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, 1996
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 office) (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
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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 10,824,160 as of December 31, 1996
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CASCADE NATURAL GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF NET EARNINGS
(unaudited)
THREE MONTHS ENDED
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Dec 31, 1996 Dec 31, 1995
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(thousands except per share data)
Operating revenues $64,971 $56,908
Less: Gas purchases 35,689 31,621
Revenue taxes 3,671 3,272
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Operating margin 25,611 22,015
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Cost of operations:
Operating expenses 8,985 7,717
Depreciation and amortization 3,223 3,028
Property and payroll taxes 1,028 935
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13,236 11,680
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Earnings from operations 12,375 10,335
Less interest and other
deductions - net 2,330 2,470
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Earnings before income taxes 10,045 7,865
Income taxes 3,597 2,666
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Earnings before preferred dividends 6,448 5,199
Preferred dividends 128 131
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Net earnings $ 6,320 $ 5,068
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Common shares outstanding:
Weighted average 10,800 9,115
End of period 10,821 9,140
Net earnings per common share $ 0.59 $ 0.56
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Cash dividends per share $ 0.24 $ 0.24
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See Notes to Consolidated Condensed Financial Statements
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CASCADE NATURAL GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
Dec 31, 1996 Sep 30, 1996
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(dollars in thousands)
(unaudited)
ASSETS
Utility Plant, net after accumulated
depreciation of $150,946 and $147,599 $ 247,295 $ 236,172
Construction work in progress 6,258 19,497
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253,553 255,669
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Other Assets:
Investments 668 667
Notes receivable, less current maturities 1,722 1,777
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2,390 2,444
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Current Assets:
Cash and cash equivalents 359 543
Accounts receivable, less allowance of $559
and $439 for doubtful accounts 31,668 11,646
Current maturities of notes receivable 631 631
Materials, supplies and inventories 5,897 6,063
Prepaid expenses and other assets 5,768 5,723
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44,323 24,606
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Deferred Charges 13,237 13,662
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$ 313,503 $ 296,381
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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 10,824,160 and 10,786,585 shares $ 10,824 $ 10,787
Additional paid-in capital 93,972 93,438
Retained earnings 8,621 4,901
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113,417 109,126
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Redeemable Preferred Stocks, aggregate redemption
amount of $6,845 and $7,097 6,630 6,851
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Long-term Debt 101,550 101,850
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Current Liabilities:
Notes payable and commercial paper 6,194 --
Accounts payable 26,744 17,599
Property, payroll and excise taxes 5,063 3,113
Dividends and interest payable 4,710 6,570
Other current liabilities 6,830 2,931
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49,541 30,213
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Deferred Credits:
Gas cost changes 15,933 21,578
Other 26,432 26,763
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42,365 48,341
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Commitments and Contingencies -- --
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$ 313,503 $ 296,381
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See Notes to Consolidated Condensed Financial Statements
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CASCADE NATURAL GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
THREE MONTHS ENDED
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Dec 31, 1996 Dec 31, 1995
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(dollars in thousands)
OPERATING ACTIVITIES:
Earnings before preferred dividends $ 6,447 $ 5,199
Adjustments to reconcile earnings before preferred
dividends to net cash provided by operating activities:
Depreciation 3,223 3,134
Amortization of gas cost changes (602) 988
Decrease in deferred income taxes (608) (427)
Decrease in deferred investment tax credits (58) (85)
Cash provided (used) by changes in operating assets and liabilities:
Current assets and liabilities (6,797) (4,480)
Gas cost changes (5,043) 3,966
Other deferrals and non-current liabilities 724 (2,350)
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Net cash (used) provided by operating activities (2,714) 5,945
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INVESTING ACTIVITIES:
Capital expenditures (6,984) (15,229)
Customer contributions in aid of construction 5,975 176
New consumer loans (244) (449)
Receipts on consumer loans 266 785
Purchase of securities available for sale -- (2,293)
Proceeds from securities available for sale -- 4,375
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Net cash used by investing activities (987) (12,635)
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FINANCING ACTIVITIES:
Issuance of common stock 282 470
Redemption of preferred stock (216) (345)
Proceeds from issuance of long-term debt -- 2,100
Repayment of long-term debt (300) (5,000)
Changes in notes payable and commercial paper, net 6,194 13,000
Dividends paid (2,443) (2,056)
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Net cash provided by financing activities 3,517 8,169
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (184) 1,479
CASH AND CASH EQUIVALENTS:
Beginning of period 543 718
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End of period $ 359 $ 2,197
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See Notes to Consolidated Condensed Financial Statements
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CASCADE NATURAL GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 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 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 1996 transition report for the period January 1, 1996 to
September 30, 1996 on Form 10-K, and to comments included therein under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
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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 month periods ended December 31, 1996 and
December 31, 1995.
RESULTS OF OPERATIONS
Net earnings for the first quarter of fiscal 1997 were $6,320,000, or
$0.59 per share, compared to net earnings of $5,068,000, or $0.56 per share,
for the quarter ended December 31, 1995. The 25% increase in net earnings is
primarily attributable to improved overall operating margin. Per share
earnings are affected by the 1,487,700 shares of new common stock issued in
August, 1996.
RESIDENTIAL AND COMMERCIAL OPERATING MARGIN
RESIDENTIAL AND COMMERCIAL OPERATING MARGIN
(dollars in thousands)
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Three Months Ended
December 31
1996 1995
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Degree Days 2,191 1,940
Average Customers
Residential 132,894 124,957
Commercial 24,403 23,345
Therms per Customer
Residential 303 272
Commercial 1,529 1,395
Margin
Residential $ 10,511 $ 8,466
Commercial $ 7,200 $ 6,168
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Operating margin from sales to residential and commercial customers
increased $3,077,000, or 21%, quarter to quarter. Factors contributing to
this increase were an increase of 8,995 (6.1%) in the average number of
residential and commercial customers, an 11.4% increase in gas consumption
per residential customer, and a 9.6% increase in gas consumption per
commercial customer. Consumption improvement is driven by the mix of
customers, particularly commercial, the number of appliances in use, and by
the weather. Estimated degree days were 13% greater than in the quarter ended
December 31, 1995, and 9% greater than normal. New tariff rates charged to
customers in the state of Washington, which became effective August 1, 1996,
contributed an estimated $1 million of additional margin. Mitigating the
improvements was $428,000 of gas cost increases representing 20% of the
excess of incurred gas cost over the base gas cost level established in the
Company's tariff for sales in the state of Oregon. The tariff requires the
Company to absorb 20% of such differences (positive or negative), while the
remaining 80% is deferred for pass back to customers.
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INDUSTRIAL AND OTHER MARGIN
Operating margin from industrial and other customers increased $520,000,
or 7%, quarter to quarter, primarily resulting from increased margins from
cogeneration customers, including service to a new customer that began
commercial operation in the second quarter of 1996.
COST OF OPERATIONS
Cost of operations, which consists of operating expenses, depreciation
and amortization, and property and payroll taxes, increased $1,556,000 or 13%
over the quarter ended December 31, 1995. Operating expenses, which are
primarily labor and benefits expenses, contributed $1,268,000 of the
increase. Of this increase, $351,000 is attributable to increases in amounts
included therein for postretirement benefits other than pensions (PBOP). From
1993 through July 1996, a portion of PBOP expenses were deferred, in
accordance with a policy statement issued by the Washington Utilities and
Transportation Commission in 1992. Concurrent with the settlement of the
Washington rate case, effective August 1, 1996, ongoing PBOP expenses are no
longer deferred, and amortization of the previously deferred amounts is also
included in operating expenses, resulting in the $351,000 increase.
Additionally there were increased expenses resulting from higher wage rates,
overtime pay, and purchased services.
Increases in depreciation and amortization and in property and payroll
taxes are primarily attributable to increases in utility plant.
INTEREST AND OTHER DEDUCTIONS
Interest and other deductions for the quarter decreased $140,000, or
5.7% from the quarter ended December 31, 1995, due primarily to decreases in
the amount of outstanding debt during the quarter. Less debt was required
because of the common stock sold in a public offering in August 1996 which
added $20 million of common equity.
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 has a $5 million five-year
revolving credit facility used for non-regulated business, and at December 31,
1996, $1.55 million was outstanding. The Company also has $25 million of
uncommitted lines from three banks.
Longer term financing is provided by a Medium-Term Note program with
$100 million outstanding at December 31, 1996, and $50 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 provided a negative cash flow of $2,714,000 for the
quarter, compared to a positive $5,943,000 for the quarter ended December 31,
1995, primarily due to higher gas costs incurred. The effect of these higher
gas costs, except for $428,000 discussed above under "Residential and
Commercial Operating Margin", has been deferred, and the Company will file
for recovery from customers through purchased gas rate adjustments over
future periods. Capital expenditures for the quarter were $6,984,000, which
was mostly offset by contributions in aid of construction of $5,975,000.
Capital
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expenditures for fiscal 1997 are budgeted at approximately $32 million. The
Company expects that fiscal 1997 capital expenditures will be financed 50% to
75% by debt financing. The broad range of capital needs coverage is due to
uncertainty of gas costs. If gas costs continue at high levels, there will
continue to be a negative effect on operating cash flow.
REGULATORY MATTERS
The Company has consistently earned in excess of its allowed rate of
return in Oregon in recent years, and continued earnings improvement in that
state would likely result in a mandated general rate reduction under the
current regulatory system. The staff of the Oregon Public Utility Commission
(OPUC) has agreed to collaborate with the Company in exploring alternative
incentive rate mechanisms which would allow the Company and its customers to
equitably share earnings improvements resulting from improved efficiency.
These discussions are not complete, and the outcome is uncertain.
Approximately 26% of the Company's pre-tax regulated operating income is
derived from Oregon operations.
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, 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
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 agreements, the Company is required
to maintain a minimum of $83,716,000 of net worth. Under the most restrictive
agreement, approximately $29,701,000 was available for the payment of
dividends as of December 31, 1996.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The 1997 annual meeting of the Shareholders of the Corporation was held
on January 23, 1997. The following directors were elected at the meeting for
terms of office expiring in 1998 by the vote indicated below:
Abstentions and
For Withheld Broker Non-Votes
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Carl Burnham, Jr. 8,944,363 81,306 2,135
Melvin C. Clapp 8,937,905 84,264 5,093
Thomas E. Cronin 8,918,272 107,367 28,226
David A. Ederer 8,944,473 81,196 2,025
Howard L. Hubbard 8,940,725 81,444 2,273
W. Brian Matsuyama 8,941,745 84,024 4,858
Larry L. Pinnt 8,939,171 82,998 3,827
Brooks G. Ragen 8,940,510 81,659 2,488
Mary A. Williams 8,937,304 84,865 5,694
ITEM 5. OTHER INFORMATION.
Ratio of Earnings to Fixed Charges:
Twelve Months Ended
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12/31/96 9/30/96 12/31/95 12/31/94 12/31/93 12/31/92
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2.39 2.17 2.16 2.07 2.86 1.97
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.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits:
No. Description
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3.2 Restated Bylaws of the Registrant
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.
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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
(Registrant)
By:
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J. D. Wessling Vice President - Finance and Chief Financial Officer
Date: February 7, 1997
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