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, 1998
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 March 31, 1998
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 10
Part II. Other Information
Item 2. Changes in Securities 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
Signature 12
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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
March 31 March 31
------------------ --------------------
1998 1997 1998 1997
------- ------- -------- --------
(thousands except per share data)
Operating revenues $65,548 $71,174 $126,532 $136,145
Less: Gas purchases 34,255 38,644 65,949 74,333
Revenue taxes 4,346 4,904 8,093 8,575
------- ------- -------- --------
Operating margin 26,947 27,626 52,490 53,237
------- ------- -------- --------
Cost of operations:
Operating expenses 9,533 9,321 18,894 18,306
Depreciation and amortization 3,600 3,286 7,090 6,509
Property and payroll taxes 1,213 834 2,335 1,862
------- ------- -------- --------
14,346 13,441 28,319 26,677
------- ------- -------- --------
Earnings from operations 12,601 14,185 24,171 26,560
Less interest and other
deductions - net 2,415 2,249 4,899 4,580
------- ------- -------- --------
Earnings before income taxes 10,186 11,936 19,272 21,980
Income taxes 3,817 4,336 7,221 7,933
------- ------- -------- --------
Net earnings 6,369 7,600 12,051 14,047
Preferred dividends 124 128 249 255
------- ------- -------- --------
Net earnings available to
common shareholders $ 6,245 $ 7,472 $ 11,802 $ 13,792
------- ------- -------- --------
------- ------- -------- --------
Common shares outstanding:
Weighted average (as restated) 11,018 10,837 10,993 10,812
End of period 11,045 10,869 11,045 10,869
Net earnings per common share $ 0.57 $ 0.69 $ 1.07 $ 1.28
------- ------- -------- --------
------- ------- -------- --------
Cash dividends per share $ 0.24 $ 0.24 $ 0.48 $ 0.48
------- ------- -------- --------
------- ------- -------- --------
The accompanying notes are an integral part of these financial statements
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CASCADE NATURAL GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(dollars in thousands)
Mar 31, 1998 Sep 30, 1997
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ASSETS (unaudited)
S>
Utility Plant, net of accumulated
depreciation of $167,643 and $160,332 $263,384 $256,033
Construction work in progress 8,941 9,192
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272,325 265,225
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Other Assets:
Investments in non-utility property 667 668
Notes receivable, less current maturities 1,352 1,493
-------- --------
2,019 2,161
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Current Assets:
Cash and cash equivalents 4,117 3,162
Accounts receivable, less allowance of $600
and $529 for doubtful accounts 21,320 11,865
Current maturities of notes receivable 456 536
Materials, supplies and inventories 4,910 5,886
Prepaid expenses and other assets 4,163 7,382
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34,966 28,831
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Deferred Charges 10,678 11,486
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$319,988 $307,703
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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
and 10,966,732 shares $ 11,045 $ 10,967
Additional paid-in capital 97,381 96,142
Retained earnings 11,060 4,553
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119,486 111,662
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Redeemable Preferred Stocks, aggregate redemption
amount of $6,592 and $6,845 6,406 6,630
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Long-term Debt 111,150 121,150
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Current Liabilities:
Notes payable and commercial paper 1,000 12,900
Accounts payable 12,332 7,753
Property, payroll and excise taxes 5,979 3,958
Dividends and interest payable 7,393 6,691
Current maturities of long-term debt 10,000 -
Other current liabilities 8,440 3,680
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45,144 34,982
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Deferred Credits and Other:
Gas cost changes 9,221 6,290
Other 28,581 26,989
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37,802 33,279
-------- --------
Commitments and Contingencies - -
$319,988 $307,703
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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 CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
SIX MONTHS ENDED MARCH 31
-------------------------
1998 1997
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(dollars in thousands)
Operating Activities:
Net earnings $ 12,051 $ 14,047
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation and amortization 7,090 6,509
Amortization of gas cost changes (511) (1,719)
Decrease in deferred income taxes (300) (1,217)
Decrease in deferred investment tax credits (129) (117)
Cash provided (used) by changes in operating
assets and liabilities:
Current assets and liabilities 6,891 (6,201)
Gas cost changes 3,442 (11,713)
Other deferrals and non-current liabilities 1,976 1,147
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Net cash provided by operating activities 30,510 736
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Investing Activities:
Capital expenditures (14,878) (13,657)
Customer contributions in aid of construction 1,293 6,219
New consumer loans (332) (697)
Receipts on consumer loans 713 769
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Net cash used by investing activities (13,204) (7,366)
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Financing Activities:
Issuance of common stock 690 712
Redemption of preferred stock (224) (216)
Repayment of long-term debt (300)
Changes in notes payable and commercial paper, net (11,900) 13,000
Dividends paid (4,917) (4,894)
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Net cash provided (used) by financing activities (16,351) 8,302
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Net Increase in Cash and Cash Equivalents 955 1,672
Cash and Cash Equivalents:
Beginning of period 3,162 543
-------- ---------
End of period $ 4,117 $ 2,215
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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
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED MARCH 31, 1998
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 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 March 31, 1997, has been restated from 10,840,000 to
10,837,000 shares. For the six months ended March 31, 1997, the restatement is
from 10,814,000 to 10,812,000 shares. These restatements did not result in a
change in reported EPS.
During the quarter ended December 31, 1997, 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.
On March 4, 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
(SOP) 98-1, "ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED
FOR INTERNAL USE". Application of this SOP is required for financial statements
for fiscal years beginning after December 15, 1998. The SOP establishes criteria
for accounting for costs as operating expense when incurred, or as a capital
expenditure. It provides that internal and external cost 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 Company's current practice is to capitalize certain costs which under
the provisions of SOP 98-1 would be expensed. Therefore, when the Company
adopts the SOP, the Company will capitalize less of the cost of projects to
develop or acquire software, and charge more cost to operating expense than is
currently done. The materiality of this change is dependent upon the magnitude
of the costs of specific software development or acquisition projects incurred
in any period.
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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 and cash flows for the three and six month periods ended
March 31, 1998 and March 31, 1997.
RESULTS OF OPERATIONS
Net earnings available to common shareholders (earnings) for the second
quarter of fiscal 1998 (quarter ended March 31, 1998) were $6,245,000, or $0.57
per share, compared to $7,472,000, or $0.69 per share, for the quarter ended
March 31, 1997. For the six months ended March 31, 1998, earnings were
$11,802,000, or $1.07 per share, compared to $13,792,000, or $1.28 per share,
for the six-month period ended March 31, 1997. The decrease in earnings, for
both the three and six month periods, is primarily attributable to lower
operating margins, stemming from warmer weather and the resulting decreases in
per customer gas consumption during the winter heating season.
OPERATING MARGIN
RESIDENTIAL AND COMMERCIAL MARGIN. Operating margins derived from sales to
residential and commercial customers were as set forth in the following table:
Residential and Commercial Operating Margin
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Second Quarter of Fiscal Six Months ended March 31
1998 1997 Change 1998 1997 Change
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(dollars in thousands)
Degree Days 2,109 2,327 (9.4%) 4,089 4,518 (9.5%)
Average Number of Customers
Residential 143,865 136,175 5.6% 142,229 134,534 5.7%
Commercial 25,611 24,925 2.8% 25,363 24,664 2.8%
Average Therm Usage per Customer
Residential 306 339 (9.7%) 572 642 (10.9%)
Commercial 1,450 1,703 (14.9%) 2,837 3,235 (12.3%)
Operating Margin
Residential $ 11,811 $ 12,009 (1.6%) $ 22,163 $ 22,521 (1.6%)
Commercial $ 7,204 $ 8,107 (11.1%) $ 14,204 $ 15,306 (7.2%)
For the quarter ended March 31, 1998, operating margin from sales to
residential and commercial customers decreased by $1,101,000 from last year. 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 9.4% warmer than the prior year and 10.9% warmer than normal. Weather for
the fiscal 1997 second quarter was only 1.7% warmer than normal. This lower
consumption resulted in a margin decline of approximately $2.4 million.
Partially offsetting this weather-related reduction were the increased number of
customers and an increase of $1 per month in the monthly service charge paid by
each customer in Washington.
On a fiscal year to date (six months) basis, similar factors affected the
comparisons of margins from residential and commercial customers. The margin
reduction resulting from lower average consumption is approximately $4.0
million, which was partially offset by increases in the number of customers and
monthly service charges.
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The effect on earnings per share of this lower average consumption was
approximately $0.14 for the quarter and $0.23 year to date.
INDUSTRIAL AND OTHER MARGIN. Operating margin from industrial and other
customers increased $422,000, or 5.6%, quarter to quarter, and $713,000, or
4.6%, for the six-month period. These increases are primarily due to increased
gas consumption by four of the Company's five cogeneration customers. During a
significant portion of fiscal 1997, these customers had significantly reduced or
curtailed their operations because of reduced demand for electricity. The
addition of several smaller industrial customers also contributed to improvement
in operating margins. These margin improvements were partially offset by a rate
reduction equivalent to the amount derived from the previously mentioned
increase in monthly service charge revenue from residential and commercial
customers in Washington. This shift in rate responsibility was allowed in the
1996 agreement with the WUTC in settlement of the rate case effective August 1,
1996.
COST OF OPERATIONS
Cost of operations for the quarter ended March 31, 1998, which consists of
operating expenses, depreciation and amortization, and property and payroll
taxes, increased $905,000 or 6.7% over the quarter ended March 31, 1997. For the
six month period ended March 31, 1998, the increase was $1,642,000, or 6.2%.
OPERATING EXPENSES, which are primarily labor and benefits expenses,
increased by $212,000, or 2.3%, for the quarter, and $588,000, or 3.2%, for the
six month period. Most of the increase is attributable to higher labor expense,
which accounted for $149,000 and $350,000 of the quarterly and fiscal year to
date increases, respectively.
DEPRECIATION AND AMORTIZATION increased by $314,000 (9.6%) for the quarter,
and $581,000 (8.9%) for the six-month period. These increases are attributable
to increases in utility plant.
PROPERTY AND PAYROLL TAXES increased by $379,000 (45.4%) for the quarter,
and $473,000 (25.4%) year to date. The increase is primarily related to the
timing of recognition of property tax reductions in Oregon. Beginning in 1991,
and resulting from a voter mandate (Ballot Measure 5), Oregon property tax rates
decreased each year for a five year period. For each of those five years, the
OPUC required regulated energy utilities to measure and defer in a regulatory
liability account, the effect of the resulting property tax reductions. Each
year from 1994 to 1997, the Company reduced its customer rates to reflect the
lower tax expense incurred, and to refund the deferred amounts to its customers.
Concurrent with the rate reductions, the Company recorded credits to property
tax expense, which amortized the deferrals in amounts equivalent to the reduced
revenue. Accordingly there was no net effect on earnings. The amortization was
substantially completed in November 1997. The resulting effect on property tax
expense is an increase of $290,000 for the fiscal 1998 second quarter, and
$262,000 year to date.
Normal tax increases related to asset additions accounted for most of the
remaining increase.
INTEREST AND OTHER DEDUCTIONS
Interest and other deductions for the quarter increased $166,000, or 7.4%,
from the quarter ended March 31, 1997. For the six month period, the increase
was $319,000, or 7.0%. The increases are due primarily to increases in the
amount of outstanding long-term debt, partially offset by lower short-term debt
and lower interest accrued on deferred gas cost balances.
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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 March 31,
1998, $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 March 31, 1998, 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
Even though net earnings for the first half of fiscal 1998 are
approximately $2 million less than for the 1997 period, net cash provided by
operating activities was $30,510,000, compared to $736,000 for the six months
ended March 31, 1997. The comparison is affected primarily by two unusual
factors in the fiscal 1997 period. First, cash flow from operations was
significantly depressed during fiscal 1997 due to higher prices paid for gas
during the 1996 - 1997 heating season. Gas prices during fiscal 1998 have been
more normal.
Also affecting operating cash flow for fiscal 1997 was the negative cash
flow from changes in current assets and liabilities. This was primarily
attributable to payment during the first quarter of fiscal 1997 of accounts
payable accruals as of September 30, 1996. This accounts payable balance
included amounts accrued for August 1996 business which were not settled until
after the end of September; such amounts are normally settled in less than 30
days.
INVESTING ACTIVITIES
Cash used by investing activities for the six months ended March 31, 1998
was $13,204,000, compared to $7,366,000 for last year. The comparison is
affected by the unusually high amount of customer contributions in aid of
construction received in the first quarter of fiscal 1997. 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 debt and equity
financing.
FINANCING ACTIVITIES
Financing activities for the six months ended March 31, 1998 resulted in a
net use of cash of $16,351,000, compared to a provision of cash of $8,302,000
for the comparable period last year. During the 1997 period, the Company
incurred a $13 million increase in short-term debt to fund the operating cash
shortfall. The more normal operating cash flow in the current year allowed an
$11,900,000 reduction in short-term debt during the period.
TECHNOLOGY RISK - YEAR 2000
Many of the Company's existing computer programs use only two digits to
identify a year. These programs were developed without considering the impact of
the upcoming change in the century. If not
9
corrected, many computer applications could fail or produce erroneous data by
or at the Year 2000. The Year 2000 Issue affects virtually all businesses.
Cascade began in 1996 identifying computer systems requiring modification
or replacement to mitigate problems associated with the Year 2000 Issue.
Management believes that the Company has identified all of its systems which are
critical to the Company's operations, and which are not year 2000 compliant. The
Company is proceeding on a plan to replace or modify existing systems, so that
normal business operations will not be disrupted by the processing of dates from
January 1, 2000 and beyond.
The Company has been using a combination of internal and external resources
to make the necessary modifications to existing systems. To date, external
spending has amounted to approximately $100,000, and is not expected to exceed
$500,000. These costs are charged to expense as incurred. The cost associated
with using internal resources is viewed primarily as an opportunity cost,
resulting in a delay of other planned system upgrades and replacements. In
addition the Company plans capital expenditures of approximately $1.45 million
to replace an existing system sooner than otherwise planned. Without the Year
2000 Issue, this system would have been replaced, due to obsolescence, within
the next one to two years. Based on these estimates, management believes costs
associated with mitigating the Year 2000 Issue will not have a material adverse
effect on the Company's earnings, cash flow, or liquidity.
There is also a risk that the Company's customers or suppliers may have
computer systems which are not compliant with year 2000 requirements.
Disruptions in the operations of customers or suppliers could have an adverse
effect on the Company. The Company is in the process of contacting its major
customers and suppliers to gather information regarding the status of their year
2000 systems compliance. However there can be no assurance that such customer
and supplier systems will be compliant
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
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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 net worth of $86,564,000. Under the most restrictive of these
agreements, approximately $32,922,000 was available for payment of dividends as
of March 31, 1998.
ITEM 5. OTHER INFORMATION
Ratio of Earnings to Fixed Charges:
Twelve Months Ended
- -----------------------------------------------------------------------
3/31/98 9/30/97 9/30/96 12/31/95 12/31/94 12/31/93
------- ------- ------- -------- -------- --------
2.36 2.68 2.17 2.16 2.07 2.86
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
--- -----------
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, 1998.
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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
Vice President - Finance and Chief Financial Officer
(Principal Financial Officer)
Date: May 13, 1998
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