<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
Commission file number: 1-7196
CASCADE NATURAL GAS CORPORATION
(Exact name of registrant as specified in its charter)
Washington 91-0599090
---------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
222 Fairview Avenue North, Seattle, WA 98109
-------------------------------------- -----
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (206) 624-3900
In February, 1996, the registrant changed its fiscal year from the year ending
December 31 to the year ending September 30.
--------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Title Outstanding
------ -----------
Common Stock, Par Value $1 per Share 9,249,611 as of June 30, 1996
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
CASCADE NATURAL GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF NET EARNINGS
(unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- ---------------------------
Jun 30, 1996 Jun 30, 1995 Jun 30, 1996 Jun 30, 1995
------------ ------------ ------------ ------------
(thousands except per share data)
<S> <C> <C> <C> <C>
Operating revenues:
Gas sales $ 29,501 $ 32,206 $ 92,958 $ 94,316
Transportation revenue 3,906 2,458 8,007 4,896
Other operating income 54 51 116 113
------------ ------------ ------------ ------------
33,461 34,715 101,081 99,325
Less: Gas purchases 18,720 19,521 56,120 56,774
Revenue taxes 2,314 2,312 6,897 6,644
------------ ------------ ------------ ------------
Operating margin 12,427 12,882 38,064 35,907
------------ ------------ ------------ ------------
Cost of operations:
Operating expenses 8,255 7,811 16,613 15,647
Depreciation and amortization 3,128 2,903 6,184 5,733
Property and payroll taxes 991 1,054 2,169 2,067
------------ ------------ ------------ ------------
12,374 11,768 24,966 23,447
------------ ------------ ------------ ------------
Earnings from operations 53 1,114 13,098 12,460
Less interest and other
deductions - net 2,524 2,366 4,974 4,669
------------ ------------ ------------ ------------
Earnings (loss) before income taxes (2,471) (1,252) 8,124 7,791
Income taxes (715) (369) 3,110 2,941
------------ ------------ ------------ ------------
Earnings (loss) before preferred dividends (1,756) (883) 5,014 4,850
Preferred dividends 131 136 262 272
------------ ------------ ------------ ------------
Net earnings (loss) $ (1,887) $ (1,019) $ 4,752 $ 4,578
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Common shares outstanding:
Weighted average 9,218 9,000 9,182 8,944
End of period 9,250 9,044 9,250 9,044
Net earnings (loss) per common share $ (0.20) $ (0.11) $ 0.52 $ 0.51
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Cash dividends per share $ 0.24 $ 0.24 $ 0.48 $ 0.48
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
See Notes to Consolidated Condensed Financial Statements
2
<PAGE>
CASCADE NATURAL GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
Jun 30, 1996 Dec 31, 1995
------------ ------------
(dollars in thousands)
(unaudited)
ASSETS
Utility Plant, net after accumulated
depreciation of $145,244 and $138,831 $ 232,133 $ 224,093
Construction work in progress 13,699 14,957
------------ ------------
245,832 239,050
------------ ------------
Other Assets:
Investments 765 919
Notes receivable, less current maturities 1,997 2,426
------------ ------------
2,762 3,345
------------ ------------
Current Assets:
Cash and cash equivalents 3,835 2,197
Accounts receivable, less allowance of $290
and $425 for doubtful accounts 12,307 26,483
Current maturities of notes receivable 694 809
Materials, supplies and inventories 5,458 6,047
Prepaid expenses and other assets 2,471 2,353
------------ ------------
24,765 37,889
------------ ------------
Deferred Charges 17,389 16,614
------------ ------------
$ 290,748 $ 296,898
------------ ------------
------------ ------------
COMMON SHAREHOLDERS' EQUITY,
PREFERRED STOCKS AND LIABILITIES
Common Shareholders' Equity:
Common stock, par value $1 per share,
authorized 15,000,000 shares, issued and
outstanding 9,249,611 and 9,144,448 shares $ 9,250 $ 9,144
Additional paid-in capital 72,628 71,098
Retained earnings 9,621 9,297
------------ ------------
91,499 89,539
------------ ------------
Redeemable Preferred Stocks, aggregate
redemption amount of $7,103 and $7,103 6,851 6,851
------------ ------------
Long-term Debt 102,100 102,100
------------ ------------
Current Liabilities:
Notes payable 16,500 32,000
Accounts payable 10,339 16,392
Property, payroll and excise taxes 3,595 4,578
Dividends and interest payable 4,233 4,365
Other current liabilities 5,160 4,646
------------ ------------
39,827 61,981
------------ ------------
Deferred Credits:
Gas cost changes 24,151 10,934
Other 26,320 25,493
------------ ------------
50,471 36,427
------------ ------------
Commitments and Contingencies - -
------------ ------------
$ 290,748 $ 296,898
------------ ------------
------------ ------------
See Notes to Consolidated Condensed Financial Statements
3
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CASCADE NATURAL GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
SIX MONTHS ENDED
---------------------------
Jun 30, 1996 Jun 30, 1995
------------ ------------
(dollars in thousands)
Operating Activities:
Earnings before preferred dividends $ 5,014 $ 4,850
Adjustments to reconcile earnings before
preferred dividends to net cash provided
by operating activities:
Depreciation 6,184 5,838
Amortization of gas cost changes 1,403 2,133
Write down of assets 154 -
Increase in deferred income taxes 551 1,139
Decrease in deferred investment tax credits (130) (120)
Cash provided (used) by changes in operating
assets and liabilities:
Current assets and liabilities 8,315 6,970
Gas cost changes 11,814 561
Other deferrals and non-current
liabilities (473) (641)
------------ ------------
Net cash provided by operating activities 32,832 20,730
------------ ------------
Investing Activities:
Capital expenditures (13,198) (15,320)
New consumer loans (497) (548)
Receipts on consumer loans 1,055 967
Purchase of securities available for sale - (802)
------------ ------------
Net cash used by investing activities (12,640) (15,703)
------------ ------------
Financing Activities:
Issuance of common stock 1,088 1,319
Redemption of preferred stock - (16)
Changes in notes payable, net (15,500) (5,500)
Dividends paid (4,142) (4,091)
------------ ------------
Net cash used by financing activities (18,554) (8,288)
------------ ------------
Net Increase (Decrease) in Cash and Cash
Equivalents 1,638 (3,261)
Cash and Cash Equivalents:
Beginning of period 2,197 3,949
------------ ------------
End of period $ 3,835 $ 688
------------ ------------
------------ ------------
See Notes to Consolidated Condensed Financial Statements
4
<PAGE>
CASCADE NATURAL GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1996
The preceding statements were taken from the books and records of the
Company and reflect all adjustments which are, in the opinion of management,
necessary for a fair statement of the results for the interim periods. All
adjustments, other than those specifically disclosed under "Management's
Discussion and Analysis of Financial Condition and Results of Operations", were
of a normal and recurring nature.
Because of the highly seasonal nature of the business, earnings or loss for
any portion of the year are disproportionate in relation to the full year.
Reference is directed to the Notes to Consolidated Financial Statements
contained in the 1995 Annual Report on Form 10-K and comments included therein
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations".
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
The following is management's assessment of the Company's financial
condition and a discussion of the principal factors that affect consolidated
results of operations for the three and six month periods ended June 30, 1996
and June 30, 1995.
RESULTS OF OPERATIONS
The net loss for the second quarter of 1996 was $1,887,000, or $0.20 per
share, compared to a net loss of $1,019,000, or $0.11 per share, for the second
quarter of 1995. Due to the seasonal nature of the business, the Company
normally experiences a net loss in the quarter ended June 30. The increase in
the net loss is due primarily to an after tax charge against income of $753,000,
or $0.08 per share, to establish a reserve of $1,158,000 for unrecovered gas
costs. The reserve resulted from management's determination that such costs are
more appropriately recoverable through non-core gas commodity sales, which are
dependent on future competitive conditions for large volume industrial gas
supplies, rather than from the more certain source of recovery through rate
increases to core customers.
For the six months ended June 30, 1996, net earnings were $4,752,000, or
$0.52 per share, compared to $4,578,000, or $0.51 per share, for the same period
in 1995.
RESIDENTIAL AND COMMERCIAL OPERATING MARGIN
RESIDENTIAL AND COMMERCIAL OPERATING Margin
(dollars in thousands)
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
1996 1995 1996 1995
Degree Days 938 870 3,354 3,071
Average Customers
Residential 127,929 120,470 128,108 120,703
Commercial 23,913 22,892 23,913 22,917
Therms per Customer
Residential 127 118 466 422
Commercial 738 717 2,513 2,392
Margin
Residential $ 4,413 $ 3,896 $ 15,074 $ 12,793
Commercial $ 3,355 $ 2,994 $ 11,505 $ 10,124
- --------------------------------------------------------------------------------
Residential and commercial operating margin increased 13% quarter to
quarter. Factors contributing to this increase were an increase of 8,480 in the
average number of residential and commercial customers, an 8% increase in gas
consumption per residential customer, and a 3%
6
<PAGE>
increase in gas consumption per commercial customer. Contributing to increased
consumption per customer was an 8% increase in estimated degree days, though
degree days were 4% less than normal.
For the six month period ended June 30, 1996, residential and commercial
margin increased 16% over the six month period ended June 30, 1995, resulting
from increases similar to the second quarter of 1996 in the number of customers
as well as weather related increases in gas consumption per customer.
INDUSTRIAL AND NON-CORE MARGIN
Operating margin from industrial and non-core customers, before the above
mentioned charge of $1,158,000, decreased by 3% from the second quarter of 1995
primarily due to reductions in deliveries to and margins from customers in the
forest products industry, and approximately $360,000 of decreases due to
certain large industrial non-core customers shifting to special contracts
with lower margin distribution service rates. Somewhat offsetting the
decrease was $447,000 of increased margin from two new cogeneration customers
in the second quarter of 1996, only one of which was in operation for a part
of the 1995 second quarter. Mitigating the increase in cogeneration margin
was a $155,000 decrease in margin due to generation curtailment by other
cogeneration customers because of the significant availability of hydro power.
COST OF OPERATIONS
Operating expenses in the second quarter of 1996, which are primarily
payroll and employee benefits expenses, increased 5.7% over the second quarter
of 1995, due in part to increases in benefit plan accruals. Also contributing to
operating expense increases were increases in various outside purchased services
costs. Increases in benefit plan accruals are related to required changes in
interest rate assumptions used in actuarial calculations of accrual amounts.
Depreciation expense for the quarter increased $225,000, consistent with a 7%
increase in utility plant.
INTEREST AND OTHER DEDUCTIONS
Interest and other deductions in the second quarter of 1996 increased
$158,000 over the second quarter of 1995 due primarily to a charge of $154,000
to write down to market value, the carrying cost of a parcel of non-utility
property.
LIQUIDITY AND CAPITAL RESOURCES
The seasonal nature of the Company's business creates short-term cash
requirements to finance customer accounts receivable and construction
expenditures. To provide working capital for these requirements, the Company has
a credit agreement, which expires in 2000, for a commitment of $40 million from
three banks. The committed line also supports a money market facility of a
similar amount. A subsidiary company has a $5 million revolving credit facility,
used for non regulated business, which expires in 2000. At June 30, 1996, $2.1
million was outstanding under the revolving credit facility. The Company also
has $25 million of uncommitted lines from three banks.
7
<PAGE>
The Company has a Medium-Term Note program used for long-term financing,
with $100 million outstanding at June 30 1996, and $50 million registered under
the Securities Act of 1933 and available for issuance. In July, 1996, the
Company registered 3,500,000 shares of common stock under the Securities Act of
1933. The Company intends to issue 1,250,000 shares of this stock in August
1996. Proceeds from this financing will be used to retire short-term debt and
for other general corporate purposes. Because of the availability of short-term
credit and the ability to issue long-term debt and additional equity, management
is of the opinion it has adequate financial flexibility to meet its anticipated
cash needs.
Operating cash flow for the six months ended June 30, 1996 improved over
the 1995 period primarily due to lower gas costs. The benefit of these lower gas
costs has been deferred, and will be refunded to customers through rate
reductions over future periods. See "Regulatory Matters" below. After dividend
payments, there was $28,690,000 of remaining cash flow from operations. This
cash flow, as well as proceeds from common stock issued to participants in the
Company's dividend reinvestment plan and 401(k) plan were used primarily to fund
$13,198,000 in capital expenditures and reduce short-term borrowings by
$15,500,000. Capital expenditures for the remainder of calendar 1996 are
budgeted at approximately $22 million. The Company expects that calendar 1996
capital expenditures will be financed 30% to 40% by operating cash flow net of
dividends.
REGULATORY MATTERS
On July 22, 1996, the Washington Utilities and Transportation Commission
(WUTC) issued its final order reflecting the terms of a negotiated settlement
among the Company, the WUTC staff, the Public Counsel for the State of
Washington, and the Northwest Industrial Gas Users, of three separate rate
applications filed by the Company in December 1995. The new rates are effective
August 1, 1996. The order approves the first general rate increase in the State
of Washington by the Company since 1986, estimated to increase revenues by
approximately $3.8 million in the first year. Offsetting the general rate
increase for the first four years are technical credits for core customers
amounting to approximately $263,000 in the first year, and increasing to
$304,000 by the fourth year. Other elements of the approved settlement include:
(i) increases in monthly customer service charges to core customers by $1.00 on
August 1 in each of 1997 and 1998, offset by simultaneous decreases in charges
to non-core customers; (ii) the refund to core customers of deferred gas cost
reductions estimated to be $1,445,000 annually for four years, and the refund of
an additional $13 million in deferred gas cost savings plus accrued interest
beginning in four years, neither of which will have an effect on the Company's
earnings; (iii) an agreement by the Company not to apply for another general
rate increase for at least three years from August 1, 1996; and (iv) an
agreement by the Company to prepare a plan, by November 30, 1996, to reduce
meter reading and billing expense, adjusted for inflation and growth, by more
than 30% within three years.
Concurrent with the August 1, 1996, effective date of new Washington rates,
Cascade will commence the amortization of deferred postretirement benefits other
than pensions (PBOP). Consistent with the WUTC's policy statement issued in 1992
regarding these costs, PBOP expenses attributable to Washington operations in
excess of amounts previously charged on a "pay-as-you-go" basis have been
deferred since 1993. The amount of the incremental expense, including
amortization, will be approximately $1.5 million per year. Amortization will be
completed at December 31, 2002.
8
<PAGE>
LABOR NEGOTIATIONS
A new three-year contract with Local 121 of the International Chemical
Workers Union was ratified by union membership on June 18, 1996. The new
contract expires on April 1, 1999. The union represents 216 Cascade employees.
FORWARD-LOOKING STATEMENTS
Statements contained in this report which are not historical in nature are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements are subject to risks
and uncertainties that may cause actual future results to differ materially.
Such risks and uncertainties with respect to the Company include its ability to
successfully implement internal performance goals, competition from alternative
forms of energy, the effects of state and federal regulation, performance issues
with key natural gas suppliers, the capital-intensive nature of the Company's
business, regulatory issues, including rate relief to recover increased capital
and operating costs, the weather, competition, exposure to environmental cleanup
requirements, and economic conditions, particularly in the Company's service
area.
9
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
Under the terms of its bank credit agreements, the Company is required to
maintain a minimum of $71,958,000 of net worth. Under the most restrictive
agreement, approximately $19,541,000 was available for the payment of dividends
as of June 30, 1996.
ITEM 5. OTHER INFORMATION.
Ratio of Earnings to Fixed Charges:
Twelve Months
Ended June 30, Year Ended December 31,
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
2.01 1.98 2.00 1.87 2.55 1.76 2.39
For the purpose of this calculation, earnings include income before income
taxes plus fixed charges. Fixed charges include interest expense and the
amortization of debt issuance expenses. Refer to Exhibit 12 for calculation of
these ratios as well as the ratio of earnings to fixed charges including
preferred dividends.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits
No. Description
--- -----------
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule UT
b. Reports on Form 8-K:
No reports were filed on Form 8-K during the quarter.
10
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CASCADE NATURAL GAS CORPORATION
(Registrant)
By:
-----------------------------------------------------------------
J. D. Wessling, Vice President - Finance, Chief Financial Officer
Date: July 31, 1996
11
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Exhibit 12
CASCADE NATURAL GAS CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED DIVIDEND REQUIREMENTS
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
JUNE 30 YEAR ENDED DECEMBER 31
------------------- -------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
--------- --------- --------- --------- --------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed charges, as defined:
Interest expense $ 10,111 9,206 9,938 8,090 7,038 7,478 $ 7,793
Amortization of debt issuance expense 609 600 606 593 562 402 362
--------- --------- --------- --------- --------- --------- ---------
Total fixed charges 10,720 9,806 10,544 8,683 7,600 7,880 $ 8,155
--------- --------- --------- --------- --------- --------- ---------
Earnings, as defined:
Earnings before preferred dividends 7,896 7,074 7,732 5,760 9,103 4,843 $ 7,651
Add (deduct):
Income taxes 4,678 4,292 4,508 3,505 5,224 2,817 4,206
Cumulative effect of change
in accounting method - - - - (209) - -
Fixed charges 10,720 9,806 10,544 8,683 7,600 7,880 8,155
--------- --------- --------- --------- --------- --------- ---------
Total earnings $ 23,294 21,172 22,784 17,948 21,718 15,540 $ 20,012
--------- --------- --------- --------- --------- --------- ---------
Ratio of earnings to fixed charges 2.17 2.16 2.16 2.07 2.86 1.97 2.45
--------- --------- --------- --------- --------- --------- ---------
Fixed charges and preferred
dividend requirements:
Fixed charges $ 10,720 9,806 10,544 8,683 7,600 7,880 $ 8,155
Preferred dividend requirements 842 882 853 898 913 941 229
--------- --------- --------- --------- --------- --------- ---------
Total $ 11,562 10,688 11,397 9,581 8,513 8,821 $ 8,384
--------- --------- --------- --------- --------- --------- ---------
Ratio of earnings to fixed charges
and preferred dividend requirements 2.01 1.98 2.00 1.87 2.55 1.76 2.39
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF CASCADE NATURAL GAS CORPORATION, INCLUDED
IN THE QUARTERLY REPORT ON FORM 10-Q FOR THE SIX MONTHS ENDED JUNE 30, 1996, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> JUN-30-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 245,832
<OTHER-PROPERTY-AND-INVEST> 2,762
<TOTAL-CURRENT-ASSETS> 24,765
<TOTAL-DEFERRED-CHARGES> 17,389
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 290,748
<COMMON> 9,250
<CAPITAL-SURPLUS-PAID-IN> 72,628
<RETAINED-EARNINGS> 9,621
<TOTAL-COMMON-STOCKHOLDERS-EQ> 91,499
6,851
0
<LONG-TERM-DEBT-NET> 102,100
<SHORT-TERM-NOTES> 16,500
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 0
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 73,798
<TOT-CAPITALIZATION-AND-LIAB> 290,748
<GROSS-OPERATING-REVENUE> 101,081
<INCOME-TAX-EXPENSE> 3,110
<OTHER-OPERATING-EXPENSES> 87,983
<TOTAL-OPERATING-EXPENSES> 87,983
<OPERATING-INCOME-LOSS> 13,098
<OTHER-INCOME-NET> (51)
<INCOME-BEFORE-INTEREST-EXPEN> 13,101
<TOTAL-INTEREST-EXPENSE> 4,923
<NET-INCOME> 5,014
262
<EARNINGS-AVAILABLE-FOR-COMM> 4,752
<COMMON-STOCK-DIVIDENDS> 4,427
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 32,832
<EPS-PRIMARY> 0.52
<EPS-DILUTED> 0.52
</TABLE>
