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 JUNE 30, 2001
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.)
28470 13 MILE ROAD, SUITE 300, FARMINGTON HILLS, MICHIGAN 48334
(Address of principal executive offices)
248-702-6000
(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 July 31,
2001: 18,077,798
INDEX TO FORM 10-Q
------------------
For Quarter Ended June 30, 2001
Page
Number
------
COVER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
INDEX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS. . . . . . . . . . . . . . . . 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . .. . . . . . . . . . . 12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 3. Default upon Senior Securities. . . . . . . . . . . . . . . . . . . . . 23
Item 4. Submission of Matters to a Vote of Securityholders . . . . . . . . . . 23
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . 23
SIGNATURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
EXHIBIT INDEX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
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
and construction 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.
- 2 -
SEMCO ENERGY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
------------------ -------------------- --------------------
2001 2000 2001 2000 2001 2000
-------- -------- --------- --------- --------- ---------
OPERATING REVENUES
Gas sales. . . . . . . . . . . . . . . . . . . . $48,245 $42,961 $170,269 $141,893 $301,688 $231,759
Gas transportation . . . . . . . . . . . . . . . 5,344 6,294 13,402 17,791 26,393 29,899
Engineering and Construction . . . . . . . . . . 33,032 25,109 51,184 41,692 117,297 85,147
Other. . . . . . . . . . . . . . . . . . . . . . 2,394 2,114 6,088 5,404 11,377 9,629
-------- -------- --------- --------- --------- ---------
89,015 76,478 240,943 206,780 456,755 356,434
-------- -------- --------- --------- --------- ---------
OPERATING EXPENSES
Cost of gas sold . . . . . . . . . . . . . . . . 28,043 22,555 108,627 83,090 187,482 135,470
Operations and maintenance . . . . . . . . . . . 44,022 38,103 78,351 70,520 159,871 130,288
Depreciation and amortization. . . . . . . . . . 9,080 8,219 18,178 16,201 35,449 27,510
Property and other taxes . . . . . . . . . . . . 2,829 2,928 5,766 6,027 9,616 11,149
-------- -------- --------- --------- --------- ---------
83,974 71,805 210,922 175,838 392,418 304,417
-------- -------- --------- --------- --------- ---------
OPERATING INCOME . . . . . . . . . . . . . . . . . 5,041 4,673 30,021 30,942 64,337 52,017
OTHER INCOME (DEDUCTIONS)
Interest expense . . . . . . . . . . . . . . . . (7,742) (9,405) (15,752) (18,101) (32,564) (31,006)
Other. . . . . . . . . . . . . . . . . . . . . . 834 608 1,712 1,668 3,003 3,349
-------- -------- --------- --------- --------- ---------
(6,908) (8,797) (14,040) (16,433) (29,561) (27,657)
-------- -------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES
AND DIVIDENDS ON TRUST
PREFERRED SECURITIES . . . . . . . . . . . . . . (1,867) (4,124) 15,981 14,509 34,776 24,360
INCOME TAX PROVISION (CREDIT). . . . . . . . . . . (678) (1,807) 5,964 4,832 12,737 7,549
-------- -------- --------- --------- --------- ---------
NET INCOME (LOSS) BEFORE DIVIDENDS
ON TRUST PREFERRED SECURITIES. . . . . . . . . . (1,189) (2,317) 10,017 9,677 22,039 16,811
Dividends on trust preferred securities, net of
income taxes . . . . . . . . . . . . . . . . . . 2,150 757 4,300 757 8,548 757
-------- -------- --------- --------- --------- ---------
NET INCOME (LOSS) AVAILABLE TO
COMMON SHAREHOLDERS. . . . . . . . . . . . . . . $(3,339) $(3,074) $ 5,717 $ 8,920 $ 13,491 $ 16,054
======== ======== ========= ========= ========= =========
BASIC EARNINGS (LOSS) PER SHARE. . . . . . . . . . $ (0.18) $ (0.17) $ 0.32 $ 0.50 $ 0.75 $ 0.90
======== ======== ========= ========= ========= =========
DILUTED EARNINGS (LOSS) PER SHARE. . . . . . . . . $ (0.18) $ (0.17) $ 0.30 $ 0.50 $ 0.71 $ 0.90
======== ======== ========= ========= ========= =========
CASH DIVIDENDS PAID PER SHARE. . . . . . . . . . . $ 0.210 $ 0.210 $ 0.420 $ 0.415 $ 0.840 $ 0.824
======== ======== ========= ========= ========= =========
AVERAGE COMMON SHARES OUTSTANDING. . . . . . . . . 18,062 17,992 18,060 17,954 18,051 17,887
======== ======== ========= ========= ========= =========
<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)
June 30, December 31,
2001 2000
-------- ------------
(Unaudited)
CURRENT ASSETS
Cash and temporary cash investments . . . . . . . . . $ 7,655 $ 1,221
Receivables, less allowances of $1,645 and $1,436 . . 49,136 73,139
Accrued revenue . . . . . . . . . . . . . . . . . . . 12,721 32,212
Prepaid expenses. . . . . . . . . . . . . . . . . . . 13,640 14,309
Gas in underground storage. . . . . . . . . . . . . . 8,715 8,739
Materials and supplies, at average cost . . . . . . . 6,006 5,065
Gas charges recoverable from customers. . . . . . . . 2,310 2,698
Accumulated deferred income taxes . . . . . . . . . . 4,143 6,994
Other . . . . . . . . . . . . . . . . . . . . . . . . 2,754 946
-------- --------
107,080 145,323
PROPERTY, PLANT AND EQUIPMENT
Gas distribution. . . . . . . . . . . . . . . . . . . 603,144 585,628
Diversified businesses. . . . . . . . . . . . . . . . 85,017 79,167
-------- --------
688,161 664,795
Less - accumulated depreciation . . . . . . . . . . . 170,834 154,769
-------- --------
517,327 510,026
DEFERRED CHARGES AND OTHER ASSETS
Goodwill, less amortization of $11,427 and $9,117 . . 167,421 169,692
Deferred retiree medical benefits . . . . . . . . . . 10,337 10,790
Unamortized debt expense. . . . . . . . . . . . . . . 8,127 6,966
Other . . . . . . . . . . . . . . . . . . . . . . . . 12,846 8,426
-------- --------
198,731 195,874
-------- --------
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . $823,138 $851,223
======== ========
<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)
June 30, December 31,
2001 2000
-------- ------------
(Unaudited)
CURRENT LIABILITIES
Notes payable. . . . . . . . . . . . . . . . . . . . . . . . . $ 71,351 $134,142
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . 24,308 32,300
Customer advance payments. . . . . . . . . . . . . . . . . . . 8,259 13,068
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . 7,789 8,020
Amounts payable to customers . . . . . . . . . . . . . . . . . 1,295 3,097
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,525 10,774
-------- --------
122,527 201,401
DEFERRED CREDITS AND OTHER LIABILITIES
Accumulated deferred income taxes. . . . . . . . . . . . . . . 33,506 36,385
Customer advances for construction . . . . . . . . . . . . . . 12,936 14,444
Unamortized investment tax credit. . . . . . . . . . . . . . . 1,579 1,713
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,764 14,504
-------- --------
60,785 67,046
LONG-TERM DEBT . . . . . . . . . . . . . . . . . . . . . . . . . 367,500 307,930
COMPANY-OBLIGATED MANDATORILY REDEEMABLE TRUST
PREFERRED SECURITIES OF SUBSIDIARIES HOLDING
SOLELY DEBT SECURITIES OF SEMCO ENERGY, INC. . . . . . . . . . 139,393 139,374
COMMON SHAREHOLDERS' EQUITY
Common stock - $1 par value; 40,000,000 shares authorized;
18,067,945 and 18,055,639 shares outstanding . . . . . . . . 18,068 18,056
Capital surplus. . . . . . . . . . . . . . . . . . . . . . . . 114,502 115,186
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . 363 2,230
-------- --------
132,933 135,472
-------- --------
TOTAL LIABILITIES AND CAPITALIZATION . . . . . . . . . . . . . . $823,138 $851,223
======== ========
<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 Six Months Ended
June 30, June 30,
--------------------- ---------------------
2001 2000 2001 2000
--------- ---------- --------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) . . . . . . . . . . . . . . . . . . . . . $ (3,339) $ (3,074) $ 5,717 $ 8,920
Adjustments to reconcile net income (loss) to net
cash from operating activities:
Depreciation and amortization . . . . . . . . . . . . 9,080 8,219 18,178 16,201
Changes in assets and liabilities, net of effects of
acquisitions, divestitures and other changes as
shown below: . . . . . . . . . . . . . . . . . . . (11,491) 12,489 22,779 26,016
--------- ---------- --------- ----------
NET CASH FROM OPERATING ACTIVITIES. . . . . . . (5,750) 17,634 46,674 51,137
--------- ---------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Property additions - gas distribution . . . . . . . . . . . (9,774) (14,333) (17,668) (20,956)
Property additions - diversified businesses and other . . . (6,209) (5,753) (10,643) (8,189)
Proceeds from property sales, net of retirement costs . . . 102 (487) (136) (202)
Acquisitions of businesses, net of cash acquired. . . . . . - (784) - (784)
--------- ---------- --------- ----------
NET CASH FROM INVESTING ACTIVITIES. . . . . . . (15,881) (21,357) (28,447) (30,131)
--------- ---------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock, net of expenses . . . . . . . . . 111 225 144 443
Issuance of trust preferred securities, net of expenses . . - 124,772 - 124,772
Issuance of long-term debt, net of expenses . . . . . . . . 58,448 136,850 58,448 136,850
Net cash change in notes payable. . . . . . . . . . . . . . (32,063) (257,681) (62,791) (281,473)
Payment of dividends. . . . . . . . . . . . . . . . . . . . (3,792) (3,784) (7,584) (7,456)
--------- ---------- --------- ----------
NET CASH FROM FINANCING ACTIVITIES. . . . . . . 22,704 382 (11,783) (26,864)
--------- ---------- --------- ----------
CASH AND TEMPORARY CASH INVESTMENTS
Net increase (decrease) . . . . . . . . . . . . . . . . . . 1,073 (3,341) 6,444 (5,858)
Beginning of period . . . . . . . . . . . . . . . . . . . . 6,592 3,569 1,221 6,086
--------- ---------- --------- ----------
End of period . . . . . . . . . . . . . . . . . . . . . . . $ 7,665 $ 228 $ 7,665 $ 228
========= ========== ========= ==========
CHANGES IN ASSETS AND LIABILITIES, NET OF EFFECTS OF
ACQUISITIONS, DIVESTITURES AND OTHER CHANGES:
Receivables, net. . . . . . . . . . . . . . . . . . . $ (1,101) $ 7,871 $ 24,003 $ 33,544
Accrued revenue . . . . . . . . . . . . . . . . . . . 10,865 9,813 19,491 19,260
Materials, supplies and gas in underground storage. . (7,281) (2,066) (916) 2,092
Gas charges recoverable from customers. . . . . . . . 162 45 388 106
Accounts payable. . . . . . . . . . . . . . . . . . . (3,343) 5,557 (7,992) (17,700)
Customer advances and amounts payable to customers. . (456) (433) (8,120) (8,775)
Accrued taxes . . . . . . . . . . . . . . . . . . . . (6,390) (7,776) (498) (2,886)
Other . . . . . . . . . . . . . . . . . . . . . . . . (3,947) (522) (3,577) 375
--------- ---------- --------- ----------
$(11,491) $ 12,489 $ 22,779 $ 26,016
========= ========== ========= ==========
<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 2000 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
2001 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.
NEW ACCOUNTING STANDARD - On January 1, 2001, the Company adopted Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," and SFAS No. 137 and SFAS No. 138, which
were amendments to SFAS No. 133 (hereinafter collectively referred to as "SFAS
133"). SFAS 133 was 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.
Certain gas purchase contracts of the Company qualify under the provisions
of SFAS 133 and require the recognition of the derivatives at their fair value
in the Consolidated Statement of Financial Position as an asset or liability.
Upon adoption of SFAS 133 on January 1, 2001, the Company recorded an asset and
liability of $1.4 million. At June 30, 2001, the Company had an asset and
liability of $5,000 recorded in its Consolidated Statement of Financial Position
in accordance with SFAS 133.
- 7 -
SEMCO ENERGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
SUPPLEMENTAL CASH FLOW INFORMATION - Supplemental cash flow information for
the three and six month periods ended June 30, 2001 and 2000 is summarized in
the table below.
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
2001 2000 2001 2000
------ -------- ------- --------
(in thousands)
CASH PAID DURING THE PERIOD FOR:
Interest . . . . . . . . . . . . . . . . . . . $8,440 $10,271 $15,591 $18,081
Income taxes, net of refunds . . . . . . . . . $4,258 $ 5,527 $ 4,258 $ 7,884
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Capital stock issued for acquisitions. . . . . $ - $ 1,000 $ - $ 1,000
Deferred payments for acquisitions . . . . . . $ - $ - $ - $ -
DETAILS OF ACQUISITIONS:
Fair value of assets acquired. . . . . . . . . $ - $ 3,364 $ - $ 3,364
Fair value of liabilities assumed. . . . . . . - (1,576) - (1,576)
Deferred payments. . . . . . . . . . . . . . . - - - -
Company stock issued . . . . . . . . . . . . . - (1,000) - (1,000)
------ -------- ------- --------
Cash paid. . . . . . . . . . . . . . . . . . . $ - $ 788 $ - $ 788
Less cash acquired . . . . . . . . . . . . . . - 4 - 4
------ -------- ------- --------
Net cash paid for (acquired via) acquisitions. $ - $ 784 $ - $ 784
(2) SHORT-TERM BORROWINGS AND CAPITALIZATION
SHORT-TERM BORROWINGS - The Company has $145 million of short-term lines
of credit with banks. At June 30, 2001, $75 million of the Company's credit
facilities were unused. The Company is in the process of obtaining an
additional $15 million of short-term credit facilities.
LONG-TERM DEBT - During June 2001, the Company issued $60 million of 8%
Senior Notes due 2016. Interest on the Senior Notes is payable quarterly. On
or after June 30, 2006, the Company may redeem some or all of the Senior Notes
at a redemption price of 100% of the principal amount plus any accrued and
unpaid interest. The proceeds from the sale of the Senior Notes were used to
repay short-term debt and for general corporate purposes.
COMMON STOCK EQUITY - On June 14, 2001 the Company's Board of Directors
declared a regular quarterly cash dividend of $0.21 per share on the Company's
common stock. The dividend is payable on August 15, 2001 to shareholders of
record at the close of business on August 1, 2001.
- 8 -
SEMCO ENERGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
In February and May 2001, the Company paid quarterly cash dividends of
$0.21 per share on its common stock. The total cash dividend for the second
quarter of 2001 was approximately $3.8 million of which $.7 million was
reinvested by shareholders into common stock of the Company through
participation in the Direct Stock Purchase and Dividend Reinvestment Plan
("DRIP"). The total cash dividend for the first six months of 2001 was
approximately $7.6 million of which $1.4 million was reinvested by shareholders
through participation in the DRIP. Beginning in June 2001, the Company began
issuing shares of its common stock to the DRIP to meet the dividend reinvestment
and stock purchase requirements of the DRIP participants. Previously, the DRIP
met these requirements by purchasing Company common stock on the open market.
During June 2001, the Company issued approximately 3,100 shares to the DRIP.
Also, during the three and six months ended June 30, 2001, the Company issued
approximately 6,900 and 9,200 shares of its common stock, respectively, 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, six
and twelve months ended June 30, 2001 and 2000 are as follows (in thousands
except per share amounts):
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
------------------ ---------------- -------------------
2001 2000 2001 2000 2001 2000
-------- -------- ------- ------- ------- -------
BASIC EARNINGS (LOSS) PER SHARE COMPUTATION:
Net income (loss). . . . . . . . . . . . . . . . $(3,339) $(3,074) $ 5,717 $ 8,920 $13,491 $16,054
Weighted average common shares outstanding . . . 18,062 17,992 18,060 17,954 18,051 17,887
Earnings (loss) per share-basic. . . . . . . . . $ (0.18) $ (0.17) $ 0.32 $ 0.50 $ 0.75 $ 0.90
DILUTED EARNINGS (LOSS) PER SHARE COMPUTATION:
Net income (loss). . . . . . . . . . . . . . . . $(3,339) $(3,074) $ 5,717 $ 8,920 $13,491 $16,054
Adjustment for effect of assumed conversions:
Preferred convertible stock dividends. . . . - - - - - 5
-------- -------- ------- ------- ------- -------
Diluted net income (loss). . . . . . . . . . . . $(3,339) $(3,074) $ 5,717 $ 8,920 $13,491 $16,059
-------- -------- ------- ------- ------- -------
Weighted average common shares outstanding . . . 18,062 17,992 18,060 17,954 18,051 17,887
Incremental shares from assumed conversions of:
FELINE PRIDES. . . . . . . . . . . . . . . . - - 829 - 805 -
Stock options. . . . . . . . . . . . . . . . - - 27 5 31 2
Preferred convertible stock. . . . . . . . . - - - - - 10
-------- -------- ------- ------- ------- -------
Diluted weighted average common
shares outstanding . . . . . . . . . . . . . 18,062 17,992 18,916 17,959 18,887 17,899
-------- -------- ------- ------- ------- -------
Earnings (loss) per share-diluted. . . . . . . . $ (0.18) $ (0.17) $ 0.30 $ 0.50 $ 0.71 $ 0.90
- 9 -
SEMCO ENERGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
The stock options and FELINE PRIDES were not included in the computation of
diluted earnings per share for the three months and six months ended June 30,
2001 and 2000, because their effect was antidilutive.
(4) BUSINESS SEGMENTS
Effective January 1, 2001, the Company began operating its engineering
services and construction services business segments as one business segment,
and started reporting its information technology services business as a
reportable business segment. As a result of these changes, the Company is
providing segment information for the following four business segments: (1) gas
distribution; (2) engineering and construction services; (3) information
technology services; and (4) propane, pipelines and storage. The latter three
segments are sometimes referred to together as the "diversified businesses".
For information regarding the determination of reportable business segment,
refer to Note 11 of the Notes to the Consolidated Financial Statements in the
Company's 2000 Annual Report on Form 10-K.
The Company's gas distribution segment distributes and transports natural
gas to approximately 264,000 customers in the state of Michigan and
approximately 105,000 customers in the state of Alaska. The engineering and
construction ("E & C") services segment currently conducts most of its business
in the mid-western, southern and southeastern areas of the United States. The E
& C segment's primary service is the installation of underground gas mains and
service lines. Other services include the installation of underground water and
cable facilities, engineering design services, quality assurance services,
testing and certification, global positioning surveys and other related
engineering and project management services. The information technology ("IT")
service segment is headquartered in Michigan and provides IT infrastructure
outsourcing services, application service provider ("ASP") services, Internet
service provider ("ISP") services and other IT services with a focus on
mid-range computers, particularly the IBM AS-400 platform. 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 accounting policies of the operating segments are the same as those
described in Notes 1 and 11 of the Notes to the Consolidated Financial
Statements in the Company's 2000 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.
- 10 -
SEMCO ENERGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
------------------ -------------------- --------------------
2001 2000 2001 2000 2001 2000
-------- -------- --------- --------- --------- ---------
(in thousands)
OPERATING REVENUES
Gas Distribution . . . . . . . . $54,457 $49,928 $185,426 $161,616 $331,661 $264,758
Engineering and Construction . . 36,966 30,370 57,045 50,472 132,459 100,134
Information Technology Services. 2,938 1,602 5,148 1,602 8,729 1,602
Propane, Pipelines and Storage . 1,369 1,228 4,118 3,289 7,778 6,345
Corporate and Other (a). . . . . (6,715) (6,650) (10,794) (10,199) (23,872) (16,405)
-------- -------- --------- --------- --------- ---------
Total Operating Revenues . . . $89,015 $76,478 $240,943 $206,780 $456,755 $356,434
======== ======== ========= ========= ========= =========
OPERATING INCOME (LOSS)
Gas Distribution . . . . . . . . $ 4,886 $ 5,348 $ 32,845 $ 34,007 $ 61,714 $ 52,209
Engineering and Construction . . 773 (425) (1,987) (2,633) 4,347 483
Information Technology Services. 85 127 237 127 591 127
Propane, Pipelines and Storage . 347 276 1,082 748 1,864 1,922
Corporate and Other. . . . . . . (1,050) (653) (2,156) (1,307) (4,179) (2,724)
-------- -------- --------- --------- --------- ---------
Total Operating Income . . . . $ 5,041 $ 4,673 $ 30,021 $ 30,942 $ 64,337 $ 52,017
======== ======== ========= ========= ========= =========
<FN>
(a) Includes the elimination of intercompany engineering and construction services
revenue of $3,934,000, $5,861,000 and $15,162,000 for the three, six and twelve
months ended June 30, 2001, respectively, and $5,261,000, $8,780,000 and
$14,988,000 for the three, six and twelve months ended June 30, 2000,
respectively. Also includes the elimination of intercompany information
technology services revenue of $2,780,000, $4,890,000 and $8,574,000 for the
three, six and twelve months ended June 30, 2001, respectively, and $1,348,000
for the three, six and twelve months ended June 30, 2000.
(5) 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.
- 11 -
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") had a net loss of
$3.3 million (or $0.18 per share) for the quarter ended June 30, 2001 compared
to a net loss of $3.1 million (or $0.17 per share) for the quarter ended June
30, 2000. All references to earnings per share in the Management's Discussion
and Analysis are on a diluted basis. For information related to the calculation
of diluted earnings per share, refer to Note 3 of the Notes to the Consolidated
Financial Statements. On a weather-normalized basis, the net loss for the three
months ended June 30, 2001 would have been approximately $2.2 million (or $0.12
per share) compared to a net loss of approximately $2.4 million (or $0.13 per
share) for the same period of the prior year.
The Company had net income of $5.7 million (or $0.30 per share) for the six
months ended June 30, 2001 compared to $8.9 million (or $0.50 per share) for the
six months ended June 30, 2000. On a weather-normalized basis, net income for
the six months ended June 30, 2001 would have been approximately $9.1 million
(or $0.48 per share) compared to approximately $12.3 million (or $0.69 per
share) for the same period of the prior year.
Net income for the twelve months ended June 30, 2001 was $13.5 million (or
$0.71 per share) compared to $16.1 million (or $0.90 per share) for the twelve
months ended June 30, 2000. On a weather-normalized basis, net income would
have been approximately $17.4 million (or $0.92 per share) for the twelve months
ended June 30, 2001, compared to approximately $21.1 million (or $1.18 per
share) for the same period ended June 30, 2000. The results for the twelve
months ended June 30, 2000 are not truly comparable since ENSTAR's results
included in this earlier period reflect only the heating season from November 1,
1999, the date ENSTAR was acquired, through June 2000.
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
income 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 engineering and 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 and six months
ended June 30, 2001 and 2000 are not necessarily indicative of results for a
full year.
- 12 -
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
------------------ -------------------- --------------------
2001 2000 2001 2000 2001 2000
-------- -------- --------- --------- --------- ---------
(in thousands, except per share amounts)
Operating revenues . . . . . . . . . . . $89,015 $76,478 $240,943 $206,780 $456,755 $356,434
Operating expenses . . . . . . . . . . 83,974 71,805 210,922 175,838 392,418 304,417
-------- -------- --------- --------- --------- ---------
Operating income . . . . . . . . . . . . $ 5,041 $ 4,673 $ 30,021 $ 30,942 $ 64,337 $ 52,017
Other income and (deductions). . . . . (6,908) (8,797) (14,040) (16,433) (29,561) (27,657)
Income tax (provision) credit. . . . . 678 1,807 (5,964) (4,832) (12,737) (7,549)
-------- -------- --------- --------- --------- ---------
Income before dividends on
trust preferred securities . . . . . . $(1,189) $(2,317) $ 10,017 $ 9,677 $ 22,039 $ 16,811
Dividends on trust preferred
securities, net of income tax. . . . 2,150 757 4,300 757 8,548 757
-------- -------- --------- --------- --------- ---------
Net income available to common
shareholders . . . . . . . . . . . . . $(3,339) $(3,074) $ 5,717 $ 8,920 $ 13,491 $ 16,054
Earnings per share ("EPS"):
Basic. . . . . . . . . . . . . . . . . $ (0.18) $ (0.17) $ 0.32 $ 0.50 $ 0.75 $ 0.90
Diluted. . . . . . . . . . . . . . . . $ (0.18) $ (0.17) $ 0.30 $ 0.50 $ 0.71 $ 0.90
Average common shares outstanding. . . . 18,062 17,992 18,060 17,954 18,051 17,887
Impact on net income of colder (warmer)
than normal weather. . . . . . . . . . $(1,102) $ (673) $ (3,334) $ (3,405) $ (3,924) $ (5,078)
Weather-normalized net income. . . . . . $(2,237) $(2,401) $ 9,051 $ 12,325 $ 17,415 $ 21,132
Weather-normalized EPS:
Basic. . . . . . . . . . . . . . . . . $ (0.12) $ (0.13) $ 0.50 $ 0.69 $ 0.96 $ 1.18
Diluted. . . . . . . . . . . . . . . . $ (0.12) $ (0.13) $ 0.48 $ 0.69 $ 0.92 $ 1.18
The Company operates four reportable business segments: (1) gas
distribution; (2) engineering and construction services; (3) information
technology 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 business segments and a summary of operating
revenues and operating income by business segment.
The business segment analyses and other discussions on the next several
pages provide additional information regarding variations in operating results
when comparing the three, six and twelve month periods ended June 30, 2001 to
the same periods of the prior year. 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".
- 13 -
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 $4.9 million for the
quarter ended June 30, 2001, compared to $5.3 million for the quarter ended June
30, 2000. On a weather-normalized basis, the operating income of the Gas
Distribution Business would have been approximately $6.6 million for the second
quarter of 2001 compared to approximately $6.4 million for the same period of
the prior year.
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
-------------------- -------------------- --------------------
2001 2000 2001 2000 2001 2000
--------- --------- --------- --------- --------- ---------
(dollars in thousands)
Gas sales revenues. . . . . . . . . . $ 48,245 $ 42,961 $ 170,269 $ 141,893 $ 301,688 $ 231,760
Cost of gas sold. . . . . . . . . . . 28,043 22,555 108,627 83,090 187,482 135,470
--------- --------- --------- --------- --------- ---------
Gas sales margin. . . . . . . . . . $ 20,202 $ 20,406 $ 61,642 $ 58,803 $ 114,206 $ 96,290
Gas transportation revenue. . . . . . 5,344 6,294 13,402 17,792 26,393 29,899
Other operating revenue . . . . . . . 868 673 1,755 1,931 3,580 3,099
--------- --------- --------- --------- --------- ---------
Gross margin. . . . . . . . . . . . $ 26,414 $ 27,373 $ 76,799 $ 78,526 $ 144,179 $ 129,288
Operating expenses. . . . . . . . . . 21,528 22,025 43,954 44,519 82,465 77,079
--------- --------- --------- --------- --------- ---------
Operating income. . . . . . . . . . . $ 4,886 $ 5,348 $ 32,845 $ 34,007 $ 61,714 $ 52,209
========= ========= ========= ========= ========= =========
Weather-normalized operating income . $ 6,631 $ 6,363 $ 38,270 $ 39,322 $ 68,314 $ 60,074
========= ========= ========= ========= ========= =========
Volumes of gas sold (MMcf). . . . . . 9,806 9,272 36,761 32,521 65,294 51,572
Volumes of gas transported (MMcf) . . 9,277 10,654 21,849 26,664 43,891 44,260
Number of customers at end of period. 368,733 361,167 368,733 361,167 368,733 361,167
Degree Days . . . . . . . . . . . . . 885 1,001 4,139 4,164 7,209 6,841
Percent colder (warmer) than normal . (19.4)% (10.1)% (9.8)% (10.4)% (6.1)% (8.6)%
<FN>
The amounts in the above table include intercompany transactions.
GAS SALES MARGIN - During the second quarter of 2001, gas sales margin
decreased by $.2 million when compared to the second quarter of 2000. The
decrease is due primarily to the impact of warmer weather and higher gas costs
compared to the second quarter of 2000, offset partially by the addition of new
customers and customers switching from the Company's aggregated transportation
services ("ATS") program back to general gas sales service.
Weather during the second quarter of 2001 was 19% warmer than normal in
Michigan and Alaska combined, while the weather during the second quarter of
2000 was 10% warmer than normal. Under normal weather conditions, gas sales
margin for the quarter ended June 30, 2001 would have been higher by
approximately $1.7 million and for the quarter ended June 30, 2000 would have
been higher by approximately $1.0 million.
Gas costs have been higher in 2001 as a result of purchasing gas with a
higher thermal content than in 2000. This trend is now diminishing but will not
likely reverse during the remainder of the year.
- 14 -
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
GAS DISTRIBUTION (CONTINUED)
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 switch to third-party gas suppliers
are recorded in gas transportation revenue rather than gas sales revenue,
because the Company acts as a transporter for those customers. During 2000 and
2001, 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 six months ended June 30, 2001 increased by $2.8
million, when compared to the six months ended June 30, 2000. The increase is
due primarily to the impact of weather, the addition of new customers, and
customers switching from the Company's ATS program back to general gas sales
service. These items were offset partially by higher gas costs.
Weather during both the six months ended June 30, 2001 and the six months
ended June 30, 2000 was approximately 10% warmer than normal in Michigan and
Alaska combined. Under normal weather conditions, gas sales margin for the six
months ended June 30, 2001 and 2000 would have been higher by approximately $5.4
million and $5.3 million, respectively.
Gas sales margin for the twelve months ended June 30, 2001 increased by
$12.3 million, when compared to the twelve months ended June 30, 2000. A full
twelve months of operations from ENSTAR, which was acquired on November 1, 1999,
accounted for approximately $6.0 million of the increase in gas sales margin.
The remainder of the increase is attributable to the Michigan gas distribution
operation, and is due primarily to an increase in gas sales as a result of
colder weather, compared to the twelve months ended June 30, 2000, the addition
of new customers, and customers switching from the Company's ATS program back to
general gas sales service. These items were offset partially by higher gas
costs.
Weather during the twelve months ended June 30, 2001 was 6% warmer than
normal in Michigan and Alaska combined, while the weather during the twelve
months ended June 30, 2000 was 9% warmer than normal. Under normal weather
conditions, gas sales margin for the twelve months ended June 30, 2001 and 2000
would have been higher by approximately $6.6 million and $7.9 million,
respectively.
GAS TRANSPORTATION REVENUE - For the three months and six months ended June
30, 2001, gas transportation revenue decreased by $.9 million and $4.4 million,
respectively, when compared to the same periods ended June 30, 2000. This
decrease was caused primarily by customers switching from the ATS program back
to the Company's general gas sales service and a decrease in standard
transportation revenue. The decrease in standard transportation revenue was due
to reduced consumption as a result of the softening of the economy and a few of
the Company's industrial and large commercial customers switching to alternative
fuels earlier in the year due to high natural gas prices. The decrease in
earnings caused by these items will likely not reverse during the remainder of
the year.
Transportation revenue for the twelve months ended June 30, 2001 decreased
by $3.5 million when compared to the same period ended June 30, 2000. The
decrease was due to the impact of ATS customers switching from the ATS program
back to general gas sales service during the period and reduced standard
transportation revenue offset partially by a full twelve months of
transportation revenue from ENSTAR, which represents an increase of $3.7
million. As discussed above, under the ATS program, the Company charges ATS
customers the same distribution fees and customer fees that are charged to
general gas sales service customers.
- 15 -
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
GAS DISTRIBUTION (CONTINUED)
OTHER OPERATING REVENUE - Other operating revenues for the twelve months
ended June 30, 2001 were $3.6 million compared to $3.1 million for the twelve
months ended June 30, 2000. The $.5 million increase was due primarily to a
bonus received for completing on schedule the installation of a large diameter
transmission pipeline for a customer, offset partially by a decrease in service
fees associated with the ATS program.
OPERATING EXPENSES - The operating expenses of the Gas Distribution
Business for the three months ended June 30, 2001 and 2000 were $21.5 million
and $22.0 million, respectively. The $.5 million decrease is made up of a
number of offsetting decreases and increases. Operations and maintenance
expenses decreased by approximately $.7 million. General business tax expense
also decreased by approximately $.2 million, due primarily to a reduction in
property taxes as a result of new property valuation tables approved by the
State of Michigan. These decreases were offset partially by an increase of $.3
million for depreciation and amortization expense, due primarily to additional
property, plant and equipment placed in service.
During the six months ended June 30, 2001 and 2000, operating expenses were
$44.0 million and $44.5 million, respectively. The $.5 million decrease
includes a $.7 million decrease in operations and maintenance expenses and a $.6
million decrease in general business tax expense. These decreases were
partially offset by an increase of $.8 million for depreciation and amortization
expense.
Operating expenses for the twelve months ended June 30, 2001 increased by
$5.4 million when compared to the twelve months ended June 30, 2000. A full
twelve months of operations at ENSTAR accounts for $8.3 million of increased
operating expenses. The offsetting decrease of $2.9 million relates to the
Michigan gas distribution operation and includes a number of offsetting
increases and decreases in expenses.
The decreases in expenses at the Michigan operation, when comparing the
twelve-month periods, included a reduction in general operating expenses of
approximately $.5 million and a reduction in general business taxes of $3.8
million. The decrease in general business tax was due primarily to property tax
expense which was lower due to new property valuation tables discussed
previously and a $2.1 million reduction in property taxes recorded in 2000 based
on pending appeals of prior years' personal property tax assessments.
The above decreases in expenses, when comparing the twelve-month periods,
were offset by an increase of approximately $1.4 million in depreciation and
amortization expense. The increase was due primarily to additional property,
plant and equipment placed in service.
REGULATORY MATTERS - During 2000, the Company filed certain revenue
requirement and cost of service information with the Regulatory Commission of
Alaska ("RCA") as required by the October 1999 order approving the transfer of
ownership of ENSTAR. In November 2000, the RCA issued an order requesting
additional information in order to ensure that ENSTAR's rates are just and
reasonable. The order also appointed a hearing examiner and established certain
procedures. The order indicated that, if changes in ENSTAR's existing rates are
required, such changes would be applied on a prospective basis. On March 5,
2001, the RCA issued an additional order granting ENSTAR's motion to use a 2000
test year, accepting a proposed procedural schedule, and finding that, because
the proceeding was taking longer than expected, ENSTAR should show cause why its
current rates should not be made interim and refundable effective April 6, 2001.
The hearing on this issue of the interim and refundable rates was held on April
4, 2001. The RCA issued an order on May 21, 2001 concluding that ENSTAR's rates
should not be made interim and refundable pending the RCA's final determination
in the rate case. In June 2001, the Company filed updated revenue requirement
information using a 2000 test year. The updated information indicated that
- 16 -
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
GAS DISTRIBUTION (CONTINUED)
ENSTAR's return on equity ("ROE") was 12.75% based on its existing rates versus
the 15.65% allowed ROE. In August 2001, the Company will also file a cost of
service study using 2000 as the test year. The Public Advocacy Section of the
RCA will file its testimony by September 2001. The Company believes that
ENSTAR's rates are just and reasonable but cannot predict the outcome of the
proceeding.
The fixed gas charge program for the Michigan gas distribution operation
will expire on April 1, 2002. During the last half of 2001, the Company plans
to file with the Michigan Public Service Commission for a new fixed gas charge
program.
ENGINEERING AND CONSTRUCTION
The Company's engineering and construction ("E & C") business is seasonal. As a
result, the business generally incurs operating losses during the winter and
spring months when underground construction and related services are inhibited
by weather, and generates the majority of its operating income during the summer
and fall months. In addition, as this business expands, the seasonal operating
losses and profits typically become proportionally larger.
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
------------------ ------------------ -------------------
2001 2000 2001 2000 2001 2000
------- -------- -------- -------- -------- --------
(in thousands)
Operating revenues. . . . . . . . $36,966 $30,370 $57,045 $50,472 $132,459 $100,134
Operating expenses. . . . . . . . 36,193 30,795 59,032 53,105 128,112 99,651
------- -------- -------- -------- -------- --------
Operating income (loss) . . . . . $ 773 $ (425) $(1,987) $(2,633) $ 4,347 $ 483
======= ======== ======== ======== ======== ========
Feet of pipe and cable installed. 1,652 1,930 2,581 2,927 7,617 6,959
Billed engineering hours. . . . . 60 94 92 188 196 355
<FN>
The amounts in the above table include intercompany transactions.
OPERATING REVENUES - The operating revenues of the E & C Business for the
three and six months ended June 30, 2001 were $36.7 million and $57.0 million,
respectively, which is a $6.6 million increase over the same periods ended June
30, 2000. This represents a 22% increase in revenues for the three-month period
and a 13% increase for the six-month period. The increase is due primarily to a
large multi-year construction project in the southeastern region of the United
States as well as increased construction revenues in other regions of the
country offset partially by lower revenues from engineering and
telecommunications projects.
Operating revenues for the twelve months ended June 30, 2001 were $132.5
million, an increase of $32.3 million (or 32%) over the same period ended June
30, 2000. The increase is due primarily to the same items discussed above and
the timing of business acquisitions. Several E & C business acquisitions were
made during or after the twelve months ended June 30, 2000. Refer to Note 3 of
the Notes to the Consolidated Financial Statements in the Company's 2000 Annual
Report on Form 10-K for the acquisition dates of all E & C businesses acquired
during the past three years.
- 17 -
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
ENGINEERING AND CONSTRUCTION (CONTINUED)
OPERATING INCOME - Operating income for the second quarter of 2001 was $.8
million compared to an operating loss of $.4 million for the second quarter of
2000. The improvement in results was due primarily to increased operating
income from construction projects, primarily the large multi-year project
mentioned above, offset partially by less operating income from engineering and
telecommunications projects and other events.
The E & C Business had a seasonal operating loss of $2.0 million for the
six months ended June 30, 2001 compared to a loss of $2.6 million for the six
months ended June 30, 2000. The improvement for the first six months of 2001
was due primarily to the same items discussed above regarding the second quarter
results, offset partially by increased project costs during the first quarter as
a result of more restrictive deep-ground frost conditions in certain regions of
the midwest.
Operating income for the twelve months ended June 30, 2001 was $4.3
million, compared to $.5 million for the twelve months ended June 30, 2000. The
$3.8 million increase is due primarily to the items discussed above, which
affected results for the six-month periods, and the operating income of the
businesses acquired during or after the twelve months ended June 30, 2000.
INFORMATION TECHNOLOGY SERVICES
This is the first year that the Company is reporting its information technology
("IT") services business as a separate business segment. This business, under
the Aretech Information Services name, began operations in May of 2000 and
provides IT infrastructure outsourcing services, application service provider
("ASP") services and other IT services with a focus on mid-range computers,
particularly the IBM AS-400 platform. Aretech is also an internet service
provider ("ISP") and currently has approximately 1,400 ISP customers.
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
------------------ ---------------- -------------------
2001 2000 2001 2000 2001 2000
------ ------ ------ ------ ------ ------
(in thousands)
Operating revenues. . $2,938 $1,602 $5,148 $1,602 $8,729 $1,602
Operating expenses. . 2,853 1,475 4,911 1,475 8,138 1,475
------ ------ ------ ------ ------ ------
Operating income. . . $ 85 $ 127 $ 237 $ 127 $ 591 $ 127
====== ====== ====== ====== ====== ======
<FN>
The amounts in the above table include intercompany transactions.
OPERATING REVENUES - Operating revenues for the IT services business for
the three months ended June 30, 2001 were $2.9 million compared to $1.6 million
for the three months ended June 30, 2000. The increase in 2001 is due primarily
to providing IT services for all affiliates of the Company and the addition of
non-affiliate customers and ISP services. During the second quarter of 2000,
the IT services business was only providing services to the Michigan gas
distribution operation and corporate office. Operating revenues for the six and
twelve months ended June 30, 2001 were $5.1 million and $8.7 million,
respectively.
- 18 -
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
INFORMATION TECHNOLOGY SERVICES (CONTINUED)
OPERATING INCOME - Operating income for the IT business for the second
quarter of 2001 was $.1 million, which was essentially unchanged from operating
income for the second quarter of 2000. Operating income for the six and twelve
months ended June 30, 2001 was $.2 million and $.6 million, respectively.
PROPANE, PIPELINES AND STORAGE
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
------------------ ---------------- -------------------
2001 2000 2001 2000 2001 2000
------ ------ ------ ------ ------ ------
(in thousands)
Operating revenues. . . $1,369 $1,228 $4,118 $3,289 $7,778 $6,345
Operating expenses. . . 1,022 952 3,036 2,541 5,914 4,423
------ ------ ------ ------ ------ ------
Operating income. . . . $ 347 $ 276 $1,082 $ 748 $1,864 $1,922
====== ====== ====== ====== ====== ======
OPERATING REVENUES - The operating revenues of the Company's propane,
pipelines and storage business for the three, six and twelve months ended June
30, 2001 were $1.4 million, $4.1 million and $7.8 million, respectively,
compared to $1.2 million, $3.3 million and $6.3 million, respectively, for the
same periods ended June 30, 2000. The increases during the periods were due
primarily to higher propane distribution revenues. The increase in propane
revenues was due to an increase in the market price of propane.
OPERATING INCOME - The operating income from the propane, pipelines and
storage business for the three and six months ended June 30, 2001, when compared
to the same periods of 2000, increased by $.1 million and $.3 million,
respectively, due primarily to better propane margins. Operating income for the
twelve months ended June 30, 2001 was $1.9 million, which was essentially
unchanged from the same period ended June 30, 2000.
OTHER INCOME AND DEDUCTIONS
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
-------- -------- --------- --------- --------- ---------
2001 2000 2001 2000 2001 2000
-------- -------- --------- --------- --------- ---------
(in thousands)
Interest expense. . . . . . . . . . . $(7,742) $(9,405) $(15,752) $(18,101) $(32,564) $(31,006)
Other income. . . . . . . . . . . . . 834 608 1,712 1,668 3,003 3,349
-------- -------- --------- --------- --------- ---------
Total other income (deductions) . . $(6,908) $(8,797) $(14,040) $(16,433) $(29,561) $(27,657)
======== ======== ========= ========= ========= =========
- 19 -
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 twelve months ended June 30,
2001, when compared to the same period ended June 30, 2000, increased by $1.6
million. 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 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. Interest expense for the twelve months ended June 30, 2000
also includes $2.1 million of income recognized on interest rate swaps
terminated during the first quarter of 2000. Refer to Notes 5 and 6 of the
Notes to the Consolidated Financial Statements in the Company's 2000 Annual
Report on Form 10-K for further information regarding bridge loan and securities
offerings.
Interest expense for the three and six months ended June 30, 2001 decreased
by $1.7 million and $2.3 million, respectively, when compared to the same
periods ended June 30, 2000. The bridge loan discussed above was outstanding
during the first half of 2000, while during the first half of 2001, the Company
had long-term debt and trust preferred securities outstanding. As a result,
interest expense is down primarily because the dividends on the trust preferred
securities are reported separately from interest expense. Interest expense for
the first six months of 2000 also included $2.1 million of non-recurring income
recognized during the first quarter of 2000 on terminated interest rate swaps.
OTHER INCOME - Other income for the three months ended June 30, 2001
increased by $.2 million, when compared to the same period ended June 30, 2000.
The increase was due primarily to higher allowances for funds used during
construction ("AFUDC") and other miscellaneous items. For the six months ended
June 30, 2001, other income was $1.7 million, which was essentially unchanged
from the six months ended June 30, 2000. However, there was an increase in
AFUDC during the six months ended June 30, 2001 that was completely offset by
non-recurring income during the first quarter of 2000 from an investment in a
gas storage partnership.
INCOME TAX PROVISION
Income taxes for the three, six and twelve months ended June 30, 2001
increased by $1.1 million, $1.1 million and $5.2 million, respectively, when
compared to the same periods ended June 30, 2000. 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 5 of the Notes
to the Consolidated Financial Statements in the Company's 2000 Annual Report on
Form 10-K. Dividends on these securities, net of income tax, for the three, six
and twelve months ended June 30, 2001 were approximately $2.2 million, $4.3
million and $8.5 million, respectively.
- 20 -
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 six months ended June 30, 2001 and 2000:
Three Months Ended Six Months Ended
June 30, June 30,
------- ------- ------- -------
2001 2000 2001 2000
------- ------- ------- -------
(in thousands)
Capital investments:
Property additions - gas distribution. . . . . . . . . $ 9,774 $14,333 $17,668 $20,956
Property additions - diversified businesses and other. 6,209 5,753 10,643 8,189
Business acquisitions (a). . . . . . . . . . . . . . . - 1,784 - 1,784
------- ------- ------- -------
$15,983 $21,870 $28,311 $30,929
======= ======= ======= =======
<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 $28.3 million on property additions
during the first six months of 2001 and anticipates spending approximately $17
million on property additions during the remainder of 2001. The Company may
also incur expenditures for business acquisitions during the remainder of 2001.
CASH FLOWS FROM OPERATIONS - Net cash from operating activities for the
three months and six months ended June 30, 2001, when compared to the same
periods of the prior year, decreased by $23.4 million and $4.5 million,
respectively. The change in operating cash flows is influenced significantly 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 provided by financing activities
during the three months and six months ended June 30, 2001 increased by $22.3
million and $15.1 million, respectively, when compared to the same periods ended
June 30, 2000.
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
2001 2000 2001 2000
--------- ---------- --------- ----------
(in thousands)
Cash provided by (used in) financing activities:
Issuance of common stock. . . . . . . . . . . . $ 111 $ 225 $ 144 $ 443
Issuance of trust preferred securities. . . . . - 124,772 - 124,772
Issuance of long-term debt, net of redemptions. 58,448 136,850 58,448 136,850
Net cash change in notes payable. . . . . . . . (32,063) (257,681) (62,791) (281,473)
Payment of dividends. . . . . . . . . . . . . . (3,792) (3,784) (7,584) (7,456)
--------- ---------- --------- ----------
$ 22,704 $ 382 $(11,783) $ (26,864)
========= ========== ========= ==========
- 21 -
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 June 2001 the Company's Board of Directors declared a regular quarterly
cash dividend of $0.21 per share on the Company's common stock. The dividend is
payable on August 15, 2001 to shareholders of record at the close of business on
August 1, 2001.
Also during June 2001, the Company issued $60 million of 8% Senior Notes
due 2016. Interest on the Senior Notes is payable quarterly. The proceeds from
the sale of the Senior Notes were used to repay short-term debt and for general
corporate purposes.
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. The Company has short-term credit facilities of $145 million. $75
million of these short-term credit facilities were unused at June 30, 2001. The
Company is in the process of obtaining an additional $15 million of short-term
credit facilities.
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. At June 30, 2001, there was $164 million
of available financing remaining under the Company's registration statement.
The Company may acquire additional businesses during the remainder of 2001.
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 1.47 for the twelve
months ended June 30, 2001. If you assume that common stock of the Company was
issued in place of the FELINE PRIDES, the ratio of earnings to fixed charges
would have been 1.84. Holders of FELINE PRIDES are obligated to purchase
Company stock in August 2003.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets.
SFAS No. 141 addresses financial accounting and reporting for all business
combinations and requires that all business combinations entered into subsequent
to June 2000 be recorded under the purchase method. This statement also
addresses financial accounting and reporting for goodwill and other intangible
assets acquired in a business combination at acquisition. SFAS No. 142
addresses financial accounting and reporting for intangible assets acquired
individually or with a group of other assets at acquisition. This statement
also addresses financial accounting and reporting for goodwill and other
intangible assets subsequent to their acquisition.
These statements will be adopted by the Company on January 1, 2002. Goodwill
amortization will cease as of December 31, 2001, which will reduce annual
amortization expense by approximately $2.8 million after income taxes (or $0.15
per share based on the current level of outstanding common stock). The Company
will be required to complete an impairment test at the date of adoption and then
perform subsequent impairment tests on the remaining goodwill balance at least
annually. If an impairment test of goodwill shows that the carrying amount of
the goodwill is in excess of the fair value, a corresponding impairment loss
would be recorded in the consolidated statements of income. The Company has not
yet determined the financial impact of adopting these standards.
- 22 -
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES.
During the second quarter of 2001, the Company issued an aggregate of
6,292 shares of unregistered common stock, valued at $90,064. The stock was
issued to certain of the Company's benefit plans and members of the Company's
Board of Directors in exchange for services rendered.
These transactions were 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.
At the April 17, 2001 Annual Meeting of Common Shareholders, the
following nominees were elected as directors to hold office for a term of three
years:
Name Votes For Votes Withheld
---- ---------- ---------------
John M. Albertine 13,589,257 703,023
William L. Johnson 13,517,396 774,884
Donald W. Thomason 13,598,863 693,417
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) List of Exhibits - (See page 25 for the Exhibit Index.)
12 Ratio of Earnings to Fixed Charges.
(b) Reports on Form 8-K.
The Company filed the following Form 8-K Reports during the second
quarter of 2001: (1) report filed on April 26, 2001, to announce the election
of Marcus Jackson as President and Chief Executive Officer effective June 1,
2001, and (2) report filed on June 21, 2001 to file exhibits relating to the
securities offerings recently completed.
- 23 -
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: August 14, 2001
By: /s/Sebastian Coppola
-------------------------------------
Sebastian Coppola
Senior Vice President and Principal
Financial Officer
- 24 -
EXHIBIT INDEX
Form 10-Q
Second Quarter 2001
Exhibit
No. Description Filed Herewith
- -------- ----------- ---------------
12 Ratio of Earnings to Fixed Charges. x
- 25 -