** **

**FORM 10-K**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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

 

| **For the fiscal year ended September 30, 2003** |   | **Commission file number:   1-7196** |
|-------------------------------------------------------|--------|-------------------------------------------|

 

**CASCADE NATURAL GAS CORPORATION**

(Exact name of Registrantas specified in its charter)

 

| **Washington**                                                    |   | **91-0599090**                                             |
|-------------------------------------------------------------------|--------|------------------------------------------------------------|
| (State or other  jurisdiction of  incorporation or organization)  |   | (I.R.S. Employer  Identification No.)                      |
|                                                              |   |                                                       |
| **222 Fairview Avenue North  Seattle, WA  98109**            |   | **(206) 624-3900**                                         |
| (Address of  principal executive offices)                         |   | (Registrant’s  telephone number  including area code) |
|                                                              |   |                                                       |
| Securities  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 bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90days.          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 Form10-K. o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Exchange Act Rule12b-2).        Yes    ý        No    o

 

The aggregate marketvalue of the voting and non-voting common equity held by non-affiliates of theregistrant as of the close of business on November 26, 2003, was$224,046,051

 

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 |   | 11,166,261 as of  November 26, 2003 |

 

DOCUMENTSINCORPORATED BY REFERENCE

 

Portions of theRegistrant’s definitive proxy statement for its 2004 Annual Meeting ofShareholders are incorporated by reference into Part III, Items 10, 11, 12, 13and 14.

 

 

----

 

**CASCADE NATURAL GAS CORPORATION**

**Annual Report to the Securities andExchange Commission on Form 10-K**

For the FiscalYear Ended September 30, 2003

 

Table of Contents

 
|       |                                                                                                       | **Page  Number** |
|------------|------------------------------------------------------------------------------------------------------------|------------------|
|       |                                                                                                       |             |
| Part I     |                                                                                                       |             |
|       | Item  1 - Business                                                                                    | 3                |
|       | Item  2 - Properties                                                                                  | 7                |
|       | Item   3 - Legal Proceedings                                                                          | 7                |
|       | Item  4 - Submission of Matters to a Vote of  Security Holders                                        | 7                |
|       | Executive Officers  of the Registrant                                                                      | 8                |
|       |                                                                                                       |             |
| Part II    |                                                                                                       |             |
|       | Item  5 - Market for Registrant’s Common Equity  and Related Stockholder Matters                 | 8                |
|       | Item  6 - Selected Financial Data                                                                     | 9                |
|       | Item  7 - Management’s Discussion and Analysis  of Financial Condition and Results of Operations | 11               |
|       | Item  7A- Quantitative and Qualitative  Disclosures about Market Risk                                 | 19               |
|       | Item  8 - Financial Statements and Supplementary  Data                                                | 20               |
|       | Item   9 - Changes in and Disagreements With Accountants on Accounting and  Financial Disclosure      | 41               |
|       | Item 9A – Controls  and Procedures                                                                    | 41               |
|       |                                                                                                       |             |
| Part III   |                                                                                                       |             |
|       | Item 10 -  Directors and Executive Officers of the Registrant                                              | 41               |
|       | Item 11 -  Executive Compensation                                                                          | 41               |
|       | Item 12 -  Security Ownership of Certain Beneficial Owners and Management                                  | 41               |
|       | Item 13 -  Certain Relationships and Related Transactions                                                  | 42               |
|       | Item 14 – Principal  Accountant Fees and Services                                                     | 42               |
|       |                                                                                                       |             |
| Part IV    |                                                                                                       |             |
|       | Item 15 - Exhibits,  Financial Statement Schedules and Reports on Form 8-K                                 | 42               |
|       |                                                                                                       |             |
| Signatures | 44                                                                                                         |

 

2

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**PARTI**

 

**Item 1.Business**

 

##### Available Information

 

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 at206-624-3900.

 

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-mail tolpinnt@cngc.com.

 

##### 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 81% of its gas distribution revenues are from customers inthe state of Washington.

 

As of September 30,2003, the Company had approximately 177,300 residential customers, 28,900commercial customers, and 800 industrial and other customers. Residential,commercial, and most small industrial customers are generally core customers,who take traditional “bundled” natural gas service, which includes supply,peaking service, and upstream interstate pipeline transportation. Sales to corecustomers in fiscal 2003 accounted for approximately 21% of gas deliveries and68% of operating margin. The Company’s sales to its core residential andcommercial customers are influenced by fluctuations in temperature,particularly during the winter season. A warm winter season will tend to reduce gas consumption.  Over the longer term, these fluctuationstend to offset each other, as rates charged to customers are developed based onthe assumption of normal weather.

 

Non-core customers aregenerally large industrial and institutional customers who have chosen“unbundled” service, meaning that they select from among several upstreamsupply, pipeline transportation, and gas management service options independentof the Company’s distribution service. The Company’s margin from non-corecustomers is derived primarily from distribution service and to a lesser extentfrom gas management service revenue. Gas management service revenue primarilyincludes fees charged to non-core customers in consideration of securing gassupplies and pipeline capacity for the customers.

 

##### 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 supplycontracts contain pricing provisions for fixed periods of time. To the extentthat prices are changed with respect to supplies purchased for core customers,Cascade 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.

 

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 bythe Company. This mechanism is intended to encourage the Company to seekopportunities to lower its cost of supplies and to be innovative in itsmanagement of the supply portfolio to avoid price spikes. Cascade’s gas supplyportfolio for Oregon core customers is comprised mostly of gas supplies that havea fixed commodity price, therefore management believes the  risk or opportunity for the Company is notsignificant under the 67% / 33% sharing arrangement during the coming year.

 

3

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Cascade has an earningssharing mechanism with respect to its Oregon jurisdictional operations asrequired by the Oregon Public Utilities Commission. The mechanism was designedas an incentive to pursue operational efficiencies and new revenueopportunities, and to share the success of such pursuits with ratepayers if theCompany’s earnings exceed a calculated ceiling. Under that arrangement, theCompany is authorized to retain all of its earnings up to a threshold levelequal to the average of the annual yields, reported monthly, for five-, seven-,and ten-year US Treasury debt securities for the test period plus 710basis points.  If the adjusted Oregonearnings are below the threshold, there is no rate adjustment. If the adjustedearnings are above the threshold, one-third of the earnings exceeding thethreshold will be refunded to customers through future rate reductions.

 

TheCompany is also subject to state regulation with respect to integrated resourceplanning, and its most recent update of its Integrated Resource Plan (IRP) wasfiled in 2002 with both the WUTC and the OPUC. The IRP shows the Company’s optimum set of supply and demand sideresources that minimizes costs and risk over the twenty-year planning horizon.  The IRP also sets forth possible corecustomer growth scenarios for a twenty-year period.  In addition, the IRP sets forth the Company’s demand sidemanagement goals of achieving certain conservation levels in customer usage.

 

The IRP also sets forththe Company’s supply side management plans regarding transportation capacityand gas supply acquisition over a twenty-year period.  The Company develops updates of the IRP every two years. Theseupdated documents take into account input solicited from the public and the WUTCand OPUC staffs.  While the filing ofthe IRP with both commissions gives the Company no advance assurance that itsacquisitions of pipeline transportation capacity and gas supplies will berecognized in rates, management believes that the integrated resource planningprocess benefits the Company by giving it the opportunity to obtain input fromregulators and the public concurrently with making these important strategicdecisions. Until the Company receives final regulatory approval of thesedecisions in the context of the rate-making process, the Company cannot predictwith certainty the extent to which the integrated resource planning processwill affect its rates.

 

Natural Gas Supply

 

The majority of Cascade’ssupply of natural gas is transported via Williams Gas Pipelines - West(Williams).  Williams owns and operatesa transmission 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).  GTN owns and operates a gas transmissionline that connects with the facilities of the TransCanada Pipeline at theinternational border near Kingsgate, British Columbia and extends throughWashington and central Oregon into California. Cascade also receives naturalgas directly from Duke Energy Gas Transmission at the Canadian border nearSumas, Washington.

 

Presently,baseload requirements for Cascade’s core market are provided by six major gassupply contracts with various expiration dates from 2003 through 2008 andaveraging 527,000 therms per day of Canadian supply and 180,000 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, 2004 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 entitled to receive up to600,000 therms per day to a maximum inventory of 5,622,000 therms.  In addition to withdrawal and inventorycapacity, Cascade maintains a corresponding amount of firm transportation fromthe storage facility to the city gate for each of these agreements.

 

During 2003, Cascadepurchased approximately 92% of its gas supplies from firm gas supply contractsand 8% from 30-day spot market contracts. In addition, 543,301,000 therms of customer purchased supplies weretransported through Cascade facilities.

 

4

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Cascade’s total cost ofgas depends primarily on the prices negotiated with producers and brokers,coupled with the cost of interstate and Canadian pipeline transportation.  Substantially all gas supplies for Oregoncore customers and the majority of gas supplies for Washington core customersare currently purchased on contracts with supplies and prices fixed through2004. Management believes that this, together with use of storage volumes,provides Cascade with the ability to mitigate the effects on Cascade and itscustomers of spikes in the market price of natural gas.

 

Federal Energy RegulatoryCommission (FERC) Matters

 

Cascade is not subject to regulation by the FERC, howeverFERC actions can affect the amounts Cascade pays to interstate pipelinecompanies for interstate deliveries of natural gas supplies. Several issues arepending before FERC, or are on appeal before the U.S. Court of Appeals. Thefinal outcome may affect prices Cascade pays. Since the policies of the WUTCand OPUC provide for 100% pass through of costs subject to FERC regulation, theCompany expects that the final resolution of pending issues will notsignificantly affect net income.

 

Curtailment Procedures

 

In previous heatingseasons, cold weather has required Cascade to significantly curtail deliveriesto its interruptible customers. Cascade has not curtailed any firm customers,except under force majeure conditions. Cascade’s tariffs effective inWashington and Oregon allow for curtailment of interruptible services, whichare provided at rates lower than for firm services.  In the event of curtailment by Cascade of firm service due to forcemajeure, Cascade’s tariffs provide that it will not be liable for damages toany customer for failure to deliver gas curtailed in accordance with theprovisions of the tariffs.  The tariffsprovide for appropriate adjustment of the monthly charges to firm customerscurtailed by reason of an insufficient supply of gas.

 

##### Territory Served andFranchises

 

Thepopulation of communities served by Cascade totals approximately 1,009,000. Atthe end of September 2003, Cascade had the franchises necessary for thedistribution of natural gas in all but two of the communities it serves inWashington and Oregon. Those franchises expired during fiscal 2003.Negotiations for those franchises are expected to be completed within fiscalyear 2004. Under the laws of those states, incorporated municipalities and countiesmay grant non-exclusive franchises for a fixed term of years conferring uponthe grantee certain rights with respect to public streets and highways in thelocation, construction, operation, maintenance and removal of gas distributionfacilities.

 

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 2004 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. This market is very weather-sensitive. See “Seasonality” below.

 

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 30-days’ notice.

 

Theprincipal industrial activities in Cascade’s service area include theproduction of pulp, paper and converted paper products, plywood, industrialchemicals; refining of crude oil; the processing, flash freezing and canning ofmany types of vegetable, fruit and fish products; processing of milk products;meat processing; drying and curing of wood and agricultural products; andelectric power generation. Electric generation customers represent asignificant portion of industrial revenues. The demand for gas-fired generationtends to decrease as the availability of hydroelectric generation increases.

 

5

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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, 2003, 69% of operating revenues and 105% ofincome from operations were derived from the first two quarters (October 2002through March 2003). 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 gas water heaters by customers, since they are not asinfluenced by weather conditions.

 

Competitive Conditions

 

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 beginning in the 2000- 2001 heating season, Cascade’s residential and commercial rate schedules  continue to maintain a price advantage overoil in its entire service territory and has an advantage over electricity inthe vast majority of its territory.  Inthe remaining areas of its service territory served by public electricutilities with their own hydro power supply, Cascade is almost equal in costwith respect to electricity furnished by those utilities for space heating andwater heating uses. In addition, natural gas enjoys the advantage of being thepreferred energy choice by builders for new home construction.

 

Thelarge volume industrial market has always been very  sensitive to price fluctuations between the comparable cost ofnatural gas and alternate fuels, principally residual fuel oil used in boilerapplications.  However, the advent ofopen access transportation in the late 1980’s and early 1990’s and thesubsequent restructuring of gas supply and contractual provisions with thesecustomers have improved the Company’s competitive position. With the escalationof wholesale natural gas prices that began in the 2000 - 2001 heating season,the Company has experienced some movement of its gas load to alternative fuelsand 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 electric ratesof all classes of customers including those applications in direct competitionwith natural gas marketed by Cascade.

 

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 of existingenvironmental problems or for the prevention of future environmental problems.For detailed descriptions of specific environmental issues, see “EnvironmentalMatters” under Item 7.

 

6

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Capital Expenditures

 

Capital expenditures areprimarily used to expand the Company’s distribution system to serve itsexpanding customer base, as well as to increase deliverability on its existingsystem to accommodate increased customer utilization. Capital expenditures forthe five fiscal years ended September 30, 2003 totaled approximately$103.3 million, and the budget for fiscal 2004 is $35.0 million.

 

The Company is currentlyforecasting that capital expenditures will total approximately $135 millionover the next five years,  including anestimated total of $10 to $12 million in 2004 and 2005 for a project toautomate the reading of customer meters. The overall objective is to invest limited capital to generate thehighest possible returns within the shortest possible time, while assumingprudent risk, anticipating customer needs and complying with the requirementsof regulators.

 

Non-Utility Subsidiaries

 

Cascade has fournon-utility subsidiaries, only two of which are actively engaged in business atpresent. Cascade Land Leasing is engaged in the servicing of loans that weremade to Cascade’s gas customers to finance their purchases of energy-efficientappliances. The subsidiary ceased making new loans in September 1997.Beginning in November 1998, CGC Resources began serving as an entityengaged in pipeline capacity management, with the objective of mitigating gascosts for Cascade.  The subsidiaries,which in the aggregate account for less than 1% of the consolidated assets ofthe Company, do not currently have a significant impact on Cascade’s financialstatements.

 

Personnel

 

At September 30,2003, Cascade had 437 employees.  Of thetotal employees, 194 are represented by the International Chemical WorkersUnion. The present contract with the union extends to April 1, 2006, andremains in force thereafter from year to year unless terminated by either partyby written notice sixty days prior to the expiration date.

 

**Item 2.Properties**

 

AtSeptember 30, 2003, Cascade’s utility plant investments includedapproximately 4,917 miles of distribution mains ranging in diameter from twoinches to twenty inches, 215 miles of transmission mains ranging in diameterfrom two inches to sixteen inches, and 3,420 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 five commercial officesand warehouse buildings. Cascade considers its properties well maintained andin good operating condition, and adequate for Cascade’s present and anticipatedneeds. All facilities are substantially utilized. In addition, the Company ownstwo buildings currently for sale due to operational consolidation.

 

**Item3.  Legal****Proceedings**

 

**Litigation:**In the fourth quarter of fiscal 2002 a fatal accidentoccurred involving facilities owned by the Company, located on the property ofone of the Company’s commercial customers. In fiscal 2003 a settlement of allplaintiffs’ claims was agreed to in consideration of a $750,000 payment. TheCompany and its co-defendant have each paid $375,000, and have agreed toresolve the allocation of the total settlement payment between them in futurenegotiations or proceedings.

 

**Other:**Incorporated herein by reference isthe information under “Environmental Matters” in Item 7.

 

**Item4.  Submission****of Mattersto a Vote of Security Holders**

 

No matters were submittedduring the fourth quarter of fiscal year 2003.

 

7

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**Executive Officers of the Registrant**

 

The executive officers ofthe Company, as of December 1, 2003, are as follows:

 
| **Name**           |   | **Office**                                                 |   | **Age** |   | **Year  Became  Officer** |
|--------------------|--------|------------------------------------------------------------|--------|---------|--------|---------------------------|
|               |   |                                                       |   |    |   |                      |
| W. Brian Matsuyama |   | President and Chief  Executive Officer                     |   | 57      |   | 1987                      |
|               |   |                                                       |   |    |   |                      |
| J. D. Wessling     |   | Chief Financial Officer                                    |   | 60      |   | 1995                      |
|               |   |                                                       |   |    |   |                      |
| William H. Odell   |   | Chief Operating Officer                                    |   | 41      |   | 2000                      |
|               |   |                                                       |   |    |   |                      |
| Jon T. Stoltz      |   | Senior Vice President -  Gas Supply and Regulatory Affairs |   | 56      |   | 1981                      |
|               |   |                                                       |   |    |   |                      |
| Larry C. Rosok     |   | Vice President - Human  Resources and Corporate Secretary  |   | 47      |   | 1995                      |
|               |   |                                                       |   |    |   |                      |
| James E. Haug      |   | Controller                                                 |   | 54      |   | 1981                      |

 

None of the aboveofficers is related by blood, marriage or adoption to any other of the abovenamed officers. Each of the above named officers has been employed by theCompany in a management capacity for at least the past five years.  None of the above officers hold directorshipsin other public corporations.  All officersserve at the pleasure of the Board of Directors.

 

###### **PART II**

###### ** **

###### **Item 5.  Marketfor** Registrant’s Common Equity and Related StockholderMatters

###### ** **

The Common Stock istraded on the New York Stock Exchange under the symbol CGC. The following tablestates the per share high and low sales prices of the Common Stock.

 

|              |   | **Fiscal  2003** |   | **Fiscal  2002** |   |
|-------------------|--------|------------------|--------|------------------|--------|
| **Quarter**       |   | **High**         |   | **Low**          |   | **High** |   | **Low** |   |
| December 31  |   | $                | 20.44  |             | $      | 17.70 |   | $ | 22.77 |   | $ | 19.62 |   |
| March 31     |   | 20.24            |   | 18.05            |   | 21.98 |   | 18.21 |   |
| June 30      |   | 20.15            |   | 18.20            |   | 24.17 |   | 19.90 |   |
| September 30 |   | 20.24            |   | 18.00            |   | 23.80 |   | 15.53 |   |
|                   |        |                  |        |                  |        |  |  |  |  |  |  |  |  |

 

At September 30,2003, there were 6,500 holders of the Common Stock. The following table showsfor the periods indicated the dividends paid per share on the Common Stock.

 

| **Quarter**       |   | **Fiscal  2003** |   | **Fiscal  2002** |   |
|-------------------|--------|------------------|--------|------------------|--------|
|              |   |             |   |             |   |
| December 31  |   | $                | 0.24   |             | $      | 0.24 |   |
| March 31     |   | $                | 0.24   |             | $      | 0.24 |   |
| June 30      |   | $                | 0.24   |             | $      | 0.24 |   |
| September 30 |   | $                | 0.24   |             | $      | 0.24 |   |

 

8

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Various debt and creditagreements restrict the Company and its subsidiaries as to indebtedness,payment of cash dividends on common stock, and other matters.  Under the most conservative restriction,approximately $12,946,000 was available for payment of dividends as ofSeptember 30, 2003.

 

**Item6. Selected****FinancialData**

 

**ConsolidatedStatements of Income and Comprehensive Income:**

(dollars in thousandsexcept per share data)

 
|                                   |   | **Year Ended September 30** |    |
|----------------------------------------|--------|----------------------------------|---------|
|                                   |   | **2003**                         |    | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
|                                   |   |                             |    |   |   |   |   |   |   |   |   |
| Operating Revenues                     |   | $                                | 302,755 |   | $ | 320,978 |   | $ | 335,814 |   | $ | 241,936 |   | $ | 208,610 |   |
| Less: Gas Purchases                    |   | 191,887                          |    | 209,225 |   | 219,795 |   | 136,681 |   | 109,263 |   |
| Revenue taxes                          |   | 20,193                           |    | 21,251 |   | 20,987 |   | 15,261 |   | 13,280 |   |
| Operating Margin                       |   | 90,675                           |    | 90,502 |   | 95,032 |   | 89,994 |   | 86,067 |   |
| Cost of Operations:                    |   |                             |    |   |   |   |   |   |   |   |   |
| Operating expenses                     |   | 45,514                           |    | 43,052 |   | 41,027 |   | 38,808 |   | 38,166 |   |
| Depreciation and  amortization         |   | 15,338                           |    | 14,926 |   | 13,839 |   | 13,293 |   | 12,841 |   |
| Property and payroll  taxes            |   | 3,532                            |    | 3,361 |   | 3,182 |   | 2,896 |   | 2,721 |   |
|                                   |   | 64,384                           |    | 61,339 |   | 58,048 |   | 54,997 |   | 53,728 |   |
| Income From Operations                 |   | 26,291                           |    | 29,163 |   | 36,984 |   | 34,997 |   | 32,339 |   |
| Nonoperating Expense  (Income):        |   |                             |    |   |   |   |   |   |   |   |   |
| Interest                               |   | 12,363                           |    | 12,384 |   | 10,509 |   | 10,936 |   | 10,486 |   |
| Interest charged to  construction      |   | (378                             | )       | (219 | ) | (333 | ) | (322 | ) | (383 | ) |
|                                   |   | 11,985                           |    | 12,165 |   | 10,176 |   | 10,614 |   | 10,103 |   |
| Amortization of debt  issuance expense |   | 696                              |    | 652 |   | 607 |   | 607 |   | 603 |   |
| Other                                  |   | (227                             | )       | (197 | ) | (313 | ) | (649 | ) | (495 | ) |
|                                   |   | 12,454                           |    | 12,620 |   | 10,470 |   | 10,572 |   | 10,211 |   |
|                                   |   |                             |    |   |   |   |   |   |   |   |   |
| Income Before Income  Taxes            |   | 13,837                           |    | 16,543 |   | 26,514 |   | 24,425 |   | 22,128 |   |
| Income Taxes                           |   | 4,733                            |    | 5,781 |   | 9,278 |   | 9,051 |   | 8,075 |   |
|                                   |   |                             |    |   |   |   |   |   |   |   |   |
| Net Income Before  Preferred Dividends |   | 9,104                            |    | 10,762 |   | 17,236 |   | 15,374 |   | 14,053 |   |
| Preferred Dividends                    |   | —                           |    | — |   | — |   | 4 |   | 483 |   |
| Net Income                             |   | $                                | 9,104   |   | $ | 10,762 |   | $ | 17,236 |   | $ | 15,370 |   | $ | 13,570 |   |
|                                   |   |                             |    |   |   |   |   |   |   |   |   |
| Other Comprehensive  Income (Loss)     |   |                             |    |   |   |   |   |   |   |   |   |
| Minimum pension  liability adjustment  |   | $                                | (2,619  | ) | $ | (11,792 | ) | $ | (6,502 | ) | $ | — |   | $ | — |   |
| Income tax benefit                     |   | 937                              |    | 4,205 |   | 2,341 |   | — |   | — |   |
| Other Comprehensive  Income (Loss)     |   | $                                | (1,682  | ) | $ | (7,587 | ) | $ | (4,161 | ) | $ | — |   | $ | — |   |
|                                   |   |                             |    |   |   |   |   |   |   |   |   |
| Comprehensive  Income                  |   | $                                | 7,422   |   | $ | 3,175 |   | $ | 13,075 |   | $ | 15,370 |   | $ | 13,570 |   |
|                                   |   |                             |    |   |   |   |   |   |   |   |   |
| Earnings  Per Common Share,            |   |                             |    |   |   |   |   |   |   |   |   |
| Basic  and Diluted                     |   | $                                | 0.82    |   | $ | 0.97 |   | $ | 1.56 |   | $ | 1.39 |   | $ | 1.23 |   |

 

9

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|                                                  |   | **At September 30** |    |
|-------------------------------------------------------|--------|--------------------------|---------|
|                                                  |   | **2003**                 |    | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
| **Retained Earnings:**                                |   |                     |    |   |   |   |   |   |   |   |   |
| Beginning  of the year                                |   | $                        | 17,524  |   | $ | 17,369 |   | $ | 10,736 |   | $ | 5,970 |   | $ | 3,003 |   |
| Net  income                                           |   | 9,104                    |    | 10,762 |   | 17,236 |   | 15,370 |   | 13,570 |   |
| Exercise  of stock options                            |   | —                   |    | (4 | ) | — |   | — |   | — |   |
| Common  dividends                                     |   | (10,647                  | )       | (10,603 | ) | (10,603 | ) | (10,604 | ) | (10,603 | ) |
| End  of the year                                      |   | $                        | 15,981  |   | $ | 17,524 |   | $ | 17,369 |   | $ | 10,736 |   | $ | 5,970 |   |
|                                                  |   |                     |    |   |   |   |   |   |   |   |   |
| **Capital Structure:**                                |   |                     |    |   |   |   |   |   |   |   |   |
| Common  shareholders’ equity                     |   | $                        | 112,560 |   | $ | 114,181 |   | $ | 121,633 |   | $ | 119,161 |   | $ | 114,395 |   |
| Redeemable  preferred stocks                          |   | —                   |    | — |   | — |   | 62 |   | 6,186 |   |
| Debt:                                                 |   |                     |    |   |   |   |   |   |   |   |   |
| Long-term  debt                                       |   | 142,930                  |    | 164,930 |   | 125,000 |   | 125,000 |   | 125,000 |   |
| Notes  payable and commercial paper                   |   | 3,800                    |    | — |   | 40,000 |   | 1,500 |   | — |   |
| Current  maturities of long-term debt                 |   | 22,000                   |    | — |   | — |   | — |   | — |   |
|                                                  |   | 168,730                  |    | 164,930 |   | 165,000 |   | 126,500 |   | 125,000 |   |
| Total  capital                                        |   | $                        | 281,290 |   | $ | 279,111 |   | $ | 286,633 |   | $ | 245,723 |   | $ | 245,581 |   |
|                                                  |   |                     |    |   |   |   |   |   |   |   |   |
| **Financial Ratios:**                                 |   |                     |    |   |   |   |   |   |   |   |   |
| Return  on common shareholders’ equity           |   | 7.62                     | %       | 8.49 | % | 13.45 | % | 12.51 | % | 11.52 | % |
| Common  stock dividend payout ratio                   |   | 117                      | %       | 99 | % | 62 | % | 69 | % | 78 | % |
| Cash  dividends declared per common share             |   | $                        | 0.96    |   | $ | 0.96 |   | $ | 0.96 |   | $ | 0.96 |   | $ | 0.96 |   |
|                                                  |   |                     |    |   |   |   |   |   |   |   |   |
| Fixed  charge coverage (before income tax deduction): |   |                     |    |   |   |   |   |   |   |   |   |
| Times  interest earned                                |   | 2.06                     |    | 2.27 |   | 3.39 |   | 3.12 |   | 3.00 |   |
| Times  interest and preferred dividends earned        |   | 2.06                     |    | 2.27 |   | 3.39 |   | 3.12 |   | 2.80 |   |
|                                                  |   |                     |    |   |   |   |   |   |   |   |   |
| Book  value per year-end share of common stock        |   | $                        | 10.11   |   | $ | 10.34 |   | $ | 11.01 |   | $ | 10.79 |   | $ | 10.33 |   |
|                                                  |   |                     |    |   |   |   |   |   |   |   |   |
| Capitalization  Ratios at End of Year                 |   |                     |    |   |   |   |   |   |   |   |   |
| Common  shareholders’ equity                     |   | 40.0                     | %       | 40.9 | % | 42.4 | % | 48.5 | % | 46.6 | % |
| Preferred  stock                                      |   | 0.0                      | %       | 0.0 | % | 0.0 | % | 0.0 | % | 2.5 | % |
| Long-term  debt (incl. current)                       |   | 58.6                     | %       | 59.1 | % | 43.6 | % | 50.9 | % | 50.9 | % |
| Short-term  debt                                      |   | 1.4                      | %       | 0.0 | % | 14.0 | % | 0.6 | % | 0.0 | % |
|                                                  |   | 100.0                    | %       | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
|                                                  |   |                     |    |   |   |   |   |   |   |   |   |
| **Utility Plant:**                                    |   |                     |    |   |   |   |   |   |   |   |   |
| Utility  plant - end of year                          |   | $                        | 529,807 |   | $ | 505,126 |   | $ | 488,231 |   | $ | 468,789 |   | $ | 453,278 |   |
| Accumulated  depreciation                             |   | 227,582                  |    | 213,476 |   | 201,530 |   | 189,058 |   | 177,878 |   |
| Net  plant                                            |   | $                        | 302,225 |   | $ | 291,650 |   | $ | 286,701 |   | $ | 279,731 |   | $ | 275,400 |   |
|                                                  |   |                     |    |   |   |   |   |   |   |   |   |
| Capital  expenditures, net of contributions in aid    |   | $                        | 27,693  |   | $ | 20,734 |   | $ | 21,649 |   | $ | 15,937 |   | $ | 17,262 |   |
| Total assets                                          |   | $                        | 371,456 |   | $ | 367,663 |   | $ | 364,253 |   | $ | 328,336 |   | $ | 315,569 |   |

 

10

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**Item 7.  Management’s Discussion****and Analysis of Financial Condition and Results ofOperations**

 

The following is management’s assessment of the Company’s financialcondition and a discussion of the principal factors that affect consolidatedresults of operations and cash flows for the fiscal years endedSeptember 30, 2003, 2002, and 2001. References herein to 2003, 2002, and2001 refer to these fiscal years.

 

## **CRITICAL ACCOUNTING POLICIES**

## ** **

TheCompany’s financial statements are prepared in accordance with accounting principlesgenerally accepted in the United States of America (GAAP). In following GAAP,management exercises judgment in selection and application of accountingprinciples. Management considers Critical Accounting Policies to be those wheredifferent assumptions regarding application could result in materialdifferences in financial statements.

 

## **Use of Estimates**

## ** **

The preparation of financial statements in conformitywith GAAP requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the date of the financial statements, and the reportedamounts of revenues and expenses during the reporting period. The Company hasused estimates in measuring certain deferred charges and deferred creditsrelated to items subject to approval of the WUTC and the OPUC. Estimates arealso used in the development of discount rates and trend rates related to themeasurement of retirement benefit obligations and accrual amounts, allowancesfor doubtful accounts, unbilled revenue, valuation of derivative instruments,and in the determination of depreciable lives of utility plant. On an ongoingbasis, management evaluates the estimates used, based on historical experience,current conditions and on various other assumptions believed to be reasonableunder the circumstances. Actual results may differ from these estimates underdifferent assumptions or conditions.

 

## **Revenue Recognition**

## ** **

## **TheCompany recognizes operating revenues based on deliveries of gas and otherservices to customers. This includes estimated revenues for gas delivered butnot billed to residential and commercial customers from the latest meterreading date to the end of the accounting period.**

## ** **

## **Regulatory Accounting**

## ** **

TheCompany’s accounting policies and practices are generally the same as used byunregulated companies for financial reporting under GAAP. However, Statement ofFinancial Accounting Standards (FAS) No. 71, “Accounting for the Effects ofCertain Types of Regulation”, requires regulated companies to apply specialaccounting treatment to reflect the financial impact of regulation. Forexample, in establishing the rates to be charged to the Company’s retailcustomers, the Washington Utilities and Transportation Commission (WUTC) andthe Oregon Public Utility Commission (OPUC) may not allow the Company to chargeits customers for recovery of certain expenses in the same period they areincurred. Instead, rates are established in the future to recover costs that wereincurred in a prior period. In this situation, FAS No. 71 requires the Companyto defer these costs and include them as regulatory assets on the balancesheet. In the subsequent period when these costs are recovered from customers,the Company then amortizes these costs as expense in the income statement, inan amount equivalent to the amounts recovered. Similarly, certain revenueitems, or cost reductions may be deferred as regulatory liabilities, which arelater amortized to the income statement as customer rates are reduced.

 

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

 

•                  An independent regulator approves the company’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.

 

11

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TheCompany periodically assesses whether conditions merit the continuedapplicability of FAS No. 71. In the event the Company should determine in thefuture that all or a portion of its regulatory assets and liabilities no longermeet the above criteria, it would be required to write off the related balancesof its regulatory assets and liabilities, and reflect the write off in itsincome statement. At September 30, 2003 there were $13,963,000 ofregulatory assets and $4,399,000 of regulatory liabilities.

 

## **Pension Plans**

 

TheCompany has a defined benefit pension plan covering substantially all employeesover 21 years of age with one year of service. The Company also providesexecutive officers with supplemental retirement, death and disability benefits.Descriptions of these plans, including plan changes adopted in 2003, areincluded in Note 10 to the Consolidated Financial Statements, as well as inItem 7 under “Employee Benefits Plan Changes”.

 

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 thedetermination of pension costs, and are affected by actual plan experience andassumptions of future experience. Key actuarial assumptions include theexpected return on plan assets, the discount rate used in determining theprojected benefit obligation and pension costs, and the assumed rate ofincrease in employee compensation. Changes in these assumptions may significantlyaffect pension costs. Changes to the provisions of the plans may also impactcurrent 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 $4,412,000 in 2002 and $4,269,000 in 2003 to thepension and supplemental executive retirement plans, and expects to contribute$3,500,000 in 2004.

 

In selecting a discountrate, the Company uses the average of the 20 year and above Aaa, Aa, A, and Baarates published by Moody’s. These are rates considered to be consistent withthe expected term of pension benefits. In 2003 the Company reduced the discountrate from 6.75% to 6.25% in connection with remeasurement of the pensionobligation at May 1, 2003, with a further reduction to 6.00% atSeptember 30, 2003. A reduction in the discount rate results in increasesin projected benefit obligation, pension liability, and pension 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 2002and 2003 the Company’s assumed rate of return on plan assets was 8.25%. Areduction in the assumed rate of return would result in increases in pensionliability and pension costs. The general downward trend in equity markets in2001 and 2002 and a partial recovery in 2003 have affected the value of theCompany’s plan assets. Additional information regarding the impact of thesemarket declines is included in Item 7 under “Other Comprehensive Income(Loss)”, and in Note 10 to the Consolidated Financial Statements.

 

## **Derivatives**

## ** **

The company accounts forderivative transactions according to the provisions of FAS No. 133, as amendedby FAS No. 138 and by**FAS No. 149. These standards require thatthe fair value of all derivative financial instruments be recognized as eitherassets or liabilities on the Company’s balance sheet and the recognition ofunrealized gains and losses.

 

The Company’s contractsfor purchase and sale of natural gas qualify for the normal purchase and normalsales exceptions under FAS No. 133 and are not required to be recorded asderivative assets and liabilities. Accordingly, the Company recognizes revenues and expenses on an accrualbasis, based on physical delivery of natural gas. The company appliesmark-to-market accounting to financial derivative contracts. Periodic changesin fair market value are recognized in earnings.

 

12

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The differences inaccounting for purchases and sales contracts versus financial contracts do notchange the underlying economics of the transactions, but could result inincreased quarterly earnings volatility.

 

**New Accounting Standards:**

 

See Note 2 to theConsolidated Financial statements.

 

**EARNINGS PER SHARE**

 

Netincome for 2003 was $9,104,000 compared to $10,762,000 for 2002. Basic anddiluted earnings per share for 2003 were $0.82, a 15% decrease from the $0.97per share earnings for 2002.

 

2002 versus 2001.Net income was $10,762,000 for 2002, compared to $17,236,000 for 2001. Basicand diluted earnings per share for 2002 were $0.97, a 38% decrease from the$1.56 reported for 2001.

 

## **OPERATING MARGIN**

## ** **

Operatingmargins by customer category for the fiscal years ended September 30,2003, 2002 and 2001are set forth in the tables below:

 

13

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Residentialand Commercial Margin

 
|                              |   | **(12 months ended September 30)** |       |
|-----------------------------------|--------|-----------------------------------------|------------|
| **($ in thousands)**              |   | **2003**                                |       | **2002** |   | **2001** |   |
|                              |   |                                    | ** ** |   | ** ** |   | ** ** |
| Degree  Days                      |   | 5,042                                   |       | 5,455 |   | 5,793 |   |
| Average  Number of Customers      |   |                                    |       |   |   |   |   |
| Residential                       |   | 177,300                                 |       | 169,454 |   | 163,427 |   |
| Commercial                        |   | 28,851                                  |       | 28,216 |   | 27,796 |   |
| Average  Therm Usage Per Customer |   |                                    | ** ** |   | ** ** |   | ** ** |
| Residential                       |   | 692                                     |       | 763 |   | 776 |   |
| Commercial                        |   | 3,473                                   |       | 3,802 |   | 4,023 |   |
| Operating  Margin                 |   |                                    |       |   |   |   |   |
| Residential                       |   | $                                       | 37,483     |   | $ | 38,396 |   | $ | 37,619 |   |
| Commercial                        |   | $                                       | 21,014     |   | $ | 22,209 |   | $ | 23,073 |   |

 

Industrialand Other Margin

 
|                            |   | **(12  months ended September 30 )** | ** ** |
|---------------------------------|--------|-------------------------------------------|------------|
| **($ and therms in thousands)** |   | **2003**                                  | ** ** | **2002** | ** ** | **2001** | ** ** |
|                            |   |                                      | ** ** |   | ** ** |   | ** ** |
| Average  Number of Customers    |   |                                      |       |   |   |   |   |
| Electric  Generation            |   | 14                                        |       | 12 |   | 8 |   |
| Industrial                      |   | 741                                       |       | 755 |   | 746 |   |
| Therms  Delivered               |   |                                      | ** ** |   | ** ** |   | ** ** |
| Electric  Generation            |   | 543,621                                   |       | 591,653 |   | 956,701 |   |
| Industrial                      |   | 395,480                                   |       | 373,252 |   | 386,872 |   |
| Operating  Margin               |   |                                      |       |   |   |   |   |
| Electric  Generation            |   | $                                         | 9,032      |   | $ | 9,263 |   | $ | 11,420 |   |
| Industrial                      |   | $                                         | 19,394     |   | $ | 19,194 |   | $ | 18,849 |   |
| Gas  Management Services        |   | $                                         | 3,509      |   | $ | 370 |   | $ | 997 |   |
| Other                           |   | $                                         | 243        |   | $ | 1,070 |   | $ | 3,074 |   |

 

2003 Versus 2002

 

Total operating margin of $90,675,000 was only slightlygreater than prior year margin of $90,502,000. Declines in margins fromresidential and commercial customers were substantially offset by improvementsin margins from industrial and other customers.

 

Residential and Commercial. Margins fromresidential and commercial customers declined $2,108,000. Weather, 7.6% warmerin 2003 compared to 2002, contributed to declines in per-customer gasconsumption. The resulting impact on margin was a reduction of approximately$4,600,000. Partially offsetting this decline was a positive impact from theaddition of new customers, which contributed approximately $2,600,000 margin.

 

Industrial and Other. Margins from delivery of gas to electric generation customers declined$231,000. Lower margins from electric generation customers in 2003reflect continued sluggish economic conditions and adequate supplies of lowercost hydropower displacing electricity from gas generation facilities.

 

Margins from deliveringgas to industrial customers increased slightly, substantially offsetting thedecline from electric generation customers.

 

14

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Margins from gasmanagement services to customers were negatively affected in both years bytermination charges in settlement of two cancelled gas supply contracts. Thecontracts were entered into to provide supplies to a group of industrialcustomers who had contracted for gas management services. In 2002 an initialcharge of $2,800,000 was recorded reflecting management’s estimate at that timeof the estimated liability under the claims. An additional charge of $865,000was recorded in 2003 reflecting full settlement of all claims related to thesecontracts.

 

In the fourth quarter offiscal 2003, the Company entered into cap and swap derivative arrangements,effectively fixing the price for supplies to be purchased for delivery to gasmanagement customers beginning in 2004. As prescribed in FAS No. 133, theCompany applies mark-to-market accounting to these derivatives. After enteringinto the derivative arrangements, the market price of gas declined, resultingin a mark-to-market charge of $315,000, reflected in gas management margins. Asignificant portion of gas management service margins is derived from arranginggas supplies for these customers. As these arrangements expire and new ones areentered into, margins will fluctuate.

 

Other margins declined$837,000. In 2003 other margins included a charge of $351,000 related to anestimated liability under an earnings-sharing requirement of the Oregon PublicUtilities Commission. Under that arrangement, the Company is required to defer,for refund to Oregon customers, 33% of amounts determined under a prescribedformula to be in excess of authorized earnings attributable to regulatedoperations in that state. In 2002, other margins included $347,000 of revenuefrom an off-system interstate pipeline transaction entered into in 2001.

 

2002versus 2001.

 

Operatingmargins in 2002 were $90,502,000, a decline of $4,530,000 from 2001, with$2,738,000 of the decline attributed to revenue in 2001 from the sale ofoff-system interstate pipeline capacity, and another $2,800,000 contracttermination charge recorded in 2002. Other components of changes in operatingmargin are described in the paragraphs below.

 

Residential and Commercial.Operatingmargins from residential and commercial customers were essentially even withfiscal year 2001. Increases in the number of residential and commercialcustomers contributed approximately $1,990,000 of new margin. Temperatures, 6%warmer than 2001, contributed to a consumption decline, the effect of whichsubstantially offset the improvement from new customer additions.

 

Industrial andOther. Operating margins from electric generation customerswere $2,157,000 lower than fiscal year 2001. The slow economy, mildtemperatures, and higher than normal hydroelectric generation dramaticallyaffected demand for gas-fired generation throughout the year but particularlyduring the third and fourth quarters. The fourth quarter alone was down$979,000 from the prior year.

 

Marginsin 2002 from providing gas management services to customers were negativelyaffected by a charge related to settlement of termination charges related tocancellation of a gas supply contract. The contract had been entered into toprovide supplies to a group of industrial customers who had contracted for gasmanagement services. In 2002 a charge of $2,800,000 was recorded reflectingmanagement’s estimate at that time of the estimated liability under the claim.

 

 Other margins declined $2,004,000 from 2001,largely related to opportunities in 2001 to enter into two off-system interstatepipeline transactions. These transactions resulted in $3,074,000 of operatingmargin in 2001, and $386,000 in 2002. The Company has no expectation ofadditional revenues from such sources, and this is not an on-going part ofCascade’s business.

 

#### COSTOF OPERATIONS

 

Cost of operations, whichconsists of operating expenses, depreciation and amortization, and property andpayroll taxes, was $64,384,000, $61,339,000, and $58,048,000 for the fiscalyears ended September 30, 2003, 2002, and 2001, respectively.

 

15

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2003 versus 2002

 

Operating Expensesincreased $2,462,000, 5.7% over 2002, including an increase in employeebenefits expenses of $1,946,000. Included in benefits expense was recognitionof a $1,451,000 curtailment loss in connection with changes in the Company’sretirement plans for salaried employees and executives. The revisions to thedefined benefit plans constitute plan curtailments under FAS No. 88, *Employers’Accounting for Settlements and Curtailments of Defined Benefit Pension Plansand for Termination Benefit*, resulting in the above-mentionedcurtailment loss associated with unrecognized prior service cost and transitionobligation. Further information on benefits plan changes is included belowunder “Employee Benefits Plan Changes”.

 

Also contributing to theincrease in operating expenses is a $524,000 charge for accrual of severancecosts, and a $701,000 increase in purchased services, stemming primarily fromconsulting charges related to two projects, the Company’s review of its benefitplans, and a project to prepare the Company for the compliance requirements ofthe Sarbanes-Oxley Act.

 

Depreciation andAmortization increased $412,000, 2.8%, over 2002 primarily asa result of increases in depreciable gas distribution system assets.

 

Property andMiscellaneous Taxes increased $171,000, 5.1% over 2002related to increases in taxable property.

 

2002versus 2001

 

Operating Expenses for 2002increased $2,025,000, or 4.9% from 2001. Employee benefits expense increased$2,030,000 over 2001. The bulk of the increase is due to increasing costs ofthe Company’s medical benefit plans for active and retired employees. In theaggregate, other expense categories decreased, due primarily to the inclusion in2001 of  $857,000 related to theinstallation of a new integrated work management system. Also included in 2002operating expenses is a $250,000 charge for the settlement of a lawsuit filedagainst the Company in 1998 in connection with personal injury claims.

 

Depreciation andAmortization for 2002 increased $1,087,000 or 7.9% over 2001.The increase is primarily attributable to the depreciation on computer systeminvestments in fiscal 2001 and natural gas distribution assets added since theprevious year. Fiscal 2002 was the first full-year of depreciation on theintegrated work management system installed at the end of 2001.

 

Property andMiscellaneous Taxes for 2002 increased $179,000 or 5.6% over2001 related to increases in taxable property.

 

**EMPLOYEE BENEFITS PLANCHANGES**

** **

The Company has conducteda comprehensive review of its employee benefits plans, and in the third quarterof fiscal 2003 began to implement significant changes to its employeeretirement plan, executive retirement plan and healthcare plans for both activeemployees and retirees. The changes apply to the Company’s non-bargaining-unitemployees, and are designed to reduce benefits costs by an estimated $3.0 to$3.5 million per year, beginning in fiscal 2004. The changes are also designedto reduce future volatility in benefits expenses and facilitate managementcontrol over future cost increases, while retaining a benefits packagemanagement believes is competitive. Though some cost reductions occurred infiscal 2003, these reductions were offset by costs of implementing the changes,including the charge described below.

 

Some of the changes involve the Company’s employee retirementplan and executive supplemental retirement plan.  As of September 30, 2003 these defined benefit plans stoppedaccruing additional benefits.  Instead,defined contribution plans will be used for benefits earned beginningOctober 1, 2003. The revisions to the defined benefit plans constituteplan curtailments under FAS No. 88, *Employers’ Accounting for Settlements andCurtailments of Defined Benefit Pension Plans and for Termination Benefits.*Therefore,the company recorded a charge to operating expense of approximately $1,451,000in the third quarter of fiscal 2003, as a curtailment loss associated withunrecognized prior service cost and transition obligation.

 

16

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**NONOPERATING EXPENSE (INCOME)**

 

2003 versus 2002

 

Net non-operating expense(income) decreased slightly from 2002, primarily due to a $159,000 increase ininterest charged to construction.

 

2002 versus 2001

 

Interest expense in 2002,net of interest capitalized, increased $1,989,000 (19.5%) from 2001, due to theissuance of  $40,000,000, 7.5 % 30 yearnotes in November of 2001. Interest on these notes exceeded interest onthe short-term debt they replaced.

 

**INCOME TAXES**

 

The changes in theprovision for income taxes from 2002 to 2003, and from 2001 to 2002 aredirectly attributable to the changes in pre-tax earnings.

 

# **OTHERCOMPREHENSIVE INCOME (LOSS)**

# ** **

During fiscal years 2001and 2002, the value of the pension plan assets declined, reflecting the generaldownward trend in common stock values. Asset values recovered somewhat in 2003.The 2001 and 2002 declines in asset values, along with a decrease in theassumed discount rate to 6% in 2003 from 7.50% in 2001, and a reduction in theearnings assumption rate to 8.25% in 2002 and 2003 from the 9.0% 2001 rate,resulted in an unfunded accumulated benefit obligation. To recognize thisliability, the Company recorded charges to Other Comprehensive Income (Loss)for minimum pension liability adjustments of $9,647,000 in 2001, $11,875,000 in2002, and $2,619,000 in 2003, in accordance with the provisions of FAS No. 87.Other comprehensive loss also includes credits for the deferred income taxeffect of $937,000, $4,205,000 and $2,341,000 for 2003, 2002 and 2001respectively.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Theseasonal nature of the Company’s business creates short-term cash requirementsto finance customer accounts receivable and construction expenditures. Toprovide working capital for these requirements, the Company has a $50,000,000bank revolving credit commitment. This agreement has an annual 0.16% commitmentfee, and a term that expires in November 2004. The Company also has a$10,000,000 uncommitted bank credit line. As of September 30, 2003, therewas $3,800,000 outstanding debt under these credit lines.

 

To providelonger-term financing, the Company in 2001 filed an omnibus registrationstatement under the Securities Act of 1933 providing the ability to issue up to$150,000,000 of new debt and equity securities. In fiscal 2002 the Companyissued $40,000,000 of 7.5% 30-year debt under the omnibus registrationstatement, leaving $110,000,000 available under that registration statement forfuture financing. The proceeds of the $40,000,000 offering were used to paydown outstanding short-term debt.

 

Becauseof the availability of short-term credit and the ability to issue long-termdebt and additional equity, management believes it has adequate financialflexibility to meet its anticipated cash needs.

 

### **OPERATINGACTIVITIES**

### ** **

For fiscal 2003,operating activities provided cash of $36,700,000, substantially equivalent tothe $36,004,000 for 2002. Included in these amounts were $5,868,000 and$8,270,000 for amortization of deferred gas cost changes. This is primarilyrelated to inclusion in customer rates of a component to recoverunder-recovered gas cost from the winter of fiscal 2001. In fiscal 2002 theWUTC approved this temporary rate increase designed to recover the 2001under-recovery by October 2004.

 

17

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**INVESTING ACTIVITIES**

 

Cash used by investingactivities in 2003 was $27,693,000, compared to $20,551,000 in 2002. Investingactivities are substantially all capital expenditures, and included $3,683,000for a project to automate meter reading (AMR). Approximately $19,000,000 of2003 capital expenditures were dedicated to connecting new customers.

 

Budgeted capitalexpenditures for fiscal 2004 are approximately $35,000,000, which includes$10,000,000 for the AMR project, with the remainder for new customerconnections, distribution system reinforcement and replacement projects,equipment, facilities upgrades, and various technology projects. The AMRproject is planned to be completed in the first quarter of fiscal 2005,resulting in savings in meter reading expenses when fully phased in by thesecond quarter of 2005.

 

#### **FINANCING ACTIVITIES**

 

Financing activities for2003 used cash of $5,243,000 compared to $12,187,000 for 2002. Other than thepayment of dividends, the primary financing activity in 2003 was the $3,800,000net increase in short-term debt. The Company also received $1,604,000 from theissuance of new common stock. In 2003, the Company began issuing new stock toits dividend reinvestment plan and 401(k) plans, and on exercise of stockoptions. The prior practice was to use funds received to purchase shares ofstock on the open market. In 2002 the primary financing activity was thereplacement of $40,000,000 short-term debt with proceeds from issuance of new7.5% 30-year notes.

 

**ENVIRONMENTAL MATTERS**

 

In 1995, the Companyreceived a claim from a property owner in Eugene, Oregon requesting that theCompany assume responsibility for investigation and possible clean up ofalleged contamination on property previously owned by a predecessor of Cascade.The predecessor company conducted a manufactured gas business on the propertyfrom approximately 1929 to 1948. Manufactured gas operations apparently wereconducted on the site by several operators beginning about 1907. The site wasused for other purposes beginning in 1949.

 

The present owner hasretained an environmental consultant, who is investigating possible contaminationon the property. To date the consultant has reported that it believescontamination is present. The contamination is consistent with that which mightoriginate from a manufactured gas operation. There have been no estimates as topossible clean up costs. The consultant’s initial report has been furnished tothe Oregon Department of Environmental Quality (DEQ). The owner has reached anintergovernmental agreement with the DEQ with respect to further investigationand possible remediation of contamination on the property under the voluntarycleanup program.

 

Another northwestutility, which purchased the property from Cascade in 1958, has declined toparticipate in the site investigation, although it may, as a one-time owner ofthe property, bear some share of the responsibility as well.

 

The Company has notifiedits insurance carriers of the claim and is keeping them advised as to theinvestigation. On one occasion in the past when hazardous materials on propertyformerly owned by a predecessor of the Company required clean up, the OPUCallowed the clean up costs to be passed on to customers. In the event theCompany is responsible for clean up costs not covered by insurance, managementanticipates asking for reimbursement through rates for such costs.

 

In 1997, a property ownerin Washington notified the Company that there is contamination on his property,and that he believes it comes from a former manufactured gas site, owned at onetime by a predecessor company, which was merged with Cascade in 1953. The Stateof Washington Department of Ecology has categorized this site as a “listedsite” ranked in its most hazardous category. As a former owner of the site, theCompany may be strictly liable to the State of Washington for investigation andremediation of the contamination of the site, but may share that cost orallocate all the cost to others who actually caused or contributed to thecontamination.

 

18

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The Company retained anenvironmental consultant who conducted a preliminary investigation of possiblecontamination at the site. There is evidence of contamination at the site, andthere is also evidence of an oil line across the site property owned andoperated by others, which may be a contributor to the contamination. There havebeen no estimates as to possible clean up costs. The Company has investigatedtitle and other government records to identify other potentially liableparties. The Company has notified the other identified parties of the contaminationclaims, and has requested cooperation and financial contribution.

 

In the event the Companyis responsible for clean up costs not covered by insurance, managementanticipates asking the WUTC for reimbursement for such costs, through ratescharged to customers.

 

**Item7A. Quantitative and****Qualitative Disclosures About Market Risk**

 

Cascade has evaluated itsrisk related to financial instruments whose values are subject to marketsensitivity. The Company has fixed-rate debt obligations, but does not havederivative financial instruments subject to interest rate risk. Cascade makesinterest and principal payments on these obligations in the normal course ofits business, and does not plan to redeem these obligations prior to normalmaturities.

 

The Company’s natural gaspurchase commodity prices are subject to fluctuations resulting from weather,congestion on interstate pipelines, and other unpredictable factors. TheCompany’s PGA mechanisms assure the recovery of prudently incurred wholesalecost of gas purchased for the core market. The Company utilizes fixed pricecontracts and financial derivatives to manage risk associated with wholesalecosts of gas purchased for non-core customers.

 

**FORWARD-LOOKING STATEMENTS**

 

Statements contained inthis report that are not historical in nature are forward-looking statementswithin the meaning of the Private Securities Litigation Reform Act of 1995.Forward-looking statements are subject to risks and uncertainties that maycause actual future results to differ materially. Such risks and uncertaintieswith respect to the Company include, among others, its ability to successfullyimplement internal performance goals, competition from alternative forms ofenergy, consolidation in the energy industry, performance issues with keynatural gas suppliers, the capital-intensive nature of the Company’s business,regulatory issues, including the need for adequate and timely rate relief torecover increased capital and operating costs resulting from customer growthand to sustain dividend levels, the weather, increasing competition brought onby deregulation initiatives at the federal and state regulatory levels, thepotential loss of large volume industrial customers due to “bypass” or theshift by such customers to special competitive contracts at lower per unitmargins, exposure to environmental cleanup requirements, and economicconditions, particularly in the Company’s service area.

 

19

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

 

INDEPENDENT AUDITORS’REPORT

 

Board of Directors

Cascade Natural Gas Corporation

Seattle, Washington

 

We have audited the accompanying consolidated balancesheets of Cascade Natural Gas Corporation and subsidiaries (the Corporation) asof September 30, 2003 and 2002, and the related consolidated statements ofincome and comprehensive income, common shareholders’ equity, and cash flowsfor each of the three years in the period ended September 30, 2003. Ouraudits also included the financial statement schedule contained in Item15(a)-2.  These financial statements andfinancial statement schedule are the responsibility of the Corporation’smanagement.  Our responsibility is toexpress an opinion on these financial statements and financial statementschedule based on our audits.

 

We conducted our audits in accordance with auditingstandards generally accepted in the United States of America.  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles usedand significant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

In our opinion, such consolidated financial statementsand financial statement schedule present fairly, in all material respects,the financial position of Cascade Natural Gas Corporation and subsidiaries asof September 30, 2003 and 2002, and the results of its operations and itscash flows for each of the three years in the period ended September 30,2003, in conformity with accounting principles generally accepted in the UnitedStates of America.  Also, in ouropinion, such financial statement schedule, when considered in relation to thebasic consolidated financial statements taken as a whole, presents fairly inall material respects the information set forth therein.

 

 

DELOITTE& TOUCHE LLP

 

Seattle,Washington November 21, 2003

 

20

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CASCADE NATURALGAS CORPORATION

CONSOLIDATED STATEMENTSOF INCOME AND COMPREHENSIVE INCOME

(Dollars in thousandsexcept per share data)

 
|                                          |   | **Year Ended September 30,** |    |
|-----------------------------------------------|--------|-----------------------------------|---------|
|                                          |   | **2003**                          |    | **2002** |   | **2001** |   |
|                                          |   |                              |    |   |   |   |   |
| Operating Revenues                            |   | $                                 | 302,755 |   | $ | 320,978 |   | $ | 335,814 |   |
| Less                                          |   |                              |    |   |   |   |   |
| Gas purchases                                 |   | 191,887                           |    | 209,225 |   | 219,795 |   |
| Revenue taxes                                 |   | 20,193                            |    | 21,251 |   | 20,987 |   |
| Operating Margin                              |   | 90,675                            |    | 90,502 |   | 95,032 |   |
|                                          |   |                              |    |   |   |   |   |
| Cost of Operations                            |   |                              |    |   |   |   |   |
| Operating expenses                            |   | 45,514                            |    | 43,052 |   | 41,027 |   |
| Depreciation and  amortization                |   | 15,338                            |    | 14,926 |   | 13,839 |   |
| Property and  miscellaneous taxes             |   | 3,532                             |    | 3,361 |   | 3,182 |   |
|                                          |   | 64,384                            |    | 61,339 |   | 58,048 |   |
|                                          |   |                              |    |   |   |   |   |
| Income from operations                        |   | 26,291                            |    | 29,163 |   | 36,984 |   |
|                                          |   |                              |    |   |   |   |   |
| Nonoperating Expense  (Income)                |   |                              |    |   |   |   |   |
| Interest                                      |   | 12,363                            |    | 12,384 |   | 10,509 |   |
| Interest charged to  construction             |   | (378                              | )       | (219 | ) | (333 | ) |
|                                          |   | 11,985                            |    | 12,165 |   | 10,176 |   |
| Amortization of debt  issuance expense        |   | 696                               |    | 652 |   | 607 |   |
| Other                                         |   | (227                              | )       | (197 | ) | (313 | ) |
|                                          |   | 12,454                            |    | 12,620 |   | 10,470 |   |
|                                          |   |                              |    |   |   |   |   |
| Income Before Income  Taxes                   |   | 13,837                            |    | 16,543 |   | 26,514 |   |
| Income Taxes                                  |   | 4,733                             |    | 5,781 |   | 9,278 |   |
|                                          |   |                              |    |   |   |   |   |
| Net Income                                    |   | $                                 | 9,104   |   | $ | 10,762 |   | $ | 17,236 |   |
|                                          |   |                              |    |   |   |   |   |
| Other Comprehensive  Income (Loss):           |   |                              |    |   |   |   |   |
| Minimum pension  liability adjustment         |   | $                                 | (2,619  | ) | $ | (11,792 | ) | $ | (6,502 | ) |
| Income tax benefit                            |   | 937                               |    | 4,205 |   | 2,341 |   |
| Other Comprehensive  Income (Loss)            |   | $                                 | (1,682  | ) | $ | (7,587 | ) | $ | (4,161 | ) |
|                                          |   |                              |    |   |   |   |   |
| Comprehensive Income                          |   | $                                 | 7,422   |   | $ | 3,175 |   | $ | 13,075 |   |
|                                          |   |                              |    |   |   |   |   |
| Earnings Per Common  Share, Basic and Diluted |   | $                                 | 0.82    |   | $ | 0.97 |   | $ | 1.56 |   |
|                                          |   |                              |    |   |   |   |   |
| Dividends Paid Per  Common Share              |   | $                                 | 0.96    |   | $ | 0.96 |   | $ | 0.96 |   |

 

The accompanying  notes are an integral part of thesefinancial statements

 

21

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CASCADE NATURAL GAS CORPORATION

CONSOLIDATED BALANCE SHEETS

 
|                                                                                                                      |   | **September 30,**          |    |
|---------------------------------------------------------------------------------------------------------------------------|--------|----------------------------|---------|
|                                                                                                                      |   | **2003**                   |    | **2002** |   |
|                                                                                                                      |   | **(Dollars in thousands)** |    |
| ASSETS                                                                                                                    |   |                       |    |   |   |
| Utility  Plant                                                                                                            |   | $                          | 529,807 |   | $ | 505,126 |   |
| Less  accumulated depreciation                                                                                            |   | 227,582                    |    | 213,476 |   |
|                                                                                                                      |   | 302,225                    |    | 291,650 |   |
| Construction  work in progress                                                                                            |   | 10,078                     |    | 7,974 |   |
|                                                                                                                      |   | 312,303                    |    | 299,624 |   |
| Other  Assets                                                                                                             |   |                       |    |   |   |
| Investments  in non utility property                                                                                      |   | 202                        |    | 202 |   |
| Notes  receivable, less current maturities                                                                                |   | 52                         |    | 127 |   |
|                                                                                                                      |   | 254                        |    | 329 |   |
| Current  Assets                                                                                                           |   |                       |    |   |   |
| Cash and  cash equivalents                                                                                                |   | 7,452                      |    | 3,688 |   |
| Accounts  receivable and current maturities of notes receivable, less allowance of $877  and $1,126 for doubtful accounts |   | 12,296                     |    | 14,547 |   |
| Materials,  supplies, and inventories                                                                                     |   | 14,737                     |    | 14,556 |   |
| Prepaid  expenses and other assets                                                                                        |   | 6,144                      |    | 6,515 |   |
| Deferred  income taxes                                                                                                    |   | 755                        |    | 1,648 |   |
|                                                                                                                      |   | 41,384                     |    | 40,954 |   |
| Deferred  Charges and Other                                                                                               |   |                       |    |   |   |
| Gas cost  changes                                                                                                         |   | 11,584                     |    | 18,788 |   |
| Other                                                                                                                     |   | 5,931                      |    | 7,968 |   |
|                                                                                                                      |   | 17,515                     |    | 26,756 |   |
|                                                                                                                      |   | $                          | 371,456 |   | $ | 367,663 |   |

 

22

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|                                                                                                                          |   | **September 30,**      |    |
|-------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|---------|
|                                                                                                                          |   | **2003**                    |    | **2002** |   |
|                                                                                                                          |   | **(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, 11,131,860 and 11,045,095 shares |   | $                           | 11,132  |   | $ | 11,045 |   |
| Additional paid-in capital                                                                                                    |   | 98,877                      |    | 97,360 |   |
| Accumulated other comprehensive income (loss)                                                                                 |   | (13,430                     | )       | (11,748 | ) |
| Retained earnings                                                                                                             |   | 15,981                      |    | 17,524 |   |
|                                                                                                                          |   | 112,560                     |    | 114,181 |   |
|                                                                                                                          |   |                        |    |   |   |
| Long-Term Debt                                                                                                                |   | 142,930                     |    | 164,930 |   |
|                                                                                                                          |   |                        |    |   |   |
| Current Liabilities                                                                                                           |   |                        |    |   |   |
| Notes payable and commercial paper                                                                                            |   | 3,800                       |    | — |   |
| Current maturities of long-term debt                                                                                          |   | 22,000                      |    | — |   |
| Accounts payable                                                                                                              |   | 10,501                      |    | 12,597 |   |
| Property, payroll, and excise taxes                                                                                           |   | 5,387                       |    | 5,777 |   |
| Dividends and interest payable                                                                                                |   | 7,884                       |    | 7,872 |   |
| Other current liabilities                                                                                                     |   | 6,431                       |    | 9,466 |   |
|                                                                                                                          |   | 56,003                      |    | 35,712 |   |
| Deferred Credits and Other                                                                                                    |   |                        |    |   |   |
| Income taxes                                                                                                                  |   | 23,292                      |    | 20,299 |   |
| Investment tax credits                                                                                                        |   | 1,479                       |    | 1,669 |   |
| Other                                                                                                                         |   | 35,192                      |    | 30,872 |   |
|                                                                                                                          |   | 59,963                      |    | 52,840 |   |
| Commitments and Contingencies (Note 11)                                                                                       |   | —                      |    | — |   |
|                                                                                                                          |   | $                           | 371,456 |   | $ | 367,663 |   |

 

The accompanying notes are an integral part of these financialstatements

 

23

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** **

CASCADE NATURAL GAS CORPORATION

CONSOLIDATED STATEMENTS OF COMMONSHAREHOLDERS’ EQUITY

 
| **(Dollars in thousands except per share data)** |              |       |          |   |   | **Paid-In  Capital** |   | **Accumulated****Other****Comprehensive****Income** |   | **Retained  Earnings** |    |
|--------------------------------------------------|-------------------|------------|---------------|--------|--------|----------------------|--------|-----------------------------------------------------|--------|------------------------|---------|
|                                             | **Common  Stock** |       |
|                                             | **Shares**        |       | **Par Value** |   |
| Balance, September 30, 2000                 |              | 11,045,095 |          | $      | 11,045 |                 | $      | 97,380                                              |   | $                      | —  |   | $ | 10,736 |   |
| Cash dividends:                                  |              |       |          |   |   |                 |   |                                                |   |                   |    |
| Common stock, $.96 per share                     |              |       |          |   |   |                 |   |                                                |   | (10,603                | )       |
| Other comprehensive income (loss)                |              |       |          |   |   |                 |   | (4,161                                              | )      |                   |    |
| Net  Income                                      |              |       |          |   |   |                 |   |                                                |   | 17,236                 |    |
| Balance, September 30, 2001                 |              | 11,045,095 |          | $      | 11,045 |                 | $      | 97,380                                              |   | $                      | (4,161  | ) | $ | 17,369 |   |
| Cash dividends:                                  |              |       |          |   |   |                 |   |                                                |   |                   |    |
| Common stock, $.96 per share                     |              |       |          |   |   |                 |   |                                                |   | (10,603                | )       |
| Other comprehensive income (loss)                |              |       |          |   |   |                 |   | (7,587                                              | )      |                   |    |
| Exercise of stock options                        |              |       |          |   |   | (20                  | )      |                                                |   | (4                     | )       |
| Net  Income                                      |              |       |          |   |   |                 |   |                                                |   | 10,762                 |    |
| Balance, September 30, 2002                 |              | 11,045,095 |          | $      | 11,045 |                 | $      | 97,360                                              |   | $                      | (11,748 | ) | $ | 17,524 |   |
| 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                                      |              |       |          |   |   |                 |   |                                                |   | 9,104                  |    |
| Balance, September 30, 2003                 |              | 11,131,860 |          | $      | 11,132 |                 | $      | 98,877                                              |   | $                      | (13,430 | ) | $ | 15,981 |   |

 

The accompanying notes are an integral part of these financialstatements

## ** **

24

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## ** **

CASCADE NATURAL GASCORPORATION

CONSOLIDATED STATEMENTSOF CASH FLOWS

 

(Dollars in thousands)

 
|                                                                               |   | **Year Ended September 30,** |   |
|------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                               |   | **2003**                          |   | **2002** |   | **2001** |   |
| Operating Activities                                                               |   |                              |   |   |   |   |   |
| Net Income                                                                         |   | $                                 | 9,104  |   | $ | 10,762 |   | $ | 17,236 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |   |                              |   |   |   |   |   |
| Depreciation and  amortization                                                     |   | 15,338                            |   | 14,926 |   | 13,839 |   |
| Deferrals of gas cost  changes                                                     |   | 1,336                             |   | 1,804 |   | (40,801 | ) |
| Amortization of gas  cost changes                                                  |   | 5,868                             |   | 8,270 |   | (3,108 | ) |
| Other deferrals and  amortizations                                                 |   | 6,032                             |   | (2,559 | ) | 3,706 |   |
| Deferred income taxes  and tax credits - net                                       |   | 2,804                             |   | 3,541 |   | 1,403 |   |
| Change in current  assets and liabilities                                          |   | (3,782                            | )      | (740 | ) | (271 | ) |
| Net cash provided  (used) by operating activities                                  |   | 36,700                            |   | 36,004 |   | (7,996 | ) |
|                                                                               |   |                              |   |   |   |   |   |
| Investing Activities                                                               |   |                              |   |   |   |   |   |
| Capital expenditures                                                               |   | (28,551                           | )      | (21,117 | ) | (23,829 | ) |
| Customer contributions  in aid of construction                                     |   | 858                               |   | 383 |   | 2,180 |   |
| Other                                                                              |   | —                            |   | 183 |   | 100 |   |
| Net cash used by  investing activities                                             |   | (27,693                           | )      | (20,551 | ) | (21,549 | ) |
|                                                                               |   |                              |   |   |   |   |   |
| Financing Activities                                                               |   |                              |   |   |   |   |   |
| Proceeds from long-term  debt, net                                                 |   | —                            |   | 38,510 |   | — |   |
| Repayment of long-term  debt                                                       |   | —                            |   | (70 | ) | — |   |
| Changes in notes  payable and commercial paper, net                                |   | 3,800                             |   | (40,000 | ) | 38,500 |   |
| Proceeds from issuance  of common stock                                            |   | 1,604                             |   | — |   | — |   |
| Dividends paid                                                                     |   | (10,647                           | )      | (10,603 | ) | (10,603 | ) |
| Redemption of preferred  stock                                                     |   |                              |   | — |   | (62 | ) |
| Other                                                                              |   |                              |   | (24 | ) | — |   |
| Net cash provided  (used) by financing activities                                  |   | (5,243                            | )      | (12,187 | ) | 27,835 |   |
|                                                                               |   |                              |   |   |   |   |   |
| Net Increase (Decrease)  in Cash and Cash Equivalents                              |   | 3,764                             |   | 3,266 |   | (1,710 | ) |
|                                                                               |   |                              |   |   |   |   |   |
| Cash and Cash  Equivalents                                                         |   |                              |   |   |   |   |   |
| Beginning of year                                                                  |   | 3,688                             |   | 422 |   | 2,132 |   |
| End of year                                                                        |   | $                                 | 7,452  |   | $ | 3,688 |   | $ | 422 |   |

 

The accompanying  notes are an integral part of thesefinancial statements

## ** **

25

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## **NOTES TO CONSOLIDATEDFINANCIAL 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’s service territory consists of townsin Washington and Oregon, ranging from the Canadian border in northwesternWashington to the Idaho border in eastern Oregon.

 

As of September 30,2003, the Company had approximately 206,000 billed core customers and 206non-core customers. Core customers are principally residential and smallcommercial and industrial customers who take traditional “bundled” natural gasservice, which includes supply, peaking service, and upstream interstatepipeline transportation. Sales to core customers account for approximately 21%of gas deliveries and 68% of operating margin. The Company’s sales to its coreresidential and commercial customers are influenced by fluctuations intemperature, particularly during the winter season.  A warm winter season will tend to reduce gas consumption.  Over the longer term, these fluctuationstend to offset each other, as rates charged to customers are developed based onthe assumption of normal weather.

 

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. The Company’s margin from non-core customers isderived primarily from this distribution service, as well as gas managementservices. The principal industrial activities of its customers include thegeneration of electricity, processing of food, processing of 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 risk primarily with respect to recovery ofcosts incurred. Various deferred charges and deferred credits reflectassumptions regarding recovery of certain costs through temporary customer rateadjustments during future periods.

 

### **Note2 - Summary of Significant Accounting Policies**

### ** **

The Company’s accountingrecords and practices conform to the requirements of the uniform system ofaccounts prescribed by the WUTC and the OPUC.

 

**Principles of consolidation:** Theconsolidated financial statements include the accounts of Cascade Natural GasCorporation and its wholly owned subsidiaries: Cascade Land Leasing Co.; CGCProperties, Inc.; CGC Energy, Inc.; and CGC Resources, Inc.  All intercompany transactions are eliminatedin consolidation.

 

**Reclassifications:**Certain reclassifications have been made in the 2002 and 2001 financialstatements to conform to the classifications used in 2003.

 

**Utility plant:** Utility plant is stated atthe historical cost of construction or purchase.  These costs include payroll-related costs such as taxes and otheremployee benefits, general and administrative costs, and the estimated cost offunds used during construction. Maintenance and repairs of property, and replacements and renewals ofitems deemed to be less than units of property, are charged to operations.  Units of utility plant retired or replacedare credited to property accounts at cost. Such amounts plus removal cost, less salvage, are charged to accumulateddepreciation.  In the case of a sale ofnon-depreciable property or major operating units, the resulting gain or losson the sale is included in other income or expense.

 

Depreciation of utilityplant is computed using the straight-line method.  The Company periodically conducts depreciation studies toestablish and update asset depreciation lives. Asset lives used for computingdepreciation range from six to seventy years, and the weighted average annualdepreciation rate is approximately 3.0%. The Company periodically reviews thecarrying amount of its utility plant and other long-lived assets forimpairment. An asset is considered impaired when estimated future cash flowsare less than the carrying amount of the asset. In the event the carryingamount of such asset is deemed not recoverable, the asset is adjusted to itsfair value. Fair value is generally determined based on discounted future cashflow.

 

26

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**Investments in non-utility property:** Realestate, carried at the lower of cost or estimated net realizable value is theprimary investment.

 

**Notes receivable:** Notes receivable includesloans made to customers for the purchase of energy efficient appliances, whichare generally the security for the loan. The loans have terms ranging from one to ten years at interest ratesvarying from 6.5% to 12%.

 

**Cash and cash equivalents:** For purposes ofreporting cash flows, the Company accounts for all liquid investments, with apurchased maturity of three months or less, as cash equivalents.  The following provides additionalinformation to the Consolidated Statements of Cash Flows:

 
| **(Dollars in  thousands)**                           |   | **2003** |   | **2002** |   | **2001** |   |
|-------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Changes  in current assets and current liabilities:   |   |     |   |     |   |     |   |
| Accounts  and notes receivable                        |   | $        | 2,327  |     | $      | 4,318    |   | $ | 2,208 |   |
| Income  taxes                                         |   | 1,156    |   | (4,031   | )      | 936      |   |
| Inventories                                           |   | (180     | )      | (5,686   | )      | (2,632   | )      |
| Prepaid  expenses and other assets                    |   | 108      |   | 12       |   | (363     | )      |
| Accounts  payable and accrued expenses                |   | (7,192   | )      | 4,647    |   | (847     | )      |
| Other                                                 |   | (1       | )      | —   |   | 427      |   |
| Net  change in current assets and current liabilities |   | $        | (3,782 | )        | $      | (740     | )      | $ | (271 | ) |
| Cash  payments:                                       |   |     |   |     |   |     |   |
| Interest  (net of amounts capitalized)                |   | $        | 12,288 |     | $      | 11,074   |   | $ | 10,868 |   |
| Income  taxes                                         |   | $        | — |     | $      | 6,938    |   | $ | 6,911 |   |

 

**Materials, supplies and inventories:**Materials and supplies for construction, operations, and maintenance, andinventories of natural gas are recorded at cost.

 

**Regulatory accounts:** The Company’sfinancial statements are prepared in accordance with Statement of FinancialAccounting Standards (FAS) No. 71, “Accounting for the Effects of Certain Typesof Regulation”. This statement provides for the deferral of certain costs andbenefits that would otherwise be recognized in revenue or expense, if it isprobable that future rates will result in recovery from customers or refund tocustomers of such amounts.

 

Regulatory assets (liabilities)at September 30, 2003 and 2002 include the following:

 
| **(dollars in  thousands)**                  |   | **2003** |   | **2002** |   |
|----------------------------------------------|--------|----------|--------|----------|--------|
| Unamortized  loss on reacquired debt         |   | $        | 2,379  |     | $      | 2,908 |   |
| Gas  cost changes                            |   | 11,584   |   | 18,788   |   |
| Deferred  income taxes                       |   | (3,967   | )      | (4,138   | )      |
| Postretirement  benefits other than pensions |   | —   |   | 187      |   |
| Other,  net                                  |   | (432     | )      | (438     | )      |
| Net                                          |   | $        | 9,564  |     | $      | 17,307 |   |

 

**Revenue recognition:** The Company recognizesoperating revenues based on deliveries of gas to customers. This includesestimated revenues for gas delivered but not billed to residential andcommercial customers from the latest meter reading date to the end of theaccounting period.

 

**Leases:** The Company leases a majority ofits vehicle fleet. These leases are classified as operating leases. TheCompany’s primary obligation under these leases is for a twelve-month period,with options to extend the lease thereafter. Commitments beyond one year arenot material. Rent expense under operating leases totaled $836,000, $813,000,and $980,000 for fiscal years ended September 30, 2003, 2002, and 2001,respectively.

 

27

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**Federal income taxes:** The Companynormalizes temporary differences between book income and taxable income, withthe exception of depreciation differences on assets placed in service prior to1981, consistent with the policies of the WUTC and OPUC. Deferred income taxesare determined using the asset and liability method, under which deferred taxassets and liabilities are measured based upon the temporary differencesbetween the financial statement and income tax bases of assets and liabilities,using current tax rates.

 

**Investment tax credits:** Investment taxcredits were deferred and are amortized over the remaining life of theproperties that gave rise to the credits.

 

**Use of estimates:** The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements, and the reported amounts of revenues and expenses during thereporting period. Actual results could differ from these estimates. The Companyhas used estimates in measuring certain deferred charges and deferred creditsrelated to items subject to approval of the WUTC and the OPUC. Estimates arealso used in the development of discount rates and trend rates related to themeasurement of retirement benefit obligations and accrual amounts, allowancesfor doubtful accounts, and in the determination of depreciable lives of utilityplant.

 

**Stock-Based Compensation:** Compensation costfor stock options is measured as the excess of the market price of the Company’sstock at the date of the grant over the price the employee must pay to acquirethe stock. The Company accounts for its stock-based compensation using theintrinsic value method prescribed in Accounting Principles Board Opinion No.25, “Accounting for Stock Issued to Employees” rather than using thefair-value-based method prescribed under FAS No. 123, “Accounting forStock-Based Compensation.” The Company has adopted the disclosure requirementsof FAS No. 123. See Note 6 for more information about the Company’s stock-basedcompensation plan. Had compensation expense been determined in accordance withFAS 123, the Company’s net income would have been as follows:

 
|                                                                                                                          |   | **2003**                                  |       | **2002** |       | **2001** |       |
|-------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                                                          |   | **(in thousands except per-share  data)** |       |
| **Amounts  as reported, reflecting stock-based employee compensation cost determined  under APB No. 25:**                     |   |                                      | ** ** |     | ** ** |     | ** ** |
|                                                                                                                          |   |                                      |       |     |       |     |       |
| Stock-based employee  compensation cost, net of tax effect                                                                    |   | $                                         | —     |     | $          | —   |       | $ | — |   |
| Net income (loss)                                                                                                             |   | $                                         | 9,104      |     | $          | 10,762   |       | $ | 17,236 |   |
| Basic earnings (loss)  per share                                                                                              |   | $                                         | 0.82       |     | $          | 0.97     |       | $ | 1.56 |   |
| Diluted earnings (loss)  per share                                                                                            |   | $                                         | 0.82       |     | $          | 0.97     |       | $ | 1.56 |   |
|                                                                                                                          |   |                                      |       |     |       |     |       |
| **Proforma  amounts, reflecting stock-based employee compensation cost as if determined  under fair value (FAS 123) method:** |   |                                      | ** ** |     | ** ** |     | ** ** |
|                                                                                                                          |   |                                      |       |     |       |     |       |
| Stock-based employee  compensation cost, net of tax effect                                                                    |   | $                                         | 110        |     | $          | 129      |       | $ | 133 |   |
| Net income (loss)                                                                                                             |   | $                                         | 8,994      |     | $          | 10,633   |       | $ | 17,103 |   |
| Basic earnings (loss)  per share                                                                                              |   | $                                         | 0.81       |     | $          | 0.96     |       | $ | 1.55 |   |
| Diluted earnings (loss)  per share                                                                                            |   | $                                         | 0.81       |     | $          | 0.96     |       | $ | 1.55 |   |

 

**Comprehensive Income (Loss):** Comprehensiveincome for the fiscal years ended September 30, 2003, 2002 and 2001,included charges to Other Comprehensive Income in the amount of $1,682,000,$7,587,000 and $4,161,000, net of income tax. The charges are related tominimum pension liability adjustments. See Note 10 for more information.

 

28

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**Segment Reporting:** Management views theCompany as operating as a single segment, that of a local distribution companyin the Pacific Northwest. Therefore, the financial statements do not includedisclosure of segment information.

 

**Derivatives:**The Company records derivativetransactions according to the provisions of FAS No. 133, *“Accounting for Derivative Instrumentsand Hedging Activities”*, as amended by FAS No. 138, *“Accountingfor Certain Derivative Instruments and Certain Hedging Activities”,*and by**FAS No. 149, *“Amendment of Statement133 on Derivative Instruments and Hedging Activities”**.*Thesestandards require that the fair value of all derivative financial instrumentsbe recognized as either assets or liabilities on the Company’s balancesheet.  Changes during a period in thefair value of a derivative instrument are required to be included in earningsor other comprehensive income for the period.

 

The Company’s contractsfor purchase and sale of natural gas qualify for the normal purchase and normalsales exceptions under FAS No. 133. Accordingly, the Company recognizes revenues and expenses on an accrualbasis, based on physical delivery of natural gas. The Company appliesmark-to-market accounting to financial derivative arrangements. Periodicchanges in fair market value are recognized in earnings.

 

**New Accounting Standards:**

 

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

 

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

 

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

 

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

 

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

 

In2003, the Company has also adopted FAS Nos. 146, 148, 149, and 150, and FASBInterpretation Nos. 45 and 46, as follows:

 

*The*FinancialAccounting Standards Board (FASB) has issued FAS No. 146, titled *“Accountingfor Costs Associated with Exit or Disposal Activities.”* Thisstandard is effective for exit or disposal activities initiated afterDecember 31, 2002, and has been adopted by the Company effectiveJanuary 1, 2003. Adoption of this standard did not have an impact on theCompany’s financial statements.

 

On December 31,2002, the FASB issued FAS No. 148, *“Accountingfor Stock-Based Compensation—Transition and Disclosure”.* ThisStatement amends FAS  No. 123, toprovide alternative methods of transition for companies that voluntarily changeto the fair-value-based method of accounting for stock-based employeecompensation. In addition, this Statement amends the disclosure requirements ofStatement 123 to require prominent disclosures in both annual and interimfinancial statements about the

 

29

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method of accounting forstock-based employee compensation and the effect of the method used on reportedresults.

 

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

 

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

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

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

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

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

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

 

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

 

***FAS No. 149.***In April 2003 theFASB issued FAS No. 149, entitled *“Amendmentof Statement 133 on Derivative Instruments and Hedging Activities”.*This Statement amends and clarifies financial accounting and reporting forderivative instruments, including certain derivative instruments embedded inother contracts (collectively referred to as derivatives) and for hedgingactivities under FAS No. 133, “*Accountingfor Derivative Instruments and Hedging Activities”,* and is effectivefor contracts entered into or modified after June 30, 2003. Adoption ofthis standard did not have an impact on the Company’s financial statements.

 

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

 

30

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# **Note 3 –Earnings per Share**

# ** **

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

 
|                                                     |   | **2003**                                  |   | **2002** |   | **2001** |   |
|----------------------------------------------------------|--------|-------------------------------------------|--------|----------|--------|----------|--------|
|                                                     |   | **(in thousands except per share  data)** |   |
|                                                     |   |                                      |   |     |   |     |   |
| Net  Income                                              |   | $                                         | 9,104  |     | $      | 10,762   |   | $ | 17,236 |   |
|                                                     |   |                                      |   |     |   |     |   |
| Weighted  average shares outstanding                     |   | 11,075                                    |   | 11,045   |   | 11,045   |   |
| Plus:  Issued on assumed exercise of stock  options |   | 16                                        |   | 19       |   | 22       |   |
| Weighted  average shares outstanding assuming dilution   |   | 11,091                                    |   | 11,064   |   | 11,067   |   |
|                                                     |   |                                      |   |     |   |     |   |
| Earnings  per common share, basic                        |   | $                                         | 0.82   |     | $      | 0.97     |   | $ | 1.56 |   |
| Earnings  per common share, diluted                      |   | $                                         | 0.82   |     | $      | 0.97     |   | $ | 1.56 |   |

 

The only dilutivesecurities are the stock options described in Note 6.

 

**Note 4 - Utility Plant**

 

Utility plant at September 30,2003 and 2002 consists of the following components:

 
| **(dollars in thousands)** |   | **2003** |    | **2002** |   |
|----------------------------|--------|----------|---------|----------|--------|
| Distribution plant         |   | $        | 470,550 |     | $      | 449,430 |   |
| Transmission plant         |   | 14,693   |    | 14,693   |   |
| General plant              |   | 40,345   |    | 36,784   |   |
| Intangible plant           |   | 212      |    | 212      |   |
| Nondepreciable plant       |   | 4,007    |    | 4,007    |   |
|                       |   | $        | 529,807 |     | $      | 505,126 |   |

 

**Note 5 - Common Stock**

 

At September 30,2003, shares of common stock are reserved for issuance as follows:

 
|                                                      |   | **Number  of shares** |   |
|-----------------------------------------------------------|--------|-----------------------|--------|
| Employee Savings Plan and Retirement Trust (401(k)  plan) |   | 103,026               |   |
| Dividend Reinvestment Plan                                |   | —                |   |
| Director Stock Award Plan                                 |   | 1,112                 |   |
| Stock Incentive Plan (Note 6)                             |   | 420,362               |   |
|                                                      |   | 524,500               |   |

 

The price of sharesissued to the above plans is determined by the market price of shares on theday of, or immediately preceding the issuance date.

 

31

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**Note 6 – Stock Compensation Plan**

 

Under the Company’s stockincentive plan, officers and other key management employees may be grantedoptions to purchase stock. The grants vest 1/3 per year over three years.Options granted in 1999, 2000, and 2001 expire five years after the grant date.Options granted in 2002 expire ten years from the grant date. No options weregranted in 2003. The weighted average remaining life of options outstanding atSeptember 30, 2003 is 2.16 years.

 

The following tablesummarizes the grants under option at September 30:

 
|                                                                   |   | **2003**                       |   | **2002**                      |    | **2001**                       |   |
|------------------------------------------------------------------------|--------|--------------------------------|--------|-------------------------------|---------|--------------------------------|--------|
|                                                                   |   | **Wtd. Avg.  Exercise  Price** |   | **No. Shares  Under  Option** |    | **Wtd. Avg.  Exercise  Price** |   | **No. Shares  Under  Option** |   | **Wtd. Avg.  Exercise  Price** |   | **No. Shares  Under  Option** |   |
| Balance at October 1                                              |   | $                              | 16.81  |                          | 192,430 |                           | $      | 16.81 |   | 142,966 |   | $ | 15.90 |   | 90,100 |   |
| Options granted                                                        |   | N/A                            |   | —                        |    | $                              | 20.84  |   | 63,000 |   | $ | 18.57 |   | 58,900 |   |
| Options cancelled                                                      |   |                           |   | (3,600                        | )       |                           |   | (7,166 | ) |   |   |   |   |
| Options exercised                                                      |   |                           |   | (6,800                        | )       | $                              | 16.62  |   | (6,370 | ) | $ | 15.63 |   | (6,034 | ) |
| Balance at September 30                                           |   | $                              | 18.04  |                          | 182,030 |                           | $      | 18.04 |   | 192,430 |   | $ | 16.81 |   | 142,966 |   |
| Exercisable at September 30                                       |   | $                              | 17.24  |                          | 124,753 |                           | $      | 16.39 |   | 79,989 |   | $ | 15.86 |   | 43,033 |   |
| Weighted average fair value of options granted  during the fiscal year |   | N/A                            |   |                          |    | $                              | 2.51   |   |   |   | $ | 2.90 |   |   |   |

 

The fair value wasestimated at the date of the grants using a Black-Scholes option pricing modelusing the following assumptions:

 
|                     |   | **Options  Granted During** |   |
|--------------------------|--------|-----------------------------|--------|
|                     |   | **2002**                    |   | **2001** |   |
| Dividend  yield          |   | 4.61                        | %      | 4.79 | % |
| Expected  volatility     |   | 17                          | %      | 24 | % |
| Expected  life           |   | 7.5 years                   |   | 5 years |   |
| Risk-Free  interest rate |   | 4.09                        | %      | 4.12 | % |

 

**Note 7 - Notes Payable and Commercial Paper**

 

The Company’s short-termborrowing needs are met with a $50,000,000 revolving credit agreement with oneof its banks. This agreement has a 0.16% annual commitment fee and a term thatexpires in November 2004. The Company also has a $10,000,000 uncommittedbank credit line.

 
|                                            |   | **September 30** |   |
|-------------------------------------------------|--------|-----------------------|--------|
| **(dollars in thousands)**                      |   | **2003**              |   | **2002** |   | **2001** |   |
|                                            |   |                  |   |   |   |   |   |
| Amount outstanding at September 30         |   | $                     | 3,800  |   | $ | — |   | $ | 40,000 |   |
| Average daily balance outstanding               |   | $                     | 449    |   | $ | 7,973 |   | $ | 23,699 |   |
| Average interest rate, excluding commitment fee |   | 2.54                  | %      | 3.01 | % | 5.01 | % |
| Maximum month end amount outstanding            |   | $                     | 6,250  |   | $ | 46,000 |   | $ | 44,500 |   |

 

Various debt and creditagreements restrict the Company and its subsidiaries as to indebtedness,payment of cash dividends on common stock, and other matters.  Under the most conservative restriction,approximately $12,946,000 is available for payment of dividends as ofSeptember 30, 2003.

 

32

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**Note 8 - Long-Term Debt**

 

Long-term debt andcurrent maturities of long-term debt at September 30, 2003 and 2002consists of the following:

 
| **(dollars in thousands)**                     |   | **2003** |    | **2002** |   |
|------------------------------------------------|--------|----------|---------|----------|--------|
| Medium-term notes:                             |   |     |    |     |   |
| 7.32% due Aug. 2004                            |   | $        | —  |     | $      | 22,000 |   |
| 7.18% due Oct. 2004                            |   | 4,000    |    | 4,000    |   |
| 8.38% due Jan.   2005                     |   | 5,000    |    | 5,000    |   |
| 8.35% due Jul.   2005                     |   | 5,000    |    | 5,000    |   |
| 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   |   |
| 7.50% Thirty-year notes due November 2031 |   | 39,930   |    | 39,930   |   |
| Total  long-term debt                          |   | $        | 142,930 |     | $      | 164,930 |   |
|                                           |   |     |    |     |   |
| Current Maturities of Long-Term Debt           |   |     |    |     |   |
| 7.32%  Medium-term notes due August 2004  |   | $        | 22,000  |     | $      | — |   |

 

None of the long-termdebt includes sinking fund requirements. Annual obligations for redemption of long-term debt and currentmaturities are as follows: $22,000,000 in fiscal year 2004, $14,000,000 infiscal year 2005, none in fiscal year 2006, $8,000,000 in fiscal year 2007,none in fiscal year 2008, and $120,930,000 thereafter.

 

There are $125 millionMedium-Term Notes (MTN’s), including current maturities, outstanding as ofSeptember 30, 2003. The $39,930,000 Thirty-Year Notes were issued under a2001 shelf registration providing ability to issue up to $150 million long-termdebt and equity securities.

 

**Note 9 - Income Taxes**

 

The provision for incometax expense consists of the following:

 
| **(dollars in thousands)**                      |   | **2003** |   | **2002** |   | **2001** |   |
|-------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                            |   |     |   |     |   |     |   |
| Current tax expense                             |   | $        | 270    |     | $      | 2,850    |   | $ | 7,875 |   |
| Deferred tax expense                            |   | 4,652    |   | 3,137    |   | 1,606    |   |
| Amortization of deferred investment tax credits |   | (189     | )      | (206     | )      | (203     | )      |
| Total income tax expense                        |   | $        | 4,733  |     | $      | 5,781    |   | $ | 9,278 |   |

 

A deferred income taxbenefit associated with a charge related to accrual of minimum pensionliability is included in Other Comprehensive Income (OCI) for each year endedSeptember 30, as follows: $937,000 in 2003, $4,205,000 in 2002, and$2,341,000 in 2001. See Note 10 for more information on OCI.

 

33

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

 
| **(dollars in thousands)**                      |   | **2003** |   | **2002** |   | **2001** |   |
|-------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                            |   |     |   |     |   |     |   |
| Statutory federal income tax rate               |   | 35       | %      | 35       | %      | 35       | %      |
| Income tax calculated at statutory federal rate |   | $        | 4,843  |     | $      | 5,790    |   | $ | 9,282 |   |
| Increase (decrease) resulting from:             |   |     |   |     |   |     |   |
| State income tax, net of federal tax benefit    |   | 109      |   | 130      |   | 200      |   |
| Non-normalized depreciation differences         |   | 305      |   | 355      |   | 343      |   |
| Amortization of investment tax credits          |   | (189     | )      | (206     | )      | (203     | )      |
| Other                                           |   | (335     | )      | (288     | )      | (344     | )      |
|                                            |   | $        | 4,733  |     | $      | 5,781    |   | $ | 9,278 |   |
|                                            |   |     |   |     |   |     |   |
| Effective tax rate                              |   | 34.2     | %      | 34.9     | %      | 35.0     | %      |

 

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 andliabilities are calculated under FAS No. 109, “Accounting for Income Taxes”.FAS No. 109 requires recording deferred tax balances, at the currently enactedtax rate, for all temporary differences between the book and tax bases ofassets and liabilities, including temporary differences for which no deferredtaxes had been previously provided because of use of flow-through taxaccounting for rate-making purposes. Because of prior and expected futurerate-making treatment of temporary differences for which flow-throughaccounting has been utilized, a regulatory liability for income taxes payablethrough future rates related to those temporary differences has beenestablished. At September 30, 2003, the balance of this regulatoryliability is $3,967,000.

 

The tax effects ofsignificant items comprising the Company’s deferred income tax accounts atSeptember 30, 2003 and 2002 are as follows:

 
| **(dollars in thousands)**             |   | **2003** |   | **2002** |   |
|----------------------------------------|--------|----------|--------|----------|--------|
|                                   |   |     |   |     |   |
| Current Amount:                        |   |     |   |     |   |
| Deferred assets:                       |   |     |   |     |   |
| Allowance for doubtful accounts        |   | $        | 365    |     | $      | 425 |   |
| Accrued liabilities                    |   | 360      |   | 1,148    |   |
| Other                                  |   | 30       |   | 75       |   |
|                                   |   | $        | 755    |     | $      | 1,648 |   |
|                                   |   |     |   |     |   |
| Non-current Amounts:                   |   |     |   |     |   |
| Deferred tax liabilities:              |   |     |   |     |   |
| Basis differences on net fixed assets  |   | $        | 31,854 |     | $      | 26,385 |   |
| Debt refinancing costs                 |   | 851      |   | 1,041    |   |
| Retirement benefit obligations         |   | 941      |   | 1,360    |   |
|                                   |   | 33,646   |   | 28,786   |   |
| Deferred tax assets:                   |   |     |   |     |   |
| Retirement benefit obligations         |   | 2,658    |   | 1,911    |   |
| Other comprehensive income             |   | 7,484    |   | 6,532    |   |
| Other                                  |   | 212      |   | 44       |   |
|                                   |   | 10,354   |   | 8,487    |   |
| Net non-current deferred tax liability |   | $        | 23,292 |     | $      | 20,299 |   |

 

 

34

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## **Note 10 - Retirement Plans**

## ** **

The Company has a noncontributory defined benefitpension plan that covers substantially all employees over 21 years of age withone year of service.  EffectiveOctober 1, 2003 non-bargaining-unit employees will no longer accruebenefits under the plan. Benefits accrued as of that point were frozen forthose employees. Employees covered by a bargaining agreement continue to accruebenefits based on a formula which includes credited years of service and theemployee’s annual compensation.

 

The Company has alsoprovided executive officers with supplemental retirement, death, and disabilitybenefits.  This plan was also frozenSeptember 30, 2003. Under the plan, vesting occurred on a stepped basis,with full vesting at age 55 and completing either five years of participationunder the plan or seventeen years of employment with the Company, upon death,or upon a change in control. The plan supplemented the benefit received throughSocial Security and the defined benefit pension plan so that the totalretirement benefits would be equal to 70% of the executive’s highest salaryduring any of the five years preceding retirement.  The plan also provides a death benefit equivalent to ten years ofvested benefits.

 

The Company has anEmployee Savings 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’s matching contribution percentage was reduced from 75% to 50% withrespect to non-bargaining-unit employees. The rate remains at 75% forbargaining-unit employees. The Company recognized costs for contributions tothis plan of $782,000, $755,000, and $842,000, for 2003, 2002 and 2001,respectively.

 

As part of acomprehensive review of its employee benefits plan, in the third quarter offiscal 2003, the Company announced changes in its retirement plans fornon-bargaining unit employees. Subsequent benefits will be in the form ofcontributions to the existing 401(k) Plan. In addition to the existing matchfor employee contributions the Company will contribute 4% of eligible salaries,and a 1% to 4% transition contribution, to employee retirement accounts.Additionally there will be annually determined “profit-sharing” contributionsbased on the Company achieving established targets. The retirement plans remainunchanged for bargaining-unit employees until the existing agreement expires in2006.

 

The Company’s health careplan provides Postretirement Benefits Other than Pensions (PBOP), consisting ofmedical and prescription drug benefits, to its retired employees hired prior toJune 1, 1992, and their eligible dependents. Changes to this plan,announced in 2003, provide for the addition of participant contributionsbeginning January 1, 2004.

 

The revisions to thedefined benefit plans constitute plan curtailments under FAS No. 88, *Employers’Accounting for Settlements and Curtailments of Defined Benefit Pension Plansand for Termination Benefits.* Therefore the Company recorded acharge to operating expense of $1,451,000 in the third quarter as a curtailmentloss associated with unrecognized prior service cost and transition obligation.

 

With the announcement ofthese plan changes, the Company’s obligation and fiscal 2003 expense underthese plans was re-measured as of May 1, 2003. Re-measured benefitsexpense for fiscal 2003, excluding the above-mentioned curtailment loss,decreased $898,000 compared to previously measured 2003 expense. Reflected inthe re-measured expense is a reduction in the discount rate assumption, from6.75% at October 1, 2002, to 6.25% at May 1, 2003.

 

The following tables setforth the pension and health care plan disclosures:

 

35

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**Components of net periodic benefit cost**

 
|                                   |   | **Pension  Benefits** |   | **Other Benefits** |   |
|----------------------------------------|--------|-----------------------|--------|--------------------|--------|
|                                   |   | **2003**              |   | **2002**           |   | **2001** |   | **2003** |   | **2002** |   | **2001** |   |
| Service cost                           |   | $                     | 1,522  |               | $      | 1,569 |   | $ | 1,928 |   | $ | 534 |   | $ | 522 |   | $ | 484 |   |
| Interest cost                          |   | 3,745                 |   | 3,630              |   | 3,373 |   | 2,182 |   | 2,153 |   | 1,949 |   |
| Expected return on plan assets         |   | (3,738                | )      | (3,927             | )      | (4,171 | ) | (731 | ) | (721 | ) | (903 | ) |
| Amortization of transition obligation  |   | 58                    |   | 100                |   | 100 |   | 657 |   | 657 |   | 657 |   |
| Amortization of prior service cost     |   | 365                   |   | 499                |   | 500 |   | (375 | ) | (72 | ) | — |   |
| Recognized net actuarial loss / (gain) |   | 1,160                 |   | 24                 |   | — |   | 1,205 |   | 298 |   | (124 | ) |
| Net periodic benefit cost              |   | $                     | 3,112  |               | $      | 1,895 |   | $ | 1,730 |   | $ | 3,472 |   | $ | 2,837 |   | $ | 2,063 |   |
| Curtailment loss recognized            |   | 1,451                 |   | —             |   | — |   | — |   | — |   | — |   |
| Total benefit cost                     |   | $                     | 4,563  |               | $      | 1,895 |   | $ | 1,730 |   | $ | 3,472 |   | $ | 2,837 |   | $ | 2,063 |   |

 
|                                                |   | **Pension  Benefits** |    | **Other  Benefits** |   |
|-----------------------------------------------------|--------|-----------------------|---------|---------------------|--------|
| **(dollars in thousands)**                          |   | **2003**              |    | **2002**            |   | **2003** |   | **2002** |   |
|                                                |   |                  |    |                |   |   |   |   |   |
| **Change in benefit obligations**                   |   |                  |    |                |   |   |   |   |   |
| Projected benefit obligation at beginning of year   |   | $                     | 56,885  |                | $      | 49,400 |   | $ | 35,820 |   | $ | 29,266 |   |
| Service Cost                                        |   | 1,522                 |    | 1,569               |   | 534 |   | 522 |   |
| Interest Cost                                       |   | 3,745                 |    | 3,630               |   | 2,182 |   | 2,153 |   |
| Plan participants’ contributions               |   | —                |    | —              |   | — |   | — |   |
| Amendments                                          |   |                  |    |                |   | (14,742 | ) | — |   |
| Curtailments                                        |   | (2,566                | )       | —              |   | — |   | — |   |
| Benefits paid                                       |   | (2,397                | )       | (2,222              | )      | (1,130 | ) | (1,339 | ) |
| Changes in assumptions                              |   | 5,955                 |    | 3,568               |   |   |   | — |   |
| Actuarial (gain)/loss                               |   | 227                   |    | 940                 |   | 2,347 |   | 5,218 |   |
| Projected benefit obligation at end of year         |   | $                     | 63,371  |                | $      | 56,885 |   | $ | 25,011 |   | $ | 35,820 |   |
|                                                |   |                  |    |                |   |   |   |   |   |
| **Change in Plan Assets**                           |   |                  |    |                |   |   |   |   |   |
| Fair value of plan assets at beginning of year      |   | $                     | 37,898  |                | $      | 40,566 |   | $ | 9,245 |   | $ | 8,695 |   |
| Actual return on plan assets                        |   | 5,953                 |    | (4,858              | )      | 1,428 |   | (696 | ) |
| Employer contributions                              |   | 4,269                 |    | 4,412               |   | 840 |   | 2,584 |   |
| Plan participants’ contributions               |   | —                |    | —              |   | — |   | — |   |
| Benefits Paid                                       |   | (2,397                | )       | (2,222              | )      | (1,130 | ) | (1,338 | ) |
| Fair value of plan assets at end of year            |   | $                     | 45,723  |                | $      | 37,898 |   | $ | 10,383 |   | $ | 9,245 |   |
|                                                |   |                  |    |                |   |   |   |   |   |
| Funded Status                                       |   | $                     | (17,648 | )                   | $      | (18,987 | ) | $ | (14,628 | ) | $ | (26,575 | ) |
| Unrecognized prior service cost                     |   | 1,056                 |    | 2,505               |   | (15,121 | ) | (755 | ) |
| Unrecognized net (gain)/loss                        |   | 24,940                |    | 24,698              |   | 16,745 |   | 16,300 |   |
| Unrecognized transition obligation/(asset)          |   | —                |    | 426                 |   | 6,077 |   | 6,734 |   |
| Net amount recognized                               |   | $                     | 8,348   |                | $      | 8,642 |   | $ | (6,927 | ) | $ | (4,296 | ) |
|                                                |   |                  |    |                |   |   |   |   |   |
| Amounts recognized in the balance sheet consist of: |   |                  |    |                |   |   |   |   |   |
| Prepaid pension cost                                |   | $                     | 3,120   |                | $      | 3,276 |   | $ | ** —** | ** ** | $ | — | ** ** |
| Accrued pension (liability)                         |   | (16,743               | )       | (15,526             | )      | (6,927 | ) | (4,296 | ) |
| Intangible asset                                    |   | 1,056                 |    | 2,598               |   | — |   | — |   |
| Accumulated other comprehensive (income) loss       |   | 20,914                |    | 18,294              |   | — |   | — |   |
| Net amount recognized                               |   | $                     | 8,347   |                | $      | 8,642 |   | $ | (6,927 | ) | $ | (4,296 | ) |

 

The Company’s accruedliability for pension and other postretirement benefits is included on thebalance sheet in other non-current liabilities.

 

36

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| **Weighted  Average  Assumptions** |   | **2003** |   | **2002** |   |
|-----------------------------------------|--------|----------|--------|----------|--------|
| Discount  rate                          |   | 6.00     | %      | 6.75     | %      |
| Average  compensation increase          |   | 3.50     | %      | 3.50     | %      |
| Expected  rate of return on plan assets |   |     |   |     |   |
| Pension  plan                           |   | 8.25     | %      | 8.25     | %      |
| Supplemental  executive retirement plan |   | 8.25     | %      | 8.25     | %      |
| Postretirement  medical benefit plan    |   | 8.25     | %      | 8.25     | %      |

# ** **

The assumed health carecost trend rate used in measuring the APBO at September 30, 2003 formedical costs is 8.0% for fiscal 2003, trending down to 5.5% in 2007. Forprescription drug costs, the rate is 13.0% for 2003, trending down to 5.5% in2013. A one percent change in the assumed health care cost trend rate wouldhave the following effects as of September 30, 2003:

 
|                                                                        |   | **One  Percentage Point** |   |
|-----------------------------------------------------------------------------|--------|---------------------------|--------|
|                                                                        |   | **Increase**              |   | **Decrease** |   |
|                                                                        |   | **(thousands)**           |   |
| Effect  on service and interest cost for year ended September 30, 2003 |   | $                         | 537    |   | $ | (435 | ) |
| Effect  on accumulated postretirement benefit obligation as of 10/1/2002    |   | $                         | 5,490  |   | $ | (4,521 | ) |
| Effect  on accumulated postretirement benefit obligation as of 9/30/2003    |   | $                         | 3,141  |   | $ | (2,624 | ) |

 

During fiscal years 2001 and2002, the value of the pension plan assets declined, reflecting the generaldownward trend in common stock values. Asset values recovered somewhat in 2003.The 2001 and 2002 declines in asset values, along with a decrease in theassumed discount rate to 6% in 2003 from 7.50% in 2001, and a reduction in theearnings assumption rate to 8.25% in 2002 and 2003 from the 9.0% 2001 rate,resulted in an unfunded accumulated benefit obligation. To recognize thisliability, the Company recorded a minimum pension liability adjustment of$9,647,000 in 2001, $11,875,000 in 2002, and $2,619,000 in 2003, in accordancewith the provisions of FAS No. 87.

 

**Note 11 - Commitments and Contingencies**

 

# **GasService Contracts**

# ** **

The Company has enteredinto various long-term contracts for natural gas supply, transportation,storage, and peaking services. These contracts are intended to provide adequatesupplies of gas firm service to core customers and to meet obligations underlong-term non-core customer agreements, and to provide that adequate capacityis available on interstate pipelines for the delivery of these supplies.  These contracts have maturities ranging upto 25 years, and generally provide for monthly and annual fixed demand chargesand minimum purchase obligations.

 

The Company’s minimumobligations under these contracts are set forth in the following table. Theamounts are based on current contract price terms and estimated commodityprices, which are subject to change:

 
| **Fiscal Year Ending  September 30** |   | **Firm Gas  Supply**        |    | **Interstate  Pipeline  Transportation** |   | **Storage  and Peaking  Service** |   | **Total** |   |
|-------------------------------------------|--------|-----------------------------|---------|------------------------------------------|--------|-----------------------------------|--------|-----------|--------|
|                                      |   | **(dollars in  thousands)** |    |
| 2004                                      |   | $                           | 155,808 |                                     | $      | 27,666                            |   | $         | 1,870  |   | $ | 185,344 |   |
| 2005                                      |   | 29,211                      |    | 27,666                                   |   | 1,491                             |   | 58,368    |   |
| 2006                                      |   | 24,966                      |    | 27,666                                   |   | 1,491                             |   | 54,123    |   |
| 2007                                      |   | 24,966                      |    | 27,666                                   |   | 1,491                             |   | 54,123    |   |
| 2008                                      |   | 24,966                      |    | 27,620                                   |   | 1,491                             |   | 54,077    |   |
| Thereafter                                |   | 24,966                      |    | 198,704                                  |   | 9,072                             |   | 232,742   |   |
|                                      |   | $                           | 284,883 |                                     | $      | 336,988                           |   | $         | 16,906 |   | $ | 638,777 |   |

 

37

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Purchases under thesecontracts for fiscal 2003, 2002, and 2001 have been as follows:

 
| **(dollars in thousands)** |   | **Firm Gas  Supply** |    | **Interstate  Pipeline  Transportation** |   | **Storage  and Peaking  Service** |   | **Total** |   |
|----------------------------|--------|----------------------|---------|------------------------------------------|--------|-----------------------------------|--------|-----------|--------|
|                       |   |                 |    |                                     |   |                              |   |      |   |
| 2003                       |   | $                    | 159,028 |                                     | $      | 26,450                            |   | $         | 2,140  |   | $ | 187,618 |   |
| 2002                       |   | $                    | 141,093 |                                     | $      | 25,210                            |   | $         | 2,140  |   | $ | 168,443 |   |
| 2001                       |   | $                    | 166,912 |                                     | $      | 35,276                            |   | $         | 3,030  |   | $ | 205,218 |   |

 

## **Financial Derivatives**

## ** **

To support new,fixed-price contracts for firm delivery of natural gas to a group of industrialcustomers in fiscal 2004, the Company entered into a swap and cap agreement inthe fourth quarter of fiscal 2003. Under the terms of the swap arrangement theCompany will either pay or receive settlement payments based on the differencebetween a fixed strike price and the monthly Inside FERC Index price. The totalquantity subject to this arrangement is 1,260,000 MMBTU’s in 2004 and 133,000MMBTU’s in 2005. As of September 30, 2003, the market value of this swapis a liability of $268,000, included in other non-current liabilities. The caparrangement provides a cap on 140,000 MMBTU’s in 2004 and 15,000 MMBTU’s in2005. As of September 30, 2003, the market value of this cap is $79,000,included in Other assets.

 

Mark-to-marketadjustments on the swap and cap resulted in a $315,000 charge to earnings inthe fourth quarter of 2003.

 

# **EnvironmentalMatters**

# ** **

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

 

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

 

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

 

Management intends topursue reimbursement from its insurance carriers, and recovery from itscustomers through increased rates, for any remediation costs for which theCompany is determined to be liable. There is precedent for such recoverythrough increased rates, as both the WUTC and OPUC have previously allowedregulated utilities to increase customer rates to recover similar costs. Noclaims now pending, in the opinion of management, are expected to have amaterial effect on the Company’s financial position, results of operations, orliquidity.

 

# **Litigationand Other Contingencies**

# ** **

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

 

In the fourth quarter offiscal 2002 a fatal accident occurred involving facilities owned by theCompany, located on the property of one of the Company’s commercial customers.In fiscal 2003 a settlement of all

 

38

----

 

plaintiffs’ claims wasagreed to in consideration of a $750,000 payment. The Company and itsco-defendant have each paid $375,000, and have agreed to resolve the allocationof the total settlement payment between them in future negotiations orproceedings.

 

No other claims nowpending, in the opinion of management, are expected to have a material effecton the Company’s financial position, results of operations, or liquidity.

 

**Note 12 - Fair Value of Financial Instruments**

 

The following estimated fair value amounts have beendetermined by the Company, using available market information and appropriatevaluation methodologies.  However,considerable judgment is required in interpreting market data to develop theestimates of fair value.  Accordingly,these estimates are not necessarily indicative of the amounts that the Companycould realize in a current market exchange. Thus, the use of different market assumptions or estimationmethodologies may have a material effect on the estimated fair value amounts.The estimated fair values have been determined by using interest rates that arecurrently available to the Company for issuance of instruments with similarterms and remaining maturities. The estimated fair value amounts, atSeptember 30, 2003 and 2002, of financial instruments whose values aresensitive to market conditions are set forth in the following table:

 
|                                 |   | **2003**             |    | **2002**                  |   |
|--------------------------------------|--------|----------------------|---------|---------------------------|--------|
| **(dollars in thousands)**           |   | **Carrying  Amount** |    | **Estimated  Fair Value** |   | **Carrying  Amount** |   | **Estimated  Fair Value** |   |
|                                 |   |                 |    |                      |   |   |   |   |   |
| Long-term debt                       |   | $                    | 142,930 |                      | $      | 166,137 |   | $ | 164,930 |   | $ | 191,231 |   |
| Current maturities of long-term debt |   | $                    | 22,000  |                      | $      | 22,955 |   | $ | — |   | $ | — |   |

 

39

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**Note 13 - Interim Results of Operations (unaudited)**

 
| **(thousands except  per share data)** |   | **Quarter  Ended** |   |
|----------------------------------------|--------|--------------------|--------|
| **9/30/2003**                          |   | **6/30/2003**      |   | **3/31/2003** |   | **12/31/2002** |
|                                   |   |               |   |   |   |   |   |   |   |
| Operating revenues                     |   | $                  | 39,180 |   | $ | 53,793 |   | $ | 109,286 |   | $ | 100,496 |   |
| Gas costs and revenue taxes            |   | 24,989             |   | 36,465 |   | 79,639 |   | 70,987 |   |
| Operating margin                       |   | 14,191             |   | 17,328 |   | 29,647 |   | 29,509 |   |
| Cost of operations                     |   | 15,597             |   | 17,249 |   | 15,749 |   | 15,789 |   |
| Income (loss) from operations          |   | (1,406             | )      | 79 |   | 13,898 |   | 13,720 |   |
| Interest and other, net                |   | 2,946              |   | 3,197 |   | 3,112 |   | 3,199 |   |
| Income (loss) before income taxes      |   | (4,352             | )      | (3,118 | ) | 10,786 |   | 10,521 |   |
| Income taxes                           |   | (1,906             | )      | (1,138 | ) | 3,937 |   | 3,840 |   |
| Net income (loss)                      |   | $                  | (2,446 | ) | $ | (1,980 | ) | $ | 6,849 |   | $ | 6,681 |   |
| Other comprehensive income (loss)      |   | (1,682             | )      | — |   | — |   | — |   |
| Comprehensive Income (loss)            |   | $                  | (4,128 | ) | $ | (1,980 | ) | $ | 6,849 |   | $ | 6,681 |   |
| Earnings (loss) per common share       |   |               |   |   |   |   |   |   |   |
| Basic                                  |   | $                  | (0.22  | ) | $ | (0.18 | ) | $ | 0.62 |   | $ | 0.61 |   |
| Diluted                                |   | $                  | (0.22  | ) | $ | (0.18 | ) | $ | 0.62 |   | $ | 0.60 |   |

 
|                              |   | **Quarter  Ended** | ** ** |
|-----------------------------------|--------|--------------------|------------|
|                              |   | **9/30/2002**      |       | **6/30/2002** | ** ** | **3/31/2002** | ** ** | **12/31/2001** | ** ** |
|                              |   |               |       |   |   |   |   |   |   |
| Operating revenues                |   | $                  | 39,041     |   | $ | 56,815 |   | $ | 122,361 |   | $ | 102,761 |   |
| Gas costs and revenue taxes       |   | 24,891             |       | 42,562 |   | 88,905 |   | 74,118 |   |
| Operating margin                  |   | 14,150             |       | 14,253 |   | 33,456 |   | 28,643 |   |
| Cost of operations                |   | 15,256             |       | 14,890 |   | 15,282 |   | 15,911 |   |
| Income (loss) from operations     |   | (1,106             | )          | (637 | ) | 18,174 |   | 12,732 |   |
| Interest and other, net           |   | 3,248              |       | 3,224 |   | 3,247 |   | 2,901 |   |
| Income (loss) before income taxes |   | (4,354             | )          | (3,861 | ) | 14,927 |   | 9,831 |   |
| Income taxes                      |   | (1,846             | )          | (1,409 | ) | 5,448 |   | 3,588 |   |
| Net income (loss)                 |   | $                  | (2,508     | ) | $ | (2,452 | ) | $ | 9,479 |   | $ | 6,243 |   |
| Other comprehensive income (loss) |   | (7,587             | )          | — |   | — |   | — |   |
| Comprehensive Income (loss)       |   | $                  | (10,095    | ) | $ | (2,452 | ) | $ | 9,479 |   | $ | 6,243 |   |
| Earnings (loss) per common share  |   |               |       |   |   |   |   |   |   |
| Basic                             |   | $                  | (0.23      | ) | $ | (0.22 | ) | $ | 0.86 |   | $ | 0.57 |   |
| Diluted                           |   | $                  | (0.23      | ) | $ | (0.22 | ) | $ | 0.86 |   | $ | 0.56 |   |
|                                   |        |                    |            |  |  |  |  |  |  |  |  |  |  |  |

 

40

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**Item 9.  Changes****in andDisagreements With Accountants on Accounting and Financial Disclosure**

 

None.

 

**Item9A  Controls****andProcedures**

 

The Company maintainscontrols and procedures designed to ensure that required disclosure informationin the reports the Company files or submits under the Securities Exchange Actof 1934, as amended, is recorded, processed, summarized and reported within thetime period specified in the rules and forms of the Securities and ExchangeCommission.  Based upon their evaluationof those controls and procedures as of the end of the year covered by thisreport, the Chief Executive Officer and Chief Financial Officer of the Companyconcluded that the Company’s disclosure controls and procedures were effective.

 

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

 

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

###### ** **

**Item10.  Directors****andExecutive Officers of the Registrant**

 

Reference is made to theinformation regarding directors under the caption “Election of Directors” onpages 1 through 3 and the caption “Section 16(a) Beneficial Ownership ReportingCompliance” on page 7 of the Proxy Statement sent to shareholders for the 2004Annual Meeting (the 2004 Proxy Statement), which information is incorporatedherein by reference. Certain information concerning the executive officers ofthe Company is set forth in Part I, under the caption “Executive Officers ofthe Registrant.”

 

The Registrant hasadopted codes of ethics for directors, officers (including the principalexecutive officer, principal financial officer and principal accountingofficer), and employees. These codes of ethics are available on theRegistrant’s website at www.cngc.com.

 

**Item 11.Executive****Compensation**

 

Reference is made to theinformation regarding executive compensation set forth in the 2004 ProxyStatement under “Executive Compensation” on pages 11 through 12, “RetirementPlan” on page 12, “Executive Supplemental Retirement Income Plan” on pages 12and 13, “Employment Agreements” on pages 13 and 14, “Supplemental BenefitTrust” on page 14, “Director Compensation” on page 14, and under “CompensationCommittee Interlocks and Insider Participation” on page 15, which informationis incorporated herein by reference.

 

**Item 12.Security****Ownership of Certain Beneficial Owners and Management**

 

Reference is made to theinformation regarding security ownership of certain beneficial owners andmanagement under the caption “Security Ownership of Certain Beneficial Ownersand Management” on page 7 of the 2004 Proxy Statement (excluding theinformation under the subheading “Section 16(a) Beneficial OwnershipReporting Compliance”), which information is incorporated herein by reference.

 

The following table setsforth information as of September 30, 2003 with respect to compensationplans (including individual compensation arrangements) under which equitysecurities of the registrant are authorized for issuance:

 

41

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**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     |   | 182,030                                                                                                      |   | $                                                                                        | 18.04  |                                                                                                                                                           | 238,332      |   |
| Equity  compensation plans not  approved by security holders |   | None                                                                                                         |   | None                                                                                     |   | 1,112                                                                                                                                                          |  (Note) |
| Total                                                        |   | 182,030                                                                                                      |   | $                                                                                        | 18.04  |                                                                                                                                                           | 239,444      |   |

 

----

(Note) Shares availablefor issuance under the Registrant’s 2000 Director Stock Award Plan. A proposalto increase the number of authorized shares under the 2000 Director Stock AwardPlan by 35,000 shares will be considered at the Registrant’s 2004 AnnualMeeting of Shareholders. Reference is made to the information under the caption“APPROVAL OF PROPOSAL TO INCREASE SHARES AUTHORIZED FOR ISSUANCE UNDER THEDIRECTOR STOCK AWARD PLAN”****on page4 of the 2004 Proxy Statement, which information is incorporated herein byreference.

 

**Item 13.Certain****Relationships and Related Transactions**

 

Reference is made to theinformation regarding certain relationships and transactions under the caption“Compensation Committee Interlocks and Insider Participation” on page 15 of the2004 Proxy Statement, which information is incorporated herein by reference.

 

**Item 14:Principal****Accountant Fees and Services**

 

Reference is made to theinformation regarding fees paid to, and services provided by the registrant’sprincipal accountant under the caption “Independent Public Auditors” on pages15 and 16 of the 2004 Proxy Statement, which information is incorporated hereinby reference.

 

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

###### ** **

###### **Item 15. Exhibits**, FinancialStatement Schedules, and Reports on Form 8-K

###### ** **

| (a)                                                          | 1.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                  |                    |

 

42

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2.               Financial StatementSchedule

 

SCHEDULE II

 

CASCADE NATURAL GAS CORPORATION

 

VALUATION AND QUALIFYING ACCOUNTS

(Thousands of Dollars)

 
| **Column A**                     |   | **Column B**                         |   | **Column C**                        |   | **Column D**                    |   | **Column E**           |   |
|----------------------------------|--------|--------------------------------------|--------|-------------------------------------|--------|---------------------------------|--------|------------------------|--------|
|                             |   |                                 |   | **Additions**                       |   |                            |   |                   |   |
| **Description**                  |   | **Balance at  Beginning  of Period** |   | **Charged to  Costs and  Expenses** |   | **Charged to  Other  Accounts** |   | **Deductions  (Note)** |   | **Balance at  End of  Period** |   |
|                             |   |                                 |   |                                |   |                            |   |                   |   |   |   |
| Allowance for Doubtful Accounts: |   |                                 |   |                                |   |                            |   |                   |   |   |   |
|                             |   |                                 |   |                                |   |                            |   |                   |   |   |   |
| Year ended:                      |   |                                 |   |                                |   |                            |   |                   |   |   |   |
|                             |   |                                 |   |                                |   |                            |   |                   |   |   |   |
| September 30, 2001          |   | $                                    | 707    |                                | 713    |                            |   |                   | 516    |   | $ | 904 |   |
|                             |   |                                 |   |                                |   |                            |   |                   |   |   |   |
| September 30, 2002          |   | $                                    | 904    |                                | 1,250  |                            |   |                   | 1,028  |   | $ | 1,126 |   |
|                             |   |                                 |   |                                |   |                            |   |                   |   |   |   |
| September 30, 2003          |   | $                                    | 1,126  |                                | 701    |                            |   |                   | 950    |   | $ | 877 |   |
|                             |   |                                 |   |                                |   |                            |   |                   |   |   |   |
| Reserve - Notes Receivable       |   |                                 |   |                                |   |                            |   |                   |   |   |   |
|                             |   |                                 |   |                                |   |                            |   |                   |   |   |   |
| September 30, 2001          |   | $                                    | 639    |                                | 4      |                            |   |                   |   |   | $ | 643 |   |
|                             |   |                                 |   |                                |   |                            |   |                   |   |   |   |
| September 30, 2002          |   | $                                    | 643    |                                | (155   | )                               |   |                   | 388    |   | $ | 100 |   |
|                             |   |                                 |   |                                |   |                            |   |                   |   |   |   |
| September 30, 2003          |   | $                                    | 100    |                                | 100    |                            |   |                   | 57     |   | $ | 143 |   |

 

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Note: Accounts written off, net of recoveries

 

3. Exhibits. Reference ismade to the index to exhibits following the signature page of this report. Eachmanagement contract or compensatory plan or arrangement required to be filed asan exhibit to this report is identified in the list.

 

(b) Reports on Form 8-K:

 

On July 25, 2003,the Company furnished a Report on Form 8-K dated July 18, 2003, to providethe information contained in its July 18 release of third quarter fiscal2003 earnings.

 

On November 17,2003, the Company furnished a Report on Form 8-K dated November 10, 2003,to provide the information contained in its November 10 release of fourthquarter and full fiscal year 2003 earnings.

 

43

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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 17,  2003 |                             | By  | /s/ J. D.  Wessling |   |
| Date                    |                             |   | J. D. Wessling |   |
|                    |                             | 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/ W. Brian Matsuyama |   | President, Chief Executive  Officer and Director | December 17, 2003 |   |
|-------------------------------|--------|--------------------------------------------------|------------------------|--------|
| W.  Brian Matsuyama           |   | (Principal Executive  Officer)                   | Date                   |   |
|                          |   |                                             |                   |   |
|                          |   |                                             |                   |   |
|   /s/ J. D. Wessling     |   | Chief Financial Officer                          | December 17, 2003 |   |
| J.  D. Wessling               |   | (Principal Financial  Officer)                   | Date                   |   |
|                          |   |                                             |                   |   |
|                          |   |                                             |                   |   |
|   /s/ James E. Haug      |   | Controller                                       | December 17, 2003 |   |
| James  E. Haug                |   | (Principal Accounting  Officer)                  | Date                   |   |
|                          |   |                                             |                   |   |
|                          |   |                                             |                   |   |
|   /s/ Larry L. Pinnt     |   | Chairman of the Board  of Directors              | December 17, 2003 |   |
| Larry  L. Pinnt               |   |                                             | Date                   |   |
|                          |   |                                             |                   |   |
|                          |   |                                             |                   |   |
|   /s/ Pirkko H. Borland  |   | Director                                         | December 17, 2003 |   |
| Pirkko  H. Borland            |   |                                             | Date                   |   |
|                          |   |                                             |                   |   |
|                          |   |                                             |                   |   |
|   /s/ Carl Burnham, Jr.  |   | Director                                         | December 17, 2003 |   |
| Carl  Burnham, Jr.            |   |                                             | Date                   |   |
|                          |   |                                             |                   |   |
|                          |   |                                             |                   |   |
|   /s/ Thomas E. Cronin   |   | Director                                         | December 17, 2003 |   |
| Thomas  E. Cronin             |   |                                             | Date                   |   |
|                          |   |                                             |                   |   |
|                          |   |                                             |                   |   |
|   /s/ David A. Ederer    |   | Director                                         | December 17, 2003 |   |
| David  A. Ederer              |   |                                             | Date                   |   |
|                          |   |                                             |                   |   |
|                          |   |                                             |                   |   |
|   /s/ Mary E. Pugh       |   | Director                                         | December 17, 2003 |   |
| Mary  E. Pugh                 |   |                                             | Date                   |   |
|                          |   |                                             |                   |   |
|                          |   |                                             |                   |   |
|   /s/ Brooks G. Ragen    |   | Director                                         | December 17, 2003 |   |
| Brooks  G. Ragen              |   |                                             | Date                   |   |
|                          |   |                                             |                   |   |
|                          |   |                                             |                   |   |
|   /s/ Douglas G. Thomas  |   | Director                                         | December 17, 2003 |   |
| Douglas  G. Thomas            |   |                                             | Date                   |   |

 

44

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**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             |   | Intentionally omitted                                                                                                                                                                                                                                                                                                                                                                                              |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                               |
| 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            |   | Intentionally omitted                                                                                                                                                                                                                                                                                                                                                                                              |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                               |
| 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                                                                                                                                                                                                                                                                                                                                                                                              |

 

45

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| 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. |
|---------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.9    |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 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   |   | Natural gas purchase  agreement dated April 26, 2001, between Sempra Energy and the  Registrant. Incorporated by reference to Exhibit 10.16 to the Registrant’s  Annual Report on Form 10-K for the year ended September 30, 2001. A  PORTION OF THIS AGREEMENT IS SUBJECT TO A REQUEST FOR CONFIDENTIAL TREATMENT.                                                                                                                                       |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 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).                                                                                              |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 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.                                                                                                                                               |

 

46

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| 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   |   | Amended and restated  Natural Gas Sales Agreement dated August 17, 1994, between Westcoast Gas  Services, Inc. and the Registrant Incorporated by reference to Exhibit 10.22  to the Registrant’s 1994 Form 10-K.                                                                        |
|    |   |                                                                                                                                                                                                                                                                                               |
| 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.                                       |
|    |   |                                                                                                                                                                                                                                                                                               |
| 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   |   | Intentionally omitted.                                                                                                                                                                                                                                                                             |
|    |   |                                                                                                                                                                                                                                                                                               |
| 10.29   |   | 2000 Director Stock  Award Plan of the Registrant.*                                                                                                                                                                                                                                                |
|    |   |                                                                                                                                                                                                                                                                                               |
| 10.30   |   | Executive Supplemental  Retirement Income Plan of the Registrant and Supplemental Benefit Trust as  amended and restated as of October 1, 2003,                                                                                                                                               |
|    |   |                                                                                                                                                                                                                                                                                               |
| 10.31   |   | Form of employment agreement  between the Registrant and certain executive officers of the Registrant.                                                                                                                                                                                             |
|    |   |                                                                                                                                                                                                                                                                                               |
| 10.32   |   | Intentionally omitted.                                                                                                                                                                                                                                                                             |
|    |   |                                                                                                                                                                                                                                                                                               |
| 12.     |   | Statement regarding  computation of ratio of earnings to fixed charges and preferred dividend  requirements.                                                                                                                                                                                       |
|    |   |                                                                                                                                                                                                                                                                                               |
| 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.                                                                                                                 |

 

47

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| 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 |

 

 

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* Management contract orcompensatory plan or arrangement.

 

48

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