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, 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 October
31, 2001: 18,157,721
INDEX TO FORM 10-Q
------------------
For Quarter Ended September 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. . . . . . . . . . . . .. . . . . . . . . . . 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . 26
Item 3. Default upon Senior Securities. . . . . . . . . . . . . . . . . . . . . 26
Item 4. Submission of Matters to a Vote of Securityholders . . . . . . . . . . 26
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . 26
SIGNATURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
EXHIBIT INDEX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
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
contracts; (viii) the impact of energy prices on the amount of projects and
business available to the Company's 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 Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
------------------ -------------------- --------------------
2001 2000 2001 2000 2001 2000
-------- -------- --------- --------- --------- ---------
OPERATING REVENUES
Gas sales. . . . . . . . . . . . . . . . . . . . $32,146 $30,545 $202,415 $172,438 $303,289 $246,686
Gas transportation . . . . . . . . . . . . . . . 4,931 5,023 18,333 22,815 26,301 31,682
Engineering and Construction . . . . . . . . . . 41,611 32,821 92,794 74,512 126,087 98,495
Other. . . . . . . . . . . . . . . . . . . . . . 2,109 1,937 8,198 7,341 11,549 9,900
-------- -------- --------- --------- --------- ---------
80,797 70,326 321,740 277,106 467,226 386,763
-------- -------- --------- --------- --------- ---------
OPERATING EXPENSES
Cost of gas sold . . . . . . . . . . . . . . . . 17,118 14,961 125,745 98,050 189,640 142,456
Operations and maintenance . . . . . . . . . . . 50,502 41,333 128,853 111,853 169,041 145,393
Depreciation and amortization. . . . . . . . . . 9,464 8,332 27,642 24,533 36,581 31,303
Property and other taxes . . . . . . . . . . . . 2,954 1,677 8,720 7,706 10,892 10,305
-------- -------- --------- --------- --------- ---------
80,038 66,303 290,960 242,142 406,154 329,457
-------- -------- --------- --------- --------- ---------
OPERATING INCOME . . . . . . . . . . . . . . . . . 759 4,023 30,780 34,964 61,072 57,306
OTHER INCOME (DEDUCTIONS)
Interest expense . . . . . . . . . . . . . . . . (8,123) (8,304) (23,876) (26,405) (32,384) (35,364)
Other. . . . . . . . . . . . . . . . . . . . . . 333 14 2,046 1,683 3,321 2,443
-------- -------- --------- --------- --------- ---------
(7,790) (8,290) (21,830) (24,722) (29,063) (32,921)
-------- -------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES
AND DIVIDENDS ON TRUST
PREFERRED SECURITIES . . . . . . . . . . . . . . (7,031) (4,267) 8,950 10,242 32,009 24,385
INCOME TAX PROVISION (CREDIT). . . . . . . . . . . (2,536) (1,622) 3,427 3,210 11,822 8,054
-------- -------- --------- --------- --------- ---------
NET INCOME (LOSS) BEFORE DIVIDENDS
ON TRUST PREFERRED SECURITIES. . . . . . . . . . (4,495) (2,645) 5,523 7,032 20,187 16,331
Dividends on trust preferred securities, net of
income taxes . . . . . . . . . . . . . . . . . . 2,150 2,104 6,451 2,861 8,594 2,861
-------- -------- --------- --------- --------- ---------
NET INCOME (LOSS) AVAILABLE TO
COMMON SHAREHOLDERS. . . . . . . . . . . . . . . $(6,645) $(4,749) $ (928) $ 4,171 $ 11,593 $ 13,470
======== ======== ========= ========= ========= =========
BASIC EARNINGS (LOSS) PER SHARE. . . . . . . . . . $ (0.37) $ (0.26) $ (0.05) $ 0.23 $ 0.64 $ 0.75
======== ======== ========= ========= ========= =========
DILUTED EARNINGS (LOSS) PER SHARE. . . . . . . . . $ (0.37) $ (0.26) $ (0.05) $ 0.23 $ 0.61 $ 0.74
======== ======== ========= ========= ========= =========
CASH DIVIDENDS PAID PER SHARE. . . . . . . . . . . $ 0.210 $ 0.210 $ 0.630 $ 0.625 $ 0.840 $ 0.830
======== ======== ========= ========= ========= =========
AVERAGE COMMON SHARES OUTSTANDING. . . . . . . . . 18,109 18,036 18,076 17,982 18,069 17,956
======== ======== ========= ========= ========= =========
<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,
2001 2000
-------------- -------------
(Unaudited)
CURRENT ASSETS
Cash and temporary cash investments. . . . . . . . . . $ 648 $ 1,221
Receivables, less allowances of $1,610 and $1,436. . . 65,607 73,139
Accrued revenue. . . . . . . . . . . . . . . . . . . . 14,056 32,212
Prepaid expenses . . . . . . . . . . . . . . . . . . . 13,758 14,309
Gas in underground storage . . . . . . . . . . . . . . 13,627 8,739
Materials and supplies, at average cost. . . . . . . . 5,467 5,065
Gas charges recoverable from customers . . . . . . . . 2,262 2,698
Accumulated deferred income taxes. . . . . . . . . . . 4,130 6,994
Other. . . . . . . . . . . . . . . . . . . . . . . . . 2,368 946
-------------- -------------
121,923 145,323
PROPERTY, PLANT AND EQUIPMENT
Gas distribution . . . . . . . . . . . . . . . . . . . 614,197 585,628
Diversified businesses . . . . . . . . . . . . . . . . 89,484 79,167
-------------- -------------
703,681 664,795
Less - accumulated depreciation. . . . . . . . . . . . 178,967 154,769
-------------- -------------
524,714 510,026
DEFERRED CHARGES AND OTHER ASSETS
Goodwill, less amortization of $12,584 and $9,117. . . 166,264 169,692
Deferred retiree medical benefits. . . . . . . . . . . 10,115 10,790
Unamortized debt expense . . . . . . . . . . . . . . . 8,054 6,966
Other. . . . . . . . . . . . . . . . . . . . . . . . . 14,138 8,426
-------------- -------------
198,571 195,874
-------------- -------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . $ 845,208 $ 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)
September 30, December 31,
2001 2000
--------------- -------------
(Unaudited)
CURRENT LIABILITIES
Notes payable . . . . . . . . . . . . . . . . . . . . . . . $ 96,451 $ 134,142
Accounts payable. . . . . . . . . . . . . . . . . . . . . . 26,254 32,300
Customer advance payments . . . . . . . . . . . . . . . . . 11,469 13,068
Accrued interest. . . . . . . . . . . . . . . . . . . . . . 9,329 8,020
Amounts payable to customers. . . . . . . . . . . . . . . . 1,379 3,097
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,139 10,774
--------------- -------------
153,021 201,401
DEFERRED CREDITS AND OTHER LIABILITIES
Accumulated deferred income taxes . . . . . . . . . . . . . 33,551 36,385
Customer advances for construction. . . . . . . . . . . . . 15,497 14,444
Unamortized investment tax credit . . . . . . . . . . . . . 1,512 1,713
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,207 14,504
--------------- -------------
61,767 67,046
LONG-TERM DEBT. . . . . . . . . . . . . . . . . . . . . . . . 367,442 307,930
COMPANY-OBLIGATED MANDATORILY REDEEMABLE TRUST
PREFERRED SECURITIES OF SUBSIDIARIES HOLDING
SOLELY DEBT SECURITIES OF SEMCO ENERGY, INC.. . . . . . . . 139,403 139,374
COMMON SHAREHOLDERS' EQUITY
Common stock - $1 par value; 40,000,000 shares authorized;
18,149,334 and 18,055,639 shares outstanding. . . . . . . 18,149 18,056
Capital surplus . . . . . . . . . . . . . . . . . . . . . . 115,505 115,186
Retained earnings (deficit) . . . . . . . . . . . . . . . . (10,079) 2,230
--------------- -------------
123,575 135,472
--------------- -------------
TOTAL LIABILITIES AND CAPITALIZATION. . . . . . . . . . . . . $ 845,208 $ 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 Nine Months Ended
September 30, September 30,
-------------------- ---------------------
2001 2000 2001 2000
--------- --------- --------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) . . . . . . . . . . . . . . . . . . . . . $ (6,645) $ (4,749) $ (928) $ 4,171
Adjustments to reconcile net income (loss) to net
cash from operating activities:
Depreciation and amortization . . . . . . . . . . . . 9,464 8,332 27,642 24,533
Changes in assets and liabilities, net of effects of
acquisitions, divestitures and other changes as
shown below: . . . . . . . . . . . . . . . . . . . (16,198) (13,227) 6,581 12,789
--------- --------- --------- ----------
NET CASH FROM OPERATING ACTIVITIES. . . . . . . (13,379) (9,644) 33,295 41,493
--------- --------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Property additions - gas distribution . . . . . . . . . . . (11,152) (16,883) (28,820) (37,839)
Property additions - diversified businesses and other . . . (4,585) (3,858) (15,228) (12,047)
Proceeds from property sales, net of retirement costs . . . (214) 838 (350) 636
Acquisitions of businesses, net of cash acquired. . . . . . - - - (784)
--------- --------- --------- ----------
NET CASH FROM INVESTING ACTIVITIES. . . . . . . (15,951) (19,903) (44,398) (50,034)
--------- --------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock, net of expenses . . . . . . . . . 1,171 216 1,315 659
Issuance of trust preferred securities, net of expenses . . - 10,196 - 134,968
Issuance of long-term debt, net of repayments and expenses. (152) (133) 58,286 136,717
Net cash change in notes payable. . . . . . . . . . . . . . 25,100 27,735 (37,691) (253,738)
Payment of dividends. . . . . . . . . . . . . . . . . . . . (3,796) (3,787) (11,380) (11,243)
--------- --------- --------- ----------
NET CASH FROM FINANCING ACTIVITIES. . . . . . . 22,323 34,227 10,530 7,363
--------- --------- --------- ----------
CASH AND TEMPORARY CASH INVESTMENTS
Net increase (decrease) . . . . . . . . . . . . . . . . . . (7,007) 4,680 (573) (1,178)
Beginning of period . . . . . . . . . . . . . . . . . . . . 7,655 228 1,221 6,086
--------- --------- --------- ----------
End of period . . . . . . . . . . . . . . . . . . . . . . . $ 648 $ 4,908 $ 648 $ 4,908
========= ========= ========= ==========
CHANGES IN ASSETS AND LIABILITIES, NET OF EFFECTS OF
ACQUISITIONS, DIVESTITURES AND OTHER CHANGES:
Receivables, net. . . . . . . . . . . . . . . . . . . $(16,471) $(13,953) $ 7,532 $ 19,591
Accrued revenue . . . . . . . . . . . . . . . . . . . (1,335) (3,196) 18,156 16,064
Materials, supplies and gas in underground storage. . (4,373) (3,426) (5,289) (1,334)
Gas charges recoverable from customers. . . . . . . . 48 25 436 131
Accounts payable. . . . . . . . . . . . . . . . . . . 1,946 2,707 (6,046) (14,993)
Customer advances and amounts payable to customers. . 5,856 3,580 (2,264) (5,195)
Accrued taxes . . . . . . . . . . . . . . . . . . . . (3,978) (2,348) (4,476) (5,234)
Other . . . . . . . . . . . . . . . . . . . . . . . . 2,109 3,384 (1,468) 3,759
--------- --------- --------- ----------
$(16,198) $(13,227) $ 6,581 $ 12,789
========= ========= ========= ==========
<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 September 30, 2001, the Company had an asset and
liability of $.9 million recorded in its Consolidated Statement of Financial
Position in accordance with SFAS 133.
On August 2, 2001 the Company entered into an interest rate swap agreement
in order to hedge its $55 million 8% Notes due June 1, 2004. This agreement
also qualifies under the provisions of SFAS 133. At September 30, 2001, the
Company also had an asset and liability of $.2 million related to this interest
rate swap, 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 nine month periods ended September 30, 2001 and 2000 is summarized
in the table below.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ---------------------
2001 2000 2001 2000
------ ------ ------- --------
(in thousands)
CASH PAID DURING THE PERIOD FOR:
Interest . . . . . . . . . . . . . . . . . . . . . $6,361 $2,428 $21,952 $20,509
Income taxes, net of refunds . . . . . . . . . . . $ - $ 100 $ 4,258 $ 7,984
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Capital stock issued for acquisitions. . . . . . . $ - $ - $ - $ 1,000
DETAILS OF ACQUISITIONS:
Fair value of assets acquired. . . . . . . . . . . $ - $ - $ - $ 3,364
Fair value of liabilities assumed. . . . . . . . . - - - (1,576)
Company stock issued . . . . . . . . . . . . . . . - - - (1,000)
------ ------ ------- --------
Cash paid. . . . . . . . . . . . . . . . . . . . . $ - $ - $ - $ 788
Less cash acquired . . . . . . . . . . . . . . . . - - - 4
------ ------ ------- --------
Net cash paid for (acquired via) acquisitions. . . $ - $ - $ - $ 784
(2) SHORT-TERM BORROWINGS AND CAPITALIZATION
SHORT-TERM BORROWINGS - The Company has $145 million of short-term credit
facilities with banks. At September 30, 2001, $49.7 million of the Company's
credit facilities were unused.
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 October 18, 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 November 15, 2001 to shareholders of
record at the close of business on November 1, 2001.
In February, May and August 2001, the Company paid quarterly cash dividends
of $0.21 per share on its common stock. The total cash dividend for the third
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 ninth months of 2001 was
approximately $11.4 million of which $2.0 million was reinvested by shareholders
- 8 -
SEMCO ENERGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
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.
For the first nine months of 2001, the Company issued approximately 78,200
shares to the DRIP. Also, during the three and nine months ended September 30,
2001, the Company issued approximately 6,300 and 15,500 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,
nine and twelve months ended September 30, 2001 and 2000 are as follows (in
thousands except per share amounts):
Three Months Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
--------------------- -------------------- -------------------
2001 2000 2001 2000 2001 2000
-------- -------- -------- ------- ------- -------
BASIC EARNINGS (LOSS) PER
SHARE COMPUTATION:
Net income (loss). . . . . . . . . . . . . . . $(6,645) $(4,479) $ (928) $ 4,171 $11,593 $13,470
Weighted average common shares outstanding . . 18,109 18,036 18,076 17,982 18,069 17,956
Earnings (loss) per share-basic. . . . . . . . $ (0.37) $ (0.26) $ (0.05) $ 0.23 $ 0.64 $ 0.75
DILUTED EARNINGS (LOSS) PER
SHARE COMPUTATION:
Net income (loss). . . . . . . . . . . . . . . $(6,645) $(4,749) $ (928) $ 4,171 $11,593 $13,470
Adjustment for effect of assumed conversions:
Preferred convertible stock dividends. . . . - - - - - 2
-------- -------- -------- ------- ------- -------
Diluted net income (loss). . . . . . . . . . . $(6,645) $(4,749) $ (928) $ 4,171 $11,593 $13,472
-------- -------- -------- ------- ------- -------
Weighted average common shares outstanding . . 18,109 18,036 18,076 17,982 18,069 17,956
Incremental shares from assumed
conversions of:
FELINE PRIDES. . . . . . . . . . . . . . . - - - 358 987 269
Stock options. . . . . . . . . . . . . . . - - - 16 33 12
Preferred convertible stock. . . . . . . . - - - - - 3
-------- -------- -------- ------- ------- -------
Diluted weighted average common
shares outstanding . . . . . . . . . . . . . 18,109 18,036 18,076 18,356 19,089 18,240
-------- -------- -------- ------- ------- -------
Earnings (loss) per share-diluted. . . . . . . $ (0.37) $ (0.26) $ (0.05) $ 0.23 $ 0.61 $ 0.74
The stock options and FELINE PRIDES were not included in the computation of
diluted earnings per share for the three months and nine months ended September
30, 2001 and the three months ended September 30,2000, because their effect was
antidilutive.
- 9 -
SEMCO ENERGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
(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 a 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 Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
------------------ -------------------- --------------------
2001 2000 2001 2000 2001 2000
-------- -------- --------- --------- --------- ---------
(in thousands)
OPERATING REVENUES
Gas Distribution . . . . . . . . . . $37,653 $35,992 $223,079 $197,608 $333,322 $281,456
Engineering and Construction . . . . 45,798 38,151 102,843 88,623 140,106 116,146
Information Technology Services. . . 2,461 1,616 7,608 3,218 9,574 3,218
Propane, Pipelines and Storage . . . 1,289 1,281 5,407 4,570 7,786 6,408
Corporate and Other (a). . . . . . . (6,404) (6,714) (17,197) (16,913) (23,562) (20,465)
-------- -------- --------- --------- --------- ---------
Total Operating Revenues . . . . . $80,797 $70,326 $321,740 $277,106 $467,226 $386,763
======== ======== ========= ========= ========= =========
OPERATING INCOME (LOSS)
Gas Distribution . . . . . . . . . . $(2,153) $ 1,110 $ 30,692 $ 35,117 $ 58,451 $ 55,336
Engineering and Construction . . . . 3,373 3,495 1,387 863 4,225 2,737
Information Technology Services. . . 117 154 353 281 553 281
Propane, Pipelines and Storage . . . 271 249 1,353 997 1,886 1,903
Corporate and Other. . . . . . . . . (849) (985) (3,005) (2,294) (4,043) (2,951)
-------- -------- --------- --------- --------- ---------
Total Operating Income . . . . . . $ 759 $ 4,023 $ 30,780 $ 34,964 $ 61,072 $ 57,306
======== ======== ========= ========= ========= =========
<FN>
(a) Includes the elimination of intercompany engineering and construction
services revenue of $4,187,000 $10,049,000 and $14,020,000 for the three, nine
and twelve months ended September 30, 2001, respectively, and $5,330,000,
$14,111,000 and $17,651,000 for the three, nine and twelve months ended
September 30, 2000, respectively. Also includes the elimination of intercompany
information technology services revenue of $2,173,000 $7,063,000 and $9,400,000
for the three, nine and twelve months ended September 30, 2001, respectively,
and $1,348,000, $2,696,000 and $2,696,000 for the three, nine and twelve months
ended September 30, 2000, respectively.
On October 26, 2001, the Company announced a redirection of its business
strategy. Refer to Note 6 for further detail.
(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.
OTHER - In the normal course of business, the Company may be a party
to certain lawsuits and administrative proceedings before various courts and
government agencies. These lawsuits and proceedings may involve personal
injury, property damage, contractual issues and other matters. Management
cannot predict the ultimate outcome of any pending or threatening litigation or
of actual or possible claims; however, management believes resulting
liabilities, if any, will not have a material adverse impact upon the Company's
financial position or results of operations.
- 11 -
SEMCO ENERGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
(6) SUBSEQUENT EVENTS
On October 26, 2001 the Company announced a redirection of its business
strategy. The Company plans to restructure corporate, business unit and
operational structures. This will involve the integration and common operation
of the Company's Michigan and Alaska gas distribution divisions and the closure
of the Company's E&C headquarters in Houston and related consolidation of
administrative functions in Michigan. The redirection will also involve the
divestiture of the Company's engineering services business and certain regions
of the construction business that are not likely to contribute to shareholder
value in the near term. The new strategy will concentrate more on profitable
growth within each line of business and less on acquisitions.
As a result of the redirected strategy and reorganization, the Company
anticipates taking a one-time after tax charge to earnings in the fourth quarter
of 2001, of up to $11 million.
- 12 -
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
$6.6 million (or $0.37 per share) for the quarter ended September 30, 2001
compared to a net loss of $4.7 million (or $0.26 per share) for the quarter
ended September 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 September 30, 2001 would have been
approximately $6.3 million (or $0.35 per share) compared to a net loss of
approximately $4.8 million (or $0.26 per share) for the same period of the prior
year.
The Company had a net loss of $.9 million (or $0.05 per share) for the nine
months ended September 30, 2001 compared to net income of $4.2 million (or $0.23
per share) for the nine months ended September 30, 2000. On a
weather-normalized basis, the Company would have had net income of approximately
$2.8 million (or $0.15 per share) for the nine months ended September 30, 2001
compared to approximately $7.6 million (or $0.41 per share) for the same period
of the prior year.
Net income for the twelve months ended September 30, 2001 was $11.6 million
(or $0.61 per share) compared to $13.5 million (or $0.74 per share) for the
twelve months ended September 30, 2000. On a weather-normalized basis, net
income would have been approximately $15.9 million (or $0.83 per share) for the
twelve months ended September 30, 2001, compared to approximately $18 million
(or $.98 per share) for the same period ended September 30, 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 nine months
ended September 30, 2001 and 2000 are not necessarily indicative of results for
a full year.
- 13 -
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
RESULTS OF OPERATIONS (CONTINUED)
Three Months Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
------------------ -------------------- --------------------
2001 2000 2001 2000 2001 2000
-------- -------- --------- --------- --------- ---------
(in thousands, except per share amounts)
Operating revenues . . . . . . . . . . . $80,797 $70,326 $321,740 $277,106 $467,226 $386,763
Operating expenses . . . . . . . . . . 80,038 66,303 290,960 242,142 406,154 329,457
-------- -------- --------- --------- --------- ---------
Operating income . . . . . . . . . . . . $ 759 $ 4,023 $ 30,780 $ 34,964 $ 61,072 $ 57,306
Other income and (deductions). . . . . (7,790) (8,290) (21,830) (24,722) (29,063) (32,921)
Income tax (provision) credit. . . . . 2,536 1,622 (3,427) (3,210) (11,822) (8,054)
-------- -------- --------- --------- --------- ---------
Income before dividends on
trust preferred securities . . . . . . $(4,495) $(2,645) $ 5,523 $ 7,032 $ 20,187 $ 16,331
Dividends on trust preferred
securities, net of income tax. . . . 2,150 2,104 6,451 2,861 8,594 2,861
-------- -------- --------- --------- --------- ---------
Net income available to common
shareholders . . . . . . . . . . . . . $(6,645) $(4,749) $ (928) $ 4,171 $ 11,593 $ 13,470
Earnings per share ("EPS"):
Basic. . . . . . . . . . . . . . . . . $ (0.37) $ (0.26) $ (0.05) $ 0.23 $ 0.64 $ 0.75
Diluted. . . . . . . . . . . . . . . . $ (0.37) $ (0.26) $ (0.05) $ 0.23 $ 0.61 $ 0.74
Average common shares outstanding. . . . 18,109 18,036 18,076 17,982 18,069 17,956
Impact on net income of colder (warmer)
than normal weather. . . . . . . . . . $ (394) $ 19 $ (3,728) $ (3,386) $ (4,337) $ (4,496)
Weather-normalized net income. . . . . . $(6,251) $(4,768) $ 2,800 $ 7,557 $ 15,930 $ 17,966
Weather-normalized EPS:
Basic. . . . . . . . . . . . . . . . . $ (0.35) $ (0.26) $ 0.15 $ 0.42 $ 0.88 $ 1.00
Diluted. . . . . . . . . . . . . . . . $ (0.35) $ (0.26) $ 0.15 $ 0.41 $ 0.83 $ 0.98
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, nine and twelve month periods ended September 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.
On October 26, 2001, the Company announced a redirection of its business
strategy. The redirection is discussed later in the section entitled
"SUBSEQUENT EVENTS".
- 14 -
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
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".
The Gas Distribution Business reported an operating loss of $2.2 million
for the quarter ended September 30, 2001, compared to operating income of $1.1
million for the quarter ended September 30, 2000. On a weather-normalized
basis, the operating loss of the Gas Distribution Business would have been
approximately $1.5 million for the third quarter of 2001 compared to operating
income of approximately $1.1 million for the same period of the prior year.
Three Months Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
-------------------- -------------------- --------------------
2001 2000 2001 2000 2001 2000
--------- --------- --------- --------- --------- ---------
(dollars in thousands)
Gas sales revenues. . . . . . . . . . . . $ 32,146 $ 30,545 $ 202,415 $ 172,438 $ 303,289 $ 246,687
Cost of gas sold. . . . . . . . . . . . . 17,118 14,961 125,745 98,050 189,640 142,456
--------- --------- --------- --------- --------- ---------
Gas sales margin. . . . . . . . . . . . $ 15,028 $ 15,584 $ 76,670 $ 74,388 $ 113,649 $ 104,231
Gas transportation revenue. . . . . . . . 4,931 5,023 18,332 22,815 26,300 31,682
Other operating revenue . . . . . . . . . 576 424 2,332 2,355 3,733 3,087
--------- --------- --------- --------- --------- ---------
Gross margin. . . . . . . . . . . . . . $ 20,535 $ 21,031 $ 97,334 $ 99,558 $ 143,682 $ 139,000
Operating expenses. . . . . . . . . . . . 22,688 19,921 66,642 64,441 85,231 83,664
--------- --------- --------- --------- --------- ---------
Operating income. . . . . . . . . . . . . $ (2,153) $ 1,110 $ 30,692 $ 35,117 $ 58,451 $ 55,336
========= ========= ========= ========= ========= =========
Weather-normalized operating
income. . . . . . . . . . . . . . . . . $ (1,503) $ 1,080 $ 36,767 $ 40,402 $ 65,731 $ 62,321
========= ========= ========= ========= ========= =========
Volumes of gas sold (MMcf). . . . . . . . 5,901 6,072 42,662 38,592 65,123 55,562
Volumes of gas transported (MMcf) . . . . 9,549 9,106 31,399 35,771 44,334 48,475
Number of customers at end of period. . . 369,231 361,228 369,231 361,228 369,231 361,228
Degree Days . . . . . . . . . . . . . . . 320 317 4,515 4,567 7,236 7,002
Percent colder (warmer) than normal . . . 3.6% 8.6% (9.0)% (8.8)% (6.0)% (6.9)%
<FN>
The amounts in the above table include intercompany transactions.
GAS SALES MARGIN - During the third quarter of 2001, gas sales margin
decreased by $.6 million when compared to the third quarter of 2000. The
decrease is due primarily to higher gas costs compared to the third 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 third quarter of 2001 was 3.6% colder than normal in
Michigan and Alaska combined, while the weather during the third quarter of 2000
was 8.6% colder than normal. However, in Alaska, weather was 5.2% warmer than
normal during the third quarter of 2001 compared to 15.8% colder than normal
during the third quarter of 2000. Under normal weather conditions, gas sales
margin for the quarter ended September 30, 2001 would have been higher by
approximately $.7 million while gas sales margin for the quarter ended September
30, 2000 would have been lower by less than $.1 million.
- 15 -
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
GAS DISTRIBUTION (CONTINUED)
Gas costs have been higher in 2001 primarily 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. Other factors
contributing to higher gas costs in 2001 are an increase in unaccounted-for gas
and the release of pipeline capacity in 2000, which reduced the Company's 2000
gas costs.
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 nine months ended September 30, 2001 increased by
$2.3 million, when compared to the nine months ended September 30, 2000. The
increase is due primarily to the addition of new customers and customers
switching from the Company's ATS program back to general gas sales service,
offset partially by the impact of weather and higher gas costs discussed
previously.
Weather during both the nine months ended September 30, 2001 and the nine
months ended September 30, 2000 was approximately 9% warmer than normal in
Michigan and Alaska combined. However, temperatures in Alaska during the first
nine months of 2001 were approximately 11% warmer than normal compared to
approximately 2% warmer than normal during the same period of 2000. Under
normal weather conditions, gas sales margin for the nine months ended September
30, 2001 and 2000 would have been higher by approximately $6.1 million and $5.3
million, respectively.
Gas sales margin for the twelve months ended September 30, 2001 increased
by $9.4 million, when compared to the twelve months ended September 30, 2000.
The increase is attributable primarily to an increase in gas sales as a result
of the addition of new customers, and customers switching from the Company's ATS
program back to general gas sales service, and a full twelve months of gas sales
margin from ENSTAR compared to only eleven months during the twelve months ended
September, 30, 2000. These items were offset partially by the impact of weather
and higher gas costs.
Weather during the twelve months ended September 30, 2001 was 6% warmer
than normal in Michigan and Alaska combined, while the weather during the twelve
months ended September 30, 2000 was approximately 7% warmer than normal. Under
normal weather conditions, gas sales margin for the twelve months ended
September 30, 2001 and 2000 would have been higher by approximately $7.3 million
and $7.0 million, respectively.
GAS TRANSPORTATION REVENUE - For the three months and nine months ended
September 30, 2001, gas transportation revenue decreased by $.1 million and $4.5
million, respectively, when compared to the same periods ended September 30,
2000. The decrease for the nine-month period 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.
- 16 -
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
GAS DISTRIBUTION (CONTINUED)
Transportation revenue for the twelve months ended September 30, 2001
decreased by $5.4 million when compared to the same period ended September 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. These items were offset partially by a full
twelve months of transportation revenue from ENSTAR during the twelve months
ended September 30, 2001 compared to only eleven months during the twelve months
ended September, 30, 2000. 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.
OTHER OPERATING REVENUE - Other operating revenues for the twelve months
ended September 30, 2001 were $3.7 million compared to $3.1 million for the
twelve months ended September 30, 2000. The $.6 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 September 30, 2001 and 2000 were $22.7
million and $19.9 million, respectively. The $2.8 million increase is made up
of a number of items. Operations and maintenance expenses increased by
approximately $1.1 million due primarily to increased employee related costs.
General business tax expense also increased by approximately $1.2 million, due
primarily to property tax reductions recorded during the third quarter of 2000
offset partially by a reduction in property taxes in 2001 as a result of new
property valuation tables approved by the state of Michigan. Lastly,
depreciation and amortization expense increased by $.5 million, due primarily to
additional property, plant and equipment placed in service.
During the nine months ended September 30, 2001 and 2000, operating
expenses were $66.6 million and $64.4 million, respectively. The $2.2 million
increase includes a $1.3 million increase in depreciation and amortization
expenses, a $.6 million increase in general business tax expense and a $.3
million increase in operation and maintenance expense. These increases were
caused primarily by the same items causing the variance in the third quarter.
Operating expenses for the twelve months ended September 30, 2001 increased
by $1.6 million when compared to the twelve months ended September 30, 2000. A
full twelve months of operations at ENSTAR accounts for approximately $1.0
million of the increase in operating expenses. The remaining increase of $.6
million relates to the Michigan gas distribution operation and includes
offsetting increases and decreases in expenses.
Depreciation expense at the Michigan operation, when comparing the
twelve-month periods, increased by approximately $1.5 million. This increase
was offset by a decrease of approximately $.9 million in general business tax
expense. This decrease was due primarily to lower property tax expense as a
result of new property valuation tables approved by the state of Michigan,
offset by a reduction in property taxes recorded in the third quarter of 2000
based on pending appeals of prior years' personal property tax assessments.
- 17 -
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
GAS DISTRIBUTION (CONTINUED)
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
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 filed a cost of service
study using 2000 as the test year. The Public Advocacy Section of the RCA filed
its testimony in October 2001. The hearing and proceeding will be held in
December 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 March 31, 2002. For information regarding the current fixed gas
charge of $3.24 per thousand cubic feet ("Mcf") refer to Note 2 of the Notes to
the Consolidated Financial Statements in the Company's 2000 Annual Report on
Form 10-K. The Company applied for and received approval from the City
Commission of Battle Creek ("CCBC") to extend the fixed gas charge program until
March 31, 2005 for customers located in the City of Battle Creek, Michigan and
surrounding communities. During the three-year extension period, the Company
will charge customers in the geographic areas subject to the regulatory
jurisdiction of the CCBC a fixed charge of $4.96 per Mcf.
The Company filed an application with the Michigan Public Service
Commission ("MPSC") in September 2001 to extend its fixed charge program until
March 31, 2005 and increase the current fixed charge for all remaining Michigan
customers. However, the Company was unable to reach an agreement with the MPSC
and other interested parties on a fixed customer charge for natural gas for the
three years of the proposed extended period. As a result, the Company has
withdrawn its application. The Company will instead reinstate its gas cost
recovery ("GCR") pricing mechanism when the current fixed gas charge program
expires on March 31, 2002. Under the GCR mechanism, the Company's customers in
the geographic areas subject to the regulatory jurisdiction of the MPSC will be
charged an amount that allows the Company to recoup its cost of purchased
natural gas. The MPSC has the authority to adjust the GCR factor based on the
variability in natural gas prices. The MPSC suspended the Company's GCR clause
in April 1999 when the current fixed gas charge program went into effect.
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.
- 18 -
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
ENGINEERING AND CONSTRUCTION (CONTINUED)
Three Months Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
------------------ ----------------- -------------------
2001 2000 2001 2000 2001 2000
------- ------- -------- ------- -------- --------
(in thousands)
Operating revenues. . . . . . . . . . $45,798 $38,151 $102,843 $88,623 $140,106 $116,146
Operating expenses. . . . . . . . . . 42,425 34,656 101,456 87,760 135,881 113,409
------- ------- -------- ------- -------- --------
Operating income (loss) . . . . . . . $ 3,373 $ 3,495 $ 1,387 $ 863 $ 4,225 $ 2,737
======= ======= ======== ======= ======== ========
Feet of pipe and cable installed. . . 2,543 2,521 5,125 5,448 7,646 7,514
Billed engineering hours. . . . . . . 58 53 150 241 201 334
<FN>
The amounts in the above table include intercompany transactions.
OPERATING REVENUES - The operating revenues of the E & C Business for the
three and nine months ended September 30, 2001 were $45.8 million and $102.8
million, respectively, which is a $7.6 million and $14.2 million increase over
the same periods ended September 30, 2000, respectively. This represents a 20%
increase in revenues for the three-month period and a 16% increase for the
nine-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 September 30, 2001 were
$140.1 million, an increase of $24.0 million (or 21%) over the same period ended
September 30, 2000. The increase is due primarily to the same items discussed
above and the timing of business acquisitions. Two of the E & C business
acquisitions were made during the twelve months ended September 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.
OPERATING INCOME - Operating income for the third quarter of 2001 was $3.4
million compared to operating income of $3.5 million for the third quarter of
2000. The small decrease in 2001 was attributable primarily to lower margins on
work at certain business units and a slow-down in telecommunications work,
offset partially by profits on the large, multi-year construction project in the
southeastern region of the United States.
The E & C Business had operating income of $1.4 million for the nine
months ended September 30, 2001 compared to operating income of $.9 million for
the nine months ended September 30, 2000. Operating income for the twelve
months ended September 30, 2001 increased by $1.5 million to $4.2 million when
compared to the twelve months ended September 30, 2000. The improved results
during the nine and twelve months ended September 30, 2001 were due primarily to
the large construction project mentioned previously, offset partially by lower
margin work and less telecommunications work in certain regions.
- 19 -
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
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").
Three Months Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
------------------- ------------------- -------------------
2001 2000 2001 2000 2001 2000
------ ------ ------ ------ ------ ------
(in thousands)
Operating revenues. . . . $2,461 $1,616 $7,608 $3,218 $9,574 $3,218
Operating expenses. . . . 2,344 1,462 7,255 2,937 9,021 2,937
------ ------ ------ ------ ------ ------
Operating income. . . . . $ 117 $ 154 $ 353 $ 281 $ 553 $ 281
====== ====== ====== ====== ====== ======
<FN>
The amounts in the above table include intercompany transactions.
OPERATING REVENUES - Operating revenues for the IT services business for
the three months ended September 30, 2001 were $2.5 million compared to $1.6
million for the three months ended September 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 first nine
months of 2000, the IT services business was only providing services to the
Michigan gas distribution operation and corporate office. Operating revenues
for the nine and twelve months ended September 30, 2001 were $7.6 million and
$9.6 million, respectively.
OPERATING INCOME - Operating income for the IT business for the third
quarter of 2001 was $.1 million, which was essentially unchanged from operating
income for the third quarter of 2000. Operating income for the nine and twelve
months ended September 30, 2001 was $.4 million and $.6 million, respectively.
PROPANE, PIPELINES AND STORAGE
Three Months Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
-------------------- ------------------- -------------------
2001 2000 2001 2000 2001 2000
------ ------ ------ ------ ------ ------
(in thousands)
Operating revenues . . . . $1,289 $1,281 $5,407 $4,570 $7,786 $6,408
Operating expenses . . . . 1,018 1,032 4,054 3,573 5,900 4,505
------ ------ ------ ------ ------ ------
Operating income . . . . . $ 271 $ 249 $1,353 $ 997 $1,886 $1,903
====== ====== ====== ====== ====== ======
- 20 -
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
PROPANE, PIPELINES AND STORAGE (CONTINUED)
OPERATING REVENUES - The operating revenues of the Company's propane,
pipelines and storage business for the three, nine and twelve months ended
September 30, 2001 were $1.3 million, $5.4 million and $7.8 million,
respectively, compared to $1.3 million, $4.6 million and $6.4 million,
respectively, for the same periods ended September 30, 2000. The increases
during the nine- and twelve-month 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 nine months ended September 30, 2001, when compared to
the same period of 2000, increased by $.4 million due primarily to better
propane margins. Operating income for the three and twelve months ended
September 30, 2001 was $.3 million and $1.9 million, which was essentially
unchanged from the same periods ended September 30, 2000.
OTHER INCOME AND DEDUCTIONS
Three Months Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
------------------ -------------------- --------------------
2001 2000 2001 2000 2001 2000
-------- -------- --------- --------- --------- ---------
(in thousands)
Interest expense. . . . . . . . . . . $(8,123) $(8,304) $(23,876) $(26,405) $(32,384) $(35,364)
Other income. . . . . . . . . . . . . 333 14 2,046 1,683 3,321 2,443
-------- -------- --------- --------- --------- ---------
Total other income (deductions) . . $(7,790) $(8,290) $(21,830) $(24,722) $(29,063) $(32,921)
======== ======== ========= ========= ========= =========
INTEREST EXPENSE - Interest expense for the three, nine and twelve months
ended September 30, 2001 decreased by $.2 million, $2.5 million and $3 million,
respectively, when compared to the same periods ended September 30, 2000. The
decrease is due primarily to lower debt levels as a result of refinancing
short-term debt with trust preferred securities and FELINE PRIDES during the
second and third quarters of 2000, offset slightly by additional debt to finance
the Company's capital expenditure programs. The bridge loan, utilized to
finance the acquisition of ENSTAR, 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 nine and
twelve months ended September 30, 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 and nine months ended September
30, 2001 increased by $.3 million, when compared to the same periods ended
September 30, 2000. The increase was due primarily to higher allowances for
funds used during construction ("AFUDC") and other miscellaneous items. For the
twelve months ended September 30, 2001, other income increased by $.9 million,
to $3.3 million when compared to the twelve months ended September 30, 2000.
This increase was due primarily to AFUDC, as discussed above.
- 21 -
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
INCOME TAX PROVISION
Income taxes for the three months ended September 30, 2001 decreased by $.9
million when compared to the same period ended September 30, 2001. Income taxes
for the nine and twelve months ended September 30, 2001 increased by $.2
million and $3.8 million, respectively, when compared to the same periods ended
September 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,
nine and twelve months ended September 30, 2001 were approximately $2.2 million,
$6.5 million and $8.6 million, respectively.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FROM INVESTING - The following table identifies capital
investments for the three and nine months ended September 30, 2001 and 2000:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2001 2000 2001 2000
------- ------- ------- -------
(in thousands)
Capital investments:
Property additions - gas distribution. . . . . . . . . . . $11,152 $16,883 $28,820 $37,839
Property additions - diversified businesses and other. . . 4,585 3,858 15,228 12,047
Business acquisitions (a). . . . . . . . . . . . . . . . . - - - 1,784
------- ------- ------- -------
$15,737 $20,741 $44,048 $51,670
======= ======= ======= =======
<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 $44 million on property additions
during the first nine months of 2001 and anticipates spending approximately $6
million on property additions during the remainder of 2001.
CASH FLOWS FROM OPERATIONS - Net cash from operating activities for the
three months and nine months ended September 30, 2001, when compared to the same
periods of the prior year, decreased by $3.7 million and $8.2 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.
- 22 -
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)
CASH FLOWS FROM FINANCING - Net cash provided by financing activities
during the three months and nine months ended September 30, 2001 decreased by
$11.9 million and increased by $3.2 million, respectively, when compared to the
same periods ended September 30, 2000.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ---------------------
2001 2000 2001 2000
-------- -------- --------- ----------
(in thousands)
Cash provided by (used in) financing activities:
Issuance of common stock. . . . . . . . . . . . . . . . $ 1,171 $ 216 $ 1,315 $ 659
Issuance of trust preferred securities. . . . . . . . . - 10,196 - 134,968
Issuance of long-term debt, net of redemptions. . . . . (152) (133) 58,296 136,717
Net cash change in notes payable. . . . . . . . . . . . 25,100 27,735 (37,691) (253,738)
Payment of dividends. . . . . . . . . . . . . . . . . . (3,796) (3,787) (11,380) (11,243)
-------- -------- --------- ----------
$22,323 $34,227 $ 10,540 $ 7,363
======== ======== ========= ==========
In October 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 November 15, 2001 to shareholders of record at the close
of business on November 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.
$49.7 million of these short-term credit facilities were unused at September 30,
2001.
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 September 30, 2001, there was $164
million of available financing remaining under the Company's registration
statement.
The Company's ratio of earnings to fixed charges was 1.41 for the twelve
months ended September 30, 2001. On a pro forma basis, assuming that common
stock of the Company was issued in place of the FELINE PRIDES, the ratio of
earnings to fixed charges would have been 1.76. Holders of FELINE PRIDES are
obligated to purchase Company stock in August 2003.
- 23 -
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
SUBSEQUENT EVENTS
On October 26, 2001 the Company announced a redirection of its business
strategy. The Company plans to restructure corporate, business unit and
operational structures. This will involve the integration and common operation
of the Company's Michigan and Alaska gas distribution divisions and the closure
of the Company's E&C headquarters in Houston and related consolidation of
administrative functions in Michigan. The redirection will also involve the
divestiture of the Company's engineering services business and certain regions
of the construction business that are not likely to contribute to shareholder
value in the near term. The new strategy will concentrate more on profitable
growth within each line of business and less on acquisitions.
As a result of the redirected strategy and reorganization, the Company
anticipates taking a one-time after tax charge to earnings in the fourth quarter
of 2001, of up to $11 million and expects to reduce annual costs by an estimated
$1.8 million after tax beginning in 2002. The Company now expects 2001 earnings
per share of $.47 to $.53 exclusive of the one time charge and assuming normal
weather for the fourth quarter. The Company also expects that, under normal
weather conditions, 2002 earnings per share will be $.87 to $.95.
RECENT ACCOUNTING PRONOUNCEMENTS
In 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("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.
In August 2001, FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations, effective January 1, 2003. The standard requires entities to
record the fair value of a liability for an asset retirement obligation in the
period in which it is incurred.
When the liability is initially recorded, the entity capitalizes a cost by
increasing the carrying amount of the related long-lived asset. Over time, the
liability is accreted to its present value each period, and the capitalized cost
is depreciated over the useful life of the related asset. Upon settlement of
the liability, an entity either settles the obligation for its recorded amount
or incurs a gain or loss upon settlement. The Company is currently studying the
new standard but has yet to quantify the effects of adoption on its financial
statements.
- 24 -
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which replaces SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of and APB No. 30, Reporting Results of Operations-Reporting the
Effects of Disposal of a Segment of a Business.
SFAS No. 144 requires long-lived assets to be measured at the lower of
either the carrying amount or of the fair value less the cost to sell, whether
reported in continuing operations or in discontinued operations. Therefore,
discontinued operations will no longer be measured at net realizable value or
include amounts for operating losses that have not yet occurred.
SFAS No. 144 also broadens the reporting of discontinued operations to
include all components of an entity with operations that can be distinguished
from the rest of the entity and that will be eliminated from the ongoing
operations of the entity in a disposal transaction. The adoption of SFAS No.
144, effective January 1, 2002, will result in the Company accounting for any
future impairment or disposal of long-lived assets under the provisions of SFAS
No. 144, but will not change the accounting used for previous asset impairments
or disposals.
- 25 -
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES.
During the third quarter of 2001, the Company issued an aggregate of
6,302 shares of unregistered common stock, valued at $95,100. The stock was
issued to 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.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) List of Exhibits - (See page 28 for the Exhibit Index.)
10.1 Amendment (dated August 10, 2001) to Employment Agreement with
William L. Johnson.
10.2 Deferred Compensation and Stock Purchase Plan for Non-Employee
Directors adopted August 23, 2001.
12 Ratio of Earnings to Fixed Charges.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the third quarter of
2001.
- 26 -
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, 2001
By: /s/Steven W. Warsinske
-----------------------------------
Steven W. Warsinske
Vice President and Controller and
Principal Financial Officer
- 27 -
EXHIBIT INDEX
Form 10-Q
Third Quarter 2001
Exhibit
No. Description Filed Herewith
- ------- ------------------------------------- --------------
10.1 Amendment (dated August 10, 2001) x
to Employment Agreement with
William L. Johnson.
10.2 Deferred Compensation and Stock x
Purchase Plan for Non-Employee
Directors adopted August 23, 2001.
12 Ratio of Earnings to Fixed Charges. x