UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
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 April
30, 2002: 18,406,264
INDEX TO FORM 10-Q
------------------
For Quarter Ended March 31, 2002
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. . . . . . . . . . . . .. . . . . . . . . . . 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . 26
Item 4. Submission of Matters to a Vote of Securityholders . . . . . . . . . . 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 engineering services business and
construction services business; (ix) the nature, availability and projected
profitability of potential investments available to the Company; (x) the
Company's ability to remain in compliance with its debt covenants and 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 Twelve Months Ended
March 31, March 31,
-------------------- --------------------
2002 2001 2002 2001
--------- --------- --------- ---------
OPERATING REVENUES
Gas sales . . . . . . . . . . . . . . . . . . . . . . . $122,223 $122,024 $295,596 $296,404
Gas transportation. . . . . . . . . . . . . . . . . . . 8,315 8,058 26,145 27,343
Construction services . . . . . . . . . . . . . . . . . 21,874 16,202 118,891 98,820
Other . . . . . . . . . . . . . . . . . . . . . . . . . 3,499 3,694 11,124 11,099
--------- --------- --------- ---------
155,911 149,978 451,756 433,666
--------- --------- --------- ---------
OPERATING EXPENSES
Cost of gas sold. . . . . . . . . . . . . . . . . . . . 78,783 80,583 183,172 181,994
Operations and maintenance. . . . . . . . . . . . . . . 36,619 31,830 167,078 143,136
Depreciation and amortization . . . . . . . . . . . . . 8,761 8,985 36,281 34,157
Property and other taxes. . . . . . . . . . . . . . . . 3,129 2,913 11,779 9,677
Restructuring and impairment charges. . . . . . . . . . - - 6,103 -
--------- --------- --------- ---------
127,292 124,311 404,413 368,964
--------- --------- --------- ---------
OPERATING INCOME. . . . . . . . . . . . . . . . . . . . . 28,619 25,667 47,343 64,702
OTHER INCOME (DEDUCTIONS)
Interest expense. . . . . . . . . . . . . . . . . . . . (7,674) (8,001) (31,457) (34,231)
Other . . . . . . . . . . . . . . . . . . . . . . . . . 325 866 1,794 2,634
--------- --------- --------- ---------
(7,349) (7,135) (29,663) (31,597)
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES AND
DIVIDENDS ON TRUST PREFERRED SECURITIES . . . . . . . . 21,270 18,532 17,680 33,105
INCOME TAX PROVISION. . . . . . . . . . . . . . . . . . . 7,790 6,904 7,464 11,840
--------- --------- --------- ---------
NET INCOME BEFORE DIVIDENDS ON TRUST
PREFERRED SECURITIES. . . . . . . . . . . . . . . . . . 13,480 11,628 10,216 21,265
Dividends on trust preferred securities, net of
income taxes. . . . . . . . . . . . . . . . . . . . . . 2,150 2,150 8,603 7,155
--------- --------- --------- ---------
NET INCOME FROM CONTINUING OPERATIONS . . . . . . . . . . 11,330 9,478 1,613 14,110
DISCONTINUED OPERATIONS
Loss from engineering services operations, net of
income taxes . . . . . . . . . . . . . . . . . . . - (422) (720) (355)
Estimated loss on divestiture of engineering services
operations, including provision for losses during
phase-out period, net of income taxes. . . . . . . - - (4,980) -
--------- --------- --------- ---------
NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS. . . . . . . . . . . . . . . . . . . . . . $ 11,330 $ 9,056 $ (4,087) $ 13,755
========= ========= ========= =========
EARNINGS PER SHARE - BASIC
Net income (loss) from continuing operations. . . . . . $ 0.62 $ 0.52 $ 0.09 $ 0.78
Net income (loss) available to common shareholders. . . $ 0.62 $ 0.50 $ (0.22) $ 0.76
EARNINGS PER SHARE - DILUTED
Net income (loss) from continuing operations. . . . . . $ 0.62 $ 0.50 $ 0.09 $ 0.75
Net income (loss) available to common shareholders. . . $ 0.62 $ 0.48 $ (0.22) $ 0.73
CASH DIVIDENDS PAID PER SHARE . . . . . . . . . . . . . . $ 0.21 $ 0.21 $ 0.84 $ 0.84
AVERAGE COMMON SHARES OUTSTANDING . . . . . . . . . . . . 18,315 18,057 18,169 18,034
<FN>
The accompanying notes to the consolidated financial statements are an integral part of these
statements.
- 3 -
SEMCO ENERGY, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
ASSETS
(In thousands)
March 31, December 31,
2002 2001
----------- -------------
(Unaudited)
CURRENT ASSETS
Cash and temporary cash investments, at cost. . . . . . $ 729 $ 1,728
Receivables, less allowances of $2,255 and $1,849 . . . 63,461 64,219
Accrued revenue . . . . . . . . . . . . . . . . . . . . 27,888 33,153
Prepaid expenses. . . . . . . . . . . . . . . . . . . . 14,745 22,276
Gas in underground storage. . . . . . . . . . . . . . . 5,070 12,731
Materials and supplies, at average cost . . . . . . . . 5,563 5,258
Gas charges recoverable from customers. . . . . . . . . 1,778 1,994
Other . . . . . . . . . . . . . . . . . . . . . . . . . 4,208 3,608
---------- -------------
123,442 144,967
PROPERTY, PLANT AND EQUIPMENT
Gas distribution. . . . . . . . . . . . . . . . . . . . 619,897 613,467
Diversified businesses and other. . . . . . . . . . . . 94,684 94,514
---------- -------------
714,581 707,981
Less - accumulated depreciation and impairments . . . . 191,912 183,436
---------- -------------
522,669 524,545
DEFERRED CHARGES AND OTHER ASSETS
Goodwill, less amortization and impairments of $17,764. 161,084 161,084
Deferred retiree medical benefits . . . . . . . . . . . 9,666 9,891
Unamortized debt expense. . . . . . . . . . . . . . . . 7,627 7,831
Other . . . . . . . . . . . . . . . . . . . . . . . . . 15,522 15,230
---------- -------------
193,899 194,036
---------- -------------
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . . $ 840,010 $ 863,548
========== =============
<FN>
The accompanying notes to the consolidated financial statements are an integral part
of these statements.
- 4 -
SEMCO ENERGY, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
LIABILITIES AND CAPITALIZATION
(In thousands)
March 31, December 31,
2002 2001
----------- --------------
(Unaudited)
CURRENT LIABILITIES
Notes payable and current maturities of long-term debt. . . $ 118,126 $ 137,957
Accounts payable. . . . . . . . . . . . . . . . . . . . . . 23,643 30,410
Customer advance payments . . . . . . . . . . . . . . . . . 10,060 13,530
Accrued interest. . . . . . . . . . . . . . . . . . . . . . 8,793 7,665
Amounts payable to customers. . . . . . . . . . . . . . . . 1,468 1,463
Accumulated deferred income taxes . . . . . . . . . . . . . 1,135 912
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,423 17,076
----------- --------------
178,648 209,013
DEFERRED CREDITS AND OTHER LIABILITIES
Accumulated deferred income taxes . . . . . . . . . . . . . 33,179 33,149
Customer advances for construction. . . . . . . . . . . . . 14,165 15,548
Unamortized investment tax credit . . . . . . . . . . . . . 1,378 1,445
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,611 12,223
----------- --------------
60,333 62,365
LONG-TERM DEBT. . . . . . . . . . . . . . . . . . . . . . . . 338,984 338,966
COMPANY-OBLIGATED MANDATORILY REDEEMABLE TRUST
PREFERRED SECURITIES OF SUBSIDIARIES HOLDING
SOLELY DEBT SECURITIES OF SEMCO ENERGY, INC.. . . . . . . . 139,405 139,394
COMMON SHAREHOLDERS' EQUITY
Common stock - $1 par value; 40,000,000 shares authorized;
18,393,169 and 18,240,143 shares outstanding. . . . . . . 18,393 18,240
Capital surplus and accumulated other comprehensive income. 116,077 114,895
Retained earnings (deficit) . . . . . . . . . . . . . . . . (11,830) (19,325)
----------- --------------
122,640 113,810
----------- --------------
TOTAL LIABILITIES AND CAPITALIZATION. . . . . . . . . . . . . $ 840,010 $ 863,548
=========== ==============
<FN>
The accompanying notes to the consolidated financial statements are an integral part of
these statements.
- 5 -
SEMCO ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Three Months Ended
March 31,
--------------------
2002 2001
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,330 $ 9,056
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . 8,761 9,098
Changes in assets and liabilities, net of effects of
acquisitions, divestitures and other changes as shown below. 8,592 34,270
--------- ---------
NET CASH FROM OPERATING ACTIVITIES. . . . . . . . . . . . 28,683 52,424
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Property additions - gas distribution . . . . . . . . . . . . . . . . (7,007) (7,894)
Property additions - diversified businesses and other . . . . . . . . (815) (4,434)
Proceeds from property sales, net of retirement costs . . . . . . . . 559 (238)
--------- ---------
NET CASH FROM INVESTING ACTIVITIES. . . . . . . . . . . . (7,263) (12,566)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock, net of expenses . . . . . . . . . . . . . . 1,247 33
Net cash change in notes payable. . . . . . . . . . . . . . . . . . . (19,831) (30,728)
Payment of dividends on common stock. . . . . . . . . . . . . . . . . (3,835) (3,792)
--------- ---------
NET CASH FROM FINANCING ACTIVITIES. . . . . . . . . . . . (22,419) (34,487)
--------- ---------
CASH AND TEMPORARY CASH INVESTMENTS
Net increase (decrease) . . . . . . . . . . . . . . . . . . . . . . . (999) 5,371
Beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . 1,728 1,221
--------- ---------
End of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 729 $ 6,592
========= =========
CHANGES IN ASSETS AND LIABILITIES, NET OF EFFECTS OF
ACQUISITIONS, DIVESTITURES AND OTHER CHANGES:
Receivables, net. . . . . . . . . . . . . . . . . . . . . . . . $ 758 $ 25,104
Accrued revenue . . . . . . . . . . . . . . . . . . . . . . . . 5,265 8,626
Materials, supplies and gas in underground storage. . . . . . . 7,357 6,365
Gas charges recoverable from customers. . . . . . . . . . . . . 216 226
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . (6,767) (4,649)
Customer advances and amounts payable to customers. . . . . . . (4,848) (7,664)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,611 6,262
--------- ---------
$ 8,592 $ 34,270
========= =========
<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)
NOTE 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 2001 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
2002 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 STANDARDS - On January 1, 2002, the Company adopted
Statement of Financial Accounting Standards ("SFAS") 141, "Business
Combinations" and SFAS 142, "Goodwill and Other Intangible Assets." SFAS 141
addresses financial accounting and reporting for all business combinations and
requires that all business combinations entered into subsequent to June 2001 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 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.
Effective with the date of adoption of these statements the Company ceased
Goodwill amortization, which has reduced amortization expense for the quarter
ended March 31, 2002 by approximately $.7 million after income taxes (or $0.04
per share based on the current level of outstanding common stock). The Company
is also required to complete an impairment test in the year of adoption, and
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 plans
to complete impairment tests on its remaining goodwill balances by the end of
the second quarter of 2002, at which time it will have a better understanding of
the financial impact, if any, of adopting these standards. There was no change
in the carrying amount of goodwill for the three months ended March 31, 2002.
The following table presents what would have been reported as net income
(loss) available to common shareholders and the related per share amounts on a
basic and diluted basis in all periods presented exclusive of amortization
expense (including any related tax effects) recognized in those periods related
to goodwill.
- 7 -
SEMCO ENERGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Three Months Ended Twelve Months Ended
March 31, March 31,
------------------ -------------------
2002 2001 2002 2001
------- ------- -------- --------
(in thousands)
NET INCOME (LOSS) AVAILABLE TO
COMMON SHAREHOLDERS
Reported net income from
continuing operations. . . . . . . $11,330 $9,478 $ 1,613 $14,110
Loss from discontinued operations. . - (422) (5,700) (355)
------- ------- -------- --------
Reported net income (loss) available
to common shareholders . . . . . . 11,330 9,056 (4,087) 13,755
Add back: Goodwill amortization, net
of income taxes. . . . . . . . . . - 699 2,106 2,737
------- ------- -------- --------
Adjusted net income (loss) available
to common shareholders . . . . . . $11,330 $9,755 $(1,981) $16,492
------- ------- -------- --------
ADJUSTED EARNINGS PER SHARE - BASIC
Reported net income from
continuing operations. . . . . . . $ 0.62 $ 0.52 $ 0.09 $ 0.78
Loss from discontinued operations. . - (0.02) (0.31) (0.02)
------- ------- -------- --------
Reported net income (loss) available
to common shareholders . . . . . . 0.62 0.50 (0.22) 0.76
Add back: Goodwill amortization, net
of income taxes. . . . . . . . . . - 0.04 0.12 0.15
------- ------- -------- --------
Adjusted net income (loss) available
to common shareholders . . . . . . $ 0.62 $ 0.54 $ (0.10) $ 0.90
------- ------- -------- --------
ADJUSTED EARNINGS PER SHARE - DILUTED
Reported net income from
continuing operations. . . . . . . $ 0.62 $ 0.50 $ 0.09 $ 0.75
Loss from discontinued operations. . - (0.02) (0.31) (0.02)
------- ------- -------- --------
Reported net income (loss) available
to common shareholders . . . . . . 0.62 0.48 (0.22) 0.73
Add back: Goodwill amortization, net
of income taxes. . . . . . . . . . - 0.04 0.12 0.15
------- ------- -------- --------
Adjusted net income (loss) available
to common shareholders . . . . . . $ 0.62 $ 0.52 $ (0.10) $ 0.87
------- ------- -------- --------
- 8 -
SEMCO ENERGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
On January 1, 2002, the Company also adopted SFAS 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which replaces SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" and Accounting Principles Board ("APB") Opinion 30, "Reporting
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business."
SFAS 144 requires long-lived assets to be measured at the lower of either
the carrying amount or the fair value less the cost to sell the assets, 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 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 144 will result in
the Company accounting for any future impairment or disposal of long-lived
assets under the provisions of SFAS 144, but has not changed the accounting used
for previous asset impairments or disposals.
In August 2001, the FASB issued SFAS 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.
SUPPLEMENTAL CASH FLOW INFORMATION - Supplemental cash flow information for
the three months ended March 31, 2002 and 2001 is summarized in the table below.
Three Months Ended
March 31,
------------------
2002 2001
------ ------
(in thousands)
CASH PAID DURING THE PERIOD FOR:
Interest. . . . . . . . . . . . . . $6,342 $7,151
Income taxes, net of refunds. . . . $1,600 $ -
NOTE 2 - SHORT-TERM BORROWINGS AND CAPITALIZATION
SHORT-TERM BORROWINGS - The Company has $145 million of short-term lines of
credit with banks, all of which are committed facilities. At March 31, 2002,
$58.2 million of the Company's credit facilities was unused. The Company's
lines of credit expire during June and July of 2002 and the Company expects to
put in place new lines of credit at that time.
COMMON STOCK EQUITY - On April 16, 2002, the Company's Board of Directors
declared a quarterly cash dividend of $0.125 per share on the Company's common
stock. The dividend is payable on May 15, 2002 to shareholders of record at the
close of business on May 1, 2002.
- 9 -
SEMCO ENERGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
NOTE 2 - SHORT-TERM BORROWINGS AND CAPITALIZATION (CONTINUED)
In February 2002, the Company paid a quarterly cash dividend of $0.21 per
share on its common stock. The total cash dividend was approximately $3.8
million of which $.6 million was reinvested by shareholders into common stock
through participation in the Direct Stock Purchase and Dividend Reinvestment
Plan ("DRIP"). During the first quarter of 2002, the Company issued
approximately 146,000 shares of Company common stock to meet the dividend
reinvestment and stock purchase requirements of its DRIP participants. Also
during the first quarter of 2002, the Company: a) issued approximately 7,300
shares of its common stock to certain of the Company's employee benefit plans
and b) purchased 16,900 shares of its common stock on the open market to
contribute to certain of its employee benefit plans.
NOTE 3 - RISK MANAGEMENT ACTIVITIES AND DERIVATIVE TRANSACTIONS
The Company's business activities expose it to a variety of risks,
including commodity price risk and interest rate risk. The Company's management
identifies risks associated with the Company's business and determines which
risks it wants to manage and which type of instruments it should use to manage
those risks.
The Company records all derivative instruments it enters into under the
provisions of SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities," and SFAS 137 and SFAS 138, which were amendments to SFAS 133
(hereinafter collectively referred to as "SFAS 133"). SFAS 133 requires 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 also
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 as fair value hedges and require the recognition of the derivatives
at their fair value in the Consolidated Statements of Financial Position as an
asset or liability. In accordance with SFAS 133, at March 31, 2002 and December
31, 2001, the Company had an asset and liability of $.5 million and $.8 million,
respectively, recorded in its Consolidated Statements of Financial Position for
these gas purchase contracts.
An affiliate, in which the Company has a 50% investment, uses an interest
rate swap agreement to hedge the variable interest rate payments on its
long-term debt. This agreement qualifies under the provisions of SFAS 133 as a
cash flow hedge. As a result of this interest rate swap agreement, the
Company's Consolidated Statements of Financial Position, at March 31, 2002 and
December 31, 2001, reflected a $.6 million and $.7 million reduction,
respectively, in the Company's equity investment in the affiliate and in
accumulated other comprehensive income.
In August 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 as a fair value hedge. In accordance
with SFAS 133, the Company's Consolidated Statements of Financial Position, at
March 31, 2002 and December 31, 2001, included an asset of $2.1 million and $1.9
million, respectively, and an increase in long-term debt of $2.1 million and
$1.9 million, respectively, for this interest rate swap.
- 10 -
SEMCO ENERGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
NOTE 4 - EARNINGS PER SHARE
The computations of basic and diluted earnings per share for the three
months and twelve months ended March 31, 2002 and 2001 are as follows (in
thousands except per share amounts):
Three Months Ended Twelve Months Ended
March 31, March 31,
------------------ -------------------
2002 2001 2002 2001
------- -------- -------- --------
(in thousands)
BASIC EARNINGS PER SHARE COMPUTATION
Net income (loss) from continuing operations . . . . . $11,330 $ 9,478 $ 1,613 $14,110
Discontinued operations (a). . . . . . . . . . . . . . - (422) (5,700) (355)
------- -------- -------- --------
Net income (loss) available to common shareholders . . $11,330 $ 9,056 $(4,087) $13,755
------- -------- -------- --------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING . . . . . . . . . . 18,315 18,057 18,169 18,034
------- -------- -------- --------
EARNINGS PER SHARE - BASIC
Net income (loss) from continuing operations . . . . . $ 0.62 $ 0.52 $ 0.09 $ 0.78
Discontinued operations (a). . . . . . . . . . . . . . - (0.02) (0.31) (0.02)
------- -------- -------- --------
Net income (loss) available to common shareholders . . $ 0.62 $ 0.50 $ (0.22) $ 0.76
------- -------- -------- --------
DILUTED EARNINGS PER SHARE COMPUTATION
Net income (loss) from continuing operations . . . . . $11,330 $ 9,478 $ 1,613 $14,110
Adjustment:. . . . . . . . . . . . . . . . . . . . . . - - - -
------- -------- -------- --------
Adjusted net income (loss) from continuing operations. 11,330 9,478 1,613 14,110
Discontinued operations (a). . . . . . . . . . . . . . - (422) (5,700) (355)
------- -------- -------- --------
Net income (loss) available to common shareholders . . $11,330 $ 9,056 $(4,087) $13,755
------- -------- -------- --------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING . . . . . . . . . . 18,315 18,057 18,169 18,034
Incremental shares from assumed conversions of:
FELINE PRIDES - stock purchase contracts (b) . . . . . - 774 - 794
Stock options. . . . . . . . . . . . . . . . . . . . . 12 26 11 26
------- -------- -------- --------
DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (b) . . . . 18,327 18,857 18,180 18,854
------- -------- -------- --------
EARNINGS PER SHARE - DILUTED
Net income (loss) from continuing operations . . . . . $ 0.62 $ 0.50 $ 0.09 $ 0.75
Discontinued operations (a). . . . . . . . . . . . . . - (0.02) (0.31) (0.02)
------- -------- -------- --------
Net income (loss) available to common shareholders . . $ 0.62 $ 0.48 $ (0.22) $ 0.73
------- -------- -------- --------
<FN>
(a) Effective December 2001, the Company began accounting for the engineering services business as a
discontinued operation. Accordingly, its operating results are segregated and reported as
discontinued operations in the Consolidated Statement of Income, with prior years restated.
(b) The FELINE PRIDES were not included in the computation of diluted earnings per share for the
three- and twelve months period ending March 31, 2002 because their effect was antidilutive.
NOTE 5 - BUSINESS SEGMENTS
The Company operates four reportable business segments: (1) gas
distribution; (2) 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 10 of the Notes
to the Consolidated Financial Statements in the Company's 2001 Annual Report on
Form 10-K.
- 11 -
SEMCO ENERGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
NOTE 5 - BUSINESS SEGMENTS (CONTINUED)
The Company's gas distribution segment distributes and transports natural
gas to approximately 269,000 customers in the state of Michigan and
approximately 109,000 customers in the state of Alaska. The construction
services segment ("Construction Services") currently conducts most of its
business in the mid-western, southern and southeastern areas of the United
States. Its primary service is the installation of underground natural gas
mains and service lines. Other services include the installation of underground
water and cable facilities. The information technology service segment ("IT
Services") is headquartered in Michigan and provides IT infrastructure
outsourcing services, and other IT services with a focus on mid-range computers,
particularly the IBM I-Series (AS-400) platform. The Company's other business
segments currently account for a large portion of IT Services revenues. The
propane, pipelines and storage segment sells more than 4 million gallons of
propane annually to retail customers in Michigan's upper peninsula and northeast
Wisconsin and operates natural gas transmission and storage facilities in
Michigan.
The accounting policies of the operating segments are the same as those
described in Notes 1 and 10 of the Notes to the Consolidated Financial
Statements in the Company's 2001 Annual Report on Form 10-K, except that
intercompany transactions have not been eliminated in determining individual
segment results. The following table provides business segment information as
well as a reconciliation ("Corporate and other") of the segment information to
the applicable line in the Consolidated Financial Statements. Corporate and
other includes corporate related expenses not allocated to segments,
intercompany eliminations and results of other smaller operations.
Three Months Ended Twelve Months Ended
March 31, March 31,
-------------------- --------------------
2002 2001 2002 2001
--------- --------- --------- ---------
(in thousands)
OPERATING REVENUES
Gas Distribution . . . . . . . . $131,452 $130,969 $324,848 $327,132
Engineering and Construction . . 25,581 17,848 133,938 108,525
Information Technology Services. 2,261 2,210 10,326 7,394
Propane, Pipelines and Storage . 2,238 2,749 6,932 7,637
Corporate and Other (a). . . . . (5,621) (3,798) (24,288) (17,022)
--------- --------- --------- ---------
Total Operating Revenues . . . $155,911 $149,978 $451,756 $433,666
========= ========= ========= =========
OPERATING INCOME (LOSS)
Gas Distribution . . . . . . . . $ 30,192 $ 27,959 $ 52,570 $ 62,175
Engineering and Construction . . (1,310) (2,073) (612) 3,882
Information Technology Services. 176 152 455 633
Propane, Pipelines and Storage . 609 736 1,745 1,794
Corporate and Other. . . . . . . (1,048) (1,107) (6,815) (3,782)
--------- --------- --------- ---------
Total Operating Income . . . . $ 28,619 $ 25,667 $ 47,343 $ 64,702
========= ========= ========= =========
<FN>
(a) Includes the elimination of intercompany construction services revenue
of $3,707,000 and $15,048,000 for the three and twelve months ended March 31,
2002, respectively, and $1,646,000 and $9,705,000 for the three and twelve
months ended March 31, 2001, respectively. Also includes the elimination of
intercompany information technology services revenue of $1,870,000 and
$9,110,000 for the three and twelve months ended March 31, 2002, respectively
and $2,110,000 and $7,142,000 for the three and twelve months ended March 31,
2001, respectively.
- 12 -
SEMCO ENERGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
NOTE 6 - COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL MATTERS - Prior to the construction of major natural gas
pipelines, gas for heating and other uses was manufactured from processes
involving coal, coke or oil. The Company owns seven Michigan sites which
formerly housed such manufacturing facilities and expects that it will
ultimately incur investigation and remedial action costs at some of these sites,
and a number of other sites. The Company has closed one site with the approval
of the appropriate environmental regulatory authority in the State of Michigan,
and has developed plans and conducted preliminary field investigations at two
other sites. The extent of the Company's liabilities and potential costs in
connection with these sites cannot be reasonably 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 threatened 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. Refer to Note 13 of the Notes
to the Consolidated Financial Statements in the Company's 2001 Annual Report on
Form 0-K for further details regarding other commitments and contingencies.
NOTE 7 - DISCONTINUED OPERATIONS
In December 2001, the Company's board of directors approved a plan to redirect
the Company's business strategy, which includes the divestiture, by sale, of its
engineering services business. The planned divestiture of the Company's
engineering services business has been accounted for as a discontinued operation
and, accordingly, the operating results and the estimated loss on the disposal
of this business segment are segregated and reported as discontinued operations
in the Consolidated Statements of Income, with prior years restated. In the
fourth quarter of 2001, the Company recorded a loss of $5.0 million, net of
income taxes, for the estimated loss the Company expects to incur on the
disposal of its engineering business segment including estimated losses from
operations during the phase-out period. As of March 31, 2002, no adjustments to
this estimated loss were required. The Company plans to sell the engineering
business before December 2002 but cannot make any assurance that it will be able
to do so.
- 13 -
SEMCO ENERGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
NOTE 7 - DISCONTINUED OPERATIONS (CONTINUED)
Three Months Ended Twelve Months Ended
March 31, March 31,
------------------ -------------------
2002 2001 2002 2001
------- ------- -------- --------
(in thousands)
CONSOLIDATED STATEMENTS OF INCOME DATA
Revenues . . . . . . . . . . . . . . . . . . . $ - $2,231 $10,016 $17,337
Operating expenses . . . . . . . . . . . . . . - 2,919 11,422 18,070
Operating income (loss). . . . . . . . . . . . - (688) (1,405) (733)
Other income (deductions). . . . . . . . . . . - 4 254 146
Income taxes . . . . . . . . . . . . . . . . . - (262) (432) (232)
------- ------- -------- --------
Income (loss) from discontinued operations . . $ - $ (422) $ (720) $ (355)
------- ------- -------- --------
Estimated loss on divestiture of discontinued
operations, including provisions for losses
during phase-out period, net of income
tax benefits of $2,429.. . . . . . . . . . . - - (4,980) -
------- ------- -------- --------
March 31, December 31,
2002 2001
---------- --------------
(in thousands)
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION DATA
Current assets. . . . . . . . . . . . . . . . . . $ 3,600 $ 4,050
Property, plant and equipment, net. . . . . . . . 235 250
Deferred charges and other assets, net. . . . . . 2 2
Current liabilities . . . . . . . . . . . . . . . (4,607) (4,880)
---------- --------------
Net assets of discontinued operations
held for sale. . . . . . . . . . . . . . . . . $ (770) $ (578)
---------- --------------
- 14 -
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 net income of
$11.3 million (or $0.62 per share) for the quarter ended March 31, 2002 compared
to net income of $9.1 million (or $0.48 per share) for the quarter ended March
31, 2001. 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 4 of the Notes to the Consolidated
Financial Statements. On a weather-normalized basis, the net income for the
three months ended March 31, 2002 would have been approximately $13.8 million
(or $0.75 per share) compared to net income of approximately $11.3 million (or
$0.60 per share) for the same period of the prior year.
The Company had a net loss of $4.1 million for the twelve months ended
March 31, 2002 (or $0.22 per share) compared to net income of $13.8 million (or
$0.73 per share) for the twelve months ended March 31, 2001. On a
weather-normalized basis, net income would have been approximately $1.5 million
(or $0.08 per share) for the twelve months ended March 31, 2002, compared to
approximately $17.3 million (or $0.91 per share) for the same period ended March
31, 2001. The result for the twelve months ended March 31, 2002 also include
several unusual items which reduced net income by $10.8 million. The unusual
items include losses from discontinued operations, restructuring charges, asset
impairments and other unusual items. Refer to Management's Discussion and
Analysis and Note 14 of the Notes to the Consolidated Financial Statements in
the Company's 2001 Annual Report on Form 10-K, for further information regarding
these unusual items.
The Company's largest business segment, natural gas distribution, is
seasonal in nature and depends on the winter months for the majority of its
operating revenue. As a result, a substantial portion of the Company's annual
results of operations is earned during the first and fourth quarters of the
year. In addition, the Company's construction services business segment is also
seasonal in nature and makes most of its income during the summer and fall
months and incurs losses during the winter and spring months. Therefore, the
Company's results of operations for the three months ended March 31, 2002 and
2001 are not necessarily indicative of results for a full year.
- 15 -
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 Twelve Months Ended
March 31, March 31,
-------------------- --------------------
2002 2001 2002 2001
--------- --------- --------- ---------
(in thousands, except per share amounts)
Operating revenues. . . . . . . . . . . . . . . . . $155,911 $149,978 $451,756 $433,666
Restructuring & impairment charges. . . . . . . . - - 6,103 -
Other operating expenses. . . . . . . . . . . . . 127,292 124,311 398,310 368,964
--------- --------- --------- ---------
Operating income. . . . . . . . . . . . . . . . . . $ 28,619 $ 25,667 $ 47,343 $ 64,702
Other income & (deductions) . . . . . . . . . . . (7,349) (7,135) (29,663) (31,597)
Income tax (provision) credit . . . . . . . . . . (7,790) (6,904) (7,464) (11,840)
--------- --------- --------- ---------
Income before dividends on trust preferred
securities & discontinued operations. . . . . . . $ 13,480 $ 11,628 $ 10,216 $ 21,265
Dividends on trust preferred
securities, net of income tax . . . . . . . . . (2,150) (2,150) (8,603) (7,155)
--------- --------- --------- ---------
Net income from continuing operations . . . . . . . $ 11,330 $ 9,478 $ 1,613 $ 14,110
Income (loss) from discontinued
operations, net of income taxes . . . . . . . . . - (422) (5,700) (355)
Net income (loss) available to common shareholders. $ 11,330 $ 9,056 $ (4,087) $ 13,755
Earnings per share ("EPS"):
Basic . . . . . . . . . . . . . . . . . . . . . . $ 0.62 $ 0.50 $ (0.22) $ 0.76
Diluted . . . . . . . . . . . . . . . . . . . . . $ 0.62 $ 0.48 $ (0.22) $ 0.73
Average common shares outstanding . . . . . . . . . 18,315 18,057 18,169 18,034
Impact on net income of the following:
Warmer than normal weather. . . . . . . . . . . . $ (2,439) $ (2,232) $ (5,557) $ (3,495)
Income (Loss) from discontinued operations. . . . - (422) (5,700) (355)
Reorganization charges, impairments
and other unusual items . . . . . . . . . . . . - - (5,083) -
Net income excluding the foregoing items. . . . . . $ 13,769 $ 11,710 $ 12,253 $ 17,605
EPS excluding the foregoing items:
Basic . . . . . . . . . . . . . . . . . . . . . . $ 0.75 $ 0.65 $ 0.67 $ 0.98
Diluted . . . . . . . . . . . . . . . . . . . . . $ 0.75 $ 0.62 $ 0.67 $ 0.93
The Company operates four reportable business segments: (1) gas
distribution; (2) 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 5 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 and twelve month periods ended March 31, 2002 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, discontinued operations or
other non-operating income and expense items. A review of the non-operating
items follows the business segment discussions.
- 16 -
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. The Michigan operation is sometimes referred to as "SEMCO
Gas" and the Alaska operation is sometimes referred to as "ENSTAR". These
operations are referred to together as the "Gas Distribution Business".
Operating income for the Gas Distribution Business was $30.2 million for
the quarter ended March 31, 2002, compared to $28.0 million for the quarter
ended March 31, 2001. On a weather-normalized basis, the operating income of
the Gas Distribution Business would have been approximately $33.9 million for
the first quarter of 2002 compared to approximately $31.6 million for the same
period of the prior year.
Three Months Ended Twelve Months Ended
March 31, March 31,
-------------------- --------------------
2002 2001 2002 2001
--------- --------- --------- ---------
(in thousands)
Gas sales revenues. . . . . . . . . . $ 122,223 $ 122,024 $ 295,595 $ 296,406
Cost of gas sold. . . . . . . . . . . 78,783 80,583 183,172 181,994
--------- --------- --------- ---------
Gas sales margin. . . . . . . . . . $ 43,440 $ 41,441 $ 112,423 $ 114,412
Gas transportation revenue. . . . . . 8,315 8,058 26,145 27,343
Other operating revenue . . . . . . . 914 887 3,108 3,383
--------- --------- --------- ---------
Gross margin. . . . . . . . . . . . $ 52,669 $ 50,386 $ 141,676 $ 145,138
Restructuring charges . . . . . . . . - - 1,051 -
Other operating expenses. . . . . . . 22,477 22,427 88,055 82,963
--------- --------- --------- ---------
Operating income. . . . . . . . . . . $ 30,192 $ 27,959 $ 52,570 $ 62,175
========= ========= ========= =========
Weather-normalized operating income . $ 33,906 $ 31,639 $ 60,999 $ 68,045
========= ========= ========= =========
Volumes of gas sold (MMcf). . . . . . 26,562 26,955 62,734 64,760
Volumes of gas transported (MMcf) . . 12,051 12,572 42,471 45,268
Number of customers at end of period. 377,550 369,110 377,550 369,110
Degree Days . . . . . . . . . . . . . 3,224 3,215 7,048 7,370
Percent colder (warmer) than normal . (7.0)% (7.3)% (8.5)% (4.2)%
<FN>
The amounts in the above table include intercompany transactions.
GAS SALES MARGIN - During the first quarter of 2002, gas sales margin
increased by $2.0 million when compared to the first quarter of 2001. The
increase is due primarily to lower gas costs and the addition of new customers.
Gas costs were lower during the first quarter of 2002 primarily as a result of
gas cost savings generated under the terms of the Company's third-party natural
gas supply and management agreements. In addition gas costs were higher than
normal during the first quarter of 2001 as a result of purchasing gas with a
higher thermal content for the Michigan operation. For further information
regarding the Company's natural gas supply and management agreements refer to
Note 2 of the Notes to Consolidated Financial Statements in the Company's 2001
Annual Report in Form 10-K.
Weather during the first quarter of 2002 was 7% warmer than normal in
Michigan and Alaska combined, while the weather during the first quarter of 2001
was 7.3% warmer than normal. Under normal weather conditions, gas sales margin
would have been higher by approximately $3.7 million for each of the quarters
ended March 31, 2002 and March 31, 2001.
- 17 -
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
GAS DISTRIBUTION (CONTINUED)
Gas sales margin for the twelve months ended March 31, 2002 decreased by
$2.0 million, when compared to the twelve months ended March 31, 2001. The
decrease is due primarily to a decrease in gas sales as a result of warmer
weather compared to the twelve months ended March 31, 2001, offset by the
addition of new customers, and customers switching from the Company's aggregated
transportation service ("ATS") program back to general gas sales service.
Weather during the twelve months ended March 31, 2002 was 8.5% warmer than
normal in Michigan and Alaska combined, while the weather during the twelve
months ended March 31, 2001 was 4.2% warmer than normal. Under normal weather
conditions, gas sales margin for the twelve months ended March 31, 2002 and 2001
would have been higher by approximately $8.4 million and $5.9 million,
respectively.
The ATS program, which was effective April 1, 1998, provides all Michigan
commercial and industrial customers the opportunity to purchase their gas from a
third-party supplier, while allowing the Gas Distribution Business to continue
charging the existing distribution fees and customer fees. Distribution and
customer fees associated with customers who 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 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 TRANSPORTATION REVENUE - For the three months ended March 31, 2002, gas
transportation revenue increased by $.3 million when compared to the same period
ended March 31, 2001. The primary cause of the increase was an increase in
high-margin commercial transportation volumes at ENSTAR, as a result of cooler
weather in Alaska for the first quarter of 2002 in comparison to the same period
last year. This was partially offset by a decrease in lower-margin
transportation volumes for power companies.
Transportation revenue for the twelve months ended March 31, 2002 decreased
by $1.2 million when compared to the same period ended March 31, 2001. The
decrease was due primarily to the impact of ATS customers switching from the ATS
program back to general gas sales service during the period. 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. In addition, a slight decrease in standard transportation
revenue contributed to the decrease.
OTHER OPERATING REVENUE - Other operating revenue, during the first quarter
of 2002, was essentially unchanged when compared to the first quarter of 2001.
Other operating revenues for the twelve months ended March 31, 2002 were $3.1
million compared to $3.4 million for the twelve months ended March 31, 2001.
The $.3 million decrease was due primarily to a reduction in ATS balancing fees
as a result of ATS customers switching back to general gas sales service.
- 18 -
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
GAS DISTRIBUTION (CONTINUED)
OPERATING EXPENSES - Operating expenses of the Gas Distribution Business
for the three months ended March 31, 2002 and 2001 were $22.5 million and $22.4
million, respectively. The $.1 million increase was the result of a number of
offsetting factors. Operation and maintenance expense increased by $.5 million
due primarily to higher employee benefit costs, such as pension expense, health
care costs and retiree medical costs, offset partially by the impact of a
reduction in workforce related to the Company's redirected business strategy.
Property and other taxes increased by $.2 million due primarily to property
taxes on additional property, plant and equipment placed in service. These
increases were offset by a $.6 million decrease in depreciation expense. The
decrease in depreciation expense is due primarily to the elimination of goodwill
amortization as a result of the adoption of SFAS 142, offset by depreciation on
additional property, plant and equipment placed in service. For further
information on SFAS 142 and its impact on goodwill, see Note 1 of the Notes to
the Consolidated Financial Statements.
Operating expenses for the twelve months ended March 31, 2002 increased by
$6.1 million when compared to the twelve months ended March 31, 2001.
Approximately $1.1 million of the increase is restructuring charges recorded in
the fourth quarter of 2001. The remainder of the increase was primarily the
result of higher operation and maintenance expenses of $3.4 million and higher
general business tax expenses of $1.9 million. The increase in operating
expenses is largely due to higher employee related costs, including pension
expense, health care costs and retiree medical costs. The increase in general
business tax expenses is due primarily to property tax reductions recorded in
2000 and higher property taxes in 2001 related to new property placed in
service. These increases were offset by a decrease in depreciation expense of
$.2 million due to the reasons previously discussed for the first quarter. For
further information regarding the property tax reductions, see Note 13, of the
Notes to Consolidated Financial Statements in the Company's 2001 Annual Report
in Form 10-K.
REGULATORY MATTERS - The Regulatory Commission of Alaska ("RCA") has been
conducting a review of ENSTAR's rates. Most recently, hearings and proceedings
were held by the RCA in December 2001. The Company expects to receive a final
order for ENSTAR during 2002. The Company believes that ENSTAR's rates are just
and reasonable; but cannot predict the outcome of the proceedings. For
additional background information on the ENSTAR rate proceedings, refer to Note
2 of the Notes to the Consolidated Financial Statements in the Company's 2001
Annual Report on Form 10-K.
- 19 -
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
CONSTRUCTION SERVICES
The Company's Construction Services business ("Construction Services") is
seasonal. As a result, it 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.
Three Months Ended Twelve Months Ended
March 31, March 31,
------------------ -------------------
2002 2001 2002 2001
-------- -------- --------- --------
(in thousands)
Operating revenues. . . . . . . . . $25,581 $17,848 $133,938 $108,525
Restructuring & impairment charges. - - 3,098 -
Other operating expenses. . . . . . 26,891 19,921 131,452 104,643
-------- -------- --------- --------
Operating income. . . . . . . . . . $(1,310) $(2,073) $ (612) $ 3,882
======== ======== ========= ========
Feet of pipe installed. . . . . . . 1,055 930 7,445 7,895
======== ======== ========= ========
<FN>
The amounts in the above table include intercompany transactions.
OPERATING REVENUES - The operating revenues of Construction Services for
the first quarter of 2002 and 2001 were $25.6 million and $17.8 million,
respectively. The increase of $7.8 million was due primarily to an increase in
work levels in the southern regions of the United States. Operating revenues
for the twelve months ended March 31, 2002 were $133.9 million, an increase of
$25.4 million (or 23%) over the same period ended March 31, 2001. The increase
is due primarily to a large multi-year construction project in the southeast
region of the United States as well as increased construction revenue in other
regions of the country.
OPERATING INCOME - Construction Services had a seasonal operating loss of
$1.3 million for the first quarter of 2002 compared to a loss of $2.1 million
for the first quarter of 2001. The lower operating loss for the first quarter
of 2002 is due primarily to an increase in construction projects in the southern
region of the country. This was offset partially by a slower release of
projects in the northern regions of the country and lower than expected margins
on a large construction project in Michigan.
Construction Services had an operating loss of $.6 million for the twelve
months ended March 31, 2002, compared to operating income of $3.9 million for
the twelve months ended March 31, 2001. The decrease of $4.5 million is due
primarily to restructuring and impairment charges of $3.1 million recorded in
the fourth quarter of 2001. Other factors contributing to the decrease are the
mix of work and the softening economy. The softening economy has reduced new
housing starts, which has caused a decrease in the number of new gas service
lines installed by the Company's construction services business. The Company
also believes that the softening economy has caused many customers to delay
certain construction projects which has changed the mix of work available to
Construction Services. The mix of work has included more lower margin work at
certain business units. These factors causing the decrease were partially
offset by profits on the large multi-year construction project in the
southeastern region of the United States.
- 20 -
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
INFORMATION TECHNOLOGY SERVICES
The information technology services business ("IT Services"), under the Aretech
Information Services name, provides IT infrastructure outsourcing services and
other IT services with a focus on mid-range computers, particularly the IBM
I-Series (AS-400) platform.
Three Months Ended Twelve Months Ended
March 31, March 31,
------------------ -------------------
2002 2001 2002 2001
------ ------ ------- ------
(in thousands)
Operating revenues. . . . . . $2,261 $2,210 $10,326 $7,394
Restructuring charges . . . . - - 20 -
Other operating expenses. . . 2,085 2,058 9,851 6,761
------ ------ ------- ------
Operating income. . . . . . . $ 176 $ 152 $ 455 $ 633
====== ====== ======= ======
<FN>
The amounts in the above table include intercompany transactions.
OPERATING REVENUES - Operating revenues for IT Services for the three
months ended March 31, 2002 were $2.3 million compared to $2.2 million in 2001.
Of these amounts, $1.9 million and $2.1 million for these same periods,
respectively, represent sales to affiliates. Operating revenues for the twelve
months ended March 31, 2002 were $10.3 million, compared to $7.4 million for the
twelve months ended March 31, 2001. Of these amounts, $9.1 million and $7.1
million for these same periods, respectively, represent sales to affiliates.
The increase in operating revenues of $2.9 million for the twelve-month period
ended March 31, 2002 is due primarily to providing IT services for all
affiliates of the Company and the addition of non-affiliate customers.
OPERATING INCOME - Operating income for IT Services for the three months
ended March 31, 2002, when compared to the three months ended March 31, 2001,
was essentially unchanged. Operating income for the twelve months ended March
31, 2002 decreased by $.2 million, compared to the twelve months ended March 31,
2001. The decrease is due primarily to more special project services performed
during the twelve-month period ended March 31, 2001. Special project services
typically provide higher margins.
PROPANE, PIPELINES AND STORAGE
Three Months Ended Twelve Months Ended
March 31, March 31,
------------------ -------------------
2002 2001 2002 2001
------ ------ ------ ------
(in thousands)
Operating revenues. . . $2,238 $2,749 $6,932 $7,637
Operating expenses. . . 1,629 2,013 5,187 5,843
------ ------ ------ ------
Operating income. . . . $ 609 $ 736 $1,745 $1,794
====== ====== ====== ======
- 21 -
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
PROPANE, PIPELINES AND STORAGE (CONTINUED)
OPERATING REVENUES - The operating revenues of the Company's propane,
pipelines and storage business for the three and twelve months ended March 31,
2002 were $2.2 million and $6.9 million, respectively, compared to $2.7 million
and $7.6 million, respectively, for the same periods ended March 31, 2001. The
decreases during these periods were due primarily to lower propane distribution
revenues resulting from warmer weather in the Company's propane distribution
service area.
OPERATING INCOME - The operating income from the propane, pipelines and
storage business for the three months ended March 31, 2002, when compared to the
same period of 2001, decreased by $.1 million due primarily to a decrease in
propane sales and related margins caused by warmer temperatures. Operating
income for the twelve months ended March 31, 2002 was essentially unchanged,
when compared to the same period ended March 31, 2001.
OTHER INCOME AND DEDUCTIONS
Three Months Ended Twelve Months Ended
March 31, March 31,
------------------ --------------------
2002 2001 2002 2001
-------- -------- --------- ---------
(in thousands)
Interest expense. . . . . . . . . . . (7,674) (8,001) (31,457) (34,231)
Other income. . . . . . . . . . . . . 325 866 1,794 2,634
-------- -------- --------- ---------
Total other income (deductions) . . $(7,349) $(7,135) $(29,663) $(31,597)
======== ======== ========= =========
INTEREST EXPENSE - Interest expense for the three months ended March 31,
2002 decreased by $.3 million when compared to the same quarter ended March 31,
2001. Interest expense is down primarily due to lower short-term interest
rates.
Interest expense for the twelve months ended March 31, 2002, when compared
to the same period ended March 31, 2001, decreased by $2.8 million. The
decrease is due primarily to lower short-term interest rates and lower debt
levels as a result of refinancing the $290 million short-term bridge loan, which
was utilized to finance the acquisition of ENSTAR, with various securities
offerings during the second and third quarters of 2000. Specifically, a portion
of the bridge loan was outstanding during the first half of 2000, while during
the last half of 2000 through the first quarter of 2002, the Company has had
long-term debt and trust preferred securities outstanding. As a result,
interest expense for the twelve-month period ended March 31, 2002 has decreased,
not only because of lower short-term interest rates, but also because the
dividends on the trust preferred securities are reported separately from
interest expense.
OTHER INCOME - Other income for the three months and twelve months ended
March 31, 2002 decreased by $.5 million and $.8 million respectively, when
compared to the same periods ended March 31, 2001. The decrease during the
first quarter of 2002 was due primarily to losses on the sale of equipment and
lower interest income. The decrease during the twelve months ended March 31,
2002, when compared to the same period of 2001, was due to the previously
discussed factors affecting the first quarter of 2002, along with a write-off of
certain assets in the fourth quarter of 2001.
- 22 -
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
INCOME TAXES
Income taxes for the first quarter of 2002 increased by $.9 million when
compared to the first quarter of 2001. Income taxes for the twelve months ended
March 31, 2002 decreased by approximately $4.4 million when compared to the same
period ended March 31, 2001. 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
Dividends on Trust Preferred Securities, net of Income taxes, for the first
quarter of 2002 were unchanged at $2.1 million, when compared to the first
quarter of 2001. For the twelve-month period ended March 31, 2002, these
dividends were higher by $1.4 million when compared to the same period ended
March 31, 2001. The increase was the result of a full year of dividends during
the twelve-month period ended March 31, 2002, compared to approximately nine
months of dividends during the twelve-month period ended March 31, 2001.
DISCONTINUED OPERATIONS
In December 2001, the Company began accounting for its engineering business as a
discontinued operation. Refer to Note 7 of the Notes to the Consolidated
Financial Statements for more information.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FROM INVESTING - The following table identifies capital
investments for the three months ended March 31, 2002 and 2001:
Three Months Ended
March 31,
------------------
2002 2001
------ -------
(in thousands)
Capital investments:
Property additions - gas distribution . . . . . . . . . . $7,007 $ 7,894
Property additions - diversified businesses and other . . 815 4,434
------ -------
$7,822 $14,112
====== =======
The Company's expenditures for property additions were approximately $7.8
million. Expenditures for property additions during the remainder of 2002 are
anticipated to be approximately $32 million.
- 23 -
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
CASH FLOWS FROM OPERATIONS - Net cash from operating activities for the
three months ended March 31, 2002, when compared to the same period of the prior
year, decreased by $23.7 million. 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 used for financing activities during
the three months ended March 31, 2002 decreased by $12.1 million when compared
to the same period ended March 31, 2001.
Three Months Ended
March 31,
--------------------
2002 2001
--------- ---------
(in thousands)
Cash provided by (used in) financing activities:
Issuance of common stock . . . . . . . . . . . $ 1,247 $ 33
Net cash change in notes payable . . . . . . . (19,831) (30,728)
Payment of dividends . . . . . . . . . . . . . (3,835) (3,792)
$(22,419) $(34,487)
========= =========
In April 2002 the Company's Board of Directors declared a regular quarterly
cash dividend of $0.125 per share on the Company's common stock. The dividend
is payable on May 15, 2002 to shareholders of record at the close of business on
May 1, 2002.
FUTURE FINANCING - In general, the Company funds its capital expenditure
program and dividend payments with operating cash flows and the utilization of
short-term lines of credit. When appropriate, the Company will refinance its
short-term lines with long-term debt, common stock or other long-term financing
instruments. At March 31, 2002, the Company had short-term credit facilities of
$145 million, all of which are committed facilities. At March 31, 2002, $58.2
million of these short-term credit facilities were unused. The Company's lines
of credit expire during June and July 2002 and the Company expects to put in
place new lines of credit at that time.
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 March 31, 2002, there was $164 million
available under the Company's registration statement for any future issuances of
common stock, preferred stock, trust preferred securities and long term debt.
- 24 -
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Company's long-term and short-term debt agreements contain restrictive
financial covenants including, among others, maintaining a Fixed Charges
Coverage Ratio (as defined in the agreements) of at least 1.50 and placing
limits on the payment of dividends beyond certain levels. Non-compliance with
these covenants could result in an acceleration of the due dates for the debt
obligations under the agreements. As of March 31, 2002, the Fixed Charges
Coverage Ratio was 1.65 and the Company was in compliance with all of the
covenants in these agreements. The Company has currently projected its
financial covenants for the remaining three quarters during 2002, based on the
Company's forecasted operating results for the year, and these forecasted
results indicate that the Company will be able to remain in compliance with all
of its covenants during 2002. However, these projected results are based on a
number of assumptions and factors. If actual results differ from management's
current expectations, they could have an adverse impact on the Company's ability
to remain in compliance with its covenants during 2002. For additional
information concerning the factors impacting compliance with the Company's debt
covenants refer to the Management Discussion and Analysis - Liquidity and
Capital Resources section in the Company's 2001 Annual Report on Form 10-K.
In the event the Company is not able to remain in compliance with these
covenants, management plans to request a modification of the covenants or a
waiver of certain covenant provisions.
The Company's ratio of earnings to fixed charges, as defined under Item 502
of SEC regulations S-K, was 1.10 for the twelve months ended March 31, 2002. If
common stock of the Company had been issued in place of the FELINE PRIDES, the
ratio of earnings to fixed charges would have been 1.38. This ratio is more
strictly defined than the Fixed Charges Coverage Ratio used to determine
compliance with the Company's previously discussed debt covenants.
NEW ACCOUNTING STANDARDS
See Note 1 of the Notes to the Financial Statements, which is incorporated
herein by reference.
- 25 -
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES.
During the first quarter of 2002, the Company issued an aggregate of
7,292 shares of unregistered common stock to the members of its Board of
Directors in exchange for services rendered, valued at $55,725.
The preceding transaction was exempt from registration under Section
4(2) of the Securities Act of 1933.
ITEM 3. DEFAULT UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) List of Exhibits - (See page 28 for the Exhibit Index.)
12 Ratio of Earnings to Fixed Charges.
(b) Reports on Form 8-K.
The Company filed a Form 8-K Report on February 22, 2002 to
Announce the change in dividend rate on its Common Stock.
The Company filed a Form 8-K Report on May 2, 2002 to report
that it had notified Arthur Andersen LLP that the Company would engage other
principal accountants upon completion of Arthur Andersen's review of the
Company's financial statements for the first quarter period ended March 31,
2002.
- 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: May 13, 2002
By: /s/John E. Schneider
-------------------------------------
Senior Vice President and Principal
Financial Officer
- 27 -
EXHIBIT INDEX
Form 10-Q
First Quarter 2002
Exhibit
No. Description Filed Herewith
- -------- ----------- ---------------
12 Ratio of Earnings to Fixed Charges. x
- 28 -