Cascade Natural Gas Corporation

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Cascade Natural Gas Corporation

222 Fairview Avenue North
Seattle, Washington 98109-5312
U.S.A.
(206) 624-3900
Fax: (206) 624-7215

Public Company
Incorporated: 1953
Employees: 466
Sales: $152.46 million
Stock Exchanges: New York
SICs: 4924 Natural Gas Distribution

Cascade Natural Gas Corporation is a gas distribution company that serves more than 100,000 customers in nearly 90 communities located throughout Washington and Oregon. Cascade primarily serves the smaller communities in this region, eschewing the more densely populated cites, such as Seattle, Tacoma, and Spokane.

In the early 1950s, business leaders and public officials in the Pacific Northwest initiated a campaign to bring natural gas to the region to replace gas and other fuels that had been steadily rising in price over the past 20 years. As an alternative fuel, natural gas afforded additional benefits beyond its cheaper cost to both industrial and residential users. Scientists by this time had discovered over 25,000 industrial applications for natural gas, a form of fuel featuring greater combustion efficiency and requiring neither storage facilities nor vaporization and atomization processes. Residential customers were attracted to the convenience and cleanliness of natural gas. In an attempt to tap into this burgeoning demand for natural gas, five gas companies serving 15 communities in Washington, Oregon, and Idaho, merged in 1953 to form Cascade Natural Gas Corporation. The five companies, Bellingham Gas Co., Bremerton Gas Co., Wen-atchee Gas Co., Northwest Cities Gas Co., and Consolidated Gas Co., possessed combined assets of $2.67 million and served between 10,000 and 11,000 customers. Stewart Matthews was selected as the corporation’s first president and C. Spencer Clark as its board chairperson.

From the corporation’s outset it only attempted to secure those markets located outside large population centers, focusing on smaller, rural communities scattered throughout the region. Natural gas came to the area predominately from the Peace River area of northern British Columbia in Canada and the San Juan Basin fields in Colorado and New Mexico, both of which Cascade drew from, although it relied more heavily on the gas originating from Canada. This dependence on Canadian gas, a source that would support the corporation’s supply for much of its existence, was not the only connection between the newly formed consortium of gas companies and Canada. One of the principal backers of the merger was Pacific Petroleums Ltd., a Canadian company that held roughly 25 percent of Cascade’s outstanding stock during it first year.

By the end of 1954, Cascade had reached an agreement with Pacific Northwest Pipeline Co. to provide a two-way supply of natural gas from the fields in Canada and in the San Juan Basin. Once the corporation had established primary and supplementary sources of natural gas, plans and financing were arranged to enlarge its area of service. At this time, Cascade was distributing gas to 17 communities in Washington, Oregon, and Idaho, and by 1955 eight additional communities in the region became Cascade customers. To bolster its customer base, Cascade, in early 1956, launched an expansion program totaling approximately $20 million to be spent over the next several years, as the corporation hurriedly sought to meet the increasing demand occasioned by a rapidly growing population.

However, by 1959 the number of customers served by Cascade had increased only marginally. A merger with Oregon Natural Gas Co. that year gave Cascade a total of 14,000 customers, only several thousand more than the original consolidation of gas companies produced six years earlier. The boost provided by this acquisition, which helped Cascade reach $9 million in revenues for the year, did, however, demonstrate the gains that could be made by purchasing additional companies. Four months after Cascade merged with Oregon Natural, in early 1960, it announced another merger, this time with Pacific Natural Gas Corp., which served communities throughout Washington. Pacific Natural initially operated as a wholly owned subsidiary of Cascade, with O. Marshall Jones, who had by now succeeded Matthews as Cascade’s president, supervising Pacific Natural’s operations. After two years, the merger was completed and the stocks between the two companies were traded on a share for share basis.

The infusion of Pacific Natural’s business yielded the first appreciable growth Cascade had experienced since its inception. By 1962, the corporation served over 20,000 customers located in 52 rural communities. Cascade had withdrawn from the utility market in Idaho several years earlier to concentrate solely on the Washington and Oregon markets, which provided more than enough business for the corporation to manage. Throughout the region, natural gas distributors were raising their capital expenditures to meet the growing demand engendered by an increasing population, economic expansion, and the wide acceptance of natural gas by both residential and industrial consumers. Cascade shared in the vitality of the industry, connecting an average of 5,000 customers annually to its service during the early 1960s. In fact, from 1960 to 1964, Cascade experienced a dramatic surge in growth, more than doubling its number of residential customers from 16,074 to 33,334, and increasing its commercial and industrial users from 4,682 to 7,555. A large part of this growth was attributable to Cascade’s success in convincing potential customers to switch to natural gas, a conversion made more attractive to residential clients by an innovative service the corporation provided. Cascade offered to install and maintain natural gas appliances in a customer’s home for a monthly charge of $2, a service at that time not offered by the corporation’s competitors. As a result, revenues soared during this period from $9 million in 1959 to $20.3 million in 1964, solidifying Cascade’s position in Washington and Oregon, and providing a foundation from which Cascade could expand its business.

Although the growing demand for natural gas augured well for Cascade’s expansion plans, some uncertainties were developing in regard to the corporation’s supply of fuel. Since 75 percent of the natural gas consumed in the Pacific Northwest had to be piped in, Cascade was largely dependent on Pacific Northwest Pipeline Co., which controlled the only two sources of natural gas to the region. This in itself posed no immediate concerns to Cascade, and, in fact, the price Pacific Northwest Pipeline charged for Cascade’s supply had just begun to stabilize in recent years, facilitating the corporation’s efforts toward meeting the heightened demand for fuel. Problems did arise, however, when the U.S. Supreme Court ordered the owner of Pacific Northwest Pipeline, El Paso Natural Gas Co., to relinquish its control of the pipeline. This ruling, the effects of which were still undetermined in 1964, raised some doubts as to the availability of natural gas in the Pacific Northwest, and Cascade’s management became convinced that the amount of fuel eventually allocated to Pacific Northwest Pipeline would be insufficient to supply the corporation’s needs, or at least would upset the stability of natural gas prices.

As a hedge against whatever resulted from El Paso Natural’s sale of Pacific Northwest Pipeline, Cascade purchased Garfield Gas Gathering Co. in 1965. The acquisition of Garfield Gas created Cascade’s Colorado-Utah division, giving the corporation valuable natural gas holdings in northwestern Colorado and equally important sales contracts to supply natural gas companies, located outside Cascade’s territory, with fuel. In addition to the $1.2 million Cascade paid for Garfield Gas, it also spent $7 million to construct 120 miles of pipeline from Colorado to Utah and began developing reserves of natural gas along the route that would eventually deliver fuel into the corporation’s distribution areas.

The exponential rise in revenues from 1960 to 1964 continued after the acquisition of Garfield Gas. In 1965, Cascade recorded $21.7 million in sales, the majority of which was garnered from industrial users. Industries within Cascade’s territory had converted to natural gas at a steady rate and by now accounted for 56 percent of the corporation’s sales. The remainder of the corporation’s business was roughly divided between commercial and residential customers. By this time, the corporation supplied nearly 30 percent of the residential market in the Pacific Northwest and anticipated increasing its share up to 80 percent by adding 5,000 to 6,000 new customers annually. Encouraged by its remarkable success over the previous five years and desirous of reaching its optimistic prognostications, Cascade continued to invest in expansion, spending $7 million on capital improvements after constructing the Utah-Colorado pipeline.

The following year, in 1966, revenues shot up to $25.3 million and an additional 7,000 customers were connected to Cascade’s service, exceeding the projections the corporation set the previous year. By now, Cascade served over 46,000 customers located in 67 Washington and Oregon communities, enough of a presence to rank the corporation as the fourth largest natural gas distributor in the northwest. Cascade continued to court residential customers by offering an “all gas rate” to those households using natural gas in space heating, water heating, and one other appliance. This offer encouraged greater natural gas usage by both new and existing customers, enabling Cascade to realize gains in revenues without necessarily having to increase its customer base. Although a shortage of new customers was not an immediate concern of Cascade’s, when the population boom did subside, and Cascade was no longer able to rely on a robust influx of new residents, greater usage by existing customers would continue to invigorate revenues. By the end of 1966, 25 percent of Cascade’s residential customers qualified for the all gas rate and nearly 17 percent used natural gas for more than two appliances.

While strides were being made in Cascade’s residential business, its industrial segment, which still accounted for over half of the corporation’s revenues, was experiencing difficulties resulting from the divestiture of El Paso Natural’s Pacific Northwest Pipeline Co. By 1967, this situation had created delays in the supply of natural gas from Canada and, consequently, Cascade was forced to switch its industrial users to an interruptible supply of natural gas in order to provide a consistent supply of fuel to its residential and commercial users. Revenues were negatively affected by the drop in industrial usage, but two years earlier Cascade had anticipated such problems might occur and continued to invest in the exploration of supplementary sources of natural gas to mitigate any further losses incurred from a vacillating supply. In addition to the money spent on natural gas development and the expansion of its distribution system, which totaled approximately $15 million since the purchase of Garfield Gas, Cascade had also diversified into mineral processing and mineral exploration by this time. The corporation held a substantial interest in a pilot plant involved in the extraction of magnesium and other commercial chemicals from olivine—a mineral found in abundance near Cascade’s service area in northwestern Washington—and had been granted mineral permits providing access to over 4,000 acres of land in northeastern Washington.

Since the acquisition of Oregon Natural Gas Co. in 1959, Cascade had grown at an enviable pace, nearly tripling the number of customers it served. In order to meet the demand of this growing clientele, which numbered 56,000 by 1968, Cascade spent a considerable amount of money to construct additional facilities and broaden its distribution network to service the 70 communities in Washington and Oregon that composed the corporation’s territory. The majority of these capital expenditures had been financed through loans and, consequently, Cascade had accrued a large debt by the end of the 1960s. When the population boom in the Pacific Northwest began to wane by the end of the decade, the debt borne by the corporation started to chip away at its earnings, and Cascade started to look for a way to ameliorate its financial position. By 1971, it became apparent that the only way to augment Cascade’s revenues was to increase its rates. The increase in rates, the first increase to raise the corporation’s rate of return since 1958, lifted the corporation’s revenues by $5.5 million, enabling Cascade to sufficiently service its debt for the present time and fund additional capital expenditures.

By the end of the 1960s, however, the years of dramatic growth were over for Cascade. From 1968 to 1980, Cascade added 26,000 customers, nearly half as many as were added from 1959 to 1968. Part of the reason for the decline in new customers was attributable to the stabilization of the population growth within Cascade’s territory, while other conditions peculiar to the Pacific Northwest natural gas industry as a whole contributed toward a general decline in business. In 1973, the same year Cascade’s stock was first traded on the New York Stock Exchange, water seepage into key natural gas fields in Canada, the primary source of Cascade’s supply, reduced the supply of natural gas to the Pacific Northwest by as much as 25 percent. Once again, Cascade’s industrial customers bore the brunt of the natural gas shortage, convincing some of the users to switch to residual fuel oil. Hampered by an inconsistent supply and losing business as a result of the decline in popularity of natural gas, Cascade responded by streamlining its operations. Three years after the Canadian supply was reduced, Cascade sold its Colorado-Utah division to Mountain Fuel Resources, Inc. for approximately $8.5 million.

Although revenues during the early and mid-1970s climbed steadily, Cascade’s net income did not respond in kind. In 1975, the corporation posted $91 million in sales and recorded $4.1 million in net income, but the following year its net income dropped to $2.5 million on sales of $106 million. This pattern continued into the late 1970s until 1978, when Cascade’s net income reached a nadir of $2.3 million from $116 million in revenues. Nevertheless, by the following year Cascade had effected a remarkable turnaround, increasing its revenues by nearly 30 percent to $150 million and reporting roughly $5 million in net income. This resurgence was largely due to the rising cost of oil, as OPEC wielded its control over the oil market and drove many of those who had converted to residual oil back to natural gas. Appliance dealers, for the first time in years, began stocking gas appliances, convinced that the public’s fear of natural gas shortages had dissipated, and Cascade once again returned to connecting a substantial number of customers to its service.

As Cascade entered the 1980s, a growing shortage of electrical energy helped buoy the corporation’s business even further. In an effort to boost their generating capacities during peak periods of usage, electrical utilities used natural gas as fuel for their turbine generators, a costly method for the utilities and one that was financially beneficial for Cascade. Moreover, the conservation of electrical energy by both industrial and residential consumers engendered additional business for Cascade, as natural gas became the preferred choice of those seeking an alternative energy source. By 1984, revenues had grown to nearly $234 million, and earnings had climbed to $7.6 million, a level of performance Cascade would soon be unable to match.

In 1986, Northwest Pipeline Co., Cascade’s longtime source for natural gas, was forced to shut down its natural gas lines in accordance with stipulations associated with deregulation. While Northwest Pipeline negotiated with the Federal Energy Regulatory Commission to arrive at an equitable solution, Cascade’s financial condition suffered. For the year, revenues dropped to $146 million, and net income plummeted to $1.1 million. A final agreement between Northwest Pipeline and the federal regulatory body was finally reached in 1988, by which time Cascade’s financial condition had improved with revenues rising to $157 million and earnings reaching $5.5 million.

As Cascade charts its course in the 1990s, the result of the Northwest Pipeline agreement bodes well for the future. Under the provisions of the agreement, Cascade was able to purchase ancillary supplies of natural gas at a lower price than the average cost of Northwest Pipeline’s gas. Analysts speculated that this reduction in price, in addition to the stabilization of the corporation’s supply of natural gas and the luxury of supplementary sources, would enable Cascade to offer a competitively priced and stable energy source to industrial, commercial, and residential consumers in the Pacific Northwest in the future.