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, 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 July 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 NINE MONTHS ENDED
June 30 June 30
---------------------- ----------------------
1998 1997 1998 1997
------- ------- -------- --------
(thousands except per share data)
Operating revenues $36,995 $33,730 $163,527 $169,875
Less: Gas purchases 19,150 17,003 85,098 91,335
Revenue taxes 2,377 2,314 10,471 10,890
------- ------- -------- --------
Operating margin 15,468 14,413 67,958 67,650
------- ------- -------- --------
Cost of operations:
Operating expenses 9,297 8,983 28,191 27,289
Depreciation and amortization 3,655 3,445 10,745 9,954
Property and payroll taxes 1,149 1,027 3,483 2,889
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14,101 13,455 42,419 40,132
------- ------- -------- --------
Earnings from operations 1,367 958 25,539 27,518
Less interest and other
deductions - net 2,400 2,241 7,299 6,821
------- ------- -------- --------
Earnings (loss) before income taxes (1,033) (1,283) 18,240 20,697
Income taxes (370) (274) 6,852 7,659
------- ------- -------- --------
Net earnings (loss) (663) (1,009) 11,388 13,038
Preferred dividends 124 128 373 383
------- ------- -------- --------
Net earnings (loss) available to
common shareholders $ (787) $(1,137) $ 11,015 $ 12,655
------- ------- -------- --------
------- ------- -------- --------
Common shares outstanding:
Weighted average (as restated) 11,045 10,880 10,998 10,827
End of period 11,045 10,912 11,045 10,912
Net earnings (loss) per common share $ (0.07) $ (0.10) $ 1.00 $ 1.17
------- ------- -------- --------
------- ------- -------- --------
Cash dividends per share $ 0.24 $ 0.24 $ 0.72 $ 0.72
------- ------- -------- --------
------- ------- -------- --------
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)
Jun 30, 1998 Sep 30, 1997
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ASSETS (Unaudited)
Utility Plant, net of accumulated
depreciation of $170,928 and $160,332 $ 265,329 $ 256,033
Construction work in progress 9,083 9,192
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274,412 265,225
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Other Assets:
Investments in non-utility property 667 668
Notes receivable, less current maturities 1,174 1,493
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1,841 2,161
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Current Assets:
Cash and cash equivalents 2,972 3,162
Accounts receivable, less allowance of $660
and $529 for doubtful accounts 11,159 11,865
Current maturities of notes receivable 387 536
Materials, supplies and inventories 5,904 5,886
Prepaid expenses and other assets 5,632 7,382
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26,054 28,831
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Deferred Charges 10,317 11,486
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$ 312,624 $ 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 7,621 4,553
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116,047 111,662
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Redeemable Preferred Stocks, aggregate redemption
amount of $6,592 and $6,845 6,408 6,630
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Long-term Debt 110,650 121,150
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Current Liabilities:
Notes payable and commercial paper 4,482 12,900
Accounts payable 10,286 7,753
Property, payroll and excise taxes 4,188 3,958
Dividends and interest payable 5,150 6,691
Current maturities of long-term debt 10,000 -
Other current liabilities 4,931 3,680
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39,037 34,982
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Deferred Credits and Other:
Gas cost changes 11,311 6,290
Other 29,171 26,989
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40,482 33,279
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Commitments and Contingencies - -
$ 312,624 $ 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)
NINE MONTHS ENDED JUNE 30
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1998 1997
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(dollars in thousands)
OPERATING ACTIVITIES:
Net earnings $ 11,388 $ 13,038
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation and amortization 10,745 9,954
Amortization of gas cost changes (450) (2,202)
Increase (decrease) in deferred income taxes 451 (1,364)
Decrease in deferred investment tax credits (194) (194)
Cash provided (used) by changes in operating assets and liabilities:
Current assets and liabilities 5,231 (8,382)
Gas cost changes 5,471 (11,166)
Other deferrals and non-current liabilities 2,209 2,278
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Net cash provided by operating activities 34,851 1,962
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INVESTING ACTIVITIES:
Capital expenditures (20,998) (20,162)
Customer contributions in aid of construction 1,578 6,418
New consumer loans (332) (858)
Receipts on consumer loans 853 1,176
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Net cash used by investing activities (18,899) (13,426)
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FINANCING ACTIVITIES:
Issuance of common stock 690 1,112
Redemption of preferred stock (222) (216)
Repayment of long-term debt (500) (300)
Changes in notes payable and commercial paper, net (8,418) 21,477
Dividends paid (7,692) (7,359)
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Net cash provided (used) by financing activities (16,142) 14,714
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (190) 3,250
CASH AND CASH EQUIVALENTS:
Beginning of period 3,162 543
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End of period $ 2,972 $ 3,793
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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 NINE MONTHS ENDED JUNE 30, 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 June 30, 1997, has been restated from 10,883,000 to
10,880,000 shares. For the nine months ended June 30, 1997, the restatement is
from 10,828,000 to 10,827,000 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 OPERATIONS
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 nine month periods ended
June 30, 1998 and June 30, 1997.
RESULTS OF OPERATIONS
The net loss to common shareholders for the quarter ended June 30, 1998
was $787,000, or $0.07 per share, compared to $1,137,000, or $0.10 per share,
for the quarter ended June 30, 1997. For the nine months ended June 30, 1998,
net earnings available to common shareholders were $11,015,000, or $1.00 per
share, compared to $12,655,000, or $1.17 per share, for the nine-month period
ended June 30, 1997. Due to the seasonal nature of the business, the Company
normally incurs a loss in the third and fourth fiscal quarters. The improvement
in results for the quarter are primarily attributable to increases in operating
margins. The decline in earnings for the nine month period is mainly due 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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Third Quarter of Fiscal Nine Months ended June 30
1998 1997 Change 1998 1997 Change
- -------------------------------------------------------------------------------- -------------------------------------------
(dollars in thousands)
DEGREE DAYS 797 833 (4.3%) 4,886 5,351 (8.7%)
AVERAGE NUMBER OF CUSTOMERS
Residential 143,430 135,659 5.7% 142,560 134,909 5.7%
Commercial 25,544 24,796 3.0% 25,411 24,708 2.8%
AVERAGE THERM USAGE PER CUSTOMER
Residential 122 119 2.5% 694 760 (8.7%)
Commercial 696 689 1.0% 3,532 3,921 (9.9%)
OPERATING MARGIN
Residential $ 5,327 $ 4,651 14.5% $ 27,490 $ 27,172 1.2%
Commercial $ 3,493 $ 3,285 6.3% $ 17,697 $ 18,591 (4.8%)
For the quarter ended June 30, 1998, operating margin from sales to
residential and commercial customers increased by $884,000 from last year. The
primary factors contributing to this improvement were the increased number of
customers and an increase of $1 per month in the monthly service charge paid by
each customer in Washington. Increased gas use per customer also contributed to
the improved quarterly margins.
On a fiscal year to date basis, operating margin from sales to residential
and commercial customers decreased by $576,000 from last year. Warmer weather
during the 1997 - 1998 winter heating season resulted in significantly lower
gas use per customer. The year to date margin reduction from this lower
consumption is approximately $3.8 million. The effect on year to date earnings
of the lower average consumption was approximately $0.22 per share.
Substantially offsetting the effects of weather were increases in the number of
customers and the increase in monthly service charge per customer.
INDUSTRIAL AND OTHER MARGIN. Operating margin from industrial and other
customers increased $171,000, or 2.6%, quarter to quarter, and $884,000, or
4.0%, for the nine-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, four of these customers had significantly
reduced or curtailed
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their operations because of reduced demand for electricity. The addition of
several smaller industrial customers also contributed to improvement in
operating margins. Margin improvements from industrial customers 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 June 30, 1998, which consists of
operating expenses, depreciation and amortization, and property and payroll
taxes, increased $646,000 or 4.8% over the quarter ended June 30, 1997. For the
nine month period ended June 30, 1998, the increase was $2,287,000, or 5.7%.
OPERATING EXPENSES, which are primarily labor and benefits expenses,
increased by $314,000, or 3.5%, for the quarter, and $902,000, or 3.3%, for the
nine month period. Increased labor expense accounted for $120,000 and $470,000
of the quarterly and fiscal year to date increases, respectively.
DEPRECIATION AND AMORTIZATION increased by $210,000, or 6.1%, for the
quarter, and $791,000, or 7.8%, for the nine-month period. These increases are
attributable to utility plant additions.
PROPERTY AND PAYROLL TAXES increased by $122,000, or 11.9%, for the
quarter, and $594,000 or 20.6%, 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 Oregon Public Utility Commission 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 $152,000 for the fiscal 1998 third quarter, and
$414,000 year to date.
INTEREST AND OTHER DEDUCTIONS
Interest and other deductions for the quarter increased $159,000, or 7.1%,
from the quarter ended June 30, 1997. For the nine month period, the increase
was $478,000, 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.
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 of $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 June 30, 1998,
$650,000 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 June 30, 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
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issue long-term debt and additional equity, management believes it has
adequate financial flexibility to meet its anticipated cash needs.
OPERATING ACTIVITIES
Although net earnings for the first nine months of fiscal 1998 were lower
by approximately $1.65 million than the 1997 period, net cash provided by
operating activities was $34,851,000, compared to $1,962,000 for the nine
months ended June 30, 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 not
experienced significant abnormalities.
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. Those amounts would normally have been settled in
less than 30 days.
INVESTING ACTIVITIES
Cash used by investing activities for the nine months ended June 30, 1998
was $18,899,000, compared to $13,426,000 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 which was
related to a project completed in fiscal 1996.
Capital expenditures for fiscal 1998 are expected to be approximately $26
million, a reduction of $5 million from the original budget. The reductions are
the result of lower than expected costs of main extensions to serve new
residential and commercial customers, and the decision to postpone certain
system reinforcement, replacement, and support facility projects. The Company
expects that 1998 capital expenditures will be financed approximately 50% from
operating activities, and 50% from debt financing.
FINANCING ACTIVITIES
Financing activities for the nine months ended June 30, 1998 resulted in a
net cash outflow of $16,142,000, compared to a provision of cash of $14,714,000
for the comparable period last year. During the 1997 period, the Company
incurred a $21.5 million increase in short-term debt to fund the operating cash
shortfall. The more normal operating cash flow in the current fiscal year
allowed an $8.4 million reduction in short-term debt during the period.
TECHNOLOGY RISK - YEAR 2000
Many of the Company's existing computer programs were developed to 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 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. A plan to replace or modify existing systems is being followed, to
achieve completion before December 31, 1999, 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 less than $100,000, and is not expected to
exceed $500,000. These costs are charged to expense as incurred. The
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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 $1.9 million to replace certain existing systems sooner than
otherwise planned. Without the Year 2000 Issue, these systems 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 $29,483,000 was available for payment of
dividends as of June 30, 1998.
ITEM 5. OTHER INFORMATION
Ratio of Earnings to Fixed Charges:
Twelve Months Ended
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6/30/98 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
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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 June 30, 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:
------------------------------------------------
J. D. Wessling
Vice President Finance and Chief Financial Officer
(Principal Financial Officer)
Date: August 13, 1998
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