicalplan.  The measurement date of planassets and obligations is as of September 30 for each year presented:

 

**Components of net periodicbenefit cost**

 
| ** **                              | ** ** | **Pension Benefits**       | ** ** | **Other Benefits** | ** ** |
|-----------------------------------------|------------|----------------------------|------------|--------------------|------------|
| ** **                              | ** ** | **2005**                   | ** ** | **2004**           | ** ** | **2003** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                              | ** ** | **(dollars in thousands)** | ** ** |
| Service  cost                           |       | $                          | 788        |               | $          | 768 |   | $ | 1,522 |   | $ | 140 |   | $ | 160 |   | $ | 534 |   |
| Interest  cost                          |       | 3,843                      |       | 3,728              |       | 3,745 |   | 1,101 |   | 1,270 |   | 2,182 |   |
| Expected  return on plan assets         |       | (4,162                     | )          | (3,913             | )          | (3,738 | ) | (846 | ) | (853 | ) | (731 | ) |
| Amortization  of transition obligation  |       | —                     |       | —             |       | 58 |   | — |   | — |   | 657 |   |
| Amortization  of prior service cost     |       | 182                        |       | 229                |       | 365 |   | (1,320 | ) | (1,319 | ) | (375 | ) |
| Recognized  net actuarial loss / (gain) |       | 1,544                      |       | 1,397              |       | 1,160 |   | 747 |   | 961 |   | 1,205 |   |
| Net  periodic benefit cost              |       | 2,195                      |       | 2,209              |       | 3,112 |   | (178 | ) | 219 |   | 3,472 |   |
| Curtailment  loss recognized            |       | —                     |       | —             |       | 1,451 |   | — |   | — |   | — |   |
| Total  benefit cost                     |       | $                          | 2,195      |               | $          | 2,209 |   | $ | 4,563 |   | $ | (178 | ) | $ | 219 |   | $ | 3,472 |   |

 

40

----

 
| ** **                                           | ** ** | **Pension Benefits**       | ** ** | **Other Benefits** | ** ** |
|------------------------------------------------------|------------|----------------------------|------------|--------------------|------------|
| ** **                                           | ** ** | **2005**                   | ** ** | **2004**           | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                           | ** ** | **(dollars in thousands)** | ** ** |
| **Change in benefit obligations**                    |       |                       |       |               |       |   |   |   |   |
| Projected  benefit obligation at beginning of year   |       | $                          | 65,523     |               | $          | 63,371 |   | $ | 18,960 |   | $ | 25,011 |   |
| Service  Cost                                        |       | 788                        |       | 768                |       | 140 |   | 160 |   |
| Interest  Cost                                       |       | 3,843                      |       | 3,728              |       | 1,101 |   | 1,270 |   |
| Plan  participants’ contributions               |       | —                     |       | —             |       | 67 |   | 56 |   |
| Amendments                                           |       | —                     |       | —             |       | (7,393 | ) | (1,216 | ) |
| Benefits  paid                                       |       | (2,880                     | )          | (2,645             | )          | (870 | ) | (1,106 | ) |
| Changes  in assumptions                              |       | 4,388                      |       | —             |       | — |   | — |   |
| Actuarial  (gain)/loss                               |       | 67                         |       | 301                |       | 413 |   | (5,215 | ) |
| Projected  benefit obligation at end of year         |       | 71,729                     |       | 65,523             |       | 12,418 |   | 18,960 |   |
|                                                 |       |                       |       |               |       |   |   |   |   |
| **Change in plan assets**                            |       |                       |       |               |       |   |   |   |   |
| Fair  value of plan assets at beginning of year      |       | 51,332                     |       | 45,723             |       | 10,935 |   | 10,383 |   |
| Actual  return on plan assets                        |       | 6,684                      |       | 4,411              |       | 1,188 |   | 1,234 |   |
| Employer  contributions                              |       | 3,365                      |       | 3,843              |       | 193 |   | 368 |   |
| Plan  participants’ contributions               |       | —                     |       | —             |       | 67 |   | 56 |   |
| Benefits  Paid                                       |       | (2,880                     | )          | (2,645             | )          | (870 | ) | (1,106 | ) |
| Fair  value of plan assets at end of year            |       | 58,501                     |       | 51,332             |       | 11,513 |   | 10,935 |   |
|                                                 |       |                       |       |               |       |   |   |   |   |
| Funded  Status                                       |       | (13,228                    | )          | (14,191            | )          | (905 | ) | (8,025 | ) |
| Unrecognized  prior service cost                     |       | 645                        |       | 827                |       | (15,013 | ) | (8,940 | ) |
| Unrecognized  net (gain)/loss                        |       | 23,734                     |       | 23,345             |       | 9,511 |   | 10,187 |   |
| Net  amount recognized                               |       | $                          | 11,151     |               | $          | 9,981 |   | $ | (6,407 | ) | $ | (6,778 | ) |
|                                                 |       |                       |       |               |       |   |   |   |   |
| Amounts  recognized in the balance sheet consist of: |       |                       |       |               |       |   |   |   |   |
| Prepaid  pension cost                                |       | $                          | 3,669      |               | $          | 3,507 |   | $ | — |   | $ | — |   |
| Accrued  pension (liability)                         |       | (12,630                    | )          | (13,997            | )          | (6,407 | ) | (6,778 | ) |
| Intangible  asset                                    |       | 645                        |       | 827                |       | — |   | — |   |
| Accumulated  other comprehensive (income) loss       |       | 19,467                     |       | 19,644             |       | — |   | — |   |
| Net  amount recognized                               |       | $                          | 11,151     |               | $          | 9,981 |   | $ | (6,407 | ) | $ | (6,778 | ) |
|                                                 |       |                       |       |               |       |   |   |   |   |
| Accumulated  Benefit Obligation                      |       | $                          | 69,161     |               | $          | 63,512 |   |   |   |   |   |

 

For the fiscal yearending September 30, 2006, the Company expects to contribute approximately$3,320,000 to the employee pension plan and none to the supplemental executiveretirement plan.  2006 funding levels forthe retiree medical plan have not been determined.

 

**Expected Future Benefit Payments**

 
| ** **              | ** ** | ** **                | ** ** | **Other**          | ** ** |
|-------------------------|------------|---------------------------|------------|--------------------|------------|
| **Fiscal  year ending** | ** ** | **Pension**               | ** ** | **Postretirement** | ** ** |
| **September 30**   | ** ** | **Benefits**              | ** ** | **Benefits**       | ** ** |
| ** **              | ** ** | **(dollars in thousads)** | ** ** |
| 2006                    |       | $                         | 3,081      |               | $          | 922 |   |
| 2007                    |       | $                         | 3,279      |               | $          | 866 |   |
| 2008                    |       | $                         | 3,520      |               | $          | 887 |   |
| 2009                    |       | $                         | 3,754      |               | $          | 940 |   |
| 2010                    |       | $                         | 4,013      |               | $          | 981 |   |
| Next five years         |       | $                         | 23,254     |               | $          | 4,968 |   |

 

41

----

 
| ** **                              | ** ** | **Discount Rate** | ** ** | **Average  Compensation Increase** | ** ** | **Expected Return on  Plan Assets** | ** ** |
|-----------------------------------------|------------|-------------------|------------|------------------------------------|------------|-------------------------------------|------------|
| ** **                              | ** ** | **2005**          | ** ** | **2004**                           | ** ** | **2005**                            | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Weighted Average Assumptions**        |       |              |       |                               |       |                                |       |   |   |   |   |   |   |
| Pension  plan                           |       | 5.50              | %          | 6.00                               | %          | 3.50                                | %          | 3.50 | % | 8.25 | % | 8.25 | % |
| Supplemental  executive retirement plan |       | 5.50              | %          | 6.00                               | %          | N/A                                 |       | N/A |   | 8.25 | % | 8.25 | % |
| Postretirement  medical benefit plan    |       | 5.50              | %          | 6.00                               | %          | N/A                                 |       | N/A |   | 8.25 | % | 8.25 | % |

 

**AssumedHealth Care Cost Trend Rates**

 
| ** **                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|
| Medical  and Medicare                      |       |     |       |     |       |
| Initial  rate                              |       | 8.5      | %          | 7.0      | %          |
| Trends  down to 5.5% ultimate rate by 2012 |       |     |       |     |       |
| Prescription  Drugs                        |       |     |       |     |       |
| Initial  rate                              |       | 13.0     | %          | 12.0     | %          |
| Trends  down to 5.5% ultimate rate by 2015 |       |     |       |     |       |

 

A one-percent change inthe assumed health care cost trend rate would have the following effects as ofSeptember 30, 2005:

 
| ** **                                                                              | ** ** | **One Percentage Point**   | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                              | ** ** | **Increase**               | ** ** | **Decrease** | ** ** |
| ** **                                                                              | ** ** | **(dollars in thousands)** | ** ** |
| Effect  on service and interest cost for year ended September 30, 2005             |       | $                          | 142        |   | $ | (121 | ) |
| Effect  on accumulated postretirement benefit obligation as of September 30,  2005 |       | $                          | 936        |   | $ | (826 | ) |

 

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 Pension Plan**

### ** **

# **InvestmentPolicy Summary**

 

The fundamentalinvestment objective of the Employee Pension Plan (the Plan) is to provide arate of return sufficient to fund the retirement benefits under the plan at areasonable cost to the plan sponsor, Cascade Natural Gas Corporation.  At a minimum, the rate of return should equalor exceed the discount rate assumed by the plan’s actuaries in projecting thefunding cost of the plan under applicable ERISA standards. To do so, the Company’sPension Committee (the Committee) may appoint one or more investment managersto invest all or portions of the assets of the Plan (collectively referred toas the “Fund”) in accordance with specific investment guidelines, objectives,standards, and benchmarks.

 

Because the Committeeexpects the Fund’s investment income, when combined with anticipatedcontributions by the Company, to exceed the sum of benefit payments andexpenses over the next several years, the Committee intends that the Fund bemanaged to achieve long-term returns, with only a small percentage of the Fundinvested in cash.

 

The Fund is divided intothe following segments based on the guidelines below:

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

 

42

----

 

**Asset Allocation**

 

The asset allocation at September 30, 2005, and2004, by major asset category is as follows:

 
| ** **              | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------|------------|----------|------------|----------|------------|
| Cash                    |       | 6        | %          | 5        | %          |
| Equity Securities       |       | 46       | %          | 72       | %          |
| Fixed Income Securities |       | 39       | %          | 23       | %          |
| Real Estate             |       | 9        | %          | 0        | %          |

 

**Expected Long-term Rate of Returnon Plan Assets**

 

The expected long-term rate of return on assetsassumption is based on historical experience and consultation with theCompany’s actuarial consultants. Factors considered include asset allocationand expected returns attributable to each category of assets over a 20-yeartime horizon.

 

**AdditionalYear-end Information (for plans with accumulated benefit obligation in excessof plan assets)**

 

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**  | ** ** |
|------------------------------------------------------|------------|----------------------------|------------|
| ** **                                           | ** ** | **2005**                   | ** ** | **2004** | ** ** |
| ** **                                           | ** ** | **(dollars in thousands)** | ** ** |
| Projected benefit  obligation                        |       | $                          | 65,418     |   | $ | 59,308 |   |
| Accumulated benefit  obligation                      |       | $                          | 62,850     |   | $ | 57,298 |   |
| Fair value of assets                                 |       | $                          | 50,220     |   | $ | 43,300 |   |
|                                                 |       |                       |       |   |   |
| Other comprehensive  (income) loss                   |       | $                          | 19,467     |   | $ | 19,644 |   |
| (Increase) / decrease  in intangible asset           |       | $                          | 182        |   | $ | 229 |   |
| Increase (decrease) in  additional minimum liability |       | $                          | (360       | ) | $ | (1,499 | ) |

 

**SupplementalExecutive Retirement Plan (SERP)**

 

**InvestmentPolicy Summary**

 

SERP assets are ininsurance policies and managed investments. The value of insurance policies at September 30, 2005 was$5,435,000, and at September 30, 2004 was $5,169,000.  The managed assets are divided into thefollowing segments with the following weightings:

 
| ** **              | ** ** | **Target** | ** ** | **Minimum** | ** ** | **Maximum** | ** ** |
|-------------------------|------------|------------|------------|-------------|------------|-------------|------------|
| Equity Securities       |       | 65         | %          | 25          | %          | 75          | %          |
| Fixed Income Securities |       | 25         | %          | 10          | %          | 40          | %          |
| Other                   |       | 10         | %          | 0           | %          | 45          | %          |

 

**Asset Allocation**

 

The allocation of assets at September 30, 2005,and 2004, by major asset category, is as follows:

 
| ** **                 | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|
| Cash                       |       | 2        | %          | 1        | %          |
| Equity Securities          |       | 23       | %          | 23       | %          |
| Fixed Income Securities    |       | 8        | %          | 8        | %          |
| Life Insurance Cash  Value |       | 65       | %          | 64       | %          |
| Real Estate                |       | 2        | %          | 4        | %          |

 

43

----

 

**Expected Long-term Rate of Returnon Plan Assets**

 

The expected long-term rate of return on assetsassumption is based on historic experience with the investment manager andconsultation with the Company's actuarial consultants.  Factors considered include asset allocationand expected returns attributable to each category of assets over a 20-yeartime horizon.

 

**RetireeMedical Plans**

 

###### **Investment Policy Summary**

###### ** **

The fundamentalinvestment objective of the Trusts (voluntary employee benefit associationswithin the meaning of Section 501(c)(9) of the Internal Revenue Code) isto provide assets sufficient to fund medical benefits under the Company’smedical plan at a reasonable cost to the plan sponsor, Cascade Natural GasCorporation.  The Company has appointed aqualified actuary to determine the benefit obligation under the medical plan(including post-retirement benefits) and the necessary funding to meet thoseobligations.  In performing thisanalysis, the actuary has used appropriate actuarial methods for medicalbenefits and complies with existing financial accounting standards.

 

The Fund is divided intothe 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**

 

The asset allocation at September 30, 2005, and2004, by major asset category, is as follows:

 
| ** **              | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------|------------|----------|------------|----------|------------|
| Cash                    |       | 3        | %          | 11       | %          |
| Equity Securities       |       | 82       | %          | 65       | %          |
| Fixed Income Securities |       | 12       | %          | 24       | %          |
| Other                   |       | 3        | %          | 0        | %          |

 

**ExpectedLong-term Rate of Return on Plan Assets**

 

The expected long-term rate of return on assetsassumption is based on historical experience and consultation with theCompany’s actuarial consultants.  Factorsconsidered include asset allocation and expected returns attributable to eachcategory of assets over a 20-year time horizon.

 

**Note 12 -Commitments and Contingencies**

 

# **GasService Contracts**

# ** **

The Company has enteredinto various long-term contracts for natural gas supply, transportation,storage, and peaking services.  Thesecontracts are intended to provide adequate supplies of gas for service to corecustomers 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 maturities ranging up to 25 years, and generallyprovide for monthly and annual fixed demand charges, and minimum purchaseobligations.

 

44

----

 

The Company’s minimumobligations under these contracts are set forth in the following table. Theamounts are based on hedged prices, as applicable, current contract price termsand estimated commodity prices on un-hedged supplies, which are subject tomarket fluctuations:

 
| ** **              | ** ** | ** **                 | ** ** | **Interstate**     | ** ** | **Storage**     | ** ** | ** ** | ** ** |
|-------------------------|------------|----------------------------|------------|--------------------|------------|-----------------|------------|------------|------------|
| **Fiscal  Year Ending** | ** ** | **Firm Gas**               | ** ** | **Pipeline**       | ** ** | **and Peaking** | ** ** | ** ** | ** ** |
| **September 30**   | ** ** | **Supply**                 | ** ** | **Transportation** | ** ** | **Service**     | ** ** | **Total**  | ** ** |
| ** **              | ** ** | **(dollars in thousands)** | ** ** |
| 2006                    |       | $                          | 245,968    |               | $          | 36,645          |       | $          | 1,738      |   | $ | 284,351 |   |
| 2007                    |       | 196,349                    |       | 36,645             |       | 1,520           |       | 234,514    |       |
| 2008                    |       | 246,884                    |       | 36,645             |       | 1,520           |       | 285,049    |       |
| 2009                    |       | 120,390                    |       | 36,535             |       | 1,520           |       | 158,445    |       |
| 2010                    |       | 5,164                      |       | 34,407             |       | 1,520           |       | 41,091     |       |
| Thereafter              |       | —                     |       | 257,444            |       | 6,078           |       | 263,522    |       |
|                    |       | $                          | 814,755    |               | $          | 438,321         |       | $          | 13,896     |   | $ | 1,266,972 |   |

 

Purchases under thesecontracts for fiscal 2005, 2004, and 2003 were as follows:

 
| ** ** | ** ** | ** **                 | ** ** | **Interstate**     | ** ** | **Storage**     | ** ** | ** ** | ** ** |
|------------|------------|----------------------------|------------|--------------------|------------|-----------------|------------|------------|------------|
| ** ** | ** ** | **Firm Gas**               | ** ** | **Pipeline**       | ** ** | **and Peaking** | ** ** | ** ** | ** ** |
| ** ** | ** ** | **Supply**                 | ** ** | **Transportation** | ** ** | **Service**     | ** ** | **Total**  | ** ** |
| ** ** | ** ** | **(dollars in thousands)** | ** ** |
| 2005       |       | $                          | 191,596    |               | $          | 30,861          |       | $          | 2,616      |   | $ | 225,073 |   |
| 2004       |       | $                          | 195,445    |               | $          | 32,114          |       | $          | 2,609      |   | $ | 230,168 |   |
| 2003       |       | $                          | 159,028    |               | $          | 26,450          |       | $          | 2,140      |   | $ | 187,618 |   |

 

## **Financial Derivatives**

 

To mitigate market riskand provide assurance of stable prices for its customers, the Company hasentered into a number of hedging arrangements related to its gas supplycontracts.  The hedging arrangements areprimarily in the form of financial swaps to fix the price of supplies. Underthe terms of the swap arrangements, the Company will either pay or receivesettlement payments based on the difference between a fixed strike price andthe monthly index price applicable to each contract.  The total quantities subject to hedgingarrangements are 19,119,000 MMBTU’s in 2006, 12,534,000 MMBTU’s in 2007,7,532,000 MMBTU’s in 2008, and 484,000 MMBTU’s in 2009. The mark-to-market valueof these hedges as of September 30, 2005 and 2004 are included in thebalance sheet as follows:

 

| ** **                                                    | ** ** | **2005**                   | ** ** | **2004** | ** ** |
|---------------------------------------------------------------|------------|----------------------------|------------|----------|------------|
| ** **                                                    | ** ** | **(dollars in thousands)** | ** ** |
| Derivative instrument  asset - energy commodity (current)     |       | $                          | 91,957     |     | $          | 17,983 |   |
| Derivative instrument  asset - energy commodity (non-current) |       | 43,440                     |       | 3,952    |       |
| Other current  liabilities                                    |       | (132                       | )          | (138     | )          |
| Other non-current  liabilities                                |       | (1,326                     | )          | (40      | )          |
| Net                                                           |       | $                          | 133,939    |     | $          | 21,757 |   |

 

### **Unregistered Shares of Common Stock Under DRIP**

 

Inconnection with modifying administrative procedures and updating the prospectusfor the Company’s Automatic Dividend Reinvestment Plan (the DRIP), the Companydetermined in April 2005 that the number of shares of its common stockissued pursuant to the DRIP had exceeded the number of shares previouslyregistered for such purpose under the Securities Act of 1933, as amended (theSecurities Act).  As a result, theCompany may have failed to comply with the registration or qualificationrequirements of federal and applicable state securities laws with respect tosuch shares.  In May 2005, theCompany registered 500,000 additional shares of common stock for futureissuance under the DRIP.

 

Basedupon the Company’s investigation, 121,458 shares of its common stock wereissued to approximately 3,500 DRIP participants between August 2003 andApril 2005 in excess of the number of shares registered specifically forsuch purpose.  Such shares were issued atthe following prices:

 

45

----

 
| **Purchase  Price**  | ** ** | **Number of Shares** | ** ** |
|----------------------|------------|----------------------|------------|
|                 |       |                 |       |
| $18.18 – $18.99 |       | 7,734                |       |
| $19.00 – $19.99 |       | 21,877               |       |
| $20.00 – $20.99 |       | 56,430               |       |
| $21.00 – $21.99 |       | 21,556               |       |
| $22.00 – $22.95 |       | 13,861               |       |

 

Theclosing market price for the Company’s common stock on November 30, 2005was $20.29.

 

TheCompany is monitoring the impact of the issuance of unregistered shares on theDRIP participants affected and is considering appropriate actions to be taken,if any, to rectify this oversight. Should the Company repurchase all of the unregistered shares at the purchaseprices for which they were issued, cash of approximately $2,493,000 would beused to retire 121,458 outstanding shares. Should the Company repurchase only the unregistered shares sold sinceSeptember 30, 2004 (approximately the period covered by the one-yearstatute of limitations applicable to sales of unregistered shares under theSecurities Act), cash of approximately $771,000 would be used to retireapproximately 36,922 outstanding shares. Current estimates of the costs of conducting a rescission offer ascompared to the potential for financial benefit to participants in the DRIPindicate that a rescission offer may not be in the best interests of theCompany or its shareholders, including the participants in the DRIP.

 

# **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.

 

Thefirst claim was received in 1995 and relates to a site in Oregon.  An investigation has shown that soil andgroundwater contamination exists at the site. There are parties in addition to the Company that are potentially liablefor cleanup of the contamination.  Someof these other parties have shared in the costs expended to date to investigatethe site, and it is expected that these and other parties will share in thecleanup 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 at this time what share ofthe cleanup costs will actually be borne by Cascade.

 

Thesecond claim was received in 1997 and relates to a site in Washington.  An 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 currently not enough informationavailable to estimate the potential liability associated with this claim, butthe Company and other parties may become more involved in investigations of thenature and extent of contamination and possible remediation of the site asincreased interest has been expressed concerning its potential forredevelopment.

 

Management first intendsto pursue reimbursement from its insurance carriers.  In the event the insurance proceeds do notcompletely cover the costs, management intends to seek recovery from itscustomers through increased rates.  Thereis precedent for such recovery through increased rates, as both the WashingtonUtilities and Transportation Commission (WUTC) and the Oregon Public UtilitiesCommission (OPUC) have previously allowed regulated utilities to increasecustomer rates to cover similar costs.

 

# **Litigationand Other Contingencies**

# ** **

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

 

# **Note13 - Fair Value of Financial Instruments**

# ** **

The following estimatedfair value amounts have been determined by the Company using available marketinformation and appropriate valuation methodologies.  However, considerable judgment is required ininterpreting market data to develop the estimates of fair value.  Accordingly, these estimates are notnecessarily indicative of the amounts that the Company could realize in a currentmarket exchange.  Thus, the use ofdifferent market assumptions or estimation methodologies may have a materialeffect on the estimated fair value amounts. The estimated fair values have been determined by using interest ratesthat are currently available to the Company for issuance of instruments withsimilar terms and remaining maturities. The estimated fair value amounts, atSeptember 30, 2005 and 2004 are set forth in the following table:

 

46

----

 

| ** **                            | ** ** | **2005**                   | ** ** | **2004**       | ** ** |
|---------------------------------------|------------|----------------------------|------------|----------------|------------|
| ** **                            | ** ** | **Carrying**               | ** ** | **Estimated**  | ** ** | **Carrying** | ** ** | **Estimated** | ** ** |
| ** **                            | ** ** | **Amount**                 | ** ** | **Fair Value** | ** ** | **Amount** | ** ** | **Fair Value** | ** ** |
| ** **                            | ** ** | **(dollars in thousands)** | ** ** |
| Long-term debt                        |       | $                          | 173,840    |           | $          | 188,630 |   | $ | 128,900 |   | $ | 151,795 |   |
| Current maturities of  long-term debt |       | $                          | —     |           | $          | — |   | $ | 14,000 |   | $ | 14,168 |   |
|                                       |            |                            |            |                |            |  |  |  |  |  |  |  |  |  |

 

47

----

 

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

 
| ** **                                          | ** ** | **Quarter Ended** | ** ** |
|-----------------------------------------------------|------------|-------------------|------------|
| **(thousands  except**                              | ** ** | **Sep 30**        | ** ** | **Jun 30** | ** ** | **Mar 31** | ** ** | **Dec 31** | ** ** |
| **per-share  data)**                                | ** ** | **2005**          | ** ** | **2005** | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                |       |              |       |   |   |   |   |   |   |
| 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 |   |
| Other comprehensive  income                         |       | 121               |       | — |   | — |   | — |   |
| Comprehensive Income  (loss)                        |       | $                 | (3,489     | ) | $ | (1,127 | ) | $ | 7,352 |   | $ | 6,632 |   |
| Earnings (loss) per  common share Basic and diluted |       | $                 | (0.32      | ) | $ | (0.10 | ) | $ | 0.65 |   | $ | 0.59 |   |

 
| ** **                                          | ** ** | **Quarter Ended** | ** ** |
|-----------------------------------------------------|------------|-------------------|------------|
| ** **                                          | ** ** | **Sep 30**        | ** ** | **Jun 30** | ** ** | **Mar 31** | ** ** | **Dec 31** | ** ** |
| ** **                                          | ** ** | **2004**          | ** ** | **2004** | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                |       |              |       |   |   |   |   |   |   |
| Operating revenues                                  |       | $                 | 41,663     |   | $ | 52,077 |   | $ | 119,454 |   | $ | 104,884 |   |
| Gas costs and revenue  taxes                        |       | 27,327            |       | 35,440 |   | 87,312 |   | 74,191 |   |
| Operating margin                                    |       | 14,336            |       | 16,637 |   | 32,142 |   | 30,693 |   |
| Cost of operations                                  |       | 15,276            |       | 14,696 |   | 15,460 |   | 15,129 |   |
| Income (loss) from  operations                      |       | (940              | )          | 1,941 |   | 16,682 |   | 15,564 |   |
| Interest and other, net                             |       | 3,050             |       | 3,099 |   | 3,121 |   | 3,116 |   |
| Income (loss) before  income taxes                  |       | (3,990            | )          | (1,158 | ) | 13,561 |   | 12,448 |   |
| Income taxes                                        |       | (1,384            | )          | (492 | ) | 4,892 |   | 4,543 |   |
| Net income (loss)                                   |       | $                 | (2,606     | ) | $ | (666 | ) | $ | 8,669 |   | $ | 7,905 |   |
| Other comprehensive  income                         |       | 822               |       | — |   | — |   | — |   |
| Comprehensive Income  (loss)                        |       | $                 | (1,784     | ) | $ | (666 | ) | $ | 8,669 |   | $ | 7,905 |   |
| Earnings (loss) per  common share Basic and diluted |       | $                 | (0.23      | ) | $ | (0.06 | ) | $ | 0.77 |   | $ | 0.71 |   |

 

48

----

 

**Item9.  Changes in and Disagreements WithAccountants on Accounting and Financial Disclosure**

 

None.

 

**Item 9A.  Controls and Procedures**

 

(a) Evaluation ofDisclosure 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.  TheCompany’s management, including the chief executive officer and chief financialofficer, evaluated disclosure controls and procedures as of the end of theperiod covered by this report.  Based onthat evaluation, the Company concluded that, as of September 30, 2005, 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 theSecurities and Exchange Commission.

 

Subsequent to the end ofthe period covered by this report, the Company identified a material contractfor which the Company determined the Report on Form 8-K had not been filedwithin the required four business days. The Company is reporting this contractunder Item 9B of this report, and is including the contract asExhibit 10.33 to this filing.

 

(b) Changes inInternal Controls over Financial Reporting

 

No change in theCompany’s internal controls over financial reporting occurred during the fourthfiscal quarter that has materially affected, or is reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

 

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

 

## **Management’s Report on Internal Controls overFinancial Reporting**

 

Management is responsiblefor establishing and maintaining adequate internal control over financialreporting for the Company.  Internalcontrol over financial reporting is defined in Rule 13a-15(f) and15d-15(f) promulgated under the Securities Exchange Act of 1934 as aprocess designed by, or under the supervision of, a company’s chief executiveand chief financial officers and effected by the company’s board of directors,management and other personnel, to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accountingprinciples. Internal control includes those policies and procedures that:

 

•                  Pertain to themaintenance of records that in reasonable detail accurately and fairly reflectthe 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 inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements.  Projections of anyevaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures may deteriorate.

 

The Company’s managementassessed the effectiveness of the Company’s internal control over financialreporting as of September 30, 2005. In making this assessment, the Company’s management used the criteriaset forth by the Committee of Sponsoring Organizations (“COSO”) of the TreadwayCommission’s Internal Control-Integrated Framework.

 

Based on theirassessment, management has concluded that, as of September 30, 2005, theCompany’s internal control over financial reporting is effective based on thosecriteria.

 

Our management’sassessment of the effectiveness of the Company’s internal control overfinancial reporting as of September 30, 2005 has been audited by Deloitteand Touche, LLP, an independent, registered public accounting firm, as statedin their report which is included herein.

 
| /s/ David W. Stevens |   |
|----------------------|--------|

David W. Stevens

President and ChiefExecutive Officer

 

 
| /s/ Rick A.  Davis |   |
|--------------------|--------|

Rick A. Davis

Chief Financial Officer

December 9, 2005

 

49

----

 

(d) IndependentRegistered Public Accounting Firm’s Report on Internal Controls over FinancialReporting

 

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Board of Directorsand Stockholders ofCascade Natural Gas CorporationSeattle, Washington

 

We have auditedmanagement’s assessment, included in the accompanying Management’s Report onInternal Controls Over Financial Reporting, that Cascade Natural GasCorporation and subsidiaries (the “Company”) maintained effective internalcontrol over financial reporting as of September 30, 2005, based oncriteria established in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission. The Company’s management is responsible for maintainingeffective internal control over financial reporting and for its assessment ofthe effectiveness of internal control over financial reporting. Ourresponsibility is to express an opinion on management’s assessment and anopinion on the effectiveness of the Company’s internal control over financialreporting based on our audit.

 

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internal control overfinancial reporting was maintained in all material respects. Our audit includedobtaining an understanding of internal control over financial reporting,evaluating management’s assessment, testing and evaluating the design andoperating effectiveness of internal control, and performing such otherprocedures as we considered necessary in the circumstances. We believe that ouraudit provides a reasonable basis for our opinions.

 

A company’s internalcontrol over financial reporting is a process designed by, or under thesupervision of, the company’s principal executive and principal financialofficers, or persons performing similar functions, and effected by thecompany’s board of directors, management, and other personnel to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. A company’s internal control overfinancial reporting includes those policies and procedures that (1) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company;(2) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance withgenerally accepted accounting principles, and that receipts and expenditures ofthe company are being made only in accordance with authorizations of managementand directors of the company; and (3) provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisition, use, ordisposition of the company’s assets that could have a material effect on thefinancial statements.

 

Because of the inherentlimitations of internal control over financial reporting, including thepossibility of collusion or improper management override of controls, materialmisstatements due to error or fraud may not be prevented or detected on atimely basis. Also, projections of any evaluation of the effectiveness of the internalcontrol over financial reporting to future periods are subject to the risk thatthe controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, management’sassessment that the Company maintained effective internal control overfinancial reporting as of September 30, 2005, is fairly stated, in allmaterial respects, based on the criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission. Also in our opinion, the Companymaintained, in all material respects, effective internal control over financialreporting as of September 30, 2005, based on the criteria established in *Internal Control—Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission.

 

50

----

 

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated financial statements and consolidatedfinancial statement schedule as of and for the year endedSeptember 30, 2005, of the Company and our report dated December 9,2005,  expressed an unqualified opinionon those consolidated financial statements and consolidated financial statementschedule and included an explanatory paragraph for the restatement of thefinancial statements for the year ended September 30, 2003.

 

 
| \s\ Deloitte &  Touche LLP |   |
|-------------------------------------|--------|
|                                |   |
| Seattle,  Washington                |   |
| December 9,  2005              |   |

 

51

----

 

###### **Item 9B.  Other Information**

###### ** **

###### **Incentive Plans**

###### ** **

As required to bereported under Item 1.01 of Form 8-K, on September 13, 2005, theregistrant’s Board of Directors adopted the following short-term incentiveplans:

 

2006 CascadeIncentive Plan:  TheCascade Incentive Plan provides for cash payments to officers and othersalaried employees if the Company is cash-flow neutral as defined in the plan,if operational targets relating to safety and customer service are attained andif earnings targets are achieved.  In2006, the CEO could earn an additional 54% of base salary if his targets arereached and up to 108% of base salary if the maximum achievement is reached.For other executive officers, target achievement levels would result in awardsof 20% to 49% of base pay with a maximum range for officers from 40% to 98% ofbase pay.

 

2006 401(k) ProfitSharing Plan:  Only salaried employees of the registrantare eligible to participate in the 2005 401(k) Profit Sharing Plan. Payouts under this plan are funded based on the registrant’s EPS.  Themidpoint payout under this plan is 4% of eligible pay, and the range of payoutsvaries from 0 to 8%.

 

The summary of theincentive plans set forth above is qualified in its entirety by reference tothe full text of these plans, a copy of which is attached to this report asExhibit 10.33, and incorporated herein by reference.

 

## **Appointment of ExecutiveOfficers**

## ** **

## **As required to be reported under Item 5.03 ofForm 8-K, on December 8, 2005, the Board of Directors designatedJulie A. Marshall, Vice President Customer Service and Michael J. Gardner –Vice President Operations as “executive officers” as defined under theSecurities Exchange Act of 1934.**

## ** **

## **Amendments to Bylaws**

## ** **

As required to bereported under Item 5.03 of Form 8-K,****onDecember 8, 2005, the Board of Directors adopted Restated Bylaws, whichincluded numerous changes to the previous Bylaws of the Company.  The changes were made to reflect theCompany’s present management structure and governance practices, to removeobsolete and conflicting provisions, to update the Bylaws in accordance withthe Washington Business Corporations Act, and to follow a more logicalorganizational scheme.  The RestatedBylaws became effective immediately upon their adoption by the Board and do notrequire shareholder approval.

 

Material changes to theBylaws included elimination of the positions of Vice Chairman of the Board andChief Operating Officer, addition of provisions regarding conflicts of interestand standards of conduct for officers, modification of the notice provisionsfor consistency and to provide greater flexibility, a substantialreorganization and regrouping of provisions, and the addition of subheadings toassist in locating applicable provisions.

 

The summary of changes tothe Bylaws set forth above is qualified in its entirety by reference to thefull text of the Restated Bylaws of the Company, a copy of which is attached tothis report as Exhibit 3.2 and incorporated herein by reference.

 

52

----

 

###### **PART III**

###### ** **

**Item10.  Directors and Executive Officers ofthe Registrant**

 

Reference is made to theinformation regarding directors under the caption “Election of Directors” andthe caption “Section 16(a) Beneficial Ownership Reporting Compliance” inthe Proxy Statement sent to shareholders for the 2006 Annual Meeting (the 2006Proxy Statement), which information is incorporated herein by reference.Certain information concerning the executive officers of the Company is setforth in Part I, under the caption “Executive Officers of the Registrant”.

 

The Registrant hasadopted codes of ethics for directors, officers (including the principalexecutive officer, principal financial officer and principal accountingofficer), and employees.  These codes ofethics are available on the Registrant’s website at www.cngc.com.  Any changes to or waivers from the codes ofethics will be posted to the Registrant’s website as well.

 

**Item 11.  Executive Compensation**

 

Reference is made to theinformation regarding executive compensation set forth in the 2006 ProxyStatement under “Executive Compensation”, “Retirement Plan”, “ExecutiveSupplemental Retirement Income Plan”, “Employment Agreements”, “SupplementalBenefit Trust”, “Director Compensation”, and under “Compensation CommitteeInterlocks and Insider Participation”, which information is incorporated hereinby reference.

 

**Item12.  Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters**

 

Reference is made to theinformation regarding security ownership of certain beneficial owners andmanagement under the caption “Security Ownership of Certain Beneficial Ownersand Management” in the 2006 Proxy Statement (excluding the information underthe subheading “Section 16(a) Beneficial Ownership ReportingCompliance”), which information is incorporated herein by reference.

 

The following table setsforth information as of September 30, 2005 with respect to compensationplans (including individual compensation arrangements) under which equitysecurities of the registrant are authorized for issuance:

 

**Equity Compensation 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     |       | 73,899                                                                                                         |       | $                                                                                              | 19.95      |                                                                                                                                                                               | 299,292    |   |
| Equity compensation plans not approved by security  holders |       | None                                                                                                           |       | None                                                                                           |       | None                                                                                                                                                                               |       |
| Total                                                       |       | 73,899                                                                                                         |       | $                                                                                              | 19.95      |                                                                                                                                                                               | 299,292    |   |

 

**Item13.  Certain Relationships and RelatedTransactions**

 

Reference is made to theinformation regarding certain relationships and transactions under the caption“Compensation Committee Interlocks and Insider Participation” in the 2006 ProxyStatement, which information is incorporated herein by reference.

 

**Item14.  Principal Accountant Fees andServices**

 

Reference is made to theinformation regarding fees paid to, and services provided by the registrant’sprincipal accountant under the caption “Independent Public Auditors” in the2006 Proxy Statement, which information is incorporated herein by reference.

 

53

----

 

###### **PART IV**

###### ** **

###### **Item15.  Exhibits, Financial StatementSchedules**

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

 

SCHEDULE II

 

CASCADENATURAL GAS CORPORATION

VALUATIONAND QUALIFYING ACCOUNTS

 
| ** **                              | ** ** | ** **     | ** ** | **Column C**                     | ** ** | ** **     | ** ** | ** **     | ** ** |
|-----------------------------------------|------------|----------------|------------|----------------------------------|------------|----------------|------------|----------------|------------|
| **Column A**                            | ** ** | **Column B**   | ** ** | **Additions**                    | ** ** | **Column D**   | ** ** | **Column E**   | ** ** |
| ** **                              | ** ** | **Balance at** | ** ** | **Charged to**                   | ** ** | **Charged to** | ** ** | ** **     | ** ** | **Balance at** | ** ** |
| ** **                              | ** ** | **Beginning**  | ** ** | **Costs and**                    | ** ** | **Other**      | ** ** | **Deductions** | ** ** | **End of** | ** ** |
| **Description**                         | ** ** | **of Period**  | ** ** | **Expenses**                     | ** ** | **Accounts**   | ** ** | **(Note)**     | ** ** | **Period** | ** ** |
| ** **                              | ** ** | ** **     | ** ** | **(dollars in thousands) ** | ** ** | ** **     | ** ** | ** **     | ** ** |
| Allowance  for Doubtful Accounts:  |       |           |       |                             |       |           |       |           |       |   |   |
|                                    |       |           |       |                             |       |           |       |           |       |   |   |
| Year  ended:                            |       |           |       |                             |       |           |       |           |       |   |   |
| September 30,  2003                |       | $              | 1,126      |                             | 701        |           |       |           | 950        |   | $ | 877 |   |
| September 30,  2004                |       | $              | 877        |                             | 970        |           |       |           | 819        |   | $ | 1,028 |   |
| September 30,  2005                |       | $              | 1,028      |                             | 1,297      |           |       |           | 1,006      |   | $ | 1,319 |   |
|                                    |       |           |       |                             |       |           |       |           |       |   |   |
| Reserve  - Notes Receivable:            |       |           |       |                             |       |           |       |           |       |   |   |
|                                    |       |           |       |                             |       |           |       |           |       |   |   |
| September 30,  2003                |       | $              | 100        |                             | 100        |           |       |           | 57         |   | $ | 143 |   |
| September 30,  2004                |       | $              | 143        |                             | 5          |           |       |           | —     |   | $ | 148 |   |
| September 30,  2005                |       | $              | 148        |                             | 3          |           |       |           | —     |   | $ | 151 |   |

 
| 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. |
|--------|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

54

----

 

SIGNATURES

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 
|                   |   |   | CASCADE NATURAL  GAS CORPORATION |
|------------------------|--------|--------|----------------------------------|
|                   |   |   |                             |   |
| December 13, 2005 |   |   | By                               | /s/ Rick A. Davis |   |
| Date                   |   |   |                             | Rick A. Davis |   |
|                   |   |   |                             | Chief Financial Officer |   |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the Registrant and in thecapacities and on the dates indicated:

 
| /s/ David W.  Stevens       |   | President, and                      |   |                    |
|-----------------------------|--------|-------------------------------------|--------|-------------------------|
| David W. Stevens            |   | Chief Executive Officer             |   | December 13,  2005 |
|                        |   | (Principal Executive  Officer)      |   | Date                    |
|                        |   |                                |   |                    |
| /s/ Rick A.  Davis          |   | Chief Financial Officer             |   | December 13,  2005 |
| Rick A. Davis               |   | (Principal Financial Officer)       |   | Date                    |
|                        |   |                                |   |                    |
|                        |   |                                |   |                    |
| /s/ James E.  Haug          |   | Controller                          |   | December 13,  2005 |
| James E. Haug               |   | (Principal Accounting  Officer)     |   | Date                    |
|                        |   |                                |   |                    |
|                        |   |                                |   |                    |
| /s/ Larry L.  Pinnt         |   | Chairman of the Board  of Directors |   | December 13,  2005 |
| Larry L. Pinnt              |   |                                |   | Date                    |
|                        |   |                                |   |                    |
| /s/ Scott M.  Boggs         |   | Director                            |   | December 13,  2005 |
| Scott M. Boggs              |   |                                |   | Date                    |
|                        |   |                                |   |                    |
| /s/ Pirkko H.  Borland      |   | Director                            |   | December 13,  2005 |
| Pirkko H.  Borland          |   |                                |   | Date                    |
|                        |   |                                |   |                    |
| /s/ Carl  Burnham, Jr. |   | Director                            |   | December 13,  2005 |
| Carl  Burnham, Jr.     |   |                                |   | Date                    |
|                        |   |                                |   |                    |
| /s/ Thomas E. Cronin        |   | Director                            |   | December 13,  2005 |
| Thomas E. Cronin            |   |                                |   | Date                    |
|                        |   |                                |   |                    |
| /s/ David A.  Ederer        |   | Director                            |   | December 13,  2005 |
| David A. Ederer             |   |                                |   | Date                    |
|                        |   |                                |   |                    |
| /s/ Brooks G.  Ragen        |   | Director                            |   | December 13,  2005 |
| Brooks G. Ragen             |   |                                |   | Date                    |
|                        |   |                                |   |                    |
| /s/ Douglas G.  Thomas      |   | Director                            |   | December 13,  2005 |
| Douglas G.  Thomas          |   |                                |   | Date                    |

 

55

----

 

**INDEX TO EXHIBITS**

 
| **Exhibit  No** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                               |
|-----------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 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             |       | Restated Bylaws of the  Registrant.                                                                                                                                                                                                                                                                                                                                                                                                           |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 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.                                                                                                                                                                                  |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.4             |       | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                        |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 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.                                                                                                                                                                                                                                          |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.2            |       | 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 SGS-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.                                                                                                                                                           |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 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            |       | Consent to Assignments,  Dated June 1, 1997, which assigns from Westcoast Gas Services Inc.,  (WGSI), to Engage Energy Canada, L.P. (Engage) all the rights and obligations  as specified in the contracts contained herein as  Exhibit No. 10.22. Incorporated by reference to Exhibit 10.6  to the Registrant’s Annual Report on Form 10-K for the year ended  September 30, 1997 (1997 Form 10-K). |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.7            |       | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                        |

 

56

----

 
| 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   |   | Replacement Firm  Transportation Agreement dated July 31, 1991, between Northwest Pipeline  Corporation and the Registrant. Incorporated by reference to  Exhibit 10(1) to the Registrant’s registration statement on  Form S-2,  No. 33-52672 (1992 Form S-2).                                                                                                                                                                                      |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.12.1 |   | Amendments dated  August 20, 1992, November 1, 1992, October 20, 1993, and  December 17, 1993, to Replacement Firm Transportation Agreement dated  July 31, 1991, between Northwest Pipeline Corporation and the  Registrant. Incorporated by reference to Exhibit 10.12.1 to the Registrant’s  1993 Form 10-K.                                                                                                                            |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 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.                                                                                                                                      |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 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).                                                                                             |

 

57

----

 
| 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.                                                                                                                                                                                                                                                                                                                                        |
|    |   |                                                                                                                                                                                                                                                                                                                                                          |
| 10.22.1 |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                        |
|    |   |                                                                                                                                                                                                                                                                                                                                                          |
| 10.22.2 |   | Amendment dated  February 28, 2003 to Amended and restated Natural Gas Sales Agreement  dated August 17, 1994, between Engage Energy Canada L.P. and Registrant.  A PORTION OF THIS AGREEMENT IS SUBJECT TO A REQUEST FOR CONFIDENTIAL  TREATMENT. Incorporated by reference to Exhibit 10.22.2 to the  Registrant’s 2003 Form 10-K. |
|    |   |                                                                                                                                                                                                                                                                                                                                                          |
| 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.                                                                                                                                                                                                            |
|    |   |                                                                                                                                                                                                                                                                                                                                                          |
| 10.30   |   | 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 *                                                                                                                                                                                                                                                               |

 

58

----

 
| 10.34      |       | Intentionally  omitted.                                                                                                                                                                                                                                                                                                                                    |
|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                                                                                                                                                       |
| 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  June 16, 2005.*                                                                                                                            |
|       |       |                                                                                                                                                                                                                                                                                                                                                       |
| 10.38      |       | Employment Agreement,  dated March 3, 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  March 3, 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.*                                                                                                                                                                  |
|       |       |                                                                                                                                                                                                                                                                                                                                                       |
| 10.41      |       | 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.*                                                                                                                |
|       |       |                                                                                                                                                                                                                                                                                                                                                       |
| 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.        |       | Certification  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.                                                                                                                                                                                                                        |

 

----

* Management contract orcompensatory plan or arrangement.

 

59

----