<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, 2000
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.
<TABLE>
<CAPTION>
Title Outstanding
----- -----------
<S> <C>
Common Stock, Par Value $1 per Share 11,045,095 as of July 31, 2000
</TABLE>
<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 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 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
Signature 11
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CASCADE NATURAL GAS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF NET EARNINGS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- ----------------------------
Jun 30, 2000 Jun 30, 1999 Jun 30, 2000 Jun 30, 1999
------------ ------------ ------------ ------------
(thousands except per share data)
<S> <C> <C> <C> <C>
Operating revenues $ 41,563 $ 42,869 $ 204,184 $ 176,904
Less: Gas purchases 22,717 22,746 115,087 91,849
Revenue taxes 2,778 2,831 12,929 11,405
------------ ------------ ------------ ------------
Operating margin 16,068 17,292 76,168 73,650
------------ ------------ ------------ ------------
Cost of operations:
Operating expenses 8,709 9,064 27,084 27,904
Depreciation and amortization 3,342 3,234 9,932 9,587
Property and payroll taxes 1,393 1,203 3,688 3,525
------------ ------------ ------------ ------------
13,444 13,501 40,704 41,016
------------ ------------ ------------ ------------
Earnings from operations 2,624 3,791 35,464 32,634
Less interest and other
deductions - net 2,692 2,477 7,961 7,683
------------ ------------ ------------ ------------
Earnings (loss) before income taxes (68) 1,314 27,503 24,951
Income taxes (23) 503 10,040 9,367
------------ ------------ ------------ ------------
Net earnings (loss) (45) 811 17,463 15,584
Preferred dividends 1 121 3 362
------------ ------------ ------------ ------------
Net earnings (loss) available to
common shareholders $ (46) $ 690 $ 17,460 $ 15,222
============ ============ ============ ============
Weighted average common
shares outstanding 11,045 11,045 11,045 11,045
Net earnings (loss) per common share,
basic and diluted $ (0.00) $ 0.06 $ 1.58 $ 1.38
============ ============ ============ ============
Cash dividends per share $ 0.24 $ 0.24 $ 0.72 $ 0.72
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
3
<PAGE>
CASCADE NATURAL GAS CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Jun 30, 2000 Sep 30, 1999
------------ ------------
ASSETS (Unaudited)
<S> <C> <C>
Utility Plant, net of accumulated
depreciation of $186,828 and $177,878 $ 277,270 $ 275,400
Construction work in progress 5,920 6,891
----------- -----------
283,190 282,291
----------- -----------
Other Assets:
Investments in non-utility property 202 202
Notes receivable, less current maturities 433 577
----------- -----------
635 779
----------- -----------
Current Assets:
Cash and cash equivalents 7,865 410
Accounts receivable, less allowance of $930
and $622 for doubtful accounts 16,900 12,468
Current maturities of notes receivable 119 176
Materials, supplies and inventories 5,758 6,250
Prepaid expenses and other assets 9,092 5,584
----------- -----------
39,734 24,888
----------- -----------
Deferred Charges 6,769 7,611
----------- -----------
$ 330,328 $ 315,569
=========== ===========
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 11,045,095 shares $ 11,045 $ 11,045
Additional paid-in capital 97,380 97,380
Retained earnings 15,477 5,970
----------- -----------
123,902 114,395
----------- -----------
Redeemable Preferred Stocks, aggregate redemption
amount of $73 and $6,338 62 6,186
----------- -----------
Long-term Debt 125,000 125,000
----------- -----------
Current Liabilities:
Accounts payable 10,566 8,933
Property, payroll and excise taxes 3,745 3,434
Dividends and interest payable 5,085 7,614
Other current liabilities 8,190 4,527
----------- -----------
27,586 24,508
----------- -----------
Deferred Credits and Other:
Gas cost changes 19,358 12,210
Other 34,420 33,270
----------- -----------
53,778 45,480
----------- -----------
Commitments and Contingencies - -
$ 330,328 $ 315,569
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
4
<PAGE>
CASCADE NATURAL GAS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------------------
(dollars in thousands)
Jun 30, 2000 Jun 30, 1999
---------------- ---------------
<S> <C> <C>
Operating Activities
Net earnings $ 17,463 $ 15,584
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 9,932 9,587
Deferrals of gas cost changes 5,484 2,588
Amortization of gas cost changes 1,665 776
Other deferrals and amortizations 1,597 1,743
Deferred income taxes and tax credits - net 529 758
Other (212) (174)
Change in current assets and liabilities (4,418) (5,741)
---------------- ---------------
Net cash provided by operating activities 32,040 25,121
---------------- ---------------
Investing Activities
Capital expenditures (13,080) (14,970)
Customer contributions in aid of construction 1,985 2,139
Other 590 883
---------------- ---------------
Net cash used by investing activities (10,505) (11,948)
---------------- ---------------
Financing Activities
Redemption of preferred stock (6,124) (222)
Issuance of long-term debt - 14,888
Repayment of long-term debt - (10,650)
Changes in notes payable and commercial paper, net - (6,929)
Dividends paid (7,956) (8,315)
---------------- ---------------
Net cash used by financing activities (14,080) (11,228)
---------------- ---------------
Net Increase in Cash and Cash Equivalents 7,455 1,945
Cash and Cash Equivalents
Beginning of year 410 2,338
---------------- ---------------
End of period $ 7,865 $ 4,283
================ ===============
</TABLE>
The accompanying notes are an integral part of these financial statements
5
<PAGE>
CASCADE NATURAL GAS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED JUNE 30, 2000
The preceding financial 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 natural gas distribution 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 1999 Annual Report on Form 10-K for the fiscal year ended
September 30, 1999, and comments included therein under "Management's Discussion
and Analysis of Financial Condition and Results of Operations".
NEW ACCOUNTING STANDARDS:
SOP 98-1. As of the first quarter of fiscal 2000, the Company adopted Statement
of Position (SOP) 98-1, "ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED
OR OBTAINED FOR INTERNAL USE", issued by the Accounting Standards Executive
Committee of the American Institute of Certified Public Accountants. The SOP
establishes criteria for accounting for software costs as operating expense when
incurred, or as a capital expenditure. It provides that internal and external
costs incurred to develop or obtain new software during the "application
development stage" should be capitalized. Other costs, including preliminary
project costs, training, data conversion, and upgrades and enhancements, would
be expensed under the provisions of SOP 98-1. The significance of this change is
dependent upon the magnitude of the costs and the nature and complexity of
specific software development or acquisition projects incurred in any period.
For the quarter and year to date periods ended June 30, 2000, adoption of this
standard had an immaterial effect.
FAS NO. 133 AND 138. In June 1998, the Financial Accounting Standards Board
(FASB) issued FAS No. 133, entitled "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES." This standard was amended in June 2000 by FAS No. 138,
ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES.
Both standards will be effective for fiscal years beginning after June 15, 2000,
and will be adopted by the Company as of October 1, 2000. FAS No. 133 requires
that the fair value of all derivative financial instruments be recognized as
either assets or liabilities on the Company's balance sheet. Changes during a
period in the fair value of a derivative instrument would be included in
earnings or other comprehensive income for the period.
The Company is currently evaluating the effects of these standards on
its financial reporting. This evaluation is not complete, but the Company
believes that under FAS No. 133, some of its natural gas supply contracts may
meet the technical definition of derivative instruments, and thus may be subject
to the requirements of FAS No. 133. However FAS 138 provides for exemptions from
derivative accounting for contracts involving "normal purchase and normal sales"
transactions. Accordingly some or all of the Company's gas supply contracts may
not be subject to the derivative accounting provisions of the standard. In the
event the contracts are defined as derivative instruments, the Company believes
that, because of rate regulation, such derivative assets and liabilities may be
offset by regulatory assets and regulatory liabilities, and the earnings effect
of application of this standard would not be material.
STOCK OPTIONS:
During the quarter ended March 31, 2000, the Company awarded officers
and certain management employees, under the 1998 Plan for Incentive Stock
Options, grants to purchase 53,100 shares of its common stock. The exercise
price per share is equal to the fair market value of the stock at the date of
grant. Stock awards granted at 100% of fair market value are not recognized as
compensation expense. No stock options were granted in the quarter ended June
30, 2000.
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 and six-month periods ended
June 30, 2000 and June 30, 1999.
RESULTS OF OPERATIONS
The Company experienced a net loss available to common shareholders for
the third quarter of fiscal 2000 (quarter ended June 30, 2000), of $46,000, or
$0.00 per share, compared to earnings of $690,000, or $0.06 per share, for the
third quarter of fiscal 1999. The less favorable results are primarily due to
lower operating margins stemming from warmer weather. For the nine-month period,
net earnings available to common shareholders were $17,460,000, or $1.58 per
share, a 14% improvement over the 1999 period results of $15,222,000, or $1.38
per share. Improvements in results for the year to date periods are primarily
attributable to increases in operating margins while overall costs of operations
decreased slightly.
OPERATING MARGIN
RESIDENTIAL AND COMMERCIAL MARGIN. Factors affecting operating margins
derived from sales to residential and commercial customers were as set forth in
the following table:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
Third Quarter of Fiscal Percent Year to Date June 30 Percent
2000 1999 Change 2000 1999 Change
-------------------------------------------------------------------- ------------------------------------
(dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
DEGREE DAYS 765 1,014 (24.6)% 5,070 5,234 (3.1)%
AVERAGE NUMBER OF CUSTOMERS
Residential 157,921 151,142 4.5% 157,214 150,136 4.7%
Commercial 27,319 26,555 2.9% 27,221 26,393 3.1%
AVERAGE THERM USAGE PER CUSTOMER
Residential 92 138 (33.3)% 717 737 (2.7)%
Commercial 598 754 (20.7)% 3,529 3,633 (2.9)%
-------------------------------------------------------------------------------------------------------------------
</TABLE>
For the quarter ended June 30, 2000, operating margin from sales to
residential and commercial customers decreased by $1.4 million (10.5%) from the
same period last year. Weather for the quarter, as measured by degree days, was
25% warmer than last year, and 22% warmer than normal, resulting in lower gas
usage by residential and commercial customers, whose consumption is highly
sensitive to weather. This lower consumption resulted in margin reductions of
approximately $1.9 million. Partially offsetting the effects of warmer weather
was a $452,000 positive effect of 7,543 more customers compared to the third
quarter of 1999.
Year to date residential and commercial margins were $868,000 higher
than last year. A margin increase of $2.3 million from customer additions was
partially offset by a $1.5 million reduction resulting from lower consumption
per customer. Overall consumption was impacted by weather, which was 5% warmer
than normal and 3% warmer than last year.
INDUSTRIAL AND OTHER MARGIN. Operating margin from industrial and other
customers during the 2000 third quarter increased $302,000 (4.5%) from the June
1999 quarter. This increase is primarily attributable to increased consumption
by electric generation customers, whose consumption was up 51.7 million therms
compared to last year's third quarter. On a year to date basis, industrial and
other margin increased $1.6 million, or 7.2%. Higher consumption by electric
generation customers accounted for about $1 million of the increase.
7
<PAGE>
COST OF OPERATIONS
Cost of operations for the quarter ended June 30, 2000, which consists
of operating expenses, depreciation and amortization, and property and payroll
taxes, decreased $57,000 or 0.4% from the quarter ended June 30, 1999.
OPERATING EXPENSES, which are primarily labor and benefits expenses,
decreased $355,000, or 3.9%, for the quarter. Essentially all the improvement
results from lower labor costs, reflecting 21 (4.5%) fewer employees. Increases
in medical benefits expense partially offset the effect of lower labor costs.
Year to date operating expenses decreased $820,000, or 2.9%, mainly
because of lower labor expense, which decreased $900,000 reflecting the reduced
number of employees. Employee benefits expenses and other expenses, in the
aggregate, increased $80,000.
DEPRECIATION AND AMORTIZATION increased $108,000 (3.3%) for the
quarter, and $345,000 (3.6%) year to date. The increases are due to new asset
additions.
PROPERTY AND PAYROLL TAXES increased $190,000 (15.8%) for the quarter
and $163,000 (4.6%) year to date compared to last year, due mainly to higher
property tax assessments for calendar year 2000.
INTEREST AND OTHER DEDUCTIONS - NET
Interest and other deductions increased $215,000 (8.7%) for the
quarter, and $278,000 (3.6%) year to date. The increases are due primarily to
higher interest accrued on deferred gas cost balances.
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 revolving credit commitment of $40 million from a bank. This agreement expires
in 2004. The annual commitment fee is 1/8 of 1%, and is subject to change based
on the ratings assigned to the Company's long-term debt. The committed lines of
credit also support a $25 million commercial paper facility. The Company also
has $30 million of uncommitted lines from three banks.
A Medium-Term Note program provides longer term financing, with $125
million outstanding at June 30, 2000. There is remaining $15 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
For the nine months ended June 30, 2000, net cash provided by
operating activities was $32,040,000, compared to $25,121,000 last year. The
improved operating cash flow resulted mainly from higher earnings and from
higher accruals of deferred gas cost credits.
INVESTING ACTIVITIES
Net cash used by investing activities for the nine months ended June
30, 2000 was $10,505,000, compared to $11,948,000 for the first nine months of
fiscal 1999. Capital expenditures in fiscal 2000 were lower due in part to
increased effectiveness of the Company's construction crews, resulting in less
utilization of outside contractors.
Capital expenditures for fiscal 2000 were originally budgeted at
approximately $23.5 million. Two large projects budgeted for $4.4 million were
either cancelled or postponed, so actual expenditures for
8
<PAGE>
the year are expected to be less than $20 million. The Company expects that
2000 capital expenditures will be financed approximately 100% from operating
activities.
FINANCING ACTIVITIES
Financing activities for the nine months ended June 30, 2000 resulted
in a net cash outflow of $14,080,000 compared to $11,228,000 for the same period
last year. During the first quarter of fiscal 2000, the Company redeemed $6.1
million of preferred stock, which matured in November 1999. This redemption was
funded with short-term debt. Subsequently all short term debt was paid with cash
provided by operating activities. As of June 30, 2000, the Company had no
short-term debt, and $7,865,000 in cash and cash equivalents.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has evaluated its risk related to financial instruments
whose values are subject to market sensitivity. The only such instruments are
Company-issued fixed-rate debt obligations. The Company makes interest and
principal payments on these obligations in the normal course of its business,
and does not plan to redeem these obligations prior to normal maturities.
Accordingly, management believes the Company is not subject to market risk as
defined in Item 305 of Regulation S-K.
FORWARD LOOKING STATEMENTS
Statements contained in this report that 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.
9
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
Under the terms of its bank credit agreement, the Company is required
to maintain a minimum net worth of $101,357,000 as of June 30, 2000. Under this
agreement, approximately $17,439,000 was available for payment of dividends at
June 30, 2000.
ITEM 5. OTHER INFORMATION
Ratio of Earnings to Fixed Charges:
<TABLE>
<CAPTION>
Twelve Months Ended
---------------------------------------------------------------------------
6/30/00 9/30/99 9/30/98 9/30/97 9/30/96 9/30/95
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
3.17 3.00 2.42 2.68 2.17 2.16
</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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
<TABLE>
<CAPTION>
No. Description
--- -----------
<S> <C>
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule UT
</TABLE>
b. Reports on Form 8-K:
No reports were filed on Form 8-K during the quarter ended
June 30, 2000.
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
By: /s/ J. D. Wessling .
-----------------------------------
J. D. Wessling
Sr. Vice President Finance and Chief Financial Officer
(Principal Financial Officer)
Date: August 8, 2000 .
-----------------------------------
11
