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, 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 January 31, 1999
CASCADE NATURAL GAS CORPORATION
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Index
Page No.
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 11
Part II. Other Information
Item 2. Changes in Securities 12
Item 4. Submission of Matters to a Vote of Security Holders. 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 13
Signature 14
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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
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Dec 31, 1998 Dec 31, 1997
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(thousands except per share data)
Operating revenues $62,917 $60,984
Less: Gas purchases 32,016 31,694
Revenue taxes 3,739 3,747
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Operating margin 27,162 25,543
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Cost of operations:
Operating expenses 9,417 9,361
Depreciation and amortization 3,148 3,490
Property and payroll taxes 1,159 1,121
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13,724 13,972
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Earnings from operations 13,438 11,571
Less interest and other
deductions - net 2,622 2,484
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Earnings before income taxes 10,816 9,087
Income taxes 4,062 3,405
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Net earnings 6,754 5,682
Preferred dividends 123 125
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Net earnings available to
common shareholders $ 6,631 $ 5,557
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Common shares outstanding:
Weighted average 11,045 10,980
End of period 11,045 11,006
Net earnings per common share (Basic & Diluted) $ 0.60 $ 0.51
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Cash dividends per share $ 0.24 $ 0.24
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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 BALANCE SHEETS
(Dollars in Thousands)
Dec 31, 1998 Sep 30, 1998
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ASSETS (Unaudited)
Utility Plant, net of accumulated
depreciation of $170,532 and $167,356 $ 270,667 $ 266,212
Construction work in progress 8,742 10,394
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279,409 276,606
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Other Assets:
Investments in non-utility property 667 667
Notes receivable, less current maturities 870 1,006
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1,537 1,673
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Current Assets:
Cash and cash equivalents 173 2,338
Accounts receivable, less allowance of $718
and $645 for doubtful accounts 29,675 9,271
Current maturities of notes receivable 276 329
Materials, supplies and inventories 5,836 6,213
Prepaid expenses and other assets 4,997 5,122
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40,957 23,273
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Deferred Charges 9,541 9,959
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$ 331,444 $ 311,511
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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 11,045,095 shares $ 11,045 $ 11,045
Additional paid-in capital 97,380 97,380
Retained earnings 6,983 3,003
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115,408 111,428
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Redeemable Preferred Stocks, aggregate redemption
amount of $6,338 and $6,592 6,186 6,408
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Long-term Debt 110,650 110,650
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Current Liabilities:
Notes payable and commercial paper 23,713 6,929
Accounts payable 15,371 10,206
Property, payroll and excise taxes 5,351 4,570
Dividends and interest payable 4,995 7,407
Current maturities of long-term debt - 10,000
Other current liabilities 7,801 3,681
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57,231 42,793
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Deferred Credits and Other:
Gas cost changes 11,699 10,330
Other 30,270 29,902
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41,969 40,232
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Commitments and Contingencies - -
$ 331,444 $ 311,511
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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)
THREE MONTHS ENDED
-------------------------------------
Dec 31, 1998 Dec 31, 1997
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(dollars in thousands)
OPERATING ACTIVITIES:
Net earnings $ 6,754 $ 5,682
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation and amortization 3,148 3,490
Amortization of gas cost changes 93 (773)
Increase (decrease) in deferred income taxes 314 (146)
Decrease in deferred investment tax credits (61) (64)
Cash provided (used) by changes in operating assets and liabilities:
Current assets and liabilities (12,280) 3,656
Gas cost changes 1,276 442
Other deferrals and non-current liabilities 616 986
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Net cash (used) provided by operating activities (140) 13,273
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INVESTING ACTIVITIES:
Capital expenditures (6,521) (8,854)
Customer contributions in aid of construction 485 1,125
New consumer loans (5) (282)
Receipts on consumer loans 227 319
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Net cash used by investing activities (5,814) (7,692)
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FINANCING ACTIVITIES:
Issuance of common stock - 321
Redemption of preferred stock (222) (219)
Repayment of long-term debt (10,000) -
Changes in notes payable and commercial paper, net 16,785 (6,200)
Dividends paid (2,774) (2,422)
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Net cash provided (used) by financing activities 3,789 (8,520)
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NET DECREASE IN CASH AND CASH EQUIVALENTS (2,165) (2,939)
CASH AND CASH EQUIVALENTS:
Beginning of period 2,338 3,162
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End of period $ 173 $ 223
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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 MONTHS ENDED DECEMBER 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 1998 Annual Report on Form 10-K for the fiscal year ended
September 30, 1998, and comments included therein under "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
NEW ACCOUNTING STANDARDS:
As of the first quarter of fiscal 1999, the Company adopted Statement of
Financial Accounting Standards (FAS) Nos. 130, 131, and 132.
FAS No. 130, entitled "REPORTING COMPREHENSIVE INCOME," requires companies
to (a) classify items of other comprehensive income by their nature in a
financial statement, and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional
paid-in-capital in the equity section of a statement of financial position.
The Company does not have other comprehensive income, therefore
implementation of this standard has not affected the reporting of its
financial information.
FAS No. 131, entitled "DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION," requires public enterprises to report financial and
descriptive information on the basis that is used internally for evaluating
segment performance and deciding how to allocate resources to segments.
Management views the Company as operating as a single segment, that of a local
distribution company (LDC) in the Pacific Northwest. Modified disclosures will
be included in the year-end financial statements.
FAS No. 132, entitled "EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER
POSTRETIREMENT BENEFITS." This standard modifies the disclosure requirements
for pensions and other postretirement benefits, but does not affect the
measurement of such benefits. These modified disclosures will be included in the
Company's year-end financial statement footnotes.
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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 month periods ended December
31, 1998 and December 31, 1997.
RESULTS OF OPERATIONS
Net earnings available to common shareholders for the first quarter of
fiscal 1999 (quarter ended December 31, 1998) was $6,631,000, or $0.60 per
share, compared to $5,557,000, or $0.51 per share, for the quarter ended
December 31, 1997. This represents an 18% improvement in first quarter earnings
per share over first quarter 1998 results. Improvements in results for the
quarter are primarily attributable to increases in operating margins.
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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First Quarter of Fiscal Percent
1999 1998 Change
- ------------------------------------------------------------------
(dollars in thousands)
DEGREE DAYS 2,015 1,980 1.8%
AVERAGE NUMBER OF CUSTOMERS
Residential 147,710 140,675 5.0%
Commercial 25,988 25,115 3.5%
AVERAGE THERM USAGE PER CUSTOMER
Residential 281 266 5.8%
Commercial 1,359 1,386 -1.9%
OPERATING MARGIN
Residential $11,609 $10,352 12.1%
Commercial $7,333 $7,000 4.8%
For the quarter ended December 31, 1998, operating margin from sales to
residential and commercial customers increased by $1,590,000 from the same
period last year. The primary factors contributing to this improvement were
the addition of 7,900 new customers and an increase of $1 per month in the
monthly service charge paid by each customer in Washington. Increased
residential consumption per customer also contributed to the improved
quarterly margins.
INDUSTRIAL AND OTHER MARGIN. Operating margin from industrial and other
customers increased $29,000, or 0.35%, quarter to quarter. This is due to
increased consumption in the first quarter of fiscal 1999 by the electric
generation customers. Margin improvements from industrial customers were
partially offset by a rate reduction equivalent to the increase in monthly
service charges as described above, and a $519,000 decline in spot sales
activity.
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COST OF OPERATIONS
Cost of operations for the quarter ended December 31, 1998, which
consists of operating expenses, depreciation and amortization, and property
and payroll taxes, decreased $248,000 or 1.8% over the quarter ended
December 31, 1997.
OPERATING EXPENSES, which are primarily labor and benefits expenses,
increased by $56,000, or 0.6%, for the quarter. Labor and benefits expenses
increased by $288,000 or 3.4%, of which $98,000 is attributable to one time
costs associated with management restructuring. Additional one-time costs of
$221,000 for restructuring accomplished to date will be recognized in the
second quarter. Ongoing savings resulting from the restructuring are
expected to be $343,000 annually ($234,000 in fiscal 1999). Also contributing
to this increase are normal wage and salary rate adjustments. These increases
were offset almost entirely by reductions in administrative and other expense
categories due to various cost reduction initiatives.
DEPRECIATION AND AMORTIZATION decreased by $342,000, or 9.8%, for the
quarter. This decrease is attributable to lower depreciation rates resulting
from a recently conducted depreciation study.
PROPERTY AND PAYROLL TAXES increased by $38,000, or 3.4%, for the
quarter. 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 which was substantially completed in
November 1997, affected the comparison by $110,000. Property taxes in the
state of Washington were reduced by $32,000 for the quarter as a result of
agreement by taxing authorities to reduce assessed value of taxable property.
INTEREST AND OTHER DEDUCTIONS
Interest and other deductions for the quarter increased $138,000, or
5.6%, for the quarter. The increases are due primarily to increases in
short-term debt, as well as higher interest accrued on deferred gas cost
balances.
LIQUIDITY AND CAPITAL RESOURCES
The seasonal nature of the Company's business creates short-term cash
requirements to finance customer accounts receivable and construction
expenditures. To provide working capital for these requirements, the Company
has a revolving credit commitment of $40 million from three banks. This
agreement expires in September 2000. The annual commitment fee is 1/8 of 1%,
and the committed lines of credit also support a money market facility and a
commercial paper facility of a similar amount. The Company also has $30
million of uncommitted lines from three banks. A non-regulated subsidiary has
a $1.5 million revolving credit facility that expires in December 2000 of
which $650,000 was outstanding at December 31, 1998.
Longer term financing is provided by a Medium-Term Note program with
$110 million outstanding at December 31, 1998. There is remaining $30 million
registered under the Securities Act of 1933 and available
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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
Although net earnings for the quarter ended December 31, 1998 were higher
by $1,072,000 than the 1997 period, net cash used by operating activities was
$140,000, compared to net cash provided of $13,273,000 for the same period in
1997.
Affecting operating cash flow for the quarter ended December 31, 1998 was
the negative cash flow from changes in current assets and liabilities. This was
primarily due to the timing of cash receipts and disbursements related to
accrued receivable and payable amounts.
INVESTING ACTIVITIES
Cash used by investing activities for the quarter ended December 31, 1998
was $5,814,000, compared to $7,692,000 for the prior year's quarter. The
comparison is affected by lower capital expenditures in the first quarter of
fiscal 1999.
Capital expenditures for fiscal 1999 are budgeted at approximately $23.5
million. This is slightly less than fiscal 1998 actual expenditures. The Company
expects that 1999 capital expenditures will be financed approximately 65% from
operating activities, and 35% from debt financing.
FINANCING ACTIVITIES
Financing activities for the quarter ended December 31, 1998 resulted in a
net cash inflow of $3,789,000, compared to a net use of $8,520,000 for the
comparable period last year. During the first quarter of fiscal 1999, the
Company redeemed $10 million of medium term notes, which matured in December.
This redemption was funded with short-term debt. Additional short-term debt was
issued to fund capital expenditures and dividend payments. The Company expects
to issue more medium term notes in 1999, the timing of which will be based on
favorable rates availability.
TECHNOLOGY RISK - YEAR 2000
Cascade is heavily reliant on computers for internal and external
information processing. Computers are used extensively in the Company's
system for payroll, accounts receivable, accounts payable, performing
critical analysis, financial reporting and e-mail communications. To mitigate
potential problems associated with this issue, Cascade began in 1996 to
address the Y2K compliance of those computers and systems that are critical
to business operations.
Risks
The Company has contacted suppliers and customers with whom it has
significant business relationships regarding year 2000 compliance. Although
response to these notifications are not yet complete, the company has not
received indication that any major third party will have significant year 2000
compliance problems that would adversely affect its ability to conduct business
with Cascade.
The Company has not yet received assurance from interstate pipeline
companies that adequate backup measures are in place in the event of a failure
of computer systems, but management is continuing to follow up on this issue.
In the event that internal computer systems fail due to year 2000
compliance problems, business processes that may be interrupted include:
monitoring of gas flow and pressure; measurement of gas receipts from
suppliers and deliveries to customers; processing customer invoices; payments
to suppliers; financial measurement and reporting; internal and external
communications; payroll processing; and
9
various other administrative functions. Management has not developed
estimates of losses that may be incurred in the event of a failure of one or
more of these systems.
Cascade presently does not anticipate major interruptions in its
business as a result of year 2000 issues. However, it is possible that
disruptions in such services as telecommunications, banking, or
transportation may occur and may have a negative effect on the Company's
operations, business and financial condition.
State of Readiness
In 1996 the Company began identifying which of its computer systems
required modification or replacement to achieve year 2000 compliance.
Management believes that substantially all mission critical systems have been
identified. Approximately 95% of the Company's personal computers, and
embedded building and office systems have been modified as necessary, tested,
and verified to be compliant. Various vendor based software has been or will
be upgraded or replaced, including financial, meter reading, and SCADA (the
system that monitors natural gas flow through the distribution system)
systems. Corrections to critical internally developed software, including
billing, cash receipts processing, and payroll, are approximately 80%
complete, and are expected to be completed and tested by June 1999. All
internal systems are targeted to be fully compliant by August 1999.
Costs of Year 2000 Compliance
The Company has been using a combination of internal and external
resources to make necessary modifications to existing internally developed
systems. To date, external spending has been less than $100,000, and the
Company intends to complete this process with internal resources. Such 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 enhancements and replacements intended to enhance
operating efficiencies.
In addition, the Company's capital expenditures to replace non-compliant
vendor based systems sooner than otherwise necessary is expected to total
approximately $1.9 million. Of this amount, approximately $610,000 has been
spent to date. Although year 2000 compliance is the primary motivating
factor for the current schedule for these system replacements, management
anticipates other significant improvements in these systems compared to the
old systems.
Although the costs and completion dates discussed above are based on
management's best estimates, actual results may differ from expectations.
Contingency Plan
The Company has developed, and continues to update, a year 2000
contingency plan. The plan addresses backup and recovery procedures and
business processes that are critical to operations. The plan also covers
contingency trigger points, and identifies roles of key individuals in the
event of system failure. Management believes the most likely worst case
scenario to be the possibility that necessary program code modifications of
legacy computer systems may have been overlooked, resulting in system
failure. The response to such an event is the dedication of available
programming staff to correct the problem.
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
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uncertainties with respect to the Company include, among others, its ability
to successfully implement internal performance goals, misjudgments in
assessing the Company's year 2000 compliance requirements and risks,
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
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. Cascade 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.
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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 $87,518,000. Under the most restrictive of
these agreements, approximately $27,890,000 was available for payment of
dividends as of December 31, 1998.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 1999 annual meeting of the Shareholders of the Corporation was held on
January 28, 1999. The following directors were elected at the meeting for terms
of office expiring in 2000 by the vote indicated below:
For Withheld
--------- ---------
Carl Burnham, Jr 9,574,639 134,260
Melvin C. Clapp 9,572,201 136,598
Thomas E. Cronin 9,566,005 142,794
David A. Ederer 9,579,074 129,725
Howard L. Hubbard 9,566,140 142,659
W. Brian Matsuyama 9,573,301 136,498
Larry L. Pinnt 9,570,521 138,278
Brooks G. Ragen 9,569,233 139,566
Mary A. Williams 9,569,832 138,967
In addition, the proposed Cascade Natural Gas Corporation 1998 Stock
Incentive Plan providing for up to 150,000 shares of Common Stock of the Company
subject to award agreements received votes as follows:
Approve Withheld Exceptions
--------- -------- ----------
8,656,791 841,313 210,695
ITEM 5. OTHER INFORMATION
Ratio of Earnings to Fixed Charges:
Twelve Months Ended
- -----------------------------------------------------------------------------------------
12/31/98 9/30/98 9/30/97 9/30/96 12/31/95 12/31/94
2.57 2.42 2.68 2.17 2.16 2.07
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.
12
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
December 31, 1998.
13
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:
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J. D. Wessling
Sr. Vice President Finance and Chief Financial Officer
(Principal Financial Officer)
Date: February 12, 1998
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