1
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, 1994
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 0-8503
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
Michigan 38-2144267
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
405 Water Street, Port Huron, Michigan 48060
(Address of principal executive offices)
810-987-2200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days. Yes [X] No [ ]
The number of shares of common stock outstanding as of October 31, 1994, is
11,192,945.
2
INDEX TO FORM 10-Q
------------------
For Quarter Ended September 30, 1994
Page
Number
------
COVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements . . . . . . . . . . . . . . . . . . 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . 10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . 14
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . 14
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . 14
SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
EXHIBIT INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
-2-
3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(Thousands of Dollars Except Per Share Amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ --------------------
1 9 9 4 1 9 9 3 1 9 9 4 1 9 9 3
------- ------- ------- -------
OPERATING REVENUE
Gas sales $23,560 $19,378 $145,543 $128,295
Gas marketing 32,959 16,890 112,134 50,581
Transportation 2,512 2,554 8,731 8,774
Other operations 1,422 1,629 4,786 4,967
------- ------- -------- --------
$60,453 $40,451 $271,194 $192,617
------- ------- -------- --------
OPERATING EXPENSES
Cost of gas sold $15,463 $10,470 $101,586 $ 85,957
Cost of gas marketed 32,060 16,088 109,042 48,193
Operation 7,949 7,579 23,074 22,548
Maintenance 1,150 1,134 3,311 2,966
Depreciation 2,879 2,848 8,715 9,007
Income taxes (1,601) (32) 3,699 3,434
Taxes, other than income taxes 2,039 2,024 6,432 6,257
------- ------- -------- --------
$59,939 $40,111 $255,859 $178,362
------- ------- -------- --------
OPERATING INCOME $ 514 $ 340 $ 15,335 $ 14,255
OTHER INCOME (EXPENSE), NET (115) 103 77 (387)
------- ------- -------- --------
INCOME BEFORE INCOME DEDUCTIONS $ 399 $ 443 $ 15,412 $ 13,868
------- ------- -------- --------
INCOME DEDUCTIONS
Interest on long-term debt $ 2,570 $ 2,357 $ 6,448 $ 7,072
Other interest 224 385 1,086 1,132
Amortization of debt expense 112 84 270 253
Dividends on preferred stock of subsidiary 45 45 133 133
------- ------- -------- --------
$ 2,951 $ 2,871 $ 7,937 $ 8,590
------- ------- -------- --------
NET INCOME (LOSS) $(2,552) $(2,428) $ 7,475 $ 5,278
Dividends on convertible preferred stock 4 5 13 15
------- ------- -------- --------
NET INCOME (LOSS) AVAILABLE FOR COMMON STOCK BEFORE
EXTRAORDINARY ITEM $(2,556) $(2,433) $ 7,462 $ 5,263
EXTRAORDINARY ITEM-Loss on early extinguishment of debt, net of
income taxes of $692 0 0 1,286 0
------- ------- -------- --------
NET INCOME (LOSS) AVAILABLE FOR COMMON STOCK $(2,556) $(2,433) $ 6,176 $ 5,263
======= ======= ======== ========
EARNINGS (LOSS) PER SHARE OF COMMON STOCK BEFORE EXTRAORDINARY ITEM $ (.23) $ (.24) $ .68 $ .53
======= ======= ======== ========
EARNINGS (LOSS) PER SHARE OF COMMON STOCK $ (.23) $ (.24) $ .56 $ .53
======= ======= ======== ========
CASH DIVIDENDS PER SHARE OF COMMON STOCK BASED ON AVERAGE
SHARES OUTSTANDING $ .20 $ .19 $ .58 $ .55
======= ======= ======== ========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (IN THOUSANDS) 11,149 10,038 11,001 9,965
======= ======= ======== ========
<FN>
The notes to the consolidated financial statements are an integral part of this statement.
-3-
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SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEET
A S S E T S
(Unaudited) (Unaudited)
Sept. 30, December 31, Sept. 30,
1994 1993 1993
-------- -------- --------
(Thousands of Dollars)
UTILITY PLANT:
Plant in Service, at Cost $283,971 $272,571 $266,676
Less - Accumulated depreciation 77,673 70,629 69,200
-------- -------- --------
$206,298 $201,942 $197,476
OTHER PROPERTY, net 15,479 16,357 17,359
-------- -------- --------
$221,777 $218,299 $214,835
-------- -------- --------
CURRENT ASSETS
Cash and temporary cash investments $ 1,988 $ 2,965 $ 708
Accounts receivables, less reserves
of $893 at September 30, 1994, $1,355
at December 31, 1993 and $1,085 at
September 30, 1993 25,639 31,708 18,205
Accrued utility revenue 3,230 17,674 4,646
Materials and supplies, at average cost 3,363 2,894 3,338
Gas in underground storage 43,818 31,146 52,854
Gas charges, recoverable from customers 11,550 15,970 6,425
Other current assets 10,089 9,862 7,548
-------- -------- --------
$ 99,677 $112,219 $ 93,724
-------- -------- --------
DEFERRED CHARGES:
Unamortized debt expense $ 6,262 $ 5,840 $ 4,678
Deferred gas charges, recoverable
from customers 179 1,474 630
Other 14,440 10,454 9,560
-------- -------- --------
$ 20,881 $ 17,768 $ 14,868
-------- -------- --------
$342,335 $348,286 $323,427
======== ======== ========
<FN>
The notes to the consolidated financial statements are an integral part of this
statement.
-4-
5
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEET
STOCKHOLDERS' INVESTMENT AND LIABILITIES
(Unaudited) (Unaudited)
Sept. 30, December 31, Sept. 30,
1994 1993 1993
-------- -------- --------
(Thousands of Dollars)
STOCKHOLDERS' INVESTMENT
Common stock equity
Common stock - $1 par value;
20,000,000 shares authorized;
11,185,305, 9,680,376 and
9,590,594 shares outstanding,
respectively $ 11,185 $ 9,680 $ 9,591
Capital surplus - common stock 82,416 64,212 62,237
Retained earnings 13,450 13,691 11,312
Capital stock expense (2,620) (1,926) (1,926)
-------- -------- --------
$104,431 $ 85,657 $ 81,214
-------- -------- --------
Preferred stock equity and surplus -
Convertible preferred stock -
$1 par value; 500,000 shares
authorized; each convertible
to 4.11 common shares $ 8 $ 8 $ 8
Capital surplus 180 182 182
-------- -------- --------
$ 188 $ 190 $ 190
-------- -------- --------
Total stockholders' investment $104,619 $ 85,847 $ 81,404
-------- -------- --------
CUMULATIVE PREFERRED STOCK OF
SUBSIDIARY -
$100 par value (redemption price
$105 per share); 50,000 shares
authorized issuable in series;
31,000 shares outstanding $ 3,100 $ 3,100 $ 3,100
-------- -------- --------
LONG-TERM DEBT $104,945 $ 97,884 $101,031
-------- -------- --------
CURRENT LIABILITIES
Notes payable to banks $ 37,450 $ 52,342 $ 51,200
Current maturities of long-term debt 0 19,138 665
Accounts payable 26,209 30,053 24,319
Customer advance payments 7,280 6,804 6,878
Accrued taxes 1,496 262 4,309
Accrued interest 2,154 1,855 1,458
Accumulated deferred income taxes 135 201 670
Amounts payable to customers 557 1,089 2,051
Other 7,327 6,571 5,956
-------- -------- --------
$ 82,608 $118,315 $ 97,506
-------- -------- --------
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income taxes $ 17,046 $ 16,102 $ 14,923
Unamortized investment tax credit 3,383 3,584 3,651
Deferred gas costs payable to suppliers 251 1,479 508
Customer advances for construction 8,353 7,806 8,169
Other 18,030 14,169 13,135
-------- -------- --------
$ 47,063 $ 43,140 $ 40,386
-------- -------- --------
$342,335 $348,286 $323,427
======== ======== ========
<FN>
The notes to the consolidated financial statements are an integral part of this
statement.
-5-
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SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Thousands of Dollars)
Nine Months Ended
September 30,
-----------------------
1994 1993
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers $295,424 $222,161
Cash paid for payrolls and to suppliers (254,714) (191,801)
Interest paid (7,235) (8,648)
Income taxes paid (3,000) (3,975)
Taxes other than income taxes paid (4,676) (4,618)
Other cash receipts and payments, net 1,508 4,066
-------- --------
NET CASH FROM OPERATING ACTIVITIES $ 27,307 $ 17,185
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Natural gas distribution property additions $(12,873) $(11,579)
Interest in other natural gas related property (32) (1,211)
Other property additions (709) (326)
Property retirement costs net of proceeds (151) (236)
-------- --------
NET CASH FROM INVESTING ACTIVITIES $(13,765) $(13,352)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock $ 19,013 $ 3,826
Net change in notes payable to banks (14,892) (1,900)
Issuance of long-term debt 80,000 0
Repayment of long-term debt (92,077) (847)
Payment of dividends (6,563) (5,649)
-------- --------
NET CASH FROM FINANCING ACTIVITIES $(14,519) $ (4,570)
-------- --------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS $ (977) $ (737)
-------- --------
CASH AND TEMPORARY CASH INVESTMENTS
Beginning of Period $ 2,965 $ 1,445
-------- --------
End of Period $ 1,988 $ 708
======== ========
RECONCILIATION OF NET INCOME TO NET CASH FROM OPERATING ACTIVITIES
Net income available for common stock $ 6,176 $ 5,263
Adjustments to reconcile net income to net cash
from operating activity
Depreciation 8,715 9,007
Extraordinary item 1,286 0
Deferred taxes and ITC 150 (1,512)
Equity (income) loss, net of distributions 530 1,391
Accounts receivable 6,069 14,356
Accrued utility revenue 14,444 11,885
Materials and supplies and gas in underground storage (13,171) (23,175)
Gas charges, recoverable from customers 4,420 (736)
Other current assets (227) (231)
Accounts payable (3,844) (1,652)
Customer advances and amounts payable to customers 491 (1,617)
Accrued taxes 1,928 200
Other, net 340 4,006
-------- --------
NET CASH FROM OPERATING ACTIVITIES $ 27,307 $ 17,185
======== ========
<FN>
The notes to the consolidated financial statements are an integral part of this statement.
-6-
7
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, 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 Southeastern Michigan Gas
Enterprises, Inc.'s (the Company's) year-end financial statements 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 1993
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.
(2) REGULATORY MATTERS
In June 1994, pursuant to the Michigan Public Service Commission
securities orders U-10509 and U-10510, Southeastern Michigan Gas Company
(Southeastern) and Michigan Gas Company (Michigan Gas) issued $23,000,000 and
$31,000,000, respectively, of long-term debt securities to the Company.
This debt was used to redeem higher cost long-term and certain short-term
debt currently owed to the Company and, in Southeastern's case, was also used
to redeem all of its remaining First Mortgage Bonds.
At September 30, 1994, the Company had a total of $493,000 in remaining
take-or-pay liabilities. These costs are substantially recoverable from
ratepayers. The Company does not anticipate additional take-or-pay
assessments.
At September 30, 1994, the Company had $887,000 of remaining direct-billed
liabilities related to Federal Energy Regulatory Commission Order 636. The
Company does not anticipate any significant additional direct billings. As
with take-or-pay costs, these costs are recoverable from ratepayers.
(3) CAPITALIZATION
Common Stock Equity
- - - - -------------------
On October 13, 1994, the Company's Board of Directors declared a regular
quarterly cash dividend on common stock of $.20 per share payable on
November 15 to shareholders of record on November 4.
-7-
8
In August 1994, the Company paid a quarterly cash dividend of $.20 per
share to its common shareholders. Of the total cash dividend of $2,224,000,
$817,000 was reinvested by shareholders into common stock through participation
in the Dividend Reinvestment and Common Stock Purchase Plan (DRIP). This
portion of the quarterly dividend and shareholders' optional cash payments of
$498,000 resulted in 70,421 new shares issued to existing shareholders during
the quarter.
Earnings per common share, cash dividends per common share and weighted
average number of shares outstanding give retroactive effect for all periods
presented to the 5% stock dividends in May 1994 and 1993.
Long-Term Debt
- - - - --------------
On June 30, 1994, the Company issued $55,000,000 of 8.00% Senior Notes due
2004 and $25,000,000 of 8.32% Senior Notes due 2024 through private placement.
The proceeds of the offering were used to pay down short-term debt incurred to
fund the redemption of the Company's 10% debentures in February 1994, to pay
down the variable rate term loan due 1997 ($20,000,000), and to redeem the
Company's 9.8% debentures due 2014 ($28,720,000) and Southeastern's outstanding
First Mortgage Bonds ($9,555,000). The variable rate loan was paid in July
1994. The 9.8% debentures and First Mortgage Bonds were redeemed in August
1994.
The Company recognized an extraordinary loss of $1,286,000, net of
applicable income taxes, in the second quarter of 1994 from expensing a portion
of the call premium and unamortized debt expense associated with the early
extinguishment of the 9.8% debentures.
(4) COMMITMENTS AND CONTINGENCIES
Guarantees. SEMCO Arkansas Pipeline Company, a wholly-owned subsidiary of
SEMCO, has a 32% interest in a partnership which operates the NOARK Pipeline
System (NOARK). NOARK is a 302-mile intrastate natural gas pipeline,
originating in northwest Arkansas and extending northeast across the state.
The pipeline became operational during the third quarter of 1992.
The Company, SEMCO Arkansas Pipeline Company and SEMCO have guaranteed 40%
of the principal and interest payments on approximately $91,000,000 of debt
used to finance the pipeline. Of the total, $60,637,500 is pursuant to a
long-term arrangement requiring annual principal payments of approximately
$3,150,000 together with interest on the unpaid balance. This arrangement
matures in 2009 and has a fixed interest rate of 9.7375%. The remaining debt
of $30,000,000 is pursuant to a credit agreement which currently terminates
January 1997. Under the terms of the credit agreement, NOARK may request, on
an annual basis, a one year extension of the then-effective termination date.
At September 30, 1994, NOARK had $29,550,000 outstanding under the agreement
with interest payments at a variable interest rate.
NOARK had entered into an interest rate swap relating to a notional amount
of $40,000,000. Pursuant to the swap, NOARK received interest payments at 5%
per annum on $40,000,000 and made interest payments on $40,000,000 at a rate
equal to six-month LIBOR. The Company had guaranteed 40% of the payments due
pursuant to this swap. This swap was terminated in November 1994.
-8-
In December 1993, Vesta Energy Corporation (Vesta), a firm shipper on
NOARK, filed a complaint in the Federal District Court for the Northern
District of Oklahoma against seven defendants, including NOARK. Vesta sought
actual damages on several theories in an aggregate amount exceeding $1,000,000,
sought punitive damages in excess of $1,000,000 and sought to rescind its
contracts with certain defendants, including its contract with NOARK.
In February 1994, the defendants, including NOARK, filed a motion for
dismissal of Vesta's claim due to lack of Federal jurisdiction in the Oklahoma
court. In addition, NOARK and certain other defendants filed separate claims
in Arkansas against Vesta for breach of contract. In June 1994, the Oklahoma
court dismissed Vesta's case. Vesta can still litigate its claims in Arkansas.
Under the terms of Vesta's 50,000 Mcf per day contract with NOARK, Vesta
is obligated to pay full firm rates which consist of a demand fee of
approximately 19.3 cents per Mcf on 50,000 Mcf per day and approximately 9.2
cents per Mcf for volumes actually transported on the NOARK system. This
contract is set to expire in 1997.
On January 1, 1994, Vesta discontinued shipments of gas pursuant to its
contract with NOARK and ceased payment of the demand fee. An affiliate of
Southwestern Energy Pipeline Company, a NOARK general partner, which was
providing 25,000 Mcf per day of the gas transported by Vesta over the NOARK
system, shipped those volumes over the system at the full firm rates from
January 1994 through May 1994.
At this time, the Company estimates the after tax loss from its equity
investment in the NOARK system could approximate $1,000,000 for 1994 compared
to a loss of $834,000 for 1993. The results for the nine months ended
September 30, 1994 include a $773,000 after tax loss from NOARK.
As these circumstances continue, NOARK's operating cash flows will be
insufficient to meet debt service requirements. To meet debt service
requirements, NOARK may require an equity contribution or a loan from its
partners, draw on its available line of credit, or a combination thereof. In
October 1994, the Company contributed $906,000 to NOARK pursuant to the
guarantee.
The Company expects to ultimately recover the remaining cost of its
investment in NOARK over the life of the project.
-9-
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PART I - FINANCIAL INFORMATION - (Continued)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
RESULTS OF OPERATIONS
Consolidated net loss available for common shareholders for the quarter
ended September 30, 1994 was $2,556,000, or $.23 per share, compared to
$2,433,000, or $.24 per share, for the quarter ended September 30, 1993.
Consolidated net income available for common shareholders before
extraordinary item for the nine months ended September 30, 1994 was $7,462,000,
or $.68 per share, compared to $5,263,000, or $.53 per share, for nine months
ended September 30, 1993. Consolidated net income available for common
shareholders for the nine months ended September 30, 1994 was $6,176,000 ($.56
per share) reflecting an extraordinary charge of $1,286,000, net of tax, ($.12
per share) for the early extinguishment of the Company's 9.8% debentures
originally due 2014.
Since the Company's primary business of natural gas distribution depends
upon the winter months for the majority of its operating revenue, the Company's
results of operations for the three-month and nine-month periods ended
September 30, 1994 and 1993 are not indicative of results for a full year. The
Company typically experiences a net loss in the third quarter.
See Note 4 in the notes to the consolidated financial statements for a
discussion of commitments and contingencies.
A comparison of quarterly and year-to-date revenues, margins and system
throughput follows on the next page.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. - (Continued)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1 9 9 4 1 9 9 3 1 9 9 4 1 9 9 3
------- ------- ------- -------
(in thousands of dollars)
Operating Revenue
Gas Sales
Residential $13,882 $12,100 $ 90,197 $ 79,771
Commercial 7,091 5,284 43,800 38,288
Industrial 2,587 1,994 11,546 10,236
------- ------- -------- --------
$23,560 $19,378 $145,543 $128,295
Cost of Gas Sold 15,463 10,470 101,586 85,957
------- ------- -------- --------
Gross Margin $ 8,097 $ 8,908 $ 43,957 $ 42,338
======= ======= ======== ========
Gas Marketing $32,959 $16,890 $112,134 $ 50,581
Cost of Gas Marketed 32,060 16,088 109,042 48,193
------- ------- -------- --------
Gross Margin $ 899 $ 802 $ 3,092 $ 2,388
======= ======= ======== ========
Transportation $ 2,512 $ 2,554 $ 8,731 $ 8,774
======= ======= ======== ========
Other Revenues $ 1,422 $ 1,629 $ 4,786 $ 4,967
======= ======= ======== ========
(in millions of cubic feet)
Gas Volumes
Gas Sales
Residential 1,608 1,784 16,866 15,692
Commercial 960 1,005 8,815 8,320
Industrial 386 450 2,473 2,417
------- ------- -------- --------
2,954 3,239 28,154 26,429
======= ======= ======== ========
Gas Marketing 18,243 8,192 52,398 23,358
======= ======= ======== ========
Gas Transported 4,284 4,107 14,998 13,963
======= ======= ======== ========
Degree Days - Actual 197 267 4,829 4,610
Gas Sales Customers - Average 214,974 209,448 215,321 209,685
Quarter Results
- - - - ---------------
Gas sales margin decreased $811,000, or 9%, for the quarter ended
September 30, 1994 compared to the same period in 1993. The decrease was due
primarily to warmer weather and the impact of the annual reconciliation of gas
purchased to gas sold. This annual reconciliation is performed during the
lowest gas sendout period, which is the third quarter, and can be significant
in relation to third quarter gas sales margin.
In the third quarter of 1994, gas volumes marketed increased by 123% over
the third quarter of 1993, while gas marketing margin per unit decreased by
50%. This contributed to a $97,000, or 12%, increase in gross margin from gas
marketing.
The increase in gas marketing volumes is primarily attributable to the
1993 implementation of Federal Energy Regulatory Commission Order 636 (Order
636). With the interstate pipelines no longer able to sell "bundled" natural
gas sales services with gathering, transportation and storage services, the
demand for natural gas marketing and related services has increased. SEMCO has
responded to this increased demand with new gas marketing services and more
aggressive marketing efforts.
-11-
12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. - (Continued)
The decrease in per-unit margin is due to the expiration of several
high-margin contracts which were outstanding in 1993, and increased competition
fostered by Order 636.
While marketing volumes have substantially increased over the same period
in 1993, SEMCO's future marketing volumes and margins are subject to
significant competitive factors. In addition to fluctuations caused by the
price of alternate fuels and seasonal patterns, competition within the industry
is likely to increase as companies continue to adapt to the post-Order 636
environment.
Income taxes decreased $1,569,000 during the third quarter of 1994
compared to 1993. The decrease primarily resulted from the cumulative
effect of the increase in statutory tax rate from 34% to 35% in the third
quarter of 1993, a higher annual expense for income taxes in 1993 caused
principally by adjustments to prior years taxes provided and the impact of
a higher pretax loss in the third quarter of 1994 compared to 1993.
In the third quarter of 1994, interest on long-term debt increased
$213,000 over the third quarter of 1993. The increase was due primarily to the
timing of long-term debt refinancing activities. Other interest decreased by
$161,000 from 1993 as notes payable to banks were reduced until the
refinancings were complete (see Note 3 in the notes to the consolidated
financial statements for further discussion of the refinancing).
Year-to-Date Results
- - - - --------------------
Gross margin on gas sales for the nine-month period ended September 30,
1994, increased $1,619,000 over the same period last year primarily due to the
impact of colder temperatures on volumes sold in the first quarter of this year
compared to last year and the impact of customer additions. Temperatures in
the first quarter of 1994 were approximately 10% colder than the same period
last year. In addition, the average number of customers served year-to-date
1994 increased from 1993 by over 5,600.
Year-to-date 1994, gross margin from gas marketing increased $704,000, or
29.4%, over 1993 as gas marketing volumes increased by 124.3%. As noted above,
Order 636 has increased the demand for the expanded gas marketing services
provided by SEMCO.
Interest on long-term debt decreased by $624,000 in the first nine months
of 1994, compared to the same period in 1993, primarily due to the temporary
use of short-term borrowings to fund the February 1994 redemption of the
Company's 10% debentures until new debt was issued in June 1994.
Liquidity and Capital Resources
- - - - -------------------------------
Cash flows from operating activities were $27,307,000 for the nine months
ended September 30, 1994. The most significant source of funds was the billing
and collection of accrued utility revenue.
-12-
13
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. - (Continued)
Financing activities used $14,519,000 in funds during the nine months
ended September 30, 1994. The Company received $19,013,000 through the
February 1994 sale of 747,500 shares of common stock and additional common
stock sales through the DRIP. The Company also received $80,000,000 through
the June 1994 issuance of $55,000,000, 8.00% Senior Notes and $25,000,000,
8.32% Senior Notes. The Company used the proceeds of these financings to
reduce notes payable to banks by $14,891,000 and $92,062,000 to redeem the
following long-term debt instruments:
10.0% Debentures due 2007 $21,169,000
10.0% Debentures due 2008 12,528,000
Variable rate term loan due 1997 20,000,000
9.8% Debentures due 2014 28,720,000
First Mortgage Bonds of Southeastern
Michigan Gas Company 9,645,000
-----------
$92,062,000
===========
Cash flows used for investing activities were $13,765,000. The following
table identifies capital expenditures by line of business for the nine months
ended September 30, 1994 and 1993 (in thousands of dollars):
1994 1993
------- -------
Natural Gas Distribution, net of capitalized payroll $12,873 $11,579
Transmission, Gathering and Storage 32 1,211
Other 709 326
------- -------
$13,614 $13,116
======= =======
The $12,873,000 expended for natural gas distribution was primarily for
installation of services and mains for new customers and the normal replacement
of distribution services and mains. Transmission, gathering and storage
capital expenditures were decreased in 1994 compared to 1993 with the
completion of the Litchfield Lateral project during the first quarter of 1993.
The Company anticipates spending approximately $7,000,000 for capital
items during the remainder of 1994. These estimated amounts will primarily
relate to customer additions and system replacement in the gas distribution
operations.
Future Financing Sources
- - - - ------------------------
The Company's operating cash flow needs, dividend payments and capital
expenditures for the balance of 1994 are expected to be generated primarily
through operating activities, short-term borrowings and cash from the DRIP.
At September 30, 1994, the Company had $37,450,000 in unused lines of
credit.
See Note 4 in the notes to the consolidated financial statements for a
discussion of commitments and contingencies.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 4 of "Notes to the Consolidated Financial Statements" for a
discussion regarding litigation involving the NOARK Pipeline System.
Item 2. Changes in Securities.
Retained earnings were available for payment of dividends on
preferred and common stock at September 30, 1994, as follows:
Total Retained Earnings - $13,450,000
Amount Available for Payment of Dividends - $13,450,000
Item 3. Not applicable.
Item 4. Not applicable.
Item 5. Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) List of Exhibits - (See page 16 for the Exhibit Index.)
--Agreement to furnish Credit agreement dated October 3, 1985, as
amended, between Enterprises and NBD Bank (National Bank of
Detroit).
--Trust Indenture dated April 1, 1992, between Enterprises and NBD
Bank, N.A. as Trustee.
--Note Agreement dated as of June 1, 1994, relating to issuance of
$80,000,000 of long-term debt.
--Guaranty Agreement dated October 10, 1991, relating to financing of
NOARK.
--Group A Employment Contract.
--Short-Term Incentive Plan.
--Deferred Compensation and Phantom Stock Purchase Agreement (for
outside directors only).
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the third quarter of 1994.
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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.
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
(Registrant)
Dated: November 14, 1994
By: Marcia M. Chmielewski
-----------------------------------------
Marcia M. Chmielewski, Vice President and
Principal Accounting and Financial
Officer
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EXHIBIT INDEX
Form 10-Q
Third Quarter 1994
Filed
--------------------
Exhibit By
No. Description Herewith Reference
- - - - ------- ----------- -------- ---------
2 Plan of Acquisition, etc. NA NA
4(a) Agreement to furnish credit Agreement dated
October 3, 1985, between Enterprises and
NBD-Bank (National Bank of Detroit).(a) x
4(b) Trust Indenture dated April 1, 1992, between
Enterprises and NBD Bank, N.A. as Trustee.(c) x
4(c) Note Agreement dated as of June 1, 1994,
relating to issuance of $80,000,000 of
long-term debt.(e) x
10 Material Contracts.
10(a) Guaranty Agreement dated October 10, 1991,
relating to financing of NOARK.(b) x
10(b) Group A Employment Contract.(d) x
10(c) Short-Term Incentive Plan.(d) x
10(d) Deferred Compensation and Phantom Stock
Purchase Agreement (for outside
directors only). x
11 Statement re computation of per share earnings. NA NA
15 Letter re unaudited interim financial
information. NA NA
18 Letter re change in accounting principle. NA NA
19 Report furnished to security holders. NA NA
22 Published report regarding matters submitted
to a vote of security holders. NA NA
23 Consents of experts and counsel. NA NA
24 Power of Attorney. NA NA
27 Financial Data Schedule. x
99 Additional exhibits. NA NA
Key to Exhibits Incorporated by Reference
(a) Filed with Enterprises' Form 10-Q for the quarter ended September 30,
1990, File No. 0-8503.
(b) Filed with Enterprises' Registration Statement, Form S-2, No.
33-46413, filed March 16, 1992.
(c) Filed with Enterprises' Form 10-Q for the quarter ended March 31,
1992, File No. 0-8503.
(d) Filed with Enterprises' Form 10-K for 1992, dated March 30, 1993,
File No. 0-8503.
(e) Filed with Enterprises' Form 10-Q for the quarter ended June 30,
1994, File No. 0-8503.
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