<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 December 31, 1997
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 offices) (Zip code)
Registrant's telephone number including area code (206) 624-3900
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 11,014,651 as of January 31, 1998
<PAGE>
CASCADE NATURAL GAS CORPORATION
Index
<TABLE>
<CAPTION>
Page No.
-------
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Condensed Statements of Net Earnings Available
to Common Shareholders 3
Consolidated Condensed Balance Sheets 4
Consolidated Condensed Statements of Cash Flows 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk 9
Part II. Other Information
Item 2. Changes in Securities 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 11
Signature 12
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CASCADE NATURAL GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF NET EARNINGS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------
Dec 31, 1997 Dec 31, 1996
------------ ------------
(thousands except per share data)
<S> <C> <C>
Operating revenues $ 60,984 $ 64,971
Less: Gas purchases 31,694 35,689
Revenue taxes 3,747 3,671
--------- ---------
Operating margin 25,543 25,611
--------- ---------
Cost of operations:
Operating expenses 9,361 8,985
Depreciation and amortization 3,490 3,223
Property and payroll taxes 1,121 1,028
--------- ---------
13,972 13,236
--------- ---------
Earnings from operations 11,571 12,375
Less interest and other
deductions - net 2,484 2,330
--------- ---------
Earnings before income taxes 9,087 10,045
Income taxes 3,405 3,597
--------- ---------
Net earnings 5,682 6,448
Preferred dividends 125 128
--------- ---------
Net earnings available to
common shareholders $ 5,557 $ 6,320
--------- ---------
--------- ---------
Common shares outstanding:
Weighted average (as restated) 10,980 10,799
End of period 11,006 10,824
Net earnings per common share $ 0.51 $ 0.59
--------- ---------
--------- ---------
Cash dividends per share $ 0.24 $ 0.24
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements
3
<PAGE>
CASCADE NATURAL GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
Dec 31, 1997 Sep 30, 1997
------------- ------------
ASSETS (Unaudited)
<S> <C> <C>
Utility Plant, net after accumulated
depreciation of $163,962 and $160,332 $ 259,179 $ 256,033
Construction work in progress 11,283 9,192
---------- ----------
270,462 265,225
---------- ----------
Other Assets:
Investments in non-utility property 668 668
Notes receivable, less current maturities 1,513 1,493
---------- ----------
2,181 2,161
---------- ----------
Current Assets:
Cash and cash equivalents 223 3,162
Accounts receivable, less allowance of $614
and $529 for doubtful accounts 27,947 11,865
Current maturities of notes receivable 536 536
Materials, supplies and inventories 5,663 5,886
Prepaid expenses and other assets 4,397 7,382
---------- ----------
38,766 28,831
---------- ----------
Deferred Charges 11,045 11,486
---------- ----------
$ 322,454 $ 307,703
---------- ----------
---------- ----------
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 11,006,393 and
10,966,732 shares $ 11,006 $ 10,967
Additional paid-in capital 96,772 96,142
Retained earnings 7,467 4,553
---------- ----------
115,245 111,662
---------- ----------
Redeemable Preferred Stocks, aggregate
redemption amount of $6,592 and $6,845 6,409 6,630
---------- ----------
Long-term Debt 111,150 121,150
---------- ----------
Current Liabilities:
Notes payable and commercial paper 6,700 12,900
Accounts payable 20,705 7,753
Property, payroll and excise taxes 5,527 3,958
Dividends and interest payable 5,102 6,691
Current maturities of long-term debt 10,000 -
Other current liabilities 7,403 3,680
---------- ----------
55,437 34,982
---------- ----------
Deferred Credits and Other:
Gas cost changes 5,959 6,290
Income taxes 15,934 16,080
Other 12,320 10,909
---------- ----------
34,213 33,279
---------- ----------
Commitments and Contingencies - -
$ 322,454 $ 307,703
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements
4
<PAGE>
CASCADE NATURAL GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------
Dec 31, 1997 Dec 31, 1996
------------ ------------
(dollars in thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net earnings $ 5,682 $ 6,447
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation and amortization 3,490 3,223
Amortization of gas cost changes (773) (602)
Decrease in deferred income taxes (146) (608)
Decrease in deferred investment tax credits (64) (58)
Cash provided (used) by changes
in operating assets and liabilities:
Current assets and liabilities 3,656 (6,797)
Gas cost changes 442 (5,043)
Other deferrals and non-current liabilities 986 724
-------- ---------
Net cash provided (used) by operating activities 13,273 (2,714)
-------- ---------
INVESTING ACTIVITIES:
Capital expenditures (8,854) (7,051)
Customer contributions in aid of construction 1,125 6,042
New consumer loans (282) (244)
Receipts on consumer loans 319 266
-------- ---------
Net cash used by investing activities (7,692) (987)
-------- ---------
FINANCING ACTIVITIES:
Issuance of common stock 321 282
Redemption of preferred stock (219) (216)
Repayment of long-term debt (300)
Changes in notes payable and commercial paper, net (6,200) 6,194
Dividends paid (2,422) (2,443)
-------- ---------
Net cash (used) provided by financing activities (8,520) 3,517
-------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,939) (184)
CASH AND CASH EQUIVALENTS:
Beginning of period 3,162 543
-------- ---------
End of period $ 223 $ 359
-------- ---------
-------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements
5
<PAGE>
CASCADE NATURAL GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 1997
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 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 1997 Annual Report on Form 10-K for the fiscal year ended
September 30, 1997, and comments included therein under "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
NEW ACCOUNTING STANDARDS:
During the quarter ended December 31, 1997, the Company adopted Statement
of Financial Accounting Standards (FAS) No. 128, "EARNINGS PER SHARE". This
statement prescribes the method of calculating and reporting earnings per share
(EPS) amounts. It replaces the presentation of primary EPS with a presentation
of basic EPS. For entities with other than a simple capital structure, it
requires the dual presentation of basic and diluted EPS on the face of the
income statement. The Company has a simple capital structure, and there is no
dilution. As a result the reported EPS represents both basic as well as diluted
EPS. Under the statement, the weighted average number of shares outstanding for
the quarter ended December 31, 1996, has been restated from 10,800,000 shares to
10,799,000 shares. This restatement did not result in a change in reported EPS.
During the quarter, FAS No. 129, "DISCLOSURE OF INFORMATION ABOUT CAPITAL
STRUCTURE" became effective. This statement establishes standards for disclosing
information about the Company's capital structure, including dividend and
liquidation preferences, participation rights, call prices and disclosure of the
dates and number of shares issued upon conversion, exercise, or satisfaction of
required conditions during at least the most recent annual fiscal period and any
subsequent interim period presented. Application of this statement has no effect
on the Company's reporting of such information.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is management's assessment of the Company's financial
condition and a discussion of the principal factors that affected consolidated
results of operations and cash flows for the three month periods ended December
31, 1997 and December 31, 1996.
RESULTS OF OPERATIONS
Net earnings available to common shareholders for the first quarter of
fiscal 1998 (quarter ended December 31, 1997) were $5,557,000, or $0.51 per
share, compared to $6,320,000, or $0.59 per share, for the quarter ended
December 31, 1996.
OPERATING MARGIN
Operating margin for the quarter decreased $68,000, or 0.3%, compared to
the prior year. While warmer weather contributed to reductions in margins from
the highly weather sensitive residential and commercial customers, improved
margins from industrial and other customers offset most of the decline.
RESIDENTIAL AND COMMERCIAL MARGIN. Operating margins derived from sales to
residential and commercial customers were as set forth in the following table:
<TABLE>
<CAPTION>
Residential and Commercial Operating Margin
- ----------------------------------------------------------------------
First Quarter of Fiscal Percent
1998 1997 Change
- ----------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
DEGREE DAYS 1,980 2,191 (9.6%)
AVERAGE NUMBER OF CUSTOMERS
Residential 140,675 132,894 5.9%
Commercial 25,115 24,403 2.9%
AVERAGE THERM USAGE PER CUSTOMER
Residential 266 303 (12.2%)
Commercial 1,386 1,529 (9.3%)
OPERATING MARGIN
Residential $ 10,352 $ 10,511 (1.5%)
Commercial $ 7,000 $ 7,200 (2.8%)
</TABLE>
Operating margin from sales to residential and commercial customers
decreased by $359,000 quarter to quarter. The most significant factor
contributing to this reduction was the lower average consumption per customer.
The decrease in the per customer gas usage was largely attributable to warmer
weather. Weather, as measured by estimated degree days, was 9.6% warmer than
the prior year and 1% warmer than normal. Weather for the fiscal 1996 first
quarter was actually 9.4% colder than normal. This lower consumption resulted in
a margin decline of approximately $1.7 million. The primary factors which
mitigated this weather-related reduction were the increased customer base and
the $1 per month per customer increase in service charge revenues from
Washington customers.
INDUSTRIAL AND OTHER MARGIN. Margin from industrial and other customers
increased $291,000. Total gas deliveries to these customers decreased by
approximately 2.8 million therms (1%). This decline, along with lower rates to
industrial customers in Washington, reduced the distribution service margin from
these customers by approximately $77,000. This reduction partially offset the
improvements in margin on gas supplies sold to these customers.
7
<PAGE>
COST OF OPERATIONS
Cost of operations for the quarter ended December 31, 1997, which consists
of operating expenses, depreciation and amortization, and property and payroll
taxes, increased $736,000 or 5.6% over the quarter ended December 31, 1996.
OPERATING EXPENSES increased by $376,000, or 4.2%, for the quarter. Of this
increase, approximately $300,000 is attributable to increases in labor and other
employee related costs. Labor cost increases are primarily due to normal wage
and salary rate adjustments and an increase from 470 to 476 in the number of
employees.
DEPRECIATION AND AMORTIZATION increased by $267,000, or 8.3%, for the
quarter. This increase is attributable to increases in depreciable utility plant
assets.
PROPERTY AND PAYROLL TAXES increased by $93,000, or 9.1%, for the quarter.
The increase is primarily in property taxes related to increases in assets.
INTEREST AND OTHER DEDUCTIONS
Interest and other deductions for the quarter increased $154,000, or 6.6%,
for the quarter. This increase is attributable to interest on $20 million of new
long term debt issued in September 1997, as well as an increase in short term
borrowings, partially offset by a reduction in interest accruals on deferred gas
cost changes.
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 five-year credit commitment for $40 million from three banks. The committed
lines also support a money market facility of a similar amount and a regional
commercial paper program. A subsidiary company has a $1.5 million five-year
revolving credit facility used for non-regulated business, and at December 31,
1997, $1.15 million was outstanding. The Company also has $30 million of
uncommitted lines from three banks.
Longer term financing is provided by a Medium-Term Note program with $120
million outstanding at December 31, 1997, including $10 million in current
maturities. There is remaining $30 million registered under the Securities Act
of 1933 and available for issuance. Because of the availability of short-term
credit and the ability to issue long-term debt and additional equity, management
believes it has adequate financial flexibility to meet its anticipated cash
needs.
OPERATING ACTIVITIES
Net cash provided by operating activities was $13,273,000 for the quarter
ended December 31, 1997, compared to negative cash flow of $2,714,000 for the
quarter ended December 31, 1996. The comparison is affected by events which
occurred in the December 1996 quarter. The negative amount for the December 1996
quarter was primarily due to unusually high gas costs incurred during the
quarter.
INVESTING ACTIVITIES
Cash used by investing activities for the quarter ended December 31, 1997
was $7,692,000, compared to $987,000 for the prior year's quarter. The
comparison is affected by the unusually high amount of customer contributions in
aid of construction received in the December 1996 quarter. Most of the amount
received was related to expenditures on a project which was completed in fiscal
1996.
Capital expenditures for fiscal 1998 are budgeted at approximately $31.1
million. The Company expects that 1998 capital expenditures will be financed
approximately 50% from operating activities, and 50% from a combination of debt
and equity financing.
8
<PAGE>
FINANCING ACTIVITIES
Financing activities for the quarter ended December 31, 1997 resulted in a
net use of $8,520,000, compared to a provision of $3,517,000 for the comparable
quarter last year. During the December 1996 quarter, the Company incurred an
increase in short-term debt to fund the operating cash shortfall. The more
normal operating cash flow in the current year allowed the $6,200,000 reduction
in short term debt during the period.
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, among others,
its ability to successfully implement internal performance goals, competition
from alternative forms of energy, consolidation in the energy industry,
performance issues with key natural gas suppliers, the capital-intensive nature
of the Company's business, regulatory issues, including the need for adequate
and timely rate relief to recover increased capital and operating costs
resulting from customer growth and to sustain dividend levels, the weather,
increasing competition brought on by deregulation initiatives at the federal and
state regulatory levels, the potential loss of large volume industrial customers
due to "bypass" or the shift by such customers to special competitive contracts
at lower per unit margins, exposure to environmental cleanup requirements, and
economic conditions, particularly in the Company's service area.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
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 net worth of $86,240,000. Under the most restrictive of these
agreements, approximately $29,005,000 is available for payment of dividends as
of December 31, 1997.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 1998 annual meeting of the Shareholders of the Corporation was held on
January 27, 1998. The following directors were elected at the meeting for terms
of office expiring in 1999 by the vote indicated below:
<TABLE>
<CAPTION>
For Withheld
--------- --------
<S> <C> <C>
Carl Burnham, Jr. 9,356,476 82,365
Melvin C. Clapp 9,353,028 85,813
Thomas E. Cronin 9,349,871 88,970
David A. Ederer 9,357,031 81,810
Howard L. Hubbard 9,346,699 92,142
W. Brian Matsuyama 9,351,669 87,172
Larry L. Pinnt 9,352,705 86,136
Brooks G. Ragen 9,350,281 88,560
Mary A. Williams 9,353,559 85,282
</TABLE>
ITEM 5. OTHER INFORMATION
Ratio of Earnings to Fixed Charges:
<TABLE>
<CAPTION>
Twelve Months Ended
-------------------
12/31/97 9/30/97 9/30/96 12/31/95 12/31/94 12/31/93
-------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
2.57 2.68 2.17 2.16 2.07 2.86
</TABLE>
For purposes 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 the
calculation of these ratios, as well as the ratio of earnings to fixed
charges including preferred dividends.
10
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
Exhibit 12, Computation of Ratio of Earnings to Fixed Charges
Exhibit 27, Financial Data Schedule UT
b. Reports on Form 8-K
No report was filed on Form 8-K during the quarter ended December 31, 1997.
11
<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
By: /s/ J D Wessling
-------------------------------
J D Wessling
Vice President - Finance and
Chief Financial Officer
(Principal Financial Officer)
Date: February 13, 1998
12
<PAGE>
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
-----------------------------------------------------------------------------------
12/31/97 9/30/97 9/30/96 12/31/95 12/31/94 12/31/93
----------- --------- ---------- ----------- ---------- ----------
(unaudited)
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed charges, as defined:
Interest expense $ 9,563 9,436 10,101 9,938 8,090 $ 7,038
Amortization of debt
issuance expense 613 612 612 606 593 562
----------- ---------- ----------- ---------- ----------- -----------
Total fixed charges $ 10,176 10,048 10,713 10,544 8,683 7,600
----------- ---------- ----------- ---------- ----------- -----------
Earnings, as defined:
Net earnings $ 9,862 10,627 8,211 7,732 5,760 $ 9,103
Add (deduct):
Income taxes 6,071 6,263 4,272 4,508 3,505 5,224
Cumulative effect of change
in accounting method - - - - - (209)
Fixed charges 10,176 10,048 10,713 10,544 8,683 7,600
----------- ---------- ----------- ---------- ----------- -----------
Total earnings $ 26,109 26,938 23,196 22,784 17,948 $ 21,718
----------- ---------- ----------- ---------- ----------- -----------
Ratio of earnings to
fixed charges 2.57 2.68 2.17 2.16 2.07 2.86
----------- ---------- ----------- ---------- ----------- -----------
Fixed charges and preferred
dividend requirements:
Fixed charges $ 10,176 10,048 10,713 10,544 8,683 $ 7,600
Preferred dividend
requirements 819 811 819 853 898 913
----------- ---------- ----------- ---------- ----------- -----------
Total $ 10,995 10,859 11,532 11,397 9,581 $ 8,513
----------- ---------- ----------- ---------- ----------- -----------
Ratio of earnings to fixed charges and
preferred dividend requirements 2.37 2.48 2.01 2.00 1.87 2.55
----------- ---------- ----------- ---------- ----------- -----------
</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 QUARTER ENDED DECEMBER 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> DEC-31-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 270,462
<OTHER-PROPERTY-AND-INVEST> 2,181
<TOTAL-CURRENT-ASSETS> 38,766
<TOTAL-DEFERRED-CHARGES> 11,045
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 322,454
<COMMON> 11,006
<CAPITAL-SURPLUS-PAID-IN> 96,772
<RETAINED-EARNINGS> 7,467
<TOTAL-COMMON-STOCKHOLDERS-EQ> 115,245
6,409
0
<LONG-TERM-DEBT-NET> 111,150
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 6,700
<LONG-TERM-DEBT-CURRENT-PORT> 10,000
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 72,950
<TOT-CAPITALIZATION-AND-LIAB> 322,454
<GROSS-OPERATING-REVENUE> 60,984
<INCOME-TAX-EXPENSE> 3,405
<OTHER-OPERATING-EXPENSES> 49,413
<TOTAL-OPERATING-EXPENSES> 49,413
<OPERATING-INCOME-LOSS> 11,571
<OTHER-INCOME-NET> 112
<INCOME-BEFORE-INTEREST-EXPEN> 8,278
<TOTAL-INTEREST-EXPENSE> 2,596
<NET-INCOME> 5,682
125
<EARNINGS-AVAILABLE-FOR-COMM> 5,557
<COMMON-STOCK-DIVIDENDS> 2,643
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 13,273
<EPS-PRIMARY> .51
<EPS-DILUTED> .51
</TABLE>
