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 March 31, 2000
Commission file number: 1-7196
CASCADE NATURAL GAS CORPORATION
(Exact name of Registrant as specified in its charter)
Washington 91-0599090
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
222 Fairview Avenue North, Seattle, WA 98109
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(Address of principal executive offices) (Zip code)
(Registrant's telephone number including area code) (206) 624-3900
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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
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Common Stock, Par Value $1 per Share 11,045,095 as of April 30, 2000
CASCADE NATURAL GAS CORPORATION
Index
Page No.
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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
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CASCADE NATURAL GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF NET EARNINGS
(unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------------- --------------------------------
Mar 31, 2000 Mar 31, 1999 Mar 31, 2000 Mar 31, 1999
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(thousands except per share data)
Operating revenues $ 88,830 $ 71,118 $ 162,621 $ 134,035
Less: Gas purchases 50,500 37,088 92,370 69,103
Revenue taxes 5,838 4,835 10,151 8,574
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Operating margin 32,492 29,195 60,100 56,358
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Cost of operations:
Operating expenses 9,829 9,423 18,374 18,840
Depreciation and amortization 3,311 3,205 6,591 6,353
Property and payroll taxes 1,104 1,163 2,295 2,322
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14,244 13,791 27,260 27,515
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Earnings from operations 18,248 15,404 32,840 28,843
Less interest and other
deductions - net 2,709 2,584 5,268 5,206
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Earnings before income taxes 15,539 12,820 27,572 23,637
Income taxes 5,672 4,801 10,064 8,864
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Net earnings 9,867 8,019 17,508 14,773
Preferred dividends 1 119 2 241
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Net earnings available to
common shareholders $ 9,866 $ 7,900 $ 17,506 $ 14,532
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Weighted average common
shares outstanding 11,045 11,045 11,045 11,045
Net earnings per common share,
basic and diluted $ 0.89 $ 0.72 $ 1.58 $ 1.32
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CASCADE NATURAL GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands)
Mar 31, 2000 Sep 30, 1999
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ASSETS (Unaudited)
Utility Plant, net of accumulated
depreciation of $183,522 and $177,878 $ 277,861 $275,400
Construction work in progress 4,502 6,891
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282,363 282,291
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Other Assets:
Investments in non-utility property 202 202
Notes receivable, less current maturities 475 577
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677 779
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Current Assets:
Cash and cash equivalents 7,789 410
Accounts receivable, less allowance of $792
and $622 for doubtful accounts 33,200 12,468
Current maturities of notes receivable 137 176
Materials, supplies and inventories 5,446 6,250
Prepaid expenses and other assets 7,126 5,584
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53,698 24,888
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Deferred Charges 7,068 7,611
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$ 343,806 $315,569
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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 18,174 5,970
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126,599 114,395
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Redeemable Preferred Stocks, aggregate redemption
amount of $73 and $6,338 62 6,186
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Long-term Debt 125,000 125,000
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Current Liabilities:
Accounts payable 16,220 8,933
Property, payroll and excise taxes 6,136 3,434
Dividends and interest payable 7,515 7,614
Other current liabilities 9,358 4,527
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39,229 24,508
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Deferred Credits and Other:
Gas cost changes 18,581 12,210
Other 34,335 33,270
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52,916 45,480
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Commitments and Contingencies - -
$ 343,806 $315,569
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The accompanying notes are an integral part of these financial statements
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CASCADE NATURAL GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED
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(dollars in thousands)
Mar 31, 2000 Mar 31, 1999
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Operating Activities
Net earnings $ 17,508 $ 14,773
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 6,591 6,353
Deferrals of gas cost changes 4,995 1,016
Amortization of gas cost changes 1,376 234
Other deferrals and amortizations 1,427 2,069
Deferred income taxes and tax credits - net 431 506
Other 127 --
Change in current assets and liabilities (6,781) (8,083)
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Net cash provided by operating activities 25,674 16,868
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Investing Activities
Capital expenditures (7,821) (10,575)
Customer contributions in aid of construction 781 1,331
Other 173 281
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Net cash used by investing activities (6,867) (8,963)
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Financing Activities
Redemption of preferred stock (6,124) (222)
Issuance of long-term debt -- 14,887
Repayment of long-term debt -- (10,650)
Changes in notes payable and commercial paper, net -- (1,929)
Dividends paid (5,304) (5,543)
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Net cash used by financing activities (11,428) (3,457)
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Net Increase in Cash and Cash Equivalents 7,379 4,448
Cash and Cash Equivalents
Beginning of year 410 2,338
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End of period $ 7,789 $ 6,786
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The accompanying notes are an integral part of these financial statements
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CASCADE NATURAL GAS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
THREE AND SIX MONTH PERIODS ENDED MARCH 31, 2000
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 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 March 31, 2000, adoption of this
standard had an immaterial effect.
FAS NO. 133. In June 1998, the Financial Accounting Standards Board (FASB)
issued FAS No. 133, entitled "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES." This standard will be effective for fiscal years beginning after
June 15, 2000, and will be adopted by the Company as of October 1, 2000. It
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 this standard on its
financial reporting. This evaluation is not complete, but the Company believes
that 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, in March 2000, the FASB issued a proposed amendment to FAS No.
133 that, if approved, would change the definition of "derivative instrument",
such that the Company's gas supply contracts would not be subject to the
provisions of the standard. In the event the amendment is not approved, 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 was 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.
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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
March 31, 2000 and March 31, 1999.
RESULTS OF OPERATIONS
Net earnings available to common shareholders for the second quarter of
fiscal 2000 (quarter ended March 31, 2000), were $9,866,000, or $0.89 per share,
compared to $7,900,000, or $0.72 per share, for the second quarter of fiscal
1999. This represents a 24% improvement in quarterly earnings per share. For the
six-month period, net earnings available to common shareholders were
$17,506,000, or $1.58 per share, a 20% improvement over the 1999 period results
of $14,532,000, or $1.32 per share. Improvements in results for the quarter and
year to date periods are primarily attributable to increases in operating
margins.
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:
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Second Quarter of Fiscal Percent Year to Date March 31 Percent
2000 1999 Change 2000 1999 Change
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(dollars in thousands) (dollars in thousands)
DEGREE DAYS 2,361 2,211 6.8% 4,305 4,220 2.0%
AVERAGE NUMBER OF CUSTOMERS
Residential 158,602 151,560 4.6% 156,861 149,633 4.8%
Commercial 27,452 26,634 3.1% 27,172 26,312 3.3%
AVERAGE THERM USAGE PER CUSTOMER
Residential 358 317 12.9% 626 599 4.5%
Commercial 1,517 1,522 -0.3% 2,934 2,883 1.8%
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For the quarter ended March 31, 2000, operating margin from sales to
residential and commercial customers increased by $2.1 million (9.5%) over the
same period last year. Approximately $940,000 of this improvement was due to the
addition of 7,900 new customers. The remainder of the improvement is
attributable primarily to increased residential gas usage per customer. The
higher consumption is due in large part to weather, which was approximately 7%
colder than last year. Overall degree days for the quarter were at approximately
normal levels.
For the year to date margin, similar factors contributed to the $2.2
million improvement, with about $1.8 million resulting from the addition of
8,100 new customers. Higher gas usage per customer, partially offset by higher
revenue taxes, accounted for most of the rest of the improvement. Degree days
for the six month period were about 2% colder than last year, and 2% warmer than
normal.
INDUSTRIAL AND OTHER MARGIN. Operating margin from industrial and other
customers during the 2000 second quarter increased $1.1 million (14%) from the
March 1999 quarter. About $521,000 resulted from higher consumption by electric
generation customers, $174,000 from new customers, and the remainder from higher
deliveries to other industrial plants. On a year to date basis, industrial and
other margin increased $1.3 million, or 8%.
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COST OF OPERATIONS
Cost of operations for the quarter ended March 31, 2000, which consists
of operating expenses, depreciation and amortization, and property and payroll
taxes, increased $453,000 or 3.3% from the quarter ended March 31, 1999.
OPERATING EXPENSES, which are primarily labor and benefits expenses,
increased $406,000, or 4.3%, for the quarter. Included in operating expense for
the quarter was an accrual of $471,000 for performance based compensation,
compared to $124,000 for the quarter ended March 31, 1999. Also included was an
accrual of $134,000 of bad debt reserve related to an account due from an
industrial customer. Other operating expenses decreased in the aggregate,
reflecting a reduction in the average number of employees by about 28 (6%).
Year to date operating expenses decreased $466,000, or 2.5%, mainly
because of lower labor expense. Labor and benefits expenses last year included
one-time management restructuring costs of $329,000. Year to date 2000 accruals
for performance based compensation were $516,000, compared to $124,000 for the
first six months of fiscal 1999.
DEPRECIATION AND AMORTIZATION increased $106,000 (3.3%) for the
quarter, and $238,000 (3.7%) year to date. The increases are due to new asset
additions.
PROPERTY AND PAYROLL TAXES decreased slightly compared to the quarterly
and year to date periods last year, due mainly to lower payroll taxes because of
fewer employees.
INTEREST AND OTHER DEDUCTIONS - NET
Interest and other deductions increased $125,000 (4.8%) for the
quarter, and $62,000 (1.2%) year to date. The increases are due primarily to
higher interest accrued on deferred gas cost balances. Included in the December
1999 quarter was a $131,000 credit for the gain on the sale of surplus 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 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 March 31, 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 six months ended March 31, 2000, net cash provided by
operating activities was $25,674,000, compared to $16,868,000 last year. The
improved operating cash flow resulted mainly from higher earnings and from
higher amounts of gas cost deferrals.
INVESTING ACTIVITIES
Net cash used by investing activities for the six months ended March
31, 2000 was $6,867,000, compared to $8,963,000 for the first six months of
fiscal 1999. Capital expenditures in fiscal 2000 were
8
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 are budgeted at approximately
$23.5 million. The Company expects that 2000 capital expenditures will be
financed approximately 75% from operating activities, and 25% from debt
financing.
FINANCING ACTIVITIES
Financing activities for the six months ended March 31, 2000 resulted
in a net cash outflow of $11,428,000 compared to $3,457,000 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 March 31, 2000, the Company had no
short-term debt, and $7,789,000 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.
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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 March 31, 2000. Under this
agreement, approximately $19,984,000 was available for payment of dividends at
March 31, 2000.
ITEM 5. OTHER INFORMATION
Ratio of Earnings to Fixed Charges:
Twelve Months Ended
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3/31/00 9/30/99 9/30/98 9/30/97 9/30/96 9/30/95
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3.31 3.00 2.42 2.68 2.17 2.16
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:
No. Description
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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 ended
March 31, 2000.
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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
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J. D. Wessling
Sr. Vice President Finance and Chief Financial Officer
(Principal Financial Officer)
Date: May 8, 2000
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