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 SEPTEMBER 30, 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)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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 October
31, 2000: 18,046,591
INDEX TO FORM 10-Q
------------------
For Quarter Ended September 30, 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. . . . . . . . . . . . .. . . . . . . . . . . 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . 27
Item 4. Submission of Matters to a Vote of Securityholders . . . . . . . . . . 27
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . 27
SIGNATURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
EXHIBIT INDEX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
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, (xi) the Company's ability
to operate and integrate acquired businesses in accordance with its plans and
(xii) the Company's ability to effectively execute its strategic plan and
strategic alternatives.
- 2 -
SEMCO ENERGY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
------------------ -------------------- --------------------
2000 1999 2000 1999 2000 1999
-------- -------- --------- --------- --------- ---------
OPERATING REVENUES
Gas sales. . . . . . . . . . . . . . . . . . . . $30,545 $15,618 $172,438 $116,921 $246,686 $165,244
Gas transportation . . . . . . . . . . . . . . . 5,023 3,241 22,815 13,502 31,682 18,353
Construction services. . . . . . . . . . . . . . 30,662 16,363 64,965 29,733 85,197 29,873
Engineering services . . . . . . . . . . . . . . 2,159 3,109 9,547 11,090 13,298 36,320
Gas marketing. . . . . . . . . . . . . . . . . . - - - 96,855 - 202,401
Other. . . . . . . . . . . . . . . . . . . . . . 1,937 1,666 7,341 7,005 9,900 9,575
-------- -------- --------- --------- --------- ---------
$70,326 $39,997 $277,106 $275,106 $386,763 $461,766
-------- -------- --------- --------- --------- ---------
OPERATING EXPENSES
Cost of gas sold . . . . . . . . . . . . . . . . $14,961 $ 7,974 $ 98,050 $ 73,384 $142,456 $105,107
Cost of gas marketed . . . . . . . . . . . . . . - - - 95,632 - 199,003
Operations and maintenance . . . . . . . . . . . 41,333 26,228 111,853 67,281 145,393 100,272
Depreciation and amortization. . . . . . . . . . 8,332 4,539 24,533 13,236 31,303 17,151
Property and other taxes . . . . . . . . . . . . 1,677 2,522 7,706 6,024 10,305 7,537
-------- -------- --------- --------- --------- ---------
$66,303 $41,263 $242,142 $255,557 $329,457 $429,070
-------- -------- --------- --------- --------- ---------
OPERATING INCOME (LOSS). . . . . . . . . . . . . . $ 4,023 $(1,266) $ 34,964 $ 19,549 $ 57,306 $ 32,696
OTHER INCOME (DEDUCTIONS)
Divestiture of energy marketing business . . . . $ - $ - $ - $ 1,122 $ - $ 1,122
Divestiture of NOARK investment. . . . . . . . . - - - - - 3,568
Interest expense . . . . . . . . . . . . . . . . (8,304) (3,946) (26,405) (11,616) (35,364) (15,452)
Other. . . . . . . . . . . . . . . . . . . . . . 14 920 1,683 1,866 2,443 1,678
-------- -------- --------- --------- --------- ---------
$(8,290) $(3,026) $(24,722) $ (8,628) $(32,921) $ (9,084)
-------- -------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES
AND DIVIDENDS ON TRUST
PREFERRED SECURITIES . . . . . . . . . . . . . . $(4,267) $(4,292) $ 10,242 $ 10,921 $ 24,385 $ 23,612
INCOME TAXES . . . . . . . . . . . . . . . . . . . $(1,622) $(2,127) $ 3,210 $ 2,561 $ 8,054 $ 8,787
-------- -------- --------- --------- --------- ---------
NET INCOME (LOSS) BEFORE DIVIDENDS
ON TRUST PREFERRED SECURITIES. . . . . . . . . . $(2,645) $(2,165) $ 7,032 $ 8,360 $ 16,331 $ 14,825
Dividends on trust preferred securities, net of
income taxes . . . . . . . . . . . . . . . . . . 2,104 - 2,861 - 2,861 -
-------- -------- --------- --------- --------- ---------
NET INCOME (LOSS) AVAILABLE TO
COMMON SHAREHOLDERS. . . . . . . . . . . . . . . $(4,749) $(2,165) $ 4,171 $ 8,360 $ 13,470 $ 14,825
======== ======== ========= ========= ========= =========
BASIC EARNINGS (LOSS) PER SHARE. . . . . . . . . . $ (0.26) $ (0.12) $ 0.23 $ 0.47 $ 0.75 $ 0.84
======== ======== ========= ========= ========= =========
DILUTED EARNINGS (LOSS) PER SHARE. . . . . . . . . $ (0.26) $ (0.12) $ 0.23 $ 0.47 $ 0.74 $ 0.84
======== ======== ========= ========= ========= =========
CASH DIVIDENDS PAID PER SHARE. . . . . . . . . . . $ 0.210 $ 0.204 $ 0.625 $ 0.659 $ 0.830 $ 0.859
======== ======== ========= ========= ========= =========
AVERAGE COMMON SHARES OUTSTANDING. . . . . . . . . 18,036 17,763 17,982 17,636 17,956 17,561
======== ======== ========= ========= ========= =========
<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)
September 30, December 31,
2000 1999
-------------- -------------
(Unaudited)
CURRENT ASSETS
Cash and temporary cash investments, at cost . . . $ 4,908 $ 6,086
Receivables, less allowances of $1,328 and $1,080. 60,709 79,587
Accrued revenue. . . . . . . . . . . . . . . . . . 9,315 25,380
Prepaid expenses . . . . . . . . . . . . . . . . . 11,753 14,231
Gas in underground storage . . . . . . . . . . . . 13,939 11,723
Materials and supplies, at average cost. . . . . . 5,265 6,146
Gas charges recoverable from customers . . . . . . 2,878 3,009
Accumulated deferred income taxes. . . . . . . . . 3,510 3,528
Other. . . . . . . . . . . . . . . . . . . . . . . 7,375 844
-------------- -------------
$ 119,652 $ 150,534
PROPERTY, PLANT AND EQUIPMENT
Gas distribution . . . . . . . . . . . . . . . . . $ 578,893 $ 542,505
Diversified businesses . . . . . . . . . . . . . . 73,613 61,434
-------------- -------------
652,506 603,939
Less - accumulated depreciation. . . . . . . . . . 150,503 129,593
-------------- -------------
$ 502,003 $ 474,346
DEFERRED CHARGES AND OTHER ASSETS
Goodwill, less amortization of $7,975 and $5,052 . $ 167,622 $ 162,691
Deferred retiree medical benefits. . . . . . . . . 11,014 11,689
Unamortized debt expense . . . . . . . . . . . . . 7,282 7,644
Other. . . . . . . . . . . . . . . . . . . . . . . 9,790 8,279
-------------- -------------
$ 195,708 $ 190,303
-------------- -------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . $ 817,363 $ 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)
September 30, December 31,
2000 1999
--------------- -------------
(Unaudited)
CURRENT LIABILITIES
Notes payable. . . . . . . . . . . . . . . . . . . . . . . . . . $ 124,112 $ 376,629
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . 21,086 35,725
Customer advance payments. . . . . . . . . . . . . . . . . . . . 12,826 13,885
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . 8,354 4,527
Amounts payable to customers . . . . . . . . . . . . . . . . . . 2,452 5,715
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,218 11,701
--------------- -------------
$ 186,048 $ 448,182
DEFERRED CREDITS AND OTHER LIABILITIES
Accumulated deferred income taxes. . . . . . . . . . . . . . . . $ 25,922 $ 25,774
Customer advances for construction . . . . . . . . . . . . . . . 14,173 15,045
Unamortized investment tax credit. . . . . . . . . . . . . . . . 1,779 1,980
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,925 11,862
--------------- -------------
$ 56,799 $ 54,661
LONG-TERM DEBT . . . . . . . . . . . . . . . . . . . . . . . . . . $ 308,183 $ 170,000
COMPANY-OBLIGATED MANDATORILY REDEEMABLE TRUST
PREFERRED SECURITIES OF SUBSIDIARIES HOLDING
SOLELY DEBT SECURITIES OF SEMCO ENERGY, INC. . . . . . . . . . . $ 139,544 $ -
CUMULATIVE PREFERRED STOCK OF SUBSIDIARY
$100 par value (redemption price of $105 per share); authorized
50,000 shares issuable in series; 31,000 shares outstanding. . $ - $ -
COMMON SHAREHOLDERS' EQUITY
Common stock - $1 par value; 40,000,000 shares authorized;
18,042,306 and 17,908,616 shares outstanding . . . . . . . . . $ 18,042 $ 17,909
Capital surplus. . . . . . . . . . . . . . . . . . . . . . . . . 115,249 123,861
Retained earnings (deficit). . . . . . . . . . . . . . . . . . . (6,502) 570
--------------- -------------
$ 126,789 $ 142,340
--------------- -------------
TOTAL LIABILITIES AND CAPITALIZATION . . . . . . . . . . . . . . . $ 817,363 $ 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 Nine Months Ended
September 30, September 30,
-------------------- ---------------------
2000 1999 2000 1999
--------- --------- ---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) . . . . . . . . . . . . . . . . . . . . . $ (4,749) $ (2,165) $ 4,171 $ 8,360
Adjustments to reconcile net income (loss) to net
cash from operating activities:
Depreciation and amortization . . . . . . . . . . . . 8,332 4,539 24,533 13,236
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: . . . . . . . . . . . . . . . . . . . (13,227) (16,709) 12,789 14,498
--------- --------- ---------- ---------
NET CASH FROM OPERATING ACTIVITIES. . . . . . . $ (9,644) $(14,335) $ 41,493 $ 34,972
--------- --------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Property additions - gas distribution . . . . . . . . . . . $(16,883) $ (6,005) $ (37,839) $(14,188)
Property additions - diversified businesses . . . . . . . . (3,858) (2,241) (12,047) (7,613)
Proceeds from property sales, net of retirement costs . . . 838 1,248 636 1,241
Proceeds from business divestiture. . . . . . . . . . . . . - 4,629 - 6,579
Acquisitions of businesses, net of cash acquired. . . . . . - (8,673) (784) (9,598)
--------- --------- ---------- ---------
NET CASH FROM INVESTING ACTIVITIES. . . . . . . $(19,903) $(11,042) $ (50,034) $(23,579)
--------- --------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock, net of expenses . . . . . . . . . $ 216 $ 1,397 $ 659 $ 4,952
Repurchase of common stock and related expenses . . . . . . - (1,213) - (1,406)
Issuance of trust preferred securities, net of expenses . . 10,196 - 134,968 -
Issuance of long-term debt, net of expenses . . . . . . . . (133) - 136,717 -
Net cash change in notes payable and related expenses . . . 27,735 29,011 (253,738) (4,621)
Payment of dividends. . . . . . . . . . . . . . . . . . . . (3,787) (3,681) (11,243) (11,762)
--------- --------- ---------- ---------
NET CASH FROM FINANCING ACTIVITIES. . . . . . . $ 34,227 $ 25,514 $ 7,363 $(12,837)
--------- --------- ---------- ---------
CASH AND TEMPORARY CASH INVESTMENTS
Net increase (decrease) . . . . . . . . . . . . . . . . . . $ 4,680 $ 137 $ (1,178) $ (1,444)
Beginning of period . . . . . . . . . . . . . . . . . . . . 228 3,372 6,086 4,953
--------- --------- ---------- ---------
End of period . . . . . . . . . . . . . . . . . . . . . . . $ 4,908 $ 3,509 $ 4,908 $ 3,509
========= ========= ========== =========
CHANGES IN ASSETS AND LIABILITIES, NET OF EFFECTS OF
ACQUISITIONS, DIVESTITURES AND OTHER CHANGES:
Receivables, net. . . . . . . . . . . . . . . . . . . $(13,953) $ 5,115 $ 19,591 $ 12,178
Accrued revenue . . . . . . . . . . . . . . . . . . . (3,196) (82) 16,064 30,119
Materials, supplies and gas in underground storage. . (3,426) (30,049) (1,334) (13,503)
Gas charges recoverable from customers. . . . . . . . 25 - 131 9,048
Accounts payable. . . . . . . . . . . . . . . . . . . 2,707 6,703 (14,993) (10,646)
Customer advances and amounts payable to customers. . 3,580 2,597 (5,195) (179)
Accrued taxes . . . . . . . . . . . . . . . . . . . . (2,348) (2,111) (5,234) (9,995)
Other . . . . . . . . . . . . . . . . . . . . . . . . 3,384 1,118 3,759 (2,524)
--------- --------- ---------- ---------
$(13,227) $(16,709) $ 12,789 $ 14,498
========= ========= ========== =========
<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 and nine months ended September 30, 2000 and 1999 is as follows (in
thousands of dollars):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -------------------
2000 1999 2000 1999
------ -------- -------- ---------
(in thousands)
CASH PAID DURING THE PERIOD FOR:
Interest . . . . . . . . . . . . . . . . . . . $2,428 $ 1,621 $20,509 $ 8,707
Income taxes . . . . . . . . . . . . . . . . . $ 100 $ - $ 7,984 $ 12,350
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Capital stock issued for acquisitions. . . . . $ - $ 1,600 $ 1,000 $ 3,699
Deferred payments for acquisitions . . . . . . $ - $ - $ - $ 1,000
DETAILS OF ACQUISITIONS:
Fair value of assets acquired. . . . . . . . . $ - $16,203 $ 3,364 $ 26,581
Fair value of liabilities assumed. . . . . . . - (5,214) (1,576) (11,493)
Deferred payments. . . . . . . . . . . . . . . - - - (1,000)
Company stock issued . . . . . . . . . . . . . - (1,600) (1,000) (3,699)
------ -------- -------- ---------
Cash paid. . . . . . . . . . . . . . . . . . . $ - $ 9,389 $ 788 $ 10,389
Less cash acquired . . . . . . . . . . . . . . - 716 4 791
------ -------- -------- ---------
Net cash paid for (acquired via) acquisitions. $ - $ 8,673 $ 784 $ 9,598
- 7 -
SEMCO ENERGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
(2) SHORT-TERM BORROWINGS AND CAPITALIZATION
SHORT-TERM BORROWINGS - During the second quarter of 2000, the Company
repaid $261 million of the $290 million short-term bridge loan utilized for the
November 1999 acquisition of the assets and certain liabilities of ENSTAR
Natural Gas Company and the outstanding stock of Alaska Pipeline Company
(together known as "ENSTAR"). The funds used to repay the $261 million came
from the public issuance of long-term debt and other securities of the Company
which are discussed in more detail in the remainder of this Note. During July
2000, the Company increased its short-term lines of credit with banks to $160
million, $140 million of which is committed facilities. Also in July 2000 the
Company utilized its short-term lines of credit to repay the remaining $29
million owed on the bridge loan utilized to acquire ENSTAR.
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 senior and subordinated 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.
LONG-TERM DEBT - In April 2000, the Company sold $30 million of 8% Senior
Notes due 2010 ("Senior Notes") in a public offering. Interest on the Senior
Notes is paid semi-annually.
The Company also sold $105 million of 8.95% Remarketable or Redeemable
Securities ("ROARS") in a public offering in June 2000. The ROARS were issued
at a discount of approximately $.3 million. Interest on the ROARS is payable
semi-annually. The ROARS mature in July 2008; however, the Company may purchase,
or be required to purchase, all of the ROARS in July 2003 if they are not
remarketed as discussed below. In conjunction with the sale of the ROARS, the
Company entered into a remarketing agreement with Banc of America Securities LLC
("BAS") under which BAS has the option to purchase all the ROARS in July 2003 or
any subsequent remarketing date. The Company received an option premium of
approximately $2.5 million for the remarketing option which is included with the
ROARS in long-term debt in the Company's Consolidated Statement of Financial
Position. The option premium is being amortized to income over the life of the
ROARS.
If BAS purchases the ROARS in July 2003, they will remarket the ROARS at a
new interest rate in accordance with the terms of the ROARS. If BAS does not
exercise its option to purchase the ROARS in July 2003 then the Company is
required to redeem all of the ROARS at that time.
The Company used the entire net proceeds from the sale of the Senior Notes
and ROARS to repay a portion of the bridge loan utilized for the acquisition of
ENSTAR.
COMPANY-OBLIGATED MANDATORILY REDEEMABLE TRUST PREFERRED SECURITIES OF
SUBSIDIARIES - The Company's Capital Trusts were established for the sole
purpose of issuing trust preferred securities and lending the gross proceeds to
the Company. The sole assets of the Capital Trusts are debt securities of the
Company with terms similar to the terms of the related trust preferred
securities. The Capital Trusts are subsidiaries of the Company.
In April 2000, SEMCO Capital Trust I issued 1.6 million shares of 10.25%
cumulative trust preferred securities ("10.25% TPS") 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 10.25% TPS to invest in subordinated
debentures of the Company bearing an interest rate of 10.25%. The Company used
the entire net proceeds from the sale of the subordinated debentures to repay a
portion of the bridge loan utilized in the ENSTAR acquisition.
- 8 -
SEMCO ENERGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
In June 2000, the Company issued 9 million FELINE PRIDES in a public
offering at a price of $10 per security. In July 2000, the underwriters for the
FELINE PRIDES exercised their option to purchase additional FELINE PRIDES to
cover over-allotments. An additional 1.1 million FELINE PRIDES were issued
bringing the total number of FELINE PRIDES outstanding to 10.1 million. Each
FELINE PRIDES initially consisted of a stock purchase contract of the Company
and a 9% trust preferred security of SEMCO Capital Trust II with a stated face
value per security of $10 ("9% TPS"). SEMCO Capital Trust II used the $101
million in proceeds to invest in 9% senior deferrable notes of the Company. The
Company used the net proceeds from the sale of the senior deferrable notes to
repay a portion of the bridge loan utilized for the acquisition of ENSTAR and to
repay a portion of its short-term lines of credit.
Under the terms of each stock purchase contract (which is a component of a
FELINE PRIDES unit), the FELINE PRIDES holder is obligated to purchase, and the
Company is obligated to sell, between .7794 and .8651 shares of Company common
stock in August 2003. The actual number of shares of common stock to be sold
will depend on the average market value of a share of common stock in August
2003. In addition to payments on the 9% TPS, the Company is also obligated to
pay the FELINE PRIDES holders a quarterly contract adjustment payment on each
stock purchase contract at an annual rate of 2% of $10.
COMMON STOCK EQUITY - On October 19, 2000 the Company's Board of Directors
declared a regular quarterly cash dividend of $.21 per share on the Company's
common stock. The dividend is payable on November 15, 2000 to shareholders of
record at the close of business on November 3, 2000.
In August 2000, the Company paid a quarterly cash dividend of $.21 per
share on its common stock. The total cash dividend was approximately $3.8
million of which $.7 million was reinvested by shareholders into common stock
through participation in the Direct Stock Purchase and Dividend Reinvestment
Plan ("DRIP"). Also during the third quarter of 2000, the Company issued
approximately 15,000 shares of its common stock to certain of the Company's
employee benefit plans.
During the nine months ended September 30, 2000 the Company paid cash
dividends on its common stock of approximately $11.2 million of which
approximately $2.1 million was reinvested by shareholders into common stock
through participation in the DRIP. During 2000, the DRIP has purchased Company
common stock on the open market to meet the dividend reinvestment and stock
purchase requirements of its participants. The only common stock issued by the
Company during the first nine months of 2000 was approximately 51,000 shares
issued to certain of the Company's employee benefit plans and approximately
83,000 shares issued in connection with a business acquisition.
- 9 -
SEMCO ENERGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
(3) EARNINGS PER SHARE
The computations of basic and diluted earnings per share for the three
months, six months and twelve months ended September 30, 2000 and 1999 are as
follows (in thousands except per share amounts):
Three Months Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
------------------ ----------------- -------------------
2000 1999 2000 1999 2000 1999
-------- -------- ------- ------- ------- -------
BASIC EARNINGS (LOSS) PER SHARE COMPUTATION:
Net income (loss). . . . . . . . . . . . . . . $(4,749) $(2,165) $ 4,171 $ 8,360 $13,470 $14,825
Weighted average common shares outstanding . . 18,036 17,763 17,982 17,636 17,956 17,561
Earnings (Loss) Per Share-Basic. . . . . . . . $ (0.26) $ (0.12) $ 0.23 $ 0.47 $ 0.75 $ 0.84
DILUTED EARNINGS (LOSS) PER SHARE COMPUTATION:
Net income (loss). . . . . . . . . . . . . . . $(4,749) $(2,165) $ 4,171 $ 8,360 $13,470 $14,825
Adjustment for effect of assumed conversions:
Preferred convertible stock dividends. . . . - - - 11 2 14
-------- -------- ------- ------- ------- -------
Diluted net income (loss). . . . . . . . . . . $(4,749) $(2,165) $ 4,171 $ 8,371 $13,472 $14,839
-------- -------- ------- ------- ------- -------
Weighted average common shares outstanding . . 18,036 17,763 17,982 17,636 17,956 17,561
Incremental shares from assumed
conversions of:
FELINE PRIDES. . . . . . . . . . . . . . . - - 358 - 269 -
Preferred convertible stock. . . . . . . . - - - 25 3 25
Stock options. . . . . . . . . . . . . . . - - 16 1 12 1
-------- -------- ------- ------- ------- -------
Diluted weighted average common
shares outstanding . . . . . . . . . . . . . 18,036 17,763 18,356 17,662 18,240 17,587
-------- -------- ------- ------- ------- -------
Earnings (Loss) Per Share-Diluted. . . . . . . $ (0.26) $ (0.12) $ 0.23 $ 0.47 $ 0.74 $ 0.84
4) 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". 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.
- 10 -
SEMCO ENERGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
The accounting policies of the operating segments are the same as those
described in Notes 1 and 12 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 Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
------------------ -------------------- --------------------
2000 1999 2000 1999 2000 1999
-------- -------- --------- --------- --------- ---------
(in thousands)
OPERATING REVENUES
Gas Distribution. . . . . . . . $35,992 $19,294 $197,608 $132,983 $281,456 $186,986
Construction Services . . . . . 33,239 18,752 72,184 35,468 94,988 44,511
Engineering Services. . . . . . 4,912 3,388 16,439 12,767 21,158 31,789
Propane, Pipelines and Storage. 1,281 1,217 4,570 4,445 6,408 6,142
Energy Marketing. . . . . . . . - - - 96,904 - 203,310
Corporate and Other (a) . . . . (5,098) (2,654) (13,695) (7,461) (17,247) (10,972)
-------- -------- --------- --------- --------- ---------
Total Operating Revenues. . . $70,326 $39,997 $277,106 $275,106 $386,763 $461,766
======== ======== ========= ========= ========= =========
OPERATING INCOME (LOSS)
Gas Distribution. . . . . . . . $ 1,110 $(2,017) $ 35,117 $ 19,915 $ 55,336 $ 29,930
Construction Services . . . . . 3,678 1,736 833 811 2,634 1,688
Engineering Services. . . . . . (183) (494) 30 (586) 103 440
Propane, Pipelines and Storage. 249 268 997 1,435 1,903 2,022
Energy Marketing. . . . . . . . - - - (341) - 1,513
Corporate and Other . . . . . . (831) (759) (2,013) (1,685) (2,670) (2,897)
-------- -------- --------- --------- --------- ---------
Total Operating Income (Loss) $ 4,023 $(1,266) $ 34,964 $ 19,549 $ 57,306 $ 32,696
======== ======== ========= ========= ========= =========
<FN>
(a) Includes the elimination of intercompany energy marketing revenues of
$49 and $910 for the nine and twelve months ended September 30, 1999,
respectively. Includes the elimination of intercompany construction services
revenue of $2,577, $7,219 and $9,791 for the three, nine and twelve months ended
September 30, 2000, respectively, and $2,389, $5,735 and $8,191 for the three,
nine and twelve months ended September 30, 1999, respectively. Includes the
elimination of intercompany engineering services revenue of $2,753, $6,892 and
$7,860 for the three, nine and twelve months ended September 30, 2000,
respectively, and $279, $1,677 and $1,915 for the three, nine and twelve months
ended September 30, 1999, respectively.
(5) PRO FORMA INFORMATION
On November 1, 1999, 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 allocated preliminarily to the assets purchased and the
liabilities assumed based on their estimated fair values at the date of the
acquisition, with the portion of the purchase price in excess of these estimated
fair values classified as goodwill. The goodwill is being amortized on a
straight-line basis over 40 years.
- 11 -
SEMCO ENERGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
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, 1999, 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 public issuance of $135 million of debentures,
$40 million of trust preferred securities and $101 million of FELINE PRIDES
(Note 2 contains additional information about these issuances), the utilization
of short-term lines of credit to fund the remaining purchase price, and the
resulting adjustments to interest expense and trust preferred dividends from
these securities issues and transactions (the "Financing Transactions"). The
pro-forma amounts include the effects of the Financing Transactions as though
they occurred on January 1, 1999 and exclude the effects of the $290 million
short-term bridge loan actually utilized in the ENSTAR acquisition. The net
proceeds from the Financing Transactions have been used primarily to retire the
bridge loan.
The pro forma amounts do not reflect any potential cost savings or
operating synergies that may be realized following the acquisition of ENSTAR.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2000 1999 2000 1999
-------- -------- -------- --------
(in thousands, except per share amounts)
Actual results:
Operating revenue. . . . . . . . . . . $70,326 $39,997 $277,106 $275,106
Net income (loss). . . . . . . . . . . (4,749) (2,165) 4,171 8,360
Basic EPS. . . . . . . . . . . . . . . (0.26) (0.12) 0.23 0.47
Pro-forma results:
Operating revenue. . . . . . . . . . . $70,326 $52,453 $277,106 $343,653
Net income (loss). . . . . . . . . . . (4,547) (5,783) 3,954 6,218
Basic EPS. . . . . . . . . . . . . . . (0.25) (0.33) 0.22 0.35
(6) MERGERS AND ACQUISITIONS
In May 2000, the Company acquired KLP Construction Co. ("KLP") for
approximately $1.8 million. KLP is based in East Peoria, Illinois and provides
natural gas pipeline and fiber optic construction services primarily for the
utility industry. For financial statement purposes, the acquisition of KLP has
been accounted for as a purchase and, accordingly, its results of operations are
included in the consolidated financial statements since the date of acquisition.
There were no adjustments necessary to the accounting practices of KLP to
conform with the practices of the Company.
- 12 -
SEMCO ENERGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
(7) 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.
(8) EARLY RETIREMENT PROGRAMS
During third quarter of 2000, the Company offered early retirement programs
to certain employees at the Company's gas distribution operations and corporate
offices in Michigan and Alaska. Sixty-three employees, or approximately ten
percent of the combined workforces for these operations, elected to take the
early retirement offer. Under the programs, eligible employees received
enhanced benefits if they chose to retire early.
- 13 -
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
SEMCO Energy, Inc. and its subsidiaries (the "Company") incurred a net loss
of $4.7 million (or $0.26 per share) for the quarter ended September 30, 2000
compared to a net loss of $2.2 million (or $0.12 per share) for the quarter
ended September 30, 1999. Net income for the nine months ended September 30,
2000 was $4.2 million (or $0.23 per share) compared to $8.4 million (or $0.47
per share) for the nine months ended September 30, 1999. On a
weather-normalized basis, the net income for the nine months ended September 30,
2000 would have been approximately $7.6 million (or $0.42 per share) compared to
net income of approximately $10.9 million (or $0.62 per share) for the same
period of the prior year.
Net income for the twelve months ended September 30, 2000 was $13.5 million
(or $.75 per share) compared to $14.8 million (or $0.84 per share) for the
twelve months ended September 30, 1999. On a weather-normalized basis, net
income would have been approximately $18.0 million (or $1.00 per share-basic,
$0.99 per share-diluted) for the twelve months ended September 30, 2000 compared
to approximately $19.2 million (or $1.09 per share) for the same period of the
prior year. The net income for the nine months and twelve months ended
September 30, 1999 includes a gain of $.7 million after tax on the sale of the
Company's energy marketing business.
Three Months Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
------------------ -------------------- --------------------
2000 1999 2000 1999 2000 1999
-------- -------- --------- --------- --------- ---------
(in thousands, except per share amounts)
Operating revenues (a). . . . . . . . . . $70,326 $39,997 $277,106 $275,106 $386,763 $461,766
Operating expenses (a). . . . . . . . . 66,303 41,263 242,142 255,557 329,457 429,070
-------- -------- --------- --------- --------- ---------
Operating income (loss) . . . . . . . . . $ 4,023 $(1,266) $ 34,964 $ 19,549 $ 57,306 $ 32,696
Other income and (deductions) . . . . . (8,290) (3,026) (24,722) (8,628) (32,921) (9,084)
Income taxes. . . . . . . . . . . . . . 1,622 2,127 (3,210) (2,561) (8,054) (8,787)
-------- -------- --------- --------- --------- ---------
Income (loss) before dividends on
trust preferred securities. . . . . . . $(2,645) $(2,165) $ 7,032 $ 8,360 $ 16,331 $ 14,825
Dividends on trust preferred
securities, net of income tax . . . . 2,104 - 2,861 - 2,861 -
-------- -------- --------- --------- --------- ---------
Net income (loss) available to common
shareholders. . . . . . . . . . . . . . $(4,749) $(2,165) $ 4,171 $ 8,360 $ 13,470 $ 14,825
Earnings per share ("EPS")
Basic . . . . . . . . . . . . . . . . . $ (0.26) $ (0.12) $ 0.23 $ 0.47 $ 0.75 $ 0.84
Diluted . . . . . . . . . . . . . . . . $ (0.26) $ (0.12) $ 0.23 $ 0.47 $ 0.74 $ 0.84
Average common shares outstanding . . . . 18,036 17,763 17,982 17,636 17,956 17,561
Impact on net income of the following:
Colder (warmer) than normal weather . . $ 19 $ (563) $ (3,386) $ (2,530) $ (4,496) $ (5,070)
Gain on sale of marketing business. . . $ - $ - $ - $ 729 $ - $ 729
Net income excluding the foregoing items. $(4,768) $(1,602) $ 7,557 $ 10,161 $ 17,966 $ 19,166
EPS excluding the foregoing items
Basic . . . . . . . . . . . . . . . . . $ (0.26) $ (0.09) $ 0.42 $ 0.58 $ 1.00 $ 1.09
Diluted . . . . . . . . . . . . . . . . $ (0.26) $ (0.09) $ 0.42 $ 0.58 $ 0.99 $ 1.09
<FN>
(a) The decrease in operating revenues and expenses for the twelve months ended September 30, 2000
was primarily due to the energy marketing business, which was sold effective March 31, 1999,
offset by the results of new business acquisitions.
- 14 -
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
RESULTS OF OPERATIONS (CONTINUED)
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. The acquisition of ENSTAR in November of 1999 significantly expanded the
Company's gas distribution business and, as a result, has made this seasonal
cycle even more pronounced by contributing additional earnings during the first
and fourth quarters and additional losses during the second and third 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 and nine months ended
September 30, 2000 and 1999 are not necessarily indicative of results for a full
year.
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, nine and twelve month periods ended
September 30, 2000 to the same periods of the prior year.
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"). 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.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2000 1999 2000 1999
-------- -------- -------- --------
(in thousands, except per share amounts)
ACTUAL RESULTS:
Operating revenue. . . . . . . . . . . $70,326 $39,997 $277,106 $275,106
Net income (loss). . . . . . . . . . . (4,749) (2,165) 4,171 8,360
Basic EPS. . . . . . . . . . . . . . . (0.26) (0.12) 0.23 0.47
Weather normalized:
Net income . . . . . . . . . . . . . (4,768) (1,602) 7,557 10,890
Basic EPS. . . . . . . . . . . . . . (0.26) (0.09) 0.42 0.62
PRO-FORMA RESULTS:
Operating revenue. . . . . . . . . . . $70,326 $52,453 $277,106 $343,653
Net income (loss). . . . . . . . . . . (4,547) (5,783) 3,954 6,218
Basic EPS. . . . . . . . . . . . . . . (0.25) (0.33) 0.22 0.35
Weather normalized:
Net income . . . . . . . . . . . . . (4,566) (4,683) 7,340 8,584
Basic EPS. . . . . . . . . . . . . . (0.25) (0.26) 0.41 0.49
- 15 -
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
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.
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 Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
------------------ -------------------- --------------------
2000 1999 2000 1999 2000 1999
-------- -------- --------- --------- --------- ---------
(in thousands)
OPERATING REVENUES
Gas Distribution. . . . . . . . $35,992 $19,294 $197,608 $132,983 $281,456 $186,986
Construction Services . . . . . 33,239 18,752 72,184 35,468 94,988 44,511
Engineering Services. . . . . . 4,912 3,388 16,439 12,767 21,158 31,789
Propane, Pipelines and Storage. 1,281 1,217 4,570 4,445 6,408 6,142
Energy Marketing. . . . . . . . - - - 96,904 - 203,310
Corporate and Other . . . . . . (5,098) (2,654) (13,695) (7,461) (17,247) (10,972)
-------- -------- --------- --------- --------- ---------
Total Operating Revenues. . . $70,326 $39,997 $277,106 $275,106 $386,763 $461,766
======== ======== ========= ========= ========= =========
OPERATING INCOME (LOSS)
Gas Distribution. . . . . . . . $ 1,110 $(2,017) $ 35,117 $ 19,915 $ 55,336 $ 29,930
Construction Services . . . . . 3,678 1,736 833 811 2,634 1,688
Engineering Services. . . . . . (183) (494) 30 (586) 103 440
Propane, Pipelines and Storage. 249 268 997 1,435 1,903 2,022
Energy Marketing. . . . . . . . - - - (341) - 1,513
Corporate and Other . . . . . . (831) (759) (2,013) (1,685) (2,670) (2,897)
-------- -------- --------- --------- --------- ---------
Total Operating Income (Loss) $ 4,023 $(1,266) $ 34,964 $ 19,549 $ 57,306 $ 32,696
======== ======== ========= ========= ========= =========
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".
- 16 -
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
GAS DISTRIBUTION (Continued)
Operating income for the Gas Distribution Business was $1.1 million for the
quarter ended September 30, 2000, compared to an operating loss of $2.0 million
for the quarter ended September 30, 1999. On a weather-normalized basis, the
operating income of the Gas Distribution Business would essentially have been
unchanged at approximately $1.1 million for the third quarter of 2000 compared
to an operating loss of approximately $1.2 million for the same period of the
prior year.
Three Months Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
-------------------- -------------------- --------------------
2000 1999 2000 1999 2000 1999
--------- --------- --------- --------- --------- ---------
(dollars in thousands)
Gas sales revenues. . . . . . . . . . $ 30,545 $ 15,618 $ 172,438 $ 116,921 $ 246,686 $ 165,244
Cost of gas sold. . . . . . . . . . . 14,961 7,974 98,050 73,384 142,456 105,107
--------- --------- --------- --------- --------- ---------
Gas sales margin. . . . . . . . . . $ 15,584 $ 7,644 $ 74,388 $ 43,537 $ 104,230 $ 60,137
Gas transportation revenue. . . . . . 5,023 3,240 22,815 13,502 31,682 18,353
Other operating revenue . . . . . . . 424 436 2,355 2,560 3,088 3,389
--------- --------- --------- --------- --------- ---------
Gross margin. . . . . . . . . . . . $ 21,031 $ 11,320 $ 99,558 $ 59,599 $ 139,000 $ 81,879
Operating expenses. . . . . . . . . . 19,921 13,337 64,441 39,684 83,664 51,949
--------- --------- --------- --------- --------- ---------
Operating income (loss) . . . . . . . $ 1,110 $ (2,017) $ 35,117 $ 19,915 $ 55,336 $ 29,930
========= ========= ========= ========= ========= =========
Weather-normalized operating
income (loss) . . . . . . . . . . . $ 1,080 $ (1,167) $ 40,402 $ 23,515 $ 62,321 $ 37,380
========= ========= ========= ========= ========= =========
Volumes of gas sold (MMcf). . . . . . 6,072 2,082 38,592 22,276 55,562 32,108
Volumes of gas transported (MMcf) . . 9,106 4,891 35,771 19,712 48,475 26,915
Number of customers at end of period. 361,228 249,633 361,228 249,633 361,228 249,633
Degree Days . . . . . . . . . . . . . 317 152 4,567 4,124 7,093 6,133
Percent colder (warmer) than normal . 8.6% (25.9)% (8.8)% (8.4)% (7.2)% (11.4)%
<FN>
The amounts in the above table include intercompany transactions.
GAS SALES MARGIN - During the third quarter of 2000, gas sales margin
increased by $7.9 million when compared to the third quarter of 1999. The
increase includes approximately $6.1 million of gas sales margin from ENSTAR.
The remaining $1.8 million of the increase is attributable to the Michigan gas
distribution operation and is due in part to an increase in sales margins earned
on the sale of the gas commodity as a result of a gas supply and storage
arrangement with TransCanada Gas Services, Inc. ("TransCanada") and an increase
in gas sales as a result of cooler weather compared to the third quarter of
1999. The increase was also due to gas sales margins from new customers and
customers switching from the Company's aggregated transportation services
("ATS") program back to general gas sales service.
- 17 -
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
GAS DISTRIBUTION (Continued)
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 third quarter of 2000 was 8.6% colder than normal in
Michigan and Alaska combined, while the weather during the third quarter of 1999
was 25.9% warmer than normal. Under normal weather conditions, gas sales margin
for the quarter ended September 30, 2000 would have been lower by less than $.1
million and for the quarter ended September 30, 1999 would have been higher by
approximately $.8 million.
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.
During 2000, certain ATS customers switched back to the Company's general gas
sales service because the third-party suppliers they were utilizing stopped
participating in the ATS program primarily due to a significant increase in the
market price of natural gas.
Gas sales margin for the nine months ended September 30, 2000 increased by
$30.9 million when compared to the same period of 1999. The increase includes
approximately $27.7 million of gas sales margin from ENSTAR. The remaining $3.2
million of the increase is attributable to the Michigan gas distribution
operation and relates in part to gas sales margins from new customers and sales
margins earned on the sale of the gas commodity. Customers switching from the
Company's ATS program back to general gas sales service also contributed to the
increase.
Weather during the nine months ended September 30, 2000 was 8.8% warmer
than normal in Michigan and Alaska combined, while the weather during the nine
months ended September 30, 1999 was 8.4% warmer than normal. Under normal
weather conditions, gas sales margin for the nine months ended September 30,
2000 and 1999 would have been higher by approximately $5.3 million and $3.6
million, respectively. The impact of weather on gas sales margin during the nine
months ended September 30, 2000 was much larger than during the same period of
1999, despite only slightly warmer weather. This is due to the increase in
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 sales margin for the twelve months ended September 30, 2000 increased
by $44.1 million when compared to the twelve months ended September 30, 1999.
The increase includes approximately $39.3 million of gas sales margin from
ENSTAR. The remaining $4.8 million of the increase is attributable to the
Michigan gas distribution operation and relates to gas sales margins from new
customers, sales margins earned on the sale of the gas commodity and increased
gas sales as a result of cooler weather during the twelve months ended September
30, 2000, when compared to the same period ended September 30, 1999. These
increases were partially offset by the impact of a shift in customers to
transportation as a result of their participation in the Company's ATS program.
- 18 -
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
GAS DISTRIBUTION (Continued)
Weather during the twelve months ended September 30, 2000 was 7.2% warmer
than normal in Michigan and Alaska combined, while the weather during the twelve
months ended September 30, 1999 was 12.7% warmer than normal. Under normal
weather conditions, gas sales margin for the twelve months ended September 30,
2000 and 1999 would have been higher by approximately $7.0 million and $7.4
million, respectively. The impact of weather on gas sales margin during the
twelve months ended September 30, 2000 was only slightly less than during the
same period of 1999, despite significantly warmer weather during the twelve
months ended September 30, 1999. As discussed previously, this is due to the
increased customer base as a result of the ENSTAR acquisition.
GAS TRANSPORTATION REVENUE - For the three months, nine months and twelve
months ended September 30, 2000, gas transportation revenue increased by $1.8
million, $9.3 million and $13.3 million, respectively, when compared to the same
periods ended June 30, 1999. The increases are due in part to ENSTAR's
transportation revenues during the three months, nine months and twelve months
ended June 30, 2000 of $2.6 million $9.6 million and $12.6 million,
respectively. The remainder of the increase during twelve months ended
September 30, 2000 relates primarily to customers participating in the new ATS
program. The offsetting decrease for the three months and nine months ended
September 30, 2000 was due primarily to ATS customers switching from the ATS
program back to the Company's general gas sales service. As discussed above,
the ATS program has essentially no impact on operating income because the
Company charges ATS customers the same distribution fees and customer fees that
are charged to general gas sales service customers.
OPERATING EXPENSES - The operating expenses of the Gas Distribution
Business during the three months, nine months and twelve months ended September
30, 2000 increased by $6.7 million, $24.8 million and $31.7 million,
respectively, when compared to the same periods ended September 30, 1999.
Operating expenses attributable to ENSTAR during the three months, nine months
and twelve months ended September 30, 2000 accounted for $7.8 million, $25.3
million and $31.3 million of the increases, respectively. The remainder of the
increases or offsetting decreases for each of the three periods relates to the
Michigan operation.
During the three months, nine months and twelve months ended September 30,
2000, depreciation and amortization expense for the Michigan operation increased
by $.2 million, $.5 million and $.6 million, respectively, when compared to the
same periods ended September 30, 1999. The increases were primarily due to
additional property, plant and equipment placed in service. General business
taxes decreased during the three months and nine months ended September 30, 2000
by approximately $1.7 million and $.5 million, respectively. The decrease
during the third quarter of 2000 was due in part to a reduction in property
taxes recorded during the quarter based on pending appeals of prior years'
personal property assessments in Michigan ("prior year tax appeals") and new
property valuation tables approved by the State of Michigan in 1999 ("new
property tax tables"). In addition, a portion of the decrease for the third
quarter was due to a decrease in 2000 property taxes as a result of the new
property tax tables. The decrease in general business taxes for the nine months
ended September 30, 2000 was also due to the items causing the third quarter
2000 decrease, offset partially by a property tax reduction recorded in the
second quarter of 1999 based on the prior year tax appeals.
The remaining variances in operating expenses between the three, nine and
twelve-month periods are due primarily to reductions in intercompany expense
allocations and changes in employee related expenses including decreases in
employee benefit expenses primarily due to changes in actuarial assumptions
associated with the employee benefit plans.
- 19 -
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
CONSTRUCTION SERVICES
In May 2000, the Company acquired KLP Construction Co. ("KLP") for approximately
$1.8 million. For financial statement purposes, the acquisition of KLP has been
accounted for as a purchase and, accordingly, its results of operations are
included in the consolidated financial statements and the table below since the
date of acquisition.
Three Months Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
------------------ ----------------- -------------------
2000 1999 2000 1999 2000 1999
------- ------- ------- ------- ------- -------
(in thousands)
Operating revenues. . . . $33,239 $18,752 $72,184 $35,468 $94,988 $44,511
Operating expenses. . . . 29,561 17,016 71,351 34,657 92,354 42,823
------- ------- ------- ------- ------- -------
Operating income. . . . . $ 3,678 $ 1,736 $ 833 $ 811 $ 2,634 $ 1,688
======= ======= ======= ======= ======= =======
Feet of pipe installed. . 2,521 1,966 5,448 4,142 7,514 5,685
======= ======= ======= ======= ======= =======
<FN>
The amounts in the above table include intercompany transactions.
OPERATING REVENUES - The operating revenues of the construction services
segment ("Construction Services") for the three months, nine months and twelve
months ended September 30, 2000 increased by $14.5 million, $36.7 million and
$50.5 million, respectively (approximately 77%, 104% and 113%, respectively)
when compared to the same periods ended September 30, 1999. The increases are
due primarily to the timing of business acquisitions and an increase in
construction projects. Several construction business acquisitions were made
during or after the three months, nine months and twelve months ended September
30, 1999. 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 had operating income of $3.7
million for the third quarter of 2000, which was more than double the $1.7
million reported for the third quarter of 1999. The increase was due primarily
to the timing of business acquisitions and an increase in construction projects
as discussed above.
Operating income was approximately $.8 million for both the nine months
ended September 30, 2000 and the nine months ended September 30, 1999. While
the operating income for each of the nine-month periods was approximately the
same, the seasonal results within each of the nine-month periods were
significantly different. For 2000, the operating losses during the winter and
spring months and operating income during the summer months were much larger
than in 1999. The changes in seasonal operating results during 2000 are due
primarily to the operating results of construction businesses acquired during or
after the first nine months of 1999 and expected higher operating costs related
to revenue growth during the slow construction season in the first half of 2000.
Construction Services generally incurs operating losses during the winter and
spring months when underground construction is inhibited by weather and costs
frequently exceed revenues as construction crews and equipment is staged at
worksites and may not be 100 percent productive for a period of time. In
contrast, Construction Services generates the majority of its income during the
summer and fall construction season when crews are fully productive. As the
Company expands its construction business, the seasonal losses and profits
become proportionally larger.
- 20 -
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
CONSTRUCTION SERVICES (Continued)
Operating income for the twelve months ended September 30, 2000 increased
by $.4 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 items discussed above, which effected results for the three and
nine-month periods.
Operating income during the three, nine and twelve months ended September
30, 2000 was also impacted by higher fuel costs and operating costs incurred on
certain construction projects delayed by rain or other events. Management
anticipates that all planned projects will be completed by year-end.
ENGINEERING SERVICES
Three Months Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
------------------ ------------------- -------------------
2000 1999 2000 1999 2000 1999
-------- -------- -------- --------- -------- --------
(in thousands, except billed hours)
Operating revenues. . . . . . . . . $ 4,912 $ 3,388 $ 16,439 $ 12,767 $ 21,158 $ 31,789
Operating expenses. . . . . . . . . 5,095 3,882 16,409 13,353 21,055 31,349
-------- -------- -------- --------- -------- --------
Operating income (loss) . . . . . . $ (183) $ (494) $ 30 $ (586) $ 103 $ 440
======== ======== ======== ========= ======== ========
Billed hours. . . . . . . . . . . . 53,000 74,000 241,000 266,000 334,000 436,000
======== ======== ======== ========= ======== ========
<FN>
The amounts in the above table include intercompany transactions.
OPERATING REVENUES - The engineering services segment ("Engineering
Services") had operating revenues during the three months and nine months ended
September 30, 2000 of $4.9 million and $16.4 million, respectively, compared to
$3.4 million and $12.8 million, respectively for the same periods of the prior
year. The increase in operating revenues was due primarily to the revenues of
engineering field service businesses acquired during the last half of 1999 and
to projects with higher revenue potential compared to 1999.
During the twelve months ended September 30, 2000, Engineering Services'
operating revenues decreased by approximately $10.6 million when compared to the
twelve months ended September 30, 1999. The decrease was due primarily to a
reduction in pipeline quality assurance projects and large turn-key projects.
OPERATING INCOME - Engineering Services had an operating loss of $.2
million during the third quarter of 2000 compared to an operating loss of $.5
million during the same quarter of 1999. During the nine months ended September
30, 2000, Engineering Services had slightly better than breakeven operating
income compared to an operating loss of $.6 million during the same period of
1999. The improvement in operating results for each period was due primarily to
projects with better revenue and profit margin potential compared to 1999 and
the absence in 2000 of unanticipated project costs incurred in 1999.
Operating income decreased by $.3 million during the twelve months ended
September 30, 2000, when compared to the twelve months ended September 30, 1999.
The decrease in operating income was due primarily a reduction in pipeline
quality assurance projects and large turn-key projects offset partially by the
absence during the twelve months ended September 30, 2000 of unanticipated
project costs incurred during the same period of 1999.
- 21 -
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
PROPANE, PIPELINES AND STORAGE
Three Months Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
------------------ ----------------- -------------------
2000 1999 2000 1999 2000 1999
------ ------ ------ ------ ------ ------
(in thousands)
Operating revenues. . . $1,281 $1,217 $4,570 $4,445 $6,408 $6,142
Operating expenses. . . 1,032 949 3,573 3,010 4,505 4,120
------ ------ ------ ------ ------ ------
Operating income. . . . $ 249 $ 268 $ 997 $1,435 $1,903 $2,022
====== ====== ====== ====== ====== ======
OPERATING REVENUES - The operating revenues of the Company's propane,
pipelines and storage business for the three, nine and twelve months ended
September 30, 2000 increased slightly when compared to the same periods ended
September 30, 1999. The increases during all the periods were primarily due to
higher propane distribution revenues offset partially by slightly lower pipeline
revenues. Pipeline revenues were down primarily 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, nine and twelve months ended
September 30, 2000 by less than $.1 million and approximately $.4 million and
$.1 million, respectively, when compared to the same periods ended September 30,
1999. The decreases were caused primarily by higher propane costs, which
reduced propane margins, and the absence of operating income from a pipeline
that was sold in mid-1999.
OTHER INCOME AND DEDUCTIONS
Three Months Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
------------------ -------------------- --------------------
2000 1999 2000 1999 2000 1999
-------- -------- --------- --------- --------- ---------
(in thousands)
Divestiture of energy marketing business. $ - $ - $ - $ 1,122 $ - $ 1,122
Divestiture of NOARK investment . . . . . - - - - - 3,568
Interest expense. . . . . . . . . . . . . (8,304) (3,946) (26,405) (11,616) (35,364) (15,452)
Other income. . . . . . . . . . . . . . . 14 920 1,683 1,866 2,443 1,678
-------- -------- --------- --------- --------- ---------
Total other income (deductions) . . . . $(8,290) $(3,026) $(24,722) $ (8,628) $(32,921) $ (9,084)
======== ======== ========= ========= ========= =========
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 six months and twelve months ended June 30, 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.
- 22 -
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
OTHER INCOME AND DEDUCTIONS (CONTINUED)
INTEREST EXPENSE - Interest expense for the three months, nine months and
twelve months ended September 30, 2000, when compared to the same periods ended
September 30, 1999, increased by $4.4 million, $14.8 million and $19.9 million,
respectively. 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. The increases during the nine months and twelve
months ended September 30, 2000 are also offset partially by $2.1 million of
income recognized on interest rate hedge instruments during the first quarter of
2000. The most significant increase in debt levels occurred on November 1, 1999
when the Company incurred $290 million of additional short-term debt to finance
the acquisition of ENSTAR ("bridge loan"). The bridge loan was repaid during the
second and third quarters of 2000 with the proceeds of several securities
offerings and borrowings from the Company's bank lines of credit, which are all
discussed in Note 2 of the Notes to the Consolidated Financial Statements.
OTHER INCOME - Other income for the three months and nine months ended
September 30, 2000 decreased by $.9 million and $.2 million respectively, when
compared to the same periods ended September 30, 1999. The decrease during the
third quarter of 2000 was due primarily to the absence during the quarter of
life insurance proceeds received during the third quarter of 1999. The decrease
during the nine months ended September 30, 2000 was due primarily to the life
insurance proceeds received during the third quarter of 1999, offset partially
by 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) and an
increase in gains on property sales and other miscellaneous non-operating
income.
INCOME TAXES
Income taxes for the three months, nine months and twelve months ended
September 30, 2000 increased (decreased) by approximately $.5 million, $.6
million and ($.7 million), respectively, when compared to the same periods ended
September 30, 1999. The change in income taxes, when comparing one period to
another, is due primarily to changes in earnings before income taxes and
dividends on trust preferred securities and any adjustments necessary for
compliance with tax laws and regulations.
DIVIDENDS ON TRUST PREFERRED SECURITIES, NET OF INCOME TAX
The Company issued trust preferred securities and FELINE PRIDES during the
second quarter of 2000. These securities are described in Note 2 of the Notes
to the Consolidated Financial Statements. Dividends on these securities, net of
income tax, for the three months and nine months ended September 30, 2000 were
approximately $2.1 million and $2.9 million, respectively.
- 23 -
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FROM INVESTING - The following table identifies capital
investments for the three and nine months ended September 30, 2000 and 1999:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2000 1999 2000 1999
------- ------- ------- -------
(in thousands)
Capital investments:
Property additions - gas distribution. . . . $16,883 $ 6,005 $37,839 $14,188
Property additions - diversified businesses. 3,858 2,241 12,047 7,613
Business acquisitions (a). . . . . . . . . . - 10,273 1,784 14,297
------- ------- ------- -------
$20,741 $18,519 $51,670 $36,098
======= ======= ======= =======
<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 $49.9 million on property additions
during the first six months of 2000 and anticipates spending approximately $10.8
million on property additions during the remainder of 2000. The increase in
property additions in 2000 is due in large part to additional expenditures
related to ENSTAR and certain construction businesses that were not part of the
Company in early 1999 and to the construction of a large diameter transmission
pipeline at the Michigan gas distribution operation to supply a power generation
plant currently under construction.
The Company may also incur additional expenditures for business
acquisitions during the remainder of 2000.
CASH FLOWS FROM OPERATIONS - Net cash from operating activities for the
three and nine months ended September 30, 2000, when compared to the same
periods of the prior year, increased by $4.7 million and $6.5 million,
respectively. 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 - Net cash from financing activities during the
three and nine months ended September 30, 2000 increased by $8.7 million and
$20.2 million, respectively, when compared to the same periods ended September
30, 1999.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ---------------------
2000 1999 2000 1999
-------- -------- ---------- ---------
(in thousands)
Cash provided by (used in) financing activities:
Issuance (repurchase) of common stock . . . . . $ 216 $ 184 $ 659 $ 3,546
Issuance of trust preferred securities. . . . . 10,196 - 134,968 -
Issuance of long-term debt. . . . . . . . . . . (133) - 136,717 -
Net cash change in notes payable. . . . . . . . 27,735 29,011 (253,738) (4,621)
Payment of dividends. . . . . . . . . . . . . . (3,787) (3,681) (11,243) (11,762)
-------- -------- ---------- ---------
$34,227 $25,514 $ 7,363 $(12,837)
======== ======== ========== =========
- 24 -
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
LIQUIDITY AND CAPITAL RESOURCES (Continued)
In October 2000 the Company's Board of Directors declared a regular
quarterly cash dividend of $.21 per share on the Company's common stock. The
dividend is payable on November 15, 2000 to shareholders of record at the close
of business on August 3, 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. During the second and third quarters of
2000 the Company and two of the capital trusts issued various securities and
used the net proceeds therefrom to repay the bridge loan utilized for the
acquisition of ENSTAR. Refer to Note 2 of the Notes to the Consolidated
Financial Statements for additional information regarding the registration
statement and securities issued.
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 September 30, 2000, the Company had short-term credit
facilities of $160 million, $140 million of which was committed facilities.
$36.7 million of these short-term credit facilities was unused at September 30,
2000.
As discussed above and in Note 2 of the Notes to the Consolidated Financial
Statements, the Company has registered up to $500 million of securities under a
registration statement filed in March 2000, of which $276 million was utilized
to issue securities during the second and third quarters of 2000.
The Company may acquire additional businesses during the remainder of 2000.
If business acquisitions are made, the Company 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's ratio of earnings to fixed charges was 1.5 for the twelve
months ended September 30, 2000.
NEW ACCOUNTING STANDARD
In June of 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133 was amended by the
issuance in June of 2000 of SFAS 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an amendment of FASB Statement No.
133." SFAS 133 is effective for fiscal years beginning after June 15, 2000 and
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.
- 25 -
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
NEW ACCOUNTING STANDARD (Continued)
In order to implement SFAS 133 by January 1, 2001, the Company has
established a project team to identify all derivative instruments, measure the
fair value of those instruments, designate and document various hedge
relationships, and evaluate the effectiveness of those hedge relationships. As
of November 1, 2000, the Company has completed the process of identifying all
derivative instruments and is currently in the process of establishing
appropriate fair value measurements of those derivative instruments. In
addition, the Company is in the process of designating and documenting all
hedging relationships and establishing tests and methodologies for evaluating
the hedge effectiveness of its hedging relationships.
The Company believes that the majority of its derivative contracts qualify
for the normal purchases and sales exception of the new standard and, therefore,
would not have to be recognized at fair value. The Company expects to have the
implementation of SFAS 133 completed by January 1, 2001.
OTHER ITEMS
During third quarter of 2000, the Company offered early retirement programs
to certain employees at the Company's gas distribution operations and corporate
offices in Michigan and Alaska. Sixty-three employees, or approximately ten
percent of the combined workforces for these operations, elected to take the
early retirement offer. Under the programs, eligible employees received
enhanced benefits if they chose to retire early.
In July 2000, the Company announced that it is exploring strategic
alternatives in an effort to enhance and maximize shareholder value. These
alternatives include evaluation of possible transactions, such as a merger with
a strategic partner. The Company anticipates that its review of strategic
alternatives will be completed by year-end.
- 26 -
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES.
During the third quarter of 2000, the Company issued an aggregate of
2,087 shares of unregistered common stock to the members of its Board of
Directors in exchange for services rendered, valued at $30,700.
The preceding transaction was exempt from registration under Section
4(2) of the Securities Act of 1933.
ITEM 3. DEFAULT UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.
Not applicable
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) List of Exhibits - (See page 29 for the Exhibit Index.)
10.1 Executive Security Trust
10.2 Supplemental Executive Retirement Plan
Executive Security Agreement
10.3 Split Dollar Agreement
12 Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
The Company filed the following Form 8-K Reports during the third
quarter of 2000: (1) report filed on July 17, 2000, to announce the resignation
of Carl W. Porter, President and Chief Operating Officer of the Company, for
personal reasons, (2) report filed on July 25, 2000 to report second quarter
earnings and announce that the Company is exploring strategic alternatives to
increase shareholder value, and (3) report filed on July 27, 2000, to file
exhibits relating to the securities offerings recently completed.
- 27 -
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: November 13 2000
By: /s/Sebastian Coppola
------------------------------------
Sebastian Coppola
Senior Vice President and Principal
Financial Officer
- 28 -
EXHIBIT INDEX
Form 10-Q
Third Quarter 2000
Exhibit
No. Description Filed Herewith
- ------- ------------------------------------------------ --------------
10.1 Executive Security Trust. . . . . . . . . . x
10.2 Supplemental Executive Retirement Plan
Executive Security Agreement. . . . . . . . x
10.3 Split Dollar Agreement. . . . . . . . . . . x
12 Ratio of Earnings to Fixed Charges. . . . . . x
27 Financial Data Schedule.. . . . . . . . . . . x
- 29-