UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal period from __________ to __________
Commission file number 001-15565
SEMCO ENERGY, INC.
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2144267
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
405 WATER STREET, PORT HURON, MICHIGAN 48060
(Address of principal executive offices)
810-987-2200
(Registrant's telephone number, including area code)
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 requirements
for the past 90 days. Yes [X] No [ ]
The number of outstanding shares of the Registrant's common stock as of April
30, 2000: 17,932,770.
INDEX TO FORM 10-Q
------------------
For Quarter Ended March 31, 2000
Page
Number
------
COVER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
INDEX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . .. . . . . . . . . . . 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . 21
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . 21
SIGNATURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
EXHIBIT INDEX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 that are based on current
expectations, estimates and projections of SEMCO Energy, Inc. and its
subsidiaries (the "Company"). Statements that are not historical facts,
including statements about the Company's outlook, beliefs, plans, goals, and
expectations, are forward-looking statements. These statements are subject to
potential risks and uncertainties and, therefore, actual results may differ
materially. The Company undertakes no obligation to update publicly any
forward-looking statements whether as a result of new information, future events
or otherwise. Factors that may impact forward-looking statements include, but
are not limited to, the following: (i) the effects of weather and other natural
phenomena; (ii) the economic climate and growth in the geographical areas where
the Company does business; (iii) the capital intensive nature of the Company's
business; (iv) increased competition within the energy industry as well as from
alternative forms of energy; (v) the timing and extent of changes in commodity
prices for natural gas and propane; (vi) the effects of changes in governmental
and regulatory policies, including income taxes, environmental compliance and
authorized rates; (vii) the Company's ability to bid on and win construction,
engineering and quality assurance contracts; (viii) the impact of energy prices
on the amount of projects and business available to the Company's engineering
services segment; (ix) the nature, availability and projected profitability of
potential investments available to the Company; (x) the Company's ability to
accomplish its financing objectives in a timely and cost-effective manner in
light of changing conditions in the capital markets and, in particular, the
Company's ability to refinance in a timely and cost effective manner, the $290
million short-term bridge-loan obtained to finance the acquisition of ENSTAR
Natural Gas Company and Alaska Pipeline Company and (xi) the Company's ability
to operate and integrate acquired businesses in accordance with its plans.
- 2 -
SEMCO ENERGY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended Twelve Months Ended
March 31, March 31,
-------------------- --------------------
2000 1999 2000 1999
--------- --------- --------- ---------
OPERATING REVENUES
Gas sales. . . . . . . . . . . . . . . . . . . . $ 98,932 $ 68,978 $221,123 $164,841
Gas transportation . . . . . . . . . . . . . . . 11,498 6,629 27,238 17,432
Construction services. . . . . . . . . . . . . . 12,919 3,557 59,326 19,000
Engineering services . . . . . . . . . . . . . . 3,665 4,547 13,960 42,335
Gas marketing. . . . . . . . . . . . . . . . . . - 96,855 - 341,998
Other. . . . . . . . . . . . . . . . . . . . . . 3,288 3,314 9,537 9,289
--------- --------- --------- ---------
$130,302 $183,880 $331,184 $594,895
--------- --------- --------- ---------
OPERATING EXPENSES
Cost of gas sold . . . . . . . . . . . . . . . . $ 60,535 $ 45,999 $132,325 $106,873
Cost of gas marketed . . . . . . . . . . . . . . - 95,632 - 337,092
Operations and maintenance . . . . . . . . . . . 32,416 18,309 114,929 95,477
Depreciation and amortization. . . . . . . . . . 7,982 4,236 23,752 15,844
Property and other taxes . . . . . . . . . . . . 3,100 2,357 9,367 9,006
--------- --------- --------- ---------
$104,033 $166,533 $280,373 $564,292
--------- --------- --------- ---------
OPERATING INCOME . . . . . . . . . . . . . . . . . $ 26,269 $ 17,347 $ 50,811 $ 30,603
OTHER INCOME (DEDUCTIONS)
Divestiture of energy marketing business . . . . $ - $ 1,122 $ - $ 1,122
Divestiture of NOARK investment. . . . . . . . . - - - 3,568
Interest expense . . . . . . . . . . . . . . . . (8,696) (3,894) (25,376) (15,018)
Dividends on preferred stock . . . . . . . . . . - (48) (277) (193)
Other. . . . . . . . . . . . . . . . . . . . . . 1,060 419 3,593 879
--------- --------- --------- ---------
$ (7,636) $ (2,401) $(22,060) $ (9,642)
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES . . . . . . . . . . . . $ 18,633 $ 14,946 $ 28,751 $ 20,961
INCOME TAXES . . . . . . . . . . . . . . . . . . . $ 6,639 $ 4,543 $ 9,501 $ 8,591
--------- --------- --------- ---------
NET INCOME BEFORE EXTRAORDINARY CHARGE . . . . . . $ 11,994 $ 10,403 $ 19,250 $ 12,370
Extraordinary charge due to early retirement of
debt, net of income taxes of $269 . . . . . . - - - (499)
--------- --------- --------- ---------
NET INCOME . . . . . . . . . . . . . . . . . . . . $ 11,994 $ 10,403 $ 19,250 $ 11,871
========= ========= ========= =========
EARNINGS PER SHARE - BASIC AND DILUTED . . . . . . $ 0.67 $ 0.60 $ 1.08 $ 0.72
========= ========= ========= =========
CASH DIVIDENDS PAID PER SHARE. . . . . . . . . . . $ 0.205 $ 0.200 $ 0.868 $ 0.766
========= ========= ========= =========
AVERAGE COMMON SHARES OUTSTANDING. . . . . . . . . 17,917 17,438 17,815 16,553
========= ========= ========= =========
<FN>
The accompanying notes to the consolidated financial statements are an integral part of these
statements.
- 3 -
SEMCO ENERGY, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
ASSETS
(In thousands)
March 31, December 31,
2000 1999
---------- -------------
(Unaudited)
CURRENT ASSETS
Cash and temporary cash investments, at cost . . . $ 3,569 $ 6,086
Receivables, less allowances of $1,315 and $1,080. 53,914 79,587
Accrued revenue. . . . . . . . . . . . . . . . . . 15,932 25,380
Prepaid expenses . . . . . . . . . . . . . . . . . 14,366 14,231
Gas in underground storage . . . . . . . . . . . . 7,287 11,723
Materials and supplies, at average cost. . . . . . 6,425 6,146
Gas charges recoverable from customers . . . . . . 2,948 3,009
Accumulated deferred income taxes. . . . . . . . . 3,526 3,528
Other. . . . . . . . . . . . . . . . . . . . . . . 98 844
---------- -------------
$ 108,065 $ 150,534
PROPERTY, PLANT AND EQUIPMENT
Gas distribution . . . . . . . . . . . . . . . . . $ 548,653 $ 542,505
Diversified businesses . . . . . . . . . . . . . . 63,854 61,434
---------- -------------
612,507 603,939
Less - accumulated depreciation. . . . . . . . . . 136,268 129,593
---------- -------------
$ 476,239 $ 474,346
DEFERRED CHARGES AND OTHER ASSETS
Goodwill, less amortization of $6,174 and $5,052 . $ 161,681 $ 162,691
Deferred retiree medical benefits. . . . . . . . . 11,464 11,689
Unamortized debt expense . . . . . . . . . . . . . 6,728 7,644
Other. . . . . . . . . . . . . . . . . . . . . . . 9,411 8,279
---------- -------------
$ 189,284 $ 190,303
---------- -------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . $ 773,588 $ 815,183
========== =============
<FN>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
- 4 -
SEMCO ENERGY, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
LIABILITIES AND CAPITALIZATION
(In thousands)
March 31, December 31,
2000 1999
---------- -------------
(Unaudited)
CURRENT LIABILITIES
Notes payable . . . . . . . . . . . . . . . . . . . . . . . $ 352,837 $ 376,629
Accounts payable. . . . . . . . . . . . . . . . . . . . . . 12,467 35,725
Customer advance payments . . . . . . . . . . . . . . . . . 9,796 13,885
Accrued interest. . . . . . . . . . . . . . . . . . . . . . 4,482 4,527
Amounts payable to customers. . . . . . . . . . . . . . . . 2,967 5,715
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,618 11,701
---------- -------------
$ 398,167 $ 448,182
DEFERRED CREDITS AND OTHER LIABILITIES
Accumulated deferred income taxes . . . . . . . . . . . . . $ 25,868 $ 25,774
Customer advances for construction. . . . . . . . . . . . . 13,540 15,045
Unamortized investment tax credit . . . . . . . . . . . . . 1,913 1,980
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,220 11,862
---------- -------------
$ 54,541 $ 54,661
LONG-TERM DEBT. . . . . . . . . . . . . . . . . . . . . . . . $ 170,000 $ 170,000
COMMON SHAREHOLDERS' EQUITY
Common stock - $1 par value; 40,000,000 shares authorized;
17,926,676 and 17,908,616 shares outstanding. . . . . . . $ 17,927 $ 17,909
Capital surplus . . . . . . . . . . . . . . . . . . . . . . 124,061 123,861
Retained earnings . . . . . . . . . . . . . . . . . . . . . 8,892 570
---------- -------------
$ 150,880 $ 142,340
---------- -------------
TOTAL LIABILITIES AND CAPITALIZATION. . . . . . . . . . . . . $ 773,588 $ 815,183
========== =============
<FN>
The accompanying notes to the consolidated financial statements are an integral part of
these statements.
- 5 -
SEMCO ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Three Months Ended
March 31,
--------------------
2000 1999
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,994 $ 10,403
Adjustments to reconcile net income (loss) to net
cash from operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . 7,982 4,236
Gain on divestiture of energy marketing business . . . . . . . . - (1,122)
Changes in assets and liabilities, net of effects of
acquisitions, divestitures and other changes as shown below . 13,527 37,171
--------- ---------
NET CASH FROM OPERATING ACTIVITIES . . . . . . . . . . . . $ 33,503 $ 50,688
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Property additions - gas distribution. . . . . . . . . . . . . . . . . $ (6,623) $ (3,907)
Property additions - diversified businesses. . . . . . . . . . . . . . (2,436) (1,922)
Proceeds from property sales, net of retirement costs. . . . . . . . . 285 (31)
Acquisitions of businesses, net of cash acquired . . . . . . . . . . . - (925)
--------- ---------
NET CASH FROM INVESTING ACTIVITIES . . . . . . . . . . . . $ (8,774) $ (6,785)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock, net of expenses. . . . . . . . . . . . . . . $ 218 $ 1,996
Net cash change in notes payable and related expenses. . . . . . . . . (23,792) (41,498)
Payment of dividends . . . . . . . . . . . . . . . . . . . . . . . . . (3,672) (3,527)
--------- ---------
NET CASH FROM FINANCING ACTIVITIES . . . . . . . . . . . . $(27,246) $(43,029)
--------- ---------
CASH AND TEMPORARY CASH INVESTMENTS
Net increase (decrease). . . . . . . . . . . . . . . . . . . . . . . . $ (2,517) $ 874
Beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . . 6,086 4,953
--------- ---------
End of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,569 $ 5,827
========= =========
CHANGES IN ASSETS AND LIABILITIES, NET OF EFFECTS OF
ACQUISITIONS, DIVESTITURES AND OTHER CHANGES:
Receivables, net . . . . . . . . . . . . . . . . . . . . . . . . $ 25,673 $ (2,933)
Accrued revenue. . . . . . . . . . . . . . . . . . . . . . . . . 9,447 22,934
Materials, supplies and gas in underground storage . . . . . . . 4,158 23,582
Gas charges recoverable from customers . . . . . . . . . . . . . 61 8,792
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . (23,257) (13,494)
Customer advances and amounts payable to customers . . . . . . . (8,342) (2,745)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,787 1,035
--------- ---------
$ 13,527 $ 37,171
========= =========
<FN>
The accompanying notes to the consolidated financial statements are an integral part of these
statements.
- 6 -
SEMCO ENERGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) SIGNIFICANT ACCOUNTING POLICIES
Under the rules and regulations of the Securities and Exchange Commission
for Form 10-Q Quarterly Reports, certain footnotes and other financial statement
information normally included in the year-end financial statements of SEMCO
Energy, Inc. and its subsidiaries (the "Company") have been condensed or omitted
in the accompanying unaudited financial statements. These financial statements
prepared by the Company should be read in conjunction with the financial
statements and notes thereto included in the Company's 1999 Annual Report on
Form 10-K filed with the Securities and Exchange Commission. The information in
the accompanying financial statements reflects, in the opinion of the Company's
management, all adjustments (which include only normal recurring adjustments)
necessary for a fair statement of the information shown, subject to year-end and
other adjustments, as later information may require. Certain reclassifications
have been made to the prior periods' financial statements to conform with the
2000 presentation.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
SUPPLEMENTAL CASH FLOW INFORMATION - Supplemental cash flow information for
the three months ended March 31, 2000 and 1999 is as follows (in thousands of
dollars):
Three Months Ended
March 31,
------------------
2000 1999
------ --------
CASH PAID DURING THE PERIOD FOR:
Interest. . . . . . . . . . . . . . . . . . . . $7,810 $ 1,271
Income taxes. . . . . . . . . . . . . . . . . . $2,357 $ 5,550
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Capital stock issued for acquisitions . . . . . $ -- $ --
Deferred payments for acquisitions. . . . . . . $ -- $ 805
DETAILS OF ACQUISITIONS:
Fair value of assets acquired . . . . . . . . . $ -- $ 4,957
Fair value of liabilities assumed . . . . . . . -- (3,152)
Deferred payments . . . . . . . . . . . . . . . -- (805)
Company stock issued. . . . . . . . . . . . . . -- --
------ --------
Cash paid . . . . . . . . . . . . . . . . . . . $ -- $ 1,000
Less cash acquired. . . . . . . . . . . . . . . -- 75
------ --------
Net cash paid for (acquired via) acquisitions . $ -- $ 925
====== ========
(2) CAPITALIZATION
REGISTRATION STATEMENT - In March 2000, a registration statement on
Form S-3 ("registration statement") filed by the Company and SEMCO Capital Trust
I, SEMCO Capital Trust II and SEMCO Capital Trust III ("Capital Trusts") with
the Securities and Exchange Commission became effective. The registration
statement was for the registration of debt securities, preferred stock, common
stock, stock purchase contracts and stock purchase units of the Company and
trust preferred securities of the Capital Trusts and related guarantees in any
combination up to $500 million.
- 7 -
In April 2000, SEMCO Capital Trust I issued 1.6 million shares of 10.25%
cumulative trust preferred securities ("Trust Preferred Securities") in a public
offering at a price of $25 per security. SEMCO Capital Trust I used the $40
million in proceeds from the issuance of the Trust Preferred Securities to
invest in subordinated debentures of the Company bearing an interest rate of
10.25% ("Subordinated Debentures"). Also in April 2000, the Company sold $30
million of 8% Senior Notes due 2010 ("Senior Notes") in a public offering. The
Company used the entire net proceeds from the sale of the Senior Notes and
Subordinated Debentures to repay a portion of the bridge loan utilized in the
ENSTAR Natural Gas Company acquisition, including a $56 million payment due May
1, 2000.
COMMON STOCK EQUITY - On April 18, 2000 the Company's Board of Directors
declared a regular quarterly cash dividend of $.21 per share on the Company's
common stock (a 2.4% increase over the prior quarterly cash dividend of $.205
per share). The dividend is payable on May 15, 2000 to shareholders of record
at the close of business on May 5, 2000.
In February 2000, the Company paid a quarterly cash dividend of $.205 per
share on its common stock. The total cash dividend was approximately $3.7
million of which $.7 million was reinvested by shareholders into common stock
through participation in the Direct Stock Purchase and Dividend Reinvestment
Plan ("DRIP"). During the first quarter of 2000, the DRIP purchased Company
common stock on the open market to meet the dividend reinvestment and stock
purchase requirements of its participants. Also during the first quarter of
2000, the Company issued approximately 18,000 shares of its common stock to
certain of the Company's employee benefit plans.
(3) EARNINGS PER SHARE
The computations of basic and diluted earnings per share for the three
months and twelve months ended March 31, 2000 and 1999 are as follows (in
thousands except per share amounts):
Three Months Ended Twelve Months Ended
March 31, March 31,
------------------ -------------------
2000 1999 2000 1999
------- ------- ------- --------
BASIC EARNINGS PER SHARE COMPUTATION
Income before extraordinary charge . . . . . . . . $11,994 $10,403 $19,250 $12,370
Extraordinary charge . . . . . . . . . . . . . . . -- -- -- (499)
------- ------- ------- --------
Net Income . . . . . . . . . . . . . . . . . . . . $11,994 $10,403 $19,250 $11,871
======= ======= ======= ========
Weighted average common shares outstanding . . . . 17,917 17,438 17,815 16,533
------- ------- ------- --------
EARNINGS PER SHARE - BASIC
Income before extraordinary charge . . . . . . . $ 0.67 $ 0.60 $ 1.08 $ 0.75
Extraordinary charge . . . . . . . . . . . . . . -- -- -- (0.03)
------- ------- ------- --------
Net Income . . . . . . . . . . . . . . . . . . . $ 0.67 $ 0.60 $ 1.08 $ 0.72
======= ======= ======= ========
DILUTED EARNINGS PER SHARE COMPUTATION
Income before extraordinary charge . . . . . . . . $11,994 $10,403 $19,250 $12,370
Adjustment for effect of assumed conversions:
Preferred convertible stock dividends. . . . . . -- 4 9 15
------- ------- ------- --------
Adjusted income before extraordinary charge. . . . 11,994 10,407 19,259 12,385
Extraordinary charge . . . . . . . . . . . . . . . -- -- -- (499)
------- ------- ------- --------
Net Income . . . . . . . . . . . . . . . . . . . . $11,994 $10,407 $19,259 $11,886
======= ======= ======= ========
Weighted average common shares outstanding . . . . 17,917 17,438 17,815 16,553
Incremental shares from assumed conversions of:
Preferred convertible stock. . . . . . . . . . . -- 26 16 26
Stock options. . . . . . . . . . . . . . . . . . -- 1 -- 1
------- ------- ------- --------
Diluted weighted average common shares outstanding 17,917 17,465 17,831 16,580
======= ======= ======= ========
EARNINGS PER SHARE - DILUTED
Income before extraordinary charge . . . . . . . $ 0.67 $ 0.60 $ 1.08 $ 0.75
Extraordinary charge . . . . . . . . . . . . . . -- -- -- (0.03)
------- ------- ------- --------
Net Income . . . . . . . . . . . . . . . . . . . $ 0.67 $ 0.60 $ 1.08 $ 0.72
======= ======= ======= ========
- 8 -
(4) BUSINESS SEGMENTS
The Company's adoption of SFAS 131 addressing disclosure about business
segments and policies applicable to the disclosure are discussed in Note 12 in
the Company's 1999 Annual Report on Form 10-K.
The Company operates four business segments: (1) gas distribution; (2)
construction services; (3) engineering services; and (4) propane, pipelines and
storage. The latter three segments are sometimes referred to together as the
"diversified businesses". The Company's gas distribution segment distributes
and transports natural gas to approximately 255,000 customers in the state of
Michigan and approximately 102,000 customers in the state of Alaska. The
construction services segment currently does business in the mid-western,
southern and southeastern areas of the United States. In addition to
constructing underground gas pipelines, the Company is expanding its underground
construction services into other industries such as telecommunications and water
supply. The engineering services segment has offices in New Jersey, Michigan,
Louisiana and Texas and provides a variety of energy related engineering and
quality assurance services in several states. The propane, pipelines and
storage segment sells approximately 5 million gallons of propane annually to
retail customers in Michigan's upper peninsula and northeast Wisconsin and
operates natural gas transmission, gathering and storage facilities in Michigan.
The Company sold the subsidiary comprising its energy marketing business
effective March 31, 1999.
The accounting policies of the operating segments are the same as those
described in Note 1 of the Notes to the Consolidated Financial Statements in the
Company's 1999 Annual Report on Form 10-K except that intercompany transactions
have not been eliminated in determining individual segment results. The
following table provides business segment information as well as a
reconciliation ("Corporate and other") of the segment information to the
applicable line in the Consolidated Financial Statements. Corporate and other
includes corporate related expenses not allocated to segments, intercompany
eliminations and results of other smaller operations.
Three Months Ended Twelve Months Ended
March 31, March 31,
-------------------- --------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(in thousands)
OPERATING REVENUES
Gas Distribution . . . . . . . . . $111,688 $ 76,980 $251,539 $185,413
Construction Services. . . . . . . 14,554 4,685 68,141 27,869
Engineering Services . . . . . . . 5,549 5,719 17,315 43,938
Propane, Pipelines and Storage . . 2,061 1,944 6,400 6,106
Energy Marketing . . . . . . . . . -- 96,904 -- 346,519
Corporate and other (a). . . . . . (3,550) (2,352) (12,211) (14,950)
--------- --------- --------- ---------
Consolidated Operating Revenues. $130,302 $183,880 $331,184 $594,895
========= ========= ========= =========
OPERATING INCOME (LOSS)
Gas Distribution . . . . . . . . . $ 28,659 $ 17,867 $ 50,925 $ 27,217
Construction Services. . . . . . . (2,278) (1,245) 1,578 (186)
Engineering Services . . . . . . . 71 451 (894) 2,975
Propane, Pipelines and Storage . . 473 796 2,017 2,008
Energy Marketing . . . . . . . . . -- (341) -- 654
Corporate and other. . . . . . . . (656) (181) (2,815) (2,065)
--------- --------- --------- ---------
Consolidated Operating Income. . $ 26,269 $ 17,347 $ 50,811 $ 30,603
========= ========= ========= =========
<FN>
(a) Includes the elimination of intercompany energy marketing revenues of
$49 and $4,521 for the three and twelve months ended March 31, 1999,
respectively. Includes the elimination of intercompany construction services
revenue of $1,635 and $8,816 for the three and twelve months ended March 31,
2000, respectively, and $1,127 and $8,869 for the three and twelve months ended
March 31, 1999, respectively. Includes the elimination of intercompany
engineering services revenue of $1,884 and $3,355 for the three and twelve
months ended March 31, 2000, respectively, and $1,173 and $1,603 for the three
and twelve months ended March 31, 1999, respectively.
- 9 -
(5) PRO FORMA INFORMATION
On November 1, 1999, the Company acquired the assets and certain
liabilities of ENSTAR Natural Gas Company and the outstanding stock of Alaska
Pipeline Company (together known as "ENSTAR"). The Company acquired ENSTAR from
Ocean Energy, Inc. ("Ocean Energy") for approximately $290 million in cash,
which included adjustments for working capital and the purchase of $58.7 million
of ENSTAR's debt held by Ocean Energy, plus the accrued interest thereon. The
acquisition has been accounted for using the purchase method of accounting.
Accordingly, the purchase price has been preliminarily allocated to the assets
purchased and the liabilities assumed based on their estimated fair values at
the date of the acquisition, with the $134.4 million of purchase price in excess
of these estimated fair values classified as goodwill and amortized on a
straight-line basis over 40 years.
The following pro forma amounts for operating revenue, consolidated net
income and earnings per share (basic and diluted) have been determined as if the
acquisition of ENSTAR occurred on January 1, 1998, and illustrate the effects
of: (1) the elimination of activities between ENSTAR and Ocean Energy or its
predecessor, Seagull Energy, Inc., that occurred prior to the closing of the
acquisition by the Company; (2) the adjustments resulting from the acquisition
by the Company including increases in depreciation and amortization expense due
primarily to the amortization, over a 40 year period, of the goodwill associated
with the acquisition; and (3) the assumed public issuance of $165 million of
debentures, $40 million of trust preferred securities and approximately 6.8
million shares of common stock of the Company producing net proceeds of
approximately $85 million and the resulting adjustments to interest expense from
these issuances (the "Financing Transactions"). The Financing Transactions
represent the Company's current expectations regarding permanent financing for
the ENSTAR acquisition. The net proceeds from the Financing Transactions will be
used primarily to retire a $290 million bridge loan facility of the Company
which was used to finance the ENSTAR acquisition.
The pro forma amounts do not reflect any potential cost savings or
operating synergies that may be realized following the acquisition of ENSTAR.
Actual Pro Forma
------------------ ------------------
Three months ended March 31, 2000 1999 2000 1999
---------------------------- -------- -------- -------- --------
(in thousands, except per share amounts)
Operating revenue (a) . . . . $130,302 $183,880 $130,302 $222,541
Net income. . . . . . . . . . 11,994 10,403 12,497 15,504
Basic and diluted EPS . . . . 0.67 0.60 0.51 0.64
<FN>
(a) The decrease in operating revenues and expenses is due primarily to
the energy marketing business, which was sold effective March 31, 1999,
offset partially by the results of new business acquisitions.
(6) COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL MATTERS - Prior to the construction of major natural gas
pipelines, gas for heating and other uses was manufactured from processes
involving coal, coke or oil. The Company owns seven Michigan sites which
formerly housed such manufacturing facilities and expects that it will
ultimately incur investigation and remedial action costs at some of these sites,
and a number of other sites. The Company has submitted plans to the appropriate
environmental regulatory authority in the State of Michigan to close one site
and begin work at another site. The extent of the Company's liabilities and
potential costs in connection with these sites cannot reasonably be estimated at
this time. In accordance with an MPSC accounting order, any environmental
investigation and remedial action costs will be deferred and amortized over ten
years. Rate recognition of the related amortization expense will not begin until
after a prudence review in a general rate case.
- 10 -
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
Net income of SEMCO Energy, Inc. and its subsidiaries (the "Company") was
$12.0 million (or $0.67 per share) for the quarter ended March 31, 2000 compared
to $10.4 million (or $0.60 per share) for the quarter ended March 31, 1999. On
a weather-normalized basis, net income for the quarter ended
March 31, 2000 would have been approximately $14.7 million (or $0.82 per share)
compared to approximately $11.1 million (or $0.63 per share) for the same period
of the prior year. The net income for the first quarter of 1999 includes a gain
of $.7 million after tax (or $0.04 per share) from the sale of the Company's
energy marketing business.
Net income for the twelve months ended March 31, 2000 was $19.2 million (or
$1.08 per share) compared to $11.9 million (or $0.72 per share) for the twelve
months ended March 31, 1999. On a weather-normalized basis, net income would
have been approximately $25.0 million (or $1.40 per share) for the twelve months
ended March 31, 2000 compared to approximately $17.1 million (or $1.03 per
share) for the same period of the prior year. The net income for the twelve
months ended March 31, 1999 includes the gain of $.7 million after tax on the
sale of the energy marketing business plus an extraordinary charge of $.5
million after tax (or $0.03 per share) from the early retirement of long-term
debt.
The Company's largest business segment, natural gas distribution, is
seasonal in nature and depends on the winter months for the majority of its
operating revenue. As a result, a substantial portion of the Company's annual
results of operations is earned during the first and fourth quarters of the
year. In addition, the Company's construction services business segment is also
seasonal in nature and makes most of its income during the summer and fall
months and incurs losses during the winter and spring months. Therefore, the
Company's results of operations for the three months ended March 31, 2000 and
1999 are not necessarily indicative of results for a full year.
Three months ended Twelve months ended
March 31, March 31,
2000 1999 2000 1999
--------- --------- --------- ---------
(in thousands, except per share amounts)
Operating revenues (a). . . . . . . . . . $130,302 $183,880 $331,184 $594,895
Operating expenses (a) . . . . . . . . 104,033 166,533 280,373 564,292
--------- --------- --------- ---------
Operating income. . . . . . . . . . . . . $ 26,269 $ 17,347 $ 50,811 $ 30,603
Other income (deductions). . . . . . . (7,636) (2,401) (22,060) (9,642)
Income taxes . . . . . . . . . . . . . (6,639) (4,543) (9,501) (8,591)
Extraordinary charge . . . . . . . . . - - - (499)
--------- --------- --------- ---------
Net income. . . . . . . . . . . . . . . . $ 11,994 $ 10,403 $ 19,250 $ 11,871
Earnings per share ("EPS"). . . . . . . . $ 0.67 $ 0.60 $ 1.08 $ 0.72
Average common shares outstanding . . . . 17,917 17,438 17,815 16,553
Impact on net income of the following:
Colder (warmer) than normal weather. . $ (2,732) $ (667) $ (5,705) $ (5,247)
Gain on sale of marketing business . . $ - $ 729 $ - $ 729
Extraordinary charge . . . . . . . . . $ - $ - $ - $ (499)
Net income excluding the foregoing items. $ 14,726 $ 10,341 $ 24,955 $ 16,888
EPS excluding the foregoing items . . . . $ 0.82 $ 0.59 $ 1.40 $ 1.02
<FN>
(a) The decrease in operating revenues and expenses is due primarily to the energy marketing
business, which was sold effective March 31, 1999, offset partially by the
results of new business acquisitions.
- 11 -
The results for the three and twelve months ended March 31, 2000 also
include net income of $2.2 million and $4.8 million, respectively, from ENSTAR
Natural Gas Company and Alaska Pipeline Company, which were acquired on November
1, 1999. The business segment analyses and other discussions on the next
several pages provide additional information regarding variances in results of
operations when comparing the three and twelve month periods ended March 31,
2000 to the same periods of the prior year.
PRO FORMA INFORMATION
As previously mentioned, on November 1, 1999, the Company acquired the
assets and certain liabilities of ENSTAR Natural Gas Company and the outstanding
stock of Alaska Pipeline Company (together known as "ENSTAR"). Note 5 of the
Notes to the Consolidated Financial Statements includes additional information
regarding the acquisition as well as a discussion of how the following pro forma
amounts were developed.
The pro forma amounts do not reflect any potential cost savings or
operating synergies that may be realized following the acquisition of ENSTAR.
Actual Pro Forma
------------------ --------------------
Three months ended March 31, 2000 1999 2000 1999
- ---------------------------- -------- -------- -------- --------
(in thousands, except per share amounts)
Operating revenue. . . . . . . $130,302 $183,880 $130,302 $222,541
Net income . . . . . . . . . . 11,994 10,403 12,497 15,504
Basic and diluted EPS. . . . . 0.67 0.60 0.51 0.64
Weather normalized results
Net income . . . . . . . . . 14,726 11,070 15,229 15,371
Basic and diluted EPS. . . . 0.82 0.63 0.62 0.63
SUMMARY OF BUSINESS SEGMENTS
The Company operates four business segments: (1) gas distribution; (2)
construction services; (3) engineering services; and (4) propane, pipelines and
storage. The latter three segments are sometimes referred to together as the
"diversified businesses". Refer to Note 4 of the Notes to the Consolidated
Financial Statements for further information regarding each business segment.
The Company sold the subsidiary comprising its energy marketing business
effective March 31, 1999.
- 12 -
The following table shows the operating revenues and operating income of
each business segment as well as a reconciliation ("Corporate and other") of the
segment information to the applicable line in the consolidated financial
statements. Corporate and other includes intercompany eliminations, corporate
related expenses not allocated to the business segments and the results of other
smaller operations.
Three Months Ended Twelve Months Ended
March 31, March 31,
-------------------- --------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(in thousands)
OPERATING REVENUES
Gas Distribution. . . . . . . . $111,688 $ 76,980 $251,539 $185,413
Construction Services . . . . . 14,554 4,685 68,141 27,869
Engineering Services. . . . . . 5,549 5,719 17,315 43,938
Propane, Pipelines and Storage. 2,061 1,944 6,400 6,106
Energy Marketing. . . . . . . . -- 96,904 -- 346,519
Corporate and Other . . . . . . (3,550) (2,352) (12,211) (14,950)
--------- --------- --------- ---------
Total Operating Revenues. . . $130,302 $183,880 $331,184 $594,895
========= ========= ========= =========
OPERATING INCOME (LOSS)
Gas Distribution. . . . . . . . $ 28,659 $ 17,867 $ 50,925 $ 27,217
Construction Services . . . . . (2,278) (1,245) 1,578 (186)
Engineering Services. . . . . . 71 451 (894) 2,975
Propane, Pipelines and Storage. 473 796 2,017 2,008
Energy Marketing. . . . . . . . -- (341) -- 654
Corporate and Other . . . . . . (656) (181) (2,815) (2,065)
--------- --------- --------- ---------
Total Operating Income. . . . $ 26,269 $ 17,347 $ 50,811 $ 30,603
========= ========= ========= =========
Each business segment is discussed separately on the following pages. The
Company evaluates the performance of its business segments based on the
operating income generated. Operating income does not include income taxes,
interest expense, extraordinary items, changes in accounting methods or other
non-operating income and expense items. A review of the non-operating items
follows the business segment discussions.
GAS DISTRIBUTION
The Company's gas distribution business segment consists of operations in
Michigan and Alaska. ENSTAR, the Alaska-based operation, was acquired on
November 1, 1999. The acquisition of ENSTAR was accounted for as a purchase and
therefore the consolidated financial statements and the table below include the
results of ENSTAR's operations since November 1, 1999. The Michigan gas
distribution operation and ENSTAR are referred to together as the "Gas
Distribution Business".
Operating income for the Gas Distribution Business was $28.7 million for
the quarter ended March 31, 2000 compared to $17.9 million for the quarter ended
March 31, 1999. On a weather-normalized basis, the operating income of the Gas
Distribution Business would have been approximately $33.0 million for the first
quarter of 2000 compared to approximately $18.8 million for the same period of
the prior year. Approximately $11.2 million of the $14.1 million increase in
weather-normalized operating income for the first quarter of 2000, when compared
to the first quarter of 1999, represents the weather-normalized operating income
of ENSTAR.
- 13 -
Three Months Ended Twelve Months Ended
March 31, March 31,
-------------------- --------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(dollars in thousands)
Gas sales revenue . . . . . . . . . . $ 98,932 $ 68,978 $ 221,123 $ 164,841
Cost of gas sold. . . . . . . . . . . 60,535 45,999 132,325 106,873
--------- --------- --------- ---------
Gas sales margin. . . . . . . . . . $ 38,397 $ 22,979 $ 88,798 $ 57,968
Gas transportation revenue. . . . . . 11,498 6,629 27,237 17,432
Other operating revenue . . . . . . . 1,258 1,373 3,179 3,140
--------- --------- --------- ---------
Gross margin. . . . . . . . . . . . $ 51,153 $ 30,981 $ 119,214 $ 78,540
Operating expenses. . . . . . . . . . 22,494 13,114 68,289 51,323
--------- --------- --------- ---------
Operating income. . . . . . . . . . . $ 28,659 $ 17,867 $ 50,925 $ 27,217
========= ========= ========= =========
Weather-normalized operating income . $ 32,959 $ 18,817 $ 59,575 $ 34,917
========= ========= ========= =========
Volumes sold (MMcf) . . . . . . . . . 23,248 15,875 46,618 32,552
Volumes transported (MMcf). . . . . . 16,010 9,293 39,134 26,403
Number of customers at end of period. 359,913 250,065 359,913 250,065
Degree days . . . . . . . . . . . . . 3,140 3,239 6,551 6,021
Percent colder (warmer) than normal . (10.6%) (2.1%) (10.7%) (12.5%)
<FN>
The amounts in the table above include intercompany transactions.
GAS SALES MARGIN - During the first quarter of 2000, gas sales margin
increased by $15.4 million when compared to the first quarter of 1999. The
increase includes approximately $14.5 million of gas sales margin from ENSTAR.
The remaining $.9 million of the increase is attributable to the Michigan gas
distribution operation and relates to gas sales margins from new customers and
sales margins earned on the sale of gas under the Company's gas supply and
storage arrangement with TransCanada Gas Services, Inc. ("TransCanada"), offset
partially by a decrease in gas sales as a result of warmer weather and a shift
in customers to transportation as a result of their participation in the
Company's aggregated transportation services ("ATS") program.
The gas supply and storage arrangement with TransCanada pertains to the
Michigan gas distribution operations. Under the terms of the agreements,
TransCanada provides the Company's natural gas requirements and manages the
Company's natural gas supply and the supply aspects of transportation and
storage operations in Michigan for the three year period that began April 1,
1999. TransCanada supplies the gas and related services to the Company at a
cost below the $3.24 per Mcf that the Company is authorized to charge its
Michigan customers for gas. As a result, the Michigan gas distribution
operation retains the sales margin on the sale of gas, subject to a customer
profit sharing mechanism. Prior to April 1, 1999, gas sales margin was
generated primarily from distribution fees and customer fees because the
Michigan operation was not allowed to earn profits from the sale of the gas
commodity. For more information on the TransCanada agreements, the $3.24
authorized gas charge and the customer profit sharing mechanism, see Note 2 of
the Notes to the Consolidated Financial Statements in the Company's 1999 Annual
Report on Form 10-K.
Weather during the first quarter of 2000 was 10.6% warmer than normal
in Michigan and Alaska combined while the weather during the first quarter of
1999 was 2.1% warmer than normal. Under normal weather conditions, gas sales
margin for the quarters ended March 31, 2000 and 1999 would have been higher by
approximately $4.3 million and $1.0 million, respectively.
The ATS program, which was effective April 1, 1998, provides all Michigan
commercial and industrial customers the opportunity to purchase their gas from a
third-party supplier, while allowing the Gas Distribution Business to continue
charging the existing distribution fees and customer fees. Distribution and
customer fees associated with customers who have switched to third-party gas
suppliers are recorded in gas transportation revenue rather than gas sales
revenue because the Company is acting as a transporter for those customers.
- 14 -
Gas sales margin for the twelve months ended March 31, 2000 increased by
$30.8 million when compared to the twelve months ended March 31, 1999. The
increase includes approximately $26.1 million of gas sales margin from ENSTAR.
The remaining $4.7 million of the increase is attributable to the Michigan gas
distribution operation and relates to gas sales margins from new customers and
sales margins earned on the sale of the gas commodity, some of which may be
non-recurring. These increases were offset partially by the impact of warmer
weather and a shift in customers to transportation as a result of their
participation in the Company's ATS program.
Weather during the twelve months ended March 31, 2000 was 10.7% warmer than
normal in Michigan and Alaska combined, while the weather during the twelve
months ended March 31, 1999 was 12.5% warmer than normal. Under normal weather
conditions, gas sales margin for the twelve months ended March 31, 2000 and 1999
would have been higher by approximately $8.6 million and $7.7 million,
respectively. The impact of weather on gas sales margin during the twelve
months ended March 31, 2000 was larger than during the same period of 1999,
despite the slightly cooler weather, because of the increased customer base as a
result of the ENSTAR acquisition. A significant increase in customer base
causes any variation from normal weather to have a more pronounced impact on gas
sales margin.
GAS TRANSPORTATION REVENUE - For the three months and twelve months ended
March 31, 2000, gas transportation revenue increased by $4.9 million and $9.8
million, respectively, when compared to the same periods of 1999. The increases
are due in part to ENSTAR's transportation revenues during the three months and
twelve months ended March 31, 2000 of $4.1 million and $7.1 million,
respectively. The remainder of the increases during both periods relates
primarily to customers participating in the new ATS program and an increase in
general transportation revenue due to increased transportation volumes. As
discussed above, the increase in gas transportation revenue as a result of
participation in the ATS program is generally offset by a corresponding decrease
in gas sales margin.
OPERATING EXPENSES - The operating expenses of the Gas Distribution
Business increased by $9.4 million during the three months ended March 31, 2000
compared to the three months ended March 31, 1999. Operating expenses
attributable to ENSTAR account for $8.9 million of the increase. The remaining
$.5 million of the increase relates to the Michigan operation. Approximately
$.2 million of the increase in Michigan operating expenses was due to additional
depreciation expense and property taxes on new property, plant and equipment
placed in service and the remainder of the increase was due primarily to
increased payroll expenses.
During the twelve months ended March 31, 2000, operating expenses increased
by $16.9 million when compared to the twelve months ended March 31, 1999.
Approximately $14.9 million of the increase is attributable to ENSTAR. The
remainder of the increase relates to the Michigan operation. Approximately $.7
million of the increase in Michigan operating expenses is due to additional
depreciation on new property, plant and equipment placed in service and
approximately $.7 million is due to increased information technology expenses
related primarily to year-2000 computer remediation. There was also an overall
increase in general and administrative operating expenses of approximately $.9
million due primarily to higher payroll related costs.
The increases in Michigan operating expenses in the twelve month period
ended March 31, 2000 were offset partially by a $.3 million decrease in general
taxes. The decrease in general taxes is made up of a reduction of $1.3 million
in property taxes which the Company booked based on pending appeals of prior
years' personal property assessments in Michigan and new property valuation
tables approved by the State of Michigan in 1999, offset partially by an
increase in property taxes associated with additional property, plant and
equipment placed in service and an increase in Michigan business tax. The
Company filed the appeals over the past three years claiming that its Michigan
utility property was over-assessed. The new valuation tables approved by the
state of Michigan are consistent with the Company's claim regarding utility
property assessments and thus significantly increases the likelihood of
recovering the overpaid property taxes.
- 15 -
CONSTRUCTION SERVICES
Three Months Ended Twelve Months Ended
March 31, March 31,
-------------------- -------------------
2000 1999 2000 1999
-------- -------- ------- --------
(in thousands)
Operating revenues. . . . . $14,554 $ 4,685 $68,141 $27,869
Operating expenses. . . . . 16,832 5,930 66,563 28,055
-------- -------- ------- --------
Operating income (loss) . . $(2,278) $(1,245) $ 1,578 $ (186)
======== ======== ======= ========
Feet of pipe installed. . . 997 697 6,508 4,702
======== ======== ======= ========
<FN>
The amounts in the table above include intercompany transactions.
OPERATING REVENUES - The operating revenues of the construction services
segment ("Construction Services") increased by $9.9 million, or more than 200%,
during the first quarter of 2000 when compared to the first quarter of 1999.
The increase is due primarily to the revenues of three contruction businesses
acquired after the first quarter of 1999. Operating revenues during the twelve
months ended March 31, 2000 increased by $40.3 million, or 145%, when compared
to the twelve months ended March 31, 1999 due primarily to the timing of
business acquisitions. Refer to Note 3 of the Notes to the Consolidated
Financial Statement in the Company's 1999 Annual Report on Form 10-K for the
acquisition dates of all construction businesses acquired during the past three
years
OPERATING INCOME - Construction Services' seasonal operating loss for the
first quarter of 2000 was $2.3 million compared to $1.2 million for the first
quarter of 1999. Construction Services generally incurs operating losses during
the winter and spring months when underground construction is inhibited by
weather and generates the majority of its income during the summer and fall
months. The increased operating loss for the first quarter of 2000 when
compared to the first quarter of 1999 was due primarily to the seasonal losses
of the three business acquired after the first quarter of 1999. As the Company
expands its construction business, the seasonal losses and profits become
proportionally larger.
Operating income for the twelve months ended March 31, 2000 increased by
$1.8 million when compared to the same period of 1999. The increase is due
primarily to the operating income of the businesses acquired since February 1999
and the absence during the twelve months ended March 31, 2000 of operating
losses from an overhead-line construction company that was started in Florida in
January of 1998. The operations of this start-up business were halted in
mid-1998 in response to lower than expected business levels and earnings.
Construction Services' results for the twelve months ended March 31, 1999
include an operating loss of $.7 million from this overhead-line business.
ENGINEERING SERVICES
Three Months Ended Twelve Months Ended
March 31, March 31,
------------------ ---------------------
2000 1999 2000 1999
------- ------- --------- --------
(in thousands, except billed hours)
Operating revenues . . . . $ 5,549 $ 5,719 $ 17,315 $ 43,938
Operating expenses . . . . 5,478 5,268 18,209 40,963
------- ------- --------- --------
Operating income (loss). . $ 71 $ 451 $ (894) $ 2,975
======= ======= ========= ========
Billed hours . . . . . . . 94,000 97,000 356,000 619,000
======= ======= ========= ========
<FN>
The amounts in the table above include intercompany transactions.
- 16 -
OPERATING REVENUES - The engineering services segment ("Engineering
Services") had operating revenues of $5.5 million during the three months ended
March 31, 2000 compared to $5.7 million for the same period of the prior year.
The decrease in operating revenues was due primarily to a reduction in
engineering projects that began during the first half of 1999. Engineering
projects for the gas distribution industry have been delayed due to the cash
flow impact on the industry of warmer weather during the past few years. Also,
many pipeline construction and engineering projects scheduled for 1999 were cut
back or delayed due to gas market uncertainty and lower oil prices in 1998 and
early 1999. Oil prices have since recovered significantly and a turnaround in
business for 2000 may occur as new and delayed engineering projects are
released.
The decrease in revenues caused by the reduction in available engineering
projects was offset partially by revenues from other lower margin jobs accepted
and performed during the first quarter of 2000. The lower margin jobs covered a
portion of Engineering Services' fixed overhead costs.
During the twelve months ended March 31, 2000, Engineering Services'
operating revenues decreased by approximately $26.6 million from the twelve
months ended March 31, 1999. The decrease was due primarily to the reduction in
available engineering projects, including turn-key projects, caused by the same
factors discussed with respect to the first quarter.
OPERATING INCOME - Operating income for Engineering Services was $.1
million for the first quarter of 2000 compared to $.5 million for the first
quarter of 1999. The decrease was due primarily to the reduction in available
engineering projects. As discussed above, a turnaround in business for 2000 may
occur as new and delayed engineering projects are released in response to higher
oil prices.
Operating income decreased by $3.9 million during the twelve months ended
March 31, 2000 when compared to the same period of the prior year. The
significant decrease in operating income was due primarily to the decrease in
operating revenues and corresponding project costs as a result of the deferral
of engineering projects discussed previously, and unanticipated ground
restoration and clean-up costs incurred during the twelve months ended March 31,
2000 related to a large turn-key project completed during the twelve months
ended March 31, 1999.
PROPANE, PIPELINES AND STORAGE
Three Months Ended Twelve Months Ended
March 31, March 31,
------------------ -------------------
2000 1999 2000 1999
------ ------ ------ ------
(in thousands)
Operating revenues . . $2,061 $1,944 $6,400 $6,106
Operating expenses . . 1,588 1,148 4,383 4,098
------ ------ ------ ------
Operating income . . . $ 473 $ 796 $2,017 $2,008
====== ====== ====== ======
OPERATING REVENUES - For the three months and twelve months ended March 31,
2000, the operating revenues of the Company's propane, pipelines and storage
business increased by $.1 million and $.3 million, respectively, when compared
to the same periods of 1999. The increases during both the three and twelve
month periods were due to higher propane distribution revenues offset partially
by slightly lower pipeline revenues due to the absence of revenues from a
pipeline that was sold in mid-1999.
OPERATING INCOME - The operating income from the propane, pipelines and
storage business decreased during the three months ended March 31, 2000 by $.3
million when compared to the first quarter of 1999. The decrease during the
first quarter of 2000 was caused primarily by higher propane costs, which reduce
propane margins, and the absence of operating income from a pipeline that was
sold in mid-1999.
Operating income was $2.0 million for both the twelve months ended March
31, 2000 and the same period of 1999. Operating revenues were higher during the
twelve months ended March 31, 2000, as discussed above, and pipeline expenses
were lower. However, these items were offset primarily by higher propane costs.
- 17 -
OTHER INCOME AND DEDUCTIONS
Three Months Ended Twelve Months Ended
March 31, March 31,
------------------ --------------------
2000 1999 2000 1999
-------- -------- --------- ---------
(in thousands)
Divestiture of energy marketing business. $ -- $ 1,122 $ -- $ 1,122
Divestiture of NOARK investment . . . . . -- -- -- 3,568
Interest expense. . . . . . . . . . . . . (8,696) (3,894) (25,376) (15,018)
Dividends on preferred stock. . . . . . . -- (48) (277) (193)
Other income. . . . . . . . . . . . . . . 1,060 419 3,593 879
-------- -------- --------- ---------
Total other income (deductions) . . . . $(7,636) $(2,401) $(22,060) $ (9,642)
======== ======== ========= =========
DIVESTITURE OF ENERGY MARKETING BUSINESS - The Company sold its energy
marketing business effective March 31, 1999. The divestiture generated a gain
of $1.1 million ($.7 million after tax) which is reflected in the results for
the three months and twelve months ended March 31, 1999.
DIVESTITURE OF NOARK INVESTMENT - The Company sold its investment in the
NOARK Pipeline System Partnership ("NOARK") in 1998 after a number of
write-downs and reserve adjustments related to the investment. Refer to
Management's Discussion and Analysis and Note 15 in the Notes to the
Consolidated Financial Statements in the Company's 1999 Annual Report on Form
10-K for additional information related to the NOARK investment.
INTEREST EXPENSE - During the first quarter of 2000, interest expense
increased $4.8 million compared to the first quarter of 1999. The increase is
due primarily to increases in debt levels to finance the Company's capital
expenditure and business acquisition programs and for general corporate
purposes, offset partially by $2.1 million of income recognized on interest rate
hedge instruments during the first quarter of 2000. The Company incurred $290
million of additional short-term debt on November 1, 1999 to finance the
acquisition of ENSTAR ("bridge loan"). Approximately $5.9 million of interest
expense during the first quarter of 2000 relates to the bridge loan. Also, $.8
million of the $5.9 million in interest expense associated with the bridge loan
is amortization of debt costs. Debt costs related to the bridge loan are being
amortized over the expected life of the loan.
Interest expense for the twelve months ended March 31, 2000 increased by
$10.4 million when compared to the same period in 1999. The increase between
the twelve-month periods is due generally to the same items that caused the
increase between quarterly periods, including the $2.1 million of income
recognized on interest rate hedge instruments during the first quarter of 2000 .
Approximately $10.1 million of interest expense during the twelve months ended
March 31, 2000 relates to the bridge loan, of which $1.5 million represents
amortization of debt costs associated with the loan.
OTHER INCOME - Other income for the three months ended March 31, 2000
increased by $.6 million when compared to the first quarter of 1999. The
increase is due in part to a $.4 million increase in equity income from a
partnership investment in a gas storage facility, most of which is likely to be
non-recurring. The remainder of the increase is due primarily to an increase in
gains on property sales.
Other income for the twelve months ended March 31, 2000 increased by $2.7
million when compared to the same twelve months of 1999. Approximately $.8
million of the increase between twelve month periods relates to life insurance
proceeds received upon the death of a retired company executive, $.7 million
relates to gains on the sale of various property, $.6 million relates to an
increase in equity income from partnership investments and the remainder is
attributable to higher miscellaneous non-operating income.
- 18 -
INCOME TAXES
Income taxes for the three months and twelve months ended March 31, 2000
increased by $2.1 million and $.9 million, respectively, when compared to the
same periods of the prior year. The change in income taxes, when comparing one
period to another, is due primarily to changes in pre-tax earnings and any
adjustments necessary for compliance with tax laws and regulations.
EXTRAORDINARY ITEM
The Company incurred an extraordinary charge of $.5 million after-tax in
the second quarter of 1998 for the early redemption of all of its outstanding
8.625% debentures due April 15, 2017. The charge is reflected in the results
for the twelve months ended March 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FROM INVESTING - The following table identifies capital
investments for the first quarter of 2000 and 1999:
Three Months Ended
March 31,
------------------
2000 1999
------ ------
Capital Investments: (in thousands)
Property additions - gas distribution. . . . $6,623 $3,907
Property additions - diversified businesses. 2,436 1,922
Business acquisitions (a). . . . . . . . . . -- 1,730
------ ------
$9,059 $7,559
====== ======
<FN>
(a) Includes net cash paid, deferred payments and the value, at the time of
issuance, of Company stock issued for acquisitions.
The Company has spent approximately $9.1 million on property additions
during the first three months of 2000 and anticipates spending approximately
$40.9 million on property additions during the remainder of 2000. In addition,
the Company may incur additional expenditures for business acquisitions during
the remainder of 2000.
CASH FLOWS FROM OPERATIONS - Net cash from operating activities for the
three months ended March 31, 2000, as compared to the same three months of the
prior year, decreased by $17.2 million. The change in operating cash flows is
significantly influenced by changes in the level and cost of gas in underground
storage, changes in accounts receivable and accrued revenue and other working
capital changes. The changes in these accounts are largely the result of the
timing of cash receipts and payments.
CASH FLOWS FROM FINANCING - During the three months ended March 31, 2000
and 1999, the Company used $27.2 million and $43.0 million, respectively, for
financing activities.
Three Months Ended
March 31,
--------------------
2000 1999
--------- ---------
Cash provided by (used in) financing activities: (in thousands)
Issuance (repurchase) of common stock . . . . . . $ 218 $ 1,996
Net cash change in notes payable. . . . . . . . . (23,792) (41,498)
Payment of dividends. . . . . . . . . . . . . . . (3,672) (3,527)
--------- ---------
$(27,246) $(43,029)
========= =========
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In April 2000 the Company's Board of Directors declared a regular quarterly
cash dividend of $.21 per share on the Company's common stock, which was an
increase of 2.4% over the prior quarterly cash dividend. The dividend is
payable on May 15, 2000 to shareholders of record at the close of business on
May 5, 2000.
In March 2000, a registration statement on Form S-3 ("registration
statement") filed by the Company and SEMCO Capital Trust I, SEMCO Capital Trust
II and SEMCO Capital Trust III ("Capital Trusts") with the Securities and
Exchange Commission became effective. The registration statement was for the
registration of debt securities, preferred stock, common stock, stock purchase
contracts and stock purchase units of the Company and trust preferred securities
of the Capital Trusts and related guarantees in any combination up to $500
million.
In April 2000, SEMCO Capital Trust I issued 1.6 million shares of 10.25%
cumulative trust preferred securities ("Trust Preferred Securities") in a public
offering at a price of $25 per security. SEMCO Capital Trust I used the $40
million in proceeds from the issuance of the Trust Preferred Securities to
invest in subordinated debentures of the Company bearing an interest rate of
10.25% ("Subordinated Debentures"). Also in April 2000, the Company sold $30
million of 8% Senior Notes due 2010 ("Senior Notes") in a public offering. The
Company used the entire net proceeds from the sale of the Senior Notes and
Subordinated Debentures to repay a portion of the ENSTAR bridge loan, including
a $56 million payment due May 1, 2000.
FUTURE FINANCING - In general, the Company funds its capital expenditure
program and dividend payments with operating cash flows and the utilization of
short-term lines of credit. When appropriate, the Company will refinance its
short-term lines with long-term debt, common stock or other long-term financing
instruments. At March 31, 2000, the Company had $110 million of short-term
credit facilities, of which $49 million was unused.
As discussed above, the Company has registered up to $500 million of
securities under the registration statement, of which $70 million was utilized
to issue securities during April of 2000.
The Company expects to acquire additional businesses in 2000 and will
likely raise the required capital through a combination of utilizing short-term
lines of credit and issuing long-term debt or equity. The Company also plans to
refinance the ENSTAR bridge loan in 2000 with a combination of long-term debt,
equity and trust preferred securities. The bridge loan matures on October 30,
2000. Payments of $56,000,000 are required on May 1, 2000 and August 1, 2000 if
the bridge loan is not prepaid prior to such dates. As discussed above, the net
proceeds from securities issued in April 2000 were used to repay a portion of
the bridge loan including the May 1, 2000 payment.
The Company's ratio of earnings to fixed charges was 2.12 for the twelve
months ended March 31, 2000.
NEW ACCOUNTING STANDARD
In June of 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the statement of financial position as either an asset or liability
measured at its fair value. SFAS 133 requires that changes in the derivative's
fair value be recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a
derivative's gains and losses to offset related results on the hedged item in
the income statement, and requires that a company must formally document,
designate, and assess the effectiveness of transactions that receive hedge
accounting.
SFAS 133 is effective for fiscal years beginning after June 15, 2000. The
Company is studying the effects of SFAS 133 but does not expect it to have a
material impact on the Company's liquidity, financial condition and results of
operations.
- 20 -
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES.
During the first quarter of 2000, the Company issued 2,731 shares of
unregistered common stock to the members of its Board of Directors in exchange
for services rendered, valued at $31,932.
The preceding transaction is exempt from registration under Section
4(2) of the Securities Act of 1933.
ITEM 3. Not applicable.
ITEM 4. Not applicable.
ITEM 5. Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) List of Exhibits - (See page 23 for the Exhibit Index.)
10.1 Form of Change in Control Agreement (for certain officers).
10.2 Form of Change of Control Employment Agreement dated as of March 1, 2000
(for certain officers).
10.3 Amended and Restated Trust Agreement of SEMCO Capital Trust I dated as of
April 19, 2000.
10.4 Guarantee Agreement between SEMCO Energy, Inc. as Guarantor and Bank One
Trust Company, National Association as Trustee dated as of April 19, 2000.
10.5 Form of 10 % Trust Preferred Security.
10.6 Indenture dated as of April 19, 2000 between SEMCO Energy, Inc. and Bank
One Trust Company, National Association, as Trustee.
10.7 First Supplemental Indenture to Indenture dated as of April 19, 2000.
10.8 Form of 10 % Subordinated Debenture.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
The Company filed a Form 8-K Report on March 20, 2000, to file (1) the
ENSTAR Combined Financial Statements and Notes Thereto for the Years Ended
December 31, 1999, 1998 and 1997 and (2) the Company's Pro Forma Statement of
Income for the Year Ended December 31, 1999 reflecting the acquisition of
ENSTAR.
- 22 -
SIGNATURES
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.
SEMCO ENERGY, INC.
(Registrant)
Dated: May 12, 2000
By: /s/Sebastian Coppola
--------------------------------
Sebastian Coppola
Senior Vice President and
Principal Financial Officer
- 22 -
EXHIBIT INDEX
Form 10-Q
First Quarter 2000
Exhibit
No. Description Filed Herewith
- ------ ----------- --------------
10.1 Form of Change in Control Agreement (for certain officers). . . . . . . . . . x
10.2 Form of Change of Control Employment Agreement dated
as of March 1, 2000 (for certain officers). . . . . . . . . . . . . . x
10.3 Amended and Restated Trust Agreement of SEMCO Capital
Trust I dated as of April 19, 2000. . . . . . . . . . . . . . . . . . x
10.4 Guarantee Agreement between SEMCO Energy, Inc. as
Guarantor and Bank One Trust Company, National Association
as Trustee dated as of April 19, 2000. . . . . . . . . . . . . . . . . x
10.5 Form of 10 % Trust Preferred Security. . . . . . . . . . . . . . . . . x
10.6 Indenture dated as of April 19, 2000 between SEMCO
Energy, Inc. and Bank One Trust Company, National
Association, as Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . x
10.7 First Supplemental Indenture to Indenture dated as of
April 19, 2000. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . x
10.8 Form of 10 % Subordinated Debenture. . . . . . . . . . . . . . . . . . . x
27 Financial Data Schedule. . . . . . . . . . . . . . . . . . . . . . . . . . x
- 23 -